Posts tagged ‘investments’

Aug 23

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.

Segment Results

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.

Odorization Orders

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.

ICE Technology

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.

Overall

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.

Nov 5

1 Comment

Third Quarter Earnings Updates: WLDN and RMGN

Willdan

Willdan has put together a number of good quarters in a row and did not disappoint in the third quarter.

Earnings were 28c per share and revenue was $58 million. Revenue was at a similar level to the second quarter but up 75% over the prior year. Though part of the revenue increase was due to acquisitions, organic growth played a big part as well. Organic growth is up 30% year to date.

Willdan’s strategy has been to expand by acquiring small engineering services firms with complementary skills that operate in areas that expand Willdan’s reach. These acquisitions have been Genesys Engineering, Abucus Resource Management and 360 Energy. The expectation is that the more complete services package will allow them to bid on contracts they previously would not have been able to.

The strategy has worked. In the third quarter Genesys generated $16.2 million of revenue, up from $8 million the previous year.

Willdan also provided a robust update of projects in the early stages. They named the following new programs that are ramping in the third and fourth quarter of this year:

6 year $90 million LCR program for SGD&E announced in March is expected to ramp in 2017
2.5 year, $41 million multi-family program for ConEd, announced in June, continues to ramp, will make a larger contribution next year
3 year, $35 million contract, small/medium business direct install and industrial program for PacifiCorp in Utah, will contribute a little in revenue this year, ramp in 2017
2 year $10 million clean energy program in New Jersey will contribute a little this year and ramp 2017
NYC housing program is beginning to contribute a “modest amount”, and is “expected to increase considerably next year” – they only have notice to proceed on small amount of the program right now, expect to know more about the timeline by year end

All the major ongoing programs are expected to remain in place in 2017. With only a few small projects rolling off, 2017 will almost assuredly be a growth year. The company put a “minimum public target” for growth of 10% for next year.

Also mentioned on the call was the improving growth landscape in California. Right now in California 20% of energy efficiency services are outsourced by utilities. The total ultities budget is around $1.8 billion. The California Public Utilities Commission (CPUC) has mandated across the board that outsourced volumes needs to exceed 60%, and they have used language that they would like to see it “as high as 100%”. This will “dramatically increase the market as new procurements are initiated”. Basically it is a 3-fold to 5-fold increase in contracted services. Willdan will be well positioned to take some of this business.

Finally the Tom Brisbin, the CEO, made comments about how he would like to expand the company into more industrial projects, specifically oil and gas and refining. Industrial end users are larger users of electricity. The amount of savings per user will be higher and so these will be larger contracts. Given past history, an acquisition in this area would not surprise me.

I was tempted to add to my position in the stock, but its already quite large.

RMG Networks

RMG Networks had what I would consider pretty decent results, and the color on the conference call was very positive. Yet the stock has floundered flat to down.

In my opinion investors are being too impatient with the story. Everyone is looking for a big top line number. When it doesn’t come they are ignoring what is happening under the surface.

Everything is moving in the right direction: pipeline, partners, pilots, and products. One of these quarters, maybe even the next one, the momentum will break through to the surface with a big revenue number, $12-$13 million, and it will be off to the races.

The company continues to make inroads into the supply chain vertical. On the third quarter conference call they said that they had 40 supply chain prospects that were in various stages of negotiation and that the 3 previously mentioned pilots had “been extended” to investigate functionality roll-out in 2017, Each of these pilots can be $1 million of revenue or more.

They also put aside some time to give us more detail on their 3 recently signed partners:

Manhattan Associates – Manhattan manages supply chains, sells supply chain products, has 1,300 products, performed account planning in Q3, training to Manhattan sales team, expect initial sales in early 2017
Regan Communications – Regan is a leading corporate communications consulting company – are specifically educating and promoting Inview. The relationship will materially expand reach into the internal communication market. The partnership kicked off on Sept 29^th at Global Employee Communication Conference at Microsoft. Robert Michelson, Chief Executive Officer was MC for part of event and delivered a keynote presentation. The presentation demonstrated Inview. RMG has received 30 new leads on Inview from summit
Airbus DS Communications – Airbus is a 911 call leader, 60% of 911 calls are received by Airbus. A new RMG-Airbus solution puts real time data displays into the Airbus system. RMG closed their first two Airbus customers in Q3 for $100,000 in revenues. There are a total of 2,800 Airbus customers.

They believe these channel partners can generate $5-$10 million of revenue annually once they are trained and ramped.

Michelson also reiterated that large deals in the pipeline have “increased dramatically” over the past couple of quarters.

Looking at geographical strength, the United States and Europe have been strong but the Middle East has not. Michelson said with regard to the Middle East that (I’m paraphrasing here):

[We have] orders in the millions but need to see the down payments, the customer has signed the contract… we need things to clear up with the economies there because price of oil has such a disproportionate impact on economy, it gives more beta there.

If oil can return and stay at the $50 level we could see some upside there. On the other hand at current prices, the Middle East may continue to be a drag on results.

Finally, some color was given on the recently filed S-3. Michelson was clear that they believed the stock was under priced and any move to raise funds would only be done because growth led to the need for additional working capital. He said that they would “protect stockholders” and keep them from being diluted, leading me to think it may be a rights offering. Michelson also said the raise would not be for anywhere near the $10 million shelf that was filed.

I didn’t add to my position but continue to sit tightly.