Good morning. Welcome to PowerFleet's First Quarter 2022 Conference Call. Joining us for today's presentation is the company's CEO, Steve Towe; and CFO, Ned Mavrommatis. 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 2022 and beyond. All such forward-looking statements imply the presence of risks and 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, 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. Now I would like to turn the call over to PowerFleet's CEO, Mr. Steve Towe. Sir, please proceed.

Welcome, everyone, and thanks for joining our call. During the first quarter, we built on a solid uplift in revenue from the prior quarter and delivered an encouraging 14% year-over-year revenue growth. The double-digit growth momentum we generated in the first quarter was driven by further commitment from some of our major customers, including Walmart, Albertsons, and American Intermodal Management. More broadly, we saw growth across our core international verticals and markets, particularly in Mexico and our pointer operations, both of which are realizing solid growth with new and existing partners. It's been a little over 4 months now since I joined PowerFleet, and my experience and interactions continue to exceed my expectations. The company has solid technology, a strong reputation, a world-class customer base, and a committed global team. Our updated strategy has been very well received by customers, partners, and employees alike. Additionally, our team and key partners are excited about the direction of the business and the increasing role PowerFleet is playing across our customer supply chain to solve the unparalleled need for high visibility and insight through unifying their operations. Before I discuss our growth strategy, operational initiatives, and business outlook, I would like to thank Ned for his valuable contributions he has made to PowerFleet over the years. Ned has been a great business partner since I joined the company, and I greatly appreciate his support as we search for our next financial leader to help us build on the operational and financial momentum and capitalize on the growth opportunities on the horizon. On behalf of the Board and leadership team, I wish Ned great success in his next endeavor. In the interim, our Global Controller, Joaquin Fong will manage the day-to-day global finance operations until the CFO search is completed. And with that, I'll turn to Ned to cover our financial results for the first quarter of 2022. Ned?

Thank you for the kind words, Steve. I look forward to supporting the company not only in a consulting capacity over the coming months, but also as a shareholder and a friend of PowerFleet's family for the years ahead. Turning to our financial results for the first quarter ended March 31, 2022, total revenue increased 14% to $33.2 million from $29 million in the same year-ago period. High-margin recurring and services revenue was $18.8 million or 57% of total revenue. This was an improvement on a dollar basis compared to $17.6 million or 61% of total revenue in Q1 of last year. Product revenue, which drives future services revenue, was $14.4 million or 43% of total revenue. This compares to $11.4 million or 39% of total revenue in Q1 of 2021. Gross profit was $14.4 million or 43% of total revenue, compared to $14.5 million or 50% of total revenue in the same year-ago period. Services gross profit was $12 million or 64% of total service revenue, an improvement compared to $11.2 million or 64% of total service revenue in Q1 of last year. Product gross profit was $2.4 million or 17% of total product revenue compared to $3.3 million or 29% of total product revenue in the same year-ago period. Product gross profit was negatively impacted in Q1 2022 by product mix, higher costs associated with supply chain issues, electronic component shortages, and inflation. During Q1 of 2022, we incurred approximately $1.3 million in purchase price variance related to supply chain issues and electronic component shortages, which impacted our product gross profit by 9%. Looking at our expenses, total operating expenses were $18.1 million, down from $18.9 million in the prior quarter, but up from $16.4 million in Q1 of last year. A key initiative of our transformation strategy is to rationalize costs in non-core areas, the benefit of which we expect to see starting in Q2. Looking at our profitability metrics, GAAP net loss attributable to common stockholders totaled $4.1 million or $0.12 per basic and diluted share. This compares to GAAP net loss attributable to common stockholders of $3 million or $0.09 per basic and diluted share in Q1 of last year. Non-GAAP net loss and non-GAAP metric totaled $2.2 million or $0.06 per basic and diluted share compared to non-GAAP net income of $61,000 or $0.00 per basic and diluted share in the same year-ago period. Adjusted EBITDA loss, a non-GAAP metric, totaled $993,000 compared to adjusted EBITDA of $1.4 million in the same year-ago period. At quarter end, the company had $20.9 million in cash and cash equivalents and $40.5 million of working capital. That concludes my prepared remarks. Steve?

