After many years of building the infrastructure and platform to handle a rapid expansion of new M2M (machine-to-machine) subscribers, Numerex (NMRX) is now at the inflection point of a rapid acceleration of subscriber additions and the resulting (and correlated) highly profitable recurring revenue that goes with it.
What is the catalyst for this? The cable industry's 50 million-plus subscribers!
The cable TV industry is in the midst of a nationwide roll-out of a new home security/home automation offering, and we believe Numerex is the only provider of wireless backup for the security alarm for every system that will be installed by the large cable companies (also called MSO, or multiple system operator). It all started three years ago when Numerex signed a deal with iControl to provide the wireless security alarm backup to the iControl Open Home Platform -- the backbone of the new home security/home automation offerings now being rolled out by the large MSOs in the U.S.
While Numerex has not announced specific deals with the major MSOs, we assume most, if not all, are under contract with Numerex. That's because during recent quarterly conference calls, Numerex has said it has agreements with four major MSOs (per its most recent quarterly conference call) that add up to 40-plus million customers/subscribers. Therefore, we believe Numerex has agreements with four of the following six MSOs:
- Comcast, the largest MSO with approximately 24 million customers and a new service called XFINITY Home.
- Time Warner Cable, with approximately 16 million customers and a new service called IntelligentHome.
- Bright House Networks, with approximately 2 million-plus customers and a new service called Bright House Networks Home Security and Automation.
- Cox Cable, with approximately 5 million customers and a new service called Cox Home Security
- Cablevision, with approximately 3.6 million customers.
- Charter Communications, with approximately 5.2 million customers.
The numbers (four MSOs and their 40 million-plus customers) tell us it is most certain that Numerex has agreements with Comcast and Time Warner Cable, plus two of the other four. Comcast appears to be the most aggressive with its roll-out. Earlier this year, Comcast targeted a nation-wide roll-out by year-end, but Brian Roberts (the CEO of Comcast) said during the May 2 earnings conference call that the company has already launched XFINITY Home in 72% of its footprint.
The impact of capturing just 4% of the existing MSO subscribers over the next few years would mean substantial growth for Numerex. For the following table we make two assumptions: one, non-MSO subscriber growth for Numerex is 20% per year (below the 24%-plus historical average) and, two, only 4% penetration of the MSO customer base by the end of 2015. We view 4% penetration as very conservative because when Comcast launched its phone service, within four years it achieved nearly 30% penetration of its customer base. For Numerex, every additional 1% penetration of the MSO customer base equals another 400,000-plus subscriber additions.
Total | MSO | ||||||
# | # | portion # | |||||
Date | Subscribers | Added | Added | ||||
Year: | |||||||
12/31/2011 | 1,438,000 | act. | 267,000 | act. | 20,000 | est. | |
3/31/2012 | 1,521,000 | act. | 83,000 | act. | 15,000 | est. | |
6/30/2012 | 1,626,000 | est. | 105,000 | est. | 35,000 | est. | |
9/30/2012 | 1,751,000 | est. | 125,000 | est. | 55,000 | est. | |
12/31/2012 | 1,941,000 | est. | 190,000 | est. | 110,000 | est. | |
503,000 | 215,000 | ||||||
2013 | 2,756,000 | est. | 815,000 | est. | 470,000 | est. | |
2014 | 3,670,000 | est. | 914,000 | est. | 500,000 | est. | |
2015 | 4,667,000 | est. | 997,000 | est. | 500,000 | est. |
In general, approximately every 1,000,000 additional subscribers will add about $1.00 (pre-tax) to Numerex's earnings per share. Breakeven for Numerex is just above 1,000,000 subscribers. Therefore, at the end of next year, Numerex should have an earnings run rate of $1.40 per share recurring (pre-tax), and growing at the rate of about $1.00 per share per year. These assumptions include operating expenses remaining relatively fixed to marginally higher over the next year or two, M2M service revenue gross margin remains at around 59%-60%, and average revenue per subscriber staying near the average for last year.
There is plenty of upside to all of these numbers due to the following:
- Greater than 4% MSO penetration: It is not unrealistic to think the MSOs expect 10%-20% penetration of their existing customer base; otherwise they would not bother with this major new service offering.
- A very high probability of adding the two MSOs not yet under agreement with Numerex, creating another potential 10 million existing customers.
- MSOs take market share away from established competitors, like Protection 1, ADT/Brink/Broadview, and others, where there are already 20 million existing customers. The new MSO home security/home automation offering seems to be superior to the competition and very competitively priced.
- Numerex is successful in the usage-based auto insurance (UBI) market. Numerex has stated during conference calls that five or six of the top 10 auto insurance carriers have been trialing AccelaView from Numerex, of which there is a possibility some may be close to some type of launch. The market opportunity is substantial. One forecast suggests that of the 240 million vehicles on the road in the U.S., 25% will have UBI within a few years -- which equates to 60 million vehicles. While that number seems too high, even a fraction of that opportunity would be very substantial for Numerex.
- There is a very high likelihood Numerex is working on additional opportunities that would provide additional subscribers in the 100,000 to 1,000,000-plus range.
At some point Numerex becomes a takeover candidate. A good rule of thumb might be 5 to 7 times recurring revenue. At the end of 2014, and using the above table, Numerex will be at about a $100 million run rate on recurring revenue, which could be worth $500 to $700 million on a takeover. With 16 million shares outstanding you get a buyout value of $31.25 to $43.75 per share in less than three years. The stock currently trades near $9.00 per share.
I have been following Numerex for 12-plus years, and never during that time has the opportunity for significant upside in the stock been as strong as it is today with such minimal downside risk.
Disclosure: I am long NMRX.
