tranzeo wireless technologies inc. buy (tzt-t $1.45) initiation report.pdf · 2005, offering 2.4m...

Barry Richards (416) 364-4835 1 January 10, 2006

Tranzeo Wireless Technologies Inc. (TZT-T $1.45)

Tranzeo Cashes in on Wireless Internet Access

• Tranzeo is a high growth company doubling revenues this year to $14.7m, up from $7.4m in 2004 and $3.3m in 2003.

• Tranzeo is also profitable, having delivered four consecutive profitable quarters and is on track to earn $0.06 in EPS in 2005 and forecast to earn $0.10 in 2006 and $0.14 in 2007.

• We are initiating coverage with a Buy rating and a $3.00 target, based on 20x FY07 EPS or 2.0x FY07 Sales.

Company Fundamentals Tranzeo is a British Columbia based company, designing and manufacturing wireless systems used primarily for high speed Internet access to those outside of urban centers. The Company completed its Initial Public Offering on October 4th, 2005, offering 2.4m shares at $2.00 (including a half warrant at $2.50). The Company sells directly to customers, primarily Internet service providers (ISP’s), and through an increasing number of distributors. The Company sells most of its products into the US (75%), with a growing base of international business. Catalysts and Risks Tranzeo has delivered outstanding growth over the last three years and is starting to realize expanding margins and improving earnings leverage. Quarterly results should be the key catalyst for the stock and Tranzeo recently reported good Q3 results with revenues of $4 million, up 108% y-o-y and a profit of $0.015 per share. The main risks for Tranzeo are related to a modest balance sheet, exposure to the US$/C$ exchange rate, managing growth, competition and a changing technology base. Valuation and Recommendation We believe that Tranzeo is undervalued at current levels given its growth and profitability. However, it is not a highly liquid stock which appears to be holding back the stock. We believe that a reasonable valuation is based on 2.0x FY07 sales or 20x FY07 EPS, suggesting a target price of $3.00 per share. As a result, we initiate coverage of Tranzeo with a Buy rating.

Stock Rating:

Buy

12-month target $3.00

Potential ROR 107%

Company Profile Sector Wireless

Ticker TZT-T

Shares O/S (m) 21.9

Free Float (m) 15.7

Mkt cap ($m) $31.8

Mkt float ($m) $22.8

Free float (%) 71.7%

Next event Q4 Results February 2006

Key Metrics (Post IPO)

Cash/sh ($) 0.14

Book Value/sh ($) 0.32

Debt ($ m) 0.00

Analyst

Barry Richards

(416) 364-4835

[email protected]

Sales

Toronto (866) 361-1064

Paradigm Capital research is available on First Call, Multex or at http://www.paradigmcap.com Please view last page for official disclaimer Issued by Paradigm Capital Inc.

Tranzeo’s 3-Month stock price chart

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Financial Summary (end-Dec) Revenue ($m) Price/Revenue (x) EPS ($) P/E (x)FY04 7.4 4.3 ($0.03) naFY05e 14.7 2.2 $0.06 24.2FY06e 23.0 1.4 $0.10 14.5FY07e 32.0 1.0 $0.14 10.4


Table of Contents Executive Summary …………………….……………………………………...3

Background……………………………………...…………...………………….4

Five Reasons to Buy Tranzeo………………...…………...………………….5

Products…………………………………………………………………………..6

Customers………………………………………………………………………..8

How Does the Technology Work……..……………………………………....9

Market Overview…………..…..…………………………………………….…11

Competition…….…………..…..………………………………………………12

Management………………..…..………………………………………………12

Financial Results …….………………………………………………..…….13

Balance Sheet ………….………………………………………………..…….15

Risks …………………………………………..…….…………………....…….16

Valuation and Recommendation …………………...………………………17

Appendix 1: Financial Statements …….….…………………..……………19


Executive Summary Tranzeo is a new company to most investors, given its recent IPO, but offers the classic profile of a good technology company, with strong revenue growth and increasing profitability. In 2005, the Company is on track for 100% top line growth and 7% net margins (untaxed), which makes this a story that should draw the attention of the market. Tranzeo is one of a wave of new and exciting high tech IPO’s in Canada in 2005, including Miranda, VCom, Ascalade and March Networks. The Internet is the most important technology of this generation and high speed access (greater than 1 Mbps) to the Internet is still remarkably elusive for many. With more than $20m of product sales in the last two years into mature markets such as Canada and the US, Tranzeo has proven that DSL and cable are not available to many businesses and homes outside of main urban centers. With price points in the $200-300 range, Tranzeo has succeeded where the first generation “broadband wireless access” or “fixed wireless” companies failed (in offering sub $1,000 access terminals). The key strength of the Company is the design and production of standards based, low cost access terminals. Tranzeo also runs a lean and focused business, which allows it to generate 30%+ gross margins, despite the aggressive price points. The Company has done well in the US and is now looking to branch out into international markets, while also starting to build out a distributor channel for the first time. Tranzeo will also be active in 2006 with a number of new products, including Wi-Max based access terminals and wireless Voice over Internet (w-VoIP) products and may pursue acquisitions in the industry. The challenges for TZT include managing aggressive growth, a strong Canadian dollar and competing with alternative technologies and other fixed wireless competitors. Other risks include a heavy reliance on the founder and CEO, selling into the emerging ISP market in international markets and an new dependence on indirect selling channels. Overall, we are convinced that Tranzeo can sustain its strong growth profile and we are pleased that the Company can be meaningfully profitable at these levels. As a profitable growth company, we think that TZT could easily trade at 2.0-3.0x FY07 sales and/or 20-30x FY07 EPS over the next year. This suggests a target price of $3.00 per share. We are therefore initiating coverage of Tranzeo Wireless Technologies Inc. with a BUY rating.


