Business Segments and Services

In 2010, Unitek did $402mm in revenues.  $270mm was in Fulfillment and $132mm was in Engineering and Construction.

Fulfillment-Stable/Recurring/Mid-Single Digit Growth

The Fullfillment Segment serves the Satellite and Cable industry end markets.  The largest customer is DirecTV and work is performed under a master service agreement (MSA).  Under the MSA, work is generated by work-orders which are performed for a fixed fee under unit-based pricing.  Work orders include installation, upgrade and network management.  Fullfillment revenues are typically recurring in nature. Other services include warehouse/logistics, customer service compliance,and fleet management.  Unitek is one of the largest home service providers for DirectTV along with competitor MasTec (MTZ).  Unitek has a market share of approximately 15% of all DirecTV service calls, with MTZ about double the size.  Unitek has grown the business with DirecTV through market share gains over smaller service providers and growth in DirectTV subscribers.  Demand for Fulfillment services increase when the subscribers to DirecTV or Comcast increase in number, need repairs, want to upgrade services, move or disconnect their service.   DirecTV will be about 40% of 2011 revenue, and while this is high, the risk is mitigated by the fact that Fulfillment is a steady business with a large backlog.  Futhermore, Unitek just renewed a 4 year contract with DirecTV in October.  Fulfillment is also viewed as a mission critical service for home TV providers such as Comcast and DirecTV.  Switching service providers is not easy and risks customer service.  We believe the growth in this business is GDP plus 4-5 points.  The extra growth come from DTV's market growth, and taking market share away from smaller competitors in both satellite and cable.  Gross margins should stay at around 19-20%.

Engineering and Construction-Big Growth and Margin Upside 

In this segment Unitek provides network engineering, design, construction and project management for wireless, wireline and cable broadband industry.  Unitek can provide end-to-end wireless infrastructure services nationwide to the leading wireless communication service providers.  Unitek provides everything from simple maintenance of networks as well as emergency services for accidents or storm damage.  Unitek can provide routine replacement work to full network overhauls.  Unitek provides site acquisition services where they act as an intermediary between their customers and property owners and facilitate the wireless site preparation process from selection through construction. In order to build and expand networks.  Telecommunications companies require locations that have direct access to highways and roads to mount their antennae and equipment. They identify appropriate properties, negotiate the transactions and handle the administrative details facilitating the eventual construction or augmentation of a wireless communication equipment site.

End Markets

Unitek serves 5 distinct end markets:  Satellite, Cable, Wireline, and Wireless

Satellite-Steady and Growting.  Unitek's exposure to the satellite market primarily consists of its relationship with DirecTV.  Satellite TV subscribers have grown the last few years.  Growth Drivers include market share gains, increased DirecTV adds, a rebound in the economy, add on services that DirecTV offers including internet and HDTV.  Satellite providers such as DirecTV spend significant marketing in upgrading existing customers which rely on Unitk.  In addition, Unitek also benefits from the simple churning of customers.  For example, if DirecTV loses a customer, Unitek works on the disconnect, if DirectTV gains a customer, then Unitek works on the addition.  As telecommunications customers fight for the consumers living rooms causing turnover, Unitek benefits.

Cable-Opportunities for add on services and market share gains.  Cable subscribers have shrunk over the past few years yet revenue to cable companies have increased.  The cable companies have been able to add on services such as HDTV, video-on-demand, internet, telephone and DVRs.  This growth in add-on services has increased the need for infrastructure in cable.  As cable companies continue to invest in infrastructure to increase services, Unitek benefits from addition design and maintenance work.

Wireless-Big growth opportunities.  Wireless represents about 30% of Unitek's business and it remains a huge opportunity to grow.  It is no secret that wireless is a growing industry with subscriber growth and more importantly growth in wireless data demand.  The industry constantly is releasing the latest products which emphasizes bringing data to your hands.  This is because consumers are demanding more data and including high speed internet and video in handheld devices.  This requires additional bandwidth and thus additional infrastructure.  The amount of cell sites is forecasted to double over the next 3-4 years bases on network upgrades.   These upgrades require construction, maintenance and repair services.  These services will be performed by companies like Unitek.  This is not something that Sprint or AT&T will do in house.  In addition, the FCC continues to issue grant access to new wireless spectrums.  This would require additional wireless networks.  Unitek also has entered a new growth wireless market with the aquisition of Pinnacle Wireless (see below).  Pinnacle serves the land mobile radio and inhouse wireless industry.  These wireless projects are specific in task and location.  The customers in this segment include corporations, institutions and the government who want to implement a wireless network or a two way radio covering a specific location.

