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spk02: Ladies and gentlemen, thank you for standing by. Welcome to the Ituran fourth 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 Eturan's investor relations team at ekglobalinvestorrelations at 1-212-378-8040 or view it in the news section of the company's website, www.eturan.co.il. I will now hand the call over to Mr. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to begin?
spk03: Thank you, Operator. Good day to all of you, and welcome to this conference call to discuss the fourth quarter and full year 2022 results. I would like to thank you to our management for hosting this call. With me on the call today are Mr. Eyal Sharadki, the co-CEO, Mr. Rudi Mizrahi, Deputy CEO and VP Finance, and Mr. Eli Kamar, the CFO. 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 Eli, would you like to begin, please?
spk06: Thank you, Ehud. I'd like to welcome all of you to our full-year and fourth quarter 2022 call, and I would like to thank you for joining us today. We are clearly very pleased with our achievements throughout 2022. From a financial perspective, we showed continued growth with record full-year revenue of $293 million, record-full EBITDA of $79 million. From a strategic perspective, we surpassed the 2 million subscriber mark, and our subscriber growth strongly accelerated in 2022, adding 185,000 net subscribers versus 113,000 in 2021, representing a 64% acceleration. We believe that this new much higher subscriber net ads will continue into 2023. As we shared with you last quarter, our expectations for the growth rate in our global aftermarket subscriber base stand at between 180,000 to 200,000 net new subscriber ads annually. I want to add that it is harder to forecast the OEM subscriber base growth rate as this depends on our OEM customer sales and doesn't depend on us. The strong subscriber growth we have experienced in 2022 is starting to be reflected in the subscription revenue growth, even despite the currency headwind due to the dollar strength compared with last year. Q4 subscription revenue grow at 10% year-over-year or 14% growth when calculating in local currencies. We have every reason to expect that this growth trend will continue well into 2023. The growth margin on subscription fees continue to improve and we have seen sequential improvements throughout each quarter of 2022. We started Q1 2022 with a subscription fee growth margins of 55.9%, which increased through 2022 by 200 basis points to 57.9% in Q4. It demonstrates that the operating leverage in our model is becoming more apparent, whereby we can add each new subscriber without a corresponding significant increase in our costs. This increase in subscribers came primarily from the growth in our traditional aftermarket business. In summary, we are very pleased with our performance in the fourth quarter, which culminated an excellent 2022 for it to run. Both ongoing solid performance in our traditional aftermarket business and especially the growth engines we have seeded in the past years are driving this subscriber growth. We expect that this accelerated subscriber growth will translate into increased subscriber revenue growth in 2023 and faster growing profitability as the operating leverage continues to work in our favor. We've already seen the initial fruits of this in 2022. Looking ahead, we believe the improvements we have made to our business in the past few years, especially the strongest subscriber growth, are here to stay for the foreseeable future. We're excited for the year ahead and expect the positive trend that started in 2022 will continue into 2023 and beyond. And with that, I hand over to Eli. Eli, please go ahead.
spk04: Thanks, Eyal. I will provide a short summary of the financial results. You can find the more detailed results that we issued in the press release early today. Revenues for the fourth quarter of 2022 were $74.9 million, a 7% increase compared with revenue of $70.4 million last year. Fourth quarter revenue from subscription fees were $53.9 million, an increase of 10% over fourth quarter 2021 revenues. In local currency terms, subscription revenue grew by 14% compared with that of last year. Revenues for 2022 was a record of $293.1 million, an 8% increase over the $270.9 million reported in 2021. In local currency terms, revenue grew by 10% compared with that of 2021. 2022 revenues from subscription fees were $209.6 million, representing an increase of 10% over 2021. In local currency terms, subscription revenues grew by 11% compared with that of 2021. The subscriber base amounted to $2.66 million as of December 31, 2022. This represents an increase of 46,000 net over that of the end of the period quarter and an increase of 185,000 year-over-year. During the quarter, there was an increase of 44,000 in the aftermarket subscriber base and an increase of 2,000 in the OEM subscriber base. Fourth quarter product revenues were $21.1 million, a decrease of 2% compared with that of the fourth quarter 2021. While we saw a decrease in US dollar terms, if we look at the product revenues in local currency terms, there was an increase of 4% compared with that of the fourth quarter 2021. 