MICT, Inc.
Q2 2016 Earnings Call Transcript

Published: 11 Aug 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome the Micronet Enertec Second Quarter 2016 Results Conference Call. All participants are at present in 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 John Nesbett of IMS. John, please go ahead.

[John Nesbett:]

Good morning, everyone and thank you for calling in to review Micronet Enertec's second quarter 2016 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 the overview. The 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 the financial results issued this morning and then clicking a second link labeled August 16 Presentation. 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 imply 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 any future revenue growth, our pipeline and backlog, increased volumes and demand in the markets in which we operate, our product offering and future market opportunities, the market potential of our command and control defense system, the roll-out of our TREQ317 all-in-one wireless platforms, the expected market potential created by the ELD mandate in the U.S. and Canada, and expected new opportunities for the company and anticipated company growth results from the ELD mandate. Such forward-looking statements and their implications involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ materially from those projected. Forward-looking statements contained in this presentation are subject to other risks and uncertainties, including those discussed in the Risk Factors and elsewhere on the company's Annual Report on Form 10-K for the year ended December 31, 2015. Please note the date of this conference call is August 11, 2016 and any forward-looking statements that management makes today are based on assumptions that are reasonable as of that date. Except as otherwise required by the law, the company is under no obligation to and expressly disclaims any obligation to update or alter the forward-looking statements, whether as results of new information, future results or otherwise. During the call, the Company's -- in addition to GAAP financial measures, the management will discuss non-GAAP financial measures as defined by the SEC RegG. Including non-GAAP net loss, these non-GAAP measures exclude both share-based compensation expenses, the amortization of intangible assets, as well as additional items. 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 consider all measures when analyzing the Company's performance. A reconciliation of these non-GAAP measures to the applicable 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. The slides containing the second quarter reconciliation can also be found in the Investor Relations section of our website. On the call, we have David Lucatz, Chairman, President and CEO; and Shai Lustgarten, CEO of Micronet Limited; and Tali Dinar, CFO of Enertec Electronics. 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. With that out of the way, I will now turn the call over to David, who will begin the presentation on Slide 4. Please go ahead, David.

[David Lucatz:]

