Telit Communications – Can you afford not to be involved?

Telit offers the industry’s broadest portfolio of integrated products and services for end-to-end IoT deployments

Telit Communications was until quite recently a little known stock listed on the AIM market.  It was built through several acquisitions, perhaps most significantly that of Motorola’s M2M division in March 2011.  It occupies a unique space in the Internet of Things world, an area which is viewed as the biggest adopter and future adopter of IoT.  That area is Machine-to-Machine (M2M) within the Industrial Internet of Things.  Telit enables machines to talk to one and other, capturing and transmitting data from its vertically aligned (automobile, smart metering, health…) chip and integrated software solutions, over the airwaves to the cloud to be analysed.  Once analysed, the data can be used to make improvements, drive efficiencies, increase automation and assist in faster decision making.  This isn’t just marketing or ‘the future’, it is here today, it is real and the benefits are already being realised.

Telit is a leader in M2M and competes largely with 2 other key players, Sierra Wireless and Gemalto.  Telit has recognised that customers not only want the chips, but the end-to-end solution.  In 2013, Telit acquired and integrated a US-based cloud provider, IoT Portal, to help customers realise full value from the Telit hardware and software offering.  Approved by Google and Cisco, the Telit cloud  and application platform also provides recurring, predictable revenues and this part of the business is expected to grow strongly.

In 2014, the company also acquired NXP Semiconductor’s ATOP (Automotive Telematics On-board unit Platform) automotive division.  This is a key piece of the Telit jigsaw as it allows direct access to technology and OEM and tier-1 automotive manufacturers.  Audi started to roll out Telit’s ATOP units in August 2015 and if all goes to plan there will be 1.5m units going in Audi cars annually.  Automotive is expected to be one of the key adopters of IoT technology in the next 5 years and Telit is uniquely placed to benefit.  For example, the EU recently brought in eCall legislation, which means that from 2018, every new car will need to be fitted with a device/chip which automatically transmits data to the emergency services in the event of a crash.  Telit’s automotive division is also well placed to generate sales from areas such as UBI (User Based Insurance) by using its technology to embed chips in vehicles.  These chips capture data for insurers on the speed and other aspects of how well a vehicle is being driven.  Insurers can use this data to set individual tariffs for users based on their driving behaviour.

The company has also expanded its operations globally and invested in Chinese and Japanese offices, recognising the growth in IoT in APAC and helping to balance out growth cycles elsewhere in the world.  It has also made excellent investments in the backbone of the company, not least in technology, with all companies operating off the same CRM and accounting software platform and every office having full video conferencing.  It is a well-run company with high levels of corporate governance and workaholic CEO.

So, Telit sounds like the perfect company doesn’t it?!  It is uniquely placed in a growing market and has a CEO who goes by the name of Oozi Cats – what more could anyone wish for?  Well the market was slow to recognise Telit and only in 2013 did the stock start to get recognition for what it was trying to achieve.  2014 and 2015 were also positive in terms of share price gain as the stock rose up through the 200p’s to peak around 350p.  It was around this level in August 2015, that JP Morgan AM opened a short position against Telit.  Several other shorts followed JP Morgan in, knocking investor’s confidence and the stock fell below 200p before bouncing back to sit in a range of between 200 and 250p.  The market reaction was overdone and was compounded by shorts manipulating the market searching for stop losses to create uncertainty for investors.  The majority of shorts, including JP Morgan closed their shorts in Jan/Feb 2016, as it became very clear that revenue and EBT growth were robust.  This was in-spite of Telit noting in October 2015 that it would come in slightly under guidance for 2015 due to some delays in customers switching to new LTE technology and that these orders would now fall into 2016.

In September 2015, Telit announced 2 major contract wins in the smart metering space which will roll out from 2017-2020.  The time from tendering and product development to delivery can be 2-3 years in areas such as these, so patience is required.  On the positive side, these contracts should underpin growth in the coming years and much of the associated R&D has already been done.

Telit has invested heavily over the years in R&D to achieve 20%+ CAGR year after year and bring the company to the position it is now in.  As for any evolving tech company, profits and cashflow will follow but it’s tough to have both at the same time until the company matures.  If a company cuts investment too early, it can hamper growth and reduce its competitive position in the market – it’s a fine balance.  Take Amazon for example.  It is investing heavily to win market share, beat competitors out of the market and achieve giant revenue growth.  Profits are not high on the agenda – yet.  Telit has managed to post very healthy profits and the next challenge, is to generate more free cash flow.  The CEO is aware of what the market is now looking for and recently announced a maiden dividend and confirmed that R&D spending would reduce as a percentage of revenues moving forward.  That is a very positive step.

So what does the future look like?  Until 2018 we are likely to see steady growth in top and bottom lines. 2018 is when we should see the quantum leap in EBITDA as the margins from the services and cloud businesses kick in. The cloud side will be 20% of the business but with 60% gross margins vs 40% for rest of business – i.e. it will contribute to a higher level.

We will see a reduction in expenses to around 15% from 17%. Investment has been high in the acquisition phase of both the ATOP and ILS businesses in equipment and headcount. There is big operating leverage in both businesses. Both are likely to reach £100m by end of 2017 from only £20m each in 2014.

China is a big target area for growth and this is already starting to flow through. On top of that there are the 2 x recent big smart-meter wins and automotive contracts.  There is plenty to get excited about for those who understand the business and the market it operates in.  The CEO owns 20% of the business and there are plenty of big players (Google, Cisco, Amazon…?) who would love to snap up a ‘Telit’.  I truly believe that the current share price of just above 200p offers incredible medium to long term value.


By @Purestockfacts April 2016.

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