What's going on with NetComm Wireless?

Today's CEO interview is with Ken Sheridan, the CEO of NetComm Wireless. 

NetComm Wireless is a very beaten up stock; it’s gone from $3 a couple of years ago to around 70-80 cents now and in fact it was over $1 not long ago and it got smashed in August when it came out with its results and a slight downgrade in its profit forecast because the NBN was being delayed. 

The question for Ken Sheridan, which he answers, is are we just talking about delayed revenue or is it cancelled. It’s very worthwhile listening to this interview because this is a stock that’s down and really beaten up and it looks like it could well be a great opportunity because the business is going quite well.

Yes, some of the revenues from the NBN have been delayed but it’s doing pretty well around the world; they’re regarding themselves as a global business now; they’re using what they are selling to the NBN to sell to AT&T and other global telcos. 

He is also getting ready for 5G and you’ll find that towards the end of the interview there is what I reckon is the best explanation of 5G and how it works that I’ve ever heard. Obviously, it’s in the context of NetComm’s potential revenue stream from selling a 5G device which goes on the house to collect 5G signal, that’s their thing, that’s what they’re going to sell. 

He reckons that they’re going to launch their 5G device in a couple of months’ time at some sort of show and he wouldn’t tell me exactly what it does now because it’s too early but I think it’s well worth a look, this stock. I think it probably was oversold. 

Here is Ken Sheridan, the CEO of NetComm Wireless.

Ken, NetComm’s share price obviously has suffered significantly obviously not just recently but over the last couple of years, down from $3 to 80 cents or something.  A lot of telecommunications companies’ share prices have done the same thing because of the NBN but yours is for a different reason, it seems to me.  Others have gone down because the NBN is competing with them, yours has gone down because there seems to be delays in the NBN buying your equipment.  Can you give us a sense of what has happened there?  Have any of the purchases been actually cancelled or are we just talking about delayed revenue?

Delays, no cancellations.  The programme obviously that we’re working on, two programmes in fact, one is fixed wireless and that’s going along very nicely through Ericsson, and the other one is distribution point units which is their fibre to the curb programme.  The fibre to the curb programme, just by the way, is very successful for NBN.  It’s got a very high consumer uptake and delight when they actually connect but it’s been a bit trickier than what they thought to roll out because you’ve got to dig down the street, lay fibre, connect up our distribution point box and then use copper for the last little bit into the person’s house.  What they’ve found is things like they get to a pit, the pits in front of people’s houses where they’re going to put our distribution point unit, and it’s full of asbestos for example.  You have to do some remediation there.

What they’ve found is it’s a bit trickier than what they initially thought and they’ve obviously had a bad experience with HFC cable and so thought right, we’re going to take our time here, make sure we understand everything, get it right and roll out.  They’re still committed to having their rollout finished by the June 2020 and so it is just the delay as opposed to any sort of cancellation at all.

The market has been merciless.  Let’s leave aside the $3 because that was a moment in time and maybe the market go over-excited about your prospects but even if you take say $1.50 where you were for quite a while down to where you are now it’s a lot.  The market seems to have just gone crazy.  Do you think it’s simply short term thinking on the part of the market or is there something more fundamental at work?

From our perspective we put out our results for the financial year 18, the best results we’ve had in our 35-year history so we thought that was pretty good.  Then we said financial year 19 is going to be about the same except we just need to make some investments into 5G and the market’s view was well you should have done a lot better than that and therefore they smashed our share price.  We look at it that we’re not building a business for the short term, what we’re doing is building a multi-year business.  We’re dealing with very big customers around the globe, what we call tier one telco carriers, they make decisions in their own timeframes and our capacity to influence them is not very high.  What we know is if you take a multi-year view of the things we’re doing we’re right in the right spot, we’re doing the right things, we’re getting great acknowledgement from these tier one players of providing things that they need.

You just need to take a longer-term view, we say a three-year view, and we think our business is very well-positioned over that three-year period to do incredibly well.

You haven’t paid a dividend for about eight years I think, should shareholders see the potential for dividends as being an indicator?  When do you think you’ll go back to paying dividends because I presume that’d be at the point where you reckon you’re on a sound footing.

