This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Good morning and welcome to PowerFleet's first quarter 2023 conference call. Joining us for today's presentation is the company's CEO, Steve To and CFO, David Wilson. Following their remarks, we will open the call for questions. Before we begin the call, I would like to provide PowerFleet's safe harbor statement that includes cautions regarding forward looking statements made during this call. During the call, there will be forward-looking statements made regarding future events, including PowerFleet'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 2023 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 could 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. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances. Finally, I would like to remind everyone that this call will be made available for replay in the investor relations section of the company's website at www.powerfleet.com. Now I would like to turn the call over to PowerFleet CEO, Mr. Steve To. Sir, you may proceed.
spk00: Good morning and thank you for joining today. It's a pleasure to share our first quarter performance with you. Our positive start to the new year reflects our unwavering focus on driving growth, profitability, and SaaS recurring revenue expansion, all while facing challenging macroeconomic pressures and highly significant FX headwinds. On a constant currency basis, our total revenue increased by 4% year over year, and our high margin recurring service revenue was up 17% compared with Q1 last year. We're also delighted to report a 15% growth profit expansion in Q1, with margins in the quarter exceeding 50%, up from 43% in the prior year. The U.S. business is seen as a major contributor for our future growth story, a thesis that continues to be validated with a 20% increase in recurring revenue versus the prior period last year. We also improved our bottom line metrics notably versus the prior year, which David will highlight shortly. Our key change efforts aim to optimize powerfully to business and concentrate our capital on areas that deliver superior returns to shareholders. This includes our revenue mix, geographies, competitive advantage, and allocating capital and resources to drive faster growth and increased profitability. As part of this transformation strategy, we're actively working to divest low margin, low growth, and subscale business units. We've made good progress on finding potential new homes for our Argentinian, Brazil, and South African business units, continuing hardware-only purchases through our seller-cater sales channel, and terminating loss-making contracts. This exercise naturally moderates our overall total revenue growth in the short term, but allows us to focus on value-enhancing recurring revenue expansion, which in turn drives attractive gross margin expansion, improved cash flow, and EBITDA. The most concrete indicator of the progress of our transformation efforts is the excellent gross margin performance of our go-forward core businesses in Q1. For these business units, we expanded our total gross margin to 53% and our high-quality service margin increased to 71%. This impressive and exciting margin profile for our core business going forward provides us with an excellent platform to drive accretive shareholder value. In addition to the major transformation activities we executed in Q1, we successfully closed the moving dots acquisition, launched a major new value-added module on our Unity platform, and secured several major customer sales leads. Before I dive deeper into our operational progress and outlook, I'll turn the call over to David to walk you through our numbers in more detail. David?
spk07: Thanks, Steve, and good morning, everyone. To begin with, I would like to provide an overview of our company's financial priorities after my first 90 days in the role. Priority number one is to accelerate our strategic transformation while staying within the limits of our current balance sheet. As Steve noted, we recently completed the Moving Docks acquisition, which brought an additional $8.7 million in liquidity. This move also onboards a talented team of engineers and data scientists to help accelerate the rollout of Unity. It brings complementary technology that meets the high performance standards set by one of the world's largest insurance providers and expands our presence to accelerate growth in the EMEA region. As we transition existing activities to the moving dots team in the second quarter, we expect to spend $1.5 million, resulting in a short-term hit to EBITDA. In parallel with the transition, we are also executing a series of cut-to-cover actions including our $3 million OPEX challenge to bring EBITDA impact of absorbing the moving dots business down to break even as we exit Q3. Priority number two is to improve the underlying operating leverage of our business by implementing a common and scalable software platform across all key geographies. We currently have an assortment of ERP systems resulting in a massive amount of manual work and costs. During my first 90 days, we made the decision to pivot from the initial ERP rollout plan that would have taken us deep into 2024 to complete to an accelerated and more cost-effective Plan B, which we expect to complete by year end. In addition to saving time and money with ERP rollouts, the