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May 26, 2006
Esmertec's Bumpy Ride
A week ago mobilephone software developer, Esmertec, saw its share price take a dive on the SWX Swiss Exchange after issuing negative sales guidance. It’s share price and valuation are now down by 75 percent from its successful IPO pricing.
Esmertec's Stock Price Movement Since Its IPO
It is not unusual in today’s market to see a growth stock fall 30 percent on news of missing targets. (It is one reason that IPOs in the US have been shunned in favour of an M&A type exit).
But Esmertec's fell by much more than 30 percent last week. So what happened?
Our research shows that it was a combination of things: the negative sales news, changes in the top management, and an illiquid stock.
The stock was positioned as a high growth venture, so when the Javaphone software developer announced that sales would be 50 percent lower than expected in the first half, down to about $10 million compared with $20.1 million a year earlier, the stock market reacted accordingly.
It didn’t matter that the downward sales numbers was due in part to a move to focus on shorter term sales contracts meant to make revenues more sustainable. That notion was overshadowed by the news that competitive pressure was affecting the price for its flagship software product.
The negative sales guidance was mentioned in the same press release that said that the CEO was stepping down to be replaced by the COO.
That particular announcement came very close in time to news issued just the week before by Esmertec, that gave the dates for the scheduled departures of the firm's two founders and another C-level manager.
The firm's board was doing something that is not uncommon, switching out top management because they are not the right people for the job anymore.
"There is no exodus of management from Esmertec but an adaptation of the current team to the market changes; our technical team was java only and we had to adapt," said Jean Schmitt [Esmertec board member and Sofinnova partner].
But the press here and shareholders didn't see it the same way. They saw it as the top level management jumping ship.
And because Esmertec is a fairly illiquid stock, something confirmed by a Zurich based investment bank, a selloff resulted that battered the share price.
Venture backers are still holding Esmertec stock and retain the same amount of shares stated in the startup's 2005 annual report, according to Esmertec's IR executive, Deborah Choate.
Schmitt said:
Sofinnova and Earlybird to my knowledge as well did not sell shares; we are supporting the company and are believers. The company has lots of great assets, lots of customers, lots of new opportunities.
Hopes are pinned on the company executing on its new strategy under the leadership of the new CEO Jean Claude Martinez.
"Jean Claude is the leader of the company; he is not a show man but an execution animal," commented Schmitt.
Esmertec is a vendor of embedded systems for javaphones. It was founded in 1999 and completed about half a dozen technologies acquisitions over the years, a veritable low-budget rollup machine with a strong focus on consolidating JVM developers, which enabled it to grow to $40M in annual sales and achieve profitability before going public.
In late January the firm announced it was having difficulty collecting royalties and that it was adapting its accounting methodology to deal with that. It also said that expenses were on the increase due to investment in Chinese and Japanese R&D.
In Februrary it said it would open a new market segment beyond the handset, the mobile network operator market. It kick-started this move with an acquisition in France, Cellicium.
The next scheduled newsflow from Esmertec is expected at the end of August. By then it will be clearer how the firm is doing reducing its dependancy on the Java embeded product and if it has found a way to generate more reliable revenues.
Posted on May 26, 2006 08:50 AM | Posted to News And Updates | Software | Permalink
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