A Foolish Treat
SignalSoft
By Chris Rugaber (TMF RFK)
October 24, 2000
Trading at $37 11/16 as of October 23, 2000
If you've run across any magazine articles about the "wireless Web" recently, you've probably read about the wonderful conveniences it will allegedly bring: You'll be able to look up neighborhood movie listings, find nearby restaurants, and receive traffic information, all with a wireless handheld device, anywhere you are!
While there are still some technological issues that need to be resolved to bring all this about, it's probable that wireless Internet access will soon be a much larger part of our lives. And, if so, then more and more people will likely take advantage of the location-based services described above. After all, a principle difference between wireless and wireline Internet access is the ability of mobile Web surfing to take customers' location into account.
One company leading the way to enable these services is software developer SignalSoft (Nasdaq: SGSF), and this could turn out to be an investing treat a year or two from now. However, before we go any further, keep in mind that while sales are growing rapidly, SignalSoft is a small, unprofitable company, and carries all the concomitant risks.
Drivers for SignalSoft's business
As you may have heard, mobile Internet access is predicted by market researchers to grow dramatically in the next few years, with some estimates putting wireless Internet users at 1 billion by 2003, far surpassing the estimated 625 million wireline customers. That's a pretty decent potential market for location-based services, should it materialize. (For more information on the wireless Web, check out our Internet Report on the subject.)
Location-based services will also benefit from FCC rulings that require all wireless providers to be able to locate 911 callers for safety reasons. By late next year, the FCC expects carriers to determine the position of at least 67% of all callers within 100 meters, and 95% of all callers within 300 meters. To meet this requirement, several of the largest U.S. carriers have already licensed SignalSoft's "Wireless 911" product, including SBC Communications (NYSE: SBC), BellSouth (NYSE: BLS) (now combined as "Cingular"), AT&T Wireless (NYSE: AWE), and Sprint PCS (NYSE: PCS).
While the company probably won't make much money from this, the safety requirements provide SignalSoft an excellent opportunity to introduce its software to service providers, which may lead to additional business.
What the company does
SignalSoft has a software platform and several applications that enable some of the most exciting location-based services. Other companies provide actual positioning information, but the longitudes and latitudes that global positioning satellites produce, for example, aren't much use to people who need street names and directions. SignalSoft's products take raw positioning data and use third-party mapping, travel, and other content to provide information that carriers, subscribers, and emergency services can actually use.
For example, a wireless carrier may want to offer different rates for mobile phone calls when they're placed within a customer's home, to compete against wireline providers, while still charging a higher rate when the subscriber is actually mobile. SignalSoft's billing software enables carriers to do so, and Australian carrier AAPT has already licensed the product.
In addition to safety and billing, the company offers content and tracking applications. SignalSoft's "local.info" software, along with more than 40 partner content providers, including MapQuest, InfoSpace (Nasdaq: INSP), i3Mobile, and Vicinity (Nasdaq: VCNT), provides information ranging from where the nearest restaurant or ATM is, to traffic and weather conditions in your area. Swiss carrier diAx has licensed the software to provide subscribers at several ski resorts with information on hotels, ski conditions, and ski lift availability. This has resulted in additional revenue for the carrier thanks to increased usage of its service.
SignalSoft rounded out its portfolio early this year by purchasing tracking service company BFound.com, gaining software that can track local delivery services.
Show me the money
Like most software companies, SignalSoft earns most of its revenues -- 73% in the first half of this year -- by licensing its products. The company sells mostly through partners, including wireless infrastructure companies Motorola (NYSE: MOT), Ericsson (Nasdaq: ERICY), Siemens (Nasdaq: SMAWY), and Compaq (NYSE: CPQ), among others.
SignalSoft's revenues are soaring, but from a pretty small base. Sales for the first half of this year reached $4.8 million, up from $400,000 in the year-ago period. (Did I mention it was a small company?) Analyst estimates are for the company to earn about $12 million this year and $30 million in 2001.
While those numbers represent healthy revenue growth, SignalSoft is far from profitable. In fact, the company's R&D and sales, general, and administrative (SG&A) expenses were almost double the company's revenues for the first six months of this year. SignalSoft doesn't expect to be profitable until mid-2002.
Nevertheless, thanks to the company's August IPO, there is about $97 million in cash on the balance sheet, and no long-term debt. Also, like most software companies, SignalSoft has high gross margins -- about 69% currently -- and no inventory. Interested investors should certainly keep their eyes on accounts receivable, which has increased in recent quarters, though not by an unreasonable amount. A new, small company like SignalSoft won't have the ability to demand the best payment terms from companies like AT&T Wireless.
More risks
There are certainly other risks for investors to consider. The company is still dependent on a few customers (for example, the diAx contract accounted for 20% of the company's sales in the first half of this year). In addition, with a market cap of about $840 million, the company is trading at a generous multiple to its projected sales for 2001.
In short, while this may not be a company to rush out and add to your portfolio right now, if you're interested in wireless, it's definitely worth putting on your radar screen. And, one day, if you're getting restaurant and other coupons spammed to your mobile phone as you walk down a busy city street, you'll know who to thank (or blame!).
A Trick or Treat represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question, or representative of anyone or anything other than that specific Fool's thoughts.
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