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Archive for July, 2007

SupportSoft (SPRT) Gaining Traction with Support.com

July 28th, 2007 by Yehuda Fruchter   |   1 Comment

It has been a little over a year since we first recommended shares of SupportSoft (SPRT). While the stock has not been a top performer, the year-over-year return has been quite satisfactory at about 30%. Normally, after holding a stock for over a year we would consider taking long-term capital gains, and transferring the proceeds into what we perceive as a better risk/reward opportunity. However, in the case of SPRT, we’re going to hold on quite awhile longer.

Our continued optimism is based on the fact that the company’s consumer offering, support.com, is just starting to get traction, as evidenced in the company’s the latest earnings release. In fact, the company’s first major revenue from this new service will only be recognized in the fourth quarter of 2007, with potentially huge growth expected in 2008.

In addition, and perhaps more importantly, the remote computer support industry, in general, is just beginning to gain wider recognition. Specifically, we think that starting later this year and into next, remote computer support will be marketed heavily by many large retailers and other service providers, helping to greatly increase awareness of these services with a wide base of consumers.

As the only pure public stock play in the growing remote computer support industry, SupportSoft (SPRT) shares could see a big boost once more consumers and investors recognize the potential of remote computer support and leading role Support.com is beginning to play in this still nascent industry.

The key question, of course, is whether the potential of Support.com is already reflected in SPRT shares and whether there is still room for some “irrational exuberance” as additional consumers and investors discover the stock. We think that at a current enterprise value of about $150 million (SupportSoft has over $100 million in cash), one can easily argue that the potential of support.com is still not yet reflected much in SupportSoft’s value.

While, we won’t go into details here, it’s important to remember that SupportSoft, as a whole, is not a start-up business. The company’s core enterprise software business is doing about $50 million a year in revenues, and also has interesting growth opportunities. While the enterprise business is lumpy, there surely are strategic buyers who would pay a decent multiple for this established business, especially as the company’s main competitor, Motive, continues to suffer from accounting and SEC issues.

This leads us to conclude that Support.com is still only a tiny slice of the SupportSoft’s current valuation and SPRT shares could increase significantly over the next 12 to 18 months, assuming revenue growth for support.com and the greater awareness of remote computer support, matches our expectations.

Please Note: We hold a position in SupportSoft and first recommended the stock at $3.95 in May 2006 . All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Phoenix (PTEC) Rising

July 19th, 2007 by Yehuda Fruchter   |   No Comments

Phoenix Technologies (PTEC), (first recommended at $4.55), reported exceptional earnings results today, demonstrating that the company’s financial turnaround is essentially complete. Management can now focus on growing the company both via new internal initiatives, and acquisitions.

Notably, the company reported nearly 40% top-line growth as compared to the previous 2007 quarter, and more importantly, the company’s generated over $4 million in cash-flow for the quarter, which compares to an over $6 million cash loss last year.

While PTEC’s stock is clearly no longer as cheap as it was when we first recommended the shares back in November 2006, we still think there is good upside in the shares over the coming year.

We remain optimistic primarily because the company’s revenue and cash-flow outlook over the next few quarters remains excellent and there still appears to be only one analyst following the company. We’d expect additional coverage in the coming year, given recent results.

Specifically, it seems likely that revenue in the fiscal fourth quarter could top $15 million for a 20% quarter to quarter growth rate, yielding an annualized revenue run rate of $60 million by next quarter.

In addition, the company still has a substantial amount of lost revenue to make up due to prior managements’ mishaps. In fact, current management of PTEC has hinted at an annual run rate of $100 million from the core BIOS business, and we think that an $80 million run rate is doable by the middle to end of 2008. Given the company’s 80%+ gross margins in the main BIOS business, the potential profits from this core revenue stream should be phenomenal and will provide the capital to pursue additional growth opportunities. Phoenix is also sitting on nearly $60 million in cash and has no debt.

So what’s the potential upside here? It’s hard to say, but it’s interesting to note the current proliferation of tech companies, with extremely capital intensive businesses and little in the way of competitive advantages, selling at obscene valuations, i.e. over 10X EV/Revenue. So we think it’s possible, at least in this environment, to argue for a much higher valuation for PTEC, given its dominant market position in the BIOS industry, and it’s almost complete lack of capital needs to support continued profitable high-growth in the core business (e.g. the company spent a measly 300K last quarter on cap-ex), as well as the solid growth opportunities it has outside the core BIOS business.

For the sake of adding some very simplistic quantitative analysis to this entry, we’ll use some recent M&A multiples in the software industry, and apply a 5X multiple off of a 2008 revenue run-rate + cash, to arrive at our $18 price target for PTEC shares over the next year.

Please Note: We first recommended Phoenix Technologies (PTEC) at $4.55, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.