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Telular (NASDAQ:WRLS)

Q3 2012 Earnings Call

August 02, 2012 4:30 pm ET

Executives

Joseph A. Beatty - Chief Executive Officer, President and Director

Jonathan M. Charak - Chief Financial Officer, Senior Vice President and Secretary

Analysts

Michael Kim - Imperial Capital, LLC, Research Division

James Lee

Chris McCampbell

Ted Moreau Jr.

Peter Enderlin

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Telular's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is also being recorded today, Thursday, August 2, 2012. I would now like to turn the conference over to our host for today, Ms. Ellice Felanie [ph] with The Blueshirt Group. Please go ahead, ma'am.

Unknown Executive

Good afternoon, ladies and gentlemen, and welcome to Telular Corp.'s conference Call to discuss operating results for the third quarter of 2012. By now, everyone should have had an opportunity to view the press release distributed this afternoon. If you need a copy of the press release, you can find it on the Investor Relations section of our website at www.telular.com/investor.

On the line with us today from Telular's management is Joe Beatty, President and Chief Executive Officer; and Jonathan Charak, Senior Vice President and Chief Financial Officer.

Before we begin, I would like to turn your attention to the fact that forward-looking statements may be made during the course of the call and certain factors may cause actual results or performance to differ materially from what is implied by these forward-looking statements. Please refer to the company's 10-K and other periodic filings with the Securities and Exchange Commission for a discussion of these factors.

During the call, we will also refer to adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a non-GAAP measure, which adds back interest expense, income taxes, depreciation, amortization and stock-based compensation to net income.

At this point, I would like to turn the call over to Mr. Joe Beatty.

Joseph A. Beatty

Thank you, Ellice [ph]. Good afternoon, everyone. We're pleased with the revenue growth and profitability we delivered this quarter. Revenue from our 3 businesses, Telguard, SkyBitz and TankLink, continue to grow as we focused on expanding our market opportunity. We're building upon our stream of high-margin, recurring service revenue, ending the quarter with approximately 809,000 billable units company-wide. Our leading reputation and product innovation are keeping us ahead of the curve and we're experiencing strong demand for our products and services, particularly with the 3G/4G Telguard units.

Our businesses are operating very well and we're executing on our strategy to drive profitable growth. Cash generation remains strong and predictable, allowing us to reward our shareholders with a regular quarterly dividend payment.

Looking forward, we have increased our fiscal year 2012 adjusted EBITDA guidance, and feel confident in our continued execution. I'll go into more detail on our progress this quarter, as well as our long-term strategy, later in the call.

First, I'll turn the call over to Jonathan Charak, our CFO, to review our financial results.

Jonathan M. Charak

Thank you, Joe. Good afternoon, everyone. We delivered strong third quarter financial results and have increased our guidance of adjusted EBITDA for fiscal 2012 to $17 million to $17.5 million. For the quarter, we reported total revenue of $22.9 million, including $13.3 million or 58% from recurring services. Pretax income was $2.4 million and adjusted EBITDA, a non-GAAP financial measure, was $5 million.

As we mentioned last quarter, we are now reporting the combined results of our Telguard and TankLink business lines within the Event Monitoring segment, while SkyBitz will be included in our Asset Tracking segment.

For the third quarter, Event Monitoring and Asset Tracking revenue was $14 million and $8.7 million, respectively. Adjusted EBITDA for Event Monitoring and Asset Tracking was $4.7 million and $1.2 million, respectively, excluding corporate expenses of $900,000.

Within our Event Monitoring segment, total Telguard revenue was up 14% year-over-year to $12 million, including $7.7 million of recurring service revenue. During the quarter, Telguard activated over 31,100 new subscribers and the total number of Telguard subscribers increased sequentially to 592,300.

Average revenue per unit or ARPU also increased sequentially to $4.37 from $4.32, due to a favorable shift in our customer mix.

