Earnings Call Transcript - ITRN Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for being here. Welcome to the Ituran Fourth Quarter 2022 Results Conference Call. This conference is being recorded. You should have received the company's press release by now. If you haven't received it, please reach out to Ituran's Investor Relations team at EK Global Investor Relations at 1 (212) 378-8040, or you can find it in the news section of the company's website, www.ituran.co.il. I will now turn the call over to Mr. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to start?

Ehud Helft, Investor Relations

Thank you, operator. Good day to all of you. And welcome to Ituran's conference call to discuss the fourth quarter and full year 2022 results. I would like to thank Ituran management for hosting this call. With me on the call today are Mr. Eyal Sheratzky, the Co-CEO; Mr. Udi Mizrahi, Deputy CEO and VP, Finance; and Mr. Eli Kamer, the CFO. Eyal will begin with a summary of the quarter results, followed by Eli with a summary of the financials. We will then open the call for the question-and-answer session. I would like to remind everyone that the safe harbor in the press release also covers the content of this conference call. And now Eyal, would you like to begin, please?

Eyal Sheratzky, Co-CEO

Thank you, Ehud. I'd like to welcome all of you to our full year and fourth quarter 2022 call, and I would like to thank you for joining us today. We are clearly very pleased with our achievements throughout 2022. From a financial perspective, we showed continued growth with record full year revenue of $293 million, record full year EBITDA of $79 million. From a strategic perspective, we surpassed the 2 million subscriber mark. And our subscriber growth strongly accelerated in 2022, adding 185,000 net subscribers versus 113,000 in 2021, representing a 64% acceleration. We believe that this new, much higher subscriber net adds will continue into 2023. As we shared with you last quarter, our expectations for the growth rate in our global aftermarket subscriber base stand at between 180,000 to 200,000 net new subscriber adds annually. I want to add that it is harder to forecast the OEM subscriber base growth rate, as these depend on our OEM customer sales and doesn't depend on us. The strong subscriber growth we have experienced in 2022 is starting to be reflected in the subscription revenue growth even despite the currency headwind due to the dollar strength compared with last year. Q4 subscription revenue grew 10% year-over-year or 14% growth when calculating in local currencies. We have every reason to expect that this growth trend will continue well into 2023. The gross margin on subscription fees continued to improve, and we have seen sequential improvements throughout each quarter of 2022. We started Q1 2022 with subscription fee gross margins of 55.9%, which increased through 2022 by 200 basis points to 57.9% in Q4. It demonstrates that the operating leverage in our model is becoming more apparent, whereby we can add each new subscriber without a corresponding significant increase in our costs. This increase in subscribers came primarily from the growth in our traditional aftermarket business. In summary, we are very pleased with our performance in the fourth quarter, which culminated in an excellent 2022 for Ituran. Both ongoing solid performance in our traditional aftermarket business and especially the growth engines we have seeded in the past years are driving this subscriber growth. We expect that this accelerated subscriber growth will translate into increased subscriber revenue growth in 2023 and faster-growing profitability as the operating leverage continues to work in our favor. We've already seen the initial fruits of this in 2022. Looking ahead, we believe the improvements we have made to our business in the past few years, especially the strongest subscriber growth, are here to stay for the foreseeable future. We're excited for the year ahead and expect the positive trend that started in 2022 will continue into 2023 and beyond. And with that, I hand over to Eli. Eli, please go ahead.

