MICT, Inc.
Q4 2014 Earnings Call Transcript

Published: 31 Mar 2015

[Operator:]

Ladies and Gentlemen, thank you for standing by. Welcome to the Micronet Enertec Fourth Quarter and Full Year 2014 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 would like to hand 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 fourth quarter and year-end 2014 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 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 go 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 expressed 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 growing presence in the local fleet vertical, anticipated orders from certain customers, the timing of pending U.S. Federal rule making and the impact of the proposed rules on our business, our expectations regarding diversifying and strengthening our customer base and our future profitability. Such forward-looking statements and their implications involve known and unknown risk, 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 risk and uncertainties including those discussed in the risk factor section and also in the company’s Annual Report on Form 10-K for the year ended December 31 filed with the SEC. Please note that the date of this conference call is March 31, 2015 and any forward-looking statements that management makes today are based on assumptions that are reasonable as of the day expect as otherwise required by law, the company is under no obligation 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 the SEC Reg-G including non-GAAP net loss and loss income. These non-GAAP measures exclude both share based compensation expenses and the amortization of intangible assets, as well as non-recurring items. These non-GAAP measures are not intended to be considered in isolation form, a substitution for or superior to our 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 applicable GAAP measures is included in today’s press release regarding annual results and can also be found in the Investor Relations section of our website. The slides containing the fourth quarter reconciliation can also be found in Investor Relations section of the website as well. On the call this morning, we have David Lucatz, Chairman, President and CEO; Tali Dinar, Chief Financial Officer; and Shai Lustgarten, CEO of Micronet LTD. And again, as a reminder, management will refer in to a slide presentation that can be accessed via the Investor Relations section of the website and then on the link in the press release. Okay with that out of the way, I would now turn the call over to David who will begin the presentation on slide four, please go ahead David.

[David Lucatz:]

Thank you, John and good morning everyone. We will start with slide four. Our fourth quarter results continued the revenue growth and momentum that characterized the second half of our 2014 performance. We delivered solid revenue improvement and achieved gross margin of 31%, within our target range. We are seeking excellent traction from our strategy to shift our sales focus to the largest vertical in the MRM space, the local fleet vertical. As the largest vertical, this is a very attractive market for us with many growth opportunities. The establishment of our U.S. based MRM division has improved our position and enabled us to accelerate our penetration into the marketplace. We have made great progress in expanding and diversifying our customer base and are identifying new opportunities every day. As a result, on a non-GAAP basis, we maintained profitability in the fourth quarter of $521,000. Slide number five illustrates individual strength of our third and fourth quarter. While consolidated revenue grew 42.5% and 12.6% respectively as compared to the third and fourth quarter of 2013 as well as the strength of the back half of 2014, which saw revenue growth of 26% compared to the second half of 2013. We believe that these results showed that our June acquisition of the U.S. based MRM division of Beijer Electronics which established our presence in the U.S. had a positive impact on top line growth as we expected and demonstrated that our Aerospace and Defense division continue to deliver steady revenue. Moving forward, we expect growing demand to our sophisticated missile defense systems. Turning to slide number six, I would like to share our progress integrating the acquisitions that we completed in June. In addition to giving us a dedicated presence and sale team in the U.S. which is the largest and most advanced MRM market in the world, the acquisition added a complementary product line that allows us to concentrate our efforts on penetrating the local fleet market. We have effectively consolidated our marketing and sales efforts resulting in a growing and more diversified customer base and recorded revenue in the second half of 2014. On slide seven, we show consolidated revenue performance in the fourth quarter of 2014 compared with the fourth quarter of 2013 and also break out the revenue contribution from each of our two divisions. Revenue grew 12.6% in the quarter, primarily driven by growth of 31% in the MRM division versus 2013. As shown in slide eight, in addition to increasing our revenue in the MRM division, we also increased our focus on the local fleet vertical within that division. In 2013, the local fleet vertical accounted for approximately 18% of our sales. By the end of 2014, the local fleet vertical accounted for approximately 38%. As previously mentioned, local fleet is the larger vertical in the MRM space and according to an industry study from Licht and Associates, local fleet is more than five times larger than the long haul market and growing rapidly. Licht predicts that the local fleet market will grow from 4.2 million units installed in 2014 to 5.7 million units installed in 2016. We believe our comprehensive portfolio of product is well positioned to meet the demand of the growing local fleet market. On slide nine, you can see how our customer diversity has increased in our MRM business. Last year, one very large long haul account represents 83% of our business. While we retained that customer in 2014, altogether our largest 10 customers account for 78% of our sales in 2014. Importantly, many of them are in the important local fleet vertical. I will now turn the call over to Tali, our CFO who will review the numbers in more details. Tali?

