PowerFleet, Inc.

Good morning. Welcome to PowerFleet's third quarter 2020 conference call. Joining us today for today's presentation is the company's CEO, Chris Wolfe, and CFO, Ned Navramadis. 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 or are not limited to the company's financial expectations for 2020 and beyond. All such forelicking 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 forelicking 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, Thank you, Shamali.

Good morning, everyone, and thank you for joining our call today. I hope everyone is staying healthy and doing well during these challenging times. Our global team of employees and partners are healthy and are continuing to drive the business forward while we follow country, state, and local health measures. While the pandemic continues to present challenging headwinds in our various geographies, we've seen business momentum pick up from the lows we saw in Q2. Despite the ongoing challenges, we delivered solid sequential improvements in all of our key financial metrics during Q3. We realized a 7% increase in total revenue, a 6% increase in gross profit, and a 71% increase in adjusted EBITDA. These results, again, demonstrate not only the resiliency of our business and the necessity of our products and services, but also our focus on driving profitable growth. We continue to make very good progress against our strategic initiative of increasing our vertical integration across our product lines. while at the same time judiciously managing costs and realizing efficiencies throughout our organization. Taken together, these measures produced another strong gross margin quarter at 54% and a 4% sequential decrease in OpEx, which drove significant improvements to our bottom line. I will now turn the call over to Ned to discuss our Q3 financial results in more detail. Afterwards, I will discuss our sales and operational progress and outlook. Then we'll open the call up for any questions.

Thank you, Chris, and good morning, everyone. Before I dive into the numbers, it's important to remind you that our financial results for Q3 2020 include consolidated results for both IED Systems and Poynter Tell Location, which were acquired on October 3, 2019. Keep in mind that the comparable year-ago period only includes standalone results from IED Systems, Inc. Now, with those qualifications, let's look at the numbers. Revenue for the third quarter of 2020 increased to $27.6 million from $25.8 million in the prior quarter and from $16.7 million in Q3 last year. High-margin recurring and services revenue was $16.7 million or 60% of total revenue. This was an improvement from $16.4 million or 64% of total revenue in the prior quarter and from 5.8 million or 34% of total revenue in Q3 of last year. Product revenue which drives future services revenue was 10.9 million or 40% of total revenue. This compares to 9.4 million or 37% of total revenue and 11.1 million or 66% of total revenue in Q3 of last year. Gross profit increased to 14.9 million or 54% of total revenue from $14 million or 55% of total revenue in the prior quarter and from $7.6 million or 45% of total revenue in Q3 of last year. Now, turning to our expenses, total operating expenses for the third quarter of 2020 were $14.2 million down from $14.7 million in the prior quarter. The $14.2 million in Q3 was down 4% from the prior quarter and down 19% from Q1 of 2020. We have additional levers to pull in our expenses to further reduce the cost should the situation with the pandemic worsen. Turning to our profitability measures, gap net loss for the third quarter of 2020 totaled $1.7 million or $0.06 per basic and diluted share. This was an improvement from a gap net loss of $3.8 million or $0.13 per basic and diluted share in the prior quarter and a gap net loss of 2.1 million or 12 cents per basic and diluted share in Q3 of last year. Adjusted EBITDA and non-gap metric for Q3 2020 totaled 3.6 million or 13% of total revenue. This was an improvement from adjusted EBITDA of 2.1 million in the prior quarter and adjusted EBITDA of 738,000 in Q3 of last year. The 3.6 million in adjusted EBITDA in Q3 of this year Mark, the highest level of adjusted EBITDA since the acquisition of Poynter, reflecting the leverage in our financial model. Our liquidity position remains strong at quarter end, with $21.1 million in cash and cash equivalents and a working capital position of $31.2 million. Our focus continues to be on working capital management and cash collections. I'm encouraged to report that for the nine months of 2020, we generated 5.3 million of cash from operations, which is an improvement from 4.3 million used in operations in the same period of 2019. In summary, we believe our diversified customer base, predictable high margin recurring revenue, and prudent approach to cash management will help us ensure we successfully navigate this uncertain time. That concludes my prepared remarks. Chris?