Yeah, I think that’s right.  Obviously, payments and dividends is a matter for the board.  I don’t see it in the next year for example, we wouldn’t think.  Post that we’re obviously going to look at how we allocate capital because at the moment we do have cash in the bank, we have no debt so we’re very well-positioned to fund our own growth internally.  We think the best use of the money at the time being is to invest in that growth and we think in due course shareholders will be rewarded.  There will be a time, there’s no doubt about it, there will be a time when a dividend is appropriate to be paid.

Whereabouts are you investing in that growth?  I’m wondering to what extent you’re a global business now and to what extent you’re an NBN supplier.

Sure.  We are an NBN supplier and we’re very proud of that, actually.  Because, one of the things that people don’t understand is that there’s a lot of noise on a sort of political level about NBN and how it’s mainly about spending and all that stuff.  From a pure technology point of view it’s one of the few networks, I’d say probably the only network in the world, that is rolling out a full end to end set of solutions across all the things you can do, so that’s satellite, fixed wireless, fibre to the curb, fibre to the premise, fibre to the node and HFC cable.  It’s a smorgasbord of all the things you could do as a telco.  What’s interesting is we’re playing in the FTTC, the fibre to the curb area, and fixed wireless.  That’s at the leading edge of what’s happening globally so we’re able to take that learning of how it works in Australia, and Australia is a complex place to operate in because of its vast distances and its climate, and all those sort of things.  We’re able to take that learning and apply them into other jurisdictions.

Today we have contracts with AT&T in America, we have a contract with a big Canadian telco as well.  Both of those are in relation to fixed wireless, one on the back of what we’ve done with NBN in Australia because those guys understand the technical challenges that we had to overcome and getting it to work in the environment of an NBN is regarded very highly.  To answer your question about how we see ourselves, we truly see ourselves as a global business.  We’re not trying to be everything to everyone, though.  We’re saying the markets we want to hit are North America, Canada and the USA.  We want to be in the UK and Europe and we want to be in Australia and New Zealand.  If you like, kind of the western democracies.

The reason why we think they’re the places for us to go, at least initially, for the next few years is that they’ve got regulators who are saying everyone needs to be connected here and you can’t just leave out the guy because he’s too hard to get to because he’s in the bush, or he is in as multi-dwelling apartment that is hard to get to.  They’re saying no, everyone is going to get a connection.  Having that impetus from regulators is actually very helpful for us because we’re trying to play in the places where it’s a bit more difficult for the telcos to connect up people hence solutions for fixed wireless in the rural environment, and distribution point units where getting fibre into a premise is actually too expensive or too time consuming, and having a fibre to the curb solution is a better alternative.

Are you positioning yourselves as a fixed wireless and fibre to the curb specialist?

At the moment we are, they’re the products that we’ve got that are solving the problem that the customer has.  What I need to make sure that people understand about our business is we’re not actually technology led, we’re problem led.  We have a look at it and say what’s the problem that these guys have, their problem is I can’t get into the house because it’s too expensive to dig up people’s driveways and rose bushes and stuff, and put a fibre in, therefore fibre to the curb is the answer.  Now, that’s the answer today and we think that’s got a number of years to go because there’s a whole bunch of technologies on what they call the copper standards…

If I could just interrupt there, Ken.  Fibre to the curb basically means connecting to the existing copper that travels from the curb to the house?

That’s correct, and it’s fibre down the street and into our, if you like, black box.  It goes fibre one end and copper out the other.

In that business what are you selling?

We’re selling two things.  We’re selling the black box, it’s called a distribution point unit, that sits in the pit, sometimes it will be up a telegraph pole, that takes the fibre in and takes the copper out.  Then we have another device that goes inside the person’s home that’s called an NCD, it’s as network connection device.  That allows you to do a very important thing, it allows power to be taken from the person’s house down the copper line to actually drive the distribution point unit because you don’t have power in the pit and it needs to get the power from somewhere, and it’s called reverse powering from the device inside the home.  That’s a very useful thing and from the person’s point of view when they subscribe to the service they get this NCD and all they have to do is plug it into the power point, plug a chord into the telephone line and then plug in their Wi-Fi router, that’s it.

