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[Nettime-bold] THE RAGAS REPORT - Wireless ISPs- The Inside Scoop on the Walking Wounded


Title: RagasReport
Knowledge Capital For Next Economy Architects
Editor: Matt Ragas
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In This Issue  
  Commentary: Wireless ISPs: The Inside Scoop on the Remaining Walking Wounded
More Knowledge Capital: Interview with IPO analyst and Stock Options author Tom Taulli
Quote of the Week: Yahoo Chief Concentrates on "Evolution" Rather than "Revolution"

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This Week's Commentary

 

Wireless ISPs: The Inside Scoop on the Remaining Walking Wounded

While bullish results this week out of Microsoft [MSFT] and Yahoo [YHOO] sparked a much-needed rally in the tech sector, it still wasn't enough to revive many beaten down wireless service stocks.

Intense skepticism still hangs over the sector.

After all, just two weeks ago high-profile wireless data provider Metricom [MCOMQ] - best known for its Ricochet data service - finally threw up its hands and announced that it was filing for Chapter 11 bankruptcy protection.

In its wake, Metricom left a $1 billion trail of debt and high profile investors like WorldCom [WCOM] and Paul Allen's Vulcan Ventures struggling for answers. It got me thinking also. What does the future really look like for remaining wireless Internet service providers?

With their stock prices already decimated- and Wall St. already dancing on their graves, is now the time to make a contrarian's bet on wireless ISPs? After all, the world hasn't suddenly decided to stop Web-enabling Palm and PocketPC PDAs, as well as laptop computers.

Thus, I decided to take a look this week at Go America [GOAM] and OmniSky [OMNY], the two pure play wireless ISPs still left out in the wireless data jungle. Of course, both companies are bleeding heavy red ink, but claiming EBITDA breakeven sometime next year.

We shall see. Clearly, Wall St. still largely disagrees with these targets. And Metricom's recent mess hasn't helped any! Let's put both companies under my analytical microscope then and see what I found out.

A second opinion never really hurt anyone.


Go America [GOAM]

A devastated stock price still hasn't stopped Go America from posting serious subscriber growth lately and new corporate partnerships. While Wall St. may have already written GOAM off, road warriors just can't seem to get enough of the company's wireless services. The Hackensack, NJ based firm announced earlier this week that it expects to report over 100,000 subscribers by the end of the second quarter. If Go America meets this target, it would represent blistering 40% sequential subscriber growth.

On another positive note, Go America announced earlier this week that it is now moving up its target of reaching positive EBITDA to the first half of 2002. Go America had previously forecasted positive EBITDA sometime during the second half of next year. It is also important to note that GOAM's management continues to believe that the company's business plan is already fully funded and that it plans to end the year with a healthy $40 to $50 million still in the bank.

While it is clearly a big positive that Go America is sitting on a nice cash pile in this type of environment, there are clearly glaring negatives hanging over this stock as well. And GOAM's lack of a bottom line isn't my biggest concern. Most discomforting to me is the fact that GOAM still expects to report negative overall gross margins this quarter and subscriber revenue margins that will only be in the single digits. These margins must improve rapidly over the next few quarters for Go America to be a long-term survivor.

For example, in the most recent quarter, GOAM saw sales rocket 450% to $8 million, but still posted an EBITDA loss of $16.5 million. Gross margins checked in at a lowly 8.4%. Looking at the bigger picture, at a recent price of $1.70 per share, Go America is now down 90% from its 52-week high, which leaves the firm trading at only 2 times its projected 2001 sales. While I'm not suggesting that anyone run out and buy this stock, at these prices Go America must be looking very attractive to some wireline ISPs, telcos and hardware manufacturers.

OmniSky [OMNY]

At least Go America doesn't have to feel like the only $2 wireless stock on the block. Wireless ISP OmniSky has also watched its stock price melt over the past year as its subscriber base continues to grow. San Francisco, CA based OmniSky ended last quarter with 39,000 subscribers and projects having 165,000-175,000 by year-end. While Wall St. seems to have already abandoned the stock, this hasn't stopped News Corp [NWS] from upping its stake in OMNY to 20% in the most recent quarter.

Much like Go America, OmniSky still has major issues to deal with in terms of its gross margins. While the company expects to report positive pretax cash flow by the fourth quarter of next year, right now OMNY is still reporting nasty negative gross margins. As new technologies like Bluetooth pick up, OmniSky should be able to transition its way largely out of the money losing modem business, but I remain skeptical of how quickly this transition will occur.

