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spk09: ladies and gentlemen thank you for standing by welcome to the eturan third quarter 2020 results conference call all participants are present in listen only mode following management's formal presentation instructions will be given for the question and answer session for operator assistance during the conference please press star zero as a reminder this conference is being recorded you should have all received by now the company's press release if you have not received it please contact Eturan's investor relations team at GK Investor and Public Relations at 1-646-688-3559 or view it in the news section of the company's website, www.eturan.com. I will now hand the call over to Mr. Ehud Helft of GK Investor Relations. Ehud, would you like to begin, please?
spk00: Thank you, good day to all of you, and welcome to E2RAN's conference call to discuss the third quarter 2020 results. I would like to thank E2RAN's management for hosting this conference call. With me today on the call are Mr. Eyal Sharadsky, the co-CEO, Mr. Udi Mizrahi, Deputy CEO and VP Finance, and Mr. Eli Kamar, the CFO of E2RAN. Eyal will begin with a summary of the quarter results, followed by Eli with a summary of the financials. We will then open the call for the questions and answers session. I would like to remind everyone that the safe harbor in the press release also covers the content of this conference call. And now, Eyal, would you like to begin, please?
spk04: Thank you, Ehud. I'd like to welcome all of you, and thank you for joining us today. I hope you and your families are continuing to stay healthy, and I wish all those who have been impacted by the virus a fast recovery. I do hope that with the recent progress towards a vaccine, we can soon look forward to a post-COVID world. We are happy with the improvement in our result in the third quarter. And this is down to our effort to overcome difficulties in many of our geographies due to the ongoing pandemic. We are also pleased that when looking at our revenues in local currencies, our subscription fee revenues were at similar level to those of the quarter last year, demonstrating the stability in the E2R business model. On the profitability side, the steps we took earlier this year as the effect of the pandemic became apparent. and nevertheless to reach similar operating profit and EBITDA levels compared with last year when excluding forest impacts. We reported an EBITDA of $15 million. I remind you that we had expected third quarter EBITDA to be similar to that of the previous quarter, which was $13.9 million. So I'm happy with that we are being successful in mitigating the impact of the pandemic on our profitability. On the cash side, we generated cash flow from operating activities of $13.6 million. This brings our business back to a net cash position for the first time since our acquisition of Roadtrak two years ago. Our ability to remain profitable and cash flow positive throughout this global crisis demonstrates the overall resilience and stability of our business model. Our stability is built on our subscriber base, which remains strong with close to 1.8 million subscribers. whereby the majority of them are paying us on an ongoing basis a monthly fee. Our starting point each month is already on the back of this. During the quarter, our aftermarket business returned to growth for the first time since the pandemic started, and we added 13,000 new subscribers in the quarter. The regions that were particularly strong were Israel and the U.S., In Brazil, the trend is also improving and we saw reduced net decrease of subscribers in the quarter compared with the previous one. We do hope to maintain this trend going forward. However, making predictions is difficult at the moment in the current environment and the new wave of lockdowns taking effect globally. The lower level of new car sales in many of our geographies during the third quarter impacted our OEM partners' ability to recruit new customers and grow the OEM side of the business, and we therefore saw a decline of 12,000 OEM subscribers. However, the fall was not as sharp as that of last quarter, which, if you remember, was a decline of 27,000 in the OEM base. Despite the impact of the pandemic and the weak economy situation in Brazil and Latin America, on our OEM business, we are working hard to harvest the synergies across our business and our various geographies. We believe that once we exit into a post-COVID world, Itoan is very well positioned for growth. In summary, overall we are very pleased with our third quarter financial results, which represent the resilience of our business model. We have used this period to make improvements throughout our business to improve efficiencies and harvest synergies. As we emerge from the corona pandemic, I believe we are well positioned to resume growth and increase profitability. I will now hand the call over to Eli for the financial review. Eli? Thank you, Eyal.
