EROAD Limited (ERD) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us for EROAD's half year results briefing for the 6 months ending September 30, 2024. I'm David Kenneson, Co-CEO of EROAD and it's a pleasure to be here with you today, alongside with my fellow Co-CEO, Mark Heine; and our CFO, Margaret Warrington. Our journey this half year reflects a team-wide commitment to excellence. This isn't just about reporting results. It's about sharing the progress we've made, the challenges we've tackled and the opportunities we're seizing for the future. We are building a future that reflects the needs of our customers and the expectations of you, our valued shareholders. Today, we'll explore the highlights of the first half of FY '25. But this isn't just a review of our achievements. It's a conversation about where we're headed. EROAD is at an exciting point in its evolution, and we're more than committed than ever to deliver sustainable growth and lasting impact. The past 6 months have been filled with achievements that strengthen our foundation and propel us forward. I'll assume you have a copy of the presentation in front of you. But if not, you can access it from our NZX or ASX announcements this morning or from the EROAD investor website. We'll have a Q&A session at the end of the presentation today, but feel free to ask questions throughout the presentation using the link in your Teams console. At the end of the presentation, Jason Kepecs will then ask them of us. I'll take the disclaimer on Slide 2 as read, so we'll move to Slide 3. Let's dive in. Our presentation today will follow 3 clear segments. First, I'll share updates on our operational achievements, focusing on how we've executed our strategy in key markets, including New Zealand, North America and Australia. We'll examine our new product introductions, partnerships and the steps we're taking to capture emerging opportunities. Margaret will then provide a detailed look at our financial results. And finally, Mark will outline our strategic priorities, including new partnerships and the outlook for the remainder of the year. Each section is designed to give you a clear picture of where we are, how we're delivering on our promises and where we're headed next. We're not just reviewing the past 6 months, we're building the case for why EROAD is well positioned for continued success in the coming months and years to come. Okay. So before I dive into the numbers, I want to take a moment to remind everyone of EROAD's purpose, and that's to deliver intelligence you can trust for a better world tomorrow. At the heart of EROAD's mission is the trust of our customers, businesses that play a critical role in keeping the world moving. From logistics companies ensuring that goods reach store shelves to fleets transporting life-saving medical supplies, our customers depend on us to deliver solutions that enhance safety, efficiency and reliability. And this trust is not given lightly. It is earned through consistent performance, innovation and an unwavering commitment to quality. We're proud to be a partner of these companies, providing the tools and insights they need to navigate complex challenges and meet their goals. The work we do doesn't just support businesses, it impacts lives. By enabling safer roads, more efficient transportation networks and better compliance with regulations, we contribute to the well-being of communities around the world. And this sense of purpose drives us every day, inspiring us to push boundaries and deliver excellence. Let's get started. I'm proud to share that we are on track to meet our FY '25 financial guidance across all measures. These financial results reflect a period of disciplined execution and strong progress. This is a testament to the hard work of our team, the clarity of our strategy and our customer-centric approach. For the first half of FY '25, our revenue reached $95.9 million. That's an 8% increase from the prior year. EBIT came in at $2.4 million, a significant improvement from last year, highlighting the progress we've made in balancing growth with operational efficiency. We're also pleased to report that we're slightly positive free cash flow on a reported basis and generated normalized free cash flow of $6.2 million, adjusting for the planned investments like the 4G hardware upgrade. This positions us ahead of expectations, ensuring a strong and growing foundation for the second half of the year. Annual recurring revenue grew to nearly $178 million, up 8% in constant currency terms. Asset retention remains high at almost 93% compared with approximately 94% in the first half of FY '24. What's particularly encouraging is our ability to balance growth with efficiency. By focusing on high-value opportunities and maintaining cost discipline, we've ensured that every dollar