TCM.L Regulatory News (TCM)

Telit Communications PLC

 ("Telit" or "the Company")

Interim Results for the six months ended 30 June 2013

Telit Communications PLC (AIM: TCM), a global leader in machine-to-machine (m2m) communications, is pleased to announce its interim results for the six months ended 30 June 2013 and the continued growth of the Company. 

Financial highlights:

Ø Revenue increased by 10% to $108.5 million (H1 2012: $98.6 million)

For the first time the company generated recurring revenues from its m2mAIR value added and connectivity business unit of $2.4 million (H1 2012: $nil)

Ø Gross margin increased from 37.1% in full year 2012 to 37.6% in H1 2013.

Ø Operating profit increased by 100% to $6.4 million (H1 2012: $3.2 million)

Ø Adjusted EBITDA increased by 17.6% to $10.0 million (9.2% margin) (H1 2012: $8.5 million, (8.6% margin)

Ø PBT increased by 107.4% to $5.6 million (H1 2012: $2.7 million)

Ø Net profit increased by 147.8% to $5.7 million (H1 2012: $2.3 million)

Ø Net cash flow from operating activities increased by 34.9% to $11.2 million (H1 2012: $8.3 million)

Ø Net debt at 30.6.2013 was $8.1 million in comparison to $12.7 million at 31.12.2012 a decrease of $4.6 million

Ø Earnings per share increased by 154.5% to 5.6 cents (H1 2012: 2.2 cents)

Operational highlights:

· H1 2013 results saw significant investment in sales and marketing expenses (H1 2013: $18.3 million; H1 2012: $13.8 million) including the m2mAIR business unit and the integration of CrossBridge Solutions Inc. that was acquired on the last day of 2012. Despite these investments the company improved each and every financial parameter including: EBIT, PBT, adjusted EBITDA and cash flow from operational activities

· The integration of CrossBridge, and its engineering and sales staff, will allow us to expand the Telit m2mAIR business unit, in particular providing connectivity into North America markets. Telit m2mair, the Company's value added and connectivity services business unit, which launched its services in mid-2012 has so far secured over 600 customers and is conducting over 570 pilots with potential customers worldwide. This strategic move will enable the Company to add a layer of recurring revenues to its business model.

· Telit has been granted by decree a US$44 million facility supported by the Italian MISE (Ministry of Economic Development) to develop an innovative platform for the application of M2M technologies. Of the US$44 million, 10% is to be provided as a grant by the Italian government, 81% is to be made available as a loan by Cassa Depositi e Prestiti, a joint stock company under public control in Italy, with a preferred interest rate of 0.5% per annum, and 9% is a loan issued directly by a financial institution. The company expects to receive about $19 million from this facility in H2 2013.

· Telit continues the investments in development of 4G LTE modules designed for use in the most demanding automotive and industrial m2m applications.

Acquisitions: 

· At August 30, 2013 - Telit Wireless Solutions Inc. a fully owned subsidiary of Telit Communications PLC, has entered into and consummated an agreement to purchase US-based ILS Technology LLC, a leading provider of a ready-to-use, off-the-shelf, cloud platform to connect enterprise IT systems to m2m-connected devices and machines for business-critical use. ILST's solutions are easy to deploy, reaching any m2m device and connected asset without the need for complex programming or development. Critical to business services, ILST delivers secure remote access, monitoring and enterprise application integration which provides customers a faster time to deployment and business value realization through a low cost PaaS services model. Employing best in class security practices and standards, customers can easily maintain critical data management and ownership as well as regulatory compliance.

The acquisition's consideration is $8.5 million in cash, funded from Telit's financial resources. The acquisition of ILST including engineering and support staff, to be consolidated with Telit's m2mAir services unit, will expand Telit's successful ONE STOP SHOP market approach while continuing to leverage ILST's broader offering in value added services. Telit created the m2mAIR business unit in 2012 to expand its offering to value added services including connectivity.

Commenting on the results, Oozi Cats, Chief Executive Officer of Telit, said:

"During this period we continued investing in sales and marketing, especially in the m2mAIR business unit while integrating our recent acquisition in the US - CrossBridge - into this business unit. Despite these investments we have been able to improve each and every financial parameter including: EBIT, PBT, adjusted EBITDA and cash flow from operational activities."

Below are the key financial figures for H1 2013 compared to H1 2012 and FY 2012:

Reconciliation of operating profit and profit before tax to the adjusted figures:

* Excluding intangibles acquired.

