Liberate jumps after analyst praise

Shares in the software maker for set-top boxes were up 75 cents to $7.88 in midday trading. Liberate Technologies makes an operating system that puts Internet content and applications on a range of information appliances including set-top boxes, personal digital assistants (PDAs), smart phones and game consoles. Most of its customers are cable companies like Cable & Wireless Communications and Cox Communications.

After Wednesday's closing bell, the company reported narrower-than-expected losses for its third fiscal quarter.

Liberate reported a loss, excluding special charges, of $8.9 million, or 9 cents a share, for the quarter that ended Feb. 28. During the same quarter last year the company lost $12.1 million, or 14 cents per share. First Call's consensus estimate had been for a loss of 12 cents per share.

On the conference call, Liberate also provided projections for fiscal 2001 and 2002, and said it expects to reach pro forma profitability during the first half of fiscal 2003.

As a result, most analysts upped their estimates, reiterated already bullish ratings and praised the company's business model as a beacon of hope in the economic storm.

"Liberate is at the front end of a nascent opportunity--deployments of interactive TV--that has not been impacted by the broader IT slowdown," J.P. Morgan Chase analyst Jack R. Ripsteen wrote in a report. Ripsteen reiterated a "long-term buy" rating and raised his estimates for fiscal 2001, and implemented 2002 estimates.

Credit Suisse First Boston analyst Todd Raker expressed similar beliefs that the company is resistant to the prevailing bear market.

"We believe that Liberate's revenue growth has limited exposure to the weakening macro environment since its fate is tied to the plans of a handful of leading cable companies," Raker wrote. Their financial health and Liberate's value to them remain strong, he added.

Raker reiterated his "buy" rating, but added on a cautious note that the stock's volatility could continue given that the interactive television market is still at an early stage and investors are sure to be risk averse in the current economic environment.

Just last month, the stock took a big dip after an analyst downgraded the company and said delays in launching interactive TV will fall hardest on the set-top box software maker.

But Raker noted that launches of Liberate's core technology are expected to accelerate during the next 12 to 18 months, something that will likely boost shares.

Raker observed that agreements for using the company's technology with the largest U.S. cable operator, AT&T, and the largest European cable operator, UPC, are on track. Both were formerly exclusive Microsoft customers, he noted.

"Given Liberate's commitment to achieving profitability, a strong cash position, and upside potential for deployments, we believe Liberate is poised for rapid growth as the interactive TV market expands on a broader basis," wrote U.S. Bancorp Piper Jaffray analyst Gene Munster. Though Munster reiterated a "strong buy," he lowered his price target from $30 to $15.

Ripsteen made note of the company's revenue mix. The company had 60 percent of revenue from its license and royalty division and 40 percent from service revenue. That's an improvement from last quarter's mix of 49 percent license revenue and 51 percent service revenue in terms of bringing the company closer to its target of 70 percent license and 30 percent service. The shift toward licensing revenue is important since its margins are higher.

Analysts were also confident that Liberate would deliver on its plan to reach profitability sooner than had been expected.

"Liberate management set a target of profitability for the second half of calendar 2002. We believe this is well within its capabilities and that it could potentially exceed this target," wrote Dain Rauscher Wessels analyst David Lee Smith, who reiterated his "strong buy."

What's more, the company remains on course in "a market saturated with disappointments and downward revisions of expectations," he added.