Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Second Quarter 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. As a reminder, this conference is being recorded.
You should have all received by now the company's press release. If you have not received it, please contact Ituran's Investor Relations team at GK Investor and Public Relations at 1-six forty six-six eighty eight-three thousand five hundred and fifty nine or view it in the News section of the company's website, www.iteran.co.il. I would now hand the call over to Mr. Gabriel Froine of GK Investor Relations. Mr.
Froine, would you like to begin?
Thank you, operator. Good day to all of you, and welcome to Intron's conference call to discuss the Q2 2018 results. I would like to thank Intron's management for hosting this conference call.
With me today on the call
are Mr. Eyal Sharadzky, CEO and Mr. Eli Commerce, CFO. Eyal will begin with a 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 in the press release also covers the contents of this conference call. And now Eyal, would you like to begin?
Thank you, Gabriel. I would like
to welcome all of you
and thank you for joining us today. We are pleased with our business and operational performance in the Q2. Even though growth in the financial result was hidden due to the substantial 11% devaluation in the Brazilian real and 19% devaluation in the Argentinian peso in 1 quarter. In local currency terms, revenues would have grown by 7% overall and 9% from subscription fees over Q2 last year, and net profit would have grown by 25%. Our growth is primarily driven by bringing new subscribers.
We ended the quarter with 1,200,000 subscribers. We added 17,000 net new subscribers in the quarter. This was below the typical range of between $200,000 $25,000 per quarter, and I want to spend a few moments explaining this. Over the past quarter in Brazil, we have worked closely with some of the insurance companies to make some changes to the way we recruit new customers and to move to a more differential pricing model that reflects the inherent risks of each customer. This is similar to a process we conducted a few years ago.
The goal is that the price that each customer pays will reflect its profile in term of risk, which will ultimately allow us to improve the margins. During this process and while upgrading the systems, we lowered the pace of recruitment of new customers. Now we are completing development of the new process, and we are restarting recruitment with full force again. We believe it will take a few more months until we see the full positive impact of the changes we have made, and we expect that we will be back to our normal pace in subscriber growth in early 2019. The most important event of the quarter was our acquisition of Road Track Holdings.
We acquired 81.3% for 91 $700,000 cash and shares valuing the company at $113,000,000 As you know, Road Track has been our partner in our Brazilian joint venture, IRT, for a number of years. IRT is on OEM agreement with a global auto carmaker in Brazil and in Argentina, providing their customers with telematics services on various new car models they sell for the 1st 6 months. Until now, we are a 50% we were a 50% owner, so we didn't consolidate IRT's results into our own, including the subscriber numbers. The contribution from IRT is a part of our share in affiliate, which amounted to $1,500,000 in the 2nd quarter. Looking ahead, after closing, we will own a little over 90% of IRT, and therefore, IRT Financial will be fully consolidated into our own as well as 81.3% of road trucks outside of Brazil and Argentina.
Share in affiliates will become negative, taking into account the portion we do not have control over. On closing, we will also have around 1,800,000 subscribers with a revenue run rate of around $400,000,000 Beyond the immediate financial impact, the acquisition gives us many points for growth synergies, and I see this as a truly game changing acquisition for Ituran. It brings us the ability to grow and penetrate our services in new countries in which we previously didn't have a foothold. Together, we also had a much stronger platform for penetrate further car manufacturer OEMs beyond the 2 we both are already working with. We've worked closely with Road Track for a number of years now and in the past few weeks since signing the agreement.
We have already started working closely with them, identifying many opportunities that we can jointly go after. I am very optimistic that joining forces with Road Track will lead to many new business opportunities for growth in the future. We expect the acquisition to close in the coming weeks during the Q3, and I'm very excited to embark on this new era for Ituran. In summary, we are pleased with our business performance in the Q2 as well as our strategic performance, and we look forward to continued growth over the quarters years to come. I will now hand the call over to Eli for the financial review.
Eli?
Thanks, Eyal. Revenues for
the Q3 of 2018 were $57,700,000 compared to revenues of $57,400,000 in the Q2 of 2017. As Eyal mentioned earlier, the significant strengthening of the U. S. Dollar versus the Brazilian real and the Argentinian peso during the Q2 versus the prior quarter as well as the Q2 of 2017 reduced the overall revenue level in U. S.
Dollars and impacted the growth rate of the revenue in U. S. Dollar trends. Excluding the exchange rate impact in local currency trends compared with those of the Q2 of 2017, the increase in revenues would have been 7%. Revenue breakdown for the quarter was $41,500,000 coming from subscription fees versus $41,700,000 last year.
Excluding the exchange rate impact, the revenues from subscription fees would have grown 9%. Product revenues were $16,200,000 versus $15,700,000 last year. The geographic breakdown of revenues in the 2nd quarter was as follows: Israel, 55% Brazil, 36% Argentina, 5% and USA, 4%. Excluding the exchange rate impact, the gross profit would have increased by 3% this quarter. Gross margin in the quarter was 50.1% compared with a gross margin 52.6% in the Q2 of last year.
