Telit Communications
2015 Full Year Financial Results Conference Call
March 7, 2016
Telit Communications – 2015 Full Year Financial Results Conference Call, March 7, 2016
CORPORATE PARTICIPANTS
Oozi Cats, Chief Executive Officer
Yosi Fait, Finance Director & President
Miri Segal, Hayden/MS-IR
CONFERENCE CALL PARTICIPANTS
Johannes Ries, Apus Capital
PRESENTATION
Operator:
Greetings and welcome to the Telit Full Year 2015 Full Year Results final conference call. At this time—
Financial Results conference call. At this time, all participants are in a listen-only mode. A question and
answer session will follow the formal presentation. If anyone should require Operator assistance during
the conference, please press star, zero on your telephone keypad. As a reminder, this conference is
being recorded.
It is now my pleasure to introduce your host, Miri Segal of Hayden/MS-IR. Please go ahead, Ms. Segal.
Miri Segal:
Thank you, Operator. Good day everyone and thanks for joining us for Telit Communications Full Year
2015 Financial Results conference call. Joining us today on the call are Mr. Oozi Cats, CEO; and Mr.
Yosi Fait, President & Finance Director. Following the prepared statements by Management, we will
open the call to the question and answer session. Please note that an updated Company presentation,
including the financial results, is available on our IR website and we invite you to review the slides during
and after the call.
I would like to remind our listeners that comments made today will contain forward-looking statements,
and Management may make additional forward-looking statements in response to your questions. Such
written and oral disclosures are made pursuant to the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. These results presented today include results that are on a non-GAAP
basis. A full reconciliation table of the non-GAAP measures to IFRS measures can be found in the
Company press release issued earlier today.
With that, I'd like to hand the call over to Oozi Cats, CEO of Telit. Oozi, please go ahead.
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Telit Communications – 2015 Full Year Financial Results Conference Call, March 7, 2016
Oozi Cats:
Thank you Miri, and thank you all for dialing in. Good afternoon and good morning to our European and
American investors and analysts. We are happy to welcome you to our Full Year 2015 Financial Results
announcement and investors’ conference.
We are delighted to announce another set of solid results and sustainable growth, showing improvements
in all the financial parameters from IoT products to Platform-as-a-Service. The numbers clearly indicate
that our strategy over the last years to invest heavily in new product development and operational
infrastructure, as well as the businesses we acquired to widen and enhance our products and services
capabilities and geographical coverage, are starting to pay off.
In the last financial year, our revenue increased by 13.5% to $333.5 million with Adjusted EBITDA up
31% to $45.3 million. Our adjusted earnings per share increased to $0.217, an 18% increase. Looking
into 2016 and beyond, our goal is to capitalize on the investment we have made in Telit IoT-as-a-Service,
building on our capabilities to provide a total triple play solution encapsulating IoT modules, IoT
connectivity and IoT Platform-as-a-Service.
After a number of years being both acquisitive and aggressive in R&D investments, we are now in a
position to further scale the business and benefit from the group’s operational leverage. In my first-half
statement made in August 2015, I spoke about how we are executing an operating model with no
technology barriers to scalability. That starts with our manufacturing and logistics strategy. Since we
outsource manufacturing from multiple vendors and sites, we can respond quickly to increase in product
demand from all our served markets. In services, that is also the case. Our mobile data connectivity
customers can increase demand as their deployments grow, and on our side, we ensure that the
networks we employ can carry the rise in traffic. For Cloud and Platform customers, our virtualization
strategy allows our cloud storage and processing resources to scale up in a matter of minutes.
Since 2012, we have more than doubled our R&D spend in order to build our Platform-as-a-Service
offering and Automotive division, while maintaining the biggest and the best IoT module portfolio in the
market. We are well aligned and integrated now to remain ahead with sustained innovation while bringing
our gross R&D spend to about 14% of the revenue by 2017. In 2015, we already shaved 1.2% from our
gross R&D spend from 16.6% of revenue down to 15.4%.
With a strategy to target larger customers, we can continue rationalizing sales and marketing costs, and
our goal is to continue decreasing sales and marketing costs as a percentage of revenue to about 14% in
2017. In 2015, we already reduced 0.5% from our sales and marketing spend from 17.1% down to
16.6%. Since 2012, we have increased our spend on sales and marketing from $30.5 million by more
than 70%. That has allowed us to fully deploy industrial IoT technical sales and Platform-as-a-Service
organizations. We are currently concluding the process of overlaying Service Sales Teams to support the
sales of Platform-as-a-Service and IoT connectivity.
