communications systems, inc....nasdaq: jcs infrastructure and services for global communications 16...

Infrastructure and Services for Global CommunicationsNASDAQ: JCS 1

Communications Systems, Inc.

Infrastructure and Services for Global Communications

NASDAQ: JCS

March 2015


Safe Harbor

This presentation includes certain forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including statements regarding future financial performance, future growth andfuture acquisitions. These statements are based on Communications Systems’ current expectations or beliefsand are subject to uncertainty and changes in circumstances. Actual results may vary materially from thoseexpressed or implied by the statements herein due to changes in economic, business, competitive or regulatoryfactors, and other risks and uncertainties affecting the operation of Communications Systems’ business. Theserisks, uncertainties and contingencies are indicated from time to time in the Company’s filings with theSecurities and Exchange Commission. The information set forth herein should be read in light of such risks.Further, investors should keep in mind that the Company’s financial results in any particular period may not beindicative of future results. Communications Systems is under no obligation to, and expressly disclaims anyobligation to, update or alter its forward-looking statements, whether as a result of new information, futureevents, changes in assumptions or otherwise.


Business OverviewA business in transformation

» The Facts

» The Situation

» The Resolution

» Established business c. 1969

» NASDAQ-listed; on a major exchange since 1981

» Credible brands

» Product portfolio focused on Network Equipment and Services

» Solid balance sheet, no goodwill and attractive dividend

» Recent difficult operating performance

» Thinly traded < 10,000 shares per day

» Stabilize and grow core businesses

» Develop breakthrough products in growth markets

» Cost improvements through Lean operations

Investment thesis, significant potential for breakout value change


Business OverviewCSI consists of three technology-driven businesses

$67.3

$43.2

$8.6

CSI Sales Breakdown - 2014($ in millions)

Total: $119.1

» Suttle– Innovative solutions for gigabit broadband

deployments

– Blue-chip telecom client base

– Rising revenues and increasing margins

» Transition Networks– Industry leader in media converter solutions

– Solid product gross margins, >43%

– Investing in R&D for future growth,

~11% of sales

» JDL Technologies– IT services and network support

– Strong presence in South Florida education market

– Pursuing new verticals, e.g. Health Care Data Protection to build annuity business

36%

7%

57%


SuttleDelivering innovative solutions for Gigabit broadband deployments

» Solutions for fiber and copper networks meeting

higher-speed demands with application diversity

– Brownfield and greenfield

– SFU, MDU and MTU

» Blue-Chip client base

$ in millionsGross margin %

Sales Growth and Margin Expansion

Quality Management CommitmentSuttle Sales by Customer Group - 2014

$45.0

$54.3

$67.3

$13.2 $15.5

26.6%29.1%

31.2%27.6%

30.7%

2012 2013 2014 4Q13 4Q14

$4.8

$5.9

$56.7

International & other

Distributors

Telecom carriers

($ in millions)


SuttleIncreasing demand for flexible low cost solutions

Telecommunications Carriers

Cable Companies

Fiber to the Premise

Low-cost high performance

Broadband distribution solutions

G.hnG.Fast

Google Fiber has substantially increased competitors’ need to deliver higher speeds to premises

Dynamic broadband component market


SuttleEvolving solutions

2015 Launch Programs

• Burial/Aerial Terminals

• Fiber Panels/Frames

• Fiber Termination

• Pushable-Pullable Fiber

• G.hn Wireless Endpoints

• G.Fast Gateways

Target New Products > 25%

2014 New Product Releases• Fiber Terminals• Building Entrance

Terminals• Premise Distribution-

Tool-less High Speed Copper Connectivity

• HPNA/G.hn EndpointsNew Products > 30%

Legacy Premise Product Platforms

• Structured Cabling

Systems

• Voice Connectivity

• DSL Filtering

A powerful transformation of the product portfolio in line with market needs


SuttleEnabling the truly connected home

1 Gigabit Broadband DistributionHigh Speed Copper-Fiber-Wireless

FutureLinkTM SOHO AccessTM SpeedStarTM CorroShieldTM MediaMaxTM


0

500

1,000

1,500

2010 2011 2012 2013 2014

Transition NetworksA Leader in Copper to Fiber Media Conversion

» Industry leader in mixed media connectivity solutions– > 1million devices deployed

world wide

– Physical layer & protocol conversion; e.g., Copper to Fiber, USB to Ethernet, POE

– Diversified customer base; Federal, Enterprise, Industrial

– Established Tier 1 channels to market

» Growth opportunity for our business is the embedded copper Ethernet base

– Solutions need to overcome bandwidth, distance & security challenges with copper networks

– Build upon ION conversion platform with innovations to make the deployment of fiber within the Enterprise faster, better, cheaper