project will address the root cause issues that currently result in G&A spend being well above our peers and our longer-term operating target. We expect to see substantial savings from this project in the P&L from Q1 2024 onwards. Now onto our financial performance, where I'm pleased to report that our Q1 results demonstrate solid performance despite economic challenges and FX headwinds. Total revenue for the quarter ended March 31, 23 was $32.8 million compared to $33.2 million last year. with the plan decline in low-value product revenue offset by growth in higher-value service revenue. On a constant currency basis, total revenue would have been $34.6 million, an annual increase of 4 percent. Our services revenue totaled $20.4 million, up $1.7 million year over year, and accounting for 62 percent of total revenue. On a constant currency basis, our service revenue grew an impressive 17 percent, reflecting the successful execution of our SaaS growth strategy. This strategy is focused on expanding our customer base and driving more value for existing customers through delivery of high-quality cloud-based services. Product revenue declined by $2 million, 12.4 million, or 38% of total revenue, with deal discipline and terminating unprofitable contracts the key drivers. While we continue to invest in new product developments, we've implemented a more disciplined approach to dealmaking. This approach has enabled us to focus on higher value, higher margin opportunities, while reducing our exposure to lower margin business. Gross profit margin expanded to 51 percent in Q1 from 43 percent in the prior year, driven by an improved mix of high margin service revenue versus product revenue, field discipline, and lower purchase price variances. Our operating expenses increased by $400,000 to $18.5 million, compared to $18.1 million in the same year-ago period. Performance in the quarter was adversely impacted by $700,000 in M&A and other non-recurring and out-of-period costs. Our ongoing focus on cost management is enabling us to shift investment into areas of higher return, including sales and marketing, with compelling results expected to be evident with accelerated revenue growth in the second half of 2023. Net profit attributable to common stockholders, inclusive of a $7.2 million gain on bargain purchase for moving dots, totaled $3.5 million, or 10-tenths per basic share and 8 cents for diluted share, up from a net loss attributable to common stockholders of $4.1 million, or 12 cents, for basic and diluted share a year ago. Adjusted EBITDA improved significantly to $1.4 million, benefiting from $2.2 million expansion in gross margin. This reflects our continued focus on profitability and our ability to deliver high-margin services to our customers. At quarter end, we had $25.1 million in cash and cash equivalents and a working capital position of $41.8 million, benefiting from $8.7 million in net proceeds from the acquisition of Moving Notes. We believe with our strength and balance sheet, combined with our focus on delivering high-quality services, we are well-positioned to drive growth and value for our shareholders. That concludes my remarks.
spk00: Steve? Thanks, David. Despite the macroeconomic and FX challenges we're currently experiencing, our team's highly focused and ruthless operational execution has enabled us to remain ahead of schedule on our plans to transform PowerFleet into a world-class SaaS solutions provider that delivers high growth and profitability. Our 2023 operating plan focuses on four key strategic objectives we're laser-focused on delivering. Objective number one is optimizing our OPEX base and operating structure. In March, we launched phase two of our optimization plan, which is expected to reduce our operating expenses by an additional $3 million annually, providing room to onboard MovingDots' engineering capability. We've also started further midterm seismic shift projects in terms of hardware rationalization, an integrated and centralized global supply chain, and shared service centers, that we believe will translate into an incremental $10 million of annualized EBITDA, which we'll begin to re-realize during early 2024. Objective number two is driving organic growth in our key regions where we can deliver high-quality recurring revenue growth. As proof points, we've established significant sales momentum in the U.S. and Mexico, where SAS recurring revenues were up 20% and 33% respectively in Q1 versus the same period last year. Our industrial vertical remains very strong with our US team delivering a 25% increase in total revenue for the channel year on year, driven by our collision avoidance advanced pedestrian safety solution. In Q1, we secured several notable Unity sales deals and strategy validating proof points with customers in the US and Mexico. To expand a little further, in the US, Unity has begun to have accelerated sales success in multiple vertical markets, with the likes of Indemo, Dull, Cart Company, selecting the Unity platform and our brand's data integration services to offer full fleet visibility and improve utilization for their assets and states. Walmart, a long-term partner of PowerFleet, has confidently expanded their relationship with us with a multi-million dollar commitment for further Unity subscriptions, with new sales orders in Q1 for over 7,000 new assets. Nestlé have also