CPNE.OB

[Michael]

Thanks guys 

After having analyzed the Subscriber development it is time to look at the profitability:



I stop at EBITDA as Interest, Tax and Depreciations have historically been negligible.

Interest
I expect this to continue to be close to Zero as the company basically is debt free

Tax
The Company had net operating loss carryforwards of approximately $6,157,276 for federal income tax purposes. I would therefore expect the company to pay tax from next quarter.

Depreciations
The company's fixed assets are negligible and we can therefore ignore depreciations.

Below is the EPS based on the forecasted EBITDA and the share count as of September 2006



As said above I expect the company to pay taxes from next quarter and this will obviously reduce the EPS.

I forecast full year 2007 EPS to 2.29 (funny enough approximately the price I paid for my stocks). Taxes will reduce this so EPS after taxes might be as "low" as 1.6.

David has said that he has never analyzed a stock with such attractive fundamentals. Neither have I   

With EPS at 1.6 this stock should trade anywhere between 16 and 32.

Let me finish with one warning. There are a lot of assumptions in these calculations. I believe I have been reasonable conservative but any changes to the assumptions can significant change the conclusions (in both directions  )

[jmccar2]

Yes, thank you very much for the calculations and spreadsheets Michael and Tireslinger...I'll definitely be holding CPNE through the $4-5 range  !

[trexkerry]

David has said that he has never analyzed a stock with such attractive fundamentals. Neither have I   

Thanks for the awesome write up Michael, I have always respected your style and your analysis.     Do you really like CPNE more than XING back when it was $8 per share? That seemed like such a sure thing with hardly any downside whereas CPNE doesn't quite give me as much confidence (although it is still my third largest holding behing XING and SYX)

[Michael]

Thanks for the awesome write up Michael, I have always respected your style and your analysis.     Do you really like CPNE more than XING back when it was $8 per share? That seemed like such a sure thing with hardly any downside whereas CPNE doesn't quite give me as much confidence (although it is still my third largest holding behing XING and SYX)

Thanks for the kind words and congrats with your holdings. You must have made a killing in the market lately 

What is that about XING at 8  I think I recommended XING at 5.5 

It is two very different picks though. The risk with XING at 5.5 was very low in my opinion. This was and is a company with a solid business and superior products.

CPNE's risk profile is much higher but so is the potential return. I don't think I suggested a 1000% increase in XING's share price in fact I sold it at 7 (to buy it back again later at 6.5   )

1000% increase might sound aggressive but if you had bought CPNE in March last year that would be the profit you would have had today and I think it has the potential to show a similar increase this year.

I am sure it will be a roller coaster ride with a lot of opportunities to sell high and buy low but this is a stock I want to own as long as they continue to show impressive gross connections.

[tireslinger]

Thanks Micheal. Great Job!!!!!

[stocky]

I do own CPNE and have full confidence in what David and Michael analysis is but the biggest thing that worries me is its .OB extension

Having said that I was worried about OPBL.OB when I let it go near 4. Only to find it smacking 100% in my face in little under two weeks.

Sometimes you have to stare the 'risk' devil in eyes to get that kind of returns.

[eggman11]

Thanks guys 

After having analyzed the Subscriber development it is time to look at the profitability:



I stop at EBITDA as Interest, Tax and Depreciations have historically been negligible.

Interest
I expect this to continue to be close to Zero as the company basically is debt free

Tax
The Company had net operating loss carryforwards of approximately $6,157,276 for federal income tax purposes. I would therefore expect the company to pay tax from next quarter.

Depreciations
The company’s fixed assets are negligible and we can therefore ignore depreciations.

Below is the EPS based on the forecasted EBITDA and the share count as of September 2006



As said above I expect the company to pay taxes from next quarter and this will obviously reduce the EPS.

I forecast full year 2007 EPS to 2.29 (funny enough approximately the price I paid for my stocks). Taxes will reduce this so EPS after taxes might be as "low" as 1.6.

David has said that he has never analyzed a stock with such attractive fundamentals. Neither have I   

With EPS at 1.6 this stock should trade anywhere between 16 and 32.

