Analyzing Small Cap Firms in IoT: Part 1

A Deeper Connected Conversation Volume 3 / Issue 3 / April 2017 Analyzing Small Cap Firms in IoT: Part 1

Small Cap IoT Firms Analysis By Keith Tamboer & Matt Champion There is a lot of noise and hype surrounding the Internet of Things (IoT), its future, and how it will usher in the next technological revolution. But the fact remains that the IoT market is made up of companies which - large or small, old or new - are faced with the same challenge of generating profitable revenues. Some companies succeed while others fail, and, despite the hype, there are many companies that have been working in IoT long before it was called IoT. Through our continuing analysis of the IoT market, James Brehm & Associates will profile public companies working to deliver on the promise of the IoT. Our series begins with small cap firms (which for our purposes will be defined as companies with a current market cap of less than $2B) with business predominantly focused on IoT. Profiles will include a brief description of the company s business, a review of any recent acquisitions, a recap of revenues and relevant operational metrics through the end of 2016 sourced from company filings, press releases, presentations, and our view of each company s short term and long term prospects in the rapidly evolving IoT marketplace. We begin with four longstanding IoT market participants: (1) CalAmp, (2) Sierra Wireless, (3) Digi International, and (4) Orbcomm. As a group, these four companies had combined revenues in calendar year 2016 of approximately $1.3B and collectively have a market cap (as of March 20, 2017) of more than $2.5B. This series will continue in the coming weeks and months with profiles of additional small cap firms spanning the IoT ecosystem. We ll then expand our market analysis to profile both mid and large cap firms where there is focus on IoT and where IoT contributes meaningfully to the company s financial metrics. 2

NASDAQ: CAMP Market Cap: Current Share Price: 52 Week Range: Revenue Last 4 Quarters: As of March 20, 2017 Company Profile $614M $17.32 $12.13 - $18.01 $335.8M CalAmp is a provider of equipment and solutions focused on connected vehicles and the broader Industrial IoT marketplace. Headquartered in Irvine, CA, the company was founded in 1981 and has been publicly traded on the NASDAQ since 1983. In March 2016, CalAmp completed the acquisition of LoJack Corporation and its portfolio of products and services related to vehicle / asset tracking and recovery for a total purchase price of $131.7M. The LoJack acquisition brings CalAmp a well-known brand along with a channel and distribution network that exceeds more than 4,000 active US dealers. LoJack operates and has license to operate in 30 countries across North America, South America, Europe, and Africa. CalAmp s business has historically been organized across two segments: (1) Wireless Datacom and (2) Satellite. Wireless Datacom includes CalAmp s portfolio of devices, service management platform, and applications. Since the close of the acquisition, CalAmp classified LoJack into the Wireless Datacom segment. CalAmp s Satellite segment, which was the company s core business from 2000 2007 and primarily covered products sales to the Dish Network affiliate-echostar, was discontinued in August 2016 following a long period of declining sales. Going forward, CalAmp will organize its business across 3 segments: (1) Telematics Systems, (2) Software & Subscription Services, and (3) OEM Products. Business Performance CalAmp most recently reported results for the quarterly period ending November 30, 2016. Quarterly revenues of $83.35M represented an increase of 11.6% Y/Y but a decline of 7.9% sequentially. There are a few moving parts in the Y/Y and sequential compares; LoJack revenues of $29.9M in the most recent quarter were not part of CalAmp s results in the comparable quarter from one year ago. At the same time, the most recent quarter did not include any revenues from Satellite which totaled $6.672M in the previous quarter and $11.833M in the comparable quarter from last year. The key take away from the sequential and Y/Y revenue compares is that CalAmp has succeeded in increasing revenue while drastically changing the sources of revenue. 3

