PTEC

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.

Phoenix Technologies (PTEC): Turnaround On Track

January 26th, 2007 by Yehuda Fruchter   |   2 Comments

Bottom Is Definitely In

Yesterday, Phoenix Technologies (PTEC) reported Q1 results which significantly exceeded expectations and provided solid evidence that the company’s turnaround is in on track. With revenue increasing by 17% over the prior quarter and the company’s loss reduced, it seems clear that a bottom has already been reached in the business and results will only continue to improve as the year progresses.

Market Rejects Ramius Capital

Importantly, the market reacted favorably to the company’s earnings report, pushing PTEC stock up nearly 10%, and leaving the share price nicely above Ramius Capital’s recent takeout offer of $5.25 per share.

Interestingly, Ramius Capital had suggested that Phoenix’s turnaround would be a, “difficult and risky operational turnaround.” However, these results seem to show that this prediction was merely a scare tactic, designed to try to acquire the company on the cheap. It appears obvious, at this juncture, given these solid results, that Ramius’s offer will be rescinded. Hopefully, with the ultimate judge, the Market, now providing its opinion, Ramius will allow Phoenix management to get on with their obviously successful turnaround plan, and cease burdening them with unproductive proxy battles.

Outlook Appears Solid

Going forward, Phoenix management remains very confident that sales will continue to increase throughout the year, with significant increases expected in the second half of 2007. Currently, management forecasts $50 million in sales this year, and breakeven during the early part of the fourth quarter, a bit earlier than the original forecast.

This improved outlook, which suggests a $60 million+ revenue run rate by mid-2007, reflects the success of the company’s new sales and pricing initiatives. As mentioned in our initial write-up of Phoenix Technologies (PTEC), the company has fully eliminated the use of fully paid up licenses in the BIOS software business in favor of a more royalty-based pricing model. With these new pricing plans now in place, management has a much easier ability to forecast revenue over the coming 12 months, suggesting that current projections are accurate. Moreover, with Microsoft’s Vista still in the very early stages of its rollout, is seems to us that current estimates may even be slightly conservative.

Stock, While No Longer A Steal, Is Still Attractive

Overall, we still remain very positive on PTEC’s stock, even though the share price has now moved up nearly 20% since the beginning of the year. While the stock is no longer “obviously” cheap, with the price now above Ramius’s takeout offer, we still think the company has significant upside from present levels.

If current forecasts are met, and the company gets back to more normalized revenue levels of $60 million, it’s conceivable, given the very high gross margins of the BIOS business, that PTEC would valued at 3X Enterprise Value to Sales. That would imply a valuation of about $8.50 per share.

However, we expect that once management fully stabilizes the BIOS business, they will seek complementary acquisitions, to beef up the company. This process may take a few years to play out, but given management’s incredible success in other similar endeavors, the odds of a positive outcome seem high and could lead to substantially greater upside than presently suggested by the BIOS business alone.

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.

A Buyout Battle Looms at Phoenix Technologies (PTEC)

January 17th, 2007 by Yehuda Fruchter   |   5 Comments

If you’ve been following Phoenix Technologies (PTEC), one of our top software turnaround picks, we’re sure you noticed that yesterday Ramius Capital offered to purchase PTEC for $5.25 per share, a 15% premium to our purchase price for the shares back in November 2006.

Today, Phoenix management soundly rejected the Ramius offer. What we found interesting about the refusal of the buyout proposal was that Ramius actually considered offering a slightly higher price for the company.

As PTEC management says:

“We have reiterated to you on several occasions our Board’s confidence in the Company’s potential to yield significantly more value to stockholders than your proposed offers, including your revised offer of $5.30 per share made verbally last week and the $5.25 per share offer made today. “

The implication is that Ramius has been pretty active with regards to PTEC and they are not finished here yet. Shareholders can look forward to an interesting hedge fund vs. management battle in the year ahead.

As for us, we’re holding onto our shares of PTEC and we would be buyers on any dip. We are not surprised that management has refused to accept the Ramius offer. New CEO Woody Hobbs has only come to PTEC recently and has clearly not had enough time to make much of an impact, even though he has already implemented several significant restructuring actions.

Given that the vast majority of Mr. Hobbs incentive options are at about $5 per share, we hardly think that the 5% return will be enough to appease this proven software executive. We remind investors that the last company Mr. Hobbs took over, subsequently rose by nearly 500% after he turned it around and sold it to Nokia. And while we’re not expecting that type of return in the case of PTEC, we surely think the company could be worth far more that $5.25 per share when BIOS revenue begins to recover over the next 12 to 18 months.

Please Note: We first recommended Phoenix (PTEC) at $4.55 per share, 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.

