MICT, Inc.
Q3 2017 Earnings Call Transcript

Published: 20 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome the Micronet Enertec Third Quarter 2017 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. I would like to hand the call over 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 third quarter 2017 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 their overview. This presentation can be found on the Investor Relations section of the Company website under Events and 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 November 20th, Presentation. Callers accessing the PDF copy of the presentation will need to manually scroll through the slides, as the 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 our belief that increasing streams of orders are expected to drive sustainable growth from Micronet during the coming quarters, Enertec's efficiency measures to improve profitability as well as the belief that Enertec will regain its growth position based on its strong reputation and an expected increase in military spending. The belief that 2018 will provide more favorable results for Enetec, the belief that Micronet will keep improving EBITDA in Q4 of 2017, the belief that Micronet will deliver more favorable top line results in Q4 of 2017, Micronet's strong pipeline with the growing number of customers evaluating products in the field, the belief that Micronet's receipt or orders of increasing value pointing to customer satisfaction with its products, our belief that our backlog is a strong indicator of the strength of our products and solutions in the market relative to competitors, and point to our expectation of strong revenue results in coming quarters, Enertec is positioned for growth based on its strong reputation and expected increase in military spending, our expectation leading to the receipt of orders resulting from the Teaming Agreement with an Indian Aerospace & Defense company, increased volumes and demand in the markets in which we operate, our product offerings and future market opportunities, expected new opportunities in anticipated orders and growth resulting from the local fleet market and ELD mandate. 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, 2016 filed with the SEC. Please note that the date of this conference call is November 20, 2017 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 results as defined by SEC Regulation G, including non-GAAP net loss/income --- net loss and income, those non-GAAP measures exclude share-based compensation expenses, amortization of intangible assets and 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 results and can also be found in the Investor Relations section of our website at www.micronet-enertec.com/ir-company. The slides containing the first quarter reconciliation can also be found in the Investor Relations section of our website at www.micronet-enertec.com/ir-company. On the call this morning, we have David Lucatz, Chairman, President and CEO of Micronet Enertec; Tali Dinar, Chief Financial Officer of Micronet Enertec; and David 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 business development this quarter 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 pleased to report the Micronet is delivering in line with our revenue expectations and we expect Micronet will meet its annual revenue and backlog targets for 2017. An increasing stream of orders from our existing and new customers is expected to drive potential growth for Micronet during the coming quarters. Enertec performed this when expected revenue as a result of efficiency in the appropriate working capital certificate, as the nature of its product oriented market in which we operate. We expect to be able to return to our yearly plan [indiscernible] and we believe we experience an improvement in the Company mix. During the third quarter, revenue increased to 6.9 million, a 29% increase over Q3 of 2016 and a 17% increase sequentially. We build our revenue pipeline to 20.5 million. This was mostly driven by demand for Micronet's new mobile resource management or MRM product. Micronet revenue for the quarter grew by 50% compared to Q3 2016 and by 45% on a quarter-over-quarter basis. Micronet's EBITDA for the third quarter was close to breakeven and we expect Micronet would keep improving the EBITDA in Q4 2017. We see demand continued to grow for Micronet's product as Electronic Logging Device or ELD mandate nears. Micronet is diversifying its customer base and its strong reputation of the provider of reliable rugged solutions. Micronet continued to invest in research and development and plans to introduce a new line of product and solution in the coming quarters. Micronet has received over 7.55 million in orders during Q3 which included annual renewable license for $100,000. An additional 3.1 million order was received in the October bringing total orders in the end of Q3 over $10 million. Here to-date, Micronet signed 350,000 worth of SaaS contracts for license fees which are expected to produce high margin annual recovery revenue. Micronet works to produce increasing quantities of its new product and as a delivery purchase order, we expect even more further top line numbers in the fourth quarter of 2017. Moving to Slide number 4. Slide number 4, we present business order for our TREQ-317 and recently launched TREQ-r5 product. The TREQ-317 is an all-in one rugged platform. The Android-based fixed mount tablet offers advanced functionality at the competitive price. In the third quarter, we received a 1.6 million order for the TREQ-317 from a current customer, a global fleet management provider. For our TREQ-r5/Smart Hub product, we received an order worth $4.3 million from a current strategic customer. That is the largest single order Micronet has received since 2012, another $1.65 order was received from the same customer during the third quarter. In October and November following the end of Q3, Micronet received additional $5 million purchase order. We believe that the ELD compliant TREQ-r5 expand Micronet market opportunities particular with a smaller fleet size customer. We have a strong pipeline with a growing number of customers evaluating our product in the field. Slide Number 5. During Q3, Enertec signed a $650,000 contract with Fortune 50 companies, medical-device companies to develop and produce fully automatic test system for medical calibration devices. This was the largest contract to-date from this customer. We believe that Enertec expertise in precision automatic testing system will be utilized into the medical device industry. Moving to Slide number Six. On Slide 6, we present an overview of the positive trend in both of our businesses. In our multi-billion MRM market, we have seen Micronet received purchase order of increasing numbers from both new and existing customers, including recurring SaaS revenue, which we believe point to strong customers satisfaction with Micronet products. Micronet's new rugged on-board computing products have experienced increasing demand because we believe they create strong value for the customers. The connected rugged devices optimized transportation planning and performance for our customers through a network of electronic link that on that transacts bulk material purchase just in time. Micronet rugged mobile device offer instant demand availability for our customer. This cuts down on-site wait time and provides proof of delivery. A very important feature which expects to improve cash flow for our customers is our device ability to create faster payment processing for the goods and services. The local fleet market and the ELD mandate are the two main growth engines of the companies at this time. Micronet continues to enlarge its product portfolio to target this additional segment in a MRM market. As most advanced military continued to reliance on missile defense system, this expects to create more demand for our missile defense offerings. We also expect order from the Indian market resulting from the previously announced Teaming Agreement with an Indian Aerospace & Defense company. I will now turn the call to Tali for financial review. Tali?

