Good morning, and welcome to PowerFleet's third quarter 2021 conference call. Joining us for today's presentation is the company's CEO, Chris Wolfe, and CFO, Ned Mavrommatis. 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 2021 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, among others, SEC filings, overall economic and business conditions, demands 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's CEO, Mr. Chris Wolfe. Sir, please proceed.
Hey, thank you, Tom. Welcome, everyone, and thanks for joining our call today. As you can see from the press release we issued this morning that while we successfully grew our recurring and services revenues by 10%, we had our product sales in Q3 impacted by the cargo ship backup in Los Angeles, which had the ripple effect of severely impacting new forklift builds starting in mid-August. All forklift manufacturers in the U.S. had their production severely affected, which in turn led to their delaying deliveries of forklifts as they waited for counterbalance weights and other critical parts to be offloaded from ships. It's worth mentioning that about 1/3 of PowerFleet's industrial sales each quarter are for new forklifts. These higher-priced, higher-margin industrial telemetry orders are typically placed the last month of each quarter for forklifts coming off the line the following quarter.
This is where our Q3 shortfall occurred. I'd like to emphasize that these forklift telemetry orders were not canceled, merely delayed, waiting on forklift deliveries, as are our customers. While we face momentary short-term sales delays in our industrial business, we've seen our investments in our logistics products continue to pay off. During the third quarter, we received several large logistics orders that could have made up for the shortfall in industrial. However, we were not able to procure the necessary electronic parts to surge our logistics deliveries. Despite the challenges we faced in the quarter, we delivered year-over-year revenue growth of 6% in Q3 and 9% for the first nine months of 2021. On top of this, we saw solid growth in our most important KPI, our high-margin recurring services revenue, which was up 10% and 7% for the third quarter and for nine months, respectively.
I'll turn it over to Ned to discuss our financial results in more detail. Afterwards, I'll cover more about our overall business climate, Q3 successes, our pipeline, and our backlog. Ned?
Thank you, Chris, and good morning, everyone. Turning to our results for the third quarter and nine months ended 30th September 2021. Total revenue for the third quarter increased 6% to $29.2 million, compared to $27.6 million in Q3 of last year. For the nine-month period, total revenue increased 9% to $91.8 million from $84.2 million in the same year-ago period. High margin recurring and services revenue for the third quarter of 2021 increased 10% to $18.5 million or 63% of total revenue from $16.7 million or 60% of total revenue in Q3 of last year.
For the 9-month period, high-margin recurring and services revenue increased 7% to $54.1 million or 63% of total revenue from $50.7 million or 60% of total revenue in the same year-ago period. Product revenue, which drives future services revenue for the third quarter of 2021, was $10.8 million or 37% of total revenue, compared to $10.9 million or 39% of total revenue in Q3 of last year. For the 9-month period, product revenue was $37.7 million or 41% of total revenue, an improvement compared to $33.5 million or 40% of total revenue in the same year-ago period.
Gross profit for the third quarter of 2021 was $14.3 million or 49% of total revenue, compared to $14.9 million or 54% of total revenue in Q3 of last year. Service gross profit for the third quarter of 2021 was $11.7 million or 63% of total services revenue, compared to $10.7 million or 64% of total service revenue in Q3 of last year. Product gross profit for the third quarter of 2021 was $2.6 million or 24% of total product revenue, compared to $4.2 million or 39% of total product revenue in Q3 of last year.
The decrease in product gross profit was primarily due to a $400,000 one-time expense related to an incentive program to expand business with an existing customer, one of the largest chassis lessors in North America. In exchange, the customer placed orders for approximately 3,000 units to be delivered in Q4 of 2021 and committed to ordering 10,000-15,000 additional units in 2022. Product gross profit was also impacted by product mix, higher costs associated with supply chain issues and electronic component shortages, and inflation. Turning to our expenses. Total operating expenses for the third quarter of 2021 were $16.7 million compared to $16.2 million in the prior quarter and $14.2 million in Q3 of last year.