expanded their partnership with PowerFleet, selecting the Unity Advanced Collision Avoidance Safety Solution for 52 warehouse sites. Additionally, we continue to partner with NACPAC to give them a competitive advantage in the chassis rental and leasing markets, with a commitment in Q1 for an additional 10,000 Unity subscriptions. These successes highlight and validate the value and effectiveness of PowerFlip's Unity platform in saving lives, time, and money for our customers. We continue to build momentum in Mexico, where FEMSA, who had already selected PowerFleet's Unity platform for their entire vehicle fleet of over 6,500 vehicles, has now expanded their relationship with us, adding 1,200 new safety camera solutions as part of the new Unity safety and security module. PowerFleet's strategic partnership with AXA Commercial Insurance goes from strength to strength, adding a further 1,500 Unity subscriptions in Q1 And notably, we were secured a pilot for our moving dot smartphone as a service insurance solution for the access 60,000 strong vehicle corporate fleet of passenger cars. The business aim is to implement safety and efficiency metrics to reduce risk level and improve access value proposition for the market. The Mexican division of one of the world's largest FMCG companies who have more than 9,000 employees in the region has chosen PowerFleet's Unity safety and security module for employee transportation with their bus fleet. We plan to significantly further expand our relationship in the second half of 2023. Our half to 2023 sales pipeline is very encouraging, improving by 47% in the first quarter, highlighted by several large strategic opportunities for our Unity platform with notable global enterprise. As examples, one of the world's largest sports shoe and accessory manufacturers is actively piloting Unity, evaluating the solution's ability to meet their visibility and analytics needs across its total organization. One of our large global vehicle rental fleet customers is planning to replicate the success we've had in the U.S. by deploying in the APAC region, leveraging the Unity connected car solutions across their estate. On top of this, another top-tier on-demand international car rental company is also currently piloting our Unity solution. We expect this prospect to decide on a preferred vendor by the end of Q2 and roll out the solution during the fourth quarter. Our third strategic objective this year is delivering highly advanced enterprise software modules to the market. In March, we introduced our safety and security data-powered application to our new Unity platform. The new application brings together multiple data sources to enhance driver management, prevent loss, and features best-in-class advanced collision reconstruction capabilities. The safety and security application is the first of a number of new and improved module applications to be delivered throughout 2023. Our next release, the sustainability module that centers on next-generation electric vehicle telematics capability and advanced ESG and CO2 reporting, is on schedule to be launched at the end of June. Objective number four is expanding our channels and routes to market to drive new growth opportunities. A great example of this is our highly creative acquisition of Moving Dots, providing us with a meaningful beachhead for the European expansion, alongside adding distinct competitive advantage in the insurance vertical with some already established blue chip go-to-market partners. In partnership with our Moving Dots team, We've now kicked off the expansion of our European sales and service teams to launch an aggressive go-to-market plan for the full breadth of our Unity solutions. We're also evaluating a number of channel partnership offers we've received from large mobile asset enterprises in the Middle East who are looking to create joint growth propositions for the local markets. In the second half of the year, we also expect to announce new strategic relationships with major transportation and mobile asset providers in the US who are looking to maximize their total fleet and third parties of contractor visibility and performance by integrating data from OEMs, from their current telematics deployment with multiple vendors, and from PowerFleet's own data gateways through the Unity platform. The customer plan is to utilize our advanced data enrichment capabilities provide enhanced customer service propositions and improve efficiency for their end clients. Combining their information channels and integrating their data sources also gives the customer the ability to optimize the performance of their full suite of business operating systems and to simplify their business processes. We call this unified operations. Our unified operation strategy is at the very heart of the future of PowerFleet and our plan to drive consolidation in the industry. In the immediate future, we will focus on the integration of moving dots and how we can truly maximize the game-changing market potential this brings us. In summary, our transformation plan remains on track, and we're fully confident in our ability to deliver on our strategic foundational pillars, which will ultimately generate sustainable top-line growth combined with increased profitability and cash flow. That concludes our prepared remarks. Now I'll turn it back over to the operator for Q&A. Operator?
