Company overview - NetComm Wireless Limited is engaged in the development of fixed wireless broadband, wireless machine-to-machine (M2M)/Industrial Internet of Things (IoT), and Fiber and Cable to the distribution point technologies. The Company operates through two segments: Broadband Business and Machine to Machine Business. The Broadband business segment supplies communication devices, which range from entry level gateways to high-performance devices that supports triple play services covering high-speed data transmission, multi high definition (HD)/4K Internet Protocol television (IPTV) and over-the-top video streaming, as well as voice over Internet protocol (VoIP) phone calls. The M2M business segment specializes in the development of technologies sold to telecommunications carriers, core network providers, system integrators, governments and enterprise customers around the world. The M2M business also includes network terminating devices designed to advance global network performance.
 

 NTC Details

Ramp up of NBN and Fixed Wireless network in FY18: For H1FY17, group operating revenue grew by 1.2% to $47.0 million led by growth business businesses of M2M (Machine to Machine & Fixed Wireless revenue as it grew by 16.4% yoy growth to $36.3 million (77% of group revenue). Traditional Business revenue declined to $10.6m due to slowdown in orders from powerline and filters business. While adjusted EBITDA grew by 40.5% yoy to $12.5 million, there was NPAT loss of $1.7 million. For H1FY17, the company witnessed a strong cash generation with cash inflow of $6.1 million, with no debt on its balance sheet, while having $30 million cash at the end of December 2016.  The group is continuously investing to target Tier-1 clients and was awarded with three major contracts from reputed customers such as Ericsson/nbn Fixed Wireless, nbn FTTC (Fiber-to-the-Curb) and US Fixed Wireless. Further, the company has increased its fixed wireless coverage by 144k premises to 485k premises at 23 March 2017.  Moreover, the composition of revenue continuous to evolve with a further increase in revenue from the company’s Ericsson/nbn Fixed Wireless contract. Further investment into additional workforce ($4.0m) and infrastructure ($1.0m) to support medium term growth initiatives, while strong balance sheet is conservatively structured to support global growth initiatives.


H1FY17 Financial summary; (Source: Company reports)
 
DPU is a substantial global growth opportunity: NetComm Wireless made a Master Equipment and Services Supply Agreement with nbn (the company rolling out Australia’s national broadband network), for supplying the Distribution Point Units (DPUs) and related services from fiscal year of 2018. NTC would supply nbn with 1-port and 4-port DPUs which are specifically designed for the nbn Fiber-to-the-Curb (FTTC) project. This initial order commitment will generate approximately $28 million revenue to NetComm upon delivery to nbn, which is expected to occur during the period June to August 2017. NTC would install the telecommunications pits outside premises to connect fiber to the current household’s copper lines enabling nbn to remotely activate the service on request. By delivering FTTC, deliver speeds would improve up to 100/40Mbps using VDSL2 and will help attain faster speed with some modern technologies that would be available. As per the nbn’s announcements, minimum of 700,000 premises would be covered with the FTTC project. On the other side, the group continued their rollout of Ericsson/nbn Fixed Wireless solution while deployed over 120,000 units as of June 2016. Importantly, nbn Fixed Wireless revenue tripled during fiscal year of 2016 while the number of homes and businesses actively using the service more than doubled. Meanwhile, NTC believes that they are well positioned to target the $80 billion annual global market given the track record of successful Fixed Wireless deployment and sees potential opportunity from other economies who are planning to start termination of their PSTN copper networks.


Ericsson/nbn rollout continuing; (Source: Company reports)

Market opportunity due to migration to 3G and 4G: NTC is positioning itself in the Wireless M2M, or Industrial IoT market which is forecasted to hit $11 trillion by 2025. Earlier, Telstra informed that they were shutting down their 2G network before the end of the year while Optus and Vodafone are following this plan for 2017. As a result, these companies are upgrading their devices, with mainly M2M devices used by utility, security and manufacturing companies. With the obvious migration of telecom players to 3G and 4G, NTC sees further opportunity. The group’s technology is in Fixed Wireless, Distribution Point and M2M and focusing on enhancing the customer experience. Recent 2G networks shutdowns prompted mass-scale device upgrades to 3G and 4G LTE. Netcomm’s 4G LTE Fixed Wireless solution delivers guaranteed network grade performance, stability and longevity and positioned as a key differentiator. Further, 5G will complement rather than replace 4G LTE, and expected to provide opportunities once standardized in 2020.


