TTZ - Total Telcom Inc.

[matthewd98]

Total Telcom Inc.

Current price: $0.07

Shares outstanding: 24,715,014

Insider ownership: ~25%

Market cap: $1.73M

 

 

Intro:

 

Total Telcom is a profitable tiny microcap trading slightly above cash, and has a recurring revenue business that has been growing at a slow double digit rate and is set to accelerate in fiscal year 2017 as per the latest MD&A: “The Company is optimistic that its growth in revenue seen over the past two years will continue and increase more rapidly in 2017 as management hopes to capitalize on global opportunities that have been initiated and are currently in the development and testing stages.”

 

The business has undergone significant transformations since the 2008 recession where it lost some notable customers and the value proposition of its products weren’t as robust, which are reflected in the company’s recent results. The CFO has also been actively buying shares in the public market since August which bodes well for the future of the business.

 

 

 

 

 

Description of the business:

 

The company operates through its wholly owned subsidiary ROM communications Inc. ROM communications provides wireless monitoring, tracking and remote control solutions for commercial, industrial and consumer applications. The company caters to niche markets as their solutions primarily rely on satellite communication, therefore they are employed in remote areas where cellular coverage is lacking (e.g. the desert, deep forest, ocean, etc). For example, they have customers in the fishery industry where they monitor their ships, in the mining and forest industry where they monitor their machinery and as of recent, in the racing industry where they track trucks and bikes in races in the desert so viewers can see the position of the vehicles.

 

They have one core platform around which they develop custom software and solutions specifically tailored to the customer. The hardware is nothing revolutionary, but their key differentiator is how they interface (i.e. integrate) with the customer’s equipment and address the customer’s specific needs – they consider themselves a service company.  They help the customer address how to most efficiently capture the data and compress it, how to sift through it to get the pertinent information they need, and how to integrate the data into their own systems. Data needs to be collected in the most efficient manner and compressed as much as possible in order to minimize satellite usage fees as satellite usage is billed by kB used. The data itself is essential to the customer and it’s much cheaper to collect it using ROM communications’ solutions than having an employee manually collect the data. What’s more, customers have the communications charges become part of their budgets.

 

The company has 3 revenue streams. The cost of the hardware for the customer is anywhere from $300 to a few thousands of dollars per unit and is the revenue segment with the lowest gross margin. The communication charge is $20-125 per unit per month and has high gross margins. In Q1 2017, a rental revenue was introduced. This is related to the tracking units they lend out for off-road truck racing (e.g. Best in Desert Race). The customer borrows the equipment for the day of the races. There is at least one truck race going on every month. The rental revenue has similar gross margins to the communication revenue. The blended gross margin for all revenue segments is 60+%.

 

Growth prospects:

 

On the rental revenue front, they will increase it by getting into bike races (starting in Q2) and seek out additional opportunities for rentals since the devices are currently only used about once a month – could add lots of extra revenue at no cost if they can lend them out during non-race days. The company believes they could grow this segment considerably as per the Q1 MD&A: “The Company also has introduced its rental fleet in the first quarter and is hoping to see growth in this area”.

 

There is also the opportunity for international sales which the company is working hard on. It’s a huge untapped opportunities as their sales are currently only in North America. They will approach the international markets through dealer networks so the overhead will be minimal. Here is what is mentioned in the MD&A: “while these relationships are not significant to the Company’s sales today, management expects sales in other parts of the world to be a significant growth area in the future.” And “management hopes to capitalize on global opportunities that have been initiated and are currently in the development and testing stage”.

 

Valuation:

 

 

The company has a market cap of $1.73M with $1.036M in cash, no long-term debt and ~$10M in NOLs. It has been profitable and most recently reported a $45k net income.

 

The company has operating expenses that should stay fairly stable as revenue grows. The annual operating expenses is around $700K. The break-even for the company is around $1.15M revenues. Assuming the most conservative case of 20%+ growth in revenue for 2017, the company should do around $1.4M in revenue. The company should be able to do $150K in earnings. At current valuation, the company is trading around P/E of 6x.

 

Also the company has NOLs worth $10M. So the company won’t be paying taxes for a long while.

 

Turnaround:

 

The company hit a rough patch during the 2008 recession after it lost some customers mainly due to budget cuts and their products having a weaker value proposition. The most notable of customers that they lost was the state of Georgia. The state of Georgia had approximately 100 units for water monitoring, but had to stop using the monitoring units due to large budget cuts. Also, at the time the company had multiple platforms and offered much less features.

