Phoenix (PTEC) Rising
Posted on July 19, 2007
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.
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