Radvision and Alvarion: 2 Companies Back From the Dead

Includes: ALVR, AUDC, RVSN
by: Shlomi Cohen

The unpleasant surprise that Cisco (NASDAQ:CSCO) gave investors last week led to a weekly drop of 2% in all the indices, the largest in the past three months. In the coming days, we will find out whether this was a deluxe correction on Cisco’s back, the first stage of a substantial correction of 5-10%, or the start of the collapse that experts have been predicting for some time and that refuses to arrive. The American consumer, who has always borne the market on his back, will be the center of attention in the next few weeks.

This week is the middle of the quarter, and a good time for a round of checks on the Israeli companies I hold in my portfolio, particularly in the light of Cisco’s warning for the quarter it began this month. The other day, I visited two companies that specialize in complementary areas of the telecommunications market: AudioCodes Ltd. (Nasdaq: AUDC), which does VoIP, and Radvision Ltd. (Nasdaq: RVSN), which does video. Both beat analysts’ estimates for the third quarter, both guided for further growth in the fourth quarter, and on Monday both repeated their guidance unhesitatingly.

What’s interesting is that both companies, according to their recent announcements, are partners of Microsoft (NASDAQ:MSFT) in launching its advanced platform for unified enterprise communications, Lync 2010, launching today with great fanfare.

I emerged from the two companies greatly encouraged, because both are enjoying marketing and technological momentum with many important partnerships, which in my opinion will ensure continued growth, not just in the current quarter but next year as well.

What has happened at Radvision in the past year is astonishing. Only a year ago, the analysts labeled the company moribund, and sent investors in panic to the escape hatch with “Sell” recommendations that cut the share price to a low of $5.5, compare with a peak of $24 three-and-a-half years ago. That happened because Cisco, which accounted for 40% of Radvision’s sales, announced the acquisition of its Norwegian competitor Tandberg, which led the video communications technology market. It was clear that with this acquisition Cisco would gradually abandon Radvision as a provider of infrastructure components for such systems.

Radvision CEO Boaz Raviv will presumably meet the guidance he gave for the current quarter, sales of around $26 million, which is unbelievable, because it means an all-time record quarter for this “moribund” company. Most analysts have deserted it, and now Raviv has to explain to investors who paid $24 per share at the time of the previous sales record ($25 million four years ago) that it is worth their while to return, because this time, for sales higher than the previous record, they will pay less than $8 per share, of which $6 represents cash.

During the grace period given to it by Cisco-- which for its part has found it hard to do without Radvision’s superb infrastructure components-- Radvision has managed to develop excellent, and relatively cheap, end-user systems for video conference calls. The contribution of these systems in the fourth quarter will be higher than the lost sales to Cisco, which-- as mentioned-- will mean all-time record revenue.

Radvision has not entirely set out on an independent path, but the technological developments it is currently working on, in addition to collaborations it has with giant companies that compete with Cisco, are likely to make 2011 one of its best years, at the end of which it will thank Cisco for abandoning it.

Still a market for WiMAX

After seeing how a company can make a turnaround like that, I am now adding to my portfolio another company considered moribund until not long ago, Alvarion Ltd. (Nasdaq: ALVR). In contrast to Radvision, which in my view was never really moribund, Alvarion is still risky, and is in the recovery room after difficult surgery, but I believe that it is on the verge of several flourishing years.

Alvarion’s good fortune is that, during the tough years, it had enough cash and no debt, and at its last reporting date it had about $1.60 cash per share.

I haven’t changed my opinion that WiMAX, in which Alvarion specializes, has lost its chance of leading the fourth generation to LTE, which giant telecommunications carriers worldwide are adopting daily.

On the other hand, there is still a huge market in the third world and in mountainous regions in the West in which there is room for WiMAX, and Alvarion has recently had fair success in securing huge contracts, alongside large and small ones.

The third quarter financials indicate to me that CEO Eran Gorev has carried out painful surgery in current expenses, that over the years prevented Alvarion from making money. Gross profit is still disappointingly low, and I believe that, with the expected rise in revenue, benefits of scale will lead to a considerable fall in selling costs, in turn leading to higher gross profit, and in the end to a substantial net profit.

I am introducing Alvarion into the portfolio in place of the company Gorev came from, Amdocs Ltd. (NYSE: DOX), because in the current transition period between CEOs there, I prefer to be on the outside.

Published by Globes [online], Israel business news - www.globes-online.com - on November 16, 2010 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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