It’s been a wild and woolly week for stocks in general and even more so for Israeli companies. We’ve seen some disappointing earnings across a broad swath of stocks and even the mighty have felt some pressure.

Let’s start with Alvarion (ALVR). Even after the Cisco purchase of WiMax competitor, Navini, the stock has had a hard go of it and even received a downgrade by Merriman, Curhan, et al. IsraelNewsletter’s Katsman, though, is still very positive on the name. Read his recent post here. Before Cisco (CSCO) officially announced its takeover of Navini, I posited that it would be better served by buying ALVR. Read that article here.

Commtouch (CTCH) out with numbers.

Radvision (RVSN) stinks up the joint. Even my colleague, Aaron “Buy Everything” Katsman has lost faith in the firm. See his recent capitulation here.

Magal (MAGS) Systems gets an order.

RRSat (RRST) reported last week.

Partner (PTNR) sees a lift from rising revenues.

Answers.com (ANSW) reports really strong traffic growth in its new WikiAnswers product.

Laggard BigBand Networks (BBND) terminates its CMTS business. I wrote on BloggingStocks about the future of cable TV and how BBND plays into the thesis.

ClickSoftware (CKSW) traded down big after reporting OK earnings. Read why Katsman smells an opportunity in this name.

Microcap Cimatron (CIMT) out with earnings and some info about its plans for China.  Read some excerpts from the conference call.

012 Smile.Communications (SMLC) floated this week.  I posted on the offering here.

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Are we having fun yet?  Tough trading out there but Israeli companies continue to make news.

Answers (ANSW) getting nailed after predicting further widening losses next quarter.

Orckit (ORCT) wins $12 million in damages from Conexant (CNXT) covering damages incurred in the period from 2001 through 2003 from a supplier of semiconductor chips that was acquired by Conexant. The semiconductor chips were used in Orckit’s legacy DSL products.

Remember Backweb Technologies (BWEBF.OB)? They reported yesterday.

Internet Gold (IGLD) reports earnings.

The Street liked Cellcom’s (CEL) earnings report. See our recent coverage of Cellcom and the issues they face given Israel’s 120% cellular penetration.

Zoran (ZRAN), the maker of software and chips for digital media products, rose off an article in Barron’s. In the article, a Jefferies & Co. analyst said the stock may jump 50% in the coming year.

Still on the lam, Comverse’s (CMVT.PK) founder and previous CEO, Kobi Alexander still eludes extradition from Namibia to the U.S. for his connection in an alleged options backdating scheme. See why IsraelNewsletter may not agree with all the politicking going on but we do like the stock. Click here to read our previous coverage on Comverse.

Ness Technologies (NSTC) buying Italian software house, Selesta SpA.

Ormat Technologies (ORA) picks up an RBC upgrade to outperform.

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Answers.com (ANSW) recently announced via a press release (read it here) that due to an algorithmic change in Google Search (remember, ANSW is extremely dependent on Google traffic which we have postulated is behind their acquisition attempts for Dictionary.com), Answers is no longer showing up as frequently in Google searches.

What’s the damage? Traffic levels are currently down approximately 28% from levels immediately prior to the change.

Here’s what the company had to say:

“The major search engines modify their algorithms all the time,” added Mr. Rosenschein (ANSW’s CEO). “This change only demonstrates the sound business rationale behind our agreement to purchase Dictionary.com, because it underscores a primary motivation for the deal: to secure a steady source of direct traffic and mitigate our current dependence on search engine algorithms… As we work to restore normal traffic levels to Answers.com, we are confident that our efforts will result in a stronger and more valuable company.”

The issue of dependence on Google’s traffic is also recognized by Answers’ bulls, notably Michael Eisenberg, an early investor in the company.

Clearly, Answers needs to diversify away its risk inherent in depending on Google so greatly for traffic. The rationale behind the acquisition of Dictionary.com was ANSW’s answer to procuring organic traffic.

