A most thorough objective analysis of DGIV's current state of affairs:
(Compiled by Lazarus Long)
Lazarus Long DGIV Evaluation (1 of 8):
Digitcom Interactive Video, Investment Evaluation
Current Price = $2.69
Objective: Determine whether to buy, sell, or hold DGIV as a result of this analysis.
Approach: Ignore present holdings and determine whether DGIV should be bought or
sold at this time. This will cause a proactive stance rather than a reactive stance.
Investment Environment:
ú Dow Jones Industrial Average is down more than 1800 in the last 6 weeks
ú Recent fall of 513 points in a single day (2nd largest single day drop in history)
ú September and October are historically "negative periods"
ú Don Hays, chief investment strategist for Wheat First Union in Richmond, VA says:
Dow at 7011 = overvalued
Dow at 6197 = fairly valued
Dow at 5383 = undervalued
Dow currently at 7640 (=> overvalued)
ú conclusion: entering a bear market or period of market correction.
Discussion: In a bear market, investors are typically more reluctant to add risk to their
portfolio and tend to shy away from small cap stocks, OTC stocks. However, DGIV's
price movement has not historically been strongly tied to the Dow's movement
(perception). The perception of market risk will not have the same incremental effect on
the perception of DGIV as compared to blue chip stocks. Because of DGIV's current
status as an "unknown" and its expected exponential growth path, the company could
"buck" the trend and post nice games as information is released... particularly if noticed
as a "winner" stock in a field of poor performers.
Conclusion: Market will tend to work against near term price appreciation unless
Digitcom is able to take action that will cause the trend to be reversed in its particular
case.
Lazarus Long DGIV Evaluation (2 of 8):
Industry:
ú Long Distance market is currently ~$600B per year.
ú Corporations are increasingly looking at telecommunications as vital infrastructure.
Though ways of reducing costs are often explored, budgetary cutbacks (in large U.S.
corps.) rarely include reduced telecommunications traffic. Individuals are also
increasingly looking at telecommunications as a necessity.
ú Successful implementation of IP Telephony is expected to cause exponential growth in
number of minutes demanded from the consumer.
ú Greatest initial opportunity is in international long distance where rates are highest.
. ú IP Telephony is a very immature solution to long distance needs.
. ú FAX requirements can be met with current technology - huge market
. ú VoIP is currently available, but quality is inferior to legacy long distance services -
potentially the biggest market. Currently there are voice quality vs. latency trade-offs
. ú Callback is an option, but not being pursued aggressively by Digitcom - convenience
issues. Forerunner of optimal solutions. Perhaps, it can be used to obtain business
where no other VoIP solution is available
. ú PC communications: PC as voice communications appliance not cost effective as
compared to handset and offers no major advantage - small niche market
. ú Video streaming is very immature - niche market. This technology is even more
immature than VoIP - magnified quality vs. latency issues due to substantially "richer"
information to be passed. Is bandwidth a problem?
ú Major advantage to IP Telephony is that it is the low cost solution. Still must pay local
companies for providing dial tone and termination ($.08 - .15 combined), but use the
internet for "long distance" connection - no charge.
ú Difficult to regulate or tax. White papers have addressed this issue with little
satisfaction.
ú Relatively little capital required for entry - uses existing telephone / internet
infrastructure for carrying signals. Maintenance of carriers is not required.
ú Requires the ability to encode signals at entry into internet system and decode signals
at exit.
Discussion: Digitcom is engaged in a business opportunity that offers distinct economic
advantages to traditional long distance solutions. IP Telephony is expected to produce
exponential growth in provided minutes as the economies reach the consumer. The
technology is immature and the quality of IP Telephony is not on par with legacy
technologies. Entry into the field does not require owning lines, satellites or other
communication carrying devices. There is risk in the regulation and tax arenas as there is
little clue as to the direction the government(s) may take in order to accomplish these
functions. . Questions: If IP Telephony all but replaces standard long distance service,
how will additional international infrastructure be added and maintained? How will they
be compensated?