 

The company reorganized after the recession and decided to go with one platform which could be much more easily customized to deliver essential features to customers. I believe the company would not be affected by similar circumstances as 2008 if they were to reoccur. Management also feels strongly about this. The proof is in the fact that the company was actually winning business in the oil fields in Canada in 2015 (a bad economic time for Canada obviously). Furthermore, as previously mentioned, they provide customers with essential data which is cheaper than having someone manually collect the data, and customers have the communications charges become part of their budgets. Lastly, the majority of their US and Canadian revenue is from businesses (unlike 2008 where they had more clients in the public domain) so they wouldn’t be forced to cut the services in bad economic times as the data is essential to them.

 

Summary:

 

Although the company’s shares are not that liquid, the cheap valuation makes it very compelling. The company is growing in low double digits with new business segment and international growth opportunities that can drastically increase earnings. Plus you have a strong balance sheet and insiders buying shares in the open market.

 

Disclosure: long common shares

 

Special thanks to parasd for the help with the write-up

[matthewd98]

New revenue stream from their Wi-Fi controller system and already significant orders.

 

 

 

Total Telcom's ROM releases Wi-Fi controller system

 

Total Telcom Inc.'s wholly owned subsidiary, ROM Communications Inc., has launched the first-ever Wi-Fi controller and diagnostic system for a line of premier German-built truck, marine and equipment heaters. Initial sales up to the end of December totalled 600 controllers worth $80,000. It is estimated that in excess of 100,000 German-made heaters are sold into North America each year, coupled with an existing market of millions of heaters.

 

Company chief executive officer Neil Magrath stated: "Orders for heater controllers are typically placed in May for the winter season. Our late October entry into the market was very encouraging, with significant sales and very positive feedback. ROM's proprietary controller is filling a void in this market segment, and we anticipate an ongoing seasonal revenue stream with significant growth potential."

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aTTZ-2435455&symbol=TTZ&region=C

[chrispy]

A nice writeup and the company is very interesting.  I hope to re-read and look into this more over the next several days.

[matthewd98]

A nice writeup and the company is very interesting.  I hope to re-read and look into this more over the next several days.

 

I think it's worth looking into especially after yesterday's news release regarding the new Wi-Fi controller and the initial orders they've had for the product. The story is a lot more de-risked IMO.

 

The CEO is very excited about this new opportunity (Wi-Fi heater controller). They managed to sale 600 units ($80k in revenue) with a late market entry. Considering there are 100,000 German-made heaters sold every year in North America and the fact heater controllers orders are typically placed in May and beyond for Winter seasons, I believe the company could easily do $300k+ in revenue with the Wi-Fi heater controllers. Significant growth beyond that could come from the existing market of millions of heaters and from international sales.

[matthewd98]

I was definitely impressed by the quarter. Revs were up 61% and net income up 147% sequentially. $0.005 in EPS and now trading at 10x annualized earnings which is still cheap for this kind of growth.

 

Next quarter will be even better I believe. There will be one large race (Mint 400) and two other normal sized ones. Rental revs could easily be over $200k. Also, as per the MD&A, there will be significant growth in the WiFi controllers in the summer and fall which are the peak seasons. I believe the WiFi controller revenue could easily be double or triple in Q4 17 and Q1 18.

 

Good comments about future prospects in the MD&A. It looks like they are still working on new products for int'l markets.

[matthewd98]

Todd from another forum modeled out Q3 and got $248k in net income which is ~$0.008 in EPS. His assumptions are highly accurate since it's easy to calculate rental revenue and other revenue segments are easy to predict (communications is recurring and hardware can make a conservative assumption). The rental revenue is calculated from the number of racers per race, and the schedule of the races can be found online (best in desert races). In Q3, there is one massive race Mint 400, and two other normal size races. Each GPS tracking unit is $250USD per car + communications charges + bracket costs. I think the stock could easily double after Q3. Here is the model:

 

http://i67.tinypic.com/nvz97a.png

[Steven B]

Is there any detailed breakdown available online except the Sedar filings? Those are kind of scarce.... Good call. This thing really popped. At this point it's a growth bet.

[matthewd98]

Is there any detailed breakdown available online except the Sedar filings? Those are kind of scarce.... Good call. This thing really popped. At this point it's a growth bet.

