PowerFleet, Inc.

Good morning. Welcome to Power Fleet's fourth quarter and full year 2023 conference call. Joining us for today's presentation are the company's CEO, Steve Towe, and CFO, David Wilson. Following their remarks, we will open up the call to questions. Before we begin the call, I would like to provide Power Fleet's safe harbor statement, which includes questions regarding forward-looking statements made during this call. During the call, there will be forward-looking statements made regarding future events, including Parafleet'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 2024 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 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. Sir, please proceed.

Good morning everyone and thank you for joining the call. Today we'll provide you with a business update that focuses on a review of the key milestones that mark 2023 as a year of stellar transformation for the business, an overview of our strong financial performance in the final quarter and second half of 2023, highlighting increased financial strength and growth trajectory and demonstrating highly effective results from the strategic operating plan for the year, and a deep dive into the progress and momentum we're making in bringing together the power fleet of mixed businesses, highlighting the value the combination brings to our shareholders. In 2023, we have embarked upon a bold and aggressive transformation plan designed to inherently change and accelerate the company's ability to elevate itself to a market leadership position at the very top table of the industry it serves. This plan required us to reshape the revenue profile of the business, fix balance sheet issues that were a major overhang on the company, accelerate a technology pivot to AI and data science-led solutions, create scale to truly give the company the ability to compete with the global leaders in the industry, reignite EBITDA expansion and positive cash flow generation, and drive a unique product and platform strategy to bring differentiated value propositions to the industry. The outcomes achieved in the last six months in particular, notably fact-checked by our strong Q4 performance, categorically underlying true world-class execution the team has delivered with the undeniable achievement of the major business objectives we have communicated to our shareholders over the last 12 to 18-month period. Starting with revenue, where we embarked on a brave transformation early in the year based on improving the quality of our revenue streams. A strategy typically seen in the private equity space, but in our case executed in the full view of the public markets. We are grateful to our shareholders for the trust shown in the leadership team's capabilities to execute this bold plan. This pivot included making tough decisions to exit poor quality revenue segments, unprofitable contracts, low performing territories and non-strategic lines of business. This deliberate pruning of approximately $8 million of annual revenue concentrated in hardware sales has not only simplified our operations, but also redirected resources towards more SaaS-based revenue and business profitability. As we predicted publicly, we've reached a fast inflection point and a return to top-line growth in mid-2023, with second-half performance painting a clear picture of success, where total revenue increased by 6% compared to half one, and gross profit followed suit with a 6% improvement. Topline success is built on our SaaS Unity platform strategy, as evidenced by Q423's high-quality SaaS revenue growing by 16% year-over-year on a constant currency basis. The total revenue performance in Q4 was our best performance in six quarters, growing 9% on a constant currency basis year over year, and was particularly pleasing as we absorbed the predicted 2 million revenue shortfall in the quarter to our Israeli business due to the current macroeconomic issues for the territory. The reshaping of top-line performance in the full year to focus on high-quality SaaS revenue resulted in a 14% increase in service revenue year-over-year on a constant currency basis and a $3 million improvement in annual gross profit from a lower total revenue base. Notably, North America, the leader in adoption of our Unity data ecosystem solution, delivered an excellent performance with annual growth of 16%. Adjusted EBITDA in the second half of 2023 saw a terrific 141% increase. A gain of $2.9 million versus the first half. It's important to highlight that this EBITDA expansion was achieved despite a full period of moving operating expenses, macroeconomic challenges in Israel, and a $1 million one-off charge for inventory-related items in the fourth quarter of 2023. The 48% sequential adjusted EBITDA increase from Q3 to Q4 2023 and 110% year-over-year increase in Q4 is a satisfying reflection on the output of the aggressive transformation efforts we've completed throughout the year. Moving on to technology, in 2023, we successfully tackled the dual challenge of aggressively ramping up investment in our next generation unity platform within the challenging landscape of managing near-term liquidity needs and addressing the financial overhang of the ABBRI preferred note. The challenge was successfully addressed in very short order with the close of our rapid and strategic acquisition of MovingDots at the end of March. As a reminder, this deal secured a cohesive and high-performing team of over 30 engineers and data scientists with deep domain knowledge, cutting-edge IP in the automotive and safety insurance space, along with robust ESG reporting capabilities to enrich Unity, and was the source of an $8 million influx of liquidity versus a drain on cash. A key commitment we made to our shareholders at the close of the moving dots acquisition was to ensure it became EBITDA neutral within two quarters of close. As David will share, we clearly met this commitment posting a flat year-on-year spend in adjusted OPEX in Q4 23, which included a $1.3 million of absorbed moving dots spend. Our greatest accomplishment in 2023 is unquestionably the successful signing of our business combination with Mixed Telematics. This milestone not only empowers us to fully realize our vision and strategy, but also significantly transforms our balance sheet, including clearing the average preferred instrument from our capital structure. The combined value creation opportunity this presents makes us incredibly excited about the future of our business. The mixed deal is also a game changer in terms of scale, with 12 months trading revenue increasing from $134 million to over $280 million, combined EBITDA increasing from $7 million to $40 million. The combination also provides a clear pathway to realize more than $25 million in cost synergies within two years of close. With resounding shareholder approval for the transaction secured for both PowerFleet and Mixed, Our integration teams, led by Chief Corporate Development Officer Melissa Ingram, will now begin to move from the planning phase to active execution. In deploying a tried and tested business integration methodology with a track record for delivering tangible results, the program aims to expedite the integration phase, enabling us to swiftly shift our attention towards driving increased shareholder value and enhancing our customers' experience underpinned by a highly robust EBITDA expansion program. With 100-day plans in place and the non-negotiable deliverables defined, our teams are ready to embark on implementing key elements of the integration plan. The entire organization is firmly behind this effort and we can already feel the collective strength of the combined team driving our integration success. We are committed to swiftly and effectively putting the integration stage behind us emerging as a unified, stronger, and more effective company. Before I dive deeper into our future business opportunities and outlook, I'll turn the call over to David to walk you through our numbers in more detail. David?