Eli Kamer, CFO

Thanks, Eyal. I will provide a short summary of the financial results. You can find the more detailed results that we issued in the press release early today. Revenues for the fourth quarter of 2022 were $74.9 million, a 7% increase compared with revenue of $70.4 million last year. Fourth quarter revenue from subscription fees was $53.9 million, an increase of 10% over fourth quarter 2021 revenues. In local currency terms, subscription revenue grew by 14% compared with that of last year. Revenues for 2022 reached a record of $293.1 million, an 8% increase over the $270.9 million reported in 2021. In local currency terms, revenue grew by 10% compared with that of 2021. 2022 revenues from subscription fees were $209.6 million, representing an increase of 10% over 2021. In local currency terms, subscription revenues grew by 11% compared with that of 2021. The subscriber base amounted to 2,066,000 as of December 31, 2022. This represents an increase of 46,000 net over that of the end of the period quarter and an increase of 185,000 year-over-year. During the quarter, there was an increase of 44,000 in the aftermarket subscriber base and an increase of 2,000 in the OEM subscriber base. Fourth quarter product revenues were $21.1 million, a decrease of 2% compared with that of the fourth quarter 2021. While we saw a decrease in U.S. dollar terms, if we look at the product revenues in local currency terms, there was an increase of 4% compared with that of the fourth quarter 2021. 2022 product revenues were $83.5 million, representing an increase of 3% compared with 2021. In local currency terms, product revenue grew by 6% compared with that of 2021. The geographic breakdown of revenues in the fourth quarter was as follows: Israel, 50%; Brazil, 25%; rest of world, 25%. EBITDA for the quarter was $20.6 million or 27.4% of revenues, an increase of 9% compared with an EBITDA of $18.9 million or 26.9% of revenue in the fourth quarter of last year. EBITDA for 2022 was a record $78.9 million or 26.9% of revenue, an increase of 9% compared to $72.7 million or 26.8% of revenues in 2021. Net income for the fourth quarter was $9.6 million or 12.8% of revenues or diluted earnings per share of $0.47, at a similar level of $9.6 million or 13.6% of revenues or diluted earnings per share of $0.46 in the fourth quarter of last year. Net income in 2022 was $37.1 million or 12.7% of revenues or fully diluted earnings per share of $1.82, an increase of 8% compared with net income of $34.3 million or 12.6% of revenues or fully diluted earnings per share of $1.65 in 2021. Cash flow from operations for the fourth quarter of 2022 was $15.9 million. Cash flow from operations for 2022 was $45.1 million. I note that, in 2021, operating cash flow was comparably higher at $55.8 million. The somewhat lower operating cash generation in 2022 was primarily because our Brazilian business grew nicely in 2022, while in 2021 the growth was much more limited. One of the business models there is Ituran com Seguro, ICS, meaning that we pay in advance for the customers' insurance policy and for their telematics units, while the customers pay us over the life of the service. Therefore, the working capital is used as the business grows. It therefore temporarily went down in 2022 as a result of the strong business growth in Brazil in 2022. And we do expect operating cash flow to catch up as time goes by. As of December 31, 2022, the company had cash, including marketable securities, of $28.2 million; and debt of $12.2 million, amounting to net cash of $16 million. This is compared with cash, including marketable securities, of $54.7 million; and debt of $31.4 million, amounting to net cash of $23.3 million as of December 31, 2021. For the fourth quarter of 2022, a dividend of $3 million was declared. In the fourth quarter, under our share buyback program, Ituran purchased 131,000 shares for a total of $3 million. During 2022, a total of 357,000 shares were purchased, totaling $8.4 million. Share repurchases were funded by available cash. And repurchases of Ituran's ordinary shares were made based on SEC Rule 10b-18. And with that, I'd like to open the call for a question-and-answer session. Operator?

Operator, Operator

The first question is from Chris Reimer of Barclays.

Chris Reimer, Analyst

I wanted to ask about the subscriber mix this quarter and the slight uptick in OEM. Can you give any color on the characteristics there you're seeing with subscribers or any changes in customer behavior?

Eyal Sheratzky, Co-CEO

Typically, as we always say, we have limited influence on the sales and marketing of the OEM. It depends on a deal with a car producer and on their sales in the market. On the aftermarket, of course, we have much more influence. This is why we succeed, from time to time, to promote new services, new technologies, and allow us to get into new segments. Currently, in the aftermarket sales, we have a very diversified customer base and strong customer retention. As you know, we have SVR, which is our traditional business. We have fleet management. Recently in the last few years, we also have services for UBI and financial institutions, so during Q4, we had a mixture of those services.

Chris Reimer, Analyst

Okay, great. And how should we be looking at gross margin going forward considering, earlier in the year, you had the weakness in products and we've seen a slight uptick since then? Just can you comment on some of the moving parts you see there?

Eyal Sheratzky, Co-CEO

Yes. First of all, during 2022, we had higher costs, the highest costs of components which are part of our hardware, which is a condition for providing our services. Based on the changes in the components markets, we know and I believe that during 2023 we will see improvements in the margins when we sell hardware. Thanks to this and to the operating leverage model, when we know that we're adding, as I said, close to 200,000 new subscribers a year, no doubt that the additional revenue is much stronger than the additional expenses. So overall, from those two revenue sources of Ituran, I really believe that we will continue to show growth in the gross margins.

Operator, Operator

The next question is from David Kelley of Jefferies.

Gavin Kennedy, Analyst

This is Gavin Kennedy on for David Kelley. Nice to hear you reiterate your annual aftermarket growth guidance for 2023. This target implies a nice acceleration from 2022. Can you just walk us through the main growth drivers here in more detail?

Eyal Sheratzky, Co-CEO

First of all, we have to understand that growing any number of subscribers is accelerating the business because it builds on the customer base that we finished 2022 with, so theoretically, even 100,000 additional subscribers a year, or 80,000, which was our average in the past, allows us to increase our profit margins and profitability. So 180,000, we have to understand it's a big number. And I wish that we will succeed to continue this growth every year in the future. This shows a very strong acceleration. Second, as I said, we base our forecast on mainly the finance sector. Because of the recent economic decrease in the world and specifically in the regions that we operate, we see and are facing increasing freight costs. When the cost of freight is higher, insurance companies' needs increase, and we provide a solution which addresses more and more needs from insurance companies. The SVR, which is a very traditional segment of Ituran, has also started to grow since 2022. Add to this the two segments we recently started, which are UBI and financing for cars, where banks or fintech companies want to secure their collaterals, and they use our solution. This is something that we see spreading around the marketplace. So having said that, this is why we believe we will continue the acceleration of our growth in subscriber base.