Our sales network consists of 35 sales offices and 60 distributors providing ideal coverage of the world’s
key markets for IoT. We expect this scale for the sales network to remain sufficient for the foreseeable
future. In 2015, our Automotive unit saw revenues increase sharply by 60% to $39.6 million from $24.8
million in 2014, pointing out the success of our efforts in the OEM Automotive and Connected Car
segments. To maximize the reach of our Automotive solutions and to more closely support Tier 1 and
OEM customers, we expanded and now count on six dedicated Automotive sales offices in Detroit,
Munich, Hamburg, Shanghai, Seoul and Tokyo, with access to car makers and relevant Tier 1 suppliers.
In February 2016, we acquired assets from Stollmann including Bluetooth, Bluetooth Smart, also known
as Bluetooth Low Energy or BLE, and Near Field Communications, also known as NFC. Stollmann is a
developer and marketer of low-power hardware products and software solutions for wireless
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Telit Communications – 2015 Full Year Financial Results Conference Call, March 7, 2016
communications. Thirty-five Stollmann employees, mainly R&D engineers have transferred to Telit in an
integration process that is already well underway. The acquisition will enhance our reach into the area of
short-range low-power IoT solutions and is another step in our strategy to connect edge devices, such as
sensors, to the Telit IoT enablement platform and to our customers’ systems.
Further to the opportunities opened by Bluetooth, our Industrial IoT Modules division is expanding the
product roadmap for 2016 and beyond to take advantage of new cellular technologies specifically created
for the IoT, like LTE Cat-1, Cat-M, and Narrow Band IoT. This is the first time ever that the standards’
bodies in charge of defining cellular technology have created standards specific for the IoT industry and is
bound to change dramatically the dynamics in our market.
On the Platform-as-a-Service side of the business, the strategy remains to leverage on the IoT modules
we provide our customers in order to up-sell services. By providing hardware programmed with valueadd software, we are able to uniquely position Telit to add mobile connectivity plus cloud with diagnostic
value-added services into a walled-garden platform. Our plans remain to conclude our unified service
offering by the end of 2016, and results for the past three years have been very encouraging with a robust
30% revenue growth in 2015 to $26 million. We are confident that in 2016 we will cross the one million
subscriber threshold. With the conclusion of fully integrated service offering, in our opinion, Telit will be
positioned as best choice for cloud service aggregator for data coming from edge devices.
We also remain bullish on the rise in demand for cloud-to-cloud opportunities from providers wishing to be
connected to our cloud in order to enjoy the stream of data coming from the Telit-based edge devices. In
order to maximize the capture of opportunities for existing and upcoming services, we are stepping up our
training program for complete system design based on Telit products and services. In 2016, we will start
the expansion of the deviceWISE University, a successful initiative which currently administers extensive
in-depth training on deviceWISE, our IoT platform technology framework. The expansion envisions the
launch of several new programs over the coming years to address the training requirements of the
enterprise channel in the broadest possible scope.
In 2015, we also launched Telit IoT Portal and Telit IoT Factory Solutions. The IoT Portal is designed to
enable customers to manage Telit’s products and services through a single portal that makes IoT
deployments easier, cuts the time to market, and saves money. The IoT Portal provides customers with
access to data management, including collection, storage, big data export, connectivity management, and
facilitates interaction with mobile network operators, dashboarding tools, security and administration.
The IoT Factory Solutions is well positioned to take advantage of the market opportunities in the industrial
IoT, also known as Industry 4.0. IoT Factory Solutions will target customers looking to take advantage of
the industrial IoT opportunity, with multiple paths to deployment centered on our proven IoT platform for
factory automation. As we map Telit’s industrial IoT segment, according to ABI Research, from July
2015, the IoT embedded modules is due to grow by CAGR of 23% between 2015 to 2020, to 208 million
devices.
In IoT services for connectivity and platforms, growth is estimated to be as robust. According to the IoT
expert analyst firm, Berg Insight, in a report published in December 2015, through 2020, the number of
cellular IoT subscribers is expected to grow at a CAGR of 23%, reaching 744 million subscribers at the
end of the period. During the same period, IoT cellular connectivity revenue grows at a CAGR of 23% as
well, from $9 billion in 2015 to approximately $25.5 billion in 2020.
We are poised to continue leveraging the barriers to entry and the scalable go-to-market model we have
built for Telit and intend to continue focusing on the strategy of becoming a single point of reference with
a unique IoT-as-a-Service concept.
