Telit Communications Plc. (OTCPK:TTCNF) Q2 2016 Earnings Conference Call August 8, 2016 9:00 AM ET
Miri Segal - Hayden/MS-IR
Oozi Cats - Chief Executive Officer
Yosi Fait - President and Finance Director
Robert Sanders - Deutsche Bank
Nichole Gilliat - Ion
Greetings and welcome to the Telit 2016 Half-Year Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It’s now my pleasure to introduce your host Miri Segal of Hayden/MS-IR. Please go ahead, Ms. Segal.
Thank you, Operator. Good day everyone and thanks for joining us for Telit Communications’ first-half 2016 financial results conference call. Joining us today on the call are Mr. Oozi Cats, CEO and Mr. Yosi Fait, President and Finance Director.
Following the prepared statements by management, we will open the call to the question-and-answer session. Please note that an updated company's presentation including the financial results is available on our IR website and we invite you to review the slides during and after the call.
I would like to remind our listeners that comments made today will contain forward-looking statements and management may make additional forward-looking statements in response to your questions.
Such written and oral disclosures are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The results presented today include results that are on a non-GAAP basis. A full reconciliation table of the non-GAAP measures to IFRS measures can be found in the Company press release issued earlier today.
And with that, I'd like to hand the call over to Oozi Cats, CEO of Telit. Oozi, please go ahead.
Thank you, Miri, and thank you all for dialing in. Good afternoon and morning to our European and U.S. investors and analysts. We are happy to welcome you here today to our 2016 half-year results and investor conference call.
The first half of 2016 continued our 2015 second half of slowdown in the U.S. market which resulted in modest growth of 6.3% to $166.1 million. The ramp up of the LTE CAT1 product line was slower than expected due to slow certification cycle which is a result of the restructuring of one of Telit’s blue-chip suppliers and therefore resulted in a lower level of support and a substantial delay in product releases.
Based on our LTE CAT1 product that were already certified during the first half, we believe that the second half of the year in the U.S. will perform much better and will drive the U.S. market to an annual growth of about 20%.
The expected growth in the U.S. will support the group guidance to grow significantly in 2016 as reflected in our full-year revenue guidance. Slower ramp-up than expected in some automotive programs impacted the first half and most probably would impact also the full-year revenue. But we see very positive automotive revenue growth for 2017 and beyond.
We continue to see strong growth in our IoT service that includes connectivity, IoT platform, IoT factory solutions and integrated end-to-end IoT solutions for corporate and enterprises alongside strong recognitions by customers and partners.
Our IoT services revenue grew 23.4% to $13.7 million from $11.1 million in H1 2015. We believe this growth will accelerate during the next few years starting from 2017.
Our gross margin improvement from 39.7% in H1 2015 to 40.1% demonstrates our ability to continue improving our IoT products cost alongside with better mix for IoT services out of the total revenue.
Although the decrease in operational expenses as a percentage of group revenues is behind our plan during H1, we expect a meaningful decrease over the next few years of gross R&D, sales and marketing as well as general and administrative expenses as a percentage of revenue. Our target is to share about 8% to 9% from those operational expenses by 2018.
As stated in our full-year guidance, we believe that the revenue growth in the second half of 2016 will lead to the full-year revenues to a double-digit growth for the seventh year in a row. Our 2016 annual guidance is for revenues of $370 million to $390 million.
Based on our expectations for strong second half, one of the main drivers for this growth will be the North America market. As mentioned earlier, this represents revenue growth of 11% to 17%.
Our adjusted EBITDA guidance is for $52 million to $60 million, which represents a growth of 15% to 32% over the $45.3 million we have achieved in 2015.
Our guidance for adjusted earnings per share is $0.24 to $0.30 which represents a growth over 2015 earnings per share of 15% to 38%. Our $0.25 interim dividend for 2016 is based on average of the guidance of $0.27 which represents a dividend growth of about 24%.
Turning to strategy, it is clear that most enterprises are not looking to buy standalone pieces of technology, which they then have to integrate but prefer complete solutions that reduce the complexity, risk, cost and time to market compared to trying to develop a custom project in-house.
