SRT Marine Technology in the News

12th November 2007 - Proactive Investors

Slicing into the secure communications market

SRT already has a very solid head start and when national mandates for coastal networks begin to be implemented, it is in a very good position to benefit. With an estimated 26 million vessels worldwide, the opportunity is considerable.

Before we delve into the wonderful world in which Software Radio Technology works, first we need to open your eyes to the world of "Tetra". Tetra stands for "Terrestrial Trunked Radio", and is best described as a sort of high tech walkie talkie system – very high tech! Some time ago, the European Telecommunications Standards Institute decided to create an open industry standard for an advanced digital professional mobile radio system. The 'standard' was specifically created for people who require mission critical communications no matter the operational circumstances: police, firemen, airports, ports, military etc. Initially TETRA was only deployed within Europe, however today networks are being rolled out in over 85 countries: excluding the USA and Canada where a different standard is used.

The major attractions to TETRA are that it is an open standard which enables different manufacturers to create a variety of 'TETRA' products for sale on to any TETRA network. It also provides secure and totally reliable voice and data communications and in an emergency situation TETRA users are not subject the vagrancies and fluctuating service levels of normal mobile phone networks.

As a result demand for TETRA equipment is growing rapidly around the globe. However due to the extreme complexity of the technology required to meet the standard, the number of companies able to supply products is very limited. This high barrier to entry combined with a large and growing market is the foundation upon which SRT plc has built its TETRA business.

Software Radio Technology is the former research and development arm of UK based Securicor. The division was in charge of tackling technical problems with mobile telecommunications and wireless technologies; it was never created to generate revenues, so when it went on the block five years ago, Simon Tucker (who had a chance encounter on a train with an employee of SRT) saw an opportunity. Simon is certainly an entrepreneur, and managed to raise £1 million to effectively buy the division from the auditors for around £500,000 in cash. What he acquired was a massive catalogue of intellectual properties, a warehouse and an entire R&D team. The building was sold for the same price paid for the whole company, leaving £1 million in working capital to choose one or two technologies that might have a decent shot at commercialisation.

Venture Capitalists entered the fray over the next few years, injecting a further capital, and when the company had finally decided on a Tetra based hardware licensing model, Rab Capital and Invesco came in, funding the company at the IPO stage.

The European Market for Tetra phones is pretty sewn up already. There are some big players here, including EADS, Motorola and Selex, and fellow listed company Sepura. Software Radio Technologies is playing the field in a different way, however. All of the other big players build and sell their own phones under their own brands. SRT provides companies interested in supplying the TETRA market with two solutions all based around its core TETRA technology. Outside of Europe, SRT has licensed the 'blueprint' for building the hardware required for the phone. All the manufacturer has to do is design and build the handset that it wishes to market. These license customers have just started selling handsets and SRT generates an average of $30 of royalty on every unit.

The company's initial approach was to license the technology to manufacturers across Asia where governments had adopted TETRA as their preferred standard, but no local producers of TETRA products existed. The company has been working with these companies for the last few years and has recently announced the commencement of production and therefore royalties. A recent announcement by the company that the first customer to enter production had received a $60m order which would generate $3m of royalties would seem like a roaring start. In total the company currently has 5 Asian based customers who are targeting massive local markets.

In Europe the company has created its own handset which will commence shipping during 2008 and will be sold to large distributors who will be able to brand it as their own. This evolution is particularly interesting as the average sale price will be Euro500 with a very good margin. New networks in Germany and Italy alone will support up to a further 700,000 users and this combined with other network expansion and replacements creates a significant EU market.

The critical aspect to the SRT business model is that all these handsets use the same core technology solution, which due to the complexity of the TETRA standard is where the real value lies and gives SRT its ability to generate such significant per unit revenues. This may sound like a silly model, but Tetra phones are very expensive, high tech pieces of kit that have to have encryption technology – so your small to mid-sized telecommunications company, or original equipment manufacturer, isn't going to move into this market from scratch without spending a lot of time and cash first. Now they have an option to join the game much quicker by partnering with SRT.

Market expectations already include royalty revenues expected from licenses currently underway in Asia, however the potential effect of the launch of their OEM product during the first half of 2008 could have a material affect on future financial performance. The Tetra market in Europe is a considerable one; all emergency or 'first response' services will eventually have one, so even if SRT's licensees snag a small slice of the market, the revenues will be material.

The fun doesn't stop there either. Perhaps even more jaw dropping is SRT's, Marine division. In 2002 a worldwide technology standard was created called AIS which allowed easy tracking and identification of vessels. Initially this was mandated on all vessels over 300 tons by the IMO. However more recently governments have started to encourage and even mandate the fitting of such devices on all vessels: all using the same technology standard – AIS. Countries as diverse as China, S.Korea, UK, Seeden, India and of course the USA have installed networks ready to keep track of maritime traffic. Much of this interest is driven by homeland security fears, but the technology also offers users many safety benefits, so it's a win win situation.

SRT Marine had a history of providing AIS technology for the larger vessels, however, recognising the market potential here it invested in the creation of an ultra low cost core AIS technology platform. This was launched in December 2006 and since then the company has signed deals with virtually every marine electronics company in the world. .

SRT Marine Technology's approach is to provide the core technology around which its customers can create their own product. The company provides customers with a variety of solutions from a license to a module or a complete OEM product. Again the technology is complex and must meet international performance standards, which through partnering with SRT the manufacturer is guaranteed to meet. This is an emerging market, and as the landscape unfolds, SRT is undoubtedly going to find competitors popping up. However, it already has a very solid head start and when national mandates for coastal networks begin to be implemented, it is in a very good position to benefit. With an estimated 26 million vessels worldwide, the opportunity is considerable.

This in part explains SRT's market cap which, on first glance, looks pretty meaty for a company just announcing its first revenues, but still unable to provide any strong visibility until the true potential can be more confidently gauged. The sectors are niche - but very substantial – making the potential for Software Radio Technology very noteworthy. Definitely worthy of further research.

by Ian Mclelland