GSB

[David Randolph]

1. Business Description

GlobalSCAPE (GSCP.OB) is a leading provider of managed and secured file transfer (EFT), wide area file services (WAFS), and continuous data protection software (CDP). Virtually all of the Fortune 100 use GlobalSCAPE products to secure and accelerate their data exchange. GlobalSCAPE's innovative managed file transfer solution, Enhanced File Transfer (EFT), enables all types of organizations to speed and automate the secure storage and movement of their data across the corporate firewall to external entities, and help them comply with government mandates such as HIPAA, Sarbanes-Oxley, and GLBA. GlobalSCAPE's Wide Area File Services (WAFS) deliver transparent, secure file replication that allows companies with branch offices across large geographic distances to replicate files within the corporate firewall to provide local file access speeds to each office, while reducing network utilization and maintaining file coherence and lock semantics. Continuous Data Protection (CDP) is GlobalSCAPE's real-time, continuous data backup solution that assures that any information on the network, even on distributed and remote servers, can be restored from any point in time in event of data loss. GlobalSCAPE is headquartered in San Antonio, TX. For more information, please visit http://www.globalscape.com or call GlobalSCAPE toll-free at 800-290-5054 (US) or 210-308-8267 (international).

2. Recent News

• GlobalSCAPE Reports 60% Growth in 2006 and Expects ''Exciting'' 2007
Business Wire (Fri, Mar 23)

• GlobalSCAPE Projects Another Record-Breaking Quarter
Business Wire (Tue, Apr 3)

• GlobalSCAPE Expands its Relationship with the U.S. Army through Additional Order for Secure Server and SSH Module Licenses
Business Wire (Thu, May 3)

• GlobalSCAPE Introduces the Secure Ad Hoc Transfer Module
Business Wire (Tue, May 8 )

• GlobalSCAPE Announces Q1 2007 Results
Business Wire (Wed, May 9)

• GlobalSCAPE Announces $3,000,000 Stock Buyback
Business Wire (Tue, May 22)

• GlobalSCAPE Gives Guidance On Record 2nd Quarter Revenues And Earnings
Business Wire (Fri, Jun 1)

• GlobalSCAPE Boosts Security, Workflow Integration, and Administrative Capabilities with Introduction of Enhanced File Transfer Server 5.0
Business Wire (Mon, Jun 4)

3. Valuation Model Estimates
3.1. Dilution Factor

GSCP paid $4.61 M in bank loans in Q1 2007. Revenues and net income are growing very fast. And the company announced a $3 M share buyback program. Just because this is an OTCBB traded company I'll put 1.05 as my dilution factor.

3.2. Revenue CAGR

Revenue growth in 2006 was 64%, and in Q2 2007 is expected to be 170% from Q2 2006. The company also released new and exciting software products, one valued at $4,995 and the other at $7,995 (each unit). I'll use 75% as my revenue CAGR estimate, or 1.75.

3.3. Net Profit Margin Estimate

Net profit margin in 2006 was 17.88%. I believe that in Q2, because of that large army order, it will be well over 30%. I guess that 25% is a fair estimate for long term net profit margin, given the current information.

3.4. EPS Multiple Estimate

The Security Software & Services industry trades at 35.84 times earnings, and I insert GSCP into that category.

4. Valuation Model



So, this is another high risk/high reward proposition for the Main Portfolio.

5. Technical Analysis
5.1. Chart since IPO



I like the fact that the stock is near an all time high.

5.2. Short term chart



The short term trend is bullish. Volume is low but it has been above average. Moreover volume has nothing to do with value. Probably it was the low volume that kept this stock undervalued for so long.

6. Overall Conclusion

I love the company's sector, internet file transmission software is red hot now. The market has also been paying high premiums for companies operating in the internet security space. Revenues are growing very strongly and 2007 will be the third year of profits for GSCP.OB. Net profit margin is fat.