Telguard product revenue for the third quarter was $4.2 million as we sold approximately 32,100 units, consistent with our unit guidance. The average selling price or ASP for Telguard hardware unit in the third quarter was $132. We are experiencing strong overall demand for our new line of 3G/4G products, and reiterate our guidance of Telguard unit sales for the remainder of this fiscal year of 25,000 to 35,000 per quarter.

The other major component to our Event Monitoring segment is TankLink. TankLink revenue increased 11% over the prior year period to $2 million, including recurring service revenue of $1 million or 50% of total TankLink revenue.

In the Asset Tracking segment, which is comprised solely of the SkyBitz business line, revenue was $8.7 million, including product revenue of $4.2 million and recurring service revenue of $4.5 million. Additionally, on a consolidated basis, 46,500 monitoring and tracking hardware units were sold with an ASP of $189, and Telular ended the third fiscal quarter with a combined total of 809,000 billable end-to-end units, generating an ARPU of $5.52.

Turning to expenses, operating expenses for the third quarter were $9.5 million, including amortization of intangible assets identified with the SkyBitz acquisition of $1.3 million. During the third quarter, we paid shareholders a dividend of $0.11 per share of common stock. Despite this payment of $1.9 million, we were able to end the period with a cash balance of $11.1 million as we continue to generate cash flow. We believe we are delivering a meaningful return to our shareholders by executing our growth strategy while simultaneously distributing dividends.

Now I'd like to turn the call back over to Joe to go into a more detailed discussion of our business.

Joseph A. Beatty

Thanks, Jonathan. I'm pleased with our results this quarter. All 3 of our business lines are profitable and growing, and we're achieving our goal of increasing our service revenue while rewarding shareholders with a dividend.

We found our sales strategy to be very effective, and continue to focus on selling Telguard's service to the small and midsized security dealers while maintaining our excellent relationships with the largest security dealers in the U.S. This has allowed us to generate higher ARPU as our mix changes.

More specifically, we've increased the number of active Telguard dealers by 24% over the prior year period to a total of 2,290. These are dealers that have activated at least one unit during the quarter.

Additionally, our most noteworthy new products, the 3G/4G cellular communicators for Telguard customers, are being well received in the market. As we have highlighted before, Telguard is the first manufacturer of cellular alarm communicators to offer the longevity of 3G/4G products for residential, commercial, fire and PERS markets at the price of today's 2G solutions.

During the quarter, we announced the availability of the TG-1 Express for 3G/4G networks. This next generation of the TG-1 Express completes the evolution of Telguard's entire product line to 3G/4G.

We also announced a one-of-a-kind upgrade incentive program. The program rewards dealers with up to $25 when they replace any manufacturer's installed 2G cellular communicator with one of Telguard's solutions for 3G/4G networks. It has just been launched, but we're excited about this promotion and the potential to gain market share from our competitors.

Turning to our new line of business, SkyBitz, we're excited about the opportunity in the Asset Tracking market. We're using SkyBitz's satellite expertise to monitor and provide real-time visibility to many different asset types, including truck trailers, intermodal containers, oilfield equipment, earthmoving equipment and others.

Our global satellite capability allows us to monitor assets in far-reaching locations around the world, including frac tanks in remote areas of the U.S., as well as government containers traversing the supply routes in the Middle East.

Satellite will remain an important part of the SkyBitz offering. We will supplement that technology with more advanced terrestrial cellular devices that will allow us to offer a richer tracking capability to domestic trucking firms, the current core of the SkyBitz customer base. The ability to apply Telular's historical expertise to developing cellular communications devices will provide SkyBitz with an increasing marketing advantage over time as we develop and release the most power-efficient and affordable cellular tracking devices in the industry.

Our SkyBitz service offering is already strong due to the software integrations we have with leading ERP systems in the trucking industry. We can further our leadership by widening the array of communicators, not only by optimizing our cellular devices, but also by increasing the number of value-added sensors that we integrate and make available to our customer base. I continue to be very excited about the potential opportunities in our SkyBitz unit.

Regarding TankLink, we announced the availability of several intrinsically safe wireless tank monitors for explosive chemicals and gasoline. These devices are approved for use in hazardous locations and address some of the more challenging problems faced by our customers, thereby expanding growth opportunities in the marketplace.

Our overall growth in the number of tanks monitored is happening through more focused, direct sales efforts and through an expansion of our indirect sales channels. We have much more room for expansion in this indirect channel activity, and that remains the essence of our market development plans in the near term.

In summary, we continue to be successful at growing our high-margin, recurring revenue streams in a profitable way. We're capitalizing on our market opportunity by increasing our distribution and expanding our advanced product portfolio. We have strong visibility into our business and remain committed to profitable growth and, as you know, maximizing shareholder value.

With that, I'd like to turn the call over to the operator to coordinate any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Michael Kim with Imperial Capital.

Michael Kim - Imperial Capital, LLC, Research Division

So first off, on the number of active security dealers. You continue to see that pace through the balance of the year. And also, within this existing base, are you increasing the number of activations per dealer per quarter? Or some metric that you use for penetration.

Joseph A. Beatty

Are you asking specifically about units per active dealer? Or are you just commenting generally about the increase in active dealer count?

Michael Kim - Imperial Capital, LLC, Research Division

Both on the active dealer count and then your units per dealer.

Joseph A. Beatty

Yes, so units per dealer is the goal. We are -- the majority of the dealers in the business use us periodically, right? So there's probably 3,000 or 4,000 who are really in the business day-to-day of intrusion detection systems. So we've got 2,290 of them using us at least once a quarter. We feel very good about that. So we're well known in the marketplace. Most of those dealers use multiple providers. So the goal is to be used more often. And so I think regarding your second comment, I don't have a number to give you, but I can tell you that that's really the daily endeavor we have, is to become even more regularly used, not only by an increasing proportion of the dealers out there, but even within a dealer as they make a decision day-to-day.

Michael Kim - Imperial Capital, LLC, Research Division

Great. And then can you talk a little about churn rates and how that's progressing, if that's more or less converging towards industry rates? Or are you tracking a little bit better than that?

Joseph A. Beatty

Yes, we're still tracking a little bit better than the industry rates, but I would say that we are approaching what the industry rates are of 13% to 15%. I think we've said for several quarters now that we are somewhere between 10% and 12% on an annual churn basis, and I would say we're getting closer to the 12% now, and again, it's still a little bit beneath the industry standard. And ultimately, we would expect to be at the industry level.

Michael Kim - Imperial Capital, LLC, Research Division

And then lastly, are you starting to see a little more competition or any further penetration on 3G/4G from other competitors?

Joseph A. Beatty

Not so much. Their units are starting to come out among the competitors. But largely, it is an exception basis where they have an offering, which happens to include a 3G/4G communicator. And so we're able to continue to contrast to our approach, which is hey, we've just converted the product line because that's what you need us to do. And by the way, we didn't raise prices. So we feel that we have a very strong message in the market still, even though competitors are starting to dribble out offerings that have that equivalent network functionality. So we feel good. And the upgrade program we just announced, we have good expectations for as well. And it's a little bit of enjoyment to get SIM cards mailed back to us with our competitors' names on them, knowing that one of our units went in active in its place.

Michael Kim - Imperial Capital, LLC, Research Division

And then just turning quickly to SkyBitz, are you seeing some of these new verticals, heavy equipment or DoD growing a little faster than the sort of the traditional or core SkyBitz markets in the past?

Joseph A. Beatty

Yes. We certainly see more activity in DoD and heavy equipment, and so we feel increasingly better about where it's going to grow. It's taking a little slower than I would like. But those kinds of decisions, especially DoD, tend to take a while. But we definitely feel good about the diversification among the customer base that is happening and should continue to happen, getting us past just being totally comprised of the trucking businesses' customers.

