Earnings Call: Q1 2021

May 5, 2021

Good morning, and welcome to PowerFleet's First Quarter 2021 Conference Call. Joining us for today's presentation is the company's CEO, Chris Wolfe and CFO, Ned Matis. Following their remarks, we'll be opening the call for questions. Before we begin the call, I would like to provide PowerFleet's Safe Harbor statements that include cautious 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 company's product offering and the industry trends are considered forward looking statements. Such statements include, but not limited to, the company's financial expectations for 2021 and beyond. All such forward looking statements imply the risk of 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 or differ materially could include, Amongst others, SEC filings, overall economic and business conditions, demand for company's product and services, competitive factors, emergence of new technologies and company's cash position. The company does not intend to undertake any duty to update or 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's CEO, Mr. Chris Wolfe. Sir, please proceed. Thank you, Matthew. Good morning, everyone, and thank you for joining our call. I hope everyone is doing well and staying healthy. During the Q1, we continued to execute on our long term strategic roadmap, which is focused on expanding our high value solutions offerings, growing our business in our targeted markets and continuously increasing our high margin recurring and services revenues. While we delivered consistent financial results in the quarter, our revenues would have been $1,800,000 more had we not experienced a third party electrical component supply issue That impacted some of our product lines and is impacting many industries globally. Fortunately, our supply chain organization acted swiftly Remediate the issues and we're able to build the products, but we are unable to recognize the revenues as these units were not delivered by the quarter's end. I will discuss the electrical component issue and our remediation efforts during the latter part of our call. Nevertheless, we did see our business pick up to near pre COVID levels in Q1, albeit still lumpy in certain geographies due to infection rates, vaccination progress and individual government actions. We are very encouraged by the business strength in Israel and our progress in the U. S. With major upgrades at both Ford and the United States Postal Service and are signing new logistics logos. As Q1 progressed, we saw a sustained and measurable pickup in our new sales activity across our geographic regions, including our U. S. Dealer channel, which is seeing record pipeline strength in Q2. Internationally, our team in Israel is nearly 100% vaccinated and most of our employees are back in the office. Our operation in Israel is home to a significant part of our supply chain, engineering and software development efforts. So it's great to have our employees healthy, our operations functioning at 100% of capacity and the economy there reigniting. I will talk more about this after Ned walks us through the financial performance for the Q1 of 2021. Ned? Thank you, Chris, and good morning, everyone. Turning to our results for the Q1 of 2021. Revenue for the Q1 of 2021 was $29,000,000 compared to $30,800,000 in Q1 of last year. The year over year decrease in revenue was primarily due to the major shipment to Avis last year and the $1,800,000 of shipment deliveries Chris mentioned in his opening remarks. It is worth noting that in Q1 of last year, we recognized $2,300,000 in product revenue from Avis due to the final major shipment, which was absent in Q1 of 2021. High margin recurring and services revenue for the Q1 was $17,600,000 or 61 percent of total revenue. This compares to $17,300,000 or 59 percent of total revenue in the prior quarter and $17,600,000 or 57% of total revenue in Q1 of last year. Product revenue, which drives future services revenue, was $11,400,000 or 39% of total revenue. This compares to $13,200,000 or 43 percent of total revenue in Q1 of last year. Gross profit increased to 50% of total revenue or $14,500,000 from 48 percent of total revenue or $14,900,000 in Q1 of last year. Now turning to our expenses. Total operating expenses for the Q1 of 2021 were $16,400,000 down $1,900,000 or 10% from $18,300,000 in Q1 of 2020. As we stated previously, certain OpEx savings that we realized in 2020 related to COVID-nineteen were to come back in 2021 and this went into effect starting in January of this year. We do not currently expect our OpEx to increase from Q1 run rates, Except for marketing expenses that will increase slightly in Q1 from Q1, as you believe timing is critical due to the pending 3 gs SunSun in the U. S, which Chris will talk about shortly. Turning to our profitability measures, GAAP net loss attributable to Commerce shareholders for the Q1 of 2021 totaled $3,000,000 or $0.09 per basic and diluted share. This compares to a net loss of $4,500,000 or $0.16 per basic and diluted share in Q1 of last year. Non GAAP net income for Q1 2021 totaled $61,000 or $0.00 per basic and diluted share. This was an improvement compared to non GAAP net loss of $1,300,000 or $0.05 per basic and diluted share in Q1 of last year. Adjusted EBITDA for Q1 2021 totaled $1,400,000 compared to adjusted EBITDA of 152,000 in Q1 of last year. Our liquidity positions remained strong at quarter end with $41,000,000 in cash and cash equivalents and a working capital position of $53,200,000 That concludes my prepared remarks. Chris? Hey, thanks, Ned. As I mentioned earlier, delays in getting select electrical sub components during Q1 impacted our ability to $1,800,000 