PowerFleet, Inc.

Good morning.

Welcome to PowerFleet's second quarter 2022 conference call. Joining us for today's presentation is the company's CEO, Steve Towe, and global controller, Joaquin Phong. Following their 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 Power Fleet'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 finance 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 but are not limited to the company's financial expectations for 2022 and beyond. All such forward-looking 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 forward-looking statement. Factors that could cause actual results to differ materially could include, amongst other SEC filings, overall economic and business conditions, demand for the company's products and services, competitive factors, emergence of new technologies, and the company's cash position. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances. Finally, I would like to remind everyone that this call will be made available for replay and the Investor Relations section of the company's website at www.powerfleet.com. Now, I would like to turn the call over to PowerFleet's CEO, Mr. Steve Towe. Sir, please proceed.

Thank you, Operator, and good morning, everyone. We appreciate you taking the time to join PowerFleet's second quarter 2022 earnings call. I'd firstly like to say thank you to those of you that joined our Virtual Investor Day in mid-June. Your positive energy and feedback were very encouraging to us. The leadership team and I appreciated the opportunity to share with you PowerFleet's enhanced vision, our growth drivers, go-to-market strategy, software and II roadmap, all of which we are executing on well, as you'll hear a lot about this morning. If you haven't had the chance to listen to our Investor Day, I encourage you to visit the Investor Relations section of our website to access the content. As you can see from our results, during the second quarter, we built on the momentum we established in Q1 and delivered solid, sequential, and year-over-year growth, the latter of which is quite impressive, given the year-ago comparison includes significant one-off product revenue. Moreover, the $34.6 million in total revenue this quarter marked a 10-quarter high for Power Fleet and third successive quarter where we've overachieved external consensus estimates. The revenue mix is also encouraging as we embark on our journey for high-quality recurring SaaS revenues at the heartbeats of our company. Importantly, we were able to achieve these milestones despite the ongoing macro headwinds and supply chain issues affecting our industry, many of our competitors, and companies globally. Our impressive top-line performance in Q2 was driven by further commitment from notable customers like Ford, Volvo, Nestle, and NACPAC. The improvement in our bottom line reveals the early benefits of our rationalisation initiatives that are enhancing our organisation's efficiency and profitability. Taken together, we realised very positive improvements in both operating expenses and our key profitability measures in the second quarter, all of which exceeded external consensus, estimates and expectations. Overall, the leadership team and I are very encouraged by the progress we're making, the execution we're delivering, and the results we're seeing. Before I dive into our operational highlights and outlook, I'll turn it over to our Principal Finance Officer, Joaquin Fong, to cover our financial results for the second quarter of 2022. Joaquin?

Thanks, Steve, and good morning to everyone on the call. Turning to our financial results for the second quarter ended June 30, 2022. Total revenue was a 10 quarter high of $34.6 million, which is up 4% from the first quarter of 2022. As Steve alluded to, we're really encouraged by the composition of revenue in the quarter, which is characterized by higher SAS and high quality recurring revenue compared to the prior quarter and Q2 of last year. Along that line, high margin recurring and services revenue was $19.8 million or 57% of total revenue. This was an improvement on the dollar basis compared to $18.1 million or 54% of total revenue in Q2 of last year. Product revenue, which drives future services revenue, was $14.8 million or 43% of total revenue. This compares to $15.5 million or 46% of total revenue in Q2 2021. Girls' Profit was $16.2 million, or 47% of total revenue, compared to $16 million, or 48% of total revenue, in the same year-ago period. Service Girls' Profit was $12.7 million, or 65% of total service revenue, an improvement compared to $11.4 million, or 63% of total service revenue, in Q2 of last year. Product growth profit was $3.5 million, or 23% of product revenue, compared to $4.6 million, or 30% of total product revenue, in the same year-ago period. A sequential improvement in product growth margin in Q2 2022 reflects the initial success we're having managing PPV challenges, as well as the reengineering of certain products to enhance our margins. We continue to navigate through the global supply chain and electronic components issues and deliver on our customer commitments, supplying products and solutions that they rely on for their business operations. As we progress through the balance of 2022, we anticipate product growth profit to incrementally improve as we realize future benefits from our operational and product reengineering initiatives. Looking at our expenses. Total operating expenses were 17.8 million, down from 18.1 million in the prior quarter, but up from 16.2 million in Q2 of last year. The sequential decrease reflects the initial impact of our ongoing rationalization efforts, which will be reducing our annual operating expenses by approximately 5 million over the next 12-month period. Looking at our profitability metrics... Loss from operations improved by 2.2 million or 58% to 1.6 million compared to a loss of 3.7 million in the first quarter of 2022. It's worth noting that a significant portion of our loss in the quarter was related to PPV and foreign currency impact. Based on our current visibility and success with our rationalization efforts, we expect to cross over to profitability on an operating basis in the first half of 2023. Gap net loss attributable to common stockholders total $1.3 million, or $0.04 per basic and diluted share. This compares to gap net loss attributable to common stockholders of $2.6 million, or $0.08 per basic and diluted share in Q2 of last year. Non-gap net income, a non-gap metric, total $2 million, or $0.06 per basic and $0.05 per diluted share, compared to non-gap net income of $1.4 million, Thank you, Joaquin.