What we’ve found is 80-year-old people can do that, it’s very simple, three things to connect, straightforward.

A couple of questions about those two things that you’re selling.  Firstly, are they very competitive businesses, who do you compete with, are there Australian competitors or are you just competing with global businesses?

There are no Australian competitors, there are some guys overseas.  We were the first in the world to develop both of these things so we’ve got a really good position and a lot of units sold into NBN.  There are other guys and they’re big guys, guys like Nokia and ADTRAN, so Nokia out of Finland and ADTRAN out of the US, and they’ve got some capability in this area as well.  The difference that we bring to light though is that we don’t have just a here’s my device, you shall buy it from me because I made it for the last guy, we say okay, here is our capability in a distribution point unit or NCD, is there some you would like augmented for your particular circumstances.  Because, we can make it fit your environment to be 100% fit not just sort of a seven out of ten.  That’s the bit that we’re prepared to do and we find that the people we’re talking to about that now are going that’s fantastic.

Are you finding that you’re able, therefore, to not have to compete entirely on price?

That’s right.  Obviously, we have to be competitive because these big telcos are masters at getting good pricing so that’s just a given.  If we can showcase the value that they can achieve because the solution is exactly what they want and not just, as I said, a seven out of ten set it’s a very different sort of story that we can have.

Let’s just talk about fixed wireless.  Could you just explain what that is?  Are we talking about line of sight microwave?

No, we’re talking about line of sight 4G so it’s standard cellular technology.  What you use in your mobile phone for example to hook up to a cell tower.

Does it have to be line of sight?

Yes, it does in the rural environments, we find that best.  In the case of NBN they’ve got towers and the distance you can go from the tower to the person’s home is around about 14 kilometres radius.  The key is using that spectrum that exists in the 4G area to use it so that you can get fast data speeds.  Today there are guys sitting – let’s use a place 60 kilometres outside of Wagga Wagga in New South Wales getting 50 megabits per second download and 20 upload.  If you compare that to some people in Sydney today on ADSL they might be getting 3 to 6.  It’s looking that your internet connection in the bush is substantially better than the one in downtown Sydney.

They just have to be 14km or less from a tower that’s owned by the NBN.

Yeah.

With the fixed wireless what are you selling there?

We’re selling the device that’s called a wireless network terminating device, a very complicated name, but it’s the device that sits on the roof of the house.  If you think about a satellite dish that receives a satellite signal this is another type of dish, if you like, or antennae that sits on top of the house, picks up the signal from the tower and then through an ethernet cable going into the house there’s another box there that allows you to plug in your Wi-Fi router.

Where do you get all these things made?

We get them made in China, all of them are designed by us, we then outsource those designs.  We have operations, design centres if you like, in Sydney, Melbourne and in Florida just outside of Fort Lauderdale.  It’s kind of if you think about the Apple model which is they say designed in California, made in China, so ours design centres are in Australia or the US and made in China.

NetComm started life in the early 1980s with Australia’s first modem I think, produced by David Stewart.

That’s absolutely right, yeah.

Now obviously it’s come a long way, so you’ve got these three devices that you’re selling for fixed wireless and for fibre to the curb so how much of your revenue is from those three things that we just talked about?

Yeah, kind of 86%.

86, I think you still sell modems, don’t you?

We sell routers, they’re modems with Wi-Fi built into them.  We did that in Australia and New Zealand and we sell them to the ISPs.  We’ve been in that business for a long time, we’ve got reputation, connections and relationships.  We haven’t chucked them out, we think that’s a good business, we actually grew it a bit during the course of financial year 18 and that was good but we’ve fenced that to Australia and New Zealand, we’re not trying to take that business outside of Australia and New Zealand.  The reason is that there are some really big players around the world and we wouldn’t have the kind of relationships and other things that allow us to do the business in Australia.  The growth is going to come from these devices such as fixed wireless distribution point units both in Australia but also in sort of the global environment.