spk03: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Mike Walkley with Canaccord. You may proceed.
spk02: Hey, guys. Good morning. This is Daniel on for Mike. Thanks for taking the questions. So, I guess my apologies if I missed this during the prepared remarks, but could you just provide some additional details on the different moving parts of your cost savings initiatives?
spk07: Sure. So in terms of last year, there was a $5 million target that's largely been realized. That was a combination of both savings at the gross margin line, so in terms of driving efficiencies from a cost of goods sold standpoint, particularly on the product side of things. In addition to that, there were savings on the G&A side of things. In terms of those dollars, they have been reinvested back into the business. So we are now investing more in terms of sales and marketing. Obviously, the goal there is to see accelerated growth, and we're on track to see strong acceleration in the second half of this year. And the other major focus is to invest in Unity in terms of building out a next-generation SaaS platform.
spk00: And then, do you want to carry on with the 2023?
spk07: Yeah, the 2023, so there's a $3 million OPEX target we set for ourselves in Q1, on track to realize that. This, in large part, is creating room to absorb the moving dots acquisition. So there's a huge talent pool that we're bringing on board. That was a major driver of that M&A decision. Again, we're working our way through those savings. There will be some overlap given we need to, in effect, transition R&D activities over from existing teams to moving dot teams. So there'll be some overlap in terms of cost in Q2. But the expectation is as we exit Q3, those savings will be realized, and that will enable us to absorb the moving dots acquisition with, in effect, a break-even EBITDA profile.
spk00: And then finally, as we talked about the seismic shifts, so there's a number of longer term projects that are underway that take a longer time to realize the savings back, but that's $10 million of EBITDA expansion that we expect to start to roll through the P&L sometime during 2024. And that's everything from the ERP savings through to the globalization of our supply chain, the rationalization of the hardware, as we talked about previously, going from 26 devices down to nine, plus other operational efficiencies around shared service centers for the global business.
spk02: Great. Thanks for the detail. And I guess just for a follow-up, could you just provide some additional color on how the integration of moving jobs into the Unity platform is trending?
spk00: It's very early days. We're only, I think, four or five weeks into... into the integration, so I think it's too early to kind of, you know, to talk about that in any level of detail. Ultimately, what Moving Dots brings is some very highly sophisticated algorithms, data science, and AI capabilities that have been born out in the insurance industry, obviously validated by Swiss Re, who is one of the world's largest reinsurers. They also as well have sustainability propositions around CO2 and emissions. So we've launched our overall new safety module. We are launching our new sustainability module. And over time, we will bring that full moving dots capabilities into one platform and one set of modules.
spk04: Great.
spk02: Thank you very much. I'll hop back in the queue.
spk03: Thank you. Once again, if you do have any questions today, please press star 1 on your phone. Our next question is coming from Max Michaelis with Lake Street Capital Markets. You may proceed.
spk01: Hey, guys. Congrats on the quarter. First question here is, I just would like to get an understanding on how order patterns have tracked so far in April and May.
spk00: So I think we've seen a very strong start to the quarter in terms of orders. So, you know, we built good momentum. There was a slowish start in January, February, as I think as people were contemplating investments, but we're seeing very good traction through March, which has continued into April and May. And that's hence why you've seen the pipeline that we're talking about that's increasing dramatically, plus some of the sales results that we've talked about on the call today.
spk01: Yeah, that was going to be my next question. I was just going to, given your commentary on the outlook for Q2 and then the rest of the year, I was wondering if you can touch on a few key points of confidence throughout 2023. And I know your pipeline's grown strong, but is there anything else you can point to?
spk00: Well, I think if you stand back and look at what we talked about a year ago coming into this company. So we said that we would focus on high-quality SaaS recurring revenues. And I think our performance there so far is pretty impressive in terms of the growth levels of that element of the business. Secondly, we talked about Unity being a game-changing and industry-defining new platform. And I think the proof points in terms of the customer wins and the pipeline opportunity and the size of the pipeline growth for PowerFleet is super validating in terms of that being a winning strategy. for the business moving forward. I think from a gross margin expansion perspective for our go forward businesses to have already reached 70% in services and recurring revenue gross margin, that's starting to get towards the ambitions that the company had to be at a couple of years out from now. So that gives us strong confidence that that will continue to expand. We're only just getting started. And the more repeatable solutions we can get on the Unity platform, the more cross-sell upsell opportunities that we get, then obviously we create more margin by doing that. And if you see and understand from the customers, we're talking about the expansion that we're getting within our customer base with that cross-sell upsell opportunity, then that should bring a high degree of confidence for all of us for the future.