Hey, thanks, Ned. Our improving financial performance reflects our global team's continued operational execution and building sales momentum. During the third quarter, we secured several notable wins in our industrial business, including Cotex, a top 100 supplier of global automotive OEMs. Cotex is leveraging our next-generation PowerFleet Enterprise solution to improve safety and efficacy across its global manufacturing centers. After initially installing our solution on all their assets at their Detroit facility, they expanded deployment at two additional North American sites. We have exceeded all their expectations and we are now in discussions regarding deploying our solution at seven other European locations. Our end of Q2 win with Rider Logistics, a leader in outsourced logistics, is notable as they continue to implement at three sites during Q3. Ryder selected PowerFleet for Enterprise Solution on their forklifts and other material handling equipment within its North American supply chain operations. For those less familiar with our industry, Ryder manages critical fleet, transportation, and supply chain functions for more than 50,000 customers, many of which make the products that customers use every day. Over the next 12 to 18 months, Ryder will be deploying our enterprise solution on more than 1,000 pieces of material handling equipment at more than 30 sites across North America. In addition to Contacts and Rider, we had several other successful implementations during Q3, including with the largest internet retailer implementing at five of its US sites. In Q3, we also signed a master purchasing agreement with Daimler Trucks North America, the leading heavy duty truck manufacturer in North America. They are currently installing our system at two of their sites with plans to install at their Portland headquarters in Q4 and other locations throughout 2021. In our logistics segment, we won additional business with two existing customers who are expanding their container and chassis fleets. The first win was with Milestone, who purchased approximately 1,000 LV100 units during Q3, representing a strategic decision to begin tracking chassis in their rental business. The other win was with Compass Lease, who purchased 500 LV100s to track assets in their rental side of the business. It's important to note that both purchases represent a new strategic investment Not previously typical of the rental business model in logistics, as it's usually low cost driven. However, both companies see the value of PowerFleet platforms and using our software and analytics for internal process improvements, including enhanced visibility of assets during high demand leasing. Additionally, both companies now can offer their rental clients extended value by providing the same visibility to their assets during the term of their rental contract. We have also seen the effects of COVID increase the demand for both dry van and refrigerated trailers. In turn, this has stimulated demand for tractors and drivers, which has driven an increased demand for intermodal container capacity as intermodal options help to move essential goods without tractors and drivers. We are especially excited about recently learning that we want a 6,000-unit container fleet that will leverage our LV500 solar unit and LV710 freight camera system that will begin shipping in Q4. This is the largest win utilizing our LV500 to date. Once we receive the purchase orders, we will issue a press release with more details on this great win. Additionally, our customers in the cold chain space have reported an increase in their business as they move essential food and pharma products. We are currently in 11 field trials with approximately 40% of those associated with refrigerated tracking command and control. While these field trials represent a 30,000 unit near-term opportunity, these customers represent an additional 130,000 units in potential. While we've had great success with our existing logistics lineup of products, we continue to not only add new functionality and features, but push innovative boundaries as well. In Q3, we entered the final stages of field trials with what we call our LV750 weight sensors. This new product will provide customers with solutions that detect mounted and dismounted states, progressing to loaded and unloaded, and also estimated weight based on the customer's required use cases and their price points. On top of this, we recently entered into beta tests on our dual mode versions of our dry van, container, and refrigerated platforms, the LV500 and LV400. Utilizing both satellite and cellular for wide area communications, these solutions open up additional market opportunities that require communications footprints beyond traditional cellular networks. In addition to new innovations and logistics, we continuously improve the safety and the security of the capability across our industrial and fleet management product lineups as well. Internationally, our Poynter Israel operations had a phenomenal Q3, growing both their historical connected car business as well as their IoT and logistics offerings. Our revenues and profits from Poynter Israel exceeded pre-COVID levels. One exciting recent development is that our Poynter Israel business unit began business development activities in Dubai following the recent peace deals with the UAE and Israel. We are currently working with several potential partners to assess deploying our solutions in the consumer, rental, and vehicle spaces and Arab countries that have signed peace deals with Israel. The vehicle security and fleet markets represent more than a 300,000 unit potential. Our cell locator business, which sells products and services outside our core markets, saw demand near pre-COVID levels in Q3. This tells us the recovery is global in nature. Also, our Mexico operations continue to thwart COVID impacts and grew at a rate of 13% year-to-date as we continue to get strong uptake from our customers, Kavak, and AXA Insurance. In Brazil, we run three significant deals in Q3, totaling over $4 million in contract value. These contracts were with Petrobras, Raisin and Endicon. Now, let us turn to our rental car business, which has been folded into what we call our power fleet for vehicles here in the United States. In Q3, we saw Avis Business recovering, and we are currently at pre-COVID monthly billing levels. We also continue discussions with the world's largest rental car company on doing a large-scale field trial of our product in 2021. Looking ahead, our now 570,000 subscriber base provides us with not only high margin recurring services and subscription revenues, but also good visibility as we enter 2021. This visibility is supported by our strong financial foundation with $21 million in cash. On top of this, our consistent cash flow and expanding adjusted EBITDA generation provide us with a diversified and stable plan to execute on our growth strategy. While COVID headwinds remain, we see sporadic closures in various countries. We remain confident in our continued ability to execute our strategy and extend our position as one of the world's leading IoT companies focused on supply chain visibility, fleet management, and unique asset and IoT solutions. With that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

Thank you. And at this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question is from Mike Walkley with Canaccord Ingenuity. Please proceed with your question.