We are achieving significant traction towards becoming the preferred enabler of end-to-end IoT solutions and we continue to invest in integrated IoT products and services that help transform businesses, driving ovation and improved operational efficiencies for enterprises across a wide variety of industries worldwide.
We continue to increase our go-to-market ecosystem with wide range of blue-chip partners including system integrators and software providers. A significant software license and resale agreement was signed with SAP to sell and distribute Telit deviceWISE IoT platform.
Telit and SAP are already working with forward-thinking companies, large and small on driving business transformation with the Internet of Things, saving money for operational efficiencies, generating revenues from new product and services and improving compliance.
The IoT factory solutions, is well positioned to take advantage of the market opportunities in the industrial IoT also known as Industry 4.0. Our innovative IoT factory solutions, is targeting customers looking to take advantage of the industrial IoT opportunity with multiple path to deployment centered on our proven IoT platform for factory automation.
Our platform has been chosen by John Deere to implement the deviceWISE industrial IoT platform, part of Telit’s IoT factory solutions portfolio and John Deere’s factory operations. The deviceWISE industrial IoT platform makes it possible for John Deere to collect and analyze real-time assembly information to improve line efficiency, prevent unplanned downtime and improve efficiencies throughout the supply chain.
As a leading player in the IoT market, we continue to invest in our products and services technology roadmap, key personnel and capabilities and operational infrastructure to become the leading enabler of end-to-end IoT solution.
During the first half of the year we had significant accomplishment in our Triple Play businesses, IoT modules, IoT connectivity and IoT platform. And more importantly we have combined and seamlessly integrated those different entities to enable end-to-end IoT solutions that cooperates an enterprise, it can easily implement with one of our ecosystem partners.
We have a series of new product launches and many new design-wins for our cellular location, automotive and short-range IoT modules during the first six month of the year. For example, we introduced a number of new 4G IoT modules across different regions including LTE CAT1 and we were first to receive CAT1 operator certifications from AT&T and also received several certifications from Verizon in North America.
We have completed the acquisition of Stollmann and now offer a range of highly competitive low-energy Bluetooth modules as part of Telit’s short-range modules portfolio. This acquisition is part of our Sensor-to- Cloud strategy to simplify and fasten the IoT deployment.
As a relatively new entrant into the IoT connectivity market, we are steadily adding customers for our IoT data plans projecting to exceed 1 million subscribers before the end of the year. We’re successful in attracting new customers with Telit’s payload packages of specifically designed IoT services across multiple Tier 1 wireless networks and one agreement offering simple terms and one prize with no hidden fees or extra roaming charges.
For example, the [indiscernible] pre mobile broadband plan, which we introduced during the half is increasingly popular with customers who have deployed assets across different wireless networks in different countries across Europe, Russia and Turkey.
As the Pure Play IoT Company, Telit is in the unique position of offering IoT modules, connectivity and platforms under one roof. What distinguishing us even further is what we are now calling Telit IoT knowhow, which is, our unmatched IoT expertise, resources and support focused on the success of our customers and partners.
While the IoT market has matured a great deal, it can still be intimidating and complex to most of our customers. Therefore we want to make it easier for them offering support along every step of the way.
Our unique value proposition spans engineering assistance, the Telit Tech Forum, the certification services, competent centers around the globe, 24x7 customer support, the IoT app-zone for developers, our deviceWISE University, the deviseWISE ready-program and fast growing partner program. We have also recently added IoT consulting services to assist customers and partners with developing and end-to-end solution from IoT concept ideation to system architecture, prototype development and full commercial deployment.
We believe we are in a breakthrough point in the IoT industry, as more and more enterprises and corporate will look for IoT solutions which will include multi-technologies, deployment, billions of sensors and massive big data that will be the new role material for many businesses.
Our investments, especially in the last five years in building our capability has enabled us to provide end-to-end IoT solutions and put us in the forefront of global IoT provider well placed to gain from the significant growth of the market in the next few years.
Now, let me hand over to Yosi Fait, Telit’s President and Financial Director to present our 2016 interim results in full detail.
Thank you, Oozi and good afternoon everyone. I’m pleased to present our financial results for H1 2016.
