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

Good morning, everyone and thank you for participating in today's conference call to discuss the proposed business combination between PowerFleet and MiX Telematics announced this morning, October 10, 2023. Joining us today are PowerFleet's CEO, Steve Towe; and CFO, David Wilson; along with MiX Telematics President and CEO, Stefan Joselowitz. Following their remarks, we will open up the call for any questions you may have. Statements or comments made on this conference call contain forward-looking statements within the meaning of Federal Securities laws. PowerFleet's, MiX's and the combined business' actual results may differ from their expectations, estimates and projections and consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements involve significant known and unknown risks, uncertainties and other factors, which may cause their actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. Such risks are discussed in detail in filings made by PowerFleet and MiX with the SEC from time to time. Please refer to the investor presentation, which is available on PowerFleet's website for additional disclaimers regarding forward-looking statements. With that, I would now like to turn the call over to PowerFleet's CEO, Steve Towe. Sir, please go ahead.

Thank you, operator. What an exciting time for our 2 companies. We really appreciate you all joining us this morning to discuss the proposed combination of PowerFleet and MiX Telematics. It's no secret that the core telematics industry is undergoing a rapid transformation. The industry is shifting towards AI-led software solutions and the monetization of data insights through multiple different mediums. Companies unable to shift their SaaS strategy and keep up with the demands of the evolving industry will be left behind. On the other hand, innovative and agile organizations will thrive significantly in this evolved industry defined by the effectiveness of their advanced AI platforms and next-generation data capabilities. The winning platforms go beyond traditional telematics. They capitalize on this advanced analytics transformation, deliver the highest quality and usable data insights for business improvement and do it in a flexible and profitable way. PowerFleet's strategy will continue to be at the forefront of this evolution. We've been seeking a partner to help us achieve transformative scale and improve profitability at pace. After an extensive search, we found an ideal partner that shares so many of our core values and strategic goals and is ready to take the combined company to the next level. We expect the combination of PowerFleet and MiX Telematics to create a scaled, top-tier provider in this redefined mobile asset IoT SaaS industry. By leveraging our proven SaaS strategy across the combined business, spearheaded by our data-agnostic Unity platform and data highway, we firmly believe that this transaction isn't simply just a step that will lead towards market consolidation, the ability to deliver rapid innovation, deeper and richer data insights and increased value for our customers and shareholders. Resulting in transformative breadth of capability and size, this transaction with MiX will provide the go-forward company with 1.7 million subscribers, the ability to cross-sell and upsell additive and accelerated AI and data-powered software solutions to a truly global set of customers and add even more talented software engineers in low-cost geographies, accelerating our AI advancement and data integration capabilities. MiX Telematics is an extremely well-run and profitable organization. Together, we intend to realize significant EBITDA expansion powered by increased efficiency through proven integration methods and leveraging top-talent across the combined organization. The powerful combination between PowerFleet and MiX will establish the new entity as a world-class IoT SaaS leader, giving us the speed and capability to drive improved growth in high-quality recurring revenues and expanded profitability much sooner. Overall, we're incredibly excited about this combination. We are highly confident this transaction will unlock strong incremental value creation opportunities for both our existing and prospective investors. Now I'll hand over the call to MiX Telematics' President and CEO, Stefan Joss Joselowitz, to provide his perspective on the combination.

