BroadVision: Profitable, But Selling for Less than Cash

Includes: BVSN, OTEX
by: Mark Gomes

Last week, Broadvision (NASDAQ:BVSN) announced weak Q4 results. Over the next couple of days, the stock sold off...and right into my risk/reward wheelhouse.

After last week's drop, BVSN's stock now trades for LESS THAN CASH, even though the company remains profitable. At present, it is the only company of the hundreds I follow with this profile.

Staying profitable is not hard for BVSN. It is able to remain profitable even during bad quarters because of its large base of maintenance-paying customers. Many customers have tightly integrated their Broadvision software with their SAP implementations. Because of this, they are locked into paying BVSN's annual fees whether they like it or not. In fact, some customers are unhappy about paying, but maintenance is a form of insurance. If a critical system goes down and the CIO doesn't have that insurance, he/she could quickly end up unemployed.

What's great for us investors is that BVSN has been using its maintenance profits to fund R&D (currently around $9M annually) on a Web 2.0 offering and HR software for sale into the Chinese market. Since customers can't risk going without maintenance, they're essentially footing the bill for the company's new growth initiatives.

According to my calculations, its adjusted net tangible value (my company's proprietary measure of the value of a company's balance sheet and off-balance sheet assets) is over $70M. Meanwhile, its market cap is hovering around $55-60M. Therefore, its adjusted enterprise value (EV) is currently NEGATIVE $10-15M. For a profitable company, a negative enterprise value is rarely seen. When we consider its $15M base of annual maintenance revenue, its market cap becomes even more astounding. In fact, BVSN currently has the most attractive EV/M ratio in the software universe, to my knowledge.

Looking at the company's profitability, if management decided to cut back on R&D and SG&A, I'm confident BVSN could generate $2.00 in annual cash earnings. With the stock trading in the low double digits, that's another favorable ratio for investors.

As it stands, Broadvision is investing heavily in R&D and SG&A. This holds EPS below its potential, but again -- earnings are still positive. This is a testament to the value of BVSN's maintenance revenue stream. BVSN also has a growing base of subscription revenue, based on the ramp of its newer Web 2.0 and HR products. That subscription stream is helping revenues, but holding earnings back for the time being, because of the initial investment required to support subscription services. That being said, after the early work is done, subscription revenues produce high marginal profits, especially in terms of cash generation.

Based on my research, Broadvision has chosen its new initiatives wisely. Web 2.0 and HR are presently among the hottest areas of the software market. Social networking (i.e. Facebook) and mobile computing (i.e. iPhone apps) are forcing companies to replace their old (circa 1999) Internet software. End-user demand for next-generation systems is growing rapidly, which has already benefited public companies like SDL (SDLLF or SDL on the London exchange) and Day Software (DYIHY or DAYN on the Swiss Exchange). It is also one of the reasons Open Text (NASDAQ:OTEX) acquired Vignette (VIGN).

The results have been unquestionable. Over the past few months, SDL's shares have risen 40% and Day Software's stock has more than tripled. Obviously, this bodes well for BVSN, as its new offerings take hold in the marketplace.

Disclosure: I hold a long position in BVSN

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