|Shares Out. (in M):||9||P/E||17.3x||13.8x|
|Market Cap (in M):||68||P/FCF||1.6x||10.5x|
|Net Debt (in M):||-41||EBIT||8||10|
Trading at 2.9x growing EBITDA, both The Company itself and its largest shareholder are competing to buy stock of this industry leader that recently expanded its market opportunity 20x.
1) Commands 50% share of its core audio conferencing market
2) Recently expanded its market opportunity 20x through the acquisition of VCON
3) Is uniquely positioned to exploit a paradigm shift in the video conferencing space
4) Recently won a net $23.5m after tax settlement resulting in 80% net working capital to market value
5) Recently announced a $10m share repurchase plan (15% of the company)
6) Received notice that largest shareholder wants special dividend and plans to increase his holdings pursuant to a 10b5-1 filed two weeks ago
7) Will generate $9.7m of EBITDA in ’13 resulting in 2.9x EBITDA
8) Would trade for $15 (100% upside) even after applying a 30% haircut to the average multiples of public peers and recent M&A transactions.
ClearOne Communications (CLRO or The Company) provides audio conferencing systems to large enterprise and organizations. CLRO’s systems provide clear, crisp, full-duplex audio for large venues such as auditoriums and board rooms, as well as desktops and small conference rooms. The Company’s products are typically integrated into complex unified communications (UC) systems by System Integrators.
Through its acquisition of VCON, CLRO entered the Video Conferencing space with a software solution which significantly expands its market opportunity and specifically exploits the paradigm shift happening now in the video conferencing industry.
LEVERAGING DOMINANT MARKET SHARE TO EXPAND INTO ADJACENT VERTICALS
According to Frost and Sullivan, ClearOne leads the market for installed audio conferencing endpoints with roughly 50% market share. Management has continually integrated new technologies into its portfolio and maintains market-leading pricing. We estimate that the core market for professional installed audio is roughly $65m p.a. and CLRO generates $32m of revenue from this market at very high margins. Including desktop and conference room audio endpoints, the overall audio opportunity is roughly $200m for CLRO. Within this TAM, CLRO has been able to generate $40-50m annual revenue at 15-20% EBITDA margins.
It is from this solid foundation that CLRO has added complementary technologies in adjacent verticals that can be sold through existing channels. With the acquisition of VCON last February, CLRO entered the HD Video Conferencing space and increased the company’s overall TAM by more than $4bn (20x traditional TAM). This significant leap in revenue opportunity means that even capturing 1% of the Video Conferencing market would nearly double CLRO’s revenue. What’s more, as we look out at the competitive landscape and tectonic paradigm shift in delivery platforms, we think that ClearOne is attractively positioned to capture a needle-moving share of the video space.
ATTRACTIVELY POSITIONED IN $4BN VIDEO CONFERENCING MARKET
There is a paradigm shift happening in the video conferencing industry from on-premise, hardware-based appliances to software-based and cloud delivered solutions. This has been a difficult transition for incumbent hardware providers and has allowed new entrants into the market.
The following are recent excerpts from video conferencing heavyweights:
Clearly the industry is in a transition as it relates to hardware-based to software-based video conferencing. I think there are companies that are offering a video-as-a-service or software-only product that are easy to implement and that are attractive to the CIO. Clearly it is a question of do I have to have a dedicated appliance.
-Polycom CEO, 17 May 2012
We’re seeing a new set of choices. What used to be traditionally hardware is now supplemented by software-based client options, infrastructure as a service or video collaboration as a service, etc. We’re starting to see CIOs pause and ask the question in the context of a pervasive rollout exactly how they fit in video collaboration and support the heterogeneous endpoint environment. It’s a combination of multiple factors creating the pause we’ve seen.
-Polycom CEO, 28 November 2012
I’m taking a hard look at whether we are the best owners of LifeSize given the evolving dynamics in the video conferencing space.
-Logitech CEO, 24 January 2013
The collaboration market is seeing a lot of market transitions. What’s happening is a lot of the value is increasingly moving from on-premise to software delivered from the cloud as a service.
