Numerex's (NMRX) CEO Stratton Nicolaides on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Numerex Corp. (NMRX)

Numerex (NASDAQ:NMRX)

Q2 2014 Earnings Call

August 06, 2014 4:30 pm ET

Executives

Stratton J. Nicolaides - Chairman, Chief Executive Officer and President

Richard A. Flynt - Chief Financial Officer and Principal Accounting Officer

Analysts

Ryan MacDonald - Northland Capital Markets, Research Division

Siddharth Sinha - Canaccord Genuity, Research Division

Richard Valera - Needham & Company, LLC, Research Division

Ross Licero - Craig-Hallum Capital Group LLC, Research Division

Gregory Burns - Sidoti & Company, LLC

Robert Bregman

Operator

Good day, ladies and gentlemen, and welcome to Numerex Corporation's Q2 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. And I would like to introduce your host for today's conference, Mr. Stratton Nicolaides, Chairman and CEO. You may begin.

Stratton J. Nicolaides

Thank you, Sam, and ladies and gentlemen, welcome to our second quarter call. Rick Flynt, our CFO, and I will comment on the company's quarterly and year-to-date performance. We'll then open the call, as we normally do, to comments and questions in the Q&A that follows.

Please keep in mind that to the extent our statements are not historical fact, they should be considered as forward-looking, and may involve certain risks as detailed in this afternoon's press release and the company's SEC filings.

Well, in general, and as we mentioned in this afternoon's release, we believe the company significant advances strategy and markedly improved its market position in Q2 and the first half of the year, with the launch of new products and services across our key verticals to the acquisition of Omnilink's offender monitoring and people tracking product lines.

Overall, the ramp-up in activity, year-to-date, is significant and is expected to translate into continued strong performance in the last 6 months of the year. We'll begin our update with our security solutions group that introduced a number of new programs to its customer channels and its distributor dealer base. New services like interactive remote monitoring and broadband alarm services that include video surveillance capabilities have gained momentum through the year and will become a cornerstone of new services we expect to introduce later this year.

Our 4G, GSM and CDMA cellular offerings are gaining traction and provide attractive alternatives to customers' transitioning to newer wireless technologies.

Our DIY alarm services have attracted a number of customers and retail opportunities with several pilots underway. Also, we have good momentum developing in the banking sector, retail pharmacy and automotive retail.

In addition, we have increased our penetration of the OEM-embedded market.

Our new Omnilink offender monitoring business got off to a solid start and is gaining traction. We are pursuing new market opportunities with both existing and new customers and through recently established channel partners. Also, we are pursuing a number of government bids, either directly or through reseller partners. In addition, loan worker programs are gaining momentum through a couple of recent customer wins. So overall, a level of activity has expanded dramatically.

Turning to our commercial and consumer solutions, which is exhibiting strong momentum, particularly as a result of recently initiated programs introduced to our wireless network operator channels. As an example, Sprint's WeGo, child safety consumer solution, is particularly worth noting, reflecting significant growth since its April launch and as a direct result of increased marketing. Also, we are vigorously pursuing mobile worker opportunities with the same channel partners utilizing a solution that will make use of our new focal point platform.

In addition, we are working with a certain channel partner to support a number of personal emergency response opportunities and to introduce their products into the dealer distributor channels that we have. Supply chain business, which is our third leg of this tool in our vertical strategy, is very encouraging in terms of the activity levels by the additional pilots that we have underway with existing and new customers and channel partners. Our supply chain programs are expanding into automotive distribution and the waste management space.

In addition, we are developing wireless network operator channels by offering a complete tank monitoring solution. Our managed services program utilizing our i3G tank monitoring solution is gaining traction through the addition of next-generation products, enhanced solutions and new commercial programs. Also, our new AVID products and services, South Pacific oil and gas field equipment issues by offering a number of attractive monitoring and control

solutions for producers well drilling sites.

Our managed service opportunities, or our build on behalf of initiatives, we've actually coined above those are gaining traction. We expect a key customer rollout of interactive security solutions with an initial release in October and a soft rollout later in Q4. Our new interface protocol that is embedded in our customers' panel will be introduced with the release.

