November 23, 2016

Cover Story: Verizon Invests Big in Telematics

About three years ago, Verizon shocked the world when it announced it was acquiring Hughes telematics for $612 million. Many speculated it was to bolster its OEM telematics practice. Some speculated it was to block competing carriers from partnering with Hughes. But at the end of the day, when the dust had settled, Networkfleet had emerged as Verizon’s branded go-to offering for small to medium fleets.

Early on, as Verizon’s sales teams positioned Networkfleet as its lead solution, many Verizon telematics partners became upset at Verizon for having entered the competitive world of software-as-a-service solutions. Networkfleet positioned Verizon to gain traction and capture software recurring revenues normally reserved for those participating up the stack.

But as time wore on, many realized Networkfleet customers were smaller fleet operators, and while Verizon improved its position in fleet management, it wasn’t a formidable competitor to solutions like Omnitracs, Fleetmatics, or PeopleNet targeting large-scale fleets. And in time, the uproar died down and things went back to business as usual for Verizon and the rest of the ecosystem – until just recently.

The Big Bang
Boom! Like a bomb piercing the silence of a ceasefire, Verizon announced the acquisition of Telogis. A rumored $930 million was offered up for a company that claims more than 80 of the 100 largest for-hire fleets as customers and has more than 300,000 vehicles under management.

Now, Verizon’s business development team will have a large-fleet solution to offer alongside Networkfleet. Additionally, Telogis has a good offering for OEM embedded fleet vehicles. Having worked with both GM and Ford on OEM embedded solutions, Telogis could reinvigorate a connected car business at Verizon that’s been waning since the loss of OnStar as a customer more than a year ago.

An Even Bigger Bang
And just as the dust was settling on the Telogis acquisition, and semi-hidden by the Yahoo! acquisition, Verizon made another big move – announcing it was acquiring Fleetmatics for $2.4 billion.

When you add Fleetmatics to Telogis and Networkfleet, Verizon effectively has rolled up 18 percent of the current market. And there are rumors that there are more to come.

With companies like MiX and Novatel on the open market and undervalued and several other fleet companies in exploratory talks with investment banks on doing formal processes, Verizon may very well own 25 percent market share by this fall.

But at What Cost? 
Let’s just look at Telogis and Fleetmatics. Those two acquisitions total $3.33 billion.

Did Verizon even do a back-of-the-envelope calculation?

Let’s just use some really, really round numbers here. If the average subscription for fleet software solutions is $25 per month (and dropping 5 percent per year), and Verizon has 300,000 Networkfleet subscribers, 700,000 Fleetmatics subscribers, and 300,000 Telogis subscribers – that’s 1.3 million subscribers times 12 months times $25 per month or $390 million per year.

If the market is growing at 20 to 25 percent per year, then breakeven happens in year six (and that’s with zero churn). 

How Much Churn?
But we know churn is going to happen.

How do we know this, you might ask. It’s because approximately 20 percent of the vehicles using Telogis software have an AT&T logo on the side of them. Do you think AT&T will want Verizon knowing where its fleet vehicles are driving to and from each day? Probably not. Look for some immediate churn to happen.

Based upon end user research, the average fleet vehicle remains on network and under subscription for approximately 3.5 years. (The average lifecycle of a fleet vehicle is 7.8 years; however, the average number of registered owners is 1.9.)

Additionally, we know that approximately 50 percent of the 1.3 million subscribers Verizon acquired have contracts for connectivity using AT&T. If this is the case, then Verizon has to pay connectivity fees (probably around $1.05) to AT&T for network access. While some would say that’s not much, we do estimate it totals somewhere between $12 and $28.5 million.

One scenario is that many of these newly acquired endpoints will naturally age-off the AT&T network organically. When this happens, their companies usually bid-out hardware, software, and connectivity solutions. Those vehicles could very well end up on Sprint with Geotab or US Cellular with Actsoft.

Another scenario, unlikely as it seems, has Verizon paying AT&T for use of AT&T’s network services. This is not very likely and is the $12 to $28.5 million cost we talked about before.

Finally, if Verizon wants to forego paying AT&T anything (which is likely), it’ll probably need to pay mightily to get a fleet subscriber to switch out the GPRS or HSPA hardware in its vehicle to accommodate Verizon’s technology. This would cost anywhere from $100-200 per device and $50-75 per installation. And if history is any indication of the future, Verizon will do just that, instead of paying AT&T for network connectivity services.

Another $97 Million
That means on top of the acquisition costs for Telogis and Fleetmatics, Verizon could spend an additional $97 million to avoid paying AT&T between $12 and $28.5 million for connectivity.

Yes. Verizon could spend $97 million to avoid paying AT&T between $12 and $28.5 million for connectivity.

So when we tally up the costs for Telogis and Fleetmatics and add on the money Verizon will spend to push the connections off of AT&T’s network, Verizon’s grand total spent is roughly $3.427 billion. And this is all before integration costs of trying to add two new companies into the Verizon platform. In our estimation, Verizon has overspent by several hundred million dollars at a minimum, or more likely a billion dollars or more!

It is likely that Verizon may not see a positive return until after 2025.

How Could $3.5 Billion have been Better Spent?
Let’s look at a list of publicly traded companies to see what Verizon could have spent $3.5 billion on, if it would have looked a little harder.

First, there are some companies that need experienced management and will benefit from the stability of a larger acquirer and the economies of scale that could be gained. On the list are Digi, MiX Telematics, Numerex, and Novatel.

These companies are a mix of hardware and software companies. Three of them have significant professional services backgrounds. And given that M2M and IoT are very complex, adding experienced professional services resources sounds like a good idea right now, especially at these costs.

Next on the list are the mid-cap movers and shakers CalAmp, Orbcomm, Sierra, Telit, and Sequans. These companies, while some of the biggest names in M2M technology, are not well known or widely traded on Wall Street. They are mid-cap stocks that are restrained a bit by reporting rules that their similarly sized privately held peers don’t have to deal with.

Being acquired by a larger organization would be a blessing, as they would have access to the ready capital that forced them into an IPO situation in the first place and would lose the costs (which are probably in the tens of millions) that regulation and reporting force them to bear.

What the Nine Companies Get You
All told, the nine public companies above have combined market caps of $2.965 billion. They represent $2 billion in annual revenue. They have a combined 4.4 million to 4.6 million subscribers. And what’s more, they have a combined $980 million in cash, receivables, and, short-term investments.

In Conclusion
What that really means is that you could approach the boards of each of the nine public companies above, offer a 50 percent premium to the company’s recent opening market valuation, and walk away knowing you have better value than Telogis and Fleetmatics alone. And as a kicker, you own a couple of the vendors used by Fleetmatics, Telogis, and Networkfleet.

Sometimes companies make a rush to judgment and buy things they think they need because they want to avoid the paralysis of analysis. Confronted with disruption in their face, they pause and stare blindly like a deer in the headlights. Then, when an area becomes suddenly and shockingly successful (like Networkfleet), a rush to recreate occurs instead of analyzing the triggers and understanding the why behind the what. What ends up happening is not an inability to take action, rather it’s the inability to understand the market and take appropriate action.

With an influx of private equity money in IoT, 25 percent plus CAGR, more than 1,000 companies participating in the market, and relatively low interest rates, M&A is sure to be a theme of the industry well into 2017. Taking appropriate action will be the key to success. And the key to taking appropriate action is arming yourself with pragmatic, fact-based, quantitative and qualitative information.

James Brehm is CEO and chief strategist of market advisory and consultancy James Brehm & Associates (www.jbrehm.com).

Edited by Ken Briodagh

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