PowerFleet, Inc.

Good morning. Welcome to Power Fleet's third 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 Power Fleet'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 statements. 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 PowerFleet CEO, Mr. Steve Towe. Sir, please proceed.

Good morning, everyone, and thank you for being here today. In today's call, I will share an update on our Q3 performance, as well as spending some time reviewing progress on the strategic pillars of the business. Turning first to our Q3 performance, we're delighted to report a strong set of Q3 financial results. Our commitment to evolve into a high-quality SaaS business required us to take brave decisions to manage existing revenues in ways where our success would become clearer in quarters rather than months. In essence, we've been executing a private equity-style transformative playbook in the public market. Central to this strategy is building a pipeline of high-margin product sales that pull through sticky, high-margin SaaS revenue while shedding non-core and non-profitable product business. We have been clear that executing this transition would result in revenues coming down through early to mid 2023 before reaching an inflection point where higher product revenue would begin to flow through the P&L in the second half of 2023. I'm pleased to report this inflection point is now evident in our numbers. Our Q3 total revenue performance was our best result in four quarters. Total revenue increased by 7% sequentially Q3 product revenue increased quarter over quarter by an impressive 19% at a much improved gross margin. At the same time, our service revenue increased by 11% on a constant currency basis year over year. Looking at adjusted EBITDA, we made a commitment that we would take the necessary steps to absorb the cost and cash burn of our investment in engineering talent following our Q1 moving dots acquisition. Clear success here is evident in our Q3 numbers. with sequential adjusted EBITDA increasing threefold to $2 million. David will dive into more details on our financial performance shortly. I view the quarterly earnings cycle as an opportunity to provide an overview of strategic and operational changes in the business and as a regular opportunity for our stakeholders to evaluate whether we're achieving the objectives we set out for the revised business strategy following my appointment in January 2022. The overriding reason I took the helm of PowerFleet was a conviction that it provided a starting foundation to build a world-class business and ultimately create a highly valued and appreciated SaaS asset in the industry. To realize this vision, it was essential to execute a substantial transformation plan at pace. To succeed, we took aggressive and decisive actions designed to enable PowerFleet to have a credible shot at being at the forefront of the data-led SaaS revolution of the industry in the years to come. This remains a bold and ambitious mission for Powerfleet, our investors, and now our partners from Mixed Telematics. Trust is a key currency in successfully navigating this kind of transition and is built by following through on your commitments. A common mantra for those of you who have joined me on this journey so far is the commitment of the Powerfleet team to say what we do and do what we say. To demonstrate that these words have substance, I'll now share proof points from the Revolutionary Change Programme Focusing on the three major areas we knew we would need to significantly transform in the first two years of my tenure. First, scale. Second, technology. And third, the shape and health of our P&L and balance sheet. Looking at scale, we're not here to be an also-ran in the industry. We're here to secure a place at the very top table. I'm convinced there will be four to five consolidated global players that will dominate the space over time, and we very much intend to be one of them. To get there, we need the depth of resources to invest at the level the market demands and have the breadth of data-led solution capability to feed, refine, and evolve best-in-class AI engines, earning the right to be a mission-critical provider in an integrated fashion for an energized customer base. With the announcement of the mixed combination, both organizations have taken a massive step towards securing the necessary scales. Anticipated achievements of the transaction to support the combined strategy include annual revenues increasing from $135 million to $280 million, adjusted EBITDA increasing from $7 million to $39 million, the number of subscribers on our platforms increasing from 700,000 to 1.8 million, the engineering team growing from 90 to over 230 colleagues, and enterprise customers growing from 3,500 to more than 7,500. Now on to technology, where the Unity AI and data platform strategy has been validated by customers and industry analysts alike. It was also pivotal to Mix's decision to combine forces with PowerFleet. Josh and his team have produced a successful and incredibly well-run business that's been steeped in the industry for over 25 years. The fact that they believe wholeheartedly that the Unity vision is the right one to take a leading position in our fast-evolving industry is a compelling validation for the unique Unity data highway and integrated ecosystem. Another proud achievement this year remains the Q1 acquisition of MovingDots, which secured some unique IP in the insurance space alongside a sizable team of data scientists and AI experts with deep domain knowledge. We believe that the combined engineering teams and data sets of PowerFleet and Mix will provide the strategic pillars for us to be a technological and market leader in the rapidly evolving artificial intelligence of things, or AIoT, space driven through the Unity platform. Now on to the evolution of our P&L and balance sheet. I shared at the start of this call our progress against the strategy to evolve the P&L to successfully build a pipeline of strategic product sales that pulled through sticky high margin SaaS revenue while shedding non-core and non-profitable product business and that we've reached the inflection point in our strong Q3 performance. I'd like to add some more colour on the strategic evolution of our P&L and balance sheet. Looking at the geographical distribution of revenue, we've been very clear that we would directly address the mindshare and hidden cost drag of our subscale businesses in Brazil, Argentina, and South Africa. At a single stroke, Our announced combination with MIX enables us to retain and scale these books of business, particularly in South Africa, which will combine with MIX's powerful local operation, and Brazil, where reaching critical mass on a combined basis now comes true. With regards to the balance sheet, the MIX combination provides an elegant and shareholder-friendly pathway to meet our commitments to address the challenging average preferred instrument. Based on any measure, These are major accomplishments across all three areas, and this is a testament to the ability of the team to deliver compelling results against ambitious targets. As I approach my two-year anniversary, I'm proud to say that the prospects and the strategic potential of the business are transformed. The right chess pieces are now in place for the next phase of our journey, a phase that is centered on realizing significant enterprise value for our shareholders. Ahead of sharing insights and thoughts on this, I'll ask David to walk through our third quarter results in detail. David?

