Checking the pulse of MGM Wireless

Mark Fortunatow is the CEO of MGM Wireless. This stock has taken off; I spoke to Mark just a year ago and the shares were 45 cents. Now, they are $4.90 or so, heading straight for $5 dollars. So a ten-bagger in one year, and the reason for that is because when I spoke to Mark last year they were just in the process of launching what they called Spacetalk Smart Watch for kids. 

They were just launching it then, they’d been working on it for five years. Their business originally was an SMS communications system for schools, but they decided that they needed to develop a watch system for kids so that parents could find them and know where they were and also communicate with them, which they did, so they’ve kind of reinvented the Apple Watch with the Spacetalk Watch, and they’ve launched that a year ago and they’re now starting to sell and they’ve got deals with JB Hi-Fi and Spark Telecom in New Zealand. 

The shares have taken off in response to that because they are beginning to sell like hotcakes. The company’s now valued at $60 million dollars and is it cheap or not? I don’t know, it depends on how much they sell, but it certainly it’s starting to sell quite well. Definitely worth listening to Mark Fortunatow, he’s really onto something now and starting to make a lot of money. 

ASX code: MWR
Share price: $4.78
Market cap: 57.157 million

Here’s Mark Fortunatow, the CEO of MGM Wireless.


Mark, the last time we spoke the share price was 45 cents and had come down a fair way, but you were just in the process at the time, I think, a year ago of launching this Spacetalk Watch.  But now it’s really taken off.  Tell us about that process, tell us about the journey of the watch – which isn’t your main business, or at least it wasn’t the business you started with, but now of course it seems to be taking over your business.

Yes, Alan, and thanks for having me on the show.  We’ve been working on Spacetalk, our all-in-one watch, smartphone and GPS device for coming into five years now, and in fact this is our second device because the first one we just couldn’t get to work correctly.  The seed of the idea came from our school communication business where our systems are predominantly used to inform parents that their kids haven’t arrived to school as expected.  When parents get an SMS like that, normally the very next thing that comes into their head is, where’s my child?  We’ve been trying to solve that problem for a long time, well over 10 years.  

We’ve tried developing apps and one thing and the other and nothing really worked all that well from a practical point of view until one day about five years ago the lightbulb moment went off and we thought, why don’t we develop an all-in-one phone, watch and GPS device for young kids.  Back then, really, that seemed like a ridiculously challenging, difficult thing to do.  Back then, it really felt like flying to the moon and back would have been easier.  But anyway, we knuckled down and started working on it and after about three years we developed a watch but it unfortunately really didn’t work to the level of reliability and security that we needed to, because we always felt that parents needed to be able to totally rely on the watch to always work, to always be able to find the location of their kids, to always be able to talk to them and send messages no matter where they were.  We scrapped that first watch and started again, and then along the way we were lucky enough to recruit into the company some really, really smart people that previously worked with Nokia and Microsoft, that really brought in extra expertise into the company to develop the watch to finish it off.  We launched about a year ago when we last spoke…

Can you tell us what was involved in developing it, what did you have to do?

Well, really to work out how you build a smart phone in a watch, it was incredibly hard to do, incredibly hard but we worked on it.  When you build so much technology, pack so much technology into a very small space like a watch, you’ve got some really difficult things to overcome.  First of all, just the antennas.  In a smartphone the edge of the phone is the antenna, which is generally quite big, but when you shrink that size down to a watch size it’s a much smaller bit of hardware that you’ve got to work with, so it’s very hard to get the reception to work properly. 

Then you’ve got battery issues because obviously you’re working with a much smaller battery and it’s just problem after problem that we had to solve, but we did it.  Even at the very end I remember – we’re Adelaide based – at the very end we had a really good working sample.  Then what we did is we built 32 variations of it, just slightly different, and we sent a group of four engineers into the Adelaide Hills, they went in and out of known black zones or grey zones where the reception is a little bit dodgy there, and we perfected it even further.  When we released it was a brilliant watch and the lab tests showed that the reception was better than any smart phone on the market and that was the feedback that came back from the field as well, it works incredibly well.

Why couldn’t you just use an Apple Watch?  Is it because your watch is different and does different things?

Well, an Apple Watch is a very different type of device.  First of all, it requires a smartphone, the iPhone.  Our market is to kids in the 5 to 12 year old age group, in other words, before they get their own smartphone.  Apart from the fact that we’ve got a device that allows parents and family members to stay connected and safe, what it doesn’t have is very important.  Spacetalk doesn’t have any access to social media, it doesn’t have access to YouTube, it doesn’t have access to the open internet, so it’s a very safe and responsible device to give to your young kid and for them to use.  That’s why we stayed right away from the Apple Watch.

Right, but in a sense,  you’ve had to reinvent a large part of what the Apple Watch does, haven’t you?