[Tali Dinar:]

Thank you, David. As David has reviewed, consolidated review grew 12.6% in the fourth quarter. Gross margin was 31% within our target range. Total operating expenses as a percentage of sales were 35% in the fourth quarter as compared to 23% in the fourth quarter last year. Sales and marketing was higher, due considerable investments in growing the MRM business and increased sale commission as a result of increasing our sales and marketing team. General and administrative expenses as percentage of sales increased to 19% from 14% primarily due to non-cash items, including $381,000 in stock-based compensation as well as $0.5 million in one-time write-off for doubtful debt. We anticipate that as we move through fiscal 2015 with our operating expenses as percentage of sales will come down. For the year ended December 31, 2014, the company revenue declined to $34.2 million as compared to $35.6 million primarily due to lower pricing and sales volume from a major customer as compared to last year. Gross margins for the year decreased to 29% from gross margin of 37% last year, mainly due to expenses associated with establishing the new U.S.-based facility combined with different product mix. Selling, general and administrative expense for 2014 increased to $8.2 million or 24% of sales compared to $5.3 million or 15% of sales last year. The increase was primarily related to approximately $1.4 million in cost associated with the reorganization of our MRM operations in the U.S. following the June acquisition of Beijer U.S. vehicle operation. General and administrative expenses include non-cash items of $402,000 in stock-based compensation as well as $1 million in one-time write-off of doubtful debt. The company reported an operating loss of $1.8 million in 2014 as compared to operating income of $4.6 million last year. Non-GAAP net loss for 2014 was $542,000 or $0.09 per share compared to non-GAAP net income of $1.6 million or $0.31 per share in 2013. Slide 11, shows non-GAAP net income. We believe that this non-GAAP financial measure reflects our ongoing business in a manner that allows for meaningful comparison and analysis of trends in our business as they exclude expenses and gains that are not reflective of our ongoing operating results. In 2014, non-GAAP net loss was $542,000 or $0.09 per diluted share. We achieved non-GAAP net income of $521,000 for the three months ended December 31, 2014. This highlights that in spite of the considerable investments we are making in the long-term growth of our business particularly on the heels of the reorganization of our MRM operations, including the U.S. acquisition, we are profitable from a non-GAAP standpoint. On slide 12, you will see that our balance sheet is healthy. As expected, cash decreased and debt increased as we integrated the acquisition of the U.S. MRM business. Working capital remained strong, as of December 31, 2014 is $16.4 million and we had $14.1 million in stockholders’ equity as of that date. I’ll now turn the call back over to David.

