Powerfleet, Inc. (AIOT) Q2 2027 Earnings Call Transcript

It was an important quarter to deliver effectively, following the deliberate decision we made to direct revenue focus, capital allocation, and operating resources towards our largest ever contract win, expected to accelerate high-quality recurring revenue over future periods. Delivering against these strategic priorities, we demonstrated disciplined execution against our plan in Q2, achieving a solid top and bottom line quarter, reinforcing our confidence in the business trajectory for the second half of fiscal 2027 and FY28. I'm particularly pleased that the enhanced and energized leadership group evolved over the last few quarters is making an immediate impact on the performance and outlook for the business. Next slide, please. Let me start with our second quarter results. We achieved a record $115.7 million of revenue, representing 4.4% sequential growth. Services revenue was $95.2 million, an increase of 7% year-over-year, with an improved mix within total revenue to 82%. Adjusted EBITDA was $24.9 million, an increase of 16% from the first quarter, With adjusted EBITDA margin improving to 21.5% from 19.4% in Q1. There are three specific items I'd like to call out. First, we are delighted to have agreed terms for a proposed device financing facility with RMB to support the rollout of our South African National Treasury contract, which will enable us to deploy a hardware-as-a-service model with the ability to scale our rollout costs with demand. Importantly, we expect this to improve working capital efficiency, support operating cash flow, and strengthen our ability to convert growth into free cash flow. Second, I am particularly pleased with the recovery of our manufacturing operations following the specific component challenge on one high running item late in Q1. In Q2, we delivered a 25% sequential growth in product revenue. This was a key execution priority coming into the quarter, and we delivered against our plan, with the remaining portion of the recovery expected to be realized in Q3. And third, our second-half plan remains firmly on track, with strong growth in new logo and existing customer demand for the remainder of FY27 and exciting opportunities to compound growth in FY28. Next slide, please. Our South African government contracts have naturally been a key focus within our recent communications. However, we want to spend time today highlighting growth we are seeing across the business. We're seeing significant traction in three high-quality growth engines, our on-site business, AI video, and IoT and connected services. Deliberately, these now account for 75% of our future pipeline. On-site brings AI-powered safety, compliance, and productivity into warehouses, facilities, and other complex on-site environments. The breadth of those applications create a differentiated proposition with major enterprises. AI video turns real-world video into actionable intelligence, helping customers run safer, smarter, and more efficient operations. This is an area where we're seeing stronger bookings, channel demand, and enterprise expansion. IoT and connected services builds on our differentiated value propositions to deliver operational intelligence, greater efficiency, and expanded recurring revenue opportunities. This is where we are choosing to concentrate resources and investment, differentiated solutions with proven customer value, and scalable long-term opportunity. Jeff and Jonathan are going to give you more details after Paul's financial review. Next slide, please. Our South African National Treasury Programme continues to progress ahead of schedule. In August, we reported that we'd reached mandates for 72,000 vehicle implementations, and as our first quarter update, we outlined a target for reaching 80,000 to 90,000 signed mandates by the end of Q4. Today, we've already achieved that target, with mandated installations now standing at more than 94,000, well ahead of schedule. As part of this... 40,000 units are now in aggressive deployment with the South African Police. The magnitude, velocity, and high-profile nature of this program is exactly the reason we took the actions to deprioritize less valuable business in the region. This progress demonstrates powerfully the ability to execute complex, large-scale programs and deliver ahead of our commitments, and reinforces our confidence in achieving our four-year objectives and medium-term outlook. Our focus remains on disciplined execution and activating the contracted services, ensuring that deployment translates into strong recurring revenues over future periods. I'll now hand over to Paul Lalgee, who will take us through the results, our affirmed four-year outlook, and his perspectives on the growth opportunity for the business. Paul, over to you.

