Josh can you tell investors when you first started researching and following Elephant Talk and what caught your attention?
A: Josh Levine, MicroCap Investor (http://www.levinesmicrocapinvestor.com)
When I go down my checklist of requirements for microcaps, Elephant Talk rates an "A" for each important item. But for all of the impressiveness of its technical capabilities, one characteristic that I find especially appealing is the sheer determination of its management to take on the very complex challenges of making it all work.
My initial recommendation for ETAK was in October 2009 at $1.39. A few weeks ago, the shares traded to new highs above $4. Despite the very speculative nature of the stock in late 2009, I wanted our subscribers to start building positions early because I had confidence in management's ability to execute on its ambitious growth strategy. If fully successful, the returns will be like a big venture capital winner - 10, 20, 30 times our investment.
When I first met with Elephant Talk's management and researched the company, management was in the process of completing its acquisition of ValidSoft. A critical part of the story is that Elephant Talk provides ValidSoft access to the telecom networks it could not otherwise get on its own. It took many months to make it official, but there was little doubt that it would be done and that it would transform the company.
In the meantime, Elephant Talk was establishing itself as a provider of a software services platform for the telecom industry. Today, Elephant Talk is at the center of a powerful wave in the telecom industry that is transforming the way businesses and organizations like supermarkets, banks, and government agencies connect with their customers. A lot of new businesses will be using the cloud by becoming mobile virtual network operators (MVNOs) to have a two-way discussion with their customers and communities.
Most major telecom companies are ill-equipped to operate on this level and prefer to outsource these operations. As a mobile virtual network enabler (MVNE), Elephant Talk serves up a full mobile operation out of a box. There is no need to build out spectrum and antennas because they are simply rented from mobile telecom operators such as Elephant Talk customers T-Mobile Netherlands and Vizzavi Spain, part of the Vodafone Group.
This is a huge global opportunity for Elephant Talk which extends from Europe, Asia and the Middle East to South America. Already, MVNOs have 85 million subscribers, according to the research firm Informa Telecoms & Media, with rapid growth continuing. The firm predicts that total revenues for MVNOs will climb to $80 billion per year by 2012.
Now, as huge as this business will be for Elephant Talk, it is ValidSoft that is going after an even bigger market opportunity.
You have referred to ValidSoft's technology as revolutionary. Can you give us a 'Reader's Digest' summary of how the ValidSoft technology works?
A: Josh Levine, MicroCap Investor
The key to understanding ValidSoft is this: It has the only real-time solution for the global credit and debit card fraud problem. At the time of a transaction, whether it's in a store or at an ATM, ValidSoft's solution enables banks and credit card companies to make a decision about the transaction's legitimacy in less than a second. Amazingly, ValidSoft is proving that the decision is correct nearly every single time.
ValidSoft's point-of-sale solution (Valid-POS) works equally well for international transactions as it does for domestic U.S. transactions. In either case, the results are delivered to the credit-card company or bank in less than a second -- 400 milliseconds to be precise.
Working behind the scenes, within the systems of financial institutions, Valid-POS takes advantage of mobile communications to detect whether a cardholder is in the same country or state in which a transaction occurs. If it is shown that the cardholder is not in proximity then there's a very high probability the transaction is fraudulent.
Importantly, ValidSoft never reveals the location of the cardholder even though it knows. The privacy aspect is critical for success and ValidSoft met the toughest requirements when it was awarded the prestigious European Privacy Seal -- the only security software company in the world to ever achieve this.
In exhaustive pilot testing with Visa Europe and major global banks, Valid-POS has demonstrated virtually 100% accuracy -- compared to the standard currently applied to those transactions that are declined at point-of-sale when nearly 90% turn out to be legitimate, know as false-positives.
By being 100% accurate, versus the industry's current 10% rate of accuracy, ValidSoft is going to cause a tidal change in how credit card companies and banks process card fraud.
Of course, any denied transaction can't just be declined without additional steps. What typically happens is that the embarrassed cardholder contacts his or her bank. At other times the bank picks up on a problem and wants to contact the customer -- either way there is a time delay.
