Entries from July 2008 ↓

Mobile operator messaging revenues are under threat. Operators are rolling out flat rate data packages to encourage mobile Internet usage and uptake, which is in turn enabling the availability of free, ad-funded online messaging on the mobile handset. Mobile application development is by nature technically challenging. However, the carriers have not helped. Mobile technologies are making mission-critical data (voice, data, video, maps) available on-demand and on-site through mobile networks and devices. Many organizations are planning remote access to their production-level enterprise applications.

Existing Internet Protocol (IP) broadband links (such as DSL or cable) are leveraged to back haul the mobile voice, video, SMS, and data traffic from the home and integrate with an existing 3G Wireless Core Network.

Base Stations are the link between wireless devices and the rest of the world. While many people would recognize the large cellular towers on the roadside as base stations, there are also smaller, lower power base stations for indoor wireless applications.

Base station manufacturers also want to evaluate the new standard. TI partnered with system developers MCS and STx to offer ATCA/AMC-based development platforms that can reduce the OEMs’ time to market. Basestations will require flexible, low cost integrated solutions that are capable of supporting several-standards.

For example, let’s analyze Powerwave Technologies:

Powerwave Technologies, Inc., is a global supplier of end-to-end wireless solutions for wireless communications networks. Powerwave designs, manufactures and markets antennas, boosters, combiners, filters, repeaters, multi-carrier RF power amplifiers and tower-mounted amplifiers and advanced coverage solutions, all for use in cellular, PCS, 3G and WiMAX networks throughout the world.

They have 3 product lines: (1) Antenna systems (2) Base station systems (3) Coverage systemsBase station systems contribute about 67% of the revenue, while Antenna systems and Coverage systems share the remaining.

Powerwave is in a challenging position. The industry has long-term strength, but the short-term is not easy.

Powerwave has two types of customers:
(1) OEM Accounts, contributing about 67% sales and
(2) Direct/Operator Accounts, contributing about 33% sales.

Powerwave has done four acquisitions in the last few years, and in their words: “Notwithstanding our acquisitions, our business remains largely dependent upon a limited number of customers within the wireless communications market and we cannot guarantee that we will continue to be successful in attracting new customers or retaining or increasing business with our existing customers.”

The 67% sales from OEM Accounts creates earning risk because of developments in the OEM side, given that 50% of total sales come from just two OEMs: Nokia Siemens and Alcatel-Lucent. They need to do a couple of things successfully if they are to move into profitability.

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Capital structure is part of fundamental business strategy, and top-level driver for Financial Management. And every business owner/board should have a map for how capital will be obtained for various projects.

Capital structure decides what combination of debt and equity will be used to finance the business projects. And it thereby decides the value basic parameters like cost of capital, earnings per share and valuation.

Arriving at the capital structure will depend on multiple factors: owner/shareholder expectations, industry type, tax policy-high corporate rates favor debt, and overall corporate risk.

Assuming there are real projects to deliver real growth (an important assumption), then if company’s equity investors expect the stock to go up 10%+ per year, and if the company can borrow money at 6%, then the company should have some debt as a source of capital.

Now, the point to note here is that it will benefit the equity investors and share price to have some debt, but overuse of debt (over-leverage) is not healthy because it increases the risk in the company’s earnings stream, which in turn tends to lower the valuation and hence the share price.

So each business owner/board will have to find their zone of comfort and create a capital structure policy that makes a trade-off between risk and return, which is acceptable to all investors.