Value Investors Club / NUMEREX CORP -CL A (NMRX)

Description

Overview

Numerex (NRMX) was founded in 1992 and through a series of acquisitions, divestitures and foresight

has morphed into a leading provider of on-demand and interactive machine-to-machine enterprise

solutions, referred to as “M2M”. An M2M solution is generally viewed as a combination of devices,

software and services that operate with little or no human interaction. It consists of using a device (D)

(e.g., sensor, meter etc.) to capture “event” data (e.g., inventory level, location, environmental status,

etc.) relaying the data through a network (N) (e.g., wireless, wired or hybrid) to an application (A)

(software program), which translates the captured data into actionable information (e.g., there is a

breach, vending machine needs to be restocked, pipe is corroded, lost vehicle is located, tank level is too

low, etc.). This combination is referred to as Numerex DNA.

Numerex’s business model is based upon a subscription-based platform of services that generate stream

of long-term, high-margin recurring revenues. In a rapidly changing business environment visibility and

real-time access to information with the ability to manage networks, devices and applications from a

single source can have a significant impact on business processes and contribute to improved

operational efficiencies. Numerex’s broad horizontal platform was designed with this is mind. Gartner

estimates Numerex’s total-addressable-market to be ~$26B by 2020 a mere five years from now. And

with significant barriers to entry, Numerex has a head-start to participate in this growth.

 +8,000 commercial customers; +2MM subscriptions

 108 patents issued and 87 patents pending

 Over 50 verticals served

 +20 years of sector experience

 +200 countries supported

 $4MM in cost cuts

 Managed services with higher ARPU’s

 Potential for bigger deals in 2015 which will lead to increased visibility in 2016

Industries and Customers

 Transportation and telematics…Audiovox

 Manufacturing and distribution…John Deere

 Energy and utilities…British Petroleum

 Home Automation…United Technologies

 Public Safety & Emergency Response…FEMA

 Healthcare…Reliant Heart

Catalyst

On August 11, 2015 Numerex announced they hired Marc Zionts as CEO succeeding the much and

rightfully so maligned Stratton J. Nicolaides. Thankfully, Zionts’ resume reads like a classic “fix and sell”

novel.

 Led six companies since 1987, five of which were acquired and one IPO

 Most recently, Marc was the President and CEO of Aicent (owned by TA Associates) that was

acquired by Syniverse

 Prior to Aicent, Marc was VP at Allot Communications, he joined Allot after they acquired Ortiva

Wireless, where he was President and CEO from January 2008

Please note this change did not come willingly or through the board’s own wisdom (average tenure on

the Numerex board is 7.3 years). Vertex Capital, a well-respected small-cap activist and 6.4%

shareholder publicly demanded a strategic review, to retain a financial adviser and to “be mindful of

strategic opportunities to maximize shareholder value, particularly in light of the significant

consolidation occurring in the industry in which Numerex operates.” Hopefully, Zionts’ stints as CEO at

multiple companies that were ultimately acquired will mitigate the disappointment of an outright sales

process.

In the short term, Zionts won’t be able to pull off a miracle, but a Hail Mary is not needed for Numerex

to succeed. His leadership and experience are what a lost growth company needs.

Valuation

Coincidentally, with the announcement of the CEO change, Numerex pulled their guidance and has

promised to update investors in the near future. That being said, given the anemic results in C1H15, the

annual guidance will more than likely be lowered from the previous of $100MM and $0.75 in EPS.

NMRX 2014A

Revenue

93.9

Growth

20.2%

Operating margin

4.2%

EPS: Q1

0.14

EPS: Q2

0.16

EPS: Q3

0.17

EPS: Q4

0.19

EPS: Year

0.66

Growth

43.2%

Overall, NMRX will eventually return to a run rate of +$125MM of high margin, recurring revenue with

EPS power north of $1.00 which should warrant a +15 EPS multiple and a valuation well north of $15 a

share and/or an equity valuation of +$300MM.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

New CEO who brings fixing and selling experience

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			2015	2016
Price:	8.82	EPS	0	0
Shares Out. (in M):	19	P/E	0	0
Market Cap (in $M):	168	P/FCF	0	0
Net Debt (in $M):	7	EBIT	0	0
TEV (in $M):	175	TEV/EBIT	0	0