For further information:

CHIEF EXECUTIVE'S STATEMENT AND REVIEW

Introduction

I am pleased to announce the Company's consolidated unaudited interim results for the first half of 2013 and to report continued growth compared to the first half of 2012. This growth helped Telit strengthen its position as a leading m2m module supplier worldwide, with a market share of about 20% according to the ABI research "M2M embedded module vendor market share"- 2013 edition.

Many of the wireless m2m module providers differentiate themselves by focusing on specific technology standards. Telit is one of the very few vendors that support many different cellular technologies, including GSM/GPRS, CDMA, UMTS/HSPA and LTE, while catering to the arena of short range RF technologies such as ZigBee, proprietary RF mesh, as well as GPS and GNSS technologies, whilst offering a unique proposition of value added services including connectivity which allows the company to be a "one stop shop" for its customers.

Financial Review

During the first half of 2013 the Group achieved growth in the number of units shipped resulting in higher gross profit, higher adjusted EBITDA and higher profit before tax compared to those achieved in the first half of 2012.

Continued growth in the number of new customers contributed to the revenue growth achieved in the period. Due to the continued revenue growth from its broad group of customers, Telit dependency on major customers continues to be low and the top 10 customers contributed 33% of total revenues in the period (H1 2012: 30%).

The split of revenues on a geographical basis for the six months ended 30 June 2013 and for the full year 2012 is as follows:

The continued development of Telit's global footprint is seen by the geographical division of revenues for H1 2013. The EMEA region remains at around 50% of the overall revenue although overall revenues from the region increased. Our operations in the Americas continued to show significant growth during the period. In APAC we faced a decline in revenue, in spite of growth in terms of units shipped due to a late adoption of 3G devices and an impact on ASP.

Gross profit in the period increased to $40.8 million, compared to $37.2 million in H1 2012, resulting in an overall margin of 37.6% compared to 37.8% in H1 2012 (and 37.1% for 2012 full year).

Research and development expenses in the period were $7.9 million and 7.3% of total revenues, compared to $10.5 million and 10.6% of revenue in H1 2012. The expenses in H1 2013 include decrease in the amount of $2.2 million due to Italian grant benefits. Sales and marketing expenses in the period were $18.3 million and 16.9% of revenue, compared to $13.8 million and 14.0% of revenue in H1 2013 affected by the integration of CrossBridge Solutions Inc. and the increase in the company's investment in the m2mAIR business unit. General and administrative expenses in the period were $9.6 million and 8.8% of revenue, compared to $9.0 million and 9.1% of revenue in H1 2012.

The overall operating expenses in the period were $35.8 million compared to $33.3 million in H1 2012 reflecting the increase in the Group's Sales and marketing expenses that include investment in the m2mAIR business unit and integration costs for CrossBridge Solutions Inc.

The other operating (income) expenses in H1 2013 include the amount of $1.6 million due to decrease in the fair value of the earn out Telit paid due to recent acquisitions. Overall the operating profit for the period increased to $6.4 million compared to operating profit of $3.2 million in H1 2012 (100% increase).

The net profit for the period increased to $5.7 million compared to $2.3 million in H1 2012 (147.8% increase). Adjusted profit before tax increased by 18.8% to $5.7 million compared to $4.8 million in H1 2012 and Adjusted EBITDA increased by 17.6% to $10.0 million compared to $8.5 million in H1 2012.

Basic and diluted earnings per share for the period were 5.6 and 5.2 cents respectively in H1 2013, compared to basic and diluted earnings per share of 2.2 and 2.1 cents respectively in H1 2012.

Shares outstanding

During the period, the Company issued 697,404 new ordinary shares of 1 pence each, due to an exercise of options under the Company's share option plan and 96,032 options lapsed. Following the above mentioned transactions, the Company's total issued share capital on 30 June 2013 consisted of 104,001,610 ordinary shares. No shares are held in treasury. The number of outstanding options, as at 30 June 2013, was 12,936,468 comprising 11.1% of the Company's share capital on a fully-diluted basis.

Business Review

During H1 2013 the following major developments took place that contributed to the overall performance of the Company and are expected to contribute to the Company's future results:

1. Innovation and expansion

Telit is committed to continued investment in R&D and new technologies which will enable it to offer a wide spectrum of mobile communications and assembly technologies to respond to the requirements of customers from all market segments and geographies. During H1 2013 the Company achieved the following milestones:

Ø Continued investment and development of the m2mAIR managed services business which provides Telit with a recurring revenue stream in addition to the revenues achieved by the Company from its established module business. The m2mAIR offering covers all customer connectivity needs including subscription management, remote module management, security, reporting and monitoring, supply of SIM cards, price plans and customer support. With Telit's wireless module technology, these services enable m2m solution providers to easily create and manage their m2m applications reducing the total cost of ownership (TCO) necessary to operate and support m2m user-applications while ensuring the highest network quality and reliability. m2mAIR's offering is currently available for European-based customers with rollouts in other regions scheduled for later this year.

