I must admit that when I first ran into Route1, I was not too impressed with the story. It was early 2005 and a really expensive, clunky pseudo-notebook "dumb terminal" passed by my desk. Excitement was brewing on Bay Street because some banks were sniffing around the concept. I thought "wishful thinking, weak idea, dead company". A year later, I saw for the first time the much more elegant Mobikey concept, and although a bit rough around the edges, I could see some potential for virtual desktops. But it was a hard contrarian sell to a world of broadband connectivity, and the customer base remained pretty skinny. I thought "solid idea...too bad about the Company" and forgot about it. In the meantime, Management continued to convince investors that there was promise while burning through loads of cash and raising more equity capital at increasingly diluted share prices.
Three years, several million dollars in deep R&D, and a few hundred million shares later, the Company has found itself positioned at the nexus of three major themes of the Obama administration: digital infrastructure, the environment and energy policy, (more on these later). The promise of the now technically perfected Mobikey is starting the be fulfilled by no less than the U.S. Federal Government itself. With real orders.
I actually joined the Route1 fanclub last fall after one of its shareholders convinced me to take another look at the Company and its technology. Soon after, I became a proud Mobikey owner and an avid user (the Mobikey hangs on my keychain). Here is why I believe that Route1 is in a special Company-making spot:
> What it does: The technology allows employees of organizations to securely use applications and manipulate data remotely without any of it ever leaving the organization's server room (virtual or otherwise). With the Mobikey, employees can access and manipulate the data from any PC-based device in the world with an addressible IP connection without compromising the data. Unparalleled employee mobility combined with unparalleled data security.
Why does the U.S. Federal Government care?
> In 2004, the U.S Congress enacted an appropriations bill legislating that all Federal employees must be able to telecommute twice every two weeks. The objective of the legislation is to reduce the carbon footprint of the U.S. Government, and to improve employee morale in the Washington area where the average commuting time has grown to 49 minutes. Data security made implementing this legislation very difficult and, by the beginning of 2007, only a small portion of government employees ever telecommuted at all (4.2%), let alone with the frequency described by the law. The level of physical and network security made it prohibitively expensive to outfit and support any but a few telecommuters with the gear required to make a secure connection. The Mobikey solution reduces the setup and support costs to a fraction of what it would be otherwise. Not only that, with this technology the Government Services Administration (GSA) could soon encourage employees to use their own home computers to telecommute.
> The gas crisis of 2007 and 2008 added fuel (so to speak) to the legislation. Agencies in the Washington area were beginning to lose employees who were choosing to find alternative employment closer to home in the suburbs. In the fall of 2007, the Director of the GSA set a goal that by 2010, 50% of its employee base would telecommute. In 2007, only 10% of GSA employees commuted, and only 4.2% of all federal workers did. Although the recession has burst the fuel bubble for now, it is a stated policy by the Obama administration to reduce energy dependence on foreign sources without increasing domestic exploration in environmentally sensitive areas. With the amount of collaborative technology available, one can expect that telecommuting could be a cornerstone initiative for fuel conservation, and the Obama administration will want to lead by example. As many as 33% of all Americans could telecommute regularly, although only 7% (Lister, Harnish 2008) do so now.
Through its Government procurement partner, Qwest (Q-NYSE), Route1 has finally secured a major reference account with U.S Federal Agencies. Although the Company does not disclose its total number of deployments to date, I estimate that the first order of approximately 30,000 units through Qwest is probably close to 5 times larger than total current deployments. And this is to fulfill an order from one section within one Department in Washington which is ordering 95,000 devices over the next three years. There are already other Departments lining up as the emphasis in Washington moves towards those themes. Apparently, employees of some Departments in Washington are personally buying Mobikeys ahead of departmental purchases.
Is Route1 out of the woods? It is very close, and Management can see daylight. There is still some cash burn to go in 2009, with little left in the tank. However, there is a clear path to earnings likely in H2 2009. And I think that there is a greater than 50% chance of some surprise upside catalysts arising out of its Qwest relationship later in 2009. The capital structure of the Company has been weakened, and Management understands that it needs to be fixed before too long.
Management is scarred and toughened by its past challenges. It has had fits and starts in sales and marketing and has changed courses many times with limited success. In the end, the U.S. Government found Route1 through a Google search, not due to intrepid sales capabilities by Route1. However, going forward, the Company has designed a really solid recurring revenue stream model based on monthly subscriptions, and has leveraged its relationship with Qwest to maximize margins. Recurring gross margins could be as high as 90%.
The Company has been busy forming reseller relationships with others, and has had some success with other foreign governments. It is likely that Management will try to repeat the Qwest model within the European Union.
Underlying the Company's positive outlook is its unique technology. Notwithstanding the Mobikey form, the fundamentals of the technology are software driven. This opens up the possibilities for many new forms including mobile devices, home routers, and wireless routers. With Mobikey technology, bandwidth utilization could be made multiples more efficient. Content producers could truly control distribution. And, even more interesting, combined with server virtualization, Route1's desktop virtualization could help to revolutionize the efficiency and security of cloud computing. The underlying Mobikey and Mobinet software could be a very important technology as network infrastructure evolves. The early investors in this Company could find themselves rewarded for patience as the technology takes off over the next 3 to 5 years.
I do not own shares in Route1 nor do I receive compensation in any way from the Company, although I do own a Mobikey.