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Summary

  • Valuation: Sum of the parts valuation makes it a buy.
  • Mobile: At these valuations you're getting Mobile for free.
  • Profitable: Five consecutive quarters of profitability.

I find that the best way to value a company is by a sum of its parts. AudioCodes (NASDAQ:AUDC) has had a spectacular turnaround over the past two years and this small cap company is shaping up to be a high flier in the months to come. Unfortunately, I don't believe that the market is valuing it correctly despite the fact that it has had five consecutive quarters of profitability and delivered solid results yet again last week. AudioCodes not only delivered solid results, but with its partnerships and relationships confirmed its position as a significant player in the $6 billion Unified Communications (UC) market and the mobile enterprise market, which according to ABI Research could be $340 billion by 2017. AudioCodes has been tangled up in a post secondary hangover and I believe that the time is right to show Seeking Alpha investors that it's attractive here on a sum of the parts analysis.

I am valuing AudioCodes on a basement level in order to get an indication of where it is valued today. Companies can trade at any value the market creates for its shares, but when a company is profitable, executing on its strategies and making news it creates a market opportunity for investors if that valuation is too low. Growth companies trade at 2 - 5 times revenues and high margin growth companies with high barriers to entry can trade at 10 - 20 times revenues, so I'm being very conservative with my 1.1 times valuation for AudioCodes. I believe a sum of the parts can bring out the true value of a company especially when that company is in an industry that has been consolidating, which the UC sector has been doing for years.

AudioCodes has three business units: Products, Services and Technology. Products and Services are the growth engines of the company while Technology is its legacy business.

Products:

AudioCodes sells Media Gateways, Session Border Controllers (SBC), Multi Service Business Routers (MSBR), IP Phones and software based products that complement these products. Total product sales are approximately $100 million and are estimated to grow at 15%-18% over the next 3-5 years as Microsoft (NASDAQ:MSFT) Lync replaces legacy UC systems and as enterprises move to hosted service providers through AudioCodes' partner BroadSoft (NASDAQ:BSFT). The UC market is growing rapidly as VoIP based networks and SIP trunking are being accepted globally and this is creating strong demand for AudioCodes' products through its many well recognized partners. AudioCodes' strongest partner is Microsoft and its strategies are well placed to help it land large enterprise deals.

I am giving AudioCodes' product sales a 1.1 times multiple or $110 million valuation on a bare bones bottom valuation as the company has turned profitable for over 1 year, invested in new products that are growing over 40%, increasing R&D dollars into new products and services and it has some of the best partnerships a small cap company could ask for in a strong growth sector as UC.

Services:

Service revenues are growing at 20%-25% as larger deals start to be deployed for Microsoft Lync. Its One Voice for Microsoft Lync is continually adding new deals and its One Voice for Hosted Services (BroadSoft) is making strong progress as per both companies' conference calls.

The $7 million in service revenues it reported this quarter leads me to estimate that it will hit $8 - $9 million by the 4th quarter of this year. I annualize service revenue will reach $30 - $32 million in 2014. Service revenues are attributable to high gross margins and are associated to long-term contracts, which make this business attractive to the market.

Historically, the services group is valued much higher than products due to its higher margins, contract lock-ins and stickiness to the key customers that allows for cross selling opportunities. I believe this group is valued in the marketplace at 3 - 5 times revenues. I am giving AudioCodes a 2.5 multiple on the $30 million estimate, which equates to $75 million.

Technology:

The Technology group is a division that doesn't have any investment associated with it within the organization so the sales flow directly to the bottom line - cash cow. However, this is a legacy business and as such it is associated with declining revenues. While there would be value here in the event of a sale (approximately $20 million in revenues in 2014), I have placed a zero valuation on this segment due to a conservative stance and in order to understand its bottom basement valuation.

Net Cash:

AudioCodes has $80 million in net cash. It conservatively estimates that it will generate $10 million in 2014. I will use $80 million in my valuation model, but that number should increase each quarter.

Mobile:

Mobile is an area of utmost importance and should be viewed as AudioCodes' crown jewel. It has been pumping a ton of resources into it and by the sounds of the most recent conference call there could finally be a payoff in sight. This space has been thrown into the spotlight with Facebook's (NASDAQ:FB) purchase of WhatsApp for $19 billion and more relative to AudioCodes has been the fact that Fring and Viber both Israeli companies were sold for $50 million and $900 million respectively. These deals have resulted in AudioCodes' mobility customers stepping up their efforts to get up to speed on Over the Top (OTT).

It is difficult to value Mobile, as we don't know exactly what's going on behind the scenes. However, we do know that AudioCodes' CEO believes it has the best Voice technology in the business and that it has carried this over to its mobile OTT solution. I am conservatively putting a $25 million valuation on Mobile.

Sum of the Parts:

Low End ValuationMid Level ValuationHigh End Valuation
Products110 MM150 MM200 MM
Services75 MM120 MM150 MM
Net Cash80 MM80 MM80 MM
Mobile25 MM60 MM70 MM
Total290 MM410 MM500 MM

Comparison:

AudioCodes' purest comparison is Sonus Networks (NASDAQ:SONS), which recently repurchased 8% of its shares at 2.25 times revenues less its cash. Furthermore, two weeks ago the CEO purchased 1 million shares of stock in the open market at 1.90 times sales.

Conclusion:

AudioCodes' shares are trying to test the $5.60 area today, but even at $5.60 per share, you're getting the mobile business for free. The shares are trading at a valuation of 1.07 times this year's revenues less its cash, which is a big discount to Sonus's two purchases. Forget about me, forget about the market, but do not forget about the sum of the parts which on the low end equals $290 million and how boisterous the CEO was on the recent conference call about its mobile business. The mobile business could sell for the 2 - 3 times the multiple of the company if they land 5 - 10 million subscribers in the next 24 months. It's time to grab some of your parts and get some AudioCodes at these trough levels.

Source: AudioCodes: A Sum Of The Parts Makes This Company A Buy