I am puzzled by this one, and I struggle to put the pieces together to make any sense.
1) The stock collapsed by 30% after NMRX reported Q2 results. Small purchases by 5 directors are not material, and I suspect instead are face saving gestures.
2) Who was the large customer they lost? Why is no reference made in the 10-Q? Was this customer actually lost? To a competitor? If so, that's quite awful.
3) The 10-Q makes no reference to litigation expenses. $450k would be a material amount - fully 10% of SG&A. Why no mention?
4) Operating losses would be acceptable if there was legitimate growth in service revenues. However, consecutive quarter revenue growth in Wireless Data service was only 1.3%. This is paltry, especially given the surge in Wireless Date product sales during the 2 preceding quarters. These product sales were supposed to create future service demand, which clearly was not evident in Q2, and which management suggests is not likely to show up any time soon.
5) They are running low on cash. The cash balance has declined every quarter since at least 12/31/07 - 6 quarters, at least. All their debt comes due in 2 years. They will need to raise capital. Unfortunately, with operating losses, this company is not bankable -- especially in the current environment. Yikes.
One would think this industry has great promise, but I am wondering if NMRX is a reasonable way to play it. I think something is wrong here, but I can't quite put my finger on it. Thoughts, anyone?
Here are my thoughts about the concerns expressed by Eggplant, by paragraph:
1) While I have become accustomed to the volatility of this small-cap stock, the 30% fall seemed to me to be a considerable overreaction to what I thought was a pretty good quarterly report, perhaps attributable more to the current unsettled state of the markets. If you look at the Insider Transaction list in Yahoo, you will see that small purchases by the directors have occurred regularly around the time of the quarterly reports -- these do not appear to be intended as "face saving gestures." More important, look at the major purchases made by directors over the past year or so, the magnitude of which appears to signify their faith in the future of the company.
2) The only information I have about the loss of customers relates to several small analog-system vendors who could not raise the necessary capital to purchase the new digital equipment -- so decided to simply go out of business (was this the "large customer" to which you refer?). This resulted in a loss of about 50,000 connections. (see m2mbeliever's message of Aug 13). However, since the quarter-to-quarter growth in connections from 580,000 to 617,000 was actually a net figure that included this loss, the real subscriber growth was 87,000 connections. Further, SN stated in the conference call that since the majority of this growth occurred during June, this figure should not be considered as representative of future quarters.
3) The only reference in the 10-Q to the legal issue with Orbit One's previous CEO was to the effect that the outcome of this case is not expected to have a material impact on the operating results. During the conference call Q&A, I believe SN did say that the Orbit One legal case continues and that this quarter's legal fees were about $450,000 [$0.04 per share]. From what I know about this case, it looks like right is on our side, so the final settlement should reduce the purchase price of Orbit One substantially from the original disputed amount.
4) In the conf call SN said overall revenues including security and Orbit One were growing at an annual rate of 30-40%. Also the connection growth rate is significantly outpacing hardware sales, and, further, we are getting connections from units we did not sell. I do not recall the discussion of why the growth in service revenues slowed for this quarter, except as it related to the timing of network connections. SN did point out that our overall churn rate is less than 5%, so 95% of the folks who sign on with us stay with us.
5) Available current assets: according to the 10-Q, cash declined $1.26 mil from 12/31/07, but the current ratio improved from 2.07 to 2.21. No doubt the expenses connected with ramping up Orbit One contributed to the decline. However, I understand that we should see substantial reductions in overhead in coming quarters.
As to the note payable in 2010: The company has already paid about half of the $2.8 million due this year. Next year another $2.8 million must be paid. In 2010 the $7.8 million you are concerned about comes due. If the revenues from M2M wireless continue to grow at 30-40% per year I assume there will be plenty of cash to pay off this debt – remember also that if the stock price is over $11 per share (if I remember correctly) the debt can be converted into equity.
Finally, as evidence of things going on behind the scene: what do you think of the earnings potential of the recently announced USTRANSCOM trial agreement?
Michael_in_Atlanta, thanks for your thoughtful response. Here's mine to yours:
1)How are you able to label 2Q08 results "a pretty good quarterly report"? By what measure? Revenue decline? Cash deterioration? Bear in mind, the pre-tax loss for NMRX in 2Q08 was the worst performance in the last 6 quarters. Only the reported tax (benefit) rate of 67.5% allowed them to report a decline in net loss from the preceding quarter.
2)There is no information available from any source, including the conference call, that suggests one significant customer, or one category of customer caused 50,000 lost connections for the qtr thus implying 87,000 new connections for the period. I believe M2mbeliever's message is speculation, and is not based on available data. The company has released no quantitative data that supports this conclusion. Of course, they should.
3) Yes, on the conf call mgt indicated that there was legal expense during the qtr that they imply exceeded $400k. If so, they should disclose this information in the 10-Q.
4) I heard a different indication on the conference call: the M2M industry is growing at 30-40%. I do not believe they stated that a specific growth rate for any of their business lines, and overall revenues for NMRX definitely are not growing at 30-40%. Indeed, 2Q08 revenue was up only 14.9% versus 2Q07, and that is inflated by the Orbit One acquisition. They should identify revenue growth realized in 2Q08 excluding Orbit One. But they do not.
5)Cash: I don't believe that current ratio is meaningful here. They are burning cash - the bills won't get paid by mailing vendors and creditors inventory or receivables. Cash has declined during each of the last 6 consecutive quarters. That is not sustainable: either it must be reversed or the company must raise more capital. You indicated that NMRX will be cutting overhead in the coming quarters. I am not aware of any source to support this statement -- other than the possible cessation of litigation expenses.
Finally, I think that the USTRANSCOM announcement represents an opportunity for NMRX to spend more of its precious cash trying to develop a new customer. Granted, there is real potential here, but I suspect the probability for success is not high, and, at best, it will be many years before any visible revenue appears. It would take even longer to determine whether any new revenue is even profitable.
I think that NMRX still offers potential in an interesting and important developing market. But I think that NMRX has been very disappointing during the past year and a half, and its almost past show me time. How much longer before they start to show real, sustainable revenue growth, and cash generation?
The company has been going downhill since the purchase of Airdesk. Insiders are buying except Lang, he is dumping. Hmmm... Airdesk was 12 million in the red when they took them over and AD continues to be a drain on the parent company. There was a indication given of increased revenue on the way with m2m, but probably just mentioned to keep the investors at bay. I suspect a selloff in the works.. or better yet, just shut down Airdesk and save a small fortune in overhead.
Bixisalive, I actually had thought of that answer, but I didn't want to say it. Now you have, and I must say that I think I agree with you. However, I don't think there is any likely change in CEO in the near term. The CEO is only 54. He's had his job for 8 years. No changes coming. Still, there are a couple of large holders. They must have the patience of Job.