PowerFleet, Inc.

Good morning. Welcome to PowerFleet's second quarter 2023 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 up 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 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 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 to differ materially could include, amongst others, 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 in the Investor Relations section of the company's website at www.powerfleet.com. Now I would like to turn the call over to Power Fleet's CEO, Mr. Steve Towe. Sir, please proceed.

Good morning and thank you for joining us today. It's a pleasure to share our second quarter performance with you. We've executed extremely well in Q2 and the first half of 2023 with dramatic transformation across the business, and we remain ahead of schedule in our strategic plans. The first half of 2023 has been focused on aggressively implementing the changes required to give the company the foundations for high-scale, profitable SaaS growth. Our overriding priority is clear, to build a superior value business centered on high-quality, sticky, recurring SaaS revenue. And while we are still relatively early in our journey, strong proof points are now evident in the shape of our P&L, our mix of revenue, and associated service growth rates of 12% for the quarter and 15% for the half on a constant currency basis. Our core Go Forward business is currently focused in North America and Israel, which generates 83% of total services revenue, with Europe identified as the key additive market for geographical expansion in 2024. Double-clicking into these markets, service revenue in our North America business grew by an impressive 16% in the first half of 2023, While our Israeli business grew by 10% on a constant currency basis. The recurring services gross margin in our core go-forward business in Q2 was an impressive 71%. These metrics, in combination with a strong pipeline coupled with early strategic customer wins since the commercial release of our Unity Data Intelligent Platform strategy, are highly encouraging. Switching gear to macro trends, we continue to see a slowdown in the logistics market segment as some customers continue to recalibrate their post-pandemic asset needs, while Israel continues to be buffeted by geopolitical events resulting in tempered new product demand and foreign currency headwinds. Despite the macro headwinds, we're confident in our growth prospects, particularly with our Unity data platform, our safety-led industrial solutions, and connected car offerings. We've extensively cleaned low-margin hardware-centric sales pipeline and reduced hardware-only business revenue significantly compared to the prior year. Our strategy is to focus on high-quality and high-margin recurring software sales deals, a brave and challenging exercise we're undertaking to prioritize mission-critical SaaS opportunities. While transitioning to SaaS sales, especially with new logo customers, revenue realization may take slightly longer. However, we have largely achieved our goal of shifting towards higher quality revenue, leading us to anticipate sequential top-line growth in the second half. Recent sales wins with esteemed companies like Pride Group Enterprises, DB Schenker, Moderna, United National Foods, Worth Industries North America, and Bridgestone Mexico have boosted our confidence for the second half of this year and 2024. Our total gross margin is showing good progress on both a quarterly and half-yearly basis, versus last year, particularly supported by the impressive 71% gross margin of service revenues in our core go-forward territories that I mentioned earlier. We delivered a $2 million improvement in gross profit for the half year, despite the impact of our control pivot strategy from hardware-centric revenues to SaaS revenues. This is a highly encouraging vector for our future value creation thesis. In terms of transformation, the vast majority of the tough decisioning and highly challenging activities are now complete, and we look forward in the second half of 2023 to tuning the growth engine and putting our foot on the accelerator as we move towards 2024. The integration of Moving Dots is running ahead of schedule on both the cost and operations side. From a cost standpoint, we have transitioned out of senior leadership and have ruthlessly executed on the necessary cost reduction initiatives across our broader business to meet our commitment to ensuring the moving dots acquisition is adjusted EBITDA neutral on a run rate basis exiting the third quarter. Outside of our core business, we have good traction with our initiative to find the right home for our low margin, low growth, and subscale business units in Argentina, Brazil, and South Africa. We expect to share a favorable resolution of this initiative on our third quarter call. Before I dive deeper into our operational progress and outlook, I'll turn the call over to David to walk through our numbers in more detail. David?