invested contributes meaningfully to our long-term goals. This balanced approach will continue to guide us as we pursue our strategic objectives. These results demonstrate our relentless focus and disciplined adherence to our strategy and in tight market conditions. Momentum is everything in business and at EROAD, we're seeing it across every facet of our operations. We're delivering on what we set out to achieve, growing our core business, upselling and cross selling to existing customers and laying the groundwork for future growth through partnerships and new customers. Our commitment to innovation is evidenced in our AI-powered Clarity Edge camera, which is driving product adoption across fleets. In North America, we've secured renewals and expansions with enterprise customers, adding $1.8 million in total contract revenue value. And in New Zealand, our reputation as a trusted partner helped us to win a significant Trans-Tasman contract with a 5,000-unit Australian fleet and a renewal of their 6,000-unit New Zealand fleet. This momentum isn't accidental. It's the result of disciplined execution and a clear focus on delivering value. Whether it's through strategic partnerships, the rollout of advanced technologies like our AI-powered Clarity Edge camera or targeted market expansions, we are continually finding ways to do more and to do it better. Our strategy is built on 4 key pillars: product expansion, fleet growth, partnerships and data-driven innovation. Take our AI camera as an example of how we're expanding our product portfolio. It's not just a device. It's a gateway to higher customer value through enhanced safety, efficiency and operational insight. We're also focusing on growing alongside our customers. As their fleets expand, so do the opportunities for EROAD to deliver value. Partnerships like the one with Geotab enables us to bring proven technologies to market faster, opening new doors in the light commercial vehicle space. And finally, our ability to harness data and provide actionable insights transforms the way our customers operate, making us an indispensable part of their ecosystem. These priorities are driving results today and setting us up for sustainable growth tomorrow. I'd like to talk a little more about our customer mix and the opportunities it creates for growth. Our customer base is critical to driving growth with our largest enterprise customers accounting for over 54% of our revenue. These customers represent not only stability but also opportunity. As they expand their operations, we're positioned to grow with them by offering additional products and services. This includes expanding our presence within fleets that already trust EROAD and unlocking new value and deepening those relationships. Our strategy is simple, focus on delivering the best outcomes for our customers and the growth will follow. This customer-first approach is what sets us apart and drives our success. On Slide 10 here, we represent an illustrative example of a 100-vehicle fleet that our expansion potential could be. For a typical 100-truck fleet in the U.S., the base opportunity is driven by our entry-level SaaS and device products. These are foundational solutions that meet core compliance and operational needs. When we layer in additional features like in-cab driver safety upgrades, enhanced tracking or fleet management tools, the revenue potential more than doubles. An example of this is our recently released AI camera, which provides our customers with computer-assisted fatigue management to keep our drivers safe, exoneration in case of an accident and expanded field of view to protect the driver, their vehicle and third parties. Since we've launched our AI camera in July of this year, we have already sold over 500 units to customers, with almost 300 of those coming after the 30th of September. There's been a spike in interest for this product recently, which is supported by a growing pipeline. But it doesn't stop there. By expanding our solutions to include trailer and load monitoring, the revenue potential jumps even further and allows our customers to interact with their vehicles on a single pane of glass integrated with their own enterprise systems. This shows the value of our strategy. We're not just meeting the minimum requirements for fleet operations, we're enabling our customers to unlock higher value by adopting multiple products across their operations. And as they grow, so does our ARR. Now let's take a closer look at how we're performing in each of our key regions. In New Zealand, revenue grew to $49.8 million, an 11% increase year-over-year, driven by consistent sales and, of course, our annual price adjustments. This performance reflects stability of the market even in tight conditions. Our asset retention rate stands at 94.1%, slightly down from