EROAD Limited (ERD) Earnings Call Transcript & Summary

Good morning, Marina. It is my pleasure along with Alex Ball, our finance -- Chief Financial Officer, to present the full year results of EROAD for FY '21. We will work through the investor presentation. It will take us about 40 minutes, leaving questions for the remaining 15 minutes now. If we begin on Page 4. So we're very pleased that we were able to grow during a very COVID-impacted year. We saw growth in each of our markets. At a group level, revenue was increased by 13% to $91.6 million. That growth dropped to EBITDA as well. So we saw EBITDA increase 13% as well, and that's taking into account a significant increase in bad debt provision of $1.5 million due to the impact at our customer base sales. And EBITDA margin improved slightly, it is 34% of revenue. One of the main focuses for FY '21 was to weather the storm and come out of the year far more competitive, but to retain all the underlying metrics that we have historically enjoyed, which was strong monthly recurring revenue to subscriber and high retention rates. And we've done a very good job of achieving that. The annualized monthly recurring revenue grew from $84 million to $88.4 million. That number would have been higher, but there was a significant impact from a FX perspective with the New Zealand dollar strengthening significantly against the U.S. dollar. You'll see on this slide year-on-year monthly recurring SaaS revenue was essentially the same at $58.30. Again, there was actually good growth in recurring -- monthly recurring revenue in North America, but when it translated into New Zealand dollars, that was reduced. Some of the big notable achievements during the year on the bottom line here was the capital raise of $53 million and the listing on the ASX. Just to summarize the purpose of that capital raise was to accelerate investment in our future-focused platforms, two was to provide seed capital for inorganic growth and third was to strengthen our balance sheet, so we are well positioned if something like COVID was to continue. Ventia was a big win for us, that happened at the end of the year and really is our first significant enterprise win across New Zealand and Australia. Let's talk a little bit more about that later on. And we had a significant new product delivery, which was our dash cam which is a road-facing and driver-facing camera solution, and that was released early March, and we saw a really strong initial sales. So this is a slide that we've shown every year, so a breakdown by market, you can see there was some growth in each market, but definitely not at the rates that we have enjoyed in earlier years. The next slide gives you a breakdown by quarter. New Zealand was the least impacted market achieving about 80% of what we would typically expect as a sort of annual run rate. North America was significantly impacted. In addition to COVID, there was a change of government, which have a little bit of disruption around significant fires on the West Coast and a lot of civil unrest, all of which significantly impacted the business confidence of our customer base. Australia was significantly impacted in the first half of FY '21, but started to recover in the second half, and that allowed us to make progress with our enterprise pipeline and winning Ventia [ enterprise ] solution, which had been in our pipeline for nearly 2 years. On the slide here, we made very good progress with re-signing our customer base. So as you know, we operate on the 36-month supply contract. So during the course of the year, we did manage to re-sign on extending 36 plus month service contracts, 640 customers, which is just under 14,000 contracted units. When you look at this as number of vehicles per customer that works out to between 2 vehicles per fleet. So there is a lot of smaller customers continuing to sign up for the service. So really demonstrates the importance of this service that we've delivered to that customer base, both small to medium and enterprise. This next slide is a new slide. And I think it's very exciting. It really shows the breadth of services that we are now providing to our customers. I'll quickly go through these. So here is the dash cam on the left-hand side, really important in North America to help our customers improve their insurance premiums by being able to provide acceleration when an accident occurs. We have EROAD Go, which provides connection to logistics systems and the in-cab experience to the driver. We have Electronic Logbooks in New Zealand, a new version of that was released in the first half of the year. And very quickly, over 6,400 subscribers. One thing to note that just over 500 Logbooks are being used by customers that do not have EROAD telematics in the vehicles. So this combined with another product that we have on there called EROAD Inspect is allowing us to win business from new customers that potentially have a competitor's telematics solution in the vehicles. So when that -- those contracts come up, we have already established a relationship with that customer. So a new way of winning business. We have EROAD Fleet Maintenance, which is a big demand from our enterprise civil construction customers to manage the myriads of suppliers which they have. And then over on the right, we have EROAD Where, which is an IoT platform for small assets, so they can be tracked very cost effectively. So you'll see this picture develop over time as we add more and more services for existing customers, as they take on these new products and services, we will see an increase in ARPU. I'm now going to hand over to Alex, that will take us to a market-by-market breakdown.

