Oct 2021

In Australian dollars

• Share price - $0.29
• Market cap - $21.4M
• Cash - $4.4M
• Shares outstanding – 75M

Company overview

BCC designs, develops, manufactures, and distributes satellite communication equipment. The company operates all around the world. BCC sells their equipment through retailers and distributors. Company partners up with large satellite service providers – Iridium, Inmarsat, Thuraya. Partnership here means being a producer of certain satcomm equipment. This means historically company mostly was in a B2B operation. Until recently that was.

Opportunity

At the beginning of 2020 BCC released a new product – ZOLEO. ZOLEO is a satellite communicator device that helps you to send messages from/to anywhere in the world using an app on your phone. ZOLEO is a B2C product and is a “company maker” as the CEO referred to it.

There are two sources of revenue for BCC – equipment sales and airtime (a monthly subscription for being able to use the device).

Potential airtime revenue from ZOLEO product is the major driver of this investment thesis. There is a 3-tier offering for airtime - $32, $55, and $80 – similar to different phone plans.

BCC owns all IP for its products, however, ZOLEO was released through what they call “joint venture (JV)” with Roadpost – a large and experienced distributor. Airtime revenue is split between them depending on territory in which device is sold (BCC/Roadpost):

1)  North America – 15/85
2)  Australia and New Zealand – 85/15
3)  Rest of the world – 50/50

The device operates on Iridium network.

Despite the fact that ZOLEO is a new product to the market 22,000 units were already sold. This is right through COVID. To put this into perspective, the most successful product to date, Iridium Go, took 6 years to sell 50,000 units. BCC is still signing on one large retailer after another in both North America and Australia.

ZOLEO product won a multitude of prestigious awards in “Outdoor lifestyle” communities already. Before ZOLEO came along the market basically had no other choice but Garmin InReach. Now people have a cheaper option with reliable service.

Financials and valuation

The company just did a capital raise recently and paid off expensive debt. They’ve been cashflow positive past 5 quarters (it is not unlikely though that they could lose a bit of money in the next few quarters as they are trying to ramp up ZOLEO sales).

The company is trading one times revenue (~$20M) and is roughly breaking even. It is not too crazy to assume that in a few years we will have 100,000 ZOLEO units running around the globe. Let’s say the average price for airtime is $50/month, which is $600/year. Sales distribution heavily depends on geography, and North America has been the major driver of ZOLEO purchases so far. But I would assume the Australian market is going to catch up soon. Let’s say 60% goes to JV partner (more devices end up in NA) – 40% left. Let’s say we lost half of that due to customers canceling or pausing the service. Apply conservative GM of 60% to what’s left. Final equation: 100,000 * $600 * 0.4 * 0.5 * 0.6 = $7.2M. Not bad for a $20M market cap.

A lot of these assumptions could (and will) be wrong but even conservative estimations, under which we assign zero value to equipment sales and to the core business which has been growing at a healthy rate before COVID, look very promising.

On top of that, Iridium spent over 5 billion dollars over the last few years on upgrading their satellites and BCC was chosen as one of the few partners to develop new high-speed (Iridium Certus initiative) products for them. That I believe will be rolled out in FY2022.

Things I don’t like

CEO pays himself a lot of money -$400k+ - plus performance-related bonuses. He owns less than 4% of the company. Not really an owner mindset. However, he does seem to be an instrumental part of the company. He joined BCC in 2003 after leaving Iridium and became managing director in 2008. I listened to a few interviews with Michael and I liked how he presents himself and the company.

Carl Hung who used to be a director just left the company recently. Carl runs Season Group which is a major contract manufacturer for BCC. Maybe I am just too suspicious, but I thought it is weird to leave the company after supposedly its life-changing product launch. Carl does remain a significant shareholder owning 10% of the company.

Company capitalizes large amounts of development costs to make EBITDA look higher than it is.

Conclusion

A lot of unknowns of how the future unfolds, but the downside is somewhat well protected – I don’t think core business will drop off suddenly. So, in the worst-case scenario of not selling ZOLEO at all, we would still have a cashflow positive $20M/year revenue company with a market cap of $20M and $4.4M in cash. On the flip side though, should the company even remotely seize the opportunity presented, we’d be in a good place.