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Elephant Talk - An Undiscovered Bitcoin Company

Nov. 27, 2013 12:45 PM ETTEUM6 Comments
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By now everyone has heard of the meteoric rise of Bitcoin over the last few weeks. Today the digital currency hit a new all time high of $950. The wild fluctuations in the price, and dreams of riches, have driven average people into the currency. Investors and traders have searched high and low for ways to get in on the action with companies involved in digital currency. Today we bring you Elephant talk Communications Corporation (ETAK) as an undiscovered play on Bitcoin and the burgeoning digital currency rage.

Background:

Most investors know ETAK as a mobile play. ETAK is a leading international provider of proprietary mobile Software DNA™ platforms for the telecommunications industry that empower Mobile Network Operators. ETAK's customers include several of the world's leading Mobile Operators such as Vodafone, T-Mobile, Zain and Iusacell. Virtually all business is focused on tier 1 and tier 2 operators worldwide. What most investors are not aware of is the gem of the ETAK portfolio,
ValidSoft Limited.

ValidSoft Limited

From the companies website we see that this company provides solutions to counter electronic fraud relating to a variety of bank, card, internet and telephone channels. ValidSoft's solutions are used to verify the authenticity of both parties to a transaction (Mutual Authentication), the security of the relevant telecommunication channel used (Secure Communications), and the integrity of transactions itself (Transaction Verification).

This brings us to the meat of the argument that ETAK is a stock that could get interest from Bitcoin. On October 9, ETAK announced a partnership with Ven, www.vencurrency.com, a leading global virtual currency managed by the Hub Culture Group, www.hubculture.com. ValidSoft was selected by Ven for its state-of-the-art, specialized purpose security architecture SMART™ (Secure Mobile Architecture for Real-Time Transactions™) to underpin its own advanced consumer offerings in social networking and virtual exchange. Ven is the premier digital currency, first appearing in 2007 and the first virtual currency to be used for 'real-world' transactions at physical Hub Pavilions, online Hub stores and as a tool for exchange among the global network of Hub Culture members. After reading all this information we see that VEN is a digital currency. ETAK is now partnered with them making it a play on digital currency. So far this makes ETAK and VEN sympathy plays on the move in Bitcoin. That in itself is very bullish for the stock of ETAK right now but there is more to this story.

To summarize the new ETAK partner:

  • Bitcoin "bank"
  • Bitcoin fund
  • Bitcoin asset miner (make your own bitcoins)

Stan Stalnaker - founder of Hub Culture in an interview in May of this year stated this, "These days we manage bitcoin assets through Hub Culture and have developed assets in Ven that our community can access to hold bitcoin without all the hassle. In fact, we just launched a Ven Fund that allows users to hold both Ven and bitcoin together." So now we see that VEN, ETAK's new partner, is a Bitcoin "bank" and also runs a Bitcoin Fund. The story now gets very interesting. If we look around the Ven website we also see that Ven last month launched its very own Bitcoin asset miner. For those unfamiliar with how Bitcoins are created here is a very quick run down.

Bitcoins 101:

New bitcoins are distributed as payment to transaction processors known as miners. Bitcoins are not physical, like dollars, they are produced by people running computers all around the world solving mathematical questions. Because creating (or "mining") blocks is so crucial to the Bitcoin network and very difficult, the Bitcoin protocol includes a mechanism to encourage people to mine: every time a block is added, the miner who found the block is given 50 Bitcoins as a reward. The Bitcoins are stored electronically. The total number of Bitcoins ever created will be 21,000,000, and the current money supply of Bitcoins recently passed 11,000,000. It is for this reason that the value of Bitcoins continues to explode higher. They were made to do this. When bitcoin was first created in January 2009, each 10 minute block paid 50 Bitcoins, and this number will halve every 4 years until the last coin is created in 2140. The first halving is expected to occur on Wednesday Novemeber 27, 2013, so the current creation rate is 25 bitcoins every 10 minutes. Bitcoins has, to put it mildly, reached a fever pitch in the media and it this reason we are looking for ways to invest on this hot item.

This brings us back to the partnership deal ETAK signed with Ven and the underlying reason for it - SECURITY. With all this Bitcoin wealth flowing around, and the currency existing only in digital format, security is a major issue. ETAK's SMART, is aimed specifically at addressing inherent security needs in virtual currencies - subscription, management, administration - and ensuring the integrity of transactions resulting from the global usage of virtual currencies where authentication, privacy and/or data integrity is paramount. Ven will debut platform extensions featuring scalable security solutions later this year with an expanded set of consumer offerings with corporate partners. This is the 1st stage on the adoption of the Bitcoin currency in average life and could make ETAK a major player in the Bitcoin market in the coming years. According to Pat Carroll, CEO of ValidSoft, "We have customized our SMARTvc™ architecture for authenticating mobile payments utilizing virtual currencies transactions and we intend to become the industry leader in securing the virtual currency space."

Looking at the financials of ETAK we find the following:

  • During the third quarter of 2013, Elephant Talk's margins grew to 79%.
  • This monthly recurring revenue mobile and security business now accounts for approximately 96% of Elephant Talk's revenue base.
  • Year-over-Year Adjusted EBITDA improved $2 million to a loss of $85,000 when compared to a $2.1 million loss during the third quarter of 2012

The chart below shows the transition of ETAK from its unprofitable business lines to the new profitable digital security market. Margins are up. The company is now at breakeven. Over the last five quarters ETAK has turned in 13% average revenue growth per quarter. If we assume this growth continues for the current quarter, as noted in the chart below, we obtain $5.65m in revenue. Based on the 79% gross profit margin the company reported for the last quarter we obtain a profit estimate of $513,500.

Bitcoin may be a bubble or it may be the dawn if of the adoption of a new currency. As investors we are always looking for ways to invest in the what is the next growing trend. Until now there have been no other ways for investors to get a piece of the Bitcoin market. Through its recent deal with Ven, ETAK appears set to fill that void. To add to the investment thesis on ETAK we also looked at its financials and surprisingly they are also very attractive. Based on its current growth rate, ETAK is set to become profitable in the current quarter, making it a turnaround stock as well. ETAK's solutions are also being rolled out in UK banks right now so there is much more to this story that investors should look into. Bitcoin sympathy and a turnaround story make ETAK a very intriguing company right now!

Disclosure: I am long ETAK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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