Alvarion: Focus on the Big Picture

| About: Alvarion Ltd. (ALVR)

Alvarion (NASDAQ:ALVR) continues to grow at a very strong clip; yet after every earnings report, most analysts, investors, and message board posters tend to dump on this very well run company. Either margins are too weak because of the weak US dollar, or too much competition from Tier 1 equipment manufacturers will push them out, or WiMAX will lose out to 3G or now LTE, or the supposed biggest proponent of WiMAX in the US, Sprint (NYSE:S), continues to struggle and delay its plans.

All along the way, ALVR continues to hit its numbers and guide to inline or even higher results going forward. What is not to like about the bigger picture of 20%+ growth and over 230 worldwide WiMAX deployments?

As a long time investor of ALVR, since the lows of the tech bubble bust, I've always been amazed that investors don't focus on the positives. The big picture with ALVR has always remained in place. Global demand in BRIC countries and other 3rd world nations continues to drive demand.

This makes ALVR a global growth story, though it is mostly ignored by the market. Now ALVR has a partnership with Nortel (NT) that has already begun shipping product, though the market assumed the original deal really signaled that NT was exiting the WiMAX market. Just go back and read any of numerous articles from June 11th, such as the one from Fortune titled 'Nortel downshifts on WiMax'. Why was there such a negative reaction and nothing really positive about ALVR reported from the announcement?

Then, on August 7th, we get news that Comstar has signed a deal with NT to use the ALVR partnership for WiMAX equipment in a Moscow network which includes at least 160 base stations from ALVR and possibly other equipment. As usual, the market assumed the worst with ALVR. Everybody should've known by now that AVLR's management doesn't waste effort on deals that won't pay off. This deal clearly provides ALVR the opportunity to go for the Tier 1 operator deals, which opens up a much bigger market.

Of late, the margins have been the biggest focus, though. In constant dollar terms, ALVR would've hit 10% operating margins in Q2 per the CFO. The Q2 results were hammered by a full $2.2M increase in costs due to the dollars 6% decline from Q1. This was on top of a 6% decline in Q1 as well. Thats a full $0.03 reduction from earings per share in Q2. They would've earned a full $0.06 for the quarter if not for the falling dollar. In fact, operating income would've grown from $2.0M to $3.8M sequentially on only a $2.6M revenue increase. Thats a 70% revenue drop to the bottom line.

There are very good signs of strong cost management and huge leverage in the business model. Management guided that Q3 earnings could be as much as double from Q2, which shows how much leverage ALVR has in the model. This is with the CFO basing her forecasts on a flat to weak dollar. What happens to earnings if the dollar rises against the shekel as it has so far this quarter? The dollar is already up to 3.58 against the shekel, which is substantially above the Q2 levels and on par with Q1. Remove the headwind and earnings will soar. Bet you haven't seen that in analyst reports. Most seemed to instead question the level costs in the Q2 conference call.

The other major distraction is the constant focus on WiMAX networks in the US. ALVR's stock tends to move with the gyrations of the proposed Sprint network over the last couple of years. Ironic, considering ALVR hasn't ever had a deal with Sprint and the real focus of WiMAX is in the underdeveloped telcom countries. So why didn't ALVR soar with the global growth story of the last few years? Again, the market was distracted by the noise at Sprint and didn't focus on the big picture of constant growth and International deployments in the hundreds.

The future remains bright for ALVR, with forecasts of growth continuing in the 20-30% range. This growth likely doesn't include any major contributions from NT. Any investor would be wise to focus on the big picture with ALVR and buy the stock on current weakness. It always seems that investors want ALVR to report blowout numbers when they instead 'stumble' along at 20%+ growth. All in all, it leaves a stock with huge potential at a very cheap price. Don't be surprised, either, if NT picks up ALVR down the road. The parnership is already showing strong results and NT has publicly stated that they expect to announce more deals. An investor won't want to be on the sidelines if a significant deal is announced. Even one bringing $50M to ALVR would be huge, yet that would be considered small for NT. ALVR is cheap regardless, making for a very compelling risk/reward ratio.

Disclosure: Author holds a long position in ALVR