Description

Radvision is a Company with technologies and products for videoconferencing, video telephony, and development of converged voice, video and data over IP and 3G networks

This is a deep value name with some nice upside optionality. Most deep value names around these days typically have businesses associated with them that don’t have much upside. I don’t believe that to be the case here. The investment thesis revolves around a stellar balance sheet that should allow management time to execute on its growth plans or eventually sell the Company if growth continues to stagnate. The Company currently has $123 mm cash (some in long term paper), no debt, against a $117 mm mkt cap.

Cash                           $123.5

Other Assets $44.3

Total                $168

Liabilities       $31

Tangible Eq   $137

Mkt Cap         $117

TEV (Mkt Cap Less Cash + Debt): -$6 Million

So it can be argued, with a market cap of $117 million, that the stock is discounting a negative value on the business. This seems misguided to me.

I actually like the space. RVSN is one of the leaders in videoconferencing (they provide the parts, not the brand name). My incredibly enlightened theory being as airlines and others ratchet up rates and cut routes aggressively to deal with rising oil prices (causing ticket prices to spike), people will utilize video conferencing more frequently. Cisco is a big relationship (1/3 of sales). They are one of the only independent providers in the space so could be a good take out for someone. It seems that the space is very out of favor for now as CSCO, Polycom, etc. have all been hammered recently.

With $80-$90 million of revenue and 80% gross profit, the company could be very profitable if management so chose. However, The Company has been aggressively spending R&D dollars on a new Cisco product called the Telepresence and has also been spending more on Sales to diversify the customer base. RVSN is a part of CSCO’s Telepresence. Telepresence is a quite expensive video-conferencing system – the top of the line. The product is a series of HD panels, wall mounted, in conference rooms that are positioned to make you feel as if you are actually with the people in the same room. The systems cost over $500k each with the biggest market so far being the government (your tax dollars at work!).RVSN is very involved in it – when the Co talks about how their engineering expenses are ramping it is primarily due to this. The Company is accelerating efforts around HD to be the first player to the 1080 and has a direct bearing on CSCO

RVSN provides the core of the VC unit called the media control unit. This is the bridging, networking hardware and software that allows multiple video and voice participants on a single conference. It is not the phones and HD panels. RVSN provides all of them for CSCO and CSCO has multiple VC solutions. Essentially, RVSN is an OEM and CSCO resells it with some modifications to make it just for CSCO. The past few years CSCO has started to focus more on this space and is beginning to put serious dollars behind it (an IBD article came out on this topic recently). The more VC equipment that is sold the more routers CSCO sells as this equipment uses a lot of bandwidth.

The Company has $80-$90 mm revenues, 80%+ Gross Margins, and is investing in R&D and sales causing them to miss on profitability. They just reported a quarter with $20 million of sales, a nice gross margin over 80% but a loss of about $.10 per share due to the above mentioned investments. What is $80-$90 million of revenues with 80% gross margins worth to someone in this space? I don’t know, but I think it is more than $0.

This could be a good idea for a shareholder activist (if any of them are still around). Management issues copious amounts of stock compensation to itself - they are in the “tech” mindset from the 90’s where everybody gets a ton of stock. This combined with the massive spending could justify an effort. The Company could be snapped up by someone like Cisco at a nice premium. I would think the company is worth at least 1.5x revenues given the technology and the amount of expenses that could be wiped. This would give you a nice double or more from current prices. The shareholder base is also favorable:

Ownership:

Systematic Financial (Hedge fund) 5.4%

Clough Capital (Hedge Fund)                     5.5%

Royce                                                 8.3%

Timesquare Capital (Hedge Fund) 5.4%

Renessaince Tech (Hedge Fund)   5.1%

Kalu Capital (??)                               5.4%

Mac Per-Wolf (Institutional)              4.4%

STRS Ohio (Institutional)                  3.2%

JDS Capital (Institutional)                2.4%

MFC Global (Inst’l)                            2.3%

S Squared (Inst’l)                              2.2%

Pennant Capital (Hedge Fund)                   1.9%

Perritt Capital (Hedge Fund)                       1.8%

Morgan Stanley (Inst’l)                                  1.5%

Prudential (Inst’l)                                1.5%

Intrepid (Inst’l)                                                1.1%

Kennedy Capital (Hedge Fund)                  0.5%

Hedge Fund                                       25.6%

Other Institutional                               32.3%

Total                                                    57.9%

Other Notes:

·        Company has $5.98 per share in cash

·        Co needs a better economic backdrop for significant sales growth – 2h may see slight bump from new CSCO product but not significant

·        Chairman purchased 414,936 shares in the open market from May 5 to May 19 for $2.9 million at an average price of $7.10 per share

·        Company has been buying back stock fairly aggressively

Conclusion

Good optionality with downside limited by the balance sheet. The Company has grown revenue from $17 million in ’99 to $80-$90 million today at high gross margins, all organically. The spending and stock price decline have left the company vulnerable to activists who could force a strategic sale.

Catalyst