Half Yearly Report

Telit Communications PLC

 ("Telit" or "the Company")

Interim Results for the six months ended 30 June 2012

Telit Communications PLC (AIM: TCM), a global leader in machine-to-machine (m2m) communications, is pleased to announce its interim results for the six months ended 30 June 2012 and the continued growth of the Company. 

Financial highlights:

·; Revenue increased by 21.6% to $98.6 million (H1 2011: $81.1 million)

·; Gross profit increased by 17.7% to $37.2 million (H1 2011: $31.6 million)

·; Adjusted EBIT increased by 3.7% to $5.4 million (H1 2011: $5.2 million)

·; Adjusted EBITDA increased by 5.9% to $8.5 million (H1 2011: $8.1 million)

·; Adjusted PBT increased by 26.5% to $4.8 million (H1 2011: $3.8 million)

·; Net cash flow from operating activities increased by 39.0% to $8.3 million (H1 2011: $6.0 million)

Operational highlights:

·; H1 2012 results were affected by significant investments in sales and marketing expenses (H1 2012: $13.8 million; H1 2011: $10.1 million) including the set-up of the m2mAIR business unit, the integration of Navman Wireless OEM Solutions LP and the opening of new sales offices in Australia and Czech Republic.

·; Launch of m2mAIR in H1 2012, a business unit dedicated to aggregating value to the module business with value added services including connectivity. This strategic move will enable the Company to add a layer of recurring revenues to its business model.

·; In H1 2012 the Company entered into an underlying agreement with Telefonica a top tier telecommunications company for the purposes of facilitating m2mAIR. m2mAIR offers its customers:

o Global coverage through the footprint of Telefonica and its roaming partners.

o Blue-chip customer pricing for mid-size/small customers.

o High quality m2m service management platform.

o m2m value added services and connectivity including over the air Remote Module Management.

According to 2011 Berg Insight market research, 2012 revenues for the market in which m2mAIR operates are expected to be $5.6 billion, growing to $15.5 billion in 2016, which are currently captured by operators and service providers around the world.

·; Successful integration of Navman Wireless OEM Solutions LP, a leading designer and manufacturer of location technologies, including the Global Positioning System (GPS) and Global Navigation Satellite System (GNSS), was completed in H1 2012. The acquisition of Navman was consummated on 03 January 2012. The acquisition augmented our location product portfolio and enhances our ability to service the needs of our customers.

·; Navman was the fifth successful, consecutive acquisition completed by Telit, indicating its ability to acquire and integrate new businesses in a successful way.

·; Development of 4G LTE designed for use in the most demanding automotive applications.

Commenting on the results, Oozi Cats, Chief Executive Officer of Telit, said:

 "During this period, the revenue growth rate achieved in recent years continued (the Compound Annual Growth Rate ("CAGR") of Telit's revenues has been 25.5% from 2007 till and including 2011). Alongside the successful integration of Navman, revenue growth was sustained with a positive impact on profitability. We expect our gross margin to remain stable in the near term and we are constantly working on improving our cost base, logistics and purchasing, to achieve and maintain a higher level of profitability.

The launch of our m2mAIR business unit is a significant development. It opens new horizons for the Company and will change the revenue model of the Company to include a layer of recurring revenues".

Below are the key financial figures for H1 2012 compared to H1 2011 and FY 2011:

Reconciliation of operating profit and profit before tax to the adjusted figures:

* Excluding intangibles acquired.

For further information:

CHIEF EXECUTIVE'S STATEMENT AND REVIEW

Introduction

I am pleased to announce the Company's consolidated unaudited interim results for the first half of 2012 and to report continued growth compared to the first half of 2011. This growth helped Telit strengthen its position as one of the three largest m2m module suppliers worldwide, with a market share of 22% according to the Beecham Research report published in July 2012.

Many of the wireless m2m module providers differentiate themselves by focusing on specific technology standards. Telit is one of the very few vendors that support many different cellular technologies, including GSM/GPRS, CDMA and UMTS/HSPA, while catering to the arena of short range RF technologies such as Wi-Fi, ZigBee, Bluetooth and GNSS Technologies.

Financial Review

During the first half of 2012 the Group achieved growth in the number of units shipped resulting in higher gross profit, higher adjusted EBITDA and higher adjusted profit before tax compared with those achieved in the first half of 2011.

