Powerfleet, Inc. Q2 FY2021 Earnings Call

Good morning, and welcome to PowerFleet’s Second Quarter 2021 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 the 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 included are but not limited to the company’s financial expectations for 2021 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, among others, CEC 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. And finally, I’d 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’d like to turn the call over to PowerFleet’s CEO, Mr. Chris Wolfe. Sir, please proceed.

Yes. Thank you, Matt. Good morning, everyone, and thank you for joining our call. I hope everyone is doing well. The measurable pickup we experienced in new sales activity was a key driver of the robust revenue growth we generated in the second quarter. The acceleration we are seeing across our business units and end markets drove a 16% sequential increase and a 30% year-over-year increase in total revenue. In addition, our focus on building predictable revenue streams resulted in a 10% year-over-year increase in high-margin recurring and services revenue. Our quarterly financial performance also demonstrates the leverage in our business model. While we had a modest increase in marketing expenses that we previously discussed, we were able to greatly improve our profitability metrics. Our results also reflect the successful execution of our strategy to continually increase our high-margin recurring and services revenue by expanding our high-value solutions offerings and growing our businesses in our targeted verticals and geographic markets. Before I discuss our operational initiatives and traction, I’ll turn it over to Ned to discuss our financial results for Q2 in more detail. Ned?

Thank you, Chris, and good morning, everyone. Turning to our results for the second quarter of '21. Revenue increased 30% to $33.5 million from $25.8 million in Q2 of last year and increased 16% sequentially compared to the previous quarter. As Chris mentioned, high-margin recurring and services revenue for the second quarter of '21 increased 10% year-over-year to $18.1 million compared to $16.4 million in Q2 last year. Product revenue, which drives future service revenue, increased 65% year-over-year to $15.5 million from $9.4 million in Q2 of last year. Gross profit dollars increased 14% year-over-year to $16 million or 48% of total revenue. This compares to $14 million or 55% of total revenue in Q2 of last year. Service gross margins for the second quarter remained strong at 63%, which was in line with the prior quarter. Product gross margin for the second quarter was 30%, an improvement from 29% in Q1 of the year. Now turning to our expenses. Total operating expenses were $16.2 million, a 10% increase compared to $14.7 million in Q2 of 2020 and a slight decrease from the $16.4 million in the previous quarter. Turning to our profitability measures. GAAP net loss attributable to common stockholders for the second quarter of '21 totaled $2.6 million or $0.08 per basic and diluted share. This is an improvement from a net loss of $3.8 million or $0.13 per basic and diluted share in Q2 of last year. Non-GAAP net income attributable to common stockholders for Q2 '21 totaled $1.4 million or $0.04 per basic and $0.03 per diluted share. This was an improvement compared to non-GAAP net income attributable to common stockholders of $789,000 or $0.03 per basic share and $0.02 per diluted share in Q2 of last year. Our adjusted EBITDA, a non-GAAP metric for Q2 2021 totaled $2.8 million, an improvement compared to adjusted EBITDA of $2.1 million in Q2 of last year. During the 6 months of 2021, we generated $3.2 million in cash from operations. Our liquidity positions remain strong. At quarter end, we had $40 million in cash and cash equivalents and working capital of $53 million. This concludes my prepared remarks. Chris?

