Description

Snapshot

I.D. Systems (IDSY) provides hardware and software solutions that enable large enterprises to track and manage industrial vehicles and assets. The company believes their product delivers a strong return on investment with typical payback achieved in less than a year. Machine-to-Machine (M2M) and Mobile Resource Management (MRM) technologies are becoming essential to the transportation and material handling businesses. IDSY should be a significant beneficiary of this trend, as its three reported segments, Vehicle Management System (VMS), Transportation Asset Management (TAM), and Rental Fleet Management (RFM), are well-positioned to grow share in an expanding market.

We believe IDSY’s products, patents, and installed base of customers hold considerable value. This value, however, has eluded investor as years of operating losses and fits and starts of revenue growth have resulted in a market multiple that is a fraction of its private and public peers. This underperformance recently culminated in the appointment of a new board and management team. The founder has returned to the CEO position and, with the support of the board and new hires, begun implementing a strategy dubbed “I.D Systems 2.0,”  a simple back to basics approach characterized by the following: A) Invest B) Fix the bottlenecks C) Grow Profitability D) Adopt Entrepreneurial culture and E) Hire the best talent to execute.

We think the stock is conservatively worth $10+ per share. Theoretically, if the CEO and management team are successful in achieving its stated goal of $100 million in sales with 25% EBIT margins, which would imply $2.50 per share in EBIT. On a current $6.18 EV, we think the stock will be worth much more than $10... The downside should be minimal given a vastly improved strategy in “ID Systems 2.0” and M&A trends. In short, we believe the new board will either successfully execute against the company’s business opportunity or consider a sale of the company within the next 12-18 months.

Keys to Thesis

Although we are still in early stages of M2M adoption, it is already a massive market. According to MarketsandMarkets, the M2M market has experienced rapid growth in the past few years and is expected to grow from “$21.52 billion in 2011 to $85.96 billion in 2017 at a CAGR of 26.1% from 2012 to 2017. Asia-Pacific is observed to have the highest growth rate.” Machine to machine (“M2M”) technologies is a fast-growing sector, enabling enterprises to capture operational efficiencies and increase ROI. IDSY proprietary technology (76 patents issued and pending) targets the VMS, TAM, and Rental Fleet market. We believe IDSY has the potential to expand into adjacent verticals such as aviation, government, oil, gas, and public transportation.

VMS

There are two sides to ID Systems’ operational history. On the one hand, approximately 50% of Fortune 200 is using ID Systems’ VMS technology. On the other, the company has achieved just 5% penetration across these Fortune 200 fleets,  which equates currently to 52% of ID Systems total revenue. The lion’s share of this business involves tracking forklifts. Forklifts are actually the number two cause of workplace fatalities behind highway collisions. IDSY’s system not only reduces the risk of injury and death, it also increases utilization. As enterprises realize the value behind M2M systems, we believe IDSY will have the capacity and reputation to roll out new and additional units. The company has also extended its VMS implementation with the #1 forklift supplier in North America, Toyota, as well as internationally to Europe and China.

TAM

The Transportation Asset Management (TAM) segment is IDSY’s second largest, accounting for 45% of total sales. This business was acquired from GE in 2010 and significantly expands the scope of addressable assets. The primary driver in the TAM segment is trailer chassis monitoring, where IDSY is the industry leader with 79% market share.

RFM

Finally, the Rental Fleet Management segment represents is a business with a small current revenue stream yet enormous optionality. In 2011, IDSY announced a partnership with Avis Budget Group whereby Avis took a 10% equity stake in IDSY and initiated a three phase deployment of IDSY’s tracking solution across its domestic rental fleet. However, Avis’ acquisition of Zipcar complicated matters.  Avis was supposedly interested in completing the rollout of IDSY’s solution but wanted more components added to the customized solution in order to accommodate the needs of the Zipcar fleet. Avis expected IDSY to add these components with no additional expense and the company never moved beyond the first phase of deployment. Although we think there will eventually be a deal with Avis or another rental car company (the exclusivity contract with Avis ended a year ago), such a deal is not factored into our estimates. A fleet-wide agreement would be a game changer. As a point of reference, the stock popped 12.6% when the initial Avis deal was announced.

