Ladies and gentlemen, thank you for standing by. Welcome to the Ituran First Quarter 2021 Results Conference Call. All participants are at present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded.
You should have all received by now the company's press release. If you have not received it, please contact Ituran's Investor Relations team at GK Investor and Public Relations at 1-six forty six-six eighty eight 3,559 or view it in the News section of the company's website, www.ituran.com. Now I would like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr.
Helft, would you like to begin?
Yes. Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to discuss the Q1 2021 results. Would like to thank you to our management for hosting this conference call. With me today on the call are Mr.
Eyal Sharaski, our Co CEO Mr. Udi Mizrahi, Deputy CEO and VP Finance and Mr. Eli Kamal,
CFO. Eyal will begin with
a summary of the quarter results, followed by Eli with a summary of the financials. We will then open the call for the question and answer session. I would like to remind everyone that the Safe Harbor in the press release also covers the contents of this conference call. And now Eyal, would you like to begin please?
Thank you, Eyal. I'd like to welcome all of you and thank you for joining us today. We are very pleased with the results of the Q1, which outperformed our expectations. We demonstrated that Ituran is well underway to full recovery and renewed growth. This is despite ongoing impact from the pandemic, which still affect many of geographies in South America in which we operate.
Not only have we maintained our profitability and strengths, we grew our subscriber base at the highest rate we have seen for many quarters at 20,000 net adds. While the OEM segment is stabilizing, the stress was driven by the aftermarket segment, which grew at a remarkable 25,000 net. This is a rate, which is nicely ahead of our typical range of between 15,021,000. We are very happy with this strong increase and it is promising sign for potential growth in the subscription revenues over the many quarters ahead. For the Q1 of 2021, revenues were $67,000,000 6% ahead of those of the 4th quarter and just 1% behind the $68,000,000 reported in the Q1 of last year, prior to the pandemic.
All this demonstrated Ituran has now recovered to its former strength and is primed for renewed growth in the quarter ahead. On the profitability side, as you know, over the past year, we carefully managed the business, which allowed us to maintain our cash generation and profit. As we return to the growth trend in the coming quarter, we expect that the operating leverage inherent in our business model, which enable us to add subscribers on a more or less fixed operating base, will allow us to see the top line revenue growth from the increase in subscribers drop down to the bottom line. From the profitability standpoint, for the quarter, we reported EBITDA of $17,000,000 our highest level since before the pandemic. Again, it is strong statement to the overall resilience and stability of our business model.
On the cash side, we had first quarter cash flow from our operating activities at $9,200,000 bringing our cash and marketable securities position to $70,000,000 I'd like to go into more details on the various parts of our business. During the quarter, as I said, our aftermarket business returned to above its normal growth rate of 25,000 new net starts. The regions that were particularly strong were Israel and the U. S. It is worth mentioning that in Brazil, even though the situation with the pandemic still remains tough, we are pleased with the stabilization in the aftermarket subscriber base.
I note that in Q1, Israel had its highest level of new car sales in history, an increase of 18% year over year increase. This is another sign that 2021 has started well in our key geographies. Many countries in South America are still highly impacted by the virus and the economies remain weak there, but we are seeing improving trends in Brazil and in Mexico. During the quarter, we saw an overall decline of 5,000 OEM customers. This decline has slowed from last year and it's moving in the right direction.
1 of the major goals of the acquisition of the OEM business was to harvest synergies across our entire business and in all the various geographies, cross selling and really taking successful business models and sales from one region to another. We are very much in the process of doing this now and tapping our large subscriber base of almost 1,800,000 with Lalit paying customers to bring them new and valuable telematics and related services by which we can organically grow our sales. And in summary, overall, we are pleased with our start to 2021. Ituran has resumed its growth trend and the strong increase in subscriber base sets us up well for the coming quarters. And I will now hand the call over to Eli for a financial review.
Eli? Thanks, Eyal.
