The Worst is Over for iPass
iPass Inc. (IPAS) has been gaining traction on subscription-based initiatives and broadband has grown to comprise the bulk of access revenue. Although we believe iPass will be able to generate strong broadband revenue growth, until the company is able to generate meaningful revenue and profit growth from software, we believe margins will remain under pressure.
The company exited the first quarter with $70 million in cash and short-term investments compared to $75.2 million in the fourth quarter of 2007. The overall decrease in cash balance was related to the repurchase of approximately $3.2 million of common stock and a cash outflow of about $1 million to purchase source code from a third party vendor to enable iPass manage the cost of and increase the capacity for 3G network integrations.
For the second quarter of 2008, iPass expects revenue in the range of $47 million to $50 million, fully diluted GAAP EPS in the range of ($0.01) to ($0.04), and non-GAAP EPS in the range of $0.00 to $0.03. Gross margin in the second quarter is expected to be between 55% and 56%.
Shares of iPass are currently trading at 0.8x our revised 2008 sales estimate, representing a significant discount to the industry mean and the S&P. Though we believe that iPass's transition to its new business model still poses significant risks, the worst appears to be behind it. The company's subscription model has been gaining traction of late and dial-up is falling as a percentage of revenue.
Although we are positive on these initiatives and the stock could offer upside if the new business model is successful, we do not expect meaningful acceleration over the near-term and we believe the share price will stay close to current levels. We, therefore, maintain a Hold rating on the shares of IPAS with a six-month price target of $3, representing a price-to-sales ratio of 0.9x our revised 2008 sales estimate.
Keep a Eye on Cytori Trial Data
We believe that 2008 should be an exciting year for Cytori Therapeutics, Inc. (CYTX) as the company has begun to record product sales revenues from early-adopter Celution System placements in Europe and Asia. Ultimately, the clinical data will determine the pace at which product sales ramp in the next several years.
We have been encouraged by the small clinical data seen so far using Cytori's technology. Data from the ongoing VENUS, PRECISE, and APOLLO trials in 2008/2009 will be the key to reaching profitability perhaps in 2011.
There are several reasons that investors should own Cytori. The company is a leader in adipose-derived stem cells and already recording revenues from sales of the Celution System. Management's guidance is for product sales between $10 and $12 million, right in-line with our thinking at $11.48 million.
We like the fact that the majority of the regulatory risk has been cleared. Most biotechnology investors have to get past significant clinical trial risk, then filing risk, and then wait for an FDA / EMEA decision.