Thank you, John, and good morning everyone. During Q1, we continued to gain traction with our product in the marketplace, resulting in a 17% increase in revenue. We saw growth in both sectors of our business with MRM growing 14% in our aerospace and defense business growing 23%. As we have mentioned on previous calls, we believe the MRM market represents a strategic growth opportunity as our advanced technology and solutions meets the needs of a wide variety of MRM customers. Our backlog grew 100% in our MRM business demonstrating the increased demand for these solutions and our aerospace defense business also saw a healthy increase in its backlog, particularly given a recent larger order. Profitability was below our expectation, importantly during the quarter we have recorded like of slow moving inventory which impacted gross margin and a provision related to losses of $0.25 million we are focusing our effort to improve feasibility over the next few quarters. We remained on enlarging our customer base and have been encouraged by increasing interest from new customers. Moving to Slide number 5; you here find the ELD mandate opportunities. This mandate represents important growth potential for our Company as it requires street operator and private truck owners to use ELDs rather than paper logbooks to log driver hours and other safety data. In early December 2015, the U.S. Department of Transportation, Federal Motor Carrier Safety Administration, issued its final rule and implementation schedule for the ELD mandate. Full enforcement of regulation will begin in 2017 and fleet operators have already begun their compliance effort. As a result, the mandate is driving increased demand for our products, particularly the TREQ317 because they provide an easily adoptable and compliant solution. With full implementation of the rule, industry analysts anticipate that the number of ELD-equipped trucks will increase to approximately 2.6 million in 2017. We are working with our customers as they prepare for the laws impending enforcement, and we believe that our comprehensive solutions are among the most competitive in the market. In Slide number 6, we are encouraged by the growing market interest in all our products, and we've had a very positive feedback regarding the field performance of the TREQ317. As we expected, the ELD mandate is driving significant interest in all of our products as the transportation industry makes preparations to meet the requirements of the mandate. Our backlog and pipeline are growing, and we believe this is being driven by the industry focus on the mandate. The TREQ317 all-in-one product has been very well received in the market over the past few quarters and has grown to be 47% of our shares in three months ended June 30, 2016 from approximately 14% in the same period last year. We developed a solution that enables the tablet to be removed from the cab for DOT, Department of Transportation, review if necessary. That capability in addition to its processing power makes our driver-reliable TREQ317 an effective device for the ELD compliance, and we look forward to capitalizing on new opportunities as the marketplace begins to feel a greater sense of urgency to put the ELD solution in place. Now moving to Slide number 7, in addition to leveraging the field of our existing products, we are in the process of developing a new product and additional solutions in order to broaden our product line and penetrate additional market segments. We are especially excited about the TREQ5 [ph] product. This product has an extreme open architecture and it's well-suited for the bring-your-own-device, or BYOD market segment. This product will be excellent for very small suite, and large and relatively untapped market. It is currently in pilot phase and we expect to launch it early next year. Now moving to Slide number 8; turning to Slide number 8, I wanted to provide an update on our participation in the New York City Taxi and Limousine Commission Vision Zero, Vehicle Safety Technology Pilot. The pilot which commenced in April is progressing well and we have finished the initial phase of the pilot and we'll be expanding our involvement as the pilot continues. This is a very large potential market opportunity for us. And with this program it also could be stepping stone into other three stretch of relative service as well as car trade in other cities. Turning to Slide number 9, during the second quarter we were awarded a $5.8 million three-stage project for the production of computer-based command and control defense systems from a multi-billion dollar aerospace defense contractor. The first order of $3.4 million has already been received and we expect to receive additional orders toward the end of 2016. This is the largest project ever received by Enertec, and we strongly believe that it demonstrates our growing reputation as a dependable and innovative provider of state-of-the-art command and control defense systems. With Slide number 10, we highlight the trends that are beneficial to our business. The local fleet vertical, which represents the majority of our MRM revenue is subject to the ELD mandate, and it is expected to grow significantly over the next several years. Our unique solutions are compliant and competitive, and we believe we are all positioned to benefit from this growth and the regulation changes. In our aerospace defense business, demand for our critical missile defense systems continues to provide a consistent stream of business that remains a key component of our core offering. We are seeking increasing market interest in our product in this segment of our business as well, and we believe we are positioned well to drive growth going forward. The next slide illustrates our revenue breakdown for the quarter. Revenue increased 17% compared to the second quarter of last year and also increased on a sequential basis. Our MRM business has grown both year-over-year and sequential growth with revenue at 11% sequentially. Given the market interest we are seeking, we remain very optimistic about continuing to drive growth. The aerospace and defense segment came in $2.3 million, a 23% increase compared to 2015 but down a bit sequentially. Given the reason large order and solid demand from our customers seeking missile aerospace solutions, and we are optimistic about future opportunities. I will now turn the call over to Tali for the financial review.

[Tali Dinar:]

Thank you, David. Revenue in the second quarter increased 17% compared to the same quarter last year. Gross margin increased to 33% as compared to 32% for the quarter, mainly a result of slow moving inventory due to different demand of sales shift towards our new products and solutions. R&D was down for the quarter as percentage of sales from 30% last year to 10% this quarter, partly a result of efficiency step and partly as a result of completing various development phases of our new all-in-one platform. As sales grow, we expect a continued decline in R&D expenses as a percentage of sales. General and administrative expenses was up mainly due to a provision related to a low suite of $250,000. Net loss attributed to MICT was $1.2 million for the quarter. On Slide 13 you will see that on a non-GAAP basis net loss for the second quarter was $967,000 or $0.16 per basic share as compared to net loss of $302,000 or $0.05 per basic share in the same quarter last year. Turning to Slide 14, you can see that our balance sheet remains strong with $11.5 million in cash and cash equivalents, $11.7 million of working capital, and $15.8 million in shareholders' equity. I will now turn the call back over to the operator for the question session.

[Operator:]

Thank you. [Operator Instructions] The first question is from Mike Vermut of Newland Capital. Please go ahead.

[Mike Vermut:]

Couple of quick questions for you; I guess the first one is on the cost side, you did great ramping up the revenues, I think we haven't really hit the inflexion point coming. On the ELD mandate, what measures are you taking to bring the cost back in line and move the company into profitability? And then also following up on that too, can you kind of just bring it back to the synergies between the two subsidiaries and the rational on keeping the company together?

[David Lucatz:]

The question etcetera is for two section, I believe. The first section -- we are very happy with the growth, we feel -- and happy with the extensive. This is partly due to the fact we haven't finished the merger of two sites, unfortunately it takes longer than expected. We believe that once we finish it then it should be towards the end of this year. We see also a reflection over expenses incurred in the G&A so forth, which should affect also the profitability. So we are -- as I said, we are aware that we need to work harder on extensive side to make sure that we make the company become profitable. On the other thing, the synergy between the two companies, I don't -- I mean, if we can turn it into a four hour discussion but the bottom line is, the three companies are in the area of one control system electronics; one is on the connection, one is on the aerospace, there are some spaces where we see synergy especially going forward. But we still need to work on it as well.

[Mike Vermut:]

Okay. And then going just maybe with Shai or both of you; can you kind of -- the industry is going to start to move very quickly and there is significant revenue out there for the company to capture over the next one/two years. How are we lining up -- our distribution channel, our strategic partnerships; where do we stand with some of the large OEMs that we discussed before, some of the larger fleets? What is the ground work that we're laying right now that gives us the confidence that we are going to be the major supplier on the hardware for the ELD mandate, and that we're going to be in the right channel, do we have the right product? Are we far along in discussions with OEMs, with some of the major telematics players? And also adding to that, there has been some significant M&A recently in this sector, what does the mean for us -- Verizon has made three acquisitions, very large acquisitions in the past; two of them actually said in the last month and three over the last six months. So how does that play into our thinking and where do we stand on the strategic partnership?

[David Lucatz:]

Well, it's a long question. Let's again address it one by one. I'll just start with saying that I don't necessarily agree with the two -- one to two year timeframe. We believe that the timeframe would be longer which again -- we still need to work very hard in order to get to capture major part of this potential and we're doing internal -- let's try address it in one moment. Another thing is regarding the acquisition, you are absolutely right, we see a lot of interest move in the space recently, not only the three acquisition you mentioned, we also saw the acquisition of Gen-X by the wireless [ph], which is -- although it's a small acquisition, it's really -- I think an important one because Gen-X is a company which is in a way similar although it's in a backlog and we are not in the backlog and the thing about feel sure the interest in all aspects of this space. So we think this is demonstrated again that we are in a right place in right time. Shai, do you want to pick from here and just address the question?

[Mike Vermut:]

I want to say Shai, you've done very nice progress in the MRM division. So the revenue side has been doing great and I think we have great progress here and it's just getting the cost structure in line.

[Shai Lustgarten:]

So thank you very much for the Michael. So regarding again -- to emphasize again what David mentioned, we're all focusing on reducing cost, we have specific plans, immediate ones that we showed before that we were successful. We began very immediate operations, plans, taking everything that David said before we did, we believe that will show results very soon on that. So that's on our focus together with growing revenue and improve our gross margin. Regarding talking about the ELD mandate that you asked about and how do we feeding, and can say that Micronet is an ELD player, so we moving from -- when we look at the market, of course this is a growth engine that we all know about and presenting the numbers before. Like David mentioned, we do believe to -- the Company does believe that it will be longer than two years to accomplish everything that -- to cover all the solutions to all the market that requires it but still we're looking at the timeframe that till now we've presented, the two-year timeframe and the directions that we are moving has been unique. The Company today, I mean after focusing in 2015 to really develop a unique know how in improvement in lot of technology in the field to start, actually I would say no, there is all types of vehicles, we offer today a unique technology that fit perfect for the year demanding the TREQ317 became -- as we demonstrated, it already 40% of our revenues and mainly because of the opportunities that we are implementing, yes it's still not even close to where we want to be but we see that it -- the technology is in the right direction and is receptive worldwide by customers. So we are focusing on technology and the next TREQ05 [ph] that will be presented soon to the market -- today it's actually in pilot with different companies. This device not only comply with BYOD but also is very well suited to be BYOD segment and I think that also connects to the second portion of your question which you mentioned the Verizon M&A transaction recently that were done. We believe when we look at this M&A, a significant one, so the third thing is great while the market is really moving up, ramping up to the opportunities in this and that's a very good sign, Telogis and Fleetmatics, that were acquired by Verizon, they focused on small fleets and also they focus on large ones as well, but they also focus on the BYOD. So the technology that we offer really complies with such companies today. And we believe also that the carrier will be -- they will be very good in approaching all the soft and all the small fleets that are there. So off the small fleet as we understand also is the largest opportunity number within this two point minimum -- 2.6 million, 2.7 million drivers that will need to get the ELD solutions. So offering the correct technology through the carriers and through these companies that comply both with BYOD and also comply the ELD requirements and working strategically to create strategic clients with the KAs [ph] and of course Verizon is one of them. We also recently had -- last year -- the end of last year with PR that together with Verizon the collaboration with Micronet. So we think working with the players, trading this strategic alliances, offering the correct technology feeds, Telogis, Fleetmatics and companies like them; this will create the achievement of the game changer within the company. I hope that gives you kind of…

[Mike Vermut:]

And then, sorry, upto on strategic rates with the OEMs and some of the major -- the omnitracs, the PeopleNext [ph] and getting back on, in with those guys and on the OEM side?

