Value Find: Terabeam Inc.
A revitalized balance sheet, renewed cost-cutting and a streamlined focus have things looking up for a little-known microcap in the wireless broadband equipment sector.
After several years of spotty performance, San Jose, Calif.-based Terabeam Inc. (Nasdaq: TRBM) finally could be ready to break out. Formed through a series of acquisitions, most notably the acquisition of Proxim Wireless in 2005, Terabeam primarily provides core-to-client solutions for broadband municipal wireless networks. It has shipped more than 1.5 million wireless devices to more than 200,000 customers.
Terabeam, with a market capitalization of $48 million, estimates the value of the broadband municipal wireless market at $3 billion over the next three years. While Terabeam is a small fry in the wireless broadband equipment market, it believes it can continue to hold its own in the lower-profile muni and public safety segment of this fast-growing market.
Terabeam has taken several steps recently to position itself for sustained profitability and growth. In July, Terabeam raised $7.5 million in a private placement and sold two patents for $2.5 million in cash. Then, earlier this month, Terabeam announced the sale of its small, money-losing Ricochet wireless network. This move takes Terabeam out of the service provider business and makes it a more-focused, wireless equipment pure-play.
Thanks to recent cost reduction efforts, such as the outsourcing of more of Terabeam’s development activities to India, the company expects to realize $1 million in quarterly cost savings beginning in the third quarter. This reduced break-even level puts Terabeam in the vicinity of hitting cash flow break-even with just modest quarterly revenue growth.
For the second quarter ended June 30, Terabeam posted revenue of $19 million, up 8% sequentially, but a decrease of 8% from the year-earlier period. Its quarterly operating loss declined to $2.8 million, from $3.2 million. Gross margin improved to 44.4%, from 41.9%. Terabeam ended the quarter with over $6 million in cash, and no debt. Note that this total doesn’t include the proceeds from the recent private placement and patent sale.
Taking into account its latest expense reductions, Terabeam believes that it can now post cash flow break-even results at the $19.5 million to $20 million revenue level. Terabeam was last profitable on an operating and GAAP basis in the fourth quarter of 2005. Up until its most recent earnings report, Terabeam’s top-line had been stuck around the $18 million revenue level, resulting in a quarterly cash burn rate in the range of $2 million.
Terabeam doesn’t have any Wall Street analyst coverage, nor does this microcap play provide guidance. Management seemed upbeat on its second quarter conference call, but we’ve heard Terabeam’s management sound upbeat previously only to then disappoint.
Given this mixed track record, if Terabeam were trading near or at a 52-week high, we probably wouldn’t take a closer look. But with the stock recently fetching $1.80 a share, at the low end of its 52-week range of $1.75-$3.00, and trading at a deep discount to its public comparables, this microcap looks like an interesting speculation at current levels.
At the stock’s recent enterprise value of $35 million, Terabeam is trading for just 1x its run-rate gross profits of $33 million and around 0.5x its run-rate revenue of $76 million. The market values larger competitors Alvarion Ltd. (Nasdaq: ALVR) and Airspan Networks Inc. (Nasdaq: AIRN) at 2.5x and 1x expected revenue on an enterprise basis, respectively.
The largest institutional shareholder in the stock is Lloyd Miller, III, a private investor that we’ve tracked for several years and whom has generally proven savvy in microcap value situations. Miller currently holds a stake in excess of 12% in Terabeam and participated in the July private placement of common stock at the $1.75 level. In May, Terabeam added a new director, which had been recommended by Miller, to its board.
One negative for the stock has been persistent insider selling by an entity controlled by Terabeam CEO Robert Fitzgerald under a 10b5-1 trading plan. Even with this selling, Fitzgerald still controls a sizeable 8% stake in the name. Several weeks ago, Terabeam CFO Brian Sereda was a modest open market buyer of the stock at the $1.82 level.
After years of largely being ahead of the market with its pre-WiMAX and WiMAX wireless solutions, Terabeam now seems to be “in the right place, at the right time.” Terabeam may continue to muddle along and be unable to turn the corner to sustained profitability, but the broader market trends have certainly turned into a nice “tailwind” for it.
With an inexpensive valuation, a very solid balance sheet, and smart money accumulating the stock, we believe the downside is modest, while the upside could be substantial.
Bottom-line, Terabeam looks like an attractive “value find” for medium-risk oriented investors.
