MiX Telematics Limited
Q1 2021 Earnings Call Transcript

Published: 31 Jul 2020

[Operator:]

Greetings. Welcome to the MiX Telematics Fiscal First Quarter 2021 Earnings Results. [Operator Instructions] Please note, this conference is being recorded. At this time, I will turn the conference over to John Granara, Chief Financial Officer. You may begin.

[John Granara:]

Thank you, and good morning, everyone. We appreciate you joining us to review MiX Telematics' earnings results for the first quarter of fiscal year 2021, which ended on June 30, 2020. Today, we will be discussing the results announced in our press release issued a few hours ago. I'm John Granara, MiX's Chief Financial Officer, and I'm joined by Stefan Joselowitz, or as many of you know him, Joss. He is President and Chief Executive Officer of MiX Telematics. During today's call, we will make forward-looking statements related to our business, which are subject to material risks and uncertainties that could cause our actual results to differ materially. For a discussion of the material risks and other important factors that could affect our results, please refer to those contained in our Form 10-K and other SEC filings, including our current report on Form 8-K that was filed today, all of which are available on the Investor Relations section of our website. We will also be referring to certain non-GAAP financial measures. There is a reconciliation schedule detailing these results currently available in our press release, which is located on our website and filed with the SEC. With that, I will turn the call over to Joss.

[Stefan Joselowitz:]

Thanks, John. I would like to thank you all for joining the call today. I hope you and your families are all safe and healthy. Our first quarter performance was relatively solid, given the challenges presented by the COVID-19 pandemic. To quickly summarize our financial and operational results for the period

[John Granara:]

Thanks, Joss. I will now turn to our financial results for Q1. Please keep in mind that all figures refer to the first quarter of 2021, and all comparisons are for the year-over-year changes, unless I say otherwise. As a reminder, the majority of our revenues and subscription revenues are derived from currencies other than the U.S. dollar. As expected, the weakening of the South African rand had a negative impact on our reported revenues due to the disruption from COVID. The South African rand weakened by 25% against the U.S. dollar compared to the first quarter of fiscal year 2020, contributing to a 12% reduction in reported subscription revenues and to an 11% reduction in reported total revenue. Starting with the P&L, total revenue came in at $27.5 million, a decrease of 13% on a constant-currency basis. Of this total, subscription revenues were $25.9 million, a decrease of 6.1% on a constant currency basis. The decline in constant currency subscription revenue was primarily due to contraction in the company's subscriber base as a result of the economic conditions attributable to the COVID-19 pandemic, as well as the impact of temporary pricing concessions granted to customers in certain verticals. We ended the quarter with over 787,000 subscribers, an increase of 3% year-over-year, but our subscriber base contracted by 30,700 subscribers in the first quarter, or 4% sequentially. As a reminder, contraction from premium fleet customers has a disproportionate impact on our overall ARPU. Hardware and other revenue of $1.6 million were down sequentially and year-over-year by 66% and 65%, respectively. Moving on to gross margin and operating expenses, gross margin was 68.8%, up from 66.3% last year. Overall, we had a strong gross margin quarter, driven by the increased mix of subscription revenue. Operating expenses before restructuring charges were 56% of total revenue, compared to 51% of revenue in the first quarter last year and were down 16% compared to prior year and 10% sequentially, reflecting the partial impact of the cost actions taken during the quarter, including headcount reductions, deferred salary increases, a hiring freeze across the business, and significant reductions in discretionary spend. We will realize the full benefit of these actions in the second quarter and beyond. I would note that as part of the headcount reductions in the quarter, we did incur an $844,000 restructuring charge. Adjusted EBITDA was $7.5 million or 27.1% of revenue compared to $10.1 million, or 27.7% of revenue, last year. We are pleased with the margin performance in the quarter, which reflects the proactive steps, with our cost structure, mentioned above, offsetting much of the impact of lower revenue. Non-GAAP net income for the quarter was $1.8 million, down from $4.4 million in the year-ago period. Company's effective tax rate was 3.7%, compared to 18.6% in the first quarter of fiscal 2020. Ignoring the impact of net foreign exchange gains and losses, the tax rate, which was used in determining non-GAAP net income, was 30.2%, compared to 27.4% in the first quarter of fiscal 2020. Turning to the balance sheet, which remains strong, we ended the quarter with $25.3 million of cash, cash equivalents, and restricted cash, compared to $18.7 million as of March 31, 2020. Accounts receivable improved sequentially, but DSO remains elevated. We continue to believe we’ve appropriately accounted for any uncollectible amounts with the allowances we have recorded. From a cash flow perspective, for the first quarter, we generated $9.4 million in net cash from operating activities and made $2.1 million investments in capital expenditures, leading to a free cash flow of $7.2 million. The use of cash includes investments in in-vehicle devices of $1 million. The significant increase in free cash flow reflects the working capital benefits, as well as lower capital intensity, due to fewer in-vehicle device installations. Before I wrap up, I would like to provide some additional perspective on how we expect the year to play out. As Joss mentioned, we continue to manage the business assuming constant currency subscription revenue could decline as much as 10% to 20%. We continue to expect that the majority of the subscriber contraction will be in the first half of the year. However, we now expect the contraction to be more balanced across the first two quarters. From a profitability perspective, we are very pleased with our cost discipline and how we manage expenses while investing for growth. As you think about costs, second quarter costs are expected to be lower than Q1 and relatively flat thereafter. We are confident we can deliver at least 20% adjusted EBITDA margins for the year. To summarize, we are executing on our core priorities in managing the business through the current environment well. Our updated profitability target for the year reflects our operating discipline and the strength of our business model. We remain confident we will deliver on our long-term growth and profitability objectives as market conditions normalize. With that, we would now like to take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Matt Pfau with William Blair.

