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Phoenix Technologies (PTEC): Turnaround On Track

Posted on January 26, 2007

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 It appears obvious, at this juncture, given these solid results, that Ramius’s offer will be rescinded.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.

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This site may include market analysis and we may own shares in the stocks mentioned in our reports. 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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