[David Lucatz:]

Thank you, Tali. An important element of our growth strategy is our ability to form new relationships to bring our solutions to customers. Slide 13 provides a few examples from the quarter. On the MRM side of the business, we began working with a leading U.S. based provider of bulk material supply chain solutions. Specifically, this company placed a $1.7 million order for TREQ-fully portable rugged mobile tablets to enable bulk material just in time transaction and proof of delivery. This order demonstrates the continued momentum of our sales and marketing efforts and our progress toward establishing Micronet as a major supplier of rugged tablets to the MRM market and we look forward to introducing new product line to the local fleet vertical in the coming months. Additionally, during the quarter our Aerospace and Defense business received two purchase orders with a combined value of $1.1 million from a global aerospace corporation for computer based solutions for critical missile defense systems. We expect to receive follow-on order from this customer as we expect growing demand for our sophisticated missile defense systems. Moving to slide 14, we present the Electronic Logging Devices or ELD mandate opportunity. This is a potential catalyst for our company that I’m not sure all of our investors are familiar with. By way of background, fleet drivers are required to keep record of hours of service. For example, fleet drivers may not drive more than 11 hours per day and are required to take rest periods. Historically, these records were kept in paper logbooks, but those are being replaced by ELDs, which connect the vehicle to the vehicle engine. In July 2012, the U.S. Congress passed legislation requiring ELDs. This legislation requires the Federal Motor Carrier Safety Administration or FMCSA to adapt rules implementing this requirement. The FMCSA is expected to issue final rules under the legislation later this year with enforcement beginning two years later. Essentially, this is expected to increase the amount of ELD-equipped trucks from 500,000 today to approximately 2.6 million. Given our position in the vehicle market, we believe there are opportunities for us to potentially benefit from this law and we are working hard to make sure our customers understand the requirements and are aware that we have the appropriate solutions for them. Turning to slide 15, there are several trends we are positioned ourself to capitalize on. In our MRM business, the local fleet vertical, which now comprise 38% of our MRM revenue is growing rapidly. Additionally, our Aerospace and Defense business is a leader in solutions for critical missile defense systems. And given the international climate, the need for the technology remains steady. In the near to medium term, we expect to continue to build on the momentum we have been seeing from strong market demand for our solutions and to continue to diversify and strength our customer base. With continued sales growth and the introduction of enhanced product, we expect to continue to march forward towards enhanced profitability. I will now turn the call over to questions. Operator?

[Operator:]

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instruction] The first question is from Nick Wilson of Rockbridge Capital. Please go ahead.

[Nick Wilson:]

Hi, thanks for taking my questions. So G&A as a percentage of sales increased a little bit in 2014, how should we think about G&A going forward?

[David Lucatz:]

Could you please repeat the question?

[Nick Wilson:]

Yeah, sorry. The G&A as a percentage of sales increased a bit in 2014. How should we think about that going forward?

[David Lucatz:]

Well, we – [indiscernible] that we had in 2013, 2014 was a decent year especially in view of acquisition and some other one-time expenses in the G&A. At the bottom line, we expect to go back to the same rate, which was roughly around 12%, like 2013.

[Nick Wilson:]

Okay, great. Thank you.

[Operator:]

The next question is from Hamed Khorsand of BWS Financial. Please go ahead.

[Hamed Khorsand:]

Hi, good morning. So first off I’m just trying to understand last year you were talking about new products that would help in – generate revenue than this year – sorry, 2013 than 2014, you transitioned to a different focus on local fleet. So I’m just trying to figure out, do you have a strategy in place? I mean, I have a stock that’s in my portfolio not done anything for two years. So I’m just trying to figure out what’s the plan.

[David Lucatz:]

Well, first of all, we definitely have a strategy and I’ll be happy to elaborate. I just want to emphasize one thing which might be unclear, but this 2014 more of a transition year because we – in addition to all other things, we also acquired a company in the U.S. and moved the majority of the business into the U.S. So, first of all, back to your question, we have a very clear and very – I would say, very aggressive strategy. We believe that 2015 will be – will give us much better view of the strategy. 2014, as I said, was a transition year. We think that – I’d like Shai Lustgarten, the CEO of Micronet to elaborate a little more about the strategy. Shai?

[Shai Lustgarten:]

So, basically, related to your question, the focus was not specifically on local fleet, the focus of the company was to be relevant to the market. If before we were relevant to one vertical, which was the long haul vertical, and that limited us from being exposed to other verticals. We came out with a product offering today that is relevant to the additional and most growing verticals of the MRM world and that show the immediate results due to that strategy implementation. So now Micronet has a very leading product portfolio that is relevant for the whole market.

