Vodavi Shares Dumped after Impairment Charge Mars Earnings; Buying Opportunity? (VTEK)

The Microcap Speculator submits: Investors dumped shares of Vodavi Technology (ticker: VTEK) yesterday after the company reported breakeven earnings on revenues of $11.0 million, versus earnings of $.12 on sales of $11.1 million in the prior quarter.

Almost all of the miss was attributable to an impairment charge from the writedown of goodwill. But for the charge, Vodavi would have reported $470,000 in earnings, or $.12 per share. That's still down about $30,000 on an absolute level from the prior year quarter.

Despite the lackluster results, CEO Greg Roeper retained his optimistic outlook:

"2005 was another very strong year for our core business. We continued to increase market share and generated strong cash flows. During 2005 and particularly in the later half of the year, we began focusing our direct sales office efforts toward more beta testing of products and on developing vertical marketing sales tools. Our first venture into vertical markets is the residential and commercial real estate markets. As a result of this effort, we are beginning to see very positive results both locally and nationally as our dealers begin using these products and tools. We anticipate these investments will provide new revenue opportunities in 2006.

"Primarily as a result of the shift in focus of this business unit, we determined that the goodwill associated with the historical basis of this entity should be written off. Despite this non-cash charge, we feel very strong about the direction of this business and its outlook not only locally, but also in helping us bring winning products and sales tools to our dealers."

My take: I'm using this pullback to rebuild a position in a high quality stock that had been reduced as scale-out profit targets were met. My investment thesis remains the same:

• Vodavi has $6.5 million in cash, versus a market cap. of only $21.6 million
• Vodavi trades at an incredibly low enterprise value to sales ratio
• I expect that Vodavi will remain highly profitable in 2006
• Vodavi may see more investor interest as a play on VoIP
• Vodavi share count actually decreased year-over-year
• For such a small company, both institutional and strategic investors have taken sizable positions in VTEK shares. An LG/Nortel joint venture owns 23.3% of the company, and Barclays owns 6%.

UPDATE: Just listened to the earnings conference call. Here are the highlights (all statements below are the company's, not my editorial conclusions):

• The product mix is slightly shifting towards higher margin products
• The company is comfortable with current inventory levels
• VoIP product shipments were up 53% quarter-over-quarter
• The company is beta testing direct sales in the real estate vertical market, and expects results from these efforts in 2006
• Vodavi is working with LG/Nortel on hosted IP services markets, and expects results from these efforts in mid/late 2006
• Vodavi is exploring strategic relationships to expand its product line. In Q & A the company said it is focusing more on partnerships than acquisitions. Management advised that there will likely be an announcement soon on this topic
• Vodavi remains "highly leveraged" to the success of the economy and specifically business investment
• Management warned of a possible "slight earnings decline" in the first half of 2006 due to increased investment, but these investments should pay off in the second half of 2006
• Vodavi's board is continuing to discuss whether to accelerate buybacks or paying out dividends

DISCLOSURE: I am long VTEK. I have no position in LG, Nortel or Barclays. Not a recommendation to buy or sell any security. For informational and educational purposes only.

VTEK 1- Yr Price Performance: