Ladies and gentlemen, thank you for standing by. Welcome to the Ituran third quarter 2018 results conference call. All participants are at present and 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 at www.ituran.com. I will now hand the call over to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?
Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to discuss the third quarter 2018 results. I would like to thank Ituran's management for hosting this conference call. With me on the line today are Mr. Eyal Sheratzky, CEO, Mr. Udi Mizrahi, Deputy CEO, and Mr. Eli Kamer, CFO. Eyal will begin with a summary of the quarter's results, followed by Eli with a summary of the financials. We'll 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 like to go ahead, please?
Thank you, Kenny. I'd like to welcome all of you and thank you for joining us today. We are pleased with both the financial results of the third quarter as well as the significant strategic progress that we made in the quarter. Of course, I would be happier if the currencies would not move against us, but this is something well out of our control. While I will start with a brief general discussion of the financial results, I want to stress that our company today, in the fourth quarter of 2018, looks very different to what these raw numbers present. As you all know, we closed the acquisition of Road Track Holdings in mid-September, the last two weeks of the third quarter. While it had a significant impact to our balance sheet, there was in a minimal impact to the P&L of the third quarter.
Currencies, and primarily the weakness of the Brazilian real before the elections and the Argentinian peso, had a very significant impact on the translation from local currencies in which operate to U.S. dollars, which is our reporting currency on our P&L. In addition, the New Year holiday season in Israel, which fell in the third quarter fully this year, while it was divided between Q3 and Q4 last year, also had a negative impact, meaning that in Israel, our business would experience a relatively weaker Q3. The fact that our gross operating and net margins throughout the P&L are at good levels shows that our underlying business is healthy and is a demonstration of the inherent leverage in our business model. As our subscriber base continues to grow, we can bring more of the revenue down to the bottom line.
Eli will discuss the third quarter financial result in a few minutes. Since mid-September, we've been working hard to integrate Road Track into Ituran. As you know, Road Track has been our partner in our Brazilian joint venture, IRT, for a number of years. IRT has an OEM agreement in Brazil and Argentina with one of the world's major auto car makers, providing their customers with telematics services on various new car models they sell for the first six months. Until the acquisition closed, we were not the majority owner in IRT, so we didn't consolidate the results into our own and did not include the subscribers in our reported subscribers numbers. After consolidating the shared, IRT subscribers as well as the new subscribers we gained from our acquisition, which together amounted to a little over a half million subscribers, Ituran now has well over 1.7 million subscribers.
While our subscribers were predominantly in Israel and Brazil, with a portion in Argentina and the U.S., we now also have subscribers in Ecuador, Mexico, and Colombia. As the largest global independent telematics company, we now also have a much stronger platform to penetrate additional car manufacturer OEMs beyond the two that we are already working with. Beyond that, the acquisition gives us many potential areas of synergies to grow our business. It bring us the ability to grow and penetrate with our services into new countries in which we previously didn't have foothold. In fact, we are already looking to launch additional services in our new geographies. In summary, we are pleased with our business performance in the third quarter, as well as significant strategic steps that we took, we look forward to continuous growth over the quarter and years to come.
I will now hand the call over to Eli for the financial review. Eli?
Thanks, Eyal. The acquisition of Road Track was closed on September 13th, 2018, there was minimal impact on the consolidated profit and loss statement. The balance sheet and subscriber base as of the end of the quarter does include the full impact of the Road Track acquisition. Revenue for the third quarter of 2018 were $53.4 million, compared to revenues of $60.6 million in the third quarter of 2017. 73% of revenues were from location-based services subscription fees, and 27% were from product revenues. Between Q3 2017 and Q3 2018, the weakening against the U.S. dollar
The Brazilian real, which lost 25% of its value, as well as the Argentinian peso, which lost 84% of its value, significantly impacted the U.S. dollar values of our revenues, gross profit, operating profit, and net profit. Revenue breakdown for the quarter was $39.1 million, coming from subscription fees versus $43.8 million last year. Product revenues were $14.3 million versus $16.8 million last year. In local currency terms, subscription revenues grew 3.4% year-over-year, while product revenues fell 13% year-over-year. The geographic breakdown of revenues in the third quarter, which also includes two weeks of Road Track's results, was as follows: Israel 52%, Brazil 37%, and the rest of world 11%. Gross profit for the third quarter of 2018 was $28.9 million, amounting to 54.1% of revenues, compared with $30.5 million, 50.4% of revenues in the third quarter of 2017.
