Ditech Networks (DITC) Presents a Compelling Risk/Reward
Posted on June 18, 2009
Ditech Networks (DITC - current price: $1.15) provides telecom equipment for use in enhancing voice quality over wireline, wireless and internet protocol (IP) networks. Since 2004, the company’s business and stock price have declined substantially, following a significant slowdown in business from core telecom clients as these customers cut spending due to changing market conditions (i.e. M&A activity and transition to 3G technology).
However, at DITC’s current price, even after taking into consideration a complete write-off of ARS assets and potential further operating losses, the enterprise valuation of the company is negative, suggesting that the worst case scenario for the company is now fully discounted. At the same time, the current valuation of DITC does not reflect several improvements that could surface at the company over the next 12 to 24 months both in the core legacy business and in various new initiatives.
Notably, recent financial results indicate that the company’s core business appears to have stabilized both in terms of the top and bottom line, and is in fact expected to grow in the coming quarters. Additionally, the company is investing significant resources in new technology that will enable mobile subscribers to interact with social networks, such as Facebook, via voice commands during a phone call. We think that these new voice applications could ignite significant interest in the stock even if these efforts are only modestly successful.
Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in DITC. 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.
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This site may include market analysis and we may own shares in the stocks mentioned in our reports. 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.
Your last selection of NAVI moved quite impressively after your recommendation at $.79. How long have you followed DITC? How long did you follow NAVI before you made that recommendation? Also, have you exited your FTGX position completely?
Hi Thomas,
I have followed NAVI and DITC for years already. I have sold FTGX, given the acquisition announcement. Best of luck.
Some basic numbers on DITC:
Shares Outstanding: 26 million
Cash (4/30/09): $38 million. This excludes $5 million in ARS. In all DITC, has written off close to $15 million in ARS. As we saw this MAIL, these ARS may be recovered in the future, leaving upside to the cash balance.
Debt: 0
Cash Burn next 12 Months: About $6 million, assuming $1.5 million burn a quarter. This is all from new initiatives, as existing business is breakeven.
EV: at $1.15 (building in cash burn) -$2.1.
Core Legacy Sales: $21 million.
$2 would be about 1X EV/Legacy Sales. So about 75% upside potential on the legacy business alone.
[…] Here is the original post: Ditech Networks (DITC) Presents a Compelling Risk/Reward Tags: core, current, ditc, does-not, legacy-business, negative-enterprise, over-the-next, the-current, various-new […]
[…] Back in June, we highlighted Ditech Networks (Nasdaq: DITC) as an interesting investment opportunity, given the company’s negative enterprise value, despite what appears to be clear signs of improving business fundamentals and financial peformance. […]
[…] Back in June, we highlighted Ditech Networks (Nasdaq: DITC) as an interesting investment opportunity, given the company’s negative enterprise value, despite what appears to be clear signs of improving business fundamentals and financial performance […]