Friday, June 13, 2008

Where is Visual Pleasure in Radvision's Price Performance?

Israeli networking device maker Radvision Ltd (RVSN-$6.85) operates through two segments, Networking Business Unit (72% of total revenue) and Technology Business Unit (28% of total revenue). RVSN's geographic revenue picture: Americas, Europe and the Middle East, and Asia represented 58%, 24% and 18%, respectively. All four regions registered annual and sequential declines.

According to the Telecommunications Industry Association (TIA), between 2008 and 2011, the American telecom industry is expected to grow slower than its counterparts in the rest of the world. While the US is slated to grow at 7.2% to touch $1.36 trillion, the rest of the world will grow at 10% to touch $3.6 trillion.

The key takeaway is that RVSN needs to increase its revenue based from faster growing economies of Middle East and Asia.

First-Quarter 2008

RVSN has a high level of revenue concentration with CSCO, which accounted for about 32% of total revenue in 2007, 35% of total revenue in 2006 and 27% of total revenue in 2005. The high level of dependency on Cisco for sales needs to be monitored closely. However, in the 1Q:08 ended March 31, the non-CSCO channel began to show positive signs on the back of its SCOPIA platform, with LifeSize up 18% and Aethra up 10% sequentially.

The network business unit (NBU) contributed $14.1 million, a 23% decrease YoY and an 18% decrease from the previous quarter. The technology business unit (TBU) revenue was up sequentially and down annually to $5.5 million, in line with Street expectations. The weakness continued to be in the Americas.

The weak trending at NBU continued, with revenues down 18% Q/Q, mainly on lower Cisco orders which reflect weak enterprise spending, as well as some seasonality. TBU was essentially flat at $5.5m, and during the call management noted similar TBU volumes were here to stay. Recently, CFO Tzipi Kagan announced her resignation, due July 30th and one viewed by the market as negative as she had good credibility with the investors, who will be replaced by Adi Sfadia, former VP of Finance at RVSN.

Forward Guidance

RVSN's guidance for Q208 called for revenue to be $20.5 million and pro forma EPS to be $(0.11), which excludes stock-option expense. While the analyst community and investors anticipated this loss, it will be larger as costs for R&D increases due to the impact of FX (approximately $800K of the sequential increase in R&D is due to the weaker dollar, according to Cantor).

Boaz Raviv, Chief Executive Officer, said in May the company is "executing on its recovery plan and is fully focused on returning to operating profitability and revenue growth in the second half of the year."

Investment Merits

Analysts at Wedbush Morgan maintain a "hold" rating on RVSN, opining the uncertain macro environment would continue to present challenges to the company in achieving operating profits by end-2008. The 12-months target price was reduced from $10 to $9.The best thing about RVSN is the 6$/share ($128 mn in net cash), which should put a floor on its price at the moment and allow the company to increase its R&D and overseas growth.

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

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