After years of lackluster results and frustrated shareholders, Kenneth Ehrman, the founder and largest individual shareholder (4.9%), recently assumed the dual roles of Chairman and CEO and  launched  “ID Systems 2.0”: an initiative to move from the previous model of a one and done sale to a holistic model that should drive higher margin, increase ease of adoption and support, and produce a more predictable, recurring revenue stream. The company is guiding to have spent $2.5M through the end of 2014, with 90% going to R&D and 10% into SG&A for this initiative. These investments are designed to improve hardware, software and firmware capabilities; improve implementation processes; and drive scalability. A few specific details are listed below:  

•       VMS Hardware Refresh: VAC4 passed beta testing with 75% faster installation than previous generations, simplified hardware and interface resulting in substantial cost reduction and higher gross margins plus multi-lingual capabilities for international deployment.

•       New TAM Products: GSM-D150 and GSM-D400 present a low cost solution to track respective trailer chassis and intermodal containers, two largely untapped markets.

•       Rental Fleet Management Products: entered a Memorandum of Understanding (MOU) with Avis to develop a next generation of in-vehicle wireless technology using both cellular & Wi-Fi (previously only had Wi-Fi).

•       Saas Monitoring Solution - I.D. Systems Analytics is a cloud-based software platform that provides benchmarking vs. competitors and tracking of unique key performance indicators (KPI).

•      Improved Installation and Monitoring: Recently forged partnership with a third party to provide field engineering services. IDSY also created a resource scheduling tool and a web based training program, eliminating the need for classroom training and site visits.

The final piece of the IDSY story has to do with a completely revamped leadership team. In addition to Mr. Ehrman, IDSY has picked up COO Norm Ellis. Mr. Ellis has 35 years of experience in M2M technology sales and management and was previously a VP at Omnitracs, a global leader in over-the-road fleet management. Omnitracs, formerly an operating division of Qualcomm, was recently acquired by Vista Equity Partners.

The newly constituted Board of Directors also brings a lot to the table. Michael Brodsky is the Executive Chairman of Selectica, a publicly traded provider of cloud-based software. Director Ron Konezny is a VP at Trimble Navigation and CEO of its PeopleNet division, a leading provider of truck tracking technology. We expect Mr. Konezny to help broaden distribution channels and help IDSY forge partnerships with adjacent vendors. Kenneth Brakebill is an intellectual property Lawyer and litigator. As noted above, the company has an impressive patent library, although it has done nothing to monetize these assets. We expect Mr. Brakebill will spend his time and doing just that. Finally, Tony Trousset, is a founder and the managing member of Atlas Technology Group, a prominent bank in Silicon Valley. 

Valuation

Public Comparables

IDSY has 43.7 LTM revenues and trades at a fraction of its peer group on an EV/Sales basis (IDSY at 1.7x; ORBC at 4.3x; CAMP at 2.5x; FLTX at 5.0x; and MIX at 1.8x.) If we apply the peer group median of 3.4x sales to IDSY, the stock would be worth $12.10. We think multiple expansion will occur in 2015 based on profitable revenue growth. 

Precedent Transactions

IDSY also looks cheap in light of recent M&A. We compiled a list of precedent transactions from 2009-2014 and found comparable companies have transacted at a median TEV/Sales multiple of 2.8x, which would imply at $9.97 stock.

Public Comps: 3.5x

Precedent Transactions: 2.8x

Average of both: 3.15x

We estimate the company will generate $45M in sales for 2014. Applying a 3.15x EV/Sales multiple to this estimate gives us a $11.55 share price.

In its investor presentation, IDSY characterizes its market opportunity as serving up to 14.4 million units. The company is attacking this opportunity by increasing fleet penetration with existing customer, attracting new customers via a revamped sales strategy, pursuing international expansion while growing into adjacent verticals.. With the M2M and MRM applications gaining popularity and with IDSY already showing signs of markedly faster sales growth, we think the company will be monitoring 300,000 units in no time. The implied share price for that number of units would be as follows:

Using the Lowest Public Company price per active unit, we can estimate IDSY is worth $10.00 share price.

Currently, IDSY has a TEV/Sales multiple of 1.73x and $379.10 per active unit. Any way you slice it, IDSY shares look very cheap.

Risks:

Unsuccessful with ID Systems 2.0 intiatives and not reaching profitability in 2015. 

http://www.marketsandmarkets.com/PressReleases/machine-to-machine1.asp

Disclaimer: This does not constitute a recommendation to buy or sell this stock. We own shares in this company, and we may buy or sell shares at any time without updating the board.

Catalyst