Aether Systems Inc. announced solid first-quarter earnings last week along with a slightly revised business plan, but the results were not enough to please investors who once cherished the company as a high-growth, high-tech gem.
Aether faced a barrage of downgrades as its stock slipped by double-digit percentage points after news of its earnings. W.R. Hambrecht, Merrill Lynch, Thomas Weisel, Salomon Smith Barney, Wedbush Morgan and Morgan Stanley all downgraded the company shortly after its earnings report, and Aether’s stock dropped almost 15 percent to hover around $13 per share. It’s a far cry from the company’s heyday at about this time last year when it was fetching almost $300 per share.
But while investors weren’t quite happy with the news, Aether executives said the company is right on course.
“We really have set this business up for long-term success,” said Dave Oros, Aether’s chairman and chief executive officer, during an investor conference call.
Aether’s revenue for the quarter, ended March 31, was $30.7 million, way up from the $5.4 million the company earned during the same quarter last year. Aether recorded a loss of $46.8 million, compared with $8.6 million during the same quarter last year.
Oros pointed out that Aether has slowed its acquisition craze-which netted nine companies in 11 months-and has worked to integrate its diverse set of offerings and businesses. Along those lines, Aether cut 150 of its more than 1,000 jobs and integrated its mobile-commerce business unit with its financial services unit.
The cost-cutting measures served Aether well-it still boasts $732 million on its balance sheet, which company executives said will play a key role in sustaining Aether during the economic slowdown.
“This significant cash reserve continues to be a key competitive weapon as we not only compete but continue to evolve into a software platform company,” said David Reymann, Aether’s chief financial officer.
Matthew Adams, senior research analyst for wireless data with Epoch Partners, agrees.
“Aether is not the cleanest story out there, but its money vault will ensure that it will be around for long-term investors,” he wrote in a research note. “At current price levels, we see more upside than downside ahead.”
However, Adams tempered his positive outlook by cautioning that Aether still has a rough road ahead before it can break even in its earnings before interest, taxes, depreciation and amortization.
“Aether will need to work to hit profitability,” he wrote.
Aether executives understand the rough road ahead. The company recently said it would hit its goal of $37 million in the second quarter but will see a slightly lower-than-expected growth rate in the third and fourth quarters due to “existing market conditions,” Oros said in a release.
However, Aether executives said last week the company would be relatively protected from harsh economic conditions.
“The markets that we have selected … they’re really taking off,” Oros said, mentioning the transportation logistics, finance and enterprise areas, where Aether plays. “We are still concerned with the macroeconomy … but we’re just not seeing it (negative effects).”
And in order to capitalize on its strengths, Aether executives said they plan to slowly change the company’s business model to focus more heavily on software development, products and licensing. In line with this model, Aether’s earnings release contained a breakdown of the company’s businesses, including recurring services revenue, engineering services, device sales and software product revenue. While software product revenue accounted for $11.8 million of Aether’s $30.7 million in revenues this quarter, the company plans to rely more heavily on its software products in the coming quarters. By next year, the company said more than 70 percent of its total revenue will come from software products and licensing.
Oros said the shift in Aether’s business model is directly related to the company’s recent release of Aether Fusion, which Aether markets as a software connection layer that allows varied wireless products and services to work together.
Aether executives said the company still wants to be a complete end-to-end solution provider-the IBM Corp. of wireless-but now that dream includes a heavier reliance on software-more like the IBM/Microsoft Corp. of wireless. Aether executives said they plan to rely more on their strategic business partners instead of doing everything themselves. However, they said, this will not affect the services Aether’s customers receive, just how those customers receive them.
While Aether is shifting its software approach, it’s also readjusting parts of its business. The most significant move was to post more than $1 billion in charges this quarter to adjust the value of its recent acquisitions and investments.
Due to the slowing economy, Aether said it hired an independent third party to re-evaluate its investments and acquisitions over the past year, which totaled $1.8 billion. In order to readjust the values, Aether wrote down $959.4 million on its acquisitions and $88.8 million on its investments.
Aether said the impact of the charges will diminish over the next several months.
Other business adjustments Aether registered were a sour deal with a German paging company, troubles from its acquisition of Motient Corp.’s transportation unit and inventory problems.
These problems, however, don’t pose a serious threat to Aether, Oros said.
“This is not something that’s fundamentally wrong with the business,” he said.