Background Based in Maple Ridge, British Columbia, Tranzeo is a designer and manufacturer of high speed wireless equipment. The Company’s primary customers are Internet Service Providers (ISP’s) serving businesses and homes outside of urban centers, which have no other access (DSL or cable) to high speed Internet. The Company employs 70 staff, and recently consolidated into a single new 38,000 square foot facility from 4 separate leased facilities, used previously. Tranzeo was founded in 2000 by its CEO, Jim Tocher, formerly the President and founder of NTS Computer Systems, a low cost laptop manufacturer. NTS completed an IPO on the TSX in 1997 and was later taken over through a reverse takeover in 2000 by Branium Technologies. Many of the employees of Tranzeo were also employees of NTS. Jim and his family control approximately 6.25m Tranzeo shares or 29% of the total shares outstanding. Tranzeo raised $4.8m in a recent IPO on the Toronto Stock Exchange, which was completed on October 4th, 2005 at $2.00 per unit (one share and a half warrant exercisable at $2.50 for a period of 18 months). Since its IPO, Tranzeo’s stock has traded mostly below its issue price as shown below. With a very limited float and with many of those shares escrowed, the stock has also traded in minimal volumes between $1.30 and $2.10. The following chart highlights the movement in the stock price over the last three months.

Figure 1: Tranzeo’s Stock Price Chart

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Five Reasons to Buy Tranzeo We think the financial numbers speak for themselves at Tranzeo, but we list the following five reasons for buying this stock:

1. Growth- Tranzeo has doubled revenues each of the last four years (despite a surging C$) and seems poised to continue its hyper growth in 2006 and 2007. The Company continues to penetrate its core US market, but is also adding new products, entering new geographies and is starting to build indirect distribution channels.

2. Profitability- Tranzeo is a relatively small company but has leveraged

itself into a profitable business for four quarters in a row. Gross margins have increased noticeably over the last year. Both EBITDA and net income have also increased as a percentage of sales each of the last four quarters.

3. Internet Access- The Internet is an amazing innovation that remains an

enigma 10 years after its introduction into the market. By definition, the graphics intensive nature of the Internet makes high speed access (beyond simple dial up) a basic requirement for everyone. Remarkably, the two basic technologies for high speed access, DSL and cable (limited ranges), are economically incapable of serving many low density areas.

4. Wi-Max and VoIP- Tranzeo is in the process of adding wireless voice over

Internet functionality (w-VoIP) to its products and will add Wi-Max (Wireless Interoperability for Microwave Access, a new wireless standard also known as IEEE 802.16) based products in 2006. These are two of the hottest new technologies anywhere in the tech space, making TZT a stock with some added sizzle in 2006 and 2007 and good exposure to both these innovations.

5. Competitive Advantages over Alternative Technologies – Fixed

wireless is cheaper and quicker to deploy versus DSL, cable and fiber, with faster connections versus dial-up, DSL, or cable and most importantly, a much greater range; although, it has historically been held back by prohibitively expensive access terminals. Today companies like Tranzeo offer low cost terminals and has also found the rapidly growing Internet Service Provider market as the natural carrier partner for fixed wireless technology.


Products The Company’s core products are base station terminals and access terminals, also known as CPE’s or customer premise equipment, which account for 90% of revenues. In simple terms, these products are advanced wireless transmitters and receivers. Generally speaking Tranzeo’s products are technology agnostic although today they rely on the Institute of Electrical Engineers (IEEE) 802.11 series of networking communications standards. Tranzeo’s products fall into two categories: “point to point” (PtP) and “point to multipoint” (PmP) that cover a pair of wireless frequencies, namely 2.4GHz and 5.8 GHz (both standard non-cellular unlicensed band frequencies). It is important to understand that in a point to point configuration, both terminals are CPE’s, while in a point to multipoint configuration, the CPE’s communicate with a central base station (as shown later in the report on figure 7). CPE’s are typically mounted on the outside of buildings and homes, shown below, similar to a small satellite dish. The following figure shows typical installations for Tranzeo’s products: Figure 4: Tranzeo’s Typical Product Installations

Source: Company Tranzeo is an R&D intensive company and it plans on introducing a number of new products every year. In 2006 it expects to roll out Wi-Max (IEEE 802.16 standard) enabled products and VoIP functionality (allowing ISP’s to offer voice telephony for the first time). The Company will also produce new base stations and CPE’s for other unlicensed frequency bands (0.9GHz and 5.4GHz) and its first licensed frequency bands (3.5GHz, 3.675GHz, 4.9GHz). The Company has its own electromagnetic certification and testing facility (also known as an EMC laboratory), built in Q4 2003. The Company’s core competency lies in design and production of cost effective products, that are easy and quick to install, easy to use, with high speed, long range and reliable performance. Management believes Tranzeo was the first company in the world to offer CPE’s for less than US$300. The Company outsources production of some components but does manufacture its own boards and also does final test and assembly in-house. Tranzeo’s products are sold directly and through distributors, with all distributors carrying $0.5m minimum yearly commitments.


