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

Good morning. Our next presenting company is PowerFleet, a global leader and provider of subscription-based wireless IoT and M2M solutions for securing, controlling, tracking and managing high-value enterprise assets. With us today is the company's CEO, Chris Wolfe; and CFO, Ned Mavrommatis. [Operator Instructions] With that, I would like to turn the podium over to Chris and Ned. The floor is yours.

Hey, thank you, Matt. Welcome, everybody, and we appreciate the opportunity to give you an update on PowerFleet. It's been a very interesting year since we acquired Pointer Telocation last October. So with that, we'll quickly get to the meat of the presentation. What is PowerFleet? PowerFleet is a B2B vertical market solutions provider of mobility platforms. What we do is we actually help our customers change their business by improving their safety and security of their assets, mobile assets, and actually helping them reduce costs and actually change their operations while being safe in doing so. We're a 550,000 cloud-based mobile subscribers who are under long-term contract. 60% of our revenue is high-margin recurring, and Ned will go through the numbers in a little bit. We've been deemed an essential service provider both here in the United States and in Israel. And what's important about that is we did not ask for that moniker. It was actually requested for us by General Mills and Ford, just 2 of our customers that consider us critical to their infrastructure. We do pursue patents, especially niche patents where we think it can be a definite hurdle to entry into our market spaces, and we have 53 granted and some pending on some of the newer technologies we've developed. If you look at the markets that we're in, they're expansive. Everyone can talk about the market opportunity, but we actually have boots on the ground. We have deals in the pipeline, and we'll kind of cover some of those. We have geographic reach. Right now, we are -- our primary business is in the United States. We also have a nice operation going on in Israel as well as Europe and the [indiscernible] states and also in Brazil, which obviously gives us a lot of traction and growth opportunity. If you look at the markets that we're in, and we'll talk about some of the changes going on in the industries and some of the tailwinds behind this that can actually help drive our growth in the future, we're differentiated. You'll see us talk about being an end-to-end supply chain solutions. From bumper to bumper to cargo, we can track, monitor and manage any mobile asset and as well as the freight itself through chain of custody and cold chain. We're agnostic. I love this term. We're the Switzerland of fleet management and also asset tracking. It doesn't matter what the OEM is, what the make, model or year is of the vehicle, we actually homogenize your fleet of vehicles so that you can actually manage them as an entire family under one umbrella. And Ned will cover this as well, but our recurring revenue base stayed phenomenally resilient as we went through the COVID crisis and as we emerge. Speaking of which, if you think about COVID, it hit us 5 months into an integration with Pointer Telocation, which I mentioned was consummated last October. That integration has gone phenomenally well. As a matter of fact, COVID, you could -- it was horrific for everybody, and it hit every geography differently and all the health ministries reacted differently. But that being said, as our executive team is a seasoned group of individuals, did what they needed to do. The number one, keep our employees safe. Number two, keep as many people working as we possibly can because we know we're going to get through this. And number three, keep our business healthy. You will see that we accelerated some cost savings, over $8 million of cost savings that we had planned through the integration process. And we have a very strong cash position and working capital position right now, and Ned will cover that as well. The vertical markets that we play in and that we actually excel in are logistics, industrial, vehicles and assets. And if you look at the value props in each one of these, this is what's critical is horizontal features that we can leverage across verticals. I mean that's how we actually scale, that's how we can get more value to the dollar, and we can spend $1 and maybe raise $4. So things like driver behavior, operator behavior, vehicle maintenance, understanding security, access control, a generalized fleet management. We can do that whether it's your forklift fleet, whether it's your service vehicle fleet or whether it's your over-the-road