PowerFleet, Inc. (AIOT) Earnings Call Transcript & Summary

Good morning. Welcome to PowerFleet's Fourth Quarter and Full Year 2019 Conference Call. Joining us for today's presentation is the company's CEO, Chris Wolfe; and CFO, Ned Mavrommatis. [Operator Instructions] Before we begin this call, I would like to provide PowerFleet's safe harbor statement that includes cautions regarding forward-looking statements made during this call. During the call, there will be forward-looking statements made regarding future events, including PowerFleet's future financial performance. All statements other than present and historical facts, which include any statements regarding the company's plans for future operations, anticipated future financial position, anticipated results of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's product offering and other industry trends, are considered forward-looking statements. Such statements include, but are not limited to, the company's financial expectations for 2020 and beyond. All such forward-looking statements imply the presence of risks, uncertainties and contingencies, many of which are beyond the company's control. The company's actual results, performance or achievements may differ materially from those projected or assumed in any forward-looking statement. Factors that could cause actual results to differ materially could include, amongst others, SEC filings, overall economic and business conditions, demand for company's products and services, competitive factors, emergence of new technologies and the company's cash position. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances. Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company's website at www.powerfleet.com. Now I would like to turn the call over to PowerFleet's CEO, Mr. Chris Wolfe. Sir, please proceed.

Thank you, Josh. Good morning, and thank you for joining us today. The fourth quarter marked a strong finish to a transformational year for PowerFleet in which we closed the acquisition of Pointer, achieved several milestones on our integration plan, secured multiple new customer wins across our verticals and geographies and generated robust, organic revenue growth, which was up 17% for the quarter on a year-over-year pro forma basis to $35.1 million. On top of this, we also ended the year with more than 550,000 mobile subscription units. As these results demonstrate, we are beginning to recognize the material benefits as well as the operational efficiencies and the deal flow of being a larger organization. As we reflect on 2019, particularly, since we acquired Pointer, we're extremely pleased with the progress we've achieved so far. And while there is still more work to be done, we're really encouraged by the efforts and the commitment by everyone involved in this pivotal transition. PowerFleet is now a cohesive team aligned around one shared vision, creating a world-class, financially successful, global IoT software and solutions provider. Before I turn the call over to Ned to discuss the financial results, I'd like to touch on some of the current macro concerns, specifically with the coronavirus. Obviously, there's a lot of valid concerns around the coronavirus and the various implications in the global economy. I'll first address the potential impacts to PowerFleet supply chain and then address the possible impacts and effects on the overall economy, specifically, the logistics segment, which appears to be at higher risk due to global interdependence. First, as it relates to PowerFleet, we source very few parts from China directly. We have also, already transitioned some ancillary parts, such as cables to the U.S. On top of this, we currently have enough inventory for a few quarters and expect very little or no impact at all to customer deliveries. Regarding the overall economy and the potential impact to the global logistics, it is important to bear in mind that the news we are hearing and reading about daily through the mainstream media outlets is predominantly focused on how the virus will impact consumer demand around travel, iPhones and other consumer electronics as well as business travel. Keep in mind that PowerFleet is a B2B provider of mobility platforms to the market segments we serve. In the economic downturns over the last 30 years, specifically 1991 and 2008, the transportation and logistics markets use these cycles to invest in technologies, which enable them to exit the downturn with much more efficient and capable organizations. So using metrics such as the number of global shipments or the number of trucks sold does not accurately reflect PowerFleet's business, as it is easier to implement new technologies when our customers' businesses are running more slowly. On top of this, with the Federal Reserve cutting interest rates by 50 basis points last week, it makes it even more likely for our customers to invest in technologies like ours at a lower cost of capital. What we are more concerned about currently is the health and safety of not only our workforce, but also those communities already impacted. We are taking the necessary precautions and following CDC recommendations. That being said, a pandemic is not your typical economic downturn. But we are staying vigilant on any possible impacts to our business and our industry. I'll now turn the call over to Ned to walk us through the financial details for the fourth quarter in 2019. Ned?

