Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Q4 and full- year 2018 results conference call. All participants are present in a 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.co.il. I will now hand the call over to Mr. Kenny Green of GK Investor Relations. Mr. Green, 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 Q4 and full- year 2018 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, CEO, Mr. Udi Mizrahi, Deputy CEO and VP of Finance, and Mr. Eli Kamer, CFO. Eyal will begin with a short summary of the quarter's results, followed by Eli 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 statement in today's press release also covers the contents of this conference call. Now, Eyal, would you please like to begin?
Thank you, [inaudible], Kenny. I would like to welcome all of you and thank you for joining us today. 2018 has been a good year for Ituran from both a strategic and financial perspective. We are very pleased with our overall performance and following the Road Track acquisition, we end the year as a much larger scale company with broad capabilities. We now have a significant footprint across Latin America with many growth opportunities ahead of us. From the financial perspective, as has been the case throughout 2018, the weakness in the Brazilian real, in particular in the earlier half of the year, as well as the Argentine peso, had a very significant impact on the translation from local currency, in which we operate, to U.S. dollars, which is our reporting currency. Despite the currency impact, we are pleased with our performance.
With revenues of over a quarter of a billion dollars, growing 20% in local currency terms, adjusted EBITDA of $79 million, and net income of $65 million. The contributing factor this year to our net profit was our share in affiliate. This was primarily due to the capital gain from our investment in Bringg. It represents the yearly fruit of success from our investment in companies which are building tomorrow's disruptive mobility technologies and solutions. To date, we have invested several very promising early-stage mobility technology companies, of which Bringg is at most advanced stage. Each of them has a strong potential to become a future industry leader. My goal is that Ituran will be at the forefront of technological advancement in an ever-changing and fast-developing mobility market. The Q4 is the first full quarter in which we consolidated the result of our recent acquisition, Road Track.
We now have close to 1.8 million subscribers. While our subscribers last year were predominantly in Israel and Brazil, with a small portion in Argentina and the U.S., we now also have subscribers throughout Latin America, including Ecuador, Mexico, and Colombia. While our business growth traditionally was driven by the net increase in the subscriber base in the aftermarket, today there are two legs driving our growth. One remains the traditional aftermarket subscriber adds in Israel and Brazil. This is now the other leg, which is working with our existing OEM partners and adding additional OEMs in the aftermarket in both new as well as existing geographies. We now have a much stronger platform to penetrate additional car manufacturer OEMs beyond the two that we are already working with.
Furthermore, there are strong synergies that will enable us to grow our business by cross-selling our capabilities to Road Track contract and vice versa. We now have a foothold to penetrate service into new countries. We are already looking to launch additional services in our new geographies. In summary, we are pleased with our performance in 2018 and with the integration of Road Track, and we look forward to harvesting the foundation we laid out into continued growth in 2019 and beyond. I will now hand the call over to Eli for the financial review. Eli?
Thanks, Eyal. I note that some of the results I present will all be on a non-GAAP basis, including adjusted EBITDA, which excludes revenue and costs related to the purchase price allocation. We believe this will provide a better understanding of our ongoing performance. For further details with regard to the reconciliation between the non-GAAP and the GAAP results, please see the table published with the press release. Revenue for the Q4 2018 were $79.2 million, representing an increase of 31% compared with revenue of $60.6 million in the Q4 of 2017. In local currency terms, Q4 revenue grew 39% year-over-year. Revenue breakdown Q4 was $55 million coming from subscription fees, a 24% year-on-year increase. In local currency terms, subscription fees grew 53% over the same period last year. Product revenues were $24.1 million, which were a 50% increase over the same quarter last year.
The geographic breakdown of revenues in the Q4 was as follows: Israel 34%, Brazil 36%, and rest of world 30%. Non-GAAP operating profits for the Q4 of 2018 was $18.9 million, an increase of 29%, compared with an operating profit of $14.7 million in the Q4 of 2017. In local currency terms, it grew 41% year-over-year. Adjusted EBITDA for the quarter was $25.2 million, an increase of 38% compared to an EBITDA of $18.2 million in the Q4 of 2017. In local currency terms, the increase was 50% year-over-year. Share in affiliates net during the quarter was an income of $4.2 million versus an income of $3 million in the same quarter of last year. In each respective quarter, the majority of this income was due to a capital gain.
Non-GAAP net profit was $15.8 million in the quarter of fully diluted EPS of $0.74, a growth of 61% year-over-year compared with the net profit of $9.8 million or fully diluted EPS of $0.47 in the Q4 of 2017. In local currency terms, the year-over-year increase was 73%. Cash flow from operations during the quarter was $18.5 million. In terms of our full- year 2018 numbers, revenues for 2018 were $253.3 million, an increase of 8% compared with revenue of $234.6 million in 2017. In local currency terms, revenue increased by 20% year-over-year. Revenue breakdown for the year was $181.4 million coming from subscription fees, up 7% year-over-year. In local currency terms, subscription revenue increased by 23% over those of last year. Product revenues were $72 million, up 11% year-over-year.
