Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Telular Corporation (NASDAQ:WRLS)

F1Q 2013 Earnings Conference Call

January 31, 2013 16:30 ET

Executives

Brinlea Johnson - Investor Relations

Joe Beatty - President and Chief Executive Officer

Jonathan Charak - Senior Vice President and Chief Financial Officer

Analysts

Noel Atkinson - Loewen

Michael Kim - Imperial Capital

Chris McCampbell - Southwest Securities

James Lee - Potrero Capital

Pete Enderlin - MAZ Partners

Jim Gentrup - Discovery Investment Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Telular’s First Quarter 2013 Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for your questions. (Operator Instructions) Today’s conference is being recorded January 31, 2013.

I would now like to turn the conference over to Brinlea Johnson. Please go ahead.

Brinlea Johnson

Good afternoon, ladies and gentlemen and welcome to Telular Corporation’s conference call to discuss operating results for the first quarter of 2013. By now, everyone should have had an opportunity to view the press release distributed this afternoon. If you need a copy of the press release, you can find it on the Investor Relations section of our website at www.telular.com\investor.

On the line with us today from Telular’s management is Joe Beatty, President and Chief Executive Officer; and Jonathan Charak, Senior Vice President and Chief Financial Officer.

Before we begin, I would like to turn the attention to the fact that forward-looking statements may be made during the course of the call and certain factors may cause actual results or performance to differ materially from what is implied by these forward-looking statements. Please refer to the company’s 10-K and other periodic filings with the SEC for discussion of these factors. During the call, we also refer to adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a non-GAAP measure, which adds back interest expense, income taxes, depreciation, amortization, and stock-based compensation expense to net income.

At this point, I would like to turn the call over to Mr. Joe Beatty.

Joe Beatty

Thanks, Brinlea and good afternoon everyone. We are pleased with our first quarter results driving impressive adjusted EBITDA growth on a consolidated basis. We continue to build upon our stream of high margin recurring service revenue and ended the quarter with approximately 850,000 billable units in service. Overall, our businesses are operating well and we are executing on our strategy to post profitable growth.

Cash generation remains strong and predictable allowing us to reward our shareholders with a regular quarterly dividend payment. Due to our strong results this quarter and the high visibility in our recurring revenue model, we are reiterating our adjusted EBITDA guidance for fiscal 2013 of $23.5 million to $25.5 million. As many of you likely saw today in a separate press release, we also announced that I will transition out of my role as Telular’s President and CEO for personal reasons effective after the next quarterly earnings announcement in early May. This was a very difficult decision for me. I really enjoyed this job immensely and have a terrific team of fellow employees and directors, a track record of success with this team and a positive work environment.

Nevertheless, based on our recent events, it has become clear to me that I need to have a much greater presence in my children’s lives right now. I am leaving at a time when the business is performing very well as evidenced by the strong financial results we released this afternoon. Furthermore, I will spend the next three months continuing to oversee the business and the exciting service development projects that are underway and expected to be released into the market this fiscal year. I think it is important to note that the success we have had at Telular in the past few years has not been the work of the CEO rather I am a leader of a hardworking and talented team. We have developed collaborative decision-making abilities and gain mutual respect, which has helped enable Telular to capitalize on its market opportunities.

I will go into more detail on the progress of our business this quarter. But first I am going to turn the call over to Jonathan Charak, our CFO to review the financial results.

Jonathan Charak

Thank you, Joe. Good afternoon everyone. We delivered strong first results. For the quarter, we reported total revenue of $24.8 million, including $14 million from recurring services. Pre-tax income was $3.4 million and adjusted EBITDA and non-financial measure was $5.9 million.

For the first quarter, Event Monitoring and Asset Tracking revenue was $15.6 million and $9.2 million respectively. Adjusted EBITDA for Event Monitoring and Asset Tracking was $5.5 million and $1.2 million respectively, excluding corporate expenses of $800,000. Within our Event Monitoring segment, total Telguard revenue was up 16% over the prior year period to $13.5 million, including $8.3 million of recurring service revenue.