Thanks, Steve, and thank you all for joining us this morning. These are exciting times indeed. As many of you are probably aware, MiX has had dedicated team searching for accretive M&A opportunities over the past year as we look to further scale our business and strengthen our footprint. Shortly after Steve and I met 6 months ago, we started discussing the synergies we could unlock and the scale we could achieve together. It quickly became apparent that this was the right move forward for our organization. Joining forces with PowerFleet dramatically accelerates our timeline towards stronger growth in the U.S. and other key geographies as well as providing our combined and loyal customer base with increased value. Organizationally, we see a symbiotic culture. Each organization has high net employee retention rates and energized, deeply experienced teams, all key ingredients for ensuring customer satisfaction. We both pride ourselves on placing best-in-class customer experience at the heart of our approach and our unification will be founded on not only maintaining but also continuing to enhance our customer experience. We're also very focused on optimizing systems and processes. We will leverage the best of both worlds to combine and accelerate our respective operational efficiencies. After an extensive due diligence period, we firmly believe this will be a smooth and efficient integration process. As we look at what the combined management structure will be going forward, I intend to retire at the conclusion of this transaction but plan to continue as a shareholder of the combined entity. Steve and David will remain CEO and CFO, respectively. Whilst it is an appropriate time for me to hand over the reins to Steve, I'm delighted that all of my talented MiX management team will play key roles in the combined business. What Steve has accomplished at PowerFleet since he took the helm in January of 2022 is very impressive. He has a proven track record of delivering exceptional results for customers, employees and shareholders. His core skill sets are focused around building world-class organizations, driving innovative go-to-market product strategies and successfully integrating strategic acquisitions. I have had the pleasure of getting to know Steve well over the past 6 months and he undoubtedly shares the values and culture that the MiX family holds so dear. My team are going to love working with him. David has also successfully led companies through business transformations, high multiple merger and acquisition transactions as well as capital raises. He brings a strong background in the B2B SaaS arena and significant international experience, along with a superb track record of delivering results. With the impressive history of these 2 leaders and a compelling strategy to combine the 2 organizations, we are looking forward to seeing the value that can unlock from the combination. Furthermore, PowerFleet's Unity platform and data ingestion capabilities will not only ensure the integration of our customers is seamless but will create incremental value for our customers and unlock new revenue streams for both our direct and indirect channels. I'm very confident that this is the best option for both organizations to succeed and thrive in today's marketplace. Scale is everything and we believe doing something this transformative gets us to the necessary scale very quickly and puts us in an excellent position to continue taking market share. I founded MiX nearly 3 decades ago, being there for subscriber #1, all the way to subscriber # 1 million and beyond. I'm particularly proud to cap off this chapter of my career, having positioned our business to be able to compete more effectively, while at the same time transferring our asset to a directly invested Nasdaq counter. I have the utmost confidence that this proposed transaction will take us to new heights. I am very eager to see what Steve and his team will accomplish with this fantastic combination. With that, I'll pass the call over to David Wilson, the CFO of PowerFleet, to walk through the details of the transaction. David?

Thanks, Joss. Having been involved in several similar transactions over the course of my career, I can't think of one that is as synergistic and obvious as bringing together the PowerFleet and MiX organizations. Our entire team is excited to hit the ground running and capitalize on the growth opportunities and operational efficiencies at hand. So let's dive into the details of the transaction. Making this as seamless as possible for all parties, the combined entity will continue to operate under the PowerFleet brand umbrella, utilizing our current ticker symbol on Nasdaq. In addition, we plan to have a secondary listing on the JSE in South Africa to ensure there will be no complications with South African-based MiX shareholders. Having the combined entity on Nasdaq will provide us with enhanced market exposure and an expanded shareholder portfolio. This is going to be an all-stock transaction. MiX shareholders will exchange 100% of their outstanding MiX ordinary shares, including MiX ordinary shares represented by MiX American depository shares, or ADSs, each of which represents 25 MiX ordinary shares for consideration consisting of PowerFleet's common shares payable at closing. The number of PowerFleet common shares to be issued as consideration will be based on the post-transaction ownership structure whereby current MiX shareholders will own approximately 65% and current PowerFleet shareholders will own approximately 35% of the combined entity immediately following the closing of the transaction. This exchange ratio assumes all MiX issued ordinary shares, including those represented by MiX ADSs are exchanged for common shares in PowerFleet. In connection with the transaction, PowerFleet and MiX are positioned to secure approximately $75 million in incremental debt, inclusive of $60 million in senior secured debt, which the companies anticipate will be fully executed at or before closing. The proceeds from the refinancing of the combined company's balance sheet will be used to redeem in full the outstanding convertible preferred stock held by affiliates of Abry Partners. Transaction-related expenses will be paid from cash on the balance sheet. Given the current sources of positive cash generation, we have also structured our balance sheet refinancing to include new Israeli shekel and South African rand-denominated debt, providing a natural FX hedge for USD-denominated investors. With all these factors considered, we believe the combined entity provides a clean, innovative capital structure that delivers significant upside value. As a condition to the consummation of the transaction, both parties will be holding separate shareholder votes. PowerFleet will be seeking stockholder approval, including for the issuance of shares of PowerFleet's common stock to MiX shareholders as consideration for the transaction and an amendment to PowerFleet's Certificate of Incorporation to increase the number of authorized shares of PowerFleet's common stock thereunder. MiX will be seeking shareholder approval for the scheme of arrangement, which is the statutory procedure for the transaction under South African rule. Subject to these and other customary closing conditions, including the receipt of required regulatory approvals, the transaction is expected to close in the first quarter of calendar year 2024. We're all very excited about the prospects of these 2 businesses coming together to create an industry-leading mobile asset IoT SaaS company with a significant pipeline for growth. We expect a smooth process to combine the businesses and we look forward to taking the next steps together to becoming one PowerFleet. This concludes my prepared remarks and I will now turn the call back over to the operator for Q&A.