The revenues in the period were $166.1 million, an increase of 6.3% over the $156.3 million recorded in H1 2015. As Oozi mentioned earlier, we expect stronger growth in the second half of the year and expect revenues for the full year to be between $370 million and $390 million, an increase of 11% to 17% year-over-year.
We expect that the growth in North America in the second half will be the main driver for the group to grow. In mid-May, we received certification from AT&T for our LTE module for use on the carriers North American LTE Wireless Network. This CAT1 module is the first in its class to be certified by AT&T.
In mid-July we received a second CAT1 certification from Verizon Communications for another of our LTE module for use on Verizon’s 4G LTE network. These two major certifications approval and more to come will influence our growth during the second half of 2016 and full-year results. Our services revenues increased by 23.4% from $11.1 million in H1 2015 to $13.7 million in H1 2016.
During the period, our IoT platforms business continued to grow steadily securing new customers for Cloud-based application enablement services and heading wins for our newly formed IoT factory solutions with Fortune 500 industrial companies, such as John Deere.
The Telit’s IoT platform is preferred by companies large and small in the light of mission critical secure and scalable IoT deployments.
The Telit’s deviceWISE platform won best industrial IoT solution in this year’s IoT evolution expo better of the platforms. The award was given for the first time at this year’s event in recognition of the growing importance of the IoT industrial automation.
Also during the period, we entered into an agreement with SAP, for SAP to license and restore the Telit deviceWISE IoT platform. The collaboration with SAP is expected to offer a foundation for easily and securely connecting devices.
The goal is to deliver trusted data to SAP enterprise systems and extract value through the SAP HANA platform, across numerous industrial environments for a multi-machine monitoring and control, production diagnostics, predictive maintenance, remote service and across several markets and industries worldwide.
American revenues increased by 3.9% to $67.3 million. As was explained earlier by Oozi, we expect the region to return to stronger growth during the second half of the year.
EMEA revenues increased by 7.7% to $63 million. We are very pleased with the growth rate in this very mature market in which 2G remains the dominant technology and we expect that our significant wins in smart grid projects in the U.K. and in the Netherlands together with some automotive design wins will lead the region to double-digit growth from 2017 onwards.
APAC revenues continued increasing by 8.5% to $35.8 million. Gross margin continued to improve from 39.7% in H1 2015 to 39.9% in full-year 2015 to 40.1% in H1 2016. This continuous improvement is a result of an ongoing effort and success to improve the hardware margins as well the greater mix of services revenues that provide higher margins.
Gross profit in H1 2016 was $66.6 million compared to $62 million in H1 2015, an increase of 7.4%. Gross R&D expenses which are expenses before capitalization and amortization of internally generated development costs increased from $24.4 million in H1 2015 to $28.8 million in H1 2016.
The amount capitalized in respect to internally generated development costs in H1 2016 is $15.3 million, which is higher by $1 million than H1 2015 but remains unchanged at 9.2% as a percentage of revenues. These figures mainly relates to the development of 4G platforms and product variance for multiple territories and verticals.
The amortization of internally generated development costs increased by 63.1% to $4.4 million in H1 2016 from $2.7 million in H1 2015. These increases relates mainly to the release of 3G and 4G and IoT services product to the market.
Sales and marketing expenses increased from $26.4 million in H1 2015 to $29.9 million in H1 2016. The increase is mainly due to the rapid build-up of global services and end-to-end solutions sales specialist team.
General and administrative expenses increased from $12.1 million in H1 2015 to $13 million in H1 2016. As was discussed in the past, we’re confident in our long-term plan to substantially decrease the growth R&D, sales and marketing and general and administrative as percentage of revenues until 2018. And as a result to improve our profitability and free cash flow generation significantly.
Adjusted EBITDA was $21.4 million which is similar to H1 2015 with $21.8 million. Our annual guidance is for $52 million to $60 million adjusted EBITDA over $45.3 million in 2015. Adjusted basic earnings per share decreased to $0.10 from $0.117 in H1 2015. In May 2016, the company paid a mid-range dividend for the 2015 financial year of $0.06 per share. This dividend represented 28% of 2016 adjusted EPS.
Based on the mid-range of the full-year guidance for adjusted earnings per share of $0.24 to $0.30, the director declared an interim dividend in respect of 2016 of $0.025 per share. This represents approximately one third of the expected dividend for the year and the directors intends to distribute 28% of the adjusted earnings per share as dividend.