Great. Thanks. I hope everybody on the call's families are safe and well. Chris and Ed, congratulations on the strong EBITDA margins. Great to see them return to double-digit levels. Just on the 570,000 subs, I think that's up 20,000 sequentially. Can you give us just some color where you're seeing maybe the strongest ads in this tough environment? and also on the other side, are you still seeing any customers downsizing just given macro concerns? And then finally, just based on the sub number, do you expect it to continue to grow absent any kind of economic shock from the pandemic worsening? Thanks.

Hey, thanks, Mike. As far as the sub growth, it was really across the board. That's kind of why we wanted to focus on the win in Brazil, the win in Mexico. Again, I think a lot of new investors that don't really know our story Like the industrial side, you have to keep in mind, we've shipped well over 100,000, probably 140,000 total units in the lifespan of that. Well, half of those are not on recurring today. So again, as we get customers to refresh, those all go on to recurring. So I think it's just a broad-based recovery, which is great to see. And so there wasn't really one shine-out massive deal that brought in a lot of subscribers.

Great, thanks. And Chris, just PowerFleet for logistics, you mentioned those two customer wins. Can you provide maybe more color on who you beat out to win the deal, why they chose you, and what that potential opportunity can be for PowerFleet?

Yeah, the two customers that we mentioned, those are actually existing customers, but this is new business with them. And just so everyone knows, typically those are put out for bid. Just anybody running a logistics company or a leasing company can You always put your new business out for bid. I can't go into who we were competing against, but we definitely had to compete for that business. And I think obviously being an entrenched provider helped us. But again, they put us through the paces. I think the opportunity with them is, and what you're seeing, as I mentioned before, this uptake demand for trailers, the uptake demand for containers. Well, if you have a container, you have to have a chassis. And so The leasing companies that are actually leasing this equipment to take care of that excess demand, you know, the more demand there is, obviously, the more opportunity for us to grow. And we'll just grow with our customers. Matter of fact, that container fleet that I mentioned, the 6,000 LV500s, I mean, that's a monster win for us. That's a brand-new fleet, to put it in context. That is not an existing fleet. This is a brand-new container fleet that's going to be hitting the road.

That sounds great. One last question for Ned, and then I'll pass the line here. Ned, very strong service and hardware gross margins in the quarter. Was there anything special in the mix or are these trends we should expect to continue? And while I know you're not giving guidance, just kind of based on the pipeline, would you expect both those businesses to potentially grow sequentially? Thank you.

Sure. Yeah, so if you look at the service gross margins, Mike, those are going to remain strong at these levels going forward, and they're going to continue to improve as we grow the service revenue. The product margins tend to fluctuate a couple percent of points based on product mix. We did have very good product mix during this quarter. Also, you know, the reason we did the acquisition of Poynter and Oden Solicator is to be vertically integrated and really control our gross margins. And you're starting to see that benefit hit the product margins. That's why we're proud of our gross margin performance in the quarter.

And then the growth the next quarter, any comment or just kind of no guidance for now?

You know, at this point, we're not given any guidance, but as obviously Chris mentioned in the prepared remarks, we feel very good what we're seeing about the growth The business, obviously, we're concerned with COVID as some of the economies globally begin to shut down again. But so far, the pipeline and our sales activity is very positive.

Right. Congrats again on the execution, and I'll pass the line.

Thanks, Mike.

Thanks, Mike.

And our next question is from Jason Smith with Lake Street. Please proceed with your questions.

Hey guys, thanks for taking my questions. Just curious if you could comment on sort of the linearity of order patterns you saw in Q3 and any additional color you could provide on what you're seeing from order momentum here in October and here in November.

