Zacks.com: Analyst Blog

iPass Inc. (IPAS) has been gaining traction on subscription-based initiatives and broadband has grown to comprise the bulk of access revenue. Although we believe iPass will be able to generate strong broadband revenue growth, until the company is able to generate meaningful revenue and profit growth from software, we believe margins will remain under pressure.

The company exited the first quarter with $70 million in cash and short-term investments compared to $75.2 million in the fourth quarter of 2007. The overall decrease in cash balance was related to the repurchase of approximately $3.2 million of common stock and a cash outflow of about $1 million to purchase source code from a third party vendor to enable iPass manage the cost of and increase the capacity for 3G network integrations.

For the second quarter of 2008, iPass expects revenue in the range of $47 million to $50 million, fully diluted GAAP EPS in the range of ($0.01) to ($0.04), and non-GAAP EPS in the range of $0.00 to $0.03. Gross margin in the second quarter is expected to be between 55% and 56%.

Shares of iPass are currently trading at 0.8x our revised 2008 sales estimate, representing a significant discount to the industry mean and the S&P. Though we believe that iPass's transition to its new business model still poses significant risks, the worst appears to be behind it. The company's subscription model has been gaining traction of late and dial-up is falling as a percentage of revenue.

Although we are positive on these initiatives and the stock could offer upside if the new business model is successful, we do not expect meaningful acceleration over the near-term and we believe the share price will stay close to current levels. We, therefore, maintain a Hold rating on the shares of IPAS with a six-month price target of $3, representing a price-to-sales ratio of 0.9x our revised 2008 sales estimate.

Read the full analyst report on IPAS.