Thank you, Chris. Good morning, everyone. Our financial results for the fourth quarter of 2019 include consolidated results for both I.D. Systems and Pointer Telocation, which we acquired on October 3, 2019. Keep in mind that the comparable year ago period only includes stand-alone financial results from I.D. Systems. Now with that qualification, let's look at the numbers. Revenue for the fourth quarter of 2019 increased to a record $35.1 million from $11.5 million in the same year ago period. As Chris mentioned, on a pro forma basis, revenue for the quarter increased 17% compared to the prior year fourth quarter. Services revenue was $18.7 million or 53% of total revenue compared to $4.3 million or 38% of total revenue in the same year ago period. Product revenue, which drives future service revenue, was $16.5 million or 47% of total revenue compared to $7.2 million or 62% of total revenue in Q4 of last year. Gross profit increased to $16.6 million or 47% of total revenue from $6.1 million or 53% of total revenue in Q4 of last year. We expect gross profit margin to increase in 2020 as during the fourth quarter, we have not seen the full benefit of being vertically integrated, as the majority of the product we shipped in the fourth quarter was already in our inventory. Now turning to our expenses for the fourth quarter of 2019. Total operating expenses were $19.9 million compared to $8.9 million in Q4 of last year. Looking at the various components of operating expenses, selling, general and administrative expenses were $12.7 million compared to $6.2 million in Q4 of last year. Research and development expenses were $3 million compared to $1.9 million in Q4 of last year. During this quarter, there were a lot of onetime items due to the acquisition and significant amortization due to the intangibles associated with the acquisition. Depreciation and amortization expenses were $2 million compared to $387,000 in the same year ago period. Severance expenses related to the Pointer acquisition were $1.7 million compared to no severance expenses in the same year ago period. And finally, acquisition-related expenses were $462,000 compared to $428,000 in Q4 last year. Turning to our profitability measures. GAAP net loss for the fourth quarter of 2019 totaled $5.2 million or $0.18 per basic and diluted share. This compares to a GAAP net loss of $2.8 million or $0.16 per basic and diluted share in Q4 of last year. Adjusted EBITDA, a non-GAAP metric, which we define as earnings before interest, taxes, depreciation, amortization, stock-based compensation and all the onetime items for the fourth quarter of 2019, totaled $2.1 million or $0.06 per diluted share. This compares to an adjusted EBITDA loss of $595,000 or $0.03 per basic and diluted share in Q4 last year. At December 31, 2019, we had 29.7 million common shares outstanding. The 50 million convertible preferred equity converts at $7.31, which equates to 6.8 million shares. Therefore, as converted, there are 36.5 million shares outstanding. Our balance sheet also remains strong and liquid. At year-end, we had $16.4 million in cash and cash equivalents and working capital position of $29.3 million. This concludes my prepared remarks. Chris?

Thanks for the financial overview, Ned. Before providing a sales and operational update, let me say that we are well on our way to becoming a fully integrated organization. I'm incredibly proud of our combined teams pulling together to achieve solid year-over-year growth during a time in which our team could have easily been distracted by the integration. During the fourth quarter, we saw a healthy mix of new sales activity and customer expansions across both our business and geographic regions. From a direct sales standpoint, our team signed several notable deals in Q4, including Michelin North America and ABB in Mississippi, a leader in digital transformation, as well as with Caterpillar in East Peoria. We also secured major new wins with our leading transportation companies, All Truck and Tropical Shipping, which we did press releases on. All Trucks selected us to upgrade its entire fleet of more than 1,500 trailers from existing 3G devices to our 5G-compatible LTE LV-100 devices. Tropical Shipping selected PowerFleet to equip its entire U.S. chassis fleet with more than 2,000 5G-compatible LTE LV-300 next-generation asset visibility systems on existing and new chassis builds. In addition to All Truck and Tropical, we also had several of the top 100 U.S. logistics fleet expand their take-up of our LV Series platforms. This includes Hub Group in the dry van division selecting our LV-300, NFI taking our LV-500 and Serva upgraded its 3G units to our LV-100 platform. We had similar success in expanding our dealer channel with significant wins, including Daimler Truck manufacturing plants, an Owens Corning plant as well as a General Mills plant. On top of this, our partnership with Jungheinrich, the third largest forklift manufacturer globally, continues to build momentum as we're seeing increased volume of orders secured in Europe. Our continued success with Avis Budget Group has spurred active discussions with other major rental fleet operators about potential deployments of our technology, and we expect to be in field trials with these operators shortly. Additionally, we are currently bringing Pointer's fleet management products to the U.S., this is one of the investments that Ned mentioned, to pursue the massive Class 1 through Class 5 vehicle market. We expect to see traction here starting in Q3. From an international perspective, our presence and footprint continue to expand. During Q4, Pointer was selected as a major provider for Israel's alternative project recently renamed [ Direct Correct ], to potentially install mobility systems on up to 4 million cars to reduce traffic congestion. The initial assessment project of 3,000 cars is currently underway with the Ministry of Transport and is already being expanded to 10,000 cars. Mobileye, a subsidiary of Intel, selected Pointer to work on reporting of traffic light status to help with Mobileye's autonomous vehicle initiative. The project will be deployed to hundreds of traffic lights with the potential of Mobileye taking this globally. Another win was with MDA, an ambulance company who selected Pointer to supply monitoring to thousands of real-time modern defibrillators and was outfitted our mobility solutions on their entire fleet of ambulance and medical motorcycle fleet for optimal response to any incident. Clearly, we are very pleased with our Division Head, Ilan Goldstein, and his team's success with the new sales and product initiatives underway in Israel that have global applicability. That covers the major sales update for the quarter. I'd like to shift gears on our -- and talk about our integration of Pointer, which is proceeding very rapidly. As I mentioned in my opening remarks, we've already received several milestones or achieved several milestones in the first 6 months since we closed the acquisition. This includes consolidating our strategic and tactical plans as well as our product road maps. On top of this, the alignment of our sales and go-to-market teams is already yielding early success, 2 of those being engagement with Avis in Mexico and also a major industrial truck opportunity in Mexico as well. We already eliminated duplicative corporate reporting costs and have identified more than $3 million in supply chain savings that will be cut in over the next several quarters. We also expect to realize another $2 million to $3 million in cost savings in 2021, related to the platform consolidations we currently have underway. Again, we invest in those platform consolidations this year to obtain those savings in 2021 to be sure we will be balancing investing in our continued growth initiatives, while we realize these savings. From a personnel standpoint, we've integrated the respective I.D. Systems and Pointer teams and are now collaborating as one cohesive unit. In fact, PowerFleet's leadership team today is one of the strongest, if not the strongest team I've personally worked with in my entire career. Wrapping it all together, PowerFleet is a much stronger business today with greater scale and resources, an industry-leading, end-to-end IoT platform, significant large-scale opportunities and robust annual growth rates in our targeted markets. These advantageous dynamics give us confidence in our ability to realize our financial outlook for the first year as a combined business. This includes generating more than $150 million in total revenue, of which over 55% is derived from high-margin subscription and services revenue. We believe our adjusted EBITDA will also expand in 2020 as we implement our identified cost savings and hit our sales targets, assuming the coronavirus is brought under control in the next 1 or 2 quarters. We are also on pace to meet or exceed our target of having more than 600,000 mobile subscriber units on our platform by the end of 2020. Longer term, our vision of creating PowerFleet as a global IoT software and solutions provider is quickly progressing, which we believe will generate significant shareholder value through global operational and financial scale, sustainable profitability and cash flow generation. And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator Instructions] Our first question comes from Mike Walkley with Canaccord Genuity.

Congratulations on the acquisition and the consolidation to date. Ned, maybe just a question for you on product gross margins. It sounds like you guys still some inventory levels to work through. Can you just help us think about gross margins for products going forward and where they could trend to once you get to realize some of those synergies?