Thanks, Ned. As stated in my introduction, PowerFleet’s improving financial performance mirrors the demonstrable pickup in sales activity we’re seeing across our key geographic regions and vertical markets. Domestically, we secured several new contract wins and follow-on orders in the quarter. Most notably, our logistics group secured Atlas Van Lines and White Oak as new customers, as well as signed a major 3,000 unit expansion with Day & Ross. In addition to these wins, our logistics group also finished shipping the 6,600 unit container order that we referenced in our Q1 call. Our industrial group recently signed and shipped the first site of a very significant renewal project. While we cannot name a customer due to requested confidentiality, I can say that this project has potential for an additional 79 sites and 7,000 industrial units, which equates to over $20 million in potential revenues. We look forward to keeping you apprised of this opportunity as it progresses. They will begin installing their units at the end of this month. Much of our success and momentum is due to our expanding partner channel network. During Q2, we entered into a reseller agreement with Mitsubishi Logisnext Americas group, a leading manufacturer of material handling and innovative automation and fleet solutions. Logisnext will offer PowerFleet’s enterprise telematics solution as a factory-installed option on all Mitsubishi forklift trucks, Cat lift trucks, and Jungheinrich warehouse products. This relationship is already paying dividends, as we have secured several significant wins in Q2, including the world’s largest online retailer for their operations in Brazil. Internationally, our sales momentum and customer traction in the second quarter was equally robust. Headlining the quarter was our Israeli operations, which achieved 2 major milestones in Q2: first, they surpassed 200,000 monthly subscribers, and second, they installed over 6,400 units in the month of June alone, which is the highest monthly total for its operations of all time. On top of this, our Cellocator division delivered a record 79,000 telemetry units in the quarter. Additionally, we signed the Israeli Police Department, which was announced earlier, and will begin installations of nearly 8,000 vehicles this month. The Israeli Police is the third rescue force following Magen David Adom and the fire and rescue services that have selected us to be part of their comprehensive command and control solutions. These 3 organizations tap PowerFleet because of our highly reliable hardware and software capabilities as well as our unique engineering competencies and excellent customer service. More broadly, we secured several additional international wins in Q2, such as Corteva Agriscience, where we are implementing an IoT solution in Romania with potential of 6 other countries to follow on. In Mexico, we secured a new Toyota motor manufacturing plant for our industrial solution. I’m also excited to report that our rollout with KAVAK, who’s the Carvana of Mexico, is exceeding expectations, putting us on a pace to have over 40,000 monthly subscribers in Mexico by year-end. In addition to our sales and pipeline momentum, we continue to build on PowerFleet’s track record of technological innovation. In the U.S., we launched Vista, a best-in-class video solution that leverages artificial intelligence to analyze and proactively manage risky driving situations in real time. This is a natural extension of our image technology portfolio focused on keeping drivers safe, protecting assets, and reducing insurance premiums. We also launched Vista in our Mexico operations during July. We currently have numerous pilots for Vista in the U.S. and in Mexico. To finish up, while we do have some concerns around the Delta COVID variant in our various geographies, we are also actively working with the global electronics component situation. But we entered the second half of this year with very encouraging momentum, giving us confidence in our growth prospects. We’re making great strides toward the realization of our long-term financial goals and our company vision, which is to be a major force in the massive industrial IoT market. And with that, we’re ready to open the call for your questions. Operator, please provide the appropriate instructions.

Your first question is coming from Jaeson Schmidt.

Chris, I just want to follow up on your last comment on the supply chain. Just to clarify, have you seen any sort of headwinds from the challenges out there, either in the June quarter or expect to see any sort of friction here in the September quarter?

As of right now, no. But remember in Q1, we had just a slight impact on some delayed shipments. I mean it’s an active situation, but right now, the answer is no. Our supply chain has the near-term view that we have, and it looks like we’re pretty solid. Yes, I think we’re just trying to set ourselves up for surging potential, right? So we have quite a few very large field trials going on, and it’s going to require us to go way beyond what our forecast is, which is our normal growth forecast.

Okay. That makes sense. And maybe not so much on the product side, but with the rising case count, have you seen customers pull back on sort of some of their timetables in regards to installations and just your guys’ ability to get products installed?

Not as of yet. And again, we did see that last year, but we’re not seeing that today. Our field engineers are actually out in the field actively. I’m happy to say that the majority of our employees are all vaccinated too. Some customers and prospects are actually requiring that, so we’re set up really well there.

Okay. And the last one for me, and I’ll jump back into the queue. Just curious if you could update us on what you’re seeing in that rental car market, both with Avis as well as the other customers you’re trialing with.

