Active Control Technologies (ACT.V): Exploiting its Competitive Advantage?

Last week ACT announced that it was initiating a partner certification program for third-party applications providers. The intent of this program is to federate its extreme environment Wi-Fi network to third-parties in an effort to offer mine operators a level of functional extensibility that does not yet exist. The objective is to quickly and cost effectively leverage excess backhaul capacity to become a highly reliable, self-healing data backbone for maintenance, monitoring, process control, and mine automation applications.

As commodity prices continue to decline, improved production efficiencies could mean the difference between sustained production and a costly mine shutdown at some operations. Management at ACT hopes to leverage this reality.

At highly regulated mine operations, maintenance is an issue. If equipment breaks down, some operations will often shut down for as long as the equipment is non-operational. Real-time monitoring of preventative maintenance, and of maintenance engineers could dramatically improve operations. By some estimates, there could be up to a 20% production improvement in some mines by solving this issue. At large production facilities, a 3% to 5% improvement could have dramatic results on the financial performance of mine operations.

The Company hopes that its extension beyond emergency communications and tracking (as defined by the MINER Act) becomes a pronounced competitive differentiator as mine operators begin to select vendors later this year according to the legislated timelimes. The currently certified ActiveMine network offers significant data capacity advantages over other certified systems, and may be the only system to scale for add-on apps. The gross backhaul capacity of the ActiveMine data network is 54 Mbps with a throughput of 22 Mbps. Combined, the data requirements of voice and tracking applications leave 3/4 of the throughput unused. As a result, there is relatively vast amounts of unused available capacity for sensor monitoring, advanced video monitoring, and remote control applications. With packet prioritization algorithms, the effective capacity is probably a few percentage points higher. Its nearest competitive solution offers a fraction of the capacity - just enough for voice and tracking. The node certification by MSHA contemplates upgrades, which allows management to scale the backhaul throughput without significant future certification delays. Management plans to double throughput for future node upgrades.

To review, the Company has a backlog of approximately $6 million ready to deploy once the telephone devices have been certified by the Mine Safety & Health Administration (MSHA), and another $60 million in its gross sales pipeline. The factored pipeline could be worth between $15 million and $20 million right now. The promise of extensibility could increase closure probabilities on the current pipeline, which may imply an increase in the factored pipeline.

Depending on how terms are structured, the Company may be in a better position, with its new partner program, to increase recurring revenue streams. Based on its limited deployment experience to date, annual recurring revenue may represent between 20% and 25% of the deployed system cost for the life of a mine based on mine face movement and device replacement schedules. With properly negotiated contracts, ACT could benefit from higher future recurring revenue by charging access fees to the network, data fees, or a combination of both. It is unknown at this point whether ACT will charge for certification programs.

In of itself, the announcement could be discounted by investors waiting for final MSHA certification for the Wi-Fi phones. However, as a sales differentiator and potential recurring revenue engine, third-party certification could have longer term positive impact on margins, and it could help the Company compete for sales as coal mine operators select vendors. Clearly, the production monitoring and process control layer is highly appealing to mine operators that extract other commodities. We may finally see an increase in non-coal deployments as a result. If the Company executes reasonably well, it begins to head strategically in the direction of Ruggedcom (RCM.T), or Matrikon (MTK.T) both of which generate excess free cash flow.

The MSHA certification process has been excruciating. However, the Company has never compromised on data capacity, which presumably it could have to expedite certification. For those reasons it has the opportunity now to exploit unique competitive advantages in network capacity via third-party applications.

Disclosure: I currently own shares of ACT. I currently do not own shares of RCM or MTK.

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