CalAmp Quarterly Revenues By Business Segment $M $69.2 $65.4 Marrying up CalAmp s portfolio of telematics products with LoJack s established brand name and large network of distributors expands the company s addressable market and creates real opportunities for future growth. In the last few months, the company has announced new product offerings such as LotSmart (a solution for auto dealerships to improve management of car lots) and SureDrive (a consumer aftermarket connected car solution featuring crash notification and stolen vehicle assistance). These new Lo- Jack-branded offerings compliment an existing portfolio of fleet management and enterprise asset tracking solutions that make up a large portion of CalAmp s 621,000 recurring service subscribers. With non-u.s. revenues having increased from 18% of CalAmp s total revenues last year to 28.5% this year, acquiring LoJack has demonstrably diversified CalAmp s geographic portfolio. Outlook $69.8 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 $74.7 $70.8 Wireless Datacom $91.1 $90.5 $83.4 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Satellite Market conditions, notably the Electronic Logging Devices (ELD) mandate, will increase demand for CalAmp s commercial telematics devices over the next few years. The company is also leveraging its 2015 acquisition of Crashboxx to increase its presence in the insurance telematics market. CalAmp is a key supplier of telematics devices to some of the largest telematics service providers in the market (e.g. Navman, Fleetmatics, Telogis, and Omnitracs). Through Verizon s acquisitions of Fleetmatics and Telogis for a combined $3.3B, CalAmp is now positioned as a critical supplier of telematics products to Verizon, which is both the largest telematics service provider in the U.S. and one of the world s largest communications service providers. CalAmp has always had a strong product portfolio with well-integrated service offerings. With the acquisition of LoJack, the company has significantly expanded its distribution network while also adding a widely recognized and respected brand. While many hardware companies are working through the challenges of pivoting to a solutions and recurring revenue business model, CalAmp is further along that curve and is well-positioned to capture more than its fair share of the expanding telematics and asset management markets. 4

NASDAQ: SWIR Market Cap: Current Share Price: 52 Week Range: Revenue Last 4 Quarters: $944M $28.05 $12.30 - $29.85 $615.6M As of March 20, 2017 Company Profile Sierra Wireless designs and builds a diverse set of embedded wireless modules and gateways. It also provides cloud and connectivity solutions and service focused on the Industrial IoT market. Headquartered in Richmond, British Columbia, the company was founded in 1993 and is publicly traded on the NASDAQ and the Toronto Stock Exchange. Sierra Wireless has approximately 1,000 employees. In 2016, Sierra Wireless completed two acquisitions in order to bolster its IoT portfolio. In August, Sierra Wireless completed the acquisition of GenX Mobile, a provider of in-vehicle cellular devices for fleet management and asset tracking, for $7.8M. Sierra Wireless acquired Blue Creation a UK-based supplier of embedded short range modules, for $6.9M total (including $0.5M in performance-based earn-outs). Adding Bluetooth and Wi-Fi capabilities via Blue Creation significantly expands Sierra Wireless addressable market especially for projects that have both short range and wide area requirements. These two acquisitions followed a busy 2015 when Sierra Wireless acquired three companies that specialized in connectivity management and services: (1) Wireless Maingate AB, (2) Accel Networks, and (3) MobiquiThings. The company organizes itself around three primary lines of business: (1) OEM Solutions, (2) Enterprise Solutions, and (3) Cloud & Connectivity Solutions. Business Performance Sierra Wireless posted very solid results in 4Q 2016: Y/Y total revenues increased by 12.5% to more than $163M. Revenues in OEM and Enterprise Solutions grew, but remained relatively flat in Cloud & Connectivity. At nearly 83% of the total, OEM Solutions accounts for the bulk of Sierra Wireless revenue. Integration of the Blue Creation portfolio expands Sierra Wireless product portfolio and fortifes the company s position in key vertical markets. The remaining 16% of revenues are split across Enterprise Solutions (13% of total) and Cloud/Connectivity (4% of total). Partially driven by the recent acquisition of GenX, Enterprise Solutions is the fastest growing segment at more than 27% Y/Y and nearly 11% sequentially. 5

Recently, Volkswagen (VW) selected Sierra Wireless modules and platform to enable its worldwide 4G connected car offering. It s a deal that presents a considerable opportunity for continued revenue growth as VW delivers approximately 10M vehicles worldwide every year. Sierra Wireless Quarterly Revenues By Business Segment $M $150.4 $158.0 $154.6 $144.8 $142.8 $156.2 $153.6 $163.0 Outlook The company s recently introduced Cat-M and NB-IoT modules - having gone through trials with several network operators - will begin to scale in 2017 and will drive growth in the near term. The recently announced VW deal is also a very positive development and should enable Sierra Wireless to maintain a leadership position in connected module shipments. The longer-term question for Sierra Wireless is how the company will respond to competitors particularly those from China who offer lower-cost hardware. Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 OEM Solutions Enterprise Solutions Cloud/Connectivity Sierra Wireless 4Q 2016 Revenue Mix 4% 13% Growing Enterprise Solutions and Cloud/Connectivity will be a key indicator to determine how Sierra Wireless counters the competitive threat. Working up the value chain to enable solutions will protect the hardware business and create new revenue opportunities. But, as Sierra Wireless continues to transform itself from maker to service 83% provider, its place in the IoT value chain becomes a little less clear. Historically, Sierra Wireless has OEM Solutions Enterprise Solutions Cloud/Connectivity been a key partner and provider of hardware for mobile operators like Verizon and AT&T. As Sierra Wireless seeks to expand its Enterprise Solutions and Cloud/Connectivity businesses, those mobile operator partners will become competitors. Also, as Sierra Wireless pursues opportunities up the stack, they will have to compete with the big cloud providers, system integrators, and solution providers with deep vertical expertise. The company has called out Enterprise Solutions wins among industrial, public safety, and transportation customers, but more vertical specific solutions and offerings may be needed. With more than $100M in cash on the balance sheet, Sierra Wireless has the financial wherewithal and flexibility to address these challenges. 6

