Trakm8 shaping up to become a global telematics player

15th Apr '18 by AnonymousUser226237

14 comments 5006 reads

Trakm8 Holdings (LON:TRAK) released their year-end update on a Friday, missed their £32m revenue estimates and did not mention a profit. Whoever writes their RNS should clearly be benched as this was a spectacular fail on all fronts and I have emailed the CEO to complain again, as I did in the past, but it has become my belief that they truly do not care about optics and just run their business without much effort spent on investor perception.

I think the lack of reasonable targets and lack of transparency in the RNSs has cost them and us gravely in terms of how the company is perceived. And it’s a shame as that is usually the easiest problem to fix. But enough of that and on to the real business....

Explosive growth in FY18

The number of connections in the Period increased by 31% to 251,000 from 191,000.

Recurring revenue during the Period increased by 11% to GBP10.9 million

year-end net debt reduced by GBP0.5 million to GBP3.4 million (31 March 2017: GBP3.9 million).

Number of devices

2015 H1	2015 H2	2016 H1	2016 H2	2017 H1	2017 H2
135,000	151,000	177,000	191,000	217,000	251,000
			+26.4%		+31.4%

Record breaking year in deployment of new devices for TRAK, with another record being that H2 has for the first time more devices deployed than H1. H2 is usually their dead season so that means that production has been ramping up significantly. Then there's also this:

reduction of GBP2.2 million following the Group fully exiting the contract electronic manufacturing business

To meet the anticipated demand for these devices from existing and new customers, the Group is planning to assemble these new hardware devices with increased levels of automation.

If they hadn't cut those contracts they'd have easily made the 32m target. And if they have 2m less orders to fill why are they investing heavily in automating the production lines when they are already low on cash? Why not play it safe and let those low margin contracts in place so they make the £32m target and make everyone happy?

I believe that the reason behind H2 shooting up like that, their move away from OEM contracts and ramping up production lines is massive demand. They have demonstrated this already by adding 60,000 devices in one year which…

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matylda

16th Apr '18

Great analysis - Thanks for sharing.

I think the only confusion for me was "with another record being that H2 has for the first time more devices deployed than H1. H2 is usually their dead season so that means that production has been ramping up significantly".

I don't see that in the table you provided, perhaps I'm just missing something obvious or it's just a bit rusty this Monday morning.

Thanks again.

AnonymousUser226237

Hi @matylda,

Thanks for the feedback. To answer your question, if you look in the difference between H1 and H2 the majority of devices is usually added in the first half. That's because budgets get approved at start of financial year, weather is better and devices can be installed, insurance renewals happen then etc. Second half (Sep-March) is usually more quiet as the weather is a lot worse and with Christmas in the middle business gets quiet.

In 2017, 56% of devices for the year were installed on the second half.
In 2016, 35% of devices for the year were installed on the second half.
In 2015, 38% of devices for the year were installed on the second half.

To me, this is a big increase in demand that has accelerated through 2018 and will continue in the next quarters with a lot more devices deployed than previous years as the company's product take off. If you think about it, you have multiple roadside clubs using their own Sales/Marketing budget to run ads to promote TRAK products and the same is true for Direct Line, SmartDriverClub, MotorEasy etc in the UK. Retail is taking off and TRAK is the sole supplier for all these devices, owning all the IP.

I don't think this unusual pickup in H2 was a one-off but a prelude to the massive demand they have, which is why they cut £2m worth of contracts in OEM and invest in automating their production lines. They need as much firepower they can get to fill the upcoming orders.

All IMO/DYOR as always.

Howard Marx

Interesting stuff blondeamon.

Three questions:

Firstly how do you account for the marked difference between the P/L's of Trakm8 Holdings (LON:TRAK) & Quartix? They have a similar level of Sales, yet have hugely different profitability (numbers indexed to 100):

Secondly, what unique assets does Trakm8 Holdings (LON:TRAK) have from the point of view of a potential acquirer? Or is TRAKm8 just a collection of contracts that a potential acquiror could compete for over time?

Thirdly, do clients in this industry typically have any break clauses on change of ownership?

