Towerstream Catapults 40%

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July 24, 2009 | SIN Picks | | Author Asif

While configuring a Dell (DELL) laptop earlier this month, I noticed that Dell was now offering WiMax as an option for the wireless card in its Inspiron line of laptops. To borrow a line from a comment following Dell’s May 5, 2009 announcement regarding the availability of WiMax on two of its computers, “if Wi-Fi is a beard then Wi-Max is like a full body beard, with all over coverage.” It has been a long journey for some of us early WiMax investors but it looks like mobile WiMax may finally be within reach of consumers. Whether WiMax continues to benefit from its lead in the consumer sector or gets eventually eclipsed by competing standards like LTE and HSPA+ remains to be seen.

While Clearwire (CLWR) along with its partners Sprint (S) and Intel (INTC) targets the consumer sector, Towerstream (TWER) has carved a niche for itself providing wireless T1 services at very competitive prices to businesses. Beyond T1 lines, Towerstream also provides a whole spectrum of services that targets everyone from small businesses to Fortune 1000 companies with fractional T1s with speeds of just 512 Kbps to high capacity connections with speed of up to 200 Mbps. Beyond the competitive rates that Towerstream provides, the true redundancy offered from a wireless connection that does not depend upon the copper lines of incumbent carriers like AT&T (T) is certainly attractive to IT managers in a business environment where an “always on” internet connection is critical.

I got a chance to speak to Towerstream’s CEO Jeff Thompson last Thursday about a number of questions that were on my mind following the company’s announcement that it had signed a record number of contracts in June. These questions were partly the result of a discussion in the comments section of my November 2008 article about the company called Towerstream Trading Below Cash and partly on account of a conversation I had with an ex-employee who had been laid off from Towerstream.

In anticipation of high growth last year, the company had put together a sales team in excess of 100 sales representatives. As economic conditions changed and investors became more risk averse, Towerstream shifted its focus towards breaking even and proving out its business model. Despite this shift in focus and weak economic conditions, the company has consistently increased revenue over the last four quarters and even managed to improve gross margins to 76% last quarter. In addition to reducing the size of its sales team through attrition and smaller rounds of layoffs, the company laid off 35 employees from its work force in early June. The represented a 21% reduction in head count and could end up saving the company between $1.2 million to $1.6 million in operating expenses.

The key question on my mind was the ability of Towerstream to sign a record number of contracts in June despite laying off a substantial number of employees from its sales and marketing departments. Jeff mentioned that the company continues to retain its top sales performers who brought in more than 90% of the business and were also able to fine tune certain marketing strategies with very good results. He elaborated on these strategies and I got a chance to see them in action.

Since business internet service contracts are usually at least a year or two in duration, the sales cycle for this industry is not very short as the San Francisco Towerstream sales representative who has been persistently calling me for the last 18 months can attest to. This would imply that some of the contracts that were closed in June could have very well been in the pipeline from before the layoffs. The corollary from this statement is that sales could flatten in coming quarters if the marketing strategy management discussed does not continue to bear fruit as expected.

Satisfied with the response to the June contracts question, I asked Jeff about the size of the federal broadband stimulus program and if Towerstream would consider entering the retail consumer segment in light of this stimulus program. Jeff told me that the federal broadband stimulus program is $7.2 billion in size and that Towerstream plans to apply for these grants. The company however does not have any plans to enter the retail segment and wants to retain its focus on the business sector.

I also asked management about the increase in churn to 1.68% in the first quarter of 2009 when compared to 1.23% in the fourth quarter of 2008. Jeff attributed the increase in Q1 churn to weak economic conditions and mentioned that management is closely monitoring churn. Since sales is all about relationships, I am concerned that we might see an increase in churn following the June layoffs. The company reports second quarter results on August 5th and it will be interesting to see if the churn number holds below 2%.

The last time I spoke to Jeff, I asked him about the WiMax equipment providers that Towerstream uses and he told me that Alvarion was one of their key suppliers. Since Alvarion (ALVR) is a SINLetter model portfolio and also in my personal portfolio, I asked Jeff if they were continuing to work with Alvarion and it was reassuring to hear that Alvarion is still their preferred provider for equipment up to 5 Mbps.

I think the big wild card with Towerstream is accessibility to the broadband stimulus dollars, which as Jeff very cleverly reminded me is a grant and not a loan that has to be repaid. As to what caused the 40% spike in the price of the stock yesterday on volume that was more than 10 times average daily volume, your guess is as good as mine. The stock is up 143% since my November 26, 2008 call about Towerstream trading below cash and as I mentioned in my previous blog entry The Timeless Question: To sell or not to sell, taking profits from time to time is never a bad idea. The ex-employee I spoke to was clearly unhappy about what happened and felt that the company was “top heavy” but nothing in the conversation raised any red flags for me. Management sounded very confident on the call last week and I continue to remain bullish on the stock.

Voluntary Disclosure: I am long Towerstream in my personal portfolio.

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