Conclusion: IP Telephony will experience exponential growth for several years as long
distance minutes are initially cannibalized from existing legacy providers and then by
creating demand as "cheap" long distance minutes become more available. Initial quality
issues may be minimized by first offering the service where price considerations are
more important than quality considerations until technical advances can be made to
alleviate the quality issue.
Lazarus Long DGIV Evaluation (3 of 8):
Technology:
ú IP Telephony's advantage over traditional long distance service is its ability to provide
"cheap" long distance minutes to the provider, which would then be passed to the
consumer.
ú Incoming signals are converted into "packets" of information that are sent
independently of the following packets of information.
ú Dedicated phone lines are not required as each small packet of information may be
routed differently to reach its destination address, depending on the most efficient
current available route.
ú Data may use all paths that standard telephony currently uses.
ú Data must be encoded to IP standards at entry into the system.
ú Data must be decoded and "assembled" at exit from the system.
ú FAX data is very much like standard internet traffic.
ú Voice data is much more "rich" than standard internet traffic. To decrease latency in
conversations, compression of the data is used. Compression affects quality of the data.
More compression reduces quality. Less compression reduces latency.
ú Standards are developing.
ú Servers are available that offer a scalable number of ports (the server Digitcom will use
from NMSS is scalable from 4 - 192 ports) offering flexibility in implementation and
ease for expansion of service.
ú Digitcom is developing proprietary software to work in conjunction with the NMSS
servers.
Discussion: The price advantage offered by IP Telephony is offset somewhat by quality
issues: latency and voice quality. FAX traffic offers little technical difficulty with quality,
while voice is the current technical task and video streaming is the future challenge. Huge
gains in overcoming quality issues have been made in just the last couple of years and it
is expected that gains in processing power, efficiency via software enhancements and
data carrier capability will drive VoIP quality toward that of legacy systems within the
next 3 - 5 years (perception). Video streaming will be much more difficult. Current
hardware technology allows providers to scale their service to the demand encountered.
Conclusion: VoIP technology is making rapid gains and tracking to resolve quality issues
in time for the period of greatest expansion of the market, further enhancing the
expansion of the market. The impact of Digitcom's proprietary software is unknown.
Lazarus Long DGIV Evaluation (4 of 8):
Competition:
ú There are numerous small and most(if not all) major telco companies are at least
investigating IP Telephony.
ú Large long distance carriers have a tremendous stake in how IP Telephony plays out.
ú Large long distance carriers have been relatively slow to react to or adapt to the new
technology and have shown some reluctance to invest in a technology that will reduce
the return on current infrastructure.
ú Many of the IP Telephony companies are concentrating on the largest long distance
markets that currently that exist.
Discussion: I don't know enough about the competition to do an effective evaluation.
What is clear is that Digitcom has been able to open markets and secure contracts in
Asia, Europe, the Middle East and (possibly) South America. The smaller companies
seem to be grabbing the overseas markets while the larger companies seem to be
plodding along and positioning themselves in the U.S.
Conclusion: Digitcom is engaged in securing as many contracts and partnerships as
possible in overseas markets. They have been quite successful over the past 6 months in
establishing a presence in a number of countries and continents.
Lazarus Long DGIV Evaluation (5 of 8):
Customers / Strategy:
ú Digitcom has concentrated its marketing thrust in emerging overseas economies. Some
common concerns and / or characteristics of these countries:
. ú Government control or recent privatization of the public telephone system
. ú Need to maintain the telephone system in relatively tight control for political reasons,
because it has become part of the military control structure and for ideological reasons.
. ú Internet access in some countries is severely restricted for ideological reasons and
propaganda reasons.
. ú Per capita income significantly lags that of the top tier developed countries.
. ú The number of phones per household significantly lags that of top tier developed
countries.
. ú Though urban centers may have well developed telephone infrastructure, rural areas
lag far behind.
ú Rapid economic growth is expected to promote rapid growth in telecommunications
requirements in both the government and business sectors.
ú Rapid economic growth will spur telecommunications demand in the private sector.
ú Phones will be one of the first new items purchased with the expansion of disposable
income.
ú Relationships form a foundation for doing business in these countries.
