Sonim Technologies: Rugged Phones, Not A Solid Stock (Yet)

Sonim Technologies (SONM) has seen a disappointing public offering, with shares being priced and trading about 20% below the midpoint of the preliminary offer price as investors apparently worry about lacklustre profitability on what is a large and rapidly growing sales base.

The filing documents reveal little information on the actual momentum of the business at this point in time and its margins potential. Therefore, I am not initiating a position at current levels, as I am looking to learn more about the business before making up my mind.

The Business

Sonim is a provider of ultra-rugged mobile phones and accessories specifically designed for task workers in work environments. The company sells these phones and accessories through AT&T (T), Sprint (S) and Verizon (VZ) on its home turf, as well as through large carriers in Canada.

Solutions are not just used for communication, but for productivity and safety as well, certainly with workers operating remotely and disparate. Typical work applicants include law enforcement, fire workers, oil & gas workers, logistics workers and construction workers, among others). The company believes that some 38 million workers in the US and Canada are labelled as task workers which could benefit from the solutions of Sonim, as they require durable and enhanced communication capabilities.

Features of the phones of Sonim include puncture shock, impact resistance, being water-proof and dust-proof, dual-shift battery life, extra audio, extreme temperatures and chemical resistance, among others.

Sonim has been around for nearly two decades, as it has taken quite some time before the solutions and operations of the business became really material. The company shipped its first phones back in 2006 (mostly Europe) and started its North American operations in 2012.

The company sold 300,000 units last year, with roughly 40% of sales tied to AT&T and 20% to Verizon. It goes without saying that this creates quite some dependency risks, of course, as large power of these players versus this small company mean that margins might be limited in the long run.

IPO Process And Valuation

Sonim initially aimed to sell 3.6 million shares in a range between $13 and $15 per share, as demand for the offering has been very soft. Shares were eventually sold at $11 per share and traded largely unchanged at the offer price. This means that some $40 million in gross proceeds are seen in connection to the offering.

With 19.5 million shares outstanding, which currently trade at $11 per share, the market value of Sonim amounts to just $215 million. Operating with a flattish net cash position ahead of the IPO, I peg the operating asset valuation at around $180 million.

Sonim has seen rapid growth and has quite a large revenue base to ''justify'' its valuation. The company generated $59 million in sales in 2017, on which it reported an operating loss of $7 million. Sales more than doubled to $136 million last year, as the company turned an operating profit of $5 million. Rapid growth is driven by the introduction of multiple phones, as well as acceptance of all major carriers in the US and Canada.

Unfortunately, I have not seen the quarterly breakdown of the sales for 2018, as I cannot get a feel for the pace of revenue growth progressing throughout 2018. While revenues more than doubled in 2018, preliminary first-quarter results reveal quite a slowdown in the pace of sales growth. First-quarter sales are seen at $25-27 million, suggesting 43% growth on an annual basis at the midpoint of the guidance. Net losses are seen around $6 million, about a million more than the same quarter last year.

Without the quarterly results being revealed, I do not have a real feel for the growth pace of the business. Assuming 20% growth this year, as a conservative guidance I see revenues at $160-170 million, which implies that the company's operations are valued at around 1.1 times sales. Operating profits are very limited, however, resulting in high valuation multiples based on earnings. This might be the reason for the disappointing pricing process.

Looks Interesting, Concerns Overshadow For Now

The reality is that the company has seen solid operating momentum in terms of sales, yet despite sales more than doubling last year, operating margins remain dismal. The question is what the current pace of growth looks like and what sustainable margins can look like.

Other concerns include the fact that the company has typically reported large losses in the past, banks on a single manufacturing facility in Shenzhen, relies heavily on a few large customers, operates in a competitive marketplace and undergoes lengthy customisation processes. Risks for the company include rapid changes in the marketplace and concerns about the relationship between the US and China.

While the current sales multiple looks modest, it is the S1-filing which does not bring sufficient information to gauge how the momentum is going and how operating margins are expected to develop this year. Given this uncertainty, I am not attracted to initiate a position at current levels, in current times. For now, I would like to learn more about the evolution of quarterly results before I make up my mind.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.