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My investing philosophy mostly centers around the Value discipline and GARP- Growth at a Reasonable Price. This blog includes commentary on market conditions as well as fundamental analysis of specific companies. Graduated from Rhodes College with a degree in Business with concentration in Finance & Marketing. Currently working on obtaining the CFA designation. Previously worked in Mortgage Trading for a major bank. Use MS Excel extensively for developing investment models, notably valuation models based on DCF methods.

Sunday, February 10, 2008

Authentidate Expects Cash Flow Break-even in 12m

Authentidate (nasd: ADAT) reported its 2nd quarter financial results last Thursday (Feb 7th) - Revenues increased 66%- to $1.66 million versus $1 million for the year-ago quarter. Sequentially, Sales for the 2nd quarter grew 58%. . ADAT continues to lose money, posting a loss of 29 cents a share. Yet, gross margin was 68% for the period. ADAT ended the quarter with a 23.3 cash position.

The most significant development was management announcing plans to achieve cash flow break-even in 12 months.

ADAT is aggressively cutting costs and reducing headcount by 20%. Management believes increasing revenues and reduced SG&A costs will result in positive cash flow hopefully in 12+ months. In addition, the company believes they will have abundant cash (stilll) when they reach that milestone.

ADAT feels revenue growth should continue to accelerate from the addition of new customers. Many existing customers are in the beginning stages of implementation, and revenue will rise as they ramp up usage.

Last November 15th, I wrote about the attractiveness of ADAT: ADAT- Attractive Speculative Play. My thesis was ADAT is attractive because it trades for less than cash on hand, and it’s growing the top-line as well. It doesn’t make sense for a company to sell for less than cash unless it’s heading straight for bankruptcy and/or has significant outstanding litigation. That was a real possibility for ADAT, but now it's looking like ADAT has cleaned up its legal issues and has embarked on a plan to reverse its cash bleed.

Fixed costs and one-time expenses are the primary factors impeding profitability. Gross margins are about 70%, which should improve with volume. ADAT’s core risk was not prospective growth materializing; moreover, it was whether ADAT cold remain afloat long enough for the adoption to take hold.

Heavy year-end tax selling coupled with general lack of interest have knocked down ADAT shares lately, leading to undervaluation. Authentidate’s had a strong balance sheet due to piles of cash and no debt. Income statement should shape up as the company continues to grow and cut costs. The catalyst for significant price appreciation hinges on achieving CF break-even. In the meantime, I believe ADAT shares are worth are least $1.

Businesses are often reluctant to implement new IT when current processes aren’t broken. The attempt to capture cost savings entails a risk of creating costly, unforeseen problems. Often, the hurdle is reaching critical mass- tested and proven among multiple firms. No firm is eager to be the guinea pig; but once several are on board, others are quick to sign up. In US, ADAT is in the stage of building a foundational user base; the initial customers are the most difficult to attract, Signing up customers will become easier with every new customer addition because a large user base legitimizes the product/service. Existing customers, in a way are vouching for the ADAT's e-doc solution.

Authentidate’s traction has been much slower than expected, but recent signs are pointing to a ramp-up in customer adoption. In a recent article:ADAT- Gaining Traction, I highlighted Authentidate’s recent contract developments.

BULLet Points:

1) Cash Holdings > Market Value
2) Book Value per Share- $ .97
3) Revenue Growth- TTM: 45% MRQ: 66%
4) SGA expense expected to decline significantly + high GM =>Operating Leverage

ADAT shares rose 30%, to 61 cents in Friday (2/8) trading, pushing its market cap up to 21m. The stock spent the morning session trading below the open, before gaining momentum to end the day up 14 cents & accompanied with strong volume.

Disclosure: Long ADAT


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