The Microcap Speculator submits: One theme that is likely to be huge this year is the adoption of voice-over-internet-protocol, or VoIP. VoIP technology promises to drive down long distance costs and bring advanced telephony features to all accounts, like teleconferencing and integrated voice mail. The media likes to focus on consumer products like Vonage or Skype, but I think businesses stand to benefit far more from VoIP adoption. After all, most consumers don't pay that much now for long distance. On the other hand, businesses frequently have staggering long distance bills, especially if they have multiple locations. We recently profiled one company likely to benefit from the VoIP trend, B.O.S. Better Online Solutions (ticker: BOSC). Another company I like in this sweet spot is Vodavi Technology (ticker: VTEK).
Vodavi makes business telephony equipment and software, including VoIP technology. VTEK trades at roughly $4.50 per share and has just over $1.25 per share in cash and no debt (key statistics). In the last twelve months, Vodavi earned $.42 per share, giving it a P/E of just over 10 if you ignore the cash on the books and a P/E of well under 10 if you discount the cash. Vodavi's revenues were over $43 million, giving Vodavi an extremely low enterprise value to sales ratio of 0.30. This means that any increase in margins will give a substantial boost to Vodavi's bottom line. Demand for Vodavi's VoIP products is growing at an annual rate of over 75%.
Vodavi shares took a hit recently after reporting lower earnings of $.09 for the second quarter of 2005. Although sales of Vodavi products were up, a few larger Vodavi dealers decided to carry lower levels of inventory. Vodavi believes these sales will be pushed into future quarters:
"Our reported revenue in the second quarter was negatively impacted by the decisions of many of our distribution partners to reduce inventories in their warehouses. Actual purchases of our products by our dealers increased by approximately 3% during the second quarter as compared to the second quarter of 2004. The reduction in our reported revenue is directly related to the reduced levels of inventory in the channel. Channel inventories remain at all time lows with approximately one month of supply on hand. While this had a negative impact in the second quarter, it does bode well for future periods as overall inventory turns should improve."
With its solid balance sheet, position in the VoIP sweet spot, and prospects for future growth, I think the dip in VTEK shares will be temporary and offer a great risk/reward at current prices.
DISCLOSURE: I am long VTEK and BOSC. Not a recommendation to buy or sell any security. For informational and educational purposes only.
VTEK 1-Yr Chart