Ladies and gentlemen, thank you for standing by. Welcome to the Ituran third quarter 2020 results conference call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question- and- answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Ituran's investor relations team at GK Investor & Public Relations at 1-646-688-3559 or view it in the news section of the company's website, www.ituran.com. I will now hand the call over to Mr. Ehud Helft of GK investor relations . Ehud, would you like to begin, please?
Thank you. Good day to all of you, welcome to Ituran's conference call to discuss the third quarter 2020 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the Co-Chief Executive Officer, Mr. Udi Mizrahi, Deputy Chief Executive Officer and Deputy Finance, and Mr. Eli Kamer, the Chief Financial Officer of Ituran. Eyal will begin with a summary of the quarter results, followed by Eli with a summary of the financials. We will open the call for the question-and-answer session. I would like to remind everyone that safe harbor in the press release also covers the content of this conference call. Now, Eyal, would you like to begin, please?
Thank you, Ehud. I'd like to welcome all of you, and thank you for joining us today. I hope you and your families are continuing to stay healthy, and I wish all those who have been impacted by the virus a fast recovery. I do hope that with the recent progress towards a vaccine, we can soon look forward to a post-COVID world. We are happy with the improvement in our result in the third quarter, and this is down to our effort to overcome difficulties in many of our geographies due to the ongoing pandemic. We are also pleased that when looking at our revenues in local currencies, our subscription fee revenues were at similar level to those of the quarter last year, demonstrating the stability in the Ituran business model.
On the profitability side, the steps we took earlier this year as the effect of the pandemic became apparent, enable us to reach similar operating profit and EBITDA levels compared with last year when excluding forex impacts. We reported an EBITDA of $15 million. I remind you that we had expected third quarter EBITDA to be similar to that of the previous quarter, which was $13.9 million. I'm happy with that we are being successful in mitigating the impact of the pandemic on our profitability. On the cash side, we generated cash flow from operating activities of $ 13.6 million. This bring our business back to a net cash position for the first time since our acquisition of Road Track two years ago. Our ability to remain profitable and cash flow positive throughout this global crisis demonstrates the overall resilience and stability of our business model.
Our stability is built on our subscriber base, which remains strong with close to 1.8 million subscribers, whereby the majority of them are paying us on an ongoing basis a monthly fee. Our starting point each month is already on the back of this. During the quarter, our aftermarket business returned to growth for the first time since the pandemic started, and we added 13,000 new subscribers in the quarter. The regions that were particularly strong were Israel and the U.S. In Brazil, the trend is also improving, and we saw a reduced net decrease of subscribers in the quarter compared with the previous one. We do hope to maintain this trend going forward. However, making predictions is difficult at the moment in the current environment and the new wave of lockdowns taking effect globally.
The lower level of new car sales in many of our geographies during the third quarter impacted our OEM partners' ability to recruit new customers and grow the OEM side of the business, and we therefore saw a decline of 12,000 OEM subscribers. However, the fall was not as sharp as that of last quarter's, which, if you remember, was a decline of 27,000 in the OEM base. Despite the impact of the pandemic and the weak economy situation in Brazil and Latin America on our OEM business, we are working hard to harvest the synergies across our business and our various geographies. We believe that once we exit into a post-COVID world, Ituran is very well positioned for growth. In summary, overall, we are very pleased with our third quarter financial results, which represent the resilience of our business model.
We have used this period to make improvements throughout our business to improve efficiency and harvest synergies. As we emerge from the corona pandemic, I believe we are well positioned to resume growth and increase profitability. I will now hand the call over to Eli for the financial review. Eli?
Thank you, Eyal. You can also refer to the press release we published today with our results. Revenues for the third quarter 2020 were $60.3 million, a decrease of 13% compared with revenue of $69 million in the third quarter of 2019. In local currency terms, third quarter revenues declined by 6% year-over-year. I also note that revenues increased by 13% over the prior quarter. Revenues from subscription fees were $44.5 million, a decrease of 12% over third quarter 2019 revenues. In local currency terms, subscription fees declined by only 2% year-over-year.
The subscriber base amounted to 1,752,000 as of September 30, 2020. This represents an increase of 1,000 subscribers net over that of the end of the prior quarter. During the quarter, there was an increase of 13,000 in the aftermarket subscriber base and the decline of 12,000 in the OEM subscriber base. Product revenues were $15.9 million, a decrease of 15% compared with that of the third quarter of 2019. The geographic breakdown of revenues in the third quarter was as follows: Israel 52%, Brazil 24%, rest of world 24%. Operating income for the quarter was $10.5 million, 17.5% of revenue, compared with $11.9 million, 17.2% of revenue in the third quarter of last year. This is a decline of 11% year-over-year. In local currency terms, the operating income would have been similar to that of the third quarter of 2019.