Thanks, Steve, and good morning, everyone. To begin with, I will provide an update on the key strategic priorities that I called out on our prior call, which will provide helpful context to digest our second quarter financial performance. Priority number one is to accelerate our strategic transformation while staying within the limits of our current balance sheet. The acquisition and integration of MovingDots is the primary project that's consuming a significant portion of execution bandwidth in the second and third quarters of 2023. As a reminder, the acquisition provided multiple benefits, including $8.7 million in liquidity, a talented engineering team for Unity, complementary high-performance technology, and an expanded presence in the EMEA region. On our last call, we committed to mitigating the impact of MovingDots business by driving down the EBITDA impacts to break even before the end of Q3. We have successfully executed our $3 million OPEX challenge complemented by an extra $1 million in cost reductions. I am pleased to announce that we have taken all necessary steps to achieve the upside target of $4 million in savings with these costs scheduled to be eliminated from run rate expense by mid-September. As expected, the acquisition was the source of significant headwinds in Q2, with an EBITDA burn of $1.2 million plus an additional $450,000 in transaction and restructuring costs. Priority number two is to improve the underlying operating leverage of our business by implementing a common and scalable ERP platform across all geographies. As I noted on the Q1 call, rolling out next week across our core businesses is a cornerstone in meeting the expectation that we expect an additional $10 million in run rate cost savings through the course of 2024. I am pleased to report the ERP project is proceeding according to plan, with the rollout in Mexico scheduled for this month and the U.S. expected to follow swiftly. Success in this project relies on creating tools for a peaceful migration processes. for the successful U.S. rollout serving as a precursor for migrating Israel to NetSuite by year-end. More details will be shared on our third quarter call. Now onto our financial performance of the quarter, which reflects the aggressive steps we have proactively taken to transform the business and feed our investments necessary to integrate moving jobs. Total revenue for the quarter ended June 30, 23 with $32.1 million compared to $34.6 million last year. with robust growth in service revenue from our strategically important core markets, offset by a planned decline in hardware product revenue. Our high-value services revenues totaled $21 million, up 6% and 12% on an absolute and constant currency basis, respectively. Revenue mix continues to improve, with service revenue standing at 66% of total revenue, up from 57% in the prior year. The decline in product revenue reflects our strategic shift towards becoming a SaaS software business, focusing on higher margin and strategic ventures. This transition contributed to a gross margin expansion to 50% in Q2, 23 from 47% in the prior year, driven by increased high margin service revenue. Our operating expenses increased by $1.3 million to $19.2 million compared to $17.8 million in the same year-ago period, with the increase solely attributable to the acquisition of moving dots. Net loss attributed to common stockholders totaled $4.3 million, or 12 cents per basic share. Adjusted EBITDA was $647,000. Proforma for EBITDA loss from moving dots of $1.2 million. Adjusted EBITDA was $1.8 million, up $400,000, or 31% sequentially. Now turning to our results for the first six months of 2023. Total revenue was $64.9 million compared to $67.8 million last year, with continued robust growth in service revenue from our strategically important core market, again, offset by a planned decline in hardware product revenue. Our high-value services revenue totaled $41.5 million, up 8% and 15% on an absolute and constant currency basis, respectively, with continued improvement in mix, with service revenue accounting for 64% of total revenues, up from 57% in the prior year. Gross profit margin expanded to 50.3% from 45.2% in the prior year period, driven by an improved mix of high margin services revenue versus product revenue. Our operating expenses increased slightly to $37.7 million compared to $36 million in the same year-ago period, with the increase attributable to the acquisition of Moving Dots, which added $2 million of incremental op-ex for the first half of 2023. Net loss attributable to common stockholders inclusive of a $7.5 million gain on bargain purchase for Moving Dots totaled $780,000 or $0.04 for basic and diluted share compared to net loss with common stockholders of $5.5 million or $0.15 for basic and diluted share in the same year ago period. Adjusted EBITDA was $2 million compared to $2.7 million in the same period last year. Cash flow from operations for the half year was a positive $1.3 million, a $4 million improvement from the same period last year. During the quarter, we recommenced paying the ABRI preferred dividend in cash versus PIC, and our balance sheet remains strong at quarter end with $22 million of cash, cash equivalent, and a working capital position of $38.3 million. One final item to cover, we understand the impact the ABRI preferred instrument has on our current trading performance. We are focused on proactively addressing this issue and are making good progress on finding options to successfully resolve it by year end. That concludes my remarks, Steve.