Thank you, Ned. Our company's laser-focused in 2022 on establishing a world-class SaaS and AI platform to maximize the impact we make for our customers and increase the wallet share that we can derive in the future. PowerFleet is well positioned to capitalize on this opportunity due to the depth and breadth of our solutions, specifically the rich history of innovative platform devices and sensors, our suite of software applications and data, coupled with the growing need for real-time AI-based solutions across our SaaS platform. Our strategic roadmap has been finessed with several go-forward, data-centric initiatives. As we start to capitalize on the rapid transformations taking place in our industry, we're driving forward a modular enterprise application methodology to help our customers prioritize and implement their digital transformations at a pace suited to their organization. It will allow them to focus on the business problems they are looking to solve across the C-suite. In turn, this will create significant upsell opportunities as we collaborate with our customers to create strategic business change roadmaps. Another initiative is unifying our platforms to a single set of interfaces, which will remain on track to deliver this year. The unification will enable PowerFleet customers to access information across their entire asset-based state through a highly intuitive single pane of glass, transforming the way operators can manage their business. We have already enjoyed several fruitful strategic conversations with major customers and key partners about our broader technology roadmap. In parallel, we are ramping up the pipeline for the unification of our platforms, which will significantly enhance our ability to cross-sell solutions across the organization. The completion of the unification will position PowerFleet as a leading global end-to-end IoT provider, catering to all asset types in a cohesive fashion. Our mission is to become a cornerstone of our customer strategy to unify their operations. As part of this effort, we have rapidly galvanized our global data and third-party integration capabilities and now have more than 80 data integrations with other best-of-breed partners, which also offer pivotal services to manage our customer supply chains and their business operations. We will continue to add significantly to the growing number of key integration points over the coming quarters. We continue to navigate through the global supply chain and electronic component issues and deliver on our customer commitments, supplying products and solutions that they rely on for their business operations. As we progress through 2022, we expect product gross profit to gradually improve as we begin to realize the benefits from our operational and product reengineering initiatives. In the longer term, we are confident these measures will give us better control over cost management for our supply chain. In step with this, we're working hard to expand recurring revenues while reducing operating expenses through even closer integration of our business units. From a sales perspective, the leadership team and I are fully focused on optimizing PowerFleet's global go-to-market growth strategy and better promoting our company's vision to improve safety, productivity, efficiency, and sustainability across business operations with intuitive and innovative IoT SaaS solutions. Along that line, we recently attended MODEX 2022, the premier industrial supply chain event. The customers and prospects we met within the trade show were very responsive to PowerFleet's positioning as having one of the most comprehensive sets of capabilities in the industrial market segment. There is excitement and demand for our newly launched pedestrian and vehicle warning system, which uses advanced AI capabilities to manage safety, prevent accidents, and reduce damage in our customer warehouse facilities. The team is fully focused on executing well on driving transformation and accelerating our vision. The successful execution of our strategic roadmap will create a highly scalable, repeatable, and profitable global organization. That concludes our prepared remarks. Now I'll turn it back to the operator for Q&A.

Your first question for today is coming from Mike Walkley from Canaccord Genuity.

Congrats on a solid start to the year, and Ned, best wishes in your future endeavors. First question from me, Steve, is just on the supply chain. We know it's very challenging. Can you just elaborate further on what PowerFleet is doing to manage this? And how we should think about the slope of recovery for hardware gross margins over the next several quarters?

Thank you for the question. A good one to start. So in terms of the medium term, we have looked to reengineer a number of potential component challenges out of the estate. And that obviously takes time for us to work through. So in the meantime, there are shortages of components. There are components that are nearing end-of-life or have reached end-of-life. Prices in the market are being affected by that. We've taken a philosophy, where practical, to continue to implement those solutions with our customers and provide the products. And that's where you've seen the hit in gross margin. So that will start to ease because we are seeing a slight improvement, I would say, in the situation over the coming quarters, along with the reengineering work. So as we kind of glide to the end of the year, we should see our sales rebound quite steadily.

Great. And I know focus is growing AI and SaaS revenue. Maybe you can talk about or elaborate more on how your sales team is adapting to this? What might be changing in terms of your go-to-market strategy and discussions with your customers?

Yes. So I think we've talked before; this is an on-demand strategy. First of all, let's get as many devices and subscribers as we can into the market, and then focus on the expansion strategy to really cement ourselves with the data solutions that we provide. So from a sales team perspective, this has been very well received because they have more solutions now to sell to customers, both in terms of data sets that we're able to provide and the breadth across different asset types. What we are looking longer term to do is ensure we can be a very good one-stop shop across all of those asset types. So we have a number of conversations now going on with different members of the C-suite within the organizations to make sure that we're looking at appropriate solutions across the business as a whole rather than maybe in a particular segment.

Great. Last question from me, and I'll pass back to the line. Just as you think about the model, obviously, you want a greater mix of SaaS revenue longer term, but there are also some cost-cutting or efficiency initiatives going on. So should we think about overall operating expense dollars declining over the course of the year? Or do you need to hire a new sales team with the changing go-to-market strategy?

Yes, it's a bit of a balancing act. Obviously, we feel there's a really good market opportunity, and we need to put some further feet on the street for the market segments we've talked about, bringing the Pointer solutions to the U.S. market in quite a large way. So I think we'll be adding people. At the same time, the cost reductions and integration efforts will take time to come in. So there might be some costs that go up before we see the full benefits of the reductions. But at the same time, there are some quick wins from a cost-reduction perspective.

Your next question for today is coming from Jaeson Schmidt with Lake Street.

