Radvision (RVSN) – We believe that Radvision’s 3G mobile video and video-to-the-desktop offerings are positioned for strong growth; mobile video should benefit from the rollout of upgraded EV-DO cellular technology in 2H06 and the company is working on several large enterprise-wide deals for video-to-the-desktop. In the meantime, investors benefit from the company’s relatively stable business and the shares’ 10% free cash flow yield.
We anticipate that RADVISION’s growth will accelerate as video-to-thedesktop and 3G mobile video take hold. RADVISION is a leader in these emerging video markets, which accounted for 31% of the company's revenue in 1Q06. We estimate that these markets are growing at approximately 60%-80% per year. We note, though, that quarterly results can vary significantly due to large deals.
New products, high-definition video, and unforeseen events could spur demand for room conferencing. We anticipate that a refreshed MCU platform (Scopia), combined with initial customer adoption of HD video endpoints, will create renewed demand for RADVISION’s traditional room-conferencing equipment, which accounts for approximately 50% of revenue. Slowing economic growth, higher oil prices, terrorism, or natural disasters could also stimulate demand for video-conferencing equipment, as happened in 2002.
Catalysts include large video-to-the-desktop deals and the introduction of EV-DO Rev A in the U.S. We expect the rollout of EV-DO Rev A in 2H06 to boost RADVISION’s 3G video business in early 2007. Not only will Rev A enable mobile videoconferencing at Sprint and Verizon, but it will likely also encourage Cingular to provide a competitive offering. On the desktop side, RADVISION is working on several significant enterprise-wide deals.
Risks include customer concentration and back-end-loaded quarters. RADVISION’s top-10 customers consistently generate 50%-60% of its revenue, with Cisco contributing approximately half of this. Each quarter, approximately 60% of revenue comes in the last month of the quarter.
We rate RVSN shares BUY with a price target of $22. Our price target is based on 15x our 2007 EPS estimate, in line with the company’s peer group multiple, plus the net cash of $6 per share that we expect RADVISION to have in one year.