Deep turnarounds can deliver major multi-bag returns to daring investors, but the reality is that many of these stories spiral down instead of turn around. Powerwave Technologies (Nasdaq:PWAV) is certainly in deep trouble; not only has carrier spending dropped significantly in recent quarters, but the company is facing competition from commodity RF amplifiers. While the potential returns from a Powerwave turnaround could indeed be massive, investors have to weigh this against the real possibility that Powerwave cannot turn itself around fast enough to overcome its debt.

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Follow the Trend
Companies like Alcatel-Lucent (NYSE:ALU), Ericsson (Nasdaq:ERIC) and Nokia-Siemens have certainly been hurt by the recent slowdown in carrier spending, but the impact has been even more serious at Powerwave. From $170 million in quarterly revenue for the period ending July 3, 2011, revenue has plunged to $60 million.

Some of this is a byproduct of the companies that Powerwave counts as customers. With the brouhaha over the AT&T (NYSE:T) and T-Mobile merger, AT&T cut back significantly on equipment spending and AT&T has long been a significant carrier customer. The problems seem to go deeper than this though. Two of Powerwave's other major customers, Clearwire (Nasdaq:CLWR) and Nokia-Siemens, have also been struggling of late.

Competition Getting Fierce
Powerwave has been talking about a fairly cogent change in its strategy, focusing more on selling direct to customers like AT&T instead of OEMs. That raises the risk of alienating these OEM customers and also subjects the company to competition from more robust end-to-end solutions.

That's not necessarily the bigger threat right now, though. It sounds as though competition in the wireless infrastructure market is heating up, with China's Huawei willing to get very aggressive on price to win business. It doesn't matter if these prices are sustainable for the long term if Powerwave can't sustain the competition in the short term.

Existential Crisis
Powerwave still has some interesting products, like its MIMO Active Array Antenna. Likewise, ongoing international 3G build-out and the potential of 4G equipment sales are both real and meaningful.

The question, though, is whether Powerwave will stay in the game long enough. The company has launched cost-cutting programs, but the carrier order rebound seems to be a slow one and the company is looking potentially a couple of years of negative free cash flow. With $250 million in debt puttable in 2014 and 2015, it is worth asking if Powerwave can generate enough cash to handle this, or whether potentially dilutive alternatives will have to be put in place.

That, then, raises the prospect that the company may survive, but to no great benefit to today's shareholder.

The Bottom Line
I've been watching Powerwave for years now and I hope I'm too negative today. I would like to see this company and stock rebound. Unfortunately, the numbers are not encouraging. In the past five years, Powerwave has produced a net sum of negative $50 million in free cash flow and I just don't see a quick turnaround in the cards.

I frankly struggle to build a free cash flow model that produces a positive net fair value after the impact of nearly $190 million in net debt is considered. That said, an acquisition may not be entirely out of the question - Powerwave has worthwhile products and customer relationships and another communications equipment company could make a low-ball, equity-heavy bid that gives shareholders some value.

While a recovery/rebound at Powerwave would indeed likely produce impressive-looking gains on a percentage basis, potential shareholders should appreciate the long odds that they face with this story.

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