Despite Mixed Report, Stock Remains Attractive

Joseph Beatty hired in 2007, and Jonathan Charak (CFO) hired in 2008-- have changed the strategic direction of the company, focusing on business segments generating high margin recurring revenue vs selling standalone communications equipment. The recurring revenue business segments are:

Telguard: Provides primary and backup alarm communication solutions for residential, VoIP (Voice over Internet Protocol), small business, financial, commercial and fire system markets. These products transmit full data from virtually all security and fire systems to central stations using the cellular network.

TankLink: In October 2008, Telular expanded its M2M portfolio through the acquisition of SupplyNet Communications, a supplier of wireless tank-level monitoring solutions which closed in October 2008. Tank monitoring products offers solutions for M2M communications. Tank monitoring and automatic replenishment solutions help address the inventory management needs in the petroleum logistics, bulk chemicals and bio fuels industries.

Telular acquired SmarTank in January, 2011, adding to TankLink's recurring revenue and operating cash flow margins. Results are included in this report. Management noted the acquisition would be without warning accretive and increased guidance for the fiscal year. Financial details concerning the acquisition were discussed in this article.Telular released its second fiscal year quarterly results on Thursday, May 5, 2011. The report was a mixed bag of positive and negative events. We’ll look at the present numbers along with past results, followed by our opinion.THE NUMBERS

Telguard:Telguard accounts for the bulk of Telular's revenue. Forward Telguard guidance remains unchanged. Telguard service revenue continues to grow sequentially, nevertheless it has slowed significantly. Telguard average recurring revenue per unit month per subscriber (ARPU) increased to $4.08, a sequential increase of $.04. The average product unit cost was $141. Telular sold 21,300 Telguard units and added 20,700 new Telguard activations, bringing the total subscriber base to in broad outline 568,600, down from 572,000.

The decrease in subscribers?

Why the decrease in subscribers? One of Telular's largest clients terminated 17,000 subscribers in the quarter. Earnings and ARPU increased because the same metrics attributed to this customer are lower than newer activations due to its volume discounts. In a conference call last year the CFO noted ARPU from the large dealer was in the $2 range.Management believes the termination rate could be as high as 29,000 then quarter. We expect the subscriber base to drop about one percent and service earnings flat to down slightly, given the magnitude of the terminations. The reason given for the terminations was that the customer is cleaning up its inactive accounts.Management raised their guidance for churn to a range of eight to ten percent longer term. The industry average is 12-15% and Telular could trend toward this range as the subscriber base grows. Below is a graphic view of our longer term subscriber projection.

TankLink:TankLink service earnings received a major boost through the acquisition of SmartTank noted above. Recurring earnings increased sequentially from $412,000 to $789,000.Telular sold over 1300 tank monitoring units nevertheless billable tanks remained unchanged at 19,900. This is a result of the way billable tanks are counted due to the SmartTank acquisition. ARPU jumped from $6.51 to $12.45 per month due to the addition of SmartTank. The last ten quarters are shown below, followed by our longer term subscriber projection:

Cash & Revenues:Telular reported income earlier taxes of $1.47 million and income afterwards taxes of $111,000. Taxes of $1.36 million-- what's going on? So then, $1.29 million of the tax is a non-cash payment. This is part of an accounting change due to Illinois new tax structure. The state legislation enacted on January 12, 2011 proclaimed NOL's are no longer recognized, among other changes, and Telular has a large amount of NOLs. The Tax Foundation stated this legislation would move the state's rank from 27th to 45th on the corporate income tax index. Telular's state cash tax payments will run about five to six percent going forward. Could Indiana be calling?The good news is Telular's fiscal year 2011 cash projection, as defined by management, remains unchanged; net income previously non-cash items of $8.5 - $9.5 million. Below is a graphic view of our longer term projection.CONCLUSION: