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

Ladies and gentlemen, thank you for your patience. Please stand by. Your first quarter 2020 conference call will begin momentarily. Thanks. Good morning, welcome to PowerFleet's First Quarter 2020 Conference Call. Joining us for today's presentation is the company's CEO, Chris Wolfe; and CFO, Ned Mavrommatis. Following their remarks we will open the call for questions. Before we begin the call, I would like to provide PowerFleet's safe harbor statement that includes cautions regarding forward-looking statements made during this call. During the call, there will be forward-looking statements made regarding future events, including PowerFleet's future financial performance, all statements other than present and historical facts, which include any statements regarding the company's plans for future operations, anticipated future financial position, anticipated results of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's products 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 statements. Factors that could cause actual results to differ materially could include, amongst others, SEC filings, overall economic and business conditions, demand for the company's products and services, competitive factors, emergence of new technologies and the company's cash position. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances. Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company's website at www.powerfleet.com. I would -- 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. I hope you're all safe and healthy during this extraordinary time. The COVID-19 health crisis requires remarkable efforts from people, communities, organizations and governments to keep our people healthy and safe. This crisis has impacted companies and people all over the world, and our thoughts go out to all those affected. Internally, our top priorities remain: keeping our employees and community safe, maintaining the health and viability of our business and ensuring our customers keep food and goods going where they need to get to. Across our businesses and geographies, we have adhered to the CDC guidelines and local health ministry recommendations, while continuing to operate as an essential business as designated by the U.S. Department of Homeland Security. Our Israeli operations were also designated as an essential service because our technology supports emergency responders and critical logistics infrastructure. We spent a considerable amount of time over the last 2 months accelerating cost saving synergies and rightsizing our business units as the pandemic impact and government responses have varied considerably and doing so while ensuring our company's and employee safety. Fortunately, our business continuity plans and IT infrastructure were effective and flexible and allowed us to continue helping our customers and partners meet the challenges of today's remote work environment. I continue to be impressed daily by our team's determination of productivity while navigating these uncharted waters. Our uninterrupted operational execution in Q1 is a testament to our unwavering commitment to helping our customers and partners in a time of increased need. And our steady financial performance for the first quarter highlighted by $30.8 million in total revenue, $17.6 million in high-margin recurring and services revenue and $2.8 million of operating cash flow we generated, demonstrates our business model's resiliency. PowerFleet continues to provide the utmost customer support during these times to enable our customers to react quickly and safely as they move critical cargo around the globe. Our tracking and monitoring technology is relied upon by global companies in the food and grocery supply chain, including Walmart, Nestlé, Procter & Gamble, General Mills, Publix, Kraft and many more. While we have a broad and diversified customer base comprised of blue-chip companies and global enterprises, a small subset of our customers, particularly in the travel industry, have been impacted by the pandemic. Our long standing partner, Avis, has not been immune to the current market dynamic, and we are working closely with them to support their efforts in rightsizing their fleet. Recognizing the ongoing uncertainty from this global pandemic and its downstream effects on the business and the economy, we believe it was necessary to enact proactive cost-saving measures to ensure our business remains secure and our long-term growth potential remains intact. At the end of March, we implemented a plan to reduce our operating costs and further optimized our organization. These are permanent expense reductions on travel, marketing, eliminating most contract [indiscernible] balances, deferring salary increases, shortening work weeks in certain geographies and structural changes, such as a reduction in our overall workforce. The actions we've taken a couple of these as to liquidity position give us confidence that we will not only weather the storm but come out stronger as the world economies reignite. Cash and liquidity are critical during these types of environments, which is why our Board believed it was prudent to put an at-the-market or ATM instrument in place as part of our previously filed Form-S3. The ATM gives us rational flexibility so that we can delever balance sheet when it makes sense to do so and more importantly, allows us to execute against some large revenue opportunities in our pipeline, which I'll review in more detail after Ned's walk-through of our first quarter financials. Ned?

