MICT, Inc.
Q1 2018 Earnings Call Transcript

Published: 15 May 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Micronet Enertec First Quarter 2018 Results Conference Call. All participants are at 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. I'd now like to hand over the call to Dilek Mir of Corporate Profile. Dilek, please go ahead.

[Dilek Mir:]

Thank you. Good morning and thank you for calling in to review Micronet Enertec’s first quarter 2018 results. Management will provide an overview of the results followed by a question-and-answer session. Importantly, there is a slide presentation, which management will use during our overview. This presentation can be found on the Investor Relations section of the company Web site under Events & Presentations. You may also access a PDF copy of the presentation by clicking the link in the company’s press release regarding these financial results issued this morning and then clicking a second link labeled Q1 2018 results. Callers accessing the PDF copy of the presentation will need to manually scroll through the slides, as management goes through the presentation. I will now take a brief moment to read the Safe Harbor statement. During the course of this call, management will make express and implied forward-looking statements within the Private Securities Litigation Reform Act of 1995 and other U.S. federal securities laws. These forward-looking statements include, but are not limited to, those statements regarding the expected sale of our aerospace and defense business Enertec that we believe the sale of Enertec will fortify our balance sheet and enable us to expand our MRM offerings that we see demand continuing to grow for Micronet’s products as the Electronic Logging Device or ELD mandate nears. Our plans for new MRM products, including Software-as-a-Service or SaaS products, that as Micronet delivers on higher volume, we will continue to see top line improvement, our expectation that Micronet will see continued demand for its products in the second quarter of 2018, our strategy to increase market share in Europe. Our expectations regarding fulfillment of backlog, pipeline and future growth that we believe that Enertec's defense business is in a strong position in the marketplace and has the potential for growth. Our belief that the combination of our existing backlog and potential new orders should improve our top line and gross margin numbers that we are broadening our portfolio of products to address additional target market segments in the MRM market to drive our expansion and other trend information. Such forward looking statements and their implications involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. The forward looking statements contained in this presentation are subject to other risks and uncertainties, including those discussed in the risk factor section and elsewhere in the company’s Annual Report on Form 10-K for the year ended December 31, 2017 and in subsequent filings with the Securities and Exchange Commission. Please note that the date of this conference call is May 15, 2018 and any forward looking statements that management makes today are based on assumptions that are reasonable as of this date. Except as otherwise required by law, the company is under no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. During this call, in addition to the GAAP financial measures, management will discuss non-GAAP financial measures as defined by SEC Rule G, including non-GAAP net loss and income. These non-GAAP measures exclude share-based compensation expenses, the amortization of intangible assets and the amortization of note discount. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to GAAP results and we encourage you to consider all measures when analyzing Micronet Enertec’s performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in today’s press release regarding our quarterly and annual results and can also be found in the Investor Relations section of our Web site at www.micronet-enertec.com/ir-company. The slides containing the first quarter results reconciliation can also be found in the Investor Relations section of our Web site also at www.micronet-enertec.com/ir-company. On our call this morning, we have David Lucatz, Chairman, President and Chief Executive Officer of Micronet Enertec; Tali Dinar, Chief Financial Officer of Micronet Enertec; and Dudy Markus, Chief Executive Officer of Micronet Ltd. And again, as a reminder, management will be referring to a slide presentation that can be accessed via the Investor Relations section of the company’s site or the link in the press release. We will start with an opening message from David, who will give an overview of the business developments for the quarter ended March 31, 2018, then we will move to review the numbers with Tali, and we will wrap up with Q&A. I will now turn the call over to David, who will begin the presentation on Slide 3. Please go ahead David.

[David Lucatz:]

