Ditech Networks (NDAQ:DITC) shares dropped $0.24, or 2.87%, to $8.13 after the company announced lower fourth quarter earnings and narrowed its guidance. The telecom equipment provider also received a letter from 5.8% owner Riley Investment Management who suggested ways to cut costs and improve revenues while returning the company's excess cash to shareholders.

The activist hedge fund expressed its concern and outlined a plan to enhance shareholder value in a Schedule 13D filing with the SEC. Since Ditech's public offering, the company has accumulated losses of over $80 million while spending $110 million in stock and cash on acquisitions and $188 million on R&D. Meanwhile, the current enterprise value stands at a mere $114 million (including NOLs), which suggests that many investors don't have much confidence in the company's future.

Despite this bleak past, Riley believes that the company is well positioned for strong cash flows and operating profits as its customer base continues to diversify and expand. The hedge fund's analysis shows that the company could be at an EBITDA run rate of $25 million in the next couple of quarters and as high as $35 million in the near future with continued customer wins. Notably, the company also has $135 million in cash on its balance sheet!

Riley suggested that given their analysis, the company should consider implementing a series of initiatives to improve its fundamentals and return at least $100 million to shareholders through a dutch tender offer between $9 and $11 and a special dividend to return the balance. Moreover, if the hedge fund's projections were overly optimistic in the company's eyes, it should consider simply issuing a cash dividend amounting to $100 million - or $3 per share.

Riley insists that Ditech is at a critical juncture. Shareholders entrusted the company with over $75 million in cash during its IPO at $11 per share and a secondary at $50.75 per share. Since then, the company's stock has declined 84% in eight years as VCs unloaded and insiders kept their exposure limited. Now, the company's fundamentals seem to be improving while a new CEO is stepping in that better understands the company's obligations to shareholders.

Riley also noted that they may seek board representation and have done so in the past with great success. Combined, these factors make DITC a stock worth watching closely over the next few months!

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