says the purchase of ptix was a good one: I wish he would of expanded the article to what he thought
the revenue growth would grow to because of this purchase. Can we think of 4-5M a year more in revenue?
Or could it go higher as Sonus was already selling the FFIV solution ?
Performance Technologies was founded in 1981 and is a network communications solutions provider. Specifically, they provide signaling solutions for legacy and 4G/LTE systems. The company has, until recently, consistently lost money. As a result, in October 2012 management decided to tighten their strategic focus, lowering op-ex by $2 million annually, and reducing the company's product line to higher margin growth segments. This has clearly produced huge dividends.
PT is now running end-of-life programs for its historic OEM business, while continuing to sell product for its SS7 (2G) and ramping 4Q/LTE.
The results have been dramatic. In 3Q, revenue increased 56% y/y to $7.3 million, while GAAP gross margins increased over 1000bps, from 38.6% to 49.1%. Non-GAAP EPS in 3Q was $0.07, vs. a loss of ($0.12) in 3Q12, and up from $0.06 in 2Q. PT also had $13.9 million cash ($1.20 per share), $16.3 million of working capital and no debt. Following the 3Q results on November 7th, shares traded higher, but later reversed, and shares now sit 16.5% below their pre-earnings level.
1. PT is dirt cheap, trading at 5x 3Q13 EPS of $0.07 ex-cash of $1.20.
2. Given the stock screens poorly based on trailing numbers, and the stock has tripled, we can understand why there might be a large seller, and no significant buyer (besides us), despite tremendous prospects.
3. 3Q call was bullish, but only a handful of listeners are aware of this. Management expects growth and as the product mix migrates believes "gross margins should improve and over the longer term should be very positive compared to where we are now."
4. Quoting activity was up 75% from 2Q. Next generation diameter signaling market is a $2.8 billion opportunity in 2017 versus $100 million today, meaning this is a huge growth story at a value price.
5. Balance sheet is cash rich and debt-free ($13.9 million or $1.20 per share), providing flexibility for buyback if shares remain cheap, or a dividend.
6. Despite a long-term management with a mediocre track record, they appear engaged (certainly engaged enough to implement and execute a strategic review) which gives us confidence they care about value creation for shareholders.
7. PT represents a potential bite-size acquisition for a large competitor at significant premium. If management fails to create value or business momentum does not continue, there is also potential for activist engagement.
8. Recent arbitrary selling has created greater liquidity and a compelling entry point.
Micro-cap and small cap stocks often provide a unique investment opportunity. They simply don't show up on most investors' radar screens. These stocks often don't have research coverage and can be so illiquid as to not be worth the time necessary for investors to do the work.
We think PT qualifies as such an opportunity. Earlier this year, shares traded below cash. The company could have been liquidated and shareholders would have received a premium. Despite this obvious opportunity (it wasn't so obvious, we missed it), there were no articles written about PT on Seeking Alpha, and we are hard pressed to find much at all about the company in any write-up on the Internet.
Admittedly, we are late to the party, since shares have more than tripled from the $0.81 they traded at year-end 2012. However, this increase in price gives us more comfort that an investor is simply taking profits, giving us, and our readers, an opportunity to get involved at a significant discount to our view of intrinsic value.
3Q Earnings enhances our bullishness
We think the 16.5% post 3Q sell-off in the stock price provides a unique buying opportunity.
1) The 3Q call was bullish, especially for investors with a medium/longer-term horizon,
2) there appears to be a seller, allowing interested buyers to establish a meaningful long position at a significant discount to fair value, and
3) new wins and margin expansion will drive shares significantly higher over time.
Earnings announcements can often produce big moves in stock prices. Typically, we understand these moves, but on occasion, they are harder to explain. In the case of a micro-cap stock, it can be particularly hard to understand post-earnings trading patterns because the trading from a single holder can have a dramatic impact on price.