ú Partnering allows immediate access to an established customer base and the ability to
co-develop new customers
ú Partnering allows Digitcom to leverage its limited capital.
Discussion: Digitcom has concentrated on opening markets in countries with emerging
economies with telecommunications infrastructure that is not fully developed. The
strategy of partnering with companies and / or countries to develop inexpensive long
distance capability and potentially leading to helping develop local infrastructure is
sound. These countries may be very willing to initially sacrifice full (legacy) quality for a
less expensive long distance solution. Corporate officers seem to have plentiful contacts
in these countries and relationships established through new customers appear as though
they are being leveraged to open new markets and / or offer additional services. Jimmy
Chin seems to have political connections in at least some of the customer countries.
Conclusion: Digitcom has tailored its strategy to offer long distance solutions that
addresses the concerns of the customer. Established relationships are leading to other
business opportunities. Personal relationships are being leveraged to open the markets.
Lazarus Long DGIV Evaluation (6 of 8):
Assets:
ú Digitcom's chief asset are its corporate officers, particularly the CEO, Jimmy Chin.
. ú Ability to close contracts
. ú Relationships in several developing countries
. ú Political contacts
. ú Work ethic
. ú Stated concern for shareholder equity (shareholder newsletters)
ú Small company with relatively little bureaucracy allows it to act quickly.
ú Little to no debt, both current and long term (as of year end, 1997).
Partnering typically requires much less capital to implement growth than other strategies.
ú Been in the telecommunications business for approximately 10 years - experience.
ú Turned a small profit last year, unlike most IP Telephony companies.
ú Has contracts that are scheduled to commence revenue generation in the 3rd quarter in
Europe, Indonesia and Mordovia.
ú Additional contact made in countries in the Pacific Rim, Europe, South America and
the Middle East have been mentioned in press releases and in the newsletters.
ú Rumors of additional "big" contracts.
ú One of few ISP licenses granted in Indonesia.
ú POP in Australia.
ú ~25M in grants and low interest loans to help develop telecommunications
infrastructure in Germany.
ú Rumors that the businesses established in Germany and Indonesia entail much more
than that which was released.
ú New financial tracking and reporting database.
ú Digitcom is starting to gain recognition as an IP Telephony player.
Discussion: Digitcom is an established small telecommunications provider that has
recently (last 1 - 2 years) changed direction to become an IP Telephony company. The
company has been successful in establishing a presence in multiple countries and
continents and it is clear that all details regarding their success in this arena have not
been released. The company's strategy of partnering with developing countries is
proving successful to this point. The company appears to have entered a period of
strong growth.
Conclusion: The company has many more positives to reveal and will be successful in
growing their business in at least the short term.
Lazarus Long DGIV Evaluation (7 of 8):
Liabilities:
ú Being a small company, it is hard to gain credibility when approaching new customers.
ú They are not widely known.
ú They do not currently have access to huge amounts of capital or debt to finance their
growth.
ú It is not proven that management knows how to manage the company through a period
of strong growth.
ú IP Telephony is mostly an unproven industry with technical challenges ahead.
ú Digitcom is a high risk investment:
. ú OTC company with its attendant risks - shares are not necessarily subject to free
market pricing
. ú 1998 1st and 2nd quarter results not yet reported
. ú Updated 10-SB has not been filed
ú Management did not keep its promise to release 1998 financial statements and the
10-SB earlier this year. There was no credible explanation offered.
Discussion: Most risk can be assigned as that belonging to a small company undergoing
rapid growth in a mostly unproven industry with technical uncertainties. Unknown
financial condition and lacking periodic updates is bothersome. There are no known
sources for capital to fund the planned expansion of services. It is not clear whether
capital will be raised through debt or through equity offerings, nor is there indication of
the capacity to raise capital. One does not have the ability to analyze future cash flows
to analyze if the company will have sufficient liquidity to maintain operations. To me, the
failure to produce financial and SEC documents when promised is particularly
troublesome and poses a credibility question. Fortunately, Silicon Investor thread
members have verified all major announcements by the company.