Non-GAAP operating profit for 2018 was $63.3 million, up 12% compared with an operating profit of $56.5 million in 2017. In local currency terms, this grew 21% year-over-year. Adjusted EBITDA for the year was $79.2 million, an increase of 13% compared to an EBITDA of $70.1 million in 2017. In local currency terms, the increase was 23% year-over-year. Share in affiliates net was an income of $8.1 million in 2018 compared with an income of $8.5 million last year. Non-GAAP net income in 2018 was $51.6 million of fully diluted earnings per share of $2.45. This is an increase of 18% compared with the net income in 2017 of $43.8 million or fully diluted earnings per share of $2.09. In local currency terms, the net income grew 26%. Cash flow from operations for 2018 was $53.2 million.
As of December 31st, 2018, the company had cash, including marketable securities, of $53.3 million or $2.50 per share. Following the acquisition of Road Track, as of December 31st, 2018, the company had debt of $73.2 million or $3.43 per share. This is compared with cash, including marketable securities, of $40.4 million or $1.93 per share, and zero debt as of December 31st, 2017. For the Q4, a dividend of $5 million was declared. For the full- year of 2018, the total dividend declared, including that of the Q4 of 2018, was $20 million, representing 51% of the full-year net income. The dividend's record date is March 26th, 2019, and the dividend will be paid on April 10th, 2019, net of taxes as levied at the rate of 25%. 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 headset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from [Sasha Karim] of IPI. Please go ahead.
Business.
Please go ahead.
Hi. Hi, guys. I think you didn't catch my question. I'll try and repeat. How much of the services revenue in the Q4 came from Road Track versus Ituran's existing services business?
That breakdown, since we are fully consolidated, completed now, are not something that we are going to establish. We are actually providing the geographies breakdown for the numbers.
Okay. Okay, fine. I'll ask you a different question later, but perhaps we can also just look at the services gross margin. It dipped in the Q4, even in non-GAAP terms, following the consolidation of Road Track services revenue. Could you just explain why Road Track services business seems to be having a negative impact on the gross margin there?
Basically, today, Ituran has two different segments. One segment is the aftermarket, and second is the OEM segments. This OEM segments is carrying a lower margins compared to the aftermarket. Once we start to consolidate those segments, it has a, I would say, a one-time drop of the margins, and this should be the margins that we will probably continue to show.
Got it. Should I take it that there is actually a revenue share paid out to partners like General Motors there in your cost of goods sold? Or is there another reason for the gross margin to be lower?
No, because the prices and the cost for OEM are different than for the aftermarket. It's different segments which carry different prices and different costs.
Got it. Okay. Also, on the product gross margin. In the Q4, it was quite high. I'm guessing it's probably mix that's driving the volatility there. Can you tell us which products have highest and lowest gross margin? How would you think about mix going forward?
We are not providing a disclosure of the gross margin between the mixture of products. As you mentioned, you are right. The mixture of the product, especially on the fleet segment, brought us to a higher gross margin. I want to remind you that comparing to the previous quarter, the gross margin was quite low. We said that it is supposed to be, in the future, a little bit higher.
Was Road Track having an impact there in the Q4, or is it really just a mix that's causing that spike in the third and Q4s?
It's mainly the mixture.
Mm-hmm. Can you give us a rough range to expect going forward? I imagine it's probably quite a wide range.
I believe that going forward, the gross margin of approximately 20% is something that makes sense to me.
Thank you.
The next question is from David Kelley of Jefferies. Please go ahead.
Good morning. Thanks for taking my questions. I guess, just the first one, could you talk about maybe some of the drivers of the subscriber base growth? Obviously, the Road Track being a primary contributor. Just any way to think about either a regional breakdown or some of the different metrics of how we should think about core Ituran versus Road Track contribution of the subscriber base.
The OEM subscriber base is much more dependent on the car market, the car industry, I would say. The correlation, which was a little bit lower when we talked or when we are talking on aftermarket, Ituran has more way to affect the market by using our tools, by using more different marketing, approaching different segments. Sometimes it's work more, but sometimes less. Still, a lot of it is something that depends between us and the market. When we are talking about OEM, we totally depend on the sales of cars from the specific car manufacturers that's working with us.
Our visibility as well as our dependency is very high. Since we know that the markets which we operate with the OEM services, which include Argentina, Brazil, and Mexico, are less stable market, of course, there will be some volatility, which we less get used to in the aftermarket.
