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spk02: Ladies and gentlemen, thank you for standing by. Welcome to the Eteron second quarter 2022 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 Eteron's investor relations team at EK Global Investor Relations at 1-212-378-8040 or view it in the news section of the company's website www.eteron.co.il. I would now like to hand the call over to Mr. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to begin?
spk01: Thank you, operator. Good day to all of you, and welcome to EITRAN's conference call to discuss the second quarter 2022 results. I would like to thank EITRAN management for hosting this conference call. With me today on the call are Mr. Eyal Sharadsky, the CEO, Mr. Udi Mizrachi, Deputy CEO and VP Finance, and Mr. Eli Kamar, the CFO of EITRAN. 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'd like to remind everyone the Safe Harbor and the press release also covers the content of this conference call. And now, Eyal, would you like to begin, please?
spk06: Thank you, Ehud. I'd like to welcome all of you and thank you for joining us today. We are very pleased with the results of the second quarter, especially at a time when component supply chains remain tight and new car sales remain constrained. In particular, the above-average growth in our aftermarket subscriber base has continued for the second quarter this year and we have so far added 91,000 subscribers in 2022, well on target to reach the top end or even exceed our expected range of between 140,000 to 160,000 for the year. This is also reflected in the current quarter subscription revenues, which surpassed $52 million, growing at 11% year over year and 4% sequentially. We grow our overall subscriber base at a record of 48,000 net ads, bringing the total to just shy of 2 million subscribers as of June end. The primary contributor was the aftermarket segment, which added 50,000 subscribers during the quarter, the third quarter in a row in which we have experienced this increased level. This increase in subscribers came from both the growth in our traditional aftermarket business, but was also boosted by the various growth engines that we have seen over the past few quarters. As I shared with you last quarter, the expectations for subscriber growth is between 140,000 to 160,000 net subscribers ad for the year. The second quarter sub-ads are clearly indicating that we are well on the right track. and that we will likely surpass the high end of the target range that we set for ourselves. Our overall results demonstrate that it runs as a strong, healthy, and growing business, and I'm very proud of our recent achievements, despite the background of what are many macro challenges. As we discussed with you in our last quarter's call, the shortage of electronic components is the most notable macro issue impacting us. While some of the component costs we've been able to pass on to customers, we indicated that our product growth margins would be impacted, which has been clear in the first two quarters of this year. However, the good news is that we now see stabilization in the components market, and we are now buying at more normal prices. The improvement in the situation should be reflected in our growth margin toward the end of this year. As we also discussed last quarter, another impact of the component shortage has been on the major car OEMs, which are less able to manufacture cars to meet demand, and therefore we are indirectly impacting in our OEM subscriber base. However, even here we have seen an improvement. The decline of 2,000 subscribers in our OEM base in Q2 has diminished compared with the 16,000 decline that we experienced in Q1. In summary, all in all, I am very pleased with our performance. I am most pleased with the ongoing strength in subscriber growth, which is the key to our long-term profitable growth. We are at the cusp of a subscriber base of 2 million customers paying us on a regular monthly basis for one or more of our services. Both ongoing solid performance in our traditional aftermarket businesses and especially our growth engines are driving this subscriber growth. This subscriber growth will ultimately translate into increased subscriber revenue growth and profitability in the year ahead. As we enter the second half of 2022 and many of the challenges seem to be moving behind us, I'm more excited now than ever with our long-term potential. And with that, I hand over to Eli. Eli, please go ahead.
spk04: Thanks, Eyal. I know that the summary results I present will all be on a GAAP basis. Revenues for the second quarter of 2022 were $73.4 million, an increase of 9% compared with revenues of $67.5 million in the second quarter of 2021. Revenues from subscription fees were $52.3 million, an increase of 11% over second quarter 2021 revenues. The subscriber base amounted to $1,972,000 as of June 30, 2022, an increase of $48,000 net over that of the end of the period quarter, which includes a net increase of 50,000 in the aftermarket subscriber base, and a net decrease of 2,000 in the OEM subscriber base. Product revenues were $21.1 million, an increase of 3% compared with that of the second quarter of 2021. The geographic breakdown of revenues in the second quarter was as follows. Israel, 51%, Brazil, 24%, rest of the world, 25%. Gross profit for the quarter was $33.8 million, 46.1% of revenues, 9% increase compared with a gross profit of $31.1 million, 46.2% of revenues in the second quarter of 2021. The gross margin in the quarter on subscription revenues improved to 56.8% compared with 55.5% in the second quarter of 2021. The gross margin on product was 19.6% in the quarter compared with 24.8% in the second quarter of 2021. As discussed last quarter, the product margin was impacted by higher component prices, which have been high since the end of last year due to the ongoing global shortage of components as well as the product sales mix sold in the quarter. As Yael mentioned, as the shortage of components has begun to ease, We expect improvements in our product growth margin towards the end of the year. Operating income for the quarter was $14.4 million, 19.7% of revenue, an increase of 5% compared with $13.8 million, 20.4% of revenues in the second quarter of last year. EBITDA For the quarter was $19.4 million, 26.5% of revenues, an increase of 7% compared with an EBITDA of $18.2 million, 26.9% of revenues in the second quarter of last year. Financial expenses for the quarter was $1.4 million compared with the financial expenses of $1 million in the second quarter of last year. Net income for the second quarter of 2022 was $8.7 million, 11.9% of revenues, or earnings per share of $0.43. Compared with a net income of $9.1 million, 13.5% of revenues, or earnings per share of $0.44. Cash flow from operation for the second quarter of 2022 was $10.9 million. As of June 30, 2022, the company had cash including multiple securities of $33.2 million and a debt of $20.1 million amounting to a net cash of $13.1 million. This is compared with cash including multiple securities of $54.7 million and a debt of $31.4 million amounting to a net cash of $23.3 million as of December 31, 2021. For the second quarter of 2022, a dividend of $3 million was declared. This is in line with the Board's current policy of issuing at least $3 million on a quarterly basis. Under the current buyback program, restarted on August 4, 2021, 146,589 shares amounting to $3.4 million was purchased in the second quarter and approximately $8 million remains under the current program. The share repurchases, if any, will be funded by a valuable cash and repurchases of Ituran Ordinary Shares will be made based on SEC Rule 10B-18. And with that, I'd like to open the call for a question and answer session. Operator?