last year due to fleet resizing, which is largely tied to economic pressures. We believe that this is equally split between small and medium businesses and enterprise customers. When we talk about retention rates and churn, it's important to differentiate between customer churn and unit reduction. Customer churn refers to customers who have left the platform entirely. This remains very low, particularly among the larger high-value enterprise fleets that align with our strategic focus, whereas unit reduction refers to a decrease in active units within customers who remain on the platform. And this is often temporary and reflects adjustments within our customers' fleets, such as seasonality, economic changes or resizing based on demand. As customers scale their operations back up, these units often return, enabling us to grow alongside them, something we experience consistently with our larger customers. The ongoing 4G hardware upgrade program is also progressing well, although at a slightly elevated churn temporarily as we replace older units. Despite the temporary challenging economic conditions, the renewal of the 6,000 units with our large Trans-Tasman enterprise customer and expansion within our Australian operations reflects the value our customers see in the EROAD platform. Over the last 6 months, we've implemented changes to lead generation and marketing and account management, which have begun to show positive signs. While we've maintained sales and marketing spend at levels consistent with prior years, our ANZ pipeline has increased over 2x by total contract value compared to the previous 5-year average. Looking ahead, New Zealand remains a highly cash-generative market and well positioned to drive further growth. Our partnership with Geotab has introduced a new low-cost solution for light commercial vehicles, opening up an untapped segment of the market. Moving on to North America. In North America, revenue for the first half reached $39.8 million (sic) [ $39.6 million ], which represents a 2.6% increase over the prior year. We've had a notable success with key renewals and expansions, including securing product expansions with Medline, ABC Trucking and US Foods, which collectively generated an additional $1.8 million of total contract value. This demonstrates our ability not only to retain but also expand relationships with large long-term customers. Additionally, while fleet resizing continues to impact the market, we're seeing positive progress from our enterprise customer base with a particular focus on expanding fleet sizes and product adoption. A large customer gave notice last year of its intention to not renew with its in-cab business, which did impact churn. To give you a sense of these fleets resizing, 6 of our top 15 enterprise customers expanded their fleets by approximately 9%, which represents about 30% of our gross sales during the same period. Consistent with ANZ, changes to how North American sales and marketing teams operate has seen the pipeline increase 2x by total contract value compared to the previous 5-year average. It's still in early days, but we're optimistic that this will grow and the result will be an increased wins. Looking ahead, we're confident that North America will continue to be a key driver of our growth, especially as we deepen our relationships with high-value customers and expand our footprint in this large and rapidly growing market. And finally, Australia. Australia is a market where our efforts are beginning to gain traction and the results speak for themselves. Revenue in the region for the first half reached $6.5 million, which represents a 16% increase compared to the same period last year. This is a clear reflection of the success of our focused sales efforts and the strong revenue growth driven by large fleet expansions. As previously mentioned, a key highlight in Australia is the ongoing rollout of our 5,000-unit contract from a Trans-Tasman enterprise customer. At the balance date, approximately 1,400 units have been rolled out and we expect significant contributions as the rollout progresses, with the aim to be completed in June of 2025. In terms of customer retention, we're seeing a solid 88.2% asset retention rate, which is in line with our expectations for the region. The primary driver of churn was the final exit of a large customer who provided notice in December of 2023. Looking forward, Australia remains a key growth market for EROAD with substantial opportunity to leverage our position in New Zealand to capture more enterprise customers along across the Tasman. We are well positioned to build upon this momentum in FY '25 and I look forward to seeing how we can continue to expand our footprint in this region. I'll now hand it over to Margaret. She'll walk you through the financial details for this period.

