A First Look at iPass (IPAS)

by Kris_Tuttle on March 8, 2011

Back­ground

We recently added iPass to our mobile ecosys­tem and decided to take a quick ini­tial look at the com­pany. This is a very small com­pany but the finan­cials and val­u­a­tion are attrac­tive: Mar­ket Cap­i­tal­iza­tion = $88m, Cash = $30m, Rev­enues = $156m (but not grow­ing), and recent near-break even operations.

iPass pro­vides WiFi access and man­age­ment ser­vices to enter­prise clients. This is an area of expand­ing demand and iPass has a large num­ber of part­ner­ships and pro­vides their ser­vices to car­ri­ers who resell them under a ”white label” arrange­ment. Car­ri­ers are key dis­tri­b­u­tion part­ners and can expand in time to cre­ate a path to the con­sumer. Tel­stra, Colt, and Deutsche Tele­com are all part­ners. Deploy­ment time seems long and takes mul­ti­ple quar­ters, which tends to dampen near-term growth in the face of these part­ner­ship deals. These com­pa­nies had rela­tion­ships with the older iPass solu­tions and have been ”rad­i­cally refreshed” with the new open mobile offering.

Man­age­ment is telling investors that 2011 is a year that they can rebuild into a growth com­pany on the strength of their ”open mobile” enter­prise plat­form. The com­pany will lose money in 2011, which will require investors to be patient. Ulti­mately, they believe they can use their plat­form to address the larger mass mar­ket oppor­tu­nity for mobile access and appli­ca­tions out­side of the enterprise.

With­out spend­ing lots of time on the sub­ject, the com­pany has had a check­ered past that included some share­holder activism back in 2006. New senior man­age­ment came into the com­pany in 2008 and 2009, which explains some part of their shift­ing strat­egy and rev­enue declines in the last two years.

Posi­tion­ing

So what does iPass really offer? From an enter­prise per­spec­tive, it’s rel­a­tively sim­ple. If you work for a large com­pany and need data access on the go, there are often instances where addi­tional options are needed to con­nect – places like air­planes, air­ports, hotels, and con­ven­tion cen­ters to name a few. Instead of a cor­po­rate user hav­ing to pay a per-access charge, they set up accounts for their employ­ees who can then access these WiFi net­works by sign­ing in. iPass pro­vides tools for enter­prise cus­tomers to man­age employee accounts, usage and deliver support.

In short, iPass pro­vides a ”bridge” tech­nol­ogy solu­tion for enter­prise mobil­ity that improves net­work access, adds flex­i­bil­ity and does it at a low enough cost that it might even save money in sit­u­a­tions where wire­less broad­band cov­er­age is lim­ited. As employ­ees typ­i­cally carry two to three IP-addressable devices (phone, lap­top, tablet), the need for addi­tional wire­less access expands.

Val­u­a­tion & Conclusion

Peer analy­sis of this space yields a very mixed bag of val­u­a­tion ranges. For exam­ple, com­pa­nies like Motric­ity ( $MOTR ), Cogent Com­mu­ni­ca­tions ( $CCOI ), and even Earth­Link ( $ELNK ) trade at some mul­ti­ple of sales. But com­pa­nies like Real­Net­works ( $RNWK ), Open­wave ( $OPWV ), and iPass ( $IPAS ) trade at well under 1x sales.

The $30m in cash (50c / share) gives the com­pany plenty of secu­rity to plan for the next few years, despite antic­i­pat­ing adjusted EBITDA losses of $5m for 2011. Look­ing at Intrin­sic Value, the shares appear under­val­ued by a rea­son­able mar­gin. A basic case that fac­tors in a return to very mod­est growth yields an IV of $2.25.

That 50% upside isn’t bad but might not be real­ized in 2011. Rev­enue growth won’t occur until 2012, which means that 2011 will still be a year of no growth and quar­terly losses. From what we can tell, man­age­ment would prob­a­bly endorse the fore­cast we put together to sup­port the IV. This means that if we have only the enter­prise sce­nario to rely on, growth will be lim­ited even into 2015. How­ever, one poten­tial wild­card is the con­sumer, but that’s also one on which we don’t think that iPass has vis­i­bil­ity at present.

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