Can you give us a sense of where you are on the curve with this?  I mean obviously you’ve got the NBN as a customer, that’s done, and you’re sort of basically in their hands in terms of their roll out and so on and that’s kind of driving the share price down mainly, up and down.  Give us a sense of where you are in the curve you think globally for that business?

Yeah.  We’ve sort of said, and the first time we actually did this in our investor presentations at results time, is to say look in three years’ time we need to have ten tier one customers.  Tier one customers are big telcos, so think of guys like AT&T, Verizon in America, Telstra in Australia, BT in the UK for example.  We want to have ten of those.  Today we have three.  We have NBN, we have AT&T and we have Bell in Canada.  They’re the three we have today so the next three years we want to have seven more.  We have discussions taking place with at least seven, a bit more actually, of various things that we can do with them both on fixed wireless and distribution point technologies in particular and also discussions, and we might get to it later, on 5G because that’s the next big thing that’s going to happen in sort of the wireless world.  We’re very confident about our capacity to move from that 3 tier ones to 10 tier ones.  That kind of gives you a bit of a view on where we are.

The thing to understand about these tier one customers is they don’t usually compete.  They compete in their own nations, so Verizon competes fiercely against AT&T for example, but outside of the national boundaries they actually collaborate.  The guys from BT speak to the guys from AT&T, the guys from Bell speak to the guys at AT&T, NBN speak to BT in the UK.  I’m telling you that because what happens is they will sort of talk amongst themselves and say okay, we’re thinking about fixed wireless, who are the guys to use for that.  We’re getting referral opportunities based on what we’ve done with the other big players because they know if you can do this for NBN or you can do it for AT&T or Bell then you can do it for me and all these guys are very much risk averse and so they want to know they can deal with people who have done it before, who have a lot of learning and we can get those recommendations in from these big tier one telco players.

I imagine you’ve got a bit of talking to do with some of these big players because you’re a little Australian company effectively talking against someone like Nokia or these other businesses you mentioned.  I mean that must make it more difficult for you?

It’s very interesting.  If we try and compete in the same way that a Nokia, for example, will compete our chances of winning go down a bit.  If we actually look at what are we really good at, and that’s sort of customising things to the exact requirements of the tier one carrier that we’re dealing with, we’re finding that we then differentiate ourselves and based on the customers that we’ve already done this for they go okay, you might be a small Australian company but you’re highly innovative.  You’ve come up with all these different solutions, you talk to me about how we want it done and you deliver on the outcome.  It’s great to deal with you guys because you’re kind of in the middle here, right, you can be a super big guy over here and they’ve got their own ways of doing things, down at the other end you can be a cottage industry, ten blokes in a garage type of thing, that’s high risk.  We’re a big enough size with enough customers, publicly listed so that people go okay, so you’ve got good transparency, it’s on the Australian exchange therefore it’s a reasonable exchange, therefore we can see what you’re up to and that’s kind of good.

It’s really about us taking advantage of the agile nature of our business and apply it to the customer so they get the best outcome.  That’s built into our DNA of how we work and we have a little sort of expression for that that’s called listen, innovate, solve.  It’s listen to the customer, find out what they want, augment what we have to suit their needs and solve their problem exactly.

I was surprised you didn’t mention Huawei as one of your competitors, don’t they do what you do?

It’s really interesting.  Huawei, they can be a competitor, that’s true, but what’s happening right now in the world is kind of good for us because they’re effectively banned from Australia in 5G, same with the US, the Canadians are not sure but a couple of senators, one Republican and one Democrat, just wrote to the Canadian Prime Minister yesterday and sort of said he might want to rethink that.  The Japanese are a bit concerned about the Chinese.  There’s a real security drive happening right now and we think that we can be a beneficiary of that not being Chinese and being in what they call the five eyes countries.

What’s your 5G product?

