PowerFleet, Inc. (AIOT) Earnings Call Transcript

Good morning. Welcome to PowerFleet's Third Quarter 2020 Conference Call. Joining us today is for today's presentation are the company's CEO, Chris Wolfe; and CFO, Ned Mavrommatis. Following their remarks, we will open the call for questions. Before we begin the call, I would like to provide PowerFleet's safe harbor statement that includes cautions regarding forward-looking statements made during this call. During the call, there will be forward-looking statements made regarding future events, including PowerFleet's future financial performance. All statements other than present and historical facts, which include any statements regarding the company's plans, for future operations, anticipated future financial position, anticipated results of operation, business strategy, competitive proposition, company's expectations regarding opportunities for growth, demand for the company's product offering and other industry trends are considered forward-looking statements. Such statements include, but are not limited to, the company's financial expectations for 2020 and beyond. All such forward-looking statements imply the presence of risks, uncertainties and contingencies, many of which are beyond the company's control. The company's actual results, performance or achievements may differ materially from those projected or assumed in any forward-looking statement. Factors that could cause actual results to differ materially could include, amongst others, SEC filings, overall economic and business conditions, demand for the company's products and services, competitive factors, emergence of new technologies and the company's cash position. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances. Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company's website at www.powerfleet.com. Now I would like to turn the call over to PowerFleet's CEO, Mr. Chris Wolfe. Sir, please proceed.

Thank you, Shamali. Good morning, everyone, and thank you for joining our call today. I hope everyone is staying healthy and doing well during this time. Our global team of employees and partners are healthy and are continuing to drive the business forward while we follow country, state and local health measures. While the pandemic continues to present challenging headwinds in our various geographies, we've seen business momentum pick up from the lows we saw in Q2. Despite the ongoing challenges, we delivered solid sequential improvements in all of our key financial metrics during Q3. We realized a 7% increase in total revenue, a 6% increase in gross profit and a 71% increase in adjusted. These results, again, demonstrate not only the resiliency of our business and the necessity of our products and services, but also our focus on driving profitable growth. We continue to make very good progress against our strategic initiative of increasing our vertical integration across our product lines, while, at the same time, judiciously managing costs and realizing efficiencies throughout our organization. Taken together, these measures produce another strong gross margin quarter of 54% and a 4% sequential decrease in OpEx, which drove significant improvements to our bottom line. I will now turn the call over to Ned to discuss our Q3 financial results in more detail. Afterwards, I will discuss our sales and operational progress and outlook, then we'll open the call up for any questions. Ned?

Thank you, Chris, and good morning, everyone. Before I dive into the numbers, it's important to remind you that our financial results 2020 include consolidated results for both I.D. Systems and Pointer Telocation, which we acquired on October 3, 2019. Keep in mind that the comparable year ago period only includes stand-alone results from I.D. Systems, Inc. Now with those qualifications, let's look at the numbers. Revenue for the third quarter of 2020 increased to $27.6 million from $25.8 million in the prior quarter and from $16.7 million in Q3 last year. High-margin recurring and services revenue were $16.7 million or 60% of total revenue. This was an improvement from $16.4 million or 64% of total revenue in the prior quarter and from $5.8 million or 34% of total revenue in Q3 of last year. Product revenue, which drives future services revenue, was $10.9 million or 40% of total revenue. This compares to $9.4 million or 37% of total revenue and $11.1 million or 66% of total revenue in Q3 of last year. Gross profit increased to $14.9 million or 54% of total revenue from $14 million or 55% of total revenue in the prior quarter and from $7.6 million or 45% of total revenue in Q3 of last year. Now turning to our expenses. Total operating expenses for the third quarter of 2020 were $14.2 million, down from $14.7 million in the prior quarter. The $14.2 million in Q3 was down 4% from the prior quarter and down 19% from Q1 of 2020. We have additional levers to pull in, in our expenses to further reduce the cost should the situation with the pandemic worsen. Turning to our profitability measures. GAAP net loss for the third quarter of 2020 totaled $1.7 million or $0.06 per basic and diluted share. This was an improvement from a GAAP net loss of $3.8 million or $0.13 per basic and diluted share in the prior quarter and GAAP net loss of $2.1 million or $0.12 per basic and diluted share in Q3 of last year. Adjusted EBITDA, a non-GAAP metric, for Q3 2020 totaled $3.6 million or 13% of total revenue. This was an improvement from adjusted EBITDA of $2.1 million in the prior quarter and adjusted EBITDA of $738,000 in Q3 of last year. The $3.6 million in adjusted EBITDA in Q3 of this year marked the highest level of adjusted EBITDA since the acquisition of Pointer, reflecting the leverage in our financial model. Our liquidity position remained strong at quarter end with $21.1 million in cash and cash equivalents and a working capital position of $31.2 million. Our focus continues to be on working capital management and cash collections. I'm encouraged to report that for the 9 months of 2020, we generated $5.3 million of cash from operations, which is an improvement from $4.3 million used in operations in the same period of 2019. In summary, we believe our diversified customer base, predictable, high-margin recurring revenue and prudent approach to cash management will help us ensure we successfully navigate this uncertain times. That concludes my prepared remarks. Chris?

