Openwave's business in the wireless data market is very unique and valuable. It has a 50 percent market share in both browsers and gateway transitions for mobile phones, making it the leader in both. Both are important parts of the market for data cell phones.
Our philosophy is to own the most important parts of markets that seem to be growing very quickly. We wrote an article in January 2004 that said the wireless revolution had begun. Based on recent information from Texas Instruments (NYSE:TXN), Qualcomm (NASDAQ:QCOM), and other third parties, it looks like the wireless data market is actually picking up speed. Based on how the world stock market and Openwave stock have been trading over the last month, this seems to go against what most people think. Most of the time, people misunderstand revolutionary growth acceleration. I think that when everyone knows about it, wireless data's strong growth will surprise a lot of people.
Openwave's business is based on the browser and the gateway. Again, our goal is to own the most important monopolistic parts of an industry. We often compare our way of thinking to having a roof over your head and gutters that control how water flows. When it rains, most of the water will land on the shingles, but a lot of it will gather in the gutters. So, one gutter can handle as much water as all of the shingles put together. This model for finding the most important parts of monopolist companies is very successful, as shown by the many top rankings given to us by third parties.
We think that the gateway and browsers are the most important parts of the wireless data market, and Openwave is the leader in both of these markets. Because Openwave is in a better position to bundle, integrate, and test its products, it becomes a natural extension of their browser and/or gateway for every new service they add. This bundled approach, as Microsoft has shown over time, is not only more convenient for the people who use it, but it can also often be made for a lot less money, which is good for the phone companies. When reviewing new or existing services, phone companies like to look at how many economies of scale a dominant player has. Imagine you're a large carrier. Do you want to work with a new company that hasn't been around long enough to prove itself? That would mean more integration, testing, billing, and ongoing maintenance. Or would you rather an existing company improve their service or maybe just add the service to an existing product? Because of this, it's hard for new wireless companies to get a foothold in the wireless data market, and when new wire data services start up, the bigger companies tend to merge.
It looks like the consolidators, like Comverse Technology Inc. (NADSAQ: CMVT) and Amdocs Ltd. (NYSE:DOX), have an edge over many of the newer companies in the industry as a whole. Both of these businesses focus more on the back end of things. The data services for phones will be the ones with the most growth, and I think Openwave is the best-positioned company as the industry continues to merge.
About 60% of Openwave's quarter is already booked, and that doesn't include about an addition 10% is a pay-as-you-go plan. That means Openwave needs to bring in about 30% more money in the next quarter. That means that Openwave has a much lower rate of failure than most other companies. The data shows that carriers are more likely to reorder because the number of new data phones is growing, each phone is being used more, and there aren't any new major competitors entering the market.
Openwave's licence sales bring in a lot of money.
Last quarter, Openwave said that licencing sales made up more than half of its total sales and that it had a gross margin of 97%. More than 70% of Openwave's gross profit comes from licencing fees. Openwave's business model is easy to understand. If long-term licencing goes up, profits will go up, and if licencing goes down, profits will go down.
Last quarter, licencing saw some of the best growth from one quarter to the next (16%) and from one year to the next (34 percent ). During the last two years, Openwave's licencing income grew at a rate of 23 percent per year.
Valuation.
Openwave is now worth about 12 times what it will earn in the future. This is because of its market dominance, the profitability of its core business, and the future of the wireless data industry. I think this company should trade at a higher price than its peers in the data wireless market.
Risk.
When compared to their peers, the stock market value of Openwave and the wireless data industry has changed a lot and by a lot over time. If an investor wants less risk, they should look at other investments.
The biggest risk is that the management won't do a good job. Since this is a relatively new management team and Openwave's stock has been sold off in large amounts, the stock market is saying that this quarter will be very hard. It's time to see if the management team can get things done. I think that a problem with earnings has already been priced into the stock market, and that any small miss by management that doesn't change their long-term forecast would be rewarded.
Conclusion.
I think this is what you should look for in an investment: a company that has shown over and over again, since the new management took over, that they are meeting their goals and have said over and over again that they are on track for the long term. Openwave is the leader, and most of the big carriers are using it more and more every day. With a core business that has very high margins, it can become very profitable over time. It looks like the market for its main products is growing faster, while the value of its stock on the stock market is going down a lot. Again, this is what I look for when I invest.