To a degree, yes.  But it’s a different device because Spacetalk is an all-in-one watch, phone and GPS device.  It doesn’t need a phone.  The kids can make phone calls, send text messages to a list of contacts, but the people that the child can make and receive phone calls from and text messages is parent controlled.  The parent sets up who they can call, grandma, grandpa, mum, dad, uncle, auntie, brother, sister, that type of thing and that’s it.  They can’t call or receive calls from anybody else or text messages.  It’s got the other benefit of there’s no chance of any bullying.  The child can’t be bullied because they can’t receive messages from anybody unknown and they can’t send messages if they want to act like bullies.  It’s a very safe, socially responsible device, which is very different to where Apple are coming from.

I take it that it doesn’t need to have an account – the original business, the account was the school, this is a separate thing although it can work with your account with the school?

No, no, it’s totally separate.  This is a consumer device that, right now it’s sold in every JB Hi-Fi store, any of your listeners can go down to the store and have a look at it, try it out and see how it all works.  It’s sold on their online store and in New Zealand it’s sold by Spark, which is the former Telecom there.  They’re selling it through all of their stores, 73 stores, and they also actually have got it on a plan.  Parents, for a fee New Zealand $17 dollars can get the device and a sim card on one monthly fee.  

Did you try to setup a deal like that with the telecom companies in Australia?

Yes, and there’s a lot of negotiations in progress underway and hopefully we’ll have some good news fairly soon. 

Is the deal with JB Hi-Fi exclusive?

Yes, it is exclusive until the end of February.  They’re giving the product terrific support for launch.  You know, Alan, JB Hi-Fi stores are very crowded stores, so to get into a good location is a very privileged thing.  What they’ve done is they’ve located Spacetalk in their drive aisle.  When you walk into a JB Hi-Fi store, the drive aisle is the aisle that you walk into and it’s right at the very front, so everybody that walks in and out of the store, they see our Spacetalk Watch.  Also, those stores that are fitted out with play tables, these cubes where you can actually see the device and play with it, we’re at every one of those play tables as well.  It’s terrific exposure they’re getting.  

Does the deal with them and Spark include an amount of marketing spend by them?

Yes, it does.  There’s ad and marketing spend and joint spend as well.  For example, Spark are well be doing quite a lot of TV advertising very soon and with JB Hi-Fi there’s a large campaign in place, but that’s largely funded by ourselves.  We’re actually spending $850,000 dollars in advertising, promoting and creating awareness through the watch.  That’s through billboard advertising, video advertising, social and a lot of other things as well. 

The deals with JB Hi-Fi and Spark really cover you for Christmas and just immediately the period after it, right?

Absolutely.  Right now there are 270 physical stores where buyers or consumers can go in and have a look at the watch, try it out…  Because with Christmas coming up there are lots of parents looking for gifts and in particular, grandparents.  This is a great device for grandparents because they can make a call or send a text message to their grandkids, see how they’re going.  What’s interesting is, the kids love it too because they can send a message like, “I love you, Grandma.” Or, “I love you, Grandpa.”  With an emoji on it, with a red heart.  It’s an incredibly emotional beautiful experience to receive a message like that from a young child.  It’s just fantastic.  It’s a really good safe device to stay connected.

What are you selling them for?

$349 dollars for the watch, then there’s an ongoing fee for the sim card.  There are lots of sim cards out there that are not very expensive that work really well.  In Australia we only work with a Telstra network, but that includes Belong and Aldi and those types of cards as well that work on the Telstra network.  There’s a monthly fee for the app.  We have an app that connects the watch and that’s $5.99 per month. 

Right, so there’s an ongoing cost of the $5.99 for you and also you’ve got to pay for the Telstra network?

Correct.

Is that a full mobile network that you have to pay for?

Yes, yes.  The watch itself doesn’t use a lot of data because it doesn’t have access to social media and YouTube and those sorts of things.  Typically, our customers are telling us that if they buy a card from Belong, which is sort of the Jetstar version of the Telstra network, from Telstra itself, it comes out to being somewhere between $7 and $10 dollars a month after the sim.

How many have you sold so far?

Last count was 8,600, and we’ve manufactured to this Christmas period, 28,000.  We’re looking at some pretty big numbers coming through. 

Where do you get them made?

We get them made in China, but the technology is all our own.  We get various factories to make the various sub-assemblies and final-assemblies under contract for us, and our engineering staff are all here in Australia.  They fly out and supervise not just the manufacturing and assemblies but all the pre-work.  We do a lot of R&D here in Australia, but the assembly and manufacturing is actually done in China.  It’s actually right next door to where Apple makes their iPhones and their watches, right next door.  

Did you have a number in your head as to how many you’ll sell this Christmas?

Well, we’ve manufactured 28,000, so that’s the number we’re hoping to sell.  Time will tell, that’s a big number.  Alan, throughout the process of designing and building the watch, we thought there was a market but we had no way of validating it, no way of being sure.  But when we launched we were lucky enough to get some very good TV coverage with Channel Nine and sales took off on the very first day, so I could see there was a market there and the feedback from customers was very, very positive.  As you can see on our Facebook page, the number of comments and positive responses we’ve got is just amazing. 

