MiX Telematics Limited
Q2 2018 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good day and welcome to the MiX Telematics Fiscal Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Paul Dell, Interim Chief Financial Officer. Please go ahead, sir.

[Paul Dell:]

Good day and welcome to MiX Telematics earnings results call for the second quarter of fiscal year 2018, which ended on September 30, 2017. Today, we will be discussing the results announced in our press release issued a few hours ago. I'm Paul Dell , Interim Chief Financial Officer and joining me on the call today is Stefan Joselowitz, or as many of you know him, Joss. He is President and Chief Executive Officer of MiX Telematics. During the call, we will also make statements relating to our business that may be considered forward-looking pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For discussion of the material risks and other important factors that could affect our results, please refer to those contained in our Form 20-F and other filings with the Securities and Exchange Commission available on our website at www.mixtelematics.com under the Investor Relations tab. Furthermore, we will also be referring to certain non-IFRS 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 Securities and Exchange Commission. With that, let me turn the call over to Joss.

[Stefan Joselowitz:]

Thanks, Paul. I would like to thank you all for joining the call today. MiX reported a very strong second quarter evidenced by our ability to exceed expectations across all key operating metrics. In particular, I'm very pleased with our over 18% year-on-year subscription revenue growth on a constant currency basis and adjusted EBITDA margins exceeding 25%. This is the fifth consecutive quarter of adjusted EBITDA margin improvement and further proof that our strategy is working. As MiX continues to leverage our position as the trusted vendor at the high-end of the market, we remain confident in our ability to maintain the momentum and achieve our longer-term adjusted EBITDA margin target of 30% plus. Turning to a summary of our second quarter performance. Our subscription revenue of ZAR 349 million was above our guidance and grew 18% year-on-year on a constant currency basis. Our strong performance was driven by the ongoing demand from a higher RP premium fleet customers globally across multiple verticals, which included over 50% subscription revenue growth in our U.S.A. business for the second consecutive quarter. As a reminder, our higher ARPU in lower trim premium fleet business represents close to 2/3 of our total subscription revenue. We added more than 14,500 net new subscribers during the quarter, taking us to a total base of over 640,000. Given the strong pipeline of committed orders and sales opportunities globally, we remain confident in our ability to maintain the momentum. From a regional perspective, during the first half of the year, we were pleased with the performance of our team in Africa, evidenced by the subscription revenue growth of 13% and adjusted EBITDA margins of 44.6%, despite the challenging economy. As our largest business unit, Africa continues to demonstrate the economies of scale that we believe should be achievable in all of our business units, as they grow towards critical mass. The continued strong execution by our Americas team is highlighted by the over 60% year-over-year growth in subscription revenue on a constant currency basis, as well as an adjusted EBITDA margin of 26%, up over 8 percentage points from last year. In Brazil, subscription revenues increased over 67% year-on-year, on a constant currency basis as adjusted EBITDA margins grew to 34.4%, up from 25.4% in the previous year. From a reporting currency perspective, both Europe and EMEA experienced significant exchange rate headwinds during the first half of the year. Nevertheless, on a constant currency basis, they both delivered modest subscription revenue growth, with Europe being up 7% and EMEA up 5.4% compared to last year. In terms of profitability, our European business delivered adjusted EBITDA margins of 32.9% up from 27% last year. In turn, our EMEA business has started reaping the benefits of the prior year restructuring, with adjusted EBITDA margins increasing to 36.4%, up 10 percentage points. During the quarter, we secured some notable wins, including signing new customers, existing contract extensions and fleet expansions. In the U.S.A., Key Energy selected MiX to ensure ELD compliance and improved fuel economy and efficiency for its fleet of over 750 vehicles. ATS our partner in Algeria, continues to expand their base with us, procuring an additional 2000 devices to meet growing customer demand. These were shipped late in the reporting period and will convert to subscribers in due course. Our partner in Saudi Arabia signed up a large new customer in the transportation business. We have committed to around 600 premium fleet subscriptions. In Brazil, we signed up 5 new bus and coach customers, as well as fleet transport operators, collectively adding over 1,000 premium fleet subscriptions. And in Mexico, we are starting to see traction in the hazardous materials vertical with the signing of 2 new customers with over 400 vehicles. In addition, during Q2, we were pleased to start installations for the large multinational customer win that we announced a few quarters back. That being said, there was a negligible contribution to subscriber growth or revenue from this project during Q2, further highlighting the broad- based strength of our subscription revenue and premium fleet subscriber growth during the quarter. As a reminder, this non-energy premium fleet customer with over 20,000 vehicles has the potential to become one of our largest global key accounts in the next 2 years. From an industry perspective, the depth and breadth of MiXs product offering continues to be one of the key differentiators versus the competition. We continually leverage the power of our premium fleet base and broad product portfolio to generate diversified revenue streams. Customers are able to subscribe to a range of software applications on top of their core solution, such as MiX Vision, Journey Management, Hours of Service and each can -- each add between $10 and $20 per vehicle per month. This not only increases ARPU, but also enhances customer retention. In addition, ARPU is benefiting from the growth of bundle deals to our customers, which are very accretive to our business and contribute significantly more cash over the average customer lifetime of approximately 8 years. The expected lifetime cash contribution from a typical bundled premium fleet subscriber is almost $1,000 higher, when compared to an unbundled deal. Given our strong balance sheet, we continue to aggressively promote bundled solutions and this category now represents approximately 25% of our premium base, up from 16% a year ago. Also recorded over 80% of new additions or bundled deals. Going forward, we expect the trend to continue, which will enhance overall ARPU and decrease lower margin hardware sales, a combination, which we will contribute towards driving our gross margins towards our targeted 70% mark and beyond. Paul will provide more detail in a few minutes, but we are raising our fiscal 2018 total and subscription revenue guidance, given our strong performance this past quarter as well as our pipeline of sales opportunities and firm orders. In addition, we are increasing our adjusted EBITDA margin guidance to 25% at the high-end of the new range, up from our previous guidance of 23.8%, which is a nice step-up closer towards our longer-term target of 30%- plus. Finally, I'm pleased to say that during the quarter, we generated positive free cash flow, while at the same time executing our branding strategy. We believe this highlights our ability to efficiently operate the business and report strong subscription revenue growth at the same time. So in summary, our strong second quarter results are further evidence that our strategy is working and we are seeing margin accretion as we drive benefits of scale from a growing subscription revenue base. MiX remains well positioned to maintain the momentum for the second half of fiscal 2018 and beyond, given the strong and growing pipeline of opportunities worldwide. With that, let me turn it back over to Paul to run through the details on the quarter.