spk01: Oh, great color, guys. And then just last one for me, and then I'll jump back into queue. A nice uptake in gross margin this quarter. Could we see future expansion going out Q2, Q3, Q4 on a sequential basis?
spk07: Yeah, I can take that one. So, Max, in terms of gross margin, we've been pretty clear that we expect gross margin for products to be 30% and above. We were 27% this year, in line with what it was last quarter, too, but obviously up significantly year over year. A key driver of the year over year improvement is just the deal discipline that we talked about earlier. But in terms of go forward, there's a few things that will work for us. Firstly, we're still working our way through some of the expensive inventory we had to acquire last year, given some of the supply chain issues that we and others faced. So that's a piece part of it. The other thing is the mix. So the mix tends to vary quarter over quarter in terms of just the customers that are buying. We have certain customers that have higher margin than others. I would say Q1 was not as sweet a mix as we typically see in terms of just the underlying customers who are acquiring product in the first quarter. So again, so that's normalized Q2, Q3, Q4. So expectation would be above 30% on a pretty standard basis with some sort of fluctuation score at a quarter, but a long-term trend would be 30% and above.
spk00: Yeah, and then on the services side, you know, in terms of getting into that mid-70s range, I think that's in sight for us earlier than expected. We can't put a date on that yet, but the more new modules we get out, the more of that cross-sell-ups opportunity that we are able to realize, then, you know, we'll start to expand margins from that perspective. There's also a lot of consolidation work going on in the background in terms of our platforms, our communication costs on the cost side of the services lines. So we feel very confident, and I think it's a good stake in the ground, as I've said, for those core markets moving forward. To be now, you know, 71% is pretty impressive at this stage.
spk04: Thanks very much, guys, and good luck the rest of the year. Thank you. Thank you.
spk03: Thank you. Our next question is coming from Scott Searle with Roth MKN. You may proceed.
spk05: Hey, good morning. Thanks for taking the questions, and congratulations on the gross margin expansion in the core SaaS business.
spk00: Thank you, Scott.
spk05: Stephen, Dave, I apologize. I got on a little bit late, but in terms of the sales acceleration into the second half of this year, I was wondering if you could provide a little bit of color of exactly what that means, and then specifically with the Unity pipeline, I think you talked about it being up 47%. I'm wondering if you could calibrate us in terms of what that looks like in absolute numbers, and as now we start to introduce the new modules with safety followed by sustainability, what that's doing to the ARPU impact or the dollar content per transaction?
spk07: So sales acceleration, again, as Steve noted earlier, pipeline's up sort of 47%. In terms of the dollar value, it's tens of millions in terms of just what that means in terms of the size of the pipe that's coming through. So that will help you just give you a sense there, Scott, in terms of sort of quantum that we're talking about there.
spk00: Okay. It was $125 million of contract value added to the pipeline during the first three months of the year. Can you repeat yourself in the third question? You went a bit quickly for us, sir.
spk05: Oh, I apologize. You know, Steve, just in terms – Of the new modules, what they're doing in terms of the ARPU per connected device or the overall deal size?
