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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | DECEMBER 28, 2000 STREET WISE By Sam Jaffe A Value Play on Wireless Wings? Aether Systems' $1 billion cash hoard is fuel for savvy acquisitions. That plus its versatile software could rekindle investor enthusiasm
Nevertheless, the growth proposition behind each of those sectors is still just as true as it was at the beginning of this annus horribilis -- meaning there must be some incredible value plays out there. One that's screaming for investors' attention is Aether Systems (AETH), a wireless-software company. Aether is certainly no value play based on traditional metrics, since it's still very much unprofitable and its sales figures are in the low millions. But it has what most tech execs would gladly sell their grandmother for: cash. Thanks to an extremely well-timed equity offering in March, just as the bottom started to fall out of the tech stock market, Aether is sitting on $1 billion in cold, hard cash. FLU-STRICKEN STOCKS. The company has a plan for that money: acquire competitors. And this is a particularly good time to be a buyer in the wireless market. Despite projections of double-digit growth over the next five years in almost every nook and cranny of the sector, wireless stocks are bedridden with the Nasdaq flu. Most have dropped substantially for the year, including such biggies as wireless-handset giant Nokia (NOK), down 10.6%, and service provider AT&T Wireless (AWE), down 45% since its March initial public offering. Aether Systems isn't in either of those markets, though. Instead, it makes software that allows businesses to use wireless technologies to increase productivity. Its main source of revenue isn't software licenses but service fees to help its clients build a wireless infrastructure. For instance, Aether helped office-supply superstore Office Depot (ODP) create an inventory system that lets store staff track every product with wireless bar-code scanners. That way the retailer knows exactly where everything is -- whether it's sitting on a warehouse shelf, in the back of a truck, or leaving the store in the hands of a customer. Office Depot is just one of many large customers Aether has already lassoed in this burgeoning market. But the company's greatest success so far has been in the lucrative financial-services area, where it provides back-end software for the wireless-trading operations of more than a dozen leading brokerages, including Charles Schwab (SCH) and Goldman Sachs (GS). And that industry represents only Aether's initial focus because its software can work for any type of company, whether a bank or a pipe manufacturer. "Aether Systems has the operating system that a lot of new wireless networks will operate on," says Robert Turner, chief investment strategist for Turner Funds, a mutual-fund company with a large holding in Aether stock. ~ In fact, things are going so well for Aether's software and services sales that it's no longer considered a small-time player. "People used to compare us to other wireless startups, but our real competition is people like IBM (IBM) and Hewlett-Packard (HWP)," Davis says. "And we have the upper hand against companies like that because they are just starting their wireless-services operations." That's not to say Aether is about to unseat IBM, a company with $30 billion in yearly sales of professional services. By comparison, Aether had revenues of only $32 million the first three quarters of this year. While that's over 500% more than the company made in 1999, it's still far from being considered a services powerhouse. MISPLACED FOCUS. And fear that such growth won't continue prompted investors to slash 89% of the stock's value from its March high of $345 a share to its current $39.37. According to the company's third-quarter 10-Q filing, organic (meaning nonacquisition-related) growth for the first three quarters of the year was only 29%. While many companies would love to have such a growth rate, it's frightening for a company that isn't expecting profitability anytime soon. Still, C.E. Unterberg, Towbin analyst Jason Tsai thinks investors are misleading themselves when they concentrate on organic growth. "[Aether] will grow by acquisition and not organic growth for the short term," Tsai says. "The company will need to continue to acquire companies in order to grow revenue and subscribers in the short-term before the company and the industry as a whole gain demand." Meanwhile, Aether has done a pretty good job with its acquisition strategy so far, according to Tsai, who evaluated its 15 acquisitions, share purchases, and joint ventures since it went public last year. The total value of those investments, according to Tsai, is $300 million. Add that to the $1 billion in cash the company has and you've got close to a $1.3 billion market capitalization. ACQUISITION SPREE. Now, Aether's main task is to use its cash hoard to buy into new markets while the stock prices of wireless companies are so low. It has bought 13 companies in the past 12 months. LocusOne, a private wireless company that Aether purchased in April for $40 million in cash, is a good illustration of its acquisition strategy. LocusOne produced the logistics system behind the Office Depot contract, an area in which Aether wasn't established before. In buying LocusOne, Aether also gained a competent sales force, a group of wireless engineers, and a major customer in a new industry. Davis expects Aether to make as many as 12 to 15 acquisitions over the next 12 months as it starts increasing its market share and acquiring customers. Aether has already shown a knack for building revenue. It expects to sell $51 million worth of products and services this year and should triple that in 2001, according to Davis. Profitability is another matter. Thanks to Aether's aggressive acquisition strategy, the company isn't forecasting a date for when it will turn profitable. Analysts expect the company to lose $1.99 per share this year and $2.21 next year, according to First Call. But if Aether Systems spends its money wisely, builds its market share, and makes its software the de facto standard for managing wireless networks, its long-term future could be very profitable.  Jaffe writes about the markets for Business Week Online Edited by BETH BELTON  | | |
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