On the technical side, one base station can service between 50 and 250 CPE’s per base station antenna (up to a maximum of 4 antennas). Typical solutions deliver 5-30 Mbps of bandwidth. Tranzeo sells both indoor and outdoor versions of the product, with generally two ranges: short (0-15 miles) and long range versions (0-30 miles), in both 2.4GHz and 5.8GHz. The Company also sells (and resells) complimentary products like amplifiers, antennas, bandwidth shapers, hotspot solutions, splitters, cables and connectors, which typically amount to about 10% of total revenues. The Company offers a range of different products, some of which are shown below in figure 5. The Company offers products that work at 2.4GHz including the TR-CPE90-15, TR-CPE90-N, TR-CPE200-15, TR-CPE200-19, TR-CPQ-15, TR-CPQ-19, TR-CPQ-N, TR-6015, TR-6019, TR-6000, TR-6519, TR-6500, TR-600, TR-650 and at 5.8GHz namely the TR-5a-21, TR-5a-24, TR-5a-N, TR-5a-26, TR-5a-29, TR-5a-32, TR-5a-V15, TR-5a-V17, TR-5a-H16, TR-amp-24, TR-5amp-N, TR-5amp-26, TR-5amp-29, TR-5amp-32, TR-5amp-V15, TR-5amp-V17, TR-5amp-H16. The following figure showcases a sampling of Tranzeo CPE terminals, base station radios and antennas. Figure 5: Tranzeo’s Various Products (CPE’s, Base Station Antennas)

Source: Company

Antennas

(front of outdoor AP/CPE)TR-6015 TR-SUR-001

(surge protector & )(power over ethernet)

TR-600 (indoor AP/CPE)

TR-6015(back of outdoor AP/CPE)


Customers The Company has shipped product to over 1,600 customers, including independent telecom service providers, Internet Service Providers, local municipalities, hotels, universities, rural communities, RV parks, convention centers, residential homes, cottages, industrial parks and warehouses. Most of its customers are based in the US. Tranzeo has a well diversified business and no single customer represents more than 10% of total revenues. The following table highlights the number of ISP customers each year for the last five years:

The Company has relied historically on direct selling to customers, but in Q3 2004 Tranzeo signed its first distributor. Since that time, the Company has recruited ten other distributors, bringing the total to 11. The Company sells only on a direct basis in Canada. Half of the distributors are resident in the US with the other half split between Europe, the Middle East and South America. Each of these distributors has an annual commitment for $546,000 in product sales. Contribution from distributors will be a key part of the Company’s 2006 top line and bottom line growth.

The following chart lists the 11 distributors signed so far:

Figure 6: Tranzeo’s Distributors

Source: Company

Company Location

DoubleRadius, Inc. North Carolina

Electro-Comm Distributing, Inc. Colorado

RF LINX Corporation Ohio

WAV Wireless Outfitters. Illinois

Wireless Guys California

Streakwave California

Company Location

ZCOMAX (UK) Limited London

Orbitel Telecom. e Informática Ltda. Brazil

Alcadis Distributeur Netherlands

Metrocom Distribution Europe Germany

Opentec Systems United Arab Emirates

US Distributors

International Distributors

2001 2002 2003 2004 2005**

ISP Customers 67 260 636 1,149 1,627

** at the end of Q3 2005


How Does the Technology Work? Fixed wireless refers to communications technology that uses Microwave radio signals instead of the traditional copper (telephone wire), coaxial cable (TV cable), or fiber optic strands, to transmit and receive data and voice. The technology is referred to as "fixed" wireless, because the equipment used is stationary, unlike "mobile" systems, such as cellular and satellite, that allow users to move from place to place and still transmit and receive voice and/or data (albeit at much lower speeds). In general, high-speed fixed wireless services offers speeds that are superior to DSL and cable (0.5-1.5Mbps), typically ranging from 1-100 Mbps, but historically the access equipment was available only at a steep premium to other technologies ($1,500-5,000 versus $200).

Fixed wireless is used in non-cellular frequency bands, some of which are set aside globally for free public usage (“unlicensed”), while most others are sold off to the highest bidder and restricted to their use only (“licensed”). Today, all of Tranzeo’s products work on unlicensed frequencies. Most point to multipoint networks use “microwave” frequencies (less than 11 GHz), which offer the most desirable signal propagation properties while point to point applications are split between microwave and “millimeter” wave bands (11 GHz to 30 GHz).

The following diagram shows the basic point to point and point to multipoint network configurations. Figure 7: Point to Point and Point to Multipoint Configurations

Source: Trango Broadband In a fixed wireless network, the customer premise equipment (CPE) is comprised of a small antenna, which is installed on a customer's home or business (usually outside) and wired into the home through a modem that is connected directly to a customers computer (much like a traditional DSL or cable modem), providing high speed Internet connection. Next generation fixed wireless systems will begin to add wireless voice over Internet (VoIP) functionality, which allows them to offer voice telephony in addition to high speed data.


The customer's CPE antenna communicates with the service provider’s base station (central antenna), which then accesses the Internet or voice network through a public switched telephone network. The first generation of data-only fixed wireless access solutions required the customer's antenna to have a clear line-of-sight to the base station antenna (usually placed on a tall building, or tower). Fog, heavy rain, thick foliage, or other solid obstructions interfered with the line-of-sight, and often degraded or interrupted the signal. However, the second generation of these systems now use special modulation techniques (like OFDM) and/or mesh network design to reduce or eliminate line-of-sight requirements (referred to a non-line-of-sight or nLOS systems).

Fixed wireless access solutions are primarily targeted at the underdeveloped world markets where there is limited or non-existent copper wire infrastructure (voice and data applications), and to rural markets in developed nations where high speed Internet via cable or DSL is not offered. In virtually every locale, fixed wireless networks can be deployed more economically than traditional landline networks, and require half the capital cost in base station equipment than do mobile cellular networks. The only question that remained unanswered was “who will deploy these fixed wireless networks”.