-Cisco’s SVP of Video Collaboration, 12 March 2013
We think that CLRO is well positioned to capture share in the video conferencing market for several reasons. When it comes to capturing share from the incumbents:
1) CLRO doesn’t have to transition away from an existing appliance-centric model. Their entre is via software
2) Having video with audio is key. The channel wants full solutions. Meanwhile, CLRO’s video products are fully interoperable with leading systems
3) CLRO is already selling to the Enterprise with a widely recognized brand name and an existing channel
4) CLRO has a large SMB customer base which is underpenetrated and offers a sizable long-term growth opportunity
When it comes to outperforming newcomers (Vidyo, BlueJeans, etc.)
1) See #s 2 and 3 above
2) Prior to acquisition, VCON spent $100m and 10 years developing their system
3) CLRO just added Adi Regev as VP of Video Conferencing, stealing him away from Vidyo
4) CLRO’s is a comprehensive product suite rather than a standalone endpoint solution or cloud bridge
Polycom’s CEO validated CLRO’s position with his recent commentary (2Q12 Earnings Call): “Start-up companies in this space are at a disadvantage selling to the enterprise where interoperability and investment protection is critical.” CLRO is a highly recognized brand name at the enterprise level and their products are fully interoperable!
As an aside, this transition reminds us of another industry undergoing a shift from on-premise appliances to cloud-delivered solutions. DGIT has servers behind the firewall in thousands of TV affiliates around the country and is #1 in delivering advertising spots. Its founders left the business, waited out their non-compete period, and formed ExtremeReach, delivering spots in the cloud at a fraction of the price. DGIT refuses to acknowledge the transition which has contributed to its stock falling substantially over the last few years. Given the precipitous fall, we tend to like DGIT down here but the moral for us is that once this type of transition takes hold, an industry will quickly re-contour to include new technologies. The good news is CLRO is positioned on the winning end of the transition.
RECORD REVENUE, NEW PRODUCTS, EXPANDED CHANNEL
CLRO conservatively recognizes revenue on sell-through to the end customers. After a poor start to 2012 along with the entire industry, CLRO’s 4Q12 revenue came in at record levels with the Video segment growing almost 50%. This is promising as CLRO launched its new line of COLLABORATE video conferencing products at InfoComm in mid-June. CLRO has also been refreshing its audio lineup, unveiling a new Digital Wireless Microphone System which will complement the existing Pro product lines and, management believes, will drive incremental system demand.
We have also seen momentum in distributor relationships. Since CLRO’s COLLABORATE family of products was introduced, the Company has announced the following:
2/26/13 – NewComm now distributing full line of software-based conferencing solutions
1/29/13 – VSO Marketing now distributing full line of software-based conferencing solutions
1/22/13 – Starin Marketing now distributing full line of software-based conferencing solutions
12/6/12 – D&H to distribute conferencing solutions and USB, analog, and VoIP conference phones
10/22/12 – Ingram Micro to distribute conferencing solutions and USB, analog, and VoIP phones
We note that both D&H and Ingram Micro mark CLRO’s development of the IT channel, where it did not previously have a presence. This is a large, untapped opportunity as Audio/Video converges with IT.
Further, management’s comments have been extremely positive. Short of giving forward guidance, CEO Zee Hakimoglu stated that she expects the positive 4Q12 momentum to be sustained and further propelled.
Despite significant progress made with respect to market opportunity, products, and distribution, CLRO’s enterprise value is well below its long-term average.
STRENGTHENED BALANCE SHEET LEADS TO COMPETITION FOR SHARES
CLRO landed a $45m settlement from UBS in December. The result was sealed however, until a similar lawsuit against Morgan Stanley was concluded. After paying a 15% fee to Lawyers and accruing for taxes on the net, CLRO ended up with $23.5m which, when added to existing cash balances and cash flow generation, results in $40.7m of cash. Net working capital represents 82% of CLRO’s market value.
Prior to the settlement, the Board of CLRO had instituted a $3m share repurchase program. Following the settlement, on February 21, the authorization was increased to $10m, or roughly 15% of the company at today’s prices. This apparently irked CLRO’s largest shareholder, Edward Bagley (former Board Chair, father of director Bryan Bagley, 30% holder). Whereas we typically see insiders enter into 10b5-1 plans to systematically sell stock, Ed Bagley filed a 10b5-1 to buy more. He also filed a 13-D demanding a one-time dividend.
Over the last seven years, CLRO has reduced share count by over 25% through stock repurchases.