in product revenue. While we're able to get the impact of products built and make sure we have components for Q2, The current environment of subcomponent uncertainty requires real time monitoring and rapid remediation. We do see this as being a temporary As overall industry shortages were exacerbated by fires at the ReneSys and AKM factories in Japan over the last two quarters. As I mentioned in my opening remarks, we saw a measurable pickup in new sales activity across our geographic regions during Q1. In the U. S, we secured several new deals in the quarter, including Nucor Tubular, Panhandle Transportation Group and Maguire Transportation. In addition to these wins, we continue to successfully deploy more 2,000 units associated with the container fleet win that we announced on our call in February. Another noteworthy win at the end of Q1 was our signing of Atlas Van Lines. We are actively working with this new customer to deploy the solution this quarter. Concurrently, we also continue to deploy a backlog of 24 rider locations that we signed last year. Additionally in Q1, PowerFleet was invited to a major U. S. Tender with 1 of the world's largest rental car companies. We look forward to sharing more details as this tender advances. A key initiative for 2021 is to transition our 30,000 plus non subscription units from our legacy industrial solution to our next generation hardware platforms And on to our software as a service recurring revenue model. Based upon our initial analysis, if all 30,000 units migrate, this will generate approximately $48,000,000 in high margin hardware Services revenue over a 5 year period. One major migration we commenced in Q1 was with Ford Motor Company. We began migrating their 4,500 units and over 40 worldwide sites. This migration will continue throughout 2021 and into 2022. We also continued negotiations and planning with the United States Postal Service on their 80 site, 7,000 unit migration and expect to be in site migrations at the end of Q2 or early Q3. The total potential revenue for both Ford and USPS migrations is $30,000,000 in high margin product and recurring revenues with a follow on potential of an additional 100 USPS sites. It is also important to note that our industrial high margin products being taken by Ford Soon USPS are not impacted by the subcomponent shortage issues. As it relates to our marketing efforts in the U. S, Our targeted campaigns on the pending 3 gs sunset are yielding very encouraging results. In fact, we have 13 active pilots 5 that are starting in Q2 that represent 75,000 in subscriber unit opportunity. 1 of these opportunities closed in early Q2 for 3,000 units You should expect a press release on this shortly. Our focused R and D initiative around weight on axle has proven to be just as fruitful. In Q1, American Intermodal Management or AIM selected us over a competitor and took 1,000 LV-three hundred mobility platforms and 1,000 units of our new weight on axle sensor. We are working closely with AIM on monitoring and calibrating system performance during this early commercial deployment. As a reminder, AIM represents 137,000 total subscriber opportunity given their merger with Flexivan. I also started we also started to market our newest asset security solutions specifically designed for construction equipment companies. While it's still early, customer and channel partner feedback has been encouraging and we were able to secure and ship an initial 1,000 unit order in Q1. Shifting to our international operations outside of Israel, during Q1, we made solid progress across our markets, especially Mexico with our deployments with AXA Insurance customers. For background, AXA is one of the world's largest insurers. During Q1, we deployed over 1700 units to AXA customers, which exceeded the total amount of units we deployed for AXA in all of 2020. Based on our pipeline and discussions with the customer, we think the potential with Just with AXA in 2021 is approximately 7,000 units. Last year, we deployed 2,000 units to Quebec And Quebec is the Carvana of Mexico. We are in active discussions and planning phases to deploy orders that could eclipse 10,000 subscription units annually. Our Mexico team is also managing 4 pilots with the world's largest baked goods producer in their Spain, Chile, Colombia and Brazilian operations. This prospect has more than 30,000 vehicles worldwide. Turning to our Israeli operations. As I mentioned in my opening, we saw a big spike in demand in the Q1 reflected by a 44% increase in installations compared to Q1 of last year. Our Israeli operations also signed the HMO Makabi for tracking cooling boxes of pathological samples, which we estimate will total over 2,000 units once deployed. We also won a prestigious police tender at the end of Q1 for more than 7,000 units. On the M and A front, we continue to build our opportunity pipeline. We are strategically targeting specific companies that can further strengthen our vertical market presence, expand our footprint in the U. S, Europe or Israel, as well as bolster our SaaS and application solution offerings. In summary, our global end markets, legacy product migration efforts An opportunity pipeline continued to build momentum and to put all these opportunity numbers I stated earlier into a concise summary, we have over 44,000 Subscription units in fairly solid backlog and over 300,000 subscription units in near to midterm pipeline opportunities. While there are still some choppiness due to COVID and electrical subcomponent supply issues I mentioned before, we remain confident and our growth prospects for 2021 and beyond. As the global economy recovers and countries reopen, our