Thank you, and good morning, everyone. We are very pleased to report that the first quarter of 2018 was an excellent quarter for Micronet, marked by improvements in the key indicators, including substantial year-over-year increase in revenue and gross margins. During the quarter, we have been shipping products from our backlog to current and new customers. In our ongoing MRM operation, we are pleased to report substantial growth in revenue and gross margin. Revenue for the three months ended March 31, 2018 were $5.98 million, 121% increase over Q1 2017 revenue of $2.7 million. Gross margin increased to 29% in Q1, 2018 from 14% in Q1, 2017. The revenue increase is due to increased volume of new Micronet products shipped mainly [indiscernible]. Our MRM backlog was $4.7 million as of March 31, 2017 and we did it on a consolidated revenue backlog of $14.5 million for the quarter ended March 31, 2018. We expect demand will continue to grow for Micronet products as the [indiscernible]. Micronet is diversifying its customers base and strengthening its reputation as a provider of reliable rugged solutions. We saw significant top line improvements at Micronet, [indiscernible] producing and shipping including quantities of its new products. We expect this trend to continue in the coming quarters. Moving to Slide number 4. Slide number 4, represent the market status and business development for Micronet. Our strong pipeline and our revenue backlog for the MRM business was $4.7 million as of March 31, 2018 with a growing number of customers evaluating our products in the field. We believe that our MRM product and solutions was very well received last month in Paris at the SITL exhibition, an important international trade show for the MRM business. Exhibiting [ph] at the SITL is in line with our strategy to increase market share in Europe. Our first quarter 2018 revenue were driven by the fulfillment with prior orders which resulted in the improvement of revenue and gross margin. Micronet has received purchase order in April 2018 and we expect continued demand for its product in the second quarter of 2018 and [indiscernible]. Mobile device management or MDM monetization is improving with SaaS offering resulting in revenue of over $300,000. We are building a foundation to upgrade this value added reseller or VAR, and distribution channels. We are launching marketing efforts in Europe with Big TSP's and a market service provider to enhance our position in the marketplace. We continue to have ongoing integration, recruitments, and partner meetings. Our strategic partnership initiatives include exploring video integration and application integration. On Slide 5, Enertec's revenue for the first quarter of 2018, were approximately the same as the first quarter of 2017, at $2.6 million. Enertec showed an improvement in all parameters, including gross margin which increased to 25% as compared to 12% in the same quarter of 2017 and a positive operating profit as compared to a loss in the third quarter of 2017. [Indiscernible] that during the third quarter, Enertec announced $1.6 million purchase order with a Fortune 50 medical device company, in a follow-on orders for fully automated testing system for the medical calibration device treating heart rhythm disorders. Enertec had a backlog of approximately $9.7 million as of March 31, 2018. Enertec is working to transition from 2-year project to 1, and 1.5 year projects. And we expect a significant increase in medical sales should contribute higher profitability in 2018. For the Command & Control shelters, we expect strong potential following good performance in 2017 deliveries, while [indiscernible]. We believe that Enertec's business is in the core position in the marketplace and its medical business shows potential. As previously announced and according with our roadmap to increase the value of our company by focusing our resources on the MRM space, we have entered into sales agreement with Coolisys Technologies, Inc. to sell Enertec. The parties are working towards completing the closing condition related to the bank approval for this change of control. I will now turn the call to Tali for a financial review. Tali?

[Tali Dinar:]

Thank you, David, and good morning, everyone. Slide 6 shows our revenues for the first quarter of 2018, as compared to first quarter of 2017. Revenues were $5.98 million in Q1 2018, a 121% increase from $2.7 million in Q1 2017. The increase in revenues is mainly due to increased shipping on orders for Micronet MRM products and services. Slide 7, provides a detailed breakdown of the numbers. Gross profit margins were 29% in Q1 2018, as compared to 14% in the same quarter of the prior year. The increase in overall gross margin was related to Micronet increasing sales volume. R&D expenses were up on a dollar basis, but down 14% on a percentage of sales basis, as compared to the prior year. In Q1 2018, selling, G&A expenses were relatively consistent on a dollar basis compared to Q1 2017, as were significantly lower as a percentage of sales as compared to the year-ago period. Net loss from continued operation for the 3 months ended March 31, 2018 was $1.85 million, as compared to $1.7 million for the 3 months ended March 31 2017. On a per basic and diluted share basis, net loss from continued operations narrowed to $0.11 in Q1 2018, as compared to $0.16 in Q1 2017. On Slide 8, you will see that non-GAAP net loss from continued operations for the 3 months ended March 31, 2018 was $725,000, as compared to $853,000 in the 3 months ended March 31, 2017. Turning to Slide 9 on our balance sheet, we had $3.6 million in cash and cash equivalents, $5.3 million in working capital, and $5.7 million in shareholders’ equity as of March 31, 2018. I will now turn the call back over to the operator.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] The first question is from Craig Boots [ph]. Please go ahead.

[Unidentified Analyst:]

Yes, I would just, I guess, I’d like a little more clarity on when we might be closing the Enertec deal? I know there seems to have been a delay based on your estimation on the last earnings call that we'd probably get it done in two to three weeks and obviously that’s went by a couple of weeks ago, and I guess in this one and what the delay might be and if you would have any timetable as to when we might be closing the deal?

