Wednesday, November 5, 2008

Q3 Earnings preview

Here are a few thoughts for tomorrow's earnings results/cc.

Q3 earnings estimates are for revenue of $182.5m. Management has guided between $180-190m. Loss estimate is for 54c/share. However, the stock will be driven more with Q4 estimates and outlook for 2009.

Q4 estimates are for revenue of $246m. There are only a couple of analysts providing estimates but the company should be able to beat this number. 2008 revenue (excluding PCD and including the shortfall discussed last quarter) should still be around $900m. That would put Q4 numbers in the high $200m/low $300m range. Book to bill should easily be over 1 due to the India Phase II contract and the fact that Q3 revenue is low due to the shortfall and some revenue recognized earlier in Q2.

The sale of PCD/MSBU also occured in early Q3 so net cash will increase substantially. The company's forecast is to end the year with net $324m in cash. They will still burn about $50m in Q4 so by the end of Q3, they should have about $375m in net cash or a little over $3/share. Enterprise value will be negative but that is not uncommon in this bear market. Aside from the cash, the company has around $200m in real estate/building and other investments/securities that yield a book value significantly higher than the current price. The key to unlocking this value is to get to profitability or atleast maintain neutral cash flows going forward.

Other things to look for are iptv subscriber numbers and new contract wins in Russia, Japan, Brazil, and other Eastern European countries, Latin American countries, etc. Its counter intiuitive to think a company can grow revenues in this environment but then again, a lot of UT traction in iptv, ngn, and broadband has happened recently.

Target expense metrics discussed all year long may also get some input. UT expenses are still way too high and revenue growth has not happened. It seems there is no major cuts in the horizon, which could mean that management is confident that revenues/bookings growth will be robust or that management is out of touch with the concept of profitability. I am not sure what "near term" means to management as well since we have been hearing about their near term revenue growth and profitability goals for the last 4 years.

Anyway, the company has been operationally in the red for the last 12 quarters but amazingly the balance sheet is fairly good. In the last year, there have been strategic wins that give hope that the company is in the right track. Whether the market will assign a large discount or ridiculously large discount to book value remains to be seen the next couple of days.

Some shareholders have become even more pessimistic on the share price predicting $1.5 or lower prices. I guess that is human nature but if it happens, its time to close your eyes, press the buy botton and hang on :-)

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