Continuing rise in revenue from growth businesses; (Source: Company reports)

Acceleration of US Fixed Wireless orders from FY18: The group opened its first R&D facility in the US with 30 engineers in Sunrise, Florida. Further, it made a Master Purchase Agreement with a major telecommunications carriers’ group for supplying Fixed Wireless devices designed to connect households and businesses to the carrier’s Fixed Wireless rural broadband network during November 2015. The group also made a Frame Purchase Agreement with Nokia for supplying Fixed Wireless devices to Nokia related to their global FastMile initiative. FastMile provides operators with an end-to-end, LTE-based means of delivering broadband internet services to suburban and rural areas, ensuring high data rates and guaranteed minimum throughput of coverage. Under the agreement, NetComm Wireless will provide Nokia with Wireless Network Terminating Devices engineered to deliver LTE broadband in rural and regional areas worldwide in specific frequencies. The arrangement will increase global market access to fixed wireless broadband devices developed by NetComm Wireless and will provide Nokia with the basis to build an ecosystem of partners for FastMile. NetComm Wireless’ devices extend the trusted zone for operators and enable universal broadband initiatives with a focus on the “last mile”. The agreement represents a further milestone in the execution of NetComm Wireless’ global fixed wireless growth strategy, where external research shows the total addressable market to be US$80 billion.  The deal was to supply Fixed Wireless broadband devices for Nokia FastMile and the company expects further ramp up in fixed wireless network in the U.S in FY18.


Substantial investment in people; (Source: Company reports)
 
FY16 revenue driven by solid M2M and fixed wireless segments: NTC delivered a decent fiscal year of 2016 results, wherein the revenue rose over 15% yoy to $85.3 million as compared to the prior corresponding period. Machine to Machine (M2M) and Fixed Wireless revenue enhanced by 76% to $59.3 million during the period driven by the ongoing ramp up of the Ericsson/nbn contract, which is forecasted to generate better volume in fiscal year of 2017. Importantly, M2M and Fixed Wireless business comprises over 70% of revenue in fiscal year of 2016 which is an increase from 45% in fiscal year of 2015. The group expects this shift in revenue to continue in fiscal year of 2017 given the mounting global scope for them.  However, the group’s revenue from their ‘base’ broadband business declined by $13 million to $26 million during the fiscal year, mainly due to the one-off revenue increase from the sale of their powerline products during fiscal year of 2015. But, NTC forecasts their base business to deliver over $30 million of annual revenue going forward. EBITDA fell to $6.2 million during fiscal year of 2016 as compared to FY15, primarily due to the group’s heavy investment of $4.3 million in staff, skills and infrastructure to win potential contracts in M2M, Fixed Wireless and Network in the coming years. However, NTC reported an underlying EBITDA growth of 23% year on year (yoy) to $11.2 million during fiscal year of 2016 (after adding back their business reinvestment and non-cash share based payments expense).


FY16 Financial summary; Source: Company reports
 
Stock performance: The stock has fallen 26.8% over the last one year (as of 27 June 2017), owing to drop in FY16 earnings and currently trading close to its 52 week low levels. However, the combination of three major contracts, in addition to multiple global M2M opportunities and the continued rollout of the Ericsson/nbn Fixed Wireless solution expected to deliver strong revenue and earnings growth from FY18 onwards. Given the positive prospects of nbn rollout and acceleration in Fixed Wireless orders from U.S, we give a “Buy” recommendation on the stock at the current price of $1.74


NTC Daily chart; (Source: Thomson Reuters)
 

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