Okay, great. Thanks. As we think about 2019 opportunity, you mentioned the volatility in the OEM market, I think South America, maybe as a region, looks better than some of the other regional production outlooks this year. Any way to think about potential contribution there? Do you think it'll be a more or less volatile year in 2019 as we think about, again, the OEM subscriber base?
As I said, we don't have a full visibility. What we are assuming is that on the aftermarket, we should expect the average numbers that we shown in the last years. In the OEM, it's something that we believe, or we hope that it will be stable. Again, this is something that are more changing among the quarters along every year since we know these segments.
Great. Thank you. Last one from me, just to jump in the share in the affiliates contribution, I believe it was from the capital gain from Bringg. Could you just talk about the opportunity of some of your investments, what you see in 2019 as we think about share and affiliates? Should that continue to be a significant jump year-over-year?
Bringg, as we said, is in the most advanced stage, this led to a very high valuation and a very high amount of money that was raised during their fund, the last fundraising round. The investors, as we said, are very major names in the software industry, such as Salesforce and Siemens Venture Capital. The other companies that we invested are still in an earlier stage than Bringg, we see how they are moving forward. I'm assuming that during 2019, assuming because, of course, I don't know, that even if they will go into the next round, it still will not be significant to Ituran's result.
In addition, just to remind that 2018 includes, until the acquisition of Road Track, in the share of affiliated, contribution of the JVs that we have in Brazil and Argentina, that in 2019 will be consolidated with the numbers.
Yeah, sure. Great. I appreciate it. That's super helpful. Thanks for taking my questions.
Thank you.
The next question is from [Eitan Assoni] of [Assoni] Portfolio Management . Please go ahead.
Yes, thank you for taking my question. I wanted to ask, it appears that organically, there's a significant drop when we take the numbers from Road Track and subtract them and then compare them to the previous quarters. Can you explain where that drop is coming from, please?
You're right. In US dollars, again, it seems that the revenues are going down if you exclude with some assumptions, but the main effect, the main decrease relates to the FX. Without the FX, in local currencies, organically, of course, comparing to last year, the revenues went up.
Right. On the previous call, you said that year-end 2018, you're at a run rate of $400 million revenue. Is that still the approximate number, or do you have an update for that figure?
It wasn't the last call. It was during the PR of the acquisition.
Okay.
Of Road Track, which was the beginning of 2018. Everything that we published was based on the numbers that we knew, which was 2017, and based on the currency exchange rate that was in 2017. Of course, when you are computing the differences with the currency exchange rate, everything is the same place.
Looking at the Q4, excluding, of course, the gain in the affiliates, it pretty much represents the quarter of the current business with the current exchange rates. Is that fair to assume that that's what we should be looking for going forward?
Absolutely. Yes. With the current, as you mentioned, and it's very important since our operation is based only on local currencies, which are none of them is dollar, almost none of them is dollar. Assuming that this is the currency exchange rate that we will continue to live with, it's absolutely right what you said.
Okay. Thank you very much.
Okay.
We have a follow-up question from [Sasha Karim] from IPI. Please go ahead.
Just one follow-up. You weren't giving us the breakout, I guess, between Road Track and Ituran existing services business. I'm having to make some assumptions, but it seems to me like the Brazilian services business that you had prior to that acquisition is probably still declining slightly in constant currency organic terms. You've obviously been making some changes to that business, expecting a return to growth, I think, in 2019. Can you give an update on how those changes are going down and when you would expect decent growth to return to that business?
Actually, most of what you described is right because, of course, we said it in the last two quarters because we changed the model working with our ICS, Ituran Com Seguro, which is the Ituran insurance program. Of course, we changed the model. Since we changed the model, it start to ramp up. We are in a very, I would say, good rhythm of coming back to the numbers that we've shown in the past. It will take us a few more quarters to be in probably or hopefully in the highest numbers, but we are now in a positive trend of losing less subscribers and growing more.
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. We have a next question is from [Heikki Lamminen], Private Investor. Please go ahead.
Thank you. Yeah, it's interesting to now see in full transparent way the [audio distortion] . Congratulations on that. My question is that I feel that the valuation is at the moment slightly low compared to kind of the transformation of forward. Have you considered maybe bringing this new Ituran to investor knowledge in a better way? Maybe, for example, regarding the capital which you are providing back to shareholders. You have been doing only dividends. Have you given thought maybe starting doing some share repurchases in the future? Thank you.
From time to time, the board is considering issues regarding the equity of the business, which is discussion regarding dividends, share purchasing program, the debt that we are using, et cetera. Currently, the situation stayed as continue with the dividend policy and continue to serve the net debt of the company.