In general, our managed services programs to beginning to gain momentum and are expected to favorably impact our performance in the upcoming quarters.

With respect to integrated M2M product lines, we are witnessing a significant ramp-up in activity there as well and is expected to impact -- favorably impact our Q3 performance. This includes embedded devices and associated platform activity. The introduction of new managed network offerings and new application initiatives, along with the launch of new device platform that we anticipate will become the basis of multiple future offerings.

Now turning to our financial highlights, which, Rick, of course, will give you -- shed some light on later on. Our financial performance, what we believe, notably improved in Q2 and for the first half of the year and the year-over-year comparison. Adjusted EBITDA in Q2 and year-to-date reflected a significant improvement in margins and in operating leverage. This is largely a direct result of improved execution of our overall product strategy and a focus in certain vertical markets. The shift to high-value solution sales and Managed Services also contributed to the company's performance in the first half of the year. As a result of this product shift, the addition of new high-value services and the expected launch of new products and services, we have increased our adjusted EBITDA growth guidance to 40% to 45%, up from 36% to 40%. In addition, the company's adjusted EBITDA margin improved to 13.2% that sets the stage for a solid performance in the second half of the year, and I believe that was a doubling over -- in terms of the year-over-year second quarter comparison.

Also relevant, while recent acquisition activity contributed significantly to our revenue base, organic product lines generated substantially all of our adjusted EBITDA results in Q2 and year-to-date. We expect our newly acquired offender monitoring consumer product lines will incrementally contribute to this year's performance in the second half of the year and beyond.

Our adjusted EBITDA was approximately $3 million for the quarter and is expected to significantly increase in Q3. Onetime items that impacted our results include write-offs, associated with discontinued operations; and transaction costs, associated with the Omnilink acquisition. Also impacting EBITDA was an increase in expenses. In response to heightened customer demand across the board, we added sales and marketing personnel, increased our support infrastructure and engineering spend in the first half of the year. And, of course, we expect these expenses -- this ramp-up in expenses to contribute to revenues beginning this quarter -- this third quarter.

Importantly, we believe most of the integration work related to our acquisition of Omnilink is complete, including: organization alignment; IT integration of macro and most of our microsystems; and other key operational issues. While we have more work to do, integration is moving forward in line with our initial timelines and with no surprises. Management has been realigned to ensure effective execution of our vertical product strategy. By way of example, our security solutions group, headed by the newest member of our leadership team, Kelly Gay, is responsible for our alarm security peripherals, DIY security, broadband security and our newly acquired offender monitoring products and services. Of course, she continues to oversee with other members of our leadership team in the remaining integration projects.

We added about 120,000 new subscriptions to our current subscription base, which has incrementally increased our average revenue per unit. Our Q2 subscription and support revenue grew 29% year-over-year, a solid growth rate substantially and favorably impacted by recently acquired product and service launch and the addition of high value subscriptions and service. We are encouraged by the growth of our high value solutions business and anticipate growth to accelerate significantly in the second half of the year with the commercialization of certain managed services initiatives. Also, we expect the continued ramp of supply chain and security solutions to favorably impact our growth.

Our embedded device and hardware revenue grew at a slower pace from Q1, but is expected to reflect significant growth as it rebounds in Q3. This is largely attributable to strong demand for modules and hardware and reflects a pickup in embedded device sales. While we continue to expect sequential quarterly swings in revenue from embedded devices and hardware, we'll expect a continuation of strong year-over-year performance, including increasing gross margin in Q3. Our recent acquisition did not materially contribute to the sales category.

And before I turn the call over to Rick, I just want to reiterate our position that the significant investment made over the years in our M2M platforms and several vertical product development initiatives is consistent with our mission to provide, as a single source, managed M2M solutions hosted through our integrated platforms and incorporate key elements of device, network and application, or DNA, primarily on a subscription basis. The acquisition of Omnilink, as we have mentioned in our previous call and in the press releases, and its robust platform and products suite fits very well within our strategic visions.

Thank you very much. And now, Rick, it's your turn.