The biggest challenges historically for broadband wireless have been terminal costs and a lack of interest from cablecos and telcos, who are otherwise committed to technologies (DSL and cable modems) which utilize their existing infrastructure (copper lines). Given that telcos and cablecos are the dominant players in telecommunications, fixed wireless has been slow to catch on. Fortunately, ISP’s are growing in numbers and are ideally suited to deploy this technology. We are even starting to see traditional carriers working with ISP’s to deploy fixed wireless in areas not reached by the core technology. Cellular carriers are also not proponents of fixed wireless, choosing to wait for broadband cellular expected in 2006 and 2007.

Competitive Advantages The fundamental advantage of fixed wireless over DSL, cable and cellular is range, which can extend to over 50km versus 2-5km for the alternatives. Secondary advantages include speed of deployment, which can be completed in 15 minutes or less versus months for alternatives. Other advantages include cost, with this type of wireless technology deployable for as little as $5,000 versus millions for mainstream alternatives (some of which can never be justified to low population density areas). Ironically, despite these advantages fixed wireless often wins because it is the only available option for many who live outside of urban centers. Other technologies like satellite are often explored in rural locations, but are prohibitively expensive and offer very limited bandwidths (again unrealistic for high speed Internet access).

The biggest change in the new year will be the network upgrade of cellular technology to offer broadband throughput (1 Mbps or more) for the first time, as carriers roll out HSDPA (high speed data packet access) technologies. However, cellular is also very limited in terms of range, like DSL and Cable, to 2-5km from the nearest base station and is designed for a single user, not delivering enough bandwidth (just 1 Mbps) to share amongst a number of simultaneous users (say a small office with 3-10 users).


Market Overview The fixed wireless equipment market has gone through significant change over the last 5 years, with the extinction of the many US competitive local exchange carriers (CLEC’s) and with the broad based slowdown in the telecom universe. During that time, the opportunity for broadband wireless access has shifted away from telcos to Internet Service Providers (ISP’s).

Market Size The fixed wireless market is made up of two main segments-the point to multipoint (PmP) and the point to point (PtP) markets. The PtP market primarily services the cellular backhaul market (connecting cellular base stations to the public telephone network) and amounts to as much as $2-3 billion a year. The PtP market is led by Ericsson, Stratex Networks and Harris Corporation. The PmP market on the other hand is more early days, with approximately $500 million in annual revenues. Surprisingly, there are many more players in the PmP market than the PtP market, with only one company with any type of market leadership based on revenues, namely Alvarion. Tranzeo is a player in both PtP and PmP markets. According to market research from Jupiter Research, there are about 5,000 ISP’s in North America and 10,000 worldwide. The top 20 ISP’s in the US serviced 29.5m or 31.5% of the US market (83.7m subscribers) as of June 2005. Parks Associates estimates the number of Wireless ISP’s (WISP’s) at over 2,500 in the US alone or approximately half of the ISP’s (up from 700 in 1999). According to some market researchers like the Ovum Research, the market for broadband fixed wireless access internationally is expected to grow from 1 million lines worldwide today to 16 million lines in 2008. A number of countries in Europe and Latin America, as well as China and Brazil, have recently auctioned off new fixed wireless licenses with great potential for growth. In terms of end users, there are 192.5m telephone lines in the US and 30.75m telephone lines in Canada, plus 15.9m DSL lines in the US and 2.9m and Canada with another 22.3m and 3.2m cable modems (as of June 2005). According to Parks Associates 20-25m US households cannot be served by telcos or cablecos. Worldwide, there are 813m telephone lines worldwide, 125m DSL lines and 65m cable modems (as of September 2005). According to numerous publications, including Internet World Stats, there over 972m Internet users (as of November 2005) or 15% of the world’s population, with only 176.3m of these users had broadband connections as of June 30, 2005 (according to Point Topic market research). Geographically, 28% of those users in North America, 30% in Europe and Middle East and 42% in Asia. Approximately 50m new broadband subscribers were added this past year 2005. In terms of technologies, DSL is the dominant technology in market share, with almost 65% share, double the share of the #2 (cable), although cable does outnumber DSL in North America. Point Topic estimates there were 15.9m DSL lines in the US and 22.3m cable lines (as of June 2005). The US remains the country with the highest number of broadband connections, 38.2m, followed by China 30.8m and Japan with 20.7m. Penetration rates for the top 20 broadband countries range from 8.5% (Portugal) of the population to 25% (Korea). Chile was the only country where fixed wireless connections out numbered all other alternative technologies. In the US, non-cellular wireless connections were relatively small and numbered less than 1m.


Competition Generally, we would refer to the market for fixed wireless equipment as being highly fragmented. The competition is also much smaller than in years gone by (with many of the telecom grade vendors exiting the business) with a handful of smaller players and one or two large OEMs. The direct competitors include Trango, Smartbridges and Motorola. Indirect competitors, that will be known to many readers and that play primarily in the telecom grade (licensed band) fixed wireless market, include Redline, Wi-Lan, SR Telecom, Wave Rider, VCom, Alvarion, Ceragon, Stratex Networks, Airspan, Wave Wireless and Terabeam. Today these companies do not compete with Tranzeo, although we could see more cross-over in the years ahead.

Figure 7: Competitive Landscape

Source: Company

Management The management team at Tranzeo is led by its CEO and founder, Jim Tocher. Jim was formerly the President and founder of NTS Computer Systems, a TSX listed company in the business of designing and manufacturing low cost laptop computers. Many of the employees, including most of the management team, come from NTS. The Company recently added Doug Howes, formerly VP Finance of Talent Technology and CFO of Riptide Technologies, as its CFO. The key members of the management team today are as follows:

Jim Tocher – President, Chief Executive Officer and Director Doug Howes – Chief Financial Officer Nick Dennis – Principal Software Scientist Anthony Kot – VP Sales David Marles – VP Quality Assurance

The board of Tranzeo includes three insiders and two independents. The insiders include Jim Tocher CEO, Anthony Kot VP Sales and David Marles VP Quality Assurance. Board independents include George Zhu the CEO of Zcomax Technologies, and Trudi Kloepper SVP Coast Capital Savings. As a group, management and directors own approximately 32% of shares outstanding.