Exactly. Maybe a add on. I understand that there is the debt that you have incurred to purchase Road Track, but still you are now generating very healthy cash flow. What do you see that increasing the dividend in the future? I guess that might come into play during this year.
The company to discuss what is Ituran policy regard all these matters. We always need working capital. We always had our policy regard how the balance sheet is look like. I think that we try to mix between the needs of the company and the way to share the profits with the shareholders through dividends. It's always a mixture between chances, risks, and needs, and that's how we are operating and how our board taking the decision. Of course, we did it from time to time every quarter.
Exactly. Maybe then a couple of operational questions. You mentioned in the press release that you see a lot of promising potential for revenue-side synergies. Could you maybe provide us with any number, like ballpark figure, say 10% additional sales in two years or something like that? Then also how then are the costs driving the business? It is very scalable. You are now combining two different business systems. They have been operating slightly in different geographies. Do you see a lot of synergy from this also on the upside?
I don't know what is the meaning of a lot, but of course, we are doing our best to leverage this acquisition by creating synergy and creating efficiency, we already started to do it. We find that we can contribute to the profitability of the group today from a cross-selling. Of course, again, some of the regions were especially focused on aftermarket, we will try or we are trying to do our best to entering OEMs or other OEMs in those geographies.
On the other hand, geographies that was very focused on OEMs has a platform to offer services and solutions also to the aftermarket. This is something that we will try to create, but it's not something that happens from day one to two. It will take time, we believe that the move and the things that we will do will contribute in the future to this solution or to these results of the cross-selling. We start with this, but it will take time, of course.
Exactly. Maybe one further question then. I understand that the money spent has been well spent on South America. In the past, you have also mentioned that you have been doing some progress in India. Maybe if you can provide any update on that.
You're right. We are counting on India for the longer terms. I will repeat, will mention that we have a joint venture, as we started in the past with Brazil and Argentina. Now we have a joint venture, 50/50% with Lumax, local big and respective OEM integrator. We are now in a phase of building the infrastructure and creating the business and answering bids, which will lead to opening new market, new segments in the market, which is very premature in the telematics industry. We actually have to create market education, we spend many hours, and we spend resources which are not significant now. I believe that as long as we will move on with sales or with deals, we will increase this platform, this business. We see very positive reaction.
We believe we have a good reason to be optimistic. Again, this is a longer-term market. When we entered the Brazilian market in the late '90s, we start reaping the profit fruits only after five, six years. I hope that it will be here earlier, but we are talking about market which is significantly larger than the Brazilian, and now India is in a phase of coming from emerging market to more industrial market. More people are transferring from rural areas to the municipal areas, and it gives us the confidence that in the future, we should do our best to be the dominant of the telematics market in India.
Exactly. Let's hope that it goes faster. Maybe one question that I think that hasn't been discussed in the calls, if I may. The electric cars are really growing fast from a low base, but growing fast, for example, as far as we all know. Tesla, for example, is a different kind of car compared to the old gasoline and so on have been. How do you see the transformation into electric vehicles? What kind of opportunities does it present for Ituran? Is it, for example, going to be easier to install your hardware and software in electric vehicles? Also, do you see any threats, like if the room for new entrants or so on, due to easier access maybe in electric cars?
The way the engine is working has no influence on the services and even the hardware that Ituran is providing, whether it's electric car or whether it's a car based on regular engine with a fuel. We don't see any threats. On the other hand, we can think, and that's what we do, about having more things or more sensors that we can be involved with the telematics, and this is an upside and not a downside by, for example, managing energy for our cars, whether we're talking in fleets, whether we're talking about groups of cars, et cetera. Generally speaking, there is no difference for telematics services, whether it's in a fuel engine or it's electric.
Yeah. It's fluent. I was exactly looking after that. Teslas and so on, they are in a way smart cars compared to what maybe the gasoline cars have been. There is lots of more monitoring and different sensors and so on, as you mentioned. That's good to hear that you're also looking at. I guess I will let others ask questions as well. Thank you.
Thank you.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. The standby will poll for more questions. The next question is from Daniel [Dopaz] of [Alpha PI]. Please go ahead.
Hi, thank you for taking the question. One simple question about future margins. Obviously, the Road Track acquisition brought operational and net margins down. Would you expect future margins to improve as you bring Road Track fully up to Ituran's old margins or current margin levels is a steady-state margin from your perspective?
I would consider our Q4 result as the right margins to consider. Yes. Our margins should be representing margins that we should show.
Okay. Thanks.
There are no further questions at this time. Before I ask Mr. Sheratzky to go ahead with his concluding 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, I would like to thank all Ituran's employees, including our new employees, for their hard work and effort in 2018. 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 look forward to speaking with you next quarter. Have a good day.
Thank you. This concludes Ituran's Q4 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.