Telular, An Under the Radar Investment: High Yield, Potential Growth

| About: Telular Corporation (WRLS)

Telular (NASDAQ:WRLS) designs and manufactures cellular products that provide machine-to-machine (M2M), voice, high-speed data, faxing for residential and business applications, digital security alarm (Telguard) and/or remote monitoring systems to operate wirelessly over the cellular network for either primary or back-up communications. Telular has been a publicly held company since 1994.

In October 2008, Telular expanded its M2M portfolio through the acquisition of SupplyNet Communications (Renamed TankLink), a supplier of wireless tank-level monitoring solutions which closed in October 2008.

The focus going forward is on the following business segments:

Telguard provides primary and backup alarm communication solutions for residential, VoIP, small business, financial, commercial and fire system markets. These products transmit full data from virtually all security and fire systems to central stations using the cellular network.

TankLink tank monitoring products offers solutions for M2M communications. Tank monitoring and automatic replenishment solutions help address the inventory management needs in the petroleum logistics, bulk chemicals and bio fuels industries.

So why look at Telular now? After all, the company has been publicly traded since 1994. New management, Joseph Beatty hired in 2007 (now CEO), and Jonathan Charak, (CFO) hired in 2008, changed the strategic direction of the company. The original investment thesis was people would cut the cord and buy a FWT (Fixed wireless terminal) to replace their landlines. Turns out the masses pretty much ignored FWTs, sending the stock nowhere. But, there was an unexpected side effect: they are cutting the cord in large numbers, requiring a wireless backup for their alarm systems. Not only does this generate equipment sales, but an added benefit of recurring revenue, with margins around 60%. Management shifted the focus from FWT sales to alarm and the tank monitoring recurring revenue model. The following charts show the growth in subscribers for TelGuard and billable tanks for TankLink segments.

click to enlarge charts
Telguard SubscribersTankLink Billable Tanks

The trends continue up and have passed a point where the recurring revenues are starting to generate substantial cash.

On November 4, 2010, Telular announced their fiscal year results and surprised the market by announcing a special one-time cash dividend of $1.00 per share and initiated a quarterly dividend of $0.10 per share. The special one-time cash dividend and quarterly dividend was payable on November 22, 2010. The yield is attractive (over 6% as of 12/23/10) and should attract value investors considering the pristine, albeit small balance sheet. Joseph Beatty had this to say:

The dividend actions we are announcing today reflect the culmination of Telular’s transformation to a recurring revenue model, with a consistent ability to generate operating cash flow. In addition, our actions reflect the board’s goal of ensuring that Telular’s value is properly realized by shareholders from a total return perspective. We have been growing our cash balance over time and for this reason, the board decided to return cash to shareholders through the declaration of a special dividend. In addition to the special dividend, the board has declared a regular quarterly dividend of $0.10 per share. With net income before non-cash items for fiscal 2011 estimated at $8.0 – $9.0 million, we expect to grow our cash balance on top of the dividend actions announced today.

Below is a chart showing actual and projected net income before non-cash items:
Income from Cont. Ops before Non-cash items

Management must be confident in growth going forward considering the size of the dividend. Insiders have not sold stock since 2008 and have been buying in the open market since 2008, as reflected in the following table:

WRLS insider transactions

Management continues to do a good job managing costs, holding down overhead costs as revenues increase. Forward Telguard guidance remains unchanged (15,000 and 25,000 new Telguard units/quarter) and the TankLink segment appears to be gaining traction. TankLink started producing positive operating cash flow and margins exceeding 60%.

The company has $4.7 million remaining in a stock repurchase program, but given the commencement of a dividend, it’s doubtful they will aggressively buy back shares until cash levels return to the pre-special dividend level, if then.

So what does this mean as far as an investment? The stock is attractive in my opinion, and here is why:

1. Management projected fiscal year 2011 net income before non-cash items of $8.0 to $9.0 million. This cash flow generation more than covers anticipated $6.0 million of annualized, regular dividends, while still providing surplus cash for corporate development activities.

2. Commencement of an annual dividend of $0.40 per share yielding 6%+ at the time of this writing.

3. Management appears to be conservative, very focused on costs and shareholder friendly - probably the best management team Telular has had since its inception. The dividend and insider buying implies high confidence by management going forward.

4. Sustained growth and the potential for accelerated growth in the TankLink segment going forward. Recurring revenue margins around 60%.

5. Pristine balance sheet, no debt and excellent cash flow generation.

For additional data an updated model with detailed financial information is available here.mht (mhtml file), and an excel 2010 xlsm version which allows some user input is can be downloaded from the bottom of this web page.

Disclosure: I am long WRLS.