Phoenix Technologies (PTEC): Activist Shareholders Still Pressing for Change

January 8th, 2007 by Yehuda Fruchter   |   2 Comments

Last week, the major activist shareholders in Phoenix Technologies (PTEC), filed an amended 13-D with the SEC. We noticed several interesting tidbits in the filing, which support our continued optimism for this software turnaround play.

Notably, the filers stated:

“The Reporting Persons continue to believe that the Shares of
the Issuer are undervalued and in order to maximize shareholder value, Ramius Capital continues to be interested in acquiring the Issuer. “

As we mentioned in our initial write-up on PTEC, Ramius Capital and other major shareholders have already offered to buy PTEC for $5.05 per share. As the new SEC filing implies, this offer is still on the table. While we doubt that current management will accept this offer, given that their options are set at about the same price, the fact that PTEC’s stock is currently trading at a decent discount to the offer price implies limited downside at current prices.

In fact, PTEC reminds us somewhat of our successful foray into Stratos International (STLW), a fiber-optic turnaround play, which traded significantly beneath Steel Partners offer price for quite some time, offering investors an extremely low-risk investment opportunity in what is generally a high-risk sector. As you may already know, it didn’t take much to push STLW’s stock back up above the offer price.

Another point of interest from the amended PTEC 13-D filing, is that the activist shareholders who are now seeking board appointments, mostly bought into PTEC at much higher prices. Some major purchases were at well above $5, offering another indication that the risk in PTEC’s shares is limited at current prices.

Finally, it is also important to note that the shareholder activists in PTEC have extensive experience in the software industry, particularly in turnaround situations, giving us further confidence in the underlying value of PTEC.

For reference the two major current activists in PTEC are:

JOHN MUTCH (AGE 50). In March 2003, Mr. Mutch was appointed to the Board of Directors of Peregrine Systems (NASD:PRGN.PK) (“Peregrine”), a global enterprise software provider, to assist Peregrine and its management in development of a plan of reorganization, which ultimately led to Peregrine’s emergence from bankruptcy. From August 2003 to December 2005, Mr. Mutch served as President and Chief Executive Officer of Peregrine, during which time he restructured and stabilized its business operations and led Peregrine through its acquisition by Hewlett-Packard.

PHILIP MOYER (AGE 41) is a private investor and entrepreneur. From
July 2003 to September 2005, Mr. Moyer served as General Manager, Professional Services Industry for Microsoft Corp. (NASD:MSFT) (“Microsoft”). From July 2002 to July 2005, Mr. Moyer also served as Microsoft’s General Manager of Global Customers, during which time he was responsible for managing worldwide sales and service teams for some of Microsoft’s largest multi-national customers. From July 1999 to July 2002, Mr. Moyer was General Manager of Microsoft’s Services Organizations (Consulting, Support, Technology Specialists, and Partners) in the U.S. East Region. From 1991 to July 1999, Mr. Moyer held a variety of executive and technical positions with Microsoft.

In sum, we still believe that PTEC has little risk at current prices, and significant upside, as management, all of whom also have excellent track records in software turnarounds, continues to restructure the company to leverage PTEC’s leading position in the BIOS market.

For our initial reports on PTEC, please click here.

Needham on Phoenix Technologies (PTEC)

December 10th, 2006 by Yehuda Fruchter   |   No Comments

In early November, Needham analyst John Lynch, wrote an updated research report on PTEC, which we think provides an excellent summary of what went wrong with the company and what may go right in the coming year. We have reproduced the commentary below and added our analysis at the end.
Needham comments:

“As the PC industry has matured and prices have dramatically declined, the component pricing environment has been fierce. Phoenix, the world’s leading supplier of the BIOS firmware, which is essentially a PC component, has felt the effects of this pricing pressure acutely. Their ASPs, especially in desktop systems, have eroded under the pressures of their highly cost conscious PC OEM customers. Inferentially, despite their gaudy market share, the company lacked an IP or engineering advantage that would enable them to maintain sufficiently favorable pricing. Other viable competitors exist, and some potential customers have opted simply to design their own BIOS in house.

Because they foresaw anemic growth in their BIOS business, the previous management team at Phoenix decided to seek growth through a new business segment that would produce applications to meet the burgeoning demand for security and disaster recovery. Citing the swelling number of threats and nuisances caused by malware and other malicious attacks, the company felt they could sell these applications to valueadded- reseller (VAR) customers, a new sales channel for Phoenix, which would in turn sell them to vulnerable corporations willing to pay for an extra layer of protection.

