Company Overview: NetComm Wireless Limited (NetComm Wireless) is an Australia-based developer of broadband products for telecommunication carriers, core network providers and system integrators. The Company is a provider of third generation (3G) and fourth generation (4G) wireless devices, serving the telecommunication carriers, machine-to-machine (M2M) and rural broadband markets. It operates through two segments: Machine to Machine and Broadband business. Its M2M segment focuses on the development of the industrial-grade and commercial 3G/4G wireless broadband products and solutions for business continuity, mobile broadband and remote M2M connectivity. Its M2M products, solutions and services support applications in various areas, such as transport, metering, security, surveillance, banking, health and mining. NetComm Wireless' Broadband segment supplies communication devices, including mobile Internet gateways, designed and manufactured for use by consumer and small medium enterprises (SME).

 

NTC Details
 
NetComm Wireless Ltd (ASX: NTC) is again gaining momentum with recent positive updates and an encouraging outlook that points to strong revenue and EBITDA growth in FY18. NTC’s growth is expected to be based on key contracts starting to deliver volumes, continuing FTTdp (Fibre-to-the-curb) deliveries and uptick in US fixed wireless orders. The FTTdp and AT&T fixed wireless contracts are primarily the ones that are expected to deliver more meaningful volumes throughout FY18.

Launched new Network Connection Device: NetComm lately launched a Network Connection Device (NCD) and also won a major order from its initial customer, NBN Co Ltd (nbn). As a result, the shares of NTC rose over 16% on December 04, 2017. The NCD is a new product category and is used in conjunction with the group’s Distribution Point Unit (DPU). The NCD incorporates a Gfast and VDSL modem as well as a Reverse Power Feed capability that enables the DPU to be powered from the customer’s premise. This device enables monitoring and diagnostics reported on the actual line performance delivered in the home. The initial volume commitment from nbn, is expected to grow over time, which would lead to revenues of $66 million to the group. Moreover, this deal represents incremental revenues (above those relating to the Reverse Power Feed only unit) of over $40 million within a period of 18 months post launch, which is planned for the first half of next year. NCDs would undergo operational, customer, business and field testing with the nbn prior to the commercial launch. Management believes that NCD technology would further boost the effectiveness of the Fibre-to-the-Curb rollout.

Targeting to be a major global player in connectivity solutions: The group is well positioned in wireless as well as fixed line segments with Wireless products being deployed in Australia. Wireless products are part of discussions with tier one telcos in North America, Europe and the UK. The group’s fixed line technology for delivering Fibre to the Curb is being deployed in Australia by nbn. They are targeting to be a major global player by leveraging their developments for nbn and AT&T. Accordingly, they are reinvesting for long term growth which is on track with their strategy. Consequently, NTC delivered an EBITDA of $3.6 million for FY17 as compared to $6.1 million in prior corresponding period (pcp). They are making further investments in people and capability (over $12.6 million) to enable contracts to scale from FY18 and deliver new contract wins. NTC is making huge investments in people and accordingly recruited a highly experienced specialist team of engineers to help them develop bespoke solutions for their customers. 

Diversifying business: The group’s growth businesses include Fixed Wireless, DPUs and M2M, which currently account over 80% of the revenue (as at FY17), as compared to 69% in FY16. The group expects the similar trends in the coming periods as the potential projects continue to enhance in scale. NTC won the first orders from nbn for their Fibre-to-the-curb (FTTC) DPU devices that were delivered from June to August this year, while won further orders from September. The group is confident to offer nbn with more of these devices over time. AT&T Fixed Wireless project kicked into gear with the first units delivered in the last month of FY17 as AT&T rolls out to an initial 18 States and targets at least 400,000 homes covered before the end of this calendar year. However, these devices’ penetration is slightly behind the estimates while the group expects a pick up in the next year. NTC got several opportunities from AT&T with whom they have developed a very good relationship. NTC operating revenue enhanced 26.3% year on year (yoy) to $107.6 million in FY17. Revenues from Growth Business (M2M, Fixed Wireless & DPU) delivered an outstanding rise of 47% to $86.3 million in FY17 as compared to $58.7 million in pcp.

 

Expanding growth business (Source: Company reports)
 
Fixed wireless highlights: The group’s Fixed Wireless technology is now targeting the remaining 10% of internet users in rural areas. Their contract to supply Fixed Wireless devices to Ericsson in Australia for the nbn enabled them for a further 68,000 customers to be activated in FY17. As a result, the group had 185,000 activated connections at the end of the financial year. The group enhanced their Fixed Wireless coverage to 555k premises since June 2015, as of November 16, 2017 while the take up rate enhanced to 37.4%, showing a growing market penetration. Connections activated were up to 208k premises. The nbn would launch new 100mbps service during 2018. As per their US progress, AT&T’s first deployment is targeted at offering a coverage to build a potential market of over 400,000 locations in 18 states by the end of this calendar year. This deployment covers over 1.1 million locations by 2020, as part of the FCC Connect America Fund commitment, while the project also has the potential to scale further in the future as the business case for Fixed Wireless is compelling for the customers.

First to market with distribution point technology in Australia: The group has a solid opportunity to deploy Distribution Point Units, with the replacement of copper networks with fibre and HFC cable. This needs a device that connects fibre or cable which is deployed down a street to the copper line that enters the customer’s premises.  Over 1 million premises have been earmarked for FTTC by nbn.

Balance sheet position: NTC has no bank debt and has a cash balance of $22.1 million. This shows that they are well positioned to leverage opportunities in their growth segments in M2M, Fixed Wireless and DPU. They continue to invest in staff and infrastructure, as orders from major contracts start to scale up. The group has $8.2 million of cash provided by operating activities. They made a solid $10.2 million turnaround in operating cash flow of showing tight management of working capital. The group used $22.6 million of cash for investing activities in engineering capabilities and product development as a part of the growth strategy.  

 

nbn fixed wireless activations and coverage (Source: Company reports)
 
Outlook: For fiscal year of 2018, the group forecasts a major uplift from major contracts, which would enable them to deliver strong growth in revenue and earnings, as compared to prior corresponding period. Moreover, they expect their investments in business in the last two financial years to generate benefits in the coming periods. They are pursuing Tier 1 customers for their solutions in North America and the UK, and are ahead of the curve. They are a leader in Fixed Wireless Network Termination Devices (NTDs) and innovators in ruggedized DPU solutions with a world leading reverse-power technology. Accordingly, they could negotiate with several customers in multiple continents, and are picking opportunities that would be at scale. The group is enhancing their market share in their core verticals, and has local and international R&D facilities in place, with top class engineers for developing innovative solutions. Moreover, NTC is enhancing their marketing activities to build a globally recognized brand as well as expanding their PR activities.

 

Global sales strategy (Source: Company reports)
 
Stock performance: The shares of NTC corrected over 35.9% in this year to date (as of December 04, 2017) at the back of volatility and some concerns over Australian Innovation Patent infringement related to their Distribution Point Unit (DPU) NDD-4100. On the other hand, management has reacted strongly against these claims. Moreover, the group delivered a decent FY17 performance and is on track to leverage growth opportunities by building a flexible balance sheet. Further, the group’s launch of Network Connection Device (NCD) is a major milestone which revamped the sentiment on the stock. Another major order from their initial customer, NBN Co Ltd (nbn) would build recurring revenues in the coming periods. Despite an outstanding stock return on December 04, 2017, we believe there is more upside momentum. We give a “Buy” recommendation on the stock at the current price of $1.295



NTC Daily Chart (Source: Thomson Reuters)

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