A Pioneer of the Wireless Revolution Strives for Profitability
By Randy Myers
Newly formed OPENWAVE SYSTEMS (OPWV) should reap handsome rewards if wireless Web surfing ever becomes popular in the United States.
OPENWAVE was created by the Nov. 17 merger of Software.com and Phone.com. Phone.com developed much of the technology behind the wireless application protocol (WAP) standard. That technology allows conventional Web sites to be converted into a format suitable for use on handheld wireless devices such as cell phones and personal digital assistants.
Wireless Internet services are already a hit in some overseas markets, but have been slow to take hold in the U.S., where transmission speeds are slow and the screens and keyboards on most handheld devices are maddeningly small. As those bugs are worked out, OPENWAVE stands ready to cash in, since its software products are already being used by more than 80 wireless operators around the world to give their subscribers access to the Internet and corporate intranets via mobile phones. The company also sells to phone makers such as ERICSSON (ERICY), MATSUSHITA (MC), MOTOROLA (MOT), NOKIA (NOK) and SAMSUNG ELECTRONICS (SMSEF).
Paul Coster, an analyst with J.P. Morgan, says OPENWAVE has a brighter future than either Phone.com or Software.com had alone, since the two will now have the opportunity to cross-sell to their differing customer bases, especially as packet-switching technologies mature. When that happens, Mr. Coster says, telecommunications carriers are likely to embrace open-standard, Internet protocol based software platforms for both wireline and wireless applications. As a premier provider of highly scalable IP-based e-mail applications for wireline carriers and Internet service providers, Mr. Coster says, Software.com gives OPENWAVE a nice entrée into this broader marketplace.
Unlike many of the companies operating in the wireless data space, OPENWAVE already has some real heft behind it. The company employs approximately 1,600 people in 15 countries, including about 700 engineers. Mr. Coster estimates that the company already owns more than 50% of the market for wireless data software applications and infrastructure.
Despite tremendous top-line growth prospects, making money is still a long-term proposition for OPENWAVE. Mr. Coster projects that the company will lose $644 million on revenue of $324 million in the fiscal year ending June 30, 2001, compared to a pro-forma loss of $285 million on revenue of $93 million in fiscal 2000. In the fiscal year ending June 30, 2002, he says, OPENWAVE should lose about $497 million on sales of $636 million.
A big chunk of those losses, though, comes from non-cash depreciation and amortization charges, which Mr. Coster estimates at about $632 million for both fiscal 2001 and fiscal 2002. He projects that the company will attain operating profitability by March 2001, and post profitable net income in fiscal 2003. Earnings before interest, taxes, depreciation and amortization should total about $173 million in fiscal 2002, he says, compared to a loss of about $3 million in fiscal 2001.
Excluding amortization and depreciation costs, Mr. Coster estimates that OPENWAVE will earn $0.03 a share in fiscal 2001 and $0.76 a share in fiscal 2002. Part of that growth will come from surging revenue, and part from expanding margins. He predicts that by the end of fiscal 2002 the company's gross margins will swell to 79.8% from their current level of 71.8%.
Mr. Coster rates OPENWAVE's stock a BUY, with a 12-month price target of $124. He notes that that represents a price-to-revenue multiple of 45-times his fiscal 2001 revenue estimate. OPENWAVE closed at $52.44 on Dec. 14.
The biggest risks confronting the company, Mr. Coster says, are that consumers simply don't embrace the wireless Internet, or that a major carrier rejects the WAP standard. By transitioning to a business model that extends beyond cell phones and WAP to the broader IP environment, he suggests, OPENWAVE is mitigating those risks.
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