I note that the results we present will all be on a GAAP basis, including adjusted EBITDA, which excludes revenues and costs related to the purchase price allocation. We believe this will provide a better understanding of our ongoing performance. Revenues for the Q1 of 2021 were $67,400,000 a decrease of 1 percent compared with revenues of $68,400,000 in the Q1 of 2020. In local currency terms, 1st quarter revenues were at the same level as those of the Q1 of last year. Revenues from subscription fees were $45,600,000 a decrease of 7% over Q1 2020 revenue.
In local currency terms, Q1 subscription fees decreased by 4% year over year. The subscriber base amounted to 1,000,000 788,000 as of March 31, 2021. This represents an increase of 20,000 net over that of the end of the period quarter. During the quarter, there was an increase of 25,000 in the aftermarket subscriber base and a decline of 5,000 in the OEM subscriber base. Product revenues were 21 $700,000 an increase of 12% compared with that of the Q1 of 2020.
The geographic breakdown of revenues in the Q1 was as follows: Israel, 52% Brazil, 22% rest of the world 26%. Operating income for the quarter was $12,800,000 or 19% of revenue, an increase of 27% compared with an operating income of $10,100,000 or 14.7 percent of revenues in the Q1 of last year. EBITDA for the quarter was $17,100,000 or 25.4 percent of revenues, an increase of 12% compared with an EBITDA of $15,300,000 or 20 2.4 percent of revenue in the Q1 of last year. Financial expenses for the quarter was $1,000,000 compared with the financial expenses of $700,000 in the Q1 of last year. Net income for the Q1 of 2021 was $8,300,000 or 12.3 percent of revenues or earnings per share of $0.40 This is an increase of 30% compared to a net income of $6,400,000 and an earnings per share of $0.31 per share in the Q1 of 2020.
Cash flow from operations for the Q1 of 2021 was $9,200,000 As of March 31, 2021, the company had cash including marketable securities of $70,100,000 and debt of $41,800,000 amounting to a net cash of $28,300,000 This is compared with cash including multiple securities of $78,800,000 and debt of $54,500,000 amounting to a net cash of $24,300,000 as of December 31, 2020. For the Q1 of 2021, a dividend of $3,000,000 was declared. This is in line with the Board's current policy of issuing at least $3,000,000 on a quarterly basis. And with that, I'd like to open the call for the question and answer session. Operator?
Thank you. The first question is from Tavy Rosner of Barclays. Please go ahead.
Hi. This is Peter Nadevski on for Tavy. Thanks for taking my question and congratulations on the quarter. You had another very strong quarter in hardware, both on sales and margins. I recall last quarter that was related to some inventory restocking.
Could you give some color on whether that continued in Q1? And then as a follow-up, have you or your customers been impacted by any supply chain shortages this year that we should consider for the outlook? Thank you. Yes.
Usually Q1 is very strong in terms of the OEM purchasing process. Since in Latin America, the OEM plants are it's the last quarter of the year. This is how they consider it. So they are increasing their volumes and their inventory. So this is typically, I would say, the highest season from the OEM purchase point.
Also in Israel, as I mentioned, Q1 was the highest ever of sales of new cars in Israel, which of course create correlation between purchasing the hardware and install it. So it was strong and it's not a one time, but it's little bit of a seasonality in hardware sales for us. Usually Q2 and Q3 are a little bit weaker than Q1 and Q4. But as you remember, still the contribution of hardware sales to our overall profits is lower than, of course, the service revenues. But still, this is the reason for Q1, yes.
I appreciate the color. Thank you.
The next question is from David Kelley of Jefferies. Please go ahead.
Sorry, thanks for taking my questions. 2 for me, maybe to start, the step up in the U. S. Aftermarket subscriber business. Just hoping you could provide a bit more color, drivers of the contribution there and maybe remind us of the size of your U.
S. Business and kind of how the competitive landscape shapes up there would be great.
Okay. So just to remind everyone that our main segment in the United States market is what they call buy here pay here, which is represent financing people to buy their cars in the dealers' shops. And in some events, those finance dealers would like to control payments of their customers and using the systems like our systems and others in order to control payments. And during last year, I think that after a while, our solution showed a very, very excellent application solution, very reliable, and we succeed to increase our penetration to additional master dealers in the United States, a trend which I believe will continue. We are now putting more resources in marketing and sales because we found that we have advantage which we have to turn to sales.