spk06: You can also refer to the press release we published today with our results. Revenues for the third quarter of 2020 were $60.3 million, a decrease of 13% compared with revenue of $69 million in the third quarter of 2019. In local currency terms, third quarter revenues declined by 6% year-over-year. I also note that revenues increased by 13% over the period quarter. Revenues from subscription fees were $44.5 million, a decrease of 12% over third quarter 2019 revenues. In local currency terms, subscription fees declined by only 2% year-over-year. The subscriber base amounted to 1,752,000 as of September 30, 2020. This represents an increase of 1,000 subscribers net over that of the end of the period quarter. During the quarter, there was an increase of 13,000 in the aftermarket subscriber base and a decline of 12,000 in the OEM subscriber base. Product revenues were $15.9 million, a decrease of 15% compared with that of the third quarter of 2019. The geographic breakdown of revenues in the third quarter was as follows. Israel, 52%, Brazil, 24%, rest of the world, 24%. Operating income for the quarter was $10.5 million, 17.5% of revenues, compared with $11.9 million, 17.2% of revenues in the third quarter of last year. This is a decline of 11% year-over-year. In local currency terms, the operating income would have been similar to that of the third quarter 2019. EBITDA for the quarter was $15 million, 24.9% of revenue, a decrease of 14% with $17.5 million, 25.4% of revenue in the third quarter of last year. In local currency terms, the decline would have been 3% year-over-year. Financial income for the quarter was $2.8 million, compared with a financial expense of $0.8 million in the third quarter of last year. Affiliated company, SaverOne, in which its run holds 11% of its public shares, is Tel Aviv listed, and our investment is based on its market value. At the end of the quarter, SaverOne had increased in in value versus the previous quarter end, and it run recorded a financial income of $3.3 million from this holding. Net income for the third quarter of 2020 was $9.3 million, 15.4% of revenue, of earnings per share of 45 cents, a 45% increase compared with $6.4 million 9.3% of revenues or fully diluted earnings per share of 30 cents in the third quarter of last year. In local currency terms, the net income would have increased by 58% year-over-year. Cash flow from operations for the third quarter of 2020 was 13.6 million dollars. As of September 30, 2020, the company had cash including marketable securities of $61.9 million and a debt of $56.8 million amounting to a net cash of $5.1 million. This is compared with a cash including marketable securities of $54.3 million and a debt of $67.9 million amounting to a net debt of $13.6 million as of December 31st, 2019. And with that, I'd like to open the call for the question and answer session. Operator?
spk09: Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you're using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from David Kelly of Jefferies. Please go ahead.
spk03: Hi, good morning and thanks for taking my questions. Maybe I wanted to start with your cost savings, some of the initiatives you noted in the second quarter. I think actions included salary reductions, payment conditions with suppliers. Can you talk about the impact to the third quarter? I'm just curious, given your nice profit recovery on a sequential basis here.
spk04: Hi. Yes, so it's important to mention that during Q3 – in the old geographies, we start increasing back salaries and contracts because we saw, as you could see, that we grow ourselves. Once we have the market open again, of course, the numbers are not the same as before the pandemic, but are growing compared to Q2, when most of the countries that we are operating was under very tough lockdowns. And since this was the situation after the lockdowns, we had, for example, to bring back more installers. Our service people had to work 100% of their time. So practically during Q3, we increased back major portion of the savings first. But add to this that during Q2, we did a kind of firing plan, specifically in Latin America, specifically in the countries where we have the OEM business, assuming that car manufacturers during the next quarters, if not even one or two years, will not sell the same cars or the car industry will shrink. So we decided to do some firing dismissal plan. And most of the cost to do it was during Q2 and some of them in Q3. But this cost will no longer, we will have to add back. So Q3 is still with a low lower cost than we were before the pandemic and a little bit lower than, for example, we believe we will have in Q4 and Q1 next year. But the differences become very low. Most of the differences came because of more revenues, more subscription fees, more sales. So this is the reason of growing the profits. Of course, some of the... some of the cost reductions still contribute to the results in Q3.