Thanks, Steven. Good morning, everybody. Our home market of New Zealand remains an important one for us from a growth point of view and remains a significant growth opportunity. In financial year '21, we continue to grow with 9% growth in contracted units, up to 87,892 units at the end of the year. And that represented a growth of just over 7,500 units. And that's really quite important for us because over 30% of that was from new customers, not just existing customers increasing growth. And that was during, as Steven said, a COVID-impacted year, albeit New Zealand is the least impacted of the 3 markets that we operate in. And within the same market, over 7,500 units were also renewed, and we'll continue that retention work in this important market into financial year '22, where we've got some significant renewals to take place. Our overall retention rate remained stable at just under 96%. And pleasingly, our ARPU increased slightly as we rolled out additional SaaS subscription services, and which Steven has just been talking to, with our EROAD Day Logbook being a very strong performing product, with over 6,400 subscriptions sold in the year. And this has contributed to an EBITDA result of $38.8 million, which is up 11% on the prior year figure. And as I've said, in terms of growth, we expect similar growth to take place going forward. We've talked about a run rate of 9,000 plus connected vehicles per annum being the run rate that we've seen in prior to COVID-impacted times, being the sort of average over the last 3 or 4 years, and we would anticipate that going forward into FY '22, and that's consistent with the previous statements we've made about the New Zealand market. We turn to the U.S. market. The U.S. market was the most challenging of the markets that we operate in from a macroeconomic conditions point of view. As Steven has outlined earlier, the pandemic and the lockdowns that resulted from that as well as civil unrest and political backdrop made sales particularly challenging in the second half of the year. But with that in mind, we continue to focus on growth and focus on both growth in contracted unit levels as well as ARPU. And we're pleased to see that ARPU in U.S. dollar terms increased by $1 year-on-year to $42.95 despite those challenging conditions, and we achieved a 4% growth in units to 35,437 contracted units. Our retention rates lowered slightly in the year by a couple of percent to just under 93%. And we have experienced an increase in aged debtors due to the COVID impact and the lockdowns. And we've, therefore, increased our doubtful debt -- debtor provisioning at the end of the year as a result of that in this space. However, we are seeing signs of the economy opening up, bolstered by the U.S. government support packages that have been passed recently. And as Steven has outlined, in March when we launched and shipped into the market our dash cam product, we saw over 1,000 dash cams sold in that 1 month. And we're continuing to see a strong demand for that dash cam product into this financial year in the states. In the enterprise segment, we are in pilots for just over 1,500 units, and we are curating the pipeline for both Ehubo and dash cam sales into the enterprise pipeline. And as a reminder, we are targeting about 2.62 million vehicles that sit in that several hundred to several thousand vehicle fleet category, which we determined to be at the enterprise segment that we're targeting. So as we've previously stated, we do have some confidence that the American market will open back up, and it's really a matter of the pace at which it does that which will determine where we'll end this year. We're very positive about our product market share, and we're also very positive about the future road map into that market. Finally, just on this slide, we're also very positive about the fact that we continue to grow our earnings in North America. And as a result, our EBITDA increased, despite those increases in doubtful debt to $10 million from $7.5 million in the prior year. We turn to our third market now. Our business continues to build in Australia. And during the year, we added another 745 units in our small and medium size customer segment. And as Steven has outlined earlier, we signed our largest enterprise customer over there being Ventia. And as we've already signaled to the market, this will double our connected vehicle subscriber base in Australia. And while our ARPU reduced in the year due to the nature of some of the SaaS bundles that we are selling into some of that growth, we do anticipate that, that ARPU will improve in FY '22 as both Ventia and the new growth comes back online. We're still seeing most of our growth coming from the enterprise segment in Australian market. And our short to medium pipeline of between 15,000 to 20,000 vehicles gives us confidence that the business can and will grow to a sustaining level within 1 to 2 years. I'll turn now to the summary of the financial results. Steven has given a little bit of synopsis of this, but just briefly, our revenue increased 13% year-on-year to $91.6 million from $81.2 million. That translated equally into a 13% increase in EBITDA at $30.7 million from $27.1 million. And our EBITDA margin improved slightly to 34% from 33% as a result of that result. If we look at the profit before tax, for the second year in a row, we reported a profit before tax at $1.9 million. That's a 36% increase on the prior year. And we were free cash flow positive in FY '21 to the tune of $5.3 million, which is a significant turnaround from the prior year of $18.1 million. Some of that is in reference to the lower levels of sales that we achieved, given our business model. But equally, we were very focused on our cash flows during this most challenging year. I turn to a more detailed income statement, just to highlight 1 or 2 things within here rather go through the whole detail. Within the revenue line, we did have the benefit of $1.5 million worth of a forgiven U.S. government support loan that we received during the COVID lockdowns. Our operating expenditure increased by 12%, which was in line with revenue, but also reflected the increases in the R&D spend levels as Steven has outlined. Some spend to save projects that we're undergoing at the moment as well as those increases in the doubtful debt provisions due to the pandemic. And there was -- furthermore, there was one-off adjustment for U.S. superannuation costs to the tune of $1.1 million, all in that totaled $60.9 million of operating expenditure. So if I turn to our summary of EBITDA by segment. We've talked to some of the results here. But as I've indicated earlier, all markets