Thank you, Chris, and good morning, everyone. Our financial results for the first quarter of 2020 include consolidated results of I.D. Systems and Pointer Telocation Ltd., 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 those qualifications, let's look at the numbers. Revenue for the first quarter of 2020 increased to $30.8 million from $13.6 million in the same year ago period. High-margin recurring revenue was $17.6 million or 57% of total revenue compared to $6.4 million or 47% of total revenue in the same year ago period. Product revenue, which drives future services revenue was $13.2 million or 43% of total revenue compared to $7.2 million or 53% of total revenue in Q1 last year. Gross profit increased to $14.9 million or 48% of total revenue from $7 million or 52% of total revenue in Q1 of last year. Now turning to our expenses for the first quarter of 2020. Total operating expenses were $18.3 million compared to $9.2 million in Q1 last year. Looking at the various components of CapEx, selling, general and administrative expenses were $13.4 million compared to $7.2 million in Q1 of last year. Research and development expenses were $3.2 million compared to $1.7 million in Q1 of last year, and depreciation and amortization expenses were $1.7 million compared to $358,000 in the same year ago period. As Chris mentioned, in March, we proactively implemented several cost-saving measures of which we expect to see the financial benefit starting in the second quarter. Some of the cost-saving measures already implemented include a reduction in force, eliminating mostly all third-party contractors and imposing a temporary hiring freeze. In certain geographies, we reduced to a 4-day work week and reduced the salary by 20%. We are monitoring the situation closely and have additional levers to pull should the COVID-19 situation worsen. Turning to the profitability measures. GAAP net loss for the first quarter of 2020 totaled $4.5 million or $0.16 per basic and diluted share. This compares to a GAAP net loss of $2.2 million or $0.12 per basic and diluted share in Q1 of last year. Adjusted EBITDA, a non-GAAP metric, which we define as earnings before interest, taxes, depreciation, amortization, stock-based compensation and nonrecurring items for the first quarter of 2020, totaled $152,000. This compares to adjusted EBITDA of $240,000 in Q1 of last year. Our cash position remains strong with $16.6 million in cash at quarter end, working capital of $24.1 million and we also have available $10 million line of credit with Bank Hapoalim in Israel which is unused at this point. We're focused on working capital management and as you can see from our Q1 results we generated $2.8 million in cash flow from operations. I am pleased to report that our cash position remained stable at the end of April. We believe that the $8 million of the annualized costs that we took out recently from our business, coupled with our overall cash and available resources, we're well positioned to meet our $4 million of bank debt that's due over the next 12 months. As of today, our pipeline remains strong and our business fully operational. However, given the uncertainties, we cannot accurately predict the specific event or duration of the impact of COVID-19 on the financial results. Recognizing this reality, we believe it is prudent to withdraw all financial guidance until our visibility returns to pre COVID-19 levels. In summary, we believe our diversified customer base, predictable recurring revenue and prudent approach to cash management will help to ensure that we successfully navigate this uncertain times. That concludes my prepared remarks. Chris?

