alum.

Steve, I wanted to follow up on the component shortages. Was this a new supplier to this component, or you just got a bad batch, and then I had a couple of follow-ups?

It was purely Tony. We had an end-of-life component for a Wi-Fi chip. We put the new component in. We thought it was good. It wasn't. It's been a pain and frustration for a few weeks as we need to get the operability much better than it was. We've now solved the problem. We're starting production back. It was one product line, painful in the quarter, just got to ramp back up, but nothing else, nothing more substantial than that. So painful and frustrating in the short term, but we're through it now.

Then to follow up on Scott's question, what kind of incremental impact are you seeing from AT&T, Rogers, and others? For instance, I mean, maybe this is a tough, how much revenue do you think was attributable to those folks in the quarter? And then lastly, I'd love to hear kind of your traction still and your in-warehouse solutions.

So I think we talk a lot about the over-the-road and in-warehouse stuff in terms of the wins that we've had. So, again, the differentiated solutions are what are driving our growth. You know, if we pro forma for the South African thing, we remain in double-digit growth from our services, and that is coming from and being helped and supported by those channels. And our North America growth is improving off the back of those channels as well. So doing what it said on the tin, lots more to come from those guys. If you look at the AI video bookings growth, a good part of that can also be attributed to those channels.

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

Hey, good morning, everyone. Just want to understand exactly what's going on here, Steve. I'm trying to write it down and keep up with you. You're seeing an acceleration in the South African business with the government contract. But you're walking away from some revenues in South Africa and deploying those resources towards the new contract.

Is that the best way to read this? yeah it is it's it's the demand has outweighed our original expectations substantially right and with any any company that's starting to really get green shoots of growth and we bought three companies together with heritage sets of revenues in order to focus and be very disciplined in terms of capital allocation resource allocation focusing on business going to bring us future growth because there is major growth still to obtain a lot more vehicles within the government contract. There's also a substantial opportunity to sell lots more services to these bigger customers, so you have fewer customers. So we've looked at our revenue base and said, how best do we amplify that compared with, you know, when you bring three companies together, you can spread yourself thin in terms of your sources of revenue. So whether that's we've decided to take our throttle off growing some areas of that revenue in order to pivot to getting more from the south african contract whether that's stopping some product lines whether that's being able to remove ourselves from onerous contracts all of that has built itself in to our abilities to a make sure this goes really really well with this phenomenal new demand and b then maximize that opportunity and use our capital globally to you know really kind of double down where scott and tony have been in terms of our over the road and um and in warehouse solution capability you know in tandem in terms of our other channel opportunities in terms of our accenture opportunity so you know as as power fleet you know has transformed organizationally we're now transforming really from a revenue perspective and because we're seeing such positivity and confidence and demand for the products and services we're taking what we think is smart and disciplined decisions to help grow the business in the best possible way and from a consistency perspective and make sure that we get to you know a consistency of growth both on the ARR line and also less lumpiness in some of the business we do we think this is a very sound move for us to do bought on by the phenomenal demand and the execution of that demand by our sales team from, as I said, we started in our own internal expectations when we first won this mandate, we thought we'd be doing around 10,000 vehicles over the next few months. And we're doing 72,000. And that's a big undertaking. We want to do that super well.

Okay. Thank you for that explanation. It clears it up. So I guess the next question I would have is on this overall South Africa contract.

You're going from initially planned 110k to 72k vehicles what's the total TAM there and and do you have the ability to capture most of that TAM in this contract yeah yeah so it's a total total TAM is 180,000 relevant for us we think there's 150,000 in terms of vehicle opportunity and then once we're in these accounts and think about it Gary we can we can kind of chase smaller contracts and smaller customers we've got we've got captive for the next five years some large um you know large customers who we can sell lots more of the portfolio to that have obviously by the fact that they've you know signed mandates to take our solution so quickly in the cycle are excited about further opportunity with us and that's really where we want to concentrate so there's an expansion in terms of more vehicles and there's a significant expansion opportunity in terms of more products and services to those customers that we've now captured.

Okay, thank you.

As a reminder, if you would like to ask a question, please press star 1. Your next question is from Dylan Becker with William Blair.

Hey, guys. Appreciate it. Steve, maybe for you, going from 10 to 72 in such short order, I guess, what's driving kind of the urgency or pull forward from the customer perspective there? And then as you're thinking about deploying against those 72, maybe the importance for other customers around kind of proving out the scalability of that, right? Like driving traction across a broader enterprise base. I'm sure there's going to be a lot of eyeballs on the success of that deployment as well, too.