EBITDA for the quarter was $15 million, 24.9% of revenue, a decrease of 14% with $17.5 million, 25.4% of revenue in the third quarter of last year. In local currency terms, the decline would have been 3% year-over-year. Financial income for the quarter was $2.8 million, compared with a financial expense of $0.8 million in the third quarter of last year. Affiliated company, SaverOne, in which Ituran holds 11% of its public shares, is Tel Aviv-listed. Our investment is based on its market value. At the end of the quarter, SaverOne had increase in value versus the previous quarter. Ituran recorded a financial income of $3.3 million from this holding.
Net income for the third quarter of 2020 was $9.3 million, 15.4% of revenue, or earnings per share of $0.45, a 45% increase compared with $6.4 million, 9.3% of revenue, or fully diluted earnings per share of $0.13 in the third quarter of last year. In local currency terms, the net income would have increased by 58% year-over-year. Cash flow from operations for the first quarter of 2020 was $13.6 million. As of September 30, 2020, the company had cash, including marketable securities, of $61.9 million and a debt of $56.8 million, amounting to a net cash of $5.1 million. This is compared with a cash, including marketable securities, of $54.3 million and a debt of $67.9 million, amounting to a net debt of $13.6 million as of December 31st, 2019. With that, I'd like to open the call for the question- and- answer session. Operator?
Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question please press star one, if you wish to cancel your request please press star two. If you are using speaker equipment kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull the questions. The first question is from David Kelley of Jefferies. Please go ahead.
Hi. Good morning, and thanks for taking my questions. Maybe wanted to start with your cost savings, some of the initiatives you noted in the second quarter. I think actions included salary reductions, payment conditions with suppliers. Can you talk about kind of the impact to the third quarter? Just curious, given your nice profit recovery on a sequential basis here.
Hi. Yes. It's important to mention that during Q3, in the old geographies, we start increasing back salaries and contracts because we saw, as you could see, that we grow our sales. Once we has a market open again, of course, the numbers are not the same as before the pandemic, but are growing compared to Q2, when most of the countries that we are operating was under very tough lockdowns. Since this was the situation after the lockdowns, we had, for example, to bring back more installers. Our service people has to work 100% of their time. Practically, during Q3, we increased back a major portion of the savings first.
Add to this that during Q2, we did a kind of firing plan, specifically in Latin America, specifically in the countries where we have the OEM business, assuming that car manufacturers, during the next quarters, if not even one or two years, will not sell the same cars or the car industry will shrink. We decide to do some firing, dismiss plan. Most of the cost to do it was during Q2 and some of them in Q3, but this cost will no longer, we will have to add back. Q3 is still with a lower cost than we were before the pandemic and a little bit lower than, for example, we believe we will have in Q4 and Q1 next year. The differences become very low. Most of the differences came because of more revenues, more subscription fees, more sales.
This is the reason of growing the profits. Of course, some of the cost reductions still contribute to the results in Q3.
Okay. That's super helpful. Yeah, really appreciate the color there. Maybe, want to follow up on that kind of the conversation around the ongoing uncertainties that you noted into Q4. Just curious as it relates to the aftermarket trajectory and the visibility there, kind of saw a nice return to growth for that business in the third quarter. With the ongoing uncertainty comment, is that largely tied to the OEM business? Just curious if you're having some better visibility at this point to sustainable aftermarket growth and that historic level that you've generally seen over the years.
Okay. First of all, we have visibility. The business model allow us to have visibility, but in order to be conservative, we know that this visibility at this time have some, I would say, more risky to provide guidance or to provide a potential specific range or numbers. This is the main reason. Just to give you some example, lockdowns in countries are stopping sales of cars, which it's an important driver for our sales. Those lockdowns, two months ago, everybody said that in Europe, for example, we are not operating in Europe, but just as an example, the leader said we will never go to another lockdown because it's not health, it's not everything. I don't know if it's political, I don't know if it's because people are afraid. Major countries in Europe are in lockdowns. This is the situation.
In Latin America, for example, there are no lockdowns, no tough lockdowns than it was in April and May. I wouldn't bet that it won't come again. To come today and be only happy with the results of Q3, telling you that it's going to be ahead for the next year, I want to believe. We have our internal assumptions, but I prefer at this time, specifically be more conservative, not rush with guidance, not rush with expectation. I can only say that, as we said in Q2, I believe that the next quarter will be almost similar, plus, minus a few percent in our operational profits and EBITDA close or similar to this quarter. Regards customer base, I said one month of lockdowns in Israel, and we are dropping some subscribers because we are not selling, for example. This is the reason.
