Steve Andrew's  Instablog

Infosonics is in the midst of a corporate metamorphism.  Last year at this time the company was a slow growth, no excitement distributor of cell phones to Latin and South America, we can call it a caterpillar.  The OEM distribution business had done fair in most economic environments.   The company is a niche player in a strong market with unique experience and expertise in the region.  The company is financially sound with a current tangible book value of about $1.90 per share.  What the company needed were two changes: a better sales model where their sales employees can be easily ramped up or down based on demand and an offering of higher margin products to sell in their existing sales channels.  The company laid out this very plan last year and if successful, it could change the company (and stock) into a beautiful butterfly.

Early this year the metamorphism began, quietly, in a market which had more to worry about then a cell phone distributor with $200 million in sales.  May 15^th the company reported a huge drop in sales YoY (37%) but the story was margins.  In the headwinds of the toughest recession the cell phone business has ever felt, the company reported 3 cents profit from continuing operations.  Management had made good on their goal of profitability.  Aggressive management of field employees and other operational expenses had shown the 1st piece of the evolution puzzle was working.  This was the best quarter since 2006, a time when Latin and South American couldn’t be hotter.  The stock responded with a run from $0.30 to over $2.00 in less than 3 months.

The 2^nd piece of the puzzle was the introduction of their own house brand of cell phones, verykool.  The markets in Latin and South America are very different then the US.  Here most people who buy a cell phone sign a contract with a provider and the provider, in turn, subsidizes the phone purchase.  In Latin and South America this is not the case.  About 90% of the purchases are pay as you go plans (no phone subsidies).  This leads to very little carrier loyalty and puts the emphasis on the phones themselves.   Here is where IFON is leveraging their expertise in each individual market.  The company has designed a line of phones to fit the niche of the markets specifically based on what are the hot capability trends currently for each location.  For example, the verykool i260 has the ability to receive analog television.  The TV phone is very important in these regions because of the upcoming soccer World Cup and lack of widespread cable coverage.  While the US has fully switched to digital TV, no country in Latin or South America has any plan to do so within at least the next 6 to 7 years (Argentina is the only country with any digital plan).  The i260s price point is much lower than competing digital TV capable phones which may be designed with other regions of the world in mind.  This gives the verykool branded phone a distinct advantage in these extremely price sensitive markets.  Each one of the 9 phones in the verykool line offer unique features to compete at all levels of these markets (high end to low end). 

The quarter ended 9/30/09 IFON reported the 3^rd consecutive profitable quarter and sequentially higher revenue from the already high 2^nd quarter of 2009.  The OEM distribution business has gross margins in the 4% to 5% range.  The verykool products are likely in the 10% to 15% range.  Looking at the YoY gross margin comparisons I believe that the verykool products are gaining traction as margins improved 49% to 6.6% of overall sales.  This was also a 6% increase sequentially over the 2^nd quarter of 2009.  If this margin expansion continues IFON is positioned to continue to grow the EPS number sequentially going forward.  The verykool phones are contract manufactured in relatively small quantities so that the company can quickly respond to changes in demand and consumer preference.  Management has been able to accomplish the verykool ramp up while reducing overall inventory levels.

The largest risk to the company is that the verykool brand falls flat with consumers.  This most likely explains the discount the company trades to its book value.  I think this is incorrect because the distribution business alone should be worth more than the company is valued now.  Using the current earnings run rate of $0.12 for the next 12 months, the stock is trading at less than 12x times earnings.  I view this as getting a call option on the verykool business for free.  With the stock currently trading around $18 million in market cap, a very small incremental amount of verykool sales could do verycool things to the bottom line and stock price. 

I am long IFON.

5/28/09

Concurrent Computer Corp. supplies golbal cable operators such as, Comcast and Cox, with vital software that makes video on demand possible.  CCUR’s technology creates and supports the operation of everything that happens after a cable customer hits the VOD button on their remote.  This includes the menu and its operation, playing of the selected video feed (movie, TV show, etc.), in video commands (pause, fast forward, etc.), and the process of billing the customer for the VOD purchase.  This technology is vital to the operation of the cable companies’ extremely lucrative VOD market.  The company also utilizes data gathered during the customer’s VOD sessions to tailor advertising content to specific customers.  This technology will continue to accelerate growth as VOD accelerates growth on PC’s, think Hulu and Youtube, and mobile devices, such as iPhones. 

 Currently the VOD business is growing at around 16% YoY for the trailing 9 months but an investor can assume that 20%+ percent growth is achievable in better economic conditions.  This business makes up roughly 66% of last quarter’s revenue with the remaining made up by a different video technology utilized in military and industrial applications.  During the last quarter the company took a large, non-cash write off of goodwill ($17.1 million), primarily stemming from a 1999 acquisition.  Excluding this impairment charge and the related tax benefits, the company earned $1.3 million or $0.16 a share.   Future earnings for the company look even stronger as the company’s lone analyst has a $0.70 EPS number for FY2010. 

CCUR, as of 3/31/09, had nearly $24 million in cash and over $23 million in accounts receivables.  Looking back over the company’s history of A/R, this appears to be a normal first calendar quarter increase and should be 100% collectable.  With that being the case the company should end the next quarter with somewhere around $40-$45 million in the bank.  With the stock trading at a market cap of only $39 million, an investor can capitalize on a fast growing company, in a fast growing sector, for the cost of the cash in the bank. 

   &... The most likely explanation for the discounted share price is a combination of the overall markets loathing of the cable sector as a whole and the lack of liquidity in the stock (averages about 40,000 shares per day).  This represents a great opportunity for smaller investors to accumulate shares while larger funds have to wait for the stock to increase in value and liquidity.  Based other companies in the industry, CCUR should get between a 15 and 20 P/E multiple.  If the company does do $0.70 in FY2010 it would be hard to believe this stock would be any less then $15 ($0.70*15[P/E]+$5[cash]) in a year’s time.  The lack of liquidity does pose a significant risk as well.  The cash position of the company provides some security and if an investor can patiently buy the stock, the liquidity risk of the stock can be mitigated.

Disclosure: I am long CCUR