Powerfleet, Inc. Q3 FY2021 Earnings Call

Good morning, and welcome to PowerFleet's Third 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 operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's product offering, and other industry trends are considered forward-looking statements. Such statements include but are not limited to the company's financial expectations for 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 statements. Factors that could cause actual results to differ materially could include amongst others SEC filings, overall economic and business conditions, demands 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. Now, I would like to turn the call over to PowerFleet’s CEO, Mr. Chris Wolfe. Sir, please proceed.

Thank you, Tom. Welcome, everyone, and thanks for joining our call today. As you can see from the press release we issued this morning, while we successfully grew our recurring services revenues by 10%, we had our product sales in Q3 impacted by the cargo ship backlog in Los Angeles, which had the ripple effect of severely impacting new forklift builds starting in mid-August. All forklift manufacturers in the U.S. had their productions severely affected, which in turn led to their delaying deliveries of forklifts as they waited for counterbalance weights and other critical parts to be offloaded from ships. It's worth mentioning that about one-third of PowerFleet's industrial sales each quarter are for new forklifts. These higher-priced, higher-margin industrial telemetry orders are typically placed in the last month of each quarter for forklifts coming off the line the following quarter. This is where our Q3 shortfall occurred. I'd like to emphasize that these forklift telemetry orders were not canceled, merely delayed, as our customers are waiting for deliveries. While we faced momentary sales delays in our industrial business, we've seen our investments in our logistics products continue to pay off. During the third quarter, we received several large logistics orders that could have made up for the shortfall in industrial. However, we were not able to procure the necessary electronic parts to surge our logistics deliveries. Despite the challenges we faced in the quarter, we delivered year-over-year revenue growth of 6% in Q3 and 9% for the first nine months of 2021. On top of this, we saw solid growth in our most important KPI, our high-margin recurring services revenue, which was up 10% and 7% for the third quarter and for nine months respectively. I'll turn it over to Ned to discuss our financial results in more detail. Afterward, I'll cover more about our overall business climate, Q3 successes, our pipeline, and our backlog. Ned.

Thank you, Chris, and good morning, everyone. Turning to our results for the third quarter and nine-months ended September 30, 2021, total revenue for the third quarter increased 6% to $29.2 million, compared to $27.6 million in Q3 of last year. For the nine-month period, total revenue increased 9% to $91.8 million from $84.2 million in the same year-ago period. High-margin recurring and services revenue for the third quarter of 2021 increased 10% to $18.5 million or 63% of total revenue from $16.7 million or 60% of total revenue in Q3 of last year. For the nine-month period, high-margin recurring and services revenue increased 7% to $54.1 million or 63% of total revenue from $50.7 million or 60% of total revenue in the same year-ago period. Product revenue, which drives future services revenue for the third quarter of 2021 was $10.8 million or 37% of total revenue, compared to $10.9 million or 39% of total revenue in Q3 of last year. For the nine-month period, product revenue was $37.7 million or 41% of total revenue, an improvement compared to $33.5 million or 40% of total revenue in the same year-ago period. Gross profit for the third quarter of 2021 was $14.3 million or 49% of total revenue, compared to $14.9 million or 54% of total revenue in Q3 of last year. Service gross profit for the third quarter of 2021 was $11.7 million or 63% of total services revenue, compared to $10.7 million or 64% of total service revenue in Q3 of last year. Product gross profit for the third quarter of 2021 was $2.6 million or 24% of total product revenue, compared to $4.2 million or 39% of total product revenue in Q3 of last year. The decrease in product gross profit was primarily due to a $400,000 one-time expense related to an incentive program to expand business within an existing customer, one of the largest chassis lessors in North America. In exchange, the customer placed orders for approximately 3,000 units to be delivered in Q4 of 2021 and committed to ordering 10,000 to 15,000 additional units in 2022. Profit growth margin was also impacted by product mix, higher costs associated with supply chain issues and electronic component shortages, and placement. Turning to our expenses, total operating expenses for the third quarter of 2021 were $16.7 million, compared to $16.2 million in the prior quarter and $14.2 million in Q3 of last year. Looking at our profitability metrics, GAAP net loss contributed to common stockholders totaled $4.5 million or $0.13 basic and diluted share compared to net loss attributable to common stockholders of $1.7 million or $0.06 per basic and diluted share in Q3 of last year. Non-GAAP net loss for the third quarter of 2021 totaled $364,000 or $0.01 per basic and diluted share. This compares to non-GAAP net income of $2.2 million or $0.07 per basic and $0.06 per diluted share in Q3 of last year. Adjusted EBITDA and non-GAAP metrics for the third quarter of 2021 totaled $1 million compared to adjusted EBITDA of $3.6 million in the same year-ago period. Our liquidity position remains strong at quarter-end with $33.8 million in cash and cash equivalents and $49.4 million of working capital. That concludes my prepared remarks. Chris.