My valuation model says the stock may rise 89.8% a year for the next three years, which is extremely attractive. The risks are the fact that this is an OTCBB traded stock (but it seems it is about to go to the AMEX) and sometimes they're only trying to attract investor's money to sell them new shares. But this doesn't seem to be the case, they've been paying their debt and have a strong balance sheet. Also, I know the products, I've used its flagship product, CuteFTP, in the past (probably you did too).

7. Trading Plan

Buy GSCP.OB, 6.66% of capital as always.

[Garoh]

David watch out for close below 3.6 today this will lose ground 

It's very important

[kpunarc]

- how do you calculate "net profit margin", "dilution factor estimate", "final net profit margin estimate (%)", and the "EPS multiple estimate"                  
         
...i've finally had some time to mess around with your analysis spreadsheet and couldn't reconcile those. thanks david!

[David Randolph]

Ok, I've added just half of the position today, the other half around tomorrow's open.

David watch out for close below 3.6 today this will lose ground 

It's very important

Why do you think $3.6 is so important Garoh? Thanks

- how do you calculate "net profit margin", "dilution factor estimate", "final net profit margin estimate (%)", and the "EPS multiple estimate"                  
         
...i've finally had some time to mess around with your analysis spreadsheet and couldn't reconcile those. thanks david!

I don't "calculate" those, they're my four estimates. The white lines of the spreadsheet are my estimates for the future:

1) Dilution factor
2) Revenue CAGR
3) Net profit margin estimate
4) EPS multiple estimate

I use several inputs, like the historical data, press releases, competitor's comparison and others to derive those.

Please, if there's something you don't understand, ask.

Thanks.

[Garoh]

David because closing below the open of the second green candle means a bearish way 

and it couldn't hold the gain .. so it's better to wait for 2 or 3 daily candles to close above this level to consider a bullish trend is real not false ..

It doesn't matter to buy 10 or 20 cents higher when everything's fine 

It's a good pick David but technical is very important for the entry point

[yukiii]

All the news is out on this already, thinly traded, expect a pullback. Volume is going down since news was out. If you notice this was run up on the last 3 days, many postings on various board.
If you look now all of the posting are down to almost 0. target $3.50 on pullback.

[DragonAMG]

All the news is out on this already, thinly traded, expect a pullback. Volume is going down since news was out.

There will most likely be a pullback, but I think this is just the start of the news.  I like this pick a lot.  I have been using their products for several years now. 

[David Randolph]

David because closing below the open of the second green candle means a bearish way 

and it couldn't hold the gain .. so it's better to wait for 2 or 3 daily candles to close above this level to consider a bullish trend is real not false ..

It doesn't matter to buy 10 or 20 cents higher when everything's fine 

It's a good pick David but technical is very important for the entry point

I respect your timing strategy Garoh.

All the news is out on this already, thinly traded, expect a pullback. Volume is going down since news was out. If you notice this was run up on the last 3 days, many postings on various board.
If you look now all of the posting are down to almost 0. target $3.50 on pullback.

hahaha, that's a funny way of analyzing stocks yukiii. "It was up because of the message boards posts, now there are no posts, it will go down". May I remind you that stocks represent companies, companies that have value?

I don't think you took a bit of effort to seriously look at this pick yukiii ... let's see, for example, look at this Q2 guidance:

«GlobalSCAPE announced today, that fueled by the previously announced DOD order, it expects the second quarter revenues to be between $6.2MM and $6.3MM, growth of 170% over 2nd quarter 2006.»

$6.25 M is more than half than 2006 full year revenue. And this is a software company, so expect what, $2.5 M in net income for the quarter? Meaning $10 M for a full year? And how much is the market cap? $66 M. So, how much is the extrapolated forward P/E? 6.6

Let's hear the conference call, here: http://www.globalscape.com/company/ir.aspx

It has a nice historical perspective of the company. GSCP.OB works in a similar space as SILC, the "work from everywhere" trend we've discussed in SILC's thread.