Sure. Mike, if you look at the quarter, our product gross margins were approximately 30%. During the fourth quarter, most of the product that we shipped was already in our inventory. Beginning in the first quarter, we are going to start to see some of the benefits of being vertically integrated. So we expect product gross margins throughout the year to get closer to 35%, and we start to see those benefits.

Great. And just a question for Chris. Lots of new products that you're showing to customers and some nice wins in the quarter. Can you just update us on feedback from clients on your combined portfolio? And I know you talked about, in these times of downturns that customers are investing for the future. Can you maybe just give any color on the sales pipeline and if you've seen anything pushed out recently?

I'm not saying -- first of all, we're not saying that deals get pushed out today. And with that being said, is -- the longer this drags on, you could possibly see that. But I -- the feedback we get from customers is, these capital investments, they have to make anyway, and if you think about the 3G to 5G conversion, which is looming, I'll use 18 to 24 months, you're now it's -- obviously, that was 3 months ago. So the customers like Tropical, the customers like All Truck, the other ones that we're in conversations with today, know they have to move. So we're not really seeing the current slowdown or anybody pushing out orders just because of the pandemic. A matter of fact, I mean, on the industrial truck side, it's kind of interesting. It's -- you'd think it's a very good barometer of industrial production. Industrial truck side is actually going on plan or above right now. So again, we're not seeing it, but I'm not saying it might not hit us like in Q2 if this continues as it is. But again, our pipeline right now is probably the strongest I've ever seen it. But again, we just have to get the deals closed, like typical. So...

Understood. Last question for me, I'll pass it on. Just an update on Jungheinrich, I think you said in the script that things are going well. Can you maybe give us an update where they are through their initial 2,000 units and how you see that opportunity progressing over time?

Yes, it's -- actually it's going ahead of plan. I mean they're uptake in units is ahead of their committed 2,000 units per year. That's what they're contractually committed to. That being said is, we are doing some work also with the Jungheinrich affiliates here in the States, which is brand new. So they're kind of bringing us into some opportunities on that side. It's a little too early to go into the details there. But again, that actually could -- to me, I see that as even almost a bigger opportunity because it can bring us into some accounts that we're currently not in today.

Our next question comes from Jaeson Schmidt with Lake Street.

Just curious to see kind of 1 year 2020 targets you laid out for the combined company, if you still feel confident in being able to achieve those?

Yes. As we mentioned in the script, and I can also let Ned chime in. This is Chris. I just -- again, I think on the revenue side, it's definitely achievable. Again, with the coronavirus, if it lasts into Q3 or 4, then we may see some effects here, but I don't see it today. And I -- again, as I mentioned, I think our pipeline is -- both here in the States as well as internationally, is fairly strong. Then on the profitability side, we do see us getting to a run rate of 15%, which is what we've been stating. Right now, we're investing in 2 things, actually, 3 things that we think is -- are really going to propel us in 2021. One of that is platform consolidation. I think anytime you do an acquisition, if you don't do the blocking and tackling and the hard work of assimilating the businesses but also the platforms -- we've identified approximately $2 million worth of savings just on platform consolidation. We're also doing some product development work for a customer that has the potential of 16,000 units. So we -- again, it's a total deal value of about $20 million. So again, we're investing in that because if that deal comes to fruition, it's a $20 million opportunity. So again, and then on the IT side, there's some consolidation work going on there. But all those can yield 2021 benefits. But we have -- like the supply chain benefits will be cut in this year. And obviously, it depends on us hitting our sales numbers to -- but again, I think right now, it's probably the strongest pipeline I've seen in a while, but we just need to make sure we deliver on the sales.

Okay. And then just following up on your comments on work -- in-field trials with others in the rental car market. How should we think about the potential time line to revenue and even the potential size compared to someone like Avis?

