Troubled Israeli tech company Telit Communications (LSE: TCM) just cant catch a break. In August, it was thrown into crisis when its CEO,Oozi Cats was reported to bea fugitive who had fled the US back in the early 1990s after being indicted for fraud. Shares in the firm dived on the news and have since struggled to recover. Year-to-date the stock has lost 41%.
And today shares in Telit are falling once again after the company issued a profit warning and announced several key management changes.
All change
After the Cats saga, Telit has decided to shake up its management team. Interim CEOYosi Fait will now become the groups permanent leader and the former chairman of gambling group 888 Holdings, Richard Kilsby has been confirmed as the new non-executive chairman. Meanwhile, COO Yariv Dafna has been appointed as finance director.
Telits new management is committed to applying the highest standards of corporate governance and transparency across the group, according to Kilsby, which should come as a relief to investors as it now looks as if the company is trying to draw a line under its disastrous past.
Unfortunately, these positive board changes were accompaniedby a profit warning from Telit. The company has already lowered expectations this year, cutting guidance in September due to tougher than expected trading. Full-year revenue guidance was slashed to between $390m and $400m and earnings before interest, tax, depreciation and amortisationto $44m to $48m. These figures were significantlybelow the EBITDA figure of $54.4m reported for 2016.
Today the firm announced that it expects to report results for 2017 materially below this guidance thanks topressure on gross profit margins as it transitions from mature technologies.
Fallen angel
Over the past few years, Telit capturedinvestors imaginations as the companys exposure to the fast-growing internet of things market (IoT) gave it enormous growth potential. Indeed, only a few months ago, analysts were expecting the company to report bottom line growth of 68% thanks to higher demand for its products.
However, while some investors have been mesmerised by its explosive growth, analysts have expressed concern about the companys cash generation or lack of it.
For example, even though net income has risen from 4m in 2012 to 17m for 2016, over this period the company reported a net cash outflow of 18m. Debt and shareholder cash has filled the gap. Earlier this year, the firm raised 39m by way of a placing and since 2012 total debt has risen by a third.
This is why Im staying away from Telit. Even though the companys net income has multiplied over the past five years, the group has struggled to generate a positive free cash flow.
In business cash is king, and without cash, its only a matter of time before the company will have to raise new funds from investors. Overall, Telits new management might be committed to restoring the firms reputation, but until the group starts to generate cold hard cash, Im happy to avoid it.
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