Peter Strom, CEO of March Networks. (Darren Brown, OBJ)

March Networks CEO says market doesn't understand his strategy

Video surveillance systems maker March Networks has had a tough time lately, despite general analyst sentiment that the company appears to be doing the right things. The company's stock has plummeted drastically from its 52-week high of $15 in September, and is currently sitting at around the $5 mark after nine months of flatness or downward movement.

The market has not taken kindly to the drop-off of business at March's largest customer, Wal-Mart, since the retailing giant announced it would start shopping around for other security vendors. But March's recent acquisitions, new product lines and new customer wins could signal the beginning of a turnaround for the company, experts maintain.

The company's view: March CEO Peter Strom contends that the company has done a solid job of diversifying its revenue base beyond Wal-Mart, having added more than 16 new customers over the past fiscal year, each representing more than $1 million in revenue.

While Wal-Mart continues to be March's largest customer, Mr. Strom noted that non-Wal-Mart revenue grew by 37 per cent in fiscal 2008, and added investors are sometimes misinformed about his company.

"There's a misunderstanding of the whole Wal-Mart situation that's been the focus of a lot of retail investors and analysts. People thought of us as strictly a Wal-Mart supplier, and that their business was what we were banking on, but that's not the case at all," he explained. "Rather, Wal-Mart's business was growing so quickly that it was overshadowing the diversification for the company ... we're actually diversifying extremely quickly and at a healthy clip."

He pointed out that March has roughly 400 banks on its client list, including bigwigs such as Wachovia, HSBC and RBC, as well as large retailers such as Boots and Giant Tiger.

With the acquisition of Italian rival CIEFFE, March has also scooped up two large clients in the Middle East in the past two weeks, including an initial 400-camera order from the Al Ain International Airport in the United Arab Emirates.

Mr. Strom said the division's broad footprint in emerging markets such as the UAE, India and China is great for the company's new Internet protocol (IP)-based camera business, which represents less than five per cent of total industry revenues but looks set to grow strongly in these new spaces.

"We're looking at new verticals such as hotels and airports that we've never addressed before, and (the all-IP market) is growing in excess of 40 per cent annually," he said.

Meanwhile, the company's older DVR market is far from dead, Mr. Strom said, with roughly $3 billion in sales and growth of eight to 10 per cent.

"We're making good long-term investments with a view of being the top player, and over the past five years we've seen growth twice the market rates out there, which indicates the strength of our management team," he added. "There's no indication we couldn't become global leader in our space."

The analysts say: March Networks might say it's making investments in its long-term future, but its spending habits and inability to break even despite raking in almost $100 million in revenues last year are still a cause for analyst concern, said Duncan Stewart of Duncan Stewart Asset Management.

"The company is not badly run, and in fact it's well-run; I've spoken with customers who love March products, but I don't know why it isn't doing better, and it seems, neither can Bay Street. There's no clear consensus on what the company's doing wrong and what it should be doing instead, so we're scratching our heads because they seem like smart guys with happy customers and good products," said Mr. Stewart, who doesn't have a target price for March as a buy-side analyst.

"But we're really expecting to see the company getting its costs under control, because ... they're taking spending up to support growth, but the growth isn't materializing rapidly enough."

Mr. Stewart said the company's enterprise value of $20 million is only a little over a quarter of its total sales, whereas comparable company NICE Systems of Israel has a market capitalization of $2 billion on sales of $500 million, making March "obviously very cheap" – as well as a prime takeover target.

For now, the outlook is fairly neutral for March, according to Canaccord Adams analyst Dushan Batrovic, who has a 'hold' rating on the stock and a target price of $5 while he waits to see how March will do in integrating CIEFFE into its business while juggling its other divisions.

"With CIEFFE, it's still pretty early and it's tough to say what progress has been made, although it's an acquisition that makes sense strategically, with nice complementary aspects," Mr. Batrovic said. "However, the stock has been languishing since Wal-Mart fell off a cliff, and it's been a bumpy road for the last 16 to 20 months, and none of March's customers represent over 10 per cent of revenues, so it's been a tough story for almost two years now.

"With Wal-Mart out of the way, a new acquisition and a new suite of products, they seem to be doing the right things, but is the turnaround happening right now? I'm still reluctant to say (the turnaround's) complete."

However, the recent contract wins through CIEFFE look positive for March, he said, even if they're not large deals.

"It's nice when you close an acquisition to be able to sign some deals on the back of that to validate the acquisition. I don't know if they're that material financially but it'll help from the sentiment standpoint," said Mr. Batrovic.