fleet. Slight hesitation here, so I apologize. Geographically, I mentioned this before, but if you look at that map, we do sell to the rest of the world. The red that you see is actually our -- where we have operating units, where we sell recurring service. We have boots on the ground doing sales, support. But in the gray areas, we do have sales through TSPs and other VAR activities. So again, we are -- we do have a global presence. One of the things we're very proud of is our customer base. If you look at the Fortune 1000, we have phenomenal customers. This is only a small snippet of the logos that we have. But all the way from Brink's to FEMSA. You may not know, they're the largest Coca-Cola distributor in Mexico. Avis, obviously impacted heavily by COVID but still operating, and we're still a great customer -- they're a great customer of ours. XPO Logistics, Swift, Walgreens. You can see some names on here that actually are just -- just everyone would be proud to have in their customer base, and we are. These are market slides. They're in the deck, and I'm not going to go through the details. But the reason we selected the markets that we're in is because of size and size and opportunity. Now again, size is one thing. Being able to execute and win is another. And so you'll see in our product portfolios and our go-to-market strategy, what we do is we identify pain points for the customer. We build, if needed, specific solutions for them. And our technology stack stems from machine learning to artificial intelligence, to data analytics, through the software-as-a-service layer, all the way down to sensors as needed to help customers solve their problems. But again, huge global logistics market segment opportunity for us and we wanted to point out some that we think we're specialists in. And one is cold chain management in North America and globally, because we are one of only 2 players that can actually do 2-way command and control of a refrigerated unit while it's in transit. It's one thing to monitor temperature. It's another thing to be able to fix it if you notice there's a problem. You can see global warehouse management, the size, 15% CAGR. All of our markets that we've selected typically have an 8% to 15% CAGR growth rate. And on a blended average, it's typically double digits for the entire company. And that's what our -- by the way, that's what we were achieving pre-COVID, and that's our goal post-COVID is, to be able to grow this company at about a 15% growth rate overall organically. To be very specific in the United States in just our targeted markets. Because it's one thing to have the big universe of opportunity, but we have 10 million industrial vehicles. And if you're new to the story and you don't understand what an industrial vehicle is, it's a forklift, it's a man lift. It's on a facility or in a warehouse that actually moves goods from a bin to a trailer or to another bin, logistics. That's over the road. We have bumper to bumper solutions all the way from the NCAP to the refrigerated container chassis. And we have a variety of solutions to match any budget and any problem. And then on vehicles, that's our work with Avis and all fleets around the world. We actually have over 180,000 vehicles in service fleets that we actually help them drive safely, more economically and make sure they run more efficiently. If you look at the -- just what's going on in the background behind these markets and what's going to drive them is, number one, the industrial IoT. Everyone says that. It's a very generic term. But there's a confluence in technologies. Number one, machine learning, 5G deployment, battery technology and the ability to pull all that together. And obviously we garner a lot more information. We kind of consider our sensor network and our mobility platforms and the 5G network as like the human nervous system. Basically we have the senses. We have sight, touch, smell, taste, et cetera. Our sensors allow the same thing on freight, allows the same thing on the assets. And you can bring all that information back now very economically, but you have to have machine learning and those kind of algorithms to process the deluge of data that's coming in and help people to actually drive decisions. We are the only mobility player on the market that actually has a key missing piece that a lot of players don't have. And that's having technology in the facility, in the warehouse, that can actually go from the bin to the forklift, to the material handling equipment, out to the trailer and on the road. And guess what? At the other side, we have a forklift that goes in, grabs the freight and takes it on the shelf. So our technology actually spans