During the quarter, Telguard activated 35,400 new subscribers and the total number of Telguard subscribers increased sequentially to 621,800. Average revenue per unit or ARPU increased sequentially to $4.45. Telguard product revenue for the first quarter was $5.2 million as we sold approximately 37,300 units on the higher end of our unit guidance of 30,000 to 40,000 units per quarter. The average selling price or ASP for Telguard hardware unit in the first quarter was $137. We continue to experience strong demand for our new line of 3G/4G products. The other major component through our Event Monitoring segment is TankLink. In the first quarter, TankLink revenue increased 22.5% over the prior year period to $2.1 million, including recurring service revenue of $1.1 million or 53% of total TankLink revenue.

In our Asset Tracking segment for which SkyBitz is currently the sole line of business, revenue was $9.2 million split evenly between product and recurring service revenue. Telular ended the first fiscal quarter with a combined total of nearly 851,000 billable M2M units with an ARPU of $5.51. Additionally, on a consolidated basis, 50,800 monitoring and tracking hardware units were sold with an ASP of $204.

Turning to expenses, operating expenses for the first quarter were $8.8 million. We expect operating expense levels going forward to return to the same levels recognized in the second half of fiscal 2012. During the first quarter, we generated $5 million in funds from operations and increased our dividend to $0.12 per share of common stock. Despite the increasing positive funds, our cash balance decreased to $9.2 million. This was primarily due to the payment of fiscal 2012 annual bonuses to employees as well as a $2.5 million payment made to a third-party to license and integrate software that will become an important foundation for increased capabilities within one of our business lines.

Now, I’d like to turn the call back over the Joe to go into a more detailed discussion of our business.

Joe Beatty

Thanks, Jonathan. I am pleased with the results this quarter. We continue to grow our service revenue, expand our margins, and award our shareholders with a dividend.

Turning to our business segment, Telguard is doing well. Strong demand for our 3G/4G cellular communicators is continuing to drive good overall Telguard growth. We delivered units in the upper half of our guidance 30,000 to 40,000 new units sold per quarter and feel confident in the continuation of this trend for the remainder of the year. We remain focused on selling Telguard service to small and mid-size security dealers, which has allowed us to generate higher ARPU as our mix changes.

As it relates to future service growth of Telguard, we knew it was important to enhance our current interactive services offering to become fully featured. Consequently, our major development project for 2013 involves doing just that. We planned to enhance our existing Telguard interactive from a basic service that allows for remote arm and disarm to a full featured service that supports home automation features such as door lock and unlock, lighting control and thermostat control with an eye towards remote and video surveillance as well. We believe consumers will increasingly want these enhanced services. And importantly, we believe our status as the leading universally compatible provider of connectivity to security dealers is unique. We plan to take advantage of this position and look forward to talking more specifically about our advanced Telguard interactive services throughout the year.

At SkyBitz, we announced the Falcon series GXT100, our new GPS asset tracking solution using 3G/4G cellular networks. Currently, a minority of SkyBitz tracking sales utilize cellular networks. However, we see the trends in asset tracking moving our business over time from satellite to cellular service. As end users seek more detailed information such as notification of door openings, sensing of cargo fill, mileage-driven, and other data points, which fully characterize the condition and location of their key assets. While the GXT100 enables SkyBitz to offer a basic cellular tracking service option, it is a resold device and nearly the precursor to the device we are working on in-house.

Later this fiscal year, we will release our new device that will give us the low cost fully-featured cellular unit. While satellite services will remain a key part of the portfolio, our new cellular device based on the latest TankLink Series 90 hardware is expected to dominate sales over the long-term. I am excited with the synergies of Telular exemplified by our ability to take a TankLink product and modify it for use in SkyBitz for Asset Tracking. Of course, perhaps the most significant synergy at Telular involves all business units use of our partnership with AT&T to carry the large volume of traffic we generate across its nationwide network at reasonable costs. This economy of scale, which we increasingly enjoy, is important to our financial performance and growth.

And finally, TankLink continued its trend of posting a largest percentage growth in revenue among our three business units at 23% year-over-year. While the smallest of our units, this top line growth combined with the highest percentage service margins of the group making an important asset. I am reminded that there was a time that Telguard was the smallest volume business at Telular and had similar characteristics.

During the quarter, we introduced the TankLink 90, the industry’s first 3G/4G wireless tank monitoring solution. The new TankLink 90 provides fully integrated GPS tracking, increased battery life, and over the year updates. The product longevity of 3G/4G technology coupled with the robust features and unique design allow us to bring to market a cost-effective, easy-to-install solution that delivers a true ROI.