So I think that we are gaining more market share. I think we have a better solution. And fortunately or unfortunately, during the pandemic, we succeed to increase our market share and grow the subscribers there. Now The American or the U. S.
Market is very competitive. So the price issue is based on this competitive landscape is creating low margins. So this is why when you see our annual results and we are providing some data, the U. S. Market profitability is low compared to the number of subscribers that we have there.
But this was always like this. This is the mentality and the DNA of the U. S. Competitive markets, but we are there. We are growing.
We're gaining market share. And in the end of the day, we are increasing our profits, we grow our sales. And if this trend will continue, which we do our best that it will happen, I believe that it will be more material here, O'BRIEN.
Okay. Got it. Thank you. That's helpful. Maybe just to clarify on that last point.
I mean, it sounds like you're expecting to continue to be selective in your U. S. Businesses while still trying to grow market share where it makes sense from a profitability standpoint. So just making sure that we
Yes.
Yes. So just maybe another way of putting it. Do you expect to remain selective with your approach to the U. S. And kind of focused on the profitability?
You noted it's a region with historically lower profit margins. So should we expect kind of your approach to the market to remain as you've always approached it historically, meaning you're not willing to sacrifice margins for growth? Okay.
So we our I would say our strategy is to keep profits, keep profitability, even giving up some growth, because when we are analyzing the market for more than 15 years, we saw that most, if not all of our competitors, which are bigger than us, always lost money, most of them bankrupt and changed ownership during the years. We have always made money. Now fortunately, we succeed, I think, to show that we have some advanced we have some advantages and we succeed to increase our growth or maybe to create new growth without sacrificing our profitability. Still compared to other regions that Ituran operates like Israel and Latin America, the U. S.
Business for Ituran has lower margins, but we always keep everything for profits, because to start giving, for example, units for free, ongoing and advertising for $50,000,000 and then sell 100 of 1000 a year, It's very nice, but no one proved that even in a long term it's turned to profits. And a business in the end of the day has to serve shareholders by creating profit. So we will not sacrifice our profits. We always try to balance between growing and profitability. Now we are in a trend, I think, which we start reaping the fruits, also grow, but without giving up for our profits.
Of course, for a short term, when I'm saying this will increase some marketing resources, of course, maybe we'll not grow our profits in the next 1 or 2 quarters in the U. S. But we do it very, very consciously. And we always know that this will lead to increased profits. This is our wholly thing, profits, profits and profits.
Okay. That's helpful. Thank you. And then last one for me and I'll pass it along. Just curious to get your views on the setup in Brazil.
I believe you noted stabilization in the aftermarket segment there in the Q1. Can you talk a bit about what you're seeing in Brazil Q2 today?
First of all, when we compare the situation today to the situation during 2020, we are in a much better solution because during 2020 until about October, the sales was very 0 very low, not 0, but very low. On the same time, the churn is something that's not depend on the market. There is a churn. So we lost or we had the minus and the negative growth in our subscriber base, which typically it's the opposite of what we are aiming. But the pandemic has hurt and changed a little bit, shake the situation.
Since October or up until today, we and we show it also in the Q4, we succeed to overcome the situation. We're back to at the beginning, the decline start shrinking. And then we saw we see now that the trend will lead us very shortly to change to a growth of net subscribers. So looking to the back is not the idea, but when we look forward, we are very optimistic. We see the graph growing.
We are now close to the full recovery. And when we look on the market, we have to understand that there is less car sales, which is influenced us. People have less money. Some people with a second car decide to sell it and not buy a new one because most of the people are in the quarantines for a longer period of time. We see and we learned from Israel and we see it's now in Europe, in the States and we know that it's now turned to be the situation also in Brazil.