In the past few quarters, inventory has been higher than management wanted it. Previously, The Company noted that monetizing its inventory wouldn’t be cost effective and that levels remained inflated due to CLRO’s preferred vendor status with VARs. After a $2.7m sequential decline in 3Q12, the inventory balance fell a further $1.6m in 4Q12 and CFO Narsi Narayanan stated there is further room to optimize as it steadily draws down $500k-$1m per quarter going forward.
GROWING SALES/EARNINGS, SEVERELY DEPRESSED VALUATION
We strip out VCON revenue from 2012 and assume the core business grows 4%, in line with PCLM (though we think it can grow faster). We add $4m, an average of $1m per quarter for video. Video was at a $600k quarterly run rate in 4Q before the channel was filled or fully trained. This results in a $50.4m top line in 2013.
We use a 60% gross margin, in-line with the long-term average (sans 2H12 inventory write-down) and that which CLRO manages the business for. Management has also guided to 60% as a long-term sustainable margin.
We keep S&M constant at 17.5% of revenue, give R&D a bump up, and get a meaningful reduction in G&A as legal fees and litigation bonus go away. The result is $9.7m EBITDA remaining conservative line-by-line, or 2.9x EBITDA.
We view EBITDA as meaningful given that The Company is amortizing acquisition-related intangibles and that the capital structure is clearly out of balance. On a cash flow basis, we think CLRO will generate $7.2m CFO (before any positive effects of working capital as they draw down inventory) and capex runs about $500-700k per annum. As such, CLRO is trading ~4x EV/FCF. Looked at another way, taxing EBITDA at a 37% rate results in $6.1m NOPAT, or 4.5x EV/NOPAT.
Note: We use 9.2m shares, a $7.45 price, and net $14.8m of deferred tax liability with the $55.5m cash position to arrive at a $27.8m adjusted enterprise value.
We think that a leader in its respective niche, with compelling opportunities for growth, well-positioned to capture market share from incumbents, generating significant, sustainable, and growing cash flow should command a valuation closer to its peers. If we apply a 30% haircut to the average peer multiple on either sales (of unprofitable peers) or EBITDA (of profitable peers), we arrive at a valuation 100% higher than today’s.
Mid-decade, CLRO held $12.2m in ARS from UBS and Morgan Stanley, which turned out to be illiquid. In 10/08, CLRO accepted offers to repurchase the $12.2m at PAR but did not waive any claims for consequential damages. CLRO subsequently sought damages as a result of their inability to access funds invested in ARS that UBS and MSCO had sold them, including losses with respect to a planned strategic business acquisition and related due diligence costs. The settlement was paid in December 2012, but not announced until January 2013. As such, the value is reflected on the 4Q12 balance sheet.
This report is neither a recommendation to purchase or sell any securities mentioned. The authors may or may not have a position in any security discussed in this report. Further, the authors may buy or sell shares in any company mentioned, at any time, without notice. The information contained herein is believed to be correct as of the posting date. Readers should conduct their own verification of any information or analyses contained in this report. The authors undertake no obligation to update this report based on any future events or information.
|Subject||How are options treated in a one time dividend?|
|Entry||03/27/2013 09:00 AM|
Great find. Thanks for highlighting this opportunity.
While Chairman Bagley owns a quarter of the company, it would appear that he may face resistance in the Boardroom. His son is on the Board, but does not sit on a committee. The other four Board members consist of the CEO and three people that own very little stock.
The CEO draws a light salary and only owns 77k shares outside of her options position. If the company pays a $3 special dividend, do her options reset down by $3? I assume this is the case, but I don't see this in the proxy anywhere. If not, it would be against her self-interest (and the Boards) to pay a special dividend -- such is the deficiency of granting options:)
Anyone have any insight here? Overall, the Board looks very weak and probably reflective of an insular culture.
|Entry||03/27/2013 09:18 AM|
After reading this write-up, I was surprised at the price action over the past 8 years. For much of that time, the stock treaded water in the $4-5 range (i.e. right where it is now taking out the arb winnings). Clearly, they could not have been producing anywhere near $9mm of EBITDA over those years or else the stock would need to be much higher. So excluding the video piece, why can we be confident that the $9mm EBITDA is sustainable and we will not see the more frequent $2mm-ish EBITDA that we saw over past 8+ years?
|Subject||RE: How are options treated in a 1x dividend?|
|Entry||03/27/2013 04:55 PM|
Hi rab, good question. The '07 Equity Incentive Plan contains the following:
"Options may be granted at any time and from time to time prior to the termination of the Plan to Participants as determined by the Administrator. No Participant shall have any rights as a shareholder with respect to any Shares subject to Option hereunder until said Shares have been issued, except that the Administrator may authorize dividend equivalent accruals with respect to such Shares."
