MICT, Inc.
Q2 2015 Earnings Call Transcript

Published: 14 Aug 2015

[Operator:]

Welcome the Micronet Enertec Second Quarter 2015 Results conference. 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 will now turn the call over to John Nesbett of IMS. John, please go ahead.

[John Nesbett:]

Good morning and thank you for calling in to review Micronet Enertec’s second quarter 2015 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 the link in the company’s press release during these results issued this morning and then clicking a second link labeled August 14 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 a 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 future growth, increased volumes and demand in the markets in which we operate, the roll-out of our new all-in-one wireless platforms, our ability to penetrate the local fleet vertical market, our ability to diversify and expand our customer base, continuing demand in our defense and aerospace business, our ability to develop new customer relationships, our ability to meet the needs of our existing customers, market interest and acceptance of our products, the introduction of new products and our ability to provide our solution in different applications, the timing of pending U.S. federal rule-making and the impact of those rules on our business, and our future profitability and revenues. Such forward-looking statements and their implications involve known risks and uncertainties and other factors that may cause 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 section and elsewhere on the company’s annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC. Please note the date of this conference call is August 14, 2015 and any forward-looking statements that management may say 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 our update or alter the forward-looking statements, whether as a result of new information, future results or otherwise. During this call, in addition the GAAP financial measures, management will discuss non-GAAP financial measure as defined by the SEC Reg. G, including non-GAAP net loss income. These non-GAAP measures exclude both share-based compensation, the amortization of 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 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 on the Investor Relations section of the website. The slides containing the first quarter reconciliation can also be found in the Investor Relations section of our website. On the call this morning, we have David Lucatz, Chairman, President and CEO; Eyal Leibowitz, Chief Financial Officer; Shai Lustgarten, CEO of Micronet Limited; and again, as a reminder, management will be referring to a slide presentation that can be access via the Investor Relations section of the site or linked through the press release. With that, 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. We start with Slide 4. While overall revenues are down for the six months, we have seen a slight increase sequentially as compared to the first quarter of 2015. Additionally, we recorded a 3% increase in MRM revenue, reflecting the initial success of our [indiscernible] wireless all-in-one product. We are aggressively marketing our all-in-one product and our current order pipeline is significantly stronger than previous years. As we indicated in last quarter’s call, many of our customers are in the process of evaluating and adapting their systems to transition to the new all-in-one technology, and we expect to see a strong second half of 2015 as we gain traction with the market and the share of the new product. Gross margin increased from 28% in the second quarter of 2014 to 32%, which falls within our gross margin target range of 30% to 35%. Also, we continue to see healthy diversification in our customer base with the majority of new sales coming from new customers. Moving to Slide 5, in the second quarter we were encouraged to see continued progress with the roll-out of our all-in-one wireless product. Our breakthrough [indiscernible] by packaging its wireless interface, operational and connectivity features, and the Android operation system into one streamlined, cost-effective system for the fleet management and several other mobile logistics enterprise needs. Four thousand unit orders have been received to date and so far the market’s reception has been significantly favorable. Strategically, we are also pursuing the OEM market, which could be an important [indiscernible]. While still early, we are encouraged by some of the discussion we’ve had with potential customers. We have also reached a milestone and now we have full production capability from our facility in Salt Lake City. During the quarter, we also made significant progress with our new Hardware as a Service, or HaaS service. We launched this service recently and already have significant interest from customers. This service allows customers to rely on Micronet for any hardware and related firmware needs while also providing Micronet with a more recurring revenue stream. Moving to Slide 6, the next slide illustrates our revenue breakdown for the quarter. As I mentioned at the beginning of the call, while revenue went down compared to the second quarter of last year, it was slightly up on a sequential basis, [indiscernible] compared to last year but we saw a sequential improvement from $3.6 million in the first quarter to $3.8 million in the second quarter. It takes some time for customers to evaluate and begin to transition to any new technology, but given the 4,000 orders already filed and our strong pipeline, we are optimistic about the potential opportunities for our all-in-one product. The aerospace and defense segment came in at $1.9 million, a very slight decrease sequentially from the first quarter. Revenue in this segment can fluctuate based on the timing in the quarter; nonetheless, we continue to see demand from our customers seeking Micronet’s defense solutions. Slide 7, we illustrate the benefits of our next generation product line. The A-317 is a breakthrough product for us and for the industry. The new product is rugged [indiscernible] our offering into a fully connected solution. The product offers [indiscernible] of 4G, LTE, Bluetooth and Wi-Fi applications and provides total connectivity. In our view, it is the most competitive solution in the marketplace, and our strong initial orders [indiscernible] the effectiveness and growth opportunity this product represents. Slide 8 provides an overview of our roll-out. The R&D for the new product line is in the latter stages of completion, and we continue to refine and adapt the product going forward in order to cater to each customer’s needs and keep the technology as current as possible. We are currently in the next stage of carrier certification. It is important for this product launch that we are certified with the wireless carriers, and as we reported last year, the Verizon certification is complete. AT&T is currently evaluating the product, and we hope to achieve certification soon. In addition, we are in discussions with other carriers [indiscernible] certification. Concurrently with carrier certification, there has been strong demand from our customers for testing the product in the field and adapting it for their needs. We’ve consistently received very positive feedback as evidenced by the 4,000 unit orders received to date. In addition to the $4 million agreement we announced in May, we also [indiscernible] another $1.4 million from a leading provider solution for the [indiscernible] market. In June, we received a $950,000 initial purchase order from [indiscernible] management company to be delivered by the end of 2015. We are in active discussions with additional major [indiscernible] customers and we expect we will move past this initial stage and begin to realize more revenue from the new product in the near future. I will now turn the call over Eyal for the financial review. Eyal?