For any transaction that Valid-POS considers potentially fraudulent, the cardholder is notified instantly on his or her mobile phone. If the customer is in close proximity (i.e., same state or country) to the location of the transaction, then he or she has an option to press the number "1" to confirm. A voice or message responds by thanking the person and apologizing for any inconvenience.
If, however, the customer is in, say, the UK and he or she is alerted that the card was used in New York, then he or she can press "#" on their mobile phone and be routed directly to the fraud center, which will deal with the potential fraud situation in real-time -- while it's happening!
In either situation, the bank looks intelligent and on the ball, and the customer is provided the best-possible service with the problem quickly addressed and/or resolved.
In the U.S. alone, credit and debit card fraud costs the financial industry $100 billion a year -- a number expected to triple during the next three-to-five years.
There are 350 billion credit and debit card transactions annually worldwide, and ValidSoft presents a win-win solution for the industry and customers through an affordable, proven technology that passes the most stringent privacy tests.
The current testing with Visa Europe and multiple global banks is progressing very well and I expect ValidSoft's Valid-POS will be running live by Q4 this year in at least one institution, if not more. The stakes are enormous since ValidSoft will net in the neighborhood of 5 to 10 cents per transaction. And once ValidSoft establishes itself with one major financial player, it will force others to jump on the bandwagon to remain competitive.
Finally, ValidSoft's technology is perfectly suited for other financial applications, including NFC (or near-field communications) and mobile wallets, which represent an even grander scale of transactions. ValidSoft started down this path in 2003 and has built a robust intellectual property portfolio that will enable it to effectively control the market slated to become one of the biggest to emerge in the coming decade: Security for the mobile cloud.
In your last ETAK update, you talk about the $ 20.5 trillion global market for in-store retail transactions that Elephant Talk and its ValidSoft subsidiary are targeting. What percentage of that market do you think they can capture?
A: Josh Levine, MicroCap Investor
This figure represents the total of all payment transactions that occur in stores around the world each year. As payments and other transactions such as banking move into the mobile cloud, Elephant Talk and ValidSoft will provide security and services solutions to the big players in this space as it emerges, including the banks and credit card companies, and telecom carriers. Of course, Apple (AAPL) and Google (GOOG) are vying for slices of this pie and are in a strong position to influence the market as it develops.
ValidSoft will generate revenues on a per transaction basis, so even at pennies for each transaction the company could scale to immense levels very rapidly.
In a recent presentation, ValidSoft CEO Pat Carroll points out that the growth of Near Field Communication (NFC) and "tap and go" payments using cell phones -- rather than credit cards -- would lead to a five-fold increase in electronic transaction volumes. It would also be advantageous for ValidSoft's multi-factor authentication approach to fraud prevention.
As NFC chips become increasingly embedded in smart phones and other devices and gain traction worldwide, the stakes get larger. A BusinessWeek article explains: "As this technology takes off the cell phone could become the central repository of not just bank account information but coupons, loyalty points, and membership cards, allowing companies such as Google to route deals to cell phones at just the right time and place."
As these trends unfold, a major portion of marketing is going to go through this personalized media channel. Retailers will be able to gather more point-of-sale data from their customers, while Google sees big dollars in helping retailers target customers with personalized, real-time deals and offers.
The pitch being made to consumers is that instead of juggling coupons, loyalty cards, credit cards and receipts, the entire payment process can be unified into a one-tap transaction. Most of us will be ready and willing to participate as long as privacy and security concerns are resolved.
Of course, the revolution cannot happen without cell phones being equipped for NFC. And nearly every phone manufacturer, including Nokia, Samsung, and Research In Motion, plans to pack its handsets with NFC chipsets, which in 2011 should cost $2.13 on average, down from $2.57 in 2009, according to ABI Research.
Despite these efforts, the game changer will be Apple, which last week reported out-of-this-world quarterly results on the strength of soaring demand for its iOS-based products, the iPhone and iPad.
Apple is believed to be vigorously pursuing NFC technologies and is expected to incorporate NFC chips in a version of the iPhone either this year or next. Meanwhile, since 2008 Apple has applied for 36 patents that involve NFC. They include a way to turn NFC-equipped iPhones and iPads into cashier terminals, and allowing Apple devices within close proximity to quickly and easily share files with each other.