spk00: Yeah, so we're very much focusing, as you heard from the customers that we were talking about, on mid- to large-size enterprises. So these are good sizes, anything ranging from the 250 subscribers up to the multiple thousands. In terms of ARPU, we're seeing a nice uptick, around about 15% to 20%. I would say at the moment in terms of improvement on ARPUs versus our historical kind of new sales of the old versions of the modules pre-Unity. So, you know, I think people are seeing the value. We're doing a much better job in terms of value-based selling, our return on investment contribution, building long-term roadmaps with our customers. We're also, when we are putting hardware in, we're focusing on a smart box concept where we're getting a higher value device fitted that ultimately then all the modules can be turned on remotely with software upgrades rather than the customer having to keep adding in more hardware. So the vectors are good, obviously still early days, but in terms of proving out the proof points, I think the strength of pipeline, the reaction to Unity, the major brands that have already signed up for it, the major brands who are expanding, you know, to different parts of their fleet or even different geographies, And, you know, the companies who are now putting in exclusive pilots to really kind of test out the solution, we couldn't be more pleased. And let's not forget, we didn't really bring Unity until Q4 to the market. So there's a long way for us to go. We've put a new sales team on the pitch that are building pipelines. So there's a lot of oxygen for us, you know, moving forward. But we couldn't be more delighted by that shift. And I think confidence is really growing in PowerFleets as a partner and a provider. particularly in kind of how we treat customers, how we look to create that long-term relationship in comparison to the service levels that they get from multiple providers in the market today.
spk05: Steve, maybe just to quickly follow up, what are you seeing from a sales cycle perspective, given the new product portfolio, but also the current economic landscape?
spk00: Yeah, so it's a bit more elongated. So I think, you know, decisions Decisions are still being made, investments are being made, but the gates to get there are taking longer, and it's really a matter of providing that confidence, as I've said. That said, the solutions that we're providing really are, you know, A, mission critical, B, can provide huge efficiency, optimization, and ultimately as well, compliance, you know, to an organization. So, you know, we feel good about it, but there's no doubt over, you know, the kind of Q4, Q1 period that, you know, decision making is taking longer and it's a lot harder to kind of get through. But that's where I think, you know, the talent that we've brought in can really have those top to top business conversations and get tied less into kind of the cost of the asset and more into the value that we bring to the business.
spk05: Great. And Maybe quickly on the divestiture fund in terms of Cell Locator and the other non-core businesses. Looks like you got it broken out from a P&L standpoint. It sounds like there's some active dialogue. Did you provide a timeline or dollar amount that you would expect to generate from those? I guess it looks like it's about $16 million in annualized sales.
spk00: We haven't done either. So obviously, I think we last spoke in March and we said that we were exploring opportunities. We've had offers for those parts of the business, which we're evaluating currently. This isn't something that we are going to rush. We're going to make sure that this is right for the business, right for our teams and our customers. So that process will continue. And again, we haven't provided anything in terms of valuation to the market of those entities today.
spk05: Okay, and lastly, if I could, just on the OPEX front, Dave, I think, you know, in the past pro forma you had taken out deal amortization. I think that is not removed in the current pro forma numbers. I just want to clarify that. Was there any moving dots, OPEX, in the first quarter? And then I just want to clarify, you've still got $3 million of OPEX saving programs expected over the course of this year, partially offset by the bump-up. in moving dots, but then as we get into 24, it sounds like there's another 10 million of various optimization plans related to ERP systems and otherwise that we should see start to kick in. Is that correct?
spk07: That's correct, Scott. So in terms of moving dots, the deal closed March 31. So we got the balance sheet pickup, but there was no expense in the year. So that's true. In terms of the managing of expenses, in terms of bringing that out of the business, yes, on track to the $3 million. And as I said, the expectation is by the time we're through the integration of moving dots, it will in effect be absorbed on an EBITDA neutral basis. So we expect that to have happened by the end of September, so as we exit Q3. And then looking to next year, as Steve mentioned in his prepared remarks, there's a $10 million opportunity. A significant portion of that, I would say about half of that, can really be driven by G&A efficiencies as we get a common platform in place. The other portion will largely come out of improvements in terms of supply, in terms of the rationalization we're doing, in terms of the number of product SKUs that we have there. So good progress there as well. And I guess, Scott, just to take a step back, obviously, there's been a huge amount of activity gone on even before I arrived in terms of taking costs out and reinvesting it back into the business. But you can see evidence in terms of just the underlying cash generation of the business. So if you look at the last couple of quarters, for example, we've been generating unlevered free cash flow, which I think is unusual for the history of moving dots. So good progress there. I think sort of 1.2 or so of unlevered free cash flow the last six months. Again, Q2 will be a little bit bumpy, just given we have to settle the transaction fees for moving dots. We'll have the double expense for moving dots, so those types of things. So Q2 will be a little bit tougher. We'll also be paying out some of the incentive comp from 2022 in the second quarter. But in terms of just the progress that's been made, and much of that predates me, that's definitely evident in terms of the unlevered free cash flow we've generated over the last six months.