[Eyal Leibowitz:]

Thank you, David. Good morning everyone. First I’ll discuss the second quarter results. Revenue decreased compared to the same quarter last year but increased slightly compared to the first quarter of 2015. Gross margin increased to 32% from 28%, [indiscernible] within our target range of 30% to 35%. R&D was flat as a percentage of sales and down on a dollar basis for the quarter; however, consolidated R&D remains significantly higher and as a percentage of sales at 12.6% as compared to approximately 8% of sales in 2013 due to our increased investment toward the development of our new all-in-one platform. In fact, in the MRM division R&D was 15% of that division’s sales for the quarter. We expect R&D expense to decline as sales grow and as we complete our core development plan. Sales and marketing expenses remained flat as a percentage of sales, and general and administrative expenses decreased to 20% of sales compared to 24% of sales in the same quarter last year. The decrease contributed to the improvement of the reported net loss to $588,000 compared to $1.3 million in the second quarter of last year. Now turning to the six month results, revenue decreased slightly to $11.4 million compared to $12.2 million in the prior year period. Lower sales reflected a transition stage between the new production introduction and roll-out. Gross margin remained mostly flat at 31% and falls within our guidance range. R&D was flat as a percentage of sales, as was the sales and marketing and general and administrative expenses. We recorded an improvement of net loss to $1.3 million as compared to a loss of $1.6 million in the first six months of 2014. On Slide 10, you will see that on the non-GAAP basis, the second quarter loss improved to $320,000 compared to $511,000 in the second quarter last year. For the six months of 2015, we recorded a $758,000 loss as compared to a loss of $818,000 in the prior year period. Turning to Slide 11, you can see that our balance sheet remains robust with $12.6 million in cash and cash equivalents, $15.3 million working capital, and $19 million of shareholders equity. Last quarter, we paid down the last portion of our [indiscernible] debt. We feel confident in the health of our balance sheet going forward. I will now turn back the call to David.

[David Lucatz:]

Thank you, Eyal. On Slide 12, you’ll find the [indiscernible] for ELD mandate opportunities. We discussed the tremendous growth potential that this mandate provides to our company last quarter, and I wanted to reiterate its importance and provide a brief update on progress. In July 2012, the U.S. Congress passed legislation requiring that drivers log their hours in ELDs instead of paper log books. The legislation required the Federal Motor Carrier Safety Administration, or FMCSA, to adopt [indiscernible] implementing this requirement by December 2015. Importantly, the number of ELD-equipped trucks is expected to increase from half a million today to approximately 2.6 million [indiscernible]. We are making sure to keep our customers informed and prepared for the law’s pending enforcement, and we feel confident that our comprehensive streamlined products are among the most competitive solutions in the market. In closing, on Slide 13 I would like to present some long-term trends that are beneficial to our business. As I discussed previously, the local fleet vertical which represents the majority of our MRM revenue is expected to grow significantly over the next several years. We believe that we have created a top of the line, all-inclusive solution that will capitalize on this growth and legislative changes. The demand for our aerospace and defense critical missile defense systems continues to provide a [indiscernible] and remains a key component of our core offering. In the medium to long term, we expect to further capitalize on sustained demand for our comprehensive solution and to further expand our diversified customer base. Particularly, we’ve found that the benefit of the all-in-one product will enable us to deal directly with the OEM market, which potentially represents a considerable growth opportunity for Micronet. Additionally, our expanded our HaaS service offering is an opportunity for us to establish recurring revenue from both new and existing customers. As we deliver more all-in-one product and realize the fruit of our labor in the latter half of the year, we will start to see further revenue growth and an improvement in all [indiscernible]. I now turn the call over to questions. Operator?

