Interview with Alan Kohler

Transcript

Alan Kohler: Well g’day, David. Welcome to Eureka Report. Thanks for joining us.
David Stewart: Thank you, Alan. A pleasure.
AK: Now, I think my first modem was NetComm way back, I don’t know, probably about 25 years ago, but NetComm has been going for 32 odd years, hasn’t it, selling modems?
DS: Thirty-three years this year.
AK: Thirty-three years this year, right. So my sense of NetComm is that you did okay selling modems for a long time and that business started to go south and so now you’ve decided you need to do something else and the decision has been made to move in to what’s called M2M or Machine to Machine equipment. Is that a kind of an oversimplification of what’s going on?
DS: It is a little, Alan. We’ve actually been focussed on data communications devices our entire history, so whilst dial up modems were the first product, we then moved in to fixed broadband or what people may know as ADSL devices and then we moved across into the cellular market or 3G devices. And so we’ve stayed consistent to being the data communications device that connects everything and the big growing market we see today is the world of M2M or Machine to Machine, as it’s commonly called.
AK: But then am I right in drawing the distinction between people to people connecting and thing to thing connecting?
DS: That’s a very good summary. There’s a term now called Internet of Things and that’s really the people to people connecting or people to their dishwasher connecting and then there’s the Machine to Machine market which is where we’re focussed, which is devices like ATMs and vending machines and other pieces of hardware which will talk to their head office or their central device with no people involved, so it’s all about reliability and permanent-on connectivity. And that’s the world of M2M.
AK: But am I right in thinking that your traditional business was not going that well and you had to do something? I guess that’s a slightly negative way to put it. You’d probably put it more positively, would you?
DS: Well no, we wouldn’t agree with that statement of going well. It’s a transitionary process that we’ve always remained true to being in the data communications devices. The problem that happened in the modem space is that prices erode over time and we evolved on to the new technologies, so we’ve stayed true to what we do and it’s just an evolutionary process. Rather than being a radical change in direction, it’s just a transformation over time as different technologies come in to play.
AK: So tell us about when you joined the business and what your background is and what your brief at NetComm is.
DS: Well, I’ve been involved in this space for about 27/28 years now. I was the founder of another company called Banksia Technology which we merged into NetComm in 1997. And as MD I’m sort of responsible for everything I guess and focus heavily on the technology evolution and the product development that we evolve here in the company and being basically involved in that whole evolution of technology over time.
AK: I note that in your first-half results that were put out recently, your broadband business, which I guess is a more traditional business for you, did pretty well, but the M2M business, which is your new strategy, did not go so well and in fact went backwards and fell short of your expectations. Tell us about what happened there.
DS: Oh, that’s only a timing difference, really. Unfortunately, deliveries of products to customers and the timetable which customers need it don’t always fit the timetable of the ASX and reporting season.
So our core or what we call base business, which is fixed broadband, has performed very well both in Australia and New Zealand. The M2M business is going well, lots of new contracts, but in the world of M2M it’s a very slow process of putting products through approvals, getting the global acceptance and then getting the customer demand generated.
We had a very large project in Victoria which fitted in to a lot of last year and the early part of this year and that’s in the smart metering area, and so we had a good bump up last year which we didn’t have that same contract going forward this year. But overall we’ve got a lot of contracts in the pipeline which will roll forward this year, next year.
We forecast to the market that we’d be up this year in revenue and EBITDA and we definitely are on track for that. So the whole year results will be quite pleasing. I’m sure the market will look at that very appreciatively. And future years look very good as well.
AK: Right. So tell us exactly what the business is in M2M. What do you make and sell?
DS: Well, we’ve got two parts in what we call the M2M business. One is where we’re making both general wireless routers – now, when I say wireless, we’re talking about devices that work on the telephone network, the cellular telephone network – and we build a general range of products which we put out for general distribution sale through our partners to M2M innovators or people who will put together a solution. It may be on security cameras, it may be on vending machines, they may be on ATMs and lots of other devices.