robust balance sheet will enable us to accelerate our growth initiatives. We are making great strides to the realization of our long term financial goals and the realization of our vision, which is for PowerFleet to be a major force in the multibillion dollar industrial Internet Matis. We are targeting 1,000,000 subscribers and over 200,000,000 in revenues by 2024. And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions. Certainly. Ladies and gentlemen, the floor is now open for questions. Matis. Your first question is coming from Mike Walkley. Your line is live. Great. Thanks. Chris and Ned, I hope You and your families are well also and everybody on the call. Chris, I guess the first logical question is just With the ongoing industry supply shortages and the $1,800,000 impact that could have shipped in the quarter, how is supply looking to meet demand in the upcoming quarters, given your encouraging comments about the measurable uptick in sales activity. As I mentioned, by the way, Hi, Mike. As I mentioned, our supply chain group was able to actually rectify the situation and get enough supply through Q2 Q2 and into Q3. And we are actively and again, I think it's a daily, it requires daily monitoring Because it's not just our suppliers, it's their suppliers. So that's why I say it's sub components. And so we're actually going to increase our inventory levels and you'll see that In our numbers over the next quarter or 2, because again, we just want to make sure we have enough supply and not only supply to meet demand I mentioned, but we have to have surge potential, Right. Because a lot of these larger deals, they're going to require us to build in volume and supply in volume. That's what we're trying to address right now is get to a position where we can surge. Got it. That makes sense. And maybe just a follow on to Ned, given It's tight supply. Is it to expect any adverse impact maybe gross margins as you have to expedite shipments or pay up to get Ready for this potential surge demand or given the industry knows how tight supply is, some of these costs and be passed on to customers? Yes. I think, Mike sorry. No, go ahead, Chris. Yes. I mean, right now, we're not passing the Because again, the subcomponent price increases by the way, so in the whole bill of materials, it's not as consequential. But again, we're not passing that along today because it's not as significant as one might think on a pricing on a cost perspective. Ned, do you want to add? Yes. I just want to say that it does have a very as Chris said, a very slight impact on the gross margins. But When you look at the gross margins on product, around 29% to 30%, we feel comfortable going forward based, take that into consideration. Okay, great. And last question from me, I'll pass the line. Just want to dig in a little more on your initiative for the 30,000 non subscription units from your old industrial solution. Yes. Congratulations on Ford and the 4,500 units. Just on that 30,000 backlog, How many are you engaged with now and how quickly do you think you can transition those 30,000 units over and for Ford with that larger A number in all their sites, how long does the transition with Afford take? Yes, that's a very good question. The good thing is we have a lot of We did Walgreens just last year and it went actually flawlessly. They're actually a good reference account for us. We've already done 2 sites at Ford in Q1. So again, it tells you the pace that we can move. We can actually do more than that. Like the gating factor even with Ryder is really their logistics and timing, not ours. So we do have the opportunity. We have installers. We can scale. But like the United States Postal Service, just between Ford and the United States Postal Service, we have we're right in Getting to the point of getting ink on paper with the United States Postal Service, planning to start deploying sites at the end of Q2, very early Q3. 3 and one of those sites by the way is a site we're not even in. So it's not even a migration. It's part of those 100 that we're not even in today. So which is that's actually even better news. But We've actually done the United States Postal Service before, I mean literally 15 years ago. So, it's like a 2 year initiative for the United States Postal Service at 80 sites and it Could be the same on 4 depending on how fast they want to roll out. Great. Thanks for taking my questions. Okay. Thanks, Mike. Thank you. Your next question is coming from Jaeson Schmidt. Your line is live. Hey, guys. Thanks for taking my questions. Chris, Just curious if you could comment if the recent momentum you're seeing in order activity is coming from new customers or expanding at existing customers? It's primarily new customers. I mentioned a lot of the tenders that we won, like the police tender in Israel that was a brand new customer. AXA Insurance, that was a new customer last year. So like Ryder Logistics to me, that's still a new customer in the initial deployment of the first orders. Like with AXA, like with Ryder and also I mentioned Kovacs. So like those are brand new customers, Panhandle brand new customers. So I'd say the Preponderance of all of our growth and activity is all brand new logos. Now that being said, like Forward in the United States Postal Service, which we've been working on for years, trying to get them to move and migrate. And, really it's Now is the time they have to do it. I think everyone had that pause through 2020 and you're seeing a lot of things starting to break loose. So I think it's going to be a blend in In 2021 between new and old primarily just because of the scale of the United States Postal Service and Ford, But