spk03: Okay, that's super helpful. Yeah, really appreciate the color there. Maybe, you know, asking, I want to follow up on kind of the conversation around the ongoing, you know, Just curious as it relates to the aftermarket trajectory and the visibility there, you know, saw a nice return to growth for that business in the third quarter. You know, with the ongoing uncertainty comment, is that largely tied to the OEM business? Just curious if you're having some better visibility at this point to sustainable aftermarket growth and that historic kind of historic levels that you've generally seen over the years.
spk04: Okay, so first of all, we have visibility. The business model allows us to have visibility, but in order to be conservative, we know that this visibility at this time has some, I would say, more risk to provide guidance or to provide a potential specific range of numbers. So this is the main reason. And just to give you some example, lockdowns in countries are stopping sales of cars, which is an important driver for our sales. So those lockdowns, you know, two months ago, everybody said that in Europe, for example, we are not operating in Europe, but just as an example, the leader said we will never go to another lockdowns. because it's not health, it's not everything, but you know, I don't know if it's political, I don't know if it's because people are hysteric. Major countries in Europe are in lockdowns. This is the situation. Now in Latin America, for example, there are no lockdowns, no tough lockdowns, and it was in April and May. But I wouldn't bet that it won't you know, come again. So to come today and be only happy with the results of Q3, telling you that it's going to be ahead for the next year, I want to believe. We have our internal assumptions, but I prefer at this time specifically be more conservative, not rush with guidance, not rush with expectation. I can only say that as we said in Q2, I believe that that the next quarter will be almost similar plus minus few percent in our operational profits and EBITDA close or similar to this quarter. But regards customer base, I said one month of lockdowns in Israel and we are dropping some subscribers because we are not selling, for example. So this is the reason.
spk03: Okay, great. Thank you. I really appreciate you taking my question.
spk09: The next question is from Etan Esioni of Esioni Portfolio Management. Please go ahead.
spk02: Yes. Happy to see the improvement. Looking at the world past the vaccine, is it fair to assume that this improvement trend will continue. That's one question. The second question is we're seeing other software companies going to a model of recurring revenues as opposed to one-time revenues. Are you also doing that?
spk04: For your first question, I think that we were asked to ask a doctor. No, I'm just kidding, but Nobody really knows what vaccine, when the vaccine will be, what will be the influence of the vaccine. If all of us want to be optimistic, as the Prime Minister of Israel, Benjamin Netanyahu, so no doubt that the corona is soon behind us. All of us want it. It's a very large crisis. So I don't have the answer. One, there will be no corona effect. and the economy will recover themselves, I don't know, somehow, in the short and mid-term. Of course, we will, I believe, that the assets of E2N in the business model, in the market that we operate, in our brand and marketing, will allow us to continue from the point that we were a year ago. But now, again, we have to be very defensive and conscious about the situation. Regarding the second question, if I understand it correctly, it wants main assets and every morning, this is the only asset that we want to keep, is a recurring revenue model. This allows us to create an operating leverage model. This allows us to have a very, very secure revenue portion every quarter, as you can see. Of course, there's some volatility during this time, but all around, this volatility influence is very low. It's mainly influenced on our growth, but on our basic numbers, basic assets, basic revenues, basic profits. As you can see, I think we keep it quite impressive compared to other industries and other business models in this time.
spk02: Okay, and one last question. The holding and saver one, that appears in marketable securities or cash equivalents?
spk05: You can see it in investment. It appears in the profit and loss. The effect of it is appearing on the finance. And the asset itself, the investment itself, there is a separate line investment in marketable securities.
spk02: But we have to... Is that at market value or is that at cost?
spk04: At market value. And this is part of the things that I would mention here, that this is something that may create volatility. This quarter it was on our benefits, but again, some other quarters can be with a bad influence, but this is not our hands.
spk02: Okay. Thank you.
spk09: The next question is from Asaf Bar-El of Oppenheimer, Israel. Please go ahead.