Let me finish with one warning. There are a lot of assumptions in these calculations. I believe I have been reasonable conservative but any changes to the assumptions can significant change the conclusions (in both directions  )

Hi I have a question about how you calculated your EPS estimates. For example, you have CPNE EBITDA at 17,000,000 in 4Q07, and EPS of .80 eps, but I get 17,000,000 divided by 43,000,000 shares and get $.40 eps. How did you end up with $.80 eps.

Thanks,

Egg

[Michael]

Hi I have a question about how you calculated your EPS estimates. For example, you have CPNE EBITDA at 17,000,000 in 4Q07, and EPS of .80 eps, but I get 17,000,000 divided by 43,000,000 shares and get $.40 eps. How did you end up with $.80 eps.

Thanks,

Egg

That was a bloody good question - applauds!

The model calculates all figures on a monthly basis but due to the limited space at 3SOF I had to add the monthly figures to quarters. The Copy and paste went wrong in the P&L

I have replaced the wrong table in the original post with the corrected table below.



I have also double-checked the rest of the formulas and I believe they are correct. You can see the monthly figures here

Thanks for pointing that mistake out!!!

[webby67]

Michael: You have done a fantsatic job of modeling with CPNE. I dont want to be one of those guys who nitpicks at such an effort...

but I am confused by your Q4 06 numbers (the numbers mgt will "prerelease" at the conf Thurs.)

Your Q4 numbers show almost NO sequential growth at all vs the Q3 06. Imean they seem to be flat as a pancake.

Revs Q3 actual = $7,627.5
Revs Q4 Michael = $7,655.1

EBITDA Q3 actual   = $3,102.0
EBITDA Q4 Michael = $3,216.9

Then I see this MONSTER jump you are estimating in both revenues and EBITDA sequentially from the Q4 06 to the Q1 07 ....a jump from $7.6 mil to almost $21 million in revs coming off a FLAT sequential the qtr before... and I have to say, Stop the Parade for a moment !!!

Are you SURE that you are meaning to estimate totally FLAT results sequentially in the Q4 ( and why would mgt be so eager to preannounce FLAT results at an investor conference via webcast live to the world??)....

Thanks much for your input.

[Michael]

Michael: You have done a fantsatic job of modeling with CPNE. I dont want to be one of those guys who nitpicks at such an effort...

but I am confused by your Q4 06 numbers (the numbers mgt will "prerelease" at the conf Thurs.)

Your Q4 numbers show almost NO sequential growth at all vs the Q3 06. Imean they seem to be flat as a pancake.

Revs Q3 actual = $7,627.5
Revs Q4 Michael = $7,655.1

EBITDA Q3 actual   = $3,102.0
EBITDA Q4 Michael = $3,216.9

Then I see this MONSTER jump you are estimating in both revenues and EBITDA sequentially from the Q4 06 to the Q1 07 ....a jump from $7.6 mil to almost $21 million in revs coming off a FLAT sequential the qtr before... and I have to say, Stop the Parade for a moment !!!

Are you SURE that you are meaning to estimate totally FLAT results sequentially in the Q4 ( and why would mgt be so eager to preannounce FLAT results at an investor conference via webcast live to the world??)....

Thanks much for your input.

This is a simplified model and one of the things I have ignored is their existing customer database, which obviously is wrong as they had $6 million in membership revenue in Q3 06. Due to the high churn this mainly affects next quarter and not the longer term forecasts.

Next quarter is probably the quarter that most people are interested in so I have used the night to make some refinements to the model, which gives a better forecast of the earnings. The following changes has been introduced:

• I estimate that they had an average of 40.000 members in Q3 paying $49.95 per month. That would probably give us an opening base of 50.000 which I churn 50% of over the first 3 month of 2006.
• I increase the fixed cost with $650K (this is the cost of the new business they have build)
• I have introduced a 30% tax after the tax allowance has been used. (I continue to ignore interest and depreciation as they are negligible)
• I am using average diluted shares as of September 06 to calculate EPS (54.6 million shares)

So here are the new assumptions:



And the new forecast:



Using diluted share count and introducing tax reduces the EPS for 2007 to 1.4. That still gives us a forward PE of 2.07. As said before I think the PE should be between 10 and 20 so there is still plenty of room for this stock to conitnue to go up