improved their EBITDA year-on-year, despite operating conditions being more challenging. But of course, the North American market was the most challenging for us, and we see that in the half year on half year results there set out in terms of the reduction in EBITDA in the second half of FY '21, and that was really driven by that increase in doubtful debt provisions, but also the challenges around the second half sales. And in Australia, as we built out the completion of our sales and marketing framework and team, we accelerated the spend there, and that's the reason for the half-on-half movement in Australia in EBITDA terms. I move through to how we track ourselves in terms of growth indicators. Our annualized monthly recurring revenue figure, as we said, increased to $88.4 million from $84.0 million, and that's despite a negative FX impact of $4.5 million in the year. And similarly for our future contracted income, which is unearned but yet contracted income going forward, that increased from $134.4 million in FY '20 to $141.9 million at the end of FY '21, again, despite an exchange rate negative impact of $9.3 million. And finally, on this slide in terms of another growth indicator for the future, our spend in R&D as a percentage of revenue, we've previously signaled the capital raise and at the half year, that, that was going to increase because we are accelerating our growth strategies for future growth, and it did increase, it increased to 23% and we anticipate it being in the range of 24% to 27% as a percentage of revenue for FY '22. Over to page to the value that we drive from our existing customer base, which is really represented by the asset retention rate and our ARPU figures, which we've talked to before, but I'll just recap. They are static -- fairly static at $58.3 million -- $58.3, sorry, for ARPU and for the asset retention rate at 94.9%, just shy of 95% and we're pleased that those both have remained stable, whilst we worked through some of the challenges in this year. Noting on the ARPU side of things, the stronger U.S. dollar and New Zealand dollar exchange rate, again, had a negative impact of $0.65 year-on-year. Finally, from a metrics point of view, our profitability metrics, we look at our cost to acquire and the [ product ] cost to serve. Our cost to acquire customers as a percentage of revenue has dropped. And not surprisingly, as we've highlighted, an increase in revenue. And of course, we've had a slight slowdown in terms of our growth. And you can see that really in this additional indicator that we put into this slide around the cost to acquire per unit. That increased in FY '21 from FY '20, really is a function of the lower levels of growth that we were able to drive out from '21 this year due to the pandemic, and that will be a focus going forward for us to reduce. On the right-hand side, our cost to service and support as a percentage of revenue. It's again relatively static around 4.5% to 4.7% in FY '21. We look to keep it within at the moment, the 4% to 5% of revenue range as we grow, and we will look over time to improve as we scale and leverage a number of those processes. Turning over the page to the operating expenses bridge. As I said, operating expenses has moved from $54.1 million to $60.9 million in the year, driven predominantly by our acceleration of our growth strategies, our continued build in the R&D space. And a lot of that is the reasons for the increases in personnel expenses, other employment and subcontractor costs, and those are the predominant drivers of cost increases this year. So turn to the additions to PPE and intangibles. Again, this year, we had a much lower level of spend on PPE due to 2 things. One is lower unit volumes, but also a tighter level of inventory management that we undertook during the course of the lockdowns. Fair to say we are taking a slightly different track now with the supply chain challenges in FY '22, and we are making sure we are looking to hold the level of inventory that we will need. In terms of our intangible assets, our R&D spend has increased to $21.3 million from the prior year figure, and that's an increase of $5.7 million and is effectively 23% of revenue, as we've said. And a lot of that was capitalized into development and software assets. There's a decrease in the level of software asset additions year-on-year, and that is really because prior year -- in the prior year, we were rolling out on new generation of business systems. And so the spend that we've made in that space this year has only really been to embed those systems further from the rollover that we did in FY '20. I move on, again, on to that movement in R&D. Briefly, just to summarize, a $21.3 million spent in the year, $13.1 million of which was capitalized and $8.2 million of which was expensed. And you can see that movement in the intangible assets as a result up to $45.3 million from $42.1 million within net of that capitalization less the amortization of previously capitalized costs. And now if we turn to the operating cash flow bridge -- sorry, free cash flow bridge. Clearly, we are now continuing to build the level of operating cash flows that come into from our markets. And whilst we're increasing the level of spends, I think $17.5 million spend in that corporate space, which is where our R&D teams sit, we'd also additionally spent in terms of some development asset spend, but there were lesser amount spent, as I said, on software and other PPE. And as a result, we had a net cash flow positive result for free cash flow at $5.3 million. I've talked to the cash flows here. The only other thing to note outside of operating and investment case was obviously the growth in financing cash flows, which is as a result of the capital raise that we undertook this year, which was the placement and the further $11 million raised through the SPP. And if we move to the balance sheet, the balance sheet, obviously, therefore, has seen a much stronger level of cash held on the balance sheet as a result of that, and we talked to how we are looking to use that cash through the increased levels of R&D spend and the seed capital for inorganic activity, growth activity. And of course, we've talked also about PPE reducing as those hardware assets have come down as we've sold more than we've got capitalized back in. The only other thing to note at the bottom is that borrowings from long-term bank loans have reduced and those are due to scheduled payments that we made in September 2020 and March 2021. I'm just going to turn back to Steven for a summary of the growth drivers going forward. And then we'll come back on the outlook at the end of the session.