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reporting of the substance of the conference call. This transcript is being made available for information purposes only.
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Telit Communications – 2015 Full Year Financial Results Conference Call, March 7, 2016
Now, let me hand you over to Yosi Fait, Telit’s Financial Director, to present our 2015 financial results in
full detail.
Yosi Fait:
Thank you, Oozi, and good afternoon everyone. I am very pleased to present our financial results for
2015.
I would like to begin by pointing out that each operational financial parameter improved during 2015
compared to the corresponding period in 2014, and all the operational expenses as a percentage of
revenues decreased. We expect this trend to continue in the coming few years.
Let’s start from the top line. Two thousand fifteen was the sixth consecutive year of double-digit growth.
The revenues increased by 13.4% to $333.5 million, over $294 million recorded in 2014, driven by
organic growth. The Automotive business unit, which is one of the fast-growing verticals with
considerable potential, saw revenues increase sharply by 60% to $39.6 million from $24.8 million in 2014.
The Services division, in which we have been heavily investing over the last few years, saw revenues
jump by 30% to $26 million, compared to $20 million in 2014.
EMEA revenues saw a return to double-digit growth following a notable slowdown in the region in the
previous years. Revenues increased by 13.4% to $133.2 million, over $117.5 million in 2014. 2G
remains the dominant technology in the EMEA region, enjoying growth in shipments, while 3G saw a
substantial ramp-up which we expect to continue. 4G is still in a nascent stage.
The EMEA Team secured significant design wins in the energy sector for utilities in the Netherlands and a
robust share of the UK smart metering implementation program, as well as substantial Automotive wins.
As a result, the group maintained its market-leading position within the region and is confident of
maintaining it in the coming years.
In Americas, the revenues after six years of 44% CAGR revenue growth, reported a 4.6% decline to
$129.4 million. The revenues were affected by the faster than expected technology shift in the US
market, mainly as a result of the imminent shutdown of the 2G networks and the resulting strong shift into
4G technology. Some customers, mainly those in the home security, energy and transportation markets,
subsequently delayed their LTE deployment plans while waiting for the LTE-Category 1 products for 4G
LTE networks to be ready and certified. We expect 2016 will see a return to revenue growth in the
region.
In APAC, we performed strongly, with revenues increasing sharply by 74% to $70.9 million, over $40.8
million in 2014, reflecting the coming of age of this market and the fruition of our investment in this region
during the last few years. The growth in the region was driven by multiple key projects and customers
moving into mass production during the year. As we continue to strengthen our presence in the region,
including the recently added Japan and Singapore sales offices, we are winning new customers and
designs to secure further growth.
We continued to improve our gross margin from 39.55% in 2014 to 39.9% in 2015 due to the group’s
strong positioning in the IoT industry, further improvements in the hardware business, and the increasing
share of revenues from the higher margin IoT services business. The gross profit increased by 14.4% to
$133.1 million, over $116.3 million in 2014. During 2015, the research and development gross operating
expenses, those expenses before capitalization and amortization of internally generated development
costs increased slightly to $51.2 million, over $48.8 million in 2014. As a percentage of revenues, 2015
expenses, as planned, decreased to 15.4% out of revenue, from 16.6% in 2014.
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Telit Communications – 2015 Full Year Financial Results Conference Call, March 7, 2016
The amount capitalized in respect to internally generated development costs in 2015 is $26.1 million,
which is similar year-on-year but represents a decline as a percentage of revenues to 7.8% compared to
8.9% in 2014. This figure mainly relates to the development of new connectivity standards, 3.5G, 4G,
and also into our new areas of Automotive Products and Services division, particularly the Platform-as-aService and the IoT portal. The amortization of internally generated development costs increased by 77%
to $7.6 million in 2015, over $4.3 million in 2014. This increase relates mainly to the release of 3G and
4G products to the market during the course of 2015.
As planned, sales and marketing expenses increased by $5.1 million to $55.5 million, over $50.4 million
in 2014, but also decreased as a percentage of revenues to 16.6% compared to 17.1% in 2014. General
and administrative expenses remained virtually unchanged at $26.6 million but decreased as a
percentage of revenues to 8% from 9% in 2014. As Oozi mentioned earlier, we expect a decrease over
the next few years of gross R&D, sales and marketing, as well as general and administrative expenses,
as a percentage of group revenues. We expect all these to materially improve our financial performance,
and importantly, increase the free cash generation.