Thanks for your comments Webby. I think the revised model gives a more realistic picture of CPNE's business. But remember that this is only a simple model and the real earnings can be very different

Please keep asking questions it can only make the model better 

[David Randolph]

Michael, you've taken fundamental analysis on CPNE.OB to a deeper level, thanks a lot

My estimates were made just by estimating revenue and EPS for the 4th quarter of 2006 and then extrapolating those numbers for the following 4 quarters, which obviously doesn't consider the exceptional growth the company has been experiencing and probably will continue to experience.

You went further and accurately designed a revenue model that considered and projected recent growth trends into the future. Your rating should rise 10 points ... done

Just considering 2006 4th quarter you get to an EPS number similar to mine, which is $0.09. Making my very simplistic (and therefore probably wrong by being too conservative) estimate of $0.36 EPS for 2007, that number alone should put the stock instantly trading at, say, $5.4 (a 15 times conservatively expected 2007 EPS?).

On Thursday we'll know more details about Q4.

I know about rudynostalgia's concerns on CPNE.OB, but I think he's wrong when considering CPNE.OB, as he says, a "classic bait and switch" scheme. The Terms of Membership of www.onlinesupplier.com clearly (in bold) say the credit card will be billed by $49.95 on a monthly basis if the free trial is not canceled over the 14 days free trial period and everybody knows this is the usual business practice (of course, some consumers don't know and get surprised, write complaints and all that stuff, but they're a small minority).

I tried to subscribe the service just to test if they write "you'll be billed $49.95 if you don't cancel your free trial within 14 days", but I couldn't provide a valid ZIP and telephone number (because I don't live in the US).

If you have the time and the will, please do it yourself and then post the results here. You don't have to actually activate your free trial, just go through part of the process to see if they make that warning, at www.onlinesupplier.com.

Anyway, even if they don't do the warning in the free trial activation process, the costumer accepts the Terms of Membership so, the contract is legal  and there's no way to make a credit card charge back (what do you think of this rudynostalgia?).

Michael and I do this a bit differently, but we both expect costumers not to last long. I consider a monthly churn rate of 50%. Let me explain this with a simple example:

(not considering new costumer additions)
- The company enrolled 91,729 subscribers in January 2007
- I estimate 45,864 will pay just January, they won't pay February, and that leaves just the other 45,864
- Only 22,932 will pay March
- Only 11,466 will pay April

... and on, and on. The great thing is that new subscriptions more than compensate this very high churn rate, because the service and commercial model is extremely appealing. However, it puts a cloud on the very long term, say, two or three years from now, because, then, every possible costumer was already enrolled and gave up on the service. But 2007 looks extremely positive and I believe the CEO has his ways to get new profitable businesses for CPNE.OB.

This is the Main Portfolio and Michael's calculus perfectly fit this thread. He talks about $16 - $32 a share during the course of 2007, and that is conservative (it means an earnings multiple between 10 and 20), given that his estimates are met.

I'll continue holding and comparing actual numbers with estimates. For as long as the company keeps anything close to trend growth I'll keep holding the stock in the Main Portfolio.

webby67 requested me to comment on the following news:

• Commerce Planet Announces the Joint Engagement of Roth Capital Partners and Craig-Hallum Capital Group to Service Their Investment Banking Needs
PR Newswire (Wed, Feb 14)

I don't consider the news as a relevant event to the share price. Any company can engage Roth Capital Partners and Craig-Hallum Capital Group (the company just has to pay )

I guess Michael Hill, the CEO of CPNE.OB, has many ideas to produce very profitable business models over the internet, and just can't stand still. I believe there are so many things that can and need to be done in this area that CPNE's growth potential is beyond our imagination.

I'll continue holding CPNE.OB.

[trexkerry]

I tried to subscribe the service just to test if they write "you'll be billed $49.95 if you don't cancel your free trial within 14 days", but I couldn't provide a valid ZIP and telephone number (because I don't live in the US).

If you have the time and the will, please do it yourself and then post the results here. You don't have to actually activate your free trial, just go through part of the process to see if they make that warning, at www.onlinesupplier.com.