Yes. The market, I think everyone is aware of that. The railcar market is having issues actually getting vehicles, getting cars to grow their fleets. But we’ve seen our units on air have rebounded significantly, being put back into the vehicles they do have. Right now, I think you’re seeing a recovery across the board in the rental space, whether it’s the top 5 or even below that. Conversations and activities are going on really well with them. A matter of fact, we were chosen by Avis for their new Flex car program, which is a pretty exciting opportunity for us.

Your next question is coming from Gary Prestopino.

Chris, a lot of good stuff going on here. But it could be very helpful, and I don’t know if you have this data, can you give us some idea of what your installed base is at right now and how that’s changed maybe year-over-year or sequentially? And then I’d also like to get an idea of what the backlog is and then the opportunity pipeline.

Okay. Just real quick on our installed base. We haven’t announced what the current numbers are yet today. At the end of last year, we were at 590,000. Just to put it in context, we shipped 79,000 units from Cellocator in the quarter. Some of those have not been installed as of yet. So we’re north of 610,000 units in that range.

That’s very helpful.

Yes. As for our opportunity pipeline and backlog, we operate on a quarter-by-quarter basis with purchase orders where we coordinate delivery schedules with customers. For example, the large order we recently received from Day & Ross is currently in the shipping phase, and we are planning how to manage those operations, similar to what we did last year with their last 3,000-unit order. We completed a container with 6,000 units in less than 7 months. We are now looking at a follow-on order with that same customer, which is quite significant. I also mentioned in the previous call that we are making good progress on the weight on axle sensor developed in collaboration with FlexiVan. We shipped 1,000 units to them in the first quarter, and we anticipate many follow-on orders as we optimize the volume. Additionally, there is another opportunity I cannot disclose at this time due to confidentiality, which is substantial for us. The rollout will commence with the first site launching in September, followed by 70 potential additional sites and 7,000 high-end industrial units. We expect most of these to come in next year, but we already know there are at least 5 or 6 units in backlog ready to upgrade as soon as we complete the first site.

It would be really helpful to keep moving forward. In Q1, you reported a backlog of 44,000 units and an opportunity pipeline of 300,000 units. With so much happening, it would be beneficial to consolidate this information to understand the company's progress both sequentially and year-over-year. Another question I have is whether a lot of this growth is being driven by the 5G upgrade in the market, or if you are seeing significant opportunities for your new technologies in logistics and cargo as well.

I’m glad you brought that up. We actually just received an award for our LV-500 and LV-710 freight camera from an IoT organization, which is phenomenal, right? Because that’s something we brought to the market. That’s why Day & Ross purchased us and why Atlas Van Lines chose our product, due to our innovation. To answer your other question, we are seeing strong traction from the 3G to 5G upgrade cycle with both new customers and our existing accounts. There are also many newcomers; regarding the numbers you mentioned, the 40,000, it’s slightly less now because we’ve signed some clients. So that number will decrease as we onboard them, but it will increase again as we attract new prospects. The figures you stated are roughly consistent, just a quarter later, with some fluctuation around 10,000 units. There are a lot of new prospects entering the market, many of whom have never used this technology before. The reasons include lower price points and enhanced functionality. For instance, our LV-500 employs supercap technology, which means it doesn’t rely on rechargeable batteries. Our product lasts as long as the trailer itself, while others require two products that only last five years each. We can potentially secure recurring revenue from them two or even three times before needing to replace our product. This gives us a distinct advantage in total cost of ownership for prospects. New clients are attracted by the competitive price points and overall performance, getting more value for their investment today.

When you are bidding or competing for these contracts, what has your win rate been? Additionally, who do you currently consider your main competitors?

That's a great question. What I appreciate is that we consistently make it to the final selection stage. Typically, in larger tenders, around four different vendors are evaluated, and we often end up as one of the final two. It usually comes down to price and our ability to deliver, which we can do effectively. However, if the decision is solely based on price, we may lose some bids. Generally, we have a strong track record of success. Currently, our objective is clear: we are determined not to lose if the competition is only slightly better in the hardware aspect. Our focus is on acquiring these customers because they represent significant long-term opportunities. We want to integrate them into our network and system for future expansion. Additionally, we are equipped with solutions for chassis, trailers, and refrigerated containers. For instance, Tropical, which partnered with us last year, initially only signed on for their containers. However, they also possess chassis, which is a common scenario, and our strategy is to establish relationships with these large accounts and grow alongside them.

