Redline Communications Group Inc. (RDL-TSX)
July 9, 2012 Issue
The Most Powerful Name In Corporate News and Information
Redline Communications Inc. is Providing Oil & Gas Companies, Telecommunications Providers, Government and Military Customers with the Infrastructure to Create their own Private Wireless Platform for Machine-to-Machine Communications necessary in Remote, Inhospitable or Difficult Environments Where Nothing Else Works
Redline Communications Inc.
(Redline) specializes in broadband wireless communications that enable its
customers to support critical applications in the most remote, inhospitable
or difficult environments where nothing else works. Redline’s proven
solutions are used by major players in the oil and gas industry, top-tier
telecommunications providers, government agencies and the military for a
variety of applications, including machine-to-machine communications (M2M),
business access, backhaul, video surveillance, data acquisition and private
networking. Redline is a subsidiary of its Canadian-based holding companies
Redline Communications Group Inc. (RCG) and Redline Communications, Inc. (RCI).
A director of Redline
Communications Group Inc. since the closing days of 2008, Eric Melka became
the company’s acting CEO in November 2009 and was appointed full-time CEO in
March 2010 to manage a turnaround and the launch of the newly refocused
Redline. Recognizing Redline’s success serving industrial, public safety and
military verticals, Eric directed the company to perfect wireless broadband
solutions to meet the most sensitive and mission critical requirements of
businesses and governments. With Eric at the helm, Redline achieved
profitability for the first time. Eric continues to inspire innovation
through a customer-centric focus which today has made Redline recognized by
oil and gas producers, public safety agencies and militaries around the
world as the leading provider in industrial-grade wireless wide area
networking for where it’s needed most - where nothing else works.
Eric came from Telemedia, a major Canadian media company, where as president he managed several portfolio companies and directed their business strategies. Eric gained more than 20 years of experience from hands-on management in business strategy, business development and sales management in the technology sector during which he developed relationships with Netscape, HP, Microsoft and Salesforce.com among other major tech brands. Throughout his career Eric has invested in, consulted with and advised several companies, and has held several board positions at both public and private Canadian companies.
Interview conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – July 9, 2012
Mr. Melka: It was not so much the attraction as it was put forth in front of me. I was asked to join the board of Redline in very late 2008. The company had lost its way and I was asked to join the board to see if there was something that could be done. By mid-2009, it was apparent there needed to be a major change to this company. It had lost around $150 million and was not gaining any kind of momentum or attraction, even though in 2005 and 2006 it was well regarded as having great technology. In late 2009, a major shareholder whom I worked for at a company called Telemedia, asked me to go in and clean house a bit and look for a new management team. I terminated the existing management team and took on an interim role. My main responsibilities were to stabilize Redline and find a new management team. Then by February 2010 our crew started a turnaround plan. We put our 45 day plan in action, despite having to deal with issues related to the way the revenues were reported, the restatement of our revenues and a number of other less attractive things. It was difficult to find a CEO and management team given these conditions, so I decided to stay on as CEO and take a more active role in managing this turnaround. I emphasized that we needed to turn this company into something successful. Therefore, I was put into the role as opposed to being attracted to it but soon realized what an incredible opportunity we had.
Mr. Melka: Redline is an exciting communications innovator that allows companies to build private broadband wireless networks for communication and connectivity to any device. We focus much more on the M2M communications aspect. In other words, one device talking to another device as opposed to voice communications between people. M2M is the next wave of wireless communication and that is exciting because it is an unbelievably huge global opportunity for us. While there are 5 to 8 billion people who talk to each other across the world, there are 50 to 200 billion devices and these devices all need to communicate with each other. M2M is taking off in multiple industries, including energy, and in particular, the oil and gas industry. This is a particularly key market for us and one in which we’re having tremendous success as oil and gas companies deploy “digital oilfields” to increase production.
Mr. Melka: Our devices are essentially wireless radios, but they are not AM/FM radios – as I thought about radios when I first got into the business. These are basically transport devices that allow machines to communicate wirelessly. We are in multiple different spectrums, so we can communicate in the free spectrum or in paid spectrum. We typically sell these devices to companies who use them to run their private networks. We do not run the networks. Our customers want their own networks and we have the infrastructure necessary to create their private wireless platform – for machine-to-machine communications.