Thanks, David. From a financial perspective, we've delivered on our promise of sustainable growth. For the first half of FY '25, we are pleased to report that our overall revenue for the period reached $95.9 million, an 8% increase from the same period last year. This reflects solid growth across all our key markets and a strong performance in our SaaS business where annual recurring revenue also grew by 8% in constant currency terms. This reflects the strength of our existing customer base and our continued success in expanding into high-value enterprise accounts, as David mentioned earlier. For the recently announced large enterprise customer win in Australia, while we've started rolling out hardware, we've yet to start invoicing. We expect to see the impact of this win in the second half of the year. In terms of reported EBIT, we saw a significant improvement to $2.4 million, up from $0.1 million in the first half of FY '24. This positive EBIT result is a clear indicator of the progress we've been making in terms of growing our top line while ensuring ongoing cost control. Normalizing for the 4G replacement program increases EBIT to $4.7 million for the 6-month period. We're on track to meet full year guidance for the key financial metrics of revenue, normalized EBIT and free cash flow. Slide 16 provides details in regard to our overall operating costs. In the first half of FY '25, we continued to see improvements in our operating costs as a percentage of revenue, which decreased to 69%. This is an excellent result and reflects the ongoing success of our cost-out program, which helped reduce our operating cost base while enabling us to grow revenue. As we move forward, we'll continue to focus on driving operating leverage, meaning that with each additional dollar of revenue, our fixed costs remain well controlled, leading to greater profitability. In terms of our cost structure, following the completion of the $20 million cost-out program, as we scale, our focus has been on managing and optimizing costs to ensure that we are operating efficiently. Both our cost to acquire and our cost to support our customers has remained relatively steady as a percentage of revenue. Our strategy to grow within our current large enterprise customers means we are continuing to invest in both sales and marketing and customer support teams, particularly in North America, to build our capability and capacity in that region. As we noted on the previous slide, our cost base as a percentage of revenue continues to decline. Our variable costs are benefiting from the cost-out work we did in FY '23 and '24, particularly in regards to the renegotiation of some key supplier contracts. The fixed costs have remained relatively steady. However, the mix of costs is changing with our general and admin costs reducing as a percentage of revenue and this is offset by the investment in sales and marketing I just previously mentioned. Now let's turn to research and development, R&D spend in the first half of FY '25. Our R&D expenditure totaled $16.5 million, which represents 17% of revenue. While this is consistent with the same period last year, we are focused on ensuring that our R&D investments are strategically aligned with projects that would provide a near-term return on investment. We are also implementing initiatives that will drive improved efficiency within our R&D activity. Our R&D program continues to focus on expanding our product offering, particularly in areas such as AI-driven safety solutions, decarbonization tools and partnering with other hardware providers to accelerate the speed to market. We're making significant progress with these initiatives and expect them to generate long-term value as they scale across our customer base. A portion of our R&D resources is also directed towards supporting the existing products we have in the field, ensuring that we continue to deliver value to our customers while driving new growth. Our forecast R&D expenditure for FY '25 has increased from $32 million -- sorry, $32 million to $35 million. This is due to the additional investment in short-term external capability to help accelerate the time to market for a number of key products. Free cash flow continues to be a key priority for us and I'm pleased to report that we have now become consistently free cash flow positive ahead of our original targets. Although we produced a marginal amount of free cash flow in the first half of the year, it includes working capital outflows of $9.8 million, mainly related to payments for accrued inventory. Our forecasts show increased free cash flow in the second half of the year and this is due to a number of factors, including the profile of inventory purchasing for the 4G replacement program, which is weighted to the first half of the year and the benefit of shifting to annual invoicing for a number of large customers as we renew. Our free cash flow is a testament to the solid foundation we've built for sustainable, profitable growth and to the strength of our New Zealand operations. This is evident when we remove the temporary impact of the 4G hardware upgrade program, showing the company generated $6.2 million in normalized free cash flow in the first half of this year. As I noted on the previous slide, the inventory purchase for the 4G upgrade program has been weighted to the first 6 months. We expect the cash impact of that program in the second half to be around $3 million. This normalization is important because it allows us to see the true underlying performance of our operations. Looking forward, we expect reported free cash flow to trend positively and increase as the 4G upgrade program completes and we scale the business further. Finally, an update on the progress with that technology refresh. As part of the ongoing commitment to providing the best technology for our customers, we've been working to replace legacy 3G and 2G units with the next-generation 4G hardware. At 30th September, 67% of our devices in ANZ were 4G compatible, although this has tracked up subsequently. And currently, we have more like 72% 4G devices with customers either installed or awaiting installation. The 3G shutdown in New Zealand has been delayed until December 2025. We remain on track with the program, and we continue to carefully monitor and manage the cash flow impacts while we make progress with customer upgrades. We expect the completion of this program by the end of calendar year 2025, and that will significantly improve our free cash flow moving forward. In addition, the refreshed technology enables our strategy of expanding within our existing customers' fleets through multi-product adoption. And with that, I'll hand over to Mark.

