Earnings Call Transcript - ITRN Q2 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Ituran's Second Quarter of 2024 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Ituran's Investor Relations team at EK Global Investor Relations at 1-212-378-8040 or view it in the news section of the company's website at www.ituran.co.il. I would now hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin?

Kenny Green, Investor Relations

Thank you. Good day to all of you and welcome to Ituran's conference call to discuss the second quarter 2024 results. I would like to thank Ituran's management for hosting this conference call. With me today on the line today are Mr. Eyal Sheratzky, CEO; Mr. Udi Mizrahi, Deputy CEO and VP Finance; and Mr. Eli Kamer, CFO of Ituran. Eyal will begin with a summary of the quarter's 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 statements in today's press release also cover the content of this conference call. And now, Eyal, would you like to begin, please.

Eyal Sheratzky, CEO

Thank you, Kenny. I'd like to welcome all of you to our second quarter 2024 call. And I would like to thank you for joining us today. We are pleased with our second quarter results, especially the ongoing growth in revenue across the geographies in which we operate. We have continued improvement in profit. We are also pleased with the solid level of additional net subscribers we brought in the quarter, which came in at the high end of our expectations. These achievements come despite the negative impact of the sharp devaluation against the U.S. dollar in the quarter, which lowered our local currency denominated results presented in U.S. dollars. In fact, we measured in local currencies, we have seen accelerated growth in most of the geographies in which we operate. Our results reflect ongoing solid demand growth for our broad location-based products and telematic services, and especially increased traction from many of our new initiatives. Our subscriber base added 38,000 subscribers in the quarter, at the high end of our expectations of between 35,000 and 40,000 net new subscribers per quarter. This is due both to our more diverse global footprint, as well as the new services and initiatives we are continuing to bring to our end markets. Over the past few years, we've launched a number of new initiatives and have seeded growth engines driving accelerated subscriber growth. We are actively engaged in new verticals adjusting to our core business of providing telematic services. At the same time, we are taking the successful initiatives, which have been limited to one of our geographies, and expanding them to our other geographies. You may remember that we signed a landmark agreement with Santander Bank a year ago, and we are actively looking to broaden our solution into new markets with existing and other finance customers. Our SaaS technology for all-in-one vehicle sharing helps fleet owners smartly and flexibly use shared vehicle fleets through efficient matching of unused vehicles with demand. We have been gaining solid traction and we are now leveraging the technology to other geographies, including Israel and the United States. We see significant demand for this type of service from car rental businesses, leasing companies, as well as corporate fleets, which are looking to more effectively and efficiently share the use of their fleets of vehicles. Also, as you may have seen, a few days ago we put out a press release with regard to our collaboration with Porsche and Microsoft for the Porsche Carrera Cup in Brazil. I encourage all of you to watch the video of our technology in action. We are incredibly proud to be part of this and associated with such industry leaders. Additionally, the fact that Ituran's telematic unit is at the heart of the Porsche Racing Car Telemetry System under the most demanding conditions demonstrates our technology leadership. One of our goals in being involved in a project such as this, apart from the honor of being associated with Porsche and Microsoft, is to bring these latest technologies used in motorsports down to Ituran’s subscribers, and we are already looking to leverage the new capabilities developed for this project over the past year throughout our business and make it more attractive to OEM players. I want to thank our team in Brazil for the exceptional work they are doing for the Porsche Carrera Cup. We recently launched a new motorcycle telematics product with strong potential given a very significant total addressable market throughout South America with a strong motorcycle culture. We are already seeing interest from OEMs and insurance companies, and we are in active discussions. We are also in active discussions with a number of major OEM car manufacturers, in addition to the two major ones that we already work with. At the same time, we are looking to broaden the scope of services we provide to our existing OEM partners, which are focused on limited geographies, in order to broaden our service to additional countries in South America. The goal is to provide OEM manufacturers with a suite of telematics and stolen vehicle recovery services. We see growth potential to bring in many new subscribers via this initiative. From a financial perspective, looking ahead to the remainder of 2024, earlier this year, we provided EBITDA guidance in addition to the guidance on subscriber growth, which we traditionally do. Today, we reiterated that for 2024, our guidance is full-year EBITDA of between $90 million and $95 million. Looking further out, our short to mid-term milestone is to cross the $100 million EBITDA landmark in 2025. We continue to expect subscriber growth at around 35,000 to 40,000 net new subscribers each quarter. Even with the currency headwind in this quarter, we remain on track to meet our targets. Given the strong net cash position of over $63 million, our ongoing cash generation, and continued solid profitability, we continue to share a strong quarterly dividend of $8 million with our shareholders. This dividend is in line with our current policy, which is at the same level that we issued last quarter and a 60% increase over that of the year-ago quarter. Our dividend yield on an analyzed basis represents a return of over 6%, which is a very solid return from a strong compound. We see our ongoing dividend as a reward to our shareholders for their loyalty and long-term support of Ituran. In summary, the second quarter of 2024 is another quarter of solid performance, which is especially clear when we remove the noise of FX and look at our results in local currencies. We believe that we will continue in this trend in 2024 and given the many growth initiatives highlighted, I would expect the growth to accelerate over the mid to long-term. Our constantly growing subscriber growth will ultimately translate into increased revenue, increased gross profit, with faster growing profitability over the long term due to the operating leverage inherent in our business. I look forward to updating you further as some of our initiatives mature. And with that, I hand over to Eli. Eli, please go ahead.

