Earnings Call Transcript - ITRN Q2 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Ituran’s Second Quarter 2023 Results Conference Call. 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 will now hand the call over to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin?

Kenny Green, Investor Relations

Thank you, operator. Good day to all of you and welcome to Ituran’s conference call to discuss the second quarter 2023 results. I would like to thank Ituran’s management for hosting this conference call. With me 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 statement in today’s press release also covers the contents of this conference call. And with that, 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 2023 call. And I would like to thank you for joining us today. We are clearly very pleased with our achievements in the second quarter of 2023 as it has been an excellent year for Ituran. Ituran’s business is in strong growth, with sales seeing the subscriber base growing twice as fast as in past years. This jump in growth rate is now clearly benefiting our financial results. Our subscription fees have been consistently at new record levels each quarter and our profits measured in added net income or EBITDA are at four-year highs. As you can imagine, we are very pleased with our results and the progress we’ve made. Given the way our business is structured, with a core and stable subscriber base of well over 2 million paying a monthly retainer and the clear long-term visibility this provides, we have good reason to expect that the current positive trends will continue throughout 2023 and into 2024 and beyond. From a strategic perspective, we experienced strong growth in subscribers, adding a net total of 47,000 subscribers, of which 45,000 were from the aftermarket and 2,000 from the OEM. This strong subscriber growth is now being reflected in our record subscription revenue, even despite the currency headwind due to the dollar's strength in 2023. Q2 subscription revenue grew at 13% year-over-year or 17% growth when calculated in local currencies, which neutralized the effects of the exchange rate on our growth. Over the past few years, we’ve entered into a few new verticals, such as a financing business, which are performing well and acting as growth engines. They are one of the main reasons that our business continues to grow well. During the quarter, we announced that our Brazilian subsidiary entered a partnership with Santander Bank, which firmly solidified our presence in the automotive financing market. This strategic alliance aims to broaden the Brazilian car ownership market by facilitating credit approval for automatic financing with Ituran Telematics Services and Santander’s financing at attractive rates and credit insurance. These new deals demonstrate that this finance vertical is performing well and supporting our overall subscriber growth. Furthermore, we see further potential and we are looking to cover additional markets and geographies with existing and other finance customers. In terms of the Israeli market, due to the general macroeconomic situation, we have seen a strong increase in the theft rates. Due to our good performance over many years in this vertical of stolen vehicle recovery, it increases the need for insurance companies to use our services. While this is very much the case in Israel, we also see similar trends throughout Latin America, where the general economic climate contributes to an increase in car theft rates. This is ultimately leading to an increase in demand for our services from insurance companies. This also provides our business with some defense in the face of an economic slowdown. Finally, we’ve launched a new product in Latin America, focused on connectivity for stolen vehicle recovery in the motorcycle market, which is a new sector for us. In 2022, there were an estimated record of 5.4 million motorcycles sold in Latin America and we believe our new solution presents a very attractive proposition for this sector. We are already seeing interest from manufacturers and insurance companies, and we are already in discussions. We see strong potential from this new product and service in the region for the coming years. In summary, we are very pleased with our results of the quarter and 2023 is shaping up to be a record year for Ituran in all respects. Solid performance in our traditional aftermarket business, as well as recovery in the OEM business and especially the growth engines we’ve seen in the past years are all driving our strong subscriber growth and record revenue. While we continue to monitor the potential global economic slowdown ahead, historically, we have found that theft rates tend to increase in economic downturns, increasing the demand for our services and beyond it. Our 2.2 million subscriber base, paying us on an ongoing monthly basis, gives us significant resilience in our economic environment. Looking ahead, we expect our recent accelerated subscriber growth will continue to translate into increased revenues, with faster growing profitability due to the operating leverage inherent to our business. We are excited for the coming quarters and anticipate the positive trend will continue throughout 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 earlier today. Revenues for the second quarter of 2023 were $28.6 million, an 11% increase compared with revenues of $25.7 million last year. In local currency, the year-over-year growth was 15%. Second quarter revenues from subscription fees were $59.2 million, an increase of 13% over the second quarter of 2022 revenues. In local currency, the year-over-year growth was 17%. We had a base of 2,162,000 subscribers as of June 30, 2023. This represents an increase of 47,000 net subscribers over the end of the previous quarter and an increase of 190,000 year-over-year. During the quarter, there was an increase of 45,000 in the aftermarket subscriber base and an increase of 2,000 in the OEM subscriber base. Second quarter product revenue was $22.5 million, an increase of 7% compared with that of the second quarter of 2022. The geographic breakdown of revenues in the second quarter was as follows: Israel, 48%; Brazil, 26%; and the rest of the world, 26%. EBITDA for the quarter was $21.8 million, or 26.7% of revenues, an increase of 12% compared with EBITDA of $19.4 million, or 26.5% of revenue in the second quarter of last year. In local currencies, the year-over-year growth was 15%. Net income for the second quarter was $12.2 million, or 15% of revenue, equivalent to diluted earnings per share of $0.61, an increase of 40% compared to $8.7 million, or 11.9% of revenues, equivalent to diluted earnings per share of $0.43 in the second quarter of last year. In local currency, the year-over-year growth was 44%. Cash flow from operations for the second quarter of 2023 was $17.5 million. On the balance sheet, as of June 30, 2023, the company had cash, including marketable securities of $34.5 million and a debt of $4.5 million, amounting to net cash of $30 million. This is compared with cash, including marketable securities of $28.2 million and a debt of $12.2 million, amounting to net cash of $16 million as of December 31, 2022. For the second quarter of 2023, a dividend of $3 million was declared. During the second quarter, under our share buyback program, we purchased 165,138 shares for a total of $3.5 million. Share repurchases were funded by available cash and repurchases of Ituran 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

Thank you. The first question is from Chris Reimer of Barclays. Please go ahead.

