Earnings Call Transcript - ITRN Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Fourth Quarter 2021 Results Conference Call. All participants are currently in listen-only mode. Following management's formal presentation, instructions will be provided 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 GK Investor and Public Relations at 1-212-378-8040 or view it in the News section of the company's website, www.ituran.co.il. I will now hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Ehud Helft, Investor Relations

Yes. Thank you, operator. Good day to all of you and welcome to Ituran's conference call to discuss the fourth quarter and full year 2021 results. I would like to thank Ituran management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the Co-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 results, followed by Eli with a summary of the financials. We will then open the call for the questions-and-answer session. I'd like to remind everyone that Safe Harbor in the press release also covers the contents 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 and thank you for joining us today. We are very pleased with our financial results. They represent a year of recovery and growth, returning to double-digit revenue growth, as well as strong profitability and double-digit EBITDA growth. We reported full year revenues of $271 million and EBITDA of $73 million, a level we have only surpassed once in our history. I would like to focus on the very solid growth in the subscriber base, which was the most notable aspect of our fourth quarter 2021 results. We grew our subscriber base at the highest rate we have seen in our history with 44,000 net adds, bringing the total to almost 1.9 million subscribers. The aftermarket segment added 50,000 subscribers during the quarter and is approaching 1.5 million subscribers. The growth in subscribers came from both our traditional businesses and was boosted by our growth engines. These include increased traction from our Usage Based Insurance, UBI business in Israel; working with car financial companies in Brazil and Mexico; new activities with rental companies in South America; as well as growth from our U.S. business. We expect this type of subscriber growth to continue into next year. We have raised our expectation, which are typically 20,000 to 25,000 net subscriber growth per quarter, or 80,000 to 100,000 per year to between 140,000 and 160,000 per year in 2022. I want to discuss Ituran’s overall ARPU. The new growth engines are at a lower revenue per user than the average of our traditional aftermarket business, which will have the effect of lowering our overall ARPU. However, I highlight that our gross margins on the lower ARPU subscribers are similar to that of the existing business. In addition, as our business scales up faster, we can better leverage the operating efficiencies inherent to our business model, where typically each individual subscriber does not require growth in operating expenses, and those subscribers tend to stay with us for a long period. I would like to stress that while 2021 has so far been a strong year for Ituran in terms of new subscriber growth, the real benefit from the additional subscribers that we gained in the past year will benefit us more toward the end of 2022, 2023, and beyond. With regard to the UBI business, in 2021, we won significant business and we are now working with all the seven major insurance companies in Israel. We continue to see increased traction as the Israeli consumer market becomes increasingly educated to the value that they gain by using a Usage Based Insurance plan rather than a fixed plan, especially since the work from home trend has significantly reduced the typical commute. The slowdown created ample new markets and opportunities. Throughout that time, new car sales around the world declined. As I explained last quarter, we identified a strong second-hand car market in many of our geographies in Latin America. New fintech startups, as well as large banks, have come in to provide financing in this market. However, they need a provider of location-based and connected car technology, such as Ituran, to monitor the cars and driver behavior and by this, reduce the risk of the loan against the car. We are quickly moving forward and are already working with financing companies with our solution. We're excited about this business and see great potential for additional growth in the coming years. I would like to address the electronic component shortage that has been widely reported over the past year and remains an issue for everyone. Despite the demand vastly exceeding supply and high prices, we have successfully managed through this shortage to date. In the current quarter, Q1 2022, we will see increased costs for all components for our products, which will temporarily lower our product gross margins in the first half of 2022. It is important to note that as primarily a subscriber service business, the impact on Ituran to date has been low and has primarily affected the product revenue side, which has a smaller effect on our bottom line. Our continued profitability and ongoing cash generation enable us to share the rewards of our success with our shareholders. We have two programs. One is our regular dividends of $3 million to shareholders, and we issued a total of $12 million in 2021. Our second program is our share buyback. During 2021, we purchased $7.3 million worth of 280,000 shares of Ituran. In summary, I am very pleased with our performance in both our traditional business and especially our growth engines, which we have seen over the past few quarters. This acceleration will enhance our growth in the years ahead. The solid performance can be seen in the jump in our subscriber base which has grown well ahead of our expectations, allowing us to increase those expectations for the current year. I am more excited now than ever about our long-term potential over the coming years. And I will now hand the call over to Eli for the financial summary. Eli?