I would say the potential size is larger. I can't go into too many more details on that. I can also say that it's going to be a -- the field trial is actually already committed to. We basically have to deliver units. It's almost like what we did with Avis in Mexico, which was actually a great success. So by the way, Avis Mexico has not deployed our products. That was -- that's a licensee. But if you look at the -- this other opportunity, they're going to trial our product then we'll go down and show them. They also do a lot of fleet management work, which actually is very complementary to what we're bringing to the States from the Pointer side. So again, I think we have 2 opportunities with this major account. One is on the rental side, which is large, I mean, phenomenally large. And then on the fleet side, they do a lot of work with commercial fleets. And so it could be a double win for us if we're successful there, but they'll start those field trials literally in the next couple of weeks.

[Operator Instructions] Our next question comes from Josh Nichols with B. Riley.

Just to clarify, could you talk a little bit more about where you are with the Avis deployment? Is that fully done? Or is there some additional units that are shipping in 1Q still?

Yes, we're shipping in Q1 as we speak. So more or less, they've taken the preponderance of the units last year. And then, this is basically the tail of the units. We expect to ship all of them, if not all of them, by the end of Q1, the remainder.

Yes, Josh. We -- as of the year-end, we shipped 57,000 out of the 75,000 and the remaining will be -- were -- are about to be shipped in Q1 and very little in Q2.

And then is just to clarify, like any re-up or additional large fleet contracts you would get with Avis or this new rental company that is outside of guidance of the upside. Is that accurate?

Yes. Yes. By the way, the 2, what I'd call business development initiatives, bringing the Class 1 to 5 in the United States, which again that could help us with this other large opportunity that's not in the $150 million. That's all upside. If we sign another large rental company, that's also upside for us.

And then could you talk a little bit, I know the move to 5G, right, or 4G LTE has been a potential tailwind for the company, but about the company's prospects for securing one of these larger, like 6-figure type unit deals with one of these larger fleets this year?

I think right now, with the field trials that we have underway, we have opportunity. I can't go into the details, but there's a couple that are quite significant. One prospect is -- and basically, because of an acquisition, they just went over about 120,000 units, and they're already a customer. So they had 10,000 of our units, and now they have 120,000. So again, we still have to earn that business and win it. But they know our product, they use it every day. So again, I think they're a very happy customer with us, and so we hope to expand into that space with them. And then we have some other field trials. One is a 39,000-unit potential. So again, those would probably -- that one would probably be later in the year, but like Hub Group, which is on the dry van side, they just continue to take units and ultimately, they're going to have to replace old units, and the same with NFI. Right now, they're just doing trailer replacements, but ultimately, they have to replace the old 3G units. So again, I think you're going to start seeing that uptick as the clock winds down to the 3G sunset.

Your next question comes from Gary Prestopino with Barrington.

When you're talking about these field trials with a large rental car agency, how long does it -- does the field trial go? And have you signed a contract? Or is the contract pending on how the field trials turn out?

It's always going to depend on the -- how the field trials turn out. So right now, we're basically in the -- they're kicking the tires. So they basically put our units on. I did -- the direct quote from them was, "Hey, if it does what you say it's going to do, we're going to bring you down here, and you can -- we'll have some more in-depth conversations." So all the major rental companies, they're familiar with telemetry and machine to machine. If our product -- our product does do what it does. It is a 3-minute install. No one else can do that. So again, I think they like what they see. They just have to get it running on a few cars because again, it's the make, models and years that are important. And by the way, we always have to certify on a given make, model and year. So working with these larger rental companies, you have to know what their fleet mix is, and then they have to tell you what car make, models and years they want you to run on. So once you've done that, you also have to integrate into their platform. Now the good thing is we already have an API suite, right? So it's -- we already know how to do it. It's just -- it's going to be a couple of weeks of integration work and then watching that data flow into their systems.

So if everything goes as planned, is it possible that you would have some kind of signed contract this year?

That's definitely possible. Yes.

Okay. All right. Then a couple of other questions here. Ned, it looks like when you -- if you back out acquisition-related fees, it looks like your operating expenses are running at about 50% of sales in the quarter. Is that a level that we should expect throughout 2020 as well? Or will that eventually step down as you integrate the acquisition?

