OnStream Media Corporation (NASDAQ:ONSM) is a Internet-based business communications services company specializing in live audio and video webcasting, audio and web conferencing and digital media management. Despite growth in revenues, the company is trading near all-time lows. On April 11, 2013, I had the opportunity to talk with Randy Selman -- ONSM's Chairman, President and Chief Executive Officer -- about some of the company's recent developments and possible under-valuation.
Below is our discussion:
Thomas: Can you start by telling OnStream Media's story? How it came to be, its business, etc.
Randy: The company was started in 1993 by myself and my partner Alan Saperstein. It was formerly called Visual Data Corporation with the intent to build interactive video libraries for what was then called interactive television. By around 1995/96, the Internet came along and along with it came the ability to stream video. So, the game plan switched from interactive television to providing content for the Internet. Over the years, we switched from building video content libraries to providing live webcasting services, especially after forming a partnership with PR Newswire. In 1997, Visual Data Corporation went public on the NASDAQ. Then we began our acquisition strategy. The first was Entertainment Digital Network that primarily did high end collaboration audio and video services, allowing major motion picture and television companies to transport audio and video from the shooting locations back to the studios. A couple years later, we bought a video webcasting company called Media On Demand. That acquisition really made our webcasting business take off. In 2004, we acquired OnStream Media Corporation, and then changed our name from Visual Data to OnStream Media. Basically, this created a new start for the company. At the time, acquired OnStream was building a digital media services platform dealing in asset management and digital content management, and we wanted to integrate that into our webcasting services. Then, a couple of years later, we acquired Infinite Conferencing, an audio and web conferencing company. Today, we have two divisions of the company: digital media services and conferencing services. Together, the segments are approaching $20 million in annual revenues -- $11 million on the conferencing side, and close to $9 million on the webcasting side.
Thomas: Recently ONSM acquired Intella2. Can you talk more about that?
Randy: Intella2 provides an additional customer list and assets that we're integrating into the conferencing segment. It hasn't appeared yet in the financials, but it will come on strong in the next couple of quarters.
Thomas: How much do you expect this acquisition to contribute to overall revenues?
Randy: Over $1 million a year, maybe as high as $1.4 million. And, we expect anywhere from $600,000 to $800,000 of cash flow from it.
Thomas: Along the line of revenues, ONSM recently lost a customer resulting in lower year-over-year revenues in its most recent quarter. Can you discuss the loss of this client?
Randy: The customer that the company lost was not a cash flow producing client. It was a pass-through as an accommodation to a strategic partnership. So, effectively this was all top line revenue with no profit in it. That customer contributed about $175,000 a quarter. The reason the company took on this accommodation is because our partner came to us and said if you are willing to not take any profits on this to help us out, we'll lower your rates overall. Who could say no to that? As a result, we have some of the lowest rates in the business, and although the client is gone, the rates will not change because it is contracted.
Thomas: Just to be clear, even though OnStream lost the customer, the lower rates still stand?
Randy: Yes, through a long-term partnership and an agreement. We expect that the only direction the company's rates will go is lower.
Thomas: How has ONSM been able to reduce costs?
Randy: We have been able to reduce costs in all of the company's facilities. We either found new facilities at lower prices, or moved the facilities closer to the sources of communications requirements, reducing the overall line charges. As a result, the company has saved hundreds of thousands of dollars. We also reduced some overall payroll costs, eliminating some positions and turning our focus to hiring sales and marketing personnel rather than research and development or operations personnel.
Thomas: Does the company expect these reductions to continue?
Randy: Yes, and then there is one other area that the cuts are coming from. The fact that the volume of minutes ordered from OnStream's customers is increasing allows the company to get lower overall rates due to the higher volume
Thomas: What will it take for OnStream to become profitable from an earnings standpoint?
Randy: The company is expecting to continue to be cash flow positive. In terms of earnings, certain non-cash amortizations have to be overcome. $5 million in sales a quarter should get the company to a level of earnings per share (EPS). It's really a matter of a little more sales effort. And the company expects to see higher revenues from some of its new initiatives. The largest is the new webcasting platform that has taken a number of years to develop. I believe that it is the best platform on the market at this point. That has been confirmed by third party studies. In an evaluation by Top Ten Reviews, the platform ranked first among all top tier providers, based on ease of use, most robust features set and unequalled customer service. Our platform received a 10 out of 10.
Thomas: What will the new platform do for OnStream overall?
Randy: The industry has been growing at a much higher rate than we have because of the old, outdated platform. Now with the new platform, ONSM should start to see an uplift in growth percentage.
Thomas: Can you talk about a few of the new platform's features?
Randy: It was designed to be easy to use, but also to include great customization and flexibility. Those two things don't match very well, but OnStream was able to make it happen. Anyone, after a very brief tutorial, can create a world class webcast in just a matter of minutes. Development took into account what customers have been asking for in a webcasting platform. Some of these requests include the ease of creating registration forms, offering multiple format streams, social networking integration, a flexible media player with great customization, ability to move things around on the screen and compatibility with mobile devices, etc.
Thomas: Getting back to financials, how can ONSM improve its working capital situation?
Randy: Recently, a large outstanding liability to management was converted into common shares. So, management now has a larger stake in the company, and the loan has been removed from the working capital deficit. Working capital is really a question of the outstanding liabilities that the company has to clean up. With equity being so low for so long, it has been hard to do that, but it should improve. We expect that due to our sales and marketing initiatives, we will see reductions in the working capital deficit over the next few quarters.
Thomas: One-time charges negatively affected the company last quarter. Can you discuss why they were incurred?
Randy: The one-time charges had to do with the acquisition of Intella2. The new accounting rules state that the costs of the acquisition have to be reported in the quarter that the acquisition was incurred. That charge prevented ONSM from being cash flow positive for the quarter, but the company should remain cash flow positive for the full year. And, like I said, if it hits the $5 million/quarter sales level, OnStream should be producing earnings as well, which could happen this year.
Thomas: Do you have anything else that you would like to add?
Randy: Obviously, I look at our company and feel that it is very undervalued. From a valuation standpoint, ONSM has two primary businesses. A conferencing company alone typically sells for 1 to 1.2 times revenue. So, at $11 million of revenue, that component has more value then our current $6 million market cap. Digital media services businesses typically have much higher multiples. They sell for 2 times sales on the low end and as much as 5.5 times sales on the high end, with several transactions occurring in the past couple of years. If you just look at the media/media services revenues for ONSM, we generate $7 to $7.5 million. Multiply that by 2 or 3, and you're up to near $20 million. If you add that number to the conferencing side, that's over $30 million. I think this is a unique situation. These types of businesses are in demand, and I believe OnStream will wind up in play in the next couple of years.
Thomas: What do you think the gap in valuation stems from?
Randy: The macro market issues with all microcaps and nanocaps in general for one. Plus ONSM being on the OTC now instead of the NASDAQ isn't helping. But the overall problem is the company's lack of growth percentage. In other words, it has grown each year and done a lot of things to improve bottom line cash flow, but hasn't really excelled in top line growth. I attribute that to the fact that the company hasn't had the resources to do any serious marketing or expansion of our sales staff until now. Also, I think that all of the other businesses in the industry are seeing a short-term slowdown, but I believe that the industry is going to expand as things become more virtual over the next couple of years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Companies discussed in this article may involve previous Bowser Companies of the Month. The discussions are the opinions of Thomas Rice and are not related to The Bowser Report's past, present or future recommendations.