Thank you, Steve, and good morning, everyone. I'm pleased to be with you today. This quarter is a good example of the business doing what we told you it would do. Last quarter, we were up front with you about a production challenge with one of our product lines. Within the quarter, we resolved the incompatibility issue with the new component, shipped a substantial majority of the deferred orders, and you can see the recovery clearly in our sequential numbers. Next slide, please. Total revenue for the second quarter was a record $115.7 million, up 4% sequentially and year over year. Services revenue grew 7% to $95.2 million, approximately 82% of total revenue. Product revenue was $20.5 million, up 25% from the first quarter. Adjusted EBITDA was $24.9 million, up 16% sequentially. And margin improved 210 basis points to 22%. Net loss was $6.9 million, or a loss of $0.05 per share, an improvement from a loss of $0.06 per share last quarter. In a nutshell, durable revenue growth, EBITDA compounding quarter-on-quarter, and the new financing being finalized to support our largest growth opportunities. Today, I'll cover revenue and the underlying growth of the business, then margin and profitability, some context in the third quarter, our funding and balance sheet, and close with our full-year outlook. Let me start with the recurring revenue engine of the business. Services revenue was $95.2 million, up 7% year-over-year, and recurring services revenue was $91.3 million, up 7%, driven by our Unity platform. Which include on-site, AI video, and IoT and connected services solutions. For the first half of the fiscal year, services revenue made up 84% of total revenue, up from 81% a year ago. Quarter after quarter, more of our revenue is recurring and high quality. Product revenue was $20.5 million, a strong rebound of 25% from the first quarter. As we said last quarter, the shortfall was about timing, not demand. Orders were in hand, they just couldn't ship. Once we resolved the compatibility issue with the new component, product revenue came right back. Year over year, product revenue was down 8% as a result of the ramping timeline of manufacturing. If we had a full quarter of manufacturing, we believe we would have been slightly up on last year. In my initial review of the business, I've been energized by getting under the hood of the growth profile of the company. Our reported revenue was up 7% and services grew 10% on a trailing 12-month basis. These numbers blend two different trajectories, areas we are investing in and areas we have retired. On depending this positive dynamic are three strategic areas. that are delivering particularly strong velocity. These areas are where we are concentrating the majority of our investment, and Jeff will take you through their performance and the opportunities ahead. Total gross margin was 53% compared with 56% a year ago. I want to be clear about what's driving that. Services' gross margin was 59%, down from 62%, primarily due to higher amortization of capitalized software and acquired intangibles. Those are non-cash charges that reflect investments we've already made, not pricing pressure. They're excluded from adjusted EBITDA, which is why adjusted EBITDA grew even as reported gross margins came down. Product gross margin is where we can see the recovery, 28%, up 7 percentage points from 21.3% in the first quarter, as deferred orders shipped. Operating expenses were $60.5 million, down from $60.9 million in the first quarter, excluding acquisition, integration, restructuring, and litigation costs. SG&A was 44% of revenue, a 240 basis points improvement from a year ago. And we did that while increasing sales and marketing spend by $3 million. We're funding growth and still generating operating leverage, and we're not finished on costs. The quarter also included $3.6 million of restructuring and one-time costs as we continue to optimize the organization. Profit from operations was $1.4 million, more than five times the first quarter. Interest expense was $6.2 million, down 11% year-over-year. Adjusted EBITDA was $24.9 million, up $3.4 million, or 16% from the first quarter, at a margin of 22%. We believe the path to a 27% margin in the fourth quarter is clear. It's built on three things, continued activation of South African mandates and improving revenue mix towards services and continued cost discipline. Now for a little context on Q3. First, product mix. Our manufacturing ramp continues, and we expect strong product revenue in the third quarter. Product carries a lower margin than services, so we expect Q3 margins to reflect that mix temporarily. The good news is that we expect the hardware we ship in Q3 to begin generating recurring services revenue as it is activated in Q4 and beyond. Second, foreign exchange. A meaningful portion of our recurring revenue is earned in international markets. If currency volatility continues, you may see some translation impact on reported U.S. dollar revenue. Even with no change to our underlying contracts and pricing. After quarter-end, we have agreed terms for a device financing facility with Rand Merchant Bank for up to 560 million Rand, or approximately $34 million, to primarily support the rollout of our South African national treasury contract. You've heard us talk about hardware as a service. We expect this facility to support that model at scale. For example, our customer pays us monthly for the device and the services together over the life of the contract. Normally, that means we pay for the hardware and the installation up front and recover the costs over several years. Under the proposed facility, the device costs will be funded up front and repaid from the contracted customer payments over time. We keep the customer relationship and continue to manage the services and the billing. In practical terms, we expect the cost of each device to be funded as it's deployed, so that rollout costs scale with demand rather than with our balance sheet. We expect this facility to allow us to scale the treasury rollout as quickly as demand allows. For the first six months of fiscal 2027, net cash provided by operating activities was $4.8 million, compared to $10.2 million in the prior period. Cash used in investing activities totaled $21.8 million, primarily reflecting capital expenditures of $12.6 million, driven largely by the upfront investment in devices to support the deployment ramp. of the South African National Treasury contract and capitalized software cost of $9.6 million. Cash provided by financing activities was $4.5 million. The device investment is expected to be largely funded on a go-forward basis through the new RMB facility. We ended the quarter with $26.8 million of cash and cash equivalents, plus $3 million of restricted cash. And $19.1 million of available borrowing capacity under our revolving credit facilities. Net leverage ratio was 2.65. Looking ahead, the device financing facility and growing adjusted EBITDA should improve our free cash flow materially in the second half of the year. Next slide, please. We are affirming our fiscal 2027 guidance of $468 to $473 million of revenue and $111 to $114 million of adjusted EBITDA. We expect to exit the fourth quarter at an annualized revenue run rate of $495 million at a 27% adjusted EBITDA margin. Our guidance assumes South Africa mandates continue on or ahead of their current trajectory. The de-emphasized operations continue to wind down, and product revenue is strong in Q3, with services mix increasing in Q4 as activations flow through. We expect fiscal year capital expenditures of approximately $52 million, cash interest of approximately $27 million. And cash taxes of approximately $10 million. Let me close with a few thoughts. This quarter demonstrated our ability to execute against our commitments. We delivered record revenue, resolved the product challenges we discussed last quarter, and grew adjusted EBITDA by 16% sequentially. But what gives me even greater confidence is the underlying trajectory of the business. The areas we're investing in are delivering double-digit growth. Our recurring revenue base continues to expand, and we're seeing the benefits of greater operating discipline and leverage. As we enter the second half, our priorities are clear. Accelerate growth in our strategic markets, convert that growth into stronger profitability and cash flow, and continue strengthening our financial position. We remain confident in our full-year outlook and our ability to exit the year with $495 million of annualized revenue run rate and a 27% adjusted EBITDA margin. We are executing against our commitments, investing where the opportunities are greatest, building a stronger and more profitable business. With that... Let me turn the call over to Jeff Lautenbach, our Chief Revenue Officer, to take you through our growth amplification story, the stuff that excites us. Jeff?