The other side of the equation consists of the world's largest credit card issuers -- the four biggest being MasterCard, Visa, American Express, and Discover. The four last week announced that they're joining ISIS, a partnership of American carriers formed last year aimed at bringing mobile payment capability to phones in early 2012.
With the leading phone manufacturers and the biggest credit card firms vested in seeing the widespread adoption of NFC, the probability is fast improving that mobile payments will reach nearly $700 billion worldwide in 2015 as Juniper Research predicts.
ValidSoft's solutions were developed from the start for NFC-type payments. As NFC is implemented, the company will be ideally positioned to partner with leading players -- just as ValidSoft is doing now in regard to credit/bank card fraud prevention, detection, and authentication.
ValidSoft's relationship with parent Elephant Talk is even more valuable in an NFC universe because ETAK's innovative telecom software services and infrastructure were developed to support media and marketing channels like those emerging for the NFC environment. Elephant Talk's services have the capacity to process 400,000 transactions per second or 12.6 trillion transactions a year.
As I mentioned earlier, ValidSoft's security solutions are incredibly accurate. Current technologies used by card processors have up to a 98% false-positive rate while ValidSoft achieves virtually 100% accuracy in eliminating false positives, thereby enabling fraud discovery.
What milestones will become the pivotal moments for the company that transforms it from a small OTC company to a major player that Wall Street takes notice of?
A: Josh Levine, MicroCap Investor
For ValidSoft, the pivotal moment comes when it announces that one or more of the global banks they have been working with go "live" with a significant number, maybe 100,00 customers, and are prepared to continue scaling from there. By all accounts, this will happen by Q4 2011 and when it does, the revolution will only have just begun for ETAK shareholders.
As for Elephant Talk's telecom platform business, with each new SIM card migrated by its partners and customers, the company is, in effect, building a long-term annuity. As the base grows, Elephant Talk will enjoy a huge revenue ramp -- and it won't be long before the bottom line turns positive. In fact, I expect the company to reach breakeven in Q4 of this year.
Even more immediately, ETAK will obtain its anticipated AMEX listing by September. This development, in combination with fast-rising revenue from Elephant Talk's telecom platform business and ValidSoft's breakthrough with major financial institutions, will make the stock very attractive to Wall Street analysts and institutional investors over the coming months.
Josh, with your focus on developers of advanced technologies for your portfolio, as you identify new companies to recommend, what trends are you watching to find the next microcap stock with the same kind of upside potential as Elephant Talk?
A: Josh Levine, MicroCap Investor
Small firms have the ability to concentrate on high-value-added processes and products where sophisticated scientific and technical knowledge are paramount. As a result, the microcaps that execute deliver wonderfully high margins and profits -- and fantastic returns to their investors.
By participating in transformational changes in the highest-growth industries, any microcap that successfully navigates the path from R&D to commercialization and beyond will emerge a big winner. There are no better sectors to find these companies than in biotechnology and medical technologies, cleantech and renewable energy, and advanced IT and networking technologies. These are the areas on which I focus most of my attention.
Elephant Talk is among the "game changers" in our current portfolio. These are companies capable of making a serious impact on an industry with new technologies, products or therapies - and delivering returns of five to 10 times or better. I am monitoring several exciting prospects these days, but only when I am convinced that they are capable of doubling in 12 to 18 months, and potentially much higher returns in the longer run, will they earn a buy recommendation.
Josh Levine's MicroCap Investorhttp://www.levinesmicrocapinvestor.com
Levine's MicroCap Investor delves deep into the world of small stocks to identify big winners, targeting innovative companies on the path of the new and revolutionary. The strategy for MicroCap Investor is simple: to focus on small, innovative companies representing the best pure plays in the fast-growing waves of change in biotechnology, cleantech, and emerging IT.
About Josh Levine
Levine has 25 years of senior-level experience in analyzing technology trends and investing in top-performing micro- and small-cap stocks. He excels at assessing management teams and evaluating new innovations and their impact on corporate valuations. More on Levine's bio: http://www.levinesmicrocapinvestor.com/aboutus/
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Josh Levine owns shares of Elephant Talk Communications (ETAK).
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