The Brazil vaccinations start late, but they are now in a very strong trends with very impressive goals of vaccinating the population, which for us is very important the situation in Sao Paulo also for them because it's the main commercial area for Brazil. And I believe that once it will be more free from the pandemic and people will back to our work, etcetera, it will allow us to grow because even today with Brazil still in the pandemic, we see that we are in a very good trend of recovery. So when it's turned to a free market at all from the pandemic, I'm totally sure that we will back to the best times. And in terms of our market share, we have to understand that our position is very, very strong in Brazil. We are the strongest player.
During the pandemic, we didn't see or we even saw that we are gaining more and more market share. Our competitors were also from the economic point of view with a worse situation. So overall, looking forward, I'm very optimistic that Brazil contribution will continue to be more and more on the positive results.
Great. That's helpful. Thanks so much.
The next question is from Asaf Baral of Oppenheimer. Please go ahead.
Hey, guys. Thanks for taking my questions and for Rafa, a very strong quarter. Maybe we can just kind of revisit the product segment because that's what really stood out to us in terms of surprise versus estimates. And obviously, I think that's part of what drove the kind of sequentially higher EBITDA generation. How should we be thinking about a normalized product revenue run rate?
Should we go back to thinking about this as a $50,000,000 kind of quarterly business? Or should we look kind of adjusting that number up given maybe some newfound strength in the auto market globally and of course in the specific countries where you operate like Brazil,
there is a specific issue, which is the situation of the OEM during Q1. And in Israel based on the high growth of new car sales. But of course, when we look backwards to 2020, it wasn't a regular year, meaning when we, I would say, talk with you guys, with the investors and shareholders 3 months ago or 6 months ago. Don't forget that we've been in the middle of a pandemic. Even in Israel, it was only the beginning of the vaccination.
So we based on conservative reasons and based on the last year data, which we had to count on, we couldn't, of course, forecast this change on this trend so fast. So first of all, when we compare it to a year ago, of course, it's at different times, at different times. Israel is free for everything. I would say it's very clearly no corona at all in Israel, we know it. Now when we go to the States and when we go to Latin America, things are even the pandemic is there, people get used to live like this and they also get out of it now.
So Q1 was strong in terms of the car industry compared to the same time the year ago or beginning of Q2 and end of Q1, which was dramatically low last year, which of course affected us. Now looking forward, as I said, I don't think that we will back to the lowest numbers of sales. But if we've been last year in about $17,000,000 per quarter, I believe that we will be somewhere between the sales that we have been last year to the sales in Q1. We will not drop is which $2,000,000 in revenues, it's a high number. When you go to the margins of our hardware is less than 20%, which means low.
So I'm less sensitive to change in sales of hardware. The nice thing of selling hardware in the end, it's turned to subscribers. Few months later, it will turn to subscribers. And this was nice and this is what's important in sales hardware. Not the sales of the hardware by itself, which is good, but it's in the end, it's not major portion of our profits.
But when you talk about those numbers, Telkru subscribers, going with our 6, 7, 8s, then you talk about high numbers and this is what is optimistic in the sales of hardware during Q1 and I am expecting that we will show always a growth in sales, but there is some volatility between the quarters. That's all what I want to say.
Okay. That's very clear. Very helpful. You mentioned earlier about the obviously, the subscriber being strong above the Q2 20 ks run rate that we were at prior. When you talk about operating leverage, can you walk us through how that plays out between the services gross margin, which has stabilized at about $52,500,000 over the last couple of quarters?
And then maybe just kind of walk us through the operating expenses because I think we're all asking what is a normalized operating expense run rate in the fight post COVID? G and A is pretty modest at these levels, but we've seen R and D come up. I know that there are some currency effects maybe playing in here, but what does a normalized spend rate look like terms of OpEx? And then any color you can give us on the services gross margin over time?
Last year, and I mentioned it every call, we did a lot of decreasing in our cost for the period of the pandemic because we want to be conservative. And I was happy that all our employees and managers were shoulder to shoulder with the interest of the company after we show that we overcome the pandemic, after we show that the company is still alive and kicking during mid Q until Q1. And during Q1, we're back to the cost before the pandemic, meaning the cost that we show in Q1 across the board, including operating, including margins and everything, I think that this is represent this is a normalized cost of the quarter in E219. Of course, if we will grow our profit, our sales, we need to sell more. So of course, from time to time, we add some costs.
