MiX Telematics Limited
Q4 2021 Earnings Call Transcript

Published: 27 May 2021

[Operator:]

Greetings and welcome to the MiX Telematics Fiscal Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Granara, Chief Financial Officer for MiX Telematics. Thank you. You may begin.

[John Granara:]

Thank you, and good morning everyone. We appreciate your joining us to review MiX Telematics earnings results for the fourth quarter of fiscal year 2021, which ended on March 31, 2021. 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 as many of you know him Joss. He is President and Chief Executive Officer of MiX Telematics.

[Stefan Joselowitz:]

Thanks John, and thanks to all of you for joining today's call. Our fourth quarter results once again reflected strong execution by the entire MiX team. Our top and bottom line results for both the quarter and the full-year were well ahead of our expectations as we continued to see modest improvement in many of our key end markets. I want to thank everybody of MiX for their extraordinary efforts during fiscal 2021 under very challenging circumstances. I will quickly summarize our financial and operational results for the fourth quarter and the full fiscal year, which John will review in more detail later. For the fourth quarter subscription revenue was $30.8 million, a 4% decrease year-over-year in constant currency. Adjusted EBITDA was $11.3 million at a 33% margin, which was well ahead of our expectations and reflects better than expected revenue performance and good cost discipline across the business. Free cash flow was $5.2 million, our fourth consecutive quarter of strong cash flow. We ended the quarter with over 744,000 subscribers, which was a decline of 5,000 compared to Q3 and the smallest quarterly decline in fiscal '21. For the full year, subscription revenue was $113.8 million, a 6% decrease year-over-year in constant currency. Adjusted EBITDA was $37.2 million at a 29% margin, which easily exceeded our initial expectations for the year. And free cash flow of close to $30 million, which was a record year of cash generation. Overall, our performance in the fourth quarter continued on the path we experienced for much of the year with modest sequential improvements in subscriber trends in many of our key markets. While we are encouraged by this improvement, new subscriber additions remain below historical levels. Similar to what we've seen in recent quarters, overall demand and customer engagement remains high across our portfolio and in each region, but some customers remain cautious on spending in the near term. We are confident we will be able to accelerate the conversion of our growing pipeline of opportunities over time as economic conditions improve.

[John Granara:]

Thanks, Joss. I'd now like to turn to our financial results for Q4. Please keep in mind that all figures refer to the fourth quarter of fiscal 2021 and all the comparisons are for the year-over-year changes, unless I say otherwise. As a reminder, the majority of our revenues are derived from currencies other than the U.S. dollar. The South African rand strengthened against the US dollar compared to the fourth quarter of fiscal year 2020, contributing to a 2.2% increase in our reported revenues. For the full year, the rand weakened against the US dollar and decreased reported revenues by approximately 5%. Starting with the P&L, total revenue came in at $34.3 million and subscription revenues were $30.8 million, a decrease of 7.4% and 4% on a constant currency basis respectively. The year-over-year decline in subscription revenue is primarily due to contraction in the company's subscriber base. There was also a one-time item in subscription revenue related to the contract renewal with our energy sector customer that Joss referenced. As part of that contract, we accelerated the recognition of revenue related to the initial bundled contract. This benefited subscription revenue by $1.1 million in the quarter. We ended the quarter with over 744,000 subscribers, a decrease of 9% year-over-year and less than 1% quarter-over-quarter. To provide some more context on the trends in our subscriber base, despite the subscriber contraction during the year, we continue to have very high customer retention rate, with a 94% retention rate on large fleets and a 98% retention rate for fleets with more than 500 vehicles. The majority of the premium fleet reduction in the subscriber base in fiscal 2021 was driven by fleet contraction and the reduction of the average customer fleet size, and not due to the loss of customers.

[Operator:]

Our first question comes from the line of Matt Pfau with William Blair. Please proceed with your question.

[Matt Pfau:]

Wanted to ask about the fleet contraction and it sounds like you're through most of the anticipated contraction within your base. But as you look at some of these verticals like public transit or transportation that we're also impacted, are you starting to see some of those fleets bring vehicles back into the fleets that were previously shut down?