Mr. Melka: We do a combination. We have a hardware platform and our radios are software defined, which means that the radio will do specifically what you need depending on your organization. If you are in the oil and gas industry – which we focus a great deal on – we have certain features and software functionality developed for the unique requirements of that industry. It is the same thing for the military. Two of our larger customers are the U.S. Marines and the U.S. Army. Obviously, in the military environment you need a very different type of radio in terms of security, connectivity, reliability and in terms of ease of deployment. Our hardware platform is rugged; the most rugged radio in the world. It is known to work in the arctic as well as the middle of the desert. It is incredibly reliable; we have the lowest failure rate of any other radio in the world. It is also software defined, which means that once it is installed, the user will never have to go back to upgrade it, or to add features or change the functionalities that they want the radio to do – it can all be done remotely via software. It becomes a future proof type of product, so that a company that does oil and gas exploration, for example, can focus on their job extracting oil from the ground, not running a wireless network. Therefore, they want a wireless broadband solution that is very easy to deploy and expand and that is reliable, rugged and flexible – these are the key differentiators of our products.
Mr. Melka: We call ourselves scalable because we work with a number of different channel partners. Typically, these are systems integrators that can reach these customers much more easily than a small company like ours. We are a company of less than 150 employees, but we do business in 100 countries and we have thousands of deployments, so obviously we do not do all of this ourselves. We rely on and work with a number of different channel partners, such as Alcatel-Lucent, Honeywell and Cisco. It’s companies like these that typically deploy our technology on behalf of large customers. We work closely with these and other channel partners. We train them and we do the selling with them as opposed to against them, so our business becomes scalable that way. These partners help us service customers, but most customers come to us directly because they already know about Redline because of the success we’ve already achieved for other companies in the same industry. For instance, if you were in the oil and gas industry and were interested in digital oil fields, you would already know of Redline because we have a huge footprint in this industry and because our solutions have been proven over and over by companies like Shell, which just deployed 2,000 of them in Oman. Our brand is also very well recognized by the U.S. military, which has made our product the most deployed COTS (Commercial Off The Shelf) radio in the history of the Department of Defense and it’s very well respected in the field of battle. Therefore, it becomes one of those things that when there is a need for our type of product, we get the call. When there isn’t an immediate need, we ensure that our partners, or ourselves, are at the right trade shows and conferences to meet the right influencers to ensure that our brand continues to expand its recognition.
Mr. Melka: One of the things we did with this turnaround was focus on a few things and do those fewer things very well. It’s important for us to make disciplined decisions, because we always have somebody contacting us from the hospitality business or from the banking business saying, “we have an application to connect all our ATMs throughout the Northern region that do not have broadband, so let us use your equipment.” It is difficult saying no to these opportunities, because our products obviously lend themselves to such applications. However, we’re not big enough to take on every ‘one off’ opportunity, so we decided to be very disciplined and to focus on a couple of key markets, which are energy (most notably oil and gas), the military and public safety. We will develop these markets before we jump into another one.
Mr. Melka: The turnaround was quite successful. We started with a loss of $150 million. I keep telling everybody that when we have to start paying taxes we will know we did a great job, because we will have made more than $150 million of profit. We are on our way to profitability. We reported a very positive year in 2011. We increased our revenue to around $58 million, our core product line grew by 35 percent year-over-year and our product gross margins, at over 60 percent, are the highest in the industry. This is because we moved to software-defined radios which use a standardized hardware configuration to reduce manufacturing costs but can be customized to customers’ requirements via software. The margins for these radios are in the high 60s and moving up. Our operating costs are relatively fixed so top-line growth strongly falls to the bottom line. All in all, we are well positioned and excited about our financial future.
Mr. Melka: Redline presents tremendous value for investors. Redline is uniquely positioned within its markets as a differentiated technology leader with a top-notch management team. We have very strong product margins, controlled operating costs, and a solid business model. Looking forward we see continued profitable growth, as our sales pipeline is stronger than ever. I am quite excited about our future.
During our turnaround, we maintained a very low public profile. Today, with the turnaround a success, we are a bit of an undiscovered gem. We’ve just started taking our story to the Street – investors have reacted positively and our first analyst coverage was recently launched by Byron Capital – with other analysts on deck to initiate also.
All that said, I could
not have done this without my team. We have a phenomenal team that has gone
against all odds in this turnaround. I have tremendous respect for their
abilities, so I want to give them the credit that they deserve.
Our customers want their own networks and we have the infrastructure necessary to create their private wireless platform for machine-to-machine communications. - Eric Melka
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