CUI Global Second Quarter results – lots of irons in the fire
While I have been reluctant to add to any stock right now and have been weighing any purchases carefully, I did add a bit to CUI Global after the release of their second quarter results.
As a reminder, the company operates in two segments. Their Power and Electromechanical segment sells power supplies, power monitoring and interconnect products, and has recently collaborated with a small start-up called VPS Partners to create a technology for datacenter power management called ICE. In the Energy segment CUI Global offers their GasPT gas analyzer system, a newly developed odorizer, VE probes for sampling gas and performs integration and engineering project work.
The company had an improved second quarter, mostly due to the Power and Electromechanical segment. That segment saw a big jump in revenue, from $13.6 million in the first quarter to $18.2 million in the second quarter. The company attributed the jump to an inventory refresh from distributors, a ramp in sales from new distributors, particularly Arrow Electronics, and design wins from 2015 and 2016 that are now ramping into production.
Regarding Arrow, on the second quarter conference call the company said they saw “much more upside” in the relationship with Arrow and that Arrow, which became a distributor early this year, is expanding the CUI Global product line and re-ordering products already.
Revenue continued to lag on the energy segment, coming in at $4.3 million versus $4.1 million in the first quarter. The company remains held up by tariff issues with Snam Rete, which was the first major customer for the GasPT units.
More on Snam Rete
As the company reiterated on the second quarter call, the Snam Rete contract calls for 7,000 GasPT units and is worth €120 million to CUI Global. It’s an extremely significant contract. Snam Rete is installing the GasPT units at the offtakes of major industrial customers, where they will be used to more accurately and quickly measure gas usage by these customers.
CUI Global delivered the first 400 of these analyzers last year before receiving word from Snam Rete that they would not be able to install any more of the units until they received regulatory approval to switch out devices on third party sites. Bill Clough (the CEO) described the issue back on the fourth quarter conference call as follows:
The plan that [Snam Rete] rolled out to install these device is to buy the installation point from these high-end industry customers. Right now where the customer connects to the gas system is currently owned by the customer and due to EU regulations that come into effect next year, the customer has to upgrade that connection, which is going to be quite costly. Snam is offering to buy that connection point from them and to install our device along with some other upgrades that they are going to do including flow computers and other things. And in order to do that they also need to buy an access or an easement to get in and obviously maintain what they are installing.
There is no problem whatsoever if the customer voluntarily agrees to that, which they believe almost all customers will, as obviously they sell an asset that’s going to cost them a lot of money during next year, and so it’s something that becomes a revenue generator as close to cost. However, the energy authority over there says the problem arises with customers who do not want to just pay. Those customers would be paying the same tariff as the customers who do participate, which they felt was a potential anti-trust violation, or what they what they are having to do is, design and implement a two-tariff system, which they have done in the past.
There has been progress on the Snam Rete bottle neck. A few days before the quarter announcement I got an email from a friend pointing to a press release from Snam Rete (here). The release described Snam Rete’s commitment to the “upgrading of measuring systems located at redelivery points of the transportation network through the acquisition of metering systems from final customers”. The press release outlined a €310 million loan from the European Investment Bank that would be used, in part, to acquire these offtakes. CUI Global referred to this press release on their conference call.
Also on the call Bill Clough said that Snam Rete had met with the regulatory authority in June, that the meeting was “productive” and that they expected to here back after the August recess.
The issue with Snam Rete still appears to be a delay, and not a permanent impasse. I would argue that the current share price is reflecting more the latter than the former. Snam Rete’s schedule on deployment is expected to require 100 analyzers a month. At €17,000 per analyzer, resumption of this contract alone would more than double Energy segment revenues. That positive outcome is just not priced in at a $3.50 stock price.
The Snam Rete press release linked to above also describes a commitment to the “installation of odorization systems for industrial final customers”. This is referring to the purchase of CUI Global odorizer product, which is a product that simply mixing in an odorizing chemical with otherwise odorless natural gas. CUI Global licensed the technology from Engie at the same time that they entered into the relationship with them.
