Ladies and gentlemen, thank you for standing by. Welcome to the Ituran First Quarter 2018 Results Conference Call. All participants are present in listen only mode. Following the management's formal presentation, instructions will be given for the question and answer 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.ituran.co.il. I would now like to turn over the call 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 Q1 2018 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr. Eyal Sharatzky, CEO and Mr.
Eli Khama, 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 would like to remind everyone that the Safe Harbor statement in today's press release also covers the contents of this conference call. And with that, Eyal, would you like to begin, please?
Thank you, Kenny. I'd like to welcome all of you and thank you for joining us today. We are pleased with our performance in the Q1, representing a solid start of 2018. At the end of the quarter, we had 1,800,000 subscribers, adding a net 21,000 subscribers during the quarter within our expected range of 20,000 to 25,000 per quarter. And that excluded the subscribers we have been adding through IRT in Brazil and Argentina in the past 2 years.
Our ongoing subscriber growth led to subscriber revenue amounting to $46,000,000 in the Q1 of 2018, a record for it to run and up 15% over last year. As you know, IRT is a joint venture with an 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 year. IRT has already been successfully operating for 2 years. As a 50% owner, we do not consolidate IRT's results into our own, including the subscriber numbers. Thus, the contribution from IoT is a part of our share in affiliates.
IoT continues to perform in line with our expectations, and we are bringing new subscribers constantly to the service. IRT has the potential for Ituran to bring additional 100 of 1000 of sales using our services in Brazil and Argentina. In fact, it positions us as the clear market leader in Brazil. I would also like to talk a little about our connected car activities. As we move through 2018, we are beginning to reap the fruits of some of our investments in the connected car technologies we have developed over the past few years.
In Israel, last quarter, I spoke about our program with Toyota, called Toyota Connect, built on our Ituran Connected Car solution, which we launched in 2017. It has already gained a few 1,000 subscribers and continues to grow each quarter. While I mentioned last quarter that we were in discussions with other car importers in Israel, we recently signed with Champion Motor, an Israeli importer Volkswagen, Siatt and Skoda to our connected car services. And we have already seen some subscribers through this service, which we expect will grow continuously. In summary, we are pleased with our performance in the Q1 and we look forward to continued strong performance in 2018 and beyond.
I will now hand the call over to Eli
for the financial review. Eli? Thanks, Eyal. Revenues for the Q1 of 2018 were $63,100,000 up 13% when compared to revenues of 56 $100,000 in the Q1 of 2017. Revenue breakdown for the quarter was $45,700,000 coming from subscription fees, a 15% year on year increase.
Product revenues were $17,400,000 which were a 7% increase over the same quarter last year. The geographic breakdown of revenues in the Q1 was as follows: Israel, 53% Brazil, 39% Argentina, 5% and United States, 3%. Gross margin in the quarter was 49.9% compared with the gross margin 50.1% in the Q1 of last year. The gross margin in the quarter on subscription fees improved to 68.4% compared with 66.1% in the same period last year. The gross margin in the quarter on product was low at 1.2% compared with 11.2% in the same period last year.
The particular low margin on product during the quarter was due to the mix of product sales in the quarter. Operating profit for the Q1 of 2018 was $15,500,000 an increase of 13% compared with an operating profit of $13,800,000 in the Q1 of 2017. EBITDA for the quarter was $19,200,000 an increase of 13% compared to an EBITDA of $17,000,000 in the Q1 of 2017. Net profit was $11,300,000 in the quarter or fully diluted EPS of 0 point $54 I note that in the Q1 of 2017, we saw a $4,000,000 gain in our share in affiliates, which was mainly due to investment rounds at Brink at higher valuation than our original investment. Thus, our Q1 2017 net income was $13,000,000 including this income, which translates to a fully diluted EPS of $0.62 Cash flow from operations during the quarter was $7,500,000 As of March 31, 2018, the company had net cash of $38,200,000 or 1 point $8.2 per share.
This is compared with $40,400,000 or $1.93 per share at the end of the year 2017. I note that its run paid out to shareholders a cash dividend of 5
$1,000,000 during the Q1.
For the Q1, a dividend of $5,000,000 was declared in line with the policy of distributing at least $5,000,000 per quarter. The dividend record date is June 26, 2018, and the dividends will be paid on July 11, 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 you. The first question is from Eitan Etzioni of Etzioni Portfolio Management. Please go ahead.
Congratulations on a good quarter. First question, please, can you refer to the situation in Latin America currency and economy, how that's affecting you, particularly in the Q2 going forward?
In general, of course, we need real and Argentina and peso stronger. Since we are working on an average currency exchange rate per quarter, I believe that it will not have a very material effect in Q2. Practically, we need to run for the always, it has some influence, but I believe it will be minor, but it will be.
And going forward, if the exchange rate stays where it is now?