Yes. Thanks for the financial overview, Ned. In the midst of the COVID-induced market disruption, our team has done a tremendous job executing against our organization, organizational and program integration plans and targeted cost savings. As I mentioned in my opening remarks, as country and state shutdowns were initiated, we took proactive actions to keep our employees safe, reduce expenses and maintain uninterrupted operational capabilities. The slowdown also forced us to look at critical priorities in our strategic plan, including temporarily shelving some initiatives that I talked about nearly 7 to 8 weeks ago, while we pulled other initiatives forward. Taken together, this has accelerated cost savings across the organization. As product volumes return to pre-COVID levels, we anticipate we will realize even greater savings from our consolidated supply chain. In terms of product development and engineering, we've been executing on our software-as-a-service platform consolidation efforts and expect to be abated by the end of Q3, which is on track with our internal schedule. The consolidation work will allow us to save over $1 million annually once finalized in 2021. Simultaneously, this gives our customers full visibility of their assets and real-time incidents regardless of asset type and whether the asset is in the facility, in the yard, at a job site or over the road. Our weight on Axle R&D initiative is being tested by a major customer with encouraging results to date, giving us confidence that we can commercialize this product over the next several months. The first iteration of this product can tell if a container is loaded onto a chassis and as well it can tell if the container is loaded and empty. We're striving to get the legal weight on axle in future iterations, which would be a game changer in the logistics market. This strategic customer has more than 120,000 chassis in which we are targeting for this product. Cellular version of our Industrial Truck platform is also slated to launch in Q3. This will allow us to pick our proven material handling solutions for access control, safety and utilization reporting into the shipper and constant yards, ports, rail yards and on to construction sites as well as to equipment rental companies, to head of equipment operating outside of the facility. It's a great synergistic market opportunity for millions of vehicles that leverage our existing sales organization. Our opportunity pipeline remains not only intact but also robust. We had a strong start to the year in terms of new business development and pipeline creation. However, in mid-March through early April, activity tapered off, as COVID-19 really took hold. And many of our customers and channel partners focused on their own COVID-19 actions, such as working from home, shutting down facilities and stopping visitations to their sites. That being said, we have not seen major deals get canceled or lost, but several have been suspended or delayed pending business revival when countries and states go back to work. We are cautiously optimistic as we've recently seen an uptick in activity, both in terms of deals progressing in our pipeline as well as a number of inbound opportunities. One notable deal includes the world's largest online retailer. And this is in the U.S. who selected one of our forklift manufacturing partners to deploy our PowerFleet technology at several U.S. sites, and that will happen in Q2. Additionally, we are selected by one of the world's largest logistics companies to deploy our industrial mobility solutions in nearly all of their U.S. facilities and represents over 1,000 high end vehicles mobility solutions. We also recently won a major 3,000 unit tender in South Africa and a similar-sized deal in Mexico. As I mentioned on our last call, we were pursuing a major opportunity with the U.S. government entity that equates to more than 5,000 high end industrial unit subscribers. If successful, we expect this contract to be awarded in the third quarter. Additionally, we are pursuing several large commercial tenders well, including a 23,000 subscriber opportunity in the U.S., a 30,000 subscriber opportunity in Europe and a 7,000 subscriber opportunity in Argentina. In parallel with these activities, we've been collaborating with a major rental car company on an active pilot. This company's thesis is that our technology is mission-critical in this environment because it provides them with real-time visibility into their inventory, even if it's not being rented. This prospect stated that our ease of installation and fuel accuracy are key differentiators of our technology. While we're early in the evaluation process, we were asked to provide pricing quotes for 100,000, 200,000 and 300,000 subscriber units, and that's always a good sign. Although we're starting to see that Israel in various U.S. states is starting to reopen, no one can truly say how long the current situation will persist. Rest assured that many on the PowerFleet leadership team have navigated through turbulent markets and recessionary times to floor, and we believe that this experience will enable us to weather the COVID-19 storm and set us up for success as global economies reignite in the months ahead. The proactive measures we've taken in the near-term will allow us to drive our business forward today and the resiliency in our business model and our secular growth drivers in our verticals ensure that our business is positioned well for tomorrow. And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

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

Great. Chris, I hope everybody at PowerFleet is well. So just on the higher-margin recurring revenue services, can you help us just walk through your customer base? What areas of the business are holding up better that are more sticky, given that they're critical and maybe some other services like in Avis that you might have some underutilized assets, maybe temporarily shut down, out of service for those markets? So we -- just trying to look at how much of the business is stable and how much might come off in the short term.

That's a very good question. It's really interesting that we've not seen actually hardly any, I would say it's very marginal, any reduction in our recurring revenues, except for with Avis, where we gave them a slight discount for a period that's very limited. It's for the 3 months to hopefully get them through what we call the belly of the crisis. And again, they're a partner with ours, but it's more of a discount. They're still under contract for the whole 125,000 units and committed to a 60-month term. And they've been paying religiously. So they've been a great partner. Our other businesses, they're all under long-term contracts. We've seen maybe just a couple of people asking for a deferral, not asking to be shut down. So again, that's very promising. And I'd say that's across the board, whether it's industrial or logistics or in our fleet management businesses, and that's also globally. We're not really seeing much impact at all to our $70-plus million in recurring services -- recurring and services revenue.

Great. And then just building on that, given the critical needs, especially in the food and other areas, are you seeing any uptick in business, or they're just still busy executing right now? It's hard to pull assets offline to add hardware, and it's just kind of steady in some of those critical businesses that are probably quite busy right now.

Yes. Again, some of the customers I mentioned, they're phenomenally busy right now. So the good thing is they're making a lot of money right now, and they're actually saving money because of fuel costs at the same time. So I do think a lot of those companies are going to be phenomenally stronger and able to do capital expenditures here, once things, I'd say, normalize, if there is going to be a normalized. But the other side of the logistics puzzle or even in our industrial truck side is if you're doing heavy manufacturing or automotive that -- those industries have basically gone dormant. So I think it's an interesting balance between the two. Like that large logistics company I mentioned, their plan was to aggressively roll out our technology this year. I mean they're rolling out 3 sites in Q2, but they have hundreds of sites. So again, it's just they're slow rolling it a little bit at the front end, just to wait and see until the states open up, right? Because some of the facilities they manage have actually been shut down.