[Hamed Khorsand:]

All right. And then from a customer standpoint, I saw the graph, you have a broader customer base, but what’s the rate of repurchasing? Are they coming back and buying more or are these all one-time deals that you’re getting and you have to go onto another customer?

[Shai Lustgarten:]

So, today – no, that is one of the unique things about Micronet. We really keep a good strong customer base and we are looking forward to continue in expanding the customer base. These are not – rarely you will see customers that leave us, but mostly these are long-term relationship, a lot of them are also backed up with agreements – supply terms agreements between us and the customers for several years to ensure supply chain directly to their fleets and et cetera. So, no, these are not one-time, these are actually long-term. And the strategy, of course, is to continue and expand the family of customers that Micronet has.

[Hamed Khorsand:]

Okay. My last question is given where revenue has been for the MRM division, now this a steady effect now above $7 million per quarter, you feel comfortable about that?

[David Lucatz:]

We don’t – as we said in the past, we don’t disclose forecast, but I’m repeating myself that we believe that the MRM market and our position in the market is growing. So we always look at it from an annual basis and I wouldn’t stick to a quarter. From an annual basis, we believe that the company will continue to grow.

[Hamed Khorsand:]

Okay. Well, today is the last day of the quarter, so how happy are you of Q1’s performance?

[David Lucatz:]

We are happy, but, first of all, again, we cannot disclose any information especially since the quarter will end by midnight, lot of movement. But basically we feel very comfortable and we – as I said, we see growth – or we expect growth in the company for 2015.

[Hamed Khorsand:]

Okay. Thank you.

[Operator:]

[Operator Instructions] The next question is from George Melas of MKH Management. Please go ahead.

[George Melas:]

Good morning, guys. Seems like a strong end to the year. If we look at the MRM business and we exclude the very large customer that you had in 2012 and 2013, it seem like the business excluding that customer basically quadrupled in 2014. Is this about right? And what kind of growth rate you think the business can have in 2015?

[David Lucatz:]

Hi, George. We are happy to have you on the call. I just – I want to address your question. And if you look at the numbers, I don’t think you can compare apples-to-apples here because 2013 and – 2012 and 2013 were characterized by a major single customer in the long haul; whereas if you look at the 2014, the majority of the sales are not for the long haul and not for this customer. So, basically, back to your question, we do see a significant growth in the MRM, because if you take it aside this customer and you look at the remaining, the majority of the sales are for new customers.

[George Melas:]

Right. I mean the math that I basically do is that it seems like excluding that customer, the MRM sales were roughly $4 million in 2013 and they jumped to $16.5 million in 2014 granted a big chunk of is from the Beijer acquisition of course, but I just want to point out to sort of the growth that you have in your business excluding that one – your old legacy customer?

[David Lucatz:]

Yes, you are absolutely right. And also the numbers are very much similar to the correct numbers. So the bottom line, we see a significant growth in the MRM if you put aside this customer. One thing though, I believe we mentioned in the past, we don’t look at it as a two different companies anymore, we – the majority of the sales are eventually done by the U.S. company now and this is exactly where we are heading to to make the U.S. company the major business unit and we’re pretty much there already. So I wouldn’t differentiate between the two companies, I would just look it as a one MRM business.

[George Melas:]

Okay, very good. And you talked about the gross margin enhancing, you mentioned that you expected the gross margin to increase in 2015, but I didn’t quite catch that. Can you give us little color on that and maybe provide a little additional color by the two segments of the business?

