PowerFleet, Inc.

Good morning and welcome to PowerFleet's fourth quarter and full year 2022 conference call. Joining us for today's presentation is the company's CEO, Steve Towe, and CFO, David Wilson. 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 plan 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. Those statements include but are not limited to the company's financial expectations for 2023 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 The company did 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 in 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 Chubb. Sir, please proceed.

Good morning and thank you for joining us today. It's a pleasure to be speaking with you once again. It's been a rigorous and exciting first year since I joined the company. I'm incredibly proud of the progress the team has made on the journey of transforming PowerFleet towards our mid- to long-term goal of being recognized as a world-class, high-growth, and profitable SaaS solutions provider. The board and I are highly encouraged by the progress we've made to date, executing our strategy to turn around the business in the first two years of my tenure as CEO. We're ahead of schedule and executing well on the mission. As a reminder, my initial priorities were as follows. First, we needed to make dramatic improvements to the caliber and experience of the leadership team in order to become a true IoT SaaS company. Second, we needed to develop a unified SaaS platform strategy that delivers great value for clients, improves our margins, and expands the total available market for our solutions. Third, we need to show evidence that we could drive sales execution and top-line traction in high-value markets and vertical segments. As we move towards the next phases of our transformation plan, we've been focusing heavily on expense containment and rationalizing certain geographies and product lines that we believe are incapable of driving sufficient rates of return and cash flow. In turn, we've been creating strategies for redeploying cost savings to accelerate our product and sales plans in the highest ROI business areas. We've accomplished a tremendous amount over the last year through ruthless and rapid execution, Powered by hiring a super talented executive team with deep experience working with high growth SaaS companies, including adding David Wilson, our CFO, who you'll hear from shortly. Our profitable growth strategy that we call PowerFleet Reimagined and which was first introduced at our inaugural Investor Day last June has been very well received by employees, customers, partners and investors alike. From a technology perspective, in November, we launched PowerFleet Unity, a new game-changing fleet intelligence platform that unites people, assets, and data together to transform the way its customers do business. Unity will be the cornerstone of our future shareholder value creation and is ahead of schedule in gaining traction with new customers, highlighted by our recent announcements with Kearney and FEMSA. Even with the dramatic business transformation efforts and fundamental operational business change in 2022, we were still able to drive top-line growth, improve gross profit, and enhance profitability, an ambitious objective I articulated to all of you at the beginning of 2022. Our encouraging financial results were also achieved in the face of ongoing macroeconomic pressures and significant supply chain headwinds. David will discuss our Q4 and 2022 results in detail, but at a high level in 2022, we delivered 7% top line revenue growth, 8% growth in high margin services revenue and grew our subscriber base by 8% to 664,000. From a profitability perspective, we improved gross profit by 4 million, reduced loss from operations from Q4 2021 to Q4 2022 by 65% and grew adjusted EBITDA 19% in 2022. We faced significant FX headwinds in 2022, but on a constant currency basis, our annual total revenue growth was 10%, with services revenue growing 11% for the full year. One of the key thesis questions was could we improve our growth in the U.S. market in the year 2022? We proved our thesis by delivering total annual revenue growth in the region of 12% and a service revenue growth of 13%. A key driver of our success was our U.S. industrial business segment, which grew 33% in the second half of 2022 versus the corresponding period in 2021. We're also excited by the performance of our Mexico business unit, which achieved 34% growth year-over-year in total and 33% in services revenues. Perhaps our progress is most telling and best measured when we compared our financial results for the second half of 2022. For the second half of 2022 versus the first half of 2022, high margin services revenues increased 5% to 40.3 million. On a constant currency basis, the sequential increase was 8% or an impressive 16% on an annualized basis. Overall, gross margins expanded from 45% to 50%, with our gross profit increasing by $3 million, or 10%. Additionally, the success from our products and re-engineering initiatives expanded our product gross margins from 20% to 29% in the second half of the year. From a profitability standpoint, we realized a 54% or 2.9 million improvement in loss from operations, as well as a 2 million or 76% improvement in adjusted EBITDA. Compared to the same period last year, we increased gross profit by 4 million or 13%, improved our operating losses by 3.5 million or 59%, as well as saw a 2.7 million or 132% improvement in adjusted EBITDA. During the fourth quarter, we saw double-digit growth in our key regions, including a 20% increase in the U.S. industrial segment and a 37% increase in revenue in Mexico, driven by both unity sales and initial sales of our industrial solutions in the region. The overall top line results in Q4 reflect the decisive actions we took to de-emphasize underperforming product lines and territories and terminate unprofitable contracts, measures I alluded to in our Q3 call. To put this into context, unrecognized revenue related to the termination of unprofitable contracts and the de-emphasis of lower margin products was approximately $2.5 million in the quarter. Nevertheless, our tight cash management produced the highest cash collections quarter in the company's history. While we were encouraged by our operational and financial progress, especially in the second half of 2022, there is still much more work for us to do to achieve the level of performance we believe is possible for our company. Although the speed of cleanup has exceeded our internal expectations, The operating state of the business when I assumed the CEO position was far more challenging than expected, and there are still crucial areas that need to be improved. Along that line, earlier this quarter, the leadership team enacted on a focus plan to optimize further our business. When completed, the plan will reduce our OPEX by an additional $3 million annually, which we expect to drive bottom line improvement. This is an addition to the $5 million we took out of the business in 2022, some of which allowed us to pivot and grow our software sales and development teams. Before I discuss our 2023 initiatives and our business outlook, I'm going to invite David to walk through our financial performance for Q4 and 2022 in more detail. David?

