Openwave May Be Getting Whacked for WAP

Mobile software provider Openwave's(OPWV Quote) earnings and revenue warnings Tuesday night drew concern over whether the country is actually ready or even remotely interested in accessing the Internet over wireless devices, say analysts.

"The primary concern is that we remain skeptical of the demand for mobile-phone-based wireless Internet services," said W.R. Hambrecht analyst Peter Friedland. "It's evidence that outside of Japan and Korea, it's not clear if people desire wireless Internet access from their mobile phones. This has relevance to the whole industry in terms of [high-speed] 3G services and the vendors who provide handsets and infrastructure."

While analysts painted Openwave's miss as part of an industry's misreading of consumer hunger for high-speed services, at least some of the blame can be more narrowly targeted; that is, on the company's image as the face of older versions of the slow wireless access protocol, or WAP, offering and on the significant competition it's receiving from larger rivals.

Supporting that notion was the suspected dearth of WAP subscribers, which the company declined to estimate. Friedland estimated that it was about 3.8 million net additional subscribers, down sequentially from 5.2 million. His firm has not done banking for Openwave.

Consumers have long complained that the current crop of wireless Internet offerings were overhyped and underdelivered. Phone users have been largely disappointed by the clunky menus and snail-like pace in retrieving Internet data through their cell phones.

The current pitch for 3G has been that it will speed up and simplify how consumers draw data from the Internet. Major handset, infrastructure and wireless operators have been investing heavily to offer high-speed data products that compete with Openwave's WAP product. Indeed, even the Openwave's management conceded that Nokia and Ericsson have put the squeeze on the company by bundling multimedia messaging products along with big infrastructure contracts.

What's more, Microsoft (MSFT Quote) can also be viewed as another competitor as it begins to release phones that run on a version of its operating system, which also make it easier to surf the Internet using an interface most consumers are already accustomed to.

The company warned Tuesday that it plans to miss its guidance by a landslide, hoping that losses excluding nonoperational items will be 17 cents to 22 cents, down from its earlier expectations of 6 cents to 13 cents. Revenue is expected to be $64 million to $71 million, down from a range of $79 million to $90 million. Analysts expected the company to lose 9 cents, on revenue of $80 million.

The announcement resulted in a sharp drop in Openwave shares, which in recent trading were down $2.67, or 57.3%, to $1.99. Nokia shares were up 4% and Ericsson was down about 1%.

After the announcement, analysts wasted no time taking swipes at the company and at the entire mobile data industry. Credit Suisse First Boston reduced its rating to hold from buy. Merrill Lynch cut its midterm rating to reduce/sell, from neutral. Salomon Smith Barney cut its rating to neutral from buy. W.R. Hambrecht cut ratings to market underperform from market perform.

Friedland raised another issue regarding its cash burn situation, which may be exacerbated by the current news. The company said it will need up to $100 million to $110 million in revenue each quarter in order to break even. And based on last night's guidance range of $64 million to $71 million, the company is expected to lose about $30 million in net income per quarter, which will take a significant toll on its available cash, which is at $269 million, including the cost of a pending acquisition.