SPECIAL SITUATIONS: Telkonet Inc. (AMEX: TKO)
Many times it will take a company with disruptive technology longer and more money than investors anticipate. Sometimes so long, that they end up in Wall Street's discard pile, forgotten by the investment community. Sometimes these companies turn out to be bargains, as it often takes investors who have given up on their potential time to realize that the business has turned around. Such could be the case with Telkonet Inc., a developer of powerline communications (PLC) technology that enables broadband Internet access using a building's internal electrical wiring. After a string of disappointments, the company reported its strongest quarter in memory, as revenue for the second quarter ended June 30, 2007 more than tripled to $3.7 million compared to $1.2 million in the 2006 second quarter. Gross profit also rose by a similar amount.
The company provides several technologies targeted at the hospitality industry, but the one that caused the surge in second quarter revenue was the SmartEnergy product, which allows customers, such as large hotels, the ability to maximize their energy uses by using intelligent programmable thermostats to adjust and maintain a room's temperature. As a result, wasted energy from heating and cooling unoccupied rooms can be avoided as the SmartSytem Setback constantly varies each room's temperature, guaranteeing that desired temperature will be achieved for any guest within minutes upon return to their room. Lights, using sensors, are turned off when the room is not in use. Energy consumption is reduced by up to 30% with this system which is a huge value-added in today's volatile, high-priced energy market. Babson College recently selected SmartEnergy to manage the in-room energy consumption in one of its dormitories by eliminating wasted energy from heating and cooling unoccupied rooms.
Telkonet custom-designs and develops all of its products and services, an attractive feature that enables the company to offer unique solutions to customers based on their specific needs. TKO's robust technology focuses on delivering high-speed transmission of secure voice, video and data communications over electrical wiring that is found in-premise for any building. This is done through the company's trademarked Telkonet iWire System that taps into a building's existing internal electrical wiring to establish Internet connectivity throughout an entire building. Telkonet iWire System offers a cost-efficient, reliable solution for properties not wired with CAT-5 or for those properties where such wiring is too expensive to install. There are thousands of hotels and properties that can't afford the expense of installing expensive wiring throughout the property. Through TKO's technology, they can offer state-of-the-art communications without a large capital outlay.
The targeted market for Telkonet's products and services is vast and consists of the hospitality, multi-dwelling unit, multi-tenant unit, residential and small business markets. Well known customers including Choice Hotels International, Destination Hotels, Marcus Hotels & Resorts, Sandman Hotels, Inns & Suites, the U.S. Department of Defense, Trump apartment and condominium properties, all have deployed the company's leading-edge technology.
The acquisitions of EthoStream and Smart Systems International allowed the company to expand its product portfolio to further diversify itself from competitors who rely on outsourcing for product development. TKO recognized the importance of EthoStream's comprehensive management platform that is backed by a dedicated in-house customer and technical support team that has a customer base of over 1900 hotel and time-share properties. As a result, the company can offer a complete line of product offerings including wireless access points and bridges, Power-over-Ethernet devices, Ethernet switches, DSL equipment and digital video recorder equipment to a large audience. Property owners
using Telkonet's technology can remotely monitor and manage their high-speed Internet access system in real time to determine that their guests are receiving high quality, reliable service. The number of users on the Internet can be viewed in addition to monitoring the amount of bandwidth being consumed. Support calls can also be tracked by management to ensure employees are providing a quality customer experience, which is crucial to the viability for any company in the hospitality industry.
Other unique qualities found in the TKO system include E-Secure, an efficient, manageable digital video security solution that provides a new level of service for property security. Such a system has the capability to display and record from 1 to 16 cameras simultaneously, providing managers with rapid and easy access to their videos and recordings. With Internet use on the rise in today's high technological world, alternative wiring options that are high quality and cost-effective are a must in the residential market as well as the commercial segment. Recently Telkonet signed a deal with 1-800-905-GEEK to penetrate the small business and residential market to bring together their family of broadband networking and energy management products to such customers.
As a result of the company taking longer than anticipated to ramp revenue, the stock has been a disappointment, creating the opportunity for risk-oriented investors. Shares that fetched more than $5 in late October, currently trade for just $1.80, giving the company a valuation of just $120 million. Recently, it implemented a program to perform nearly all of its installations in-house, virtually eliminating the need for outside contractors, which should result in higher margins and meaningful cost savings. The company said last week that it expected profitability by year-end. It also said that its energy management business should grow over the coming quarters as both electric utilities and building owners seek additional ways to conserve energy. Finally, its federal government-related programs are now well underway and are accelerating and its hospitality business is winning important contracts. Since the company appears to be heading down the right path, long-overdue rewards could be heading for shareholders.
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