Thank you, Paul. And now I want to take you through three shining lights in our greatest areas of go-to-market investment. I'll walk you through the customer activity behind those engines, the bookings and pipeline we're building, the global enterprises we're winning, and how innovation is expanding the opportunity. I'll begin with on-site. Next slide, please. On-site is a particularly differentiated part of our portfolio. It addresses the environments where goods are manufactured, handled, and moved, and where safety, compliance, and productivity are critical. Trailing 12-month industrial revenue grew 23 percent, services grew 29 percent, and one-off services grew 42 percent. The first driver is large enterprise adoption. Across the last 12 months, 73 Fortune 500 and Global 500 companies adopted our on-site solutions at 263 sites. The second driver is AI video safety. AI safety accounts for 30% of sales and average tickets are 10 times larger than conventional orders. Fortune 500 accounts contributed 91% of industrial AI video revenue. Third, our platform is extending into 10 additional asset types and environments, including cranes, ports, mining, airports, and transit depots. That broadens both the customers and applications we can serve. This combination of enterprise adoption, high-value safety solutions, and market expansions gives on-site a strong opportunity to compound growth. Next slide, please. Three customer relationships show the high level of growth and revenue opportunity we have with our on-site business and major multinational accounts. At a leading global manufacturer, we generated more than $12.5 million in total contract value in the last 12 months from 84 orders across 36 sites in the U.S., U.K., and Mexico. Our solutions support site safety, inspection automation, and operator access. At a global beverage company, we secured more than $11 million in total contract value with 16 orders and expansion to eight new sites in the past year. The platform is helping digitize safety, compliance, access, and maintenance. And at a global automaker, $2 million in orders covered 142 orders across 33 plants in five countries, extending across assembly, engine, transmission, and battery operations. In each case, the customer is not simply purchasing a point solution for one facility. It is standardizing operational process across multiple locations, creating a foundation for repeat deployments. Now to our second growth engine, AI Video. Next slide, please. AI Video is seeing encouraging commercial momentum across bookings, pipeline, and subscribers. Over the trailing 12 months, Bookings AR grew 32%, Pipeline Build grew 36%, and our North America video subscriber base expanded by 30%. The three lower panels explain what is driving that progress. First, channel and enterprise-led AI video growth. We achieved 35% year-over-year growth in the first half of FY 2027, with momentum across verticals, including public sector fleets. Second, multi-product expansion. 50% of our total year-over-year growth came from existing customers adopting additional capabilities from 360-degree cameras at AI Safeguard and Integrated Full-Stack Camera Solutions. Third, enterprise scale. In the trailing 12 months, we secured 209 deals from Fortune and Global 500 customers. Their average orders were 3.6 times larger than those from the rest of our customer base. Together, these signals point to an increasingly repeatable model. Win customers, expand the use of the platform, and earn larger, higher-value enterprise orders. Next slide, please. Here are three practical examples of that enterprise model of work, following the slide from left to right. First, a global top 50 integrated energy company, AI Video has become a group standard with $1 million in total contract value, 73 orders, and 20 locations. Orders accelerated after the first deployment. Second, a Global 500 food and support services group. We have expanded an existing customer relationship through our premium safety stack, including fatigue alerts and driver work diaries, representing $1 million in total contract value and national coverage. Third, a Fortune 500 vehicle rental company. We have secured $1 million in total contract value as AI video and fatigue alerts are deployed across multiple branches, supported by a flexible supply and install model. What these examples have in common is scalability. We demonstrate value in one part of an enterprise, then expand across sites, fleets, and applications. Next slide. Our channel momentum is improving across several key markets, and this slide shows the breadth of that improvement. Starting on the top left, The high-quality Vision AI pipeline increased 92% year-over-year. Alongside that, our sellers generated 3,918 opportunities in Q2 FY 2027, the highest quarterly level in the last eight quarters. In one of our key North America channels, three key areas delivered 24% quarter-on-quarter growth in one ARR. In a key Canadian channel, Pipeline ARR rose 25% order-on-quarter, while one deals increased 19%. Another of our key North America channels is rolling out its data-driven image solution, and we expect customer on-site deployments by the end of Q4 FY2027. And in Australia, Pipeline value doubled year-over-year with increased focus on enterprise-sized opportunities. The message is not simply more leads. We believe our commercial engines are producing higher quality opportunities across different partners and geographies, and the pipeline is increasingly supporting future recurring revenue. Let's move to IoT and connected services, our third growth engine. Next slide, please. Our IoT and connected services business continues to expand from its established connected vehicle base. Over the trailing 12 months, revenue grew 23 percent, recurring revenue grew 24 percent, and one-off services grew 49 percent, as highlighted at the top of this slide. The lower section shows five areas of practical growth opportunity. Fleet diagnostics and predictive maintenance helps operators spot faults earlier and reduce downtime. Invisible digital protection adds built-in theft prevention, and the connected digital topograph responds to regulatory needs through connected compliance data. The core strategic point is that we are extending the value of an existing connected asset platform rather than starting from scratch and building a growing portfolio of recurring and higher value applications. That brings us to today's exciting new product announcements, which Jonathan Bates, our Chief Marketing Officer, will take you through. Jonathan?

