Telular third quarter results (ending 6/10) comments by D Klein 7/29/10


Telular exceeded my expectations by a significant amount despite Telguard subscriber growth remaining flat.  Management continues to do a very good job managing costs. Forward guidance is slightly higher than I had modeled, especially as it relates to the TankLink segment.

Telguard service revenue was able to grow sequentially without increasing the subscriber base because units deactivated by a large dealer (my guess is ADT) generate less revenue than new activations with other security dealers. ARPU from the large dealer was in the $2 range and ARPU from new activations are above $4 resulting in a sequential increase in Telguard gross margins of about 9%, excellent results with or without the subscriber base changing.  Telguard average recurring rev/unit month/subscriber (ARPU) increased to $3.99 and as the large dealer purges old (lower margin) accounts this number will increase.  The purge is expected to end this quarter so the subscriber base should remain flat for one more quarter but gross margins will continue to increase since the low margin subscribers are being replaced with high margin ones.

Fourth quarter guidance was increased to sell between 15,000 and 25,000 new Telguard units.  Another surprise was the ASP increased from $134 to $149 helping drive higher than expected revenue.  Telular sold approximately 16,700 Telguard units and had 18,000 new Telguard activations which were offset by a similar number of deactivations as explained above.

Management seems to be more upbeat in the TankLink segment. Billable tanks increased from 17,000 to 17,700 sequentially or about 4% and they expect this trend to continue. ARPU is $6.75 per month and management stated margins are in line with Telguard margins although revenues still have not exceeded expectations when they bought the business but the trend is up.

Cash continues to increase.  They ended the quarter at $24.6m and this number will continue to grow.  They have more than enough to run the business including the buy-back program so hopefully they will be cautious and not over spend for any acquisitions.

Earnings were $0.06 per share and I expect earnings on a diluted basis to be $0.08 next quarter.  The reason for the jump is the stock based compensation expense was high this quarter and should come down substantially in the next quarter.  Their five year EPS growth rate should be above the 15% range going forward based on the facts we know today and if the TankLink segment ever gains strong traction this number could substantially increase.

They repurchased 86,000 shares, a disappointment since any share repurchases will come at a higher price going forward IMO.  They still have $4.7 million allotted to the repurchase program but have not been very aggressive over the last several quarters.

Overall the quarter was better than expected which is why the stock is trading up IMO.  The EPS trend is heading up although not as fast as I would have hoped in the past. Still the downside looks limited, barring the unexpected.

An updated model is at:
http://kleincody.web.officelive.com/Documents/WRLS_Projections.mht 
and an excel version which allows some user input is can be downloaded from the bottom of the following web page:
http://kleincody.web.officelive.com/IIExstockvalues.aspx
It is an xlsm file (excel 2007). 

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