[David Lucatz:]

Sure. Hi. First of all, last time I said two weeks, not two to three weeks. But a few weeks and right now since last time we completed most of the thing, we feel -- as I said, working to complete the closing condition related to the bank. This is about the only thing which is still open. I have no -- I cannot estimate, because bank have their own speed. But this is where we’re right now.

[Unidentified Analyst:]

So there isn't any difficulties that they were -- the company that’s buying from us, they were pleased with the financial results that they’ve seen on Enertec, they’re not trying to renegotiate or anything like that?

[David Lucatz:]

Based on what I know there is nothing like that. And again, what we are doing right now is dialoguing with the bank, since we need their approval for this transaction, and we’re working on it. So other than that I cannot give any more information.

[Unidentified Analyst:]

Yes, I guess, what I was really asking then the initial agreement that they made with us, they’re not trying to alter [ph] the agreement or anything like that, they’re basically going to keep the same agreement than it is just a matter of waiting for the banks approval.

[David Lucatz:]

Again, I cannot speculate on the other party, but I cannot -- I can tell you based on what I know right now, nobody told me that they want to back from the agreement. So as I said, the major thing we need to achieve now is getting the approval of the bank.

[Unidentified Analyst:]

Okay. However, that answers that part of my question. I guess the only other thing I’m wondering is I know we had an $0.11 share loss this quarter. I know that didn’t narrow from the previous quarter. I guess, I was expecting more narrowing of the loss and I guess what I’m wondering is that what point we either breakeven or start to turn to profit?

[David Lucatz:]

Well, it's a -- again, I cannot speculate or focus on when it go back to profitability, we’re working on it and as I said previously, we see the improvement on parameters, so we see the trend continuing to go -- moving forward. But there are some other open question like how the market behave and how the product -- new product will behave in. So, all in all, we cannot focus on when we are going to move into profitability. But as I said, the positive side of this we see a significant improvement in all parameters.

[Unidentified Analyst:]

And then on previous -- I don’t know if it was the last call or the one before, you seem to be indicating, maybe Q2 or Q3 that we may actually turn the corner and start becoming profitable. I know you’ve kind of answered me already, I’m -- guess, I’m just wondering is that original assessments still fairly accurate?

[David Lucatz:]

Honestly I don’t -- I cannot recall what I said in three quarters ago, but as I said, just now we are looking forward. We see good indication. I cannot give you an exact time when we will [indiscernible].

[Unidentified Analyst:]

Okay. I guess, the only other thing going back to the Enertec question, it's somewhat related to that. If something would break down with that agreement, how are we going to be able to get by with our cash that we’ve on hand? I mean, is there going to be a need to raise more cash through selling more shares to -- I think its [indiscernible] or something I’m not really sure with the name that we’ve been have in the share agreement with, but are we going to need to raise more cash if we are not able to close the deal with Enertec?

[David Lucatz:]

I will say that we’re always looking to raise some more cash just from to stabilize our plan, growth plan. And if we not have this deal, if nothing happen, it will break, then we need to [indiscernible] position and see what we’re going to do moving forward. One thing, which -- if you mentioned, one thing which I want to point out that, if you look at the Enertec performance in the first quarter and our focus -- if this performance continue, we can say that Enertec have a very positive parameter [ph] already in fiscal [ph].

[Unidentified Analyst:]

Right. Again, it sounded like Enertec was doing better, so I mean, even if it didn’t go through, obviously, we are still turning the corner with Enertec as well as Micronet, I mean both whom should be profitable in the near future?

[David Lucatz:]

I’m really [indiscernible] by that remark. We cannot -- we don’t give guidance or anything about the future, but as you can see from the first quarter we believe that the trend will continue.

[Unidentified Analyst:]

Right. Not as much for Enertec as it would be for Micronet, I guess, I’m just -- looking obviously we are going towards positive with Micronet, but it also appears that way with Enertec in your mind as well?

[David Lucatz:]

Yes. Yes, -- based on the current backlog of Enertec and the change in the company, yes, we have a -- yes, we believe that the next quarter will be in the same -- have the same parameter, positive.

[Unidentified Analyst:]

Okay. Sounds good. Thank you much.

[David Lucatz:]

Thank you.

[Operator:]

The next question is from William Velmer of S.A Advisory. Please go ahead.

[William Velmer:]

Yes, I’m just curious, you kind of explained on your longer conference call as well as your presentation that the aerospace division looks like it's turning the corner, backlog is strong, business is strong, why do you really want to even sell the division? I mean, it's been going on for months, DPW, who knows they’re going to come up with the cash or not, their business seem to be a breakup fee. Why don’t you just pull out? I mean, I don’t really understand why you crawl about how wonderful the division is doing, but why you’re trying to sell it?