ISP's Telecom Grade

Tranzeo Redline Trango Wi-Lan Smartbridges Alvarion Motorola SR Telecom

WaveRider Airspan Terabeam VCom Ceragon Stratex Networks


Financial Results On November 14th, 2005, Tranzeo reported its Q3 results, which continued the Company’s recent trend of strong growth and increasing profitability. Revenues for the quarter were up 108% y-o-y and up 13% sequentially to $4 million with EPS of $0.015. The following table outlines the highlights and the trends in some major financial indicators:

Revenues from direct sales and distributors were 53% and 47% respectively versus 78%-22% a year earlier. In dollar terms, revenues from distributors increased from $0.4m to $1.9m year-over-year, in the quarter. Revenues from repeat customers contributed approximately 50% of total revenues in the quarter. Geographically, North America generated 94% of the total, with the rest of the world adding 6%. Gross margins grew by 50% year-over-year but remained steady sequentially in the 30% range although we believe it could increase further in the coming quarters as the Company realizes economies of scale on some supply components. Operating expenses were up marginally (9%) from Q2 levels, but grew at a slower rate than revenues (13%). Year over year, operating expenses grew at 40%, again slower than the revenue growth in the same period (108%). Overall, net margins continue to increase with higher economies of scale and increasing earnings leverage. Net income in the quarter was $0.3m, translating into a net margin of 6.9% of total sales (untaxed) up from 5.2% in Q2 and up from negative 15% a year ago. EPS was down from $0.02 to $0.01, despite a higher net income, due the higher share count from the conversion of debentures into common shares in the quarter (dilution from the IPO will occur this quarter). The following table highlights the progression at Tranzeo in quarterly revenues and gross margins over the last two years, including our forecast for the coming quarter. Note that Q4 FY04 gross margins were artificially high due to one time year end adjustments as a result of certain volume discounts from suppliers.

Figure 8: Financial Results ($000 except /share amounts)

Source: Company, Paradigm Capital

Q3/F2005 Q2/F2005 Q3/F2004 Q2/F2005 Q3/F2004

Revenue 4,004 3,546 1,923 12.9% 108.1%Gross Margin (%) 30.0% 30.0% 20.1% 0.0% 9.9%Operating Expense 890 814 635 9.3% 40.3%Operating Income 312 250 (248) 24.5% NMFNet Income 277 186 (300) 49.0% NMFNet margin (%) 7% 5% -16% 32.0% NMFEPS - basic 0.01 0.02 (0.03) -7.6% NMF

% Change


Figure 9: Quarterly Revenues and Gross Margins

Source: Company, Paradigm Capital The following tables highlight the improving profitability over the last year. Tranzeo has been EBITDA and Net Income positive for 4 consecutive quarters. We also show our estimates for Q4 EBITDA and Net Income.

Figure 10: Quarterly EBITDA


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The Company had approximately $1m in tax loss carryforwards entering FY05, most of which will be used up in 2005 and hence Tranzeo will be taxable early in 2006. As a result, we have factored in a 23% tax rate into our FY06 earnings estimates and 33% in FY07. Balance Sheet The Company has maintained a very modest balance sheet since its inception. With the proceeds from its recent IPO, the Company’s cash will increase considerably in the current quarter (Q4) to the $3-4m level. We have attached our forecasts for the cashflow statement in Appendix 1, Figure 14. At end of the Q3 (before the IPO closed), the Company maintained just $47,000 in cash albeit with no short term or long term debt. On the assets side, last quarter the company retained $3.1m in inventory (up 200% from Q4 FY04), $0.6m receivables and $1.5m in working capital. Post IPO, working capital will grow significantly to about $5.5m – $6.0m. On the liabilities side, there was $2.4m in payables and shareholders equity of $2.9m (or $0.15 per share in book value), not including the proceeds of the recent financing. Post IPO, the shareholders equity will increase to approximately $7.0m - $7.5m or $0.36 per share. Tranzeo has 1.5m stock options outstanding, with a weighted average of $1.00, although none of the options have vested yet. From the IPO, there are 1.2m warrants outstanding exercisable at $2.50 until April 2007, which would bring in another $3.0m in cash (if exercised).


Risks 1. Managing Growth: Tranzeo has delivered exemplary growth over the last

four years and seems poised to continue that in 2006 and beyond. However, sustaining the current growth profile of doubling revenues year over year is difficult to manage. The Company is in the process of moving into its third production facility in the last 3 years and will be busy this quarter and next moving its equipment and ramping up the new facility. The Company has approximately 70 employees and will need to hire additional folks in the new-year, including some in key positions. At its current pace, Tranzeo will need to evolve from a small player to one of the bigger players in the market in a relatively short period of time, which can be difficult for some companies. Overall, the biggest risk to managing this business may be the reliance on Jim Tocher, who plays such an active role in every facet of this small but growing business.

2. Increasing Indirect Selling: Tranzeo has been successful selling directly but

is now diversifying into indirect channels. Over the last year or so, the Company added its first 11 distributors, about half in the US and half internationally. We look for the Company to add as many as 20 new distributors in 2006, both in the US and internationally. The distributors have minimum commitments for $0.5m per year, but there are no real guarantees and the risk is that this area underperforms while outside of the control of Tranzeo’s management.

