Apr 23, 2013

M2M service provider metrics

This note is part of my occasional series dealing with business metrics for the M2M sector. On this occasion I examine a few operational benchmarks for an M2M service provider. In this case, I have drawn on data for Numerex in the US which is one of a few publicly quoted entities in the M2M market.

Numerex was established in 1992 and has focused on wireless connectivity since 1999 after divesting its wire line business to BT. The company recently passed the 2m connections milestone during Q1-2013. While this connections base is small in relation to the M2M business units of the large mobile operators (many of which fall in roughly the 5–10m range) it serves as a useful reference point for business planning, performance benchmarking and investor due diligence insights. These are highly topical in the present climate where companies are expanding their M2M operations; this earlier post on building a billion dollar M2M business, for example, has been the most read item on this site in recent months.

The main driver of revenues for an M2M service provider is the base of connected devices and the revenue from each device as shown in the Chart #1 below (I use the ARPU label for convenience of notation). Numerex’s base has grown consistently over the past few years, at a compound annual rate of 27% which is broadly in line with industry analyst expectations for the overall market. At the same time, ARPU has declined at an annual rate of 9%. This decline is tolerable since the faster pace of growth in the base of connections has resulted in rising top-line revenues.

Numerex’s business model includes a hardware component which also contributes to top-line revenues as shown in Chart #2. Interestingly, the company generates a contribution from the sale of devices.

I have made several assumptions from the published Numerex data to estimate the number of new connections in each quarter. This is then used to quantify the average revenue per device and the associated gross margin. This analysis indicates that Numerex has found a way to bring device costs down over time (hence lowering barriers to adoption) while still generating a contribution margin over most of the recent quarters of operation.



Using the same figures I derived for new connection sales, I also looked at a couple of operating cost trends. Chart #3 deals with two cost categories: sales and marketing; and other costs that encompass administration, engineering, bad debt and depreciation.

Sales and marketing per new connection was initially volatile but appears to have stabilized at around $20 per new connected device. This suggests that Numerex was fine tuning its business model around the 2010 period. The stabilization of operations combined with improving economies of scale also shows up in ‘platform running costs’ which are now trending at about $10 per connected device per year. These data points are useful for connection life-time value analysis and business model optimization as I have written about here.

I will note that the calculation of sales and marketing expenditure per connected device is an artificial one. This is because the impact of sales and marketing spend in a given period will show up in contract wins at some later point in time. To explore this point, Chart #4 shows the total spend on sales and marketing for each given quarter. It also shows the number of new connections for the period that occurs two quarters later. This visual correlation suggests that there is a 6 month lag in seeing the benefits sales and marketing expenditures. The coming quarters will be interesting to study in light of the fact that Numerex has recently trimmed its sales and marketing expenditure.

Overall, investors seem to appreciate Numerex's business given that its stock has handsomely outperformed the NASDAQ and S&P500 since 2009.

While the data points above are specific to Numerex and its business model, they do hold some relevance to the M2M business units of other organizations. Specialist M2M service providers with a comparable base of connections can assess whether their operations have been optimized and are repeatable to the extent that they enhance marketing effectiveness, support costs and business profitability.

The business dynamic is slightly different for mobile operator business units which benefit from factors such as more visible brands as well as existing enterprise customer relationships with attendant cross-selling opportunities. The challenge is to leverage these strengths into cost effective sales without 'overpaying' in marketing and sales costs. At the same time, the operating costs of supporting the installed base need to feed the benefits of scale economies to the bottom line and also into business unit value.


2 comments:

  1. 24 Sep 2021 update

    Discussion of the M2M business model

    Topic: KORE / Cerberus Telecom Acquisition Corp. (CTAC) Public Investor Day

    https://gatewayir.zoom.us/webinar/register/WN_O0_uZIi7QbmHbCdJEE-6tQ

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  2. 14 Apr 2022 update

    1NCE upon a time in the West – how 1NCE brought order to the global IoT game

    Rook tells how low-power IoT – the traditional IoT stuff, separate of the new-fangled 5G stuff, which the traditional cellular market has struggled with for so long; “fitted in light bulbs, embedded in parking lots” – has also been high-pressure IoT, effectively, until now – until 1NCE rode into town. “Customers want to know it works, and never needs attention. They worry about truck-roll; visit once-more than planned, and the business case fails.”

    The point is, Rook reckons, low-power IoT IoT should be fit-and-forget, anywhere in the world, for the whole of its prescribed lifetime. “Which is what we offer – that you don’t have to worry about it, ever,” he says. Yes, but hang on; the prepaid thing was the ‘game-changer’; no question. 1NCE was the first to flat-rate cellular IoT, at $10 for 10 years (10-for-10), nominally. Everyone else has followed suit; the 1NCE pricing has opened up this New West, effectively.

    Which means the piece we, at Enterprise IoT Insights, struggle with is how 1NCE is different – from the likes of Deutsche Telekom, the Cologne firm’s majority shareholder, and Vodafone, the biggest telco-mover on NB-IoT, as well as from MVNO-style setups like Belgium-based BICS or UK-based Arkessa. Tell us that tale, if you please. “But you have to read the fine print,” responds Rook. Right, and how so?

    He gets into the weeds about the minimum revenue commitment (MRC) being offered, variously, which on the telco-side is buried in the small print to cover legacy IT costs. Rook, formerly with Vodafone in the UK and T-Mobile in the US, explains: “One of the issues for operators is the pure IT cost to run a connection inside an operator IT system is about $3 a year, just to have that connection live. So for them, actually, running at 10-for-10 is almost impossible.”

    He goes on: “And we don’t go just to $10 for 10 years, but to a dollar a year, or even eight cents per month. And the fine print is those other offers, advertised that way, as copying our model, says there’s an MRC of 20 or 30 cents, or a big setup fee. There is no setup with us; our model is so disruptive because our costs are so much lower.” He reverses, again, and splits the cost structure into two elements: network minutes and network systems.

    https://enterpriseiotinsights.com/20220414/internet-of-things/1nce-upon-a-time-in-the-west-how-a-german-startup-brought-order-to-the-global-iot-game

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