To be honest, I was rather surprised that PowerDsine Ltd.’s (Nasdaq:PDSN) results showed a decline. This tells me two things. The first is that my understanding of the company’s technology is apparently limited, to put it mildly. The second is that, in the current information revolution, even if had two degrees in engineering from the Technion, and three more degrees in physics from MIT, I still wouldn’t know much more about it. This is because one characteristic of IT is the daily coining of new technological words and their penetration into everyday language. What does this mean? It means that, slowly but surely, we lay people have to accept the fact that we can’t understand anything in the company’s press releases.
When a non-expert wants to know what PowerDsine actually does, he or she gets the following explanation: “PowerDsine designs, develops and supplies integrated circuits, modules and systems that enable the implementation of Power over Ethernet in local area networks, providing the capability to deliver and manage electrical power over data network cables.”
Marvelous, the non-expert feels like the village idiot as he or tries to understand what that means. In any event, when Hod Hasharon-based PowerDsine held its IPO, it was said that the company had set the industry standard; a great achievement for a small company. Setting the industry standard is all very well, if you translate this into something like Qualcomm Inc. (Nasdaq:QCOM), for example, otherwise the achievement is temporary, and gives you nothing at the bank.
From what I understand, PowerDsine gives its customers the power to drive information over the network, which is very important for things such as VoIP telephony, or to send pictures, and so on. It is clear to me that many companies are potential clients for the kind of systems PowerDsine offers. If that is really the case, then why are sales falling? After all, I once met the company’s managers, and CEO Igal Rotem seemed to me to be a salesman of the highest caliber. So why are sales falling so hard?
Reading the company’s financials leads to the conclusion that that the problem really is sales, and nothing else. Rotem said, "As we had announced in mid-December, sales of our PoE (Power-over-Ethernet) midspan products, particularly to OEM customers, declined significantly during the fourth quarter and weighed on our overall performance for the year.” Then he says something that seems to me to be quite odd: “Despite what we believe is a temporary setback, we are optimistic with respect to the long-term potential of the PoE market and PowerDsine's position as one of the leaders in this emerging industry."
When I spoke with Rotem 18 months ago, he said PoE would grow in “a year or two”. It seems rather odd to me that now, in 2006, he is talking about the long term potential. I know that PoE is growing.
Two years ago in 2004, when it was worth $2.7 billion, it was said that the PoE market would reach almost $10 billion by the end of the decade. This market is subdivided into three sectors. The smallest sector is the design of processors that drive the systems. The two large sectors are power sourcing equipment, and powered devices. The leading companies in the sector in 2004 were Cisco Systems (Nasdaq:CSCO), Nortel Networks (NYSE; TSX:NT), Hewlett-Packard (NYSE:HPQ), 3Com (Nasdaq:COMS), and PowerDsine. The sectors that were supposed to drive PoE forward were VoIP, smoke detectors, network security cameras, and wireless local area network (WLAN) exit points.
PowerDsine posted $38.6 million in sales in 2005, compared with $41.2 million in 2004. Fourth quarter 2005 sales were 37.6% below sales in the corresponding quarter of 2004, indicating that the company’s situation is deteriorating. The fall in sales put the company into the red - it posted a net loss of $1.7 million for the fourth quarter.
In my opinion, we should wait and see what happens to sales, because the company is liable to face problems with customers seeking full service of the kind that companies such as Cisco or Nortel can provide, but PowerDsine cannot. PowerDsine must develop OEMs. What worries me is that this is where the company saw a fall in the fourth quarter. Nevertheless, if sales resume their growth, at its current share price, PowerDsine is quite a bargain, since the company has over $76 million in cash, and a market cap of $142.6 million. Unquestionably, this is not a high value if Rotem is right. If he is wrong, then it is a good idea to wait.
Published by Globes [online], Israel business news - www.globes.co.il - on February 8, 2006