Turning to the balance sheet and cash flow. As a result of the continuing profit making, the company’s net equity increased to $112.6 million from $110.1 million at the end of 2015. The company generated $21.2 million from operating activities before working capital movements compared to $21.6 million in the comparable period last year.
As of 30, June 2016, the group has net debt of $29.1 million compared to net cash of $1.1 million at the end of 2015. The main reason the increase of the net debt are, acquisitions about $14 million, payment of 2015 dividend about $7 million and an increase in working capital.
At the end of 2016, Telit employed 950 people from 30 nationalities that are spread over 35 sales officers nine are in these centers and speak more than 21 languages.
To summarize the call, before continuing to our Q&A session, I would like to highlight the following market growth projection.
The ABI Research report, M2M and IoT embedded modules published on April 14, 2016 predicts that the demand for cellular IoT modules will grow significantly over the coming years. ABI predicts that the number of units in all cellular technologies to be shipped globally will reach 365 million units by 2021 representing a 2016 to 2021 CAGR of 33%.
The report projects gradual ASP decline for modules across the different wireless standards for the period 2016 to 2021. This trend of declining prices is fueling the growth of the industry. Considering the product mixed focus by ABI the market will grow monetary value at a CAGR of 21% from 2016 to 2021, with total revenues from cellular module sales reaching $4.9 billion in 2021.
In IoT services, for connectivity and platforms, growth is estimated to be even more robust. According to IoT experts analyst [indiscernible] he needs to report IoT application enablement forecast 2015 to 2025 published June 1 this year. In 2015, IoT application enablement and device management revenues were $600 million and will increase in the CAGR of 65% over the 10-year period to $83 billion by 2025.
In each report the global M2M IoT communications market, published in December 2015, analyst from Berg Insight estimated that the global number of cellular IoT subscribers increased by 23% in 2015 reaching $265.5 million corresponding to around 3% of all mobile subscribers.
Through 2020, the firm estimates the number of cellular IoT subscribers will grow at CAGR of 23% to reach $744.2 million. During the same period cellular IoT connectivity revenues are forecasted to grow at a CAGR of 23.3% from $8.8 billion in 2015 to approximately $25.2 billion in 2020.
Meanwhile the market average revenue per user or ARPU is expected to remain stable at around $2.75. The Internet of Things has the power to completely transform businesses and industries and hence the way in which they gather, analyze and distribute data and in-term conserve that data into productivity gains, new revenue streams and new business model.
We believe that companies that will adopt IoT will be better companies for the long-term. Telit is well-positioned to capitalize on this market growth to continue increasing its market share, revenues, profitability and cash flows.
I would like to thank Telit’s management and employees for their hard work and achievements over the years. Thank you all for joining us today. I will now transfer the call again to Miri for the Q&A session.
[Operator Instructions]. Thank you. Our first question is from the line of Robert Sanders with Deutsche Bank. Please proceed with your question.
Yes, good afternoon. I just had a question about what your thoughts were around the emergence of Narrow Band IoT and how you think Telit is positioned to benefit from what is the technology standard that seems to be getting a lot of momentum. Thanks.
Good morning, this is Oozi Cats speaking. Thank you for the question. Narrow Band IoT as well as CAT M which is the technology on the way to Narrow Band, as well as the parallel for I might say competing technologies such as older technologies under the roof of low power, wide area network Zig, Volks, Laura [ph] and a dozen others. Those represent a phenomenal opportunity growth in our market.
Those technologies will not enable customers with voice nor mobility. And it would be very simple devices that will have very high attach rates to non-movable assets such as the tables and chairs and flower pots and of course many other things that will become connected.
We expect Narrow Band and low power wide area network in a few years from now let’s say beyond 2020 to have a price of around $5. Hopefully that will include also the activity, maybe even lifetime connectivity. Again, this is the way actually to see hundreds of billions and maybe trillion of devices getting connected in the future.
So, this usually represents for us a phenomenal growth opportunity. We are engaged in the technology of building those devices already. We will have probably Narrow Band IoT products launched next year. They would be not optimized they would be more a softer downgraded products from the CAT1 and the CAT M.