Michael Kim - Imperial Capital, LLC, Research Division

And just based on your visibility now, how are you feeling about the pipeline in the second half versus first half?

Joseph A. Beatty

We feel good about the near-term pipeline. I was just speaking with our sales leader in SkyBitz and we went over what the pipeline looks like, and it looks good. I would say year-to-date, it's below our expectation, frankly, for SkyBitz. And even with that, I think our results consolidated are very good. So that alone makes me feel better because some of those are just deferred decisions by some of our customers, because they watch -- that business is more economically sensitive than our other 2 lines of business, very much driven by how many trucks are being put on the road with goods. And in this time of year, we're going to start to have the orders for Christmas goods start to affect that business as well. So more economically sensitive, and we felt that our customers deferred some decisions in the last 3 months, and we hope that those come back at us in the rest of the year.

Operator

And our next question comes from the line of James Lee with Potrero Capital.

James Lee

Within the balance sheet, how much debt do you guys currently have?

Jonathan M. Charak

We have $29.25 million as of the end of the -- as of June 30, $29.25 million.

James Lee

Okay. And then on -- going to Telguard, is there -- do you have any update on the integration with panel makers for your wireless units?

Joseph A. Beatty

The integration -- could you repeat that? The integration...

James Lee

Yes. I think in the past you've talked about with these integrated panel for its wireless devices that you guys are working on, perhaps integrating your wireless device into these panel makers of this panel.

Jonathan M. Charak

Yes, we haven't -- no specific update in that regard today, other than to say that we still have a good feeling that we will be able to have our service offering to be part of at least some of those service offerings in the future. We'll talk more about it when there's something firm to discuss.

James Lee

And looking at your EBITDA guidance for the year, if I take the midpoint, that implies the Q4 EBITDA to be about flat versus Q3. And so if I -- I know you guys don't give the revenue guidance, but assuming flat or EBITDA margins being the same implies that your Q4 revenue is flat quarter-for-quarter. Is there something seasonally that makes Q4 a little weaker? I would expect you would be growing quarter-for-quarter.

Joseph A. Beatty

Yes, I think the one thing just to realize is the fourth fiscal quarter, it's the year end, so in terms of closing the books for the year, there's a little more variability and taking a look at inventories and making sure that any end of lag parts are written off. Probably its just a little bit of year-end caution in there. I wouldn't read anything more than that into it.

James Lee

Okay. And lastly, as you think about the growth rate for each of the segments, it looks like your Telguard and TankLink are growing in the low to mid teens. How should we think about the growth rate for SkyBitz over time?

Joseph A. Beatty

I think you should think about it as the same, really. Listen, the businesses are similar. It's a little like watching some of the Olympics swim meets. You see one racer get ahead of the other and then the other catches up. All of the businesses are in the teens up to 20% in a good quarter. So I think if you take the range of 10% to 20%, hopefully much more often in the second half of that range. That's the kind of organic revenue growth that we're targeting.

James Lee

It sounds like near-term SkyBitz is on the lower end of that or even below that.

Joseph A. Beatty

Yes. SkyBitz, yes, it was below expectations in the last quarter for sure and for the reasons I talked about, I think some industry caution. We've got a -- we have a product transition as well, where we announced a -- released a new product. And so you think about educate customers about that, and sometimes that can put a little bit of a lag in demand.

James Lee

Is there any change in relationship with Iridium? Or are you still using -- are you using Iridium?

Joseph A. Beatty

Yes, we are still using Iridium. We also still use LightSquared. In terms of the new product, it is Iridium-based. And it is our flagship satellite product.

Operator

[Operator Instructions] And our next question comes from the line of Chris McCampbell with Southwest Securities.

Chris McCampbell

Do you see your SkyBitz debt repayment as prohibiting your ability to grow the dividend going forward? Or do you think you can do both?

