EROAD Limited (ERD) Earnings Call Transcript & Summary

[Audio Gap] The first half of FY '22 results. I think we've got most people in. So we will begin. So it's been a solid half year, definitely very challenging macroeconomic conditions impacting all 3 markets. That said, we did see some growth. Alex will talk more about that. When you do a comparison year-on-year, it was $1.6 million of grants given around COVID in North America, which didn't happen this year. So the growth year-on-year, excluding that one-off, is the $2.2 million plus $1.6 million. In terms of EBITDA, we're at $12.6 million. That includes $2 million of transaction and integration costs relating to the Coretex acquisition. So there are a number of one-offs that did clear in this half year. When Alex gets to those, you'll get to see what the accounting number is and what that normalizes with the removal of the one-offs. In terms of AMRR, an increase year-on-year from $88.4 million to $92.9 million. Contracted unit growth, 6,500. Improvement round ARPU of $0.66, but when it's ForEx adjusted, there's an adverse impact of $1.23. Asset retention rates remained high at 94.1%. R&D spend was 28% of revenue, slightly higher than we had previously said. And that really relates to going hard on the technology platforms for the future and some of the revenue that we hope to get in the U.S. not coming through. Good progress has been made with 2 strategic partnerships with Philips Connect and Seeing Machines, and we'll talk a little bit more about those later on. And I suppose, the really great delivery for this half year was the deal-making due diligence and integration planning of Coretex into EROAD. We now have all of the clearances we need, and that transaction will complete on the 30th of November, effectively operating from the 1st of December. On the next slide, this is really an update on our sort of ESG activities. Last year, we did a materiality matrix. So understanding really what's important, both internally and with our customer base and then focusing our activities of work on that. So some of the key bits to make there, as you would expect, we've seen improved driver behavior as a result of dashcams being in vehicles. We will have an NPS score for customers in the future. Proxy for that at the moment is the number of customers renewing their contracts with EROAD. So 538 customers renewed, which was 16,481 units. So it represents happy customers. Infrastructure around [indiscernible] was highly reliable, industry leading at 99.9%. A lot of help from our customer care people supporting customers through the lockdowns we've had in New Zealand and Australia. Work is well underway in terms of determining what EROAD's footprint is from a carbon perspective, and we did our first sustainability report involving 1,400 customers across New Zealand, Australia to really understand what initiatives they're doing and from that, how we can help them achieve that. In terms of the operating contracted units, 5% growth for the half. We had previously reported that there was 1 customer that we unfortunately lost. That was an enterprise account that had been acquired by another company. They were very happy with the service that EROAD was providing. That customer came out of our subscriber base during the half. That was a customer of 1,751. With additional adds in the U.S. of 306, there was a net loss of 1,445. One of the frustrating things of the acquisition is that while we waited for ComCom clearance, we were in a bit of no man's land in terms of customers or prospects, which had locked that EROAD product, and we're in a position to put them on when they were made aware of what the Coretex offering would be post acquisition. They really wanted to wait for that. Also during the second quarter of the half, there were the first trade shows that had happened in that North American market for 2 years. And there was a really good list of prospects and that, again, waiting for the transaction to complete before we can begin the piloting process. So we're very confident that in the next half of FY '22, we'll see some really good pilot activity and hopefully, the completing of 1 or 2 of those enterprise pieces of work. There was 1 customer of 530 added just outside the half, and that customer is in the process of putting EROAD into this week. So I think we will see an increase in activity in that U.S. market upon completing the acquisition. Really big focus on retention and key account management that's reflected in high asset retention rates. We've talked about the number of customers that renewed. There were 472 customers that upgraded to more valuable plans. So that was just under 5,000. And then there was just under 300 customers that added the additional services such as the Electronic Logbooks and Inspect service and maintenance products. So some really good uptake in terms of the increased offer that EROAD can provide. So you get to see what the individual numbers there on the right-hand side, Philips Connect is the partnership we have with the trailer telematics company. They're definitely one of the strongest in that U.S. market. So it makes sense for us to partner with them as opposed to build that product ourselves. So the combination of EROAD and Philips Connect is a really compelling one. So this is a new product for our sales team to learn how to sell. So momentum is building around that 666 trailers added, but those units are not included in our unit count. We have had 6 months of trading with the EROAD Clarity Dashcam to the over 3,000 sold across 3 markets. That product is sold in combination with our Ehubo2. So many of our customers in that 300 -- 3,087 is upgrading to add cameras. The Solo camera got released in October, and that doesn't require any telematics box. That is a complete unit and allows us to sell a camera alongside competitors' telematics solutions, so a bit of a Trojan horse. So we're making very good progress around cameras. And I'll talk a little bit more about plans later on. I'll hand over to Alex to take us through our market by market progress report.