[Tali Dinar:]

Thank you, David, and good morning everyone. The next slide illustrates our revenue breakdown by segment for the third quarter of 2017, as compared to the year ago period, as well as quarter-over-quarter comparison with the second quarter of 2017. MRM revenues were $5.5 million in the third quarter of this year, a 50% increase from $3.7 million in the third quarter of 2016 and an increase of 45% from 3.8 million sequentially. For the Aerospace & Defense segment, revenues were $1.04 million in the third quarter of 2017, a 14% decline from $1.7 million in the third quarter of 2016. On a quarter-over-quarter basis, revenues declined 32% from $2.1 million in the second quarter of 2017. Moving to Slide 8, we have the revenue breakdown by segment for the first nine months of 2017, as compared to a year ago period. MRM revenues were $12 million in the first nine months of 2017 consistent to the same period of 2016. For the Aerospace & Defense segments, revenues were $6.1 million in the first nine months of 2017 and 8% decline from 6.6 million for the same period last year. Moving to Slide 9, you will see consolidated revenue increased by 29% to $6.9 million in the third quarter of 2017, as compared to $5.4 million in the third quarter of 2016. On a quarter-over-quarter basis, revenue increased by 17% from the first second quarter of 2017. The increase in revenues is mainly due to increase demand and order from Micronet's MRM products. Gross profit margins were 23% in the third quarter of 2017 as compared to 20% in the same period of the prior year. The increase in overall gross margin was related to Mircronet's increasing sales volumes. R&D expenses were up on a dollar basis and remained relatively consistent on a percentage basis, as compared to the prior year. In the third quarter selling, general and administrative expenses were relatively consistent as compared to the second quarter of 2017 and the third quarter of 2016 and were lower as a percentage of sale -- as compared to both the same period last year and prior quarter. Net loss attributed to MICT was 1.3 million in the third quarter of 2017 and the third quarter of 2016. On a basic and diluted share basis, net loss was $0.18 in the third quarter of 2017, as compared to $0.22 in the second quarter of 2016. On Slide 10, you will see that on a non-GAAP basis, net loss for the first nine months of 2017 was $3.8 million or $0.56 per basic and diluted share as compared to net loss of $2.1 million or $0.26 per basic and diluted share in the first nine months of 2016. Turning to Slide 11, you can see that our balance sheet remained strong with $9.2 million in cash and cash equivalents, $4.7 million in working capital and $9.3 million in shareholders' equity as of end of the quarter. I will now turn the call back over to the operator.

[Operator:]

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

[Unidentified Analyst:]

First question I am wondering on the projected date for the spin-off of Enertec, if you have any more recent development on when that may occur?

[David Lucatz:]

We don’t have a specific date. We are working on it and as I mentioned in our previous discussion last quarter in addition or parallel to working on a spin-off we are exploring other options with defense, doing some other things, and this is mainly as a result of our strategy to focus MICT on MRM telematics business.