[Shai Lustgarten:]

So, as we previously discussed in the future, we do believe that OEMs will become increasingly important player in the fleet management ecosystem, that's something that is notable. We've had focused on it and I cannot mention the OEM name but we previously announced that in our call that when we have pilot with one of the OEMs and I'm pleased to say that we have completed the pilot, we integrated all the TREQ317 to platform today we received the purchases in 2017 from that OEM. That is a significant -- but still another encouraging step in this opportunity. So that's the first OEM that actually Micronet is collaborating with, that's the third step that we accomplished in the OEM strategy and to become part of the OEM significant role played around in the fleet management role.

[Mike Vermut:]

Excellent. And then one more question for David probably; should we assume -- the backlog is ramping, our revenues are ramping, we should start to see real leverage on the bottom line. Should we assume that large ends move back into the mid-30s relatively fast? We had the inventory adjustment, we had some litigation; so margins have moved back into the mid-30s. And the SG&A line, I just wanted to understand the -- I think you had $500,000 increase on the SG&A line. Should that come back in line -- and any other math there is, if you continue this growth trajectory, we had profitability pretty quick. So how do we look at these margins because I know in prior calls you said, we should be in the mid-30s on the gross margin line.

[David Lucatz:]

Can you hear me now?

[Mike Vermut:]

Yes, now I can hear you.

[David Lucatz:]

I'll start with the G&A, the G&A I think -- I said earlier, we're still working on the merge of the two companies which should affect the G&A. However, if we look at the G&A increase, the major reason for the increase in G&A is the one-time, one quarter million dollar which we have a provision for bigger expenses, so it speaks much -- the G&A speaking not going to remain stable -- even go down to more -- we'll proceed with major stride. Our gross margin as said is between 30% and 35%, really depends on the mixture of the product, if you put aside again, the one-time write-off the inventory, you're getting close to 30% plus also this half year and on either basis, we -- as I said, we certainly believe we can go back to same clause which again depends on the mix of the product but it's going to be between 30% to 35%. I just want to remind you once again that in this gross margin we also have 1% to 2% amortization, it's not reflected but we should be aware of it. The actual gross margin is higher by 1% or 2%. But one more last thing, regarding the profitability, it's really going to be outcome of the rate of growth, more the growth -- the bottom line consumer try because of the stretch of acceptance is pretty much stable as I said before.

[Mike Vermut:]

Right. But whether when you like it -- back half has historically been stronger than the first half or backlog is increasing, we should expect to see sales sequential ramp quarter-to-quarter and if our margins get back in line, we should see at least EBITDA positive and we were there two quarters ago, we should see us moving pretty quickly back into positive cash flow. Correct?

[David Lucatz:]

Well, what I can say is more -- we grow the better the EBITDA will look and we should see a better EBITDA. The speed of it if we go back to profitability, it really depends on the rate of growth and our ability to -- as I said, measure two sides. But eventually, we believe that we will see a better performance.

[Mike Vermut:]

And Shai, should we expect to see better growth in the back half of this year?

[Shai Lustgarten:]

A better growth?

[Mike Vermut:]

Or growth sequentially in third and fourth quarter?

[Shai Lustgarten:]

We should see a growth in this second half of the year.

[Mike Vermut:]

That's good. Alright, thanks guys. There is a huge opportunity out there for us, so go get it.

[Shai Lustgarten:]

Yes, sir.

[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 1-888-782-4291. In Israel, please dial 03-925-5925. Internationally, please dial 972-39-255-925. David, would you like to make your closing remarks?

[David Lucatz:]

Yes, thank you, operator. We are very excited about the progress we are making and about the strong market-based interest in our products. The ELD mandate provides opportunity to drive growth in our MRM business as demonstrated not only by our revenue growth but this quarter also by our solid backlog and the strength of our pipeline. Additionally, we are optimistic about growth opportunities in our aerospace defense division which we believe will enhance the strength of our business. I would like to take this opportunity and thank our dedicated team of employees and manager, and I look speaking with you next quarter. Thank you.

[Operator:]

Thank you. This concludes Micronet Enertec Technologies' second quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.