Finance costs, net increased from $1.3 million in 2014 to $2.9 million in 2015 mainly due to exchange rate
differences, which moved from $1.4 million income in 2014 to $0.4 million expenses in 2015. The
expenses for 2015 include $1.1 million in non-cash expenses as fair value of Italian preferred loans.
The group income tax rate increased slightly from 10.2% in 2014 to 11% in 2015.
Adjusted EBITDA increased by 31% to $54.3 million, over $34.7 million in 2014. As a percentage of
revenues, it increased to 13.6% from 11.8% in 2014.
Adjusted EBIT increased by 24% to $30.6 million, over $24.7 million in 2014. As a percentage of
revenue, it also increased to 9.2% from 8.4% in 2014. These improvements reflect the operational
leverage the group has now obtained.
Adjusted basic earnings per share increased by 18% to $0.217.
Turning to the balance sheet and cash flow, as a result of strong financial performance, the group’s net
equity increased to $110.2 million from $97.8 million at the end of 2014. The internally generated
development assets net as of 31st of December 2015 increased by $14.5 million to $54.2 million from
$39.7 million in 2014. Internally generated development assets that completed the development phase
moved to mass production phase and started the three to five years of amortization, increased to 45% of
total internally generated development assets from only 25% in 2014. The net assets that are in
development phase before starting the amortization phase are mainly Automotive products, 4G products,
and the Platform-as-a-Service.
The group repurchased about 409,000 ordinary shares for a consideration of $1.3 million during the year.
As of 31st December 2015, the group held net cash of $1.1 million compared to a net debt of $3.9 million
in 2014. The operating cash flow before movements in working capital items increased by 30% to $44.3
million from $31.1 million in 2014.
To summarize the call, it has been another year of strong organic growth with Services division revenues
increasing strongly. Following an investment period, Telit has now established a leading position in the
IoT industry with single point of reference and unique IoT-as-a-Service concepts. We are now in a
position to scale the business and benefit from the group’s operational leverage. Finally, major
corporates are poised to exploit IoT capabilities to drive down their cost base, improve efficiencies, create
new revenue streams and be compliant. With that, Telit remains well positioned to capitalize on the IoT
market growth, to continue increasing its market share, revenues, recurring revenues and profitability.
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Telit Communications – 2015 Full Year Financial Results Conference Call, March 7, 2016
Thank you all for joining us today. I will now transfer the call again to Miri for the Q&A session.
Operator:
Thank you. At this time, we’ll be conducting a question and answer session. If you’d like to ask a
question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is
in the question queue. You may press star, two if you’d like to remove your question from the queue. For
participants using speaker equipment, it may be necessary to pick up your handset before pressing the
star keys. Once again, if you’d like to ask a question today, please press star, one at this time. One
moment please while we poll for questions.
Once again, that’s star, one if you’d like to be placed in the question queue.
If there are no questions at this time, I’d like to turn the floor back over to Management for any further or
closing comments.
We do have a question coming from Johannes Ries from Apus Capital.
question.
Please proceed with your
Johannes Ries:
Hello? Hello, can you hear me?
Operator:
Yes, hello. We have a question from Johannes Ries from Apus Capital. Please proceed with your
question.
Johannes Ries:
Yes, hello. The question is regarding maybe the discussion which was pushed by an analyst report last
week regarding the development of the US market. You mentioned during your presentation you expect
a return to growth in the US, but maybe you can give some more comments about the situation there,
maybe that some customers are reluctant to invest because maybe of some problems with their ATE
standard, which was mentioned in this research report.
Oozi Cats:
Yes, thank you. This is Oozi here. I think I read the same report you are talking about, and I have to
admit that reading it for three times, I couldn’t really understand what it is based on. My reflection from
the current trading on the US market is that we are going to see a very nice growth this year, a doubledigit one.
Johannes Ries:
A double-digit one, okay. Thanks, that helps.
Operator:
Thank you. As a reminder, if you’d like to be placed in the question queue, please press star, one at this
time. One moment please while we poll for further questions.
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Telit Communications – 2015 Full Year Financial Results Conference Call, March 7, 2016
If there are no further questions, I’ll turn the floor back over to Management for any further or closing
comments.
Yosi Fait:
It’s Yosi. As we don’t have any more questions, I wish to thank everybody for joining us for this results
conference call. We will most probably meet part of you in the next few days while Oozi is making
meetings in London and Europe and I am making meetings here in the US. So hopefully you enjoyed the
call and see you on the next call. Thank you and have a good day, everybody.
Operator:
Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and
have a wonderful day. We thank you for your participation today.
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reporting of the substance of the conference call. This transcript is being made available for information purposes only.
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