Thanks, Steven, and good morning, everybody. So we'll start with the New Zealand home markets, which remains, as we say, a significant growth opportunity for EROAD. It's made very solid progress across the board in the 6 months to 30 September despite a challenging macroeconomic environment, despite the lockdown that's occurred in Auckland and there was effectively 43 days of that included in the half. But we still delivered a growth of 7% in units in New Zealand. And you can see that that's a combination of the Ventia contract rollout, which was the large enterprise rollout within the half in New Zealand and Australia, but also additional growth elsewhere. We've continued to enjoy a very strong asset retention rate in New Zealand, 97.3%, which is up from the prior year comparable period of 95.7%. And across the board, we've been doing a lot of work around renewals and upgrades and expansion into customers' activities in terms of adding additional products and services. So you can see that we had 360 customers renew their plan with us, which is over 12,000 units in the 6 months. We had 180 customers that added products and services, just under 5,000 of those. And we had 329 customers that upgraded their plan from 1 bundle level to another. Again, just over 1,700 units relating to that as well. So some really good momentum in the business. The ARPU that we have over the entire sort of 90 -- almost 94,000 connected vehicles increased by $0.60, which is, I mean, a feat given the size of that customer base from the $56.18 at the end of 31 March '21 up to the $56.78 that is for this half. So in terms of the growth opportunity in front of us, we still expect EROAD's growth for New Zealand to be similar to the prior year level, which was over 9,000 connected vehicles added in the year despite the lockdowns that we've been experiencing in Auckland. And of course, with the Coretex combination that comes into effect on the 1st of December, we bring onboard 7,628 connected units, which is as at 30 September on to the additional 90 -- almost 94,000 that we have within EROAD. So we will be over 100,000 connected vehicles once we combine, which is a great business in its own right. So if we move to the North American market. Just one moment. Just having problems moving the slide along. Thank you. North America has again had challenging macroeconomic environmental factors impacting growth in the business. We have had and we've previously discussed in the second quarter operating update the issues that are out there around lagging impacts in the states around particularly driver shortages that are impacting the entire industry, and there's a lot of poaching of drivers by bigger fleets from smaller fleets, and we have got quite a number of smaller and medium-sized fleets in our customer base. So we've been impacted by that. And that's flowed through into the asset retention rates as well as this one-off loss of an enterprise customer we talked about where they moved and aligned their technology with that of the company which acquired it. So in combination, that's why we've seen the dip that we've seen in the asset retention rate. We are still working through the upgrade program to upgrade 3G technology in the cabs for our customers' 3G technology. And you can see that almost 80% of the units that we have in our customer base are now on 4G technology. So we're close to completing that program. And in doing so, we've been renewing and recontracting customers, so then we had 172 customers in the period renewed their plan. And in fact, ARPU overall increased in the period in U.S. terms to $44.42. So again, brought about by some work that we've been doing around upgrades and adding products and services. You can see 86 customers added products and services to their plan during the period. But it's also been impacted by the dash cam sales that we've made, which are obviously integrated -- most of those have been integrated with the Ehubo in the cab and therefore, that's added to the ARPU outcome that we've got. We have had a delay around growth opportunities. We've talked about that at the second quarter operating update. The delay really is centered around customers being interested in what Coretex brings to the table and the desire to actually wait to pilot the next-generation platform, which we will be launching in the next few weeks. And we are expecting that will be -- it will be the Coretex 360 platform and Corehub hardware solution from Coretex. As that next generation, we will start that, as I say, expected in the next couple of weeks. And customers are really interested in that. But of course, we haven't been able -- until we physically are combined with Coretex on the 1st of December. We haven't been able to demonstrate that and pilot that with those prospects. So now we can move forward and increase the momentum in terms of progressing prospects through the pipeline. We have significantly increased the addressable market during this period as well through the partnership that we entered into in June with Philips Connect, which brings on board the best-in-class trailer tracking solutions. And of course, with the launch not only of the dash cam Clarity, which is integrated with Ehubo, which we launched in March and has continued to sell through the year, we also recently in October launched the stand-alone Solo variant of the dash cam, which doesn't require an in-cab telematics hardware to be integrated to it. And therefore, we are expanding that addressable market into vehicles that don't have any telematics hardware in the vehicle or are using a competitor's telematics hardware product. So effectively, as Steven said, a Trojan horse into that vehicle. And of course, the -- finally, the point around Coretex. Coretex brings a very significant presence in America into combination with our business in America. Coretex adds just under 51,000 connected units at 30 September as well as an advanced short- to medium-term enterprise pipeline being -- Coretex is very focused on the enterprise business. And so we will be working heavily with the Coretex team from the 1st of