"The number and kind of Shares available for issuance under this Plan (including under any Awards then outstanding), and the number and kind of Shares subject to the individual limits set forth in Section 5 of this Plan, shall be adjusted by the Administrator as it determines appropriate to reflect any reorganization, reclassification, combination of shares, stock split, reverse stock split, spin-off, dividend or distribution of securities."
|Subject||Thoughts on results?|
|Entry||05/02/2013 11:04 AM|
Hi Lukai. Non-GAAP adjusted EBITDA increased by 34% to $1.6 million, or $0.17 per common share, compared with $1.2 million or $0.13 per common share. That appears to be roughly roughly inline with your thinking. I'm surprised given the inline result that the stock is getting taken to the woodshed like this. Any additional thoughts on the quarter?
|Subject||RE: Thoughts on results?|
|Entry||05/03/2013 10:29 AM|
Hi MM...I was pleased with the results. CLRO's record 1Q13 handily outperformed peer growth in the quarter:
Gross margins were above management's target largely due to mix. As you mentioned, EBITDA grew 34% and EPS grew 52%. Meanwhile, the balance sheet remains strong with $42.6m of cash while net working capital represents 73% of CLRO's market value.
Management mentioned a 50/50 mix of AV/IT channels at maturity. Holding AV constant, building out the IT channel beyond UC could have a substnantial positive impact on revenue. They're also targeting additional Pro Audio market share gains through an earnest pursuit of the microphone market where they haven't been before.
There may have been some guys in the stock expecting a real discussion around a cash dividend given that Ed Bagley filed his D/A subsequent to the last quarterly conference call...nonetheless, the results were good in a difficult market (in my opinion) and CLRO has several internal and external opportunites to grow throughout the year.
|Entry||02/26/2014 10:58 AM|
rumor FB buying for headets for whatsapp . . . joking
this stock has traded extremely sloppy for quite some time. if i was inclined to be a trader-type, i'd sell some here and take the chance that the buyer has insider information as to tomorrow's news.
|Entry||02/27/2014 10:37 AM|
Do you have thoughts on how your thesis is playing out before the earnings call?
Also, why did they halt stock?
At S=$11, I have TEV of $60mm not including $5mm for Spontania. And I have run-rate EBITDA of about $11mm with $1mm of capex so unlevered FCF of $6.5mm (9.2x).
If acquisitions are completed, I would certainly like to see them return $20mm of the pro-forma $38mm cash (after Spontania) via shr buybacks.
Thanks for your thoughts.
|Entry||10/14/2014 10:42 AM|
In an effort to restart the conversation I post the following.
CLRO's stock is down 20% in the last 45 days as small caps and illiquid names have been extremely weak. Maybe it's being subkected to tax loss selling now before mutual fund year end in October?
The stock trades still at 4.4x EV/EBITDA for 2014 and at 0.7x EV/sales. BV is $7.64 p/s as of the 2Q14 balance sheet and Tangible BV is $5.41 p/s. They have $32.3 mm in net cash or $3.33 p/s (42.8% of their mkt cap at this price).
They buy companies at what seems to be multiples of sales indicating that the PMV of this business is higher (competitors also pay multiples of sales).
My understanding is that the company has to fight a proxy battle again this year against their largest holder to make sure that his shares aren't qualified for voting again. For some strange reason, even though CLRO is on a calendar year end, they still have their annual meeting at the end of November. Ridicoulous.
Any insights into what might jumpstart this comapny to get closer to its PMV? Can this happen w/o a sale of the entire company?
|Entry||10/15/2014 08:30 AM|
nt my thread, but I think this is all about the mgmt. Are they going to use cash wisely or blow it on acquisitions? Are they willing to sell? Clearly, at $7.80, there is value here if mgmt does not screw it up. So I would argue this is a case where only clear catalyst is sale of company.
