Wireless Ronin (RNIN) takes a beating. Will they survive?

With $20M in the bank, it's hard to imagine a company in our industry going out of business, but Wireless Ronin seems to be trying hard to do just that.  They announced their 3rd quarter numbers last night, which look roughly like this:

• 3rd quarter revenue of $1.9 million for the third quarter of 2008, up 73% from $1.1 million in Q3 2007.
• 3rd quarter net loss of $4.6 million compared to a net loss of $2.4 million in Q3 2007.
• Basic and diluted loss per share of $0.31 compared to a basic and diluted loss per share of $0.17 last year.

That's bad. They still lose more than $2 for every $1 they take in. The firm's stock price has been hammered down to about $1M more than the cash they have in the bank.  That's certainly harsh, though more fair than the preposterous $100M+ valuation they were trading at last year.

Even worse than the revenue numbers, though,  are the margin numbers. From the press release:

For the third quarter of 2008, gross margin averaged 5.2 percent, compared to a gross margin of 36.8 percent in the third quarter of 2007. The 2008 gross margin was impacted by investments in the company's NOC and costs to support customer pilots and program tests. Excluding these investments, gross margin would have averaged 20.7 percent through the first three quarters of 2008.

So for every dollar of gross margins they earn, they lose about $46. RNIN, I have news for you: pilots will continue to happen, so I doubt you'll ever be able to simply eliminate those costs.  In our industry, it's a big part of the cost of doing business.  I can't speak to what the company has been spending on their NOC, but I can practically guarantee it was way more than necessary.  In fact, a digital signage company that builds their own NOC is almost certainly doing something inherently wrong. Use a company like NTT/Verio for colocation, or even better, Rackspace for managed hosting.

So, will they survive?

Like I said in the beginning, $20M is a lot of cash to have in the bank, and at the present burn rate still gives the company almost a year to get their act together.  With a head count of 125 employees, you can be sure there's also plenty of room for further layoffs, and my advice would be the sooner the better. RNIN needs to slim down to a svelte 25 or 30, close their NOC, outsource everything that isn't related to selling high-margin products and services, and stick it out until some of their bigger prospects decide to open their wallets.  It'd also help to find a CEO who knows something about this business and its cycles.

Tags: digital signage, wireless ronin

So, what's gonna happen to Wireless Ronin (RNIN)?

Yikes, it has been a bad week for one of the few publicly-traded digital signage companies in the US market.  Granted, it's been a bad week for most publicly-traded markets, but RNIN is facing some exceptional challenges right now.  As we noted a few months ago, the company had to write off a huge portion of its 2006 and 2007 income as a bad debt, and unless their estimates for next quarter are extraordinary, 2008 doesn't look to be doing them any favors in the revenue department either.

This week, in a triple-whammy, the firm's stock got downgraded, longtime CEO Jeff Mack announced he was leaving, and consequently, the stock saw about a quarter of its value evaporate. While an interim CEO has been appointed whose sole job is to find the next leader of the firm, clearly investors must be wondering what the company has going in its favor these days.  With the credit market so tight right now, it's hard to fund new projects, and RNIN's cost infrastructure is far too high for their own good.  As one commenter on Yahoo! Finance put it:

The current consensus is for a loss $1.15 per share for 2008, that is up from an estimated loss of $.94 just 90 days ago...They have been low side for the past 4 straight quarters, meaning the company lost more than expected. As they look to 2009, the estimated loss per share is at $.83 versus a loss per share of $.58 cents. That translates into RNIN burning through $17.25 million this year, and $12.45 million next year. Add those two number up, and you burn through more cash than RNIN has. Do you think they can do a secondary offering to raise more cash with a 2 or 3 dollar share price? I think not...

That's a hugely important point in this crazy market right now. RNIN has relied on the cash raised from two successful public offerings to keep them going while trying to ramp sales.  Unless there's a major turnaround in the market soon, they'll have a very hard time selling more shares to raise a significant amount of money.  And offering debt is totally out of the question given their performance.

And before you go bashing me for being a RNIN-hater, the fact is that I'd like to see these guys be successful.  We gain basically nothing for having them fail, and in fact it might hamper our own ability to raise money in the future.  What confounds me to no end, though, is how these guys managed to get such a high valuation and extract such a large amount of money from the public not once, but twice.  On the private markets they'd never be able to secure a $50M+ valuation with such tiny sales and such large expenses.  It's like they've exploited some bizarre reverse wisdom-of-crowds effect.