[Stefan Joselowitz:]

Yes, thanks. We are certainly seeing in many geographies a steady return to what I'd call normality. Clearly, the global situation is not back to normal yet. So we have countries that are dipping in and out of restrictions, as you're aware. But certainly what we're observing currently and certainly in the geographies where we have big exposure to verticals like public transportation. Is that the picture is certainly looking better than it was four months ago when we were at the beginning of the pandemic, so to speak.

[Matt Pfau:]

And you mentioned that growing the customer base for the year and that was driven by the sub 50 vehicle fleet segments. So I guess that would imply that you're having some nice success with mix now and that initiative. Maybe just give us an update on what's going on there?

[Stefan Joselowitz:]

Yes, certainly we're seeing improvements and the one thing worth mentioning is that the improvements we're seeing is not restricted exclusively for arguments. Actually United States we are seeing a lot fleet efforts, ticking upwards in multiple geographies, which is a good time. So we continue to work on enhancing our digital lead generation efforts, expanding our sales teams and of course enhancing our product range. So overall, I think it's a combination of things that have contributed towards the improvement that we're seeing.

[Matt Pfau:]

Last one from me Joss, just was sort of curious if you're seeing discussions around ESG initiatives play a bigger role in discussions with prospective customers, in terms of them looking to - adopt your solutions to help them achieve some of those goals? Thanks.

[Stefan Joselowitz:]

Thank you and it's a great question. And the answer is yes, it is clearly playing a bigger role. The point we've been making, since inception is that one of the key benefits we offer customers is a substantial reduction in fuel usage, which as a byproduct, obviously lowering the carbon emissions. And so not only are we able to help our customers save a lot of money, by the improving efficiencies, but it also enables them to improve their forecast in terms of ESG performance. So it's definitely a key selling feature of ours. And it's certainly I think, a selling feature that's resonating better with customers now than it was 10 years ago for argument's sake. So we're excited about that trend.

[Operator:]

Our next question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

[Mike Walkley:]

Great, thanks for taking my question. And hope everybody is well and yes congrats on navigating the tough year.

[Stefan Joselowitz:]

Thank you, Mike.

[Mike Walkley:]

Joss the question from me is just as your reinvesting in the business, are there any geographies where you really ramping sales more than others or any - end markets or geographies that you're most excited about in terms of the pace of the recovery, to get to your growth objectives this year?

[Stefan Joselowitz:]

So, from our perspective, the good news is that we're seeing opportunities in really all of our geographies. So we are making great investments across our portfolio. I will repeat that the Americas remain as part of an overweight focus in terms of investments. I think, by virtue of the fact that, we're still relatively in terms of looking at our industry relatively new here. And we see overweight opportunities here. So we are focusing a lot of effort and attention. Yes in terms of recovery, clearly, the United States has done in recent months, a great job of dealing with the pandemic. And we're very excited about the trends that we're seeing here. Conversely, the sad part is there is other geographies in the world that have done a less stellar job or haven't yet got on top of the issues. So the picture in some geographies remain murkier, as they still grapple on the level of restrictions they're going to impose on the citizens and hence the knock on effect that will have on the economies of those regions. But as a management team, we have to adapt. And so we continue to watch the steps carefully and when necessary, treat our efforts. But overall, we're excited about an opportunity, real opportunity that we believe we see ahead of us to return to growth this year.

[Mike Walkley:]

And John, just a follow-up question may be just on some modeling questions. For the quarter, gross margins came in quite strong. How do we think of those going forward and did this upfront payment give kind of a benefit to gross margin. So should we temper that a little bit to kind of tie into your low 20 adjusted EBITDA guidance?

[John Granara:]

I think the 60 - I hope we said previously 64% to 66% is good on a blended basis with subs margin 70% level is typically will have been running out right now. And I think that, those ranges are still good. The one-time discrete event that we made reference to actually had a negative impact on margin both 50 basis points. And so we actually I think, would have been at subscription margin over 70% was actually closer - of one percentage point. So it actually had a little bit of a knock on the gross margins, we reported this quarter. But moving forward, I think 64%, 66% on a blended basis with subscriptions at 70%. I think that's fair.

