Telular (WRLS) conference call comments 08/12/09 by D Klein


Funny how things work out.  The original investment thesis was that more and more would cut the cord and buy an FWT to replace their landlines.  Turns out the masses pretty much ignored FWT’s sending the stock to the dumpster but there was an unexpected side effect: they are cutting the cord in large numbers requiring a wireless backup for their alarm systems.  Not only does this generate equipment sales but an added benefit of a recurring revenue sale. So what’s the potential?

From the CC:

”security dealers have realized, gosh a portion of our customers don’t even have phone lines so we have to put it in for them, and oh, by the way I’m starting to get calls from existing customers that have removed their phone line so now I have to do a truck-roll and add something to their system for wireless, maybe I should just be putting it in right up front on all my system sales.”

AND

”I would speak to the penetration though. I think of the 20 or 22 million monitored premises in the U.S., I’d estimate about 10%, a couple million of those have wireless, and so I just think that penetration is just going to start marching forward continuously over a period of years to the majority over 50%. It’s tough to hazard a guess as to how quickly that will happen but I think we are going to see just a continual increase in penetration of that existing base and that’s really what’s going on here. And so that’s a lot of potential if we’re only at around 10% penetration we’ve got a long way to go.”

So if he’s (CEO) in the ball park with his estimates then about 2m are wireless which gives Telular about a 23% market share.  If the number approaches 50%  and the overall market does not grow (hard to believe but lets just be conservative), and Telular’s market share drops to 20% (it could grow but lets stay on the conservative side), would be about 2m subscribers.  Of course at this rate it could take up to ten years to get there but if they show continued growth in this segment it will not take long for others to figure out what a cash cow this would be.  That number would generate about 100m/year in recurring revenues say in 10 years time.  Considering the margins (50%+) generated by this segment that is a huge number, but if the trend starts to prove out, and say the shares outstanding double to say 30m, operating expenses of 25m (from  about 16m today) would contribute about $0.83/share and that ignores all other revenue.

These are long term guesses but not unreasonable IMO considering the present growth in the subscriber base plus some of the above assumptions could turn out to be conservative, who knows, but if the present trend continues the above could become reality.  The present trend is shown in the graph below:

image

Time will tell.

As I said, its funny the business segment (Telguard) which was ignored as a driver for many years is turning out to be the gem of the company while the FWT’s fade into the sunset.

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