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Mobile
Software Stocks- The Bridge Between Wireless and the Desktop
Handheld
and wireless devices are seemingly everywhere these days.
From Blackberry pagers and Palm PDAs to data enabled
cell phones and hybrid PDA/cell devices, everyone seems to
be joining the wireless revolution.
While
the first phase of this revolution centered primarily on the
consumer, the second phase of the data driven wireless Web
is likely to be led by businesses - both large and small.
Get ready
for the wireless corporation.
In other
words, instead of simply retrieving stock quotes and sports
scores on wireless devices, employees will instead constantly
swap valuable business information from wireline legacy databases
to a diverse range of wireless platforms all in real time.
Growth
is not an issue for this sector.
In the
U.S. alone, industry analysts expect the number of wireless
data users to grow from 3 million to between 15 and 36 million
by 2004. Regardless of this fact, the valuations of mobile
software stocks have plummeted along with the rest of the
tech sector over the past year.
So far,
Wall St. seems to have had a hard time separating the brutal
price competition taking place among device makers like Palm
[PALM] and Handspring [HAND], with the more attractive
and less cutthroat margins of mobile software providers. These
stocks are battered but not beaten.
With this
in mind, then, I decided to take a look this week at three
of the largest pure play mobile software stocks- Pumatech,
Extended Systems and Aether Systems. After much
slicing and dicing of this group, let's see what my analytical
microscope found out.
Pumatech [PUMA]
The past
year for Pumatech hasn't been easy. In fact, the collapse
in tech valuations has left this mobile data synchronization
player looking much more like a timid house cat then a wild
cat lately. That being said, Pumatech still has a very widely
used product in Intellisync and has actually become the synchronization
standard for large handheld players like Casio and
Research in Motion [RIMM]. In addition, Pumatech now
holds a total of 15 synchronization related patents.
While
tightening corporate IT budgets are having their effect on
Pumatech, sales for the most recent quarter still jumped 29%
to $10.3 million. Another small positive was the fact that
the company's loss for the quarter dropped to $9.2 million
or 11 cents compared to $10 million in the same period last
year. Sequentially, Pumatech's sales actually decline almost
9% last quarter. Year over year, though, Pumatech's 2001 sales
are still expected to rise over 35% to $42 million.
The wireless
hype of late 1999 and early 2000 shot Pumatech's share price
to the moon. At a recent price of $3 per share, though, PUMA
is now down 90% from its 52-week high. While Pumatech is not
predicting breakeven next year, the company is still well
stocked with capital- having ended last quarter with $52 million
in its coffers. Sales should grow 40% next year to $59 million,
while losses shrink to 20 cents per share for the year. PUMA
shares look tasty to me at these prices.
Extended Systems [XTND]
Few companies
ever get to know what it feels like to be left at the altar,
but Extended Systems is one of them. After announcing plans
to be acquired by Palm Inc. [PALM] back in March, the two
companies surprised investors by calling off the deal last
month. The botched deal now leaves this mobile information
management company in an interesting position. Will it seek
out another merger partner or will it attempt to continue
to play the wireless software game on its own?
On the
surface, Extended would appear to have the tools needed to
stay independent. After  all,
the company boasts a blue chip customer list, which includes
the likes of Proctor & Gamble [PG], EDS
[EDS] and Daimler Chrysler [DAJ] among many others.
On the other hand, Extended currently faces declining overall
sales and a limited cash position to worth with. The company
responded to this situation earlier this month by signing
a deal to sell its legacy printing solutions business, as
well as fire 15% of its worldwide workforce.
Sales
are expected to decline roughly 12% to $10 million or so next
quarter as Extended reports a pro forma operating loss of
between $2.2 and $2.6 million. While Extended ended last quarter
with only $4.4 million still left in the bank, the firm still
has a $10 million credit line to tap. In addition, with a
recent valuation of approximately $70 million, Extended is
only trading for less than two times its projected 2001 sales
($47.5M). This is a new acquisition just waiting to happen.
Aether Systems [AETH]
Aether
has gone from wireless savior to profitless pariah in only
a year or so. Shares in the wireless products and services
provider are now down 95% from their 52-week high and are
currently teetering at an all time low. Wall St.'s confidence
in Aether's ability to actually turn a profit looks highly
suspect at this point. Out of 23 brokers currently following
the stock, a staggering 12 of them currently have a HOLD (read-
sell) rating on the company's shares. Even so, Aether still
has an interesting story.
Founded
in 1996, Aether products and services allow individuals to
receive real time data on wireless devices. Clients include
Charles Schwab [SCH], Office Depot [ODP] and
the US Postal Service among many others. Sales shot
up a staggering 600% to $30.7 million last quarter. While
this was certainly impressive, Aether expects to see only
"flat to modest" revenue growth for the rest of
the year. Even with this being the case, the company still
expects to be cash flow positive by the third quarter of 2002.
This would be great. We shall see.
The fact
remains, though, that right now at least, Aether is still
a ferocious cash burning hog. Aether lost $46.8 million in
the last quarter alone. Thankfully for AETH shareholders,
the company still has $730 million in cash on hand and expects
to reach breakeven next year with $550 million still on hand.
While this goal isn't impossible, the analyst community still
seems decidedly bearish on Aether after it dropped the ball
on meeting its estimates earlier this year. For now, this
looks like one wireless name to avoid.
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