Numerex BUY Target Price $15

NMRX : NASDAQ : US$10.12
BUY 
Target: US$15.00

COMPANY DESCRIPTION:
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
STRONG Q1/14 RESULTS: INCREASING ADJUSTED
EBITDA ESTIMATES AND UPGRADING TO BUY
Investment recommendation:

Numerex reported Q1/14 results with
adjusted EBITDA of $2.8M, above our $2.2M estimate. Management’s 2014
guidance for recurring revenue of $68M to $70M including the recent
Omnilink acquisition was consistent with to slightly above our $63M estimate
excluding Omnilink. We maintain our belief Numerex’s vertically integrated
Device Network Application (DNA) M2M offering and focus on higher value
managed services deals positions the company for strong long-term growth
trends in leading M2M verticals such as security, supply chain, remote tank
and bin monitoring, emergency response, and asset tracking. We believe an
increasing mix of high-margin recurring services revenue should drive solid
subscription revenue growth, increased ARPU, operating leverage, and
expanding EBITDA margins. While we maintain our $15 price target, we
upgrade to BUY given our belief the shares are undervalued relative to the
company’s growth and expanding adjusted EBITDA margins.
Investment highlights
 Numerex reported Q1/14 recurring and hardware revenue of $13.9M
and $6.9M, respectively, versus our $13.8M/$7.8M estimates. While
hardware revenue tends to be lumpy by quarter, hardware gross margin
of 19.1% was well above our 13% estimate. Total subscribers of 2.26M
exiting Q1/14 were consistent with our expectations.
 With the Omnilink acquisition, Numerex will add roughly 30K
subscribers that generate roughly $25 ARPUs. We believe Omnilink fits
well with Numerex’s managed services strategy and focus to increase
ARPUs and should be modestly accretive to 2014 adjusted EBITDA.
 We believe an expanding deal pipeline for managed services combined
with our expectations for continued healthy subscriber growth trends
position Numerex for strong long-term recurring revenue growth and
expanding margins. We model adjusted EBITDA margins expanding
from 10.7% in 2013 to 12.0% in 2014 to 16.2% in 2015.
 We are maintaining our 2014 adjusted EBIDTA estimate of $11.5M and
increasing our 2015 estimate from $18.5M to $19.7M.
Valuation: Our $15 price target is based on shares trading at roughly 14x
EV/EBITDA, based on our 2015 adjusted EBITDA estimate.

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