Monopolistic Review: Telit Communications (TTCNF) .934 (TCM.LSE) 58.50
A global wireless M2M (machine to machine) technology pure play
What makes this a good business?
We believe Telit Communications is an exciting monopolistic building block business model with rapid revenue growth resulting from its superior platform, and its growing footprint and solutions within an ecosystem recognized as being one of the world’s fastest growing industries. There are countless applications that are already based on two-way wireless communications, in shopping, medicine, transport, security, energy, remote reading of electricity, water, gas meters and many other industries. Many observers believe the industry will accelerate with the introduction of LTE (next generation wireless smartphone) networks that provide far greater bandwidth. Cisco (CSCO) estimated that the amount of information transmitted via M2M solutions would grow at an average rate of 109% a year between 2010 and 2015. According to Analysys Mason, the global market for machine-to-machine (M2M) device connections will grow from 62 million devices in 2010 to 2.1 billion devices in 2020, and according to Berg Insight, current cellular M2M connections will more than triple by 2016.
Telit Communications has been the fastest growing of the major M2M vendors for several years, rising from roughly 6% market share in 2007 to more than 25 % market share in 2012. The company utilized its core business, a pure play position, to provide customers and markets the widest uses of wireless communication between many mobile and desktop devices.
Being one of the first in the M2M industry has forced Telit to develop their own protocol stack, and this basic building block has allowed them to have complete control of their own architectural destiny. One significant advantage of this, is that it can be first to new markets, as exemplified in the recent announcement that Telit has attained full compliance and certification to Zigbee standards version 1.1, for Home Display and Energy Service Interface. This ground floor advantage is important, considering that other services will look to build on a common protocol/standard when launching their own value added products or services.
Telit gains a high degree of flexibility from its total control over this key standard setting software element. Being the market’s only technology company dedicated solely to M2M, Telit has been quick to adapt its products to the broad range of variegated and changing demands typical of the emerging and fast growing markets of smart-grid, smart-home, and smart-metering markets, allowing it to tap into many of these new fast moving opportunities.
Telit’s Unique Product Family Concept
Telit offers its customers a form factor and family concept. The product families are tailored to different levels of integration and volumes according to application size and production scale. All the modules of one family have the same size and shape, the same connectors and the same software interface so that that they can be exchanged with and easily integrated into existing customer designs with minimal adaptation. The demands on M2M modules will continue to increase in the future – requiring substantial added versatility in use.
Not only does Telit provide flexibility in the stack, in 2008, Telit made a strategic move to widen its footprint from a “cellular M2M” solutions provider to a “wireless M2M” solutions provider, so now both Satellite and Short Range RF technologies are built into the product offerings. Being the only M2M supplier worldwide to offer all relevant wireless technologies in its product portfolio accentuates its product advantages. The company develops, manufactures and markets a wide range of enterprise communication modules such as Wi-Fi, GPS, Bluetooth, and ZigBee. As the market for small and compact standard modules steadily grows, the module level continues to increase in importance as total cost and time to market turn lower.
This fast moving proprietary stack market reminds us of other companies that we have identified in the past such as Qualcomm (QCOM), RED HAT (RHT), Arm Holdings (ARMH) and Citrix (CTXS), where over time they were able to leverage the key building block of a fast growing industry and turn a monopolistic position into real market leadership and produce outstanding returns for the long term investor. Telit may soon be able to find a robust application from a competitor, perhaps like Microsoft (MSFT) found in Netscape, and after integrate it into their protocol stack be able to sell the whole stack for slightly more while giving the end application away. This is a typical advantage of a monopolistic business.
Our previous studies have revealed to us that companies achieving monopoly/platform positions, or in this case having ownership of a protocol stack, have more of a “gutter approach” versus the individual roof shingle, which interacts only with the rain that falls on it. While gutters often remain unseen, they typically receive the same amount of rain (or in business terms, profit) as all of the shingles combined. Telit is endeavoring to be the stand alone leader and the de facto standard for this entirely new, and rapidly developing, mobile media market. Along with better and more complete services, Telif is orchestrating outstanding barriers to competition, while being able to achieve excellent margins and economics of scale as a result of its many strategic partnerships.
New products will drive revenues
A potentially large new market that Telit that is aggressively pursuing is m2mAIR, which offers M2M managed connectivity and value-added services. Telit’s m2mAIR offers module and subscription lifecycle management via its ‘Software as a Service’ (SaaS) platform and its global wireless coverage in partnership with Telefónica. Initially available in Europe, rollouts for m2mAir are scheduled in the U.S., APAC and Latin America later this year.
However, the most successful new product might be its PC based adapter card that enables secure 3G, data, voice, and video communications for PC’s. The new Mini-PCI card can be used for updating ATMs, kiosks, digital signage, surveillance, fleet management, and other applications benefiting from always-on wireless data connection, monitoring, and control.
Telit has also acquired new GPS customers and products beyond the traditional M2M industry with the purchase of Navman Wireless OEM Solutions. This will help them increase their already strong position of core technologies in the GPS sector, and further integrate higher levels of GPS services into their protocol stack.
Schlumberger Water Services (SWS), a division of Schlumberger (SLB), and Telit have developed a dedicated gateway that enables the wireless transmission of data acquired by groundwater monitoring devices. The groundwater monitoring devices are installed in the wells to continuously provide real-time status regarding water depletion or any potential for flooding, salinization or pollution. Integrating GPS features into these devices could help identify and quarantine water issues, and help predict or point to other eminent problem locations. This type of monopolistic leverage potential is rare to see a small company like Telit. Having a unique solution with which to leverage the much larger Schlumberger is an example of a shingle (Schlumberger) providing revenue for the gutter (Telit.)
Below is a simply value chart to compare some of the technology companies that we identified previously as monopolistic, having early advantages similar to what Telit appears to now have.
|Company||Price to Sales||Future expected PE||Last Quarter’s Growth (in percentage)|
Companies that make multiple acquisitions such as Telit has often purchase a problem company that has serious integration difficulties and proves to be far more costly than what was initially anticipated. Platform integration requires a strong management team in order to make sure that not just the purchase is sound, but that business plan execution is also superior. The acquisition pace of Telit has been aggressive, giving us concerns about management’s ability to maintain a long term focus and solid execution within this industry’s enormous tidal wave ride. Considering that it appears to have excellent potential for establishing itself as a monopolistic business, Durig Capital has selected Telt for early addition to our Monopoly Portfolio.
Telit is a European based company, and Europe is facing a broad economic slowdown. Slower European sales would probably have a negative impact on Telit product sales. However, in spite of this, Telit has projected about 21% growth in its second half. Net cash flow from operating activities in H1 2012 have increased by 39.0% to $8.3 million (H1 2012: $6.0 million.) This is indicative of very strong growth in light of the overall economic uncertainty in Europe, and suggests that Telit is probably gaining market share from competitors Gemalto (GTOMY.pk), another European company, and from Sierra Wireless (SWIR), of Canada.
This is not widely known company trading at a deep discount to most of its technology peers, which could be a reflection of liquidity issues and keep traders away.
The potential market for wireless M2M market is enormous. In the current economy, Telit is indicating a growth rate that would be welcome by most any company. Considering that this growth comes with new products and solutions, with thousands of value added resellers and solutions based on their core technologies, helps validate our belief that Telit’s platform is just starting to realizing true economics of scale along with its market leadership. Most notably, we see Telit as possibly having many monopolistic type advantages in front of a tsunami growth market.
The latest Telit updates and other monopolistic ideas from Durig Capital may be found here.
Disclosure: Durig Capital and certain of its clients may currently hold positions in Telit.
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