[Operator:]

[Operator instructions] The first question is from Jennifer Walters [ph] of Comstock Partners. Please go ahead.

[Jennifer Walters:]

Good morning. Could you provide us a little more insight regarding your capacity at the Salt Lake City facility?

[David Lucatz:]

Yes, sure. Thank you for your question. As I mentioned, our Salt Lake facility is now [indiscernible] and we in fact have the ability to produce our product, including the product from [indiscernible] Israel, in the facility. It drastically improves our volume, our capacity, and in terms of revenue it really depends on the mix of our products, but basically I would say it’s a minimum $30 million to $40 million at capacity today, just in Salt Lake.

[Jennifer Walters:]

Okay, great. Thanks so much.

[Operator:]

Your next question is from [indiscernible] of Northwest Investments. Please go ahead.

[Unknown Analyst:]

Hi, good morning. So obviously the ELD mandate is a really big deal for the industry, so could you just provide a little bit more insight as to why your solution is positioned to benefit from it?

[David Lucatz:]

I apologize, but I can hardly hear you. Could you repeat the question, please?

[Unknown Analyst:]

Sure. The ELD mandate is a really big deal for the industry, so could you provide a little bit more insight as to why your solution is positioned to benefit from it?

[David Lucatz:]

Yes, sure. Thank you. Shai, could you please address this question?

[Shai Lustgartner:]

Sure, thank you. Good morning. So the benefits that we have actually relates directly to what was presented by David earlier. Our products actually allow a very easy installation. 2.6 million drivers will need to start being equipped with a suitable, compatible solution, which we have today already. We know that we are one of the first, if not the first ones to have that, and also our solution, the all-in-one concept, unique in the market, allows a very fast, one-time installation. That’s one advantage that we have over the competition. The other advantage, of course, is the open platform, the Android platform that we have in our all-in-one product which allows it to run all type of software that today are developed specifically to respond to the hours of service DoT mandate. So we are very flexible to whatever software integration needs to be on the tablet and very easy to use for driver interface.

[Unknown Analyst:]

Great, thank you.

[Shai Lustgartner:]

Thank you.

[Operator:]

If there are additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. There are no further questions at this time. 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 03-925-5929. Internationally, please dial 972-3-925-5929. David, would you like to make a concluding statement?

[David Lucatz:]

Thank you. In conclusion, we are very excited about the progress we are making. Despite the fact that the progress was not reflected in the financials for the quarter, we have seen it every day from our existing and potential customers. We are going through a major product launch which potentially over time should have a significant positive impact on our business. We have received one very large order from a scooter company in the U.S. for $4 million in the first year, with that number likely climbing in the following two years. This order reflects the potential for us to increase our market penetration with this enhanced solution. The market we are focused on now, the local fleet market, is huge and continues to grow. Furthermore, our revenues are significantly more diverse now across many more customers as opposed to being [indiscernible] in the one customer representing a disproportionate amount of our revenue, as was the case last year. [Indiscernible] of the two facilities in Israel and the U.S. is well progressed and we believe that by the end of 2015, the majority of [indiscernible] will be completed. As part of the process, [indiscernible] relocated to our Salt Lake City facility is driving the company from the U.S. We see great interest from the market and saw a large number of [indiscernible] during the first half of 2015. I would like to thank the devoted team of employees and management, and I look forward to speaking with you next quarter. Thank you.

[Operator:]

Thank you. This concludes the Micronet Enertec Technologies second quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.