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 fourth quarter of 2021 were $70.4 million, which is an 11% increase compared with revenues of $63.6 million in the fourth quarter of 2020. Revenues from subscription fees were $48.8 million, up 7% year-over-year. Revenues for 2021 were $270.9 million, 10% above the $245.6 million reported in 2020. Revenues from subscription fees were $189.6 million, representing an increase of 4% over 2021. The subscriber base amounted to 1,881,000 as of December 31, 2021, an increase of 44,000, net over that of the end of the prior quarter, and an increase of 113,000 since the end of the fourth quarter last year. Fourth quarter product revenues were $21.6 million, up 21% year-over-year. Full year 2021 product revenues were $81.2 million, representing an increase of 30% compared with the same period last year. The geographic breakdown of revenues in the fourth quarter was as follows: Israel, 52%; Brazil, 20%; rest of world, 28%. EBITDA for the quarter was $18.9 million or 26.9% of revenues, an increase of 14% compared with an EBITDA of $16.6 million, or 26.1% of revenues in the fourth quarter of last year. EBITDA for 2021 was $72.7 million, 26.8% of revenues, an increase of 56% compared to $46.7 million, 19% of revenues in 2020. Net income for the fourth quarter of 2021 was $9.6 million, 13.6% of revenues or diluted earnings per share of $0.46 compared with $6.8 million, 10.7% of revenues or diluted earnings per share of $0.33. Net income in 2021 was $34.3 million, 12.6% of revenues or fully diluted earnings per share of $1.65, an increase of 113% compared with net income of $16.1 million, 6.6% of revenue or fully diluted earnings per share of $0.77 in 2020. In 2020, there was an impairment charge of $13.5 million. Excluding the impairment charge, in 2021, the net profit increased by 16%. Cash flow from operations for the fourth quarter of 2021 was $16 million. Cash flow from operations for the year was $55.8 million. As of December 31, 2021, the company had cash, including marketable securities, of $54.7 million and a debt of $31.4 million, amounting to a net cash of $23.3 million. This is compared with cash, including marketable securities, of $78.8 million and a debt of $54.5 million, amounting to a net cash of $24.3 million as of December 31, 2020. For the fourth quarter of 2021, a dividend of $3 million was declared. In the fourth quarter, under the renewed program, Ituran purchased 208,000 shares for a total of $5.4 million. During 2021, a total of 280,000 shares were purchased, totaling $7.3 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

The first question is from Tavy Rosner of Barclays. Please go ahead.

Chris Reimer, Analyst

Hi. This is Chris Reimer on for Tavy. Thank you for taking my questions. First off, congratulations on the strong quarter. I wanted to touch on gross profit. You alluded to some of the supply chain issues in your comments. Could you just give some color on the moving parts into cost and what kind of things you're seeing in terms of cost inflation and supply chain issues?

Eyal Sheratzky, Co-CEO

As of today, as we mentioned, and we stated in the script, the component shortage all over the world is getting bigger. And of course, as of now, we did mention that we managed to deal with that effectively. I believe, as we mentioned, that during the first half of 2022, we will see some effects from this component shortage, which will, of course, decrease the gross margin of the hardware segment slightly. However, it's not something that we see as significant or material for our business, as approximately 70% of our revenues come from service revenues, which are unaffected.

Chris Reimer, Analyst

Got it. And then just in the subscriptions guidance, can you give any granularity into where you see the largest growth either by product or geography?

