CallWave, Inc. CALL
December 15, 2005 - 10:55am EST by
2005 2006
Price: 4.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 104 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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CallWave is a Top 25 Magic Formula* company so hopefully this write-up will save you some time as I doubt many people are familiar with it. CALL isn’t exactly a household name…yet. At its current price, you are getting a very cheap CALL option (pun intended) on a mobile VOIP business that could be huge.

CALL has two telecom businesses: (1) Home and (2) Mobile. Home is a legacy dial-up related business that allows users to see caller ID on their PC for incoming calls and decide whether or not to disconnect from the internet and take the call.

Obviously the Home side of the business is going the way of the Dodo as customers migrate to broadband service from dial-up over time. However, Home is profitable and is a cash cow. The Home business is worth about $1.50/share on a DCF basis. CALL also has $2.91/share in net cash. Combined, the cash and the Home business are worth $4.41/share. Thus you are paying $.50/share or $10M for the Mobile business.

Mobile VOIP, CALL’s second business, is in its infancy and has an extremely large addressable market. Since Mobile is where all the upside is for the company and the stock, I’ll discuss this business first.

Mobile VOIP

CallWave has developed proprietary mobile VOIP software that has the ability to dramatically change the way people handle mobile calls. CALL’s mobile VOIP applications allow subscribers to:

o Listen real-time to voicemails being left on their mobile phones and decide whether or not to pick up the call mid-message (think back to the days of answering machines and your ability to screen calls by listening to who was leaving a message). Maybe someone who you don’t want to talk to is calling but they are leaving an important message so you need to pick up. Or maybe you have forwarded your calls from your office to your cell phone so you don’t know who is calling by looking at caller ID.

o Transfer mobile calls to a landline instantly. Ever get a mobile call at home or in your office with bad reception? Problem solved. Hit one button and your mobile call is instantly transferred to your landline. This feature also comes in handy when your battery is dying or if you just want to save battery time or minutes.

o For prepaid mobile users (or minute conscious consumers), this service allows them to “save” their minutes by transferring mobile calls to a landline. Also think about parents who get their kids a mobile phone but don’t want them to be “minute hogs”. The “minute burn” factor can be significantly reduced by the kids transferring mobile calls to a landline when they receive mobile calls at home.

o CALL has a “follow me home” feature that automatically routes calls to your mobile phone to a predetermined landline if your cell phone is turned off (or out of batteries!) or if you are out of minutes for the month.

o Mobile voicemails can be stored automatically on your PC or e-mailed to you (or you can have your kid’s voicemail messages e-mailed to you if you want to snoop).

CALL has some good demos on its website that are worth watching to get a better feel of the service.

The beauty of the Mobile business is that it’s simply a software platform which doesn’t require substantial investment as the subscriber base grows. Talk about ROIC!

CALL currently has one Mobile customer—Hawaiian Telecom. Sales for this relationship are just beginning this quarter. The company is in discussions with all the major wireless carriers. I think this product could really catch on through word-of-mouth and become a “must offer” product. The product could also be attractive for wireless carriers that also have landline businesses as a way to stem the landline disconnects as customers assign a higher value to their existing landlines rather than disconnecting in favor of going 100% mobile.

At the present time, CALL offers prepaid CallWave enabled phones through a direct channel and has about 10,000 subs. The company has no long-term plans to be in the direct business but rather is just testing and learning more about the product. You can see the offering on their website. The plans currently sell for between $3.95/month to $9.95/month.


For the legacy Home business, I have calculated a conservative DCF value for the business of $1.50/share based on the following assumptions:

780,000 current subscribers; no new customer adds
15% discount rate
$4.00 ARPU, $1.45 annual cost of sales per sub
2.5% monthly churn
$4M annual cash G&A related to this business
DCF calculated based on next five years of business; terminal value of zero

Earnings and Valuation

I have no idea what CALL could be worth but I think the option value is very significant. At the current price, net of cash per share, you are paying 7.6x last quarter’s earnings annualized. These earnings basically represent the Home earnings less the start-up losses for Mobile VOIP.

CALL management stated last quarter that they expect to remain profitable next year even with increased spending on Mobile.

The one knock on management that I have is that they haven’t bought back any stock, even when the stock dipped into the $3’s. I understand not wanting to use all their cash but a token amount would be nice. However, I don’t think their reluctance stems from lack of confidence in the business but rather from not being able to predict all the opportunities that might come from Mobile and they want to be prepared to take advantage of unforeseen opportunities. Management has a sizeable stake in the company.

* For those who may be wondering what a “Magic Formula” company is, see I guess you could call it a sister-website to VIC as it relates to the Magic Formula discussed in Joel Greenblatt’s new book.


Adoption of new mobile VOIP product
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