NASDAQ: DGII Market Cap: Current Share Price: 52 Week Range: Revenue Last 4 Quarters: As of March 20, 2017 Company Profile $329M $12.55 $8.37 - $14.15 $197.9M Digi International is a provider of connectivity products and solutions with a strong focus on IoT. Headquartered in Minnetonka, MN, the company was founded in 1985 and is publicly traded on the NASDAQ. Digi has more than 500 employees worldwide. While hardware products make up the historical foundation of Digi s business, the company has recently focused on building out a portfolio of solutions and services particularly within Cold Chain. In October 2015, Digi acquired Bluenica Corporation for up to $18.0M (includes earn-outs over 4 years as well as other payments) that formed the basis of Digi Cold Chain Solutions. The company continued to build out its capabilities to monitor and track perishable goods with the acquisitions of FreshTemp (up to $4M including earn-outs) in November 2016 and SMART Temps (up to $36M including earn-outs) in January 2017. Digi reports revenues across two broad categories: (1) Hardware and (2) Services. Within its Hardware segment, the company provides breakouts among Cellular Routers & Gateways, RF, Embedded, and Network. In November 2016, Digi rejected a proposed takeover bid from Belden Inc, a St. Louis-based company specializing in signal transmission solutions (wired switching & routing, network cable, etc.). Belden s all cash offer of $380M represented a premium of approximately 20% versus Digi s share price in November. Business Performance While Digi has identified Cold Chain Solutions as a path to revenue growth, the last two years have demonstrated a focus on business transformation through the simplification of operations and expense management. The company sold its underperforming Etherios CRM consulting business in October 2015, consolidated real estate operations, and continues to reduce and optimize products SKUs. Revenues in the quarter that ended December 2016 were down 10.1% Y/Y and 10.5% sequentially. RF revenues declined more than 28% Y/Y while Network declined by more than 20%; these declines were partially offset by Cellular Routers & 7

Gateways which increased Y/Y by more than 13%. While recent investments have focused on expanding its services and solutions portfolio, Hardware continues to make up more than 95% of Digi s revenues. Digi has seen some progress from its Cold Chain Solutions business. Notable wins include Love s Travel Stops, the Dallas Independent School District, and AMC Theatres. Digi disclosed that more than 10,000 sites are being serviced by the company s solutions Digi Intl Quarterly Revenues By Segment $M $50.4 $52.1 $54.2 $50.3 $50.2 $52.1 $50.5 $45.2 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Hardware Digi Intl 1Q FY2017 Revenue Mix 4% Service Outlook Despite declining revenues from its hardware business, Digi has managed to maintain an acceptable level of profitability largely through improved operational efficiency. But initiatives focused at reducing costs will demonstrate diminishing returns especially when SKU levels reach a point where they can t be optimized any further. Since the rejection of Belden s $380M bid, Digi has reaffirmed its intention to stay the course and double down on its Cold Chain Solution business by acquiring FreshTemps and SMART Temps which included up-front cash payments of approximately $30.5M (FreshTemps: $1.7M & SMART Temps: $28.8M). The acquisitions reduce Digi s cash reserves by more than 35% but still leaves the company with an estimated $50M in cash on the balance sheet. An analysis of Digi s upcoming results through the first 3 months of 2017 will reveal whether the recent acquisitions were part of long term Cold Chain expansion strategy or a knee jerk reaction to Belden s offer. Per the SMART Temps website, the company has more than 14,000 locations monitored with its 96% Cold Chain solution. The acquisition more than doubles the number of sites (more than 10,000) already Hardware Service monitored by Digi s Cold Chain Solutions. Digi generated $2M in service revenues in the last 3 months of 2016 and approximately $6.9M in calendar year 2016. Based on the price paid for SMART Temps and a full quarter of FreshTemps, Digi should generate service revenues in the $4.5M - $5M range in the current quarter. Digi opted to stay the course; the time is now to demonstrate that it was the right choice. 8