December to get the maximum momentum through both sales teams into the North American market for the remainder of the year and for FY '23 going on. If we move on to the Australian market. Again, it has had its challenges within the macroeconomic environment. We've had lockdowns in Melbourne and Sydney throughout large parts of the half. And that's caused delay in installations in terms of rolling out the Ventia rollout, which was the win that we had at the back end of FY '21, albeit we've now managed to complete about 60% of that fleet rollout before the 30th of September, and we expect to complete the remainder of that by the end of financial year '22. But of course, it's also slowed us down in terms of being able to demonstrate and pilot with other opportunities. So that's delayed, as you can see in the growth opportunity segment. It's been one of the items of delay. And the other piece, which is another impact similar to America where there are some customers and prospects that are interested in understanding when EROAD and Coretex combine what the technology stack will look like, what the platform of products will be in terms of what their needs are. So again, we're anticipating increasing momentum in Australia once we are able to demonstrate the Coretex technology. We've also, in the year -- in the half, sorry, built out and continue to build out our team in Australia. We've added, as you can see, a number of significant roles there. And we've now got what we consider to be a reasonable-sized team presence there. We've built out a market development and regulatory person as well as we continue to need to be -- have key aspects of capability in the market given the COVID environment. We'll move on. Just to talk to the financial performance metrics now. For revenue, as Steven said, we've reported a 5% increase to $48 million from $45.8 million in prior comparable period. Once we normalize that for that $1.6 million one-off U.S. grant for COVID-19 that was in the half to 30 September '21, it's more like a 9% increase. And when we look at EBITDA, again, as a reported outcome, EBITDA dropped down to $12.6 million. But once we normalize both for that $1.6 million grant in the prior comparable period as well as the $2 million that we spent in this half on transaction and integration costs, you can see we actually increased on a normalized basis EBITDA from $13.7 million to $14.6 million, and our normalized EBITDA margin is back up into sort of 30% territory, which is where we would like it to be. On the right-hand side, these are all reported. Profit before tax and free cash flow figures. So obviously, pre-normalization. So that drop in reported EBITDA translates down into a small loss before tax for the half. And in the free cash flow, we raised money in September '20 and recently to continue to push forward with our growth strategies, including putting the foot to the floor on our R&D road map. And that's what we've -- you can see the outcome of that in terms of the money that we spent on R&D, as well as the money we are continuing to spend around additional hardware, additional dash cam sales, and the 3G to 4G upgrade program in America as well as inventory management. So with the global supply chain being what it is and the issues that we have there where we can hold greater levels of stock of real componentry or finished goods in those markets, we will do that, which means we will be able to satisfy and can satisfy the demand that we're seeing from those markets. Income statement in the next slide. Again, we've talked to the growth in revenue. Operating expenditure did increase year-on-year. Again, we've talked about the $2 million integration and transaction costs that drove some of that. But in terms of other drivers of the remaining increase, that was really centered particularly around the cost pressures that we're seeing around remuneration. We've hired additional R&D folks in the period as we push forward with that product roadmap rollout. But it's a competitive labor market with the boarders being closed in New Zealand. And as a result, we're seeing increased levels of recruitment costs and an increased level of churn with our team and, therefore, increased average salary levels as well. The other aspect of increased cost is around annual leave. Again, as people have been locked up, the annual lead balances tick up. So we'll be working on managing that through the remainder of the year. To the next slide. And then if we look a little bit more around EBITDA by segment. New Zealand has that continuing growth from customer fleets. The 19% increase translated into period-on-period for New Zealand, which is really pleasing. As I said, in North America, it's been more challenging. We had the one-off loan in the prior year, which is some large part of the drop. But the other piece is we've had to temporarily increase our staff count to deal with the 3G to 4G program, which needs to be completed before February 2022. And of course, in the prior comparable period, we didn't have, because of the U.S. lockdown, very much travel and similar sales activity. And we've now recommenced that as we get the sales momentum reenergized in the States and has a small FX impact as well. In Australia, the continuing SaaS revenue growth, which really reflects the increasing customer base as we roll out things like Ventia and we increase our underlying small and medium-sized customer base. We've had an increased level of revenue into Australia, but that's been offset by the investment that we've made in that staff to build out that team to be able to really push forward and grab that enterprise growth that we anticipate coming through. And in the corporate segment, finally, again, there's further integration costs and transaction costs, that where that's been booked. So that's $2 million of the $3 million increase in costs. And as I said earlier, the employment costs is the remaining $1 million, which really reflects both the increase in headcount in that space, which is including our engineering teams, but also the average costs and those annual leave balances increasing. Just