Ø The m2mAIR offering was further expanded in H1 2013 with the acquisition of CrossBridge (now m2mAIR NA). m2mAIR NA completes Telit's offering for NA customers with offerings and rate plans based on NA cellular carriers (Verizon, Sprint, AT&T).

Ø 4G LTE developments - Telit completed the development of the LE920 next generation of Telit Automotive form factor xE920. The LE920 combines a 3.5G wireless data module offering HSPA+ connectivity with download speeds up to 42 Mbps, and 4G LTE, providing an ultra-high-speed downlink of 100 Mbps.

Designed for use in the most demanding automotive applications and manufactured according to ISO TS16949, the LE920 offers rugged LGA packaging with an increased robustness and cost effective solution. Two LE920 regional versions are available, one for European, APAC and Latin American markets and one for the North American market. Both versions come with a multi-band configuration, covering different sets of 3G and 4G bands. LE920, together with its 3.5G compan-ion HE920, offers an Automotive LGA family in a common form factor. Developers can take advantage of Telit's xE920 Form Factor that enables a "design once, use anywhere"strategy. The LE920 also provides fallback to existing EDGE and GSM/GPRS networks through integrated quad-band radios.

Ø The Company engaged in the development of the second generation dual GPS/GLONASS module that dramatically improves navigation performance by providing access to both the Russian GLONASS global navigation satellite system and GPS. The new Jupiter® SE868-V3 provides three times the usual satellite visibility by accessing up to 22 satellites compared to the six or eight satellites normally available through standard GPS, providing optimal performance for any navigation application, from personal and asset tracking to automotive solutions. The Jupiter® SE868-V3 reduces the delay from several minutes to seconds for a navigation device to acquire its position after being powered on. The module also reduces the incidence of lost satellite coverage, which is especially problematic in urban areas with tall buildings, by enabling additional satellite fixes that reduce blind spots. 

Ø The Company continues to invest in the development of its flagship xE910 family of wireless modules featuring a single, compact form factor that is interchangeable on any regional cellular network, delivering ubiquitous, cost effective coverage for m2m applications and consumer electronics devices worldwide. Based on a Land-Grid-Array (LGA) form factor with a footprint of just 795mm2 and a total size of 28.2 x 28.2 x 2.2mm, the Telit xE910 family's uniform design gives customers the ability to choose between global or regional cellular technologies depending upon the location and requirements of a specific application for optimum data rates and module costs. Supporting GSM/GPRS, UMTS/HSPA+ and CDMA/EV-DO cellular technologies, the xE910 family also allows applications to be easily upgraded, such as when migrating from 2G to 3.5G, while maintaining the core design of an application or device throughout its lifecycle.

Ø The Company has extended its xE910 form factor family with the introduction of the cost optimized UE910 variants completing the WCDMA portfolio with dual and tri band regional variants with optimized communication speeds ranging from UMTS to HSDPA and HSPA+.

Ø The xE910 product family will be further expanded to LTE with the introduction of 5 new variants of LE910 aimed at NA, EU, Korea and Japan markets. New LE910 products will be available in Q4/13.

Ø The Company introduced new m.2 (NGFF) products aimed towards the mobile computing market (laptops and tablets) and towards the industrial m2m markets leveraging on industry standard m.2 form factor. The new xN930 product family offers several variants of LTE and HSPA+ products designed for optimal band mix for the NA, EU and APAC markets.

Employees

Telit's focus is, and will continue to be, to expand and strengthen its position as one of the world's leading m2m technology providers. The hard work and dedication of Telit's staff across the globe remains crucial to Telit's success. I would like to thank the Company's employees, management team and directors for their commitment to the Company and its success. Their dedication is an invaluable asset to the Company.

The number of employees of the Group is as follows:

Market Opportunity

The ABI Research report on the m2m embedded modules, released in May 2013, analysing market trends and developments in regions around the world has forecast that the market will enjoy strong growth over the coming years. ABI Research believes that the number of m2m embedded modules to be shipped will reach 151 million by 2018 representing a 2013-2018 CAGR of 23%. ABI Research also projects an average selling price (ASP) decline for 2G modules of 6%, for 3G modules of 6%, and LTE of 14% CAGR 2013-18. The resulting monetary value of the sector is a CAGR of 24% growth 2013-18 with total annual revenue for m2m modules reaching $3.4 billion in 2018. In 2013, North America is forecast to take over the market share lead which Europe has enjoyed for many years.