The gross margin in the quarter on subscription fees were 65.3%, compared with 66.7% in the same period last year. The gross margin on products were 23.4%, compared with 7.6% in the same period last year. Due to the mix, the gross margin on product sales this quarter was higher than usual, and in the past few quarters, it was lower than usual, we expect the rate to generally average at the 10%-15% rate. Operating profit for the third quarter of 2018 was $13.7 million, compared with an operating profit of $13.9 million in the third quarter of 2017. In local currency terms, operating profit grew 15%. During the quarter, Ituran had a one-time other income of $13.8 million.
This was related to an accounting gain from an acquisition following a gain of control of the Ituran joint venture that Ituran has with Road Track Holdings in Brazil and Argentina, which under GAAP rules, it accounted for the market value and was therefore reevaluated. The total gain is net of the transaction-related expenses. EBITDA for the quarter was $17 million, representing a margin of 31.8%, compared to an EBITDA of $17.4 million in the third quarter of 2017, representing a margin of 28.7%. In local currency terms, the EBITDA increased 13%. Net profit was $26.1 million in the third quarter of 2018, for fully diluted EPS of $1.24. This is compared with a net profit of $10.5 million or 17.4% of revenue, which is fully diluted EPS of $0.50 in the third quarter of 2017. Cash flow from operation during the quarter was $14.8 million.
As of September 30, 2018, the company had cash, including marketable securities, of $57.4 million. The company also had short and long-term debt of $84.9 million. On a net basis, the net debt of the company was $27.5 million, compared with a net cash of $40.4 million as of December 31st, 2017. Let me also provide you with our pro forma numbers in order to help you understand how to model Ituran following the acquisition. Our pro forma numbers consolidate Road Track numbers from the beginning of 2018. The consolidated non-GAAP pro forma revenues for the first nine months of 2018 were $270 million. Operating income was $59.2 million. Net profit was $41.9 million. When assuming the constant exchange rate, which is based on the average rate of 2017, our pro forma revenues were $286.8 million, operating income were $65.9 million, and net profit were $46.6 million.
For the third quarter, a dividend of $5 million was declared in line with the company's dividend policy. The dividend's record date is December 26th, 2018, and the dividend will be paid on January 9th, 2019, net of taxes and levies at the rate of 25%. With that, I'd like to open the call for the question-and-answer session. Operator?
Thank you. Ladies and gentlemen, at this time, we'll 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're 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 for your questions. The first question is from David Kelley of Jefferies. Please go ahead.
Hey, good morning. Thanks for taking my questions. Just a couple quick ones. I think you referenced maybe a little over half a million subscribers in the quarter from Road Track, but just wanted to, A, double check on that number, and maybe if you could give us the underlying subscriber growth for the core business for the quarter, that'd be great.
Actually, since this is the first quarter that we are consolidating the Road Track subscribers, which overlapping some of our subscriber from the JV that we didn't publish in the past, thanks to competitive situation, we will, from now on, provide the total changes in subscribers only in the past. Only in the annual reports we will differentiate between geographies. This quarter is a little bit foggy, but from the next quarter, you will see the changes that will happen through the quarter. We will never divide it between different segments. It's what we advise to do.
Okay, great. Understandable. Thank you. I guess, another follow-up. Could you provide a little bit more color on the big jump in the product sales gross margin? I think you referenced it should normalize somewhere in the 10%-15% range. I guess, was it product mix, regional mix? What drove the big jump in the quarter, and how soon should we see that kind of downshift back to that normalized margin rate?
As we saw in the past, the product mix between quarters and between seasons along the year, just reminding you that most of the product sales are done in Israel. In the future, of course, we will have product sales from the Road Track segments. Regard Israel, the mix of product seasonality, and in this case, even declining in sales because of the holiday, still on the margins, we had a mixture which allow us to have a high gross margins. Just to be clear, this is not represent a constant gross margin as well as having some quarters with a 5% is not constant. I would like to look on something around 15% as an average gross margin for the product line.