[Paul Dell:]

Thanks Joss. Let me walk through our second quarter fiscal year 2018 performance. And recall that our operating currency is the South African rand. For convenience, we have translated our results into U.S. dollars both for the 2018 and 2017 periods, using the September 30, 2017 spot rate. You can find these conversions in our press release. In addition, please note that our results are presented on an IFRS basis, unless otherwise noted. In the second quarter, total revenue came in at ZAR 411 million, of this total, subscription revenues were ZAR 349 million, up approximately 16% and above the high-end of our guidance range. On a constant currency basis, subscription revenues grew over 18% and this was the highest quarter-over-quarter growth rate in over 3 years. The strong performance was driven by the ongoing positive traction from our premium fleet customers across all geographies and vertical markets, including the energy sector. Hardware and other revenue was ZAR 62 million or down 7% year-over-year. We continue to see significantly more bundled contracts, which is positive for our business longer-term as the largest subscription engagements are more profitable, subscription revenue now represent 85% of total revenue, an improvement compared to 82% in the second quarter last year. Looking forward, we expect the ongoing shift toward bundled deals to increase our subscription revenue as a percentage of total revenue, which will provide us with both improved visibility and higher margins. Our gross profit margin in the second quarter was 65.5%, which includes additional depreciation charges related to in-vehicle devices and hardware peripherals used in certain of our bundled fleet contracts. These contracts generate higher ARPUs and as they go through contract renewal cycles are expected to drive an increase in gross profit margins, which we expect to trend towards 70% in the longer term. Operating expenses were 55% of total revenue compared to 62% of revenue in the second quarter last year, which highlights our ongoing commitment to cost controls and scale in the business. Recall that our general and administration cost include research and development costs not capitalized. For those of you interested to see our historical capitalization and development cost expense, we have provided a table in our earnings press release. To provide investors with additional information regarding our financial results, we disclose adjusted EBITDA and adjusted EBITDA margin, as well as adjusted earnings for the period. These are non-IFRS measures, so we have provided full reconciliation tables in our press release. Second quarter adjusted EBITDA increased 56% to ZAR 103 million or 25.1% of revenue compared to ZAR 66 million or 18% of revenue last year. As Joss mentioned in his remarks, we are very pleased with our adjusted EBITDA margin highlighting our steady improvement towards our long-term target of 30%- plus. Adjusted earnings for the quarter was ZAR 31 million or 5 South African cent per diluted ordinary share, which was up from the ZAR 20 million or 3 South African cents per share we posted a year ago. From a cash flow perspective, we generated a ZAR 104 million in net cash from operating activities and made ZAR 100 million investments in capital expenditures, including investments of approximately ZAR 72 million in in-vehicle devices. This led to a positive free cash flow of ZAR 4 million for the second quarter compared with negative free cash flow of ZAR 16 million during the same period last year. As Joss mentioned, we are very pleased with our ability to generate cash, giving the ongoing investments in in-vehicle devices driven by the demand for our bundled offering. Now, turning to our financial outlook. Due to our better than expected second quarter as well as our expectation for the momentum of subscription revenue growth to continue, we are increasing our expectations for fiscal 2018. Specifically, we are raising our guidance of total revenue to the range of ZAR 1.661 billion to ZAR 1. 687 billion and subscription revenue in the range of ZAR 1.420 billion to ZAR 1.432 billion. This would represent growth of 14.5% to 15.5% compared to our previous guidance of 13% to 14.6% growth. In terms of adjusted EBITDA, we are also increasing our guidance, given the strong Q2 results and our expectation of the margin accretion to continue. Specifically, we are now targeting adjusted EBITDA of ZAR 403 million to ZAR 421 million of fiscal 2018, up from our previous guidance of ZAR 375 million to ZAR 395 million. At the high end of the new range, this represents a margin of 25%, up from our previous expectation of 23.8%. In regards to adjusted diluted earnings per share for fiscal 2018, we are increasing the range to 22 South African cents to 23.5 South African cents from our previous guidance of 19.7 South African cents to 21.8 South African cents. Our new guidance is based on 568 million diluted ordinary shares and an effective tax rate of between 28% to 31%. As we have discussed previously, our attention is to focus on annual targets, as this is how our management has focused and we do not wish to close deals in sub-optimal terms in order to achieve quarterly objectives. This is most relevant as it relates to the hardware and other revenue line items in our profit and loss. The area of revenue where we have the highest level of visibility and predictability is our subscription revenue, which as we have discussed is the largest, fastest growing and highest margin component of our business. For the third quarter of 2018, we are targeting subscription revenue in the range of the ZAR 362 million to ZAR 367 million , which would represent year-over-year growth of 16.5% to 18.1%. In summary, MiX reported another strong quarter as we continue to benefit from the momentum of our premium fleet business and execute our margin accretion strategy. As a result, the company remains well positioned to maintain the momentum for the second half of fiscal 2018 and beyond. I will now hand it back over to Joss for some closing remarks.