Looking at our profitability metrics, GAAP net loss attributed to common stockholders totaled $4.5 million or $0.13 per basic and diluted share, compared to net loss attributable to common stockholders of $1.7 million or $0.06 per basic and diluted share in Q3 of last year. Non-GAAP net loss for the third quarter of 2021 totaled $364 thousand or $0.01 per basic and diluted share. This compares to non-GAAP net income of $2.2 million or $0.07 per basic and $0.06 per diluted share in Q3 of last year. Adjusted EBITDA, a non-GAAP metric, for the third quarter of 2021 totaled $1 million compared to adjusted EBITDA of $3.6 million in the same year ago period.
Our liquidity position remains strong at quarter end, with $33.8 million in cash and cash equivalents and $49.4 million of working capital. That concludes my prepared remarks. Chris?
Thank you, Ned. As I mentioned in my opening remarks, the container backlog in Los Angeles is causing production delays and lengthening delivery lead times for new forklifts. We have started to see this issue normalize in Q4, and we expect the normalization to continue over the next two to three months as we get through the holiday season. Our large industrial deployment with Ford, which is underway, as well as our deployment with a large federal agency, which rolls out in 2022, are both after-market installations and are not impacted by these forklift production issues. As I mentioned, supply chain disruptions are also impacting our ability to surge deliveries in our other product lines.
For instance, we had two electronic component suppliers decommit on deliveries at the last minute, which then impacted our ability to surge Q3 deliveries for our logistics and vehicle products as we had an additional $4 million in orders that could have been shipped if we had the components to build them. We entered Q4 with a solid backlog that was up 50% compared to our typical quarterly logistics and vehicle backlog going into any quarter. Our supply chain organization, like many, is dealing with daily surprises. It is good to note that we are hearing from our customers that they believe that many of these issues will start to lessen over the next two quarters. Many of our automotive customers are starting to say the worst is over.
However, we are not waiting for the electronic supply issues to self-correct, and our engineering teams have been diligently working on providing us with critical component optionality. These initiatives will cut into production early next year, giving us additional flexibility on components, further reducing our reliance on any one supplier, and giving us more control over component pricing. The current economic recovery has shown us that we may need to deal with some air bubbles in our fuel line, so to speak, and while some orders may be delayed, we have not experienced any loss of business to competitors. Just to be clear, our industrial business was impacted by new forklift availability and not our ability to supply our products.
While we did experience temporary challenges in Q3, we had a couple of very notable successes, which included our team in Israel shipping and installing over 7,800 units in August, which marked a new monthly record. Also in Israel, our largest cold chain IoT project with Maccabi HMO surpassed having 2,000 cooling boxes being monitored. In Mexico, Kavak, which is considered the Carvana of Mexico, installed over 10,000 units by the end of Q3, which was three months ahead of forecast. In the U.S., as I mentioned, our logistics team won a follow-on order for 10,000 LV-500 container telemetry devices that also included our patented freight camera sensor. This customer has the option to increase this order by an additional 2,000 units. These units started shipping in October with a plan for shipping over 1,000 units per month.
Our U.S. team also signed and shipped over 2,500 LV-300 chassis telemetry units in Q3. This solution includes our patent-pending weight-on-axle sensor, which allows the fleet operator to know if a chassis has a container on it and if the container is loaded and empty. As Ned mentioned in his remarks, we took a $400,000 expense related to a one-time incentive in the form of a credit for old 3G units, and this positioned PowerFleet to become this major chassis lessor's preferred provider. They immediately gave us an order for 3,000 chassis optimization systems to be delivered in Q4. More importantly, we received a letter of intent from this customer for an additional 10,000-15,000 units to be delivered next year, and we're currently finalizing their 2022 product mix and delivery schedules.
In summary, this chassis product order, combined with the 10,000-plus unit order for containers that I mentioned previously, along with other orders in hand, gives us a backlog of over 25,000 logistics order units that we will close as we close out 2021. This is the highest logistics unit backlog going into a new year in the company's history. Our U.S. Industrial group successfully launched the first site at a major government agency that we've talked about previously, and this site is now fully up and operational. The site was a critical milestone moving forward with the additional 80 sites that represent $20 million opportunity that we will start implementing in 2022.