Eli Kamer, CFO

Thank you, 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 earlier today. Second quarter revenue was $84.9 million, a 4% increase, compared with revenue of $81.6 million last year. The strengthening of the U.S. dollar in the second quarter versus the various local currencies in which Ituran operates impacted the revenues when translated into U.S. dollars. In local currency, revenue grew by 6% year-over-year. Revenue from subscription fees in the quarter was $60.4 million, an increase of 2% year-over-year, and in local currencies, an increase of 5%. Product revenues in the quarter were $24.5 million, an increase of 9% year-over-year, and in local currency, an increase of 10%. The subscriber base expanded to 2,329,000 by the end of the second quarter, an increase of 38,000 from the end of the previous quarter. The geographic breakdown of revenues in the second quarter was as follows: Israel 51%; Brazil 24%; rest of the world 25%. EBITDA for the quarter was $23.1 million or 27.2% of revenue, an increase of 6% compared with EBITDA of $21.8 million or 26.7% of revenue in the second quarter of last year. In local currency, EBITDA grew 9% year-over-year. Net income for the second quarter was $13.1 million or diluted earnings per share of $0.66, an increase of 7% compared with $12.2 million or diluted earnings per share of $0.61 from the second quarter of last year. In local currency, net income grew 10% year-over-year. Cash flow from operations for the second quarter of 2024 was $22.9 million. As of June 30, 2024, the company had cash including multiple securities of $63.3 million and a debt of $0.2 million, amounting to a net cash position of $63.1 million. This is compared with the cash including marketable securities of $53.6 million and a debt of $0.6 million, amounting to a net cash position of $53 million as of year-end 2023. The Board of Directors declared a dividend for the quarter of $8 million. The current dividend takes into account the company's continuing strong profitability, ongoing positive cash flow, and strong balance sheet. And with that, I'd like to open the call for the question-and-answer session.

Operator, Operator

Thank you. Ladies and gentlemen, we will now start the question-and-answer session. The first question is from Chris Reimer of Barclays. Please go ahead.

Chris Reimer, Analyst

Thanks for taking my questions and congratulations on the solid quarter. I was wondering if you could talk about some of what contributed to the stronger product growth this quarter?

Eyal Sheratzky, CEO

I want to remind you that we have a subsidiary called DRM, which is our main supplier and also serves many third-party customers. They primarily focus on hardware and had a strong quarter. Since their sales are almost entirely hardware, we need to consider that there can be some volatility from quarter to quarter, as it largely depends on various customers from around the world.

Chris Reimer, Analyst

Got it. And on pricing, I was wondering if you are seeing any pricing pressures or changes in the pricing environment in any of your geographies?

Eyal Sheratzky, CEO

No. The answer is no. We have to, again, remember that Ituran's main revenue source is the subscriber fees. We have to understand that the average ARPU is about $10. So the sensitivity among the end users, as much as I can say, is quite low. Regarding the hardware itself, if you look at our historical numbers, the margins that we sell are very low in order to get more and more subscribers, and in that case, our prices are quite low by definition and we don't see pressure in this field as well.

Chris Reimer, Analyst

Got it. And just one more housekeeping bit, and I apologize if I missed this on the first release, but you previously had been giving the aftermarket and OEM breakout for subscribers. So I didn't see it this quarter. Is that a change in reporting?

Eyal Sheratzky, CEO

Actually, I'm not sure that we did it constantly, but yes we will try to do it. I think because the differences, when the differences are very high, we are divided. I think that…

Chris Reimer, Analyst

Oh, okay. Got it.

Eyal Sheratzky, CEO

It was more balanced this quarter probably.

Chris Reimer, Analyst

Okay, that's it from me. Thank you.

Operator, Operator

The next question is from Sergey Glinyanov of Freedom Capital Markets. Please go ahead.

Sergey Glinyanov, Analyst

Hello, everyone. We had pretty good results. Could you share your outlook for product sales growth and the growth rate for the near future?

Eyal Sheratzky, CEO

Again, I would like to remind that our product sales are mainly done all by our subsidiary that I mentioned or by the Israeli company in the rest of the world, which is more than 50% of our revenues. We almost, I can say at least, and we sell it as a program with the monthly fees. When I talk about our subsidiary and about selling hardware to our, let's say, to our distributors, it's something that always has some volatility between quarters, because it mainly depends on their inventory pressures, inventory decisions, etc. So I think that we are not expecting any specific growth. I think that the average number is on an annual basis. You have to judge it on an annual basis.