Now, things are really tough for Answers. Before this happened, it was unclear that Answers could get a $100M deal done. Now that their traffic is plummeting, it may get even harder. Combined with a cratering high yield market and a decreased appetite for stocks, Answers should be scrambling looking for The Answer.

Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 8/1/07.

Please see our Disclaimer HERE.

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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com

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Zack Miller
www.IsraelNewsletter.com

I wanted to let the dust clear a bit before positing my opinion on Answers.com’s (ANSW) acquisition of top 30 (in terms of traffic) website, Dictionary.com. Readers of IsraelNewsletter.com know that I’ve written somewhat critically on Answers.com before and I wanted to provide an update on my thesis.

See what I’ve written previously here; the crux of my point could have been summarized as the following: while Answers.com’s content model is very much Web 2.0, its revenue model isn’t.

Now, purists can take issue with whether or not Answers really is Web 2.0. given the fact that there is no user participation, data-sharing, social networking, etc. Fine. My point was merely that Answers is competing on the Web 2.0 playing field. Essentially, Answers is aggregating Web 2.0 content and that in an of itself, means it competes against the same companies it aggregates.

But as I said previously, I believe that the company’s revenue model is very much Web 1.0. Why the distinction, you ask? Because while Web 2.0 companies can very quickly scale their content models via user-generated content and social networking (see in point, Facebook’s recent meteoric rise in value), not many Web 2.0 companies have levered revenue models. Traditionally, to make money with straight-ahead advertising (whether that’s TV, radio, Internet, video, whatever), you need to execute on the ad sales side. Nothing 2.0 about that: selling ads is all about hiring people and squeezing dollars out of partners. Ultimately, both activities hit a huge wall with CPMs eventually plateauing.

Michael Eisenberg has written a great article on Answers but I have to disagree with his point regarding scalability: getting a top 100 web site does not mean ad sales becomes scalable. It just means that the publisher may get a larger piece of advertisers’ wallets. True, large advertisers frequently don’t even want to talk to smaller publisher fish. Getting big gets you in front of their marketing/advertising team but the same problem of scalability remains and this is a question of human execution, not economies of scale.

So, what do I think was actually behind Answers’ purchase of Dictionary.com? Paul Kedrosky had a keen comment that this was a story about a record-setting domain name purchase. I think Paul’s partly right. But it’s also about the the traffic that came along with the domain name. From all accounts (including Answers’ own CEO), Dictionary came at a hefty price tag and a poor history of monetization and I’m not even talking about the cost of capital that Answers is going to incur (sorry, that investors in Answers are going to have to incur) when they buy a company at 1X their market cap and almost 10X their cash position.

But how many of us actually saw that within the announcement of the impending purchase, Answers pre-announced to the downside. If this is a game about optimizing ad sales, Answers is having a hard go at it.

By the way, in Answers defense, Google has the most successful ad sales team on the planet for its network and although sell-through for a network is a different game of optimization, Google is spending heavily on this non-scaleable activity. Their secret sauce is working and good as they are at sales, this will return less and less over time. To bring in big Fortune 500 advertisers, Google is wooing them with a direct sales force and packaging together vertical groups of publishers for larger buys.

So, if advertising revenues = page views X cost per impression, Answers has decided that growth is not going to come from boosting its own cost per impression, but rather by boosting its impressions. Answers has a lot of dependence on Google for impressions and like most non-Facebook websites, occurs significant TAC (traffic acquisition costs). Doing the math, management must have decided that making a huge acquisition is a better investment than making the tough ad sales slog.

This puts Answers.com right back where it started. This is an admission that ad sales is very much a question about execution and that Answers was completely dependent on this non-scaleable, Web 1.0 activity.

In some sense, this was the only way to grow, albeit at investors’ expense.

Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 7/18/07.

Please see our Disclaimer HERE.

Like what you see? Sign up to receive daily updates from IsraelNewsletter here.

**************

Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com

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