[David Lucatz:]

So, you know, it's a -- don’t answer it -- I don’t want to go into issues like strategy and so on, but you to take it back couple of quarters ago where the management decided to focus on the MRM business and not because necessarily the business was bad, but because we want to focus our resources. We are not a big company at this moment. Same [indiscernible] if anything happened and again at this very moment we don’t know anything that -- we don’t focus or know anything that’s going to happen, except for getting the bank approval which we don’t have right now. But if anything will happen, then we will -- we need to restrategize and see what the position. I definitely agree with you that the parameters indications of financing are positive and getting more positive than we even expected, that’s correct. But we are still not in this point at this very moment.

[William Velmer:]

But where are you -- I mean, when do you pull the plug? I mean, this thing has been going on for months. When is [indiscernible] there, there isn't a breakup period -- there isn't breakup fee, why don’t you just pull the plug if you want to sell it, find somebody who really wants to buy it, who can come up with the money. I mean, this was suppose to close back in March of this year and here we’re into May, and now it’s the bank's issue, it's not really your issue, its transferring the debt from you to them, so obviously they must have -- the bank must have issues with them whether they can carry the debt or how they’re going to raise the money even though we know they’re raising money. I mean, I just -- I mean, you’re contradicting yourself with your presentation and your documentation about the aerospace division. I’m assuming that also includes your medical device, that also goes with the sale or is that stay with the company?

[David Lucatz:]

Kind of a package there, few question in one question. So I will try to address one-by-one and …

[William Velmer:]

Okay. All right.

[David Lucatz:]

… first question I already agreed, I mean, at this very moment formerly legally we are in a process that need to be completed. Again, I don’t go into all the details about that at this very moment, we are looking forward to get the bank approval which we might get. There were always chance, we do not get it, okay? But once we get it, then we know if we have a deal or not, that’s one thing, okay? Secondly, I don’t -- I disagree with you that we contradict our self because first of all I would rather be in such a position that the two division are doing okay, rather than division of Enertec is doing bad and then we have to sell it. So we don’t contradict our self because our strategy was very clear that we believe that the potential in MRM is good. Obviously, the potential of Enertec seems to be better than we even expected. And again, if there were not be a deal, we need to sit down and explore -- examine our strategy and plan what to do moving forward. But at this very moment, again, we have a legal position here and we didn’t get any feedback as I said or any input from the buyer who want to back out from the deal. And we need to give it a chance to finish it.

[William Velmer:]

I know, but when do you pull the plug? How long? How much longer?

[David Lucatz:]

No, I don’t …

[William Velmer:]

How much longer?

[David Lucatz:]

I don’t think it's a legitimate question, because it's not that we have said in previous time. We are subject to an agreement deal, okay? And again, I don’t have all the details [indiscernible] in my mind, but there's probably -- there's a section that related to how long it's going to take.

[William Velmer:]

No, I understand that, but again there's no breakup fee in this documentation.

[David Lucatz:]

No, no you’re wrong.

[William Velmer:]

There is no -- excuse me?

[David Lucatz:]

No, no, you’re wrong. You’re absolutely wrong. There is a breakup fee.

[William Velmer:]

What is the breakup fee?

[David Lucatz:]

$300,000, which is put already in that.

[William Velmer:]

There's $400,000, that’s the breakup fee? So if you pull out, you got to give them back the $400,000?

[David Lucatz:]

No, no, no. You got it wrong. Now let me correct myself. There's a breakup fee of $300,000 that [indiscernible] in escrow. We don’t have a breakup fee. They have a breakup fee.

[William Velmer:]

Okay. So if you pulled out, what’s it going to cost you? If you pulled out of the deal, what would this cost you?

[David Lucatz:]

I don’t believe I can address this question at the very moment, okay? Because we didn’t plan to pull up, so I didn’t prepare this question if you ask me.

[William Velmer:]

Okay. I mean, that was just part of the negotiation would be a breakup fee if you get -- either party decides to pull out or can't come up with the amount of money, and obviously this may [indiscernible] point, they may come up with it, but I’m just -- again, you crawl about how wonderful the business is, why would you want to sell it? But okay, I get your [indiscernible]. Thank you very much sir. Thank you.

[David Lucatz:]

Fortunately we don’t have a breakup fee, they have a breakup fee.

[William Velmer:]

Right.

[David Lucatz:]

[Indiscernible] good business, but a deal -- but this is the situation right now.

[William Velmer:]

Okay. Thank you.

[Operator:]

The next question is from Joe Tracy of Lakeview Capital Partners. Please go ahead.

