Next-gen 9-1-1: A multi-billion dollar microcap opportunity
By Jerram Lindsay, Analyst, Spheria Global Microcap Fund
The 9-1-1 service in the United States has been active since 1967, when the President’s Commission on Law Enforcement and Administration of Justice recommended the creation of a single number that could be used nationwide for reporting emergencies.
A lot has changed since the 1967, yet the evolution of the 9-1-1 service has failed to keep pace with the technological advancements of the devices most of us would use to report an emergency.
Under the existing 9-1-1 services, the public can only contact emergency services via voice calls, and in some rare circumstances, text messages. Only minimal data is transmitted with these calls, such as caller and location identification, and only when available.
Next-generation 9-1-1 (NG911) will enable the public to contact emergency services via the traditional methods of voice and text, as well as send images, video, and precise location data.
It will allow the reporting public to provide live information to the emergency services personnel responding to the call-out, and enable interoperability between different jurisdictions 911 systems.
Personal safety devices such as car collision detection systems, medical devices, and other various types of sensors will also be able to link in to NG911 systems, drastically improving the efficiency and effectiveness of first responders.
The investment opportunity
Comtech Telecommunications (NASDAQ: CMTL) is a US-based communications technology company that the Spheria team has been watching for the past couple of years, and added to the Spheria Global Microcap Fund portfolio in early 2021.
It’s traditionally been known as a hardware-centric company, with expertise in satellite ground station technology, but it has been involved in the deployment of 911 services for almost 2 decades, with customers in the US, Canada, Australia and New Zealand.
It has spent the last few years building out its NG911 product and service portfolio – an opportunity we believe is being overlooked by the market.
The US is in the process of a multi-year upgrade cycle to NG911, with varying degrees of progress nationwide. Some states have not yet begun planning, some have outlined a plan and are in the process of selecting and implementing a solution, while others have completed the initial transition to NG911.
The latest available data shows that by 2020, 33 states had adopted a state-wide NG911 plan, while only 11 states reported that their Public Safety Access Points (PSAPs) were fully capable of processing and interpreting NG911 information.
To provide some context as to the size of this market opportunity in the US, the Implementation Coordination Office submitted a report to Congress in 2018, estimating the cost of deploying NG911 to be between US$9.5b and US$12.7b over a 10-year implementation period, followed by an additional US$13.5b to US$16b for operations, maintenance and equipment refreshes over the 10-year period following implementation.
This is not only a domestic opportunity either. In June 2021, the Canadian Radio-Television and Telecommunications Commission (CRTC) directed all PSAPs to have successfully transitioned to NG911 by March 2024, at which point all 911 network components that do not form part of NG911 networks will be decommissioned.
Comtech has so far won six state-wide contracts for the states of Washington, South Carolina, Massachusetts, Ohio, Arizona and Pennsylvania. It has also won a smattering of contracts from direct end users and municipalities, such as the Toronto Police Service, the City of Edmonton, Los Angeles County, and the Northern Illinois Next Generation Alliance Consortium.
At the end of 2020, it was estimated that Comtech had a 26.2% market share among NG911 primary contract holders in the US.
Verizon (the second-largest wireless carrier in the US) also count on Comtech to handle their 911 call and text routing services, which accounts for approximately 30% of the country’s 911 volume.
These contracts tend to have long sales cycles given the bureaucratic processes and hoops that must be jumped through to secure funding. However, once a contract is secured, the revenue is very sticky as the system becomes heavily entrenched for the lifecycle of the technology, and switching systems is an incredibly costly and arduous process.
There is also plenty of potential in these contracts to upsell additional products and services.
Because Comtech is both an end-to-end system integrator, as well as the primary service provider for their NG911 deployments, they are able to earn upfront revenue, as well as on-going service revenue for the life of the contract, which tend to be very long-term in nature.
Comtech trades on 12.1x FY21 EBIT, has a 20-year historic free cash flow conversion of 106% and ROIC of 21%, and is still sitting well below its pre-COVID-19 levels.
A great price to pay for a growing business that’s providing market-leading solutions to power a critical service.