Richard A. Flynt

Thank you, Stratton, and good afternoon, everyone. As we have previously disclosed, we completed the Omnilink transaction on May 5 of this year. Consequently, we have consolidated Omnilink's operations into Numerex for the period subsequent to May 5, which means we have included approximately 2 months of Omnilink's results in our second quarter results.

Moving on to the income statement. For the quarter, revenues are up by $5.3 million over the comparable quarter last year. Subscription and support revenues of $16.2 million in the second quarter are up 29% over the same quarter of the prior year. Gross profit of $10.7 million is up by more than $4 million at the same period last year. And on the year-to-date basis, revenues have increased by nearly $10 million and gross profit has increased by $7 million, which is reflective of our strong recurring revenue model and the additional business we have gained.

As you might expect, our expenses have also increased with sales and marketing and engineering and development comprising the majority of the increase that will be ongoing. The increases reflect the incorporation of Omnilink for 2 months with the remainder of the increase to support the longer-term growth of the company and to support current projects that are in the pipeline. We believe that our sales and marketing and engineering and development spending, as a percentage of revenues, has plateaued and that our investment will contribute to future revenue and gross profit increases and will meaningfully add to our bottom line through improved leverage.

The growth in general and administrative expenses is primarily related to the Omnilink acquisition, higher noncash compensation and personnel cost. We incurred approximately $900,000 of transaction-related expenses during the quarter, which will not recur in future quarters. Even with the additional expenses of the transaction and the integration of Omnilink, we generated net income from continuing operations of approximately $200,000 for the quarter. We've recognized an unusually large tax benefit in the quarter. This benefit was generated in part by the offset of capital gains on the sale of our cost basis equity investment with capital losses on the sale of our businesses comprising discontinued operations. Since we completed the disposition of our discontinued businesses during the quarter, discontinued operations will no longer impact our income statement, and we will no longer have amounts related to discontinued operations reflected on our balance sheet.

Adjusted EBITDA for the second quarter totaled $3 million as compared with $1.1 million in the second quarter of 2013. The improvement is reflective of our significantly higher revenues and improved profit margins.

On a non-GAAP basis, adjusted income from continuing operations, net of cash taxes, totaled $1.6 million or $0.08 per fully diluted share in Q2 2014 as compared to $0.1 million or $0.01 per fully diluted share at Q2 of the prior year.

Non-GAAP adjusted income from continuing operations, net of cash taxes, totaled $4.2 million or $0.22 per fully diluted share for the 6 months ended June 30, 2014, as compared to $1.3 million or $0.07 per fully diluted share in the comparable period in the prior year. We calculate this non-GAAP metrics as income from continuing operations net of income taxes adjusted for equity-based compensation expense, amortization of other intangible assets, infrequent or unusual items and noncash taxes.

Now moving to the balance sheet. We put our cash to good use with the completion of an acquisition that is added to our existing vertical product lines will contribute significantly to recurring revenue, brings a significant number of high ARPU subs and provides additional growth opportunities for the combined organization. We had cash balances of $16.4 million at June 30, 2014, as compared to $25.6 million at the end of 2013. We used approximately $12 million of cash in the acquisition of Omnilink. We believe that our cash on hand and our line of credit are combined with our cash generated from operations, will be sufficient to fund our future operations.

During the second quarter of 2014, we also invested in our business, including outlays of $1.6 million for software, intangibles and other assets; and $1 million for the purchase of property and equipment. Accounts receivable, net of the allowance with doubtful accounts at June 30, 2014, totaled $10.4 million compared to $9.4 million at the end of 2013. Based on a rolling 12 months of revenue, our DSO were 43 days at June 30, 2014, compared to 44 days at December 31, 2013, and 48 days at June 30, 2013.

Inventory at the end of Q2 was $8.4 million compared to $8.3 million at December 31, 2013. The increase generally relates to the addition of Omnilink's inventory balance. At the end of June 2014, working capital was $22.6 million compared to $34.9 million at December 31, 2013. The cash used to fund the Omnilink acquisition, as well as the addition of the short-term portion of our new term loan are the primary reasons for the decrease.

That concludes my remarks and now, will open the session to Q&A. [Operator Instructions] Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Mike Walkley with Canaccord Genuity. I'm sorry, Mike Latimore with Northland Securities.

