Alvarion: A WiMax Gift

Alvarion may be facing some troubles now, but global growth in WiMax could make it an M&A target in 2010

August 3, 2009

8 Min Read
Alvarion: A WiMax Gift

If you work in the communications field, or it’s an area in which you like to invest, for most of the last year it’s been a pretty tough environment. But every once in a while, the market serves up a present, and that’s what I think is happening right now with Israeli-based WiMax equipment supplier Alvarion Technologies Ltd. (Nasdaq: ALVR).

The source of the humble investor’s pain and suffering for the last four quarters or so has been no secret: Capital spending by service providers in virtually all areas has taken a huge hit in 2009, and we are expected to struggle next year as well, as you can see in the table below.

Table 1: Worldwide Telecom Capex

2009

2010

Wireless

Flat

6%-8%

Wireline

10%+

Flat

Total

5%-6%

4%-5%



While we’re still talking fairly big numbers here (an estimated $250 billion in 2009), that comes on the heels of three years that averaged growth in the low double-digits. Obviously, wireless growth has exceeded that of wireline, and, depending upon your calculations, wireless nudged over the 50 percent mark for the first time in 2008 and continues above that threshold into 2010.

Another major shift that has taken place is that the Asia/Pacific region has exploded from less than one-third of wireless spending in 2005 to more than half of wireless spending this year. Particularly from 2008 to 2010, a major portion of that spending derives from the 3G rollout talking place in China.

The simple fact of the matter is that if your company is not selling wireless infrastructure equipment into one of the service providers in China – preferably China Mobile Ltd. (NYSE: CHL) – the last couple of years, business probably hasn’t been great. Since the bulk of the capital spending at China Mobile/Telecom/Unicom is being directed to the “home team” – i.e., Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) – it doesn’t leave many scraps on the table for the remainder of the pack to fight over.

So recently, wireless infrastructure in China has been the only game in town, so to speak. Or has it?

— Bob Faulkner, Special to Unstrung. Alvarion is one of the many technology and telecom companies that Bob Faulkner writes about weekly in The Telecom Connection.

Next Page: Going Global

Like it or not, WiMax doesn’t get a lot of “air time” (pun intended) in the U.S. as a 4G alternative, in large part because the sole nationwide service provider,Clearwire LLC (Nasdaq: CLWR), is only just bringing the service up in a handful of markets. As that’s taking place, cellular behemoth, Verizon Wireless , is reiterating its Long Term Evolution (LTE) plans for 4G commencing in the second half on 2009, with the intention of having coverage of 100 million POPs by the end of 2010. Just how successfully WiMax competes against LTE in North America is anyone’s guess at this point, but it’s really not the focal point of this essay.

The bulk of WiMax investment has been taking place in less developed markets to bring wireless broadband to an underserved population. Typically, these are markets in which the current cellular state-of-the-art is still a 2G system.

This is not to suggest that developed markets are being ignored. Quite the contrary! When you look at some of the interesting public transportation applications being developed and tested, it would appear that the technology has widespread applications.

The bottom line is that there are about 460 network deployments in more than 130 countries, according to the WiMAX Forum . Those represent a combination of fixed, portable, and mobile installations. More importantly, those networks are on a trajectory to cover approximately 800 million POPs by the end of 2010, and that’s a 75 percent increase in about 18 months. Now that’s a lot of potential!

Alvarion has been the leader in worldwide WiMax installations (fixed and mobile) for some period of time, due to its early adoption of the technology. The path has not been a smooth one because, in a restricted credit environment, funding for some projects has not been easy to obtain and in a few cases has fallen through. Despite that, however, Alvarion continues to execute.The company reported its second-quarter results the other day, and on the surface they continue to show a tough environment. But when investors dig a little deeper, you begin to see what’s buried underneath.

A quick look at the graph below tells the story of Alvarion’s WiMax revenues for the past four quarters as well as its growth rate. There are two important points to keep in mind. First, yes, the growth rate is “slowing,” but that’s as much a function of accounting rules as anything else. Revenue recognition rules state that an original equipment manufacturer (OEM) may not record as revenue products that it's shipped and installed until after the customer has signed off that the equipment is “accepted.” This can be months, or even quarters, after shipment, creating a very “lumpy” revenue stream – particularly when you are small. (See Alvarion's Recovery Act Ready and Alvarion Reports Q2.)