Joseph A. Beatty

Yes. I would -- no, I don't think the SkyBitz debt or the debt service requirements we have would be an impediment, necessarily, to growing the dividend going forward. Of course, that decision -- we and the board discuss periodically about whether or not to grow the dividend. I think in our short history, we have grown it already one time. But the board will continue to take that into consideration. But certainly, based on what we think the business can do in terms of cash flow generation, the debt service is more than covered.

Operator

[Operator Instructions] And our next question comes from the line of Ted Moreau with Knight Capital.

Ted Moreau Jr.

Joe and Jon, I just wanted to -- maybe elaborate a little bit more on the 3G/4G initiatives you had. You've talked about a little bit that you're ahead of the competition. Are there any other products in that, that are 3G/4G related? And secondly, are you dependent on the carrier build-outs at all to be able to bring out and develop products in that segment?

Joseph A. Beatty

In terms of others -- 3G/4G is most applicable to our Telguard line of business currently because many of those units, once they're put in someone's home or business, are expected to be on the wall for 5 to 7 years or more, in some cases. So it's relevant for that line of business because the sunset of 2G, it's already starting, honestly. I'll talk about that more in a minute. But a permanent sunset of 2G is something that is thought to be in the 4- to 5-year range. So if you're going to put a unit on someone's wall, it's going to last 5 or 7, you'd like that to be something you don't have to take down early. In terms of TankLink and SkyBitz, the expected life of those units is still at or within the range of 2G. So it's less critical, if they be converted. I think that answers your first question. Or depending on the carriers, yes, I mean yes and no, we're not dependent to modify our products for 3G/4G capability at this point. The networks are up. And we're not doing LTE, for those of you that are into the cellular vernacular. That's not the 4G version we've got. And so 3G is fully implemented widely across the country. So there's no risk there. In fact, it's the opposite. What we're seeing is as many more of us have 3G smartphones with data capabilities, the cellular carriers are harvesting spectrum, taking frequency that was dedicated to 2G devices and converting it to 3G. So the coverage of 2G is effectively shrinking already now, years ahead of when it will be turned off. So it's an issue that's relevant today. That's why we're pushing it.

Ted Moreau Jr.

Great. And it sounds like you have a pretty good advantage on the -- from a competitive standpoint in the 3G/4G-related products?

Joseph A. Beatty

Yes, we feel that we do. We jumped on it early. We've got a great partnership with AT&T. And so it's all good, and we think the message is resonating.

Operator

And our next question comes from the line of Pete Enderlin with MAZ Partners.

Peter Enderlin

What would the SkyBitz's revenues have been a year ago, I mean, on a pro forma basis? I remember that it's indicated, annual run rate was around $35 million. So that's about where we are? Was it basically flat versus that quarter last year?

Joseph A. Beatty

Yes, that's the way to look at it. You're right that we talked about a $35 million run rate. It's a bit seasonal. So that's an annualized figure. And quarter-to-quarter, it can move around a little bit with seasonality. But I think cutting to the chase on your point, as I said earlier on the call, we're a bit disappointed with this quarter's results from SkyBitz for the couple of reasons I said. We think the trucking customers deferred some purchases and we're at a product transition point, so that sometimes makes us take a little more time to educate existing customers about the new version we like to ship them.

Peter Enderlin

Right. Does it make sense to talk about a churn rate in that business? And what is that roughly?

Joseph A. Beatty

Yes, it's relevant. The contracts in that business are typically signed for a 3- to 5-year period. And so at the end of the contract term, there's a renewed decision. Sometimes it's made. So -- and when those happen, you can think about a churn rate, and I think we talked about this in the past, that it was roughly 15% annual churn rate was the number that's kind of in our heads softly as what we expect that business to incur.

Peter Enderlin

Okay. And if you just look at the trucking industry target market as opposed to all the other possible markets that you have, what kind of industry penetration is there at present for the whole industry? Is it pretty...