We already have low-power wide area product and we’re selling them in the market, although the quantities are still low. Also, pay attention to our recent acquisition of the assets from Stollmann, where we enabled Telit with a BLE, the smart Bluetooth starting technology. This is a huge step in the direction of those low-power devices, very low cost devices.
So, I would sum up the answer by saying again, this is a huge opportunity for us in the future, the cannibalization with our current business is very, very minimum. Thank you.
Yes, got it. Yes, thanks for that. And just looking at what Vodafone have publicly said that all of their sales sites will be supporting NBIOC by 2020. What does that mean for the market as it evolves as we look out to 2020, how will the Telco get involved here and how that play to you guys? Thanks.
Well, again, thank you for the question. It’s such an interesting question that there is not really a straight forward answer unfortunately. Where the answer is not straight-forward is on the subscription management side, where the normal business model would since so far is that all of us in the world are actually building products to the IoT market.
The mobile network operators are providing the infrastructure and then there is this magic thing that they’re able to actually insert a SIM card, a plastic one or even a chip on SIM into our devices and those devices will get connected to those mobile network operators.
That is not the case in the real future of Narrow Band IoT or low-power wide-area network. There is another place there of subscription management, giving the identity to those $5 devices with lifetime connectivity. It’s not really clear how that will be made.
To start with, when we’re talking about 2018, ‘19 and ‘20, it’s still going to be vis-à-vis SIM card in form for or another. However that obviously will increase dramatically the cost of the product to $8 and $10 which is pretty much the 2G cost products today, that’s not good enough.
And that will still create a quite significant cost in terms of connectivity. But what’s going to happen beyond 2020 is yet to be seen how subscription management will be determined I can only hint by saying that based on the Telit platform, we are ready to provide subscription management but I rather not to extend on this.
Thanks a lot.
Thank you. [Operator Instructions] Our next question is from the line of Nichole Gilliat with Ion. Please go ahead with your question.
Hi Yosi and Oozi, congrats on the good execution in the first half. I have a couple of questions for you guys. Last week one of your competitors announced reduced annual guidance it was softer, short-term demand and tighter inventory management. Have you seen any signs of such trends from any of your customers, verticals or geographies?
Thank you, Nicole. Well, first let me point out that this competitor you’re referring to have actually reported just about minus 5% growth where we provided slightly more than 6% growth. And therefore the difference between us as it stands for H1 is at least 11%.
If you apply that to the year-end and considering they might not expect any growth i.e. zero growth, if we’re able to only this 11% as our difference, that actually touches our lower side of the guidance.
So, obviously, it seems like we’re executing better. I think our competitors suffered from the same CAT1 phenomena. Probably also it’s the same blue-chip supplier we’ve mentioned, I’ve mentioned in my statement. But I think they have other issues which I rather not discuss. But there is major difference between our performance and the market than the competitor you referenced to.
Yosi, do you want to compliment that?
No, I think this was very well - accurate answer.
Okay, thanks. So, moving on, the implied growth rate for the second half based on annual guidance is quite broad. Can you give me some color on what factors would cause you to hit the lower or higher end of your annual guidance range?
Look, it’s quite simple. If we haven’t had the execution problem with one of our suppliers in H2 last year and in H1 of this year, our results in both, H - i.e. in the past 12 months would be significantly higher. And I mean what I say significantly higher.
We’re not talking about few millions of dollars we’re talking about few tens of millions of dollars. I think the second half should be better with achieved some of those required certification. There are still more coming, they’re not all of the ones we need are here with us. And therefore we have made I think a balanced guidance with the pipeline that we currently have and see. And we’re very confident that we’re able to achieve our guidance.
Okay. Thanks a lot.
Thank you. At this time, I’ll turn back to management for closing remarks.
Thank you all for joining us today. I think we’re looking for a second half which hopefully will be much different than the first half and the second half of last year. And looking also into 2017, I believe we will be able to provide a significantly growth beyond what you can see right now on our platform as we’re serving. So, the 23% growth that you’ve seen right now will change into a much bigger growth in our opinion.
Thank you very much you all. And see you in the end of the year.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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