Eyal Sheratzky, Co-CEO

Okay. As I said, we have, I would say, two types of growth in our subscriber base. One is the traditional, which primarily consists of Stolen Vehicle Recovery (SVR), which is experiencing lower growth in markets where we’re already dominant, such as Israel and Brazil. On the other hand, during the last two or three years, especially during the Corona pandemic, we have identified other needs and segments, allowing us to grow once the pandemic subsides. During the last quarter and now, we have identified two main segments: First, financial companies and commercial banks that provide loans for people to buy cars. We do this mainly in Brazil and Mexico. I would say we have almost invented this segment, and we see a lot of interest which contributes a few thousand subscribers per month in each of those countries, Brazil and Mexico. The second segment, which previously received little focus in Latin America, is the B2B fleet management solution. We are now working with strong channels such as leasing companies and commercial rental car companies, which are promoting our solutions to various fleets. Previously, we approached this only in the Israeli market, where we have dominated the fleet management segment for many years. We're trying to replicate that success in Latin America, particularly Brazil and Mexico. This is why we’ve been able to show strong growth recently. Moreover, the third segment, which we began about three years ago, is the Usage Based Insurance, which currently attracts attention primarily in the Israeli market. However, we started this three years ago, and today, as I said, we have contracts and distribute our solution among almost 100% of Israeli insurance companies. We still have to educate the market on the advantages of usage-based insurance, based on mileage and driver behavior. This is a significant market change. We have to instruct the brokers and the insurance companies' centers. We've made impressive progress in this regard, and we expect strong growth moving forward. To summarize, while lower ARPU from newly acquired subscribers may influence our overall ARPU, our profit margins should remain stable due to the lower customer maintenance costs associated with these B2B businesses.

Operator, Operator

The next question is from David Kelley of Jefferies.

David Kelley, Analyst

Maybe the follow-up on the earlier supply chain discussion. I guess, are you seeing any shortages that are limiting volumes on the product side? Or is the impact solely tied to input cost inflation at this point?

Eyal Sheratzky, Co-CEO

At the beginning, we faced some challenges to understand market trends, pricing, and customer needs. But today, I'm pleased to say that even in Q4, we succeeded in fulfilling all requests. Over the last six months, we prepared and signed contracts with suppliers for the year ahead with specific terms. Therefore, I do not anticipate any shortages affecting our customers. We are responding to all requests. We understand that the demand specifically in the OEM market is lower since car manufacturers are experiencing their own challenges with components, leading to some plants around the world having to shut down. However, we are not seeing this situation with our customers in Latin America, although the sales have decreased. I believe there is a 20% to 25% decline in new car sales, which affects our OEM business. But to reiterate your main question, we do not expect any shortages from our side to our customers. We will provide any unit they request. Of course, we have increased our sales and inventory, which incurs additional costs affecting our margins. However, if you review our financial reports, you will see that while every dollar counts, the impact will not significantly affect our bottom line.

David Kelley, Analyst

And then back to the raised full year subscriber growth forecast; it's about 50,000 subscribers above your historic typical core outlook for the year. I was just hoping you could provide a bit more color on the core aftermarket business. How you're thinking about that? If there's any upside there or if this is slowly raised to some of the growth engines such as your UBI opportunity?

Eyal Sheratzky, Co-CEO

I think the numbers and forecast speak for themselves. We're expecting to achieve something around 150,000 this year, which represents a historically significant increase. I believe this supports our strategic choices in targeting the right segments, and we are now reaping the benefits. When managing a subscriber-based business, it takes time to translate subscriber growth to revenue and profits. This is why I've mentioned that we will see material benefits toward the end of this year and into 2023 when we start recognizing revenues from these 100,000 new subscribers. I believe that although subscriber growth will contribute less to top-line revenue growth, it will translate to an increase in profits due to our operating leverage model.