Moreover, the low profile form factor makes the 90 a perfect fit for the increasing number of above ground storage tanks being used in the truck fueling and agricultural chemical spaces. We also announced a business partner program to expand our region to vertical markets. With 12 distribution partners already signed on, we are looking to add more agents in the specialty chemicals, water treatment, and agricultural markets. Broadening the distribution channels continues to be the focus of our marketing efforts of TankLink.

In summary, we are growing our high margin recurring revenue streams in a profitable way. During 2013, we are committed to product innovation and increasing distribution to capitalize on our market opportunities. We have strong visibility into our business and remain optimistic about revenue growth and our ability to deliver regular dividends and maximize shareholder value. Finally, I planned to be on the earnings call next time and will continue to be engaged during the transition period. I am confident that Telular will continue to prosper in my absence.

With that, I’d like to turn the call over to our operator, Alicia, to answer any questions you might have.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Noel Atkinson with Loewen. Please go ahead.

Noel Atkinson - Loewen

Hello folks.

Joe Beatty

Hello.

Noel Atkinson - Loewen

Joe, just first off, just congratulations on turning the company around and I hadn’t seen some impressive growth during your tenure. So, congratulations for that.

Joe Beatty

I appreciate that.

Noel Atkinson - Loewen

So, if we could talk about SkyBitz for a minute. Did you folks achieve positive net adds for SkyBitz in the quarter?

Joe Beatty

Yeah. We don’t disclose specifically the number of additions we make there, but it was a positive increase in net subscribers, yes.

Noel Atkinson - Loewen

Okay. So, it looks like your hardware orders went up sequentially, are you expecting to start seeing some whether it’s seasonal or whatever some starting to see some acceleration in the SkyBitz service revenue as you go forward?

Joe Beatty

Well, the SkyBitz I’ll talk to the product revenue. That’s a bit lumpy depending on the timing of larger orders that we get. We have a kind of a consistent flow of incremental additions from our existing customers. And then we’ll add new customers or see larger one-time orders even from existing customers. So, it’s a little bit lumpy on the additions. Your question referenced service revenue, so that’s obviously a direct build off of when we still activate units.

Noel Atkinson - Loewen

Right. So, you will just start seeing that impact coming in the coming quarters now?

Joe Beatty

Right, yeah it’s immediately trailing, Noel.

Noel Atkinson - Loewen

Okay. In the Telguard side, I guess you folks saw the catch up in insurance from your largest customer reported in that quarter, is that correct?

Joe Beatty

Yes, there was a file received of deactivations from their large customer during the first fiscal quarter.

Noel Atkinson - Loewen

Okay. And then overall within the Telguard unit from cross-seller dealers in U.S. what are you seeing for attrition rates overall?

Joe Beatty

Because of the one large customer and the fact that it’s lumpy and somewhat hard to predict in that regard, I do look at the non-big customer churn rate and for that customer base excluding the large customer, we’ve seen a pretty study 3% quarterly or just under 12% annually and that’s been holding steady for several quarters now.

Noel Atkinson - Loewen

Okay, good. And then and just my last quick question here, the PIRs, your largest customers has been making a pretty big statement about PIRs being one of their major growth initiatives over the coming year in the next couple of years. I was wondering if you guys want to talk about sort of your own PIRs product and whether you are seeing some any uptick in that area?

Joe Beatty

Yeah. We will probably talk about PIRs more over time as its becoming, it had good growth sequentially and the market knows the product well including all of our customers especially our large ones. So, we feel good about its position, we don’t want to talk any specifics about any particular customer of ours may chose to use it or not but I will just say many people have been trialing it and we feel very good about for us growth here.

Noel Atkinson - Loewen

Okay, great. Thanks very much.

Joe Beatty

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Kim with Imperial Capital. Please go ahead.

Joe Beatty

Hi, Michael. Michael.

Operator

Michael your line is open, if you have a question?

Michael Kim - Imperial Capital

Can you guys hear me?

Joe Beatty

Now we can.