It's kind of interesting that, you know, as I mentioned before, you know, even with our subscriber growth, it's kind of across the board. And to be honest with you, that's great to see, you know, because that tells you the run rate business is recovering. If you look at what we call our dealer network channel here in the United States, many of you know that we do business with 500 dealers that actually sell our products here in the States. That's like our Young Heinrich channel in Europe. We saw that business actually recover at pre-COVID levels during Q3, which that's awesome. On the strategic side, which we won some huge strategic deals, we still We're starting to see that recover. That's where it was most impacted in Q2. And when we say strategics, that's large companies that we deal directly with. So a lot of them put off their capital expenditures in Q2 because of COVID. We're starting to see that recover. And to put it in context, that was well over $11 million in business that basically kind of put on hold. Now, that being said, we're starting to see that come back. I think what Ned said is true. Israel shut down for three weeks at the end of Q3. Thank goodness. I think it was happenstance, but it was right during their holiday time, so it's really minimal impact. But you're also seeing Germany being impacted. That has not impacted us as of yet with young Heinrich, and the UK is shutting down again. So I think the uncertainty is the only thing that I would say is we're seeing the momentum pick up across the board, but it's just that what could happen. As long as we see the strategic deals starting to come in, we feel a lot better about Q4 and going into next year.

Okay, that's really helpful. And then looking at your large online retailer customer here in the U.S., I know that's really driven by your partnership, but how should we think about the potential trajectory of further rollout? Would we expect further expansion here in Q4 and throughout 2021?

We have visibility into some of that. You know, I'm not at liberty to go into the details. That being said is we've seen the momentum pick up there over the last year, even in the midst of COVID, you know, with our partner. And I think we're going to continue to see that in 2021. I mean, again, what we're hearing is that large retailer, online retailers, looking to – Winnie Down or narrow down their choices in telemetry. Right now, they actually pick a telemetry unit depending on the forklifts they pick at given sites. We see that continuing, but I think they're starting to be very selective, and so we think that actually bodes very well for us next year.

Okay, and the last one for me, and I'll jump back into Q. Ned, how should we think about OPEX here in Q4? I know you mentioned there's additional levers to be pulled if needed, depending on the macro situation. But is OpEx going to remain relatively flat?

Yes. Our goal is to really maintain the expenses flat at this level. And obviously, you see as the revenue grows, a lot of that goes right to the bottom line.

Okay. Perfect. Thanks a lot, guys.

Thanks, Jason.

And our next question is from Gary Prestopino with Barrington Research. Please proceed with your question.

Hey, good morning, Ned and Chris. Chris, I thought I heard you say you have 100,000 units that have been shipped but are not reflecting any kind of revenue on the services side. Is that correct?

Yeah, let me make sure that's very clear. Historically, ID Systems used to sell only industrial vehicles, right? I mean, we're talking back in the dark ages. Prior to four years ago, every unit that was shipped there did not have recurring. And we're talking customers like Ford, Walmart on the dock, I mean, on their distribution centers, the United States Postal Service. I mean, there's a lot of customers. All those do, you know, some do pay as a maintenance fee, so I don't want to But the preponderance of those units, and it's roughly about half of what we shipped, it's about 50,000 units, do not pay us a recurring. Now, those are in refresh cycle, and we've talked about that before, but now it's obviously because of end-of-life on technology and upgrade cycles, it's getting to where they have to upgrade. So it's about 50,000 units, and usually the ARPU on that is about $10 a month.

Okay, but I'm trying to understand this. That's not a lock that they're going to move over into the services side and start paying you recurring revenue.

No, it's not a lock. But, you know, again, I think somebody in the 70% range or whatever will move. I mean, it's just they like the product. They get value out of it.

Great. All right. And then I apologize for this. You went through this so quickly. In terms of some of the new business awards in the quarter in logistics and industrial, would it be too much to ask just to go through that again, just a little bit slower here? Some of the key ones, Chris, some of the key ones.

Okay, so again, all those deals were signed, not necessarily shipped. I hope that's clear. So with CAUTEX, we have started implementing sites, right? We implemented Detroit, and we implemented two North American, and now there's seven more sites across Europe. Rider Logistics, I think we have about six sites, six or seven, because, again, it's very fluid. We actually start installations almost every day. Their total rollout next year will be 30 sites in total. So we have about 24 sites to go. and we've barely touched 1,000 units total. And everyone needs to keep in mind that retail price of that product is like in the $1,600 range. It's not a $200 tracking unit. And then on the logistics side, there was three major deals, one just recently right prior to quarter close, but the two were those extensions of fleets that we currently are in, and, you know, as we're, you know, which is about 1,500 units and then the 6,000 unit order we just got notified of just literally as the quarter closed.