[Operator Instructions] Your first question for today is coming from Jaeson Schmidt at Lake Street.

Congrats on the announcement this morning. I just want to start with how we should be thinking about a long-term growth rate for this combined company?

Yes, Jaeson, I'll pick that one up. And so in terms of the growth, there's significant revenue synergy opportunities just given the natural fit of both, where MiX is strong, in terms of, particularly in sort of the high-end in-cab video devices, AI, which is a great complement in terms of where PowerFleet as a whole has been relatively weak. In addition to that, we're very strong in the industrial side of things. That's an area where PowerFleet -- sorry, where MiX has not been active to date. We'll also benefit from MiX having 120 global partners in terms of more reach, more distribution. So that's a huge positive as well. So in terms of top line growth, we expect to be double-digit top line growth as we bring this business together with a boost in terms of additional revenue synergies on top of that. From an EBITDA standpoint, we expect EBITDA to grow at a much more rapid rate. We see significant operating leverage in the model. In addition to that, there's a lot of efficiencies we'll be able to drive from a combined business standpoint. You can look at the success that Steve and team have had even before I arrived in terms of being able to take costs out and reinvest in the business to accelerate growth. So we do expect that to continue but we definitely see very strong growth from an EBITDA standpoint. On a trailing 12-month basis, EBITDA was $39 million. We believe we have the capability to double that within the next 2 years.

Okay. That's really helpful. And then just as a follow-up, it seems pretty complementary from a geographical perspective. But just curious, when you look at the worldwide customer base, are there any geographies that you want to deemphasize going forward? And I guess relatedly, are there any geographies that you think that provide significant opportunities now that the 2 companies are combined?

Yes. Great question. I think -- I mean, we publicly discussed the fact that we had some smaller territories that we were struggling to make strategic for us. One of the great things is that, each of those territories to combine with the MiX organization. So we feel that the continents that we're working on, the geographies that we have, we know we can drive significant opportunity in those current geographies. What we would say is, we both have a very direct ambition to grow significantly in the U.S. and Europe. And both companies already have plans for future investments to continue to drive improvement in those regions and gain more market share and that's going to be 100% of our focus moving forward. So we're going to have more solutions to sell. We're going to have more cross-sell, upsell opportunity in our customer base. There's very little crossover between our customer base, there's a lot of international accounts. So as we all know, companies are looking for less suppliers, they're looking for more consistency in terms of the solutions that they deploy in multi-geographies. So all of this is upside to the business. But if I have to kind of say where we're going to put most of our focus, right now in incremental investment and growth in the short term is very much the U.S., North America and Europe.

Your next question is coming from Scott Searle at ROTH MKM.

Guys, congratulations on the transaction, really transformative. And Joss, congratulations on your pending retirement.

Thank you for that.

Guys, just real quick in terms of the transaction itself, I'm wondering if there are any colors or breakup fees, it sounds like the MiX is basically going to be 35%, 65%. But just If there's any other color on that front? And Dave, maybe quickly in terms of interest rate that you would expect to be paying with new debt to solve the Abry issue?

Yes. So in terms of breakup fees, nothing of any significance. So no breakup fees of any sort of size in terms of the deal. So the expectation is, this gets through regulatory approval successfully. We think it's great for both sets of shareholders. So we don't see or if we'll see any issues on that front. From a debt standpoint, as I said in my prepared remarks, a significant portion of the debt will be senior bank debt. So senior secured debt, a significant portion will be in South African rand, a significant portion in shekel. On a blended basis, we see the debt being about 9.7% but obviously, that is inclusive of wonderful currency hedging in terms of the source of the cash that we generate today. So we think it is a very elegant solution. We think it's a solution that works really well for our shareholders.

Great. And if I could, just to follow up, Steve. You've got the Unity platform now. How quickly can you integrate the MiX Telematics platform customers and begin to offer the Unity platform into that customer base? And what are some of the key features that you get in terms of blending the 2 entities together?