Okay. Thanks, Ned. Our improving financial performance reflects our global team's continued operational execution and building sales momentum. During the third quarter, we secured several notable wins in our industrial business, including Kautex, a top 100 supplier of global automotive OEMs. Kautex is leveraging our next-generation PowerFleet enterprise solution to improve safety and efficacy across its global manufacturing centers. After initially installing our solution on all their assets at the Detroit facility, they expanded deployment of 2 additional North American sites. We have exceeded all of their expectations, and we are now in discussions regarding deploying our solution at 7 other European locations. Our end of Q2 win with Ryder logistics, a leader in outsourced logistics, is notable as they continue to implement at 3 sites during Q3. Ryder selected PowerFleet for enterprise solution on their forklifts and other material handling equipment within its North American supply chain operations. For those less familiar with our industry, Ryder manages critical fleet, transportation and supply chain functions for more than 50,000 customers, many of which make the products that customers use every day. Over the next 12 to 18 months, Ryder will be deploying our enterprise solution on more than 1,000 pieces of material handling equipment at more than 30 sites across North America. In addition to Kautex and Ryder, we had several other successful implementations during Q3, including with the largest Internet retailer implementing at 5 of its U.S. sites. In Q3, we also signed a master purchasing agreement with Daimler Trucks North America, the leading heavy-duty truck manufacturer in North America. They are currently installing our system at 2 of their sites with plans to install at their Portland headquarters in Q4 and other locations throughout 2021. In our logistics segment, we won additional business with 2 existing customers who are expanding their container and chassis fleets. The first win was with Milestone, who purchased approximately 1,000 LV-100 units during Q3, representing a strategic decision to begin tracking chassis in their rental business. The other win was with Compass Lease, who purchased 500 LV-100s to track assets in their rental side of the business. It's important to note that both purchases represent a new strategic investment, not previously typical of the rental business model and logistics, as it's usually low cost driven. However, both companies see the value of PowerFleet platforms and using our software and analytics for internal process improvements, including enhanced visibility of assets during high demand leasing. Additionally, both companies now can offer their rental clients extended value by providing the same visibility to their assets during the term of the rental contract. We have also seen the effects of COVID increase demand for both dry van and refrigerated trailers. In turn, this has stimulated demand for tractors and drivers, which has driven an increased demand for intermodal container capacity, as intermodal options helped to move essential goods without tractors and drivers. We are especially excited about our recently learning that we won a 6,000 unit container fleet that will leverage our LV-500 solar unit and LV-710 freight camera system that will begin shipping in Q4. This is the largest win utilizing our LV-500 to date. Once we receive the purchase orders, we will issue a press release with more details on this great win. Additionally, our customers in the cold chain space have reported an increase in their air business as they move essential food and pharma products. We are currently in 11 field trials with approximately 40% of those associated with refrigerated tracking command and control. While these field trials represent a 30,000 unit near-term opportunity, these customers represent an additional 130,000 units in potential. While we've had great success with our existing logistics lineup of products, we continue to not only add new functionality and features but push innovative boundaries as well. In Q3, we entered the final stages of field trials with what we call our [ LV-750 ] weight sensors. This new product will provide customers with solutions that detect mounted and dismounted states, progressing to loaded and unloaded and also estimated weight based on the customers' required use cases and their price points. On top of this, we recently entered into beta tests on our dual mode versions of our dry van container and refrigerated platforms, the LV-500 and LV-400, utilizing both satellite and cellular for wide area communications. These solutions open up additional market opportunities that require communications footprints beyond traditional cellular networks. In addition to new innovations and logistics, we continuously improve the safety and the security of the capability across our industrial and fleet management product lines as well. Internationally, our Pointer Israel operations had a phenomenal Q3, growing both their historical connected car business as well as their IoT and logistics offerings. Our revenues and profits from Pointer Israel exceeded pre-COVID levels. One exciting recent development is that our Pointer Israel business unit began business development activities in Dubai following the recent piece deals with the UAE and Israel. We are currently working with several potential partners to assess deploying our solutions in the consumer rental and vehicle spaces in Arab countries that have signed piece deals with Israel. The vehicle security and fleet markets represent more than 300,000 unit potential. Our Cellocator business, which sells products and services outside our core markets, saw demand near pre-COVID levels in Q3. This tells us the recovery is global in nature. Also, our Mexico operations continued to report COVID impacts and grew at a rate of 13% year-to-date as we continue to get strong uptake from our customers [ Quebec ] and accident insurance. In Brazil, we won 3 significant deals in Q3, totaling over $4 million in contract value. These contracts were with Petrobras, Raizen and [ Endicon ]. Now let us turn to our rental car business, which has been folded into what we call our PowerFleet for Vehicles here in the United States. In Q3, we saw Avis business recovering, and we are currently at pre-COVID monthly billing levels. We also continued discussions with the world's largest rental car company on doing a large-scale field trial of our product in 2021. Looking ahead, our now 570,000 subscriber base provides us with not only high-margin recurring services and subscription revenues, but also good visibility as we enter 2021. This visibility is supported by our strong financial foundation with $21 million in cash. On top of this, our consistent cash flow and expanding adjusted EBITDA generation provide us with diversified and stable plan to execute on our growth strategy. While COVID headwinds remain, we see sporadic closures in various countries. We remain confident in our continued ability to execute our strategy and extend our position as one of the world's leading IoT companies focused on supply chain visibility, fleet management and unique asset and IoT solutions. With that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator Instructions] And our first question is from Mike Walkley with Canaccord Genuity.

