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Telit attracting interest from private equity buyers

The march of the machines ... Telit has placed itself firmly at the forefront of the next digital revolution - the Internet of Things (IoT).
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I'll be back ... the machine-to-machines comms specialist has bounced back before

Telit Communications Plc (LON:TCM) has placed itself firmly at the forefront of the next digital revolution - the Internet of Things (IoT).

The group’s technology allows devices to communicate and share data through a wireless network.

It is currently the number-one player in the industrial IoT sector with almost a third share of the market.

Telit designs and manufactures IoT modules in order to connect devices with each other and a centralised dashboard or app.

The modules are electronic components that are designed into the inner-workings of a device, allowing it to send and receive data over wireless networks. Satellite navigation modules make the device position aware.

Telit’s aim is to be an end-to-end solutions provider for its customer, which means keeping at the cutting edge of technology and providing its customers with a global support network.

Sometimes, keeping at the cutting edge of technology is made more difficult by industry bodies dragging their feet over adoption of new standards, as happened in the Americas in the middle of the decade with the introduction of new Long-Term Evolution (LTE) standards.

Recently, and in similar vein, the shares have been battered by similar delays in the timing of certifications for the LTE CAT-1 VoLTE product and a handful of large scale deployments, all of which could be deployed slower than planned.

Investors should take heart from the fact that Telit has suffered this sort of share price slump before and bounced back.

Telit’s official line remains that the certifications should come through in the current quarter and will provide a fillip to revenues in 2018 and beyond.

LTE promises faster speeds compared to G4

LTE is the name given to the technology used in pursuit of next generation data speed standards. It exists as a set of requirements for high-speed wireless mobile data networks.

LTE involves increasing the capacity and speed of the network using a different radio interface together with core network improvements. The standard is used to upgrade from the 2G wireless networks to 3G and 4G.

In the case of 4G, users should see data speeds up to ten times faster than current networks.

Strong rebound in the Americas after the last sped bump

History suggests that once delays in certification are overcome, it will regain momentum in the Americas.

The highlight of the results for 2016 was the 36.5% growth in IoT services revenues to US$35.1mln.

Overall, Telit’s revenues were up 11% to US$370.3mln as the Americas returned to strong growth in the second half.

This gave adjusted underlying earnings (EBIDTA) of US$54.4mln (up 20%) and pre-tax profit of US$19.1mln (also up 20%).

In its half-year results for 2017, the company indicated that revenues would fall somewhere in the range of US$400mln to US$430mln, while adjusted EBITDA would be between US$47mln and US$60mln.

The width of those guidance ranges indicates the level of uncertainty currently in the business, though Telit is confident the delayed revenues have only been deferred, not lost.

The uncertainty has had an effect on cash generation and as a precaution the company has suspended the interim dividend.

Bolt-on acquisitions flesh out the product suite

Telit has its own research & development (R&D) technology, but it is not averse to buying up companies that augment its product offering.

Telit acquired some Bluetooth Low Energy (BLE) assets early in 2016 from German company Stollmann Entwicklungs und Vertriebs – and a year later it pulled off what looks like a coup with the acquisition of smart Wi-Fi specialist GainSpan.

This is a company that was once part of the company known as “Chipzilla”: Intel.

The computer chip giant ploughed millions of dollars into it, resulting in top-notch technology and patents, all of which Telit has picked up for US$8mln in cash.

While the technological development has been excellent, the commercial side of things at GainSpan did not pan out so well, and the company is currently loss-making. As a result, Telit's earnings will take a hit of around US$4mln in the first year of ownership, but Yosi Fait, Telit’s president and finance director, thinks the San Jose, California ultra-low-power Wi-Fi specialist will blossom under Telit’s management.

“It has annual revenues of about US$10mln, which is very small. This will grow significantly, and this will be a great addition [to the Telit stable],” Fait predicted, adding that the company has already heard from many existing customers expressing approval of the acquisition.

Damage repair mode

There is little doubt that the company has a bit of damage repair work to do after the savage reaction to its 2017 interims, but (now ex) chief executive Oozi Cats remains upbeat.

"Our IoT Services business unit, with its recurring revenue business model, is continuing to gain real momentum. Its growth rate continues to be strong - with revenues up over 25% - as increasingly large industrial organisations seek integrated end-to-end solutions to meet their IoT requirements,” Cats said

"Our ability to provide integrated end-to-end IoT solutions for corporates and enterprises - including our IoT portal, global SIM cards with custom data plan, our IoT modules, and our factory solutions platform together with our IoT know-how is gaining strong traction and recognition by customers and partners.  Two recently announced partners are OT-Morpho and Cisco, joining existing partners SAP and Tech Mahindra, as well as many others,” he continued, adding that the company remains confident of a strong performance in the second half of this year.

Cats resigns after investigation into historical indictments

Chief executive Cats recently resigned from his position with immediate effect following an internal investigation into alleged historical indictments.

Reports at the start of August alleged that Cats had been on the run from US law enforcement since the early ‘90s after skipping a plea hearing.

Shortly after those reports surfaced Telit confirmed it had hired a law firm to assess whether or not Oozi and his wife were connected to the Uzi and Ruth Katz named in the court papers.

The Internet of Things (IoT) enabler said the evidence showed Cats had “knowingly withheld” the indictments from the company.

“It is a source of considerable anger to the board that the historical indictment against Oozi Cats was never disclosed to them or previous members of the board and that they have only been made aware of its existence through third parties,” a statement said.

Yosi Fait will continue as interim chief executive officer while three independent non-executive directors are expected to be appointed “as soon as possible” to reinforce the board.

Meanwhile, private equity companies were said to be sizing up the company - among them Berkshire Partners, Vector Capital, Apax, Advent and Battery Ventures - though none as yet have lodged an offer.

Merchant bank Rothschild is apparently gauging interest from funds for Telit's automotive division, while potential trade buyers have also been sounded out.

Finally, Chinese investor Run Liang Tai Management has quickly built up a stake of more than 14% following the London-listed company's profit warning in August.

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