On the call management said that Snam Rete is looking at purchasing 1,300 of the odorizers. They said Engie is also looking at deploying the odorizers throughout their system. CUI Global said on their first quarter call that odorizers would sell for €7,000 to €10,000. The odorizers are still in the beta phase of development but they are proceeding to field trials (with Snam Rete) in September.
Other GasPT orders
CUI Global is making progress with Engie as well as in North America with a pipeline company in Alberta (TransCanada?).
Regarding Engie, CUI Global submitted a bid on 1,000 GasPT units and 1,000 remote terminal units (RTUs) to be installed by Engie’s subsidiary Endel. They said on the call that they are the only bidder, and they that have already been spec’d in on the design. The per unit revenue for the analyzers is in the €17,000 to €20,000 range, and there is similar pricing on the RTUs. So again, another big opportunity.
In Canada, the company has had their previous Italian testing approved by Measurements Canada, which leaves a final step of a 3 month installation test on a Canadian pipeline. This is expected to begin in September.
Future Billing Contract
This is a contract with DNV GL to explore the potential of using GasPT units to monitor the delivery of biogases into the delivery system. The project is in the early stages and won’t result in revenue until 2019 at the earliest. However it could have big implications if it concludes favorably. Clough said that if the project is approved and deployed across the network (the UK) it would require in the range of 45,000 GasPT units. If adopted in other European countries (France, Germany, the Norwegian nations), a similar magnitude of units would be required for each country. Keep in mind the Snam Rete contract, which is extremely significant in its own right, calls for 7,000 GasPT units.
The last data point that I will touch on is the ICE technology. As I mentioned above, this is a partnership with VPS to provide a power optimization solution for datacenters. CUI Global provides the hardware while VPS has developed the software.
On the second quarter call for the first time management gave a bit more color around the opportunity.
There “is no competing technology in terms of doing peak shaving” to ICE. The return on investment by implementing an ICE system is significant, as it can unlock 10% to 20% of power capacity.
So far beta and sampling testing have reported good or better than expected results. They expect small, immaterial revenues in beginning in the fourth quarter. This will be followed by a pick-up in 2018 and adoption (assuming it occurs) in 2019.
They delineated the revenue opportunity based on data center size. The smallest scale centers are $750,000 opportunities, the average datacenter is a $2 million opportunity, and the largest scale datacenter is $30 million opportunity.
The overall total addressable market (TAM) is estimated at $700 million to $1.5 billion for North America and 5x that for the rest of the world. I suspect that these numbers are for the entire ICE product. As CUI Global delivers only the hardware, and I get the sense that the innovation is really the VPS software, their fraction of the TAM is likely quite a bit less than the total. Nevertheless, it’s a big market for a little company. They said that in the mid-term they could see revenue ramping to a few million per quarter and in later years with scaled adoption it could be as much as $15-$20 million.
At $3.50 CUI Global has a market capitalization of $75 million. Net debt is about $4 million. They plan to raise about $4 million cash from the sale of their Washington facility. That cash influx, combined with the better outlook from both the energy and electromechanical segments has led them to cancel the at the market (ATM) share program. I think a lot of investors looked unfavorably at the ATM program, particularly the uncertainty as to whether the company was helping to beat down its own stock over the last few months (they weren’t).
At the current market capitalization the company trades at 1x revenue. Given the opportunities outlined above, I think its still a reasonable bet, which is why I added a little last week.
This is a nice story. In your opinion, what makes the GasPT technology unique technically? They seem to offer a key functionality at the right size and price, but how easily could others compete against them? How proprietary is this?
Utilities are normally horrible customers for a small company. They have decade-long sales cycles, regulatory issues, etc. By the time the utility is ready to buy, the technology is often no longer as competitive as it was at the start. What I like in this story is how CUI’s sales queue seems to have some depth to it.
What kind of margins do you think they would have once they reach profitability? What’s an appropriate multiple for that? Probably 10 to 15?