Thank you, Margaret. As you can see, the EROAD platform has evolved into a fully integrated system designed to meet the needs of modern fleets. Managing fleets is complex work, balancing compliance, safety, productivity and sustainability, all of which require a lot of data and coordination. Our platform brings these elements together in one place, providing the tools and insights our customers need to manage their operations more effectively. By simplifying fleet management and having all capabilities in one place, customers can easily expand into additional tools. This drives deeper customer engagement and aligns with our strategy to increase ARR through product adoption. A single platform helps customers reduce the cost and time involved in managing multiple systems and integrations. This supports safe, productive and sustainable fleet operations while simplifying a traditionally complex environment. We have successfully delivered on our turnaround strategy over the last 2 years. Our focus going forward is on our scalable customer-center platform to drive sustainable ARR growth across our markets. We have 4 priority areas. The first is our product suite expansion and interoperability. Driving multi-product adoption starts with product. New additions like the Clarity Edge AI dashcam is already demonstrating its value in improving driver safety and operational efficiency while enabling cross-product adoption within our platform. This approach allows our customers to consolidate their operations and grow their spend with us over time. Second is our customer-centric sales strategy. We continue to align our sales efforts to target high-value accounts with complex needs. Our success in securing multi-year renewals and expansions with major customers like Medline, US Foods and ABC Supply reflects this focus. Additionally, we're refining our account management processes to ensure seamless onboarding and multi-product adoption for maximum customer lifetime value. A key part of this strategy is that our engaged customers continue to roll EROAD out in their businesses as they grow. This is by them either adding new vehicles for their fleets off the back of organic growth or where the customer acquires new businesses. Growth with these existing customers is a key element of our growth strategy. Third is our ecosystem partnership for market reach. Partnerships like Geotab broaden our addressable market, especially in the light commercial vehicle segment. Leveraging third-party hardware and OEM integrations allows us to meet customer needs without diluting our focus on our core offerings. And finally is our data-driven insights and AI innovations. In addition to Clarity Edge, we've launched predictive maintenance tools and other AI-powered features to help customers optimize fleet performance while improving safety and efficiency. These capabilities enhance fleet operations while also supporting premium pricing, which boosts ARR. Our strategy builds on the solid foundation we've established and ensures we continue to deliver measurable results for our customers and our shareholders. As recently announced, we have partnered with Geotab to launch EROAD Locate, a cost-effective entry-level solution tailored to the light commercial vehicle market in ANZ. This partnership strategically extends our product ecosystem. By utilizing Geotab's hardware, we've expanded our offering while maintaining core focuses on our key engineering priorities. This enables us to address a significant opportunity in market with 4.8 million light commercial vehicles in ANZ, nearly half of which currently lack any telematics solution. EROAD Locate acts as both an affordable entry point for new customers and a simple add-on for existing customers managing mixed-use fleets. It complements our core platform, supporting our AR growth strategy, introducing new customers to the ecosystem and paving the way for upsell and multi-product adoption. We have a significant opportunity for growth in the light commercial vehicle segment of the eRUC market. While eRUC already captures an impressive 86% of all electronic heavy vehicle RUC, the uptake in light commercial vehicle for any eRUC solution remains low. Only 9% of diesel or EV light commercial vehicles use any type of eRUC, with the remainder still choosing paper. With EROAD Locate, we add an affordable entry-level solution designed to help these customers transition from paper-based RUC to digital. It's an important step in addressing this gap and expanding our reach. This offers immediate expansion of our addressable market while also placing us in a strong position for future opportunities. The New Zealand government's proposed changes to fuel tax regime to transition all vehicles to electronic road user charges by 2027 would add an approximately 3.6 million additional vehicles to our addressable market. By addressing this unpenetrated light vehicle market now, we are well positioned to capture future growth and further cement our leadership in eRUC as the market evolves. Our new Clarity Edge cameras represent a significant leap forward in our fleet safety offering, combining AI-powered video detection with real-time voice coaching to actively engage and intervene with drivers as they're on the road. While only recently launched, customer feedback is positive and we're already seeing momentum grow. This with both new and existing customers recognizing the value it offers to their operations, leading to new sales already. As the data from U.S. pilot demonstrates, the results are impactful. Real-time voice coaching led to reductions in unsafe behaviors across critical road safety areas. Clarity Edge improves safety and encourages multi-product adoption. It aligns with our broader strategy to drive ARR growth as customers see the value in expanding the use of EROAD's integrated product suite. It is a perfect example of how our focus on innovation and a deep understanding of fleet challenges translate into meaningful real-world benefits for our customers and the communities that they serve. Now, our report card. As a reminder, at March 2023, our Investor Day, we set clear targets for FY '26. We've not deviated from this target, and we continue to have confidence that we will achieve them. First is our annualized recurring revenue. This grew by over 8% over the last 12 months from nearly $154 million to almost $178 million at the half year. As to asset retention, we target a churn at between 5% and 7%. As discussed earlier, we have seen increased churn this year, meaning we're at the upper part of this band. Although on an industry basis, EROAD is performing well, we are focused on reducing churn in our key customer segments. The next metric I'd like to call out is R&D. Our long-term target in R&D has been spending not more than 13% to 15% of revenue. As at the half year, we're trending at 17% of revenue, and we forecast to be at the end of the year at around 18% of revenue. Finally, our free cash flow target. Normalized for the 4G upgrade program, which Margaret mentioned before, our target for FY '26 is 9% free cash flow. As at the half year, our normalized margin is around 6% of revenue. As we enter the second half of FY '25, we remain confident in EROAD's clear focus on complex fleet operations, disciplined growth and our commitment to delivering value through innovation. We are firmly on track to deliver against our full year financial guidance, supported by a strategy that prioritizes high-quality revenue and effective execution. This means revenue of between $190 million and $195 million, with the growth reflecting the targeting of large enterprise customers with long sales cycle, EBIT of between $5 million and $10 million, normalized for the 4G upgrade program and EROAD being free cash flow positive for the full year. Our end market focus is to grow our existing customer base in North America, utilizing dedicated North American sales teams targeting new logo acquisition and expansion of existing relationships. In New Zealand, we see increased opportunity to leverage brand recognition to capture new enterprise accounts. And further, the proposed government policy for eRUC represents significant medium- to long-term opportunity given the New Zealand government's announcement that it intends to roll out eRUC for all vehicles by 2027. Finally, we're building on momentum gained in Australia and launching an expanded product suite beyond our existing customers. On behalf of everyone at EROAD, we thank you, our shareholders, for your continued trust and support. We'll now hand over to Jason Kepecs for your questions. Jason, over to you.

