Tech Beat: Room for small caps in wireless?
Not all that long ago, the term wireless applied specifically to voice communications. But as is understood by anyone who has discovered the texting feature on their cell phones, the global positioning systems in their cars, or attends company conferences remotely from a laptop in their local Starbucks, wireless voice technology today is just one of a multitude of wireless applications.
The term wireless in the year 2007 applies to the transmission of voice, video and data and covers a long and growing list of uses from accessing the Internet over a handheld device to preventing theft of truck cargo by implanting a GPS device in the trailer. Quite simply, the industry is booming.
Wireless technology helps corporate executives work more effectively on the road, keeps blue collar workers more efficient in the field, and is providing a lot more entertainment options for the living room, the car and the daily subway commute.
The sheer number of wireless devices and applications as well as potential users makes it difficult to even measure the size of the market.
One good statistic is that consumer spending on wireless technologies is projected to exceed spending on wireline, or fixed wire services by the year 2010. And anecdotally, there is growing evidence that more and more consumers prefer using their cell phones for text and entertainment data than to talk. That shift is spurring demand for new wireless technologies.
All the companies that years ago made money selling traditional land-line telephone equipment today are pouring resources into wireless networks, and in recent years many of these industry giants have grown even larger through mergers and alliances. France’s Alcatel merged last year with Lucent Technologies – resulting in Alcatel-Lucent (NYSE: ALU) - while Nortel Networks Corp. (NYSE: NT) formed a partnership with Microsoft Corporation (Nasdaq: MSFT) to build wireless technologies for corporations. Cisco Systems, Inc. (Nasdaq: CSCO) has increasingly been investing in Internet gear to allow for the delivery of voice, video and data to wireless devices, and Motorola Inc. (NYSE: MOT) is actively acquiring smaller businesses that make technologies to enable wireless communications.
All this means that it’s not the easiest time to be small in this industry. While small startups remain a key source of innovation in wireless technology, as they have traditionally been throughout the high-tech industry, the challenge of competing with large global players, and of relying on a smaller base of customers can cause results to be erratic from one quarter to the next.
A number of small-cap wireless technology makers that have enjoyed impressive revenue growth in recent years, have also seen their stocks tumble of late. This volatility is not necessarily bad news, but just underscores the uncertain nature of this industry, which holds a wealth of opportunity but is also marked by fierce competition, and, like any rapidly growing market, may suffer from some excessive hype and over-spending.
CalAmp Corp.
CalAmp Corp. (Nasdaq: CAMP) is an Oxnard, Calif. company that makes wireless products and software aimed at delivering the holy grail of anytime/anywhere connectivity in very remote areas. Its products are targeted at a range of industries from law enforcement to healthcare to entertainment.
The company more than doubled its revenues from about $100 million in fiscal 2003 to $220 million two years later, but since 2005 has seen slower growth, with sales in fiscal 2007 totaling $222.3 million. And, after doubling net income from $5.2 million in 2003 to $14.6 million in 2004, CalAmp produced a $31.2 million net loss in 2007, due to a problem supplying one key customer that accounts for nearly half its sales.
When CalAmp reported 2007 results last month, it said the sudden reversal of fortunes reflected a quality issue with one of its satellite broadcasting technologies and warned the problem could hurt sales to its main customer, EchoStar Communications (Nasdaq: DISH), which accounts for 48.2% of its total revenues, going forward.
Its stock has been punished badly, now trading around $4.70, down from $8.82 at the start of the year and $8.61 one year ago. Oppenheimer & Co. has cut its rating on the stock to neutral from buy on concerns that sales would continue to suffer.
On the positive side, none of other CalAmp’s other customers was affected by its product problem, and the company is continually expanding through acquisitions, which should make it less dependent on any single customer.
The average analyst estimate for fiscal 2008 ending next February is that CalAmp will report full year revenues of $175.6 million and lose $0.17 per share, compared with a $0.05 per share profit in fiscal 2007. However, those forecasts are based on the estimates of only two analysts.
Relm Wireless Corp.
Relm Wireless Corp. (AMEX: RWC) of West Melbourne, Fla., has seen some less dramatic weakness in its stock price of late, despite a steady track record growing sales. The company’s revenues grew to $32.5 million in fiscal 2006, from $28.5 million in 2005 and $20.7 million in 2004. While Relm’s operating income has also grown, its net income fell to $3.4 million last year from $10.3 million the year before and $7.9 million in 2004, partly reflecting large tax credits in the two prior years.
Two analysts who have published estimates for fiscal 2007 ending in December are forecasting revenues of $31 million on net income of 23 cents per share.
The company’s products, targeted at the government and public safety industries, are sometimes described as high-tech walkie-talkies that can keep police, firefighters or rescue workers in better contact with one another from the field.
Relm, which has publicly spoken of the challenges competing with much bigger companies like Motorola, was in March was downgraded by Feltl & Co. to a hold from a buy.
Nonetheless, the company has not had any significant bad news in recent months.
With its current share price of about $4.72 down from $6.03 at the start of the year and $5.75 the year before, it could be a buying opportunity for an investor with a tolerance for volatility.
