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. Cytori is in an enviable position where they can generate clinical data that could have an immediate impact on sales of already approved products.

That is a benefit over most biotechnology companies, but still doesn't alleviate the clinical trial risk. Until we see data from RESTORE-2, VENUS, PRECISE, and APOLLO it is difficult to forecast the ramp in product sales. That being said, third-party stem cell research has the potential to drive sales of Cytori's products. Also, as academia and private organizations expand their stem cell platforms there exists significant opportunity for Cytori to receive revenues form Lonza and Invitrogen.

We think 2008 has the potential to be a very exciting year for Cytori and we encourage investors to stay-tuned. Right now we see $8 as fair-value based on $276.7 million in revenues in 2012 generating $2.17 in EPS. We apply an industry-like 25x multiple and discount back to present day at 35%.

Dividend Balances KT Corp. Issues

KT Corporation's (KTC) fixed-line revenue is likely to decline over the near-term, as wireless substitution continues and VoIP competition enters the market. Intensifying broadband competition and continued regulatory pressures are also expected to compress future revenue growth levels.

Meanwhile, KT paid a dividend of $1.07 (KRW 2,000) which equates to a payout yield of 4.9%. We see limited downside in the shares due to KT's higher dividend and modest valuation.

However, the company's business catalysts are not yet entirely convincing that would drive up share demand, in our opinion, and therefore we maintain our Hold recommendation. KT is trading at a forward multiple of 12.5x our 2008 EPADS estimate, which is in the mid-range for its global peers.

We expect KT to generate modest top-line growth, and the company's cost structure is relatively inflexible due to government regulations and the power of its trade unions. Therefore, the below-average valuation is warranted to some degree, at least over the near-term.

Admittedly, the company's leadership position in the Korean telecom market and its focus on next-generation broadband and wireless services should partially offset the effects of intensifying competition and a difficult regulatory environment. The stock price also fluctuates based on the outlook for the Korean economy and changes in the KRW/US$ exchange rate. Our six-month $26 price target is based on a target P/E of 15x our 2008 EPADS estimate.

Trends Keep RH Donnelly a Hold

We rate the shares of R.H. Donnelley Corporation (RHD) a Hold following the release of first quarter 2008 financial results. The company continues to generate substantial cash flow, although we note that debt currently comprises more than 90% of total enterprise value. The company expects ad sales declines in the mid single-digits in 2008, and we project relatively flat EBITDA generation this year.

Given ongoing concerns about an economic slowdown, we remain cautious on shares of RHD. The shares currently trade at approximately 15.2x our 2008 EPS estimate.

In light of the number and magnitude of acquisitions in the company's recent past, we believe that valuation based on an EBITDA multiple is more appropriate in this situation. The shares presently trade at approximately 7.8x our projection for full-year 2008 EBITDA.

We note that this multiple represents a discount to the weighted average EBITDA multiple paid by RHD for its three major acquisitions of the last four years. The company paid multiples of 9x, 8.3x and 10.4x for its acquisitions of the Embarq (EQ) directory business in 2003, the AT&T (T) directory business in 2004, and the Dex Media business in 2006, respectively. In light of the current economic environment, we believe that a discounted multiple, relative to previous acquisitions, is appropriate at this time.

In addition, the company's efforts to further establish its presence in the online local search business remain a work in progress, with the recent rollout of the DexKnows.com brand. We consider the success of these efforts to be highly important to the company's long-term success, and will monitor the company's progress going forward.

In light of the challenging economic conditions and a tight credit market, we believe that a Hold rating is appropriate at this time. Our price target of $8 per share equates to approximately 7.75x our 2008 EBITDA estimate.

Osiris' Pipeline vs. Cash Burn

Osiris Therapeutics, Inc. (OSIR) is a company founded to commercialize stem cell products from adult bone marrow, a readily available and non-controversial source. The company is making significant progress with stem cell therapies.

The potential for Prochymal is enormous if several of the phase III trials in Graft vs. Host Disease (GvHD), Crohn's Disease (CD), as well as early-stage programs in acute MI and Type-1 diabetes, pan out. In the meantime, cash burn is a concern and we do not see profitability until 2011.

Both GvHD and CD opportunities are significantly under-served and offer large market potentials, especially for a novel biologic therapeutic like Prochymal. Mid-stage data in acute myocardial infraction and Type-1 diabetes also looks encouraging. These are potentially blockbuster indications, although our enthusiasm is tempered based on the early-stage nature of the data.

The $224.7 million contract win with Genzyme Corporation (GENZ) from the U.S. Department of Defense was fantastic news. Although the headline number of $224.7 inflates the actually economic value to Osiris, if Prochymal can eventually receive FDA approval for acute radiation syndrome (ARS), this could be a very profitable venture for management.

We are excited about the potential that Osiris has with its pipeline. However, things are still a little early and our income statement shows continued operating losses for the next few years. In the meantime, we see $14 as fair value and rate the shares Hold.