Your next question is coming from Mike Walkley.

Chris and Ned, I hope everybody is well, your families are well. Just wanted to circle back on the industrial group. With the 79 sites and the $20 million of potential revenue, can you just help us think about a framework for the time horizon of a big project like that rolling out and how it might flow into the model?

We are still engaged with that customer, who was a prospect about three weeks ago. They are expected to finalize the project in September during Q3. However, due to the holiday season in Q4, there are concerns about completing everything before the holidays. We need to have things wrapped up before November, and discussions are ongoing about that. Following this, they will begin rolling out next year. We had previously initiated a rollout with this customer. Typically, we could see 6 sites each quarter, with each site generating around $0.5 million or even more. The initial site is set for September, and we are aware of 6 to 7 additional sites that are looking to launch before the year ends, depending on our ability to meet the timeline. We will also plan the schedule for next year based on their operational integration as we achieve success. We are very confident about this.

Great. Chris, is this part of that 30,000 non-subscription unit base in industrial that’s upgrading? And if not, maybe just update us on how that transition is going.

Yes. By the way, they are. They’re at 7,000. So if you take the 30,000 that we wanted to try and get upgraded, Ford is in the process; I mentioned that in the last call. They’ve done over 3 sites, maybe 4 now as I speak, but they have about 39 more sites globally to do. That’s Ford, and there are 5,000 units there that will be moving on to recurring. Then this is 7,000. You can see it’s a big chunk of the 30,000. It’s not all of it. After that, the accounts aren’t quite as large, but we are actively pursuing the rest of those upgrades as well. These are like 12,000 units that will go on the air at about $10 a month each.

Great. That’s great to see executing against that opportunity. And I guess, Ned, I know you’re not giving guidance. I think there’s the Delta variant there which creates uncertainty and supply can still be challenging. Given the framework and momentum in the business, should we think about maybe steady growth off Q2 in the back half of the year? Or maybe you can help frame second half of the year versus first half, kind of what you’re seeing?

Yes. I think, Mike, we want to continue the steady growth. Obviously, we’re keeping an eye on the Delta variant and how it’s going to impact the business. As Chris mentioned, supply chain is an issue. Our team has been doing a very good job dealing with it, so we didn’t see any impact in Q2. Behind the scenes, there’s a significant amount of work being done just getting parts and ensuring we’re able to meet and deliver. Things are not getting any better. They’re actually getting worse out there. Those are the two issues that we’re trying to manage. But from where we sit today, the business is looking strong, as you can see, and we want to continue the steady growth into the back half of this year.

Great. Just last question for me, Ned, just building on that. Should we be conservative in our product gross margin modeling maybe for Q3 given supply constraints and expedited shipments? Or could it be steady based on what you see, kind of the mix in your backlog?

Yes. If you saw the product gross margin this quarter, it was 30%. It was a slight improvement from last quarter, it was 29%. It should be around this level going forward.

Thank you. There are no further questions in the queue. I will now turn the floor back over to Chris Wolfe for closing remarks.

Thank you for joining us this morning. Ned and I will be virtually attending several upcoming financial conferences during Q3, including: the Canaccord Genuity Growth Conference, August 10 and 11; the 10th Annual Gateway Conference on September 8; the Barrington Research Fall Investment Conference on September 9; the Lake Street Capital Market’s BIG5 Conference on September 14; and the Jefferies Virtual Software Conference on September 15. Before we wrap, I’d like to thank our employees for their diligent efforts and operational execution. I’d also like to thank our valued customers for putting their trust in our products and services. Lastly, I would like to thank our investors for their continued support and your confidence in our ability to realize our vision. Please stay healthy, and we look forward to speaking with you again soon.

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