RNDC, -- a value stock in a high oil price enviroment

URL of this document: www.growingvalue.com/research/rndc.htm

Raindance Communications, Inc. provides web conference services to serve business to business and comsumers. In a market where oil price is at $45, business is cutting travel costs as much as possible. Web conference is more popular than ever. In this extremely lucrative business. Many companies are willing to pay huge marketing fees. Those companies include but not limited to:

Netviwer, Cisco, MeetingOne, CSLive, WebEx, grclive, usercentric, COItalk.com, conference-solutions, communicast, glance, convoq, callworthy, webconferencing4u, ataconnection, bitpipe, ConferZone, Teligent, quickconnected, freeconferenceservice, Call-Fusion, ivocalize, webcastplanet. Raindance is one of the top 5 players in the market in term of functions and features of the product, total usage, customer reviews, and industry expert reviews.

as at 2004/08/11 close, Price/Book = 0.68. Price/Sale = 0.95. The company has $38M net cash in hand.

RNDC is #47 on Fast 500 Companies in the world in 2003. Among the Fast 500 Companies, many are darlings on Wall Street. So why is RNDC only traded at this level today? We have to look into the two downgrades by Pacific Growth Equities on Dec 03, 2003 and Jan 22, 2004. The first downgrade dropped the price from 2.65 to 2.2 and the second one dropped the price from its 52 week high of 3.6 to 3.15. The main reason for the downgrade was that the analyst in Pacific Growth Equities called the senior management of RNDC many times for a break down of the sales numbers, and the management refused to give that information to him. RNDC's management's action is perfect legal and proper. As a public company's officers, they should treat all investors equally, so no investor could gain inside information by showing an ID of analyst. However, this action indeed becomes the bad blood between RNDC and the analyst covering it. Written reasons behind both downgrades are "Uncertainty of future revenue growth due to unknown of current revenues. Suspecting the main current revenue growth is from voice over IP." Those two downgrades stopped any investor from long term investing in RNDC. That set the negative tone for the past year.

Joe Noel who downgraded RNDC twice in the past 4 months, upgraded RNDC at 1pm on 2004/04/21 following our advice. Here are the exact words from him:

"We are upgrading shares of Raindance Communications to a rating of Equal Weight from Under Weight. We believe Raindance Meeting Edition, the Company's new fully integrated web, audio and desktop video conferencing platform, is showing some signs of progress and is gaining some traction with customers.

Our discussions with RNDC personnel indicate the sales process for the Company's new product offering is rapidly moving forward, with some customer signings currently being seen. We believe the Company will likely see signings for its new product accelerating in the June and September quarters, with revenue from these contracts likely seen later in the September and December quarters. Finally, we believe the other parts of RNDC's business remain stable, although still waiting to demonstrate a meaningful growth rate, in our view.

Overall, we believe the business situation at the Company remains steady and is undergoing improvements. Revenue from the Company's new product offering will likely be seen later in the second half of the year, and we believe will serve to supplement RNDC's currently stable business operations, potentially leading to an increase in the Company's share price. For this reason, we now believe an Equal Weight rating is warranted, and thereby we are upgrading shares of RNDC to Equal Weight from Under Weight.

Raindance Communications is a provider of integrated telephone and Internet conferencing solutions. Raindance's services include phone conferencing, web conferencing and web collaboration services. The Company's proprietary architecture integrates technologies into a single communications platform designed to increase productivity and strengthen business relationships. Raindance's platform is built from the ground up to handle voice and data traffic, allowing for easy conference set up, integrated billing and single vendor technical support. "

In the second quarter of 2004, RNDC is in a down trend, because Oracle developed an in-house product and stopped using RNDC. However, as in the latest conference call, IBM is considering using RNDC's products with its Lotus Sametime platform. With RNDC at this extremely undervalued price, it is cheaper for IBM to buy RNDC as a company than to buy its services. You can hear the latest conference call by playing the following:

20040728rndc.wav

Valuation of RNDC at 2004/08/11 close:
We compare RNDC with its competitor, WEBX.

Price: WEBX 18.50, RNDC 1.34
Price/Book: WEBX 3.86, RNDC 0.68
Price/Sales: WEBX 3.70, RNDC 0.95
The main reason for WEBX to be traded at 4 times premium of RNDC on Price/Book ratio is that WEBX is so called market leader in this field. We must agree that the old product RNDC lacks many features of WEBX, such as application sharing, and video conferencing. Several reviews and comparisons of the video conferencing also rated RNDC's product low. However, on March 01, 2004, RNDC introduced a new conference product, Raindance Meeting Edition, which has all the features of WEBX. Even with a product lacking features, RNDC achieved 15% gain in sales in 2003. Their sales force did a great job. PC Magazine published their new review on RNDC's product on 2004/05/20 on the Internet (PC Magazine June 08 2004 issue, page 48). The link to the review is www.pcmag.com/article2/0,1759,1596059,00.asp PC Magazine upgraded its rating from 2 stars to 4 stars, the highest rating in Web Conference products. We expect RNDC to achieve even high growth with their new product in 2004.

Conservatively speaking, if RNDC is only valued at half of the Price/Book ratio of WEBX, it will be $4. We think $4 is a reasonable price target for RNDC, an undervalued, small cap and growing company. We give RNDC a STRONG BUY. Technically, RNDC tested its 52 week low around 1.28 twice in August. Its support at this level is very strong.

Negative points you should consider:
RNDC reduced its Q2 sales forecast on April 28th. RNDC is to lose one big client, Oracle in Q2, because Oracle starts using its own conferencing product. This loss will reflect a missing $1M sales per Q.

Positive points you should consider:
High oil price forces business to reduce spending on travel and use tele conference products in stead of face to face meetings.