Thanks, Steve, and good morning, everyone. Continuing the spirit of transparency and accountability, I'll firstly provide an update on the key strategic priorities that I called out on our prior call before providing additional insight on the numbers. Strategic priority number one is to accelerate our business transformation while living within the limits of our current balance sheet. Our October 10th NICS business combination announcement is a game changer, while the realized results from our cut-to-cover activities for moving dots with adjusted EBITDA troubling sequentially demonstrate a team that can execute decisively and at pace. While these initiatives are major wins, they naturally created some headwinds in our short-term financial results, with $1.4 million in one-time transaction rationalization expenses incurred in the quarter. Priority number two is to improve the underlying operator leverage of our business by implementing a common and scalable software platform across all geographies. The central talent of this initiative is the rollout of a global ERP system and, as I'm sure you can appreciate, our business combination with Mix significantly increases the scale of this endeavor and presents it as with alternate pathways. Based on an initial review, we concluded that the most expeditious option to get the entire global business on a single ERP instance is to standardize our mixed dynamics 365 solution that is actively being rolled out. A global ERP is of a critical importance both for realizing millions of dollars in spend efficiencies and building out a rich set of SaaS metrics that provide proof points on the durability of revenue and operating leverage inherent in our business model. ERP is a major work stream for integration, planning, and execution, and we will continue to provide regular insights and updates on future calls. Now onto our financial performance for the quarter. Starting with revenue, where the underlying quality is radically improved versus the prior year. While total revenue for the quarter ended September 30, 23 of $34.2 million was in line with last year, approximately $2 million of low value product revenue has been actively shed from the business and replaced with high margin service revenue of 4% on an absolute basis and over 11% on a constant currency basis. Additionally, our product sales are increasingly high margin, differentiated and centered on pulling through sticky SaaS revenue. Success here is evident in sequential performance where product margins increase from 22% to over 30%. Total gross profit margin for the quarter of 50% was in line with the prior year. Product gross margin of 33% benefited from $400,000 in out-of-period import duty recovery. On an adjusted basis, product margin was 30%. Meanwhile, service gross margin of 61% was hindered by $400,000 in out-of-period infrastructure expense and $300,000 in unity depreciation expense. Adjusting for these items, service gross margin was in line with the 64% hosted in the prior year. Onto operating expenses, which increased by $2 million to $20.4 million compared to the same-ago period, with the current year impacted by one-time deal and rationalization costs of $1.4 million. NEP also tripled the common shareholders, totaled $5 million, or 14 cents per basic and diluted share, and adjusted EBITDA was $2 million, three times higher than the prior quarter, following cut-to-cover activities for moving dots. Our balance sheet remains strong at quarter end, with $19.6 million in cash and cash equivalents, and a working capital position of $34.5 million. Looking to the future, we recognize that the macro environment poses certain challenges in specific markets and regions. Specifically, the ongoing conflict in Israel has, understandably, brought about temporary fluctuations in product demand and foreign currency challenges. It is worthy to note that over 80% of our book of business in Israel is recurring subscription revenue that is centered on transportation safety and security, an essential versus discretionary need. Most importantly, I'm relieved to report that despite the horrific ongoing events and related strain to all those impacted, our Israeli team members are currently safe and our facilities remain unaffected. While we continue to closely monitor the situation, this assurance of safety is paramount. We have also enacted our business continuity plan to ensure we have redundant capabilities for the services our Israeli team provides to our global business, particularly around supply chain and distribution. That concludes my remarks.