I hope everybody on the call's families are safe and well. Chris and Ned, congratulations on the strong EBITDA margins. Great to see them return to double-digit levels. Just on the 570,000 subs, I think that's up 20,000 sequentially. Can you give us just some color where you're seeing maybe the strongest adds in this tough environment? And also on the other side, are you still seeing any customers downsizing just given macro concerns? And then finally, just based on the sub number, do you expect it to continue to grow absent any kind of economic shock from the pandemic worsening?

Thanks, Mike. As far as the sub growth, it was really across the board. That's kind of why we wanted to focus on the win in Brazil, the win in Mexico. Again, I think a lot of new investors that don't really know our story, like the industrial side, you have to keep in mind we've shipped well over 100,000, probably 140,000 total units in the life span of that. Well, half of those are not on recurring today. So again, as we get customers to refresh, those all go on to recurring. So I think it's just a broad-based recovery, which is great to see. And so there wasn't really one shine-out massive deal that brought in a lot of subscribers.

Great. And Chris, just PowerFleet for Logistics, you mentioned those 2 customer wins. Can you provide maybe more color on who you beat out to win the deal, why they chose you and what that potential opportunity can be for PowerFleet?

Yes. The 2 customers we mentioned, those are actually existing customers, but this is new business with them. And just so everyone knows, typically, those are put out for bid. Just anybody running a logistics company or a leasing company, you always put your new business out for bid. I can't go into who we were competing against, but we definitely had to compete for that business. And I think, obviously, being an entrenched provider helped us but, again, they've put us through the paces. I think the opportunity with them is -- and what you're seeing, as I mentioned before, this uptake demand for trailers, the uptake demand for containers, well, if you have a container, you have to have a chassis. And so the leasing companies that are actually leasing this equipment to take care of that excess demand, the more demand there is, obviously, the more opportunity for us to grow. And we'll just grow with our customers. As a matter of fact, that container fleet that I mentioned, the 6,000 LV-500s, I mean that's a monster win for us. That's a brand-new fleet, to put it in context. That is not an existing fleet. This is a brand-new container fleet that's going to be hitting the road.

