Ladies and gentlemen, thank you for standing by. Welcome to Ituran's fourth quarter and full year 2019 results conference call. All participants are present in a listen-only mode. Following the management's formal presentation, instructions will be given for the question and answer session. For operator's 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.co.il. I will now hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?
Yeah, thank you. Good day to all of you, and welcome to Ituran's conference call to discuss the fourth quarter 2019 results. I would like to thank Ituran management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the Co-CEO, and Mr. Udi Mizrahi, Deputy CEO and VP Finance. Eyal will begin with a summary of the quarter results, followed by Udi with a summary of the financials. We will then open the call for the question and answer session. I'd like to remind everyone that the 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. 2019 ends a tough year for Ituran. I am pleased to say that we believe the fourth quarter finally will present the bottom and the turning point. Looking ahead, I expect to show sequential growth throughout 2020. I will spend the next few minutes diving into the deta $ of both the aftermarket business as well as the OEM business as our overall consolidated financial results with the actual deta $. In addition, in today's results, we provided you with a subscriber breakdown of the two main segments of our business to give you more tools to which to analyze our performance. As you can see, the retail aftermarket business has recovered, and this is now the third quarter with net subscriber adds on the aftermarket side at above 20,000 subscribers.
Now I'm going into more deta $. The aftermarket business in Israel remained stable in 2019, and we are pleased with our continued positive performance in this market. Our leading market share has remained stable now for many years. New car sales in the country were slightly below about 5% what they were in 2018, and while there are some shifting trends within, the market itself has been mostly stable. Our Ituran SVR product remained an attractive proposition and has been a key driver towards our net subscriber growth in the market for a number of years. We expect the aftermarket business in Israel to continue to grow, subject to the new car sales trend in the country. As always, we continue to consider strategies for penetrating additional segments. One of our growth drivers in Israel is our UBI offering.
The insurance policies are built around Ituran solutions for taking into account a driver's accumulated mileage and behavior as it relates to safety. Insurance premiums can be directly related to usage, which is fairer for the driver and better for the insurance company in terms of managing risk. In the past few months, we have signed on two insurance companies for our usage-based insurance service, Harel and Shlomo Insurance. We've already seen some early success with initial customers from these two insurance companies that are paying us a monthly fee. Beyond that, we see strong interest throughout the market, and we are close to signing up other insurance companies to our services. We expect to see an increasing contribution to our subscriber base and revenue in 2020 and beyond from this growth engine.
Longer term, once we prove success in our home market of Israel, a synergy from the fact that we are now operating in a number of countries is that it will be simpler for us to leverage this solution into our other markets. Looking at Brazil now, as we discussed over the past few quarters, the aftermarket business there faced significant challenges starting from the second half of 2018 and up to early to mid-2019. We solved those challenges and made changes to our Brazilian business model and system. We expect to continue our aftermarket subscriber growth at this solid pace. I would like to spend a few more moments talking about the aftermarket in Mexico, which is a new initiative for us.
We are building our new ICS, which stands for, Ituran Consigura program in Mexico, taking the product which has been successful in Brazil, reproducing and adjusting it for the Mexican market. We expect to launch and to start selling the product during the second half of 2020, which will have a more significant impact to our revenues in 2021. Now our OEM business in Brazil and Argentina. As we discussed earlier this year, because of the weak economic situation in Brazil and Argentina, our major OEM customer has been looking for ways to reduce its cost and increase margins.
Earlier in the year, they cut their subsidized free trial period for new car buyers from six months down to three months. This had an immediate negative impact on our number of subscribers in those countries in the second quarter. In the fourth quarter, they cut the free trial period down to one month, which was the primary cause of the OEM subscriber decline in the fourth quarter. That it will continue to decline our subscriber base in the OEM operation of Brazil and Argentina. In light of the reduced revenue related to this customer in the fourth quarter and currently in the first quarter, we have implemented changes to improve our margins in this segment, including reducing manpower and rationalizing costs, which will benefit us in the coming quarters.
Due to all of the issues I've just mentioned, we have recognized an impairment loss this quarter, which you can see in our results. I stress that this impairment is a non-cash accounting charge for our results. I want to take a minute to discuss the coronavirus issue. We are not seeing significant direct impact, so the impact it is having on the macroeconomy can indirectly affect us. We estimated between $1.5 million-$2 million of hardware revenues and several hundred thousand dollars of profit could shift from the first to the second quarter due to delay in the hardware shipment, mainly to Mexico. In summary, 2019 was indeed not an easy year for us. While our aftermarket business began its recovery, the OEM business in Brazil and Argentina was particularly difficult throughout the year.