We'll continue to track this company to see if they can pull it out (or at least appoint a CEO that can stabilize them).  But as of right now, I would not be bullish on them at all.

Tags: digital signage, wireless ronin, rnin

What we can learn from Wireless Ronin (RNIN)

For anybody that hasn't been following the saga of Wireless Ronin, they're a small digital signage company noteworthy only because they managed to go public on the Nasdaq about a year ago at an improbably high valuation. In early November of last year (2006), we took a technical look at the company's SEC filings and came to the conclusion that for every $1 that came in, a bit more than $4 went out, for a net loss of $3 for every dollar of revenues. Despite this, they did manage to complete an initial offering and even a follow-on offering later this year that put a ton of cash into their coffers. At one point this year, their stock traded at over $10/share, giving them a valuation of over $100M.

Unfortunately, what they failed to mention to their investors was that lots and lots of potential clients in the digital signage industry are little more than start-up companies with lots of hope and good ideas, but little ability to execute. What's more, even good-looking projects with great prospects can get delayed, for months, years, and sometimes indefinitely. That has hurt RNIN, since they had to drop their earnings estimate for 2007 from the initial guess of $18-20M, to a much more modest $4-6M. Worse, looking at their third quarter numbers, RNIN committed one of the cardinal sins of digital signage: extending a large credit line to a small company. When you're selling software, it's easy to get lulled into the trap of extending a much larger credit line than a customer might be worthy of. After all, software doesn't often carry that high a cost of sale (unless you're licensing lots of components, have to pay royalties, etc.) But in RNIN's case, "for the third quarter of 2007, year-to-date gross margins averaged 38.6 percent, compared to a gross margin of 60.1 percent through the first three quarters of 2006. Gross margin levels in 2007 continue to re-build from 2006 as a greater percentage of higher-margin software revenue continues to get added into the product mix." So they fronted hard assets (hardware) as well as billable person-hours ("services," probably content creation or project management), which is a much more aggressive stance to take, since if your clients don't pay you, it's hard to reclaim the former and basically impossible for the latter.

And that's more or less what has happened. Earlier this year RNIN announced an agreement with a small company called NewSight Corporation to roll out digital signs to 2,000 doctors offices across the country as well as a network of large displays in shopping malls. From earlier earnings calls, it sounded like RNIN would be supplying everything -- hardware, software, content and logistics -- to make the networks happen. But we're now guessing that they "sold" some units to NewSight, gave them generous terms, but have not been able to collect. That leaves RNIN in the uncomfortable position of having a very large accounts receivable (it's nearly 3/4th of their YTD sales), most of which is in the hands of a company that may well never be able to pay them.

The only upside is that the company still has nearly $30M in the bank which will allow them to recover from the mistake should NewSight default on the debt, and it's enough that RNIN could even deploy and operate the network themselves if they wanted to.

The moral of the story? Even the best-intentioned companies can fail to execute, and even the best-laid plans can be put on hold forever. Unless it's your business, don't go loaning out money, goods or services to untested companies unless you and your investors all understand the industry well enough to estimate the true risk of doing so.

Tags: Wireless Ronin, RNIN, digital signage

Note: The information contained in this blog is to be used for entertainment purposes only. I'm not a lawyer, accountant or financial professional, nor am I qualified to pick stocks, set prices or give any kind financial or stock market advice. Disagree with something I've said? Let me know why in a comment.

Wireless Ronin somehow completes IPO

I don't know who first said that there's a sucker born every minute, but apparently there are still a whole bunch of them around, and they've learned how to invest in the stock market. That's right, Wireless Ronin completed an IPO, as the guys at the sixteen:nine weblog were sharp enough to notice. I still stand by my original ramblings on the matter: $3 going out for every $1 earned does not a good business model make.

Stock symbol (for your enjoyment): RNIN

Links to the rest of the posts in this saga:
Wireless Ronin updates SEC filings in preparation for going public via IPO
Digital signage company Wireless Ronin getting ready for a mini-IPO?

Tags: Wireless Ronin, digital signage IPO