Thank you, Alex. This slide has been updated since September. Much of it is the same. Telematics solutions grow by on 2 things, being able to get access to vehicles, put hardware in them. And secondarily, being able to train people particularly in the back office and in the vehicle to use the system. So really very difficult to make progress when you are in the lockdown situation. With COVID lifting, we would expect the high-growth opportunities that we had enjoyed before FY '21 to rebound. In addition to the digital transformation that we had been seeing with customers requiring more and more services to help them better manage their businesses in terms of health and safety compliance outcomes, but also efficiency, they want those actionable insights and predictive analytics to gain further benefits. As the cost to track comes down, which is really where that EROAD Where product is, customers will want to track more than what they have traditionally than trucks, trailers and cars, so micro assets all the way down to handhelds. And customers are requiring higher levels of integration into the back office, the logistics systems, HR, ERPs. Those things also important to unlock actionable insights and predictions. We've seen further [indiscernible] looking at alternate ways to fund the roads, the governments are becoming acutely aware that with Kiwis' electric vehicles making up more of the fleet that the revenues from fuel taxes are going to significantly reduce. In New Zealand, there is signaling that a move to some kind of road user charge for all road vehicles. And we look forward to working with the New Zealand government in terms of how reform could happen in that space. In North America, we're about to enter the fourth year of road user charge pilots. Each year, the extent and scope has widened. So we will see a larger number of states and important stakeholders and transportation being involved in that. It was expected to be a national road user charge pilot start early FY '22. That has been delayed potentially 6 months, but we would expect that to take off during the course of this year. Health and safety remains a focus and is a key driver in New Zealand, and we see that becoming an increasing thing in that North American market. Electronic Logbook having more adopters in the New Zealand market and that potentially in both New Zealand and Australia could become a mandatory product within the next 5 years. If we move over to the right-hand side, which is our post COVID-19 trends, there were a bunch of things that we would have called trends, which have kind of disappeared. Conversation around autonomous vehicles has really dropped off. As an example, some of the things which have intensified has been some of the struggles that COVID has shown, a real lack of visibility and transparency within supply chains that will drive the demand and also reducing human contact with removing of paper and making everything as contactless as possible, particularly for drivers. We're also seeing bigger demand from our enterprise accounts from ESG reporting, so they can report on their improvements around sustainability as transport, unfortunately, is seen as a significant polluter as well as also the highest increase year-on-year in pollutants, but definitely quite a change, particularly in New Zealand towards adoption of electronic vehicles, particularly within government fleets. This slide I won't talk to because I'll cover it when I talk about where our key sort of strategic focuses are by market. So this is a snapshot of where EROAD is today. You see the total contracted units by market. Underneath that, what percentage enterprise. So we've got 45% in New Zealand and every year, that creeps up; 30% in America. And over on the right, 32%, but as we deliver Ventia, that will quickly get past 50% this year, I'm expecting. Down below that, we tried to do a breakdown of those sort of key transportation verticals that we are in. You can see that civil construction a particularly strong theme along with freight and road transportation. So in terms of where our platform serves in the different markets. From a New Zealand perspective, it's still a significant growth opportunity for us. If we look at the percentage market share we have in terms of commercial vehicles, light and heavy in New Zealand, there is still a long way to go. We believe there is some pent-up demand from FY '21, that will realize itself in FY '22. The team has set themselves a magic number to hit over the next 18 months, which is 100,000 contracted vehicles. In terms of product development focus, we want to extend product offerings in the area of civil engineering, government fleets, health and safety, electric vehicles and helping our customers reduce their carbon footprint and in PPEs through reporting. We expect to see good improvements in ARPU as we sell additional services, both SaaS and mobile to existing customers. We will see our range of telematic solutions widen beyond trucks and light commercial vehicles into those smaller assets. And because of the leadership position we do enjoy in this market, there is opportunities to work with others on the transportation ecosystem to realize their own sustainability initiatives over the coming years. In North America, the magic number that we're shooting for over the next 18 months is 50,000 connected vehicles in terms of extending the product offering, that is primarily focused around road transportation fleets and an increasing focus on health and safety products, many of which we've already matured in the New Zealand and Australian markets. We like to extend our telematic solutions beyond trucks into trailers and associated light duty vehicles and larger assets. So similar story in terms of shape compared to New Zealand in that respect. We have a pipeline of enterprise opportunities, which we will aggressively procure -- pursue and at the same time, continue to build our month-on-month small to medium fleet run rate. And of course, there is the national pilot happening in the U.S., which we continue to support as the only provider in the heavy vehicle road charging states. In Australia, we're aiming to get to 10,000 connected units over the next 18 months. Similar focus in terms of product offering from a New Zealand perspective, but more in that driver fatigue space. We have starting about 6 months ago, started building out a leadership team based in Australia to support enterprise accounts and to aggressively grow that market. Likewise a good pipeline of enterprise opportunities to progress and also build out that small to medium monthly run rate. Definitely big focus to increase our brand awareness and start using digital marketing activities to bigger target opportunities. And if there is the opportunity with the national RUC pilot happening, we aim to be the key participant in that. Outside of that, our product and engineering teams continue to extend and build out our new platforms and look to partner with best-in-class providers in order to bring products to market quicker and not have to build everything. And finally, big focus this year is around inorganic growth. We've talked about this Q4. Now is the time to really put a lot more resource and focus into this area. And that really has been the case for the last 6 months. We're forecasting to make at least 1 acquisition in the next 12 months and look forward to sharing that as we go through that process. This slide here really breaks down what that R&D investment looks like. So I won't go through in detail. But certainly, extending our platforms. So they are enterprise grade. We're on our third generation of platforms. With previous ones, we're really focused around small to medium customers. And while we enjoy significant large enterprise accounts, those platforms have fared well. But with third generation, we need to make them scalable. So we potentially could support up to 40,000 vehicles in the fleet and 6,000 drivers. With that, I'll hand back to Alex to provide an outlook for FY '22 and then we'd love to answer any questions you may have.

