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B. Riley Conference
March 15, 2007 11:15 am ET
Alan Catherall - CFO
Good morning, I’m very happy to introduce Alan Catherall, CFO of Numerex. Thanks for being here.
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Good morning everybody. As Michael said I’m the CFO of Numerex, I’ve been with Numerex for about four years. I am going to take you through about a 20 slide presentation and then obviously, stop, and ask questions.
I will not read the Safe Harbor statement.
OK, what does Numerex do? As the slide indicates, we’re a wireless machine to machine communication company. We transmit information over wireless radios through a network and provide backend connectivity.
Another way of putting that is that we allow companies to track their remote assets, to track the performance of their remote assets, and management information, and basically turn the data that we receive from those remote assets into actionable information.
I’ll give you an example, a vending machine company, a vending bottling company, installs wireless radios in their vending machines and those wireless radios are connected to a backend website that tracks the performance of each machine. Whether that machine needs more servicing, more Coke cans, what’s the contents of the cash box, whether power is onto the machine. Basic information like that, that as the slide indicates, can be turned into actionable information by the bottler.
OK, I’m sure all of you know that all the companies you follow say they're in a large and growing market, we’re not going to say anything different. If you look at the M2M space, these are certain industry statistics or projections. The one I like best is that the industry will grow at least 40% through the end of this decade, and quite honestly that’s what we’re seeing in our own business. We grew over 40% ’05 over ’04. We grew almost 40% ’06 versus ’05. We’ve given guidance of ’07 versus ’06 of 30-40% growth. This really summarizes or backs that up.
These are wireless devices. In North America right now, there are about 12 million M2M radios deployed nationwide. We believe, or industry analysts believe that that will grow to at least 100 million in five years time by 2011, worldwide with even obviously larger numbers.
So if you look at Numerex, where does our revenue come from? As I said we’re a wireless M2M company, but we have a small Legacy unit as well that generated about 9% of our total revenue in the fourth quarter, but obviously dominated by the wireless side.
Sale of both products and provision of service accounted or 91% of our total revenue and that’s the piece that will be growing 30-40% each year.
The Legacy piece, we manage those businesses for cash, cover corporate overheads, it actually declined about 10% ’06 versus ’05 with a similar number ’05 over ’04.
We sort of believe that’s a reasonable statistic that you should use for thinking about ’07 versus ’06, a slight decline but strong growth obviously on the wireless side.
So where does our wireless revenue come from? Really three key parts.
First, we sell network services. Great business, provision of long time retiring revenue sold to OEMs, value added resellers, and even end users. So we provide the network the connection between the wireless device and our backend information services.
Secondly, we sell technology. In this case, wireless devices…the wireless radio that goes into the vending machine.
Thirdly, in a couple of cases we provide end to end solutions that deal with specific customer problems if you will, that need to be solved. We provide the solutions.
So, three pieces: wireless networks, the technology (i.e. provision of wireless devices), and thirdly, provision of end to end solutions.
Let me first talk about the network. Numerex networks, it’s really the cellular networks of about, I think it’s 47 different carriers that we have contracts with today. We have contracts with Cingular, T-Mobile, Verizon, Sprint, etc. This provides ubiquitous coverage throughout the United States. We have contracts with five carriers in Canada and TelCell in Mexico. TelCell, as many of you know, is Mexico’s major cellular carrier. So, ubiquitous coverage in North America as well as some coverage in the Caribbean, number one.
Secondly, we provide different network technologies, whether its SMS or short message services, which is great if you have an application that needs exception reporting. Two or three messages a month just to tell you if that device is working and whether you have an alarm situation. SMS is definitely the way to go in that regard. GPRS is the data equivalent, if you will, of the GSM network CDMA 1XRTT, obviously for specific building applications or in building penetration to different technologies.
If you visited our location up in Atlanta, you’d see a carrier-grade network operations center. People monitoring the performance of the networks, and those guys are there 24 hours a day, 7 days a week, every day of the year. It’s a redundant network, we have a redundant second site about 10 miles away from our primary location co-located with AT&T. So a very secure, reliable network that provides services to our customers.
So that’s the network piece. Secondly are the modules, the technology. We sell wireless radios. In 2006, we sold over 200,000 wireless radios, primarily manufactured by WaveCom and WaveCom has about 40% of the market for wireless radios. It’s primary competitor is Siemens. We have the world’s largest distributor of WaveCom radios, we’re also the fastest growing distributor, and we’re the only distributor that WaveCom has in the United States. So key advantages for us as far as we’re concerned. And every radio that we sell becomes a candidate for network services, which is really important if you look at our margins, a key aspect.