Continued growth in the number of new customers contributed to the revenue growth achieved in the period. Due to the continued revenue growth from a broad group of customers, Telit's dependency on major customers continues to be low and the top 10 customers contributed 30% of total revenues in the period (H1 2011: 28%).

The split of revenue on a geographical basis for the six months ended 30 June 2012 and for the full year 2011 is as follows:

The continued development of Telit's global footprint is seen by the geographical division of revenues for H1 2012. The EMEA region remains at around 50% of the overall revenue although overall revenues from the region increased. Our operations in the Americas continued to show significant growth during the period. In APAC we faced a decline in revenue, in spite of growth in terms of units shipped due to a late adoption of 3G devices and an impact on ASP.

Gross profit in the period increased to $37.2 million, compared to $31.6 million in H1 2011, resulting in an overall margin of 37.8% compared to 39.0% in H1 2011, reflecting the lower gross margin typically achieved by sales of the products manufactured in EMEA (mainly ex-Motorola products), relative to products manufactured in China. Completion of moving manufacturing of these products to China is expected in the first quarter of 2013 and we would expect, subject to sales mix, a consequential improvement in margin.

Research and development expenses in the period were $10.5 million and 10.6% of total revenues, compared to $10.7 million and 13.2% of revenue in H1 2011. Sales and marketing expenses in the period were $13.8 million and 14.0% of revenue, compared to $10.1 million and 12.4% of revenue in H1 2011 affected by set-up of the m2mAIR business unit, the integration of Navman Wireless OEM Solutions LP and the opening of new sales offices. General and administrative expenses in the period were $9.0 million and 9.1% of revenue, compared to $7.6 million and 9.3% of revenue in H1 2011.

The overall operating expenses in the period were $34.0 million compared to $28.7 million in H1 2011 reflecting the increase in the Group's revenue, significant expenses invested in the m2mAIR business unit that has not yet contributed material revenue, integration costs for the Navman OEM business and legal expenses for corporate matters. All the above resulted in a decrease of $0.9 million in the overall operating profit for the period to $3.2 million compared to operating profit of $4.1 million in H1 2011.

The net profit for the period decreased to $2.3 million compared to $2.6 million in H1 2011. Adjusted profit before tax increased by 26.5% to $4.8 million compared to $3.8 million in H1 2011 and Adjusted EBITDA increased by 5.9% to $8.5 million compared to $8.1 million in H1 2011.

Basic and diluted earnings per share for the period were 2.2 and 2.1 cents respectively in H1 2012, compared to basic and diluted earnings per share of 2.7 and 2.4 cents respectively in H1 2011.

Shares outstanding

During the period, the Company issued 298,001 new ordinary shares of 1 pence each, due to an exercise of options under the Company's share option plan and 5,000 options lapsed. Following the above mentioned transactions, the Company's total issued share capital on 30 June 2012 consisted of 102,976,770 ordinary shares of 1 pence each with one voting right per share and no shares held in treasury. The number of outstanding options, as at 30 June 2012 was 13,910,507 comprising 11.9% of the Company's share capital on a fully-diluted basis.

Business Review

During H1 2012 the following major developments took place that contributed to the overall performance of the Company and is expected to contribute to the Company's future results:

1. Acquisitions

The acquisition of Navman Wireless OEM Solutions LP on 3 January 2012 strengthens our position as the premier product and consultative partner in the m2m industry, by leveraging the synergies of both companies to better serve our global customers. The acquisition of Navman's technology and the engagement of its US based executive engineering and sales staff will make Telit a major contender in the GNSS market while providing an enhanced product portfolio for its m2m customers and providing Telit access to new GPS customers and products beyond the traditional m2m industry. Navman's reputation for delivering state of the art GPS technology and the global reach of Telit's sales and marketing organization put us in a strong position of growth in the GPS sector.

2. Innovation and expansion

Telit is committed to continued investment in R&D and new technologies which will enable it to offer a wide spectrum of mobile communications and assembly technologies to respond to the requirements of customers from all market segments and at any place worldwide. During H1 2012 the Company achieved the following milestones:

Ø Launch of the m2mAIR managed services business which will provide Telit with a recurring revenue stream in addition to the revenues achieved by the Company from its established module business. The m2mAIR offering covers all network related needs including SIM (subscription) management, remote module management, security, reporting, and monitoring, SIM cards, price plans and customer support - all from a single vendor. With Telit's wireless module technology, these services enable m2m solution providers to easily create and manage their m2m applications reducing the total cost of ownership (TCO) necessary to operate and support m2m user-applications while ensuring the highest network quality and reliability. m2mAIR's offering is available today for European-based customers with rollouts in other regions scheduled for later this year.