Looking ahead, we believe the worst is finally behind us, and we expect to see continued sequential growth into the first quarter and beyond throughout 2020. We continue to see growth engines, the UBI business in Israel. We will also continue to expand our existing services and competencies to the new countries in which we now operate. We are gaining traction in the Indian market. Our JV in India is moving ahead successfully, and we are currently running pilots with various potential customers. We feel the market is waking up to our offering. My overall goal is that Ituran will always create value for its shareholders by remaining at the forefront of the technological advancement in an ever-changing, consumer-oriented mobility market. I will now hand the call over to Udi for the financial review.
Thank you, Eyal. I note that the results I present will be on a non-GAAP basis, including adjusted EBITDA, which exclude revenue and cost related to the purchase price allocation. We believe this will provide a better understanding of our ongoing performance. For further deta $ with regard to the reconciliation between the non-GAAP and the GAAP results, please see the tables published with the press release. Non-GAAP revenues for the fourth quarter of 2019 were $66.2 million, representing a decrease of 17% compared with revenues of $79.4 million in the fourth quarter of 2018. Revenue breakdown was $50.3 million coming from subscription fees, a 9% year-on-year decrease. This decrease mainly relates to the Brazil and Argentina OEM operation, where the free trial has been reduced from six months to three months.
Ituran added 22,000 net subscribers aftermarket during the quarter, and there was a similar 22,000 decline in the number of OEM subscribers. Product revenues were $15.8 million, which were a 34% decrease over the same quarter last year, primarily due to the lower contribution from the OEM business. The geographic breakdown of revenues in the fourth quarter was as follows: Israel, 43%; Brazil, 31%; rest of the world, 26%. Non-GAAP operating profit for the fourth quarter of 2019 was $11.8 million, compared with an operating profit of $18.9 million in the fourth quarter of 2018. Operating loss for the quarter was $16.4 million, which includes an impairment loss of $26.2 million related to the acquisition of RoadTrack Holdings, which was acquired in the third quarter of 2018. Excluding this impairment loss, the operating profit would have been $9.8 million, 15% of revenue.
It is important to note that this impairment is a non-cash charge. Adjusted EBITDA for the quarter was $16.6 million, compared to an EBITDA of $25.2 million in the fourth quarter of 2018. Finance income for the quarter was $3.3 million compared to a financial expense of $1.4 million last year. Those finance income in the quarter include the $4.7 million income, which relate to the impairment loss, as I discussed a few moments ago. Non-GAAP net profit was $6.6 million in the quarter of fully diluted EPS of $0.31, compared with a net profit of $12 million of fully diluted EPS of $0.56 in the fourth quarter of 2018. Cash flow from operations during the quarter was $17 million. Now for the full-year results.
Revenues for 2019 were $283 million, an increase of 12% compared with revenues of $253.6 million in 2018. In local currency terms, revenue increased by 16% year-over-year. Revenue breakdown for the year was $208.4 million coming from subscription fees, up 15% year-over-year. In local currency terms, subscription revenues increased by 21% over those of last year. Product revenues were $74.6 million, up 4% year-over-year. Non-GAAP operating profit for 2019 was $57.1 million, compared with an operating profit of $63.3 million in 2018. Note that our GAAP operating profit does include the impairment loss of $26.2 million that I mentioned earlier. Adjusted EBITDA for the year was $76.7 million, compared to an EBITDA of $79.2 million in 2018. Finance income for the year was $0.6 million, compared to financial income of $0.7 million last year.
As I mentioned earlier, the finance income in the quarter included a $4.7 million income related to impairment loss. Non-GAAP net income in 2019 was $33.3 million, or fully diluted earnings per share of $1.58. This is compared to a non-GAAP net income of $47.8 million, or fully diluted shares of $2.27 in 2018. Cash flow from operations for 2019 was a record of $59.7 million. As of December 31, 2019, Ituran had cash, including marketable securities, of $54.3 million and debt of $67.9 million, amounting to a net debt of $13.6 million. This is compared with cash, including marketable securities, of $53.3 million and debt of $73.2 million, amounting to a net debt of $19.9 million as of December 31, 2018. As of December 31, 2019, Ituran has repurchased a total of 228,000 shares, amounting to approximately $6 million.
For the fourth quarter, a dividend of $5 million was declared. The dividend's record date is March 24th, 2020, and the dividend will be paid on April 7, 2020, net of taxes and levies at the rate of 25%. With that, I'd like to open the call for questions and answer session. Operator?
