The change in focus to rural broadband and machine-to-machine (M2M) is paying off big time for Netcomm Wireless Ltd (ASX: NTC) as the stock rallied to a record high this afternoon on the back of a better-than-expected full year result.
The wireless hardware company revealed a 142% surge in net profit to $2.5 million on a 15.1% uplift in revenue to $74.3 million for the year ended June 30, 2015. This is ahead of my forecasts of $1.8 million in net income and $73.1 million in sales.
What is also pleasing is the sharp increase in operating margin with the 2014-15 earnings before interest, tax, depreciation and amortisation (EBITDA) margin improving 21% to 9.8% due to Netcomm's strong operating leverage and economies of scale. This means any change in revenue will have a disproportionately larger impact on the company's bottom line.
The ramp up in sales of transmission dishes to the NBN fixed-wireless network and its M2M business (which are disparate devices communicating on a network like smart meters and contactless payment cards) now account for 54.5% of group EBITDA.
These markets are the future of the company and are the reason for investing in the stock even though its traditional home broadband device division posted a much better-than-expected 29% increase in sales.
If there is a negative to the result, this would be it. I would have preferred to see Netcomm's M2M/rural broadband sales drive the earnings beat instead of its traditional ADSL business, although this doesn't change the investment case for Netcomm Wireless.
The company is in discussions and running trials with a number of international clients. Converting even one of these into a sales contract could materially transform the tiny $118 million market cap tech player.
In the past six months alone, Netcomm has signed an agreement with Singtel to market its M2M products and services and won a partnership to provide wireless communications components to Hitachi's smart energy project.
Netcomm also has M2M agreements with Vodafone and Middle East telco Etisalat.
It's impossible to know when new contracts will materialise and I don't blame management from shying away from giving guidance for 2015-16. But I think sales to the NBN will increase materially in the current financial year given that adoption of fixed-wireless is still in its infancy.
Shares in Netcomm have surged nearly 150% since I called the stock a buy in February, and while it isn't as big a bargain as it was back then, I think it's headed for well over $1 in the coming year.
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