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spk05: Ladies and gentlemen, thank you for standing by. Welcome to the Ituran third 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 Ituran's investor relations team at I will now hand the call over to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin?
spk03: Thank you. Good day to all of you and welcome to Ituran's conference call to discuss the third quarter 2002 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr. Eyal Sharatsky, CEO, Mr. Udi Mizrahi, Deputy CEO and VP Finance, and Mr. Eli Kamar, CFO of Ituran. Eyal will begin with a summary of the quarter's results, followed by Eli with a summary of the financials. We will then open the call for the question and answer session. I would like to remind everyone that the Safe Harbor statement in today's press release also covers the contents of this conference call. And now, Eyal, would you like to begin, please?
spk02: Thank you, Kenny. I'd like to welcome all of you, and thank you for joining us today. We are very pleased with the achievement during the third quarter. Apart from our excellent results, we surpassed the goal we have had for many years at E2One, that is surpassing a subscriber base of 2 million globally. Given our continued strong subscriber growth, adding a net of 48,000 new subscribers in each of the past two quarters, we achieved this goal earlier than expected. This is because it is quite clear that the aftermarket subscriber growth rate has accelerated in recent quarters. In the second half of 2019, prior to the corona era, and even over the past two years, apart from the shutdown of Q2 2020, our aftermarket growth run rate was approximately 20,000 net new subscribers per quarter. Today, we have shared with you our new aftermarket growth expectation going forward. Based on the recent run rate, we increased our expectations for the growth rate of our global aftermarket subscriber base ahead, expecting 180,000 to 200,000 net new subscribers as annually. I want to add that we are not making any predictions on the OEM subscriber base growth rate, as this doesn't depend on us. can vary quite a lot and is harder to forecast. The recent strong subscriber growth is starting to be reflected in the current quarter's subscription revenues, which continued to grow despite currency headwinds due to the dollar's strength. Revenue grew at 10% year-over-year and 13% when calculating in local currencies, and with all the reasons to believe that this trend will continue well in 2023. The gross margin on the subscription fee also grow and demonstrate some of the operating leverage in our model, becoming more apparent. We recorded gross margin of 57.2% up from 56.5% in Q3 last year and 56.8% last quarter. This increase in subscribers came from the growth in our traditional aftermarket business and was also boosted by the various growth engines that we have seeded over the past few quarters across all our geographies. One growth engine I would like to highlight this quarter is our service to financial firms active in the second-hand car market in Latin America. Because of the shortage of components and ultimately new cars, the second-hand car market has grown stronger everywhere. New fintech startups, as well as major banks, have come in to provide financing to this growing market. However, they all need a way to track the collateral on the loans they provide, which is the car. And D2One provides the perfect solution with its location-based and connected car technology. We've already started working with financing customers in Latin America, and we are also talking to some major financial institutions in those markets which we hope to close in the near future. We are constantly looking to bring in new financing customers and broaden the service to additional geographies. We are excited about this business and see great potential for additional growth in the coming years. In summary, we are very pleased with our performance in the quarter. That is both the financial performance and in particular the continued strong subscriber growth which has led to the milestones we announced to do of servicing 2 million subscribers. Both ongoing solid performance in our traditional aftermarket business and especially our growth engines are driving this subscriber growth. The subscriber growth will ultimately translate into increased subscriber revenue growth and faster growing profitability in the years ahead. And we can already see the initial fruits of that in the current quarter. It is clear that our subscriber growth rate has accelerated, and today we increase the expectation going forward. We now expect the aftermarket subscriber annual growth rate at between 180,000 to 200,000 net. All in all, I'm more excited now than ever with our long-term potential and look forward to a strong Q4 in 2023 ahead. And with that, I hand over to Eli. Eli, please go ahead.
spk04: Thank you. I know that the summary results I present will all be on a gap basis. Revenues for the third quarter of 2022 were $72.7 million, an increase of 11% compared with revenues of $65.7 million in the third quarter of 2021. Revenues from subscription fees were $53.1 million, an increase of 10% over third quarter 2021 revenues. The strong appreciation of the U.S. dollar versus the currencies in the geography that it operates over the past year impacted the revenues as reported in U.S. dollars. In local currency terms, third quarter revenues grew by 13%, compared with that of the third quarter of last year. The subscriber base amounted to 2,020,000 as of September 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 $19.5 million, an increase of 12% compared with that of the third quarter of 2021. In local currency terms, third quarter revenues grew by 16% compared with that of the third quarter of last year. The geographic breakdown of revenues in the third quarter was as follows. Israel 51%, Brazil 25%, rest of world 24%. Gross profit for the quarter was $34.6 million, 47.6% of revenues, a 7% increase compared with gross profit of $32.2 million, 49% of revenues in the third quarter of 2021. The gross margin in the quarter on subscription revenues improved to 57.2% compared with 56.5% in the third quarter of 2021. The gross margin on product was 21.5% in the quarter compared with 28.3% in the third quarter of 2021. The product margin was impacted by higher components prices and we expect this impact to ease in the fourth quarter and early 2023. Operating income for the quarter was $14.7 million, 20.2% of revenues, an increase of 6% compared with $13.9 million 21.1% of revenues in the third quarter of last year. In local currency terms, third quarter operating income grew by 9% compared with that of the third quarter of last year. EBITDA for the quarter was $19.6 million, 27% of revenues, an increase of 6% compared with $18.5 million, 28.1% of revenues in the third quarter of last year. In local currency terms, third quarter EBITDA grew by 9% compared with that of the third quarter of last year. Financial expenses for the quarter was $0.7 million compared with the financial expense of $2.7 million in the third quarter of last year. Net income for the third quarter of 2022 was $10.1 million or earning per share of $0.49 compared with $7.3 million or earning per share of $0.35 in the third quarter of last year. Cash flow from operations for the third quarter of 2022 was $11.4 million. As of September 30, 2022, the company had cash including marketable securities of $30.5 million and a debt of $16 million, amounting to a net cash of $14.5 million. This is compared with cash including marketable 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 third 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 announced in August 2021, 79,816 shares amounting to $2 million was purchased in the third quarter of 2022, and approximately $6 million remains under the current program. The share repurchases, if any, will be funded by a valuable cash and repurchase of It Runs 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?