I got to the final page before having to put in my credit card number and it does have a warning at the bottom that the customer will have to pay $49.95 per month if they don't cancel.  Probably most people are so excited to start that they don't read the fine print.  I have attached an image of this screen shot, see the link at the end of the post.

This reminds me of what a lot of my credit card companies do.  They send me a $10 or $20 check to sign up for a free month of their "Credit Protector Monitoring Service" but by cashing the check you have to pay something like $49.99 per month for the service.  I always cash these checks and then call the company to cancel within a week, before I even get my intro package.     Each one of those is another share of XING (not for long it looks like though) 

[rudynostalgia]

To answer David's question about chargebacks: even a valid contract can be contested. It's an automatic process and the credit card issuer assumes the customer is correct. The customer has to do no more than say he changed his mind. Some cards (such as Amex and several large Visa/Mc issuers), give the customer an immediate credit while they investigate. The investigation consists of sending a letter to the company that posted the charge. They then must reply with an explanation. It then goes back to the customer, who has a right to reply and on and on. This is a long drawn out process and in the vast number of cases, the credit card issuer decides in favor of the customer. If there are a large number of complaiints, the card issuer will then either revoke the charging company's right to charge or hit them with a penalty percentage  on the charges they make. These charges can range up to and sometimes over 10% (usual costs of processing a card are in the 2 - 3% range, with Amex being a bit higher.)

[webby67]

Michael
Thanks for your updated earnings and subscription model. As I look at it, the really key variables are the gross new and churn... but particularly the Gross New as I think you have done a pretty conservative job on the churn. We could tinker with a lot of other variables a bit.. tax rate, shares out, small changes in margin, but really the ability of CPNE to attract new subscribers monthly and keep them for a few months at least seems to be key to the entire investment thesis.

Since you are the keeper of the model, can you determine how sensitive the bottom line is to percentage changes in Gross New subscribers?

That is, if you plug in 10% less (arbitrary number) new gross subscribers vs your current model in any given qtr, what is the bottom line impact? You could also do a churn sensitivity and see if churn is 5% greater or less than your model, what the eps impact is (or ebitda if you prefer).

To my own relatively new eye, your Gross New assumptions for 2007 seem rather aggressive. Your Q1 07 represents a DOUBLING of new adds over Q4 06 and this lofty level then gets doubled again by the Q4 of 07. That is astounding to say the least... possibly TOO astounding? This then leads to an eps estimate for 07 of well over $1.00 -- actually $1.40 mostly taxed in your model -- which seems.... shall we say... ambitious for a company that just did 6 cents totally untaxed in the Q3 of 06.

But hey, if they can pull off even half of what you are estimating, this is a moonshot. if they match your estimates full bore, this is a intergalactic shot.

[Michael]

Michael
Thanks for your updated earnings and subscription model. As I look at it, the really key variables are the gross new and churn... but particularly the Gross New as I think you have done a pretty conservative job on the churn. We could tinker with a lot of other variables a bit.. tax rate, shares out, small changes in margin, but really the ability of CPNE to attract new subscribers monthly and keep them for a few months at least seems to be key to the entire investment thesis.

Since you are the keeper of the model, can you determine how sensitive the bottom line is to percentage changes in Gross New subscribers?

That is, if you plug in 10% less (arbitrary number) new gross subscribers vs your current model in any given qtr, what is the bottom line impact? You could also do a churn sensitivity and see if churn is 5% greater or less than your model, what the eps impact is (or ebitda if you prefer).

Hi Webby

That is exactly why I made the model. It make it much easier to assess the effect of any changes in VPNE's business and you are pointing at the two most critical assumptions Gross Connections and Churn:

The long term profitability can therefore be condensed to two factors:

• The company's ability to reduce churn
• The company's ability to replace churned customers

Below are two simulations with different Gross connections and Churn assumptions.

The first scenario basically shows what happens if there is Zero growth in gross connections from this month.

In the second scenario I assume that only 90% of the subscriber churns. I think this is quite realistic. Some clients might like the service and some might just forget that they signed up and continue to pay.