Understood. And I know it's tough in this environment with the pooled guidance. Can you just maybe give us some high level color? How are visibility and conversations maybe here in mid-May versus April when everything is being shut down? Are there signs of things starting to come back with Israel and different states opening up? Or is it just too early still as everybody is still kind of just figuring things out?

Yes, this is actually a testament to like our team in Israel actually and our analytics team here in the States. They took all of our data from all over the world. And because we're on the dock, we're actually in the facility at -- whether it's warehousing or manufacturing. And we're also over-the-road, whether it's in cars or trucks, and we did activity indexes on every country. And you can actually see the falloff in every country when it happened by time at the beginning of the year. And we actually saw what countries have hit the trough, what I'd say is the canyon. And then we've actually seen recoveries, which is great. And by the way, getting to Israel, there's -- probably, I'd say, they're like 3 weeks ahead of us. That's kind of the way it's been tracking. And we're seeing an uptick in business there already. Pent-up car demand is coming back online, which is good to hear. And also in the States, inbound inquiries, as I mentioned before, are picking up, activities on programs. I mentioned that logistics company that's starting to -- they're starting to contact us about starting their site deployment. So I'd say right now, the United States is kind of variable because every state is opening up at different levels. So it's -- we have seen it, like what I'd say, hit the canyon here in the States. It's just probably going to be a little bit more jerky here than it is in some other countries.

Last question, and I'll pass the line. Ned, just on some of the cost savings initiatives, lowering consultants, some headcount reductions and shorter work weeks. Can you help us just quantify how we should think about maybe the spread of those costs where they hit the P&L and what you're thinking about maybe for a run rate of OpEx in this -- maybe this quarter and then where it could go exiting the year?

Yes. So the -- Mike, the savings amount to approximately $2 million per quarter. So we should see the operating expenses starting in Q2 to be reduced by approximately $2 million. The majority of it is in SG&A with a few hundred thousand in R&D. Right now, we're -- have additional plans in place. So we definitely have more levers to pull if things take a little bit longer. But the goal is to keep expenses at this level. We're also managing the company on a cash flow basis and managing working capital very efficiently. So as you can see from the first quarter, we generated about $2.7 million in our cash flow from operations. So our cash position also remains very strong.

Our next question comes from Scott Searle with Roth Capital.

Glad to hear you guys and your families and teams are safe. Ned, maybe just to dig in a little bit more on Mike's question on OpEx. You talked about some permanently fixed and optimized cost structures as well as some variable like comp structures that would come back. Could you kind of give us an idea about how that breaks down? And also, Ned, in terms of depreciation and amortization in the quarter, can you give us a quick breakout of what the Pointer Telocation amortization was related to the deal? And then I had a couple of follow-ups.

Sure. Thanks, Scott. So the cost savings is approximately $2 million per quarter. We're going to start seeing that immediately in 2Q. The majority of it is in SG&A with a few hundred thousand in R&D. When you look at depreciation amortization, out of the $1.7 million in depreciation and amortization that's included in OpEx, $1.1 million relates to the amortization of the Pointer acquisition related to the intangibles.

Got you. And then just a follow-up though on that $2 million cost reduction, will we see the full benefit of that in the second quarter? Or will that be -- the full benefit of that is in the third quarter? And it sounds like there are some permanent reductions there as well as some variable that would come back compensation or otherwise. Could you give us an idea of what that looks like, provided the outlook and we start to see a little bit of inflection in the second half?

Yes. So the -- we are going to start seeing immediately in the second quarter. We took action in late March. So the costs were implemented at the beginning of April. So we're going to see the full benefit of those savings in the second quarter. And when I look at -- although you're right, some of them are fixed and some of them are variable, we don't intend to increase any of those expenses until we start to see a significant pickup in revenue.

Okay. And Chris, maybe just a follow-up. You highlighted a lot of your customers that are in more essential industries, such as grocery. Is there a number that you could put around that in terms of what they represent across the different product lines to give us an idea by end market about what that looks like. And if you could as well -- things certainly started to slow in the March quarter, but could you give us some linearity in terms of how things progressed on a monthly basis through the first quarter and into April to give us an idea about where things are kind of troughing to be able to model going forward?

