For management at Telit Communications (TCM), companies everywhere can now use the connected environment to “drive down their cost base, improve efficiencies and create new revenue streams”. The same could not be said of Telit in the first half. The self-described “enabler" of the Internet of Things (where everyday devices can be linked up) saw meagre revenue growth, a weaker gross margin and a balance sheet still showing a net debt position despite the $50m (£38m) capital raise in May. Pre-tax losses of $6.7m marked a serious reversal of the $4.7m gain seen in last year's first half, and no dividend was paid. In reply, the shares were down by almost a third as we went to press.
A 90 basis point contraction in the gross margin to 39.2 per cent stemmed from a delay in certifications of Telit’s ‘CAT-1 VoLTE’, its long-term evolution modules. Some customers were consequently sold a higher cost version at a lower price. Worryingly, the timing of these certifications, and those for some other “large scale deployments”, remains uncertain. The group optimistically expects $400m to $430m in sales for the full year.
Meanwhile, the recent acquisitions of Stollman (smart bluetooth) last year and GainSpan (smart wifi) this year led to increased research and development and marketing expenses as Telit expanded in those markets, which contributed to $4.8m in first-half operating losses. However, management expects sales and marketing costs to decline as a percentage of revenue from the second half onwards.
There was some good news to go with the doom and gloom, though. Telit received its first purchase order from Tesla for its new Model 3 car. And the services division – now the company's focus – saw 25 per cent sales growth, reminding us that a strong addressable market does exist for connected devices. Revenue is typically second-half weighted and management “remains confident of a strong second-half performance”. Still, a question mark looms over the funds raised in May to enable acquisitions. Management might now have to use this cash elsewhere.
Analysts at Canaccord Genuity downgraded forecast pre-tax profit to $19.8m (from $32.7m) and diluted EPS of 13¢ (was 22¢) for FY2017, down from $32.8m and 23¢ in 2016, before rebounding in 2018.
| TELIT COMMUNICATIONS (TCM) | ||||
| ORD PRICE: | 177.5p | MARKET VALUE: | £230m | |
| TOUCH: | 177.5-178.3p | 12-MONTH HIGH: | 379p | LOW: 143p |
| DIVIDEND YIELD: | 2.1% | PE RATIO: | 31 | |
| NET ASSET VALUE: | 131ȼ* | NET DEBT: | 5% | |
| Half-year to 30 Jun | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (ȼ) | Dividend per share (ȼ) |
| 2016 | 166 | 4.7 | 3.50 | 2.5 |
| 2017 | 178 | -6.7 | -3.50 | nil |
| % change | +7 | -242 | -200 | -100 |
| Ex-div: | nil | |||
| Payment: | nil | |||
| *Includes intangible assets of $124m, or 95ȼ a share £1=$1.31 | ||||