Thank you, Steven. Just regarding our outlook for financial year '22, we're really reiterating the FY '22 guidance that we provided in November of '20 after the half year. We do anticipate that the percentage of revenue growth in FY '22 will strengthen from that delivered in the year that we're just reporting on, but not at the level of experience in FY '20 and I think really, the extent of that really does depend as we outline on the momentum that builds in those reopening markets, particularly in the North American market as we walk through that. In New Zealand, we do expect to have a similar number of units that we've seen prior financial year '21. So about at least 9,000 units per annum. And we will complement those connected vehicle sales of those 9,000 with additional Clarity Dashcam sales. In North America, we do expect increased unit growth in '22 as that economy opens, supported and probably at this stage led by direct Clarity Dashcam sales at the front end, and we will get back to pre-COVID conditions over the course of FY '22. And in Australia, growth in the next few years, as we've said, will come predominantly from that enterprise pipeline of between 15,000 and 20,000 committed vehicles. But as we grow and as we continue to accelerate our product delivery for the years -- the benefits in the years FY '23 and '24, we, therefore, anticipate spending between 24% and 27% of revenue on R&D during FY '22. We do maintain that guidance that we anticipate that EBITDA margin will be maintained for FY '22 from '21, but we'll start to improve at the end of '22 as some of that revenue growth fueled by an accelerated R&D work starts to come online. And with that, I'll hand over to the call for questions and answers from participants.