Cellular m2m connectivity services revenue, according to study by ABI Research released in June 2013, are also forecast to grow at 23% CAGR 2013-18 globally reaching annual $12.2 billion in 2018. North America is expected to be the leading region in revenue growth with 27% CAGR 2013-18 with Europe at 19%, APAC at 25% and LATAM at 22% CAGR for the same period.

Strategy

We believe that Telit is well positioned to take advantage of the market opportunities ahead and we look forward to continuing to grow our revenue and gain market share while maintaining existing margins and improving profitability. We are constantly seeking further expansion opportunities through new technologies or by gaining access to new territories and new market segments. We believe this will continue to have a positive effect on our results in the second half of the year and beyond. Moreover, the operations of our m2mAIR business unit allow Telit to offer value added services, including connectivity, to its customers, which is already contributing to 2013 revenues and which the Company anticipates will become material in future years.

Telit intends to continue to take advantage of the considerable opportunities arising in this growing global market. I look forward to sharing further news of the Company's progress over the coming months.

Outlook and update on current trading

The outlook for the rest of 2013 remains positive for Telit, and we expect to continue our growth. The Company has started H2 strongly and we are confident of meeting our expectations for the full year. We believe we are well positioned to benefit from key trends in the technology market and will look to leverage our strong position to further increase market share in 2013 and beyond. We will continue to review expansion opportunities, both organic and through potential acquisitions, to maintain momentum and continue to expand activities within the m2m value chain.

Oozi Cats

Chief Executive Officer

9 September 2013

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(*) The Company has changed the presentation of grant income to be shown as a reduction from the research and development expenses in 2013. In prior periods, this was presented within other operating income. The impact of this change is to move $2,292K from grant income to research and development expenses in the 6 months to 30 June 2013 ($6K 6 months to 30 June 2012, $960K year ended 31 December 2012). The change in the accounting policy has been implemented to present a fairer view of the research and development expenses incurred.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CASH FLOWS

CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Six months ended 30 June 2013 (Unaudited)

Six months ended 30 June 2012 (Unaudited)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

Year ended 31 December 2012 (Audited)

NOTES TO THE INTERIM FINANCIAL STATEMENT AT 30 JUNE 2013 (Unaudited)

1. The Company was incorporated and registered in England and Wales as a public limited company on 30 November 2004 under the Companies Act 1985.

2. The interim financial statements include the results of operations and the financial position of the Company and its subsidiaries (together the "Group") as at and for the six months ended 30 June 2013. The consolidated interim financial statements of the Company have been prepared in accordance with the recognition and measurement criteria of IFRS and the disclosure requirements of the AIM Rules using the accounting policies set out in the Group's 31 December 2012 statutory accounts, with the exception of the classification of the grant income to the research and development expenses (see note in page 10 - consolidated statement of comprehensive income). The AIM Rules do not require compliance with the requirements of IAS 34 "Interim Financial Statements" and these consolidated interim financial statements have not been prepared in compliance with the disclosure requirements of that standard. The consolidated interim financial statements have not been audited or reviewed and do not constitute the Company's statutory accounts within the meaning of Section 435 of the Companies Act 2006. The financial information for the year ended 31 December 2012 is derived from the statutory accounts for that year, which have been delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

3. The Directors have not declared an interim dividend.

4. Reconciliation of profit for the period to adjusted profit for the period:

5. Adjusted profit per share

The calculations of adjusted basic and diluted earnings per ordinary share are based on the following results and numbers of shares:

6. Net (debt)/cash position:

(1) Mainly drawn letters of credit and borrowings arising from invoice advances.

(2) Representing the preferential rate loan supported by the Ministry of Trade and Commerce in Italy provided in connection with the Group's business development program in Sardinia. The loan is denominated in Euro, attracts interest at a rate of 0.75% and is repayable in ten annual instalments that commenced on 20 March 2009. In December 2012 an additional loan of $975,000, carrying the same terms, was received.

(3) Representing a preferential rate loan from a regional fund in Italy provided in connection with the Group's acquisition of the campus used for the Company's main R&D facility in Italy. The mortgage loan is denominated in Euro, attracts interest at a rate of Euribor 6 months less 20% and is repayable in 30 semi-annual instalments that will commenced on 1 July 2012.

(4) Representing a 5 years loan with a 3.5% yearly interest.

7. In July 2013 the Company signed an agreement with the shareholders of CrossBridge according to which it paid the shareholders an earn out in the amount of $1.15 million, instead of the earn out amount of $2.75 million which was due to be paid at the end of 2013 according to the share purchase agreement signed on December 2012.