3. Expansion into International Markets: In each of the last three years,

Tranzeo has generated 90-95% of revenues from North America, with the rest coming from a handful of international markets. The Company sells primarily to ISP’s, who by definition are smaller companies with much more risk than say a mainstream telecom carrier. The universe of ISP’s outside of the US is also smaller and much less sophisticated, which should mean that these new markets will be generally slower to ramp. Fortunately, the need for high speed Internet is even greater in the international markets, so the upside of this foray abroad is significant longer term. We have seen a number of key markets like India, Brazil and China, announce auctions for fixed wireless frequencies and we look for meaningful contracts to be awarded in these regions. These regions have been very price sensitive historically, which favors Tranzeo, and are less inclined to be controlled by mainstream telecom carriers.

4. Currency Changes: One of the bigger challenges today for Canadian

technology companies, including Tranzeo, is managing the impact of a strong Canadian dollar. The Company generated 72% of its total revenues in 2004 from the US and will continue to generate most of its business in the US. The Company has a natural hedge on some of its cashflow exposure, but may be forced to more actively hedge its increasing exposure going forward.

5. Competition: The direct competition in Tranzeo’s market is relatively limited.

The Company’s primary competitors are Trango (US) and Smartbridges (Singapore), two private companies that appear to be about the same size as Tranzeo. The bigger risk may be the negative image that has been created by the fixed wireless market, which has seen numerous disappointments with the telecom carriers and consequently in the public markets over the last 10 years (including here in Canada with Wi-LAN and SR Telecom).


Valuation and Recommendation The valuation metrics in fixed wireless equipment are fairly straight forward, with most companies trading between 1.5-3x trailing sales. Fortunately, Tranzeo’s financials compare very favorably relative to its comparables, with revenue growth of 100% and 7% net margins (untaxed) and is trading at just 2.2x trailing revenues. Leading industry comparables like Alvarion and Airspan trade at sales multiples between 2.2 and 2.6x trailing 12 month sales. Other less successful comps like Ceragon, Stratex Networks and Terabeam trade at lower multiples in the 1.5-1.7x range. It is worth noting that only Ceragon is profitable in this group, trading at 31.5x trailing earnings, which seems high but in reality reflects a modest level of profitability given the low price to sales ratio. The following comparable table highlights the various financial metrics for the fixed wireless universe, plus a handful of general hardware comparables in Canada: Figure 12: Comparable Table

Source: Company, Paradigm Capital There have been a number of M&A transactions in this space over the years, although most involve very small companies and/or distressed companies. These deals include Terabeam acquiring Proxim, YDI Wireless acquiring Terabeam, Wave Wireless merging with WaveRider (still in process) and Alvarion acquiring Interwave, to name a few. We do not believe that Tranzeo is a take-out candidate, given management’s lack of interest in being acquired (in our opinion).

Revenue (mm) Net Income

Company Symbol Stock Price

(Jan.9) Market Cap

Last 12 Months

(LTM)2 Year CAGR

Last Fiscal

Year P/Sales

LTM P/E

LTM

Airspan Networks Inc. AIRN -Q 6.43 $ 253.3$ 110.6$ 112.8% (8.5) $ 2.3 naAlvarion Ltd. ALVR -Q 9.22 $ 544.0$ 205.1$ 30.1% (15.5) $ 2.7 naCeragon Networks Ltd. CRNT -Q 4.45 $ 117.0$ 69.6$ 43.2% 3.3 $ 1.7 35.0Stratex Networks Inc. STXN -Q 3.73 $ 355.3$ 202.1$ 13.3% (37.6) $ 1.8 naTerabeam Wireless TRBM -Q 2.92 $ 62.5$ 37.7$ 24.4% (9.7) $ 1.7 na

US Average 266.4$ 125.0$ 45% (13.6) $ 2.0 35.0

Canadian CSI Wireless Inc. CSY - T 1.79 $ 77.6$ 81.6$ 7.4% (4.5) $ 1.0 naNovAtel Inc. NGPS -Q 28.97 $ 240.5$ 52.6$ 26.2% 14.6 $ 4.6 16.5VCom VCM-T 8.00 $ 180.0$ 63.0$ 40.1% 10.3 $ 2.9 17.5Webtech Wireless WEW-V 1.50 $ 60.2$ 10.3$ 75.1% 0.4 $ 5.8 150.4Wi-LAN Inc. WIN - T 0.80 $ 33.8$ 28.6$ 3.7% (11.7) $ 1.2 na

Canadian Average 118.4$ 47.2$ 30% 1.8 $ 3.1 61.5

86.1$ 38% (5.9) $ 2.5 $ 54.8

Tranzeo Wireless Inc. TZT-T 1.45 $ 31.8 14.7$ 112.6% 1.0 $ 2.2 33.5

Total Average


Comparable Canadian wireless hardware companies trade at a premium to the fixed wireless universe, with sales multiples in the 1.0-6.0x range. The Canadian universe puts a significant premium on profitability and growth, with NovAtel, Vcom and Webtech all fit that bill and trade between 2.8-5.6x trailing sales. Tranzeo also fits that bill, implying the stock could be in good company as it garners interest from investors. Overall, we are excited by the potential at TZT and expect that the Company will continue to grow revenues and earnings aggressively in the coming years, both organically and through acquisitions. As a result, we believe that Tranzeo can easily trade as high as 2-3x sales or 20-25x EPS. This suggests a target price in the range of $3.00 per share. This implies significant upside on the stock. As such, we are initiating coverage with a Buy rating.