Thank you, Ned. As I mentioned in my opening remarks, the container backlog in Los Angeles is causing production delays and lengthening delivery lead times for new forklifts. We have started to see this issue normalize in Q4, and we expect the normalization to continue over the next two to three months as we get through the holiday season. Our large industrial deployment with Ford, which is underway, as well as our deployment with a large federal agency, which rolls out in 2022, are both aftermarket installations and are not impacted by these forklift production issues. As I mentioned, supply chain disruptions are also impacting our ability to surge deliveries of our other product lines. For instance, we had two electronic components suppliers decommit on deliveries at the last minute, which then impacted our ability to surge Q3 deliveries for our logistics and vehicle products, as we had an additional $4 million in orders that could have been shipped if we had the components to build them. We entered Q4 with a solid backlog that was up 50% compared to our typical quarterly logistics and vehicle backlog going into any quarter. Our supply chain organization, like many, is dealing with daily surprises. But it is good to note that we are hearing from our customers that they believe that many of these issues will start to lessen over the next two quarters, and many of our automotive customers are starting to say the worst is over. However, we are not waiting for the electronic supply issues to self-correct, and our engineering teams have been diligently working on providing us with critical components optionality. These initiatives will cut into production early next year, giving us additional flexibility and control over component pricing. The current economic recovery has shown us that we may need to deal with some air bubbles in our fuel line. While some orders may be delayed, we have not experienced any loss of business to competitors. Just to be clear, our industrial business was impacted by new forklift availability and not our ability to supply our products. While we did experience temporary challenges in Q3, we had a couple of very notable successes, including our team in Israel shipping and installing over 7,800 units in August, which marked a new monthly record. Also in Israel, our largest cold chain IoT project with MACCABI HMO surpassed having 2,000 cooling boxes being monitored. In Mexico, KAVAK, which is considered the Carvana of Mexico, installed over 10,000 units by the end of Q3, which was three months ahead of forecast. In the U.S., as I mentioned, our logistics team won a follow-on order for 10,000 LV-500 container telemetry devices that also included our patented freight camera sensor. This customer has the option to increase this order by an additional 2,000 units. These units started shipping in October with a plan for shipping over 1,000 units per month. Our U.S. team also signed and shipped over 2,500 LV-300 chassis telemetry units in Q3. This solution includes our patent-pending weight-on-axle sensor, which allows the fleet operator to know if a chassis has a container on it and if the container is loaded or empty. As Ned mentioned in his remarks, we took a $400,000 expense related to a one-time incentive in the form of a credit for old 3G units, and this positioned PowerFleet to become this major chassis lessor’s preferred provider. They immediately gave us an order for 3,000 chassis optimization systems to be delivered in Q4. More importantly, we received a letter of intent from this customer for an additional 10,000 to 15,000 units to be delivered next year, and we're currently finalizing their 2022 product mix and delivery schedules. In summary, this chassis product order combined with the 10,000-plus unit order for containers that I mentioned previously, along with other orders in hand, gives us a backlog of over 25,000 logistics ordered units that we will close as we finalize 2021. This is the highest logistics unit backlog going into a new year in the company's history. Our U.S. industrial group successfully launched the first site at a major government agency that we've talked about previously, and this site is now fully operational. The site was a critical milestone in moving forward to an additional 80 sites that represent a $20 million opportunity that we will start implementing in 2022. In closing, while Q2 reflected the strength of our business and our ability to deliver, Q3 showed our business's susceptibility to global supply chain hiccups that are impacting the delivery of new forklifts, as well as the extremely tight electronics component market. We know that global supply chain issues can affect our customers' ability to procure vehicles, but this will depend upon each OEM's situation. One example that was contrary to the U.S. forklift production issue is our business with Jungheinrich, the number three global forklift manufacturer, where our orders have not been affected as our forklift production is based out of Europe. We ended Q3 with our recurring and services revenues at record levels and growing, with a record backlog in logistics and vehicle opportunities, as well as the 2022 aftermarket industrial implementations at Ford and the government agency. We look to build on the sales momentum in Q4 as we continue to close out new deals and launch several new products, which will add to our 2022 opportunity pipeline. We've already received an order for 3,000 units of one of these new products, and these will be delivered by the end of Q4. Now I'll turn the call back over to the operator for Q&A.

Thank you. The first question is coming from Scott Searle from ROTH Capital. Scott, your line is live. Please go ahead.