spk02: Thank you. 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 are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Chris Reimer of Barclays. Please go ahead.
spk00: Hi. Thank you for taking my questions. I wanted to go back to what you mentioned in your opening comments. about the OEM subscriber levels, and considering it was less of a decrease sequentially, do you see this as a kind of turning point where there is now more supply at the OEMs, or do you see that it might be even more prolonged, the lack of materials at the OEMs?
spk06: Hi. As we always stated, the OEM market is something that we have no, I would say, direct influence, like we do in the aftermarket. We are very dependent on the OEM's producers. And in that case, I can't tell you what's going to be in the future. At this current quarter, we saw better productions and better sales of cars. We have to understand that it depends on two things. One is the total sales and second is the market share on a specific time of our customer. So in Q2, it showed better position. Still, saying very generally, I still think that a car manufacturer's situation, I'm not sure that it's the shortage and the shipment problems behind them. So I wouldn't say that it's going to change dramatically, but there is some shifts between quarters, so I cannot forecast quarter by quarter.
spk00: Mm-hmm. Understood. I also wanted to ask if you could expand a little on the user-based insurance business and what the further growth opportunities are for that area?
spk06: As we said, the current geography that we made penetrations in And we are currently, I would say, almost the sole provider of this solution to the entire insurance groups in Israel. And this segment is continuing to grow. Some of the insurance companies are strongly growing this segment. Some of them are still... offer it, but they are more promoting the traditional insurance. But overall saying, we see growth year over year, and we believe that it's still only the beginning. We got other geographies that we operate and we have advantages, which is mainly Latin America. We have some discussion, but again, as I said, I think that market education that we are doing will take longer than it was at the beginning in Israel. It will take more time before we will succeed to go commercially, full commercially to the markets, if it's Mexico or Brazil. So the main market we grow the UBI, usage-based insurance solution, is in Israel.
spk00: Got it. Okay, thank you very much. That's it for me.
spk02: The next question is from Gavin Kennedy. Please go ahead.
spk03: Hi, Jane. This is Gavin Kennedy on for David Kelly. Thanks for taking my questions. You posted the third consecutive quarter of at least 50,000 aftermarket sub-ads. Can you just provide more details on what is specifically driving the strength here? And then secondarily, how should we think about aftermarket sub cadence in the back half of the year and into 23?
spk06: Uh, first of all, again, I have to, uh, remind everybody that, uh, during the, let's say the Corona period, we said that we had to, uh, uh, invent or to start looking for new segments and new application. such as the UBI, which is growing, such as the car selling or finance companies that finance car selling. And we did it mainly in Mexico and Brazil when new fintech companies use our solution to secure their collaterals, which is the car when they finance it. and we succeed also to grow and to expand this segment. Also, the traditional SVR, whether it's in Israel and also in Brazil, we succeed to penetrate and gaining more and more market share during the corona in second-hand cars, but now also for new cars. And we see also that this segment, which is traditional, but this is our, I would say, this is our bread and butter This bread and butter had more and more butter, and we really succeeded also to increase this subscriber base, again, mainly in Israel and Brazil. So overall, the new segment and our ability to gain more market share and more penetration in the traditional segment allow us to show, I would say, this dramatic growth in subscribers. I know that it's still not translated into the bottom line ZX, because this is the way of operating leverage of the business. Now it still costs us to bring these customers, but once we will translate all these 150,000 subscribers in 2023 to a full revenue stream and the cost will stay as it is now or will not grow as it has grown recently, I believe that we will be able to show higher growth in the profits. And regarding the numbers, we forecasted 140,000 to 160,000 for this year. And as we can see, we did 91,000 in the first half. I just want to remind you that these include the OEM. And the OEM is a negative growth, has a churn. Without it, we would be much higher. Now, regarding the second half, as I said, we believe that if things will move as is, we probably will be at least high number of the range, and hopefully we will succeed to be beyond it But we still have time to the end of the year. And remember that there is always some shifts between quarter. I'm optimistic. I see a very strong trend toward our solutions. And I believe that the number will be at least the higher number of the range.