Appendix 1: Tranzeo Wireless’ Financial Statements Figure 13: Income Statement Year End December 31 2002 2003 2004 Q1/05e Q2/05e Q3/05e Q4/05e 2005e 2006e 2007e

($000 s) 31-Dec 31-Dec 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-Dec 31-Dec 31-DecYear over Year 125.8% 90.8% 114.3% 108.1% 88.1% 99.7% 56.1% 38.9%Sequential 12.3% 32.1% 12.9% 12.4%

Revenues 1,549 3,267 7,377 2,685 3,546 4,004 4,500 14,735 23,000 31,950

Cost of Goods Sold 1,227 2,592 5,492 1,858 2,481 2,802 3,105 10,247 14,950 20,927

Gross Profit 322 675 1,885 827 1,065 1,202 1,395 4,488 8,050 11,023% 20.8% 20.7% 25.6% 30.8% 30.0% 30.0% 31.0% 30.5% 35.0% 34.5%

ExpensesSales and Marketing 142 355 744 270 271 279 350 1,170 1,625 2,160Reseach and development, net 85 172 430 118 187 188 200 692 1,350 1,765General and Administrative 246 354 750 227 297 362 400 1,287 1,450 1,960Depreciation & Am. 39 45 112 46 60 61 65 232 330 650Special Charges 0 0 0 0 0 0 0 0 0 0

512 926 2,036 661 814 890 1,015 3,381 4,755 6,535

%S&M 9.2% 10.9% 10% 10% 8% 7% 8% 8% 7% 7%%R&D 5.5% 5.3% 6% 4% 5% 5% 4% 5% 6% 6%%G&A 15.9% 10.8% 10% 8% 8% 9% 9% 9% 6% 6%

26% 23% 21% 21% 21% 21% 19% 18%

Operating Income (loss) -190 -251 -151 166 250 312 380 1,107 3,295 4,488

Interest and bank charges 13 46 141 45 46 3 3 97 -170 -220Gains on disposal 2 0 0 0 0 0 0 0 0 0Foreign exchange loss 10 22 24 10 19 32 0 61 0 0Other income 0 0 0 0 0 0 0 0 0 0Income before tax provision -215 -319 -316 111 186 277 377 950 3,465 4,708

Provision for income taxes 0 0 0 0 0 0 0 0 -756 -1,498Tax rate 0% 0% 0% 0% 0% 0% 0% 0% -23% -33%

Net Income (loss) from continuing ops. -215 -319 -316 111 186 277 377 950 2,300 3,209Net Margin -13.9% -9.8% -4.3% 4.1% 5.2% 6.9% 8.4% 6.4% 10.0% 10.0%

Including goodwill and one-time gains/chargesEPS (0.03) (0.05) (0.03) 0.01 0.02 0.01 0.02 0.06 0.10 0.14FDEPS (0.03) (0.05) (0.03) 0.01 0.02 0.01 0.02 0.06 0.10 0.14

Weighted average shares o/s 6,884 6,884 10,875 12,077 12,250 18,936 21,917 16,295 22,117 22,517 Fully Diluted Shares 6,884 6,884 10,875 12,077 12,250 19,769 22,500 16,649 22,750 23,150



Figure 14: Cashflow Statement (annually)


Tranzeo Wireless Technologies Inc.Statement of Changes in Financial Position

(C$000s, except per share amounts)

Year End December 31 2003 2004 2005e 2006e 2007e

Cash Provided by (Used for):

Operating

Net Earnings $(319) $(316) $950 $2,300 $3,209Add/(Deduct) Items Not Affecting Cash:

Depreciation and Amortization 45 112 232 330 650 Other 7 19 - - -

Changes in Non-cash WC 53 (673) (2,000) (1,000) (1,000)

Cash Flow From Operations $(214) $(858) $(819) $1,630 $2,859

Financing

Inc./(Decrease) in Share Capital $0 $503 $6,467 $0 $0Increase/(Decrease) in LTD - - - - - Increase in Convert. Debentures 307 1,065 (1,595) - - Change in Other 12 (36) - - -

Cash Flow From Financing $319 $1,533 $4,872 $0 $0

Investments

Increase in Capital Assets $(105) $(702) $(1,400) $(1,250) $(1,000)

Cash Flow From Investing $(105) $(702) $(1,400) $(1,250) $(1,000)

Increase in Cash Position (0) (28) 2,653 380 1,859 Cash Position, Begin. of Year 1 1 (27) 2,626 3,006 Cash Position, End of Year $1 $(27) $2,626 $3,006 $4,865


Figure 15: Balance Statement (quarterly) Source: Company, Paradigm Capital Note: IPO financing was completed early in Q4 FY05 and is not reflected in Q3 numbers shown above

Tranzeo Wireless Technologies Inc. Balance Sheet ($ Thousands) FY Ends In December 2004

Q4/04 Q1/05 Q2/05 Q3/05Dec-04 Mar-05 Jun-05 Sep-05

Assets Cash & Cash Equivalents $0 $276 $144 $47Accounts Receivable, net $268 $149 $385 $578Inventories, net $1,081 $1,732 $2,013 $3,063Other Current Assets $58 $295 $334 $242 Total Current Assets $1,407 $2,452 $2,876 $3,929

Capital Assets $772 $901 $1,087 $1,486Other $0 $0 $0 $0 Total Assets $2,178 $3,353 $3,963 $5,415

Liability & Shareholders' Equity Short Term Obligations $27 $0 $0 $0Accounts Payable & Accrued Liab $702 $1,105 $1,367 $2,447Due to Related Party $3 $0 $3 $0Customer Deposits $80 $45 $9 $45Current Portion of Convertible debentures $550 $957 $1,237 $20 Total Current Liabilities $1,361 $2,107 $2,616 $2,512