Caveatemtied

Howard Marx

My understanding is that Quartix have a lot of long standing small fleet high margin legacy customers hence their greater gross margin . Trak is also historically more exposed to the lower margin insurance market. Trak has built an organisational capability for a much bigger sales line so at current sales volume its fixed costs are a significantly higher percentage of sales value.
Their IP value would include the latest market leading combined two way dashboard camera/ telematics unit products and the R&D expertise which has created them and the data they hold on millions of miles of route specific Driver behaviour.
My expectation is that sophisticated Driver monitoring dash cams robust enough to survive serious collisions will become manadatory in HGV’s sooner rather than later and Trak will be in a strong position to benefit.
I am not sure about contractual break clauses . I think larger clients are generally “sticky” in telematics because they are getting bespoke data feeding directly into their own systems and it’s disruptive ( a la software) to change suppliers. Unless a client felt threatened by the nature of a new owner of Trak it’s not obvious why that would create a problem.

Bonitabeach

Hi Howard,

I followed TRAKM 8 (LON:TRAK) for a while but lost interest as the numbers never seemed to match the management narrative. The answer to your first question is probably to be found in sales per employee: TRAKM 8 (£107k), QUARTIX (£198k).

Looking forward, Stockopedia is far more bullish about TRAKM than Quartix. Quartix looks very expensive; TRAKM 8 may just start to be offering some value.

No position.

Thanks again for the analysis and your time but I still don't see it.

I think it's best anyway to wait and see actuals here, so at present that's what I am going to do.

Thanks once again to you and others for the comment.

2015 H1	2015 H2	2016 H1	2016 H2	2017 H1	2017 H2
+33,000	+16000	+26000	+14000	+26000	+34000

Does this make things more obvious? I display number of devices added each half.

H2 always had very few devices compared to H1 for any of the previous year. 2017 was the exception.

1) QTX is how you should never run a telematics business. They were lucky to be among the first so they grabbed some good customers at the beginning and since then have spent 0£ in R&D, their IT is non existent and their devices are the worst ones in the market. But because they have such low costs they just milk those recurring revenues to the maximum and show nice profits...for a while. In this industry technology is everything and those with inferior products lose all their clients.

QTX already lost all their insurance clients to competitors(TRAK being one of them) and now they started losing their Fleet clients one by one. For example Calor Gas was with QTX for years and now switched to TRAK's flagship product, the RoadHawk 600 telematics camera. Their devices are so bad they are not even plug&play and require a technician to come and install them. Compare that to the Car Genie with the magnificent device and app that comes with it, Trakm8Prime that can get your SME fleet hooked up with as many devices as you want without even talking to a salesman etc

I think QTX is about to go into a series of profit warnings from here as it has become irrelevant in the market with those products and relies on the fact that their clients are too lazy to move, so just milks those fees. It won't last long.

2) TRAK has a spectacular set of Intellectual Property that they completely own. The RoadHawk cameras are top of the market and their flagship product is not only the only 4G telematics camera in the world but it also comes with integrated Route Optimisation. As they own the whole IP they can beat any competitor in bringing new products into the market.

More importantly, they are now almost finished with the new ADAS products that will be provided as extras with the RoadHawk 600. Advanced Driver Assistance Systems are a market on their own with very profitable companies all across Europe. This will be the only telematics product in the world to have ADAS on a 4G camera.

An acquirer gets his hands on that IP and they can do anything they want. Spin it off to different products, break the company into smaller ones etc. Of course, they will also get their hands to more than 3000 customers and 250,000 deployed devices across Europe. TRAK's exclusive relationship with all the biggest roadside clubs in Europe is worth its weight in gold and it hasn't even show its true potential yet.

3) No idea but if TRAK gets sold, I don't care much about what happens afterwards :)

john652

Hi Blondemon,

I wrote them off because of the very poor update but you make some interesting points so I have three questions if you wouldn't mind answering:

1. Do you know why (post 7) that 2016 was a worse year than 2015 for the additional devices added, H1 2017 was the same as 2016 (ie +26000), so also worse than 2015?

2. Did you get a reply from the CEO either time, I see on another thread Paul also contacted them.

3. Do you have industry knowledge of this sector, you seem to?

Thanks

DarwenLad

I have no feel for TRAK's technological advantage relative to its competitors, and am hoping that Blondemon's seemingly knowledgeable assessment of TRAK's competitive edge turns out to be correct. But I would be much more confident in TRAK's future if its board of directors looked a bit more like the board of a normal company. John Watkins, the executive chairman and major shareholder, should do the same as Quartix's founder Andy Walters, and bring in a non-executive chairman prepared to ask him and his other executive directors some awkward questions. I am also uneasy about the role of Mark Watkins, TRAK’s chief operating officer. Did he get the job because he is the chairman’s son? Meanwhile, the job titles of TRAK’s other executive directors, other than its finance director, seem rather unfocussed : Tim Cowley, strategy director, Matt Cowley, big data director, and Sean Morris, automotive business unit director. Quartix, by contrast, has a much more straight forward board structure – a non-executive chairman, a chief exec in the form of Andy Walters, a finance director, and chief operating officer, plus a non exec director. It is easy to dismiss the importance of good corporate governance, but it would help reassure TRAK’s long suffering shareholders if its boardroom looked more like that of its main competitor rather than a family fiefdom.

17th Apr '18

@john652:

1) In 2014 they signed their deal with Direct Line so they went from a small telematics manufacturer that had only Fleet products to a services provider that started to do Insurance. Within a year they had 50,000 Insurance devices and by the second year it went up to 90,000. Direct Line was the second biggest most important contract for TRAK after the AA.

That is why you see an explosion in 2015 which then normalized.

2) I have emailed the CEO 3 times in the past and in all occasions I got an immediate reply with an honest answer, of course denied to answer anything confidential but shed light on everything else. In my email 2 days ago I sent it on a Sunday night and got a reply in the very late of the afternoon the same day. The guy is really committed. I can't reveal what he said but let's say the recent RNS complaints did not fall on deaf ears.

3) I'm in tech by profession for the last 15 years and I have a really good understanding of how all these work but no I am not in the industry, in fact I don't even live in the UK anymore but only invest in British shares.

Edit: Full Year results by the AA today: Car Genie mentioned 3 times, including the CEO opening statement and already have 6,000 devices deployed since August. That will soon be tens of thousands, their words from their Strategy Update.

@DarwenLad: agree that it's not a usual setup and I would prefer it the normal way you would expect. But I also think of the positive side, as all these people are heavily invested and their fate is linked to ours Share Price wise.

No one wants TRAK to succeed more than they do and the investor's interests are aligned. That said, the recent appointment of an outsider CFO with experience in growing and selling hot tech companies is very positive. My hopes are that Jon Furber can secure a nice bid for TRAK and cash out, he did that with his previous company as CFO very successfully.

And you can bet Watkins will not let TRAK go cheap, it's his baby and it pays their salaries. If they sell it, it will be for a multiple of today's price.

pgs501

Hi blondeamon,

Firstly, thank you for your post and the comments. I had never looked at Trakm8 Holdings (LON:TRAK) before and I am now looking to take a small position soon. These are the highlights to me:

I really like that it is in an industry that is expected to grow very rapidly for the next 5 years (even if you ignore the international growth opportunities). Getting the best IP and driver data should work as a networking effect and build a stronger and stronger moat over time. This is also seemingly a very fragmented industry (based on one evenings research I admit) so there is no superior competitor out there who has already got this moat.

Revenue grew 13% but Solutions grew 27% and is now 89% of total revenues. Per the 2018 FY update Products will fall £2m further to just £1.3m (my calculation) in 2018/19 so that is in the tail end of being a lag on revenue growth.

Currently I am assuming a fairly constant Solutions revenue per connection (if this is not the case please do let me know). In 2016/17 it was £111 (£21.2m / 191,000) and in 2017/18 it was £107 (£26.9m / 251,000). As such growth in Solutions revenues should follow increases in connections. If we take the 31% growth in connections and assume it will be the same in 2018/19 that gives us £35.5m in Solutions revenue. Add on the £1.3m from Products and we get £36.6m for revenues. I note that Stocko’s 2019 revenue prediction is £35.5m, so a slight beat.

