Earnings Call Transcript - AIOT Q2 2022

Operator, Operator

Good morning. Welcome to PowerFleet's Second Quarter 2022 Conference Call. Joining us for today's presentation is the company's CEO, Steve Towe; and Global Controller, Joaquin Fong. Following the 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 2022 and beyond. All such forward-looking statements imply the presence of risks, uncertainties, and contingencies, many of which are beyond the company's control. The company's actual results, performance, or achievements may differ materially from those projected or assumed in any forward-looking statement. Factors that could cause actual results to differ materially could include, 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.

Steve Towe, CEO

Thank you, operator, and good morning, everyone. We appreciate you taking the time to join PowerFleet’s second quarter 2022 earnings call. I'd firstly like to say thank you to those of you that joined our virtual Investor Day in mid-June. Your positive energy and feedback were very encouraging to us. The leadership team and I appreciated the opportunity to share with you PowerFleet’s enhanced vision, our growth drivers, go-to-market strategy, software, NII roadmap, all of which we are executing on well, as you'll hear a lot about this morning. If you haven't had the chance to listen to our Investor Day, I encourage you to visit the Investor Relations section of our website to access the content. As you can see from our results, during the second quarter we built on the momentum we established in Q1 and delivered solid sequential and year-over-year growth. The latter of which is quite impressive given the year ago comparison includes significant one-off product revenue. Moreover, the $34.6 million in total revenue in this quarter marked a 10-quarter high for PowerFleet and the third successive quarter where we've overachieved external consensus estimates. The revenue mix is also encouraging as we embark on our journey for high quality recurring SaaS revenues at the heartbeat of our company. Importantly, we were able to achieve these milestones despite the ongoing macro headwinds and supply chain issues affecting our industry, many of our competitors, and companies globally. Our impressive top line performance in Q2 was driven by further commitment from notable customers like Ford, Volvo, Nestle, and NetPac. While the improvements in our bottom line reveal the early benefits of our rationalization initiatives that are enhancing our organization's efficiency and profitability. Taken together, we realized very positive improvements in both operating expenses and our key profitability measures in the second quarter, all of which exceeded external consensus estimates and expectations. Overall, the leadership team and I are very encouraged by the progress we're making, the execution we're delivering, and the results we're seeing. Before I dive into our operational highlights and outlook, I'll turn it over to our Principal Finance Officer, Joaquin Fong to cover our financial results for the second quarter of 2022. Joaquin.

Joaquin Fong, CFO

Thanks, Steve, and good morning to everyone on the call. Turning to our financial results for the second quarter ended June 30, 2022. Total revenue was a 10-quarter high of $34.6 million, which was up 4% from the first quarter of 2022. As Steve alluded to, we're really encouraged by the composition of revenue in the quarter, which is characterized by higher SaaS and high-quality recurring revenue compared to the prior quarter and Q2 of last year. Along that line, high margin recurring and services revenue was $19.8 million or 57% of total revenue. This was an improvement on the dollar basis compared to $18.1 million or 54% of total revenue in Q2 of last year. Product revenue, which drives future services revenue, was $14.8 million or 43% of total revenue. This compares to $15.5 million or 46% of total revenue in Q2 2021. Gross profit was $16.2 million or 47% of total revenue, compared to $16 million or 48% of total revenue in the same year ago period. Service gross profit was $12.7 million or 65% of the total service revenue, an improvement compared to $11.4 million or 63% of total service revenue in Q2 of last year. Product gross profit was $3.5 million or 23% of product revenue, compared to $4.6 million or 30% of total product revenue in the same year ago period. The sequential improvement in product gross margin in Q2 2022 reflects the initial success we're having managing PPV challenges as well as the reengineering of certain products to enhance our margins. We continue to navigate through the global supply chain and electronic components issues and deliver on our customer commitments supplying products and solutions that they rely on for their business operations. As we progress through the balance of 2022, we anticipate product gross profit to incrementally improve as we realize future benefits from our operational and product reengineering initiatives. Looking at our expenses, total operating expenses were $17.8 million down from $18.1 million in the prior quarter but up from $16.2 million in Q2 of last year. The sequential decrease reflects the initial impact of our ongoing rationalization efforts, which will be reducing our annual operating expenses by approximately $5 million over the next 12-month period. Looking at our profitability metrics, loss from operations improved by $2.2 million, or 58% to $1.6 million compared to a loss of $3.7 million in the first quarter of 2022. It's worth noting that a significant portion of our loss in the quarter was related to PPV and foreign currency impact. Based on our current visibility and success with our rationalization efforts, we expect to cross over to profitability on an operating basis in the first half of 2023. GAAP net loss attributable to common stockholders totaled $1.3 million, or $0.04 per basic and diluted share. This compares to GAAP net loss attributable to common stockholders of $2.6 million or $0.08 per basic and diluted share in Q2 of last year. Non-GAAP net income and non-GAAP metric totaled $2 million or $0.06 per basic and $0.05 per diluted share, compared to non-GAAP net income of $1.4 million or $0.04 per basic and $0.03 per diluted share in the same year ago period. Adjusted EBITDA gain, a non-GAAP metric stayed consistent at $2.8 million compared to adjusted EBITDA of $2.8 million in the same year ago period. At quarter end, we had $18 million in cash and cash equivalents and $38.5 million of working capital. That concludes my prepared remarks. Steve.