The gross margin in the quarter on subscription fees improved to 67.7% compared with 66.9% in the same period last year. The gross margin in the quarter on product was 4.9% compared with 14.6%
in the
same period last year. The lower gross margin on product was due to the mix favoring more complex products being sold supporting our service revenues. Operating profit for the Q2 of 2018 was $14,800,000 compared with an operating profit of $14,200,000 in the Q2 of 2017. Excluding the impact of the change in exchange rate over the period, the operating profit would have increased by 15% over the Q2 of 2017. EBITDA for the quarter was $17,800,000 compared to an EBITDA of $17,400,000 in the Q2 of 2017.
Excluding the impact of the change in exchange rates over the period, the EBITDA would have increased by 12%. Net income was $12,000,000 in the quarter or fully diluted EPS of $0.57 compared with net income of $10,400,000 or a fully diluted EPS of $0.50 Excluding the impact of the change in exchange rate as described above, the net profit would have increased 25% over the Q2 of last year. Cash flow from operations during the quarter was $12,400,000 As of June 30, 2018, the company had net cash of $37,400,000 or $1.78 per share. This is compared with $40,400,000 or $1.93 at year end 2017. For the Q2, a dividend of 5,000,000 dollars was declared in line with the policy of distributing at least $5,000,000 per quarter.
The dividend record date is September 26, 2018, and the dividend will be paid on October 10, 2018, net of taxes and levies at the rate of 25%. And with that, I'd like to open the call for a question and answer session. Operator?
Thank The first question is from Bret Jordan of Jefferies. Please go ahead.
Hi, good morning guys.
Good morning. Can you hear me? Yes. The
a quick question on the subscriber growth. I guess, could you the 17,000, could you address the impact from that risk adjustment process you made in South America? Just to sort of quantify how much of the subscriber growth was impacted? And then I guess secondarily, if you think about monthly revenue per subscriber, was there any impact there as a result of that shift as well?
Actually, during the quarter, we are not providing subscribers trend per region, but I can say something general following the explanation is that the most material, I would say, decreasing in the trend and in the growth came from this change in Brazil. As I said, it's something that we controlled. It's something that was in purpose. I'm not sure that everybody were with Ituran around 6 years ago when we did almost the same when we shift to the retail segments, and we did almost the same in order to, I would say, create a different quality of subscribers risk, which will allow us and the insurance companies that support the policies that we are offering the market with a much higher confidence and much higher margins. As I explained, we changed from typical one price to something which is more flexible, more fitting specific customers, which will allow us, by the way, to, as we believe, to penetrate more aggressively the market.
And since this, every change takes some time. We are already in this situation during 2018, a little bit more than the last two quarters. We just finished to build the system, the technology in terms of IT, the marketing preparations, and we are just started with full power to back to the market. So we believe that we will ramping up the new subscribers growth. And as I said, we believe that during the beginning of 2019, we will be hopefully back with the same trend that we had in the past.
Do you regard the ARPU? Is the ARPU itself didn't change. We are not expecting the ARPU to change, but we believe that we will create higher margins between the cost and the policies that we are actually buying compared to the prices that we are charging.
Okay, great. And I guess on housekeeping, what should we assume for a tax rate? And obviously, that's very good SG and A spend control. Do you have a thought as far as SG and A rate for the balance of the year?
Regard taxes, you mean the corporate taxes or I don't understand Yes,
the corporate tax rate for the what should we be modeling for the corporate tax rate?
No, the corporate tax rate is, I believe, we always should consider something like overall 30%. Sometimes we have some volatility if we have some one time event or something like this. And sometimes it's lowering by specific occasions. But I would say that on average and in longer and midterms, always we consider it to 30%.
Okay, great. Thank you very much.
On annual basis, of course.
Okay, yes.
The next question is from Ethan Asione of Etzioni Portfolio Management. Please go ahead.
Yes, thank you. I wanted to ask about the profit from share in affiliate. I see it was this quarter $1,500,000 versus $7,000,000 in the prior quarter. I wanted to ask what has changed there and how should we look at it going forward?
Mainly because of the joint venture, the IRT issue, that's the total number grew. So of course, the parts of the affiliates grew as well.
So the profit from Q1 to Q2 more than doubled? So how did that happen?
Yes. It's almost more than doubled basically because of the IRT trends. Again, there's some volatility also among the reasons between Argentinian IRT, the Brazilian IRT and the sales of the hardware to the car manufacturers. And at Q2, it was, yes, higher than Q1 as you
can see. There was no one time item there, no sale revaluation?
No, no.
Just everything is from current business? Yes. And should we assume that you can continue to grow this item going forward?
Hopefully, that it won't be in Q3 actually. But in the future, we are very expecting to grow. This is one of the reasons that we decided to acquire Road Track. And from Q4 and ahead, you will see part of all the consolidated numbers from revenue to the bottom line. And of course, the share of affiliates will increase because of road truck minor shareholders.
But you
will see
the numbers, and we hope that we will continue to grow. That's what we expect.
There are no further questions at this time. Before I ask Mr. Shirazske to go ahead with his closing statement, I'd like to remind participants that a replay of this call will be available tomorrow on Ituran's website, www.ituran.co.im. Mr. Shervatsky, would you like to make your concluding statement?
Yes. On behalf of management of Futurana, I would like to thank you, our shareholders, for your continued interest and long term support of our business. I look forward to the close of our acquisition of Road Track in the coming weeks. And beyond that, we will speak with you next quarter. Have a good day.
Thank you. This concludes the Ituran's Q2 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.