MICT, Inc.
Q4 2016 Earnings Call Transcript

Published: 31 Mar 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome the Micronet Enertec Fourth Quarter 2016 Results Conference Call. All participants are as 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 over the call to Derek Mire [ph] of Corporate Profile, Derek please go ahead.

[Laurel Moody:]

Good morning, and thank you for calling in to review Micronet Enertec's Technologies Inc fourth quarter and year end 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. 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 in the link in the company's press release regarding these financial results issued this morning and then clicking a second link labeled March 31, 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 meaning of 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 to our outlook for 2017, estimated 2017 revenues, expected benefits and military aid to Israel, future growth, our pipeline and backlog, increased volumes and demand in the markets in which we operate, our product offerings and future market opportunities, expected new opportunities and anticipated orders and growth result from the ELD mandate and the timing and expected benefits from our spinoff of the aerospace and defense division, including whether such spinoff will be completed. 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. The forward-looking statements contained in this presentation are subject to other risks and uncertainties, including those discussed in the Risk Factors Section and elsewhere in the company's Annual Report on Form 10-K for the year ended December 31, 2016 filed to the SEC. Please note that the date of this conference call is March 31, 2017 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 this call, in addition to the GAAP financial measures, management will discuss non-GAAP financial measures as defined by SEC Regulation G. Including non-GAAP net loss and income, these non-GAAP measures exclude both 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, as a substitute for, or as superior to our GAAP results, and we encourage you consider all measures when analyzing the Micronet Enertec'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 be found in the Investor Relations section of the website at www.micronet-enertec.com/ir-company. On the call this morning, we have David Lucatz, Chairman, President and CEO of Micronet Enertec; Ken Wiesner, CEO of Micronet and Oren Harari, Chief Financial Officer of Micronet Enertec. And 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 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 3. Please go ahead, David.

[David Lucatz:]

Thank you and good morning everyone. Although our revenue in this 12 month ended December 31, 2016 declined slightly as compared to the same period in 2015, we are very encouraged about 2017. The combined backlog of both our business units remains robust. Enertec is positioned for growth based on our strong reputation and increase in military spending. There is potential [ph] significant sector growth expected in 2017 for Micronet as the ELD electronic logging device mandate requirement deadline nears, this coupled with our inventory launch MRM product and several more in development, will propel Micronet. At the end of 2016 and during Q1 of 2017, we announced a $1 million of purchase order for our recently introduce TREQr-5 and $2.1 billion order for our all in one TREQ317 respectively. We strongly believe the MRM market, represents a strategic opportunity of our state of the technology contently meets the needs of a wide variety of MRM customers. We are seeking contributors, new opportunities for our product related to the reason set around ELD mandate requiring Electronic Logging Devices for truck and bus fleet. Beyond the mandate, our rugged MRM device creates compelling business benefits for our customers in transportation logistics industry including boosting efficiency and productivity. We remain focused on diversifying our customer base and have been encouraged by the increasing interest from new customers. I’ll now turn the call over to Ken.

[Ken Wiesner:]

Thank you, David. On Slide 4, you will find the ELD mandate opportunity. We believe we are one of the best solutions in the industry to help customers comply with the ELD mandate. This mandate represents important growth potential for our customer, as it requires fleet operators and private truck owners to use ELDs rather than paper log books or log driver hours and enter safety data. Based on the U.S. Department of Transportation Federal Motor Carrier Safety Administration's find rule enforcement of the regulations for carriers and drivers who are using paper logs and logging software is no longer -- no later than December 18, 2017, while carriers and drivers who use an automated onboard recording device must transition to ELD no later than December 16, 2019. Industry analyst anticipate ELDs for trucks and busses will increase to a potential multi-billion dollar market in the coming years. We are working with customers as they prepare for log impending enforcement and we believe that our comprehensive solutions are among the most competitive in the market, while we believe that this ELD mandate will remain in place in the four quarter, sales of our rugged computing devices which help customers meet the ELD requirement were below our expectations. We believe this indicates purchases have been temporarily delayed and may result in higher or more immediate demand in the coming quarters. On Slide 5, we present more information on our recently launched TREQr-5 product. TREQ-r5 is an innovative ruggedized telematics android onboard computer optimized for the Internet of Things and fleet management applications. It’s benefit their MRM customers includes open architecture with no customization required. It is well suited for the bring your own device market, it pairs easily with smart phones and offers enhanced safety monitoring features, helps customers to focus on driver safety, efficiency, compliance, electronic logging device analysis service. Driver costing and fuel reports for the local fleet and heavy duty trucks and equipment. At the end of December 2016 we announced a related purchase order from the leading fleet management service provider for TREQ-r5 valued at over $1 million, we are currently shipping on this order. The TREQ-r5 expands Micronet's market opportunity particularly with the smaller fleet size. We have strong pipeline with a growing number of customers evaluating our products in the field. I will now turn the call back over to David.