Wireless Customer opportunity--AT&T

Currently Unitek does very little wireless business with AT&T, but a huge opportunity exists to capture meaning full business over the next several years.  AT&T has stated that it intends to spend almost $20 billion billion in both its wireless and wireline networks and other capital projects in 2011. AT&T's wireless capex increased over 50% y/y in 2010 and capital expenditures will continue to shift toward wireless and away from wireline over the next several years.  Data demand is surging. AT&T's mobile data volume is up 8,000% over the past four years. Network constraints are forcing AT&T to invest heavily in its network to improve reliability. By 2015, AT&T expects data demand to be 8x-10x 2010 levels. The ever-growing need for bandwidth will require continuous investments in increased capacity and functionality.  Over the last few years, the focus for AT&T was the rollout of 3G.  Now AT&T plans to extend 4G deployment an additional 1.2 million square miles and increase its infrastructure investment by more than $8 billion over the next 7 years.  AT&T has also offered to acquire T-Mobile, and while this will take a long time to close it presents another opportunity as it will cost another $7 billion to integrate the two networks. 

Origin of Unitek

CEO Scott Hisey founded Unitek in 2004 with the acquisition of DirectSat USA.  From 2004 to 2007, the company grew via organic growth and acquisitions.  In 2007, Unitek was acquired by Hicks Muse Capital for $210mm, when Unitek was doing about $166mm in revenue.  Under the ownership of Hicks Muse, the company made a number of small acquisitions including a transaction with DTV to acquire additional markets. The reverse merger with Berliner Communications in January 2010 allowed the company to be traded on the bulletin board.  In November 2010, the company raised $83mm to pay down debt which will allow the company to grow topline in excess of 20% in 2011.

Acquisitions

Berliner Communications-Acquired January 2010 for $30mm.  A reverse merger that allowed Unitek to be listed on the bulletin board.  Berliner did about $85mm in sales in 2010.  Berliner greatly contributes to Unitek Wireless infrastructure offering.  It puts Unitek in position to capture significant wins with the rollout of broadband wireless.

Pinnacle Wireless-Acquied April 2011 for $20mm for about a 5X EBITDA multiple.  This is a higher multiple than they would have liked to play but it opens up a new growing wireless market for them.  Pinnacle provides engineering, implementation and maintenance of specialty wireless networks for specific locations and applications.  Currently Pinnacle operates primarily in the Northeast, but there are opportunities to grow the business over the country.  Pinnacle provides wireless communication systems for facilities such as the Red Bull Arena.  It has also been selected to provide the in-building communication at the New World Trade Center.  Pinnacle has also experience in Land Mobile Radio (LMR).  Governments and businesses across the world require secure, reliable, and effective wireless communications capabilities to carry out various protective, enforcement, and security missions, and LMR systems are perceived to be the vital tool to communicate in this field.  Also, LMR equipment and systems deliver such control, command, and communications capabilities that cannot be delivered by commercial wireless networks. Land mobile radio (LMR) network consist of infrastructure components (transmitters, receivers, base stations), network switches, and hand-held and mobile two-way radios. From large emergency medical service agencies that coordinate volunteers and relief efforts in a disaster recovery mission to small companies conducting routine status checks or dispatching technicians on service calls, both public and private sectors benefit from basic and inexpensive wireless radio communication in the form of Land Mobile Radio.

Model  (in millions)

Valuation

Unitek trades at 5.2X 2011 EBITDA and 4.3X 2012 EBITDA.  On free cash flow yield basis, Unitek trades at a 15.6% for 2011 and 21.4% for 2012.

The closest comparable company to Unitek is MasTec (MTZ).  MTZ's market capitalization is $1.9 billion.  MTZ derives 20% of its revenue from DTV in Fulfillment and also offers wireless infrastructure services like Unitek.  Unlike Unitek, MTZ also participates in oil and gas pipelines and electric transmission, while Unitek purely focuses on telecommunications.  In total, about 50% of the MTZ's business is similar to Unitek while the rest is oil and gas and other construction.  MTZ stock has been rallying quite sharply due to the growth opportunities in wireless particularly due to AT&T's 4G rollout which includes deployment of an additional 1.2 million square miles and spending over $8 billion dollars.  In addition, AT&T would also spend an additional $7 billion to integrate the AT&T and T-Mobile networks pending the closing of that merger.

MasTec currently trades at 7.4X 2011 EBITDA, and 6.5X 2012.  On a free cash flow yield basis, MTZ trades at 7.7% for 2011 and 9.1% for 2012.