Okay, great. Thank you. I appreciate you taking my questions.
Thank you.
The next question is from Sasha Karim of IPI. Please go ahead.
Hi. Could you please give us the rough organic growth rate for Road Track's business in the third quarter?
As we just answered the question, RoadTrack is part of the business now, and we are not differentiate between different segments in the group.
Would you even give us anything qualitatively, like it was growing faster or slower than the core business?
Practically, as we said, in Q3, the influence of Road Track was very minor on our P&L results since we are consolidating something like few days. Actually, what you see is a very major represent the historical organic numbers. In Q4, of course, it will be much more substantial, the contribution of Road Track. For Q3, what you see is quite typical to Ituran historical organic growth.
No. That's what I appreciate. I'm just trying to get a feel for going forward, once Road Track is fully consolidated in revenues, if the growth of the whole business combined should be faster or slower than before in organic terms.
Yeah. You can actually, I think, look at the pro forma numbers that we published. This, by a small summary, you can see the nine months, how it look like, and
Make your calculations.
Okay. Thank you. Then, in terms of R&D in the third quarter, there seemed to be a bit of a spike there. Could you explain and give us a feeling for what should happen going forwards?
It's mainly because the same as it's minor, is again, is some portion in Road Track, a high portion of their operational cost is from R&D. This influence was a little bit more on the total P&L, but still it's a minor strike.
In addition, due to the acquisition, there is a purchase price allocation that usually what we are making is most of it is allocated to R&D and technology. This one was depreciated for those days, and this is also a small effect on that.
Great. Thanks. Final one from me would just be, going forward in terms of the balance sheet situation, historically, you've always paid pretty high payout ratios of net income, in terms of dividends. Now that you have net debt, is there any sort of change in the speed at which you would pay out net income?
Currently, the board took a decision to continue with the dividend policy, which is representing $5 million per quarter. This is the situation today, looking forward, we can't say now. The policy is to continue with the dividend.
Great. Thank you.
You're welcome.
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. The next question is from Hajed Lennon. Please go ahead.
Hi. Thanks for taking my question, and congratulations on the acquisition. Two questions. One is, first, you are showing the pro forma in margin as at 22%, and looking at this year previously, it had been somewhere along the lines of 25%-25%. Can you give any estimate as to how soon do you think that we might see the EBIT margin back at the previous levels? How do you see it going forward?
As you mentioned, organically, Ituran was working with approximately 25% EBIT margin, and the acquired business and the acquisition, due to the segment that they are working over there, is a lower margin. The combined results together will represent a lower margin than the 25%. Of course, as a subscriber model, as long as we continue to increase our subscriber base, with this model, I don't see any reason why this operating margin would not go up.
Can you give any estimate, for example, one year from now, where we might be at?
We are not providing future forecasts, as Udi just mentioned, I think that there is a high visibility regarding our margins, and specifically based on the pro forma that we supply, you can imagine that there is no high differences and high volatility in a longer-term period.
Yes. Exactly. Just one small detail. Can you provide us with the number of shares? You provided the average number of shares, but you already know the kind of closing numbers already. It's something like 21 million and maybe 300,000. What's the exact number?
Sorry about that. We didn't understand the question. Regarding the sales, what part of the sales that is not appearing in the financial report?
The number of shares of the company. What's the current exact number?
Sorry, we are not-
You mean for the acquired business?
No, the number of shares of Ituran. It used to be 20,968,000.
Share.
Now you provided us with the average number of shares, which is a little bit + 21 million.
Okay. I get.
How about that?
It's actually almost the same. It changed with about 370,000 shares that was allocated as part of the price of the acquisition. Today, we have 370,000 shares more.
It was 21 million, and now going forward it will be around 21.3 million shares.
Exactly. Thank you.
Welcome.
Next question is from Abba Horwitz of Old School Partners. Please go ahead.
Hi, good afternoon. I have two questions. One is there any rush for you to pay down the debt? Would this hinder you from making other acquisitions, the current debt position? That's the first question. I'll give the follow one after that.