In closing, while Q2 reflected the strength of our business and our ability to deliver, Q3 showed our business' susceptibility to global supply chain hiccups that are impacting the delivery of new forklifts as well as the extremely tight electronics component market. We know that global supply chain issues can affect our customers' ability to procure vehicles, but this will depend upon each OEM situation. One example that was contrary to the U.S. forklift production issue is our business with Jungheinrich, the number three global forklift manufacturer, where our orders have not been affected as their forklift production is based out of Europe. We ended Q3 with our recurring and services revenues at record levels and growing with a record backlog in logistics and vehicle opportunities, as well as the 2022 aftermarket industrial implementations at Ford and the government agency.
We look to build on the sales momentum in Q4 as we continue to close out new deals and launch several new products which will add to our 2022 opportunity pipeline. We've already received an order for 3,000 units of one of these new products, and these will be delivered by the end of Q4. Now I'll turn the call back over to the operator for Q&A. Operator?
Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question, you may press star one on your telephone keypad at this time to enter the queue to ask a question. Once again, ladies and gentlemen, if you would like to ask a question at this time, you may press star one on your telephone keypad to enter the queue. We ask those listening on speakerphone to please pick up your handset while asking your question to provide optimal sound quality. Please stand by a moment while we poll for questions. We do have some questions in the queue at this time, and the first question is coming from Scott Searle from Roth Capital. Scott, your line is live. Please go ahead.
Hey, good morning. Thanks for taking the questions. Hey, Chris, you gave a number in terms of the logistics opportunity that you were unable to ship due to components. I'm wondering if you could quantify what the forklift impact was in the quarter. Also, as you would expect, right, given the incremental freight costs and otherwise, gross margins were impacted on the product front. I'm wondering if you could quantify what that impact was in the quarter and maybe give us an idea about the product industrial mix versus logistics mix, and then I had a couple of follow-ups.
Yeah. In Q3, if you -- the industrial products that we ship are typically in the $1,500 range per, you know, that's the retail price. I'd say probably 90% of, you know, the dollar amount that we're missing analyst expectations was due to industrial, and that those are all targeted to, you know, what I'd say new forklift builds. The gross margins are actually impacted by that mix because the more of the higher, you know, price, higher margin industrial products we ship, obviously our gross margins go up on products. But we have seen probably a few percentage points, and Ned, you can add in here just the impact to gross margin due to, you know, shipping costs and component price increases. Scott, did that answer your question?
Yeah, that answered my question. Sorry, I didn't hear Ned. Then Chris, to follow up, it sounds like the port and the shipping issues are starting to resolve. Sounds like you have some pretty good visibility then, I guess, going into the start of next year. I was wondering if you could kind of talk us through that comfort level of why you're feeling better about things improving. As we think about that recovery then going into the first quarter, I would assume that traditional seasonality maybe doesn't happen, and kind of how you're thinking about what product revenue looks like as we go into the first quarter of next year. Thanks.
Okay. What's interesting about Q4 is that it also depends on aftermarket installations on the industrial side. I mentioned we have a large implementation going on at Ford. It's a refresh. We're now talking to them. You know, they could take anywhere up, you know, 800 units in Q4, or it could slip into Q1. That, just as an example, right there is well over, you know, $1 million opportunity. You know, the federal government, federal agency that we're working with, you know, if they pull in their orders from Q1, you know, that would have a pretty impressive impact on Q4 as well. We are seeing our channel, and by the way, you know, we actually polled our channel, which is our dealer channel. We have 500 dealers throughout the United States.
That's actually where, you know, we've gotten all the feedback on the OEMs and the impact on them. They're not getting the forklifts to sell to their end customers, but they're seeing that starting to break free. By that, I mean normalized. Just so everyone knows, there were 65 ships, you know, backlogged out of San Pedro in September. There were 100 backlogged in October, and now there's 100. It's like if it's always 100, sooner or later, just the, you know, number of containers getting off the ship is gonna normalize. That's what we're kind of seeing right now. What's really interesting, it wasn't electronic component parts that were holding up forklift manufacturing.
The preponderance of the delays were counterbalance weights, which is needed in the forklift. You know, at the end of the forklift production, you have to have a weight in the forklift to counterbalance the forks and the tines at the front. Going into next year, you know, actually we see our logistics products, all you know that backlog, 25,000 will start, has started shipping, by the way. We've started shipping some of that in Q4. But the preponderance of that will start shipping in Q1, and we're working right now with the customers on just delivery schedules.