Convertible Debenture $1,038 $636 $362 $0Other $0 $0 $0 $0 Total Long Term Debt $1,038 $636 $362 $0Shareholders' Equity Share capital $778 $1,498 $1,688 $3,383Equity Portion of Convert. $55 $55 $55 $1Deficit ($1,054) ($943) ($757) ($481)Total Equity ($221) $610 $985 $2,903 Total Liabilities & SH Equity $2,178 $3,353 $3,963 $5,415


Disclaimer Section: 1. Barry Richards does not have an ownership position in Tranzeo Wireless Technologies Inc. (TZT-

T). 2. Paradigm Capital Inc. has assumed an underwriting liability for, and/or provided financial advice for

consideration to Tranzeo during the past 12 months. 3. Paradigm’s disclosure policies and research distribution procedures can be found on our website

at www.paradigmcapinc.com. Research Rating System: Paradigm Capital uses the following rating recommendations in its research: Strong Buy – Analysts’ top sector picks, with expected returns of 10% or more over the next 6-12 months. (4.3% of Paradigm’s coverage list consists of Strong Buy recommendations). Buy – Expected returns of 10% or more over the next 6-12 months. (62.4% of Paradigm’s coverage list consists of Buy recommendations). Hold – Expected returns of +/-10% over the next 6-12 months. (18.8% of Paradigm’s coverage list consists of Hold recommendations). Sell – Expected returns of –10% or more over the next 6-12 months. (6.8% of Paradigm’s coverage list consists of Sell recommendations). Speculative Buy – Expected returns of 10% or more over the next 6-12 months on high-risk development or “pre-revenue” companies, such as junior mining and early stage biotech companies. (7.7% of Paradigm’s coverage list consists of Speculative Buy recommendations).

About Paradigm Capital Inc. Paradigm Capital is a research driven, independent, institutional equity investment dealer focused on sectors and companies that have attractive long-term secular growth prospects. Paradigm Capital’s research is available on our website at www.paradigmcap.com. Please speak to your Sales or Trading Representative if you require access to the website. The analyst (and associate) certify that the views expressed in this report accurately reflect their personal views about the subject securities or issuers. No part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations expressed in this research report. Analysts are compensated through a combined base salary and bonus payout system. The bonus payout is determined by revenues generated directly or indirectly from various departments including Investment Banking, based on a system that includes the following criteria: reports generated, timeliness, performance of recommendations, knowledge of industry, quality of research and investment guidance and client feedback. Analysts are not directly compensated for specific Investment Banking transactions. The opinions, estimates and projections contained herein are those of Paradigm Capital Inc. (“PCI”) as of the date hereof and are subject to change without notice. PCI makes every effort to ensure that the contents herein have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. However, PCI makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this research report or its contents. Information may be available to PCI, which is not reflected herein. This research report is not to be construed as, an offer to sell or solicitation for or an offer to buy, any securities. PCI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. PCI may act as financial advisor and/or underwriter for certain of the corporations mentioned herein and may receive remuneration for same. Paradigm Capital Inc. is a member of The Toronto Stock Exchange, The TSX Venture Exchange and The Investment Dealers Association of Canada. To U.S. Residents: Paradigm Capital U.S. Inc., affiliate of PCI, accepts responsibility for the contents herein, subject to the terms as set out above. Any U.S. person wishing to effect transactions in any security discussed herein should do so through Paradigm Capital U.S. Inc. This report was prepared by Paradigm Capital Inc. which is not subject to U.S. rules with regard to the preparation of research reports and the independence of analysts.


Research Special Situations Doug Cooper (416) 363-5115 (Head of Research) Technology – Software/IT Services Gabriel Leung (416) 361-6054 Technology – Hardware/Semiconductors Daniel Kim (416) 363-6644 Technology – Wireless Barry Richards (416) 364-4835 Industrial Products Marvin Wolff, CFA (416) 361-3376 Gold and Precious Metals Don MacLean (416) 360-3459 Don Blyth (416) 360-3461 Metals, Mining and Fertilizer David Davidson (416) 360-3462 Biotech & Health Care Claude Camiré (416) 360-1322 Entertainment Corey Hammill (416) 361-0754 Research Associates Jacob Willoughby (416) 361-9557 Marissa Caron (416) 364-9764 Research Assistant Michael Lobodzinski (416) 363-6228 Offices Toronto 95 Wellington St. W., Suite 2101 Toronto, Ontario M5J 2N7 General Line (416) 361-9892 Fax (416) 361-6050

Sales John Bellamy (Head of Sales) (416) 361-6032 David Roland (416) 216-6844 Kristina Bates, CA (416) 361-9698 John Cooke, CFA (416) 361-6053 Fabiene Evans, CA (416) 361-6056 Nancy Fearon (416) 360-3578 Robert Stabile, CFA (416) 361-1895 Trading Chris Glavin, CFA (416) 361-1901 Kevin Heffernan (416) 361-9752 Mervin Kopeck (416) 364-5451 Clark Toews (416) 360-5129 Stock Rating System Strong Buy: The stock is expected to appreciate and produce a total return of at least 10% over the next twelve months. This rating is used to highlight one or two stocks that our Analysts believe will outperform, from a risk-reward standpoint, all other companies in their respective coverage universes. Buy: The stock is expected to appreciate and produce a total return of at least 10% over the next twelve months. Hold: The stock is expected to provide returns of +/- 10% over the next twelve months. Sell: The stock is expected to depreciate and produce a total return of -10% or less over the next twelve months.

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