Yes. So I'm -- just off the top of my head, that we don't necessarily break it out by food and grocery and distribution and put it into an aggregate number like across all geographies. But in the U.S., it probably represents about 25% of our business as far as users in service. And I would say, like in Mexico, it varies, it's probably like 30% because they have a huge business going on with Coca Cola, which is not necessarily an essential service, but obviously, it's in food and grocery distribution. So again, it varies by geography, but I'd say it's around the 25% to 30% range of total users in service. Looking at the geographies. Mexico, again, it's really hard to understand where they are in the COVID-19 situation because I don't think they report their numbers quite as accurately as other countries. But that being said is they -- we're seeing a lot of pickup in activity in Mexico. We mentioned that one tender that we won. Surprisingly enough, South Africa is -- I mean, it's had a pretty bad basically economy for a while, but winning a 3,000 unit tender down there basically almost changes our business in South Africa overnight. And we are seeing that basically it's the bottom and coming out. Argentina has just been steady. Even with the shutdown, the business areas have been pretty good. Israel is the one where, again, it's a preponderance. It's a large part of our -- it's almost equal to the States and the same size as revenue. And that's the one we're seeing a lot of pickup activity starting. We're seeing it actually in the data, right? And the same in the U.S., we've actually started to see pockets like in the certain areas like industrial truck is starting to pick up. And then certain parts of logistics kind of flatline, but now they're starting to pick up. So that's...

Great. Very helpful. And Chris, lastly, if I could, just -- you gave a lot of qualitative examples and data points related to inbounds and customers. Is there a way to quantify the backlog or the pipeline in terms of what you're seeing? And it sounds like really the trick here in the near term is the ability to get in and install and close some of these contracts. What's going to be the real milestone in catalyst? It sounds like it's going to vary region by region, even state by state. But what should we really be paying attention to when we're starting to get back into full swing, your ability to get into a warehouse, to get into an enterprise to be able to install against that backlog?

Okay. So I would say right now, like the one logistics company in the -- I don't want to keep relying on them because it was a huge deal that we signed in Q1 rolling out in Q2 and throughout 2020. We're going to see -- so that backlog, we've only, I think, installed 100 units. So we have 900 units to go there. Jungheinrich, by the way, is well ahead of plan and Jungheinrich brought us into their U.S. affiliate. And they're the ones that brought us into the world's largest online retailer. So implementing those sites in Q2. So again -- but keep in mind that online retailer, those sites are brand-new sites, they're brand-new warehouses. So it's really easy to get into something like that versus somewhere where there's lots of people, and they're trying to keep external influences out. There's no reason to have COVID contact tracing and have other vendors walking through your property. That we do see lessening up. As a matter of fact, our field installers for the first time -- it's probably an interesting data point, our field installers right now are booked all the way through July. They're fully booked. Now again, we contract out a lot of field installing, but I think that's pretelling. So the sales backlog is good, that's deals that are signed and units that we need to ship. These huge prospects that we're working on. Again, there's where -- that's where the big opportunity is for us. And again, the deals haven't stopped. And I mentioned that U.S. government agency one, 5,000 units might not sound like a big account, but it's literally almost a $19 million opportunity because it includes a lot of software engineering and a lot of software implementation. Hopefully, that helps.

[Operator Instructions] Our next question comes from Jaeson Schmidt with Lake Street.

I'm just curious if you're seeing any pushback on pricing from any of your business lines, just given the current environment.

In -- I'd say in the logistics side, more than like industrial. And obviously, one part of our business, it's about -- like I'd say it's maybe 10% of our business is hardware-only sales because we sell to the rest of the world our product where we don't actually run operations. That's been impacted. But I would say, I don't know. Ned, what would you add on to that?

Yes. I think on the logistics side, transportation, I think some of the competition out there is -- everyone is trying to close deals, so we are seeing some pricing pressure there. On the industrial side, we haven't seen any of that yet.

Okay. That's helpful. And then following up on the online retailer, should we expect the rollout in the U.S. to sort of follow the same trajectory you saw with this customer over in Europe?