Michael Kim - Imperial Capital

Great. Good afternoon, Jonathan and Joe. Likewise I want to express my complements to you Joe for your leadership and execution has been terrific especially in Telguard in the last couple of years, considering some of the headwinds with your large customer, but great transition there and I am looking forward to…?

Joe Beatty

Thanks for that. I am going to deflect it to my team. It’s really is a great team here, so team effort.

Michael Kim - Imperial Capital

Specifically on their leadership transition typically we’ve seen with other companies, it could take six to nine months to go through the search process both internal and external candidates. With your scheduled departure at the end of the second quarter, can you maybe outline who will be interim CEO upon you departure and who will lead day-to-day operations?

Joe Beatty

Yeah, the Board is still accessing, it’s due on how long the process will take. They are going to look at internal and external candidates. So, I think until they handicap how long they think it will take, the next step would be how to handle any gap there might be between when I leave and when a successor is brought in. I think there are different options. There is certainly an option of one of my direct reports being interim, which is options of director coming in and its options of the blend of those two. So, I think we just need to wait and see as the Board further gets into this process and assess this how long it might take I think we’ll know more about if and when there is gap anticipated.

Michael Kim - Imperial Capital

Okay, great. And I know at this point you couldn’t provide any sense on in terms of that calls your background or experience of the next leader maybe if there is some specific aspects that you think or the Board may think that Tellular may need on the next transition?

Joe Beatty

I think it’s what’s you would expect I don’t want to speak for the Board and it’s searching requirements but I do know this I know they have recognized the company so what evolves to which is we’re not a hardware company anymore. We make hardware and support of our services and we view ourselves as a very healthy portion of a service company. And so I’m pretty sure that would be elemental to with the board will be looking for someone with experience in that regard.

Michael Kim - Imperial Capital

Great, and then just turning back to the business with Telguard, the full service of the Telguard Interactive. Can you talk a little bit more about what level that they’re involved will that include some changes of the hardware, is it more software base and what needs to take place to develop a full featured solution?

Joe Beatty

Sure. Certainly, a healthy dose of software, and so that’s a key portion of it also does have hardware impact. So, I’d say we won some of the near field wireless unlicensed wireless technologies such as ZigBee and Z-Wave to control lights and locks. So, it’s both aspects really of evolving the product which create us and we have a great basic service today. We use our unit which in the old base was a one way path out for alarms. It’s already a two way path and a way to turn on and off the security panels. So, we are proud of where we are at, but yeah, the evolution will involve both hardware modifications maybe new hardware elements and a healthy dose of software.

Michael Kim - Imperial Capital

And did you indicate video would be included initially or is that follow-on in the development pipeline?

Joe Beatty

That would be a follow on. Wanted to make mention of it, because I think it’s the ultimate spot where people get. And I do think I would say this, we think it’s just beginning. If you look at services that are available today, the uptick from consumers, consumers are still getting comfortable with how much more they want to do. We do think over time they will get very comfortable and want to control many aspects of their home, but we certainly don’t think we are too late to the party. We think where timing hits very well with consumer demand and I will roll the numbers to enable security dealers to succeed in their business. And so our historical target of small and midsize security dealers, they don’t have the wherewithal of the supplier deals that some of the large careers who are leading the PIRs have available to them. So, if we can bring that to the smaller half of them, I should say, lower half of the market. In aggregate, it’s not smaller. It’s a good position to be in to take the Telguard brand known to those security dealers and equip them to have same kind of offerings that the big guys have.

Michael Kim - Imperial Capital

Great. And then turning to the Telguard units in the pricings maybe a little bit above kind of what I have been sort of expecting, was there some unusual mix in the quarter or are you just finding different segments to the market to target or maybe if you talk a little bit about the drivers for the pricing expansion?

Jonathan Charak

Hey, Michael, it’s Jonathan. It’s really just a mix issue. We have a full line of products and there is different prices and depending on who books in larger orders in a given period of time, they can jump around. We have been fairly consistent in the low to mid 130s over the last several quarters. And then within that range, I would expect that to continue.

Michael Kim - Imperial Capital

And then also on the service ARPU, is it your sense that you should continue or we should continue to see some upward migration in the service ARPU or is there any opportunity to accelerate?