So I think firstly, you know, there's a big shift in the territory for safety and there's a big need for efficiency. So that bodes well. And I think, you know, some of these customers have had legacy solutions that they've looked at the Unity platform, they've looked at our capabilities and feel that there's a very big value add. And remember that this was previously a bunch of different contracts and this is the first time it's been consolidated into one kind of umbrella. So I think, you know, those guys coming together, seeing the capabilities, looking at how they can be used for different departments, I think has also helped for that perspective. So, you know, I think this is something that the demand is there and we fit that demand very, very well. And, you know, I'm very proud of the team in South Africa who's been able to, you know, bring this to the table a lot faster than we expected. So that's why we want to do this really well. And to your point, it's already starting to emerge other large-scale opportunities. I mean, you know, we talked about some of the deals at the top of the call, which kind of are dwarfed by this, but these are still big deals for the company, including, you know, a lot of expansion with Fortune 500. And there's a lot of eyes on us doing this really well, because we can see and we have pipeline towards doing more enterprise and pure enterprise deals, which is, you know, Now, these companies have been, you know, Fleet Complete was a mid-market company. I would say Power Fleet and Mix were kind of small enterprise. But we're now, you know, getting more share and more confidence in the larger enterprises. So all of these decisions are based on that forward thinking and what we can see. And, you know, we've been very proud of the fact and, you know, throughout the time that we've been in the company, we always, we will not sacrifice on quality. We will not sacrifice in terms of getting customers long-term outcomes. And we see the shift we're making is an important stage to make sure we can do that on a much bigger scale. And it's so exciting for us as a team. But, you know, we have trade-offs. We have to make some decisions to ensure that we don't stretch ourselves too thin. You've heard me say many times when people have said, what's the challenges to the success of the company? I mean, I've always said you can spread yourself too thin. So this is operational discipline that we're taking these decisions that we've done.

Very helpful. And then just to kind of clarify one other piece too, as a part of this, right, all of that reorganization is taking place purely around for the South African operations side of the business. Because it does sound like, right, 20% quarter over quarter, video safety, bookings, momentum, everything kind of ex-South Africa dynamic seems to be tracking quite well. Just kind of maybe a sense of resource prioritization there and broader kind of business momentum outside of this one segment.

Yeah, so Melissa Ingram, I think, was it last call, took you through some of the centralization pieces we're doing, you know, which is the next part of our optimization, which will support this contract as well. But, you know, this is this is change predominantly for our South Africa team and their focus. But, you know, what we're making sure that we do is we're bringing the best practice so we can repeat this in other geographies. And we can get, you know, as I say, we're kind of two years into that operational cadence and organizational change. So, you know, we're making sure that we do a lot of repeatability across the business, which not only supports the South Africa contract, but also, as well, these other large-scale contracts, you know, that we have going on in North America and Europe and elsewhere.

Very helpful. Thank you.

Your next question is from Alex Sklar with Raymond James.

Great. Thank you. Steve, just following up on Gary and Dylan's questions on South Africa, the $17 million of foregone revenue, can you just elaborate? what exactly is that? Is that tied to existing revenue that's churning off? Is that projected bookings that you just can't sell anymore given the reprioritized go-to-market or implementation team? And then as we think about the kind of implied margins of that revenue you put on the slide, we're kind of accretive to the overall business. So maybe just a bit more color on your kind of internal deliberation on why that has to be foregone versus maybe staffing up a bit and trying to delay it. Thanks.

Yeah, let me pick that one up. So in terms of the revenue, it is a combination. So part of it is walking away from certain books of business, that just the operation, the OPEX overhead is so high that it sort of drags things down and we need to free up that capacity, obviously, for the growth that's coming through. So that's a piece part of it. To Steve's earlier point in terms of spreading ourselves too thinly, We do have to sort of refocus in terms of working through the backlog of the bookings that are coming through the national treasury contract. So that does mean foregoing revenue that we plan to get elsewhere in the market. That's a piece part of it as well. And then in terms of the implied margin, obviously, there's significant operating leverage from an OPEX standpoint. So in terms of the margin, you're losing a lot of gross margin without necessarily an average recovery in terms of OPEX. So, you know, the implied margin would actually be higher as it flows through than you would expect just looking at EBITDA margins by themselves. So that's why it's a relatively high number from an EBITDA standpoint.

I appreciate that answer and the clarification.