Okay, great. Thank you. Really appreciate you taking my questions.
The next question is from Eitan Etzioni of Etzioni Portfolio Management. Please go ahead.
Yes. Happy to see the improvement. Looking at the world past the vaccine, is it fair to assume that this improvement trend will continue? That's one question. The second question is, we're seeing other software companies going to a model of recurring revenues as opposed to one-time revenues. Are you also doing that?
For your first question, I think that you have to ask a doctor. No, I'm just kidding. Nobody really knows what vaccine, when the vaccine will be, what will be the influence of the vaccine. If all of us want to be optimistic as the Prime Minister of Israel, Benjamin Netanyahu, so no doubt that the corona is soon behind us. All of us want it. It's a very large crisis, so I don't have the answer. Once there will be no corona effect. The economy will recover themselves, I don't know, somehow in the short and midterm. Of course, I believe that the assets of Ituran in the business model, in the market that we operate, in our brand and marketing, will allow us to continue from the point that we were a year ago.
Now, again, we have to be very defensive and conscious about the situation. Regarding second question, if I understand it correctly, Ituran's main assets, and every morning, this is the only assets that we want to keep, is a recurring revenue model. This allow us to create operating leverage model. This allow us to have a very secure revenue portion every quarter, as you can see. Of course, there's some volatility during this time, all around, this volatility influence is very low. It's mainly influence on our growth, on our basic numbers, basic assets, basic revenues, basic profits, as you can see, I think we keep it quite impressive compared to other industries and other business models in this time.
Okay, one last question, the holding in SaverOne, that appears in marketable securities or cash equivalents, or where do we see this?
You can see it in investment. It appears in the profit and loss. The effect of it is appearing on the finance, and the asset itself, the investment itself, there is a separate line investment in marketable security.
Is that at market value or is that at cost?
It's market value.
Market value. This is part of the things that I would mention here, that this is something that may create volatility, that this quarter it was on our benefits. Again, some other quarters can be with a bad influence, but this is not in our hands.
Okay. Thank you.
The next question is from Asaf Barel of Oppenheimer Israel. Please go ahead.
Hey, guys. Congrats on a pretty solid quarter. You had mentioned at the top of the call on strength in the U.S. subscribers. I know we don't talk about this topic too often, is there any kind of color you can give us? Any more specificity you would want to point us?
I think that one of the things that we've been surprised by the U.S. operation is that compared to the other geographies, including Israel and Brazil, and of course, the other markets, is that the corona, the pandemic effect, in the U.S. and specifically in our business, was very low, if at all. This allow us to show in the U.S. the same numbers of subscribers or the same growth of subscribers as we did last year. Overall, it's contributed positive net growing subscribers, and main of the reason is that our segments that we operate in the U.S., it's what they call a buy here, pay here. Those are dealers which support or have their own finance company, and subprime customers taking loans from the dealers or lease the cars from the dealers.
One of the conditions is that they will have units to recover their car. During this period, we assume and we see that the need for this kind of finance companies and the demand for this type of population is growing, and it supports our growth in the U.S.
Okay. That's very interesting. Okay, I appreciate all the detail. Maybe more of a modeling question. R&D was markedly lower this year. We assume there's obviously some COVID impact here. It's even much lower than 2Q. Anything one time in nature here? How should we think about that line item on a go-forward basis?
Actually, the main reason for the decrease in the R&D is coming from a reclassification, based on a recommendation of our auditors, between the R&D depreciation and between the operational cost. Basically, if we would just measure it the same as before, the R&D would have been more or less the same as the second quarter.
Okay. Now, where did you say that cost was being funneled? Is that the G&A?
No, it's coming from the telematics services.
You're saying that's in the cost of revenues of telematics services, yeah?
That's correct.
Okay. Yeah. Okay. Any way that we should be modeling a little bit differently? Should I just be thinking about whatever contribution was in R&D, just moving up to the cost of revenues? Meaning it's going to look like there's a bit of pressure on that margin when it's not really the case.
I think it's going to be more or less the same. The third quarter will be more or less representative, maybe a little bit higher as some of it was retroactive for the second quarter, but more or less, it's the same level.
Okay. That's helpful. I guess, I know you haven't made budgets and everybody wants for you to give a clear, concrete answer when you can't, color would be more helpful. How should we be thinking about operating expenses for 2021? You had mentioned the longer-term cost reductions or restructuring that you took in the second quarter. I just kind of want to understand how, when some of the salary reductions kind of let off by the end of the year, what costs really look like on a normalized basis.