Current Serviceable

Market

Total Addressable Market Opportunity Total Copper Switch Ports

Over 1.2 BILLION

Copper Switch Ports in Service

Solutions for Enterprise networks evolution

$ in millions

Gross margin %

Stabilizing Revenues, High Gross Margins

Reposition the business to lead the Ethernet-over-Fiber network migration

$53.8

$43.9 $43.2

$11.7 $10.6

52.0% 51.1% 44.5%

50.1%38.9%

2012 2013 2014 4Q13 4Q14

>30% CAGR


Transition NetworksInnovations to Grow Market

Add Security• Security of fiber transmission to

network connected devices• Scorpion-USBTM, NIC, AV interfaces

ION Platform• Intelligent, high-density, multi-

protocol media conversion platform• Re-designed for mission critical

management & security• Fiber migration solutions for

brownfield Enterprise applications

Bandwidth

Future proof fiber transport

End-to-end fiber transport solutions

Distance

Copper to fiber conversion

Complete copper to fiber devices

2.5/5 Gbps Networking• Enable >2x bandwidth over existing

Cat 5e/6 cable• Solutions to solve cable bottleneck to

802.11 AC WiFi• Alternative for UTP horizontal

> Double bandwidth of existing UTP

Flexibility of hybrid fiber/UTP

Security

SSL, SSH, Radius

Security of Fiber transport

• Cost effective managed remote devices• Cloud based management, API

Apps to remotely manage & control SLA

Intelligent end-points, ease-of-use

Physical layer network separation

Reposition Core Platform

Late 2015

Early 2016

Build High-Speed Copper

Improve Network Management


Transition NetworksSolutions to address existing network limitations

Copper to Fiber

interface to existing

copper switch

infrastructure1

Add capacity in verticals

with fiber while

maintaining copper to

desk

Extend fiber to

desktop,

AV equipment

3

Double data rate of

existing embedded UTP

copper to take advantage

of 802.11 AC

4

Extend fiber distance to

remote locations in a

Campus Area Network

7

Remotely managed, smart

connected devices

2

Public Network

1. ION Chassis Solutions

2. ION Stand-alone converters

3. Scorpion-USBTM and NIC desk-top solutions

4. 2.5/5 Gbps conversion

5. Ethernet over Coax/Smart SFP

6. ION fiber extenders

7. Smart connectivity

Solutions to migrate any medium to a Fiber, Ethernet network

Add digital

solutions while

using embedded

RG coax

common in

security

applications

6

5

Distance

Security

Bandwidth


Transition NetworksEnter Carrier market with TDM/ISDN over IP solutions

» Breakthrough solution to reduce Service Providers’ costs in maintaining legacy infrastructure

– Liberator™ platform: TDM, ISDN, Serial over Fiber, IP network with Carrier Ethernet (CE) 2.0 assurance

– Single SKU solution to accommodate TDM, Serial, ISDN & CE2.0

– No change to end users’ TDM/ISDN equipment

» Liberator™ enables Service Providers to

– Retire infrastructure, maintain the revenue, reduce OPEX, while not risking revenue, customer satisfaction

– Sell todays Ethernet services from same platform (no truck roll required)

– Consolidate onto IP networks with zero impact

on customers

Large addressable, valuable embedded baseSolutions for the evolving network

~75 MILLION LINES

TDM, ISDN, Serial

» Significant embedded legacy infrastructure

» Addressable global market for Liberator™

>$100 MILLION

Flexible, comprehensive solution for large emerging market opportunity

Liberator™

ISDN


JDL TechnologiesDelivering value-added IT services to education markets

» Broad portfolio of technology solutions for

– Procurement , Network & Managed services

» Focused on South Florida Public Education

market

– Inconsistent Fed and local IT funding led to

volatile JDL revenue

» Broward Education Region partnership has

been substantial 2009-13 >$40 mm

Revenues 1

$ in millions

» Target new verticals– Health Care

» Expand geographic footprint

» Broaden portfolio of IT solutions

» Build a Monthly Recurring Revenue model (annuity model)

Strategic Direction

1 JDL revenues reflect the conclusion of a large K12 project in 1Q’14

$5.4

$33.1

$8.6

$2.4 $1.1

2012 2013 2014 4Q13 4Q14

Contract Rebids2015-2020

JDL WINS• Internal wireless

(old contract)PLUS • Data center contract

(new contract)


JDL TechnologiesDiversifying end-markets and expanding footprint

Historical Focus Expanded Growth Strategy

Ve

rtic

als

Ge

ogr

aph

y

Health Care• HIPAA-Compliant IT• Data Security• Compliance training

Financial• Leveraging data

security reqs Gramm-Leach-Bliley Act

Goal: Higher growth and lower volatility in period-to-period revenues

Education• K12 to higher

Education•Wireless

classroom• E-Rate funding

initiative

Commercial•Diverse range of

small commercial enterprises

Education• K12 to higher Education• Wireless classroom• E-Rate funding initiative• Private education

