This is one in a series of articles examining Joel Greenblatt's Magic Formula for picking value stocks. Today's stock: CallWave (NASDAQ:CALL).
CallWave provides application services on a subscription basis that add features and functionality to the telecommunications services used by consumers and small and home offices. CallWave is currently moving away from providing direct services to consumers and instead providing fixed wireless convergence services to regional telecommunication providers. I just listened to their second quarter conference call.
CallWave is in a phase of rapid change where they are moving from direct channel to indirect channel customers. Their new business focuses in on convergence of fixed, mobile phone and the Internet VoIP. CallWave is offering some mobile services for free to help study consumer adoption patterns. It might be worth trying this service out if you are interested in this company.
Let’s take a look at the big five numbers -- the five key metrics for FTD Group that determine whether a stock has a growing and sustainable competitive position, and they were not impressive. These factors are: (1) return on invested capital — ROIC, (2) book value growth, (3) earnings per share growth, (4) sales growth, and (5) free cash flow growth, over the past five years.
I checked CallWave’s financials at ADVFN. ROIC in the previous quarter was 14 percent and in the previous year it was 18 percent. However, over the past five years CALL did not produce a ROIC. Book value has also only become positive recently. Earnings per share has decreased dramatically recently. Revenue has been at a 37 percent growth rate. However, revenue has been declining recently. Free cash flow has decreased from 2004 to 2005 and is likely to continue to decline given the companies investment activities. These numbers do not really indicate that CallWave has a wide moat at this time.
CallWave competes with traditional telecom suppliers that have longer development lead times. CallWave believes they provide a hosted solution in the convergence application market that can evolve quickly by capturing market intelligence in real time. CallWave’s service and applications allow end users to obtain a call on any device. CallWave’s service allows one phone number to be sent to fixed land lines at high quality, wireless services, and carrier branded computer VoIP software. When a customer signs up for CallWave’s convergence services with their telecom company, CallWave will start to bill the telecom for the service monthly at a wholesale rate.
CallWave has been selected by several carriers to provide convergence telecommunication services recently. This could be a toll booth with potential switching costs, but the depth of the moat and its sustainability is not clear to me at this time. They are at the early stages of potentially developing a moat. Their partners right now include Earthlink and Hawaiian Telecom. They are targeting regional access carriers like Hawaiian Telecom for future growth. This could be a limited market.
CallWave is now focusing on developing and providing software and services. They won’t be replacing churn in their direct customer base. The hope to encouraging regular active use of their services.
On yesterday’s conference call, CallWave indicated that they do not expected to be profitable over the next four quarters. In fact, they estimate that they could loose $10 million in that time period. They are in an investment mode to develop their new indirect channel business.
CallWave does not look like an attractive investment. The company does not have a wide moat at this time, though it has the potential to develop a moat in the future. Its major challenge is competing with the R&D departments of major telecommunication companies and the potential that their regional telecom customer base could decrease even further if there are more telecom mergers. I’ll be passing on this stock for now.