Thank you. 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 polled in the order they are received. Please stand by while we poll for your questions. First question is by Tavy Rosner of Barclays. Tavy, please go ahead.
Hi. Thanks for taking my questions. I got disconnected for two minutes, so apologies if you already touched on some of the questions. First, about the OEM. You mentioned that 2019 was a challenging year, especially Brazil, Argentina, but that seems to be the bottom with 2020 shaping up to be a better year. I guess, can you run us through the dynamics through the different geographies? I'm also interested in any additional color on the cost-cutting measures you touched on in Latin America.
Hi, Tavy. We mentioned that we expect that the bottom of the declining in our results happened in Q4, after the situation that we had to manage during 2019, which I would divide into two. First is the recovery that we had to do in our aftermarket in Brazil, that started in the end of 2018. We changed the model. This is something that had some effect until the end of 2019, although we almost third quarter after we succeed to recover growing back the subscribers. In terms of the results, it's taking some time. I'm expecting that Q4 was again the bottom line for this situation.
The second issue was, if you remember, the Mexican situation with the telcos that declared that they will shut down the 2G systems in two years from now, and our customer asked us to change the modules to 3G, and it took us also a major part of 2019, and we start to recover those sales only around September and October, which now is in a very good term. The third issue is the OEM. I didn't say that the OEM, which I want to be more specific, the OEM customer in Brazil and Argentina changed around during the last year. It changed the conditions of the free trial period from six months to three months, and recently, which affected the last quarter of 2019, and probably will continue to affect, but much lower numbers, much lower effect.
In the coming one or two quarters, is changing to a one-month free trial. When it's a one-month free trial, it means that there is more churn. It means that it's more difficult to recruit payment customers after this month. That's something that we faced in Q4, and it will affect in the coming quarters. The second aspect is that every new customer is also integrated with the hardware that we sold to this car manufacturer in the last four years, and since 2019, looking forward to 2020, the numbers or the revenues from selling hardware to this specific customer in this specific geography will continue to decline. We said in the past, and I will say it again now, that we're going to offset it during 2020 from two major resources.
One of them is that the aftermarket, as you can see, is growing again. It will start to affect more materially in our P&L in the coming quarters, and this should at least offset the declining in the OEM in Brazil and Argentina. Second, we expect, based on the current situation in Mexico, Ecuador, and Colombia, to increase or at least to keep the same numbers for 2020. These two resources, we have the reason to believe will offset and will be even higher than the declining in the OEM in Brazil and Argentina. By saying this, the overall consolidated business of Ituran should now sequentially increase every quarter. In terms of the numbers, we hope, we believe, we have confidence that Q4 was the bottom line of the fundamental results.
Yeah. Thank you. That's very clear. Maybe something I might have missed, but the impairment at RoadTrack, what was the reason that triggered it?
It's a very accounting issue. I will explain. When we acquired RoadTrack, it's not related specifically to the value or the economic value of the acquisition. It's basically when you acquire the company, you have to write some assets, which is the difference between the equity and the value. This is based on some scans that you have to use third-party accounting firm to evaluate these differences. Since it's based on some proprietary numbers, as you know, it was affected by the Brazilian and Argentinian business forecast. We didn't expect that they will reduce the free trial from six months to one month, it means that all the decline that the market saw during this year, it actually affects the value of this number in our balance sheet.
In order to be conservative and to obey the accounting rules after this kind of acquisition, we had to do this accounting move, and we put this number. As Udi mentioned, it has any influence, not from the operational point of view and not from a cash point of view.
Understood. Thank you. I'll go back to the queue.
Okay.
Next question is by David Kelley from Jefferies. David, please go ahead.
Thanks for taking my questions. Could you update us on the OEM renewal rates? I know you've talked about that 35% range. Just curious how that's tracking with the shorter free trial length.
The renewal rate is actually on the same rhythm as you mentioned, around the 35%. Of course, it diversified between the different markets. Some of them we have more, some of them we have less. The numbers, specifically in Brazil and Argentina, become lower. The absolute number is lower. In terms of percentage, we succeed to keep at least the percentage of the 35%.
Okay. Thank you. Could you provide some color around the magnitude? You referenced the lower cost and some of the synergies you're looking to create in Brazil and Argentina between the two businesses. How should we think about the dollar magnitude of that impact in 2020?
We can't give the number, but, as I said, I believe that Q4 and some influences from Q1, including some severance costs and some downsizing and integrated to the Ituran aftermarket team will allow us to stop and to enjoy this benefit, and benefit from it in 2020, probably from somewhere around Q2, Q3, when I believe that from this moment, we will no longer be declining our profits in this segment, specifically in Brazil and Argentina.