Gavin Kennedy, Analyst

Got it, makes sense. And then it looks like your operating income margins modestly increased 20 basis points this quarter. What were the drivers here? And how should we think about operating margin trajectory into 2023?

Eyal Sheratzky, Co-CEO

As I said before, if the gross margins or if our operating leverage model, which is derived mainly from our recurring revenue, and add to this the changing situation of buying electric components for our hardware, which has also decreased in the last months. I believe this will lead to increased gross margins and operating margins as well.

Operator, Operator

The next question is from Abba Horovitz of OSP.

Abba Horovitz, Analyst

I was hoping you could explain better. I want to understand the differential of getting new subscribers and then those margins actually starting to expand, because I know there's a lag time between a new subscriber and actually seeing that profit come from that new subscriber. How can we view that over the next year given the high growth in subscribers in 2022, but you're also having a high growth in subscribers in 2023? So I just want to know. Will there be a moment that we'll start to see this major expansion in the margins?

Eyal Sheratzky, Co-CEO

First of all, as you saw, 200 basis points is something that derives from this growth of subscribers at the end of the day. Of course, what you say is right. If you look: We also grew in 2021 with subscribers, but you'll start to see it only in the beginning of 2022. Now what we've shown is after a year. It's 2022, the end of 2022. Now again, we will have the contribution of what we added during 2022 starting to influence our results in Q1, Q2; then add to this the new subscribers. I believe, and this is the reason I said, that in the end of 2023 we will see another jump in our margins. So it cannot grow from 57% to 70%. It's growing 2%, 3% every year. In 3, 5 years, it should be very material. This is the reason; as we said, it takes time from this ramping-up of subscriber base to the moment that you see a material growth in profitability, but you always see it.

Abba Horovitz, Analyst

Okay. And in terms of your cash. So you have about $12 million net debt. Are you going to pay off this $12 million of debt? Or are you just going to leave it for now?

Eyal Sheratzky, Co-CEO

Okay. So actually the company usually has no need for any debt. The reason that you still see it, is that when we acquired Road Track—today, it's part of Ituran—but when we acquired it 4 years ago, we used a bank loan for this acquisition. It's paid down over time. We still have 2 payments to make until September this year, and in September, we will finish. In September, we'll be at zero, so we have to pay it back, yes.

Abba Horovitz, Analyst

Okay, fair enough. And at that point, would that change your approach? Would you get more aggressive in buying back stock? Would you increase the dividend at that point in time? In other words, as we get to the second half of the year, can we expect—at the same time that subscriber earnings are kicking in and you've paid off your debt, would it make sense to increase the dividend or do a larger share repurchase?

Eyal Sheratzky, Co-CEO

Of course. And as we just declared—you can see it now in the SEC and in the press—our Board approved an additional $10 million for this year to buy back Ituran shares, yes. What you say is right. We feel comfortable with our cash position. We believe that the best investment for us currently is to repurchase Ituran shares compared to any other possible investments at this scale.

Abba Horovitz, Analyst

Would it make sense to do a Dutch auction where you essentially give a price above where it is today, and then allocate a certain amount of money to buy out the shares instead of doing it drip by drip on a daily basis?

Eyal Sheratzky, Co-CEO

First of all, it's something that we didn't specifically think about, but I will consider your proposal and I will discuss it with our financial advisers.

Abba Horovitz, Analyst

Okay, wonderful. And there's— I want to leave it off. Can you give us just some highlights on the investments that you have, if there's any change to the investments?

Eyal Sheratzky, Co-CEO

We have two investments that are part of our financial portfolio. One is Bringg, which is a private company that we hold 17%. It's a tech start-up. Just to remind you: the last round, round E, was at a valuation of $1 billion, led by Insight Partners. Since then, the company has sufficient cash, $150 million, so the company has enough cash for the coming years. The situation today with tech companies has changed a little bit, but we feel that the company continues to perform based on its business plan. We are not in a position to sell our shares since it's a private company, and I believe it's not the right decision to do so right now. The second investment is in SaverOne, which is a publicly traded company in the Israeli stock market. In this case, we still have the valuation, and along with the rest of the shares in this ecosystem, it has gone down, so we have already accounted for those losses in our financial portion during 2022. You can see that it has cost us something like almost $5 million in financial losses, although not in cash. Our holdings there are worth a few hundred thousand dollars, so I don't expect it to continue negatively impacting our net income in 2023.

Operator, Operator

There are no further questions at this time. Before I ask Mr. Sheratzky to proceed with his closing statement, I would like to remind participants that a replay of this call will be available tomorrow on Ituran's website, www.ituran.co.il. Mr. Sheratzky, would you like to make your concluding statement?

Eyal Sheratzky, Co-CEO

Yes. On behalf of management of Ituran, I would like to thank you for your continued interest and long-term support of our business. We hope to be speaking with you over the coming quarter. If you are interested in meeting or speaking with us, feel free to reach out to our investor relations team. Thank you, and have a good day.

Operator, Operator

Thank you. This concludes the Ituran Fourth Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.