ONVI, AGYS, and CLRO -- three small-cap VIC ideas where waiting for sale. CLRO seems most likely for mgmt to blow the cash on acquisition. I would say AGYS least likely to blow cash and most likely to attempt sale. On the flipside, unlike the other two, CLRO is producing the most positive cash flow (EBITDA-capex) while we wait. We have been dipping our toe with the selloff in these three names, but think all three could linger for a long time.
|Subject||RE: RE: CLRO|
|Entry||10/23/2014 11:34 AM|
Thanks. I agree that mgmt is key here. The comapny just reported pretty good #'s. 15% yr/yr. growth ex the recent acquisitions it seems. Balance sheet still strong and trades at 5x 2014E EBITDA and 0.89x EV/sales. They bought back stock smartly as well. Wild. They should pay a $2 p/s dividend, buy back more stock and then look to grow nicely in 2015 and if they dont get the stock up, they should sell the company.
Stock should be up 35% right now. We will see. cc started now...
|Subject||Update on valuation and business|
|Entry||06/15/2015 12:54 PM|
I just updated my CLRO model and read through the latest financials and transcripts. I think that CLRO is on track to have a pretty good year. They have a lot of new products and their margins are expanding nicely. FY12 GM were 58.9%, FY13 were 60.2%, FY14 were 61% and in FY15E I expect 62.5% (1Q15 was 62.3%).
TTM EPS (non-GAAP) are $0.85 p/s and GAAP are p/s. I expcet close to $1 p.s in 2015.
The company has $3.82 p/s in net cash and generates FCF pretty much every year.
I value the business at $20+ p/s or 9x 2016E EBITDA and around 2x EV/sales. I expect the company is a potential acquisition for a large, better funded multi-national (such as Panasonic, Logitech, Polycom, Avaya, etc.) who can take out synergies easily and likely double CLRO's EBITDA, which would be only 5x at $20 p/s. So theoretically if someone wants what they have, they could pay more.
The challenge is getting CLRO's stock higher so that a normal small cap deal premium (35-50%) could be applied.
|Subject||Re: Update on valuation and business|
|Entry||07/23/2015 11:49 AM|
Hi repetek, with regard to a potential takeout, have you seen the most recent proxy? Bagley (~35% owner with his son) has pushed for a sale/special/recap/etc. in the past. He was hired by the board as a consultant to begin at the end of this month with the following responsibilities (emphasis mine):
Consultant agrees to provide consulting services to the Company in connection with strategic decisions and planning including, without limitation, merger and acquisition discussions, private equity discussions, tender offers, lines of credit, market makers, and new lines of business. Consultant will spend a minimum of twenty-five hours per month engaged in such services for the benefit of Company. The Company shall invite Consultant to attend meetings of the Company’s Board of Directors, on an as needed basis, for the purpose of reporting on and discussing his consulting activities. It is not anticipated that Consultant will be present at the Company’s offices on a daily basis. The Consultant will not participate in the day-to-day decisions of management.
|Subject||Re: Re: Update on valuation and business|
|Entry||11/09/2015 01:32 PM|
I don't know what of make of this. A means of keeping him satisfied and quiet? Very strange. But then again, the mgmt here is very strange. The company should be worth more than it is but they need to have a couple great sales growth quarters to get there I believe.
Clearly, CLRO should look to sell themselves to someone who can take this to the next level. I doubt the current CEO is up for building this into a $100 mm sales based business.
|Subject||CLRO 3Q15 EPS solid|
|Entry||11/19/2015 09:32 AM|
The cc starts later but they have $4.41 p/s in cash (up $5.2 mm sequentially - no idea how that happened unless they worked WC hard) and no debt and TTM EPS (adjusted) is $1.02 p/s. Stock should be $20 and they should sell to a larger company...
|Subject||Question from a strategic perspective|
|Entry||07/14/2016 10:45 AM|
If you were to want to prod CLRO to do something and become a bit more activist, what would you do? Would you tell them to just sell? Push them to have mgmt own more stock and then ask for a Leveraged recap and one time dividend? improve supply chaina nd inventory turns, bjuy back stock and then sell? Who is the natural buyer?
Thanks for your ideas.