As I said, Q3 quite represents a cost, which are very close to the highest point because we raised salaries, we raised costs, as I said, we start paying, for example, bonuses for all the sales department around the world because we are selling, the markets are open. Still, of course, we keep some costs, I would say some cost reduction on compensation for management teams, which I believe that, if the situation that we are facing now, meaning the markets are open, I assume that during Q1 2021, we will be back to almost similar cost, or we will increase some portion of the cost. As I said, the cost reduction divided for two. Firing costs, which this will not come back, and we fired some hundreds of people around the world that, this cost will not come back, meaning we will continue to save it.
The other side of the cost reduction, which is reducing salaries, this probably, as much as we will continue with this trend of our continued sales, continued growth subscribers, continue installing more and more OEM cars, will be back, and we should expect very few percent, by the way, very few percent of our cost increasing, with a correlation to growing the revenues, of course.
Okay, great. That's helpful. As the company has kind of shifted back into a net cash position, which is great to see, although pretty expected. The financing cost line, I know that it's obviously been made kind of a little bit difficult to read by some of the recent impairments and gains, how should we be thinking about that on a go-forward basis? I know you have some hedging costs involved.
We expect that it will not change, and we will not have to do a cut somewhere in the future. As it looks now, we feel confident that this is the case, and because of this, we didn't do it again. I believe that we'll not do it again. Regarding the financial cost, again, as you can see in the balance sheet, we have the loans, and the loans, we are paying them until 2024. Until then, of course, the company will continue to have financial expenses related to that.
Okay, fine. Last question on my end. I know that there hasn't been any final decision made yet, just given all the signs of stabilization we're seeing across the business, whether it be the profit levels or it be the subscriber levels, which are finally up on a net basis quarter-over-quarter, how are you guys thinking, at least at this point, about shareholder return and dividends? The yield, even if you do just return to maybe the $20 million level that you had historically, would be pretty significant. I do think it's pretty important for investors, how they should be thinking about it.
We can see, first of all, our cash positive that we performed Q2, Q3. Hopefully, this will continue. I think that we need a little bit more time to feel more confident. As I said, we are very conservative, and the board here is very conservative. Maybe it requires a little bit more patience from investors. As we did more than 15 years, when we making positive cash and when the company is confident and we don't see a specific goal to keep excess cash, we always pay dividend. I think that as a management, we see that it's something that, in the close future, we will ask the board to do it. Of course, it depends on the board. I assume that soon, beginning of next year, we will push the board to vote for coming back and pay dividend or going for a buyback, et cetera.
I must add again that one of the values that we are holding here in Ituran is that since there is still a large portion of management team, hundreds of people that voluntarily together with the company and support the company at this stage by decreasing their salaries. We have suppliers of many years, which they are also, we find the correlation between this and paying dividend to shareholders. Once we feel confidence, we will back all the employees and the suppliers to be in a position that the company is confident and in good shape to go to the next level, or we feel that we overcome the pandemic effect on the business, it will come together and we will do it.
Okay. Great to hear. Thank you for all the details.
The next question is from Sasha Karim of IPI. Please go ahead.
Thanks for taking my questions. I've just got two left. The first one, can I just clarify, so in the third quarter, you had a one-off cost for redundancies or restructuring, and you didn't back this out from the EBITDA number you gave. Could you give us a feeling for how big it was?
Yeah.
Yes, you are correct.
Can you give us a feeling, was it like ILS 1 million or ILS 500,000 or something like that?
No. First of all, it's not something material. We're not talking about millions of dollars of firing cost in the third quarter. As what we presented, we didn't exclude this.
Yeah. Okay.
So the-
My next question. Thank you. My next question would be regarding UBI. We're seeing some companies now doing IPOs in the U.S. that are essentially UBI insurance-based companies getting very high valuations. Obviously, there's a part of Ituran which has a similarity to that, your UBI division, which is still small, but growing fast. Could you maybe just give us a bit more detail about exactly what IP that UBI division has? By that, I mean, are you mainly providing just information on telematics to the insurance companies, or are you also heavily involved in the algorithm which prices the driver's risk level?
First of all, I don't know what companies you're talking about. There are companies that provide insurance in the States that mix with some algorithm that know to measure the risk of the customer. This is not what we do. We provide a telematics unit and software and algorithm to the insurance companies that provide a real-time driving behavior of their insurers. Based on this, they know how to price the premium. We are not involved with the pricing of the insurance. We are not involved on the insurance portion. What we give, for example, if this is a fleet, for example, that want to know how the driver behave, which this something we do many years, it's almost the same technology, the same IP, and the same software. Insurance companies now, we integrate it into their system.
