Why the Netcomm Wireless Ltd share price is sinking today

The Netcomm Wireless Ltd (ASX: NTC) share price plunged as low as $2.41 today, and is currently down around 6.9% at $2.56.

Clearly, investors were disappointed with the company’s full year 2016 (FY16) financial results released today – and the company’s outlook for next financial year (FY17).

One line of the result is probably responsible for the majority of the negative reaction and that was net profit after tax sinking by 17.7% from $2.46 million to $2.03 million. That’s despite a 14.8% increase in revenues.

Here’s a quick summary of the main points…

  • Revenues up 14.8% to $85.3 million compared to last financial year (FY15)
  • Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) up 23% to $11.2 million
  • Earnings per share (EPS) down 19.6% to 1.54 cents per share
  • Net cash on the balance sheet of $36.5 million
  • No dividend declared

It’s a disappointing result – but can be partly explained by a $14.1 million fall in revenues to $26.4 million in the company’s broadband business this year compared to FY15. FY2015 had a one-off increase from powerline and ADSL / VDSL products. Netcomm expects this business to generate around $30 million in annual revenue going forward.

What next for Netcomm?

The company says it expects to see continued strong growth in revenues in FY17 – although that looks like it’s going to be offset for reinvestment back into the business – suggesting FY17 will see another year of weak profit results. Netcomm expects to plough $22 – $23 million back into people, infrastructure and capital expenditure – after spending $6.2 million on staff and infrastructure in FY16.

That should set the company up for strong growth and a jump in profit in the medium to long-term.

Foolish takeaway

Netcomm is still well positioned as copper networks are replaced with fibre. That should demand for fixed wireless products increase over time – which should benefit Netcomm.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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