Conclusion: Investment in Digitcom will continue to be generally perceived as riskier
than it probably really is until such time as the 10-SB is filed and the company can be
more fully analyzed. The credibility of the management team to shareholders has been
tested by not producing promised documents on time and introduces an unnecessary
layer of uncertainty. However, credibility is likely to be regained, once the 10-SB has
been filed.
Lazarus Long DGIV Evaluation (8 of 8):
Summary and Conclusion:
Discussion: Digitcom is engaged in an emerging industry with experts expecting
exponential growth. The industry has the advantage of not having to establish a long
distance market, but rather only convincing them of the advantages inherent with IP
Telephony. Price will be the driver. Great strides have been made in recent months to
overcome technical challenges and there is no reason to assume additional progress will
not be made.
Digitcom's strategy of engaging countries and local telephone companies as partners is
not only sound, but perfectly suited to enhance their corporate strengths and minimize
their weaknesses. They have chosen to pursue the most lucrative of the long distance
market: international calling.
Competition, at this point seems to be having no negative impact on Digitcom's ability to
generate contracts. Perhaps the greatest shareholder risk from competition, in the near
term, is a hostile takeover (presumably since management is rumored to not desire a
sale of the company in the short term) that would not allow Digitcom to reach full
appreciation or fulfill its potential.
Management believes in the company. There have been no significant disclosures of
inside selling this year. The float remains small: 6-7M shares, as does the number
outstanding: ~20M shares. ~100M shares are authorized.
IP Telephony revenues are scheduled to start in the 3rd quarter from contracts signed
earlier this year. Rumors abound about additional substantial contracts, new countries
that have been added as clients, additional infrastructure authorized and commissioned
and sources of capital and institutional investor interest.
There has been no discernible progress toward a NASDAQ listing, though the company
has stated this as a goal. Requirements have not been met to date, including the filing of
required documents. The fact that the company trades on the OTC market introduces
price risk to the shareholders. Lack of current information on the company also
substantially increases the perceived risk to the shareholders. Lastly, management
credibility has been damaged by failing to comply with self-imposed deadlines on
releasing the 10-SB and financial reports; although, shareholders are so satisfied with
management in all areas that this transgression is likely to be forgotten once the
documents have been filed. Furthermore, the company has indicated, via a recent Press
Release, that the 10-SB would be released before a trade show taking place in New
York on September 23 -25... employees would be on hand to "answer inquiries from
Wall Street that may follow from the company's 10-SB filing with the SEC."
Digitcom's participation in the show seems to indicate a willingness of management to
start making Digitcom more visible to the investing and IP Telephony world. This would
be consistent with their desire to get the required documentation for NASDAQ listing
filed.
It is clear that Digitcom was grossly overvalued upon initial purchase. The current price
would predicate a multiplier of almost 150 on last year's earnings of $.02 per share.
Clearly, shareholders are expecting a much improved performance in 1998. In fact, a
previous analysis I did based on announced contracts and a multiplier of 20 on revenues
and 50 on earnings indicated a share price of $10 - 12 as fair valuation. Even at
multipliers reduced by 2, current pricing indicates an underpriced condition. However, it
is expected that announced contracts are not the only current source of revenue and
Digitcom's rapid growth plan and its execution indicate that share price appreciation is
likely over at least the intermediate term.
Conclusion: Digitcom is an underpriced stock that has huge potential in both the
intermediate and long term. A combination of risk factors due to lack of information and
being traded in the OTC market have combined to increase volatility and discount the
stock. Removal of many of the unkowns, as is expected shortly, will tend to decrease
volatility and reduce the risk discount. Further price appreciation is expected through the
announcement of contracts already obtained and future revenue growth, regardless of
general market conditions.
Digitcom shares may experience some price resistance (on the way up) at $4 - 5, as
recent purchasers of lower priced shares take some profits.
Decision: If no present holdings, take an intermediate position until the 10-SB is filed. If
analysis of the 10-SB and current stock price so warrants, take a full position.
Translated to current position: Hold and update the evaluation upon 10-SB filing and /
or September 25, whichever comes first.
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