Route1 (ROI.V) Hits a Key Milestone.

Ealier today, Route1 announced that it has completed the deployment of the Defense Identity Management Network, (DEFIMNET) for the U.S. Department of Homeland Security. The total value of this platform is approximately $2 million. More importantly, this is a launch point to deploy TruOffice subscriptions.

In Jaunary, its exclusive government reseller partner, Qwest (Q.NYSE) Government Services inc, commited to deliver 30,000 Mobikeys and related TruOffice subscriptions during 2009. The total expected value of those subscriptions is expected to reach $8 million in year 1 and $5 million annually once the roll-out is completed. To put this into perspective, we estimate that to date, Route1 has deployed somewhere in the range of 4000 to 6000 subscriptions under various pricing models. The Qwest commitment is approximately 8x total historical deployments. Unlike in the past, the pricing for these subsciptions is set, making future cash flows more predictable than in the past, so shareholders should expect fewer downside surprises. With guaranteed free hosting by Quest Communications, the gross margins on the TruOffice subscriptions may reach over 90%, which is impressive.

Expect the Company to finally become break-even shortly, and to begin to generate free cash flow by 2010 based on reaching this important milestone (right on schedule). It is unlikely that Qwest will stop selling Mobikeys and TruOffice subscriptions to government agencies, so investors should expect the level of subscriptions to grow beyond 30,000 over the next several quarters, adding to free cash flow potential.

The market conditions appear favorable for more U.S. government agency subscriptions. The new U.S. administration has a stronger bias towards "green" initiatives, and reduced energy consumption. The security afforded by the DEFIMNET platform combined with Mobikeys and TruOffice subscriptions allows U.S. Federal Agencies of all levels of data security access to more easily and cost-effectively tele-commute. DEFIMNET/TruOffice aligns with President Obama's stated Agenda (which should reflect budget prioritization) in several areas including:
  • Technology:
  • "Bring Government into the 21st Century"
  • "Modernize Public Safety Networks"
  • Homeland Security:
  • "Protect Our Information Networks"
  • Energy and Environment:
  • "Reduce our Greenhouse Gas Emissions 80 Percent by 2050"

The stock should benefit from today's announcement. Is it a good entry point for investors? First of all, with approximately 400 million shares, there are a LOT of shares outstanding for a Company at this stage of development. The stock is highly liquid on a share basis, although the daily value traded is modest. It is unlikely now that the company will return to the market to raise more equity, so there is little chance that that the fully diluted share count will increase in the short-term. However, the capital structure could be a value impediment. Secondly, as the Company scales and becomes profitable, shareholders could see its market valuation align to similar recurring revenue technology companies that have reported one or two consecutive EBITDA positive quarters. Many of those Companies have experienced significant share price increases since March, and appear to be trading in the $30 million to $50 million range measured in terms of market cap. As ROI progresses, the market cap may reach similar levels once it begins to report positive earnings, which on a share basis, implies upside from current levels. However, the excessive shares outstanding creates inherent volatility. At current prices, a half a penny swing in the shareprice could mean up to a 10% swing in valuation.

I do not own shares of ROI.V or Q.

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