And then we also have the products that we do for the NBN in the fixed wireless broadband connectivity, which we supply through Ericsson. So there are two different product groups that we supply there. If we go back to M2M, some of the examples are: in Sydney the transport system now is running on the contactless ticketing system or what they call the Opal card. We actually build the physical hardware which goes on the buses, the ferries, the trains that enable that device to work. We provide the communications part to that.
So that’s just one example of the type of device we do. We do work for Vodafone Global Enterprise globally and we build the 3G and now 4G devices which will enable people to connect to their network and connect their multitude of various machines or devices, and these can be from remote weather stations to medical devices to lots of other different applications.
Now, the other device that I just touched on is the device we build for the NBN and Ericsson. Ericsson is the primary contractor for the fixed wireless part of the NBN and we build the device that gets installed on the outside of a premises and for all the people in rural areas who can’t be connected via fibre or fibre-to-the-node, we provide the wireless connectivity so that those people can access the NBN. And that’s a very big growth market for us as well. We call it the Rural Broadband market.
AK: Is that satellite broadband or is that coming off mobile phone towers?
DS: No. Well, this is coming off a version of a mobile phone tower, but it’s not running on the mobile network as we all know it today. Ericsson builds a tower and it’s a dedicated tower to address all the rural properties and smaller country towns and we deliver LTE or 4G, as people know it, on a guaranteed bandwidth, so it’s an always on, guaranteed bandwidth to all the premises in that footprint and that’s what is called the Rural Broadband wireless component.
AK: And have you got an exclusive contract with Ericsson for that?
DS: Yes, we do. There are many man years of development in this product where we work jointly with Ericsson and the NBN to develop this piece of hardware and it’s integrated as part of their total network.
AK: But how long does the contract go and what’s it worth?
DS: Well, it goes as long as the NBN is continuing to roll out and it will have a lot of installations over the next four years, but we consider that there’ll be a very long tail which will go on for many, many years thereafter.
As to the value of the contract, it is directly dependent on the addressable market that the NBN has. There was a release put out by the NBN last year on a review of their wireless and satellite footprint, which has increased the numbers substantially, but it all depends on the take up rate. It’s voluntary whether you take it up or not. We supply the device to Ericsson. Ericsson contractors install it on the premises for those people that sign up to take it. So it’s hard to forecast a number or we’d rather not forecast a number, but it is looking very substantial for us over the next four years and more.
AK: And is this a high-margin business?
DS: It’s a reasonable-margin business. Obviously anything that’s in high volume does require competitive structure, but we’re very happy with the margin that’s built in to this.
Also, I should point out that it’s very incremental; as the volume goes up, we don’t actually have a large increase in our operating costs, so it’s all incremental business that will flow straight through to the bottom line in a large case.
AK: Right. Now, okay, well just perhaps we can get back to the M2M thing. You talk about what you call a ‘coattail strategy’. Could you explain that?
DS: Yes. What we are trying to educate the market on there is that we don’t go out and try and sell an end to end solution for everybody; we rather work with partners, whether those partners be telecommunications carriers like Telstra, like Vodafone and many others or we work with integration partners who will pull together a total solution which may consist of some software, cloud-based servers and physical hardware, so we will work on providing the communications hardware part of a total solution.
So what we’re saying is we’re not trying to conquer the world all on our own; we’re working closely with partners who will put out the total solution and we are just the communications part of that solution. So we hang on the coattails of much bigger companies and Ericsson is an example of that, as is Vodafone and others like that.
AK: Right. And your Vodafone partnership is a global one, is it?
DS: Correct. We have a global relationship with Vodafone Global Enterprise based in Europe which flows through to all of the Vodafone properties on a global basis. And we specifically build the physical hardware devices that they use for their M2M connectivity.
AK: You mentioned that the decline in M2M profitability or revenue in the latest half was just a matter of timing. Can you give us a sense in some detail of what the pipeline looks like?
DS: Yes. Well, there are a lot of different projects on with a lot of different carriers, so we are now geographically set up not only in Australia and New Zealand but we now have offices in the US, Japan, the Middle East, the UK and Europe and so our sales teams based in those areas are working on a lot of different projects with multiple carriers and multiple end user customer groups and so we’ve got different projects in different stages.
As I said earlier in the interview, it generally takes us from the time we meet a customer to about 12 months from the time we’ve designed a product, put it through the regulatory approvals in the various countries to when that product will start to commercially roll out.
So our pipeline is ever building and we’re looking forward to later this year and next year with greater numbers in the world of M2M. And it will be in M2M greater than 50 per cent of the revenue and continuing to grow. Whereas the base broadband business, we consider it fairly static even though it has actually outperformed what our expectations were.
AK: How rapidly is the M2M business growing in general?
DS: Well, M2M globally is growing very quickly and there are a lot of reports out from big organisations, including Ericsson, which talk about 50 billion connected devices by 2020. Now, that goes right across a very wide spread of markets including smart metering and the connected cars and telematics and fleet management, etcetera.
So that whole area is growing and the big growth behind it is the ubiquity of the networks today and the relatively low cost. The costs from telcos of running their networks have come down quite a lot and so now it’s becoming relevant to connect everything and so that’s causing this big growth. Now, I should emphasise we’re not trying to play in the whole market; that would be impossible for a company of our size, so we’re being very selective in the areas of M2M in which we participate and very selective in which ones we don’t participate in as well.
AK: So, you said 50 billion, right?
DS: That’s the publicly stated comments that you will see from Ericsson and others.
AK: I suppose the thing is with connecting machines is that there’s a heap more of those than there are people in the world.
DS: Absolutely. There are a lot more machines and you just have to look in to your home and businesses and walking down the street.
And I mean other examples of what’s being connected is the digital displays. Once upon a time somebody would put a hard drive or USB key in to a digital display. Today they can connect that through an M2M device and you can update advertising at whim all the time.
We’re seeing other examples of M2M is where you see bus signs with indications of when the next bus is going to arrive and that’s a real-life application of data being transmitted to that location, accurately updating the customers or the passengers on arrival times.
You’re seeing vending machines that were once not connected and they’d run out of product and people would wait two to three days before it would be refilled. Nowadays, by connecting the vending machines, not only can you do credit card transactions on the vending machine you couldn’t do before, all of a sudden, it manages the inventory and lets the company know when any product is running low, so that machine is kept stocked up. So it’s all about not necessarily new things but making things that have been there for a while operate so much more efficiently and more up to date, that sort of thing. That’s the world of M2M.
AK: Well, what are you going to be doing in 2020 when the 50 billion machines are talking to each other? I mean I don’t mean you personally necessarily but the company. What position will NetComm have in that world?
DS: Well, we will still be a player in that market. It is such a very large market that we will continue to focus on certain verticals. We don’t make rash statements that we’re going to conquer the world in this. We’ll just be one of the part players in providing ever growing speeds and connectivity to devices. We just think that it’s a very big market and growing very, very quickly and we will continue to evolve and develop devices that will appeal to the market.
AK: And you’re confident that your position in that world, in that market is entrenched?
DS: Oh, we believe so. We’re playing in very selected market segments. There are large companies which will attack certain areas. The connected cars, for example, is an area that we’re not playing in and that’s deliberate in that that will be a market because of its size that will appeal to some of the bigger players. So we’re picking market segments where there’s a fair degree of difficulty in designing the product and that we feel we can bring our expertise and knowledge to develop a device which will work in certain vertical markets.
AK: What sort of markets?
DS: Well, once again, we’re back into the vending machines, the smart metering.
AK: Right. So you’re seeing vending machines, smart metering. You’re making some money from smart metering now, aren’t you?
DS: Yes, we are. Another big growth area we see is health. The whole idea of people being able to use a 3G or 4G device and couple it with various pieces of medical equipment they’ll have in a home and so that doctors can remotely monitor the elderly and take action if they see some adverse conditions emerging in the data that they’re recording.
And this is a very big growth market, particularly for diabetes patients and some of the other patients in this area; being able to have all this data transmitted remotely without having to send in forms or have nurses come to the home to take readings is all very helpful, so we see the health market is a big growth area as well.
AK: Well, it’s very interesting, David. Thanks very much. It’s been great talking to you.
DS: Thanks very much, Alan. Thanks for the time.