Jonathan Charak

I think it will be a slow drift upwards continuing if there is two things. Number one and the biggest factor is still the mix there as well with a large customer holding relatively flat. And there as a large customer getting better pricing everybody else has a higher price compared to that big customer. So, that’s the big thing but there is also other things as we talked about the interactive services, the product or the service that we have currently the basic service continues to add to that ARPU, but I would expect for both of those reasons to continue and there will be a drift upwards.

Michael Kim - Imperial Capital

Yeah. And just one last one on SkyBitz, any commentary on the customer pipeline for intermodal and how you see that developing as another portion of your business beyond trucking?

Jonathan Charak

We certainly continue to work it, and volumes, the proportion of freight that intermodal is getting is increasing over time in the transport business. I wouldn’t say anything specific other than we definitely continue to work that sub-vertical market and I feel good that our product offering is a fit for that group.

Michael Kim - Imperial Capital

Great, thank you very much.

Jonathan Charak

Thanks Michael.

Operator

Thank you. Our next question comes from the line of Chris McCampbell with Southwest Securities. Please go ahead.

Chris McCampbell - Southwest Securities

Thanks. Yeah, the risk of being repetitive, I did want to thank you, Joe on behalf of my clients for your stewardship with the company and certainly wish you the best with your family going forward?

Joe Beatty

I appreciate that.

Chris McCampbell - Southwest Securities

Lot of my questions have been answered already, but just from a historical standpoint, what if new home sales done in terms of an impact (indiscernible) business, I guess in the past and whether or not you are seeing anything materially from home sales picking up now?

Joe Beatty

Yeah, there is not we’ve never had a direct correlation between home sales and our growth in our business. Obviously, we look more towards the existing home sales versus new home sales, because a large part of our business is the retrofitting of the existing systems out there. Clearly, the better that statistic gets, the better we should do, but I don’t believe we have really been able to drive direct correlation and give you specifics as to what that means, but the market is improving and that should bode well.

Chris McCampbell - Southwest Securities

Yeah, it certainly doesn’t hurt and I think during the housing downturn we thought we would have done even, but we did well because of the wireless trends. I think we thought we would have even better if housing had troubles. So, it can only help.

Chris McCampbell - Southwest Securities

Okay, I appreciate it. Thanks.

Joe Beatty

Thanks.

Operator

Thank you. Our next question comes from the line of James Lee with Potrero Capital. Please go ahead.

James Lee - Potrero Capital

Yes, hi. First, I want to follow-up on there was question about I guess in Q1 you had a large customer, I guess that they have turned out the service or if you could explain that a little bit, and is that a session largely done in the quarter or should we see session continue from the customer in the next few quarters?

Jonathan Charak

Yeah. The issue this one James has been around for actually a couple of years and as a large customer that apparently doesn’t have a process in place to timely notify us to their deactivation. So, in some quarters we are getting virtually no deactivations from them, but they are still happening and they are compiling and they give us a large file with everything from the past quarter or two at one point in time. So, this is again, it’s been around for many quarters now. This happened to be a quarter, our first quarter of 2013 where we had one of these files, where we had more than just a nominal amount of deactivations. If you look back to fourth quarter of 2012, we did not have such a file and if you look to calculate our actually churn rate in that quarter, it will seem a little bit lower than it probably should actually have been. So, it’s really nothing new and that continues and until they start notifying us on a real-time basis of their deactivations, I would expect that lumpiness to continue.

James Lee - Potrero Capital

Okay, but so it sounds like the worse is done in Q1 and you probably won’t see that again in Q2?

Joe Beatty

Well it’s really hard for us to predict. I would say if you have been following us for a couple of years. The first few times that this has happened they were going back years in terms of their deactivations, but they hadn’t been cleaning up timely. I feel like they are caught up to a relatively recent point in time. So, I wouldn’t expect anything much more different than what happened in the first quarter, but whether which quarters we may get a file, it’s hard for me to predict. It’s really their discretion.

James Lee - Potrero Capital

Okay. And then on gross margin, it looks like the hardware gross margin came down quite a bit, could you talk about what’s going on here and how should we think about the gross margin churn overall for the company and for the year, should it be similar to at least 2012 or Q1 sort of the trend for the rest of the year?