Yes. Gary, this is Ned. The numbers should stay flat for the next quarter and then slightly starts going down as we integrate. And as Chris mentioned, we are going to see a big reduction in '21 because these investments that we're making this year related to the platform consolidation and the other things Chris spoke about, not only do they improve the product, but they also lead to significant cost savings.

Okay. And then in terms of the gross margin on the services, looks like the first quarter for the combined company was about 62%. Is that a good level? I mean is there any leverage there in terms of getting that margin up? Or is that just what that margin is going to be?

The margin is going to be at that level for the next couple of quarters. The leverage comes as the service revenue number grows because you're just adding additional numbers to the platform without an additional increase in expense. So they'll -- as the service revenue number grows, we should see the improvement in the gross margin in services as well.

Okay. And then just lastly, just so I get this right. Chris, you said that you feel pretty good about hitting the 15% adjusted EBITDA margin on the $150 million this year?

I would say, on a run rate basis. I mean I would say our Q1 and 2 is -- if you think about it, in Q4, even, we had some duplicative costs that have come out, right? So yes, you didn't see it in Q4. And then the same with Q1 as we consolidate the groups, there's like, I could go into specific head counts and processes and costs. But the bottom line is some of those are dropping out in Q1 as well, right? So it's like we're probably going to see it improve throughout the year. And hopefully, by Q3, we look to get to like a run rate of that. So I think we're pretty pleased with where we're at, and we don't want to curtail our investment to bring the -- like the Class 1 to 5 opportunity that's in the United States or the platform consolidation. We've had a lot of serious conversations internally about, we could push that off, but I think everyone here knows what happens when you do that. It's probably best to invest today because I know other companies have not done that, and they've paid the price in the long term. But right now, by the way, that's ahead of schedule, our consolidation work.

Okay. So the old range of adjusted EBITDA that you guys said you would possibly do was 15% to 20%. It's going to be stepped down from there just because of some of these investments in the platform consolidation, at least for 2020?

Yes, I'd say, for the beginning of 2020. Again, I would say that by the end of it, we're going to be hitting our stride at that level. So I would just say these first 2 quarters, as we -- again, because of these duplicative costs, as we pull cost out of the organization and do these investments. So it's more like a beginning of the year type of event.

[Operator Instructions] Our next question comes from Glenn Mattson with Ladenburg Thalmann.

Most of my questions have already been answered. But I just have one more about the macro situation. The -- as far as I know, the travel ban to Europe is less than 12 hours old. But as far as how you see logistically that working, do you have people in the right place? Can you service customers now that you've been a more global company now? And specific update about the Jungheinrich deal, but in general, do you imagine that impacting your business at all?

It's a good question. The answer is it's almost like, thank goodness, we did this acquisition, right? Because this acquisition actually sets us up just so -- because some people might not be aware of this. We actually have boots on the ground and operating units that are, by the way, they're phenomenally talented people, whether it's in customer service or sales like in Europe. So we don't have to send people to Europe to help Jungheinrich out. The same with like South America and Israel. They're fully functioning business units that can kind of run autonomously. So that's actually what's great about my organization. And by the way, the leadership team, which I mentioned earlier. Like I said, it's probably the best. So it's like -- right now, they're concerned about their employees. They have contingency plans. We do have inventory, and we feel very good that we can withstand the storm. And what I tell my leadership team and my employees is we -- human beings are very resilient. It's like, we'll get through this. We have to be smart. You have to do the basics. You have to follow CDC instructions. We don't travel as much as we did, but we don't need to, getting back to the question. We don't need to travel to get deals done.

I would now like to turn the call back over to Chris Wolfe for any further remarks.

Thank you for joining us today. I'd like to thank our global employees, customers, partners and obviously, our shareholders for their continued support. I look forward to updating you on our next call. Operator?

Thank you for joining us today for our presentation. You may now disconnect.