If it's stairway is now. So what the numbers that are converting to dollar now will continue to convert into dollar. But practically saying we faced in Brazil about 2 years ago even much more dramatic fluctuation. And still, as you can look backwards in the results and you see that the influence didn't create problem and we continue to grow with the profits, with the profitability and with the all margins in our results, which we expect to be in the future. But of course, this is one of the disadvantages while you are working in markets which has, let's say, kind of exotic currencies, by the way, and this is important to be mentioned.
We are working in local currencies in our cost, expenses as well as revenue. So the translation goes to dollar. But on the operational side, we are working with local currencies.
Right. I understand. And Argentina as well, you don't see a material impact?
No, because Argentinian contribution to our P and L is a few percentages. So the influence is very, very minor. Again, just to send you back exactly a year ago, February 2017, there was a 40% fluctuation in one day. And the influence on the same quarter for us was very minor. So it was much worse case than now.
This is, again, because Argentina results is less than 5% of our total results.
Okay. Second question please with regard to the margin on the product side, it seems to be a little lower. Can you please explain?
Yes. By the way, again, this is something that we always had some volatility in the margins, but the main aspect is a mix of product sales. But I would like to add some information. As I mentioned by myself in my speech, and it started a few quarters ago. Ituran is not considering only stolen vehicle recovery services company.
We are added we added connected car solutions, accident notifications features, more fleets, management and driver diagnostic solutions, which increased a little bit the cost of the unit. On the other hand, in order to continue being attractive for getting subscribers, which in the end of the day is a much more profitable and recurring revenue solution. So we sometimes give up for the margins. It's this is the main reason.
I understand. And on the share of affiliates, is this the $700,000 this quarter. Is that kind of the representative run rate? Or should we
This mainly built on 2 or 3 main items. The 2 main items are IRT and on the other hand, our share in the expenses of the very successful startup Bring, which increased its burn rates, and we have to take our share with this with its P and L. So practically, this
is the 2
aspects. I cannot measure exactly, but it seems that in the next, I would say, coming quarter or 2, it should be some expected numbers.
Can you break out ILT?
No, we are not doing it publicly. Okay. Thank you. Thank you.
The next question is from Charles Eliot of Inflection Point. Please go ahead.
Hi. Just a follow-up on the product margin. Is it possible you would go into loss for this side to feed the growth of the rest of the business?
We couldn't hear you very clearly. Can you hear
me better?
Is it on another question on product margin? I appreciate that this is to feed the profitability of the rest of the business. But is it possible that your product side would go into negative margin to feed the growth of the rest of the company?
Practically, in the last 23 years of Ituran operation, I don't remember that we or at least based on our strategy, we never sell any product in losses. But theoretically, per quarter or per event or per campaign, it can happen. But we prefer and we'll do our best, and our strategy is always to sell the product with profits. We have to understand that most of the sales are in Israel because in Latin America, which is our next major market, we are selling it like we lease the hardware. So we're talking about sales in Israel.
And as I expect as I said, most of the reasons of changing in the gross margin on the product is because the product today includes much more features that we can add on to the services and to our ARPU recurring revenues. So in sometimes, we're giving up some raising in the revenue price in order to keep the same customer growth. But we are not expecting or we are not strategically work with Selic in losses.
The next question is from Sasha Khan of IPI. Please go ahead.
Hi. First question on your net subscriber growth of 21,000. Does that include any
No, not at all. IRT, since we hold only 50% in this joint venture, So based on the accounting policy, we cannot or we are not allowed to consolidate any details, and it also means that we are not providing any data regarding subscriber base of this joint venture. So the numbers, the 21,000, it's fully done by Ituran.
Perhaps maybe you can just talk qualitatively because, obviously, the growth in net subscribers has gradually been falling over the last few quarters. But if you were to include the contribution from premium IRT subscribers, I. E, those after year 1, should we assume that there isn't really a slowdown in general in the sort of quarterly traction there?
Practically, there was some cannibalism, I would say, at the beginning in Brazil since some percentage of Ituran customers came from cars that was sold by this car manufacturer. But since we started it 2 years ago, we more faced it at the beginning. And when you are looking today compared to the last quarters, I don't think, to be honest, that this is the reason of a little bit reducing in growth. I would more say that it's because of some things happens in Latin America, economic situation, which influence on insurance frauds and things like this. We are more tied with decision which customer to add to our customer base.
It's something that we do in purpose. We also found some solutions to do in order to come back to higher numbers of subscribers than this 20,000 or 21,000, And this is the main reason.
Can you give us a rough indication of what range you'd be comfortable to expect going forward for quarterly net additions?
Since we are still in the range and we still believe that this range is something that we live quietly with, So we are not changing it.
Can you remind me, is it 20,000 to 35,000?
20,000 to 25, It's even easier to say 80,000 to 100,000 on an annual basis because when you have almost 1,200,000 subscribers, sometimes you can miss 1,000 or 2 per quarter, but on an annual base, I would say that 80,000 to 100,000 is something that we live in a very good confidence about it.
Great. Thank you.
There are no further questions at this time. Before I ask Mr. Sharatsky 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. Sharatzky, 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. And I look forward to speaking with you next quarter again. Have a good day.
Thank you. This concludes the Ituran's Q1 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.