[David Lucatz:]

Thank you, Ken. Turning to slide 6, our Electronic Enertec business continues to show strength. Our backlog at Enertec on December 31, 2016 grew by 10% as compared to December 31st 2015. Due to the second quarter of 2016, we were awarded a three stage project with a total value of $5.8 million for the production of computer based command and control defense system for a multi-billion dollars Aerospace & Defense contractor. During the third quarter of 2016 we received a follow-on order in the mark of $900,000 from this customer and we expect to see additional orders. This is the largest project ever received by Enertec and we strongly believe that it demonstrates our growing reputation of a dependable and innovative provider of state of the art command and control defense system. Also, during the fourth quarter we have received continues order for our mobile command and control tender for a multinational aerospace and defense contractor. This command and control centers are used in rugged and difficult terrain for the control and monitoring of advanced weapon systems. In addition, in view of the recent U.S. pledge for a $38 billion in military to Israel Enertec's stronger reputation providing technologies and services with some of the top military constructor in the world coupled with increasing demand created growth environment for our aerospace and defense business. With Slide 7 we highlight the trend that are beneficial to our business. As I discuss previously the local fleet vertical, which represents most of our MRM revenue is expected to grow significantly over the next several years. We believe that we created a unique and all-inclusive solution that would benefit from this growth and this pledge [ph] changes, as previously discussed by Ken. In our aerospace and defense business the demand for our critical missile defense system continues to provide a consistent stream of business that remains a key component of our core offering. Hence, we are positioned well to drive considerable growth going forward and have demonstrated an ability to drive efficiency that should result in profitability. On March 30, 2017 the company's Board of Director approved the spinoff of the aerospace and defense division of MICT into a standalone company, if this spinoff is completed MICTs shareholders would receive in addition to their shares in MICT, common stock in [indiscernible] of entity on a pro rata basis based on the ownership of MICT. We strongly believe that both divisions are positioned in high profession markets. The MRM and connected cost based market is extremely resulting [ph] and the Aerospace and Defense is booming up. We believe that this [indiscernible] will better enable us to utilize this potential. In addition, the spinoff will increase our focus in both businesses, will enable better allocation of financial resources and allow us to pursue appropriate growth opportunities, along with ability to execute strategic plan best suited to each respective business. This spinoff is also expected to enhance strategic flexibility and improve response to industry dynamics including attracting top talent to each business space. Management will be able to report time in a fashion to the development and incantation [ph] of corporate strategy and policies. Also, we believe that spinoff will allow investments to make independent investment decision with respect to each business space and achieve alignment with a more natural stockholder base. I will now turn the call to Oren for financial review.

[Oren Harari:]

Thank you, David and good morning everyone. The next slide illustrates our revenue breakdown by segment for the full year of 2016, as compared to 2015. MRM revenue were 13.3 million, a decline of 9%, as compared to revenues of 14.6 million in 2015. The declines primarily attributed to the fourth quarter mainly due to a reduction of unit volume related to the company’s product line and related to market optimization with the company’s new product line combined with the change in management. These delayed orders are processed and expected to ship during Q2 of 2017. Aerospace and Defense segment came in at 9.5 million, a 5% increase compared to 2015. We continue to see a solid demand for our customers seeking Aerospace and Defense solution. On Slide 10, consolidated revenue declined slightly to 22.7 million in 2016, as compared to 23.6 million in 2015. Lower sales reflect the transition stage between the new product introduction and rollout in our MRM business. Our backlog remains strong at 9 million as of the end of 2016. Gross profit margins were 18% in 2016, as compared to 31% in 2015. The decrease was due to inventory write-off mostly attributed to Micronet's old product lines combined with increased customer support costs associated with introduction of the company’s new product line. In our Aerospace and Defense business we had some inventory write-off and completion of certain projects with lower profitability. R&D expenses came down in dollar basis and remain consistent on a percentage basis, as compared to the prior year. Selling, general and administrative expenses or SG&A in 2016 increased both on a dollar based and percentage over 2015. 2016 SG&A include the of $150,000 related to the settlement agreement pursuant to the company’s termination of the potential acquisition. Aside of this charge, the increased in SG&A is primarily due to an increase in sales force in the MRM segment, increase in profession consulting of $250,000 [ph] -- sorry increasing professional and consultant and [indiscernible] related to MRM division. Net loss in 2016 was 5.8 million or a loss of $0.97 per basic and diluted share as compared to a net loss of 2.5 million or a loss of $0.42 basic and diluted share in 2015. On Slide 11, you will see that on a non-GAAP basis, loss for 2016 was 4.9 million or $0.83 of basic and diluted share as compared to 1.5 million or $0.25 of basic and diluted share on a non-GAAP loss in 2015. Turning to Slide 12, you can see that our balance sheet remains strong with 8.1 million in cash and cash equivalents, 6.7 million working capital and 10.9 million in shareholders' equity. I will now turn the call back over to the operator for Q&A.