But then about a month after launch, Gartner, the tech research company, came out with a remarkable report that said in their opinion, 30% of all smart watch devices will be into this brand new kids category, being 5 to 12-year-olds.  They’re 30% of all wearables in this category will go to this brand new kids market which is a very, very large number.  In the same report they were forecasting that Apple would end up with only 21% of the wearables market.  It looks like it’s going to be a very big category, still in its early stages but it’s certainly taking off very quickly.   

Are there any other products that are competing with you in Australia?

Yes, there are.  There’s some fairly inexpensive watches coming from China and from other Asian countries, but they’re different.  They’re not very reliable, they’re not secure and they certainly can’t be used as a safety or reliable communication device.  They’re more of a vanity, more of a fun toy type product.  They’re out there and they typically sell from $30 to maybe $70 or $90.  The difference with Spacetalk is that it’s a very high quality reliable, dependable, secure device that you can really use a safety device and a device that you can rely on to reach and communicate with your child at any time.   

These other ones that are on the market, I can see they all look fairly Chinese, but do they operate as phones and SMS devices?

Sometimes, but none of them actually are certified or approved to work in Australia or on the Australian networks.   Really, to sell a device such as this in Australia, you have to have all of the various government compliance, all the testing so that they’re safe to be used with kids, security, the testing on mobile networks…  All of those procedures and regulations and testing needs to occur for them to be sold.  None of them have got that.  We’re the only device that’s got through all that testing so parents and grandparents can buy it with confidence and a surety that everything’s going to work fine.  And of course, the customer service, we’ve got a brilliant customer service team here in Australia, therefore available to ask any queries and help set things up or anything like that as well.

Perhaps you better tell us about the original business and how that’s going?

Well, I’m pleased to say that for the 1Q of FY19 we booked a record quarter.  The school business is going great.  That’s a very solid, dependable, reliable business.  However, it’s hard to grow revenues at a meaningful rate because every year the price of SMS messaging comes down a bit.  Even now, it’s being replaced by what’s called in-app messaging.  But that’s a very good, solid, profitable business that generates a lot of cash flow, and the remarkable thing, Alan, is that throughout the four years that we were developing the Spacetalk watch, we actually funded that entire process including the first production run of 3,000 units entirely out of the profits of the school business.  We actually raised no money – it’s a remarkable achievement.   

Just in case people haven’t listened to or read our previous interview, describe the original school business to us, exactly how it worked.

Sure.  Almost two decades ago, we’re the company that discovered the use of SMS messaging in schools, and in particular, to rapidly inform parents that their kids hadn’t arrived at school as expected.  We discovered that and we developed the technology and we grew and grew that business to the point where probably about 3,000 or more schools around the country have used our systems at various times to not just notify parents that their kids haven’t arrived at school, but also then to remind them of school events, late breaking news, reminders, sports notifications, that type of thing.

Along the way, just about every education department in the country, including New Zealand in fact, have purchased and installed and used our systems.  It’s a communication system for schools to notify parents.

And it’s a subscription for the school, right?  How much is the subscription?

The subscription is based on number of enrolments and it’s anywhere from $3 to maybe $5 or $6 or $7 dollars per student, per year, plus the communication costs.  They’ve spread it because it depends which products they buy from us.  We have a number of core products and then bolt-on add-ons that increase the annual licence fee. 

And you’re making what, $3 million in cash a year from that, is that right?

Yes, that’s what it generated roughly last year, yes.  But this year of course we’ve got all the new revenue coming through from Spacetalk and in fact, our revenues – we released a trading update a few weeks ago, our year on year revenue has already grown by 180% compared to last year with all the new Spacetalk revenue coming through, and of course the school business is tracking very nicely as well having recorded that record revenue quarter for the first quarter of this year.  

In fact, 8,600 Spacetalk phones is $3 million dollars.  8,600 times $349 is $3 million dollars.

Yes, that’s at retailer level, but when we sell it to Spark in New Zealand we sell it at wholesale level which is ultimately less than that.

Yes, of course.

And plus, we’ve got the strong underlying school business as well.

But it’s clear, particularly if you sell all the watches you’ve made, it’s clear that your business is shifting fundamentally to being a wearable device business, isn’t it?

Absolutely.  And wearables really is recognised as one of the fastest growing areas in tech today.  I think that’s why we’ve got the interest of so many investors, because MGM is a way that investors can actually participate and get exposure to the Sparks growing wearables business via a public company.  It’s important to realise we’re not a start-up, we’ve actually been going for almost 20 years and we have a very strong school communication business underpinning the wearables business, and I think that’s why we’ve drawn the attention of so many investors recently.

Well, it’s great to talk to you, Mark, thanks very much for your time.

Thank you, Alan, great to catch up with you again.

That was Mark Fortunatow, the CEO of MGM Wireless.