Openwave's Further Woes; No Bait Shop Add Yet

Openwave Systems (OPWV) is a name that has been puzzling, and more disappointing than rewarding of late.  Tonight they are trading down almost 5% to around $9.00 after they widened out their loss expectations from -$0.01 to $-0.08 or -$0.09 (and -$0.24 after options) and took revenues down to $83 to $84 million; compared to -$0.01 and $88.75 million estimates.  I was actually looking for break-even or better on EPS with all the hub-ub over mobile search crazes we read about in Q3 and Q4, so this is an agitating warning.  They also lowered estimates on revenues in the coming quarter from almost $92 million down to $85 to $90 million, a further irk.

Going into 2006 they were set to turn into a profitable operator in mobile web search and a myriad of other online and mobile services for major telecom and wireless providers, yet as we get into 2007 they are a struggling player with a few competitors in each of their fields that all have to fight and wait for business from what seems and feels like a shrinking customer base (carriers merging, not end users).  This company would make a key strategic acquisition for any search king that wanted to gobble up a player that is already entrenched into most mobile providers out there, BUT……… Yes, the dreaded "but."  The problem isn’t that they have significant charges, and it isn’t that the field is too mature for a monster to swipe up a tiny company for under $1 Billion.  The valuation and lack of ability to post anything resembling continuous earnings is the issue.

You could literally imagine a Google (GOOG) or a Yahoo! (YHOO) jumping all over this, and there are a dozen other players in new and old media that come to mind.  It makes more sense that Google could hide this on the books better (yes, hide), and Yahoo! has to worry about its real earnings.  Maybe it can happen, but I have never been able to bring myself to officially add it to the BAIT SHOP of takeover candidates.  This $100 million share buyback that it simultaneously announced is merely a stock stabilizing effort that does the company ultimately no good at all, and I would argue they are just going to further erode their balance sheet going into what could be slightly slower times.  It has an $895 million market cap, and as of Sept. 30 it had right at $400 million in cash and short term investments.  Its total liabilities were $390 million. Sure it listed over $900 million in total assets, but more than $200 million of these assets were from Goodwill, Intangibles, and Other; which I am a stickler on and many of the other assets would be hard to instantly monetize.

I have had this on a "WATCH LIST" for the BAIT SHOP for a long time, and while part of me wishes I would have added officially as a BAIT SHOP member back at $7 or $6 it has traded down there for a reason and is hanging lower than in much of 2005 and 2006.  So, here it still sits as a WATCH LIST company, meaning they are a candidate rather than a member.  It would make sense to acquire this company, but the price that this would occur at is a different matter entirely and I just can’t bring myself to add it into the BAIT SHOP yet.  The company has activism activities from the outside pressuring it to do better, but that isn’t enough for me.  So, Openwave will have to remain on the sidelines for now.  Stay tuned.

Jon C. Ogg
January 4, 2007

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Jon Ogg is a partner in 24/7 Wall St., LLC; he does not own securities in the companies he covers.