Openwave Systems – Bottom Fishing or Bottom Snaking? (OPWV)

Dr. Ge Submits: Bottom fishing in OPWV has unfortunately become bottom snaking – instead of catching a good looking bass, I caught an ugly snake, and got bitten badly.

I sold all my interests in OPWV in 2005 for a decent profit because I didn’t see the growth story that people were expecting. From a business point of view, Openwave could be among one of the biggest failures in terms of its billions of dollars of accumulated losses. It’s a dot com story that has never fully recovered. The hyped growth never becomes a reality. And also, I didn’t like its CEO David Peterschmidt at all. He sold Inktomi to Yahoo (YHOO) at exactly the lowest point of the business cycle while Google (GOOG) and other search engines were making a powerful comeback.

I didn’t like Openwave’s acquisition of Musicwave because it signaled that the organic growth of its core business in the wireless software arena was slowing and a diversification into the content business didn’t make any sound business sense. In the mean time, Openwave issued a secondary offering of its stocks and further diluted its EPS. My guess was that the company was trying to buy the growth using the cash it just raised.

However, I started to accumulate OPWV when the stock dropped from the $20s to $11. I thought such a steep drop was an overreaction of the market to its option backdating problem and the possibility of losing a system deal. So I bought it expecting that it may bounce back quickly to the $15 level as the general market condition improves. $11 a share was a bargain in my opinion given its attractive position in the wireless software market. I thought the revenue miss would be in the several million dollars range, but not as shocking as the $30 million miss the company reported Thursday.

The management didn’t give any reasonable explanation for such a dramatic drop in revenue for this past quarter, or for its reduced outlook of fiscal year 2007 in their conference call. They claimed that the large system deal – the business that Openwave has been pursuing for the last several years, caused the lumpiness of its revenue recognition. However, the lumpiness in the system deal may affect one or two quarters, but shouldn’t cause the slowdown of the entire fiscal year of 2007, except there are many more problems within the company that the management was reluctant to discuss.

But I think $7s a share is a good bargain. The company has plenty of cash and a relatively strong position in the wireless data application software arena. If it cannot recover on it own, someone will grab it. Therefore, I will continue to hold my shares and may add more as the dust settles.

Generally, I bottom-fish at the moment when the longs of the stock feel so desperate that the only thing in their mind is to sell, get out and be done with it. Meanwhile, when the insiders start to buy, it’s usually an extra plus. Unfortunately I was not so patient on OPWV this time. I bought the stock at $11s partly because I had seen the up and down of this stock so many times – almost every time I made money when I bought at low – but this time the bottom is much deeper (30% more) than I thought.

OPWV 1-yr chart: