Numerex Raising Target Price to $18

NMRX : NASDAQ : US$11.92
Target: US$18.00

Numerex is a leading provider of machine-to-machine (M2M) business services, technology, wireless network
connectivity, and products used in the development and support of M2M solutions for enterprise and government
markets worldwide.

Technology — Communications Technology — Wireless Equipment
Investment recommendation

Numerex reported strong Q3/13 results with 31% Y/Y subscriber growth, slightly higher Q/Q ARPU, and improved
subscription gross margins consistent with our estimates. Additionally, hardware sales – a precursor to future recurring revenue growth – beat our estimate.

Following disappointing Q2/13 results, the strong Q3/13 results,management’s reiteration of its 30-35% Y/Y subscription growth and 18- 23% recurring revenue growth guidance ranges for 2013, and our expectations for higher ARPU managed services contracts to ramp during 2014 increase our confidence in our strong 2015 estimates.

We maintain our belief Numerex’s vertically integrated Device Network Application (DNA) M2M offering is well positioned in key M2M verticals such as security, remote monitoring, and asset tracking. Further, we believe an increasing mix of high-margin recurring services revenue should drive accelerating 2014 subscription revenue growth, increased ARPU, operating leverage, and expanding EBITDA margins. We reiterate our BUY rating and increase our price target from $15 to $18 due to our introduced 2015 estimates.
Investment highlights
 Numerex reported Q3/13 recurring and hardware revenue of $13.5M and $8.5M, respectively, vs. our  13.5M/$6.7M estimates. Subscribers totaled 2.31M exiting Q3/13, up 31% Y/Y, or consistent with our
estimates. Further, comparable recurring revenue gross margins of 56.0% improved 140 bps Q/Q with increased scale and improved operational efficiencies. We believe these improvements are sustainable.
 We believe an expanding deal pipeline and strong subscriber growth positions Numerex for healthy long-term recurring revenue growth and expanding margins. In fact, we are modeling adjusted EBITDA margins expanding from 8.7% in 2013 to 17.1% in 2014 and 24.3% in 2015.
 Due to slightly lower hardware sales, we lower our 2014 pro forma EPS estimate from $0.85 to $0.73. We introduce our 2015 estimate of $1.30.

Our $18 price target is based on shares trading at roughly 12x EV/EBITDA, based on our 2015 adjusted EBITDA estimate.


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