a lot of the new logo activity. Matter of fact, our dealer network I mentioned in the U. S, we have 500 dealers that represent us Our products, again, is probably the best pipeline I've ever seen and I've been here 4 years. Okay. That's helpful. And just curious if you're seeing any timetables from customers and their launches get pushed to their right at all? Not really, actually. It's kind of surprising that I mentioned the tender for the rental car company. They actually contacted us, which is like that's the best way to get involved in a tender. So we're actually seeing people be more aggressive Then like last year, there was a lot of pushing going on last year, like just because you couldn't get into facilities, you couldn't get into Headquarters, you couldn't get POs done by the purchasing group. And you're seeing that all starting to break free this year, So which is good. I mean, I think right now we're seeing it across the board. Okay. And just last one from me, and I'll jump back in the queue. Ned, you mentioned some of the OpEx coming Back this year after it being relatively muted from COVID last year. How should we think about OpEx trending throughout this year, kind of just steady growth as revenue grows? That's exactly right. Primarily, we expect to spend slightly a little bit more In marketing, as Chris mentioned, right now there's a 3 gs sunset in the U. S. And we believe we can capture a lot of the markets, so we're going to aggressively pursue some marketing. So some slight growth quarter over quarter. Okay, sounds good. Thanks a lot guys. Hey, thanks. Thank you. Your next question is coming from Scott Searle. Your line is live. Hey, good morning. Thanks for taking my questions. Chris, Ned, hope you guys and your families are doing well. Hey, just to dig in a little bit on the product front, certainly constrained this quarter from a component availability standpoint, but you can build in a big pipeline there. And I think going back About just before COVID, the close of the Pointer Telocation acquisition, you guys peaked at $16,000,000 or so in product revenue. Chris, is that something that's attainable this year when you're looking at that pipeline? And then I guess as part of that, we've moved from a Demand constrained environment in COVID to COVID really driving the demand for the overall supply chain and logistics visibility. We've had some component issues on top of it, but now are we moving to an area where there are deployment issues possibly in terms of your capacity or your partners and integrators availability and capacity to deploy solutions? No, I kind of mentioned that on a prior answer, but we actually have really good capabilities of surging our implementation capability. So whether it's installers, we use 3rd party installers, we do train the trainer. So again, when it comes to actually implementing our solution, It's typically just working around our customers' schedules, right? And but again, now we're seeing them being a lot more flexible because they can be With the people getting vaccinated, places opening up, it's our only constraint is going to be if there's A surprise in the supply chain of being able to get product. We've addressed it so far. But again, it's the whole industry is facing it. And I mentioned those 2 fires at those 2 factories. Obviously, fires are horrible. Thank goodness nobody was injured, but it Put them out of commission for a while. Now those kind of problems can be rectified pretty quickly. They can actually stand up plants and move production and That's what they've been doing. And so that I see that again, like I said, temporary. But again, the overall part shortages and just the Restrictive nature of it right now just causes us to we're spending a lot of time right now just making sure our supply chain is intact. That's the only constraint. So Chris, can you get back to those peak kind of product levels? Yes. Absolutely. By the way, just again, if you think about like the United States Postal Service and Ford, that's our high end products. I mean those products, Very good margins. They're over $1200 a unit. It's not like a trailer tracking product for $300 or $400 So they have very good high margin products. And so every one of those that ship, the USPS, that's almost like a 4x of a trailer or a chassis or container In value to us. So we can get there as Ford ramps up, as the United States Postal Service signs and starts moving, you'll see us get back to those numbers. Got you. And then Chris, maybe to follow-up on Mike's earlier question related to product gross margins. I think Ned, you said 29% to 30%, which is where you were this quarter. It's below where you've been historically, but when you think about then the favorable mix that could be coming on the horizon, I mean, how should we be thinking about gross margins late this year and into 2022. Yes, that's a great point, Scott. So mix has a lot to do with it, especially this Q1. Our logistics business was very strong, that tends to have a lower product gross margin by its nature. But as Chris mentioned, a lot of this pipeline in the industrial truck business, that product has a much higher gross margin where we can see the product gross margins go to the mid-30s depending on mix. Great. Thank you. And maybe just to follow-up geographically as well, Chris. Certainly, COVID issues have been accelerating in certain parts of the world and Certain parts of Europe remained a little bit locked down on that front. You've been doing well in Israel. It sounds like you're doing well in Mexico despite some of the it seemed like the health So I'm wondering if you could just broadly talk about what you're seeing