5899.jpgMy second point is: Look at the second graph. Yes, Alvarion’s growth has trended downward, but when compared to some others in the communications equipment space, it’s still doing quite well. Ericsson AB (Nasdaq: ERIC) aside, Alcatel-Lucent (NYSE: ALU), ADC (Nasdaq: ADCT), Cisco Systems Inc. (Nasdaq: CSCO), Nokia Networks , and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) are all suffering to one degree or another. Granted, Alvarion’s revenue base is far smaller, but that’s what investors want – an under-penetrated market with lots of growth potential. WiMax as a market may be difficult to find, but it is certainly doing far better than most segments in this environment.

Next Page: A Good Buy?

That brings us to the question: "In what sense is Alvarion a gift from the market?"

Backpedal a few years and many (not all) communications OEMs were devoting R&D resources to both WiMax and LTE. Many assumed that LTE would be the logical path of most cellular carriers, but WiMax was further down the development path. Nortel Networks Ltd. was among the first to cancel its WiMax efforts, driven primarily by its own financial constraints. As the economy headed south, OEMs had to make hard choices as they cut expenses. Nortel, prior to its bankruptcy, opted for a “strategic relationship” with Alvarion to sell Alvarion’s equipment. Obviously, the Nortel relationship has fallen by the wayside, but Nokia Siemens Networks has subsequently stepped up its relationship with Alvarion for the very same reasons. It's currently a low-cost solution to a problem: NSN needs to participate in every viable growth opportunity it can because it has missed the brass ring in China. Lacking a home-grown WiMax alternative, selling Alvarion’s equipment fills that hole.

Where this becomes particularly interesting from an investment perspective is in 2010. If WiMax adoption begins to accelerate next year (and that’s something still subject to debate), there will be a handful of OEMs looking to dance but lacking a partner. That will be particularly true for those that have been excluded from the 3G market in China.

Alvarion, Huawei, Motorola Inc. (NYSE: MOT), and Samsung Electronics Co. Ltd. (Korea: SEC) are essentially the primary players in the WiMax infrastructure market today (apologies to any not mentioned). From commentary I’ve heard, ZTE is small but also making an attempt to be a top-tier supplier as well. If you’re Alcatel-Lucent, Ericsson, or NSN, what do you do?

Common sense tells you that someone acquires Alvarion. But the more important question from our perspective is: “At what price?” – and therein lies the gift.

There are no hard-and-fast rules for what something's worth because, in reality, it’s only worth what someone is willing to pay. (Jerry Yang, formerly of Yahoo Inc. (Nasdaq: YHOO) found that out the hard way.) Also adding to the complexity is the type of transaction (strategic versus financial) as well as a myriad of variables too numerous to mention. However, one thing you will find is that many – not all – technology acquisitions are consummated in the three- to five-times trailing revenue space.

Look at the recent acquisition of Data Domain by EMC Corp. (NYSE: EMC) done at approximately 6.1 times trailing revenue net of cash. Keep in mind that this was a motivated buyer in a bidding contest with another potential buyer. Consider the attempt by Microsoft Corp. (Nasdaq: MSFT) to acquire Yahoo – they walked at about 5.7 times trailing revenue net of cash. Again, no set rules and plenty of variables, but we do have some guideposts to bracket what is reasonable for Alvarion.

If you assume a multiple of trailing revenue at the low-end (say, 3 times) you arrive at a market capitalization of about $740 million to $940 million (adding back net cash) compared with the current valuation of $245 million. This equates to a stock price of about $12 to $15 per share. The range is based upon using WiMax-only revenue or total revenue. You pick!

That’s quite a bit of upside considering the current stock price (less than $4.00), but occasionally the market creates presents – and this, I think, is one of them.

Obviously, this is all dependent upon how WiMax demand develops in 2010, but thus far it has developed largely according to plan but moving below the radar. Only you can determine if you think that will continue.

Position: None

— Bob Faulkner, Special to Unstrung. Alvarion is one of the many technology and telecom companies that Bob Faulkner writes about weekly in The Telecom Connection.

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