But again, the operating leverage allow us to add costs less than the profits that we generate from our sales. So looking for the short term, I don't see growth in our, I would call it, budget, our cost. We are now back to the almost the highest cost in every division, every region. So this I would say that Q1 is very close to a normalized cost situation of the group.
Okay. Okay. That's very clear. Can we get an update on the maybe the outlook for the Mexico aftermarket business and how that's going to play out maybe over the next year? Because I think we all expect for it to maybe more meaningfully impact numbers in 2022 that kind of really start to take shape this year?
So any color there would be helpful.
Again, this is something that I discussed last shareholders meeting and shareholder conference call. And as we said, we delayed a little bit our launch of the ICS Day 2 Run Con Segur, Day 2 Run Insurance Plan in Mexico. And we started only in the end of 2020 when we fell together with our marketing advisers that this is the right time to launch because to launch it when everything was in quarantine and lockdowns and people were in a very bad mood it's not the right time to launch a new product and to do it. So we did it in the end of 2020 and we see the graph growing. We sell every year more and more, but we have to understand when you have 1,800,000 subscribers, adding few 100 for the 1st month and then even 1,000 for the next month, etcetera, in percentage and in the plan, it's even better than our plan, but it has no meaning in terms of showing now results in our quarterly financials.
I'm not expecting that it will affect in the coming quarters. But I think that as it was in Brazil when we started, it's looking we entered the right market. We put our legs in the right door. And now we are again adding more and more direct cost, I mean, more insurance companies and more sales discussions, etcetera. I don't think that it will be material in 2021.
And in 2022, I hope that somewhere in middle of the year, we can be in a position to start talking about 1,000 of new subscribers per month from the ICS. Add to this that in Mexico, we also do what we call a regular aftermarket, which is not the lead to run insurance solution, but we're selling now to more insurance companies. We're selling to leasing companies. We now in a pilot with a large company of payer value, which they try to copy this, I would call it, is kind of a startup, but they are a very large company today, try to compare finance and leadership in the U. S.
To Mexico. So we are there too also to monitoring their subprime customers. And I must say that this pilot is going very well. They are very satisfied with what they see. But of course, again, it will take time to educate our market.
Overall, I am very satisfied with our penetration to the aftermarket segment in Mexico, but it will take time to be a more major to our results, no doubt.
Okay, great. Great. Yes, it's nice there. Thank you for the color. We noticed that we can dismiss this if it's not relevant, but in case you give us any insights into any other kind of subsidiary, net income attributable to non controlling interests was quite strong this quarter around $700,000 Anything you can comment there?
I mean, if anything, it looks quite positive, but you can correct me if I'm misreading it.
As you mentioned, we have the minority rights, which of course contributed to the consolidated to run profit this quarter.
Of course, some quarters they contribute more, some quarters
they contribute less. So today, I think it's very important for us to keep this minority as this minority is also is acting as an active position
in the company and it's very relevant.
So I think as of now as we see it, it's a good position for us.
Okay, great. I'll just finish up with a technical question for a while. I know it fluctuates from quarter to quarter. I mean, there's a very big difference in marginal and effective. But given maybe some of the shifts in revenues and profits, can you give an update there on how we should be thinking about effective tax rate longer term or even for just the next few quarters?
Yes. I think that you know more or less approximately 27% is the tax rate may make sense for us.
Okay, great. Great. Thank you for taking all my questions. And again, congrats on a great quarter and hope to stick again soon.
Thank you, Asaf. Thank you very much. Thank you. You're welcome.
There are no further questions at this time. Before I ask Mr. Sharosky to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available tomorrow on Ituran's website, www.ituran.com. Mr. Shevrodsky, would you like to make your closing statement?
Thank you. On behalf of management of Ituran, I would like to thank you, our shareholders, for your continued interest and long term support of our business. And I do look forward to speaking with you next quarter. Have a good day. Bye.
Thank you. This concludes the Ituran Q1 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.