walking through the measures. We do need to go back one. Thank you. So we turn to our growth indicators first. So our annualized monthly recurring revenue and future contracted income indicators are the 2 that we use to outline growth as an organization. AMRR has increased to $92.9 million for the period. I just need to come -- the slides had moved forward again. Thank you. Increasing the period from $88.4 million in the prior half, again, reflecting the growth that we put through. And as importantly, the future contracted income has moved up to $149.1 million from $141.9 million at the end of March, which again reflects the work that we're doing on renewing customers -- slide has moved again. Customers, as we move to the rollout. And finally, R&D as a percentage of revenue has increased up to 28%. We've always said that we would be increasing that as we put our foot to the floor around the R&D rollout, and that's been the case here. So you can see that. And that's as we get through this bow wave of work that we need to do to take maximum advantage of the growth opportunity in front of us. We go to the next slide, please. In terms of our -- the value from our existing customer base as we've talked about ARPU, so I'll move on from that. But the main reason it's down is that there's been $1.23 prime exchange impact and actually, there was an underlying $0.66 increase across the group. Our asset retention rate at 94.1% is slightly down on the prior reported levels. But again, once you back out the loss of that enterprise customer, it's more like 95.5%. And we are happy that it's stabilized as we go through quite significant renewal and upgrade programs, particularly in North America with that 3G program. In terms of cost to acquire, cost to serve. Cost to acquire as a percentage of revenue has gone up, and that's been really reflecting the investments we've made in Australia and in North America in our sales teams as we look to prime the pump for the growth that we're going to be getting in those markets. The cost to acquire per unit, whilst it looks like it increased once you -- as I say, once you back out that loss of the enterprise customer because this is all net units acquired, it's $947, which is a drop from $1,026 in the pro comparable period and certainly, a large drop from the second half of last year. And cost to service as a percentage of revenue has gone up. That's mainly because we've invested dollars in billing improvements and automated customer support, self-service portals, which we will be seeing the benefits of in future periods. We've only just really launched the first part of our customer support self-service portal. So we will see the benefit of that in due course. And just rounding out, operating expenses, as I said earlier, there's really 2 drivers to this. One is the integration and transaction costs of $2 million and that other $2.4 million, which is the increase in personnel costs coming through from increased levels of actual employment costs as well as that buildup of annual leave balances that we would look to unwind as much as we can in the second half. When we move through to the balance sheet, in terms of our additions to property, plant and equipment, significant increase in this half, a lot of which, as you can see, is in hardware additions. And once you exclude the inventory management, I would say it's a more modest increase. So you can see the amount of work that we're doing to build up stock levels in advance of any issues -- further issues coming down the pipeline in terms of supply chain issues as well as the work that we've been doing in terms of putting additional hardware into the market in dash cams and in that 3G upgrade program. On the intangible side, most of the intangible additions, of course, are development asset additions, so our capitalized development costs, and there's been a significant increase period-on-period in that as we push forward with the R&D road map completion and a very minor amount of software additions as support to our ongoing business systems. So when we turn to the next slide, which just shows you the movement in that. On the left-hand side is the total amount of spend for research and development. And you can see there's been an increase in overall amount spent, but also in the relative amount of capitalized R&D as we're really focusing on the things that really will drive future revenue growth through our product launch and platform development. And on the right-hand side, you can see the movement in the balances from $45.3 million to $52.4 million. I'll move quickly to the cash flow analysis. So this is analysis we have frequently done. And you can see we're reconciling on how we get down to the net cash movement around free cash flow. And a large part of that movement into negative free cash flow has been the investment that we're making of $13.8 million, both in terms of additional headcount in the corporate engineering and product space where we're building greater capability to deliver as well as the actual time that we then spent on developing assets, and that's in that $10.5 million amount as well. So we're pleased with the progress we've made but with still a little bit more to go in the second half in terms of development as well as the integration work, which we'll talk about in a moment. This is just the cash flow statement stating that. And of course, we've then also had financing activities, which is a result of the issue of equity that we raised in July through both a placement and share purchase plan for the Coretex acquisition, which, of course, we'll settle on the 30th of November. The balance sheet has moved accordingly. And importantly, you'll see a buildup in not only PPE and tangible assets, as we've talked about, but there are other movements in working capital as we've built up the inventory levels. Debt has increased as well during the period. And again, some of that has to do with the impact of COVID and some of it has to do with the level of growth that we've also seen in terms of our customer base. To the outlook, and I'll hand back to Steven.

