Tuesday, July 28, 2009
Telit Communications is helping machines talk
Wireless machine-to-machine (M2M) communications; you may never have heard of the term before today, but in the coming years it will have a seismic impact on virtually everything you do. So what is wireless M2M communications? Quite simply, it is the technology that enables one machine to talk to another machine via a wireless network.
It is the technology that allows the new meter installed in your house to remotely send data back to your utility provider on a continuous basis and your car to send information to your insurance company or to the nearest search and rescue team. In fact, technology exists today to allow your car to talk to your mobile phone, or your fridge to your stove.
The applications where M2M communications can be applied are virtually endless, and in many ways, this technology is already enabled and at work in many products – many modern machines already contain computers that store information. Many more in the future will also have an inbuilt radio to transmit and receive information.
As smaller and cheaper computers are designed to process more data while consuming less power, the M2M market will continue to expand and the number of applications that will be completed remotely will increase exponentially. This is no insignificant market, with Beecham Research estimating that global cellular module sales were US$868 million in 2008 and are forecast to clear US$2 billion by 2013 – a compound annual growth rate of just under 20%.
As of today, there is only one listed pure play on the rapidly growing M2M sector in London: Telit Communications Plc. Telit is one of three key global players that are offering solutions to allow a machine to talk. There has been quite a bit of M&A activity in the area in the past 18 months, with Cinterion, the biggest player, acquired by a private group from Siemens in 2008. The other main competitor in the sector is the French outfit Wavecom, which is now a subsidiary of NASDAQ listed Sierra Wireless after being acquired for last year, with an enterprise value of circa €90 million.
Interestingly, Cinterion and Wavecom have presented revenues for 2008 which were significantly below 2007 revenues (20-35% decrease year on year) allowing Telit Communications and some other smaller players to capture market share.
So how is Telit doing? The answer is very well compared to its peers.
Preliminary results for the year ending 31 December 2009 were in-line with Seymour Pierce’s expectations. Total group revenues rose 13% to €59 million, gross profit rose a more impressive 32% to €29 million and adjusted earnings before interest, tax, depreciation and amortisation and stock based compensation rose 265% to €3.7 million. The results weren’t completely void of blemishes; there were some one- off exceptional items that impacted the result, mainly a write-down of a €3 million deferred tax asset. The exceptional items pushed Telit to a loss of €1.4 million from continuing operations, but this is still a major improvement to the €7 million loss in 2007.
Nonetheless, Telit managed to hit forecasts set by the house broker despite the seismic shift in the global economy in the second half of 2008. At year end Telit had cash and cash equivalents of €10.6 million (including €6 million in restricted cash) and net debt of €11.9 million. It’s pretty clear that the net debt position of the company was a concern for investors since the implosion of Lehman Brothers in September 2008, but as the credit markets gradually thaw, and risk appetite of investors return, concern about the net debt position have started to abate.
There are two other important facts to note about Telit. First, the company invests heavily in R&D as it continues to expand its market share and roll out new products for the M2M market (including, very recently, the world's smallest M2M module), but also, the high R&D spend can be viewed as a barometer of the forward order book, as Telit designs many bespoke products for its larger clients. Hence a substantial capital investment is required upfront from Telit, perhaps 1-3 years before a new product is integrated into a new machine and starts to generate substantial revenues. Telit’s heavy investment now is all about securing future growth. For example, in 2009 the company launched ‘Infinita’ services and the pace of integration of cellular and short range technologies into its product line moved up a notch with a small acquisition the company made in late 2008.
Second, because of the substantial investment in products for its key customers there is a high barrier to entry for competitors, as Telit is quite heavily integrated into its customer’s product development line and the windows of opportunity for replacing the incumbent suppliers of M2M modules are few and far between.
For the current full year, Seymour Pierce has maintained its forecast of revenues climbing to €80 million, rising strongly again in FY 2010 to €100 million, with adjusted profit before tax of €0.7 million and €8.3 million respectively. This puts Telit on a 2009 P/E of 19 but only a 2010 P/E of 1.5.
The substantial jump in profits in 2010 is largely associated with revenues climbing strongly as operating costs begin to even-out as the company has most major investments needed to support future growth already in place.
So despite all the doom and gloom in the market, the future is looking rather bright for Telit. Of course there are risks, and ideally a net cash position would soothe a lot of concerns, but if the world economy recovers as expected in 2010, Telit is positioned to benefit strongly.
Senior Marketing Manager