Really nice momentum on the revenue line in March. Just curious what you're seeing from an order pattern standpoint here in April and early May?

Yes. So we're seeing good momentum remain in our pipelines. I think Q4 was a strong revenue quarter, Q1 was a strong revenue quarter, and we're seeing demand continue. I think customers are, again, thinking of us now in a different light. So not only near-term pipeline but also longer-term pipeline as to how PowerFleet can be a partner on a broader basis. As I said in the note, we're feeling that those conversations are fruitful, which helps both the short term and the long term.

Okay, that's really helpful. I'm curious about the equipment gross margin line. I know you expect improvement this year as some initiatives take effect. Is any of this improvement also based on the assumption that the supply chain situation will overall improve?

A lot of it, as I've said, is our reengineering, and obviously we've been putting that action into execution from mid-year last year through the rest of this year. We are seeing slight improvement, but I wouldn't say anything that makes us feel totally confident that that pattern is going to continue at this point in time.

Okay. And then just the last one from me, and I'll jump back in the queue. I know you spelled out in Mexico in the release. But from a geographical perspective, any other areas that jump out, either positive or negative?

So I mean, what's great is the improvement is being spread around the globe. Our Israeli team saw good growth, our Mexican team, as we said, and also our U.S. team as well. So those three territories, I would say, are leading the way for us. I wouldn't say anything from a negative perspective, but they're really standing out as getting market share and market gain.

Your next question for today is coming from Scott Searle with ROTH Capital.

Ned, I want to wish you all the best of luck going forward. It's been fun working with you over the years. Maybe just to follow up on a couple of the earlier questions on the gross margin front. Steve, you're going through product redesigns. I'm wondering what that entails in terms of the certification process, if you could put some time frames around that? And then as we start to think about the recovery on the product side, what should we be expecting kind of exit rate in '22? And what are the ultimate targets here? This used to be a business that ran at 30% plus, and we're at 17%. Is that still an achievable number subject to mix?

Okay. So let's take those two in separation. So in terms of the certification, some we do need certifications, some we don't, in terms of the minor designs and everything that we're changing. So that has all taken place where it needs to and will continue to take place. We see really the fruits of that full engineering work to take place in Q4 this year. So that's the first part. In the second part, I think getting back to the mid-20s is a good short-term target for us, while 30% plus is achievable, but there are a lot of macroeconomics that we need to look at to be able to be certain of that moving forward. We expect to improve on that mid-20s later in the year and early next year.

Got you. Very helpful. And on the OpEx front, up sequentially, I'm wondering if there are any one-time items to call out? I know at the beginning of the year, you got things like FICA and otherwise. But is there anything to highlight in terms of that base level OpEx that we're starting from?

Ned, do you want to take that one?

Sure. It's actually down slightly compared to Q4, but nothing specific. During the first quarter, there were a few hundred thousand in one-time items that were hit in the first quarter that should not be there in the second quarter.

Got you. Okay. And lastly, Steve, if I could. You've talked about the evolution of the platform becoming more modular and identifying some partners. It sounds like you've gotten further along on that front. And I think you had, in the past, talked about starting to see some of the initial betas rolling into the marketplace with those partners in the second half. Are those metrics, are those timelines still tracking? And I'm also wondering from a metric standpoint going forward as you think about the business and how you're going to be reporting it going forward? And lastly, if I could, I know you guys had talked before about an Analyst Day. Is that something that we should still be thinking about? Or is that kind of looking more like in the third quarter, fourth quarter kind of timeframe?

From the first one, in terms of the integrations, those 8 integrations are live now. The team has done a fantastic job to move very quickly. So I think that's a fantastic start for us, and we'll now be really publishing that from the second half of the year and getting our go-to-market teams behind it. In terms of your question regarding reporting of the business, I don't think we would be saying anything different than what we've been saying before or looking at the business in a different way. Obviously, we're going to go very strong on recurring revenues and the metrics around that. I think quality across the organization is something throughout the organization internally that we're ensuring we're at the top of our game. So maybe a bit more strength around those particular metrics. But the general running of the business, I think we have good metrics today. In terms of your third question, yes, we are hosting our Analyst Investor Day on the 14th of June in New York City.

There are no further questions in queue. I would like to turn the floor over to Steve for closing remarks.

Thank you to everyone for the insightful questions, and thanks for joining the call today. As I just mentioned, we are hosting an Investor and Analyst Day in New York City on Tuesday, June 14, from 12 noon to 3 p.m. Eastern Time. The event will provide an opportunity to meet the expanded leadership team and gain insight into our strategic growth drivers and long-term outlook, and to really spend some time with the heart of the business. For RSVP for the event, please contact Mark Glover via [email protected]. In closing, I'd like to thank our employees for their diligent efforts and operational execution, extend a thank you to our valued customers for putting their trust in PowerFleet, and thanks to our investors for your continued support and confidence in our ability to realize our vision.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.