Steve Towe, CEO

Thank you, Joaquin. Today PowerFleet has more than 600,000 recurring subscribers, long standing customer relationships with some of the largest companies in the world, tremendous industry experience, and proven technology that we're actively deploying globally. We have a significant opportunity to gain further wallet share with our 8,000 enterprise customers and to increase the role we play within these organizations. And not only do we have a tremendous upsell opportunity in front of us, but we also have the capabilities to operate in a fast-demand market that is growing at over 20% annually. With our customer base, along with the breadth of portfolio that we have across our geographies and the end markets we operate in, we are confident we can capture significant new logos, establish new recurring revenue streams, and grow our subscriber base substantially in the years ahead. Now that I've highlighted the broader opportunity, let me dive into the increasing opportunity we're seeing today in our key regions and the traction that we're realizing. In the U.S., a market PowerFleet has operated in for more than 20 years, we delivered a much improved 12% growth in the first half of the year, driven by building demand from our industrial customers. In addition to the robust double-digit growth, our industrial fleet segment recently surpassed 3,000 customers, which is not only a testament to our commitment to innovation but also a validation that the industry is seeking enterprise technology solutions to drive improved safety and productivity across business operations. This milestone also represents tens of thousands of workers that we're working with to keep safe and help mitigate risk in the workplace. Warehouses and manufacturing facilities are crucial links in the supply chain and becoming increasingly complex workplaces where machines and people are working alongside each other in a fast-paced environment. As you have heard during our Investor Day, our team has been focused on how data can help customers improve safety operations and lower risk in material handling facilities while balancing increased demand and workforce shortages. We're excited by the momentum and market acceptance of our latest products in the pedestrian safety arena, further driving our success as the best-in-class solution provider utilizing artificial intelligence and data science. As the industry changes in response to continued challenges, our technology plays a crucial role in modernizing our customer software in support of their digital transformations. We look forward to further accelerating the innovation of our software and data solutions and we remain fully on track to deliver our single pane of glass software interface and our new enterprise modular SaaS approach in Q4 of 2022. The growth we generated in the U.S. in the first half of 2022 is indicative of the untapped potential in the region. We're driving consistency and enhancing the profitability of our U.S. business and have been well positioned to be the leading growth vector for PowerFleet in the years ahead. From a market synergy perspective, there's a lot of capability today that exists with our customers and verticals in our global markets, which we haven't yet brought to the North American market with advanced solutions in car leasing, insurance, electric vehicles, and connected car. The team is actively working to bring these products and relationships to the U.S. and are highly energized by the productive conversations we're having with customers and partners alike. We allocated some of our cost savings through the rationalization efforts and have now put in place a dedicated sales team to attack the U.S. market with the point of base solutions. We're seeing great early traction and expect to meaningfully penetrate the U.S. market with point of solutions in 2023. To that end, this initiative is part of a broader and reinvigorated renewals and upsell program that we launched last month across our global customer base. Our Israeli operation is an incredibly important piece of our go-forward strategy. With a 20-year history, tens of thousands of subscribers, and a 40% market share in the region, we're bringing to market new technology solutions that are not yet released anywhere else in the world. Our Israeli Innovation Center utilizes the creative and innovative part of the operational body we drive in all the key geographies. Despite the foreign currency hit we reported in Q2 due to the strengthening U.S. dollar, our Pointer Israel operation is performing exceptionally well. We've seen IoT solutions continue to gain momentum, particularly with IoT-enabled defibrillators and core training solutions for pharma products. Last week, we announced that we expanded our IoT technological services to MDA, Israel's only national blood and medical emergency service, for more than 800 IoT-enabled defibrillators countrywide throughout Israel. After a successful initial deployment in 2021, the solution will be applied at additional municipalities throughout Israel. MDA plans to install its IoT-enabled defibrillators with Pointer by PowerFleet Technology in more public and commercial spaces such as parks and high-rise buildings to save more lives. This additional order signifies the value and results MDA has received since implementing our technology, not only to ensure life-saving equipment is available in more locations but also to help organizations manage time-critical emergencies most effectively. We see significant opportunity to bring these solutions to all of our key geographies very soon. In addition to the leading-edge solutions we have already brought to market in the expanded IoT arena, we expect to announce some very exciting strategic innovation partnerships in Q3 for the next-generation IoT ecosystem. In other international markets, we're actively working to introduce the IoT solutions to Dubai and the United Arab Emirates, relatively untapped markets that have expressed a deep interest for our solutions. In parallel, we're seeing strong growth in Mexico and Argentina, and the team is focused on driving even more growth out of these regions. More broadly, we're finalizing strategic plans to establish a larger footprint in Europe in 2023. As you've heard, we're gaining momentum in our key regions and go-to-market strategy execution. In summary, PowerFleet's transformation is well underway. Our initiatives over the last six months are already yielding visible returns. The $5 million annualized cost reduction and efficiency program we articulated in detail at the Investor Day is being executed on time with high levels of precision. Our business is starting to optimize, and now we're beginning to hit our stride. Our plan is supported by a solid cash position and available resources that provide sufficient runway to execute our growth strategy. We entered the third quarter with a record pipeline of opportunities that we are converting at an escalating pace. We also entered Q3 in the second half of the year in a strong position supported by building customer engagement, a growing pipeline, as well as several strategic opportunities, which are moving forward nicely. We anticipate that the second half of 2022 will bring more momentum, building on the very solid first half of the year, and position us for higher growth inflection in 2023. As we look ahead, the team remains very focused and is executing well on driving our own transformation and accelerating our vision. The successful evolution of the strategic value-creating roadmap we introduced at our Investor Day 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.