Because these products worked best when a computer was equipped with Phoenix BIOS, the company made a staunch effort to preserve, and even expand, their share of the market. This effort entailed entering into fully paid up license agreements, in which a customer received essentially unlimited rights to use Phoenix’s BIOS code for the duration of the contract. This move towards fully paid up licenses was further encouraged by management’s belief that the current generation of BIOS was soon to be obsolete, and that the Vista upgrade cycle would spur demand for their next generation of higher ASP BIOS. These agreements were in contrast to their traditional agreements, in which Phoenix was paid based a royalty based on the number of units shipped.

This plan, however, has been pronounced a failure (as evidenced by explicit comments from management as well as the stock price). By branching into an unfamiliar space dominated by well known brands like McAfee and Symantec, the company seems to have bit off more than it could chew, as they say. VARs were slow to bite, and those that did found themselves with buggy products marred by compatibility issues and installation problems. Once these problems became apparent, the company found itself in dire straits. By entering into fully paid up licenses, in which all revenues were recognized immediately, they had exhausted a large piece of their recurring revenues in their core business. As Vista has been famously delayed, new revenue streams from next generation BIOS have not begun to flow. And the revenues from applications, which were to make up for weak BIOS revenues, did not materialize.

So now new management has entered the picture, and returned to a BIOS centric strategy. The company plans to focus its engineering dollars on adding the functionality and innovation necessary to command higher BIOS ASPs. And the sales force, rather than trying to learn about and pander to the unfamiliar VAR channel, will be focusing on their traditional, established OEM customers. Furthermore, management has already eliminated the practice of using fully paid up licenses, and thus should be able to provide more stability and visibility to the business. However, this plan will take time, and management believes they will be able to get back to breakeven by late 2007. The cleanup at Phoenix will be an arduous process. The biggest question, in our mind, is whether or not Phoenix can indeed add features and functionality to their BIOS business such that they can reverse the ASP declines that have plagued both the company and the industry. At this early stage of the new strategy, it’s too soon to tell.”

Comments:

Needham has established a $52 million sales estimate for PTEC in 2007 and has modeled a breakeven in the 4th quarter based on management comments. Other Wall Street firms are projecting $40 million in sales. Our estimate is closer to the $40 million range. The uncertainty here relates to the terms of the upfront license agreements, and how long it will take PTEC’s management to replace these contracts with new, and more favorable agreements. Clearly a key factor is the speed in which Vista will be adopted by computer OEM’s. If the uptake is slow, it will take longer for PTEC’s sales to recover meaningfully.

Notwithstanding the timing issues for a turnaround, our view remains that the last quarter was probably the bottom for PTEC’s sales drop and that sales should begin to increase sequentially in 2007, as Vista is slowly adopted by the industry.

Given that PTEC has already received a buyout offer of $5 per share from a shareholder group, we see little downside to the stock at current prices. The stock price is also supported by a basic valuation analysis, in which we assume $40 million in revenue in 2007. Given the very high gross margins of the BIOS line, we think that 2X Revenue, or $80 million, is an appropriate valuation for the business, especially since the company could easily far surpass the $40 million revenue run rate in due time. Taking that $80 million valuation and adding back $40 million in expected cash, results in a $120 million company valuation or about $4.60 per share.

On the upside, we expect that once management stabilizes the BIOS business, they will seek complementary acquisitions, and beef up the company for a sale. This may take a few years to play out, but given management’s incredible success in other similar endeavors, the odds of a positive outcome seem high and the upside potential seems significant. Quantitatively, as new BIOS agreements take hold and acquisition activity heats up, PTEC can conceivably reach prior sales levels of $80 million in a few years time, which given the reduced cost structure could lead to substantial profits of nearly $1 per share, suggesting a long-term price target of over $10, or an over 100% gain from current levels over the next few years. Finally, it is also important to remember that the new management team at PTEC faced a more difficult situation during their last turnaround at Intellisync and yet subsequently reinvigorated that company leading to a more than 400% rise in the stock price over a five year period.

Phoenix Technology (PTEC): A Compelling Software Turnaround

November 29th, 2006 by Yehuda Fruchter   |   No Comments

Investment Summary
Even though investors may have to suffer thru several more quarters of losses, we think that Phoenix Technologies (PTEC), the leading supplier of BIOS software for PC’s, is an attractive turnaround investment opportunity at current prices. (Note: The price of PTEC’s stock was $4.55 as of this writing).