the entire supply chain, and we can actually get visibility into data and collateral information that customers and our prospects could never have before. One thing I'd like to say is our technology is like a LEGO set. In other words, you can buy one piece of our technology and knowing full well that you can invest in another piece later on and you'll have backward compatibility as well as capability that you can leverage. So it's not like you have to buy the whole enchilada and the whole story all at one time. As a matter of fact, some of the biggest deals we just recently signed were specifically for that. Day & Ross out of Canada, one of Canada's largest carriers, selected us because they saw the technology platforms we bring, not telemetry platforms, the technology platform we bring enables them to do so much more than other players in the market. And the same with Tropical, which we signed last year. A lot of you might know Tropical. They actually haul goods from the Caribbean all the way up to Canada. And they have a fleet of chassis, containers, in cab, et cetera. And they picked us just for one part of their fleet, knowing full well that we could actually satisfy the rest of their fleet when they're ready to move forward. And by the way, all of our solutions tie together and communicate and bring all the information together. So they have one channel of information to make decisions from it. We have great software. By the way, we just were selected in Q2 by a $19 billion technology company in the Midwest. They did a phenomenally thorough analysis of all the competition. Out of about 20 criteria, we scored the highest, they said, of anybody that's ever -- they've ever rated. The quotes were amazing. It was like, "Your software was the most intuitive, easy-to-use software than we've ever seen. Your reporting tool was the most robust that we've actually ever used." And again, this is a company that put us through the wringer, and they've selected us actually in the midst of the COVID pandemic. Our analytics, and I'd like to go to the third item on here. Our analytics sets us apart. That's why people buy our solutions in general because they can see how it helps them. But what we're doing on machine learning, an image -- a picture is worth a thousand words. Just looking at that picture, you can tell something wrong, right? The freight is not where it's supposed to be. That's a load shift. But by the way, our technology can also tell you it was loaded incorrectly to begin with. We can tell you it's not loaded and it should be loaded. We can tell you how to unload it. There's so much value that we can garner and glean out of the images. And we're doing that today. And that's exactly why Day & Ross selected us because they could see the value of that information. We do build purpose-built technologies. We don't build it ourselves. We outsource the manufacturing, but we actually design. And this is where we're a full stack provider. So part of our applications are on the edge. Our applications are run on these devices. This is just a small part of our portfolio, but these are the mobility platforms that all tie together. On the far left, you see an in-cab device, an Android that's off -- literally a ruggedized off-the-shelf Android device. We don't actually manufacture that. We get it out of Korea. The solar panel device, that's actually unique patented technology. Because one of our claim to fames is we understand power management. And so the solar panel on that will last 15 years inside of the supercap technology. We're the only ones with supercap technology. And why is that important? Guess what, supercaps last 15 years in the field. So what we're basically saying is you can buy this product, put it on a container, and it will last as long as the container will. So when we sign up somebody for a 36- or 48-month contract, they'll probably be under contract for 9 years. They're not going to throw out a piece of equipment that's working. And by the way, all these platforms run on the next-generation technologies. There's a big 3G to 5G migration that's going to happen in the United States. And what that means is that everybody that's has currently got a telemetry platform has got to migrate from 3G to 5G over the next 2 years. AT&T is about 24 months out, T-Mobile is about 18 months, but those networks will start going dark here, and that will actually cause people not to get the value from their investment that they made many years ago. All of our platforms run and -- run on the new technology on 5G and actually give people backward compatibility to 3G as well. I'll turn it over to Ned. He can kind of run through the financials. Go ahead.