Ø As part of m2mAIR's soft launch the Company initiated pilots with more than 130 customers. The Company estimates that the initial set of pilot customers alone represent a potential market of more than 1 million annual subscriptions, and is pleased to note that a number of pilot customers have already become full-fledged commercial customers.

Ø 4G LTE development - the new Telit LE920 represents the next generation of Telit Automotive form factor xE920. The LE920 combines the two cutting edge technologies HSPA+ and LTE. The LE920 is a 3.5G wireless data module offering HSPA+ connectivity with download speeds up to 42 Mbps, and a 4G m2m module at the same time, providing an ultra-high-speed downlink at 100 Mbps.

Designed for use in the most demanding automotive applications and manufactured according ISO TS16949, the LE920 offers rugged LGA packaging with an increased robustness and cost effective solution. Two LE920 regional versions are available, one for European, APAC and Latin American markets and one for the North American market. Both versions come with a multi-band configuration, covering different sets of 3G and 4G bands. LE920, together with its 3.5G compan-ion HE920, offers an Automotive LGA family in a common package. Developers can take advantage of Telit's xE920 Unified Form Factor that enables a "design once, use anywhere" strategy. The LE920 is also fully backwards compatible to existing EDGE and GSM/GPRS networks through integrated quad-band radios.

Ø The Company announced a new dual GPS/GLONASS module that dramatically improves navigation performance by providing access to both the Russian GLONASS global navigation satellite system and US GPS. The new Jupiter® SL869 provides three times the usual satellite visibility by accessing up to 22 satellites compared to the six or eight satellites normally available through standard GPS, providing optimal performance for any navigation application, from personal and asset tracking to automotive solutions. The Jupiter SL869 reduces the delay from several minutes to seconds for a navigation device to acquire its position after being powered on. The module also reduces the incidence of lost satellite coverage, which is especially problematic in urban areas with tall buildings, by enabling additional satellite fixes that reduce blind spots. Finally, the module enables more accurate positioning, better "pinning" a person, car or an asset's true location on a digital map.

Ø The Company announced its xE910 family of wireless modules featuring a single, compact form factor that is interchangeable on any regional cellular network, delivering ubiquitous, cost effective coverage for m2m applications and consumer electronics devices worldwide. Based on a Land-Grid-Array (LGA) form factor with a footprint of just 795mm2 and a total size of 28.2 x 28.2 x 2.2mm, the Telit xE910 family's uniform design gives customers the ability to choose between global or regional cellular technologies depending upon the location and requirements of a specific application for optimum data rates and module costs. Supporting GSM/GPRS, UMTS/HSPA+ and CDMA/EV-DO cellular technologies, the xE910 family also allows applications to be easily upgraded, such as when migrating from 2G to 3.5G, while maintaining the core design of an application or device throughout its lifecycle.

Ø The Company has extended its xE910 form factor family with the introduction of the CE910-DUAL, a CDMA 1xRTT embedded cellular module ideal for fixed and mobile m2m applications that require robust network coverage and reliability, such as fleet tracking and industrial monitoring. Telit's CE910 module allows connected device developers to lower costs and leverage the extensive CDMA network coverage in the US with a CE910-based design. m2m integrators can also easily upgrade or create regional variants of an application with other modules within the family based on UMTS/HSPA, CDMA EV-DO and GSM/GPRS network technologies, effectively future proofing designs and facilitating global deployments. The CE910 features a Land-Grid-Array (LGA) form factor with a footprint of just 795mm2, resulting in an extremely low profile in compact cellular devices. In addition to serving as a cost-effective development platform, the CE910 boasts a range of functions for over-the-air maintenance and management of software in the module, further protecting customers' investments in creating and deploying m2m solutions. 

