Friday, January 05, 2007

Color on warning: Openwave (NASDAQ:OPWV)

Several firms are commenting on Openwave (NASDAQ:OPWV) after the co yet again lowered guidance and provided a reply to Harbinger's filings:

- JP Morgan is the most optimistic of the bunch saying product and operational transitions are progressing, and a good bookings quarter in December shows promise for future improvement. But revenue/EPS will likely be light based on preliminary results as the company's move to a more ratable model should show up first in bookings then in income statement.

Bookings are expected to be ~$120M for the quarter and revenue/EPS between $83-84M/($0.08)-($0.09) compared to JPM estimate of $90.9M/$0.00. Big part of bookings came from Sprint, the largest customer, but there are some signs of broader improvement. Timing of one large systems deal did not contribute to revenue holding back the top line, while the combination of lower revenue and higher commission expenses on the good bookings contributed to the earnings miss.

Management is looking for ways to improve shareholder value with the announcement of a $100M repurchase program that the firm expects to begin in late January and be completed quickly over 30-60 days.

JPM believes there is value in the stock trading at 1.7X revenue, a 48% discount to its peers. Remains Overweight.

- CIBC notes that with its proxy fight less than two weeks away, OPWV downplayed weak F2Q07 results and trumpeted its 1.43 book-to-bill as validation of its strategic plan. But the firm has their doubts, given management's indication that visibility is unimproved and that '07 numbers need a fresh sheering.

Though generally encouraged by bookings, several factors curb firm's enthusiasm. Almost half the bookings were with Sprint; exclude it and book-to- bill is only ~0.9. Also, the disconnect between bookings (improved), visibility (unchanged), and rev. outlook (reduced) is puzzling.

Typically, they would expect bookings and backlog growth to be a harbinger of either improved visibility or of revenue momentum. The firm is therefore perplexed by management's indication that, despite the multi-year high backlog level a) visibility on a quarterly basis remains stuck at 60%-70% and b) revenue growth for the remainder of the year will be only moderate (and below earlier

Nevertheless, they view OPWV s $100 million share buyback announcement as a constructive move towards further shareholder value creation and a solid way to utilize its strong cash postion. Maintains SO.

- Jefferies is downgrading their rating to Hold from Buy saying another negative preannouncement indicates no near-term stability in the core business, and offers no evidence of new product traction. No sign of a major restructuring in sight either. However, $3.60 in net cash/share, a $100MM stock buyback program and >$1Bn in NOLs should all help support OPWV stock.

Firm's downgrade today reflects a slower-than- expected recovery process, and increasing financial risk related to cash burn and very high DSOs. While downside is probably limited, it is difficult to find a catalyst right now for OPWV shares. Recent shareholder activism has been scorned by management, but detailed guidance, a significant buyback, and a renewed focus on costs show that the shareholder discontent is already producing results. Jeffco remains concerned that Openwave's high dependency on new products that may not be enough to offset a declining legacy business.

Tgt goes to $9 from $11.

Notablecalls: In case you consider investing in OPWV I strongly suggest you go back and read Harbinger's filings. I especially enjoyed description of the events of late August, when dismissal of the chief marketing officer, chief administrative officer, chief operating officer, chief of business development and 60-odd other employees was allegedly misrepresented to investors as a reorganization. According to Harbinger, the action had more to do with silencing dissent than cutting costs or improving operations a Silicon Valley version of the night of the long knives.

Secondly, take a close look at what the co is doing. WAP gateways, ringback tones and mobile browsers (not for smartphones, though!). Hope LBS and music will save the day. Really. Pass.

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