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Today morning, before the open, Salt Lake City-based ClearOne Communications (CLRO) announced outstanding results for the December 2010 quarter, reporting $12.6 million in revenue and 18c in pro forma earnings. This is the highest quarterly revenue and operating profit for this 30-year old company, at least since 2004, and a strong acceleration in operating performance over recent quarters (see the Table below).

Quarter Ending

Mar

2009

June

2009

Sep

2009

Dec

2009

Mar

2010

June

2010

Sep

2010

Dec

2010

Revenue (in $ million)

7.6

7.1

7.7

9.2

8.4

9.9

10.4

12.6

Pro forma Earnings

0.04

(0.05)

(0.03)

0.08

0.02

0.04

0.11

0.18

The stock closed today up 29c at $4.68, despite the overall weakness in the markets. However, as explained below, the price still lags the recent improvement in its operating fundamentals, and offers investors the opportunity to capitalize on the momentum into 2011 associated with both an improvement in global economic fundamentals as well as due to company-specific product initiatives.

Company Background

ClearOne is a global provider of premium audio and video conferencing solutions for enhancing collaboration, presentation, distance communications, and multimedia applications. They have been a pioneer in developing innovative audio products since 1981, and currently dominate the professional conferencing space with a 54% global market share. Their customers include the world’s largest corporations as well as small businesses, educational institutions, and governmental organizations. Besides North America, the company has offices in Europe, Asia, South Asia and Australia, and reaches their customers via a network of independent distributors and dealers, including systems integrators and value-added resellers.

ClearOne is the recipient of dozens of product and innovation awards, including the prestigious Frost & Sullivan Global Market Leadership Award in 2008. Their product portfolio includes not just audio and video conferencing devices and systems, but they also sell products to serve all types of conferencing needs, including for example desktop and tabletop document cameras, dual-display media carts, and other conference-specific furniture. Also, recently in November 2009, they acquired NetStreams, thereby expanding their product capability to include audio and video distribution over TCP/IP networks. This has enabled them to serve new markets including digital signage, distribution of HD video and audio, LAN Cloud Matrix Switching and audio paging over data networks.

The company outsources the manufacturing of all of its products to third-party manufacturers located in both the U.S. and Asia. Also, there are currently no analysts covering the stock, and 9 institutions together hold a combined 2.1 million shares or 23% of the company’s outstanding shares.

Valuation

Based on the company’s own statements in their press release,

"ClearOne had an outstanding quarter and an outstanding year on all fronts ... we achieved record revenue and profitability growth for the quarter and for the year ...Throughout 2010, we continued to build operational momentum ... Looking ahead, we are confident of sustaining the momentum and continuing our strong financial and operational performance into 2011."

it appears that the momentum in operating fundamentals that we saw in the recent quarterly report (see Table above) will continue into 2011. This assessment by the company is supported by two factors. First, corporation technology budgets, especially for products that may lead to travel and operational cost savings, will increase as the global economy improves in 2011 and beyond. And second, incremental growth can be expected from new company initiatives such as the recently launched "Collaborate" solution, an all-in-one voice, video and data collaboration console for users of Unified Communications or popular cloud based services, that will open up new applications markets.

The company has been growing revenues at 35-40% year-over-year for the last 3 quarters; also, revenue for the year ended December 2010 was 31% higher than the previous year. Granted, some of this growth is from the acquired revenue stream from the NetStreams acquisition in November 2009, but independent of that acquisition the company seems to have organically grown revenue at almost 20% growth in the past year, including accelerating to over 30% revenue growth in the latest December 2010 quarter.

Assuming say a more modest 25% sales growth for FY 2011, it is possible then that the company may generate $50-$52 million in annual revenue; pro-forma earnings, however, may almost double to above 70c due to the high operating leverage in terms of over 60% gross margins. This was determined assuming gross margins rise slightly above the current 60%, a generous 15% increase in inflation-adjusted SG&A and R&D costs, and a 30% tax rate going forward as the company’s Net-Operating Loss carry-forwards have now expired. This projected increase in operating margin to 17% for 2011 is consistent with the peak in ‘pro-forma’ operating margins to 19% in the December 2010 quarter from single-digits in recent quarters when revenues were lower, and the 21% and 18% operating margins seen in September 2008 and December 2007 quarters respectively when revenues peaked at $11.1 million and $10.8 million respectively.

The stock currently trades in the $4.60s, and the company is projected to grow revenue 25% in 2011 to $50-52 million and generate 70c in annual earnings. This is a steep discount compared to the recent $4.40 to $7.40 trading range level in 2007 when it generated then peak revenue and earnings of $40.4m and 40c at 10-12% revenue growth; and also a steep discount to the $3.10-$5.80 trading range in 2008 when revenues were flat year-over-year at $40m and it generated lower 30c in earnings (and it had 10-12 million outstanding shares in 2006-08 v/s current 8.9 million shares).

The company also trades at a discount to peers operating in the audio and video conferencing products space, including Polycom Inc (PLCM), a developer of unified communications solutions for content collaboration; Onstream Media Corp (OTCQB:ONSM), a provider of webcasting and web-conferencing solutions; and Logitech Intl SA (LOGI), a Swiss manufacturer of peripheral devices including video-conferencing products (see Table below).

CLRO

PLCM

ONSM

LOGI

Current Price

$4.68

$47.24

$1.10

$18.91

Projected 2011 Annual Rev ($m)

50-52

1660

16-20

2670

Market Capitalization ($m)

41

4140

$10

3370

Price-to-Sales Ratio

<0.80

2.50

0.5-0.6

1.26

Projected 2011 Fiscal Year Earnings

0.70+

2.06

Losses

1.21

Current PE

<7

>23

NA

>15

Projected Revenue Growth Rate

25%+

19%

<10%

10-12%

As is evident from the Table, CLRO trades at a steep discount based on both current Price-to-Earnings ratio as well Price-to-Sales ratio compared to its peers, while at the same time exhibiting strong revenue growth. Also, please note that analyst estimates for ONSM are not available, so a continuation of current trends was assumed for this comparison.

CLRO also has a strong balance sheet including over $11 million or $1.25 per share in cash and cash equivalents, which is more than a quarter of its current market capitalization. Based on 70c+ target annual earnings for FY ending December 2011, the company is trading at just over between 6 times forward PE for 2011 (not adjusting for the available cash). Applying even a nominal 12-15 PE to the projected 70c+ in annual earnings for 2011 would yield a price target of $8-10+, almost double the levels at which it trades currently.

Conclusion

CLRO shares are trading at a steep discount to fair valuation based on a comparison to both its own historical ratios as well as those of its nearest peers. A minimum target of $8-10 is achievable in the medium-term, in the next 6-9 months, which is almost double compared to current prices. This is based on both an improvement in global economic fundamentals as well as company-specific initiatives.

While there is no guarantee that the economy will recover or that the company will continue to execute well, what CLRO offers is a more attractive value and at least an opportunity to diversify out of its larger-cap well-known peers such as PLCM and LOGI in the Audio/Video conferencing space that are trading at richer multiples while exhibiting slower growth, and into a known ‘leader’ in the Audio/Video conferencing space whose stock is less known on Wall Street, and a better value with stronger growth.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix by Edgar Online.

Disclaimer: Material presented here is for informational purposes only. Before buying or selling any stock you should do your own research and reach your own conclusion.

Source: ClearOne Communications: Best Value in the Audio/Video Conferencing Space