Airspan: Small, But A Challenger For Ericsson And Nokia With O-RAN

Summary

• U.S.-based Airspan uses O-RAN software to "virtualize" network functions in the cloud.
• It enables mobile network providers to reduce their dependence on the custom-made hardware of Ericsson and Nokia.
• The smaller competitor's higher gross margins show better production efficiency, but it is suffering from supply chain woes.
• As a newcomer in the 4G LTE and 5G RAN space, it has to incur higher marketing and research expenses, but its strong partnership ecosystem deserves to be emphasized.
• Inflation-induced escalating costs could tilt the balance in favor of O-RAN more rapidly than expected, and with $3 billion of TAM, Airspan should be valued accordingly.

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When we talk about fifth-generation wireless radio equipment vendors, the names which instantly come to mind are Ericsson (NASDAQ:ERIC), Nokia (NOK), and more recently Samsung (OTCPK:OTC:SSNLF). Well, there is also Airspan (NYSE:MIMO) a relatively unknown U.S.-based 4G LTE and 5G RAN (radio access networks) solutions provider.

Since its IPO in August 2021, the company's stock has suffered from a downtrend and is currently available for less than $3.

Data by YCharts

This would constitute a suitable point of entry for those looking to profit from product innovation in a world where despite tighter inflationary pressures, the secular digital transformation trend remains firmly entrenched. My objective with this thesis is to assess Airspan's finances and how it could benefit from higher Capex spends in 5G to drive its open technology among mobile network providers (MNOs) in a changing competitive landscape.

Shift From RAN To O-RAN

Airspan forms part of several smaller U.S. companies such as Altiostar, Mavenir, JMA, and Parallel Wireless which came to the fore about 4-5 years ago after Huawei was sanctioned by the Trump administration because of cybersecurity concerns. Removal of the Chinese company from the 5G equipment supply chain of the U.S and its allies resulted in MNOs being left to deal with mostly Ericsson and Nokia.

In addition to higher costs due to the duopoly, there was a lack of interoperability between the radio equipment of the two European plays, resulting in carriers becoming more dependent on them. Consequently, higher costs and closed network interfaces contributed to the emergence of Open RAN or O-RAN which makes it possible for operators to use equipment of different suppliers when building a mobile base station.

Now, in addition to openness, O-RAN is also more software-centric, as opposed to relying only on opaque hardware boxes. This ultimately means a cloud-based approach which can be envisioned as extending the digital transformation of core 5G to the outskirts of the network where the radio part is situated.

This vision has actually translated into concrete sales figures for Airspan which obtained $177 million in 2021, with a large part derived from the one million base stations shipped. The company also has more than 1,000 customers in 100 countries.

Company presentation (Seeking Alpha)

Scanning the industry, while most of the big carriers like AT&T (T) and Deutsche Telekom (OTCQX:DTEGY) are testing open-standards equipment and plan to gradually introduce it, Japan's Rakuten (OTCPK:RKUNY) has already used the technology to provide 96% of the population with 4G LTE coverage four years before schedule. Now, some of you must be wondering why I am talking about 4G when other Japanese operators are already at the 5G stage. The reason is that Rakuten is a relatively new MNO as it only started operations in 2020 and is at the beginning of the 5G rollout.

Looking across the Pacific ocean, Dish Networks (NASDAQ:DISH), which has invested in Airspan also wants to emulate the same feat in the U.S as I had explained in my thesis in 2020. Last year, the RAN disruptor also supported T-Mobile (NASDAQ: TMUS) in rapidly covering Long Island (New York) with 20,000 small cells for 5G communication. For investors, small cells provide mobile coverage across smaller densely populated locations within cities whereas the tall towers which you see on the outskirts maintain strong signals across large distances.

Therefore, product strength has translated to top-line growth for Airspan, but it is important to go further into the bottom line and identify risks.

The Margins, Competition, And Risks

Revenue for 2021 was 3% more than 2020 but, at the same time, gross margins declined from 48.6% to 44% as shown in the table below.

Income statement (Seeking Alpha)

According to the executives, this was due to two factors, namely a lower percentage of maintenance/support revenues and the effects of supply chain shortages including higher freight costs. These adversely impacted both component availability and the prices at which they were sourced.