spk03: Got it. And then as a follow-up, subscriber gross profit expanded to 57% which is pretty notable in this quarter can you provide more commentary on what drove the improvement here and is this a sustainable margin level going forward now you're talking about the overall gross profit I think that the gross profit for the services are higher if you consider the total gross profit of the revenues so this is a different
spk06: different reason and I can explain. And I said it. The shortage of components is influencing our hardware sales, mainly in Israel. In Israel, in Latin America, we have Comodato solution, which is kind of a leasing. It's less influence the hardware sales. But in Israel, which represents 50% of the revenues, but represent almost 80% of the hardware sales, we had to buy this inventory in a much higher prices. So when we bought it, it was at the beginning of the change in the components shortage, Q3 of 4, 2021. But now it translates, when you sell the inventory, it translates to our P&L. So as I said a quarter ago, we have a few millions of dollars which we paid higher. So the cost of goods sold is now translating higher to our P&L. I believe the Q3 should be the last quarter when we will get rid of of the higher cost of those components. During 2022, after this, I say, this shock of the world of the shortage, we succeed to buy new inventories and make capex in a lower prices, not lower compared to the past, but much lower compared to the current prices that we bought. So I'm expecting that total Q4 and for sure for the second half of 2023, this cost will translate to lower cost and to higher gross margins. So I believe that the profitability, the gross margins, which in the end it's also influenced the EBIT margins and the net profit will be, I believe materially better.
spk03: Okay, thank you, Tim.
spk02: The next question is from Abba Horowitz of OSB. Please go ahead.
spk05: Hi, good afternoon. First of all, thank you for a really good quarter. Given the backdrop that's out there, I think you guys did amazing. I was wondering if you could maybe give us a view to 2023. It would seem to me that gross margins should actually expand in 2023. And if the growth continues on the subscriber growth and it would perhaps even accelerate, could you give us a glimpse of what your view would be? Could we see an acceleration of growth in 2023 and a commensurate profitability?
spk06: Without talking about, you know, guidance or numbers, generally speaking, e-to-run is business model, it's very easy, I think, and we have a very high visibility. Of course, there's some always things which in, like, for example, if you go backward to the corona, nobody expected it and its influence, and we have to organize for it, et cetera. But if the things will continue as the second, the first half of 2022, as we show today, and with the shortage of components, which we already handle it. It's not a period in our P&L because things are in processes always. You cannot buy an inventory today and get rid of it tomorrow. It's taking time because we hold inventories, we hold contracts, but during the first half, we succeed to grow materially higher in subscribers, which is our, in the end of the day, the most profitable segment of the business. And on the other end, the hardware side, we paid the price, let's call it, for the beginning or the last year high prices. Now we changed it. So if the growing in subscribers will continue at this rhythm and we do more to do more, and I believe that we have the potential market today to do more. So no doubt that in this case, your statement is very, very right. That's the operating leverage model of a recurring revenue business. So that's what we aim. These are our expectations. But let's see.
spk05: Okay. And just finally, if you could comment, I think last quarter you didn't comment on it, but bring. If you could give us a sense of where bring is right now. Is there any potential of them IPO-ing, and what is the current market value of Bring, and how is the business doing?
spk06: Okay, so since Bring is a private company, a startup, Israeli startups, so the last financial round was declared by the company, and the valuation was a billion dollars, and the company raised more than $100 million. The company is in good shape in terms of of financials and in operation, but we never thought that the IPO will come this year or next year. Now, when we all know where the market, the stock market and the economy is, and it's not only BRINC, many other companies, even more mature companies, I don't see plenty of IPOs happening on a daily basis. So I'm not expecting, but I'm really expecting that the company is in a good shape from financial and operational side, and they will continue to grow, continue to become market leaders in their industry. And in three, four to five years, when the market will allow companies To do IPO at this stage, I hope that they will be ready with higher revenues and higher profits.
spk05: Okay. And just to remind, you still own 17% of Brink?
spk06: Yes, yes. Since this round, we didn't dilute.
spk05: Would you sell any at these levels, at this valuation? No. Okay. Okay, beautiful. Thank you. You're welcome.
spk02: If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we pull for more questions. There are no further questions at this time. Before I ask Mr. Sharadsky to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available tomorrow on ITERAN's website, www.iteran.co.il. Mr. Sharadsky, would you like to make your concluding statement?
spk06: Hi. On behalf of management of ITERAN, 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. Thank you and have a good day.
spk02: Thank you. This concludes the ITERON second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.
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