Joe Beatty

The hardware gross margin was affected by SkyBitz division. We have an opportunity to go for a customer deal and we put pricing in there that was lower than we typically do. That was a nice deal with the big customers. So, we appreciated the win, but we did have lower margins in the hardware. And of course we look at the hardware as a way to get the service revenue. So, for the right customer and the right transaction we would do that. And that’s what happened last quarter. I think over time we had a very stable pricing environment across all lines of business. And I would just say, if there is large opportunities that time, so we might go for it and you might see the hardware margin impinge a little bit, but we don’t expect us to be in the new norm.

James Lee - Potrero Capital

Okay. So, at least for the rest of the year or for the whole year, it should look somewhere similar to last year at least right for the overall gross margin for the company?

Joe Beatty

Yeah. We have no reason to expect hardware gross margins changing in the near-term.

James Lee - Potrero Capital

Okay. Then on your cash flow, it looks like negative for this year versus last, can you talk about what happened this year, why is it negative versus last year?

Jonathan Charak

To be more specific about you are just talking cash balance…

James Lee - Potrero Capital

Cash flow, operating cash flow, sorry.

Jonathan Charak

Well, operating cash flow….

Joe Beatty

From operating activities?

James Lee - Potrero Capital

Yes.

Joe Beatty

Yeah. So, for this quarter we talked about that, a big thing was $2.5 million dollar payment that we made is a prepayment on some licensing and development work for this new software capabilities that we are bringing to market.

James Lee - Potrero Capital

Okay.

Joe Beatty

That was really the big thing. The December calendar quarter is also a low point. It’s a 9/30 fiscal year end. We measure our results for that fiscal year and we pay annual bonuses to all of our employees in the month of December. So, those two things combined cash flow lot of what you saw negative in the first quarter.

James Lee - Potrero Capital

Okay. So, I missed that. And so overall just over time your operating cash flow, cash from operating activities should track EBITDA right?

Jonathan Charak

Yes. I mean the timing differences of where collections on receivables and inventory receipts and payments and so forth, affects those timing differences, but from an operating perspective, yeah, it shouldn’t be tracking close to our EBITDA.

James Lee - Potrero Capital

Okay. And what was debt at the end of the quarter?

Jonathan Charak

The debt was about $27 million.

James Lee - Potrero Capital

Right. And then could you talk about AT&T, I mean they have made all the noise recently about you don’t want to get more involved in M2M and do you think there will be more of a direct competitor to you guys or are they thinking more about still using the issues like you guys to the basic payment for the spectrum?

Joe Beatty

Yeah, I haven’t seen any sign that AT&T will become a direct competitor of ours. We feel very good about our relationship with them. I haven’t seen them enter any of the markets, certainly in tank telemetry, Asset Tracking yet. So, over time, it’s difficult to predict, but I don’t have that feeling of AT&T becoming a competitor. Right now, we feel like it’s just a very strong partnership.

James Lee - Potrero Capital

More upon the security business, because they also want again the security business, will you guys be partners of theirs or are they competitor of yours?

Joe Beatty

Well, thinking on the security business, I think depends on Solaris that they would be a competitor to our customers. And so to that extent, it’s that debate about is it a good thing on the cables and the telcos get into security and the industry opinion which we concur with is that all that advertising and entry is going to increase penetration and the CEO of ADT and a couple others in the industry have said we are 20% penetrated in the security business in terms of monitored service versus households and business locations. And if you look at other automated services, cable TV, cell phone penetration, it’s above, well above 50%. So, we are on record saying we don’t why we can’t get that 20% up to 40% penetration, particularly with home automation services via the smartphones that everyone is getting. So, if that penetration increases, there is more market for everyone. And so it’s going to come down to a game of well AT&T may compete with some of our traditional customers. If our traditional customers are doing their job right and if we are equipping them with the right solutions, we could end up with a bigger piece of the pie rather than a smaller piece of the pie.

James Lee - Potrero Capital

Lastly, on this interactive service that you guys are investing in, how will this impact in the near term, your operating expenses and then longer term as you roll this out how does the margin on both the hardware services compared to your currently your margins today?

Joe Beatty

Right. While you are seeing in the immediate term, you see we already booked an asset in terms of prepaid investment for certain software. So, that’s one element and that will go from the balance sheet to the income statement as an expense over time as we sell units.