Today, PowerFleet has more than 600,000 recurring subscribers, long-standing customer relationships with some of the largest companies in the world, tremendous industry experience, and proven technology that we're actively deploying globally. We have a significant opportunity to gain further wallet share with our 8,000 enterprise customers and to increase the role we play within these organizations. and not only do we have a tremendous upsell opportunity in front of us, we have the capabilities to operate in an expanded market that is growing at north of 20% annually. With our customer base, along with the breadth of portfolio that we have across our geographies and the end markets we operate in, we are confident we can capture significant new logos, establish new recurring revenue streams and grow our subscriber base substantially in the years ahead. Now that I've highlighted the broader opportunity, let me dive into the increasing opportunity we're seeing currently today in our key regions and the traction that we're realizing. In the US, a market power fleet has been operating for more than 20 years. We delivered a much improved 12% growth in the first half of the year, driven by building demand from our industrial customers. In addition to the robust double digit growth, our industrial fleet segment recently surpassed 3,000 customers, which is not only a testament to our commitment to innovation, but also validation that the industry is seeking enterprise technology solutions to drive improved safety and productivity across business operations. This milestone also represents tens of thousands of workers that we're working with to keep safe and help mitigate risk in the workplace. Thank you for joining us today. We're excited by the momentum and market acceptance of our latest products in the pedestrian safety arena, further driving our success as a best-in-class solution provider utilizing artificial intelligence and data science. As the industry changes in response to continued challenges, our technology plays a crucial role in modernizing our customer software in support of their digital transformations. We look forward to further accelerating the innovation of our software and data solutions and we remain fully on track to deliver our single pane of glass software interface and our new enterprise modular SaaS approach in Q4 of 2022. The growth we generated in the US in the first half of 2022 is indicative of the untapped potential in the region. We're driving consistency and enhancing the profitability of our US business and have been well positioned to be the leading growth vector for PowerFleet in the years ahead. From a market synergy perspective, there's lots of capability today that live and exist with our customers and verticals in our global markets, which we haven't yet brought to the North American market with advanced solutions in car leasing, insurance, electric vehicles, and connected car. The team is actively working to bring these products and relationships to the US and are highly energized by the productive conversations we're having with customers and partners alike. We allocated some of our cost savings from the rationalization efforts and have now put in place a dedicated sales team to attack the U.S. market with the pointer-based solutions. We're seeing great early traction and expect to meaningfully penetrate the U.S. market with the pointer solutions in 2023. To that end, this initiative is part of a broader reinvigorated renewals and upsell program that we launched last month across our global customer base. Our Israeli operation is an incredibly important piece of our go-forward strategy. With a 20-year history, tens of thousands of subscribers and a 40% market share in the region, we're bringing to market new technology solutions that are not yet released anywhere else in the world. Our Israeli Innovation Center is the creative and innovative heart of the operational body we drive in other key geographies. Despite the foreign currency hit we recorded in Q2 due to the strengthening US dollar, our pointer Israel operation is performing exceptionally well. We've seen IoT solutions continue to gain momentum, particularly with IoT-enabled defibrillators and cool chain solutions for pharma products. Last week, we announced that we expanded our IoT technological services to MDA, Israel's only national blood and medical emergency service, for more than 800 IoT-enabled defibrillators countrywide throughout Israel. After a successful initial deployment in 2021, the solution will be applied at additional municipalities throughout Israel. MDA plans to install its IoT-enabled defibrillators with point-to-buy PowerFleet technology in more public and commercial spaces, such as parks and high-rise buildings, to save more lives. This additional order signifies the value and results MDA has received since implementing our technology, not only to ensure life-saving equipment is available to more locations, but also to help organizations manage time-critical emergencies most effectively. We expect to announce some very exciting strategic innovation partnerships in Q3 for the next generation IoT ecosystem. In other international markets, we're actively working to introduce the IoT solutions to Dubai and the United Arab Emirates, relatively untapped markets that have expressed a deep interest for our solutions. In parallel, we're seeing strong growth in Mexico and Argentina, and the team is focused on driving even more growth out of these regions. More broadly, we're finalizing strategic plans to establish a larger footprint in Europe in 2023. As you've heard, we're gaining momentum in our key regions and go-to-market strategy execution. In summary, PowerFleet's transformation is well underway. Our initiatives over the last six months are already yielding visible returns. The $5 million annualized cost reduction and efficiency program we articulated in detail at the Investor Day is being executed to time with high levels of precision. Our business is starting to optimize and now we're starting to hit our stride. Our plan is supported by a solid cash position and available resources that provide sufficient runway to execute our growth strategy. We entered the third quarter with a record pipeline of opportunities that we are converting at an escalating pace. We also entered Q3 in the second half of the year in a strong position supported by building customer engagement and that growing pipeline as well as several strategic opportunities which are moving forward nicely. We anticipate that the second half of 2022 will bring more momentum building on the very solid first half of the year and position us for higher growth inflection in 2023. As we look ahead The team remains very focused and is executing well on driving our own transformation and accelerating our vision. The successful evolution of the strategic value creating roadmap we introduced at our investor day will create a highly scalable, repeatable, and profitable global organization. That concludes our prepared remarks. Now I'll turn it back to the operator for Q&A.