[Mike Walkley:]

So really indicating, to get to your guidance, a pretty good OpEx investment as you highlighted. And I know travel comes back heavily over the year hopefully as COVID reduces around the globe. But it just still front end loaded and then just continues to grow throughout the years as travel into unique layers on top of your upfront investments is that good way to think about it?

[John Granara:]

Yes, the majority of the investments you'll see in sales and marketing. Now we did mention travel as an example of an expense that will come back. But that's not going to have a material impact as much as the investments we're making in sales and marketing. So I think what you're going to see is the uptick in sales and marketing in the first half of the year. And that's what we laid out from our quarterly cadence standpoint, I think we'll start to see the benefit of that in the second half of the year, but the majority of the investments are being made now. And as Joss mentioned, it's worth mentioning again, we made investments this past year. But we're making incremental investments on top of those.

[Mike Walkley:]

Last question from me I'll pass the line so it is for I guess Joss, just in terms of I guess for both of you in terms of some of the new products that you're working on any of that you expect to impact revenue this year? Are there more products to drive future growth - are you just kind of thinking about timing of any new product introductions coming into the model?

[Stefan Joselowitz:]

Yes, certainly the innovations that we've already announced, we expect it should be revenue generating in this fiscal year. Bear in mind that MiX Vision AI is, an incremental development on top of our existing Vision solutions. Nonetheless, we do believe it's opening up the broader market for us. And we did make reference in the call Jay a large fleet 12,000 units that we've started rolling out that solution for. And we think we expect to see particularly as this year progresses, an increasing impact from the value added products that we've launched including MyMiX Tracking, which is an app-based service, which we believe will expand some of our existing - with some of our existing customers into niche areas of their fleet. So generally, we're excited about the investments we made.

[Operator:]

Our next question comes from the line of Brian Peterson with Raymond James. Please keep your question.

[Brian Peterson:]

Thanks, gentlemen, and congrats on a really strong quarter that revenue number is way ahead of where I had it. So Joss may be, I’ll start with you. We have seen some M&A in the space, particularly in the U.S. over the last several months. I'd be curious to kind of get your thoughts on M&A and what you're seeing in terms of private company valuations and how you're thinking about that as a growth sector going forward?

[Stefan Joselowitz:]

Yes, thank you and appreciate the kind words. Yes, we certainly seeing a continued active M&A environment and the number of transactions announced in the quarter. And we had created some visibility into valuations not all the time, but some of the company has certainly information available on the matrix. And we remain a strong believer that scale matters and we've certainly continue to engage in conversations and look at opportunities. It's certainly one of we call a priority but you know, it's a priority that we're not going to get as stupid about as I guess has already been evidence over our performance over the last five years. We haven't rushed into anything like we have. We have taken around a few things. And I think we will continue to do so. So it's an extra market. And we certainly continue to engage in discussions where appropriate, and we'll continue to keep shop all out for opportunities.

[Brian Peterson:]

And John maybe one for you I know, we talk about some of the growth investments that you're making this year. And I can appreciate the T&E is coming back. Maybe directionally can you help me understand the payback period for some of these growth investments? I know that sales hiring in digital, but should we see those really impact the growth rates this year, maybe back half or is that really just setting us up for the long-term? Thanks, guys.

[John Granara:]

Sure, so we did - as the investments are being made in the front half of the year. I don't expect that we'll start to see a meaningful benefit until the second half of the year, but even more meaningfully, as we go beyond the current fiscal year. So I think you're looking at the investments we're making. Typically, they'll have a six to 12 months lag between when you start to see the benefits. And that's why we said in the prepared remarks that we will probably see it first in ARR, because that's going to be a better leading indicator than subs revenue, because the subs revenue is more of a lag in that regard. So that's so, the meaningful benefit will happen towards the end of the year and most meaningfully into the next fiscal year.

[Operator:]

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Joss for any final comments.

[Stefan Joselowitz:]

Thanks so much, Melissa. And thanks to all of you for joining us today on the call. We really appreciate your interest in MiX Telematics. We will be meeting investors virtually later this quarter, in fact, next week at the William Blair Annual Growth Stock Conference. And we look forward to speaking with some of you then. In the meantime, I hope that you and your families remain safe and healthy. And thanks again for your time.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.