POWER PLAY
Powerwave Pitches Gear Makers on Outsourcing
By ANDREW SIMONS
If it were up to officials at Powerwave Technologies Inc., there wouldn’t be a stretch of highway where your wireless phone couldn’t be used.
And, after a year of declining sales and losses, the maker of power amplifiers for wireless networks hopes to have more of a hand in making it happen.
The Santa Ana-based company is eagerly looking for customers beyond networking gear maker Nortel Networks Corp., which made up 44% of Powerwave’s $300 million in 2001 sales.
Company officials hope the wireless industry’s nascent move to networks that carry voice, video and data,called third generation wireless networks, or 3G,will help them land more deals and diversify their customer base.
Powerwave already has begun the process, signing a deal last year with Nokia Corp. to supply 3G power amplifiers. That pact followed a $140 million deal with Nortel for 3G amplifiers.
“We pursue the major players in the industry,” said Kevin Michaels, Powerwaves’ chief financial officer. “Obviously, there is going to be some highs and lows.”
It’s been a rough year for Powerwave as changing fortunes at Nortel and other gear makers caused the company’s once heady growth to go anemic.
In the fourth quarter, Powerwave saw sales drop 30% from the year-ago period to $84.4 million. The company posted a $6.4 million operating loss, vs. a $17 million operating profit a year earlier.
Declining sales to Nortel alone shaved $80 million from Powerwave’s 2001 sales.
In the past year, Powerwave shares dove from a high of 51 down to a low of 9. Last week, they were trading at about 15 with a market value of nearly $970 million.
Powerwave has been here before. A few years back, the company relied on Samsung Electronics Co. and other South Korean customers for more than 80% of sales. A 1998 halt in wireless network building in South Korea, spurred by the Asian financial crisis, hit Powerwave hard.
By 2000, South Korean customers made up just 8% of Powerwave’s sales.
While Powerwave is more diverse than it was a few years ago, the company still relies on a handful of customers for most of its business.
“We believe that our future success depends upon our ability to broaden our customer base and maintain relationships with major wireless original equipment manufacturers,” the company said in a recent federal filing.
That means developing more business with the rest of Powerwave’s customers, including LM Ericsson Telephone Co. and Cingular Wireless, which both account for about 10% of sales. AT & T; Wireless Services Inc., Nokia and Samsung are smaller customers.
“The bulk of our stuff is made internally,” Michaels said. “We think companies want to outsource this.”
That’s what Nortel did. The company shuttered much of its own internal amplifier production a couple of years ago and tapped Powerwave for much of its business.
Powerwave officials are counting on other wireless gear makers to start contracting out their amplifier production.
It’s not a sure thing, though. Some companies have opted to bring amplifier production inhouse. In 2000, Ericsson bought Hauppauge, N.Y.-based Microwave Power Devices Inc., one of Powerwave’s rivals.
And Powerwave has new competition. A few months ago, Lucent Technologies Inc. spun off its internal power amplifier group into what now is Warren, N.J.-based Celiant Corp. Last month, Orland Park, Ill.-based Andrew Corp. said it plans to buy Celiant.
Sunnyvale’s Spectrian Corp. is another rival.
The strategy of Chief Executive Bruce Edwards is to counter naysayers with the pitch that Powerwave can save companies time and money by taking on their amplifier production.
“Oh yeah, we’re trying to convince them,” Edwards said. “We work to create demand and demonstrate what our products can do for our customers.”
Powerwave’s work with Nortel and Nokia could open doors, according to Michael Walkley, an analyst with Dain Rauscher Wessels.
“We believe Powerwave is well-positioned for longer-term growth over the next several years through the company’s (original equipment manufacturer) relationships,” Walkley wrote in a research note.
Networking gear makers could start to outsource 3G amplifiers instead of upgrading production themselves, Walkley said.
“Powerwave is well positioned to capture this business that offers long-term growth potential,” he said.
The company could grow in other ways. In December, Powerwave bought England’s Torocomm Ltd., an engineering company known for its work with 3G.
And, a few weeks ago, Powerwave registered 250,000 shares with the Securities and Exchange Commission. Some of the shares were issued to Torocomm. But the rest were saved for other purposes, including acquisitions.
Powerwave also has $123 million in cash at recent check.
“We have a lot of financial flexibility,” Michaels said.
