Conditions in Mobile Infrastructure Remain Very Favorable for Bridgewater

Nov. 6.09 | About: Bridgewater Sys (BDWRF)

Thursday morning Bridgewater Systems (OTC:BDWRF) reported Q3 2009 earnings and subsequently discussed the results and outlook during an analyst call. Analysts are likely to view the results and the business outlook as positive for the stock.

Net income for the quarter was reported at $1.7 million or $0.07 EPS, ahead of consensus forecasts of $0.05 EPS. Revenue was reported at $15.8 million, a 53% increase over prior year Q3 revenue of $10.3 million and ahead of consensus forecasts of $14.6 million for the quarter. Gross Margins contracted sequentially to 64% from Q2 2009 Gross Margins of 75% and from Q3 2008 Gross Margins of 75%. The gross margins contraction is related to the deployment of the Widespan contract and activities related to various trials and deployment preparations associated with various recent contract wins - basically scaling costs. Management expects Gross Margins to continue in the mid-60s range until H2 2010, when it anticipates that Gross Margins will expand to a target of 70% where it is expected to stabilize.

Management raised FY 2009 revenue guidance from a range of $58 million to $62 million to a range of $62 million to $64 million. Earnings guidance was tightened towards the high end of previous guidance from a range of $8.0 million to $10 million to a range of $9.5 million to $10 million, or $0.38 to $0.40 EPS.

Bridgewater Systems generated $3.9 million in free cash flow for the quarter, exiting with $61.5 million of cash on its balance sheet. For F9M 2009, BWC has generated approximately $14.9 million in free cash flow.

During the conference call, the company alluded to another multi-million dollar Tier 1 GSM contract in EMEA, which is expected to be announced shortly. A small portion of expected revenue is baked into 2009 guidance, however most of the revenue should be recognized during 2010.

Outlook

As stated in previous posts, Bridgewater is positioned well in the "eye of the storm" as demand for the mobile internet intensifies. Here are a few trends that should positively impact Bridgewater over the next 3 years:

  • By 2014, traffic on the mobile internet is expected to be double the size of the wired network.
  • By 2011 it is expected that there will be 1.5 billion 3G subscribers worldwide, up from about 350 million now.
  • Wireless carriers worldwide will continue to struggle to scale data capacity to maintain quality service.
  • Already there are over 150,000 mobile applications that subscribers can download, and this should continue to increase as Android devices gain traction among consumers. Service complexity should increase exponentially.
  • Bridgewater solutions help carriers to manage capacity, traffic flows, and the complexity of subscriber services.

Investors should expect an acceleration of new contract announcements as the growing pipeline continues to convert leading into FY 2010. Contract announcement should continue to roll throughout next year as international deployments increase via an expanding channel network, while current 4G and LTE trials convert. Currently, 7% of sales come from third-party channels (mostly HP (NYSE:HPQ)). Investors should see an increasing amount of deals from third-party partners (not HP) over the coming quarters. By Q1 2010, channel partners could represent over 10% of sales and the third-party channel could represent 30% of sales exiting FY 2010.

The company guided that it expects expenses to be 10% higher in H2 2009 versus H1 2010 as it hires business development and professional service resources in order to support its global expansion.

Bottom line: Bridgewater retains a competitive advantage in the areas of subscriber policy and data management because its solutions can be deployed across multiple technologies in a network including LTE, WiMAX and WiFi, allowing carriers to maximize the data capacity of invested technology.

Bridgewater Systems continues to exceed consensus forecasts and appears to have good visibility on future revenue and earnings. The outlook heading into 2010 and beyond, to at least 2012, suggests that conditions within the emerging mobile infrastructure are extremely favorable for continued high growth and earnings leverage at Bridgewater Systems.

There is some scaling risk associated with this stock as Management continues to build out infrastructure and capabilities a step ahead of the deals being won. As business accelerates, this could become a greater challenge.

Expect analysts with current 12 month targets below $10.00 to begin raising forecasts and targets based on accelerated contract announcements.

Disclosure: Author owns shares of Bridgewater.