[Operator Instructions] The first question is, ARR appears to be flat half-over-half. Can you talk to that?

Sure. While ARR appears to be flat in nominal terms, it was really impacted by the Kiwi dollar strengthening to the U.S. dollar in September. And it's in September when we actually do our ARR calculation. So normalized for currency, it would have been -- ARR would have been just over $4 million. Does that help?

Yes. Can you tell us more about the Geotab partnership economics?

Sure. Thanks, Jason. So in terms of Geotab, we're really excited about this opportunity. Geotab came to us. Typically, Geotab has an indirect model, so they don't sell direct in market, rather they appoint resellers and market if it comes to EROAD and ANZ to be a key reseller in this market. In terms of the economics, as I mentioned earlier, there's about 4.8 million light commercial vehicles in ANZ and only half of which actually have any form of telematics in them. So for us, partnering with Geotab allows us to provide a lower cost solution into the market, which is -- under sort of represented at the moment in terms of telematics solutions. We're also looking at how we can sell the solution into the market. So we're going to look to sell the hardware upfront and then have an annualized -- sorry, recurring monthly revenue model for the SaaS side of the business, too. So we're really delighted by this opportunity and look forward to expanding with Geotab in this market.

A follow-up question on the Geotab partnership. How do you manage the competitive tensions? And does Geotab compete directly against EROAD in Australia?

Sure. So Geotab appoints resellers in the market, so don't compete directly against the resellers. Their model is to go indirect. In terms of managing channel conflict in New Zealand, for example, we will be the largest Geotab reseller. There's only 1 or 2 others who focus on very small esoteric areas. In Australia, there's more resellers appointed. When it comes to EROADers, we'll be certainly focused on the mixed-use fleets where we can sell not just in heavy vehicles using our Ehubo technology or CoreHub technology, but then use Geotab as an add-on to those customers as well. So we don't predict channel conflict there given that the key way we'll enter and sell into Australian market will be off the back of mixed fleets already using EROAD hardware.

We've noticed that you've increased your R&D forecast spend. How should we read that and can you give more color on how that is to be deployed?

Sure. I can start on that one. So in terms of R&D spend, we only spend R&D where we see that we get real return for doing so. So we're delighted there's some opportunities this year around Geotab or Clarity Dashcam, Clarity Edge dashcam and also building on our platform, improving its performance as well. So we're focusing on spend R&D there. What I think is really important to note is that even though expanding our investment into R&D, we're still maintaining our guidance to be free cash flow positive this year. So we're still seeing strong free cash flow generation in the business while also improving on our R&D investment in the markets we operate in.

Next question is, how do you expect to achieve your FY '26 revenue targets and what is your confidence in those?