Thanks, Alex. So we are very focused on our growth plans and accelerating our growth. We have talked previously that, that really breaks into 3 areas. One is organic growth. And we've seen the broadening out and deepening of our products and services. There's a lot going on in addition to the Coretex platforms that are very enterprise-based to get a better product market fit for enterprise accounts. As Alex mentioned, there has been a real headwind in terms of global supply chain, how that represents itself around electronic parts, those -- there are parts that have gone out to the best parts of the year. We have -- we saw that coming. We have strengthened our global supply team. It's nearly double the size than it was. A lot of focus has gone into building agility into the supply of those products, so alternate parts, relaying out of circuit boards. I think we're doing an incredibly good job, especially compared to competitors, in preventing stock out situation. It did look like things were trending back to normal, but what we've really seen over the last 2 months and definitely, you've seen it in the media, the global supply chains [ teriorating ] or getting better. In terms of acquisitions, we've talked about Coretex. We're very excited about that. Of course, it does accelerate our growth plans 2 years in terms of all the different growth metrics, number of units, customers by market, the capability of the platforms and products that we have. So that will be a big engine growth driver for us. The acquisition of the 2 companies, Coretex being about 40% the size of EROAD are significant. They're incredibly well planned and will take us 12 months, and some activities will take a further 6 months beyond that. But once we have that end rolled out, as we have previously said, as we show ourselves to be a good acquirer and deliver value from the Coretex acquisition, we will then lock to other inorganic growth opportunities as we expect the industry to consolidate very heavily over the coming years. Strategic partnering is seen as a key ingredient for that, and I'll talk a little bit more about some of those strategic partners. The products that EROAD will bode in its home right, they need to be world-class if we're not prepared to put that level of investment or it doesn't make economic sense, but our customers need it, then we will partner with best-in-class and integrate our products together to make sure that we can give our customers what they need. One of the things I wanted to highlight at this point is the camera opportunity. So you've seen the delivery of the Clarity dash cam and Solo dash cams over the last year. We would expect in 3 to 5 years, pretty well every one of our customers to have a camera in addition to the telematics solution. It's an area of low adoption compared to the telematics market, particularly in North America. So it's a good opportunity for us to grow into accounts that already have telematic solutions in it. Since March this year, we have sold 4,100 units. That is quite a different product to our standard telematics products. So the market getting to know us as also a camera telematics provider take some time getting our engineer -- our sales teams really confident in selling these products. It takes some time, but we're definitely seeing good momentum around these camera products. And it's definitely a key area of investment going forward. At the top end of cameras, cameras that will be able to track driver fatigue. So you're looking at the eyeballs and the actual posture of the driver. Really important safety product. It's a product that we could spend literally tens of millions on to be world-class. We've chosen to partner with best-in-class that is Seeing Machines. So we have customers now that, for the high-risk hazardous goods vehicles, they could put Seeing Machines in it which is definitely in a much higher price point. For their lower risk vehicles, they can put Solo or Clarity EROAD dash cams in and both of them feed into our SaaS back-end and provide a seamless experience for our customers to manage the driver coaching and safety management behavior. So we see that as a really important relationship for us going forward. On the trailer side, we've got first traction in the North American market with Philips. We have conversations ongoing in terms of how we could bring those products to New Zealand and Australia. So we'll report more on that at the full year. But I think there has been competing trends, one is as our customers go through digital transformation, they want to have technology partners that can help them with that journey. For many of our customers, that is quite complex for them so they want that complexity handled by their technology partner. And they do want to have all the things they need to digitalize them as much. So we need to be very good at partnering and being able to integrate the different technologies to provide a really compelling customer experience. And then finally, Coretex acquisition, it feels like [indiscernible]. So July, when we signed the original deal and then there was the capital raise, and then there was the Commerce Commission clearance. That's all being done. We've used that time very well in terms of finding out what the high-impact things that we need to do day 1, and deliver first value from the acquisition. So we can't wait to get going on this. When you look at what their product offering is, that's far more extensive. As you can expect, there are conversations around key opportunities and products that we want to build together but couldn't have those conversations with competitors. So we're looking forward to be coming together as one company and making sure that we maximize the opportunity of those first best opportunities. In terms of Coretex, this gives an idea of the progress for the 6 months. So New Zealand, which hasn't been a focus area of investment, that has declined slightly. Good growth in America, 3,300 vehicles added. How they do revenue recognition as a stand-alone business is slightly different to us. But there is 4,100 additional units where they have won the business, but they haven't shipped it yet. So all in all, a pretty strong half year for them. In Australia, again, not a high area of focus compared to North America. They are in the final stages of getting the electronic work diary approved, which is equivalent to the ELD in North America. So we're anticipating some good growth going forward on the back of that. So when you add the 2 companies together for the end of September, we're just under 200,000 units. This here is just a summary slide of some of the integration planning that has been going on and the order in which we look to get things done. I suppose, the most notable thing we have there is, first, focus, it's about leveraging the Coretex platforms in that North American market and having got to a unified customer experience, and taking the base of both sets of applications operating on top of an Android platform will be looked to bring it to Australia and New Zealand. So in terms of last but final outlook, while EROAD be seen -- be joining with Coretex, the stand-alone guidance kind of is interesting but not as relevant. On that basis, the Board has decided that we should be telling the market that, that guidance is not relevant as a stand-alone, even though as a stand-alone it makes sense, but as a combined business it doesn't. So 2 companies come together, there's some accounting treatments and things that we need to do. But what I've seen is, practical, we will be providing an update on what the combined company looks like. In terms of the stand-alone guidance, which we issued about a month ago, we're looking at 10% to 13% growth at a revenue level. And when we normalize the one-offs, such as the integration and transition costs, we're at similar levels to FY '21. We expect continued good progress in New Zealand and Australia lockdowns. We're getting better at working around those, and the roll-outs in the relevant markets. There's some backlog that we will produce some good sales in the second half of the year but may push into FY '23. North America's definitely impacted by COVID. Unless they head into winter, we would expect that impact to continue to be worse. Certainly, the driver shortage is also creating some challenges. But as I mentioned before, there are some very good prospects that have come out of the conferences that we've been at, about 40 of them over the last 2.5 months. The sales cycle for those larger opportunities is typically 6 to 9 to 12 months. If we're lucky, we'll get to complete 1 or 2 of those within this financial year, but more likely to be next financial year. And I think that concludes the presentation. So happy to take questions.