So you had a 6,000 unit order? I'm sorry, did you say a 6,000 unit order? Yeah, a 6,000 unit order of our LV500 and FreightCam, which is our high-end product.

Right.

Great. So it seems to me that you're really starting to see a lot of momentum there just overall. And, you know, I guess... A lot has changed with the perception of the company since the pointer acquisition in the market. Is that a fair statement?

Yeah, I think it's a fair statement. I think more than that is, you know, these field trials, if it wasn't for COVID, you know, again, I think it's about a six-month impact, right? You know, field trials stalled. I think people are seeing the value. I mean, once Dan Ross signed this summer, you know, that's a huge name, you know, people who know who they are. And so we started getting a lot more inbound inquiries, you know, once you get those kind of wins.

Well, that's good. I mean, especially in this environment, to be winning new businesses is great. All right. Thank you so much.

Okay.

Thanks, Gary.

And again, as a reminder, if you have any questions, you may press star one on your telephone keypad. Our next question is from Glenn Mattson with Lattenberg. Please proceed with your question.

Hi, thanks for taking the question. Great quarter. Ned, quick, just on the cash flow, remind me the priorities going forward. Are you going to look to pay down debt quickly, or what's the use of cash?

That's correct, Glenn. Our goal is really to continue to pay down the debt. If you look at our working capital, we have $21 million in cash. Strong Working Capital, which improved versus the prior quarter. And we generated $5.2 million in cash flow from operations.

And we'll continue paying down the debt.

There's also one thing I want to point out on the debt. Sorry about that. One thing I want to point out on the debt. We closed the debt about a year ago. Since then, the interest rate environment has gotten a lot better. So we're looking at opportunities where we're able to reduce the interest on the debt, which would be a very positive thing. We should hopefully get it done in the next couple of quarters, and we should announce it when we get it done.

Great. And then on the deferred revenue, how do you – How should we think about that? It was down a little bit sequentially, but obviously business is strong. But just maybe is there some dynamic there that drives it lower seasonally or is there a difference in how the booking works or something like that?

No, the deferred revenue shouldn't have any real impact. If you look at our business model, we usually get paid for the hardware up front and the services we invoice and collect them monthly. So, in certain cases, we have certain customers that prepay, so you might see the deferred revenue go up and down, but it should not be an indicator of future businesses.

Great. Thank you. And then, Chris, just stepping back for a minute and looking at, you know, like taking an assessment, it seems the business is doing really well. The You know, the pointer acquisition has been integrated at this point. It's the costs of, like, a lot of them have been taken out. You know, but there's been this pandemic in between when you signed the deal to now. You know, maybe could you just kind of point out, like, where you think you've, like, hit the mark or exceeded on your initial expectations or where there's still room for improvement over the next, you know, whatever period of time, six months or a year or so? Absolutely.

Yeah, that's a great question. So in our IT integration, in various aspects of what we've done on IT, consolidating tenants, et cetera, that's been phenomenal. By the way, that's actually helped us work more efficiently across the globe. So hats off to that team. And they also have been working on what we call financial consolidation, which has enabled us to, obviously, we have operations around the globe. So it's like helping us just be more efficient in closing the books. That all being said, Supply chain and operations, we've seen significant savings there. A lot of it's volume-driven, so as volumes go up, there'll even be more savings, which has been great. So I think our team there has just been doing phenomenally well. We have already integrated and we're in beta of our analytics platform. So part of it is platform consolidation, which takes more time. and so the analytics platform is currently in beta. So once we get that done, we'll see some additional cost savings there. Then it'll be our other platforms as we consolidate through next year. You know, there's about another million dollars in savings as we get our software platforms consolidated. Now, when I say that, I just want people to realize from an end customer perspective, they might not even know we're consolidating the platforms, right? You know, because you can actually, the front end and the back end, how you integrate and what they see, you know, The customer might not even care as long as it's secure and the data is delivered as it needs to get there and stable. So, you know, our goal is to make it transparent to the customers and at the same time get the cost savings out over the next year of the consolidation.

Great. Thanks, Vinicolor. That's it for me. Congrats on the quarter. Thanks, Glenn.

And we have reached the end of the question and answer session. I'll now turn the call over to the CEO of Chris Wolfe for closing remarks.

Yeah, thank you for joining us today. I'd like to thank our employees for their diligent efforts and great results, our customers for putting their trust in our products and services, and our investors for their support of our vision. Please stay healthy, and we look forward to speaking to you again soon. Operator?

Thank you for joining us today for our presentation. You may now disconnect.