Thank you. We will now 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 your questions. Our first questions come from the line of Mike Walkley with Canaccord Genuity. Please proceed with your questions.

Great. Thanks, Steve. Congrats on the solid Q2 results in the recovery in the hardware gross margins. Can you just delve into the hardware gross margin a little more? Was this some favorable mix, maybe improving supply input costs or other factors? I know you're working on the reengineering, but I assume that would be more later in the year.

Yeah, thanks, Mike. Good question. And we've started to get some of the reengineering quicker than we expected, which was great. And then also, I think we've done a better job of choosing the business that we've taken from a profitability perspective. and also, you know, we've been quite robust internally around, you know, making sure that we get a fair price for the cost that we are entertaining today. So the team is, you know, always looking out for the components at the best possible price. Even last week, we were quoted a 50x price on a component. So the madness continues. But I think, you know, overall, we set it as a key KPI to get that bounce back going. And we're very, very pleased that we've moved from, you know, 16, 17% up to 24. So not one factor, quite a few that add into it together.

And just speaking on that supply, how is that? Does it impact any sales this quarter and How is it looking, maybe easing in the second half of the year?

So I get asked this question, you know, is it getting better anytime soon? And I think the answer, we can't give a solid answer that it's going to get better. I think from our perspective, you know, we haven't lost any revenue or not taken any revenue that we wanted to take in the quarter. We have looked at some deals that we didn't feel were the right deals to do from a high-quality revenue perspective. and to all of that effort we talked about, that will continue. And I think from our perspective, we look to improve again next quarter. Off the back of more of that re-engineering coming to play. But I don't think we're particularly seeing market conditions calm down. And I think if you look at the industry and some of the notes that our competitors have sent out, you know, we seem to have fared very well in comparison to some of those challenges. So we'll keep on doing what we're doing and hopefully we can continue that trajectory back to historic levels. But I'm not going to say it's going to kind of all get better within the next, you know, three to six month period.

Great, thanks. And then one last question, then I'll jump back in the queue. Just on the pace of this $5 million savings, can you kind of remind us how that's focused and where it hits the P&L? Is it spread in gross margin and OPEX, or is it more just OPEX-focused in terms of that $5 million savings? Thank you.

