Phoenix Technologies: I solemnly swear

There’s no lack of heart or nerve at Phoenix Technologies (Nasdaq:PTEC). The company will tell you exactly where it wants to be and how it will get there: by making its software the soul of next-generation computers.

Phoenix aims to soothe frustrations over slow computer start-up times, short battery life, tedious wireless connections and even more tedious software maintenance. It is fighting malware attacks and smoothing multi-user complications. It is combining the best of Windows and Linux systems and with the best of portable media players, PDAs and smart phones.

That’s its heart. Here’s its nerve: Phoenix pledges average annual revenue growth of 50%, positive operating cash flows of more than 10% of revenues and market capitalization of $1.3 billion by the fiscal end of 2011 in September. By December 2011, annualized revenues will run above $275 million, and net income will be at 15% of revenues.

Gutsy goals for a company that lost $0.63 per share in 2007 and saw revenues fall 22% to $47 million, from $60.5 million in 2006. Phoenix is now valued at $300 million.
But never mind. Phoenix is feeling it. The company started 2008 with revenue guidance of $68 million, raised it to $70 million after the first quarter, raised it again to $74 million at the end of the second quarter and, after exceeding guidance for the third quarter through June, raised it once more to $75.2 million. It expects 2008 non-GAAP earnings of 10% of revenues, or $0.26 per share. 

Cocky? Not really. Phoenix believes in itself and analysts believe in it, too. There are many reasons:  Phoenix’s strong market share in computer systems, the projected expansion in mobile devices and new products that are already gaining traction. Oh, and a CEO that’s proven capable of pulling off a winner.

The Milpitas, Calif.-based company’s core system software (CSS) is sold mainly overseas and goes into more than 125 million computing devices a year, making Phoenix the global leader in the CSS sector. These sales provide nearly all company revenues.

Phoenix is growing along with its industry. The global mobile PC market is expected to expand 14% per year to 2011. Worldwide notebook demand is seen growing 30% annually through 2012, according to data from market intelligence firm IDC and presented by Phoenix at its May mid-year meeting. 

Not only are Phoenix’s CSS sales strong, but new products already are aiding 2008 revenues.  FailSafe is Phoenix’s new theft-loss protection and prevention software for mobile PCs; its HyperSpace entry enables various Phoenix and third-party applications to be installed on devices and to operate independently from the user’s primary operating system.
 
“Evidence of new-product success should be more apparent with upcoming OEM announcements this summer, which represent an important near-term catalyst,” wrote Nathan Schneiderman, analyst at Roth Capital Partners, after third-quarter results in July.

Others are similarly bullish: “Based on the number of recently announced FailSafe and HyperSpace partnerships, combined with our checks and the rapidly growing mobile PC market, we believe management’s guidance/targets can be achieved and may prove conservative,” wrote Joe Maxa at Dougherty and Co. Maxa said he expects more partnerships and customer announcements in the coming months. 

Phoenix has been active in acquisitions to increase its offerings. It bought BeInSync in the June quarter and in early July closed on TouchStone. In mid-July, it bought General Software, a private company that sells to makers of handheld computers, among other devices. These acquisitions have lowered cash reserves from the second quarter, but the company still has $64.8 million in cash and equivalents against no long-term debt.

And, Phoenix brought on notable new management in 2006. CEO Woodson Hobbs joined the company from Intellisync Corp., which became the second-largest wireless email company under his leadership from 2002 until it was bought by Nokia in 2006. Intellisync stock increased almost 10-fold during Hobbs’s tenure.

Such expertise could go a long way at Phoenix. The company’s shares nearly quadrupled from an early 2007 low of $4.50 to a high this February of $17.60. Shares closed Tuesday at $10.62, after falling this spring.

“In our view, the Q2 sell off has created an outstanding entry point, as investors can now buy the name at valuation levels appropriate for the core system software business and get HUGE optionality on the new products almost for free,” said Schneiderman.

He rates Phoenix a “buy” with a $17 target. Risk factors include acquisition-related challenges and uncertain demand for new products. Maxa carries a “buy” rating with a $15 target, based on a P/E of 25 times his 2010 pro-forma earnings expectation of $0.60.

If Phoenix keeps its vows, the company will have earned a legion of happy computer users, wealthy shareholders and enthusiastic analysts. Not to mention bragging rights.   

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