Our margins on the radios: on the hardware side if we just sell a radio, 15-25%. Our margins on the provision of network services are 65-75%, and that keeps on recurring with very low term rates. So key advantage is not only selling the radio but getting the network connection with the radio.
OK, I’m going to talk about a couple of solutions that we offer, these are end-to-end solutions that we offer to our customers. First of all, the mobile solution that we offer, called AirDesk mobile. If you think of Lowjack, this is a better mousetrap than Lowjack. It’s a device that’s discreetly located or discreetly installed in a car or vehicle, combines the use our network, GPS, and the web, to provide location and recovery solutions to our customers. So actually, this is an aerial map, it depicts our office, that’s one of the screen shots that you get if you wanted to track where your car is located.
So, with our device you get a couple of key advantages. First of all, if your car is stolen, you’re going to be immediately notified through a text message on your cell phone, number one.
Secondly, you’re going to be able to go to a website, and I’ll show you the website, this is website for one of our customers, find out exactly where your vehicle is located and how fast it’s going.
Thirdly, if the car has been stolen and the engine isn’t running, you have the ability, through the website to prevent the engine from being restarted. So it can clearly disable the car if necessary.
So we sell the mobile solution both to new car dealers, where we compete with Lowjack, but where we’re seeing the most headway is in the sub-prime finance market where we sell the device to sub-prime finance companies who need to track the collateral of their assets if you will, and find out where that car or vehicle that they financed is located and if necessary, disable the vehicle. It provides a key advantage if you think of the default rates in the sub-prime finance car market.
So that’s one solution, that’s the mobile solution.
The other solution that we offer is a fix solution. Basically, again, using our network, we provide wireless communications as a back up to wire-line connectivity. So if you have a home security system and you have wire-line that’s connected to the central monitoring station through wire-line connection, if that wire-line is cut, you don’t have a security system. It doesn’t work. It won’t be able to transmit an alarm signal to the central monitoring station. Our wireless radio acts as a back up and will automatically kick in and generate an alarm message to the central monitoring station. This key advantage obviously it’s not an ROI sale, you’re selling peace of mind, peace of mind to the consumer or the small business owner, that they have a security system that works in the event of a wire-line cut.
So we’ve deployed over 200,000 of these devices, you can see the device on the chart, it’s about three inches tall, usually installed, takes seconds to install and we sell the device itself into distribution, where it’s selected by the alarm dealers and then installed by the alarm dealer.
The key part for us is that it generates between $4-5 on average a month in recurring revenue. So we sell the device, make a small margin on the sale of the device, but then the real margin opportunity becomes in providing recurring service revenue of $4-5 a month with a margin of 65-75%. So, we’ve got 200,000 subscribers and we sold over 60,000 devices in 2006. So, that business is really accelerating as far as we’re concerned.
Uplink is a well known brand name in the security alarm service. A couple of things that we’re doing this year, w’re getting additional Underwriters Lab Certifications and we’re also embarking on a contract with TelCell where TelCell will sell the device in Mexico.
Key advantage for us, they’ve got a great brand name, the Uplink brand name isn’t really known in Mexico, and if you’ve ever built customers or collected money from customers in Mexico, you know it’s a little bit challenging. TelCell has a good deal of leverage with those customers. It’s a great business.
Financial performance just real quickly, you can see the growth in annual revenue from $18.8 million in 2003 to almost $53 million in 2006. We’ve not given an annual revenue guidance number for 2007, but given that the wireless M2M pieces open 90% of our revenue, we’ve definitely given guidance on the growth. So, that’s easy math, if you will, in terms of the total revenue expectation for 2007. I’m talking about wireless, you can see the growth in wireless from just over $11 million five years ago, to four times that amount in 2006 and that's where the growth of the company will come from. Obviously I like this, everybody at the company likes the Charlie an???d vehicle of performance.
From losing money in 2003, to $6.4 million in 2006, there's a lot of leverage in the business and as we grew the revenue, which we will do in 2007, obviously more will fall to the EBITDA line and the net-income line. The balance sheet at the end of the year: $20 million in cash, current ratio of about three to one, current assets of $37 million and current liabilities of almost $12 million.
A little bit of debt but a strong company. Very soundly financed.
Debt structure at the end of the year, we had almost 13 million shares outstanding, about 5 million of those were held by insiders. Market Cap was based on a price at the end of the year of $9.42. I think yesterday's closing price was $10.30 or something like that. It's a little bit north of that number and enterprise value as you can see.
Investment considerations: a couple of key take-aways. Obviously going after large and growing markets, we think that we are in the right space at the right time. We have a scalable business model that is highly leveraged with $20 million in cash, almost 40% insider ownership. My boss, the company's CEO, his family trust owns about 3.2 million shares. That's 25% of the outstanding number and an experienced management team.