However, viewed from the longer-term perspective, the 44% level marks a significant improvement from the 32% in 2018. Now, the gross margin metric for a communications equipment provider depends both on the top line as well its ability to tilt the product mix from hardware to include more virtualized (software) components. This renders the production process more efficient resulting in improved margins.

Here, the fact that Airspan has been able to increase margins by 6% in the last three years shows that it has not only considerably broadened its customer base but also managed to tweak its products with a higher dose of software compared to both Nokia and Ericsson. Consequently, as shown in the table below, the RAN disruptor bears higher gross margins.

Peer comparison (Seeking Alpha)

The two European companies have also joined the O-RAN bandwagon, but this was due to increasing demand from telcos as well as the need to digitally transform their own products, rather than actually wishing to open up their interfaces. Moreover, motivated by disruptors like Airspan, they have also increased the dose of software virtualization in their solutions, but, the fact that they still have lower margins despite enjoying much higher revenue levels suggests that they are much further behind Airspan as to the degree to which they have been able to move away from hardware.

Conversely, the fact that the U.S. company has higher margins despite its relatively lower revenues on which to spread its fixed costs, not only illustrates the advanced status it has reached in converting to virtualization but also that just with a few hundred million dollars more on the income statement, it could change its operating loss status.

In the meantime, this is not possible as the company is suffering from supply chain pressures which are expected to ease only by the second quarter of 2022. Thus, margins will continue to be under pressure in Q1-2022 despite a relatively higher inventory buildup of $17.2 million. For this matter, Airspan has sourcing agreements with manufacturing subcontractors Foxconn and Cape from Taiwan and Malaysia respectively. This means that it is less dependent on China where there is a major Covid outbreak impacting the shipping of products out of the country. However, it still does not have the same degree of control over its supply chain as the likes of Nokia and Ericsson which have their own factories.

Additionally, Airspan has to spend a lot on marketing to drive the adoption of O-RAN and on research to continuously adapt to different use cases. For this purpose, Airspan's ticker name MIMO stands for multiple input multiple output or a novel antenna technology. Pursuing further, higher operating expenses have exceeded gross profits, resulting in a loss-making status as shown in the above table. This is not well digested by investors in a stock market where, due to high inflation concerns, the value strategy prevails.

Valuations And Key Takeaways

On the other hand, the cost factor itself could trigger an inflection point in encouraging wider adoption of O-RAN globally. In this respect, the Rakuten implementation I talked about earlier was not only a showcase of innovation for Airspan but, also shows the ability of its technology to reduce costs, namely 40% in Capex and 30% in Opex. Additionally, Airspan is involved in specific bids for projects across a wide spectrum comprising traditional MNOs, new operators as well as novel upstarts. It is helped in this endeavor by awards and industry-level recognition, and also through a broad product range covering wireless carriers, private 5G, and fixed wireless access ("FWA") as shown in the table below.

Company presentation (Seeking Alpha)

These add to a total addressable market ("TAM") of over $30 billion, which can be more precisely funneled to a potential project value of $3 billion considering that Airspan is engaged with different customers categories as shown in the figure above.

Assuming that the company can just convert 10% of project plans and proof of concepts into concrete sales figures, this would signify revenues of $300 million. Adjusting the trailing Price to Sales of 3.47x, I obtain a target of 5.88x ((3.47 x 300)/177). This translates to an estimated target of $4.97 based on the current share price of $2.93, but due to the supply chain, this would constitute a long-term target, achievable by mid-2023.

In the meantime, news pertaining to a new contract or even testing with one of the major carriers has the potential to propel the stock higher. For this matter, it appears to have bottomed out already at the $2.45-$2.5 range which makes Airspan a buy.

Summing up, this thesis has primarily elaborated on Airspan's product differentiation with respect to two European incumbents and how by using a higher dose of software virtualization, it is producing more efficiently, but, the disruptor remains constrained by the supply chain. This said this tiny U.S. play has a solid partnership network including behemoths like Softbank and Qualcomm (NASDAQ:QCOM). Finally, its end-to-end RAN including virtualization of base stations complements partner Cisco's (CSCO) 5G core strength in enabling an all-American solution for fifth-generation wireless.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in MIMO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.