Ryan MacDonald - Northland Capital Markets, Research Division

This is Ryan MacDonald on for Mike Latimore. So I guess first off, you discussed a little bit on some new opportunities for the -- for managed service opportunities rolling out and I just wanted to get a clarification. Did you mention that, that initial rollout would be in October followed by a greater rollout sometime in -- later in fourth quarter?

Stratton J. Nicolaides

Yes, that's -- they won projects that we have a clear visibility into that as something we built on behalf of one of our major customers, is rolling out, kicking off in October with a soft launch for the fourth quarter. And then they kick off in earnest beginning of the year. Now we have several Managed Services arranged with some projects that we've already implemented and will continue to grow. And there are several others in the pipeline.

Ryan MacDonald - Northland Capital Markets, Research Division

Can you give us maybe a little bit of a clarification on, I guess, the number of managed service opportunities you have, if you can quantify? And then also, I mean, is there a, say, subscriber opportunity that is represented by those managed service opportunities?

Stratton J. Nicolaides

Well, for the most part, the -- all managed services arrangements we have will generate, or expected to generate, recurring service revenue either through application or network or combined application and network services and other services that we have offered our customers. With respect to the number, we have several and most of them are focused in our key vertical markets: supply chain, security, and we even have some on the asset ID and tracking space. So there's a number of them, probably several in each category, which is the -- some of them already initiated, some of them are expected to be initiated in this quarter and next.

Ryan MacDonald - Northland Capital Markets, Research Division

Got you. And just one final follow-up. Did you mention -- I think you said Omnilink contributed or you recorded 2 months worth of Omnilink during the quarter. Can you quantify that at all in terms of what that contributed in revenue to the quarter?

Stratton J. Nicolaides

Well, it was -- it did contribute to revenues -- a significant contributor to revenues. However, for all intents and purposes, contributed very little to the EBITDA line or adjusted EBITDA line. That, I think, we've broken that out historically, so if you'd like, you can refer back to the 8-K. But last year, on average, the Omnilink was producing about $1 million of revenue a month.

Operator

Our next question comes from Mike Walkley from Canaccord.

Siddharth Sinha - Canaccord Genuity, Research Division

This is Sid on for Mike. Starting a quick question on the subscriber growth guidance. I think you said you're not providing that anymore. I just wanted to get a little more color in that. Is it just because it's just harder for you to predict now? Or is it because the focus is more on these higher ARPU subscribers who might be less in number, but with a significantly higher ARPU level, I guess?

Stratton J. Nicolaides

Well, it's a little bit of both. I mean, clearly the shift -- the product shift has changed our thinking in terms of the relevance of the subscriber guidance. The subscribers, for example, could be anywhere from sub $2, but they could range anywhere from $0.35 to $5. We are obviously much more interested in the higher ARPU production. So the -- for way -- by way of example, if you look at one subscription from our supply chain, it could be 30 times the amount of revenue generated from that subscription as opposed to some of the others that we can add. So our focus is clearly in the high value, high ARPU subscriptions.

Siddharth Sinha - Canaccord Genuity, Research Division

Okay. And then just the Omnilink acquisition now complete and if you are executing on your integration and consolidation plan for the different products. Do you have -- can you give us a sense of what the hardware and embedded device revenue growth will be this year? Do you still expected to grow year-on-year? Or how should we think about that?

Stratton J. Nicolaides

Yes. We clearly think it's going to grow year-on-year. And the -- sequentially, I think we had a little slowdown in the hardware side. We expect that to pick up dramatically in Q3. So year-over-year, Rick, I think we're going to see a very substantial growth in hardware embedded devices and hardware year-over-year for the full year. And certainly, in the third quarter and accumulatively. So if you look at our 6-month results, I think you can clearly see that we are expecting solid growth, especially with what we're anticipating in Q3.

Richard A. Flynt

Keep in mind the Omnilink business primary operates on a Managed Services-type business rather than a hardware sales business.

Stratton J. Nicolaides

So the amount of -- even in historical numbers, if you look the hardware contribution was de minimis from Omnilink.

Operator

Our next question comes from Rich Valera with Needham & Company.