Ø The Company's HE863-NAG and H24 cellular modules received AT&T certification. Supporting rapid data transfer speeds over the carrier's HSPA network and featuring universally low power consumption, these modules will enable m2m integrators to deploy high bandwidth applications and extend the life of their devices with 3G-based designs. The HE863-NAG is the third module from the HE863 family to earn AT&T certification, joining the ranks of the -NAD and -NAR. Within the same lightweight, compact ball-grid-array (BGA) form factor, this variant uniquely features the greatest functionality within the family, including an integrated high sensitivity GPS receiver that supports simultaneous GPS with voice and data. Telit's H24 offers the same high-speed HSUPA/HSDPA connectivity (5.76Mbps up / 7.2 Mbps down) with on-board GPS, making both modules ideal for robust location based solutions such as automotive infotainment.

Ø The Company introduced a Mini PCI Express card with an embedded m2m module designed for industrial applications. Telit's HE910-based Mini-PCIe adapter card enables secure 3G cellular data, voice, and video communication for embedded PCs in a variety of commercial and industrial applications, including ATMs, kiosks, digital signage, surveillance, fleet management, and other applications benefitting from always-on wireless data connection, monitoring, and control. The "plug and play" Mini PCI Express card slot and 52-pin card edge connector allow application developers to easily integrate m2m capabilities into their solutions. Designed for m2m applications requiring high bandwidth and worldwide coverage, the HE910 with Mini PCIe Adapter combines premium radio access technology UMTS/HSPA+ with backward compatibility to GSM, GPRS and EDGE networks. It includes HSDPA 21.0 Mbps (Cat 14), HSUPA 5.7 Mbps (Cat 6), embedded TCP/IP protocol stack and custom Telit AT commands. Support for USB and RIL drivers for Windows and Linux environments is available. Customers can also choose to add integrated high sensitivity A-GPS functionality.

Ø The Company opened a new office in Melbourne, Victoria to serve the growing m2m markets in Australia, New Zealand and the Oceania region which includes Melanesia, Micronesia and Polynesia. According to a 2011 study by market research firm Telsyte, the Australian m2m mobile services market is expected to grow to 3 million connections by 2015. The study also said that nearly 35% of Australian organizations are considering m2m solutions for their businesses, mostly driven by applications in energy, security, automotive and logistics.

Employees

Telit's focus is, and will continue to be, to expand and strengthen its position as one of the world's leading m2m technology providers. The hard work and dedication of Telit's staff across the globe remains crucial to Telit's success. I would like to thank the Company's employees, management team and directors for their commitment to the Company and its success. Their dedication is an invaluable asset to the Company.

The number of employees of the Group is as follows:

*the update in the number of employees at 31 December 2011 is due to a change in the calculation method used which now includes certain consultants.

Market Opportunity

The Beecham Research report on the m2m sector, released in July 2012, analyses the latest market developments in regions around the world and forecasts that the market will enjoy high growth over the coming years. Beecham Research believes that the number of units to be shipped will reach 97.1 million by 2016 representing a 2010-2015 CAGR of 23.6%. Beecham Research also projects an average selling price decline of 8.9% per annum resulting in a CAGR of 12.6% growth in monetary value of the sector through to 2015 with a total value of m2m market of $1.6 billion.

Strategy

We believe that Telit is well positioned to take advantage of the market opportunities ahead and look forward to continuing to grow our revenue and gain market share while maintaining existing margins and improving profitability. We are constantly seeking further expansion opportunities through new technologies or by gaining access to new territories and new market segments. We believe this will continue to have a positive effect on our results in the second half of the year and beyond. Moreover, the launch of our m2mAIR business unit allows Telit to offer value added services, including connectivity, to its customers, which is already starting to contribute to 2012 revenue and which the Company anticipates will become material in future years.

Telit intends to continue to take advantage of the considerable opportunities arising in this growing global market. I look forward to sharing further news of the Company's progress over the coming months.

Outlook and update on current trading

The outlook for the rest of 2012 remains positive for Telit, and we expect to continue our growth. Trading has remained stable since the half-year end. We believe we are well positioned to benefit from key trends in the technology market and will look to leverage our strong position to further increase market share in 2012 and beyond. We will continue to review expansion opportunities, both organic and through potential acquisitions, to maintain momentum and continue to expand activities within the m2m value chain.

Oozi Cats

Chief Executive Officer

10 September 2012

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CASH FLOWS

CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Six months ended 30 June 2012 (Unaudited)

Six months ended 30 June 2011 (Unaudited)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

Year ended 31 December 2011 (Audited)

NOTES TO THE INTERIM FINANCIAL STATEMENT AT 30 JUNE 2012 (Unaudited)

1. The Company was incorporated and registered in England and Wales as a public limited company on 30 November 2004 under the Companies Act 1985.