2022 product revenue were $83.5 million, representing an increase of 3% compared with 2021. In local currency terms, product revenue grew by 6% compared with that of 2021. The geographic breakdown of revenues in the fourth quarter was as follows. Israel, 50%, Brazil, 25%, rest of the world, 25%. EBITDA for the quarter was 6%. $20.6 million, or 27.4% of revenues, an increase of 9% compared with an EBITDA of $18.9 million, or 26.9% of revenues in the fourth quarter of last year. EBITDA for 2022 was a record $78.9 million, or 26.9% of revenues. an increase of 9% compared to $72.7 million, or 26.8% of revenues in 2021. Net income for the fourth quarter was $9.6 million, or 12.8% of revenues, or dilute earnings per share of $0.47. At a similar level of $9.6 million, or 13.2%, 6% of revenues or diluted earnings per share of 46% in the fourth quarter of last year. Net income in 2022 was $37.1 million or 12.7% of revenues or fully dilute earnings per share of $1.82, an increase of 8% compared with a net income of $34.3 million or 12.6% of revenues or fully dilute earnings per share of $1.65 in 2021. Cash flow from operations for the fourth quarter of 2022 was $15.9 million. Cash flow from operations for 2022 was $45.1 million. I know that in 2021, operating cash flow was comparably higher at $55.8 million. The somewhat lower operating cash generation in 2022 was primarily because our Brazilian business grew nicely in 2022, while in 2021 the growth was much more limited. One of the business models there is it run Consigura ICS, meaning that we pay in advance for the customer's insurance policy and for their telematics units, while the customer pays us over the life of the service. Therefore, the working capital is used at the business growth. It, therefore, temporarily went down in 2022 as a result of the strong business growth in Brazil in 2022, and we do expect operating cash flow to catch up as time goes by. As of December 31, 2022, the company had cash including multiple securities of $28.2 million and debt of $12.2 million amounting to a net cash of $16 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 fourth quarter of 2022, a dividend of $3 million was declared. In the fourth quarter, under our share buyback program, it won purchased 131,000 shares for a total of $3 million. During 2022, a total of $357,000 shares were purchased totaling $8.4 million. Share repurchases were funded by available cash and repurchases of Fituran's ordinary shares were 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 ask about the subscriber mix this quarter and the slight uptick in OEM. Can you give any color on the characteristics there you're seeing with subscribers or any changes in customer behavior?
spk06: Typically, as we always say, we have not a lot of influence on, let's say, sales and marketing of the OEM. We have a deal with a car producer and it depends on his sales in the market. On the aftermarket, of course, we have much more influence and this is why we succeed from time to time to promote new services, new technologies, and allow us to get to new segments. And currently in the aftermarket sales, we have a very diversified customer base and customer retention. As you know, we have SVR, which is our traditional business. We have fleet management, and recently in the last few years, we also have services for UBI and financial institutions. So during Q4, we had a mixture of those services.
spk00: Okay, great. How should we be looking at gross margin going forward, considering earlier in the year you had the weakness in products and we've seen a slight uptick since then? Just can you comment on some of the moving parts you see there?
spk06: Yes. First of all, during 2022, we had a higher cost. I can say the highest cost. of components, which is part of our hardware, which is a condition for providing our services. Based on the changes in the components markets, we know, and I believe that during 2023, we will see improvements of the margins when we sell hardware. And thanks to this and to the operating leverage model, when we know that we're adding, as I said, close to 200,000 new subscribers a year, which no doubt that the additional revenue is much stronger than the needs of additional expenses. So, overall, from those two revenue source of it to one, I really believe that we will continue to show growth in the gross margins.
spk00: Great. Thanks for that. That's it for me.
spk02: The next question is from David Kelly of Jefferies. Please go ahead.
spk01: Hi team. This is Gavin Kennedy on for David Kelly. Thanks for taking my questions. Nice to hear you reiterate your annual aftermarket growth guidance for 2023. This target implies a nice acceleration from 2022. Can you just walk us through the main growth drivers here in more detail?
spk06: First of all, we have to understand that growing any number of growing the subscribers, is accelerating the business because it's growing on the customer base that we finished in 2022. So theoretically, even 100,000 additional subscribers a year or 80,000, which was our average in the past, allow us to increase our profit margins and profitability. So 180,000, we have to understand it's a large number And I wish that we will succeed to continue this growth of this number every year in the future. So I think that this shows a very strong acceleration. First. Second, as I said, we base our forecast on mainly the finance. First of all, okay. I will repeat the last quarter, as I said. Because of the, let's say, some economic, I would say, decrease in the world, and specifically in the regions that we operate, so we see and we face increasing of cost of freight. When the cost of freight is higher, insurance companies need increase, and we provide a solution which we see more and more needs from insurance companies. So also the SVR, which is a very traditional segment of E2E1, is now growing since 2022 when it started. Add to this the two segments, which we start recently, which is the UBI and the finance segment, finance for cars. Banks or fintech companies that provide loans for people to buy cars, but they want to secure their collaterals, which is the car, and they use our solution. And this is something that we see how it spreads around this marketplace. So having said that, this is the reason why we believe that we will continue with the acceleration of our growth in subscriber base.
spk01: Got it, makes sense. And then it looks like your operating income margins modestly increased 20 bps this quarter. What are the drivers here and how should we think about operating margin trajectory into 2023? So as I said before,
spk06: if the gross margins or if our operating leverage model, which is derived mainly from our recurring revenue, and add to this the changing in the situation of buying electric components for our hardware, which is also decreased in the last months, I believe that this will lead to increase and grow our gross margins, operating margins as well.