[indiscernible]. Look, we're very confident we're going to hit them. We need to continue to do what we've done, which is carry on and grow. But don't forget they're also underpinned by the price increases where we're growing our value to our customers. We've got new products that have come to the market like the AI cameras. They're creating momentum and upselling for us within our current customer base. We've got expanding fleets with our current large enterprise customers. So we've talked about our strategy, which really was around continuing to grow with those current large enterprise customers. That's why they're so valuable to us. So all of those things factor in along with new growth ultimately. So a combination of those factors mean we remain really confident.

And just a follow-up on that. Do you provide any guidance or targets in terms of the number of unit growth that is required to hit that FY '26 target?

Look, units is increasingly becoming a difficult metric for us. I'll just put it out there. So I'm going to use cameras as an example, why a camera wouldn't be counted as a unit, but the revenue we get from a camera is often more than what we'll get for the in-cab unit. So we've put -- we think we've put metrics out there to try and help guide where we're going to hit both this year and next year. But no, we weren't going to go ahead and give guidance in unit numbers.

Great. And just a follow-up on the R&D. Do you expect R&D to unwind following this step-up? Is this a recurring increase? Or is this just a one-off?

So from our perspective, we're looking to drive more and more efficiency in R&D. So we don't expect it to continue to step up over time. Indeed, we're going to keep driving efficiency into that part of the business to keep it between the 13% and 15% of revenue that we've targeted by FY '26. That being said, if we do see an opportunity, that can mean that we can get better growth for our customers -- sorry for our shareholders, we will focus on those. But we do not expect or predict that we'll be increasing our spend in R&D into FY '26.

Great. And in North America, the gross additions this half were lower than in some of the previous halves. When do you see the growth in that division resuming?

Yes. So the last 12 to 18 months have been economically tough in North America and New Zealand, especially in the transportation industry. We did have -- we went into FY '25 with a known churn from December of 2024. We don't have any of those types of churns on the horizon right now. We also had some fleet resizing across 5 of our customers or about 100 units for each of those 5 customers. We expect to see a rebound as we move into more economic favorable times in 2025. So again, we're holding to our FY '25 guidance, but we're very optimistic on FY '26 and beyond. North America is a key region of growth for EROAD.

And can you provide more -- shed more light on the customer churn in the U.S. this half?

I think I talked about it a little bit. We had 5 customers who each had a fleet resizing of 100 each and we went in with QCD, knowing that they left our organization. They were using us for ELD. They had left again last year. We had the impact of that 703 units in the first half of this year.

You mentioned on Slide 19, you're phasing in annual upfront billing. Could you provide more color on that?

Yes. Sure. For a lot of our large enterprise customers, it's actually easier for them to do more simplified billing. It's obviously favorable to us from a cash perspective. Three of our largest customers that we've renewed so far this year, all between $1 million and $4 million in revenue. All 3 of them that we've renewed, all 3 have renewed and gone to annual billing. So we're seeing that the market is willing to do that. Again, it makes it easier on us from a payables and receivables perspective and it obviously helps our free cash flow position.

Can you give us a sense of how many pilot customers or potential units there are currently in pilot?

I don't know if I have the units in terms of that. But if you look in North America right now, 2 of our largest customers both have, we'll say, roughly 10,000 units. And one of those customers were in the reefer, their cold chain and the refrigerated trailers. We're now expanding into the in-cab with them. We have another large customer where we're in the cab. And now we're currently doing a pilot for the refrigerated units. So those 2 alone would account for close to 20,000 units. But we have significant pilots going on right now with the AI camera across numbers of our fleet. So the pipeline, as I talked about during the presentation of being 2x the 5-year average is looking really healthy right now. So a significant number of units. But again, we're going to continue to move away from that metric as we roll out more AI solutions, as we roll out more in-cab solutions as well like the AI camera.

That's great. And this is more of a geopolitical question. With the incoming administration in the U.S. would tariffs have any impact on EROAD's business in the U.S.?

So EROAD is clearly looking closely at any changes around tariffs in North America. One key point to note is we do not do manufacturing in China. We'll see how tariffs evolve over time. As a Kiwi business that imports into the U.S., we've been working closely with U.S. Chamber of Commerce and other organizations to understand whether these tariffs will come into effect. But we do see that more and more our sales into North America really are around our SaaS solution. And so we'd hope that any impact would be minimal, if any, if tariffs do come into effect and we're still waiting to see what may happen on that front.

