The state of Indiana has been using Authentidate’s technology for DMV and court-related documents. In Germany, firms are authenticating electronic invoices for VAT tax compliance standards. The legal, financial, real estate, medical, and likely almost every other industry could benefit from using ADAT’s document security solutions.
The core issue is developing a critical mass of users, since adoption spreads virally. Hence, a user wanting to send documents requires the counterparty to use the technology as well. Think of a fax machine. The first fax machine was useless since it requires another fax machine to receive. Yet, as fax usage increased, more and more people purchased fax machines so they could correspond with those already using fax machines. Thus, adoption rates begin at a slow pace but accelerate quickly resulting in exponential growth.
Authentidate is expanding its addressable market. Over $500 billion are spent annually administering healthcare. $10’s of billions are spent handling business and legal documents. Document-intensive industries are stuck in a paper-based world, however, Authentidate provides solutions for migrating to a more efficient, electronic based environment. The following table is from Authentidate’s May 2008 shareholder meeting. It highlights the potential markets and revenue streams available to Authentidate.
Cost Reduction:
Operating expenses have been averaging $5-6 million per quarter, but have been trending down. Costs should continue to fall as ADAT recently cut 20% of its workforce, mostly mid-senior level positions. In addition, severance costs and legal fees will soon go away, further decreasing Authentidate’s expenses. Management is highly focused on cost control, and it should be able to continue to make progress in this area.
Operating Performance History:?
Authentidate sold its DocStar and DJS marketing group to focus solely on security solutions. Looking at historical financial statements doesn’t represent an accurate picture of Authentidate’s current operations. For example, income statement found on Yahoo Finance shows sales of $17.5m-2005, $16.5m-2006, and $5m-2007. These figures include revenue from discontinued business segments. Revenues from continuing operations only, are illustrated below.
2003: 950?
2004: 1250?
2005: 2822?
2006: 3870?
2007: 4998?
Sales growth for the past 5 years has averaged 56% per annum. Management declined to give specific guidance, but insinuated that Inscrybe (August release) will accelerate customer adoption and usage rate causing a significant increase in sales growth. Gross margins have historically ranged 60-70%. SGA expenses have been the primary problem, totaling $16.8m fro FY07. For the 3 quarters already reported for FY08, ADAT recored 4.4 million in sales.
Conclusion:
Authentidate is on pace to achieve cash flow break-even in the next 6-9 months, and subsequently become profitable on a GAAP basis. The stock trades for less than cash, hence no value is attributed to ADAT business nor as a going concern. The stock is undervalued because very few know about ADAT and its prospects. The scant trading volume confirms this, thus if more investors knew the facts surrounding ADAT, it would be trading higher, in my opinion. As ADAT moves to profitability, we will see increased interest in ADAT shares accompanied with higher prices.
Disclosure: Long ADAT