It's a bit of both, and some of them are quicker wins in terms of what we can do with freight and some of the efficiency savings, and then some of it's a bit longer term in terms of systems being introduced into the business, which is why we're saying it was a 12-month plan to get to that full operational run rate of the five-year reduction. So there's some in product gross margin, there's some in service gross margin in terms of The way that we're kind of managing our relationships with our suppliers and some of the synergies of bringing Point and Power Fleet together from a kind of economy of scale perspective. And then there's some OPEC savings as well. But as you've heard, we've reinvested some of that, living within the envelope that we had in terms of putting more people on the street from a go-to-market perspective and some more kind of data science software folks as well in the development arena.

Thanks for taking my questions and look forward to some of those new products coming out in Q4.

It's exciting.

Thank you. Our next questions come from the line of Scott Searle with Roth Capital. Please proceed with your questions.

Hey, good morning. Thanks for taking my questions. Steve, nice job. First full quarter out of the gate here, starting to see some of those improvements, particularly on the gross margin front. Maybe looking into the back half of this year, It sounds like we're far from perfect visibility, but I'm wondering if you'd give us some idea in terms of how you're seeing sequential visibility to product ramping into the second half of this year from a sales perspective and also what you would think the exit rate for the product gross margins would be this year and kind of what you're targeting for next year.

Thank you very much. Q3 was quite challenging for the business in terms of revenue last year, but we're hopeful that the rhythm that we're now in will continue in the back half. We've brought in a new go-to-market team. We've brought in Patrick, our CRO, and a lot of work's going on in terms of lead generation. The pipeline's getting stronger. We're not so reliant on one individual large deal or one customer that makes or breaks the quarter. That was the other kind of I think interesting dynamic within this quarter plus on top of that the services move so you know the subscription revenue is coming through really strong so you know we expect it to continue you know as I've said I think you know 2023 is going to look a super year but you know we expect this momentum to continue through the second half in terms of product gross margin then you know I'd want to get north of 25% in this year, and then I would expect we get back to the 30% plus margins in 2023 that we've experienced in the past.

Great. Very helpful. If I could follow up, Steve, just on the pipeline, I don't know if you want to give a quantitative metric, but could you qualify at least in terms of what you're seeing and how strong it is relative to recent history? And a quick question on the OPEX front. R&D was down quite a bit sequentially. I know that there are some bodies getting moved around in terms of how you're allocating resources, but I'm wondering what a more normalized number should be. Was there software capitalization or anything unusual that was in the second quarter results?

So in terms of that one, I'll let Joaquin give you some detail, but we were able to capitalize some software on some new products that came to market. So pretty much where we want to get to is relatively keeping OpEx flat, but revenue obviously growing at pace, which gives us the expanded EBITDA. So Joaquin, do you want to add anything on the development side?

I think, you know, as we invest in product development, you know, you can continue to see, you know, the capitalization of the software. But as we kind of develop the products, you'll see that start to tail off in the future.

It's managed for working within the envelope. But as you can see, we're moving things around to get the right people and the right cost into, you know, the future areas that we want to invest in.

Steven, then just on the pipeline front, and if I could throw in there as well, right, in terms of the evolution to analytics and AI and the monetization on that front, any color you could provide on the front sounds like, look, we've got the new single pane of glass in the fourth quarter. But in terms of some of those opportunities, I don't know if you're willing to start to quantify that opportunity as we get out until late 23.

Thanks. I think it's too early to quantify that. I think once we talk through our 2023 plans, we'll be able to quantify a little bit more. I mean, in terms of pipeline, we're north of 15% higher in what I call qualified pipeline from this time last year. and in terms of the kind of monetization so we'll be launching in Q1 the modular first new module and by that time we'll have already carved out the solutions into the modular categorization so what that means is people will be able to buy the solutions based on that business need that we talked about a lot in the investor day with the first updated kind of true I think and AI-led module being available in Q1 next year. And as we start to kind of ramp that up and we were able to sit down and work through that upsell program that we talked about, the renewals program that we've already started to put in place, then I think another quarter out and we can give you some more concrete views on what, when and how from a volume perspective.

Great. Thanks so much. Nice job.

Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Gary Prestapino with Barrington Research. Please proceed with your questions.

Hey, good morning, everyone. Steve, when you talk about trying to re-engineer these products, could you maybe dwell into that a little bit in terms of getting the gross margin up exactly To the extent you can talk about it, what are you doing on the re-engineering side?

So in very simple terms, there's a number of components that obviously have been engineered into our hardware solutions over the years. And some of those are older than others. And where some of those have started to become end of life and that end of life has been accelerated, the cost of those components in the build has gone up astronomically. Thank you very much. Just done an actually bang-up job in terms of driving that change. And it was, you know, we're kind of six months into that change. We've got another probably six months to go. But ultimately what it will lead is to a, you know, more cost-effective, from our perspective, units to put out in the market, which, you know, obviously helps the gross margin and bring it back and maybe exceed where it was previously.

Okay. And then in terms of your subscriber base, could you give us some idea of the growth sequentially?

Joaquin, do you have that available? Around about 10%?

Yeah, it's about 10% from where we were sequentially.

Okay, and you're over 600,000 now, right?

Correct, yes.

Okay. And then... Just a couple more questions here. I know we're realizing it's early in the game here, but with the new sales team and the new philosophy and all that, but of the 3% total revenue growth that you had in the quarter, or really from products, I suppose, that would be where you would do some upsells and cross-sells. Could you give us some idea of how that's going, or is it too early to say right now?

No, I think in terms of the new solutions, I mean, the good news about the growth in the first half, it hasn't come from introducing new solutions to new geographies. And that's where we're very excited about that growth opportunity, particularly in the U.S., So the 12% half-won growth, a lot of that was in the industrial segment of the market, the traditional segments where we've launched the pedestrian warning system. And I think we're getting a better level of sales execution across the board, basically, in industrial and logistics. We're also seeing some strong growth in in subscription revenues in our other territories. So the US is the only territory that we have where we sell on a hardware plus services model. Everything else is on services-based. So the fleet management solutions that were on the pointer side of the house, I think most of the geographies are growing very, very nicely, and that is all subscription-based. So it doesn't give you the volume, but it gives you the quality. in terms of that high margin recurring revenue. So, you know, and as we kind of, you know, look at the U.S. market and the demands of that subscription versus the hardware model will continue to evolve that over time. Where we're now, you know, really putting our foot on the accelerator for half two is those conversations where we have logistics customers or industrial customers in the U.S., all of which have, you know, Thank you for joining us. Any kind of incentive from us, they've all come and said, your solutions are as good as it gets out in the market. And they're very pumped up about what we can do against the competition in those spaces. So, you know, it's a bit early in terms of, you know, the quantification of that. These guys need to get productive. That will take three to six months. But, you know, you look at 2023 and, you know, we should be able to take a very dominant position in the U.S. market across the board.

Okay. And then just a couple of questions on the balance sheet. Looks like from year end your cash is down almost $10 million, maybe let's call it $9 million. Looks like you paid down some debt, about $5 million. Are there any more debt maturities coming up? And then the other question I would have is it looks like the inventories are up about 27%, 28% from December. And I would assume that's just because of that strong pipeline that you've talked about and the Thank you for joining us.

So we believe it's prudent in order to maintain and grow gross margins to get enough stock through the door. And that was a conscious decision. But as we look into 2022 second half, as we look into the first half of 2023, which we're getting more visibility on longer term pipeline, which is great, then we felt that was the right thing to do. Joaquin, do you want to take the first part?

Sure. We do have the quarterly maturities on the long term debt.

Yeah, well, what are those quarterly maturities then? I mean, I'm trying to get an idea of cash in, cash out.

Yeah, approximately around $1.5 million.

Okay, so quarterly maturities of $1.5 million. Okay.

All right, thank you very much. Thank you. There are no further questions at this time. I would like to turn the call back over to Stephen Towe for any closing comments.

So look, everybody, thank you for the insightful questions and thanks again for everybody for joining us today. We are very excited about the future. We're a work in progress, but I think we're making very good progress in the first six months of this year, especially with the change that's taken place in the organization. And we see strong momentum on all of our metrics and vectors. So we're very encouraged and we'll continue to work hard We look forward to speaking to you again soon. Take care. Thank you. Bye-bye.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.