Yes. So I mean, if you look at how quickly we bought Unity to market and how we did that was, obviously, all of our heritage platforms, all the functionality the customers were enjoying yesterday, they enjoy today and tomorrow. And it's very much for the MiX family to start on that same concept with us and we're already talking through how we go do that. So within a matter of months, the extra capabilities and flexibility that the Unity platform will provide will be very much an opportunity for MiX customers to enjoy. And that overall harmonization of their data, their ability to minimize the amount of suppliers they have and for us to become that mission-critical partner is going to be there in fairly short order. Obviously, there's some work to be done behind that. But again, it's a similar model to what we deployed for the PowerFleet customers and PowerFleet platform. The great thing about MiX is they have 1 platform. So Joss and team have done a superb job in making sure that, that's highly scalable and highly flexible and complementary to the add-on benefits that kind of the data highway piece that the Unity brings alongside it, will bring to the party. As David said, I mean, we have a lot of vertical expertise across the 2 businesses from a product perspective. I think MiX has some really super high-end logistics solutions that PowerFleet -- we have a lot of logistics customers but we were unable to provide that high-end logistics solutions to, comprehensively. I think the AI -- the camera solutions that MiX have again will be complementary and they're driving great growth in their business through the advancement of those solutions. And then as David alluded to you, the whole industrial piece, is something that MiX don't have the ability to sell to their customers today. So we're talking about that one-stop shop across all asset types, again, super upside there. Moving up as well. So the South African team, as we kind of build out the insurance market, they very much see moving up to something that is really key and MiX have some great innovation with the mesh network capability called Beame. That again, we have concentrations of customer bases that we can and territories that we can bring that to. So we are going to have, by far, the most comprehensive set of solutions. I would love to be a sales guy in this combined organization with the kickback that I've got to go sell, having spent a long time in this industry, trying to convince customers of taking solutions. So we're super excited by what that's going to bring. And then secondly, I think if you put Unity on top of that, that gives the uniqueness that doesn't exist in those other top-tier providers. We've leveled up the playing field in terms of our ability to go and sell and compete at scale. And we think we're going to have a winning and unique strategy to help drive growth very comprehensively for the combined business.

Great. Perfect. And lastly, if I could, you talked a little bit about growth being targeted at double digits. I think MiX in constant currency has been growing at that rate on the SaaS front. Just looking out then -- it's probably a little bit early to talk about sales synergies but I'm wondering if there's any chance you take a stab at what that could be and the timeline of when you think you'd get to a Rule of 40 company?

Yes. So thanks, Scott. We'll give you some of that but not all of it today. So in terms of Rule of 40, we have line of sight to get there within a couple of year period from there. So that is something that is super exciting. Obviously, MiX, we're well on the way. We bring some transformative abilities to help accelerate that. In terms of kind of debt -- [ let's ] lay down in some of the questions, you're asking about sales synergies, we're having a joint Investor Day on the 16th of November in New York. And that will give investors and analysts the ability to come and stay under the hood in terms of how we get to where we're going to get to. So we'll hold some of that for now and point everybody towards coming to join us at that Investor Day.

Your next question for today is coming from Gary Prestopino at Barrington Research.

Steve, I know you kind of talked a little bit about this but -- in the prior question. But legacy PowerFleet is very strong in the industrial side and had some, I think, gaps on logistics, while MiX definitely has at least from what you're saying, a better portfolio of products on logistics. So could you maybe go into some of the things that MiX brings on the logistics side in terms of product capabilities that legacy PowerFleet does not have?

Yes. Certainly, I can take that one. We've been -- in terms of the logistics space, it's kind of back to our roots where -- back in South Africa where we originally started this business, some of our very first customers were pretty complex logistics operations. So we've certainly honed our skills in that particular area. Big focus, of course, on in-cab solutions, which steadily evolved into caravan, trailer. But the piece that a lot of our customers have a need for is on the material handling side, which was never really a big focus of ours and it's certainly one of the many synergies that we see in terms of this combination, is that we have high-end logistics solutions that we think will be very applicable to [ beat ] some of their existing customer base and vice versa. We have significant customer relationships that we believe that PowerFleet's industrial IoT will be a fantastic upsell solution for. So the combination certainly has a significant opportunity for revenue enhancement through an existing customer base.

So Stefan, I mean, where a lot of these -- some of this logistics products, this is camera-enabled too?

Yes, it is. Of course, it's evolved over a period of time but the big growth area now is around in-cab camera, which can be as simple as just a dual camera, one forward facing, one facing into the cab. And we've got clients now that are using multiple camera solutions around the vehicle to give them a 360-degree safety environment. So we have, within our range, the ability to satisfy the entire gamut, so to speak, of both telematics data and video data solutions. And we combined with a fantastic product range that we see at PowerFleet, we think that the combined product offering is second to none frankly.

Okay. And then the second question would be and I've just got your financials for Q2 and it looks like you did about $36 million of revenues, of which probably more than -- of which more than half are in Africa and I would assume that's South Africa, correct, mostly?

That's correct. Yes.