[Unidentified Analyst:]

And I am also wondering if our working capital is definitely sufficiently for all of our new orders that we have received lately. I know it was such a large backlog of orders, it is obviously going to take a lot of money to complete these orders and I am also wondering, what the expected completion dates are going to be on these orders? And when we are going to expect to be positive for making a profit, I mean?

[David Lucatz:]

Well, you've actually asked several questions in one question. So let's address them one by one. Okay?

[Unidentified Analyst:]

Yes.

[David Lucatz:]

So, one in terms of sufficient working capital for delivering the orders, taking into solution that the majority of the orders, the backlog is in Micronet -- Micronet right now have close to $3 million in cash, net cash. So we -- at this stage, we believe it's sufficient in a good case where the backlog will grow significantly. We believe we have a way to address it also. The second question was regarding the timing of delivery it's really vary, normally in this business, you're looking an order which is roughly around two to three quarters. So, this is basically, all the answer I can give you right now.

[Unidentified Analyst:]

So, two to three quarters and it's going to be -- we're going to be seeing revenue come in the next two to three quarters. Is that what you're saying?

[David Lucatz:]

Normally, again we need to go into the backlog and to analyze it, but normally in this type of business, you see in the next two to three quarters, your backlog because as by the way as opposed to in the defense where you have the backlog normally is for -- can be year and a half. In the MRM, the backlog we represent one to three quarter -- one to -- next quarter, quarter two, quarter three quarter.

[Unidentified Analyst:]

And I guess on profitability, you're expecting to be turning profitable here in the fourth quarter and then maybe increasing profits in the beginning of next year?

[David Lucatz:]

So, we -- talking specifically on Micronet, we -- based on what we know right now and we're already in the middle of the quarter, we see a better profitability in Micronet. As for 2018, we expect to have a better profitability than in all promises in addition, so we in addition strong 2018 years.

[Operator:]

[Operator Instructions] The next question is from Carl Burkinshaw [ph] from American Trust. Please go ahead.

[Unidentified Analyst:]

Recently, your CFO was terminated. What was the reasoning behind terminating the old CFO?

[David Lucatz:]

So, the CFO was terminated because we have duplication of two CFOs. We had CFO in the subsidiary and CFO in the mother company of MICT, and we decided in order to cut expenses to take one position and one person will do the deposition.

[Unidentified Analyst:]

And then another question, the reasoning behind the -- I mean the -- how is your defense backlogs looking? Are they increasing along with you’re the new TREQ-317?

[David Lucatz:]

So, the defense backlog is pretty stable. Right now, it's is around $9 million and vary between -- again normally it vary between 8 to 10, it's not growing but it’s not deteriorating.

[Unidentified Analyst:]

And that's a pretty steady margin business, correct?

[David Lucatz:]

It really depends on the nature of the project. This year for instance it’s less profitable, sometimes it takes more strategic projects, sometimes you are not working efficiently enough. So it really depends and the margin can vary.

[Unidentified Analyst:]

Has there been any move towards more orders since the recent change in the Syria and the fact that they are starting to move closer to the border in the Golan?

[David Lucatz:]

You've combined a few aspect of question here of business, financial, political. So I'll try to address only the one which concerns us okay. So basically, we believe we're going to get higher demand, we didn't get anything yet at this moment.

[Operator:]

At this point, there are no further questions. Before I ask David to make his concluding statement, I would like to remind participants that a replay of this call will be available within two hours. In the U.S. please dial 1-888-269-0005. In Israel, please dial 03-925-5904. Internationally, please dial 972-925-5904. David, would you like to make your closing remarks.

[David Lucatz:]

Yes, thank you. We are pleased to seeing increasing revenue for the third quarter as well as EBITDA of Micronet as it's very close to breakeven. Our backlog continues to grow and stand at 20.5 million as of December 30, 2017. We believe this is a strong indicator on the strength of our products and services in the market relative to the competitors. We believe it also points to our expectations of strongly revenue in the last and the coming quarter. Micronet is focused on delivering products to meet increasing ELD-related demand. We continue to experience quarter-over-quarter growth. Micronet is increasing its portfolio of industry leading rugged mobile resource management offering, positioning itself as a trusted leader in the market. Our Aerospace & Defense business increasing military budget combined with a trend of large multinational defense contractors through outsource have a potential benefit to Enertec. We maintain our previously announced guidance. The combined revenues for the next 12 months ending December 31, 2017, will range between $25 million to $28 million. I just want to correct myself, the guidance details for 2017 and the revenue will range between $25 million to $28 million. Thank you and looking forward to speaking with you next quarter.

[Operator:]

Thank you. This concludes Micronet Enertec Technologies' third quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.