[Matt Pfau:]

Hey guys, thanks for taking my questions. First, Joss, I wanted to start off with the comments that you made around the traction you're seeing with large fleets in the pipeline. Maybe you can just give us some more detail on that comment. What types of fleets? Is there a trend there? And any specific geographies that you're seeing strengthened?

[Stefan Joselowitz:]

Yes, it's almost counterintuitive, but considering the circumstances that we're facing, but our pipeline and the kind of conversations we're having with many large fleets from in various verticals, in various geographies is as exciting, probably, as I've ever seen it. I mean, we are involved in a lot of very exciting bids. Of course, we’ve got to get them across the line, but we’ve always backed ourselves when we are in this kind of situation. And it's pretty encouraging, particularly considering the world that we are currently in.

[Matt Pfau:]

Got it. And is there anything specifically that's sort of driving these discussions? Are they viewing maybe a slower economic time as a good opportunity to implement a fleet management solution or change one out, or anything regulation else that's sort of driving these discussions?

[Stefan Joselowitz:]

Yes, I think there's a growing recognition among larger fleets that centralized data and the value that it unlocks in a mobile from a mobile asset perspective is significant and accretive to their businesses. And I think that recognition and realization is driving these conversations. And I think it's exciting from an industry perspective, and particularly exciting from our perspective, as it applies to global fleets, that we are almost uniquely positioned to be able to, I guess, solve some pieces of this puzzle for them.

[Matt Pfau:]

Got it. And then I wanted to ask one on the pricing concessions that you mentioned. I think if we go back to the last earnings call, there was a discussion around specifically in the bus and coach vertical, with some of those operations being near completely shut down, that you were giving some of those customers some breaks? Is that what the pricing concessions are related to, or are they more broad-based than that?