spk01: Okay, thank you, Tim.
spk02: The next question is from Abba Horvitz of OSP. Please go ahead.
spk05: Hi, good afternoon. I was hoping you could explain better. I want to understand the differential of getting new subscribers and then those margins... actually starting to expand? Because I know there's a lag time between a new subscriber and actually seeing that profit come from that new subscriber. How can we view that over the next year, given the high growth of subscribers in 2022, but yet you're also having a high growth of subscribers in 2023? So I just want to know, will there be a magic moment that we'll start to see this major expansion in the margins?
spk06: First of all, as you saw, 200 basis points, it's something that derived from this growth of subscribers in the end of the day. Of course, what you say is right. If you look, we also grow in 2021 with subscribers, but you start to see it only in the beginning of 2022. Now, what we show is after a year. It's 2022, the end of 2022. So now, again, we will have the contribution of what we added during 2022, starting influence on our results in Q1, Q2. Then add to this the new subscribers. So I believe, and this is the reason I said, that in the end of 2023, again, we'll see another jump of our margins growing. So it cannot grow 20% from 57 to 70. It's growing 2%. 3% every year. In three, five years, it should be very material. But this is the reason, as you said, it takes time from this ramping up of subscriber base to the moment that you see material number of your growth in the profitability. But you always see.
spk05: Okay. And in terms of your cash, so you have about, what is it, 12 million net debt? Sorry. Sorry. you have $12 or $14 million, sorry, $17 million net cash. Sorry. Are you going to pay off this $12 million of debt or are you just going to leave it for now?
spk06: Okay, so actually the companies usually have no need for any debt. The reason that you still see it, when we acquired Roll Truck, today it's part of it to run, but when we acquired it four years ago, We used a bank loan for this acquisition, and it's paid along with the time. We still have two payments to pay until September this year. And in September, we will finish. So I mean, in September, we will be in zero. So we have to pay it back, yes.
spk05: Okay, fair enough. And at that point, would that change your approach? Would you get more aggressive in buying back stock? Would you increase the dividend at that point in time? In other words, as we get to the second half of the year, can we expect at the same time that the subscriber earnings are kicking in and you've paid off your debt, wouldn't it make sense to increase the dividend or do a larger share repurchase?
spk06: Of course, and as we just declared, and you can see it now in the SEC and in the press, Our board approved additional $10 million for this year of buyback of E2RAN shares. So what you say is right. We feel comfortable with our cash position and we feel that the best investment for us currently is to repurchase the shares of E2RAN compared to any other possible investment with this cash.
spk05: Would it make sense to do a Dutch auction where you essentially give a price above where it is today and then a certain amount of money you allocate to that to buy out the shares instead of doing it drip by drip on a daily basis?
spk06: First of all, it's something that we didn't think about specifically, but I will accept this offer. This proposal, what you said, and I will advise with our financial advisors.
spk05: Okay, wonderful. And I want to leave it off. Can you give us just some highlights on the investments that you have, if there's any change to the investments?
spk06: You talked about we have two investments, which sits on our, I would say, financial part. One is Bring, which is a private company that we hold 17%. It's a tech startup. And just to remind you that the last round, round E, was an evaluation of $1 billion. That was led by Insight Partners. Since then, the company covered with, I would say, enough cash, $150 million. So the company has enough cash for the coming years. Of course, the situation today, with the tech companies that changed a little bit this, I would say, this ecosystem, didn't change how the businesses go, but of course, we as part of the board see things less aggressively and with more conscious, but a company is going to continue to perform based on its business plan. Of course, we are not in a position now to sell our shares. It's a private company and the market, it's not, I think it's not the right thing to do it now. And the second investment, which is holding shares of SaverOne, which is a publicly traded company in the Israel stock market. At that case, we still have the valuation together with the rest of the shares in this, again, in this ecosystem, and specifically in the Israeli stock markets went down. So we already wrote those losses in our financial portion of the P&L during 2022. You can see it's cost us something like almost $5 million financial losses, of course, not in cash. So today our holdings there, worth a few hundred thousand dollars, so I don't see that it will continue to, let's say, damaging part of our net income in 2023.
spk05: Okay. Thank you very much for the overview, and good luck, and thanks again for the wonderful performance. Thank you very much.
spk02: 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. Sharotsky 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.co.il. Mr. Sharotsky. Would you like to make your concluding statement?
spk06: Yes. On behalf of management of Ituran, I would like to thank you for your continued interest and long-term support of our business. We hope to be speaking with you over the coming quarter, and if you are interested in meeting or speaking with us, feel free to reach out to our investor relations team. Thank you and have a good day.
spk02: Thank you. This concludes the Ituran 4th Quarter 2022 webinar. results conference call. Thank you for your participation. You may go ahead and disconnect.
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