And just to add to that, sorry, Alex, it's about quality of revenue. It's around cash, right? So, you know, the South African contract comes with more opportunity to improve cash collection as well. So that also was in our minds as we looked and made these deliberations. And you can stack it up and you can kind of, you know, think, can you do both? But I think where we've got the weathered eye on what's going on in the rest of the world and the continued growth there, I mean, we're dominating this call on South Africa quite rightly. but we could also dominate this call on some of the other growth areas. So all of that is not just like an individual kind of balance sheet and P&L view for South Africa. This is a much broader set of deliberations that have brought us to this choice.

I appreciate that. Maybe let's talk about the rest of the world then. So that 26-country European construction win, you're obviously in a strong competitive position. You've got the global footprint, pretty good differentiation. You have some enterprise customers already. Can you talk about, did that deal start off looking for someone globally across 26 countries, or was that the team really able to expand the size of the opportunity? And then you mentioned kind of vendor of choice. Is that a book deal, or is that still coming in the next couple quarters? Just those questions.

So it's in contract at the moment. It was a customer who had a smaller footprint with us, But what they wanted on a global basis was someone who can provide safety and visibility both in the yard and over the road. So obviously, that is the key differentiation, both nationally and internationally. So that's why, you know, it's been so exciting for us as a vendor of choice, because we are the company who can, A, cover that footprint with our global footprint that we have. And secondly, in terms of the unique proposition to give consistency, single visibility, single sources, true through unity, as I say, in a yard and over the road and in a warehouse that gives us that unique capacity. Great. Thank you both.

Your next question for today is a follow-up question from Scott Searly. Your line is live.

Hey, Dave, just to follow up a little bit on the cost front, gross margins on the product front down because of component availability and absorption issues. I think it was 21% versus 29% in the prior quarter. What's the recovery look like into the second half of this year? And thinking about that 27% EBITDA margin exiting the year, You know, what do product gross margins look like at that point in time? And also on the OPEX front, a little bit higher this quarter, but you've been going through some integration and otherwise, right, trying to optimize a cost structure. What is the non-GAAP OPEX that we should be thinking about exiting the year?

So in terms of the product margins, it will sort of come back in terms of the second half of the year. In terms of expectations, I think sort of 31%, 32% is the right expectation there, Scott, in terms of where we're at. In terms of OPEX, as we said on the last call, we are investing ahead of taking significant costs out. So we've got a target of $12 million of annual costs to come out in the second half. So in terms of what that means from a sort of a sales and marketing SG&A standpoint, that will be 19 percentage points or so in terms of sales and marketing. And then expect G&A expenses to come down to much closer to sort of 20% as we exit the year.

And Scott, if I can just be really, really clear on the product margin. So the only reason that it was down at that level was the lateness on the production thing. All of those orders are being fulfilled. They're all intact. It's just a timing thing that will recover either through this quarter or maybe a little bit into Q3. And it's very high margin business. And we're actually seeing a lot of strength in our high margin product line. So, just wanted absolute clarity there that that was the only reason that was down. As production ramps back up, as we're able to fulfill customers, it just springs back.

Great. Thank you.

We have reached the end of the question and answer session, and I will now turn the call over to Steve Toe for closing remarks.

Thank you, Operation. Just before we do, we do have Paul Algy on the call with us. So, we're delighted to have Paul join us as our president and CFO. So, Paul, you might just want to say a quick hello to everybody.

Thank you, Steve, and good to meet everyone on the call. I'm genuinely excited to join PowerFleet as president and chief financial officer. Over the past several months, I had the opportunity to work alongside Steve and the executive team as a strategic advisor. One example that stood out for me was the South Africa opportunity, which grew from an initial estimate of roughly 10,000 vehicles to more than 70,000 in a matter of months. That kind of expansion don't happen by accident. It happens when a differentiated platform addresses a real customer need and when the team behind it knows how to execute. That experience helped make my decision straightforward. I believe in what PowerFleet is building, and I want to help turn the momentum that we're seeing in the business today into durable and profitable growth. A little bit about me. I bring more than 25 years of experience leading finance and operations across technology companies, including more than a decade as a public company CFO, and most recently, as Steve pointed out, CEO of a publicly traded company. I've led businesses through growth, acquisitions, capital raises, and transformations, and at times in markets that were anything but easy. Those experiences have shaped three commitments I bring to PowerFleet. Clarity, discipline, and delivery. First, clarity means communicating transparently with investors, with customers, and with our teams, and building trust through honest and consistent dialogue. Second, discipline. Discipline for us means making deliberate choices about where we invest, how we allocate capital, and how we balance growth, profitability, and risk. I believe finance could be an engine for better decisions, not simply a scorekeeper. And third, delivery. Delivery means converting strategy into measurable results. A compelling strategy creates the opportunity. Consistent execution creates value. So what does this mean? You should expect me to be transparent about our progress.