Hi, good afternoon. No, we actually have the debts under payment conditions and a contract, of course, with the bank that gave this loan. We are not in a rush to pay it back. We will take any decision whether to pay it back or not during the next years, upon our needs for money regard additional acquisition. From a financial point of view and a balance sheet point of view and a debt ratio, of course, I think that it's very easy to see that we have the capabilities. Practically and operationally, I just want to mention that in the next couple of months or the next year, we are not expecting to make acquisition, since we have a lot of work to do to create synergy and to create better results from the current acquisition.
Okay. That's great. I applaud that. Second question. I don't know if you mentioned this, I came on the call late. Did you talk about your venture capital investments? If you didn't, could you talk about them and where they are and, valuation-wise as well?
Yes. Actually, we have, I would say, main three investments. Two, where we have a very minor share, which is only to have, I would say, our footnote and relationship, and of course, the future upside. The third one, which you should be more familiar with, which is Bringg, where we hold almost 25%, and we are the largest shareholder. We already, after four years since we were the first investors, had three rounds that the valuation and the investors grow very materially. This company is doing very well. Of course, we are not published. It's a startup yet. We are not published any internal information. We are only show it in our P&L at the equity side. From my perspective, and the way that we see this company, is that we are very optimistic regard their improves and going forward.
We also have a part in a Israeli incubator, but there we are more talking about very early-stage ideas, very early-stage, if I can say, companies. At that case, we are more using it for creating future solutions that we can adopt, or as well with our partners, which is, if you don't remember, it's Honda, it's Volvo, it's Hertz, together with us, and of course, we are measuring every quarter what is the more longer-term possibilities to join forces with these technologies. This is not something that you can see on the P&L right now. It's something which is more a longer term, being at the high and excellence of the Israeli automotive technologies that are as ideas of development.
Okay. Just the Bringg investment, do you expect to IPO this investment at some point? Do you expect to completely monetize your 25%? Is there currently a value in the private market for this 25% position that you own?
The last valuation, which was less than a year ago, as far as I remember, was very close to $100 million, the valuation of Bringg. As I said, we are representing the largest shareholder. We have the major portion in the board, but it's more and more going toward the market of shipment, market of real-time shipment. I believe that if the company will continue to grow as it was in the last three years, for the next three years, no doubt that this company goal to become much larger, and in some point of time, IPO is not an ugly word. To say that this is the goal, it's not. The goal is to create, I wouldn't use the term everybody use, the unicorn, but at least a small unicorn in its field.
Okay. I'm sorry to add one more. You have a very good story to tell, especially now with the acquisition that you've done, and it's actually made your company even more valuable and more undervalued. I'm wondering, are you going to be telling this story to investors at any point? Will there be any sort of IR effort on your side?
I can't argue with you. Yes. One of the things that we are now putting more gas, pushing more forward is IR. We are going to present in a month from now, soon after the beginning of next year, at the Needham Conference in N.Y. In 2019, our goal is to be more, I would say, acting and more aggressive in being in conferences and kind of roadshows with investors around the world and, of course, specifically in the U.S. Yes, absolutely right.
Okay. Fantastic. Thank you again, and good luck.
You're welcome. 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 pull 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 at www.ituran.com. Mr. Sheratzky, would you like to make a concluding statement? One moment. We have another question on the line. Following question is from Lee Kronzon of General American. Please go ahead.
Can you update us on the joint venture, the partnership you have in India, and the progress you're making there?
Yes. Again, as we mentioned, when we established this joint venture a few quarters ago, we just are now building the local infrastructure of the joint venture. That means first we recruit the general managers and his team. We start few pilots, with some large player in the industry. We are now at the stage of some RFQs and a price list. I believe that, soon we will see some deals taking place there. The influence, again, on our financial results in 2019, I believe, or to be conservative, will be minor, but in terms of the trend that we see in India for adopting and welcoming our ideas, we are very optimistic. I think that we need at this emerging market, this big market, and this very premature market, more patient, and understanding that it's a more longer term.
Since we've been here, all of us, when we did it in Brazil, in year 2000, 2001, and the first time that we actually start reaping fruits was five years later. I believe that first we can do it faster, but still, we have a long way before it will be material or more material. No doubt that this is a very potential and attractive market for what we have to offer.
There are no further questions at this time. Mr. Sheratzky, would you like to make your concluding statement?
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. Have a good day. Bye.
Thank you. This concludes the Ituran third quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.