Operator, Operator

Thank you. Our first questions come from Mike Walkley with Canaccord Genuity. Please proceed with your questions.

T. Michael Walkley, Analyst

Okay, thanks Steve, congrats on the solid Q2 results and the recovery in the hardware gross margins. Could you just delve into the hardware gross margin a little more with some favorable mix maybe improving supply input costs or other factors? I know you're working on the reengineering, but I assume that would be more later in the year?

Steve Towe, CEO

Yes, thanks Mike. Good question. And we've started to get some of the reengineering quicker than we expected, which was great. And then also, I think we've done a better job of choosing the business that we've taken from a profitability perspective. And we've been quite robust internally about ensuring that we get a fair price for the costs we are entertaining today. So the team is always looking out for the components of the best possible price. Even last week, we were quoted a 50x price on the component, so the madness continues. But I think overall, we set it as a key KPI to get that balance back going, and we're very pleased that we've moved from 16%, 17% up to 24%. So it's not one factor; quite a few that contribute to it.

T. Michael Walkley, Analyst

Great. And just speaking on that supply, does it impact any sales this quarter, and how is it looking maybe easing in the second half of the year?

Steve Towe, CEO

So I get asked this question: is it getting better anytime soon? And the answer is, we can't give a solid answer that it's going to get better. I think from our perspective, we haven't lost any revenue or taken any revenue that we wanted to take in the quarter. We considered some deals that we didn't feel were the right deals to pursue from a high-quality revenue perspective. And to all of that effort we discussed, again, that will continue. I think from our perspective, we look to improve again next quarter on the back of more reengineering coming into play. But I don't think we're particularly seeing market conditions calm down. And I think if you look at the industry and some of the notes that competitors have sent out, we seem to have fared very well in comparison to some of those challenges. So we'll keep on doing what we're doing, and hopefully, we can continue that trajectory back to historic levels, but I'm not going to say it's all going to get better within the next three to six months.

T. Michael Walkley, Analyst

Great, thanks. And then one last question from me, and I'll jump back in the queue. Just on the pace of the $5 million savings, can you kind of remind us how that's focused and where it hits the P&L spread in gross margin and OPEX or is it more just OPEX focused in terms of that $5 million savings? Thank you.

Steve Towe, CEO

It's a combination of both short-term and long-term gains. Some initial successes are related to freight and efficiency savings, while others involve system implementations within the business. This is why we mentioned a 12-month plan to reach the full operational run rate for the $5 million reduction. Savings are generated in product gross margin and service gross margin through our supplier management, as well as from the synergies created by merging Pointer and PowerFleet from an economies of scale perspective. Additionally, there are some operational expenditure savings, but as you have heard, we have reinvested some of those savings while also expanding our team for market outreach and hiring more data science software professionals.