[Stefan Joselowitz:]

Well, I think it's sometimes more it's certainly more broad-based than just necessarily a particular vertical. So of course, we're acquired and where appropriate, we are working with our customers. We generally endeavor to get future concessions as part of that process. And generally, we are not in all instances, but generally, I think we are successful in achieving that. But I think it's in time of crisis that there's an opportunity to really cement customer relationships and show that you're a willing and I guess empathetic partner to help the customer through the situation. And we've learned that from previous situations, although this is this one is pretty unique. We've been through other economic fallout before, and we have worked with our customers, and we've generally found that cooperating, not just relying necessarily on the absolute letter of the contract, but showing empathy and cooperating on finding a way to get through the hard times together pays long-term dividends.

[Matt Pfau:]

Got it. Thanks for taking my questions, guys.

[Stefan Joselowitz:]

I appreciate it.

[Operator:]

Thank you. [Operator Instructions] Our next question is from the line of Brian Peterson with Raymond James.

[Unidentified Analyst:]

Hi guys. Kevin here on for Brian. Thanks for taking my call. I think you said that new subscriber activity improved toward the end of the quarter, and I'm wondering if there's anything else you could say around the cadence for the quarter. And, maybe, how have you seen retention trend across some of your key verticals?

[Stefan Joselowitz:]

Yes, so I will probably, in terms of the retention, pass it over to John. But in terms of the cadence, the first two months were really unprecedented. We were facing almost a total shutdown in multiple geographies. And I guess new economic activity was roughly, and I’m just giving you an idea of the cadence, was running at something like 20% of normal. In June, we saw it, as some geographies started opening up, rising to something resembling 50% of normal. And I guess that's a, in terms of a broad brushstroke kind of view, that can certainly give you a feel of the cadence. John, do you want to comment on churn versus contraction?

[John Granara:]

Absolutely. And with regards to the contraction, I would say the -- and just qualitatively say the majority of the subscriber contraction came from customers with large fleets where we did not lose the customer. We actually retained the customers. In terms of customers lost, the majority of those were consumer-based or very small fleet operators. So, importantly for us, we retained the majority of the customers, and it was really just a result of them reducing their fleets during the pandemic. And more importantly, we -- as we’ve seen before in the past with recoveries, the important point there would be is that we would expect, at some point, those vehicles to come back online.

[Stefan Joselowitz:]

Yes, I suppose if I can just finish up on that answer is, so new economic activity was significantly down, contraction was up. And as far as regular churn, let's call it, and particularly in our smaller asset-tracking consumer kind of businesses, that was about par, so that ran as normal. No significant change to the regular cadence of that.

[Unidentified Analyst:]

Got it. That’s helpful. Maybe one other one. I think you said previously that previously, it was where you're seeing some of the bigger contractions. Was that still the case this quarter, and were there any differences to call out between that versus some of the asset or light fleet products?

[Stefan Joselowitz:]

So from a contraction perspective, and again, differentiating from churn is that contraction with -- the customer is happy. We continue with our relationship with them. And it's been other there's been a reduction in fleet size. And if we compare to the same quarter a year-ago, most of our key verticals contributed expansion to our positioning 12 months ago, whereas this quarter, they were contraction. Was it all out of premium fleet? No. We did see significant contraction, as would be expected out of our -- in our asset-tracking business, primarily from our leasing vertical, car rental companies who have experienced, obviously, a lot of pain through the absence of tourism due to the pandemic and related shutdowns.

[Unidentified Analyst:]

Very helpful. Thanks, guys.

[Stefan Joselowitz:]

I appreciate it. Thank you.

[Operator:]

Thank you. At this time, we've come to the end of our question-and-answer session, and I will turn the floor back over to Mr. Stefan Joselowitz for closing remarks.

[Stefan Joselowitz:]

Yes, I just want to, again, thank everybody for joining the call today. And we are not going to be seeing anybody, so to speak, at conferences in the near future, but we are participating in some virtual events. I think the next one we've got coming up is with Canaccord, if I'm not mistaken, and we're looking forward to that, John. And in the meantime, until we talk again, please wish -- we wish everybody and their families all the best through this crisis and look forward to returning to a world of normality in the not-too-distant future. Thanks for your time, everybody.

[Operator:]

Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.