In the case of PT, we found the 3Q call bullish (discussed below). However, given the stock has more than tripled year-to-date, it's possible a seller can be selling for many reasons. Perhaps they feel their thesis has played out and they're moving onto something else. Perhaps they feel 4Q will be okay, but not great, and they need something that can move in the short term. We can imagine many potential motives for selling - on a micro-cap stock, it's not always obvious (as an aside, if this were Apple or Amazon or any large cap and we couldn't explain the move we'd be more reluctant to get involved, but we've seen this before, a single seller can create a compelling opportunity in a micro-cap). What we know is that in absolute terms, shares remain cheap for a story that appears to us in its early innings.
Key takes from the 3Q call
On their 3Q call (you can listen to the call here - but only through November 21st - or access the transcript on Capital IQ), PT management indicated the following key points:
•Level of quoting activity in terms of dollars during the third quarter grew by 75% over the second quarter. Request for trials of the SEGway solutions have "increased exponentially."
•PT CEO and co-founder John Slusser stated, "that as mix migrates here the gross margins should improve and over the longer term should be very positive compared to where we are now." (Italics added, and we note that this is a company that increased GM 1000bps y/y in 3Q)
•Indicated that the OEM platform business (exiting) has GM of approximately 40%, IPnexus internetworking 50% range, and signaling is "60%, 65% is probably where our gross margin is at the current time."
•Stated that while the SS7 market is declining, given the exit from the market of competitors, PT expects to grow y/y in 2014. For additional information on PT's view of SS7 end of life, here is a blog.
•The diameter market is hard to size precisely, but "certainly 50% you would will be typical" for annual growth in the segment.
The bottom line is that the company appeared very optimistic about its growth profile and margin expansion opportunity over time. We don't have a strong view on 4Q results, and management did not, and does not, give guidance (our best guess is 4Q will be fine), but we strongly believe that looking out 12 months we will see a company with similar or slightly higher revenue (revenue growth will likely be muted by the exit of the legacy OEM business) with dramatically higher gross margins. Management acknowledged the possibility of intra-quarter lumpiness, but that's always been the case (although growth has been the trend recently). However, in our view, PT is well positioned to be a more profitable company over time, and investors with a long-term horizon stand to benefit.
Margin of Safety
We're surprised shares of PT are trading at current levels. With any investment, we always look at how we can be hurt. With $1.20 per share of cash, trading at 1.1x book, $23 million of NOLs, solid profitability and healthy prospects we simply don't see a lot of downside. We believe shares are simply way too cheap, despite the year-to-date rise. We think there is a large seller (based on our ability in recent days to buy large blocks of stock without moving the price) who has been selling. We think when they're done, the stock has substantial upside.
We believe competitors F5 (FFIV), Tekelec or others could digest PT in an easy bite-size acquisition. We also think that management, as it becomes more comfortable with its ongoing profitable profile, now has tools with its cash-rich balance sheet, to create shareholder value, either via highly accretive share repurchases at current prices (come on guys, how about a nice Thanksgiving gift of a $5 million buyback?), or by establishing a modest $0.16 annual dividend (~6% yield, current cash could support roughly 8 years).
Should the share price remain depressed, and management not pursue value-creating activities, we believe the relatively low insider ownership sets up well for activists, with the caveat that there is a staggered Board, which is obviously not friendly for shareholders. With the average age of PT Board members beyond retirement, we tend to think an activist would have a high probability of success. We don't want to pick on the Board or management, since they appear to have finally steered this ship in the right direction, we simply want to point out that we consider the potential for activists to step in and make positive change as part of our safety net with this investment. (We can imagine at ISS the Board being asked, "How is it that under your oversight shares traded below cash?" - yes, this is a company that better make shareholders happy.)
not sure what codes pays servicing this debt but maybe they should pay it off. q4 is calling for .05 profit.
so take that 2M with 14m from savings and pay it off.
As I'm looking for sales to pick up and the cash should be replaced in 2014.
Wouldn't be surprised to see oppco raise estimates and price targets...and rating to buy. I believe the Dell
pr will give him reason. And if Josh is right maybe somebody else jumps in as well..
