NMS Communications: Getting into the Groove

Paul Rolfes | May 19, 2008 6:20am EDT | Comment

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So what jingle-linga-ling brings your cell phone to life? Beethoven’s 5th? Your sweetheart’s favorite love song? Some Grateful Dead?

That’s ringtone. But what about the beeps and blips that someone hears while waiting for you to pick up? That’s ringback.

In an impersonal world, consumers enjoy personalizing mobile phones in many ways, and adding ringback tones appears to be a growing fad — plus there’s a potential for video content. NMS Communications Corp. (Nasdaq:NMSS) is making some noise about becoming a leading player in this blossoming market, and has made some strategic changes to its business model while serving up a suite of added services.

Investors in NMS Communications might like the sound of that, since this Framingham, Mass., company has posted losses for the past two years. Now this 20-year-old company is feeling the Groove (as in Groove Mobile; more on this later).

NMS Communications is transitioning from a nuts-and-bolts, equipment and products sort of company, to a company with a services-oriented focus. And it could lead to a divorce of its NMS Communications voice, video and data platform business from its LiveWire Mobile suite of managed personalization services.

Of the four analysts surveyed by Thomson Reuters, three have NMS Communications as a “buy,” with another calling the stock a “hold,” with a median price target of $2.50.

NMS appears to be pinning its future on the cutting-edge mobile media services field. Shares hit a 52-week low of $1.16 on Friday, three days after NMS reported first-quarter results. The stock traded as high as $1.97 last June 4, but has not moved above $2 since February 2007. NMS Communications closed Friday at $1.27.

What makes this company interesting is the potential for not only ringback tones, but its plan to offer cell phone service providers an integrated suite of audio and video services that they can dish up to their customers.

That’s where Groove Mobile comes in. NMS Communications splurged to acquire the Bedford, Mass., mobile music provider in March for $14.5 million. Groove brings to LiveWire more business in the way of ringtones and full-track music and video download services. LiveWire can reach out to a potential 260 million subscribers, through 42 operators; currently it has 15 million subscribers. Adding Groove moved up the profitability of LiveWire — formed last December — into the fourth quarter from 2009.

Companies using LiveWire services include Sprint Nextel Corp. (NYSE:S), Vodafone Group PLC (NYSE:VOD), Virgin Mobile USA (NYSE:VM) and Rogers Communications Inc. (NYSE:RCI). It recently announced deals in Europe and Asia.

While the focus is on mobile phones, ringback tones can be offered on any type of system, including traditional landlines. Since the genesis in Asia, U.S. companies including Verizon Communications (NYSE:VZ) provide ringback options.

Ringbacks are a growth market, according to Juniper Research, which predicts the 2008 global demand of $2.9 billion to reach $4.7 billion by 2012. Juniper expects the market for all mobile music personalization services, including ringbacks, ringtones, full-track downloads and subscription music services, to climb to $17.5 billion in 2012, from the current 2008 estimate of $10.7 billion.

NMS’s changeover and acquisition did produce a painful quarter. Revenue from continuing operations for the three months ended March 31 was $19.2 million, up 7% from the corresponding 2007 quarter but down 15% from the fourth quarter of 2007. The net loss grew to $6.2 million, or $0.14 per share, from a net loss of $5.1 million, or $0.12 a share, the year before.

On a May 12 conference call, NMS issued guidance calling for $30 million in LiveWire Mobile revenue this year, helping the overall company “to deliver modest profitability,” on a non-GAAP basis. Predictions for the June quarter are for flat to slightly better results than the $20.6 million in revenue and a $0.07-a-share loss a year ago.

“Over the past year, we have taken a series of steps to more clearly delineate and enhance the value of our LiveWire Mobile and NMS Communications businesses,” Chairman and CEO Bob Schechter said on the call. “Ultimately, we believe the best way to realize value is to separate the two businesses.” He did not give a time frame for any action.

Margins from both divisions are high for a tech microcap, said Joel Achramowicz, a director of equity research at MDB Capital Group in Santa Monica, Calif., in a telephone interview. In the first quarter, LiveWire gross margins were 61%, with the NMS Communications division tallying a 69% margin.

Achramowicz, who believes the mobile personalization services sector does offer some growth potential, noted: “From a management perspective, they seem to be executing the blocking and tackling well, the question is whether they’ll be able to score a touchdown.”

Cantor Fitzgerald analyst Ted Jackson issued a May 13 update on NMS Communications, maintaining a “buy” rating but trimming the 12-month target price to $2 from $2.75, on “disappointing” full-year guidance. Calling NMS “undervalued,” Jackson wrote that success in unwinding the two businesses “will facilitate share appreciation by enabling investors to value the distinct businesses separately.”

NMS Communications is signaling that it hopes to connect with a bigger customer base, which could bring patient investors who have stomached recent losses a sound return.