Over the next two years the shares could begin to rebound sharply as the company starts showing dramatic financial improvements and investors begin to price in new growth opportunities for the business. Specifically, the hiring of a new group of proven technology turnaround executives coupled with the release of Microsoft’s Vista operating system in 2007, have enhanced the company’s future prospects.
At the same time, we also do not see much long-term downside risk for PTEC’s stock at current valuation levels, even assuming that our positive scenarios for the business do not pan out over the next two years. The company’s strong financial position and leadership in the stable BIOS business eliminate any terminal risk for the company and increase the odds of an eventual takeover should current turnaround efforts fail.
The People
In September 2006, Phoenix hired Woody Hobbs as new CEO. Mr. Hobbs was the former CEO of Intellisync which was sold to Nokia in late 2005 for over $400 million. During Mr. Hobbs 5-year tenure, Intellisynch’s revenue more than tripled and the stock rose by over 500%. Prior to Intellisynch, Mr. Hobbs served as the chief information officer of Charles Schwab. He received 900,000 shares of PTEC stock at $5.05 at the time of his hiring. We expect that in mid-2007, Mr. Hobbs will begin to unveil several aggressive growth strategies, which could attract renewed investor attention to the company.
In addition to Mr. Hobbs, PTEC has also recently hired two other well-known technology executives. Dr. Gaurav Banga, the former VP of Product Development of Intellisync and the creator of VeriChat, was hired as the new chief technology officer of PTEC. Richard Arnold, another high-level executive at Intellisync, and the former CFO of Charles Schwab, was hired as the VP of Strategy at PTEC. Mr. Arnold received options on 600,000 Shares at $4.45. Mr. Banga received options on 275,000 shares at $4.51 per share.
Finally, aside for these executives PTEC has a highly active base of institutional investors who have been pressing for corporate change for quite some time and have bought into the stock at much higher prices. Chief among the activist investors is Ramius Capital, which recently actually offered to buy 90% of Phoenix for $5.05 per share. We encourage you to read thru Ramius’s initial 13-D filing for a decent summary of the investment thesis for PTEC’s shares. You can access the filing here:

http://www.sec.gov/Archives/edgar/data/832767/000092189506001435/sc13d06297pho_06052006.htm

The Business
Basic Statistics
As of 9/30/2006 Phoenix has about 26 million shares outstanding, $60 million in cash, and no debt. We estimate that, in a worst case scenario, the company could burn thru $20 million in more cash before returning to profitability in late 2007. We also estimate a core, sales run rate of about $40 million per year with gross margins approaching 80%.
Background
Phoenix was founded in 1979. The company is the leading provider of BIOS software for digital devices based on the x.86 microprocessor architecture.
What is BIOS? From Webopida: “BIOS is Acronym for basic input/output system, the built-in software that determines what a computer can do without accessing programs from a disk. On PCs, the BIOS contains all the code required to control the keyboard, display screen, disk drives, serial communications, and a number of miscellaneous functions. The PC BIOS is fairly standardized, so all PCs are similar at this level.”
In plain English, the BIOS makes software that loads a computer’s operating system when it is turned on. It provides a critical link between hardware platforms and operating systems. In case you may not have noticed, when you turn on your PC, you will see something related to the BIOS flash across your screen before Windows is loaded. In most cases, the BIOS software that is loaded on your PC comes from PTEC.
PTEC’s customers include major computer manufacturers such as Dell, Matsushita Electric Industrial Co. Ltd., Lenovo Group Ltd. (which acquired IBM Corp.’s personal computer division last year), Sony Corp., and Hewlett-Packard Co.
Comments
We like PTEC’s business for three primary reasons:
• Solid Brand, Operating History, and Customer Base
While not a well-known consumer brand, Phoenix Technology is one of the best known software brands in the PC industry. The company’s software has been a core component of computing systems for over 20 years. The company’s customer base is a who’s who of the consumer computer world.
• Stable Business Outlook that is Defensible
Though the company has failed in the past to build additional growth businesses upon its dominant BIOS position, it is clear that the company has a solid business foundation that cannot be easily replicated and which should provide stable revenues for quite a long time, i.e. as long as x86 computing devices are used. In addition, it is highly unlikely that the technology surrounding BIOS will change much in the company years, preventing any technological obsolescence for PTEC’s core product. This highly defensible core BIOS business provides solid downside business protection for investors in PTEC’s stock.
• High Gross Margins
PTEC, like Microsoft, essentially licenses its core BIOS software to PC manufacturers for a share of revenue on every PC that is sold. This is a business with 80%+ gross margin potential. Without much in R&D or marketing expenses, the BIOS software business is essentially a cash cow, if managed properly.