Joseph A. Beatty

Yes. We think -- yes -- so we have, we think, about 30% share with our couple of hundred thousand units, so 650,000, 700,000 trailers tracked today out of a universe of maybe 4 million. It would be a rough path on penetration.

Peter Enderlin

Okay, so there's a big runway potentially still ahead.

Joseph A. Beatty

Yes, we feel that there is.

Peter Enderlin

And you mentioned something about some software integration of SkyBitz, I think, with truckers. Could you elaborate on that a little bit?

Joseph A. Beatty

Yes. One of the things, really, in each of these businesses, but probably more for TankLink and SkyBitz is we have a device and we can tell our customers where a trailer is or when a tank needs to be refilled. But the means in which we tell them, the data exists and do they want to go look at a portal to see that information or would they rather have it automatically flow from our system into their ERP system integrated into their truck routing application, for example? Well, the latter is the best situation. If you can be integrated with their software, so that it's -- the business processes that they normally have that this feeds right into it instead of making them look at a different website, that's a better situation to be in. And we have integrations with the top 3 ERP systems that the trucking industry uses. And that's a differentiating factor. I kind of put that in the remarks to give investors a flavor for similar reasons we win business, and that's one of them. So I'm glad you picked up on it, but it does matter to be integrated as we are.

Peter Enderlin

Yes. And then you also mentioned additional price of sensors in some of your businesses, I mean, in both TankLink and SkyBitz. What kinds of sensors are we talking about? And is it difficult to source them on a proprietary basis? Or are they very standard kinds of things?

Joseph A. Beatty

Well, I would say it can be difficult to source the optimal sensors. And we'd -- that's an advantage for us because we've been at it with TankLink. And we got that business, there we're using U.S. manufacturers of differential pressure. Submersible sensors, if you are a little bit arcane. But what we discovered in the last few years is if we can find those around the globe, those that are maybe better made and more cost effective, that's an advantage when we bring those back to the U.S., pair them up with our communicator and sell the solution. And so sensors can be -- it can be difficult. And for us, I would argue, it's an advantage because we're pretty good at it. So for TankLink, we need to sense the fluid in the tank and when it's at a certain level and we use certain sensor types, then we -- as I said in the remarks, we created a -- not only the sensor for gasoline, for example, has to be more robust, but also the electronics above it that sit on the tank. It's an explosive environment, and there are very specific UL requirements to be able to put something that's battery-powered and has the potential to spark. So it's a different, more robust piece of electronics. In SkyBitz, the sensors we're talking about have to do with added value for the trucking firm in the case of trucking. So we can -- we have cargo sensors where we can tell you not only where your trailer is, but we can tell you how full it is, because there are RF sensors that can look forward in the trailer and see if there's any cargo in it. We can tell you if the door is open or when the door opens with a door sensor. So we can tell you if ambient light gets in, in the containers. So maybe someone didn't open the door but they cut into the metal wall in order to steal the cargo. Well, if you have a light sensor in there, you can tell that something happened. So those are just ways that add more value.

Peter Enderlin

They're containers in a way.

Joseph A. Beatty

Exactly. Yes, they're containers, that's applicable. This is getting more nuanced and we're just making the point that that's all part of being stickier, adding more value and serving customers better.

Operator

At this time, I'm showing no further questions in the queue. Please continue with any closing remarks.

Joseph A. Beatty

Great. Well, I just want to thank everyone for your continued interest. We feel great about business. We feel like it was a good quarter. The ability to raise our EBITDA guidance for the rest of the year feels good, so we appreciate your continued interest, and look forward to speaking with you again in the future.

Operator

Thank you. Ladies and gentlemen, this concludes Telular's Third Quarter 2012 Earnings Conference Call. If you would like to listen to a replay of today's conference, please dial (303) 590-3030 or the toll-free number of 1 (800) 406-7325 and enter the access code of 4552085. Thank you for your participation, and you may now disconnect.

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