We have Mr. Dale first up. So I'll unmute you and allow you to talk.

Just first question. When you say customers are waiting for the Coretex platform and products sort of throughout your slide pack, are they waiting until December 1st or are they needing to wait the full 12 to 18 months for the full integration? Or is there some in-between? Can you sort of explain how that works?

Sure. So we aren't allowed to show them the product until we have completed. The Coretex product apparently stands where we can start selling that immediately, and we will get those sales. There are gaps between the products. So EROAD has a very good set of sort of road techs products, which they need to be integrated into the Coretex platform. Getting some of the single sign-ons between the 2 systems that gets done early on. So we definitely have a very viable set of products to sell day 1. When we look at the electronic logging device, which is kind of one of those key things that all interstate fleets need to have, both companies have got very good ELDs. The EROAD product is easier to use. The Coretex product has got more of the hours of service for all sets. So neatly is positives and negatives. To get the best out of both ELDs and unify around one, that will take under a year to do. So we've kind of got an interim branding position, which is kind of better together. So as we integrate these products together, we go from having what is arguably the best ELD and the top 5 ELD to be kind of an absolute leading products in that market. So hopefully, that answers your question. We will be able to sell day 1. There will be 1 or 2 things that we need to integrate some of the EROAD products into the Coretex one, the main ones. So that will get done over the first sort of 3 to 6 months. And then we are into getting more uniformity around sort of the customer experience.

Sure. Okay. That's helpful. So I suppose when you sort of say momentum is expected to increase in FY '23, by that point, you're just sort of expecting most of the integrations to be done and have a more complete product set in that financial year rather than FY '22?

Correct. So when you look at what we have actually been doing. So we -- EROAD has been building sort of equivalent platform, which relates to SaaS mobile and Android, which is the embedded software on the NKF hardware or trailer. And with Coretex, they basically got to solve those problems, like, 18 months before we have. So instead of us duplicating that spend, let's use what they have. There is a lot of value in what we have developed in our platforms in terms of architectural elements, which we'll get ahead of them over time. So it's not like we have wasted a lot of money and certainly -- over the 6-month period while we have had that sort of optionality on whether we would get ComCom approval or not, which we were always very confident. But you do have to have a plan B. We have been progressing a number of elements that would be useful, both as a merged or unmerged company. So that will add more value fast when we integrate the EROAD bits into it. But I think the key success for 2 technology companies coming together is to be absolutely crystal which platforms you're going to build on and start building on those quickly as trying to have some kind of beauty contest between different subproducts across the 2 of them. So I think we've really been very focused on what we're doing there so we can get -- we can maximize first value from the acquisition as quickly as we can.

Great. That makes sense. And just one last question, if I may, before I step off. If we ignore Coretex, you seem to be having some good success with upselling additional products. And if we look at the ARPU chart on Slide 18, ARPU is obviously an average. But if you're cross-selling a bit more and ARPU sort of staying relatively flat. Has your sort of cross-selling activity offsetting perhaps some underlying decline that we might not be able to see? Is that right? Or is there an explanation for that?

So I think technology does devalue over time. That's not the right way that does get commoditized. So customers that have been using, say, road use charging in New Zealand for now a decade, that's kind of hygiene. But -- and would they pay more for that or the same for that? They would expect that over time that might come down in value. So you are, unless this area where you are wanting to add more value that more than counters that commoditization of technology that commonly happens. And I think we've done a very good job of doing that. So many of the renewals that we've had, when we do that resigning, we will get them the base package or there may be a small discount on that, but then we will counter that by them taking on additional services and paying a slightly higher price. So you've also got the effect of we renewed, what, 16,000 customers out of 132,000. So some of those customers were paying another $4, $5 for the Logbook, et cetera, but when you divide it by the total number, that becomes a much smaller number. That makes sense?

Yes, it does. No, that was a very helpful explanation. That was all from me.

I'll go to Hamish.