T. Michael Walkley, Analyst

Great. Thanks for taking my question. And I look forward to some of those new products coming out in Q4.

Steve Towe, CEO

Yeah, it's exciting.

Operator, Operator

Thank you. Our next questions come from the line of Scott Searle with ROTH Capital. Please proceed with your questions.

Scott Searle, Analyst

Hey, good morning. Thanks for taking my questions. Steve, nice job. First full quarter out of the gate here, starting to see some of those improvements, particularly on the gross margin front. Maybe looking into the back half of this year, it sounds like there's far from perfect visibility, but I'm wondering if you could give us some idea in terms of how you're seeing sequential visibility to product ramping into the second half of this year from a sales perspective? And also what you would think the exit rate for the product gross margins would be this year and kind of what you're targeting for next year?

Steve Towe, CEO

So I think if you examine the last three sequential quarters, we've delivered solid growth. As we said, this is a 10-Q high, which is pivotal for us as a business that we're doing better than we've done before. We expect this momentum to continue. So I think Q3 was quite challenging in terms of revenue last year, but we're hopeful that the rhythm we are now in will carry through to the back half. We've brought in a new go-to-market team. We brought in Patrick, our CRO, and a lot of what’s happening in terms of lead generation. So the pipeline is getting stronger. We're no longer so reliant on one individual large deal or one customer that makes or breaks the quarter. That was another interesting dynamic within this quarter, plus on top of that, the service move. So the subscription revenue is coming through really strong. We expect it to continue. As I've stated, I believe 2023 is going to look like a banner year, but we expect this momentum to carry through the second half. In terms of product gross margin, I expect to be north of 25% this year and then anticipate that we’ll return to 30% plus margins in 2023 that we've experienced in the past.

Scott Searle, Analyst

If I could follow up, Steve, regarding the pipeline. I'm not sure if you can provide a specific number, but could you describe how strong it is in comparison to recent history? Also, on the operating expenses front, I noticed that R&D decreased significantly from the previous quarter. I understand there are some changes happening with resource allocation, but I'm interested in what you consider a more typical figure. Was there any software capitalization or anything unusual in the second quarter results?

Steve Towe, CEO

Yes. So in terms of the R&D question, I'll let Joaquin give you some detail, but we were able to capitalize some software on some new products that came to market. So we're very much where we want to be, while keeping OPEX flat, but revenue is obviously growing at a fast pace, which leads to expanded EBITDA. Joaquin, do you want to add anything on the development side?

Joaquin Fong, CFO

I think as we invest in product development, you'll see the capitalization of the software continue, but as we sort of develop the products, you’ll see that start to tail off in the future.

Steve Towe, CEO

So much for working within the envelope, but as you can see, we're moving things around to get the right people and the right cost into the future areas that we want to invest in.

Scott Searle, Analyst

And then just on the pipeline front, and if I could throw in there as well, in terms of the evolution to analytics and AI and the monetization on that front, any color you could provide on that? It sounds like we’ve got the new single pane of glass in Q4, but in terms of some of those opportunities, I don't know if you're willing to start to quantify that opportunity as we get out into late 2023? Thanks.

Steve Towe, CEO

I think it's too early to quantify that. I think once we discuss our 2023 plans, we'll be able to quantify a bit more. In terms of pipeline, we're over 15% higher in what I call, qualified pipeline from this time last year. In terms of the kind of monetization, we will be launching in Q1 our first new modular solution, and by that time, we would have already organized the solutions into the modular categorization. This means people will be able to purchase the solutions based on their business need that we talked about in the Investor Day with the first updated AI-led module being available in Q1 next year. As we start to ramp that up and begin to work through that upsell program and the renewal program that we've already initiated, I think another quarter out and we can provide some more concrete views on what went and how from a volume perspective.

Scott Searle, Analyst

Hey, great. Thanks so much. Nice job.

Steve Towe, CEO

Thank you.

Operator, Operator

Thank you. Our next questions come from Gary Prestopino with Barrington Research. Please go ahead with your questions.

Gary Prestopino, Analyst

Hey, good morning everyone. Steve, when you talk about trying to reengineer these products, could you maybe delve into that a little bit in terms of getting the gross margin up exactly? To the extent you can talk about it, what are you doing on the reengineering side?