What Went Wrong Here?
Despite establishing a dominant position in one of the most important software components in the PC market, management incompetence prevented PTEC from ever fully capitalizing on this unique position. Specifically, management attempted to diversify into enterprise software application businesses that leveraged next to nothing from the company’s dominant BIOS business. As is usually the case in business, this diversification outside of their core business was unsuccessful and led to bloated corporate overhead and significant losses.
In addition to a failed diversification strategy, management also severely damaged the attractiveness of the BIOS business by implementing fully paid-up license pricing policies for the BIOS software, instead of using the royalty-based license model, wherein the company gets paid for the use of BIOS on every single PC. The paid-up licensing model severely undermined the perceived value of the company’s products, limited revenue predictability, and put pressure on average selling prices.

What Has Changed?
Under the leadership of new CEO, Woody Hobbs, PTEC has quickly exited from several of the unprofitable enterprise software businesses and thereby reduced headcount by over 15%. In addition, the company has decided to fully eliminate the use of fully paid up licenses in the BIOS business in favor of royalty-based pricing model. Finally, Microsoft’s delayed launch of the Vista operating system has caused a slow down with PC makers which has negatively impacted PTEC’s top line. However, with the launch of Vista expected in early 2007, PTEC should see a significant increase in revenues as PC makers are forced to order new BIOS software to be installed on the new Vista systems. These new BIOS “upgrades” will also allow PTEC to renegotiate unfavorable terms of past license deals and move towards a complete royalty-based model.
Risk Analysis
Phoenix faces several major risks on a go-forward basis:
• Continued Losses
The company will report significant losses for at least the next two quarters before revenues can increase enough to cover fixed overhead costs. In addition, though Mr. Hobbs was quite successful in fixing up Intellisync for a sale to Nokia, our research suggests that he never really steered the company to profitability. So it is conceivable that he has no intention of driving PTEC to profitability either. It’s possible he just wants to significantly increase the top-line without worrying much about profits. This is a risky strategy which will only pay out for investors in the event the company is sold and/or is hyped to other investors. Mr. Hobbs clearly has the skills to accomplish these two objectives, but betting on the “greater fool” is at times a risky proposition.
• Acquisition Activity Could Backfire
A key component of Mr. Hobbs strategy at Intellisync was aggressive acquisition activity. We expect he will pursue the same strategy for Phoenix. Acquisitions are always a risky endeavor.
• Dependence on Slow Growth PC Industry
Phoenix’s core BIOS revenue is primarily dependent on sales of PC’s. As is well-known, the PC market is no longer the growth industry it once was. As such, despite the fact that the BIOS business is stable and very profitable as a standalone operation, one cannot expect major growth from BIOS software going forward.
• New BIOS Licensing Model Could Backfire
As Phoenix moves towards the new royalty-based licensing model for BIOS software and seeks to renegotiate deals with customers, it’s possible that customers will balk at the new pricing model. In such a case, it is conceivable that Phoenix will lose business to competitors, who may offer more favorable pricing for BIOS software.

Importantly, even though the above risks seem daunting, the truth is that they mainly relate to execution risk going forward and are already reflected in the company’s current valuation. We do not think any of these risks would cause a major problem for the company as we still think the company would in the worst case have a stable base of $40 million in revenue for quite some time from the BIOS business. With 80% gross margins, this business would be very profitable.
Return Analysis
Since we are more focused on risk than return, we’ll keep the upside/hype scenario short. Basically, the company has just started implementing a major restructuring effort that will significantly reduce overhead costs on a go-forward basis. At the same time, the company’s top-line prospects appear to have improved given the move towards royalty-based licensing and the upcoming release of Microsoft’s Vista operating system in 2007. Plus there is a new management team that has proven experience in growing the top-line for small technology companies.
All in all, management is assuming a $15 million expense base here, and is therefore implying the potential for at minimum a $60 million+ revenue base over the coming few years. That would be about 50% higher than current base revenue levels suggest, implying pretty significant top-line growth. Notably, Hobbs tripled Intellisync’s revenue, and so it seems that he can do the same with Phoenix, especially considering that Phoenix actually had $80 million+ in annual revenue for much of the late 90’s and into 2000.
Valuation: Downside and Upside Scenarios
We think that in a worst case, a company with a dominant position in BIOS, selling software at 80% gross margins should be worth 2X base revenue + cash (2X Enterprise Value/Revenue). In the case of PTEC, assuming $40 million in cash, and $40 million in base revenue, that implies a worst case value of $120 million or about $4.60 per share, right about where the stock is currently trading.
On the upside, if new management can reinvigorate the company and get it back to more normalized revenue levels of $60 million, it’s conceivable that the company would be valued at 3X Enterprise Value. That would imply a valuation of $220 million or about $8.50 per share.
Giving each scenario 50% odds implies an expected value of about $6.50 per share, implying 45% appreciation potential in the shares.