Just a couple from me, if I can. Firstly, just the Australian ARPU, I saw in constant currency it came down $6. Is that just reflective of, I guess, Ventia has been a really large enterprise and competitive pricing there? Or -- and where does that sit in the market? And I guess, how should we think about that going forward?

It's actually less about Ventia. Ventia is not a really sharp price. It's a good price that we, obviously, won't disclose and they don't want to disclose. But we got good value for them in terms of what they've got as a bundle of services. Some of the other growth that we've seen in the market has been in those small- and medium-sized customers, and it really depends on what we're selling. So we're selling a lot of tracking-related telematics services, which don't have a bigger bundle of services and therefore, don't attract the ARPU that you would attract from the full of services. So that's where some of that small- and medium-sized growth has come from. The other aspect of it is we did actually have a customer roll off. It's not huge, but it was several hundred units, which is in the prior year number, and that's -- they are actually acquired. It's an organization that actually has acquired a telematics provider. It's a global organization. So that was on quite a high ARPU. So being -- as there's a relatively small denominator with the number of units we've got there in Australia, the math means that, that accentuates that drop. But we would anticipate, as we push further into enterprise, actually the ARPU to come up, mainly because we're not just delivering certain types of services, and Ventia is certainly at a better pricing than what you're seeing there.

And just a quick one on the U.S. sales. I think I heard that after the end of the half, you have added 530 units in the U.S. Is that correct? And can I just confirm that? And I guess how is churn going on in that market underlying since we've entered this half?

So the net underlying, I think 306 is the net underlying add pre that drop of the 1,751 units for that enterprise customer which changed its technology. So the net add is 306 for the half.

And recent times, like in the last couple of weeks, we have added a fleet of 530. So that is in this -- will be in those month's numbers.

Perfect. I just wanted to confirm that. And just one more question. I just didn't want to take your time there, Alex. But just a Coretex update. Compared to the independent expert report, by memory, it was about 85,500 in there that we were hoping that to close FY '22 with. Given we're at, what, 66,000-plus have added 4,000 units in the U.S., so 71,000-ish as it stands today once they're shipped. Do you think that can get to that 85,000 number in the second half once you guys take control? Is that still possible? Or are they suffering some of the same impacts in the North American market that are out of your control?

So I think you've got a number of things there. I think the New Zealand number went back more than what we thought, 1,000 units. In terms of the U.S. and our current level of visibility, of course, having not completed, we can't see the deals which they have in the pipeline, we don't actually really talk too much about it. Certainly, how they're going against the plans which they have is good. Their delivery for this last month was 96% of budget. So they seem very bullish in terms of substantively understanding their sales pipeline. Past the 1st of December, we get more color on that. The other side of that. Some of the prospects, which have come out of the trade shows, there's a good 6 of them, which require refrigeration solutions, which is one of the key verticals that Coretex is really strong in. So one of the -- I think, the first benefits will be that through the marketing efforts on the shows that we've been to, those opportunities, we'll be able to work collectively together. Coretex's approach at this point really has been very focused around we're working a target of accounts as opposed to doing a lot of marketing and trade shows. So there's some opportunities in there through the combination of that. We'll see progress in the next 6 months.

We do have one question that's in the Q&A in the actual chat mechanism from [ Raymond Jain. ] Who do you see as your biggest competitors in the North American market, and what differentiates EROAD's products and solutions from these? I know we're short on time, but maybe Steven, we can just briefly touch on that.

Sure. So I think the answer to that question improves with the acquisition of Coretex. So prior to Coretex, we aligned for right compliance solutions related to the driver fatigue sort of ELD type of product, the safety side of things, which camera further enhances there. With the addition of Coretex, who focus on a larger customer size, we are going to be more competitive within the professional full truckload interstate fleets to which we have been focusing on. Coretex also brings really specialist telematics solutions to refrigeration, construction, waste and recycling. So -- and less on the truckload, which is similar to full truckload vertical. So I think the additional differentiators that we'll be able to provide with Coretex is better being able to address that larger fleet. Coretex has been in that U.S. market another 60 years longer and really have been focused in those larger fleets, whereas we've been more small to medium. So I think the combined company is going to be very competitive in that sort of 3 to 300 to sort of 2,000 size fleet.

Wassim might be next up.

Guys, can I just ask regarding the pilots -- the enterprise pilots in the U.S. Where they're up to and can you sort of remind us around your conversion record around -- within enterprise pilots in the U.S.?

