Sarantel boss Wither expects revenue will get back on track in H2

Sarantel Group (LON:SLG) chief executive David Wither expects revenues to get back on track in the second half of the year.

This morning the shares fell after the group revealed that product sales have been slower than forecast in the first half of the financial year.

Wither stressed that the delays were not related to Sarantel’s technology, and the underlying trends in the business are positive.

The specialist technology group put the slower sales performance down to unexpected internal technical development issues experienced by two major customers. But the company said it is confident that performance over the remainder of the financial year will improve.

“Because we are still a relatively small company, from a revenue standpoint, we have a couple of large customers that are quite significant in terms of the contribution to our revenues.”

“We got kind of a double-whammy here. There were two unrelated issues, neither relating to Sarantel’s technology, but the end result for us is the same. Our customers aren’t selling their products.”

Sarantel produces tiny but incredibly potent antennas used in GPS devices. Its specialist antenna - a copper coated, centimetre-high capsule - negates the effect of the human body which absorbs radiation and distorts the signal.

The high-performance antennas are superior, but understandably more expensive, than the ‘run-of-the-mill’ components used in most GPS devices. Importantly they can offer device manufacturers greater accuracy, and therefore broader applications.

The hold-ups that precipitated today’s announcement are understood to be the result of two separate and unrelated technical glitches, relating to other aspects of the respective manufacturer's development process - not problems with the Sarantel tech itself.

One of these customers is from the consumer side of Sarantel’s business.

Wither explained that the customer recently launched a new version of its lead product and shortly after it was rolled out a technical fault was identified. 

He said that Sarantel had shipped ‘a fair bit’ to the customer in September and more orders were expected to follow. 

Subsequently it stopped production while this issue was resolved.

“So we find ourselves five months into the fiscal year with no orders from one of our largest customers, obviously that is a big miss,” he said.

“They’ve told us that they’ve sorted these issues out and we’re expecting an order any day, for delivery in April.”

Wither adds: “Based on years worth of trading history with these guys, and their commitment to our technology, we are confident in what they are saying to us.”

“So I think we’re going to see that business come back.”

“The future is always uncertain, but with this one we’re as certain as you can be.”

The other hold-up is with a customer in the defence technology area. Wither notes that the customer has quickly become an important source of business. It co-funded the development of a high-end, dual-frequency military GPS antenna.

Wither emphasised that the customer is a major player in its target market, "the world leader from a market share standpoint".

“This is our first opportunity to break into the high ASP - average selling price - military market, and we’re displacing some incumbents who have been in this market for a long time. So this is actually a really good opportunity for us,” he added.

Wither said that the customer had taken a little longer to get the approval for the product than Sarantel had anticipated and then it also ran into a completely different technical problem.

“The good news is they placed an order this week, it is a significant blanket order,” Wither went on.

“So we have three-months of production orders, and they usually order on a quarterly basis, so it looks like that programme finally got restarted. And we expect shipments to begin in April.”

Should the revenues catch up in the second half, as Wither is expecting, then he reckons the group will be near breakeven in the second half, on a monthly basis.

When asked about Sarantel’s funding position Wither said: “Right now I don’t think we have a problem.”

Although he did acknowledge that this kind of set-back will have eroded some of the cash-buffer that was provided by December’s placing.

Wither notes that as revenue ‘shifted-to-the-right’ the group has eaten into the buffer, but as revenues get back to expected levels Sarantel’s cash burn will reduce significantly. 

“We haven’t lost those top customers, we think they’re coming back in the second half of the fiscal year. But if you look just one level below and there’s this really positive trend happening in our business.”

Wither added: “The problem is when you are a small company like we are, these kind of setbacks are sort of inevitable, it can happen from time to time.”

“It doesn’t mean that the trends in the business are bad, or the technology isn’t relevant. In our case, I think the trend is improving and our technology it becoming more relevant.”

The Sarantel boss explained that even if you strip out the group’s top few clients, that admittedly give the firm most of its revenue, it has a long list of smaller customers. Here the overall trend is positive and he is seeing a broad base of growth.

He said: “If you look at everybody else our sales are actually up about 60 percent.

“The trends in the business look positive. Over the past two years we have done a lot of work on technology, on our sales and distribution channels, we are really working on getting our technology in the hands of more customers.

“It really looks like it's finally starting to happen because in the last two years we’ve put our technology in the hands of 800 new customers. Within this customer base I am sure we are going to see the next big customer for Sarantel.”

“There are a lot of different applications and a lot of different markets we’re involved with.”

By 14:30 am Sarantel shares were down 0.7 pence, or 28.9 percent, as they changed hands at 1.725 pence a share.

Clearly the market has taken the news badly, though HB Markets analyst Julian Tolley reckons this is a knee-jerk reaction

In a note to clients Tolley said: “While it is tempting to knee-jerk react, the company does go on to say that it expects sales in H2 to recover. Indeed one customer has already placed a milestone production order with them while shipments to the other expected to start in April. 

“The good news is that underlying orders from other customers will ensure the group meets revenue expectations, despite the initial hit from 2 major customers. So this bodes rather well for the momentum into the second half and beyond. 

“We maintain the speculative buy and continue to note the antenna’s excellent performance which with out-sourced manufacturing now in place suggesting volume orders will continue to build.”