[Operator:]

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

[Mike Vermut:]

Ken, quick one for you. When we look at this, what is the strategy now going forward to really make sure we capture the opportunities here on the MRM market and the ELD mandate coming and my guess is that it's going to be a wave of orders coming in probably second quarters or third quarter or fourth quarter, this year into next year. How do we make sure that we're aligned with the right platers and where did those talks stand and can we expect to see some developments there shortly?

[Ken Wiesner:]

I think Mike, I appreciate your question, we've in alignment with many of the larger players and it has been in existence since 2016. And now it's really the execution of the deployment of the products in 2017. So we're firmly aligned with some fairly large industry players associated with that deployment and we're excited about the opportunity and know we have the products on both sides in order to deploying in 2017 and I think we see that in our order as of today that we look to fulfill in the second and third quarter.

[Mike Vermut:]

Okay and like the part looking at -- how do we get the business and is any of it going to be morphing into some recurring revenue aspect? How do we start shifting instead of being a full hardware business, which I think is going to be great coming up, but is it going to be an element of the business when we start morphing into recurring revenue streams?

[Ken Wiesner:]

There are some strategies associated with that, today some of that will require us to polish off some technology, some of that will require to establishing some partnerships associated with those services, and so there is a mentality associated in the organization in pursuing those strengths so that we can have a recurring aspect to the business on a go forward basis.

[Mike Vermut:]

And this is for David, when you look at spreading the business here, if you spill over [ph], who is going to be running which businesses, cost -- how the costs should be allocated and when we expect these business to cross back into profitability, or should it be a -- I would [indiscernible] 2017 events?

[David Lucatz:]

So I'm just careful in terms of who is going where, it should always be disclose in the public filing which will come shortly and you can see there. As a general answer, we strongly believe that the separation apart from all the good things and advantages we mentioned is not going to incur a significant increase in cost. And I want to -- one thing further, if you remember our discussion several times in the last two years, when I think -- I believe it was you that asked, how are we going to arrange the size that we're working now with two public companies, one in the subsidiary in Tel Aviv and one in MICT and one of the answer was we need to separate the two businesses in order to be able to focus and make it one company. So this is certainly one of the things which you need to prerequisite in order to do to move forward and also in order to cut expenses on the public company.

[Mike Vermut:]

Where are those reduced expenses of the plans going forward?

[David Lucatz:]

It's really, on the long run, if we're able to make it as one company, if you remember the question of listing the company, it will certainly do. Even if not, it will not increase our expenses.

[Mike Vermut:]

Okay, and then with the backlog we have now, with the orders you see coming, should we expect profitable 2017 or at least returns are profitable, quarters towards the end, should that be the expectation?

[Ken Wiesner:]

Mike, this is Ken Wiesner, I think that with the projected growth we do, we do anticipate some good enhancement towards a profitable entity and so you know the -- towards the end of the year that is an assumption that I would say that we have as well.

[Mike Vermut:]

Okay, excellent, okay thanks guys.

[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 039-255-941. Internationally please dial 972-392-55941. David, would you like to make your closing remarks.

[David Lucatz:]

Thank you operator, although the last quarter in our yearly results were below expectations we believe both products [ph] have extremely strong fundamentals based on our visibility today and we are very encouraged and optimistic regarding 2017. We estimate that the combined revenue for the 12 month ending December 2017 will range between $25 million to $30 million with approximately two-third projections from the MRM division and one-third from the Aerospace & Defense conditions. This indicates an increase of a minimum of 20% of our consolidated revenue. In addition to the anticipated revenue growth and to increase our profitability we're taking necessary cost reduction measures. We believe that these steps will have an immediate effect on 2017 performance. In conclusion, we believe that the anticipated spinoff quarters will increase profit in both divisions allowing us to pursue appropriate growth opportunities and increase our financial costs. I would like to thank our dedicated team of employees and managers and I look forward to speaking with you next quarter, thank you.

[Operator:]

Thank you, this concludes Micronet Enertec Technologies fourth quarter 2016 results conference call, thank you for your participation you may go ahead and disconnect.