The online retailer is actually putting units in -- when I say units -- so let's say, vehicles. So they're putting vehicles in their warehousing facilities. And if they pick a vehicle that does not have a telemetry, like in other words, the OEM doesn't provide their own telemetry unit, then we have a huge opportunity. And the partner with Jungheinrich here in the States they're affiliate here, they got us in, they expect to get more warehouses, which would be great for us. But let's say, if they pick a OEM like Raymond or they pick Crown for a facility, we're probably not going to get that because Raymond or Crown have their own telemetry device. So it would be an OEM supplied product that they can subsidize when they sell the forklift. Our claim to fame and where we usually win 100% of the deals is in a mixed fleet environment, which -- that's the preponderance, by the way. So -- but this online retailer likes to bid the forklifts against each other, and then they'll take and go 100% Crown or 100% Raymond or 100% Toyota. So if it's Toyota or MCFA or Jungheinrich, then we'll be in that site. But if it's the other guys, then we might not.

Okay. And then the final one for me. I know it's hard just given overall visibility, but do you have a sense if a lot of these delays are being pushed into the second half or are more being pushed out to 2021?

No. I'd say the second half. I think right now, we're in a critical time. It's like the United States is just now opening, Israel's opening. And by the way, it's great to see the traction that's starting there as quickly as it is on the business side. Everyone needs to remember that we are a B2B player, right? So that kind of -- it's like the B2C space in some aspects, unless you're a telco, and you're just providing data, that's pretty immune because everyone is on their cell phone and everyone's using GoToMeeting and all that. But in the B2B space, we'll be the first ones to get the benefit, I think, because as they start lighting up factories, as they start getting trucks back on the road, that's when they'll start moving faster with us. So I think what we've seen so far is very encouraging. I think in the States, I don't -- the deals I'm talking about have not been pushed out into next year. As a matter of fact, the United States government deal -- their process is just slow. Anybody that's ever worked with the government knows that. But we think they're fast-tracking this, and we do expect to get -- if we're successful, we'll get that deal in Q3 announced in Q3.

Our next question comes from Josh Nichols with B. Riley FBR.

I was just curious, could you talk a little bit about, one, where are we on the Avis unit delivery front in regards to the 75,000 units under contract today?

Yes. Avis took -- they're under contract have -- they needed to take every unit by October of this year. And so they've taken every -- of the 75,000, they've taken about 71,000, roughly. So there's literally a little over 4,000 units left for Avis to take. And so right now, they're contractually obligated to take those by October. And so we're just -- right now, we're just looking and seeing how their business recovers over the summer.

And then could you talk a little bit -- I know for Pointer like strong U.S. dollars typically been a little bit of a headwind. Are you seeing much impact there as a temporary headwind in places like Argentina and Brazil, Mexico, given the strength of dollar?

Yes. Josh, it's Ned. Obviously, as part of the combined company, those geographies are much smaller part of our revenue. So the impact is not as significant. However, our expenses are also in those currencies, the change in the foreign currency doesn't have an impact in our bottom line, but it could have an impact in our revenue, but approximately 50% of our revenue today is in the U.S. and a majority of the remaining is in Israel, so we're not impacted as much by the changes in those currencies.

And then just to dive into that a little bit more, like how much of Pointer's business -- or the legacy Pointer business in Israel is really related to like more basic like standard vehicle recovery solutions that they used to offer that's kind of tied a little bit more to like auto sales? And any additional color you could provide on what you're seeing over there would be great.

Yes. A big percentage of the business in Israel comes from that segment of our business. To date, it's been very resilient. The monthly billing remains strong in the -- throughout COVID-19. We're waiting to see how it is going to impact new units. But so far, it's been very resilient, that piece of our business.

I know that's always hard, but any idea for potential time line with the U.S. government for this 5,000 unit opportunity? I know that -- like I said it's hard, but is there any type of formal RFP or anything else, the deadlines that you could kind of point to, to help guide us when this might be awarded?

Yes, there's a -- they call it par. And that par is already in process, and we've supplied them like all the -- basically, we've responded to their RFP already. The good thing is it's sole sourced because it's actually a replacement proposal. So initially, if everyone remembers like 3 years ago or 2 years ago, they went out with a par, they selected a competitor and they're not happy, right? So they came to us and they asked -- just this year, they came and said, "Hey, we'd like you to come in and see if you can help us out." And so by them making it a replacement par there's over 80 facilities that need to be installed. They're moving from decentralized IT to centralize, which basically, we can do very well. That's what we do. We basically have software-as-a-service. So again, that's where a lot of the money for this program is being generated as well because we'll be behind the firewall. It's a U.S. government agency. They're not going to run in the cloud. So there's some implementation dollars, et cetera, to go into that. There's equipment replacement dollars. And then there's recurring for the first time for this customer. They've never been on a recurring situation. So again, the time line they've given us is Q3. And so we're all marching to that right now.