Chris Reimer, Analyst

Yes. Hi. Thanks for taking my question and congratulations on the strong results. You mentioned in the past operational leverage, and I was wondering how much expansion is possible under the current operational conditions you have right now?

Eyal Sheratzky, CEO

Practically, when you look at the numbers today, we actually increased from 20% to 20.4% in a very short period, and we expect that this trend will continue. This is actually what our recurring revenue model allows us to do in the future.

Chris Reimer, Analyst

Okay. And in your view, what is underpinning the consistent subscriber growth?

Eyal Sheratzky, CEO

Actually, I think I mentioned it generally. First of all, the traditional segments rely heavily on theft rates. In the last quarters, we are seeing strong growth, creating a solid demand from insurance companies as well as car owners needing to secure their vehicles more and more. This also depends on the economy and the financing market, where we are entering recently. We see that after this penetration, other players in Brazil and other Latin American countries are interested in these solutions. And, of course, there are always the regular growth drivers, such as our brand being the strongest in the region with very high credibility from both B2B and B2C customers. So we have good feedback from the market plus new segments that we entered recently. We believe this will continue to drive subscriber growth.

Chris Reimer, Analyst

Got it. Thanks a lot. That’s really good color.

Operator, Operator

The next question is from an unknown participant. Please go ahead.

Kenny Green, Investor Relations

Josh, we don’t hear you, but you can go ahead and ask your question.

Unidentified Analyst, Analyst

Sorry, my bad. I was on mute. Good morning. Good to see this terrific quarter, guys. And thanks for taking my call. I wondered whether or not you could provide any color on what’s happening with Bringg? I mean I know it’s a passive private investment, but I was curious if you could provide any updates on what’s going on with that investment?

Eyal Sheratzky, CEO

Practically, Bringg is doing quite well with its business plan and internal projections. I think we made the right move when we participated in the last funding round about a year, a year and a half ago, before the changes in the stock market and financial markets. The company adjusted to utilize those proceeds for more years than we initially thought because we had to adapt the company to the current financial situation. But from an operational point of view, the company is delivering results as expected. I want to remind all of you that it’s an asset on our balance sheet with no immediate value, meaning it does not influence our P&L. I would say that it represents hidden assets, which we believe will yield profits in the future.

Unidentified Analyst, Analyst

Got it. Okay, thank you. Well, looking forward to seeing that getting monetized at some point in the future. The second question I had was a couple of years back, you had leveraged the balance sheet slightly, which was unlike you guys historically because you’ve been a conservative management team, in order to buy Road Track. Over the years, you’ve been paying back your debt. Your gross debt is almost zero, and your net debt has been positive for some time. I greatly appreciate the buybacks and the dividends, but I’m curious about how your plans may or may not change going forward, given the cash reserves you have? Is it more of the same with an occasional small early-stage VC investment in Israeli companies that relate to your business? Can you give us some color on what your plans are over the next couple of years?

Eyal Sheratzky, CEO

First of all, the investments in small startups linked to potential systems for the mobility market is something we approach cautiously. It’s not connected to the loan we took, which was primarily for the acquisition of Road Track. Today, we are very pleased that we made that acquisition as it has fully integrated and contributed to our business. We will prioritize using our generated cash for growth opportunities, such as acquisitions and partnerships. However, finding suitable opportunities is not always easy. We are a conservative company, and we will not spend money just to spend it. As we have done in the past, we aim to find valuable opportunities for inorganic growth first. If we do not identify such opportunities and continue to generate cash, we will look to benefit our shareholders through increased dividends or buybacks.

Unidentified Analyst, Analyst

Great. Okay, well thank you very much. Good luck, guys.

Eyal Sheratzky, CEO

Thank you very much.

Operator, Operator

The next question is from Abba Horwitz from Old School Partners. Please go ahead.

Abba Horwitz, Analyst

Thank you. Hi and congratulations on a real milestone. This is quite an amazing quarter relative to the last couple of years. I wanted to drill down on the motorcycle opportunity. How are you entering the motorcycle market? How rapidly do you see this being implemented? And how meaningful can it be for the overall business?

