Note:Due to limited liquidity, this idea is possibly suitable for small funds and PA’s.
Alteva, (formerly WVT Communications or Warwick Valley Telephone) historically was a plain vanilla ILEC landline business for over 100 years. They began to transition in the late 2000’s with technology acquisitions in 2009 and 2011, both of which created the UCaaS (Unified Communications as a Service) product they offer today. Currently, about 50% of ALTV’s revenues are from the UCaaS business (recurring revenues) and the rest is from the legacy landline business. The legacy business is currently generating a little cash and is funding part of the growth of the UC business.
Alteva offers a complete UC solution – Voice Over IP (VOIP), Collaboration, Video, Archiving, Email, Mobility, etc. They do not build the technology themselves, rather they supplement their product offering with the newest innovative technology from leaders like Microsoft and Broadsoft. This allows them to stay nimble and move with the industry as opposed to their competition, who develops all of their own technology and faces technology obsolescence risk.
The UC business will likely generate $20+ mln in revenue this year (50% growth YoY) which we believe is very conservative (they grew by 60%+ in 2012). Management has not issued much in the form of guidance but they have projected to be EBITDA positive by the end of 1Q14. There is a growing recurring revenue component to this story and as it scales, they will reach a tipping point. Gross Margins were 57% in Q2 (up from 50% in Q2 ’12), driven by the growth of the UC business.
Off Balance Sheet Asset:
Alteva, holds a very valuable asset that gives the stock some unique downside protection. In 1987, Altvea invested alongside NYNEX (now Verizon Wireless) in a partnership called the Orange County-Poughkeepsie Limited Partnership. In 2011, Verizon and Alteva updated the agreement which allowed for the following guaranteed payments/agreements:
Guaranteed minimum quarterly dividend payments to Alteva of $3.25 million for 2012 & 2013, thereafter based on financial performance of the Partnership.
Put option to sell their partnership ownership back to Verizon for minimum $50 mill in April 2014
If the Put is not exercised in April 2014, the dividend payments will revert to non-guaranteed quarterly payments based on the financial performance of the Partnership, until 2017.
The net/net is that Alteva will, in fact, exercise the Put option. So, between now and April 2014, following are the Verizon payments to Alteva:
1. $3.25 mill in Q3 2013 (has already been paid but ALTV has not released their qtrly results yet);
2. $3.25 mill in Q4 2013;
3. $2 mill in Q1 2014 (depends on financial performance)
4. $50 mill in April 2014
The current market cap today is $46 mln. If you tax effect the incoming cash payments, the company should net about $40 mill. Suntracting the $15 mill in debt, ALTV should have a net cash position (pro forma to all payments and taxes) of $25-$30 mill. So, ALTV currently is left with an Enterprise Value of $16-$21 mill.
The reason the stock is where it is now is because they discontinued paying their dividend on August 12. This was the right decision, as the company is now a growth company. But, the dividend cut drove a lot of retail, dividend oriented shareholders to run for the exits. This has created a unique buying opportunity, in our opinion.
The UC business is conservatively worth 2-4x revenue. That’s $40-$80 mill of value ($6.50-$13/share). Assuming the ILEC is worth zero- they may be able to sell it for a few million at some point. Add back the net cash ($4-$5/share) and you have a company whose stock price should be able to get to $10 conservatively and up to $18 potentially.
Over the next 6-9 months, we would expect the following to occur: the company to pay down a portion of their debt with the $6.5mln due from the partnership through the balance of this year. Would also expect them to continue to show growth on the UC side and move towards EBITDA positive.
If you are new to UC, these videos do a decent job explaining it and showing it. The adoption curve on UC is just getting started. UC becomes a competitive advantage for companies, in terms of cost savings and increased productivity.