Based on OmniSky's most recent guidance, the firm expects to report 2001 sales of between $51-$56 million with negative EBITDA of between $105-$110 million. While it's easy to get excited about OmniSky's anticipated 350% annual top line growth this year, the speed at which OMNY is chewing through its remaining cash ($90 million) is frightening. OmniSky saw revenue grow 300% last quarter to $5.5 million with an accompanying loss of $33.6 million.

Clearly, OmniSky and Go America are both companies trapped in a market demanding profits "now" - with business models better accustomed for the days of yester-year (Nasdaq 5000). While at a recent lowly price of $2 per share, OMNY is also trading for only a little more than 2 times this year's projected sales; GOAM looks like the better play at this time. Of course, "the better play" in this case feels a lot like choosing between walking on fire or jumping off a bridge. Steer clear of both and avoid meeting the ghost of Metricom.

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More Knowledge Capital

 

AN INSIDER'S LOOK AT THE FUTURE OF STOCK OPTIONS AND MORE

I recently had a chance to catch up with IPO stock guru and RagasReport friend Tom Taulli. Tom is the author of Investing in IPOs Version 2.0 and also recently released a new book called Stock Options - Getting Your Fair Share of the Action. (http://www.stockoptions411.com). I thought that now would be a great time to pick Tom's brain on the future of stock options in a beaten down tech sector as well as see if there were any promising new IPOs on the horizon.

Ragas: Stock options. They've become the rocket fuel of the Next Economy. Give us an idea of what your latest book "Stock Options" is really all about?

Taulli: It certainly helps that the book came out kind of late. I was writing quite a bit of it when the NASDAQ was collapsing. So, I have lots of material about how to diversify and deal with the tricky tax issues - especially when the stock price tanks. The big reason I wrote the book was that, even though I have a finance background and a law degree, I was still confused with employee stock option plans. And I'm sure I'm not alone. Yet, it is critical to understand them. A few wrong moves can make a big difference with your net worth.

Ragas: Hasn't the drastic decline of NASDAQ made stock options - especially for under-funded private companies- a much less powerful incentive then they were before?

Taulli: I think things have actually become more realistic. For the past few years, the high-tech industry lived in a bubble. It was very easy to make quick money from options. But options are not meant for the quick buck. Rather, they are for long-term motivation. So, with the market valuations coming down to earth, I think options will be in much better perspective. Besides, over 12 million employees in the US have options and many countries are starting to adopt these plans. Options have been a critical part of not only tech companies - such as Microsoft and Oracle - but also non-tech companies - such as Home Depot and Starbucks.

(cont'd below)

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Ragas: Finally, you're also one of the most well-known IPO commentators. Any upcoming deals that my readers should keep their eyes on?

Taulli: The IPO market is in the worst slump since 1990, when we had another recession. Historically, though, such depressed times present great investment opportunities in the IPO market. Only good quality companies go out - and at great valuations. In fact, during the first half of 2001, the best performing IPO was Verisity. It has gone from $7 to $17. With these successes, expect to see some more semiconductor deals. One that looks particularly interesting is Mykrolis. The company develops products that purify the liquids and gasses for the manufacture of semiconductors. The proposed ticker symbol is MYK.

Ragas: That'll wrap it up. Thanks, Tom! To learn more about Tom's new book or to get in touch with him, don't forget to visit the book's website at: http://www.stockoptions411.com or purchase the book online now at BN.com or Amazon.com.

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Quote of the Week


"Yahoo is in control of its future; my agenda is to stabilize and evolve its business. I think of our challenges as an evolution rather than a revolution."

-- Comments made this week by new Yahoo chief Terry Semel. Yahoo announced earnings that slightly topped analysts' expectations.




 
July 13, 2001


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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About Matthew W. Ragas: Ragas is President and Chief Analyst of Matthew Ragas & Associates, an Orlando, FL based strategic advisory and venture development firm. He was previously the founding editor of Raging Bull and is the author of the new e-business book Lessons From the E-Front from Prima Publishing.


DISCLAIMER:
The RagasReport and Matthew Ragas and Associates, are not a registered Investment Adviser or a Broker/Dealer. Readers are advised that the report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The opinions and analyses included herein are based from sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned. In addition, we receive no compensation of any kind from any companies that we mention in this report.




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