spk05: 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're 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: Oh, hi. Thank you for taking my questions. Just regarding the subscriber guidance, you mentioned the opportunity in the secondhand car market in Latin America. I was just wondering if you could give any color on some of the other growth drivers that led you to the new number?
spk02: Yes. So we remark, and you would say, a new service that we just launched during the last, I would say, four or six quarters, which is very important because it's a new one, and we see that it's created a lot of attraction from the market. But having said that, of course, we still – have, let's call it our bread and butter, which is the SVR and the fleet management. Regarding the SVR, we also see that since, again, since the COVID, let's say, crisis and where the new car sales decreased and more spare parts requirements and there is no inventories, The nature of this situation is that there are more car theft attempts, car theft situations, and when this situation is in all the geographies that we operate, it means that insurance companies need more services like we offer, and since we are dominant in the geographies that we are operating, most of the requirements of the new policies for security systems Fortunately, we succeed to to penetrate and more concepts more concepts attempt meaning more needs for our solutions after almost a decade where the cost of rate were very very low although we succeed to keep our market share and to maintain subscriber base growth on the SVR and I must say that in the last 12 to 18 months, we see dramatically higher. So this is one reason. Second, we, of course, we are focused in other segments such as UBI, which in Israel is another growth engine. We have, as we said, a collateral, I would say, a solution, a finance solution for subprime customers, which we Until recently, we operate in debt segment only in the U.S., but now we copy to Latin America, mainly Brazil and Mexico, which are huge markets, which huge banks are now trying to handle the finance situation and attract more and more car buyers. And we are... allow them to do it to segments that in the past they didn't go. So all in all, those three items plus the traditional fleet management allow us, I think, to show much higher subscriber growth than ever.
spk00: Okay. Yeah, that's very helpful. Just another question on margins. What are some of the challenges you're seeing in supporting your operating margins considering the current macro environment? Are you expecting any impact from inflation or higher labor costs, et cetera?
spk02: First of all, we already handle this situation. in the past. As you know, we are operating many years in Latin America where the inflation is not only a new game like we face in more advanced countries like in the US or Great Britain or even in Israel. So historically, and now we also are using the same solution, is that of course our costs are growing. Our main cost is human resources, is compensation. And always when there is inflation, we have to adjust the compensation based on unions or based on legal requirements. But on the other hand, because it's very common that there is inflation, and now also in other markets, which is not common in Israel, no doubt that we had to adjust our sales prices. And we did it all around the world. and as well as in Israel and we always try to adjust the cost to the price and most of the time we succeed to do it when it's B2B our customers are in the same situation so they understand they know sometimes it's required more tough negotiations sometimes no and on the other end I remind everybody that most of our customers in Israel and in Brazil, are retail customers. And in that case, of course, we behave like any retail company. And unfortunately, we have to raise prices, what we did recently. So to make the long story short, we believe that we will succeed or will succeed to maintain the margins and the profitability.
spk00: Okay, understood. Thanks. That's it for me.
spk05: 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. The next question is from Abba Horvitz of Old School. Please go ahead.
spk01: Hi, good afternoon, and thank you for a really good quarter, especially in this tough environment. I wanted to understand next year, 2023, if you could explain... what you think perhaps the operating margins will look like, given that there should be certain margin expansion in 2023. I was wondering if you could comment on that.
spk02: Okay, so first of all, we are not providing, of course, specific guidance, but I will talk generally. Since we are based on operating leverage model and we are not expecting... Again, always there is the unexpected, but we are not expecting to increase our budgets. And on the other hand, as we took the right to say that we expect something which is closer to 200,000, 180 to 200,000 subscribers, no doubt that we expect, based on the model that we will show continuously, improving of the margins, of the operating margins. What will be the exact number we will not provide and of course it will be a little bit not responsible to do it, but I totally expect that a year from now we will be able to show higher profit margins.
spk01: Okay. Also, is the price for a used car the same as a new car?
spk02: Yes. Historically, also, we talk specifically about the finance segment. The finance segment is a pure B2B market. I mean, in the end, the finance bank or the finance company, they are our customer. They decide which of their customers they want to secure the collateral. So it's a B2B, so it's totally negotiated between two sides. When we talk about the retail market, always we sold to old cars and brand new cars, and the price is usually not depend on whether it's a used or a new car. It depends on things like how, let's say, we have three or four types of cars not related to whether it's old or new.
spk01: Okay. All right. Thanks. And congratulations, a really nice quarter. Thank you.
spk02: Thank you.
spk05: There are no further questions at this time. Before I ask Mr. Sharofsky to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available tomorrow on Ituron's website, www.ituron.co.il. Mr. Sharofsky, would you like to make your concluding statement?
spk02: On behalf of the management of Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. Have a good day. Bye.
spk05: Thank you. This concludes the Ituran Third Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
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