And there's a question here asking if there are plans or can we -- for assurance that there are no plans to raise equity capital in the normal course of business.

As we see in the pack today, we've got a very strong liquidity position. We raised capital last year to ensure that we have a strong balance sheet to enable growth. We got at least $55 million of liquidity on the balance sheet right now. So we're very confident that there's enough capital to sort of grow the business going forward. So no, there's no intention for any capital raise.

And could you talk about the sort of solutions that are currently being used by the ANZ light vehicle fleets using -- currently using telematics?

Sure. So there's a range of smaller providers out there who are providing quite simple tracking solutions in the market. It's quite a diverse segment to be fair. What we're looking at is we've got a very strong brand, obviously, when it comes to telematics generally in New Zealand. And by trading off the brand and focusing those customers on a clear upsell path from a low-cost Geotab type solution to a more [ incumbent Ehubo type ] solution, we see great opportunity there. So although there are some operators out there that are relatively small, and we see good opportunities to compete against them and sell a solution into that market.

And, Dave, a follow-on to that. Is there any risk of the Geotab solution cannibalizing EROAD's current product suite or customers?

We look really carefully at how Geotab complements our current product suite. So our current customers who've been really successful with highly value health and safety as a key component of the offering and our Ehubo offering provides in-cab feedback instantaneously. So those customers who value that, we don't see them as downgrading to a Geotab type solution. Rather the Geotab type solution is really targeting those parts of the market that don't ever use telematics at all right now and to really provide an entry level into the part of the market. So we're fairly confident we won't see cannibalization by introducing that solution in the market.

Yes. And although it's early days, is there any guidance in terms of financial parameters around the significance of the eRUC opportunity in light vehicles?

Sure. So we're obviously looking very closely at the opportunity around eRUC being rolled out an additional 3.5 million to 3.6 million vehicles by 2027. At this point in time, it's very early on in the policy framework for the government. We're responding to the RFI that came out a couple of weeks ago to show how EROAD can help support those customers out there. It is a significant expansion of our addressable market. As we get closer into the nature of the technology we'll use to support them, we can provide better guidance then. I think what's really important to note, though, is already there's about 1 million vehicles that are in the regime, many of which are light commercial vehicles in the EV and diesel space. Right now, we're going after them, and that's part of what the Geotab solution provides us on that journey. So we're targeting commercial fleets right now. We see great opportunity there. In the short to medium term, we'll see those passenger vehicles open up, and then we can hopefully provide better guidance there around what that could look like in the future.

And the final question, in terms of your U.S. competitors, some of the larger ones are moving aggressively to buy market share. Do you believe that EROAD's strategy is aggressive enough in that sense? And is that -- how does that look from a competition viewpoint?

I think it's really important for us to maintain a strong balance sheet and have sustainable growth in North America. While I know some of these large customers are out there buying business, we don't believe that, that's a sustainable business model. If you look at the growth in our pipeline over the last year, we believe that our existing customers are signaling to us that they want to continue to expand with us. They want to choose more solutions from us and they're staying with us as evidenced by our extremely low churn. So right now, we believe the path we're on is the right one and a sustainable one. And certainly, we're disappointed with the current multiples that we're trading at, and we hope to see that increase in the quarters and years to come. Any other additions?

No.

[ Sounds Good ].

Perfect. That's all the questions for today.

Thanks, Jason. And just before moving on from questions, I'd like to make a special mention of Margaret. Unfortunately, today, we've announced Marg's departure. She will be with us until the end of February. She is returning to the dynamic and fast-paced retirement sector from EROAD, rejoining Summerset as their CFO. We've been really delighted with Margaret's contributions over the course of the last couple of years. As CFO, she has left a very strong finance team and we're in good hands going forward. And we'll obviously update the market as and when there are future developments around the CFO side. So thank you, Margaret, for all that you've done for us and our shareholders.

Thank you, guys. It's been a privilege.

And thank you to all our shareholders for joining us today. We are really proud of the progress for the half year. In addition to launching innovative new products and re-signing significant customers, our revenue and ARR have both grown by around 8%. We've significantly improved our EBIT and we are now consistently free cash flow positive. We're on track for our full year financial guidance and we're really excited about the opportunities that the second half of the financial year brings. Thank you for all of you who joined us today and have a great rest of your day.