NASDAQ: ORBC Market Cap: Current Share Price: 52 Week Range: Revenue Last 4 Quarters: As of March 20, 2017 Company Profile $667M $9.48 $7.15 - $10.98 $186.7M Orbcomm is an operator of global communications solutions via a commercial satellite network dedicated to IoT. In addition to its own satellite network, Orbcomm offers cellular connectivity services through reseller agreements with tier-one service providers and has an agreement with Inmarsat for higher bandwidth, low latency satellite connectivity. In addition to connectivity, the company offers a variety of solutions and services for asset tracking and monitoring for industries such as transportation, heavy equipment, oil & gas, maritime, and government. Orbcomm is headquartered in Rochelle Park, NJ. In May 2016, Orbcomm acquired Skygistics in a deal worth up to $4.8M (including performance considerations). Based on Johannesburg, South Africa, Skygistics expands Orbcomm s distribution for satellite and connectivity services in Africa and Australia. In October 2015, the company acquired New Jersey-based WAM Technologies, a provider of remote monitoring and control solutions for ocean transported refrigerated containers for up to $8.7M. The WAM acquisition has been instrumental in establishing Orbcomm as a market leader in refrigerated container monitoring and management. Orbcomm reports revenues across two categories: (1) Service and (2) Product Sales. Business Performance Orbcomm s offerings range from connectivity via satellite and cellular to full solutions across Fleet Management, Refrigerated Trailer & Container Monitoring, Heavy Equipment, Cargo Monitoring & Security, and Cold Chain. Orbcomm had 1.724M billable subscribers at the end of 2016 with net adds that typically average 40,000 per quarter. The company s growth in billable subscribers translates to consistent growth in service revenue which, in 2016, was up nearly 13% versus 2015. Revenue from product sales can be lumpy from quarter to quarter but they serve as potential indicatord of future service revenue growth. Over the past year, approximately 60% of Orbcomm s revenue are from service, and 40% are from equipment sales. Orbcomm lists some large multinational enterprises among its customer base such as Doosan, Walmart, and Swift. The company has recently announced several new deals across fleet management, container monitoring, and Cold Chain. Orbcomm recently announced that J.B. Hunt Transport has selected it to equip its 90,000+ intermodal and over-the-road trailing fleets with tracking and monitoring solutions. 9

Orbcomm Quarterly Revenues By Segment $M $42.3 $44.9 $46.1 $45.0 $43.6 $50.1 $46.3 $46.8 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Service Revenue Orbcomm Subscribers Millions Of Subscribers 1.608 Product Sales 1.650 1.687 A Deeper Connected Conversation 1.724 Outlook Through a series of acquisitions and strategic investments, the company has developed a strong portfolio of offerings and solutions. While its easy to call Orbcomm a satellite service provider, the company is much more than that. Its also an MVNO offering cellular service through its tier-one network partners: AT&T, Verizon, T-Mobile, Vodafone, Telefonica, and Orange (which uses a robust connectivity management platform provided by ORBCOMMconnect). Finally, Orbcomm is also a solutions provider offering hardware designed for a variety of vertical markets along with applications for asset monitoring and management. Through this diverse set of capabilities, Orbcomm is able to participate in the market in a number of capacities and position itself in IoT opportunities that extend far beyond those of a traditional satellite provider. 1.569 As evidenced by recent announced wins in transportation and asset management, Orbcomm has emerged as the provider of choice for customers with complex 1.330 1.297 1.262 requirements. The company has done a really good job of leveraging its satellite assets as a competitive differentiator but has not settled on being only a satellite service provider. Orbcomm has made smart investments over the past couple of years that are bearing fruit. Recent wins with J.B. Hunt and the U.S. Postal Service will Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 drive service and product revenues and help sustain Orbcomm s continued growth trajectory. With approximately $25M in cash on its balance sheet, Orbcomm does have the flexibility to add to its portfolio of IoT services and solutions through acquisition. Over the last few years, the company has seemingly operated on a six-totwelve-month cycle of acquiring and ingesting companies before moving on to the next one. The company s acquisition strategy has been very deliberate with the goal of improving its asset management capabilities. With the Skygistics acquisition nearing its one year anniversary, additional strategic investments into adjacent markets are likely. 10

James Brehm & Associates is a consulting and marketing intelligence firm that provides project-based and retained strategic advisory services to technology companies worldwide. With a firm focus on the Internet of Things (IoT), Machine-to-Machine (M2M) Communications, and Big Data Analytics, James Brehm & Associates provides actionable insight and direction to a wide range of organizations including Communications Service Providers, Hardware Maunufacturers, Software Vendors, OEMs, Private Equity, and venture Capital Firms. Through projects on market size and share, competitive intelligence, product development, go-to-market strategy, and client-specific consulting services, we help companies reach their maximum potential. http://www.jbrehm.com If you d like to continue to receive The Connected Conversation, please email info@jbrehm.com or call (210) 401-0051. 11