They get kind of results of how the driver is driving, and they choose with their algorithm what price they should do. It's a little bit different, I believe, of what you mentioned.
Yes. It's definitely a bit different. Just wondering, are you actually providing the insurance companies with some kind of a score, this driver is safe or unsafe, or are you just providing raw data?
No, we provide a score. We provide a score. I must say again, to be clear, the system that we provide a score. Currently, since this is the first year, and insurance companies in Israel, when we started, as you remember, less than a year ago, they want now only one criteria of the entire data, which is mileage. How many mileage the driver is driving, that the system or the unit and the software can allow them to get score and much more information. They wanted for the first stage for educating the market to integrate it with their marketing and campaign, they use only the mileage usage by the customer, okay, for this stage.
Yeah. Just thinking about the other question on the U.S., given that this type of product is seeing take-up in the U.S., and given that you already have technology for it, why would you not try and sell this product into the U.S. market?
First of all, we are in the U.S. many years. The business or the segment that we approach are, first of all, stolen vehicle recovery. Stolen vehicle recovery for the mass market in the U.S. based on insurance and cost rate.
As we saw, there's no market. There was a company called LoJack, actually, they were sold to CalAmp, but I would say it's not a business anymore because insurance companies in the U.S. are not suffering from car theft. Recovery, it's not a market in the U.S. for us, as we see, again, compared to a more violent market like Latin America, Israel, et cetera. Second is fleet management. Fleet management, we provide services of fleet management in the U.S., and the competitive landscape is very tough. Regarding UBI, we started to show it to some insurance companies. As long as I remember from some discussions that we had, I must say it was more than a year ago, insurance companies are not open to use a UBI.
The UBI, I would say something which is more comparative to UBI, it's the companies which are digital insurance companies, something very new. Those companies provide insurance, and they provide all the algorithm, including the usage-based algorithm, to their customers. Maybe they use some subcontractor. It's not us. We try to offer our UBI solution in the U.S., and we didn't see an open interest from the insurance companies in the U.S.
Okay. Thank you very much.
From the traditional insurance companies.
Thank you.
The next question is from Tavy Rosner of Barclays. Please go ahead.
Hi, this is Peter Zdebski, on for Tavy. Congratulations on a strong quarter. Great to see the sequential subscriber growth. I'm trying to think about the sustainability of the product revenues. Could you maybe dig down a little on the sequential growth in product? I was just having a little trouble reconciling the drivers of that, given the new car sales challenges that you still face in Brazil and the more modest subscriber growth numbers.
Mainly what you see of Q3, we have to maybe put more color now. We sell hardware mainly in the OEM countries, let's call it, and also in Israel. The Israeli market during Q3 were soon after the lockdown, so the sales of cars in Israel and the aggressive marketing campaigns and the car importers and the car dealers in Israel, they sold and installed many cars. There was a vacuum of two months. You have to understand what happened in Israel in March and April, they didn't install, they couldn't open their garages. They had to give cars to people that bought it before the pandemic. Soon after, we had in Q3 almost two quarter of sales of hardware to the car importers in Israel. I wouldn't say it's a shift, but practically it's like a shift. This number was high for Q2.
Q3, I assume that it will go down, but not as it was in Q2 because there is no lockdowns anymore. Also during the lockdown in Q3 here in Israel, by the way, the car dealer garages or installation points were open. It was a little bit different lockdown. The vacuum is not the same. I believe that the average between Q2 and Q3 of sales, this is the right number of sales in Israel per quarter.
That's very helpful color. Thank you. Maybe wanted to ask about Brazil. Earlier this year, you had overhauled the go-to-market strategy there. Is that still helping to boost the retail figures overall?
Look, now, first of all, yes, it helped us then. There was a reshuffle of everything because of the pandemic. One thing that I can say now is, and I said it during my speech at the beginning, is that we had a very high negative net new subscribers in Q2, and in the end of Q3, we come to a point which it's almost not negative. The trend is very positive strong. This is the situation as long as, again, as Brazil will be at the same situation as now, I believe that we will change from a negative to a positive net subscribers in Brazil very soon. Hope it will happen in Q4.
Great. Thank you for taking the question.
If there are any additional questions please press star one. If you wish to cancel your request please press star two. Please stand by while we pull for more questions. There are no more further questions at this time. Before I ask Mr. Sheratzky 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. Sheratzky, would you like to make your concluding statement?
Yes. 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. I do look forward to speaking with you next quarter and hope that we will see better times by then. Have a good day.
Thank you. This concludes the Ituran third quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.