Great. Lastly, if I could, Chris, just, I was wondering if you could provide some color around Hyundai Translead, you know, kind of frame how big that could be in 2022. Car rental opportunities, you know, certainly went away during the nadir of the pandemic, but now those opportunities seem like they're starting to come back. I was wondering if you had any color in terms of what's going on that front. Thanks.
Yeah. Just interesting as far as the car rental opportunities, you have, you know, Avis, which is a great customer of ours. We've been the technology selected provider for their Flexcar program, which is a huge growth opportunity for Avis. We continue to, you know, provide services and product for Avis, which includes our, you know, our patented fuel processing for accuracy. The rental car companies are still having issues getting new cars. I mean, you saw Hertz, you know, obviously put an order for 100,000 EVs from Tesla. The good and bad about that is that those cars already come with telemetry. You know, the good thing is that we're, you know, our product actually works on either internal combustion or electric.
You know, even though you might not need the fuel accuracy, you still need all the other telemetry data, which is like automatic check-in, check-out, odometer, et cetera. Scott, if you could repeat the first part of your question so I could make sure I answer it.
Oh, I'm sorry, just, Hyundai Translead, any color on that front? Thanks.
Their Hyundai Translead, their typical trailer build annual in the U.S. is about 70,000. They actually build them out of Mexico, but you know it's about 70,000 total. Our goal there is, you know, to get at least 10% of their build, and that's kind of what we're working for right now.
Great. Thank you.
Yep. Thanks, Scott.
Thank you. Your next question is coming from Jaeson Schmidt of Lake Street. Jaeson, your line is live. Please go ahead.
Hey, guys. Thanks for taking my questions. Just following up on Scott's question, just curious if you could quantify the expected impact from the supply chain you expect here in Q4.
Yeah. I wanna make sure it's clear too that the supply chain on the forklift side is primarily impacting new forklift delivery, not our products. You know, we have product to ship. We're just waiting for those new forklifts to actually finish their manufacturing. On our logistics and vehicle side, we have the parts to build to our normal forecast. What we have is an opportunity to expand and accelerate that, and that's what we weren't able to capitalize on in Q3. Right now with Q4, you know, to hit our normal forecast in logistics and vehicles looks doable. I'm not saying they're, you know, it's not susceptible to some last-minute hiccup. When you look at our inventory numbers, you'll see that our inventory has increased almost to the tune of $3 million.
You know, that's getting all the components so that we can, you know, actually address all that backlog of logistics units that you see in that 25,000+ backlog. We still are, you know, working to get one component here or there. You can't build a product if you don't have 100% of the components. Right now, Q4 looks like it won't be impacted due to any kind of electronics part shortage.
Okay. Just following up on that, I know you mentioned no cancellations in the industrial segment. Are you at all concerned about some decommits? Just trying to get a sense of how firm these orders actually are.
Yeah. Actually, we've never seen any kind of level of decommits, you know, in the company's history 'cause there is a normal flow like in our channel business. One issue that's also impacting the number of forklifts, and it actually kind of exacerbates the forklift availability issue is Toyota, which is the number one forklift manufacturer in the world. Their IC truck, which is an internal combustion truck, which is 20% of the North American market, was pulled off the market in April because of an EPA issue. Now they're addressing that, but that's 20% of, you know, every internal combustion forklift that's in the market, you know, has basically vanished. All the other OEMs are scrambling to kind of fill that void, and that just kind of exacerbated the situation.
Again, we see all that normalizing because as those parts come off the ships, as the production lines, you know, kind of get back up to steam. But that doesn't mean there won't be like hiccups, but we're not seeing it get worse. We're actually starting to see it improve, you know, through our channel.
Okay. Just the last one from me, and I'll jump back into queue. Looking at that government agency, I know you mentioned some potentially could be pulled forward in Q4, but if we look at those sort of remaining 80 sites, how should we think about the timeline for that to be completed?