Richard Valera - Needham & Company, LLC, Research Division

Yes, so just following-up on the Managed Services questions before. I wonder if you could give any update on Deere? How that's rolling out and any update there?

Stratton J. Nicolaides

Sure. That's rolling out very nicely. We've concluded the first phase of that rollout, and we're now looking at other plans and other types of applications. So we are very pleased with the rollout of Deere. It involves -- it touches on all the key points of our value proposition from device, network application, analytic -- data analytics, Big Data stuff. So it's -- it is the hallmark, if you will, in our portfolio for the totality of our services. We're very pleased with that.

Richard Valera - Needham & Company, LLC, Research Division

And are you able to give any color on the next big project you've rolling out, the one that kind of starts in October and really kicks off first quarter of next year?

Stratton J. Nicolaides

It's a security-based product. It advances our strategy in terms of embedding ourselves into the home automation or the alarm panel, if you will. And it's with a major customers. Got a very, very significant market presence. So we're -- that's about as much color as I can give you, but we're very happy with the rollout and the timing.

Richard Valera - Needham & Company, LLC, Research Division

And that one still has well above historical ARPUs, is that?

Stratton J. Nicolaides

Yes.

Richard Valera - Needham & Company, LLC, Research Division

Okay, great. And then you mentioned in M2M offering that you expected to contribute in Q3, some new M2M products. Can you give anymore color on what those are? And what gives you the confidence that they're going to contribute immediately or the customers already signed up? Or is this just something that you should think there's ready channel for?

Stratton J. Nicolaides

No, there is, number one, a ready channel for it, a matter of fact, a couple of ready channels for these new launches. They are also higher ARPU-type of products that we're launching services in both the tank monitoring area, the general supply chain, security. And Rick, what am I missing here? The asset -- another one very significant one is in the asset ID and tracking side. So these are what we call -- they're M2M products and services, but they -- many of them comfortably fit into our key verticals of supply chain, and security and asset identification and tracking. And, of course, now also the offender monitoring and some of the commercial consumer stuff that we're doing.

Richard Valera - Needham & Company, LLC, Research Division

Great. Next quickly on the income statement. Your second quarter in a row, we had nicely above 60% on the gross margin for the services. Is there any reason to expect that to dip below 60% going forward? Or do you think it's sustainable at or above these levels?

Stratton J. Nicolaides

Well, I think what you'll find is the contribution margin from -- that's generated from sales. As Rick pointed out in his comments, I think cumulatively year-over-year, we've generated incremental $10 million in revenue and what was left behind was $7 million in gross profit in absolute terms. So the margin, we think, could hang in there. It could very slightly year in, year out. But overall, we are very, very pleased with the contribution of whatever revenue we're generating. We're seeing an increase across-the-board of margins. We're doing a very effective job on engineering, the value engineering, if you will, of existing product lines. And the offender monitoring in commercial and consumer stuff is even higher margin than our historical margins that we've enjoyed. So it all looks -- it all -- it's pointing in the right direction, Rich, but we're just trying to make sure we manage expectations properly. So I think if it's around the 60% mark. We're very happy on the service side. And if it's in the mid-teens in hardware, we're happy there as well.

Operator

[Operator Instructions] Our next question comes from Mike Malouf with Craig-Hallum.

Ross Licero - Craig-Hallum Capital Group LLC, Research Division

This is Ross Licero on for Mike. Just one question, given the success of the Omnilink acquisition and the fact that it's fully integrated now, or most integrated, what are your -- what's your strategy for future acquisitions and what's the pipeline look like?

Stratton J. Nicolaides

Well, we have the benefit now of -- since we've -- again, with our product shift and our shift to these particular verticals, we can go up the stack, if you will. We can start bolstering our activity within the vertical markets, supply chain, security and asset ID, offender monitoring. And so that's one potential strategy. We are not -- we don't need to flush out any longer, anything on the horizontal. So again, this -- we are very optimistic. It's my job, our job to constantly look for opportunities. But at the end of the day, we have nothing that's in the wings. And right now, we have our plates is full with some excellent products, excellent programs. And as a result, we're putting sales people to work or hiring business development people that we have, and that's all reflected in the first half results. So as Rick said, we think the SG&A, overall, has plateaued relative to the -- as a percentage of revenue. So we expect that to favorably to operating leverage, if you will. We're always looking. So that's our job, right?