Your next question comes from Gary Prestopino with Barrington Research.

A couple of questions. In terms of how your margins broke out between product and service in the quarter, obviously, a big step down because of Pointer. But are those margins, particularly on the product side, are they going to vary considerably either way as we go forward here? Or is that somewhere within that 28%, 29% range? Is that a good number to use?

Gary, it's Ned. That is a good number to use. We expected because of the fact now that we're vertically integrated, that we would see a slight improvement in those margins to get into the low 30s. However, as I mentioned before, we are seeing some pricing pressure, especially in the logistics business as well as due to the fact that the product revenue is a lower amount due to the COVID-19 situation. So using that number for the next few quarters is a good way to look at it.

And then any slippage in revenue that we're going to see relative to our expectations would be on the product side, right? The services side, you're basically contracted out to. So unless...

That is correct. And as Chris mentioned, to date, our service revenue has been very resilient. We continue to invoice and collect on a monthly basis. We are going to see a slight decline due to some deferrals, but on an overall basis, we feel comfortable with the service revenue.

Okay. And then can you kind of, possibly, if at all, just frame this out for us. If this -- how much did this COVID impact hit you for in the latter half of March? Have you guys gone through that exercise in terms of revenues?

Yes, this is Chris. And I'd probably say there was probably about $2 million worth of revenue that we would have had. Because again, everyone should -- and this is the way that works. Product revenue is always -- it's usually at the end of the year because people have to -- or at the end of their fiscal year because they want to spend their budgeted money. And number two, it's usually at the end of a quarter when our deals usually come in. So it's kind of -- I'd say it was probably in the $2 million range that we would have had that just got pushed out. And it's -- again, some of the deals are -- all the deals are still in play. It's just customers just said, hey -- because you got to remember, those first -- the last 2 weeks of March, literally, everybody just shut down. And it was almost overnight, and they started focusing on their own stuff, right? They had to focus on their own COVID-19 actions. So that's a good number to use or to think about.

Okay. And then I would assume that you're saying your pipeline is still pretty strong and all that, but your sales force is actively out -- doing outbound calls here, talking to your counterparts in the industry. I mean, obviously, nobody is doing face-to-face meetings. But I mean, just to get an idea of just how well you are operating, are your people able to get potentials on the line on the other end?

Yes. That's a very good question. And for a while, the answer was no. Because basically, everyone -- our customers and prospects were all trying to work from home, et cetera. That's eased up. And by the way, our dealer network, go-to-market strategy, they always did it over the phone. So -- which is great. So it's like they rarely went to dealers and to the end customer because it was through a channel. That's the same with Jungheinrich, right? So that -- those are not impacted. On the logistics side, where it's more direct, our inside sales team has always been working over the phone. So that's actually not -- a matter of fact, we've gotten some really good leads just recently because I think people have more time to pick up the phone, too, which is interesting. But on the closing the deals, we're closing deals in the logistics side as well, which is great. But it's a little bit more difficult. There's a lot of -- sometimes, you just got to look at somebody in the face, and you can do it on Zoom, too. But it's -- but we're doing it. And it's -- I think everyone is kind of getting accustomed to it.

Okay. And then lastly, Chris, this government contract that you're bidding on, did I hear you right that this is a $19 million contract on an annual basis? Or is there just some upfront consulting that's done there, and then it annualizes on a certain number?

Yes, it annualizes at a certain number. I used to know what that was like -- but I don't have the latest numbers in front of them because they asked for 2 different models, by the way. So that being said, there's -- the hardware part of that, it's 5,000 units and roughly think about -- that's our high end product, but everyone needs to remember, an industrial truck product sells for over $1,000. So it's not like selling a trailer device, which is like a couple of hundred dollars. So -- but there is a recurring on that, which will kick in once the units go online.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Wolfe for any further remarks.

Yes. Thank you for joining us today. Ned and I are presenting at the 15th Annual Needham Virtual Technology and Media Conference next Tuesday, May 19 at 11:30 a.m. Eastern Time. The presentation will be webcast and available in the Investor Relations section of our website. Thanks again for everyone's attendance and participation today. Please stay safe, and we look forward to hopefully talking to you and keeping you updated in the months ahead. Thank you. Operator?

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