[David Lucatz:]

Okay. It’s a very good question, George. The gross margin have been in 2014 affected by two major factors. One is the fact that we had a major decrease of sales to our major customer, including a major decrease in prices. So this obviously affected the gross margin and this is one of the thing, which we don’t expect, we don’t see in 2015. As a matter of fact, in the first quarter of 2015 we haven’t sell a single dollar to this major customer. So this obviously would affect the gross margin. Secondly, you mentioned right, it’s also affected by the Aerospace division. In Aerospace division, we see pretty much a stable gross margin. We believe that 2015 we have a little better gross margin, but if you look back for the last few years, the gross margin was pretty much around the same number in the Aerospace/Defense. Taking everything which we just said and wrapping up, we do believe that June 2015 will see an improvement of the gross margin.

[George Melas:]

Okay. You ventured to give us a margin – do you think that you’d grow to 35%?

[David Lucatz:]

Well, again, I cannot be too specific, but we’d probably be in the 30% to 35%, and we of course we believe it’s going to be on the high part of it.

[George Melas:]

Okay. Great and…

[David Lucatz:]

And George, one more thing, if you look only on the fourth quarter you can see the improvement on the gross margin. In MRM business, we’ve been up from, I believe 25% up to 31%. So, basically you can see the trend already, and then the major reason is the decrease of sales to this major customer.

[George Melas:]

Okay. And just to understand that, the gross margin in the MRM business from third to fourth went from what to what?

[David Lucatz:]

I believe it 25% to 31%.

[George Melas:]

Okay, okay, great. And then maybe a couple of balance sheet items, can you tell us how much cash and how much debt is attributable to Micronet Israel, to your sub?

[David Lucatz:]

Tali, could you please address the questions?

[Tali Dinar:]

Yeah, of course, out of the $14.9 million cash and cash equivalent, we have around $8 million related to the MRM and the rest related to the Aerospace. And the debt of course increased, but this is result of the acquisition and total debt increased from a $9 million to $14 million, mainly due to bank debt taken related to Beijer acquisition.

[George Melas:]

Yeah, and the how much of that debt is with the sub?

[Tali Dinar:]

Sorry.

[George Melas:]

How much of the debt is attributable to Micronet Israel?

[Shai Lustgarten:]

If you want a precise number, it is going to take a while to find it, but it’s roughly around $4 million.

[Tali Dinar:]

$4 million yes.

[Shai Lustgarten:]

It is $4 million in Micronet and the majority of the remaining is in Enertec.

[George Melas:]

Okay, great. Okay, I look forward to a great 2015. Thank you very much.

[Shai Lustgarten:]

Thank you, George.

[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 1888-782-4291, in Israel, please dial 03-9255-941, internationally, please dial 9723-9255-941. David, would you like to make closing remarks?

[David Lucatz:]

Yeah, thank you. In closing of this call, as you can see, in 2014 we established a solid and healthy base for the future success of the company towards becoming a dominant and global player in the MRM field. We acquire base of operation in the U.S. and quickly combine the two operations into one solid efficient organization with immediate results in sales growth and customer diversification. We have established a new customer base shifting from 83% of sales to one major customer in 2013. We moved to 2014 with ten customers accounting for 78% of sales. This is significant result in a minimum time. We sold over 160 DTKs, some for development tool kits to various potential customers in 2014 as compared to approximately 20 last year. This emphasizes the market’s interest in our enhanced product and our marketing efforts we are doing. As the MRM market is very dynamic we continue to invest in R&D aiming to offer new innovative products with very attractive features. It’s innovation to be announced during 2015 should be market leaders and the engine of our future growth. This is only a partial review of the operational steps we’ve taken in 2014. We enjoy now a solid base to continue toward next year with a stronger company with diversified customer base and comprehensive product offering, fulfilling our plan to become one of the leading providers of Rugged Tablets to the multi-billion MRM market. I would like in fact to thank the local team of employees and manager that working hard contributed to the 2014 achievements and I want to thank you, the shareholders, for the confidence and support. Wish you happy holiday and talk to you soon.

[Operator:]

Thank you. This concludes Micronet Enertec Technologies fourth quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.