Modavox: The Next Big Internet Patent Licensor?

For the past few months, I have had an ongoing dialogue with a reader who is close to Modavox (MDVX.OB). He’s a large shareholder, so assume that he is talking his book. But the story is certainly worth looking into.

Modavox has two main businesses:

1. Broadcast Media - basically just internet talk radio. This division was responsible for about 80% of revenues last quarter, but it's not where Modavox’s future lies.
2. Interactive Media - provides behaviorally-targeted advertising solutions and interactive e-learning platforms.

The numbers in a vacuum are not inspiring. For the first three quarters of its 2007 fiscal year, Modavox inked $2,531,779 in revenues, compared to $2,000,255 in the prior year, and lost $650,207, compared to a loss of $397,491 in 2006. At this run rate, Modavox has an enterprise value-to-sales ratio of 17.85, well above Google (GOOG) (9.11), Apple (AAPL) (3.44), and most other high fliers. Plus, it's not profitable. Viewed without context, these numbers give little reason to get excited.

But with this stock, the context matters. Modavox has a few broad patents covering, among other things, behavioral targeting of internet ads. It has already brought a patent infringement suit against Tacoda, now a division of AOL (TWX). My source believes that scores of internet businesses could also be infringing on the patent portfolio. Think of Tacoda as a test case. If Modavox prevails and its patents are upheld, Modavox could be the next big patent licensor - the Patriot Scientific (PTSC.OB) of internet advertising. And unlike Patriot Scientific, Modavox is actually practicing the technology, so it shouldn’t be disadvantaged by last year’s Supreme Court ruling in KSR v. Teleflex.

The technology also could make Modavox an attractive buyout candidate. Both AOL (Tacoda) and Yahoo! (YHOO)(Blue Lithium) have recently bought behavioral advertising companies. I’m not sure if Modavox’s business has sufficient scale to justify a buyout, absent the patent bludgeon. That is why I’m focusing on the growth of the Interactive Media division. Revenues are very small now, but substantial growth here will likely be rewarded by the market and attract suitors.

Despite the potential, I’m not a buyer (yet). Modavox is overextended, and the potential patent and buyout catalysts may take some time to develop, if they do at all. For now, MDVX is on my watchlist.

DISCLOSURE: No position.

Comments

[MVLA:]

I'm thinking MDVX will be bought out sooner than later. I find Google to be a particularly interesting suitor. AOL/Tacoda spinning out Platform A and Microsoft-Yahoo integration of Blue Lithium/Maven would all be in jeopardy if Google purchased the IP and aggressively pursued patent infringement cases. Given that Google winner in search ads and is not as interested in the behavioral targeting space, they may want to work hard to prevent others from entering. This would certainly yield crushing defeats to its competitors! I also think Google would utilize the streaming video and podcast assets.

As a MDVX long, I'm glad to see they are on your watch list!

2008 Feb 19 12:20 PM

[Davis Freeberg:]

At a market cap north of $60 million, this company is obscenely overvalued. Why you think that someone would be willing to pay 25 times sales for a company that is losing money is beyond me, but I wouldn't touch this one.

2008 Feb 20 10:33 AM

[Off the Rad...:]

I think this company has the potential to possibly be a billion dollar company. I see them having similarities to Qualcom in terms of a licensing opportunity.

I think this company has the potential to essentially be like the toll booth taking a fee from all those infringing on their patented technology. I can't believe the current market cap is dramatically undervalued in my opinion. Just look at Facebook and others valuations and they are burning cash like crazy and relying on monetizing their audiences through online advertising. What none of them know but may soon because of your piece and a growing awareness in the market is that none of these companies with their huge online audiences can effectively monetize them without infringing on this company's patented IP.

This tiny little company owns the golden key imo to allowing the actual custimization of content to end users. If Facebook, AOL, Yahoo, Google and tones of other companies can't customize their advertising to the right audience, the whole process of bettering roi on advertisers ad spend is significantly impeded.

The old saying "You can't get their from here comes to mind"

The company's fundamentals appear pretty solid. Based on their growth and huge increase in deferred revenues up from 80k to over 500k, I'd expect the company is actually very profitable going forward, it has no debt, a million in cash, good management and already has investment bankers on their team. Importantly, insiders own about 35% of the company having a vested interest in building shareholder value.

What wasn't mentioned is that just their radio division has over 5 million unique visitors that could be valued at $250 million just based on $50 per visitor. Recent comps including MySPace, YouTube, Facebook and many others are fetching $70-$80 per unique. Again, all the unique visitors in the world have no value unless you can effectivley monetize them through online advertising. The key process there is customizing content or ads to the end user based on proccured behavioral data. This company owns the patented technological process being used by a host of major internet players to monetize their online audiences and facilitate the growth of their online advertising initiatives. This is many of these large internet companies sole method for revenue generation and most have bet their future growth squarely on it, just look at AOL. They simply need this companies technology imo, this makes Modavoxand their patented IP extremely valuable. Not only for the leverage it gives to whoever owns it but for the leverage it gives them agains their competitors who may also be infringing. Anyone of the large internet companies who acquires this company may have literally gotten their hands on "a weapon of mass destruction" in terms of what they can do to the competition.

The company will be acquired, no doubt in my opinion. I see it as a matter of when and not if. They are sitting on some of the most valuable patented IP in the entire internet space imo. You're spot on as far as I'm concerned.

I just hope they don't sell out too cheap because as you point out, the biggest opportunity is the licensing one. They knock over AOL/Tacoda in their current suit against them, watch out!

Great article and work!

2008 Feb 21 12:05 AM

[Off the Rad...:]

More Listeners, More Money: Online Radio Growth Continues
 
Internet radio isn't the biggest earner online, but its appeal continues to grow.  Just recently, Accustream iMedia Research pointed to a 26.1 percent increase in total listening hours in 2007 to 4.85 billion.  That is drawing more advertiser interest, though the group credited heavyweights Clear Channel and Citadel Broadcasting for drawing the most advertising visibility.  In total, internet radio billings topped $80 million in 2007, according to the group, almost triple sales of $26.9 million in 2006.
 
Additionally, the internet radio industry is also spinning video-based advertisements, which yielded an additional $12-15 million last year.  AOL-owned Shoutcast grabbed the most attention last year, with 48.4 percent of total listening hours, according to the ranking.  Other top-ranked destinations included Clear Channel Online, Yahoo Music, AOL Radio Networks and Pandora.
 
 

2008 Feb 21 10:52 AM

[weng ho teng:]

Certainly MDVX.OB is attractive for its patents.

I like the chances of this stock being bought out or even more likely a settlement and licensing deal that they can use to leverage others into paying up.

I also like MYST.OB as another great targeted ad play on the otcbb.
This time in China via a deal with the giant China Netcom

2008 May 04 08:50 PM