Thank you, Jeff. The growth indicators you've just seen show that our current solutions are gaining traction. We're now extending what Unity can deliver with two new innovations that help customers act on operational data and connect many more types of assets. The first is Unity Foresight. Next slide, please. Unity Foresight is an AI-powered operational intelligence offering that takes our proposition to the next level of AI insights. It brings data together across connected operations to show customers what is happening, what is likely to happen next, and what action they should take. As the slide illustrates, that starts with insights. Operational visibility, hotspots, and risk signals across assets and locations. It advances to predictions, anticipating collisions, congestion, equipment failures, and other emerging risks. And it leads to prescriptions, recommending interventions, training priorities, and operational adjustments that teams can act on. We consider the commercial opportunity to be significant. By bringing these AI-driven capabilities to existing on-site and on-road relationships, we can expand the value delivered per asset, attract new customer groups, and create incremental recurring revenue over time, as well as approaching a whole new prospect base. We believe this is how our established platform becomes a source of even higher value intelligence. Moving now to our second product announcement. Which significantly broadens the range of assets we conserve and deepens our competitive mode. Next slide, please. Unity's assets intelligence category extends our reach beyond vehicles to a considerably wider range of assets within a customer and prospect operations. Think here about pallets, containers moving through distribution centers, trailers, generators, and equipment in yards, people and mobile industrial assets across sites, and port and terminal equipment, all types of both powered and non-powered assets. These are central to customer daily operations, yet many sit outside the traditional systems that track vehicle movements and operational performance. Our new solution brings these assets into one connected view in Unity, combining asset identification, location, and utilization data with operational information and risk. This helps customers understand not only where vehicles are, but also which assets, equipment, and other resources are available in use, missing, or at risk. We believe the scale of this opportunity is compelling. We estimate a total potential market of more than 100 million additional assets and over $30 billion in additional addressable opportunity globally. It also opens the door to more asset-based subscriptions. And broader relationships with customers already using our platform, as well as new customers, extending differentiated propositions like our on-site portfolios significantly. We see a pathway to growth, both through more connected assets and through intelligence that makes those connections more useful. Taken together, both these innovations are an exciting step forward for PowerFleet and for our customers. Moving to our final slide, please. So, in closing, our growth engines are showing tangible commercial momentum across on-site, AI video, and IoT and connected services. Large enterprises are adopting our capabilities across more sites and applications, and our two new Unity offerings create opportunities to connect more assets, deliver more predictive intelligence, and further broaden our recurring revenue. Those themes are consistent with the growth strategy outlined today and with the full-year outlook affirmed by the company. With that, I'll hand back to Steve, Paul, and the operator as we open the call for questions. Thank you. Operator?

Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. And once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Scott Searle from Roth Capital. Your line is live.

Hey, good morning. Thanks for taking the questions. Nice to see momentum building into the second half of fiscal 27. Hey, Steve, maybe to start, a lot going on here, but now as you start to free up some resources from the South African Treasury deployments, I was wondering if you'd give us a quick update in terms of the relationships with Tier 1 M&Os, how that channel is doing, and in particular with the announcement today of Unity Asset Intelligence. I'm wondering if you could expand a little bit more about it. It starts to make you look more SEMSAR-like in certain respects in different verticals. But also, we'd love to know kind of how you're thinking about it in terms of attach rates, and as we think about fiscal 28, how big of an opportunity that could be, and then I had a quick financial follow-up.

Good. Thanks, Scott. In terms of the MB&Os, then, that's all within Jeff's slides. So I think he talked about, you know, a US channel and a Canadian channel and a new Canadian channel, which he's launching. So I think you can see there the traction that we're starting to get and the momentum that we're starting to get. Across the North American market, we have to pick our battles. So, you know, there's a lot of capital out there. I think we've been very smart in terms of where we're spending our time, where we're investing, and how we go to market. So the channels, particularly in the over-the-road space, remain extremely strategic for us, as does our on-site capabilities. And then coming to your second point, and I'll ask Jonathan to give you a bit more detail. In terms of the asset intelligence platform. But if you look at where we can expand, if you look at the wallet share opportunity, if you look at the fact that we're being trusted now by many Fortune 500 customers, you know, we're in a place where I think, you know, people are saying, bring us more, do more for us, connect our data together. And that's where the asset intelligence platform, that's where the Unity foresight proposition from an AI perspective, all build that mission criticality. So we see it as potentially extensive, both from a new logo acquisition. A volume perspective in terms of recurring revenue and really expanding those major relationships that we have. And I think, you know, we're finding our sweet spot, we're finding our rhythm. And, you know, we've talked an awful lot about the South African contract, quite rightly, but we very much wanted to demonstrate, you know, the energy and excitement that we've got for those propositions that we have, the uniqueness of those propositions and the channels that go alongside it. So, you know, we haven't quantified numbers, you know, in terms of what we think that will deliver upside into 2028. But we see 2028 as a real acceleration of growth for us. And maybe with that, Jonathan, maybe just give a broader kind of sense in terms of some of the capabilities within the asset intelligence platform.

Sure. Thank you. Thank you, Stephen. Hi, Scott. So I think some of the interesting pieces when it comes to asset intelligence are not only the on-road space, which we can address with this asset tagging proposition, but also a more comprehensive asset intelligence capability. We can also extend that into the on-site piece. So I think that's part of the really exciting opportunity for us and highly differentiated is As we've been able to accelerate our on-site momentum, now bringing in asset intelligence as well allows us to extend what we already do in the warehouse and the distribution space. And just to give you a kind of idea on the... On the size of assets that that could mean, we think that on a conservative level, perhaps for every one forklift truck in a warehouse, there could be as many as 50 to 100 other types of powered and non-powered assets. And so with this proposition, we're able to identify those assets, look at the location and movement of where those assets are and where they're going and where they should be. But then the asset intelligence piece, which goes beyond the tagging, is also looking at things like the condition and utilisation of the assets. Understanding what operating conditions they're going in, and then also being able to connect the assets with the vehicles, the operators, the zones and jobs and things like cargo movements, and then, as Steve said, overlaying things like the AI foresight capabilities on top, which start to do more analytics and then predictive capabilities. So I think you can see how it goes very quickly from an asset tagging proposition, which some of our competitors have launched into the market, into asset intelligence and extending both on-road and in the warehouse space as well. So I think that's the exciting differentiated part of the opportunity for us.

Great. Thank you. Very helpful. And if I could, for Paul, you know, looking at the guidance for fiscal 27, the exit rate, you're starting to get overannualized EBITDA north of $130 million, and it looks like, you know, SaaS or recurring services growth, you know, getting to that double-digit number again with a lot of reacceleration going into fiscal 28. So is there any reason to believe that your recurring revenues are not growing double digits in fiscal 28? And given some of the new product cycles, is there any reason to believe that there is a step function up in terms of OPEX investment to support that, or should we continue to see more operating leverage as we're going into fiscal 28? Thanks.