Okay, thank you. Last one from me. You referenced the shift in the OEM business away from hardware sales to more of a services model. How do you see that playing out as far as the margin impact of that shift over the next year to two years?
First of all, I wish that we have more sales also of hardware, because the margins are lower, but the absolute number is higher, and in the end, we will have more profits. Talking about the current situation, I believe that, again, from the moment that we will finally put the team, the company in the final stage after the full downsizing around April or May, from that moment, we believe that these specific segments will have higher margins. This is one of our aim to do in the last month and in the coming months, but it will increase. Don't forget that this is only part of our OEM business, and we are in Mexico, Colombia, and Ecuador, very material business, which is continued to sell hardware even more than in the past.
The overall OEM business, I wouldn't say that it will have material higher margins, but I expect that toward 2021, we at least will see more or growing numbers, subscribers, and profits. During 2020, still, the downsizing in Brazil and Argentina will affect the total OEM business.
Okay, thank you.
Next question is by Sasha Karim of IPI. Sasha, please go ahead.
Hi, guys. First question from me. You've made it very clear that Q4 was the trough. I just want to be a bit more specific. Would you say that Q4 was the trough for revenue and also for your non-GAAP EBIT?
Yes. Again, it's expectation. It's based on what we see and how we recover the Brazilian aftermarket. It's how we recover the Mexican market. I just mentioned that in Q1, we're going to have some effects from the corona. I don't think it will change those expectations, as long as the numbers is, as I mentioned, something like a few hundreds, thousands of dollars in the EBIT. If this is the case, we expect to start increasing quarter-over-quarter, the EBIT, the EBITDA, the profits. Yes, this is the case. Of course, from a GAAP perspective, of course.
Yeah. My next question would be, can you give us an update on roughly what is the revenue per UBI sub in Israel?
I can't give it specifically because it's part of our total ARPU, but it's lower, and it's something like a few dollars per month. It's not the same as the typical ARPU of the other services, but we expect that the numbers of subscribers in the future, more mid and longer terms, will be much larger growth than the SVR. Second, don't forget that for the other services, we have cost integrated too, which is, for example, the control centers, the customer support, it's a more B2C. This is a few B2B, almost no cost integrated with those revenues. It's a few dollars, but almost 100% of these few dollars goes to the EBIT.
Understood. Just to be clear there, you're saying that you think that the addressable market in terms of number of subs is higher than in SVR?
Theoretically, for SVR, is depend on, let's say, on the actuarial needs of the insurance companies, which derives from how many of a specific model is popular among thieves. This puts our penetration potential in something like 20%, 25%, 30% of the total car audience. Once the insurance market in Israel will be covered by all insurance companies based on how a person is drive or how many mileages drive. If most of the people, it will be cheaper, it will be more efficient for them to buy this kind of a policy. It doesn't matter whether you have an old car, a very old car, a brand-new cars, if it will be efficient for the customer, so he will take the decision to buy it. If in Israel there are millions of old cars that no longer subscribe for SVR, potentially they can be our customers, potentially.
Yeah, understood. Finally, for me, just on India, you talked about some early progress there, and we saw that you launched your JV with Lumax a while ago. Can you just give a rough indication of when you might be able to do a full launch, in which regions if so, and would it be mainly for the SVR business through insurance channel or through the retail channel or anything else?
The Indian market, our offering to the Indian market together with our partner is almost only B2B, meaning going through, whether it's car manufacturers, whether it's large fleets, whether it's a leasing or a rental companies. This segment, sales cycle is much longer, specifically when you go to a premature geography, premature market. Also there is a very large challenge, which is the pricing in this geography. All those differences from the SVR and the B2C, which Ituran is doing in the other geographies, here it's taking more time. When I said that it's going very well, is because we see attraction from large customers, like large commercial customers.
We are now in a pilot mode, we are in negotiation mode, and I believe that it will take a little bit more time, I would say, and I said it, that during 2020 it will not be significant to our results. I believe that in 2021 we can, or I want to believe that in 2021, based on the steps that we do now and the relationship that we have now with potential customers and tenders, in 2021, we will be able to declare some more major deals.
Thank you.
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 poll for more questions. There are no 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.co.il. Mr. Sheratzky, would you like to make your concluding statement?
Yes, thank you. On behalf of the management of Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. I look forward to speaking with you next quarter. Have a good day. Bye.
Thank you. This concludes Ituran's fourth quarter and full year 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.