I also enjoyed the future plans of the company, looking at $40 M revenue in 2008. They also confirmed my 25% long term net profit margin. AMEX said the company is great, but the stock price and the market cap is too low. The company should get help in boosting the stock price to move to the AMEX (it just moved!). 

This can be a $200 M to $300 M market cap.

According to my valuation model GSCP.OB is the second most attractive stock of the Main Portfolio, and therefore will replace SILC at the 3 Stocks on Fire Portfolio (I wish I never had replaced NVTL for SILC in that portfolio, but I was pressured to do it and there wasn't a fundamental justification not to).

I'll buy the second half of my position in GSCP.OB and the position for the 3 Stocks on Fire Portfolio around tomorrow's open.

[yukiii]

yes, I took a look Old news June 1st

announced today, that fueled by the previously announced DOD order, it expects the second quarter revenues to be between $6.2MM and $6.3MM, growth of 170% over 2nd quarter 2006. "The 2nd quarter will clearly set a net high for us in both revenue and earnings," commented Randy Poole, President and CEO. "While this quarter's numbers should not be looked at as the new standard, neither should they be seen as a one time thing," continued Poole. "We believe that from time to time orders of this magnitude will occur and become a part of our business model. We certainly plan to work to that end. Whether they come in the form of government requirements or through other endeavors, we believe our products meet a market need at this level."

Company did .09 2005
.12 2006

1st 2007 .03 2nd .07
2007 estimates are .18
If you read between the lines next quarter is a one time thing but they wish it would happen more often.
Company wants to keep the stock over $3.00 to get on the AMEX. The reason I mention the yahoo boards is there was no new news for the stock to jump up the last few days, but the boards were pumping this up and emails flying, and now its silent.

I did not say I don't like it, but you need to wait to see where this settles now. I don't believe the estimates of .30 for the year.

What information can you offer that that everyone does not know a few weeks ago?

I got this back in May in my email.
May 15, 2007
This afternoon I purchased two stocks that I have been tracking for a few months now: Harbin Electric and Globescape. I am in beginning to write up reports on both companies, but in the meantime, I will provide some brief commentary regarding my purchases.
I purchased a large stake in HRBN at $13.20. Harbin is now my largest holding, and I believe it has the potential to be a big performer over the near to medium term. HRBN posted a monster quarter last quarter, and the stock nearly doubled in just about two months. However, since hitting a high of $15, the stock pulled back below the 50 day MA. After two attempts to retake the 50 day MA on heavier volume last week fell short, HRBN has finally managed to retake its 50 day MA in the heaviest trading volume the stock has seen since February. The breakout coincides with news that Harbin was booked to supply electric motors for a major North American auto parts supplier, and I believe the stock is beginning to pick up some momentum. I will get to the fundamentals in an article coming very soon, but with a net cash position of $40 million and a trailing P/E of 13, this stock has room to run from a valuation standpoint.
As per Globescape, I've been tracking this company for some time, and listened to their conference call last night. This is a business which has put up solid numbers for some time, and their recent contract with the Army provides the base for a potentially growing relationship with the DoD. The stock has been selling off post earnings (despite the fact that earnings were in my view pretty solid), and today the stock is really getting hammered for no reason. With the stock down 10%, I've entered a position at $2.25. Today's action is giving me a gift on the price side, and this an opportunity I could not pass up. I will be writing in more detail about GSCP shortly. In the meantime, keep in mind that this is a very thinly traded stock.

Globescape announced this morning that it would repurchase $3 million in stock, or just over 6% of the total shares outstanding. This was one of my recent additions when the stock price dipped to $2.25, and the stock has already had a nice 17% bounce since then. Today's news comes as a bit of a surprise, given that microcap companies seldom buy back their own stock, but those who listened to the GSCP conference call for the first quarter probably picked up on the fact that management was looking to enhance the share price in order to achieve an AMEX listing. It was obvious to everyone that management was frustrated by what they perceived to be an excessively low multiple for a company growing 30%+ per year, and today's action indicates that they are going to take matters into their own hands and move the stock up above the $3 level for an AMEX listing. This is a nice vote of confidence in GSCP shares, and it should put a nice bottom under the stock over the next few months. I still believe this company has big upside if they can procure another big contract with the DoD, and the business seems to be gaining momentum in the last few quarters.