Steve Towe, CEO

Yes. So in very simple terms, there are many components that have obviously been engineered into our hardware solutions over the years, and some of those are older than others. And where some of those have started to become end-of-life, and that end-of-life has been accelerated, the cost of those components in the build has gone up astronomically. So what we've looked to do is to take our volume solutions and understand where there are optimization efforts in terms of the functionality, in terms of those components where there are new more advanced components that are cheaper. The team is doing an exceptional job in driving that change, and we're about six months into that change. We've got another six months to go, but ultimately, what it will lead to is more cost-effective units from our perspective to put out in the market, which will obviously help the gross margin and potentially exceed where it was previously.

Gary Prestopino, Analyst

Okay. And then in terms of your subscriber base, could you give us some idea of the growth sequentially?

Steve Towe, CEO

Joaquin, do you have that available? It's around about 10%.

Joaquin Fong, CFO

Yes, it's about 10% from where we were sequentially.

Gary Prestopino, Analyst

Yes. Okay. And you're over 600,000 now, right?

Steve Towe, CEO

Correct.

Joaquin Fong, CFO

Yes.

Gary Prestopino, Analyst

Okay. And then just a couple more questions here. I'm now realizing it's early in the game here, but with the new sales team and the new philosophy and all that, but of the 3% total revenue growth that you had in the quarter or really from products, I suppose that would be where you would do some upsells and cross-sells. Could you give us some idea of how that's going or is it too early to say right now?

Steve Towe, CEO

No, I think in terms of the new solutions, I mean the good news about the growth in the first half, it hasn't come from introducing new solutions to new geographies. And that's where we're very excited about that growth opportunity, particularly in the U.S. So the 12% half-on-half growth was largely in the industrial segment of the market, the traditional segments where we've launched the pedestrian warning system. I think we're getting a better level of sales execution across the board, basically in industrial and logistics. We're also seeing strong growth in subscription revenues in our other territories. In the U.S., we have the hardware plus services model; everything else is service based. The fleet management solutions that were on the Pointer side of the house have been growing very nicely, and that is all subscription based. This doesn't give you the volume, but it provides quality in terms of high margin recurring revenue. So as we evaluate the U.S. market and the demands of that subscription versus the hardware model, we'll continue to evolve that over time. We're really putting our foot on the gas for the second half regarding conversations we have with logistics customers or industrial customers in the U.S., all of which have connected car opportunities, light commercial vehicles opportunities. Many fleets are considering the move to electric for buses and such. There's a huge opportunity for us. I think what has energized us is we brought in sales people with industry experience, and without any sort of incentive from us, they've all said your solutions are top-tier in the market. They're very enthusiastic about what we can do against the competition in those spaces. It’s a bit early for quantification of that. These team members need to become productive; that will take three to six months. Looking towards 2023, we should be able to take a very dominant position in the U.S. market across the board.

Gary Prestopino, Analyst

Okay. And then just a couple of questions on the balance sheet. Looks like from year-end, your cash is down almost $10 million, maybe let's call it $9 million. It looks like you paid down some debt about $5 million. Are there any more debt maturities coming up? And then the other question I would have is, it looks like the inventories are up about 27%, 28% from December and I would assume that's just because of that strong pipeline that you've talked about and the back half of the year should be pretty strong on a product basis?

Steve Towe, CEO

I'll answer the second part, and I'll ask Joaquin to answer the first part for you. So yes, you're right. It's in terms of the strong pipeline, but also, we're making sure that we invest in some inventory with inflation being so high as those prices continue to rise. We believe it's prudent to maintain and grow gross margins to get enough stock through the door, and that was a conscious decision. But as we look into the second half of 2022 and into the first half of 2023, which is showing more visibility on longer-term pipeline, we felt that was the right choice to make. Joaquin, do you want to take the first part?

Joaquin Fong, CFO

Sure. We do have the quarterly maturities on the long-term debt.

Gary Prestopino, Analyst

Yes, what are those quarterly maturities then? I'm trying to get an idea of cash in, cash out?

Joaquin Fong, CFO

Yes, approximately around $1.5 million.

Gary Prestopino, Analyst

Okay. So quarterly maturities of $1.5 million. Okay. Alright, thank you very much.

Operator, Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to Steve Towe for any closing comments.

Steve Towe, CEO

So look everybody, thank you for the insightful questions, and thanks again everybody for joining us today. We are very excited about the future. We are a work in progress, but I think we're making very good progress in the first six months of this year, especially with the changes taking place in the organization. We see strong momentum across all of our metrics and vectors. So we're very encouraged, and we'll continue to work hard. We look forward to speaking to you again soon. Take care. Thank you. Bye-bye.

Operator, Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.