spk00: And just to add to make sure we're all aligned on moving dots. So, you know, moving dots was an acquisition where Swiss Re had not really bought to market the sales element of the solutions that are out there to be provided. So basically they built a world-class product. The amazing tech team were even more delighted with the team. Now they've become part of the business. And we were planning to invest in R&D for Unity, and these guys fit perfectly into that scenario. And we feel that with both our sales channels and the Swiss Re channel as well, we have the ability to significantly drive revenues in the insurance space. So it's a cost burden right now, but it will very quickly translate into value on the top line and ultimately on the bottom line of the business as we expand out, and particularly as we expand out our European operation as well. So we've got a much better capability now to go and sell a full range of solutions in the European market.
spk04: Great. Thanks so much.
spk03: Thank you. Our next question is coming from Gary Prestapino with Barrington Research. You may proceed.
spk06: Hi. Good morning, Steve and David. First of all, a lot of questions have been asked here. I'm just trying to follow along, but You said there were $700,000 of M&A expense related to moving dots in the quarter. Did you back that back into the adjusted EBITDA calculation, David?
spk07: Yeah, so it was $700,000 of M&A costs together with certain out-of-period and one-time costs. So there's about $300,000 of transaction costs in the quarter that was backed out in terms of arriving at EBITDA, but there's also $400,000 of sort of one-time costs another non-recurring cost that's still in the OPEX that was not backed out.
spk06: Okay. So, all right. And then, um, Steve, if I understand this, once you're finished with, with these markets that you are low growth and you don't want to be in, um, where is the base, the bulk of your business? Would it be the U S and Mexico?
spk00: US, Mexico, Europe, obviously we have our strong foothold in Israel as well. And what we're saying from emerging markets is, you know, we'll do those once we've got the business really cooking, you know, in terms of the top line growth, the growth margin and the profitability of our core markets. But we'll do them through those indirect channels that we've talked about. So we've got some, you know, significant offers from multi-territory markets. in terms of organizations want to partner with us and go to market on their own. We think that's more a scalable way for emerging markets and having our own entities. But that's really a phase two because, you know, we've got significant opportunity in those core markets where we know we can make money. We're established today. We have great customer base with a lot of white space opportunity. And we want to focus. You know, one of the things I think the organization has done has gone very broad in terms of where it's tried to play. And we want, you know, we want to laser focus on that high quality revenue, take a true market leader's position in those core markets. And if you see by the results we've already had with that strategy on the gross margin side, you know, we've got a chance to create a spectacular set of businesses in those core markets.
spk06: Right. And then another question was mentioned something about is there 16 million annualized with total revenue from these markets that you are trying to sell?
spk07: Yeah, so in terms of it with 1.6 annualized, in terms of the recurring piece of it, which is the service piece of it, that's about $12, $12.5 million on an annualized basis from the, again, Brazil, South Africa, Argentina.
spk06: All right, so on a pro forma basis, you would have about $4 million less of revenue in this quarter, but your margins would have been up Pretty significantly. I mean, you report a 50.6 gross margin, but you're saying it would have been 53%?
spk07: Correct.
spk06: Okay. So just a couple other things here. Steve, what are the other platforms for Unity, the sequence of what you're going to issue this year or put out in the market? You have safety and security is out, right?
spk00: Yeah, safety and security is out. Sustainability comes next. We're then looking at advanced fuel management, and then we're looking at compliance. So those are the ones that we delivered in the next sequence.
spk06: Okay, and that will all be out by 23, end of 23?