Thank you, Scott. Let me start with the operating leverage. I think as you get into 2028, you'll continue to see operating leverage in the business. You've seen the restructuring line. That is a good indication of costs that are coming out of the business. We will continue to do that to optimize the business. We've talked in the past about simplification. There is a significant element of simplification in the business, particularly around the back office, that will allow us to continue to see that improvement as we go forward, particularly in areas like G&A. And to the first part of your question, as we exit the year and into 2028, we expect to continue to see improvement or year-over-year growth in the double-digit area, particularly for... The recurring services that we're investing in. I think Jeff did a fantastic job of pointing out those areas that we're seeing tremendous velocity in the business, and we will expect to see those things continue into 2028. If we look at the run rate, the $4.95 that we set as a target on the last call and affirmed on this one, that represents the tradeoff. Try to draw a comparison to show how better off we will be with the tradeoff that we're making as we enter 2028. You know, when we provide guidance for 2028, we will provide context around where those numbers should be, but we expect that to be our baseline. Once we have the 27 million of ARR from the South African contract come in, then you can see where that baseline is. And then we can then see what the impact would be for things like recurring services as we get into 2028. So it's a little premature to have that conclusive view on what recurring revenue growth will be in 2028. But we expect it to continue to do well as we get into 2028.

Hey, great. Thanks so much. You know, I see the momentum building into the back half. I'll get back in the queue.

Appreciate it, Scott. Thank you. Your next question is coming from Tony Stoss from Craig Hallam. Your line is live.

Good afternoon, or excuse me, good morning, guys. Nice, nice progress. Steve and crew, could you care to comment on how you expect to charge for the new software products, the Foresight and the Asset Intelligence? And then, Steve, maybe give us a sense of if you think your carrier partnerships are now up to speed on all the products, or is there still a further learning curve to help them in the sales process?

Yeah. So, the majority of the revenues from the new launches will be recurring. So, you know, there's a small fee for the asset tagging piece, but the majority of it is recurring. And the AI intelligence is very much, the foresight is very much based on recurring software revenues. So this will bring nice momentum. If you think about the layers, RT46 building in, the ability for us to charge monthly fees and amortize the hardware in a different way. You look at where Jeff's coming from, you look at those, you know, 75% of our pipeline and the recurring revenue growth within there, then adding these new solutions. I think we're, you know, we feel good about the momentum for the recurring line. In terms of the channels, I still think there's, you know, I mean, the progress is very solid. You've seen that, you know, in numbers today, and you've heard it from Jeff in terms of, you know, his excitement for the future. There's still more we can do. So I think, you know, as we launch new solutions, as people get more accustomed to selling, as we kind of bed in more in terms of the pre-sales and the solution consulting opportunity, there's much more expansion we can do. But, you know, we're starting to get our stride now. And I think it just, you know, takes a little bit of time to get these things going. So I think good progress, but definitely more to come.

Got it. I think I just follow up with Paul. Expectations around December gross margins and OPEX and maybe kind of on a go-forward basis. I know you made a cursory call on gross margins kind of being similar maybe, but just any help on OPEX or gross margins, not just December, but on forward would be helpful. Thanks.

Tony, on the gross margin piece, I think it's important to point out that if we look at the... The things that are impacting gross margin, it is not customer contracts. It is not pricing. It is really the non-cash items, which is the amortization of capitalized software from prior periods, and then the amortization of acquired intangibles as we go forward. Those two things, we expect them to continue at the levels as we move forward. That's point number one. Point number two, we expect product to be A more important contributor to our growth in the second half of the year, particularly the third quarter. So we do expect the margins to remain the same as we get through this year. And then as we get into next year, we can expect some improvement. But as we go through the next six months, we should expect it to be the same. And then we can update you as we get into next year. On the operating expense side of the equation, I pointed out earlier that we do expect more operating leverage as we get to the second half of this year and into next year, and particularly around the simplification of the business, particularly around G&A. I think, um... Sales and marketing as a percentage of our revenue is still relatively low compared to the industry. But if we can continue to improve the back office, the use of automation, the use of AI, the use of those types of things, particularly in areas such as finance, then I think we can continue to see that improvement as we get into next year.

Great. Thank you.

Thank you. Your next question is coming from Gary Prestopino from Barrington Research. Your line is live.

Hey, good morning, all. Again, great to see progress here. Hey, Steve, I want to refer to the slide that you say here, ahead of schedule on the South African contract. Miners, as I read this, these are mandates, but could you give us some idea of where you stand in terms of implementations? I seem to recall that there was You needed to get to a certain level of implementations by, I think, the end of the fiscal year to possibly kick in more endpoint sales going into the following fiscal year. So could you give us an update on that?