spk07: Hey, guys. Congrats on a pretty solid quarter. You had mentioned at the top of the call on strength in the U.S. subscribers. I know we don't talk about this topic too often, so is there any kind of color you can give us, anywhere specifically you would want to point us?
spk04: I think that one of the things that we've been surprised by the U.S. operation is that compared to the other geographies, including Israel and Brazil, and of course the other markets, is that the pandemic effect in the U.S. and specifically in our business sector was very low, if at all. And this allowed us to show in the States the same numbers of subscribers or the same growth of subscribers as we did last year. So overall, it contributes to a positive net growing subscribers. And the main reason is that Our segments that we operate in the US is what they call buy here, pay here. Those are dealers which support or have their own finance company and subprime customers taking loans from the dealers or lease the cars from the dealers. And one of the conditions is that they will have units to recover their car. During this period, we assume and we see that the need for this kind of finance companies and the demand for this type of population is growing. And it supports our growth in the U.S.
spk07: Okay, that's very interesting. Okay, I appreciate all the details. Maybe more of a modeling question. R&D was markedly lower this year. We assume there's obviously some COVID impact here, but it's even much lower than 2Q. Anything one time in nature here? How should we think about that line item on a go-forward basis?
spk05: Actually, the main reason for the decrease in the R&D is coming from a reclassification based on a recommendation of our auditors, between the R&D depreciation and between the operational cost. So basically, if we would measure it the same as before, the R&D would have been more or less the same as the second quarter.
spk07: Okay. Now, where did you say that cost was being funneled? Is that the GNA?
spk05: No, no, no. It's coming from the telematic services.
spk07: You're saying that's in the cost of revenues of telematic services, yeah?
spk02: Correct.
spk07: Okay, yeah. Okay. Okay, any way then that we should be modeling a little bit differently? Should I just be thinking about whatever contribution was in R&D just moving up to the cost of revenues? Meaning it's going to look like there's a bit of kind of pressure on that margin when it's not really the case.
spk05: I think it's going to be more or less the same. The third quarter will be more or less representative, maybe a little bit higher as it was a little bit, some of it was retroactive for the second quarter, but more or less it's the same level.
spk07: Okay. Okay. That's helpful. Okay. Yeah. So I guess I know you haven't made budgets and everybody wants, you know, for you to give a clear concrete answer when you can't. So color would be more helpful. how should we be thinking about operating expenses for 2021? You had mentioned the longer-term cost reductions or restructuring that you took in the second quarter. I just kind of want to understand how when some of the salary reductions kind of let off by the end of the year, what costs really look like on a normalized basis?
spk04: As I said, Q3 quite represents a cost which are very close to the highest point because we raise salaries, we raise costs, as I said. We start paying, for example, bonuses for all the sales departments around the world because we are selling. The markets are open. Still, of course, we keep some costs. I would say some cost reduction on compensation for management teams, which I believe that if the situation that we are facing now, meaning the markets are open, I assume that during year one, 2021, we will back to almost similar cost, or we will increase some portion of the cost. But as I said, cost reduction divided for two firing costs which this will not come back and we fired some hundreds of people around the world that this cost will not back so mean we will continue to save it but the other side of the cost reduction which is reducing salaries this probably is As much as we will continue with this trend of our continuous sale, continue to grow subscribers, continue installing more and more OEM cars, we'll be back and we should expect very few percent, by the way, very few percent of our cost increasing with a correlation to growing the revenues, of course.
spk07: Okay, great. That's helpful. As the company has kind of shifted back into a net cash position, which is great to see, although pretty expected, the financing cost line, I know that it's obviously been made kind of, you know, a little bit difficult to read by some of the recent impairments and gains, but how should we be thinking about that on a go-forward basis? I know you have some hedging costs involved.
spk04: we expect that it will not change and we will not have to do a cut in the future. But as it looks now, I feel confident that this is the case and because of this we didn't do it again. I believe that we will not do it again.
spk05: Regarding the financial costs, again, we have, as you can see in the balance sheet, we have the loans. And the loans, we are paying them until 2024. So until then, of course, the company will continue to have financial expenses related to that.
