On September 19, FleetMatics Group PLC (NYSE:FLTX) fell nearly 16% after the publication of a highly adverse report that alleged, among other things, “accounting shenanigans that inflate profitability, the material weaknesses in its internal controls, the inexplicable discrepancies between related accounts in its financials, and Fleetmatics’ founding backer’s ties to a previous accounting fraud.”

FleetMatics Group

The report suggested the stock had an intrinsic value of just about $11 a share.

Analysts Bhavan Suri and Matthew Pfau at William Blair issued their report in response the next day, saying the sell-off in FleetMatics Group PLC (NYSE:FLTX) was exaggerated and instead provided a buying opportunity.

Churn allegations not correct

Addressing the question of churn head-on, their report says the allegations that management grossly understates churn is incorrect. This is mainly because customers are actually increasing use of the company’s product by adding vehicles, as observed on a same-store-sales basis. This is an indication of positive churn. On the likelihood of failed renewals due to bankruptcies in the small and medium business sector, the analysts counter that FleetMatics Group PLC (NYSE:FLTX) has a dollar renewal rate in the 85% range which is healthy for a business addressing the SMB sector. According to Blair, customers are renewing three-year contracts “at a healthy clip” and are therefore availing a remunerative ROI, also evidenced by the fact that auditors at FLTX have recommended that useful life of a device be boosted from six years to eight years. Lastly, the company’s larger accounts such as Comcast Corporation (NASDAQ:CMCSA) are stickier than SMB accounts and this should be positive for churn.

FleetMatics Device depreciation

The report also clarified that FleetMatics Group PLC (NYSE:FLTX) amortized deferred commissions over contract life, as usual for SaaS companies, instead of six years as alleged in the report. Regarding device depreciation, Blair said it was not correct to compare FleetMatics Group PLC (NYSE:FLTX)’s policy in this regard to that of MiX Telematics Ltd – (NYSE:MIXT) as the devices and business mix of the companies were dissimilar.

FleetMatics Business outlook

Blair state that low telematics adoption is in fact an opportunity rather than a threat, and it is this promise that is creating competition in the field. In fact the macroeconomic pressures are nudging small business operators to adopt telematics to improve efficiencies and FleetMatics Group PLC (NYSE:FLTX) would be a beneficiary as global adoption rates improve.

Blair’s rating

Rating: Outperform

EPS 2013E: $0.82 Forward P/E 48.7X

EPS 2014E: $1.07 Forward P/E 37.3X

Positive factors cited are the expected strong growth of +25% in the topline for the next several years compared to the SaaS average of 21%, healthy margins, clarity of revenue model and unmet market opportunities.