Racing to win in the next age of connectivity

Gamma Communictions (GAMA) had a great year in 2020: adjusted cash profits grew by a quarter to £79m, as all of its key products posted growth across the year. The pandemic only had a small impact on its business, as it was mostly immune to the cancellations, bad debt and churn that sprung up elsewhere in the market. 

This is perhaps expected for a company that sells cloud-based connectivity products, over a year when easy, high-speed communication was essential for the smooth operation of many other businesses. But it is all the more impressive when you take into consideration that Gamma’s client base is made up primarily of small- to mid-sized enterprises (SMEs), which have been at the mercy of a difficult macro environment. 

The number of Gamma’s installed cloud telephony ‘SIP Trunk’ products grew by almost a fifth to 1.2m, including the sales of the ‘MS Teams Direct Routing’ service, which integrates Gamma software with Microsoft’s (US:MSFT) video conferencing platform. This is a smart way of collaborating with rivals in the connectivity space rather than being drowned out by them – but management flagged growing competition in its core product areas, and warned of potential price pressures. 

Although for now, ongoing software updates seem to have kept its various services competitive. The launch of a single line replacement product, PhoneLine+, in the second quarter of this year should also help its users to draw together Gamma services with MS Teams in one place. 

But some investors may be wary of the sustainability of the wider software communications trend. Fatigue already seems to have settled in – this week major bank Citigroup (US:C) said that it plans to launch ‘Zoom-free Fridays’, in an attempt to help its burned out employees cope with the stress of the pandemic. The constant stream of video calls is not an uncommon grievance: 73 per cent of people suffered from so-called ‘Zoom anxiety’ over the last 12 months, in a 2,066 person poll conducted by design agency Buffalo 7. 

It is inevitable that video conferencing will start to wane once coronavirus restrictions lift and offices gradually reopen. But the need for greater connectivity is not limited to people – and the rise of the internet of things (or ‘IoT’) will not likely run out of steam. 

That could explain why Telit Communications (TCM) recently confirmed that it has yet again attracted a potential takeover bid from Dbay Advisors, an asset management group that is also its largest shareholder – and had mounted a takeover attempt towards the end of last year. Dbay, which rescued logistics company Eddie Stobart in 2019, is now considering an offer of at least 206p a share, slightly below Telit’s current trading level. 

This possible (rather meagre) offer may seem justified to some market participants, given that the group’s adjusted pre-tax profits dropped 5 per cent to $12.5m (£9.1m) in 2020, as the impact of Covid-19 weighed on customer demand for new hardware. But its IoT cloud and connectivity business posted a 7.3 per cent increase in revenue to $44m – a pointer to the main growth opportunity. The scope for scalability here is compelling – and we think is it is one of the main reasons why Telit rejected several takeover offers towards the end of 2020. 

Cloud revenues from the Americas, its biggest market, were flat last year, although management says that it is confident it will return to growth in 2021. In Europe, Telit blamed a 13 per cent decline in cloud product sales partly on the stagnation of cellular technology on the continent. But we think that could start to look up, especially as the roll-out of 5G smooths out, now that various governments have made a final decision on excluding Huawei equipment from national networks. Consensus forecasts compiled by FactSet are bullish, pointing to EPS of 11.09 per share in 2021, compared with 4.7p in 2020. We move to hold. 

Last IC View: Sell, 154p, 18 Aug 2020

Meanwhile, analysts at Peel Hunt expect that Gamma’s adjusted pre-tax profits and EPS will grow to £69.2m and 57.7p in 2021, compared with £61.7m and 51.3p in 2020. We stick to buy.

Last IC View: Buy, 1,585p, 8 Sep 2020