spk07: Okay. Okay, fine. Last question on my end. I know that there hasn't been any final decision made yet, but just given all the signs of stabilization we're seeing across the business, whether it be the profit levels or it be the subscriber levels, which are finally up on a basis quarter over quarter, how are you guys thinking, at least at this point, about shareholder return and dividends? Because the yield, even if you do just return to maybe the $20 million level that you had historically, would be pretty significant. So I do think it's pretty important for investors, you know, how they should be thinking about it.
spk04: There is no, we can see our, first of all, our cash positive that we performed Q2, Q3. Hopefully this will continue. I think that we need a little bit more time to feel more confident. As I said, we are very conservative and the board is very conservative. Maybe it's required a little bit more patience from investors, but as we did more than 15 years, when we're making positive cash and when the company is confident and we don't see a specific goal to keep access cash, we always... pay dividend. I think that as a management we see that it's something that in the close future we will ask the board to do it. Of course, it depends on the board, but I assume that soon, beginning of next year, we will push the board to vote for going back and pay dividend or going for a buyback, etc. And I must add again that that one of the values that we are holding here in Itoran is that since there is still a large portion of management team, hundreds of people that volunteer together with the company and support the company these days by decreasing their salaries, and we have suppliers of many years which they are also, we find it a little bit, we find the correlation between this and paying dividend to shareholders. Once we feel confidence, and we will back all the employees and the suppliers to be in a position that the company is confident, is in good shape to go to the next level, or we feel that we overcome the pandemic effect on the business, it will come together and we will do it.
spk07: Okay, great to hear. Thank you for all the detail.
spk09: The next question is from Sasha Karim of IPI. Please go ahead.
spk01: Thanks for taking my questions. I've just got two left. The first one, can I just clarify? So in the third quarter, you had a one-off cost for redundancies or restructuring. And you didn't back this out from the EBITDA number you gave. So could you give us a feeling for how big it was?
spk05: Yes, you are correct.
spk01: And can you give us a feeling, was it a million or half a million or something like that?
spk05: No, first of all, it's not something material. We're not talking about the millions of dollars of firing costs in the third quarter. But what we presented, we didn't exclude this.
spk01: Yeah. Okay. My next question. Thank you. My next question would be regarding UBI. We're seeing some companies now doing IPOs in the U.S. that are essentially UBI insurance-based companies. getting very high valuations. And obviously, there's a part of it around which has a similarity to that, your UBI division, which is still small but growing fast. Could you maybe just give us a bit more detail about exactly what IP that UBI division has? And by that, I mean, are you mainly providing just information on telematics to the insurance companies, or are you also heavily involved in the algorithm which prices the driver's risk level?
spk04: First of all, I don't know what companies you're talking about. There are companies that provide insurance in the States that mix with some algorithm that know to measure the risk of the customer. This is not what we do. We provide a telematics unit and software and algorithm to the insurance companies that provide a real-time driving behavior of their insurers and based on this they know how to how to price the premium we are not involved with the with the pricing of the insurance we are not involved on the insurance portion what we forgive for example if this is a fleet for example that want to know how the driver is behave, which is something we do many years, it's almost the same technology, the same IP, and the same software. But the insurance companies now, we integrate it into their system, they get kind of results of how the driver is driving, and they choose with their algorithm what price they should do. So it's a little bit different, I believe, of what you mentioned.
spk01: Yes, it's definitely a bit different. Just wondering, are you actually providing the insurance companies with some kind of a score, this driver is safe or unsafe, or are you just providing raw data?
spk04: No, no, we provide a score. We provide a score, but I must say again, to be clear, the system that we provide, provide a score, but currently, since this is the first year, And the insurance companies in Israel, when we started, as you remember, less than a year ago, they want now only one criteria of the entire data, which is mileage. How many mileage the driver is driving. The system or the unit and the software can allow them to get score and much more information. But they want it for the first stage. for educating the market to integrate it with their marketing and campaign, they use only the mileage usage by the customer, okay, for this stage.