Now let me talk briefly about the management team. Stratton Nicolaides, the company's CEO, chairman, my boss, basically has been with the company really from day one. Numerex was founded or really existed in the 1990's. It was a public shell and Stratton acquired several companies that merged into Numerex, went republic in 1994, left the business, rejoined the company in 2000, and he's been with Numerex since then.
I can tell you he is a 24/7/365 day guy because I probably have calls on each of those 365 days.
I'm the CFO, pretty familiar with public companies. I've been a CFO for other public companies since 1999. Mike Morat is the company's Chief Operating Officer. Mike's definition, which I will pass onto you, he's the guy that makes the doughnuts if you will. He makes sure that the revenues come in and helps me control the cost side.
Let me talk about a couple of other things. The company is definitely looking at acquisitions as a key part of our strategy. The 30-40% growth that I talked about is organic growth. That's what we believe our business will generate organically in 2007. Sales of wireless modules, network services, and (inaudible) mobile is where the 30-40% will come from.
Our VP of corporate development, prior to joining Numerex, worked for Jefferies for about 20 years. So he has a strong M&A background in investment banking. Will spends, I won't say all of his time but certainly most of his time, looking for acquisition targets.
The types of companies that we're looking at are companies that have a strong retiring revenue theme to them, or at least a path to that. That's as far as we're concerned. Those are the types of companies that we're interested in. Companies that will round out our wireless technology and there are several candidates that we're looking at.
Finally Michael Lang. Mike has been with Numerex since 2006. Numerex in early 2006 acquired another company called Urdask and Mike Lang owned Urdask and he's been with us since then, runs our sales organization.
And that's it. So what questions do you have?
Unidentified Audience Member
In the vehicle margin, does the trucking industry represent a significant opportunity to you?
We don't know. It's probably not the answer that you wanted to hear, but we think that the trucking industry just from our view is very competitive and very low margins. So there's reluctance on the part of the trucking companies to pay what we believe is a market rate for the good service that we offer. So right now we're sort of staying away from the trucking industry. That's not to say that we'll never get into that industry, but right now it's not a key target of ours. So margins will be too low.
Unidentified Audience Member
Gross margin was 35% or 36% in '06. We believe a target over the next couple of years will be 40%, low 40%.
How will we get there? We will get there by basically by providing additional network services. A key aspect of our business is to grow network services. And as I said earlier, the network services attract a lot higher margin than the product sales. So that's a key focus of ours, adding additional network connections in '07 and '08. So that's our target. That's definitely one thing we're aiming for and we believe you'll see that happen maybe not by the end of this year but definitely by 2008.
Unidentified Audience Member
Operating margin I think in '06 was about 8%. Again because of the leveragable, scalable nature of our business, again over the next couple of years we see that moving towards the 13, 14, 15% range.
Unidentified Audience Member
Actually very little. We have contracts with the cellular carriers. That was my prior life when I was a CFO of a cellular carrier. We spent a ton of money implementing our network and building it out. That's another factor for us. So our CapEx last year, was I'd say about $600,000. You should expect about the same number in '07.
Unidentified Audience Member
It depends which segments of the market in the low-end segment. We offer a basic device and we're selling tens of thousands of those devices every quarter. So our market share is definitely greater than Tellular at the low-end. Tellular probably does a better job, has a better product at the higher end, a device that provides full data applications and so provides additional monitoring information, we will probably roll out a similar device by the end of the second quarter and we believe there are markets that will find that device attractive.
Unidentified Audience Member
I think one thing Tellular is doing is developing a low-end device. At least that's our market intelligence and I think that's the downright impact that we're having on their business. So I don't' know how far along but we understand they're talking about developing a low-end device.
LowJack has a great, great brand name. You know, we've all heard of the name Lowjack. Their technology is a little bit antiquated. It's based on private radio towers that they erect so they have a very small geographic footprint. I'm sure Lowjack, I'm not sure I'm guessing though, Lowjack offers coverage in Las Vegas but I'm also guessing if you drove outside the metro area there is not Lowjack coverage. So that's a key advantage of ours vis-à-vis Lowjack. I know Lowjack has talked to other companies similar to ours that provide cellular technology. I don't believe they've been successful in implementing that solution.
Unidentified Audience Member
Not really. You know if you think about it, the key part to us is obviously the recurring service. You know, the three, four, five, six, seven dollars a month. And if I look at the rates, the disk and the net rates of people that have network service, it’s very low, less than 10% per year. If a customer comes to us, he or she, or the company, stays with us. So there’s no competitive threat as far as we’re concerned in that regard.
Unidentified Audience Member
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