Sergey Glinyanov, Analyst

Okay. Is it related to all the markets when or where you have presence?

Eyal Sheratzky, CEO

No, because what you see in our P&L is that it's divided into services and products. More than 50% of the geography of our revenues is the hardware is integrated into our service fees. We lease it. So what you see is you see it in one hand in the CapEx, in the CapEx in the cash flow report, and here it's part of the service revenues. So you don't see the sales in more than 50% of our total revenues. But you see it's only in Israel and our subsidiary, which is a supplier of hardware.

Sergey Glinyanov, Analyst

Got it, thanks.

Operator, Operator

The next question is from Eli Goldberg of Oppenheimer. Please go ahead.

Eli Goldberg, Analyst

Hi, I wanted to know if you guys could provide some more insights about the motorcycle product you just launched? And how should we think about it going forward?

Eyal Sheratzky, CEO

I think that I mentioned it also in our call in the Q1, but I will, of course, do it again. We just started a few months ago to launch our solution in, I would say, two main channels. One is insurance companies in Brazil. We realized that the Brazilian market, and I would say even mentality is that motorcycles are very common and there is a high portion of the motorcycle market with expensive and high-end motorcycles by Yamaha and Honda, and in that case, insurance companies weren't happy to provide insurance to those kinds of vehicles, because the risk of theft is very high. Thanks to our solution, which we could show that it reduces the risk, insurance companies are more interested in selling insurance policies to motorcycle owners. In that case, we are now in discussions or we already started to sell our solutions for motorcycles. So I wouldn't say that it's not the contribution currently is high, but like we started with the ICS for cars in the past, it starts to ramp up, and I believe that in a year or two it can be much more material in the revenue and profit size. The second segment is OEM, which I cannot yet report for a final contract or a deal, but this segment is something which we are putting focus on in discussions with motorcycle manufacturers in order to convince them and to show them what we did with car connectivity as an OEM and what benefits their customers can get from a telematic solution in a motorcycle. So this is something else which we now have to offer. I want to add that in Israel, for example, in the last more than a year, and this also contributes to our growth in subscribers, we already have a solution. It's a different solution than I now offer in Brazil, something which is a simpler solution, mainly and only for motorcycles theft. We already have sales of thousands of motorcycles and in Israel, by the way, motorcycles do not insure their motorcycle. So instead of having nothing, because they don't insure the insurance here, it's very expensive, they decided to find a solution that reduces their risk as motorcycle owners by installing Ituran and of course joining our customer base.

Eli Goldberg, Analyst

Okay, thank you. And another follow-up, how would you say investors should look at the growth going ahead, talking about ‘25 even for Ituran? What should we look at?

Eyal Sheratzky, CEO

I am always focusing on our growth in terms of profit, specifically EBIT and EBITDA, as this is crucial for our SaaS business with nearly 2.4 million subscribers. Even a growth of 100,000 to 180,000 subscribers annually does not dramatically impact revenue. However, given our operating leverage model, we anticipate improvements in our profit margin, EBIT, and EBITDA. We have already set goals for 2024 and aim for an EBITDA of $100 million by 2025. It's important to note that our operations and revenues come from various currencies, mainly from emerging markets, which we cannot predict or control, as seen in Q2. Therefore, the $100 million target is based on the current currency situation. In terms of profit growth, I believe this is a very ambitious goal.

Eli Goldberg, Analyst

Okay, thank you.

Operator, Operator

The next question is from Boris Schneider of More Investment House. Please go ahead.

Boris Schneider, Analyst

Yes, hello. My question is on ARPU this quarter, which declined, compared to previous quarters that were obviously there were roughly 12 quarters of growth? So what else is going there besides the depreciation in the currency against the dollar? Is it because of more sales to OEM or other lower ARPU margin products?

Eyal Sheratzky, CEO

I think that if we eliminate the FX, you would see that the ARPU for Q2 is even higher. So this is the only reason that you see a lower ARPU. In local currencies, we have higher ARPU. Although you're right, the OEM is lower. There's some applications that we sell, like big data solutions for car dealers, it's lower, but still the variety is still taking our ARPU up in local currencies.

Boris Schneider, Analyst

Okay, thank you.

Operator, Operator

There are no further questions at this time. Before I ask Mr. Sheratzky to provide his closing statement, I want 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 a concluding statement?

Eyal Sheratzky, CEO

On behalf of the management of Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. In the coming months, we will be meeting with investors and presenting at two conferences, LD, Micro and Needham, and we hope to see some of you there. If you are interested in meeting or speaking with us, feel free to reach out to our investor relations team. And with that, we end our call. Thank you and have a good day, everyone.

Operator, Operator

Thank you. This concludes the Ituran second quarter of 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.