spk01: Yeah. And just thinking about the other question in the U.S., given that this type of product is seeing take up in the U.S., given that you already have technology for it, Why would you not try and sell this product into the U.S. market?
spk04: First of all, we are in the U.S. many years. The business or the segments that we approach are, first of all, stolen vehicle recovery, stolen vehicle recovery for the mass market in the U.S. based on insurance and car theft rate, As we saw, there's no market. There was a company called Logic, you know, they actually, they were sold to Callum, but it's not, I would say it's not a business anymore because insurance companies in the U.S. are not suffering from cost. So recovery, it's not a market in the U.S. For us, as we see, again, compared to a more violent market like Latin America, Israel, et cetera. Second is fleet management. Fleet management, we provide services of fleet management in the U.S., and the competitive landscape is very, very tough. Regarding the UBI, we started to show it to some insurance companies. As long as I remember from some discussions that we had, I must say it was – more than a year ago, insurance companies are not open to use a UBI. Again, the UBI, I would say something which is more comparable to UBI, it's the companies which are digital insurance companies, something very new. Those companies provide insurance and they provide all the algorithms, including the usage-based algorithm, to their customers. Maybe they use some subcontractors. It's not us. But we try to offer the UBI, our UBI solution in the U.S. And we didn't see an open interest from the insurance companies in the U.S. From the traditional insurance companies.
spk09: Thank you. The next question is from Tavi Rosner of Barclays. Please go ahead.
spk08: Hi, this is Peter Zdebski. I'm for Tavi. Congratulations on a strong quarter. Great to see the sequential subscriber growth. I'm trying to think about the sustainability of the product revenues. Could you maybe dig down a little on the sequential growth in product? I was just having a little trouble reconciling the drivers of that, given the new car sales challenges that they still face in Brazil and the more modest subscriber growth number.
spk04: Mainly what you see of Q3, we have to maybe put more color now. We sell hardware mainly in the OEM countries, let's call it, and also in Israel. The Israeli market during Q3 were soon after the lockdown, so the sales of cars in Israel and the aggressive marketing campaigns and the car importers and the car dealers in Israel, they sold and installed many cars, there was a vacuum of two months. We have to understand what happened in Israel in March and April. They didn't install, they couldn't open their garages, but they had to give cars to people that bought it before the pandemic. So soon after, we had in Q3 almost two quarters of sales of hardware to the car importers in Israel. So I wouldn't say it's a shift, but it's practically it's like a shift. So This number was high for Q3. I assume that it will go down, but not as it was in Q2 because there is no lockdowns anymore. Also, during the lockdown in Q3 here in Israel, by the way, the car dealer garages or installation points were open. It was a little bit different lockdown. So the vacuum is not the same. So I believe that the average between Q2 and Q3 of sales, this is the right number of sales in Israel per quarter.
spk08: That's very helpful, Kolar. Thank you. And then maybe I wanted to ask about Brazil. Earlier this year, you had to overhaul the market, the go-to-market strategy there. Is that still helping to boost the retail figures, all as equal?
spk04: Look, first of all, yes, it's helped us. Then there was a reshuffle of everything because of the pandemic. But one thing that I can say now is And I said it during my speech at the beginning, is that we had a very high negative net new subscribers in Q2. And in the end of Q3, we come to a point which it's almost not negative. I mean, the trend is very, very strong, very, very positive strong. So this is the situation. As long as, again, as Brazil will be at the same situation as now, I believe that we will change from a negative to a positive net subscribers in Brazil very, very soon. Hope it will happen in Q4.
spk08: Great. Thank you for taking my question.
spk09: If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Shirotsky to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available tomorrow on Eturan's website, www.eturan.com. Mr. Sharotsky, would you like to make your concluding statement?
spk04: Yeah. On behalf of management of Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. I do look forward to speaking with you next quarter and hope that we will see better time by then. Have a good day.
spk09: Thank you. This concludes the Ituran third quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.
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