Bridgewater plays it smart

In a tradition that began with Spar Aerospace circa 1997, Bridgewater Systems (BWC:TSX) is the latest Canadian public company to agree to a negotiated settlement with Eric Rosenfeld, Chief Chanter at activist hedge fund Crescendo Partners (aka The Crooner©). In the Bridgewater case, Crescendo got three board seats, just as they did with Dalsa (DSA:TSX); two of whom were well respected Canadian business leaders. The very kinds of people that Dalsa shareholders would be glad to have, without or without the prompting of a hedge fund manager.

As settlements go, this is an upgrade from the single Board seats that Mr. Rosenfeld received earlier in the decade on threatened proxy battles at Geac Inc. and Sierra Systems as I recall.
Bridgewater is a great company, and a perfect example of what Canada’s VCs can help build. A negotiated settlement is probably the right outcome for the existing Board and management team.

Here is a snapshot on the upcoming quarter from the research team at Genuity Capital Markets:

Q1/09 preview – Bridgewater will report its Q1/09 before market open on Friday, May 1, 2009. For Q1/09, we are forecasting revenue and EPS of $12.5 million and $0.04, respectively. We are effectively in line with consensus at $12.1 million and $0.05. We are forecasting gross margins of 73% reflecting a product mix shift to lower margin Widespan sales.

· Expect company to reiterate outlook – We expect the company to reiterate its outlook for revenue of $52-58 million and earnings of $6-9 million (or EPS of $0.25-0.37). In fact, we expect the company to be slightly more positive on its ability to hit the upper end of its guidance range. The company is seeing a very active pipeline of RFP activity, as carriers are dealing with bandwidth capacity issues and are looking to offer more value added services to their end customers. “iPhone/BlackBerry” carriers need help to manage their networks and are looking at Bridgewater ’s policy management solutions. Our revenue and EPS estimate for 2009 is $54.8 million and $0.25. We believe the company’s hard backlog entering 2009 was around $35 million. That said, the company has indicated that there is some risk of delayed rollouts, especially in smaller contracts, with WiMAX operators.

· Backlog and Verizon rollout – We will be looking for commentary from the company regarding; 1) developments in its backlog, 2) progress on the Verizon contract, rollout schedule, and indications of an extension of the deal; 3) progress with GSM contract signings and Tier-1 reference clients (current expectations are for the H2/09); and 4) status of system integrator (i.e., HP, Oracle, IBM) or network OEM (i.e., Ericsson, Nokia Siemens, Huawei) partnerships.

· Proxy battle ends; Ultimately positive for the stock – This morning, Bridgewater and Crescendo Partners agreed to end their proxy battle, as Crescendo Partners will get a Board seat. While there might be some disappointment that Crescendo will not take control and push for an immediate sale, we believe that ultimately, the move will be good for Bridgewater’s shares, as the company will continue to build out its business. We believe that Bridgewater’s solutions are in the thick of the Smartphone trend that should drive revenue and EPS for the coming years. Ultimately, the company could be sold, however, with larger financials. We reiterate our BUY rating and $4.75 target price.

MRM
(disclosure – this was updated to reflect the fact that Crescendo received 3 board seats ay BWC, not one)