That sounds great. And one last question for Ned, and then I'll pass the line here. Ned, very strong service and some hardware gross margins in the quarter. Was there anything special in the mix? Are these trends we should expect to continue? And while I know you're not giving guidance, just kind of based on the pipeline, would you expect both those businesses to potentially grow sequentially?

Yes. So if you look at the service gross margins, Mike, we have -- those are going to remain strong at these levels going forward and they're going to continue to improve as we grow the service revenue. The product margins tend to fluctuate a couple of percentage points based on product mix. We did have very good product mix during this quarter. Also, the reason we did the acquisition of Pointer and owning Cellocator is to be vertically integrated and really control our gross margins. And you're starting to see that benefit with the product margins. That's why we're proud of our gross margin performance in the quarter.

And then the growth in next quarter, any comment or just kind of no guidance for now?

Yes. At this point, we're not giving any guidance. But as obviously, Chris mentioned in the prepared remarks, we feel very good to what we're seeing about the business. Obviously, we're concerned with COVID as some of the economies globally are beginning to shut down again. But so far, the pipeline and our sales activity is very positive.

Right. Congrats again on the execution, and I'll pass the line.

Thanks, Mike.

Thanks, Mike.

And our next question is from Jaeson Schmidt with Lake Street.

Just curious if you could comment on sort of the linearity of order patterns you saw in Q3. And any additional color you could provide on what you're seeing from order momentum here in October and here in November?

It's kind of interesting that, as I mentioned before, even with our subscriber growth, it's kind of across the board. And to be honest with you, that's great to see because that tells you that the run rate business is recovering. If you look at our -- what we call our dealer network channel here in the United States, many of you know that we have -- we do business with 500 dealers that actually sell our products here in the States. That's like our Jungheinrich channel in Europe. We've sold that. That business actually recovered at pre-COVID levels during Q3, which -- that's awesome. On the strategic side, which we won some huge strategic deals, we still -- we're starting to see that recover. That's where it was most impacted in Q2. And when we say strategic, that's the large companies that we deal directly with. So a lot of them put off their capital expenditures in Q2 because of COVID. We're starting to see that recover. And to put it in context, that was well over $11 million in business that basically kind of put on hold. Now that being said, we're starting to see that come back. I think what Ned said is true. Like Israel shutdown for 3 weeks at the end of Q3. Thank goodness it was during -- they could -- I think it was happenstance, but it was like right during their holiday time, so it's really minimal impact. But you're also seeing Germany being impacted. That has not impacted us as of yet with Jungheinrich, and the U.K. is shutting down again. So I think the uncertainty is the only thing that I would say is we're seeing the momentum pick up across the board, but it's just that what could happen. And as long as we see the strategic deals starting to come in, we feel a lot better about like Q4 and going into next year.

Okay. That's really helpful. And then looking at your large online retailer customer here in the U.S. I know that's really driven by your partnership, but how should we think about the potential trajectory of further rollout? Would we expect further expansion here in Q4 and throughout 2021?

We have visibility into some of that. I'm not at liberty to go into the details. That being said is, we've seen the momentum pick up there over the last year, even in the midst of COVID with our partner. I think we're going to continue to see that in 2021. I mean, again, what we're hearing is that a large retailer, an online retailer is looking to wind down or narrow down their choices in telemetry. Right now, they actually pick a telemetry unit depending on the forklifts they pick at given sites. We see that continuing, but I think they're starting to be very selective. And so we think that actually bodes very well for us next year.

Okay. And the last one for me, and I'll jump in -- back into queue. Ned, how should we think about OpEx here in Q4? I know you mentioned there's additional levers to be pulled if needed, depending on the macro situation. But is OpEx going to remain relatively flat?

Yes. Our goal is to really maintain the expenses flat at this level. And obviously, you see as the revenue grows, a lot of that goes right to the bottom line.

And our next question is from Gary Prestopino with Barrington Research.

Chris, I thought I heard you say you have 100,000 units that have been shipped but are not reflecting any kind of revenue on the services side. Is that correct?