WRLS

[David Randolph]

The following analysis was written on October 2nd, 2007:

WRLS...looks very attractive with latest guidance update.

1. Profile

Telular Corporation (WRLS) engages in the design, development, manufacture, and marketing of component elements, and telecommunications equipment assemblies and other complementary products. These products provide the capability to connect alarm panels, telephones, fax machines, and data modems directly to cellular networks. It primarily offers Fixed Cellular Terminals and Fixed Cellular Phones that are used in various applications, such as wireless security, Internet access, least cost routing, machine-to-machine, wireless basic telephone services, and cellular public phones. Its customers include security system installation companies, and security system distributors and dealers in the North and South America, El Salvador, Guatemala, Mexico, India, South Africa, and Venezuela. Telular was founded in 1986 and is headquartered in Chicago, Illinois.

2. Stock Price History



In the 13 years period between 1994 and 2006, WRLS lost money in 12 of those years. It was profitable only in 2001. This is the primary explanation to why the stock is down 93% from its IPO price back in 1994. The second explanation is dilution, since the share count rose from 7.9 million in 97 to 18.3 million shares outstanding now.

However, it seems something is changing, because Q2 2007 was marginally profitable (the first profitable quarter going back 11 quarters):

• Telular Corporation Reaches Profitability in the Third Quarter of 2007
Business Wire (Tue, Jul 24)

3. Short Term Chart



The reaction to the earnings news is marked with a 1 on the chart above. I think the "juice" in the press release is:

«We continue to serve the residential cellular security market with our leading, cellular security product, Telguard Digital, and with less than eight months left until the "sunset date," when analog cellular networks will be deactivated, we are starting to experience an acceleration of analog to digital upgrade activity and receive significant orders. Based on this demand and increased backlog, we currently expect sequential growth in revenue from our Telguard products of over 30% in the fourth quarter.»

A couple of months later they raised guidance for the fiscal 4th quarter:

• Telular Raises Telguard Revenue Guidance Due to Strong Demand For Digital Cellular Communicators
Business Wire (Wed, Sep 12)

The reaction originated the gap up marked with a 2 on the chart. The talk is:

«During the current fiscal fourth quarter, Telular has seen a dramatic increase in sales of its fully digital line of security products fueled by the approaching analog cellular sunset date. Previously, Telular estimated Telguard product revenue was expected to grow 30% sequentially for the fourth quarter and now estimates that growth to exceed 90% sequentially.»

You see, the problem of all this is that the revenue growth is being fueled by a temporary effect. When the "sunset date" passes, there's going to be an hangover and revenue will decline to the previous level or even lower.

4. Conclusion

WRLS wasn't a good investment before, since the company lost money in 12 out of 13 years (and diluted shareholder's value for cash) and it probably won't be a good investment in the future, after the temporary effect of the change from analog to digital alarms is gone. The short term positives seem to be baked into valuation, with the stock up 100% over the past 6 months or so.

So, my long term outlook for WRLS is neutral at best.

[David Randolph]

Hmm, this temporary or permanent analysis has served me well in the past:

You see, the problem of all this is that the revenue growth is being fueled by a temporary effect. When the "sunset date" passes, there's going to be an hangover and revenue will decline to the previous level or even lower.

4. Conclusion

WRLS wasn't a good investment before, since the company lost money in 12 out of 13 years (and diluted shareholder's value for cash) and it probably won't be a good investment in the future, after the temporary effect of the change from analog to digital alarms is gone. The short term positives seem to be baked into valuation, with the stock up 100% over the past 6 months or so.

So, my long term outlook for WRLS is neutral at best.

... and WRLS is down sharply: