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Archive for June, 2007

Extreme Networks (EXTR) Submits Updated SEC Filings

June 28th, 2007 by Yehuda Fruchter   |   No Comments

Extreme Networks (EXTR), one of our dissappointing picks this year, has finally completed its options investigation and filed up-to-date financials with the SEC. We believe that this represents a turning point for the company, as it eliminates a major uncertainty that we think has held back the shares, even as Avaya, a big partner of EXTR was scooped up by private equity at a significant premium, and Foundry (FDRY), EXTR’s  main comp, has slowly regained favor with investors after it too finally filed updated financials with the SEC.

As we have mentioned in the past, the main knock against EXTR is that it simply can’t compete against CSCO or FDRY, as evidenced by declining US revenues in the last two years. However, despite the negativity towards the company, there are still signs of hope. Specifically, there is the company’s strong growth in regions outside the US, a host of new products that appear to be gaining some traction, and a highly capable new management team that is both restructuring the sales force and cutting costs. In addition, EXTR remains free cash-flow positive, has over $200 million in cash (no debt) and has little cap-ex needs. With a cost-structure that is being repaired (see the 8-K filed yesterday), we think there is plenty of room for financial improvement at EXTR even without much sales growth.

To top it off, EXTR’s stock price clearly has already priced in all the negatives. Currently, the stock is trading at 0.7 times EV/Sales, vs. FDRY 3.0X EV/Sales. In our view, the valuation gap makes little sense, and it’s possible that FDRY could consider a buyout of EXTR at these levels. Juniper is also, at times, rumored as a suitor for EXTR. In any case, the downside in EXTR now appears minimal, especially after the refiling of up-to-date financial restatements. On the upside, with even a small improvement in sales, the stock could easily double to $8, at which level the stock would still be priced at a major discount to peers, notwithstanding the company’s solid technology reputation.

Please Note: We first recommended Extreme Networks (EXTR) at $4.22, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Global Telecom and Technology (GTLT): New Investment Idea

June 21st, 2007 by Yehuda Fruchter   |   1 Comment

Please note: GTLT shares are highly illiquid. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Following on our success with our investments in Internap (INAP) and FiberNet (FTGX), we’re ready to take the plunge into another Managed IP services play: Global Telecom and Technology (OTC: GTLT.ob, current stock price: $2.40). We believe the shares offer an attractive investment opportunity in a business which should be familiar to investors in FTGX.

GTLT was formed via a SPAC entity (special purpose acquisition company), which ultimately late in 2006, used its cash to acquire two Virtual Network Operators (VNO’s): European Telecommunications and Technology and Global Internetworking. Apparently, disappointment over the acquisitions, and some degree of uncertainty related to seller promissory notes, caused a steep decline in the company’s stock price, providing an interesting opportunity for longer-term oriented investors.

In brief, our belief is that as the management team at GTLT reports several quarters of good numbers, investors will re-discover the growth story at GTLT and begin to price the security more in line with the valuations afforded to its peers, such as Vanco (VAN.L).

Business Summary

For a better understanding of GTLT’s Virtual Network Operator (VNO) business, which is quite similar to the off-net transport business of FiberNet Telecom (FTGX), we recommend you read thru the company’s recent presentation which is available in a recent 8-K filed with the SEC (click here for the fiilng).

In addition, potential investors may also want to review a recent Frost and Sullivan report on the VNO industry, a summary of which is available here. Our favorite quote in the article is this: “The barriers to entry are fairly high for VNOs (Virtual Network Operators), which helps to explain why there are only a few operating at this time.”

Capital Structure and Share Summary:

Shares Outstanding: approx. 12 million

Warrants: approx. 24 million with $5 strike price
Net Debt: $6 million
Estimated 2007 Sales: $65 million

Cannell Capital LLC owns about 48% of the stock.

Low Downside Risk

As regards to risk in GTLT’s stock, we think that the summary points below, demonstrate on a simplistic level that GTLT’s stock has little downside risk at current prices.

Specifically,

  • The current valuation (about $30 million) is nearly half of what was paid for the operating businesses late last year. So basically a current investor is able to buy two businesses at significantly less than private market value.
  • The relative valuation of GTLT is well beneath that of their largest competitor, Vanco, which trades in London under VAN.L and is valued at over 1.5X EV/Sales. GTLT.ob is at about 0.5X EV/Sales based on estimated 2007 sales of $65 million.
  • It appears that Vanco paid about 0.5X Sales for Univeral Access, a competitor of GTLT, during a bankruptcy proceeding, implying a worst case valuation for GTLT.ob at about current prices. However, GTLT.ob is not at any risk of bankruptcy at the present time, implying that one can buy a healthy growth company at bankruptcy-like valuations.
  • The Company is currently profitable on a cash basis, and the forecast is for continued EBITDA profits over the coming quarters.
  • The business has a diversified customer base.
  • The company’s Balance sheet, while not superb, is clean, with a manageable amount of debt, which primarily relates to seller financing.
  • Importantly, GTLT has a huge amount of warrants at a $5 stock price (see 10Q for further details). With these warrants well underwater dilution is not a factor. At the same time, if the stock price does recover the significant amount of cash generated via warrant exercises would provide GTLT with more than sufficient capital to grow the business.

Significant Upside Potential

In an addition to a depressed valuation noted above, we also believe that GTLT has substantial growth opportunities over the coming years. Again, we advise investors to read thru the company’s 8-K and the Frost and Sullivan report to get a handle on the growth potential here.

However, as always we’d like to point out that GTLT is run by a highly experienced management team, several of whom have actually been buyers of the stock on the recent decline. Specifically, the Chairman of the company, H. Brian Thompson, who had been buying shares in the $1.80 range, was the former CEO of LCI International, a high flying telecom outfit in the 90′s, which was sold to Qwest in 1998 for $4 billion. Furthermore, new CEO, Rick Calder, who also was buying shares recently above $2, was the former President of Inphonic (INPC), which had a high successful IPO. Mr. Calder was also an executive at Broadwing and WinStar, another former high-flying telecom company.

As should be clear, the management team of GTLT has extensive connections and experience in both the telecom industry and on Wall Street. They are also highly incentivised to make GTLT successful and increase the company’s stock price.

As noted above, as the management team at GTLT reports several quarters of good numbers, investors will re-discover the growth story here and the stock should rise to level reflective of industry valuations (i.e. 1.5 X revenue or over $7 per share, excluding warrant dilution). At that time, even assuming warrant conversion, GTLT’s management will have at its disposal the capital resources necessary to accelerate the growth of the company via acquisitions, which depending on the nature of the deals could generate even more excitement for the shares.

Please Note: We hold a position in GTLT. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.