Hey, good morning. Thanks for taking the questions. Hey, Chris, you gave a number in terms of the logistics opportunity that you're unable to ship due to components. I'm wondering if you could quantify what the forklift impact was in the quarter? Also, as you would expect, right, given the incremental freight costs and otherwise gross margins were impacted on the product front. I'm wondering if you could quantify what that impact was in the quarter and maybe give us an idea about the product industrial mix versus logistics mix? And then, I had a couple of follow-ups.

Yeah. So in Q3, if you consider the industrial products that we ship are typically in the $1,500 range per unit. I'd say 90% of the dollar amount, the missed analyst expectations was due to industrial. Those are all targeted to what I'd say new forklift builds. The gross margins are actually impacted by that mix because the more of the higher-priced, higher-margin industrial products we ship, obviously our gross margins go up on products. But we have seen probably a few percentage points that you can add in here just due to the impact on gross margin from shipping costs and component price increases. Scott, did that answer your question?

Yeah. That answers my questions. Sorry, I didn't hear Ned. But then, Chris to follow up it sounds like the port and shipping issues are starting to resolve. It sounds like you have some pretty good visibility going into the start of next year. I was wondering if you could kind of talk us through that comfort level of why you're feeling better about things improving, and as we think about that recovery going into the first quarter, I would assume that traditional seasonality may not happen and how you're thinking about what product revenue looks like as we go into the first quarter of next year? Thanks.

What's interesting about Q4 is that it largely hinges on aftermarket installations on the industrial side. We have a significant rollout happening with Ford, which is a refresh, and we're currently in discussions with them. They could order up to 800 units in Q4, but it might be delayed until Q1. That’s just an illustration, and that represents well over a $1 million opportunity. If the federal agency we are partnering with advances their orders from Q1, it could also positively affect Q4. We're monitoring our dealer channel, which includes 500 dealers across the United States. This channel has provided valuable insights regarding the OEMs and their influence. Although dealers aren't currently acquiring forklifts to sell to end customers, they are observing a gradual normalization in the supply situation. In September, there were over 65 ships waiting at San Pedro, with 100 backlogged in October, and that number has stabilized at 100. If this figure remains consistent, eventually, the flow of containers off the ships will return to normal, which appears to be happening. Interestingly, the hold-up in forklift production wasn't due to electronic component parts; the main delays were caused by counterbalance weights that are essential for the forklifts. These weights are necessary for proper balance at the end of the forklift production process. Looking ahead to next year, we anticipate our logistics products, which have a backlog of 25,000, will begin shipping. We’ve started shipping some of this in Q4, but we expect most of it to commence in Q1, and we are currently coordinating delivery schedules with our customers.

Great. And lastly, if I could, Chris, I just wanted to get some color around Hyundai Translead. Kind of frame how big that could be in 2022 and car rental opportunities, certainly went away during the pandemic, but now those opportunities seem like they're starting to come back. I was wondering if you had any color in terms of what's going on in that front? Thanks.

Yeah. So just interesting as far as the car rental opportunities, you have Avis, which is a great customer of ours. We've been the technology-selected provider for their flex car program, which is a huge growth opportunity for Avis. So we continue to provide services and products for Avis, which includes our patented fuel processing for accuracy. The rental car companies are still having issues getting new cars. I mean you saw Hertz obviously put an order for 100,000 EVs from Tesla. The good and bad about that is that those cars already come with telemetry. But the good thing is that our product actually works on either internal combustion or electric. So even though you might not need the fuel accuracy, you still need all the other telemetry data, which is like automatic check-in, check-out, odometer, etc. And Scott, if you could repeat the first part of your question so I can make sure I answer it.

Oh, sorry. Just Hyundai Translead, any color on that front? Thanks.

Hyundai Translead's typical trailer build in the U.S. is about 70,000, and they actually source them from Mexico. Our goal is to secure at least 10% of their production, which is what we are currently striving for.

Great. Thank you.

Yup. Thanks, Scott.

Thank you. Your next question is coming from Jaeson Schmidt of Lake Street. Jaeson, your line is live. Please go ahead.

Hey, guys. Thanks for taking my questions. Just following up on Scott's question. I'm just curious if you could quantify the expected impact from the supply chain you expect here in Q4?

Yeah, I want to make sure it's clear too that the supply chain on the forklift side is primarily impacting new forklift delivery, not our products. We have products to ship; we're just waiting for those new forklifts to actually finish their manufacturing. On our logistics and vehicle side, we have the parts and we had the parts to build to our normal forecast. What we have is an opportunity to expand and accelerate that and that's what we weren't able to capitalize on in Q3. Right now, in Q4, to hit our normal forecast on logistics and vehicles looks doable. I'm not saying that that's not susceptible to some last-minute hiccups, but when you look at our inventory numbers, you'll see our inventory has increased almost to the tune of $3 million, and that's getting all the components so that we can actually address all that backlog of logistics units in that 25,000-plus backlog. But we still are working to get one component here or there. So you can't build a product if you don't have 100% of the components. But right now Q4 looks like it won't be impacted by any kind of electronics hard shortage.