spk00: Correct, yeah. And obviously what already exists is the kind of optimization productivity module as well. That's kind of the base module that was already out there as well. We'll have five modules fully out, obviously generating pipeline, you know, through 2023 for 2024. But if you see the reaction to the safety and security module, you see the wins that we've got and the pipeline, people are really getting behind this because ultimately it is different to what is out there in terms of its ability to drive change and drive improvement in a more simplified way. So that's exciting. And then secondly, it's not just about the module. So we talked about unified operations, and this is where we have a data agnostic capability to bring in data from our own device, from third-party devices, from OEMs and other data sources, normalize that, do some really cool stuff on it, and then send that integrated normalized data into other folks' operating systems. So ultimately, they can drive the performance of their ERP, their planning, their driver training, their payroll, lots of other different systems. And what we're seeing is, and this is where we referenced a couple of very major organizations in the US, who've got this total spaghetti of different telematics providers. They've got all these different data sources. They're overpowered by the amount of data they've got. And what they want is a partner who ultimately can provide the insights that they need to drive their business and take away all of the noise that exists and all the complexity of this exists from all these different providers and give them true visibility of their own estate, which allows them to improve their efficiency, their productivity, but also as well competitive and customer advantage with their end customers. That play is something that we're super excited about. And the early traction on that, you know, in terms of people coming to the table and wanting that is really super. And that's something that, you know, Unity outside of just kind of creating telematics modules and enterprise software modules, That's really the next generation pair of unity. And, you know, I think you can hear from my voice, it's a pretty exciting space for us right now.
spk06: Yeah, that sounds great. I just want to clarify something. You said you had a pipeline of $125 million of new business. Is that signed business or is that just out there that you're negotiating right now?
spk00: So we have added to our pipeline $125 million total contract value in the first quarter. for our future pipeline.
spk04: Okay. All right.
spk06: And then lastly, could you just talk about what you're, David, you mentioned something about that you've got to put in a, or your, what you're doing with the common platform. I mean, you said something to the effect that that What you had been doing was going to take too much time, so you're going to replace it with something else. Could you just maybe very simply explain what's going on there?
spk07: Yeah, absolutely. So, obviously, PowerFleet is the amalgamation of a number of different entities through M&A. One thing that never happened was just getting a common enterprise resource planning system in place. Even the ones that were inherited were probably a little bit archaic, too. So in essence, that results in a huge amount of manual effort, a huge amount of manual activity, delays in terms of getting high-quality information that's actionable. All these things basically drive costs, both direct costs and indirect costs, in terms of just not being on top of businesses as well as we would wish to be. So we were going to change out the – The assortment of existing platforms anyway, so there was a plan in place as I walked through the door, but that was going to take until deep into 2024 to get done. And to be frank, we don't have the time, nor do we want to spend the money there. So by spending less and getting it done more quickly, it basically means we can spend more calories on driving the business forward, which is key. But as importantly, if we get it done more quickly, it basically means we can start shedding that incremental cost sooner too. So the expectation is across all of our key markets, we have everybody on the same ERP system exiting this year. And as we do that, for example, we can start creating shared services centers in Mexico City and other things. We can also start shedding a lot of work that's done manually today. We can start getting better information to be better stewards of the assets that we have. All those fruits will start harvesting in 2024, and we expect that to help drive down E2R for G&A to something that's more in line with what you would expect for a business our size. Because to be honest, as we see it here today, it's way above both the peer group and our long-term target. So the expectation is there's a few percentage points we can shed, and ERP will be a key catalyst to make that happen.
spk04: Okay. Thank you. Thank you.
spk03: We have reached the end of our question and answer session. So I will now turn the call back over to Mr. To for his closing remarks.
spk00: So thank you, everybody, for attending the call. We appreciate your support. Our style is very much to come in a very transparent way and walk through the transformation activities that we're undertaking as a business. That transformation has been and remains substantial. I think if you look at all the key vectors of our strategy in terms of wanting to become a high-growth, profitable SaaS business, we're making very solid progress against all those vectors. We appreciate that some of the changes and the volume of changes we're making, it's sometimes hard to follow the ins and outs. But ultimately, the execution plan, we believe, is ahead of plan, and we're very confident for the future. So thank you for today.
spk04: Enjoy your day, and we'll speak to you soon. thank you for joining us today for our presentation you may now disconnect
Disclaimer