We're happy to unmute you and ask -- have you ask the question rather than come through the digital method, but it's left to your choice. I think we're going straight to the digitals from Josh.

Can you hear me?

Yes, I can.

Yes.

Great. Just a few questions from me. Obviously, the implied guidance range for FY '22 is very wide. Can you give us a sense of what needs to happen to deliver at the low end and what needs to happen to get to the high end?

Yes. So I think the low end would be where we see a sort of slower opening back up of particularly the North American market. And we would need some fairly fast opening back up of the North American market to get back up to those -- that top end, which is, as you say, the FY '20 run rate. And I think that would be -- it has to be fairly consistent across the North American market. And I think from an Australian point of view, we would have to -- we talk about landing 1 to 2 enterprise accounts within that FY '22 result. We'd have to land at least that, if not potentially more to get back up to that top end of the number.

Great. And I suppose, how does that sort of tie in with Slide 31 of your presentation where you state the goal of reaching 50,000 units in North America over the next 18 months, which is about [indiscernible] units higher than where you are now, is it sort of ambitious?

I don't believe we think it's that ambitious. As I said, the momentum will build. So I'm not sure it's necessarily something that we see as linear. But we have good anticipated growth in FY '22, and we certainly would anticipate seeing an acceleration of that growth as we move into the early part of FY '23, which is implied from that 18-month time frame. So we're relatively comfortable with those figures that we put up in Slide 31.

Okay. Great. And just moving to New Zealand. There's obviously been some chatter out there about introducing ELDs. Can you give us any color on what proportion of your New Zealand fleet currently use ELDs as opposed to paper logs and what the uplift in ARPU might be if they were to become mandated?

So ELDs, that's the U.S. reference, we call them Electronic Logbooks. And that's really charged on a per driver basis as opposed to per vehicle basis. And we've presented the number, that's 6,400, that's the number of drivers using that product. We would -- in our system, we typically have around about 1.3, 1.4 drivers per vehicle. So it is definitely a really interesting space for us, exactly [indiscernible] introduced that. Certainly, one of the main associations, RTF is very active in trying to make that mandatory just to improve safety on New Zealand roads. The Logbook depending on whether it's stand-alone or bundled ranges typically from $5 to $12 a month. And yes, it represents a pretty interesting asset for us.

