Saguna Networks Is Sold

Saguna Network Ltd., a pioneer in mobile edge compute (MEC), has been sold to COMSovereign Holding Corp. (Nasdaq: COMS), a U.S.-based vendor specializing in mobile communications. COMSovereign announced this week it will pay $13.1 million in an all-stock transaction to buy Saguna.

At first glance, the price seems a bargain for COMSovereign. Saguna, founded in 2008 and based in Yokneam, Israel, has had small (about $8.2 million) but influential backing from SoftBank Ventures Korea and Akamai Technologies, among others. In 2018 it became the first company to support ETSI-standardized application programming interfaces (APIs) in a commercial MEC platform.

Saguna was also among the first companies to offer Ultra-Reliable Low-Latency Communications (URLLC) MEC solutions not only for carriers, but for enterprises and developers intent on bringing MEC into their 4G/5G/WiFi hybrid networks. It was also listed as a Futuriom 40 company, thanks to its innovations at the network edge.

Saguna doesn’t offer much customer information, and it lists just 23 employees on LinkedIn. But it’s been involved in trials of 5G with the likes of CommScope (Nasdaq: COMM) and Ericsson (Nasdaq: ERIC). And recently Saguna was picked by Hewlett Packard Enterprise (NYSE: HPE) as the basis for trialing an Intel Xeon-based MEC in a pre-rollout 5G lab trial at Globe Telecom in the Philippines.

COMSovereign: A Mixed Record

COMSovereign, based in Dallas, Texas, operates as a holding company for selected acquisitions. It was formed in December 2019 through the merger of a technology holding company named Drone Aviation with ComSovereign, which was billed in the press release as “a consortium of 5G telecommunications radio, silicon photonics and power systems designed for the next generation of global networks.”

The renamed COMSovereign debuted on Nasdaq in January 2021 and subsequently raised $39 million from equity offerings. In a business update in April 2021, management reinforced COMSovereign’s mission to become a leading domestic U.S. provider of LTE Advanced and 5G-NR telecom technologies.

But COMSovereign’s track record has been mixed. The holding company has suffered criticism of its management, and recent quarterly earnings showed revenues down 16% year-over-year and gross profit down nearly 30% year-over-year. The company’s earnings release attributed the drop in sales to “the lack of capital available for parts and manufacturing as the capital from two public offerings completed in January and February was deployed towards the end of the period and did not contribute to revenue in the quarter.”

COMSovereign CEO Daniel Hodges defended the company’s numbers during the company’s earnings call with financial analysts:

“Looking across our industry, many of our competitors and peers have recently announced first quarter earnings, showing top line first quarter revenue growth and confirming the large potential of 5G, but this growth is often accompanied by very poor net profitability metrics. Philosophically, we also believe strong earnings is critical to running our business. But net profits are far more important than gross profits, than just seeking high revenues and willingly taking loss leader contracts in an effort to capture market share.”

Bad News or Good?

There are signs that Saguna’s sale to COMSovereign is a lackluster end to a promising company that once competed with the likes of Metaswitch, purchased by Microsoft for reportedly over $270 million in stock.

Saguna’s lack of customers and small funding, despite much public exposure, hint at management, implementation, or go-to-market issues. Perhaps COMSovereign will offer the support required to get Saguna’s products into a wider market. Perhaps the rise of 5G will boost the fortunes of both companies.

Still, COMSovereign itself seems challenged on several fronts. Its approach of wrangling multiple companies into a coherent structure is questionable. Its finances will hopefully improve, but the last report was discouraging. Perhaps its customer base, strong in government sales — reportedly boosted by border protection drones in the southern U.S. -- will be a savior next quarter.

Investors seem underwhelmed by the acquisition of Saguna. In morning trading today, COMSovereign shares were selling for $2.08 (-0.090, -4.15%).