Thanks, Steve, and I'm pleased to connect with many of you for the first time on this call. This week marks my second month with PowerFleet, and my time on board has reaffirmed two key reasons I chose to join the team. Firstly, there's a rich set of complementary assets at PowerFleet that have a massive amount of latent value. Secondly, the team that Steve has put in place are aggressive change agents who have the drive and experience required to realize PowerFleet's full potential. The third key reason I joined PowerFleet is pattern recognition. Prior to joining Powerfleet, I was the CFO of ACS, a regional telco, which was an amalgamation of acquired companies that had a newly installed management team tasked with turning the business around and creating a huge amount of value for stakeholders. While the road at ACS was more rocky than smooth in the early quarters, during my tenure, we outperformed the sector by 16 times, turning ACS from a valuation laggard to a valuation leader. I look forward to playing my part in achieving similar success with Powerfleet. Now onto our fourth quarter results for the year ended December 31, 2022. Total revenue was $33.1 million compared to $34.4 million in Q4, 21. As Steve noted earlier, the step down in revenue was by design with increasingly sharp focus on the quality versus the quantity of revenue. In the quarter, we sidestepped approximately $2.5 million in available sales in non-core underperforming product lines and territories. Centering the business around high-margin SaaS revenue is a central tenet of PowerFleet Reimagined, with the four-quarter mix of service revenue increasing to 60%, or $20 million in 2022, from 56%, or $19.1 million in 2021. Product revenue, where the quarter's sales were focused on deals with a high attachment of SaaS service revenue, was $13.1 million versus $15.3 million in Q4 last year. Gross profit was $16.4 million compared to $15.4 million. Importantly, gross margin expanded by 5% to 49% of total revenue, up from 45% last year. Fourth quarter service gross profit was $12.8 million, with margins of 64% of total service revenue in line with expectations. This compared to $12.4 million, or 65% of service revenue, in Q4 last year. Product gross profit was $3.6 million compared to $3.1 million in the same year-ago period. While deal discipline was a primary driver of quarterly product gross margins expanding to 28% of product revenue, up from 20% last year, 2022 performance was adversely impacted by $600,000 or 5% gross margin for inventory and warranty reserve adjustments and out-of-period charges. Looking at expenses, OPEX was $17.6 million compared to $18.9 million in the same year-ago period. 2022 operating expenses benefited from foreign exchange translation gains of $1 million, which is reversed for calculated adjusted EBITDA, and $0.7 million in incremental SOX and audit professional fees, which flows through to adjusted EBITDA. In terms of profitability metrics, Net loss attributable to common stockholders totaled $2.9 million, or negative $0.08 per basic and diluted share. This compares to a net loss attributable to common stockholders of $7.9 million, or a loss of $0.23 per basic and diluted share in Q4 last year. And finally, adjusted EBITDA, a non-GAAP metric, in the fourth quarter of 2022 totaled $1.4 million, compared to an adjusted EBITDA of $1 million in the same year-ago period. Our balance sheet remained strong in the quarter, with $18 million of cash and cash equivalents. The company's working capital position at quarter end was $35.5 million. Shifting gears to our financial results for the full year ended December 31-22, total revenue was $135.2 million, an improvement compared to $126.2 million in 2021. High margin services revenue was $78.8 million compared to $73.2 million in 2021, Product revenue which drives future services revenue was $56.3 million compared to $53 million in 2021. Gross profit was $64.2 million or 48% of revenue compared to $60.2 million or 48% of revenue in 2021. Services gross profit was $50.5 million or 64% of total service revenue compared to $46.6 million or 64% of total service revenue in 2021. Product gross profit was $13.7 million or 24% of total product revenue compared to $13.5 million or 26% of product revenue in 2021. Operating expenses were $72 million compared to $68.2 million in 2021. were net loss tripled to common stockholders totaled 11.9 million or negative 34 cents per basic and diluted share in 22, which compares to a net loss tripled to common stockholders of 18.8 million or negative 52 cents per basic and diluted share in 21. Adjusted EBITDA, a non-GAAP metric, totaled 7.3 million compared to adjusted EBITDA of 6.2 million in 21. That concludes my remarks. Steve.