 

Actually a good friend of mine, Todd (same person who made the model), just wrote an article on how to calculate revenue from the racing events: http://investbeforethestreet.com/importance-microcap-penny-stock-research/ . His rental revenue estimate is lower because he forgot to incorporate the $69USD mounting brackets and the $20 app which families can download on their phones to track the racers.

 

For a breakdown of the other revenue segments, you would need to read the MD&A and look at the segmented revenue portion in the financials.

[matthewd98]

Here are some notes from another investor's conversation with management. I've highlighted the important points.

 

RacingTraX/MotoTraX:

Yes, all revenue related to the RacingTraX/MotoTraX including add-ons are recorded under rental revenue (there are no communication fees).

The original race tracker (Rom series) needed to use the car’s power-supply and be harnessed to the car.

MotoTraX is the second-generation race tracker device; it has an internal battery; it attaches to the bikes.

The first use of MotoTrax was the January 2017 race.

The pricing is currently the same for RacingTraX and MotoTrax: $250 per unit. There are add-ons, like $20 for a cell phone app (if family wants to follow race) and $69 mounting brackets. Again, there are no communication fees.

There is no revenue share with the race company; there is a commission (shows up in G&A) for an agent who goes to the races and helps with the units.

Currently, the fleet is almost 400 units (company spent $100k on units over the last two quarters). There won’t be an increase in the fleet unless events grow above 400 participants.

Racer/event must pay for any units lost/damaged.

BITD races have mandated tracking units.

RacingTraX/MotoTraX provide near-real-time (almost real-time) race monitoring and mapping.

 

OUTLOOK for other races:

[amazonsearch]TTZ is also looking at the Baja series (SCORE) in Mexico, but TTZ doesn’t have a “key relationship” with the race organization. A couple years ago, some racing teams used ROM devices to track their Baja races (which is how TTZ got started in this area).

In the future, TTZ would love to get into races in Europe.[/amazonsearch]

 

Wi-Fi controllers:

Heaters are generally purchased in late summer and early fall (in front of the winter season).

TTZ’s first order was in early December 2016 (600 devices for $72k).

The WiFi controllers are hardware only (no recurring communications charges; it’s WiFi).

TTZ also has controllers that integrate with satellite (but the sales focus is focused on WiFi-only controllers).

TTZ has a goal of 50% gross margin, though gross margin was below that for the first sales.

TTZ has a single distributor (a Canadian company) which has an exclusive agreement to sell the WiFi controllers in North America. TTZ prices the controllers to the distributor at a 50% gross margin, and the distributor then sets the retail price.

With strong distribution, sales could reach $1 million in a few years. C17 sales will grow significantly from C16 ($72k) but prob not reach $500k.

 

Other products:

TTZ is working on specific applications for various customers.

TTZ “will not compete directly with ONSTAR”; instead, TTZ looks at niche industrial applications where other solutions are expensive.

HVAC could be another product line in the future (TTZ had a HVAC-related contract with the Air Force a few years ago).

Textanywhere.ca is the service where text messages can be delivered by satellite unit for $0.25 a text.

Satellite units cost $400, which limits the market to these industrial niche applications (e.g. fishing vessels).

Eventually, these satellite units could cost <$300, which would open up more applications (e.g. remote hikers, who now use emergency beacons, which cost ~$200).

 

Competitive advantage:

TTZ’s “SECRET SAUCE”: Back-end programming in units and how to adapt the platform for each customer application (i.e. compressing, encrypting and getting data so it is delivered cost effectively). There are trade secrets and special know-how in the software. The hardware itself is not patentable (and not hard to put together).

TTZ has a contract manufacturer in Vancouver who assembles the hardware components.

 

CEO background:

CEO Neil (founded ROM in mid-1990s) is solely focused on selectively growing the business. He seems like a persistent tinkerer, who has been focused on these products for over 20 years. He meets with shareholders at the AGM or in his office in Kelonwa, British Columbia.

AGM tentatively planned for late September 2017 (when June 2017 annual financials finalized).

[matthewd98]

Excellent Q3 results.

 

Net income: $157k ($0.007 in EPS) -- almost double from last Q

Sales: $519k

1.4M in cash (20% of current market cap)

 

[matthewd98]

I’ve sold my shares. The stock has run up a lot since being picked up by a successful microcap newsletter. It’s definitely unwarranted IMO.

 

I will add shares again on bad quarters if the stock drops. I don’t think most investors realize that there is some seasonality to the different businesses.

[CleverLongboat]

Just out of curiosity, which microcap newsletter picked it up?