And I think we've talked about the number of subscriptions that we've signed up this year and we've talked about a certain number of customers, and I think just over 300 customers that have got that over 6,500 -- or close to 6,500 Logbook subscriptions. We have over 4,500 customers in New Zealand. So you can see where a lot of that growth is coming from, it will be from a lot of medium to large fleets. And as you say, Josh, if it's mandated, then you could see that happening -- that sort of expansion happening across some of the smaller end. So that's probably where a lot of the growth would come from. And we would obviously be well positioned subject to how that's mandated.

Yes, you can understand why we've put the investment into the Electronic Logbook when we did anticipating potentially some reform in the space.

Sure. Okay, makes sense. And just to clarify, is the Day Logbook, I guess, equivalent to an ELD in the sense that it ties in with, say, the ignition switch on the vehicle, et cetera? Or is it simply in that, that the driver uses with no linkage to the vehicle?

It is the latter. So when you look at these type of fatigue management products, the Americans did a very thorough job in terms of creating that linkage between the driver and the vehicle movements with ignition on, et cetera. So this is both trying to understand what's happening to the vehicle because at this stage vehicles don't drive themselves and also about the drivers. The other approach is to take a very driver-centric approach. And if you have drivers working for multiple companies, which is reasonably common in New Zealand, that Logbook follows the driver. So it is good merits for that approach, but it doesn't do the -- you don't understand the mileage and the crosscheck around the vehicle. So inevitably, if there is an investigation, they do go and try and work out what was happening with the vehicles. But the New Zealand Electronic Logbook is a driver only product, that is all it's needed. So you'll see that there are about 500 Logbooks sold to customers that don't have telematics -- EROAD telematics in the vehicles.

Just 1 last question for me, on ARPU in New Zealand. Are the customers you expect to add going forward of the same ARPU value as your existing customer base, given it feels like there might be a bit of a shift away from road user charges and toward health and safety?

Sure. It's a combination. So we do have light vehicle offerings and we have heavy vehicle offerings. And we have RUC only and then we bundle typically the health and safety in with that RUC as well. So you generally don't have health and safety only option, but it's about what the value driver is, that's most important to the customer within that package of telematic services that we provide. The ARPU is different, as I say, for light and heavy vehicles. So we do monitor that mix of sales. And as you will probably appreciate the drive of layering on additional SaaS services is there to ensure on a portfolio basis that we don't drop overall across our subscriber base in terms of ARPU that we continue to build, and that's the intention. I think Hamish has his hand up.

Just a couple of quick ones. The first 1, just being interested in, I guess, the exit rate on that churn in North America. You did 93.4% for the year. I think at first half it was reported at 94.3%. So it sort of assumes that -- I mean it implies that the second half was down at about 93%. Have you guys seen an improvement in that? Because I mean it would mean that your sort of gross additions are a lot higher than the net reported number we saw throughout that second half. And as things normalize, you guys should pick up some units just via virtue of less churn.

Yes. So certainly, it's something we monitor very quickly. And I think we talked to this at the quarters Q3, Q4. Q3 was certainly the toughest of the quarters that we had in North America because of those lockdowns really kicking in. And that was really driving some issues for a lot of customers and resulted in some churn from a lockdown impact. Competitive activity hasn't stopped during the year as well. There were, again, a number of things contributing to it in that second half. So that was the anniversary of the December 17, sign-ups for a lot of smaller customers in terms of a 3-year anniversary of the ELD mandate for them. And so we did lose some of our existing customers to competitors and that contributes to the churn. So we would look and are doing work to make -- to stabilize that churn. And I agree with you, Hamish, on the basis that the economy opens up and we can get our gross levels of sales up and work on churn, the net result should be that we have our sales levels increase on a net basis.

I think one of the other things was the government stimulus packages. So we're talking about the very small end of the fleet size where they were very dependent on those stimulus. And I think from memory, the U.S. stimulus kind of dropped off around that August time frame. So that wasn't until Biden came in and then there's that new stimulus package that happened. So there was a good 4 months to those smaller fleets were just hardly exposed and a number of them did end up going [indiscernible].

A lot of that support is now tied into focused on -- being focused on organizations that really have suffered year-on-year revenue decrease, where it's a blanket level of support before. So that should help those customers. We will monitor the situation.