David Ritchie in SA nailed the short term target will he nail the long term ?
Looking at the weekly chart we can see AudioCodes completing an inverse head and shoulders pattern. A break above $4.50 should take the stock to $7.50, the next target will be $12.00.
Market Capitalization: $155 million
2014 Revenue Estimates $150 million
2014 EPS Estimates $0.30 per share
Cash per Share $0.90 per share
Short-Term Price Target: $7.50
Long-Term Price Target: $12.00
So you have two Behemoths in the tech space using AUDC for lync ::: Interesting..... Josh nailed that part
lets see if his other predictions come true...
I believe that AudioCodes has the best value, the best technology and one of the best strategies in the sector and it's best suited for a large Microsoft Lync partner like Dell Computer (Dell now only sells AudioCodes' UC products), International Business Machines (IBM), Hewlett Packard (HPQ) (Hewlett Packard now only sells AudioCodes' UC products), Polycom (PLCM), or Sonus Networks in that order.
IMO, Mobility VMAS will generate 5-6 million in 2014 conservatively and 12-15 million conservatively in 2015 and running at 90% margins. That business alone will be worth 100 million dollars in 2015. the great part about it is its not expensive to launch for the SP or the enterprise and it delivers a great sound quality and secure VoIP calling. This business is going to make this stock go parabolic one day in 2014. You cannot hide this asset from investors.
That said, NWK is taken out at 1x and AUDC is only worth 1.50 times the 150 million est.(my est: 152-158)??? As you can see, if i'm right on VMAS(which i think i am), MSFT Lync One Voice program( largest deals in co. history), sector rotation to all-IP, One Voice for Hosted Services, multi business router( all in one SBC,gateway and router) that no one else has in the market,strong contact center partnerships and all out R&D ramp for anywhere WebRTC goes makes Audiocodes worth 600-750 million by the end of 2014 on takeover or not.
Please hit the Dell Link on the article: it now has services which it never had months ago. Progress is being made there.
your right that's positive : But the last time I sold calls that far out was a disaster.
I owned 5K shares of LVS at 2 and sold the dollar calls 6 months out I watched the stock
go to 6 quickly and I was too ignorant or stubborn to buy them back : I did triple my money
but the shares of LVS went 50 shortly after. felt like I lost big time !
low volume.. buyers might be waiting to see a reversal. Small cap and small float companies can turn on a dime up or down. I'm sure buyers at 2-5 Bucks have moved on ( most ) to other picks, those that bought
higher into the 7's need to either average down the price, sit patient or sell for loss.
Josh Franklin may come out with a positive article, but little hope for any other article or coverage.
Telco , They spent money on Empire and Senate. It was handled wrong in my opinion.
Now 13M shares down .70 not a good buy... I told Rays voice Mail that he shouldn't buy shares that way especially when he knows earnings will miss. Better to let the price drop to 2.5 and start buying on the open market. to see 6 Bucks they better hope some serious Government spending on SBC software. LOL
I agree but I don't believe Ray thinks AUDC is a threat to Sonus. And I believe he thinks Sonus is moving into other areas while AUDC is a pure voice play. If they did buy them they could dominate Lync and get margins to about 75%.
Nice call : walked them through the tier 1s. starting to win application and peering. not saying they'll score
10M each next year but over period of years from each t1. if you win carrier u can win edge easier. Lync very vibrant, UC market around 5B and growing. SBC mission critical element. Early innings... Some Carriers aren't comfortable with Oracle per wells fargo...Oracle /acme open people minds .
AUDC is above the 200 day average of 5.31. Sonus which I own as well is below the 200 day average of 3.15. Which is a positive. ON small tech stocks that don't have all ducks in a row on earnings date
that's beating revenue, beating bottom line and having guidance and cc go well you see big drops.
AUDC hit 2 out of 3 . Sonus hit 1 out of 3, as the CC went extremely well for them.