Jonathan Charak

And some of that will be – some of it is a prepaid licensing fee, so that probably go through the cost of sales line item. Other part is related to some development services, which would find its way through the engineering line team, the R&D line item on our financial statements.

Joe Beatty

We may have some modest increased spend in the short and intermediate team with engineering and development costs. And then in terms of margins over time, what we would expect would be a higher ARPU and perhaps somewhat lower percent margin, depends on the mix, depends on how many of the advanced service packages we sell versus the basic, but in terms of absolute margin dollars, we certainly expect growth there. So, that’s really what we are after.

James Lee - Potrero Capital

Great, thank you.

Joe Beatty

Thanks, James.

Operator

Thank you. Our next question comes from the line of Pete Enderlin with MAZ Partners. Please go ahead.

Pete Enderlin - MAZ Partners

Thanks you. Good afternoon guys.

Joe Beatty

Good afternoon.

Pete Enderlin - MAZ Partners

Well, Joe, I was sorry to hear by your decision to step down, I just had a couple of questions about that one is that you consider taking a leave of absence instead of a more or less permanent rescission of your position?

Joe Beatty

I did with the board and I spoke of that last weekend. And my conclusion was that I needed more time that made sense for a leave of absence.

Pete Enderlin - MAZ Partners

Okay. And will you stay on the board or will you eliminate that connection as well?

Joe Beatty

We talked about that as well. And the view is that it might be – it might including coming candidate if he or she had this Former CEO looking over his or her shoulders, so I think for that reason I won’t be staying on the board. I will stay on until I leave, but at that point we don’t want to do that to a newcomer.

Pete Enderlin - MAZ Partners

Yeah, that makes sense. Now, the business, are you considering or did you consider changing your guidance for the unit sales of Telgaurd, I mean you have been ramping that up I had forgot what the low point of that was, but it’s basically roughly double from where you were a couple of years ago. So, you are not talking about 30,000 to 40,000 unit sales range, is it possible that it’s more realistic to talk about something higher than that or would this quarter represent a little bit of a blip and you would expect to pullback?

Joe Beatty

Yeah, our history on that guidance range Pete is we have tended bring it up as we’ve had successive quarters in a certain band. And so if you look over time how we’ve handled the unit guidance that’s how we have done it. So, I think we feel good about the current trend and if we see successive quarters in the upper portion of it that would be kind of the circumstance where we would consider revising either taking the base up or taking the entire range up.

Pete Enderlin - MAZ Partners

Do you have a sense of whether you are gaining market share at this point in terms of new unit placements?

Joe Beatty

Difficult to assess I think we had been over the last few years losing share despite growing in profitability. And not all of our competitors report numbers. It’s close to a pure play as we are and so it’s really difficult to ascertain, yes, I hard hazard to guess I know our plan in terms of getting bigger pieces of the business from certain panel manufacturers and dealer communities. We are excited about that, but really hard to do the market share assessment.

Pete Enderlin - MAZ Partners

Did you give the ASP number for TankLink I didn’t hear?

Joe Beatty

We don’t give that for competitive reasons.

Pete Enderlin - MAZ Partners

Okay, has it been stable or going up?

Joe Beatty

Yeah I think it’s like – it’s like it is for Telguard in the sense that we have a full product line. And in the case of TankLink in particular there is this difference between the high and the low is even greater because it includes a sensor which is something that we purchase and resell. There are some sensors that cost significant amount of money. So, at ASP there jumps around quite a bit depending on the product mix who is buying what type of products in particular the sensors that go along with that. It jumps around a little bit more than Telguard does.

Pete Enderlin - MAZ Partners

Are you starting to see a little more traction on that internationally?

Joe Beatty

Yeah, actually, not so much that we would devote a portion of the conference call talking about international yet, but we are seeing a little bit of improvement there and we do present the products for Latin America. And we have a partnership with Telefonico, which we are pleased with strong partner. So, as that develops over time we will talk more about it.

Pete Enderlin - MAZ Partners

Okay, well thank you and best wishes for you and your family too.

Joe Beatty

Thanks. We appreciate that.

Pete Enderlin - MAZ Partners

Bye.

Joe Beatty

Bye-bye.

Operator

Thank you. Our next question comes from the line Jim Gentrup with Discovery Investment Research. Please go ahead.

Jim Gentrup - Discovery Investment Research

Hi good afternoon gentlemen.

