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. 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 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. Ehud Helft , would you like to begin?
Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to discuss the second quarter 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, 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 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?
Thank you, . I would like to welcome all of you, Thank you for joining us today. We are pleased with our business and operational performance in the second quarter, 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 one quarter. In local currency terms, revenues would have grown by 7% overall and 9% from subscription fees over Q2 last year, net profit would have grown by 25%. Our growth is primarily driven by bringing new subscribers. We ended the quarter with 1.2 million subscribers. We added 17,000 net new subscribers in the quarter. This was below the typical range of between 20,000 and 25,000 per quarter, 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 terms of risk, which will ultimately allow us to improve the margins. During this process, While upgrading the systems, we lowered the pace of recruitment of new customers. Now we are completing development of the new process, 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 $91.7 million cash and shares, valuing the company at $113 million. 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 car maker in Brazil and in Argentina, providing their customers with telematics services on various new car models they sell for the first six months. Until now, 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 $1.5 million in the second quarter. Looking ahead, after closing, we will own a little over 90% of IRT, and therefore IRT's financial will be fully consolidated into our own as well as 81.3% of Road-Track 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 1.8 million subscribers with a revenue run rate of around $400 million. 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 have a much stronger platform for penetrate further car manufacturer OEMs beyond the two we both are already working with. We've worked closely with Road-Track for a number of years now. 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 third quarter. I am very excited to embark on this new era for Ituran. In summary, we are pleased with our business performance in the second quarter as well as our strategic performance, and we look forward to continued growth over the quarters and years to come.
I will now hand the call over to Eli for the financial review. Eli?
Thanks, Eyal. Revenues for the second quarter of 2018 were $57.7 million compared to revenues of $57.4 million in the second quarter of 2017. As Eyal mentioned earlier, the significant strengthening of the US dollar versus the Brazilian real and the Argentinian peso during the second quarter versus the prior quarter, as well as the second quarter of 2017, reduced the overall revenue level in US dollars and impacted the growth rate of the revenue in US dollar terms. Excluding the exchange rate impact in local currency terms compared with those of the second quarter of 2017, the increase in revenue would have been 7%. Revenue breakdown for the quarter was $41.5 million coming from subscription fees versus $41.7 million last year. Excluding the exchange rate impact, the revenue from subscription fees would have grown 9%. Product revenues were $16.2 million versus $15.7 million last year.
The geographic breakdown of revenues in the second quarter was as follows: Israel 55%, Brazil 36%, Argentina 5%, and USA 4%. Excluding the exchange rate impact, the gross profits would have increased by 3% this quarter. Gross margin in the quarter was 50.1%, compared with a gross margin 52.6% in the second quarter 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 second quarter of 2018 was $14.8 million, compared with an operating profit of $14.2 million in the second quarter of 2017.
Excluding the impact of the change in exchange rate over the period, the operating profit would have increased by 15% over the second quarter of 2017. EBITDA for the quarter was $17.8 million compared to an EBITDA of $17.4 million in the second quarter 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 million in the quarter of fully diluted EPS of $0.57, compared with net income of $10.4 million, or a fully diluted EPS of $0.50. Excluding the impact of the change in exchange rates, as described above, the net profit would have increased 25% over the second quarter of last year. Cash flow from operations during the quarter was $12.4 million. As of June 30, 2018, the company had net cash of $37.4 million, or $1.78 per share.
This is compared with $40.4 million or $1.93 at year-end 2017. For the second quarter, a dividend of $5 million was declared in line with the policy of distributing at least $5 million per quarter. The dividend's record day is September 26, 2018, and the dividend will be paid on October 10, 2018, net of taxes and levies at the rate of 25%. With that, I'd like to open the call for a question 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 *1. If you wish to cancel your request, please press *2. If you are using speaker equipment, kindly deaf the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull through your questions. The first question is from Brett Jordan of Jefferies. Please go ahead.
Hi. Good morning, guys.
Good morning.
Can you hear me?
Yes.
A quick question on the subscriber growth. I guess, 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? 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. 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 on purpose. I'm not sure that everybody were with Ituran around six years ago when we did almost the same, when we shift to the retail segments. 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 a typical one price to something which is more flexible, more fitting specific customers, which will allow us, by the way, as we believe, to penetrate more aggressively the market. 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. We are just started with full power back to the market. We believe that we will ramping up the new subscribers growth. 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. Regarding the output, the output itself didn't change.
We are not expecting the output to change, 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. I guess some housekeeping, what should we assume for a tax rate? Obviously, that was very good SG&A spend control. Do you have a thought as far as SG&A rate for the balance of the year?
Regarding taxes, you mean the corporate taxes, or I don't understand.
Yeah, the corporate tax rate. What should we be modeling for the corporate tax rate?
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, sometimes it's lowering by specific occasions. I would say that on average and in longer and mid-terms, always we consider it as 30%.
Okay, great. Thank you very much.
On annual basis, of course.
Okay, yes.
The next question is from Eitan Itzioni of Itzioni Portfolio Management. Please go ahead.
Yes, thank you. I wanted to ask about the profit from share and affiliate. I see it was this quarter, $1.5 million versus $0.7 million in the prior quarter. I want to ask what has changed there, and how should we look at it going forward?
Mainly because of the joint venture, the IRT issue, the total number grew, so of course, the parts of the affiliates grew as well.
The profit from first quarter to second quarter more than doubled. How did that happen?
Yes. It's almost more than doubles. Basically, because of the IRT trends. Again, there's some volatility also among the regions between Argentinian IRT, the Brazilian IRT, and the sales of the hardware to the car manufacturers, and at Q2, which was, yes, higher than Q1, as you can see.
There was no one-time item there, no sale revaluation?
No.
Just everything is from current business.
Yes.
Should we assume that you can continue to grow this item going forward?
Hopefully. That it won't be in Q3, actually. In the future, we are very expecting to grow. This is one of the reasons that we decide to acquire RoadTrack, from Q4 and ahead, you will see it part of all the consolidated numbers from revenue to the bottom line. Of course, the share of affiliates will increase because of RoadTrack minor shareholders. You will see the numbers, and we hope that we will continue to grow. That's what we expect.
Okay. Thank you very much.
Good luck.
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 your questions. There are no further questions at this time. Before I ask Mr. Sheratzky 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.il. 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 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 second quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.