Thanks, Chris. As you can see on this slide, everyone, is our quarterly financial results over the last few quarters. We recently announced our Q2 2020 results. Total revenue was $25.8 million. 65% of our revenue was high-margin recurring and services revenue. And as Chris mentioned before, we're very proud of the resilience of our service revenue during COVID. These companies -- our customers continue to use our technology. We continue to invoice and they continue to pay for the monthly service. Our margins for the second quarter were very strong at 55%. Our high-margin recurring services revenue had 65% margin. But even our hardware was very strong with 35% margin, and that really has to do with the acquisition and a lot of the integration efforts that we put in place. With the acquisition of Pointer, Pointer has a subsidiary called Cellocator which designs and assembles most of our products. So right now, we're vertically integrated. We control our own supply chain, and you see the improvement in the product gross margins. During the second quarter, adjusted EBITDA was $2.1 million. And what's important to note, if you look at the fourth quarter of 2019, revenue -- that was the first quarter that we reported as a combined company. Revenue was $35 million, and adjusted EBITDA was $2.1 million. So you saw the impact of COVID especially on the product revenue, where we saw a decline in top line of $10 million from Q4 of 2019 to Q2 of 2020. However, adjusted EBITDA remained the same at $2.1 million. And that's really because of the actions we took towards the late first quarter of 2020. As Chris mentioned before, we reduced our operating expenses by $8 million per year. And we really focused the company on cash flow generation and working capital management due to COVID. And for the first half of 2020, we were able to generate $4.4 million in positive cash flow from operations. The slide here shows you the company's performance and the increase in revenue over the last few years. Obviously a lot of this growth has come through acquisition. But what's important to know that's something that we're very proud of is if you look at the trailing 12 months number, our recurring service revenue is approximately $60 million and growing. That's really a big focus of ours. And if you look from -- over the last few years, we were able to grow that number from $15 million to $60 million, and we expect that to continue to grow. It's important to note that even though we do sell hardware and we make margin on our hardware, every hardware unit that we sell comes with a long-term recurring revenue contract. So the hardware revenue that we sell today leads to higher recurring services revenue in the future. This slide here shows the company's target model of $200 million in annual revenue. There's significant leverage in our model. When you look at the company at $200 million in revenue, we expect about $100 million to come from high-margin recurring and services revenue, which those -- that revenue has very high margins, which increases the company gross profit. But there's also significant leverage in the operating model. When you look at our operating expenses today, they're primarily fixed, so they do not increase at the same level as revenue does. When you look at the revenue, once we start generating approximately $120 million in annual revenue, any additional dollar that goes to revenue, about 40% goes to the bottom line. So $200 million in annual revenue, we expect adjusted EBITDA to be approximately 25% or $50 million. The next slide just shows you our balance sheet and our capitalization. If you look at the balance sheet at the end of June, the company had a very strong balance sheet. $21.5 million in cash and cash equivalents. We had debt of $33.3 million, so net debt of $11.8 million. If you look at our debt today, the majority of it is in Israel. We used the cash flow of Pointer to borrow the money. The average rate of interest is 5.5%, and only $4 million of the debt is due over the next 12 months. In addition, we have an unused credit facility of $10 million. We do not intend on using it, but it's good to have it in place. And the company had very strong working capital of almost $30 million and current ratio of 1.7. There's approximately 30 million shares outstanding. We do have a convertible preferred instrument of $50 million with Abry Partners. That converts at $7.31. So as converted, that's an additional 6.8 million dollar -- 6.8 million shares, so fully shares outstanding [ as converted ] is approximately 37 million. We are -- we do have a few minutes for questions, well, hopefully some questions. We'd love to answer any questions that are out there.

Thanks, Ned. As we pool for questions, I'll probably kick it off with just one question for both you and Chris. In your opinion, what is the one thing that is either misunderstood or underappreciated by the investment community about your business?

This is Chris. I think the fact that -- people have asked me this is like, so why do people pay you recurring? And by the way, it's not just -- we're not just reselling a pipe, right? That's not what we do. So basically the recurring is an application rental. So it's -- basically our applications span a whole tech stack. So it's the integration into their ERP or into their transportation management system or into their warehouse management system. It's the analytics around that data that's going into the integration. It's our decision support software layer that actually helps them on a daily basis manage the asset, and it's actually the firmware, which is part of the application on the edge, that it all ties it together. Because, again, anybody -- you can put a box out there that beeps, but you're going to get a deluge of data that you're going to have to handle. So our applications are what customers rent. So when you see that 60% of our revenue, it's really long-term application rental of applications that have value, not just the data pipe.

That's helpful. Your partnership with Jungheinrich continues to build momentum. Can you talk about the partnership's success to date and what the expanded scope looks like and what it means for PowerFleet going forward?