Fixed wireless.  In the world of 4G the signal can go quite a distance, 14 kilometres as I said.  That’s great for the rural environment.  In the urban environment though 5G as a signal in what they call millimetre waves, so this is above 20ghz.  In that millimetre wave area the signal doesn’t go very far, maybe 200-300 metres, and it doesn’t penetrate anything.  It wouldn’t go through paper, for example, it doesn’t go through windows, for example.  What it does provide is a huge amount of bandwidth so you can get a big data transfer rate, so you could get 10 gigabits per second and 4G is more like 100 going to 500 megabits per second, so quite an increase in speed.  It promises a lot and we’re working on how do you come up with a solution that overcomes the problems of this propagation and penetration, and deliver that in an urban environment.

It won’t in any way, shape or form cannibalise our 4G offering in the rural areas but we’ll take all the learnings we’ve had of how you get signals to go further, how you design antennae that are more sensitive to pick up signals outside an apartment or a single dwelling, so it can pick up the signal.  All the things that we have sort of learnt over the last six years doing fixed wireless in the rural environment we can take that fairly directly into the urban environment but without cannibalising our business.

What have you come up with?

We have come up with a way that you can take an aerial, install it on the outside of a home or apartment block and do it yourself as a customer so you don’t need a professional installer to come around.  That is very attractive to the big telcos because every time you have to have a truck roll that costs you about $200 to $300.  If you can avoid that it is very helpful.

As long as you can get up on the roof.

I’m not going to go into the specifics about what we’re doing, you’ve got to do it so it’s very safe.  You don’t have to go on the roof but we’re keeping that a bit close to our chest because it’s a competitive world out there and we’re going to showcase a solution in February, end of February 2019, at a big trade show called Mobile World Congress.  That’s kind of our launch spot for the product.

If it’s only going 200 or 300 metres it’s got to come from somewhere nearby obviously, does there have to be a tower nearby or some sort of line of sight?

The world of 5G is a bit different to 4G where you used to have what they call macro towers.  You’re familiar with the big towers, 40 metres high and all that stuff, sending its signal out.  5G is going to be a lot more of what they call small cells, so you might see a small cell on the top of a telegraph pole for example.  It’s going to be a much more dense network, way more dense in terms of the number of mini cell towers that will actually be required to service a 5G deployment. 

I presume the signal won’t go through trees either.

That’s true and people are trying to work on how can we solve that.  It gets a little bit worse, if for example it rains then the water on the leaves of the tree actually makes it denser and therefore you have a greater problem.  What you need to do is have some techniques that allow you to bounce the signal, so think about that like if you were playing on a pool table you want to bounce it off a cushion over here and get it to the place you want to get to.

Right.  I presume your thing can’t go inside the ceiling because it can’t get through the roof so it actually has to go outside.

That’s the best spot for it to be, absolutely.

Yeah, well that’s going to be interesting.

Just so you understand that’s the antennae that goes on the outside that picks up the signal, then you’ve got to bring that signal inside.  You’ve got to bring it through the window and then put it into a Wi-Fi router that can disseminate the signal around.  There’s some very interesting things that you do to get that signal inside, through the window if you like, through magnetics and a whole bunch of other new age things that they’re looking at.  This is kind of a new frontier.

You reckon it’s all going to be worthwhile because we’ll be able to download a three hour action movie in 30 seconds or something.

Right, that’s the promise.  Let me tell you what the use case is though.  Take America.  America is predominantly serviced with cable, they’ve got big cable operators, Charter and Comcast, and those sort of guys.  Some of the telcos are going well wait a second, I want to compete against those guys with high speed, I could put in a 5G capability and I don’t have to lay cables or do anything like that.  I can use spectrum and small cells, and then I can beam into those guys and I’m going to pinch them off the cable companies and put them onto my own series of – whether it’s Netflix or it’s Time Warner, HBO, whatever it is, Amazon Prime.  It’s going to be a different way to get a connection into a household that isn’t the higher cost of laying cables and fibre and all that stuff.

I must say, Ken, that’s the best explanation I’ve had yet of 5G.  Now I get it.

Okay, there you go, happy to help.

I’ve really enjoyed our chat about NTC, about NetComm Wireless, so thanks very much for that.

Okay, thanks, Alan.

That was Ken Sheridan, the CEO of NetComm Wireless.