Okay. And then just following up on that, I know you mentioned no cancellations in the industrial segment, but are you at all concerned about some decommits, just trying to get a sense of how firm these orders actually are?

We haven't experienced any level of decommitments in the company's history, as there is a regular flow in our channel business. However, one factor affecting the number of available forklifts is Toyota, the leading forklift manufacturer globally. They removed their internal combustion truck from the market in April due to an EPA issue, which represents 20% of all internal combustion forklifts. This has led other manufacturers to scramble to fill that gap, worsening the availability issue. Nonetheless, we expect things to normalize as parts arrive and production resumes, though there may be occasional hiccups. Overall, we are beginning to see improvement through our channel.

Okay. And then just the last one for me and I'll jump back in the queue. Looking at that government agency, I know you mentioned some potentially could be pulled forward in Q4, but if we look at those sort of remaining 80 sites, how should we think about the timeline for that to be completed?

It’s likely a two-year project in total. The process starts with the first site, which follows a bowling tender approach. They need to establish all the processes for training their operators, and since we have collaborated with this customer before, we’re quite familiar with it. Once they are fully operational, they could potentially handle six or seven sites each quarter. Initially, they will probably manage two or three sites in the first quarter, then they will reach the six or seven site run rate after the first quarter of next year.

Okay. Thanks a lot, guys.

Okay. Thanks, Jaeson.

And your next question is coming from Gary Prestopino from Barrington Research. Gary, your line is live. Please go ahead.

Thank you. Hey Chris, this new order that you've gotten logistics for 10k of the LV-500, can you quantify what kind of revenue you derive off that—on both the product and recurring revenue basis—and when will that be fully implemented?

Yeah. We've actually started shipping those units. We'll probably be up to full steam on that in November, and we typically try to ship those units out by the 15th of every month. That unit does consist of the LV-500 and the freight camera. The typical retail price is around $4.50 to $4.75 on the hardware price, and then the recurring revenue is around $5.

Per unit, right, per month?

Per unit per month. Correct.

Okay, great. Thank you. And then just to be clear, you said that the industrial was obviously impacted by the OEM forklifts. In the logistics segment, you had $4 million in orders that you could not—or you could have accelerated, but you couldn't get a component part, is that correct?

It's two areas, logistics and vehicles. If you keep in mind we do sell a lot of units—tens of thousands of units like to KAVAK in Mexico. We actually have a backlog there as well. So between logistics and our vehicles segment, it's $4 million combined that we could have shipped if we could have built the products.

Okay, alright. And again, none of these things have been canceled; they've just been pushed out, right?

Oh, absolutely nothing's been canceled. As a matter of fact, anything on-demand is even stronger.

And you also said your backlog was up 50% overall or was that just backlog in logistics?

That's a backlog in logistics and vehicles. We don't count when I say backlog—that's firm orders waiting to be built. On the industrial side, it's PO by PO. So when we get the PO we fulfill the orders. Until we get the purchase order from the OEM or from the dealer or from the end customer we don't really classify it as backlog.

Okay, and then, last—

No. I'm in here.

Okay, Ned, it looks like your gross margin on the product was down, which is understandable. But it looks like your gross margin on service, if I have my numbers correct, was down almost 840—over 840 basis points. Could you explain what is going on there?

Yeah, the product margin on service was consistent; it was 64% last year, 63% this quarter. So it was very consistent. The product margin on the product was definitely lower. If you recall during the prepared remarks, there was one-time $400,000 expense that we did—an incentive program to get our customer to replace their old units, which are going to lead to significant orders in Q4 and next year with this customer. If you exclude that one-time $400,000 expense, the product gross margins were approximately 27% to 28%, and it was impacted by a few percentage points related to all the issues that we talked about related to supply chain issues, electronic components, higher freight costs, and product mix as well.

Okay, thank you.

You're welcome.

And there are no further questions in queue at this time. I would now like to turn the floor back to Mr. Chris Wolfe for closing remarks.

Thank you for joining us this morning. Ned and I will be virtually attending several upcoming financial conferences during Q4 including the 10th Annual Roth Capital Technology Conference on November 17th, and the Ladenburg Thalmann Virtual Technology Expo 2021 on November 18th. In closing, I'd like to thank our global employees for their diligent efforts and operational execution; extend the thank you to our valued customers for putting their trust in PowerFleet's products and services; and thank our investors for your continued support and 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.