2. The interim financial statements include the results of operations and the financial position of the Company and its subsidiaries (together the "Group") as at and for the six months ended 30 June 2012. The consolidated interim financial statements of the Company have been prepared in accordance with the recognition and measurement criteria of IFRS and the disclosure requirements of the AIM Rules using the accounting policies set out in the Group's 31 December 2011 statutory accounts. The AIM Rules do not require compliance with the requirements of IAS 34 "Interim Financial Statements" and these consolidated interim financial statements have not been prepared in compliance with the disclosure requirements of that standard. The consolidated interim financial statements have not been audited or reviewed and do not constitute the Company's statutory accounts within the meaning of Section 435 of the Companies Act 2006. The financial information for the year ended 31 December 2011 is derived from the statutory accounts for that year, which have been delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

3. The Directors have not declared an interim dividend.

4. On 3 January 2012 the Company consummated the binding agreement it entered into on 20 December 2011 to purchase 100% of the shares of Navman Wireless OEM Solutions LP, a designer and manufacturer of world-class GPS modules and solutions, for approximately $3.0 million in cash. The amount is subject to an additional earn-out amount of up to $750,000 subject to certain conditions. The acquisition of Navman's technology and its US based executive engineering and sales staff will make Telit a major contender in the GPS market while providing an enhanced product portfolio for its m2m customers.

The provisional assessment of the fair values of the assets and liabilities acquired is as follows:

The contingent consideration represents the fair value of an earn-out of $750,000 at the acquisition date.

5. Reconciliation of profit for the period to adjusted profit for the period:

6. Adjusted profit per share

The calculations of adjusted basic and diluted earnings per ordinary share are based on the following results and numbers of shares:

7. Net (debt)/cash position:

(1) Mainly drawn letters of credit and borrowings arising from invoice advances.

(2) Representing the preferential rate loan supported by the Ministry of Trade and Commerce in Italy provided in connection with the Group's business development program in Sardinia. The loan is denominated in Euro, attracts interest at a rate of 0.75% and is repayable in ten annual instalments that commenced on 20 March 2009.

(3) Representing a preferential rate loan from a regional fund in Italy provided in connection with the Group's acquisition of the campus used for the Company's main R&D facility in Italy. The mortgage loan is denominated in Euro, attracts interest at a rate of Euribor 6 months less 20% and is repayable in 30 semi-annual instalments that will commenced on 1 July 2012.

8. On 13 January 2012, M2M Solutions LLC, a company allegedly incorporated under the laws of the State of Delaware, USA ("M2M Solutions"), filed a complaint in the United States District Court for the District of Delaware (the "Court") against Motorola Solutions Inc. ("Motorola"), the Company and Telit Wireless Solutions Inc. ("Wireless"), asserting that Motorola allegedly infringed one and the Telit defendants allegedly infringed two patents allegedly owned by M2M Solutions (the "Complaint"). M2M Solutions asserted that the Company and Wireless allegedly infringed, and continue to infringe, one or more of the claims covered by the asserted patents, and asked the Court to award: (i) damages for past infringement (i.e., on products sold by them since 2009, when the older of the two patents was issued), (ii) treble damages for alleged willful infringement, and (iii) M2M Solutions' attorneys' fees and costs. M2M Solutions also asked the Court to issue an injunction prohibiting the Company and Wireless from selling any allegedly infringing products in the future.

In connection with the complaint, on 2 February 2012, the Company received a letter from Motorola asserting that the Company is allegedly required to indemnify Motorola pursuant to provisions of the Asset Purchase Agreement pursuant to which Wireless purchased the assets of Motorola Israel Ltd.

The Company is still examining whether it is required to indemnify Motorola and/or to pay any damages, or counsel fees that Motorola may incur, and in the meantime, has, on 14 February 2012, together with Wireless, signed a Tolling Agreement with Motorola and Motorola Israel Ltd. agreeing, inter alia, that during the pendency of the lawsuit none of the parties will make claims against each other arising from the causes of action asserted by M2M Solutions or seek any cost recovery or indemnity.

9. In February 2012, based on the opinion of its legal and tax advisors, the Company settled the 2007 tax assessments of Telit Wireless Solutions S.r.l received from the Italian Tax Authority by payment of $0.3 million (€0.24 million).