in Latin America and demand there and kind of the European theater in general. And then I had 2 follow ups. Yes. I like that question because I really didn't bring it out in the script, but our Cellocator division, if you No, what that does, it actually takes our product and sells it to geographies we're not in. So we are in Brazil. We are seeing strength in Brazil as far but again, it's probably other than India, one of the most heavily COVID impacted. So we're seeing activity there, but it's definitely impacted by COVID. So we don't expect a lot of growth in Brazil until they get their COVID situation handled. Argentina for us is growing, but their currency always kind of masked the growth, the currency translation. South Africa, by the way, for us Went from not being profitable to profitable because we signed a major customer and deployed them actually Throughout COVID. Turning to Europe and our cell locator division, and our Jungheinrich. By the way, Jungheinrich even with Germany shut They've been taking their orders and they're on plan, which is great. And our Cellocator division, which sells to all those other telemetry service providers, Has the biggest backlog they've ever had. And this is for pre acquisition, so which is great. That tells you there's Strength beyond even our business. Other providers are having strength in their business. Great. Very helpful. Thank you for the color. And just lastly, Could you reiterate the opportunity in terms of what you're seeing in the pipeline for the 3 gs sunsetting opportunity? And Chris, if you could as well, M and A now becoming a more realistic opportunity. I'm just kind of wondering if you could provide a little bit more detail in terms of the activity and opportunities within the pipeline and the framework of parameters I want you to put around what you're looking for. Thanks guys. Okay. Now I'm going to have to remember the first part of your question. Sorry, if you could repeat it, that'd be great. But I can cover 3 gs sunsetting. Go ahead. Yes, go ahead. 3 gs sunsetting, Chris. Yes. Thank you. So yes, on our pipeline, and I mentioned it, of what's bringing customers to us right now is the 3 gs sunset. So we've spent Ned mentioned it, we have basically campaigns going on, reach out campaigns, advertising campaigns, our marketing spend is up, our inside sales groups work in the Matis. Our marketing spend is up. Our inside sales groups work in the phones. It's but basically we're also having a lot of inbound inquiries because the Sunset is literally in 2022. So if you have units and by the way, some of our competitors, By the one of the companies I used to work for, they don't even have a replacement product. So they had 250,000 units deployed. So that means 250,000 units have to find a home. And so we're actually glad to be that home. So we have 75,000 Units that we're currently in field trials on, we just closed 3,000 of those and like I mentioned, the other 300,000 is A mix, but I'll give you a case in point. We have 2 that are not in that 300,000 number, 2 customers that actually total 100,000. So we're in field trials with them right now. Those 2 right there could just double our logistics size if they move forward And when they move forward. But again, they're not going to take 100,000 units on day 1. They're going to take them over a period of probably throughout 2022. Again, very strong. I think everybody in the industry, they were delayed because of the ELD HOS mandate that was in 2019, then they got delayed because of COVID. But the network sunset didn't get delayed that much. And so it's like now it's definitely like the wall that's coming up on everyone. Turning to M and A very quickly. Our team when we met actually a year ago and did strategic planning, we actually spent a lot of time saying, What part of our portfolio do we need to strengthen? What geography would we like to expand in? And then obviously, we wanted to be immediately accretive. We wanted to actually help us with our software as a service Capabilities and our applications. So we're actually looking at technology companies that are in specific geographic regions. We like Europe right now, even though it's in still kind of a lockdown mode. We think there's some opportunities in Europe. It's actually very convenient to Israel. It's like a 2 hour plane flight, maybe 3 hours depending on where you're at. Actually Eastern Europe, we think the cost structure there and just the entrepreneurial spirit is great. The education levels are phenomenal. So again, we're doing a lot of research and building on our M and A pipeline of opportunities. We do have a couple of opportunities in Israel that we're looking at on the software side and also in the U. S. So some are more transformational, But the sweet spot for us would be around $20,000,000 to $30,000,000 in revenue and profitable than the software company. So So just hopefully I'll give you enough color. Perfect. Thanks guys. Okay. Thanks. Thank you. There are no further questions in the queue at this time. I will now turn the floor back to our hosts. Okay. Thanks, Matthew. Thank you for joining us today. I'd like to thank our employees for their diligent efforts and our customers for putting their trust in our products and services and also our investors for their support of our vision. Ned and I will be attending several upcoming financial conferences including the 16th Annual Needham Virtual Technology and Media Conference on May 19 and the ROTH Capital Virtual London Conference on June 23. Please stay healthy and we look forward to speaking with you again soon. Operator? Thank you for joining us today for our presentation. You may now disconnect.