However, I think your point about the growth in the increase in new connections during H2 would imply a much higher rate of growth than 31%. A 31% growth would be going from 60,000 new connections in the last year to 78,848 in the coming year. Well if the H2 rate was simply repeated for the next two halves that would be 68,000 and as you said, that is the quiet time of the year (and assuming zero growth from H2 onwards). That H2 2017 rate is 142% higher than H2 2016 and whilst I do not think for a moment it could grow at that kind of rate I think it would not be unreasonable to have connection growth at more like 50% than 31%. That would imply Solutions revenues of £40.3m, Product revenues of £1.3m, and total revenues of £41.6m. That would be a significant beat on the £35.5m.

I have not yet found however how much gross margin each of these connections actually makes. I see the revenue figures and have estimated an average revenue per connection but the only thing I find mentioned is that it is higher than the Products division. I see your point about a rapid payback period, but could you point me in the direction of what kind of gross margin these make? My view generally is that Admin costs are more fixed and as such we should get operational gearing if gross margin is good, even if operating margin is rubbish currently that will therefore dramatically improve.

I appreciate the Trakm8 hold almost all the IP in their devices and agree that this is potentially a competitive advantage however how much will this R&D cost going forward? As you say it is a technology driven industry and would R&D expense need to remain high in order to retain their reputation for quality and avoid losing customers. Although I must admit even if R&D does remain high it would become a smaller percentage of revenues as such revenues increase over time.

The share price has been mediocre / ignored at best over the last year, having fallen from a high of 375p in Dec 2015 to hover around 100p since Dec 2016. This really looks like the chart of a story stock that the market has lost interest in following major hype during 2015. Given the arguments you have made, and I hope to have added to, I would have hoped / expected a positive response whereas the share price is down 10% or so. Maybe we are missing something.

Overall, I agree with your investment case for Trakm8 and the fundamentals and industry look really good for aggressive growth in the coming year and the operational gearing that should bring to profits. I however will only be putting a small position in for now for two reasons: I suspect there could be further price weakness over the next month or so as the latest results were not well received, and it would appear prudent to wait until the market has confirmed that this is a catalyst for rerating the stock through an increase in the price. I may miss some gains however if this takes off as it could I will add as it goes up and who would really care then.

Pete

18th Apr '18

Hi @pgs501,

Thanks for your kind words, I try my best to share my research with other PIs as I think it's the best way to protect ourselves and help each other against biggest, well funded institutions.

Regarding the gross margin, you need to take notice of the effect the GBP/USD fall had on them. TRAK, like all telematics providers, buy their raw materials from Asia in USD. They published in the full year results that they lost 600k from the currency slump.

Since then, this has reversed and actually the GBP/USD pair is actually higher than before Brexit so in this year margins should go back up to their best years like 2015. I expect them to make back 700k this year if it holds above 1.42.

If you check the previous RNSs since 2015:

In Half year 2017 the Gross Margin was 48% and before that in the full Year it was 49.4% and in general way higher than 2015 when it was 45.4% so the company is increasing Gross Margin steadily and this year should be above 50%, which is very positive.

Operating margin on the other hand was best at 2015 as since then the company has invested massively in R&D and more Engineers/Sales staff.

On the R&D space, I think it will significantly start to stabilise now as their products are ahead of the market globally and they are simply the best at what they do. Everyone else is still on 3G cameras that they have 3rd party providers make, almost noone has camera and telematics and absolutely noone has camera/telematics/route Optimisation in one device. When they launch ADAS this quarter they'll be at least 5 years ahead of competition.

In my view, R&D will tone down significantly soon while revenues will roam ahead. But it won't happen overnight, I've been holding for more than 3 years and I can see the spectacular progress, this company is now starting to book contracts right and left in Europe and the UK as their products are simply the best in the market. And they still innovate on the Insurance front as well, I am expecting a brand new Fintech insurance to launch soon which uses TRAK products and will be big in the UK.

It's very prudent of you to start small and way for corrections, they happen suddenly here and you can accumulate slowly. It's very illiquid and as it's AIM, a lot more volatile than usual but in my view the reward potential is very big and flies completely below radar.

Trakm8 shaping up to become a global telematics player

Explosive growth in FY18

Number of devices

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