Yeah, sure. So let me just make sure I cover it comprehensively. So on the last call, I think we were 72,500 mandates that we'd received the orders for. And mandate means order. Mandate means go implement, you know, as we can. And within that, there was 40,000. We talked about a specific agency. We're able to name that agency today as the South Africa Police. So when we talk about the timelines on these things, you know, you can understand, you know, we've got to work very feverishly and at the behest of the customer in terms of, you know, how and when we can complete these installations. And that has now kicked off aggressively. Their timeline is aggressive in terms of wanting to bring the new solutions in. In terms of pure installations today, as I look at my screen, it's 18,250 have been completed, which is where we would want it to be in terms of the numbers that we've projected through this financial year. And it's important that we keep that rate. We then said, in terms of orders, we hope to be at 80,000 to 90,000 by the end of Q4. So that was our revised target after, obviously, we had this, you know, major influx of orders ahead of schedule, you know, through last quarter. As of today, we're at orders mandates of now more than 94,000, you know, right now, which is obviously well ahead of the end of Q4 schedule. So we will continue to play our way, and I'm delighted with the progress. And the efficiency that we're now getting to, you know, scaling those operations, putting those resources in, you know, we're getting better productivity every week. And, you know, we just have to remain a little cautious around, you know, these government agencies and when they can make vehicles available. But we're super, super happy with the progress, super happy with the commitments and super happy in terms of, you know, our ability to achieve the numbers that we've put forward.

Okay, thank you. That's helpful. And then with this new financing agreement that you've got, Let me understand this, is that you guys, you will still be selling the device and booking, you know, your normal gross profit on those sales, and then you sell that to RMB, and then you just act as a conduit for the payments from the South African government to RMB for this product. I just kind of get an idea of what is the implications on your income statement. for this new financing agreement that you've got starting to put in place.

Yeah, so Barry, I think at its highest level from an architecture perspective, we will still be selling a bundled service to the customer. We will still be recognizing revenue as such. Third, I would say the ownership of that customer relationship, the billing, the collecting. Even the ownership of the hardware still resides with us and will be recorded on our books as such. The difference is we will have the RMB upfront financing or funding for that particular hardware component of that sale, and it will be mainly a balance sheet transaction, if you will. So, the impact. On a cash flow statement is, you will probably see the contributor of cash at the end of the day coming from investing activities versus operating activities. And that will be something that we will discuss and reflect as we go forward. The ideal way to do this is to have it reflect in operating, but I think, you know, we have to follow the guidance and do that in accordance with GAP.

Okay, thank you. Thank you. Your next question is coming from Dylan Becker from William Blair. Your line is live.

Hey, gentlemen, really nice job here. I wanted to go back. I know you called out product strength in 3Q, but Paul, maybe if you can remind us how that gives conviction product leading kind of the recurring services component of the business as we talk about acceleration. And maybe Steve, too, within that, I think you called out of the three pillars anywhere from 25 to 30% kind of bookings momentum exiting the year at 10%. Not putting a number on it, but how that kind of gives conviction in that reacceleration trajectory for 2028. Thank you.

Yeah. So two things, I think, in terms of products. So firstly, we had the challenge in Q1. We fixed it. We were in the process of moving back to manufacturing, I think, as we spoke on the last call, and we were able to get a large part of the backlog. introduced into revenue in the quarter with the remaining being recognized this quarter on. We're also seeing a lot of strength in that on-site business. I think Jeff called out two or three major customers who are putting significant product-based orders into the business, all of which would come with recurring services, and Jeff talked also as well in terms of the number of sites that we're expanding to from a revenue perspective. So that all leads into, you know, that product strength brings recurring. But obviously, you know, we take the hardware in that element of the business as a product sale, and then we get the recurring over time. But if you look at the three major areas, including that warehouse, I think we're getting recurring revenue, revenue increase year over year of nearly 30%. And then we're launching the foresight capability, we're launching the asset intelligence ability. And if you look across there from, you know, then into AI video over the road, and then you look into the IO2 solutions, they are all based on recurring revenue. So it's kind of, you know, there's a little bit of positive lumpiness coming, you know, off the back of the fact that we're pivoting, you know, to that on-site space, you know, we talked earlier about where do we pick our battles? Where do we find our sweet spots? Where do we have our differentiation? And where is the strong customer demand that powerfully, you know, in relation to its competition, has a right to win, a right to play and a strong set of win rates. So we've pointed those out today in those areas, which we feel very confident about, which then gets us, you know, well into double digit growth rate. And, you know, Paul also talked at the start in terms of the trajectory of the business. So if you look at the majority of our base where this pipeline is, and the pipeline has turned into realities and orders, there's a few stragglers of things that we've retired, things we've talked about previously, which kind of dampen those growth rates. So as that inflection changes, then we get the acceleration in growth rate. As our T46, you know, this big complex. When implementation comes to bear, we'll get an acceleration in recurring revenue growth. So put all those things together, that's where we feel pretty confident or very confident in terms of going into, you know, FY28 and beyond and really kind of accelerating that recurring revenue growth.