Eyal Sheratzky, CEO

So I will divide it into two different markets. One is the Israeli market where we have been selling products and services for motorcycles for a few years already. However, we must understand that the motorcycle trend is quite low in Israel compared to the Latin American market, where many motorcycles are sold each year, particularly in Brazil. It's very challenging to insure motorcycles due to their higher risk, which leads to higher insurance prices. Nevertheless, insurance companies don't want to ignore this segment. Therefore, we have been developing a unit specialized for motorcycle drivers, which includes applications, stolen vehicle recovery capabilities, and other sensors that create benefits for the drivers. We see significant demand and traction for this across Latin America. While I can't discuss specific numbers yet, we believe this segment will become substantial in the coming years.

Abba Horwitz, Analyst

Okay. Would it mean that using this product would encourage insurance companies to offer cheaper alternatives? Or would it simply be a product for customers without insurance?

Eyal Sheratzky, CEO

This segment has two sides. Firstly, insurance companies will find it easier to offer competitive options with a solid solution for motorcycle security. Also, in Brazil, motorcycle rentals are incredibly common, and rental companies want solutions to secure their assets. This is why we are proactively entering this market.

Abba Horwitz, Analyst

Would it be safe to assume that you can leverage the same monitoring infrastructure that you currently have?

Eyal Sheratzky, CEO

Of course. Everything we do leverages our existing technology. Our solutions can be adapted to fit various segments. When we identify a new market, we utilize our existing infrastructure while customizing the firmware for new applications. This modular approach allows for technological leverage across different segments. Our focus remains on delivering excellent service.

Abba Horwitz, Analyst

Is the product priced similarly to a car, or is it cheaper?

Eyal Sheratzky, CEO

The motorcycle product will be priced lower than for cars. The installation cost is also cheaper, making it more accessible. The pricing for services will depend on the type of services offered, which can be similar to what we charge for cars.

Abba Horwitz, Analyst

Thank you very much, Eyal. Good luck.

Eyal Sheratzky, CEO

Thank you very much.

Operator, Operator

The next question is from Josh Traut. Please go ahead.

Unidentified Analyst, Analyst

Hi. Thanks for taking my call. You talked in the past about reestablishing relationships and reaccelerating your business with OEMs in Brazil. I wondered if there was any additional progress worth noting.

Eyal Sheratzky, CEO

Actually, the OEM and manufacturer cycle is generally longer due to the necessary validations required in each country. I can say that we are currently working on expanding our relationships with existing car manufacturers into other geographic areas, mainly in Latin America. I cannot provide specific details yet, but we see traction in discussions and believe we will succeed in expanding these relationships.

Unidentified Analyst, Analyst

What about the progress you're making with financial institutions in Brazil for subprime customers? How material could that opportunity become in the next few years?

Eyal Sheratzky, CEO

About a month ago, we reported a significant contract with one of the largest banks in the world, Santander in Brazil. This contract enables exclusive financing for cars and presents substantial potential for customer acquisition through Santander. We aim to leverage this contract to expand into other regions within Latin America. For now, this is a mutually beneficial and material partnership for us. As other banks recognize the value of this arrangement, we believe it will foster more opportunities.

Unidentified Analyst, Analyst

Thank you very much. I appreciate it.

Eyal Sheratzky, CEO

Thanks.

Operator, Operator

The next question is from Fred Foulkes of Boston University. Please go ahead.

Fred Foulkes, Analyst

Good morning. Congratulations on an outstanding quarter and very informative call. Given the challenges in your country right now, is that impacting worker productivity, recruitment, retention, etc.?

Eyal Sheratzky, CEO

Actually, no. I think the situation in Israel is primarily political. It has not directly influenced our operations yet. Historically, during economic downturns, we have seen increases in demand for our services due to rising crime rates. Currently, I do not expect these challenges to affect our business. In Tel-Aviv, life feels quite normal despite what is reported. But yes, we have challenges here.

Fred Foulkes, Analyst

Thank you and congratulations on your leadership.

Eyal Sheratzky, CEO

Thank you very much.

Operator, Operator

The next question is from Charles Elliott of IBI. Please go ahead.

Unidentified Analyst, Analyst

Hi. I would like to ask about a deal that you announced in July with the 99 Rideshare company acquired by DD, where you will provide SVR on their BYD models. I know it sounds small, but could this be significant as it would represent Ituran’s first step into a platform for car sharing?

Eyal Sheratzky, CEO

We didn't report this from a Nasdaq and SEC perspective because it is not a material deal currently. You are correct, BYD launched their brand in Brazil alongside us. This partnership is part of a mutual marketing strategy. They are using our units for controlling and securing the cars they distribute for rental. Although it is a valuable relationship, it does not yet indicate an OEM deal in Brazil. We are thinking long-term, and while this initiative is just starting, we believe it could evolve into something bigger in the future.

Unidentified Analyst, Analyst

Great, thank you.

Operator, Operator

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

Eyal Sheratzky, CEO

Yes. On behalf of management at Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. We will be speaking with some of you over the coming quarter. If you are interested in meeting or speaking with us, please feel free to reach out to our Investor Relations team. And with that, we end our call. Thank you and have a good day.

Operator, Operator

Okay. Thank you. This concludes Ituran’s second quarter 2023 results conference call. Thank you for your participation. You may now go ahead and disconnect.