TAKING STOCK: Bridge to a mobile ‘revolution’?

Published in the Ottawa Business Journal newspaper and website.
June 29, 2009 (July 2 on OttawaBusinessJournal.com)

Bridgewater could benefit from the one area where carriers are still spending

While many other tech companies have seen their stock value plunge since the onset of the recession as customers trim or delay their spending, Bridgewater Systems is one of the few exceptions.

Although its share price has dipped somewhat in recent weeks, over the past six months its value has more than doubled, hitting a 52-week high of $5.25 in May that brought it close to revisiting its $5.50 initial public offering price. With record revenues in its last fiscal year and recent deals with major partners and customers, as well as a successful compromise with shareholder Crescendo Partners that helped avert a messy proxy battle, the path seems clear for the mobile service management software firm to capitalize on the rising popularity of the smartphone. So is there a downside?

The company’s view: Bridgewater CEO Ed Ogonek has said the company is at the “front stage of a mobile data revolution.” As more people request services and add more applications onto their mobile devices, demand for Bridgewater’s subscriber management and policy control technology is expected to soar, which makes sense considering many users are already drowning in a sea of applications ranging from the mundane and functional to a plethora of online games.

Mr. Ogonek noted the company is debt-free, has reported profits in 19 out of its last 20 quarters and, notably, has enough cash to be conducting an ongoing share buyback program and to be considering strategic acquisitions.

“I’m pleased with the company,” said tech veteran and Bridgewater chairman Terry Matthews. Mr. Matthews was one of the most vocal opponents of Crescendo’s call for a sale of Bridgewater, which he told OBJ was because he believed the company could do better than the valuations that would be offered in the current poor market conditions.

“Don’t come in to a company with excellent opportunities with a ludicrously low valuation … In a time of recession, when flat is the new growth, Bridgewater is seeing 30-per-cent growth,” said Mr. Matthews, following the company’s annual general meeting late last month. “But that doesn’t mean (a sale) won’t eventually happen. Everything has a price, but it’ll be on the company’s terms, not on forced terms.”

Mr. Ogonek pointed out that Bridgewater’s market is one of the few areas where carriers are still spending, with worldwide mobile broadband revenues expected to grow more than quadruple to $137 billion by around 2014. The policy control chunk of that market, in which Bridgewater specializes, meanwhile, is anticipated to grow from $200 million in 2008 to $1.8 billion.

The analysts say: Bridgewater’s recent signing of HP as a global reseller is seen as key to the company’s success internationally, since it has primarily been focused on North America until now. “HP has some very large global carriers as customers, including AT&T, China Telecom and NTT DoCoMo, and if HP introduces Bridgewater to even a handful of these tier-one customers, there’s the potential for significant revenue opportunities,” said BMO Nesbitt Burns analyst Thanos Moschopoulos, who has an “outperform” rating and a $6 target price.

Mr. Moschopoulos added Bridgewater’s solutions appear superior to that of its competitors and that its new WideSpan business model helps to tie revenue growth closely to the increase in customers’ mobile traffic.

“The downside is that it’s a small-cap tech company and there’s always an execution risk, the possibility of lumpiness in revenue and competitive threats, but it is one of the only markets growing right now, even in a recession,” he said.

He noted the company will need to get more traction with GSM operators if it intends to capture global dollars, since the market for GSM is larger than for WiMAX or CDMA.

Deepak Chopra of Genuity Capital Markets, who provides a $5.50 target price and a “buy” recommendation, said Bridgewater could also benefit from a deal with a major international carrier such as Vodafone, Orange or T-Mobile to show that it can execute its strategy beyond its traditional strength in the CDMA and North American market.

“Eighty per cent of the world’s users are on GSM,” said Mr. Chopra.

Still, he had many good things to say about the stock, and added he was pleased Bridgewater was able to resolve its conflict with Crescendo, since a prolonged proxy battle could have hurt employee morale. With the current arrangement, shareholders can also be confident there will be board members who are looking out for viable merger and acquisition opportunities, he said.

“I continue to like the name – it’s sitting in the sweet spot of the smartphone revolution, with carriers increasingly looking to monetize revenues from the smartphone base in the medium and long term,” said Mr. Chopra. “The stock has had a good run, but there are still plenty of levers in the longer term if it can execute.”

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