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Wednesday, September 21, 2005

Ezenia! (EZEN)

This company (website) makes web collaberation software. My first reaction was that their field is just waiting for Microsoft to come along and destroy all competitors. But they're mostly working with the military and it seems to be a high-specialization required for their customers. They're letting the legacy videoconferencing die a noble death while they focus on newer collaboration software business. Their research costs have dropped fairly dramatically, but that's due to giving up on the legacy stuff.

Most of their assets are cash. Most of their liabilities are deferred revenue (much less than total cash). Current ratio = 2.

Revenue stream tells a typical story for this time frame:
Q2 05: $3.3 million, gross margin 65%, 27% operational margin
Q1 05: $3.1 million, gross margin 63%
Q4 04: $2.8 million
Q3 04: $2.5 million, gross margin 65%
Q2 04: $2.5 million, gross margin 64%
Q1 04: $2.6 million, gross margin 60%
2003: $8.2 million
2002: $11.4 million
2001: $15 million
2000: $28 million

First half 2005: $2.6 million cash provided by operations (on earnings of $1.6 million) with only $135K capex. First half 2004 wasn't much different. 2004 free cash flow was essentially identical to earnings.

Less than 1.5 million stock options outstanding at end of 2004, ave strike is $3.94 with 6.4 years remaining. Current shares in Aug 05 is 14.6 million. Probably less than 18 million totally diluted.

During the 1990s they did a lot of classic data communications video conferencing stuff, mostly infrastructure, protocols, etc. They followed all the usual trends: ISDN, frame relay, ATM. I liked this part of the annual report mind you:
Contrary to how most videoconferencing vendors would like to indoctrinate potential customers, video—in particular talking heads as in the case of most video conferences—was and is, now more than ever, far from being the “piece de resistance” of true, meaningful real-time collaboration. Furthermore, its monolithic approach, whereby you either get a successful videoconference session or get nothing, relegates all other more critical collaboration activities second to video talking heads. Most importantly, the lack of presence awareness detection and inability to leverage the web for ease of access prevent flexible, on-demand, free-flowing collaboration sessions whereby participants can come, go, or be invited at will.
I think the real question here is going to be whether they will be a survivor or not in the long run. Like LiveWorld, they have the advantage of experience.

Customers include: US Intelligence community, U.S. Joint Forces Command, Marines, Navy, Air Force, Army. This is good. Currently in use in Afghanistan and Iraq. Focus is entirely on Defense and intelligence community worldwide (US and foreign allies). Annual subscription based revenue includes maintainence. Also sell training, installation, customization. Sales methods mirror government market matrix. Indirect sales via General Dynamics, SAIC, Northrop Grumman and others. In 2004, 60% of sales were via indirect channels. Top three customers: US Join Forces Command, Defense Intelligence Agency, US Army. Older products are sold internationally and percent of sales is dropping radically (2% 2004, 14% 2003, 24% 2002).

Unix and Windows. Server, database, app server, user directory, utilities. Encryption and accecc control PKI and X.509. Auditing, word searching, patterns. Text chat and IM, audio chat, whiteboard, app sharing, secure file sharing. Security, scalability, flexibility are priorities.

R&D is mostly software engs and contractors, many with top secret clearance. Research spending has dropped from $4.6 million in 2002, to $1.9 million 2003, to $1.1 million 2004. 24/7 hotline.

Competitors are IBM Lotus, Documentum, Groove Networks. Also similar products like WebEx, Centra SW, Oracle, Cisco, Microsoft. In videoconferencing, Polycom, RADvision, Tandberg Telecom.

Unfortunately, the price is a bit high, so it's not worth digging any further. But it's one to keep in mind. It's probably worth around $2 and change.

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