Joe Beatty

Good afternoon.

Jim Gentrup - Discovery Investment Research

Joe when you were speaking about the market share gains with the last caller was that – were you talking about SkyBitz or were you telling about the whole business, can you – my question was really surrounding SkyBitz and whether there are market share gains there or lack there?

Joe Beatty

I was referring to Telguard and how our direct competition there doesn’t report, so it’s difficult to measure market share. Although I did I think say that over the last few years we thought we were losing some share despite having good growth in units and margin. In terms of SkyBitz’s share our assessment is that we have the leading share in the historical mainline of trailer tracking. And I think one of our competitors ID Systems, which is public and it gives presentations and investor conferences has also has leading market share around 30% in trailer tracking.

Jim Gentrup - Discovery Investment Research

And is this dynamic in this field has this changed over the past couple of years or quarters or can you talk a little bit about that?

Joe Beatty

Yeah, it’s held up since we’ve owned SkyBitz and since we looked at SkyBitz I guess its coming on a year now certainly since we have been looking at SkyBitz. And we closed that acquisition on Feb 1, so it’s almost a year. So, it’s held around 30% by our best assessment. In terms of share gain that’s in trailer tracking. Now what we have seen is growth in adjacent markets particularly non-trucking asset tracking and I am speaking really of fracking boom in the U.S. in the oil industry. There is a lot of assets that go out of fracking site, fracking sites are many times outside of cellular boundaries for the fact that we’re the satellite assets tracking guys, it’s really helped us. And we have seen growth in that adjacent sub-segment of the markets. So, that’s good.

Jim Gentrup - Discovery Investment Research

So, would you say overall that’s the growth in SkyBitz would come from, more from just expansion of the overall market for example you started seeing the satellite side and is that a fair assessment that you will grow versus market share you’ll grow just because the whole pie grows?

Joe Beatty

Yeah I would say this. So, we are historically strong in trailer tracking that grows more like 8% to 10%. So, we would need to take share to grow above that rate in trailer tracking. I think what we’re looking for since we target like challenge our general managers to grow at 20% on the top line that means SkyBitz is going to have to do more in the oil and gas in that fracking world and it is. And I think there is other adjacent sub-vertical markets especially once we get an in-house cellular tracking device that we can make at very low costs, price very attractively I think there is other adjacent markets with SkyBitz, so more to come on that.

Jim Gentrup - Discovery Investment Research

Do you have enough coverage in the field to attack those markets efficiently or do you have to add more there staff?

Joe Beatty

I think we can do what we’ve done in each of our lines of business we do varying degrees of direct selling and partnering with indirect channel partners. SkyBitz historically has been predominately direct sales model. We’re calling on the largest trucking firms actually all size trucking firms. We have begun in the last year and a half to add channel partners in adjacent spaces and even in the trucking market. And I think we have additional opportunities over time to bring on other channel partners to bring SkyBitz and asset tracking to these adjacent vertical markets.

Jim Gentrup - Discovery Investment Research

Okay and then the last question I have then is still on the SkyBitz issues, is that business seasonal is your December quarter usually lighter I mean I know its kind of new we don’t really have it really but I mean from your due diligence that you did when you bought it is it – should we expect sequential growth there throughout the fiscal year?

Joe Beatty

Yeah, it does have a seasonal factor to it and the middle two quarters of the calendar year tend to be the best because that’s when trailers – trucking companies place that trailer orders to the trailer manufacturers. And we tend majority of the time our units are going on brand new trailers can be delivered to a trucking firm. So, those deliveries keep in the second two quarters of the year, so that’s the seasonality factor.

Jim Gentrup - Discovery Investment Research

Okay. Thanks very much.

Joe Beatty

Thanks Jim.

Operator

Thank you. At this time I would like to turn the conference back to management for any closing remarks.

Joe Beatty

Thank you. I appreciate the questions and it’s been a pleasure to work here. Again I would emphasize the fact that we’ve got a great team here at Telular, so while I will be departing in several months, I feel good about the team and I will of course be here full-time in the next several months to help the Board in transitioning. So, I appreciate the support and look forward to talking to you next time.

Operator

Ladies and gentlemen, this concludes your conference for today. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Telular's CEO Discusses F1Q 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts