FY2010 Q1 Telular (WRLS) comments by D Klein 02/06/10


Revenues and earnings were better than expected due to the Telguard segment.  The number of Telguard units increased to 38,000 topping their previous estimates of 30,000-35,000.  Going forward they have adjusted the range to 30,000-40,000 per quarter for FY2010.  Unit prices remained in line with the previous quarter.  Service revenues are growing in the 20%+ range year over year which is important since margins for these revenues are approaching 60%.  Hopefully they can continue to add scale without needing major investments to expand the facilities, etc.

TankLink has been a disappointment to date.  Remember when they made the acquisition their thinking was based on revenues of 6 million for FY2009.  They missed by about half and it appears FY2010 will not be much better.  The PR combined the FWT and Tanklink products so some guesswork is required to separate them, hopefully the 10-q will be more transparent.  Not sure why the lack of transparency except maybe to mask the disappointing results when compared to the original expectations.

FWT sales are what they are and will probably be a no growth unit going forward.

Cash is now about 21 million which has me a little worried.  Why?  Buffet once said that managers can be excellent at running a business but in many cases excellent managers are horrible allocators of capital and so far Telular has been no exception.  CSI was, in short, a disaster but to be fair this management team was not a part of that, however the jury is still out on TankLink.  As with CSI the original analysis of TankLink was way off the mark.  Hopefully they used a different investment firm, doesn’t look like it.  Then again if you ask an investment firm what’s better, an acquisition, a stock buyback or a dividend is akin to asking an interior decorator if you need to buy a new rug or save the money.  At the time of purchase they could have bought back an additional 1.4 million shares (+-) of company stock.  The question is which creates more value in the long run, so far its not looking good for TankLink unless Mexico turns into something meaningful, but to date they are not close to the expected revenue numbers they paid for.  So they have 21 million in the bank and growing.  I’m worried they might feel compelled to attempt an expansion of the empire at shareholder value expense vs other means that may better increase value.  That said I don’t know what their thinking is and I doubt they would tell so we’ll just have to wait and see what happens.

Speaking of cash lets not forget those warrants that expire September 2, 2010.  A closing price above 4.5 will generate about 6 million in cash and a close above 5+ will generate another 6 million adding about 2.6 million shares (combined).  The stock will almost certainly be above 5 IMO by then (based on the current Telguard trend) so my guess is it pays for the company to continue buying stock below these levels.

On another note the company issued options and restricted stock totaling about 200,000 shares in the last few days to senior management and directors. No additional comment.

Overall I’d give high marks for a solid quarter, both top and bottom lines along with controlling costs, but we’ll need a few more good quarters before I’d call it a sustainable trend. The big question is what to do with a growing pile of cash.

For a valuation see the preliminary (need the SEC filing) stock model on the website. 

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2 Responses to FY2010 Q1 Telular (WRLS) comments by D Klein 02/06/10

  1. Investor says:

    Transparency for the TankLink segment was provided in the 10-Q filed today. Tanklink products came in at 555,000. Add the TankLink recurring revenues and the total segment revenue was about 909,000 which is a run rate of about 3.6 million per year, well short of the 6 million envisioned when purchased which means they probably overpaid. Assuming they grow from here it could be a few years before they get back to the 6 million number and it finally starts to add to shareholder value over the price paid. In the meantime it is the Telgaurd segment that will drive the price in the short term.I’m not against M&A but the problem with any acquisition/merger is paying too much which may have occurred here since their original premise of 6 million in revenues in FY09 was way off the mark. Acquisitions should be measured against:a) Get it for intrinsic value or lessb) Have similar cultures and technologyc) Be 100% confident they could produce positive earnings once integrated or increase the intrinsic value paid. Assuming they could get b & c then as with everything else it all comes down to price. If the price is too high c doesn’t really matter since it could be years before the owners (shareholders) get back to where we were before any deal which may be the case with TankLink. Since TankLinks (SupplyNet) financials were not public no analysis is possible except what management provided and they only metric they provided was 6 million in FY09 and the actual number was less than half. Since they are building cash my hope is they don’t give it away to expand the empire. This will not benefit the owners vs. allocating the capital toward other means of enhancing value. I like this management team but so far the company as a whole has not been very efficient in the M&A area. CSI was a disaster and TankLink will hopefully recover over time. We’ll see.

  2. Unknown says:

    FYI…This management team is clueless and has been running on luck. Well it seems luck is running out and the house of cards is falling down. This is a sinking boat and will continue to be untill they replace some players who could easily be swapped out with chimps to achieve the same results.

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