IT Services Leader in South Florida Expanding Nationally via Managed Services

Commercial• Diverse commercial

enterprises• Leveraging compliance

requirements


JDL TechnologiesFocus on Florida Health Care market

» Fast growing market opportunity

– Health care has 1/3 of data breaches

– Violations can carry >$1MM penalties

– EMR becoming standard

» Value proposition

– Medical practices managing in

increasingly complex IT environment

– Providing HIPPA-compliant solutions is

essential» Florida health care profile

– Companies with 20-200 users: 4,000

– IT spending per company: $300K

JDL Market Opportunity >$200MM with 15%

CAGR

» Early market success

– First to market HIPPA-compliant IT services in Florida

– Significant GM % showing continuous quarterly growth

– Building out nationally from Florida

Strongly positioned for market success


» All businesses have solid growth opportunities > 10% CAGR

» Reinvested in R&D >7%, IP portfolio developing

» New management structure in place, >20 key industry appointments

» Corporate cost structure reduced ~$1m

» Substantial Lean operations cost gains >$1m in 2015

» Significant tax opportunities exist >500 bps

» Solid Balance sheet, no Goodwill

Well positioned for success

Investment thesis, significant potential for breakout value change


Strong Financial ProfileSolid balance sheet and attractive dividend yield

1 based on 8,658,784 CSI shares outstanding as of 3/1/20152 based on CSI’s fourth quarter ending share price of $10.50 on 12/31/14

Balance Sheet Summary($ in millions, except share figure) 12/31/14

Cash, equivalents, investments $29.9

Total assets $100.3

Total long-term debt $0.6

Working capital $56.9

Stockholders’ equity $86.0

Cash per share 1 $3.45

50 Consecutive Quarters of Dividend Payments

Annual Dividend of $0.64 Per Share Equates to a Yield of 6.1% 2

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

$ 0.19 $ 0.29 $ 0.36 $ 0.44 $ 0.48 $ 0.54 $ 0.59 $ 0.60 $ 0.64 $ 0.64 $ 0.64

Year

Div.


Appendix


Financial Results Overview

CSI Consolidated($ MMs, except share figures) 2012 2013 2014 4Q‘13 4Q‘14

Revenues $104.2 $131.3 $119.1 $27.3 $27.2

Gross Profit 1 41.5 44.9 42.2 10.0 9.1

Operating Income (Loss) 1,2 3.4 1.2 3.3 (0.1) (1.5)

Net Income (Loss) $2.2 $(1.0) $2.0 $(0.8) $(1.0)

Diluted Shares 8,518,613 8,531,073 8,640,416 8,517,212 8,653,191

Earnings (Loss) Per Share $0.26 $(0.11) $0.23 $(0.09) $(0.12)

Cash Dividends Per Share $0.64 $0.64 $0.64 $0.16 $0.16

1 4Q’14 and 2014 gross profit and operating income includes an inventory reserve charge of $1.1 million at Transition Networks2 2013 operating income includes a goodwill impairment charge of $5.8 million at Transition Networks


Summary of Segment Results

($ MMs, except share figures) 2012 2013 2014 4Q‘13 4Q‘14

Suttle

Revenues $45.0 $54.3 $67.3 $13.2 $15.5

Gross Profit 12.0 15.8 21.0 3.7 4.8

Operating Income 1.1 3.7 6.6 0.2 0.5

Transition Networks

Revenues $53.8 $43.9 $43.2 $11.7 $10.6

Gross Profit 1 28.0 22.4 19.2 5.9 4.1

Operating Income (Loss) 1,2 3.3 (5.8) (2.4) 0.3 (1.5)

JDL Technologies

Revenues $5.4 $33.1 $8.6 $2.4 $1.1

Gross Profit 1.5 6.7 2.0 0.5 0.2

Operating Income (Loss) (1.0) 3.2 (0.9) (0.6) (0.6)

1 4Q’14 and 2014 gross profit and operating income includes an inventory reserve charge of $1.1 million at Transition Networks2 2013 operating income includes a goodwill impairment charge of $5.8 million at Transition Networks


Contact Us

Devin Sullivan, SVP

212.836.9608

[email protected]

Kalle Ahl, Sr. Associate

212.836.9614

[email protected]

Ed Freeman, CFO

952.996.1691

[email protected]
mailto:[email protected]:[email protected]:[email protected]

communications systems, inc....nasdaq: jcs infrastructure and services for global communications 16...

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