Got it. Okay, very helpful. Thanks, Steve. And then I thought it was pretty interesting, too, on the enterprise momentum, but kind of Fortune 500, Global 500. Now, to your point, you have more products to sell. You're adding and connecting more assets. You're adding and connecting more sites. But how you're thinking of, and I think these are landing larger in one of the slides as well, too, but how you're thinking about that enterprise momentum contributing, given that they have a higher propensity to kind of buy more modules and you're solving for greater complexity effectively in that regard.

Well, first of all, I want to give Jeff great kudos in terms of really maneuvering us towards that enterprise space. So, Jeff, why don't you take that? You're living that every day and doing a phenomenal job.

Yeah, thanks, Steve. What we're seeing is we're landing with six-figure deals and we're expanding with seven and sometimes eight-figure deals. And that's worked out really, really well for us. You can see the amount of sites that we're expanding to, and you can see that the value props, and you made a great point, it's several products right now. So, you know, with the launch of Unity Foresight, that's another solution which is going to provide immense value and add to that recurring line in the industrial on-site space. And we're starting to see this kind of expansion into verticals, too, which is really important. You see the diversity of verticals, both in the on-site and in a different set, really, in the video on-road. So I'm really encouraged, and I do think we've got great enterprise momentum, and I appreciate you pointing that out. The strategy is working. We're adding to it, and I think, you know, the way we're going after it with kind of a combination of really good product, expertise, and scale, right? So a lot of these are global customers as well, so we're starting to see more global implementations as the slides point out. And we're one of the few companies that can really go end-to-end with the customers across their global landscape, and that's meaningful, and that's what's helping us win.

Great. Thank you.

Thank you. And once again, everyone, if you have any questions or comments, please press star, then one on your phone. Your next question is coming from Alexander Sklar from Raymond James. Your line is live.

Great. Thank you. Maybe for Steve or Jeff, just on the partner channel, can you elaborate on what drove some of the positive unlock in second quarter as it relates to that seller activity reference? What parts of the market are you seeing higher activity? And then maybe how are you seeing close rates and sales cycles evolve for those indirect channels in terms of driving a larger mix of bookings? Thanks.

Jeff, do you want to say anything?

Yeah, sure. So, good question. So, yeah, look, I mean, you're seeing the two things kind of go hand in hand. We're improving and increasing the pipeline. That's very, very clear. We're improving the quality of the pipeline. One of the things we've really focused in on is quality pipe, and that's coming through in terms of both conversion and win rates. Those are also increasing as well right now. In my opinion, like I just stated, I think moving up market is really, really important. We've got great channel business, great channel velocity. I'm really excited to see that channel velocity also move to other sectors. You heard about public sector, for example, in that vision AI and in that channel space. That was a really important kind of lever for us as we think about new market, new market opportunity. Like I mentioned before, you see the vertical expansion, too. I think that's a really important indicator. We're maniacally focused. You saw auto, you saw food and beverage, you saw kind of manufacturing industrial. Those three verticals are critical and where we're seeing the most opportunity kind of on this global landscape as well. That's what's driving the growth. But it's kind of leading to us getting much more targeted, much more focused, and getting that concentration on these key verticals is really helping us with the win rates as we know exactly how to exploit them, what to go after, and what our winning differentiated value proposition is.

Okay, thanks for that color, Jeff. Maybe a follow-up for you, Paul. You spoke to the services revenue down the line telling that blended story, so you've got the core growth and it's offset by the de-emphasized ARR. How much of that $17 million of de-emphasized revenue is kind of in this run rate second quarter today versus still to come in the back half of the year? Thanks.

Well, a couple of things. I think... It is not as black and white, because as we think of the de-emphasized revenue, we want them to naturally come down. We don't want to force that reduction. So we will see what I would describe as a soft landing on that de-emphasized revenue as we go through the year here. So we should expect to see very similar numbers, at least for the next quarter. And then we start to see a reduction as we get into fiscal 2028. All right.

Thank you all for the time. Appreciate it, Alex.

Thank you. That concludes our Q&A session. I'll now hand the conference back to Steve Toe for closing remarks. Please go ahead.

Thank you. Everyone, this concludes today's event.

You may disconnect at this time and have a wonderful day. Thank you for your participation.