Thanks, Steve, and good morning, everyone. We are delighted that our progress in transforming the makeup of our revenue base with growth in our differentiated sticky recurring service revenue pulling through product sales where we have increased levels of pricing power. As Steve noted, we have actively shed approximately $2 million in quarterly revenue from the first quarter of 2023, and it is great to see that market success from our next generation offerings now are pacing these surgical cuts with fourth quarter revenue of $34.5 million up 4.2% on an absolute basis and 9% on a constant currency basis versus the prior year period. As noted earlier, service revenue was the driver here, up 8.2% on an absolute basis and 16% on a constant currency basis. While our gross profit margin for the quarter reached 50%, reflecting a modest improvement of one percentage point over the prior year, these figures only partially reflect the underlying progress we've achieved in expanding margins. It's important to note that within the quarter, we absorbed $1.1 million in non-recurring inventory adjustments. Without these one-time costs, our gross margin would have been 53% or four percentage points higher than the prior year. Improved margins were driven by the continued evolution of revenue, with high margin service revenue now comprising 63% of total revenue, up from 60% in the prior year, and absolute service margins expanding to an historic high of 67% versus 64% in the prior year period. Product margins were 22% on an absolute basis and 30% when adjusted for non-recurring imagery charges up from 27% in the prior year period. Now on to OPEX, which was $21.3 million on an absolute basis and $17.6 million after adjusting for $3.7 million in transaction expenses and in line with the $17.6 million incurred in the prior year. Flat year-over-year OPEX provides a compelling proof point of meeting our commitment that moving dots would be EBITDA neutral within two quarters of closing the transaction, with cut-to-cover activities absorbing $1.3 million of OPEX incurred by moving dots in the quarter. Moving on to adjusted EBITDA, which more than doubled from $1.4 million to $2.9 million, with a $1 million increase at the gross margin level, a lower cash OPEX spend year-over-year key drivers. Net loss attributable to common stockholders totaled $4.6 million, or 13 cents per basic and diluted share, inclusive of an additional $1.5 million gain on bargain purchase arising from the moving dots transaction. Adjusting for transaction costs and the gain on bargain purchase, net loss attributable to stockholders was $2.4 million, or 7 cents per basic and diluted share. Closing with cash, we'll re-exit the quarter with cash of $19.3 million on the back of strong generation with cash from operations totaling $4.5 million in the quarter, inclusive of $1.2 million in cash settled transaction costs. I'll now provide an update on closing the mixed transaction with a focus on funding and the underlying capital structure. We have finalized a $100 million credit agreement with Rand Merchant Bank in South Africa and renewing a $50 million credit agreement with Bank Hapalim in Israel. In terms of timing and as a condition for the merger to be declared effective in South Africa on April 2nd, we will draw down $85 million of debt from RMB on March 13th in order to demonstrate we have unfettered access to the necessary capital to pay down the $90 million owed to ABRI at close. We also plan to draw down the full $30 million of term loan from Hapalene and pay down $23 million of existing Hapalene debt on March 18th. In terms of the makeup and the cost of debt, $30 million in term loans from Hapalene will be denominated in New Israeli Shekel, providing a natural hedge for USD denominated investors for cash flows generated in Israel. $90 million will be denominated in USD, which differs from our earlier intention to have $50 million denominated in Zahar. While we were ultimately unable to obtain exchange control relief in South Africa to borrow in ZAR and remit to PowerFleet, Inc. in USD, we are exploring entering into an FX swap to essentially obtain the same hedging benefit for USD-denominated investors by alternate means. The blended annual cost of debt is expected to be $11 million, an effective cash coupon of 8.8%, with interest rates fixed on $85 million of USD-denominated debt. While this cash coupon is approximately 1.7 percentage points lower than the effective rate included in the January 2024 S-4 filing, we expect this saving to be effectively consumed by the contemplated FX swap. Total and net debt at close is forecast to be $125 million and approximately $110 million, respectively. Total liquidity at close is forecast to be approximately $40 million, inclusive of $25 million in undrawn revolver capacity. In terms of the underlying business, it is performing in line with the numbers shared at our November investor day, with expected trailing 12 months revenue and EBITDA of the combined business at close to be approximately $285 million, north of $40 million, respectively. Some additional context here. When overriding focus in the first quarter has been on aligning both organizations, so we have a running start on aggressively realizing revenue and cost synergies at close. While this is undoubtedly the right call from a shareholder value creation standpoint, it necessarily requires taking some focus away from maximizing top-line performance in the first couple of quarters, as well as investing back into OPEX to ensure we have the right team and skill set in place to meet and beat our prior guidance on the timing of synergies. Building on this, in order to provide investors with a comprehensive understanding of our joint operations, our first quarter 2024 earnings call and release will concentrate on the financial outcomes of the merged entity, rather than just standalone figures for legacy PowerFleet, which will appear in the 10Q filing. A final note in the first quarter of 2024. Israel continues to be impacted by the challenging macroeconomic backdrop, which is more pronounced in the first quarter, which has historically been the strongest quarter for new business, car sales, and associated revenue. That concludes my remarks. Steve.