Towerstream: Cost Structure Is Too High

The latest edition of Asif Suria’s stock newsletter SINletter recommends microcap WiMax provider Towerstream (TWER).  Any SINLetter recommendation deserves serious attention for two reasons: first, Asif is a bright and insightful investor and second, SINLetter has an impressive track record:

 

 

 

 

 

 

 

 

 

 

 

 

So when Asif suggested I take a look at Towerstream, I fired up the browser and dug in.  At first glance, I could see what he found so compelling.  WiMax is an exciting area, with potential for explosive growth.  Towerstream itself has posted respectable growth while limiting customer churn, critical for any telecommunications company.  Perhaps best of all, it has a huge stash of cash — over $36M.  Backing this out, Towerstream has a  reasonable enterprise value-to-sales ratio of only 1.30.

Yet beneath the surface, the numbers tell a different story.  According to its latest quarterly report, Towerstream’s quarterly revenues grew slightly more than $500k year-over-year to $2,081,881.  To achieve this growth, however, Towerstream had to spend over $1.8M in selling expenses.  Add in another $1.9M in general & administrative overhead, $400k in customer support costs, and almost $1M in cost of services sold, and it is clear that Towerstream’s cost structure is too high.  If Towerstream does not dramatically ramp its growth rate while keeping SG&A costs in check, or cut expenses, I don’t see any path to profitability.

Nor does the company claim it will become profitable.  Instead, Towerstream states that certain markets will be EBITDA positive in 2009.  But Towerstream has been active in Boston and Providence since 2004.  Why will it take so long for even a single market to pay off, and what does that say about newly-launched markets?

The company’s failure to take a major chunk out of any market makes me wonder whether its efforts have been spread too thin, or whether there is some other fundamental or managerial problem.

Bottom Line: To be fair, the company has come a long way since its January 2007 reverse merger with a tiny shell called University Girls Calendars.  Its strong cash position gives it both operational and strategic flexibility.  It could offer a huge dividend, buy back shares, or invest substantially in increased growth.  But for my money, I’d like to see some improvement in financial results before investing.

DISCLOSURE: No position in TWER.  Long one subscription to SINLetter.

Comments

[ILuvTheBack...:]

Have you factored in the large ramp-up in sales personnel that TWER has made in the past year? It takes time to get them trained, in the field and booking sales. Regards, ILTBF

2008 Aug 04 09:42 AM

[Microcap Sp...:]

@ILTBF: There is no doubt that sg&a has ballooned as a result of the increased sales personnel. That expense is reflected in the company's Q and my analysis, as are the results that the sales team have achieved to date. If you are asking whether I have factored a projection of increased future sales growth as a result of these efforts, I have not. While I hope the company's sales push is successful, I am going to wait to see the actual numbers rather than anticipate a particular result.

2008 Aug 04 12:18 PM

[TheSnail:]

If this is the level of your analytical ability, I would give up on investing all together.

To fail to acknowledge the high expenses over the past year associated with training of sales staff, building a call center, etc., all of which are on hold with their strategy for the next year, means your comparing apples and oranges.

You are not being added to my watch list.

2008 Aug 04 08:13 PM

[globalview99:]

ditto; the analysis is shabby. These are typical ramp-up costs: hire a slew of sales people in multiple cities, build a call center, rent tower space, wire buildings, they're all associated with ramping up a business. The one flagrant lie in the analysis is that the Boston and Providence Market are not profitable; I don't think TWER breaks out those numbers bc it will tell the competition how profitable this business is once it does reach critical mass.

If the author wanted to do the analysis right, he should be taking a close look at the business model and the dynamics and risks of the business as well as the proverbial moat.

2008 Aug 04 10:59 PM

[richard2003:]

Each quarter will be very telling for TWER. Expenses are high and solid sales growth on a quarterly basis is critical. TWER will have to adjust selling expense up or down as needed and not be too stubborn about spending.

The concept of not disclosing results for competitive reasons sounds like the company is being driven by technical/operational types not those who have a marketing/sales focus. Are they trying to sneak up behind the competition and bite them in the ankle or are they the leader in sales and service that they claim to be?? If management is doing a great job and are proud of what they are doing then they should shout it from the roof tops not hedge their activity and hide in the weeds.

2008 Aug 05 09:13 AM

[Concerned C...:]

Why has no one mentioned that Towerstream also spent millions in buying the FSS grandfathered licenses in Florida and are working to do so in the NE.
With this "Earth Station" license they claim a monopoly in that market buy refusal of of use by other broadband providers. They claim it will interfere with their operations in that market. Yeah! Hello! ?? Anybody else see the FCC failing and falling on its face because of loosely written regulations? How the heck can that be legal?

Concerned Consultant

PS: We already got a black eye from Metro-Fi and Erathlink screwing the pooch for Muni Wi-Fi, and now we are going to let Towerstream and Clearwire define the life or death of "AMERICAN WiMAX"?????

Mar 15 12:43 PM