May 23, 2007
We're back after a few technical problems yesterday. Yesterday was a pretty boring day for the market, so I will not bother to look backward too much. My one comment is regarding Globescape's buyback. Essentially, management just said, "We are going to take the stock to $3 and get an AMEX listing." Anyone who listened to the conference call understands that management is really targeting an AMEX listing and that they are going to do what it takes to get there. The buyback is certainly a step in this direction, and I still believe GSCP has significant further upside here as a result. Although I'm sitting on a very nice short term gain, I still believe there is more upside left here, and I'm not selling because I believe that I would be leaving a lot on the table.

[David Randolph]

«What information can you offer that that everyone does not know a few weeks ago?»

I don't need to offer anything new, just the view that the public information is not yet completely reflected in the share price.

In 2008 we'll probably get $40 M in revenues, with 25% net profit margin that means $10 M in net income. Apply an average P/E of 35 (that's this industry's average) and get a $350 M market cap company.

That means a price per share of $20.

What's the flaw? I don't see one, do you?

Thanks for the article.

[yukiii]

«What information can you offer that that everyone does not know a few weeks ago?»

I don't need to offer anything new, just the view that the public information is not yet completely reflected in the share price.

In 2008 we'll probably get $40 M in revenues, with 25% net profit margin that means $10 M in net income. Apply an average P/E of 35 (that's this industry's average) and get a $350 M market cap company.

That means a price per share of $20.

What's the flaw? I don't see one, do you?

Thanks for the article.

You are ahead of your self again. They rely on contacts, even the CEO said you can't rely on anything
untill they get the money.
You don't know what 2008 rev will be?
Right now you have a thinly traded company, that has doubled on the news, all you know is next quarter will be great but the 3 and 4th will probably be the same as the first. You always assume the growth rate will be the same as there best quarter going forward even when the CEO only wishes it would. I think its a buy on a pullback, but to rely on a DOD contact every quarter. If I bought this a $2 I would be taking profits and moving on. Buying at $3.8 is tough here.

[Stocky2000]

i think between 2.50 and 3.00 this stock was mainly undiscovered...with the low volume it didnt show up in the filters but someone accumulated in this area. probably the.MM of the stock... the firm planned to bring it to the amex soon ...they are in the progress of buying shares......up from here with a g-pattern...its rarely you see a nice consolidation of 1.5 years...a breakout of this range will not die that fast mostly stocks advance at lot of this kind of charts.......many people doesn know the fundamentals yet...wait for amex confirmation this will be fast at 5++. And stocks that are on nasdaq or amex plus 3.00 will be on the radar.

The 3-4 year long term chart looks like a big floor with a 3.00 bottom...now we made the first step out of that.

[yukiii]

Article on GSCP you might find interesting.

http://sanantonio.bizjournals.com/sanantonio/stories/2007/05/07/story11.html

[David Randolph]

You always assume the growth rate will be the same as there best quarter going forward even when the CEO only wishes it would. I think its a buy on a pullback, but to rely on a DOD contact every quarter.

I don't rely on that. There's revenue growth without DOD.

It's not me, it was the CEO that talked about $40 M annual revenues and 25% net profit margin, listen to the conference call. Moreover, I know the company's products and I clearly see the need for them.

But you wait for a further pullback, perhaps it will happen ... It's indifferent to me, good luck.

[nicknite20]

David,
I may be wrong, but i dont share your enthusiasm on this company's long term prospects.

Who will pay for secure email products / file transfer products?

I may be looking at it from a very simplistic viewpoint - But all private individuals are happy to use yahoo / hotmal. Most corporates use their own encryption / PKI built in into their email infrastructure.

They will have a tough time selling their products in my opinion. But let me ask you for another side - do they differentiate their product from all the other encryption software (Entrust for example) out there?
Nick