David Kelley, Analyst

Last one for me, and then I'll pass it along. The financing opportunity you referenced in the prepared remarks. Is that mostly U.S. related via your Buy Here, Pay Here exposure? Are you also seeing opportunities in other regions as well?

Eyal Sheratzky, Co-CEO

The answer is absolutely not. In the U.S., that’s our primary segment for almost ten years, as SVR is unattractive as a business there. Our U.S. business focuses on the Buy Here, Pay Here method, meaning we finance the cars and utilize our system alongside other telematics systems to secure the car loan. Conversely, this segment hasn't been part of the financing landscape in Latin America. We have studied the finance markets, understanding subprime loans in Brazil and Mexico, determining that this is a battleground for us to engage with financial institutions. We entered this market in April 2021, and we are in the early phases of development; however, our growth has been evident.

Operator, Operator

The next question is from Eli Berenshtein of Etzioni Portfolio Management. Please go ahead.

Unidentified Analyst, Analyst

I wanted to ask regarding the new segment of banks and finance companies. Just to get more idea, why do they really need your services? I mean, a bank that gives a new loan to a customer, why does he need to know the location of the vehicle or how he's driving? Thank you.

Eyal Sheratzky, Co-CEO

I’ll explain their interest. When they provide a loan to someone, especially a subprime customer, their confidence is only based on the car's value. If that customer fails to pay, they need to repossess the vehicle. Based on our experience in the U.S., most people who default are not criminals; they just face financial challenges. They continue to drive the car, thinking it belongs to them. In a large country like Brazil or Mexico, tracking the vehicle becomes crucial for banks since the car is their only real asset. By utilizing our technology to monitor location and ignition status, as well as sending notifications to customers, we can assist in recovery efforts. This model has shown strong returns on equity in financial groups, and we aim to replicate this success in new markets.

Unidentified Analyst, Analyst

Okay. I see. Got it. Thank you. Another question I wanted to know about is the UBI proposition. So in Israel, it's obviously very strong with several insurance companies. Can you take it to other places? I mean, I would guess that insurance companies all over the world would like mileage-based insurance. Is it possible to extend this to Europe, for example, or penetrate new places in Latin America?

Eyal Sheratzky, Co-CEO

Sure. We started in Israel, but after one or two years of operating successfully, we are looking to expand into other markets, primarily regions where we already have a presence. That's often more efficient, as it involves upselling to existing customers with whom we have solid relationships. We are currently trying to penetrate Latin America. I must say, however, that dealing with insurance companies can be highly challenging; they are traditionally slow to adapt. It took us many years to convince Israeli insurers of the benefits of UBI for their profitability. Entering markets like Brazil, Argentina, and Mexico involves trials, and we are currently in that stage. As digital insurance providers emerge in Latin America, traditional firms will need to adapt to stay competitive, presenting us with opportunities to enter new markets. I believe it's a matter of time before we can expand our UBI offerings to new geographical areas, but I'm cautious not to overpromise on timelines.

Unidentified Analyst, Analyst

Last question I guess for Eli. So in the cash flow statement this quarter, there was an $11.3 million settlement of obligations to purchase non-controlling interest. Can you please remind us what it is and if any other payments are necessary in the future?

Eli Kamer, CFO

Yes. If you remember, in 2018, we acquired almost 82% of Road Track. According to the agreement, in October, we finalized acquiring the remaining shares. So, as of today, we hold 100% of Road Track and its OEM operations.

Unidentified Analyst, Analyst

In the minority, what will be left basically?

Eli Kamer, CFO

There is no minority. I'm sorry. We purchased the remaining 18% from the minority stakeholders. The rest pertains to our subsidiary, which holds approximately 49%.

Operator, Operator

There are no further questions at this time. Before I ask Mr. Sheratzky to go ahead with his concluding 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 the management of Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. I look forward to speaking with you next quarter. Have a good day. Thanks.

Operator, Operator

Thank you. This concludes the Ituran fourth quarter 2021 results conference call. Thank you for your participation. You may disconnect.