It's probably a two-year project in total. You know, once they get by the way, the way that works is they take the first site, and they kind of do the bowling pin approach. The first site is the cookie cutter. You know, they have to get all the processes down, how they train their operators. We've worked with this customer in the past, so we know this very well. But once they get up to steam, you know, they can be doing up to six or seven sites a quarter. That probably will start, you know, they'll probably do two or three sites in Q1, and then they'll get up to that 6-7 site run rate, you know, after Q1 of next year.
Okay. Thanks a lot, guys.
Okay. Thanks, Jaeson.
Thank you. Once again, ladies and gentlemen, if you would like to enter the queue at this time to ask a question, you may press star one on your telephone keypad to enter the queue. Once again, that'll be star one to enter the queue to ask a question at this time. Your next question is coming from Gary Prestopino from Barrington Research. Gary, your line is open.
Morning, everyone.
Please go ahead.
Thank you. Hey, Chris, this new order that you got in logistics for 10,000 of the LV-500, can you quantify, you know, what kind of revenue you derive off that on both the product and a recurring revenue basis, and when will that be fully implemented?
Yeah. We've actually started shipping those units. We'll probably be up to full steam on that in November. We typically try and ship those units out by the fifteenth of every month. That unit does consist of the LV-500 and the FreightCam.
Mm-hmm.
Typical retail price is around $450-$475.
Okay.
On the hardware price, and then the recurring revenue is around $5.
Per unit, right? Per month.
Per unit per month, correct.
Okay, great. Thank you. Just to be clear, you said that the industrial was obviously impacted by the OEM forklifts. In logistics segment, you had $4 million in orders that you could not or you could have accelerated, but you couldn't get a component part. Is that correct?
It's two areas, logistics and vehicles. If you keep in mind, we do sell a lot of units. I mean, you know, tens of thousands of units, like to Kavak, in Mexico. You know, we actually have a backlog there as well. Between logistics and our vehicles segment
Mm-hmm.
It's $4 million combined that we could have shipped if we could have built the products.
Okay. All right. Again, none of these things have been canceled, they've just been pushed out, right?
Oh, absolutely nothing's been canceled. Matter of fact-
And then-
If anything, the demand is even stronger.
You also said your backlog was up 50% overall, or was that just backlog in logistics?
That's backlog in logistics and vehicles. We don't count. When I say backlog, that's firm orders, you know, waiting to be built.
Mm-hmm.
You know, the industrial side is PO by PO. In other words, we kinda, when we get the PO, we fulfill the order. Until we get the purchase order from the OEM or from the dealer or from the end customer, you know-
Mm-hmm.
We don't really classify it as backlog.
Okay.
The backlog is.
Last.
Logistics and vehicles. Yeah.
Okay, I'm sorry. Lastly, I don't know if Ned's on. We may have lost him, but I mean, it looks like.
No, I'm on, Gary.
Okay, Ned. It looks like your gross margin on product was down, which is understandable, but it looks like your gross margin on service, if I have my numbers correct, was down almost 840, over 840 basis points. Could you explain what is going on there, or you know, you can-
Yeah. The product margin on service was consistent. It was 64% last year, 63%.
Mm-hmm, mm-hmm
This quarter. It was very consistent. The margin on product was definitely lower. If you recall, during the prepared remarks, there was one-time $400,000 expense that we did an incentive program to get a customer to replace their old units, which it's gonna lead to significant orders in Q4 and next year with this customer. If you exclude that one-time $400,000 expense, the product gross margins was in approximately 28.7%, and it was impacted by a few percentage points related to all the issues that we talked about related to the supply chain issues, electronic components, higher freight costs, and product mix as well.
Okay. Thank you.
You're welcome.
There are no further questions in queue at this time. I would now like to turn the floor back to Mr. Wolfe for closing remarks.
Thank you for joining us this morning. Ned and I will be virtually attending several upcoming financial conferences during Q4, including the 10th annual Roth Technology Conference on 17th November and the Ladenburg Thalmann Virtual Technology Expo 2021 on November 18. In closing, I'd like to thank our global employees for their diligent efforts and operational execution, extend a thank you to our valued customers for putting their trust in PowerFleet's products and services, and thank our investors for your continued support and confidence in our ability to realize our vision. 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.