Ross Licero - Craig-Hallum Capital Group LLC, Research Division

Right. And just to reconcile the increased EBITDA guidance versus the reiteration of your subscription guidance, where is the additional EBITDA coming from? Is that -- I think you said gross margins were expected to stay in the 60% range. Should we see hardware embedded devices higher than what you initially thought? Or is that coming from somewhere else?

Stratton J. Nicolaides

Well, it's coming from a combination of areas from all of our lines of business, I think we're seeing expenses somewhat staid other than areas that we think are going to make hay in terms of new revenues generation and capturing of new opportunities. So we think that the EBITDA margin, I think -- on the last call, I think it was obvious that we're being -- we're just digesting an acquisition so we want to be somewhat conservative, but we think that the 40% to 45% is very achievable. And it's a result of keeping our expenses in line and increased production of gross profit.

Operator

Our next question comes from Greg Burns with Sidoti.

Gregory Burns - Sidoti & Company, LLC

I just have a question, the managed service contract of customers' you talked about in the past, Cascade. Have they roll on any customers or they still trying to penetrate the market with that solution?

Stratton J. Nicolaides

Well, Cascade is a channel partner of ours, so we have -- we've collaborated on addressing the needs of the waste management market, solid waste in particular. They have been -- I think an excellent contributor to that collaboration, if you will. And we expect -- we fully expect to see results as -- from our collective investment. They're a good partner and they certainly have -- understand the space. We don't break out revenues along lines like that, but they are -- we're very, obviously, pleased with the relationship.

Gregory Burns - Sidoti & Company, LLC

But has there -- is there actually any customers deploying that solution currently?

Stratton J. Nicolaides

Well, in waste management, yes. In waste management, certainly. I mean, there's pilots and there's also lots of activity in and around the space.

Gregory Burns - Sidoti & Company, LLC

Okay. And then in terms of the EBITDA margins of the business, now that you've talked about SG&A kind of plateauing here as a percent of sales, have you put out or ever talked about kind of a long-term target model where margins could go as you continue to stay on the Managed Services in some of these higher value solutions?

Stratton J. Nicolaides

Well, no, we don't have any long-range projections of EBITDA margin, but we have said that over the years, we believe that this -- our model is conducive to generating high-operating leverage and we're starting to see the result of that. So I think year-over-year, we've seen a nice, very nice increase in our EBITDA margins -- adjusted EBITDA margins, and we -- there's no reason to dissuade me, at least, from believing that they'll continue to climb now over time, so -- but we haven't put any projections out.

Operator

You have a follow-up question from Rich Valera.

Richard Valera - Needham & Company, LLC, Research Division

Question on taxes. Wondering how we should think about taxes going forward. Obviously, you had the tax credit this quarter, which seemed kind of onetime. But any color or help you could give us on how to model taxes going forward, Rick?

Richard A. Flynt

No, we know generally what our carryforwards are, and so I think in the next couple of years, we'll be paying cash taxes. We'll pay a little bit now, small as the probably more normalized in the couple of years.

Richard Valera - Needham & Company, LLC, Research Division

I understood the cash tax. What we're talking kind of a few 100k to $0.5 million a quarter? Or is there any way we can provide it finer than that?

Richard A. Flynt

It will be basically around the statutory range for both the federal and the state.

Stratton J. Nicolaides

Rich, were you saying the cash tax portion or the...

Richard Valera - Needham & Company, LLC, Research Division

The cash tax. Yes...

Richard A. Flynt

The cash tax, it will be more minor than that. I mean, that's...

Richard Valera - Needham & Company, LLC, Research Division

What you think about $100,000 going forward? $100,000 a quarter?

Richard A. Flynt

Depending, of course.

Stratton J. Nicolaides

Depending -- there can be fluctuations, Rich, for the cash taxes are pretty small percentage of our -- of that accrual.