[Joe Tracy:]

Yes, I’m just wondering, if there are any plans coming up this year to try and increase institutional exposure probably attending investor conferences or getting out on the road to meet with some analysts and trying to increase institutional exposure?

[David Lucatz:]

Yes, sure. There's a plan we’re going to do it. One of the reason we waited in the last couple of weeks [indiscernible] actually was we wanted to [indiscernible] focus of our strategy until we have a clarity about the transaction we are limited in what -- focusing on the strategy. But it is going to be clear very soon hopefully than we -- of course, we like to expose to and to increase our exposure to the market.

[Joe Tracy:]

Thank you.

[Operator:]

The next question is from Karl Birkenfeld of American Trust. Please go ahead.

[Karl Birkenfeld:]

Hi, David. It's Karl Birkenfeld. Could you elaborate a little bit on the medical product at medical device? And do you have FDA in United States or is just sales in Europe?

[David Lucatz:]

Hi, Karl. Thank you for the question. So as we mentioned [indiscernible] involved in the medical device sale for the last couple of years, but only a minor scope. Literally, we start to get more and more orders in this field and right now we don’t [indiscernible] because we actually -- we [indiscernible] fairly to big Fortune 50 global companies, so they’re in charge of the FDA. But looking forward -- and again, looking forward, we definitely want to see if we remain with this division, we'd like to -- try to explore the sales and [indiscernible]. So …

[Karl Birkenfeld:]

So, MicroTek [ph] handles the actual distribution in the United States for Enertec?

[David Lucatz:]

No, no. At this very moment what we do -- Enertec is doing for this -- again its a [indiscernible] manufacture for this big company. We also have a dialogue with them, and again, right now it's just a dialogue, we don’t have any order or anything, but dialogue will potentially move into more and more product, new product. We don’t have the order yet, but we do have a dialogue with them. And one of the reason is we want to see what’s going on with this division. Again, I believe I answer the question. Right now we get this orders, this is for an existing product which we already manufacture in the past, but we’re exploring additional cooperation with this company and also potentially going to grow this business.

[Karl Birkenfeld:]

Okay. That’s great. Thank you.

[Operator:]

We have a follow-up question from Craig Boots [ph]. Please go ahead.

[Unidentified Analyst:]

Yes, I guess, I just have a two part question related to Enertec. I guess, the first one would be if the deal did fall through, would we go back to our original plans of spinning off the company into its own stand on company? And then, I guess, my other question is if it does go through and we do get the cash and all that, are we going to buy more shares in Micronet subsidiary that’s over in Israel?

[David Lucatz:]

Thank you very much for the good questions. First of all, at this moment I cannot -- again, I cannot focus what we do if we remain with the division. One of the possibility is [indiscernible] not necessary, bring up changes as you can see in the company [indiscernible]. So once we know exactly we have a clarity where we stand, we will look at it again and we decide what to do. One of the option is [indiscernible], but not necessarily the only option. We just discuss couple of minutes ago the medical device direction, so all in all, scenes have a changed a little, but the option of spin off still exist. The same principle apply for the second question, because once we have the cash, one of the possibility is to increase our position in the Micronet in Tel Aviv. We’ve been discussed it in the last couple of years several times. So this is another possibility which we need to explore once we know that [indiscernible] is done.

[Unidentified Analyst:]

So that would then possibly mean that you would increase your holding in the subsidiary? Because I know right now it's just slightly over 50% and I’m sure it would be desirable if we could own a larger stake in it?

[David Lucatz:]

So, again, maybe I didn’t -- we didn’t -- express myself totally, but it's an option, it's a serious option. Once we get to this point that we have the cash we need to [indiscernible] it's a serious option. Not a [indiscernible] we do it, but we think of it positively.

[Karl Birkenfeld:]

Okay. Thank you.

[Operator:]

[Operator Instructions] At this point, there are no further questions. Before I ask David to make his concluding statement, I’d like to remind participants that a replay of this call will be available within two hours. In the U.S., please dial 1866-276-1485. In Israel, please dial 03-925-5941. Internationally, please dial 972-3-925-5941. David, would you like to make your concluding remarks?

[David Lucatz:]

Yes, thank you. Micronet continue to ship on exact [indiscernible] of previous orders. We are seeing strong top line performance in our MRM business and we believe that combined with our continuing ability to ship on our existing backlog, we should continue to experience good performance. Thank you, and I look forward to speaking with you next quarter.

[Operator:]

Thank you. This concludes Micronet Enertec Technologies’ first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.