This idea is off-the-beaten path (and for good reason at
least historically). However, for members who can tolerate a technology
investment with many moving pieces, this is one very interesting situation to
follow over the next few months and potentially get involved with.
Avistar Communications is a $32M market cap (roughly $37M
enterprise value) technology company with an intellectual property portfolio
independently valued by a leading IP appraisal firm at over $400M. Now,
appraisals to begin with are highly inexact, and IP appraisals are even more
so. However, as I will detail, Avistar has shown the value of its patents both
on paper and in practice. With the just announced licensing deal with IBM (the
importance of which I don’t think the market has fully appreciated yet), I
believe investors have little downside risk and a free option on the IP
portfolio bringing in hundreds of millions in proceeds over the next four
Avistar was founded by Dr. Gerald Burnett. Dr. Burnett is
both a prominent scientist who serves on MIT’s Board of Directors and a
technology entrepreneur who has created hundreds of millions of dollars in
value in past companies he has started or co-founded (Vicor, Teknekron, Western
Data Systems). In the early 1990s, he started his ‘last hoorah,’ Avistar
Communications, which has a focus on videoconferencing technologies. Before
anyone else in the space, Avistar patented methods and technologies that would
not come into play until two decades later. The entire 80+ patent portfolio can
be viewed on their website (http://avistar.com/company/default.aspx?id=73)
and covers such things as instant messaging, desktop video, videoconferencing,
VoIP, data sharing, etc. It does not take a technology genius to recognize the
foresight of Dr. Burnett and the value these patents might have. While much of
the portfolio expires in 2013, patent law allows you to collect 6 years of past
royalties so even deals in 2013 would have significant value. Furthermore, many
of the recent patents granted have much longer lives. Finally, it’s important
to note that Avistar’s portfolio covers both the US and most foreign markets.
This patent portfolio took Dr. Burnett decades (and nearly
$60M in operating losses since 1993) to properly document and has already led
to cash proceeds to Avistar in excess of $50M over the last several years.
However, it is only in the last few years with the rise of instant messaging
and videoconferencing that these patents could have significant value and
Avistar began having IP discussions with the large technology companies. In a
2007 appraisal, Ocean Tomo estimated a pre-tax net present value after all
costs (and after risk adjusting the proceeds) to be in the range of $350 - $500
million. Ocean Tomo is the leading and most respected valuation firm in the IP
industry, and I encourage members to visit their website at www.oceantomo.com.
Fortunately for value investors, you can get a free option
on this appraised value. Avistar just announced (September 15th) a
major IP and technology licensing agreement with IBM. Avistar will receive 2%
of all IBM Lotus Sametime sales which incorporate Avistar’s product in it.
Lotus Sametime (www.ibm.com/lotus/sametime)
is IBM’s software suite for corporate clients and has a current installed base
of over 20 million seats. There are several things to note about this deal:
A 2% royalty is quite high in the IP
The agreement is not for any of Avistar’s
video technology but only for its bandwidth management IP. Avistar
management is optimistic that this will be the start of future licensing
deals with IBM and describe the current partnership as a backdoor way into
much broader collaboration.
Management has not released enough details
to know what % of the 20 million seats will have Avistar’s product in it,
but they guided towards tens of millions revenue over the life of the
agreement (5 years). They also informally
indicated gross margins substantially higher than 70% and no increase in
SG&A to support this licensing income.
At $8M of revenue a year, this could be incremental
$6M of EBITDA per annum over 5 years. There is no D&A or taxes
(Avistar has a large NOL), so this is essentially free cash flow.
As such, the IBM deal gets you a long way to the market cap. Another smaller
royalty deal with Sony provides another $5M of pre-tax present value. It will
be worth learning more about the IBM deal as further details are released to
prove out this downside protection.
The upside is that IBM is just one of 10-20 large technology companies
that Avistar is negotiating with currently on the IP front. It is public that
they have been negotiating with Microsoft, for example, and I would imagine
Cisco due to their big push into videoconferencing and AOL due to their
dominance in instant messaging. If just one of these works out over the next
few years, the present value of that deal with the present value of IBM could
lead to significant appreciation from here. If more than one works out, AVSR
has multibagger potential. IBM’s deal gives the portfolio great credibility and
I imagine would significantly accelerate the discussions with other parties.
Furthermore, as mentioned, AVSR management believes that there are much greater
opportunities for further licensing within IBM itself.
The story gets even better when you look at the other side of Avistar’s
business, which is selling desktop videoconferencing software. Avistar currently
has an installed base of 14,000 seats in over 400 client sites; key customers
are Sony, Deutsche Bank, and UBS. Historically, this division lost money which
was funded by proceeds from the IP division’s winnings. However, in January of
this year, technology turn-around expert Simon Moss became CEO of Avistar. His
previous role was the CEO of the IT compliance firm Mantas, which he took over
in 2001 when the company was bleeding cash. He led sales to increase by several
multiples and sold the company for his private equity backers for about $150M
in 2006. His next job was to join Avistar in 2007 and officially become CEO
this past January. Under his leadership, the product division’s operating
losses have come down dramatically, and management has guided for EBITDA
break-even by 4Q08. Moss’ strategy was to recognize that most videoconferencing
solutions (and software in general) is sold through software distributors and
value-added resellers (VARs). Under Dr. Burnett (who is more of a scientist and
entrepreneur than a turn-around CEO), Avistar has an expensive direct sales
force and had no channel relationships. Through Moss’ new go-to-market
strategy, sales force costs have come down dramatically whiles sales have
actually grown through leveraging off of channel partners.
It will be worth following to see if Moss is successful in achieving EBITDA
break-even in the product company (expect further definitive guidance when Avistar
reports 3Q08 numbers in the next two weeks). If so, the IP proceeds will truly fall
to the bottom line for the first in Avistar’s history. Furthermore, in addition
to the call options investors in Avistar have on the firm’s IP portfolio,
Avistar is the only desktop videoconferencing company that has had a decade of
experience selling software to highly demanding clients such as Deutsche Bank.
While videoconferencing may take off next year or 5 years from now or never,
investors have the call option that it takes off soon and videoconferencing
firms like Avistar become stock market darlings. It may finally be real this
time as the high oil price environment is causing many firms to slash travel
budgets. More importantly, Microsoft and Cisco see videoconferencing as a
crucial battleground area for their corporate customers and have recently announced
multi-billion dollar investments into this area. Both firms have specifically
singled out desktop videoconferencing as where the future lies. Given Avistar’s
IP and its real-world experience and credibility in selling high-end
videoconferencing solutions, you could see a sale of the company in 2009 or
Finally, please note the company has a long and diverse history of insider buying and that Leucadia National invested in the company in January of 2008 through a convertible debt private placement.
One of several IP negotiations currently under way produce a large settlement similar to IBM
Turn-around CEO Simon Moss achieves break-even EBITDA guidance on product division
Sale of company as videoconferencing takes off in high oil price environment