Telit Communications issues upbeat full-year guidance

Telit Communications reported a drop in profits at the half-year stage despite improved margins, as the company continued to invest in research and developments and due to setbacks in the ramp-up for some of its products in the US.

Nevertheless, the company - as well as some analysts - were upbeat on its prospects for the second half of the year.

Telit boss Oozi Cats said: "Overall, we are confident of a strong second half performance, which will lead to double digit revenue growth and profitability growth for the year."

Total revenues at the machine-to-machine communications solutions specialist grew 6.3% to $166.1m while gross margins improved from 39.7% to 40.1%, despite which adjusted profits before tax dropped by about 18% to $11.4m.

Spending on R&D increased from $12.8m one year ago to $17.85m, alongside increased selling and marketing as well as general and administrative expenses.

On a more positive note, its Internet of Things services revenues increased 23.4% to $13.7m.

Revenues in the US, on ther other hand, were negatively impacted by the slower-than-expected ramp-up of its LTE Cat-1 product line, due to the slow certifications cycle because of the restructuring which was taking place at one of Telit´s blue chip suppliers.

In terms of guidance, Telit forecast full-year group revenues would rise to between $370m and $390m, or between 11% and 17%, and adjusted basic earnings per share by between 11% to 38% to between 24 and 30 cents.

The company declared an interim dividend of 2.5 cents per share.

Analysts at Canaccord Genuity reiterated their 'buy' recommendation and 280p target price on the stock.

Canaccord´s Bil Barnard and Salvatore Carruso said: "In order to achieve our full year revenue forecast, Telit needs to deliver 56% in the second half. Although this looks demanding, we note that 53% of full year revenues came in H2 last year, despite a flat performance in the US.

"So if the US can achieve the 20% full year growth that management is expecting, then doing 56% in H2 looks achievable. A key reason for this H2 weighting is Q4 customer budget catch-up spend combined with stock building ahead of Q1 roll out of IOT solutions in the following year."

For their part, analysts at Berenberg upped their target price on the shares from 250p to 280p to reflect the then current spot exchange rate for cable of 1.30.

"A common question from investors focused on the continued capitalisation of R&D on the balance sheet. Telit capitalised 53% of gross R&D expenditure in H1 2016 versus 58% in H1 2015. This downward trend should help allay investor concerns," Berenberg said.

Shares in Telit finished the session 0.96% higher at 262.50p, giving the firm a market capitalisation of £302.22m.