Yes. And just to be clear, I mean, is -- do you guys look at it at a run rate basis? Or is it too lumpy to look at it like that? I mean if we...

No, we monitor it -- we monitor it on a monthly basis.

Has it been improving, I guess, just the main...

We haven't seen any significant deterioration yet, but it's probably too early to say, it's definitely sustainably turned a corner. But we'll keep monitoring, and we'll talk to it at the quarter result.

Perfect. And just a couple more, if I may. Just that cost to acquire per unit. You call out, it's increased quite significantly, which is in line with what you guys call out in terms of the lower net unit adds. But the question, just can you guys quantify, I guess, how much is that? And just how much is investing ahead into your sales teams in the U.S. and Australia? Because that's been a focus as well.

Yes. I think, to me, what that slide really means is that we made a conscious decision to retain our talent and keep the business whole so we can respond best in the market, okay? It takes time to get sales folks effective at selling our products because we're quite complex. So we chose to take the hit and retain and time will tell if that was a good decision to make, which I believe it was.

And that's only true of those 2 existing markets, Hamish, and the other thing I just underline is that in the Australian market, we also chose to further extend our sales team to build that enterprise delivery capability. So that is an investment for that future pipeline to be crystallized. So there's an element of that in it definitely. But most of it is down to retaining the existing team over low levels of growth.

Yes. And just 2 more. This one is a bit granular on the P&L versus what's capitalized. But as you guys increase this R&D spend, do you expect that I guess, your levels of expense in R&D versus capitalized in line with your accounting positivities will stay at the normal? Will that be a skew towards one or the other, given that it might?

Yes. So we do monitor how it fits, and it's fairly consistent around the sort of 60%, 65% capitalized level. Clearly, we challenge ourselves to make sure that we're spending the right amount of dollars on things which are contributing to growth, and therefore, are capitalizable. So we would not anticipate it dropping over time as we work through this acceleration of road map. And if we are seeing an increase in the levels of noncapitalized R&D, we will be looking at what we're doing. But at this stage, we think it's going to continue as is.

Yes. And just a bit of an extension just on the last question, and this was a last question from me. But those 18-month targets, I mean you provided some good color on it in discussing before, but I mean as we think about them, I think you said they're not ambitious, but you note the review of them is just sort of a -- I mean are they -- is it a range, should we be thinking plus/minus 10,000 or 5,000? Or how should we be thinking about it?

Yes. I think we have put out numbers, which we think are achievable. And we have a great amount of uncertainty in front of it in terms of, as we said earlier, how the North American market momentum will build. And in fact, how the Australian market will build. So what I'm signaling is there is probably greater levels of upside than there is downside to that.

I mean we use these targets inside our business to motivate and drive. So that's why it's always worth sharing those numbers more widely. So we can get pretty focused on getting to what I think for 3 markets quite critical milestones. The 10,000 in Australia in itself kind of represents a number where we financially start making sense. And it stops being a heavy investment market from a cash and negative EBITDA statement.

Yes.

Yes, interesting on the -- just 1 more, if I may, the Australian market. In your sales efforts so far and the Ventia agreements and what you've learned so far, can you give us any more light on, I guess, the R&D pipeline you might need to do there? What the key focus would be to really accelerate those sales to enterprises in Australian market and differentiate?

Yes. I mean when you look at Australia as a country, there are some regulatory differences. So delivering products that [indiscernible]. Australia is very vast as a continent. And cellular coverage is not universal. So having to have a satellite communications link when you're out of cellular coverage would be another point and increasing the amount of sensory stuff we can have on vehicles as well would be another key point. So a lot of it is focused around civil engineering requirements to customers. But because they're so large in terms of enterprise, we end up building an awful lot of other things for other enterprise prospects in our pipelines. Unfortunately, we've come to time. So 1 last question. Okay. Thank you very much for attending the call. I apologize for the technical problem at the beginning. I think it will be better next time. So really pleased we've got through FY '21 as well as we have, I think we leave the year much stronger than we went into it. And we're looking forward to really positive in the next 12 months.Thank you, everybody.

Thank you.