Richard Valera - Needham & Company, LLC, Research Division

Okay. And then with respect to Omnilink, you said you got 2 months of it, I guess, in this quarter. So presumably, when you get a full 3 months, that would ramp your OpEx a bit in the third quarter as you have the full 3 months of Omnilink. Is that fair? I understand G&A has the onetimer, but in terms of sales and marketing and R&D?

Richard A. Flynt

Well, sure. I mean, we've got 2 months now and then it's going to be 3. But you're also going to have 3 months of revenue, and so everything will balance out just like it normally would.

Stratton J. Nicolaides

Keep in mind, Rich, that our margins in the Omnilink business are above the line. Our gross margin is actually slightly better or I think slightly better than our average, than our historical margin.

Richard Valera - Needham & Company, LLC, Research Division

Understood. I wasn't thinking of percentages more, just absolute dollars when you're looking at the income statement just from Omnilink purposes.

Stratton J. Nicolaides

And what remains to be seen, see if there are any synergies in the business. But -- and obviously, through an integration process, we have identified some. We don't know if those synergies will be reflected in the third quarter. We expect a very good third quarter. We expect an increase in top line. Bottom line, the increase in our EBITDA margins, so we'll see what -- if that incrementally impacts third and fourth quarter.

Operator

And we do have a question from Greg Burns.

Gregory Burns - Sidoti & Company, LLC

Just one last one on Omnilink. You mentioned some government contracts. I was just wondering if that business has any kind of significant customer concentration, particularly in the government market where a certain contract might call out for a renewal that could potentially negatively impact results if you'd convert it?

Stratton J. Nicolaides

Well, not now. It's currently in our current -- in our business at hand. No, there's nothing in there that would arise to a significant concentration of activity. Going forward, it remains to be seen, but some of the contracts are very significant. Some of them are basically state run, some are local run. But for the most part, we're dealing with the judicial marketplace, which involves government of one sort or another.

Operator

We also have a question from Robert Bregman with Morgan Stanley.

Robert Bregman

On a more of a macro sense and a micro sense, I note that I think it was around July 31, you had 8-K filing where you changed some of your, I think, you reduced the time from 2 years to 1 year that golden parachutes would become effective and you have increased the dollars, et cetera, which is -- I've been around this business for a long time, so what it means to me that you do have pretty good numbers and the stock price doesn't really reflect the potential value of the company. I just thought maybe you'd comment, if you can, as to -- since you did make these changes, is there possibly interest in our company from outside that would might generate a bid well below what you really think the value of the company is? Do you set these kind of programs up just in case that would happen? Am I correct?

Stratton J. Nicolaides

Well, partially, partially correct. I mean, I think the -- first of all, we are in a very competitive market. We are the -- at least in my view, my personal view, is that we're at the tip of the sphere in terms of the M2M and Internet of Things activity. So we want to make sure that we have what I believe is an excellent leadership team. I want to make sure that they are happy and looking forward, not looking back. And so that's part for us. So far as activity, the common interest of the company -- I mean, we're all interested in the company. We're all interested in shareholder value, but obviously, I couldn't comment on anything that if there's any activity with respect to becoming part of an other organization or something. So you're halfway there, Bob, with the...

Robert Bregman

Okay. Well, I just -- I think the stock is undervalued and just wondering why one would put these type of protocol into effect, but you've explained it perfectly.

Operator

I am showing no further questions at this time. This does conclude the program, and you may all disconnect.

Stratton J. Nicolaides

Sam, I think I have a wrap up statement here, so if you wouldn't mind, if I could -- you still there?

Operator

Yes, sir. You can go ahead.

Stratton J. Nicolaides

Thanks, Sam. Now we're -- again, we're just very encouraged by the continued strong demand for products and services, including our -- we mentioned our newly-acquired suite of services and solutions. We expect, as we stated, a very strong third quarter with substantial growth in both in topline service revenue and bottom line, strong sales pipeline, a robust opportunity funnel and the anticipated launch of Managed Services projects and new product initiatives that positions us very well for continued strong performance in the second half of the year and in the future periods. Again, ladies and gentlemen, thank you for your continued support and we look forward to speaking with you on our next earnings call. And thank you, Sam.

Operator

Thank you, everyone. That does conclude the program. You may now disconnect.

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