So the -- one of those pilots, of course, has just completed, that 530. That, we got into a '22 situation where we're piloting prospects, we're happy with that. We could close them with the EROAD product, but we would potentially get them upset when they find out a short time later that we have this other product that we could have offered to them. So there are a number which we have done that and they're waiting to pilot the Coretex product, which is more extensible than the Ehubo2 product, which is 3, 4 years old than kind of the Coretex platform. So in terms of win rates, we are not as diverse as many of our competitors as EROAD. So we need to be -- where customers need great compliance, we're incredibly capable where they need other specialist functionality based on the industry that they run where we're less well placed. With the Coretex acquisition, via our additional products and services, that, we can provide beyond the EROAD's feature set. So I think our ability to win -- I think, our win rate is reasonably good because we do the upfront discovery, and if these things that we can't meet, then, of course, we will not proceed. So I think there will be an improved number of opportunities that we'll be able to together work and have, hopefully, a higher win rate.

We have a question in from [ Claude ], which you might be able to cover off a minute. And then Owen. So [ Claude Walker's ] question is just on the question around competitors in North America, which is the competitor we respect most in the U.S.A. market, which is probably quite an interesting question.

I think there's multilayers to this now. So we have -- within our vertical, which is that professional interstate trucking, they're primarily the incumbents being sort of Trimble, Omnitracs and more recently, Samsara. If you look up, Samsara's about to IPO, so there is some interesting commercial activities they're doing trying to maximize their pre-IPO situation, which we see is not sustainable long term. In terms of Trimble and Qualcomm, they've had some interesting rough roads. So they are losing customer base. So -- but they're the ones that we're typically coming up against the most. When we start looking into the specialist verticals for Coretex and the refrigeration side of thing, there's ORBCOMM would be the big competitor in that space. Within the construction side of things, that would be Command Alkon. And the waste and recycling seems to be a very open market in terms of its -- typically had quite generic telematics solutions. So I think the Coretex offering in that vertical looks quite exciting. I think the recent infrastructure goal that was passed in the U.S. is going to see a huge amount of activity within that construction vertical, particularly around concrete, which they specialize in. So we see that as a really good growth market. Many of these competitors in the verticals Coretex also needs to cooperate with. So there is quite specialist stuff, like if you look on the concrete side, there's slump for concrete. And that's a product that Coretex most probably won't ever do. There's one that Command Alkon has. End customers put together what they want. So it is quite interesting in terms of how competitors cooperate within those verticals to meet the end customer needs. So hopefully that sort of answers the question.

Thanks, Steven. And I think we've got Owen still wanting to ask a question.

I'll be quick, given the time. But just to understand the guidance, that's on an underlying basis, right? So you're kind of talking about a 34% margin profile for the business on an FY '22 basis? Is that right versus 31% in the first half?

That's 35%, yes, is where we had landed last year. And as we've said, we anticipate being at or around that number for the full year on the underlying. And that's been reiterated here.

And if the first half was 30%?

That's a normalized basis, yes.

And if it's 31% for the first half, is that kind of highlighting that the cost base is now flat, and you're expecting some operating leverage in the second half?

We certainly are anticipating some additional operating leverage from growth coming through. And yes, we've ramped up a lot of what we're going to be doing around the R&D, and we wouldn't see the same level of ramp up in the second half. There might be some aspects of what we've got to do around integration. And obviously, integration will come through in the second half. But once you normalize for that, yes, not seeing too many other cost pressures. Supply chain aside, of course, that's the qualifier.

And Steven, a question for you. Given the industry growth rate that we've talked about and you talked about your TAM before, what's a unit growth cadence, you could say, per annum that you'd be happy with in North America?

I think we're expecting that the U.S. CAGR for the industry is going to be around that 15% as an industry average. So we need to be north of that.

And does your pipeline that you have today facilitate that in FY '23 and beyond?

Yes. I mean, remember, there's 2 parts to that pipeline, there's an EROAD part and there's a Coretex part. Based on what we can see, we would expect that to be the case, yes.

And just remind me, just around the earnouts for Coretex or just what's the expectations for them to achieve the high-water mark to Coretex in terms of growth?

So the contingency components are around 2 elements. One is the safe transfer of the customers that make up 60% of the recurring revenue. And the other is around the new platforms are very new. So there are things in there making sure that they mature and scale. What we're seeing so far is incredibly promising. But we would expect all of those contingencies to be paid out. They're really there to focus everyone's mind in terms of what the very key things that must happen as pretty fundamental side of things.

Not from a growth perspective. Just more around the platform and product and retention.

No, there wasn't a contingency element around the growth side of things. I think that becomes incredibly hard to place as a sort of contingent element. You would want them to be operating reasonably independent to allow them to earn out. We thought that was pretty amazing. I think if you go to what are those critical elements that's going to allow you to drive growth, if you have safely transferred across the critical accounts and they're happy, well, you've got good references for future opportunities. And if the technology is rock solid and it can scale and it has all the functionality that the current product offerings have, then we're very well addressed in terms of growing.

Good one. Thanks, and I'll see you this afternoon.

Okay. Thank you, everybody. I think we're past time. Hopefully, that was informative, and many of you, we will talk to you in the coming days. Thank you, everybody.