[Stefan Joselowitz:]

Thanks, Paul. In closing, MiX is executing its strategy of achieving double-digit subscription revenue growth in parallel with strong margin accretion. This is evidenced by the Q2 performance of over 18% sub-revenue growth on a constant currency basis and our ability to improve adjusted EBITDA margins for the fifth consecutive quarter reaching a new high of over 25%. Our team remains fully focused on building scale through top line growth, which in turn will drive steadily improving adjusted EBITDA margins over time. With that, let me turn the call over to the operator to begin the Q&A session.

[Operator:]

[Operator Instructions]. We'll go first to Brian Peterson of Raymond James.

[Brian Peterson:]

Thanks for taking the question and congrats on a really solid result this quarter. So maybe a little bit of a longer-term question, Joss, so obviously there's some inventory deal wins and clearly increase in growth rates by geographic market and in by vertical but if we had to boil it all down, what do you think the rate -- subscription revenue or maybe deal forecast is for this business as we think about kind of the 3 to 5 year time frame?

[Stefan Joselowitz:]

Brian as you know, we've got a -- inherited booking to our DNA is a balanced approach to the way we build our business. So certainly the way we are thinking about our business going forward is to grow steadily and certainly mid-teens is the kind of growth rate that I would ideally like to sustain in this business, whilst at the same time steadily building our scale in terms of improved efficiency as we -- as we build it. And that's of course a purely organic view on the business. We will also if any opportunities come to accelerate the building of scale through an acquisition at the right price, we would certainly take advantage of that. But I hope that answers your question.

[Brian Peterson:]

No it does. Thanks. And we think about potentially investing into go-to-market resources. How should we think about that qualitatively particularly in the Americas? Are you happy with where you are at right now? Or should we see those investment increase for the next 2 years?

[Stefan Joselowitz:]

We clearly ideally want to see the U.S. and our Americas business steadily grow to a much larger component of our business and that's really a key part of our strategy. And I think even we set a high objectives for ourselves, we clearly will be putting ongoing investment into achieving that objective. But again on a balanced basis. So it's really just getting that balance right and that from a management team perspective, it requires ongoing tweaking. So we will carry on investing in stock that we know is working and of course trying out some new things some of which may need tweaking as we go forward.

[Brian Peterson:]

Got it. And 1 more from me, real quick. Just any update on the CFO search?

[Stefan Joselowitz:]

There is no CFO search here at the moment. Paul is understandably the title, sales interim. And the reality is we've got optionality in terms of how this business progresses from some strategic options that are available to us. And when we have a clear handle in our own minds of the strategic direction that we're going to take for this business. We will make the call to either change the title or bring in a individual that has a skill set required to drive a specific strategy that we may be aiming for. But as things currently stand right now, we are very happy with the job that Paul is doing and we will, as I said, we'll see how things play out once we -- as we move further down the road in terms of evolving our strategy.

[Operator:]

We'll take our next question from Bhavan Suri with William Blair.

[Bhavan Suri:]

Congrats gentlemen, those are very nice set of numbers there. I guess, Joss just right dig into it, you touched on strategic options. I guess, I'm surprised by that comment given sort of -- you guys sort of talked about some interest in past and sort of said values in the company starting to support, you've demonstrated the growth here . Is there anything you want to add to that?

[Stefan Joselowitz:]

No, right now, we are building this business organically. It's no secret to anybody that we are boxing above our weight division from a complexity perspective with a dual listing and we are thinking about how we could longer term simplify our business by potentially having a single listing. And I think I have said it before. If I had a magic wand, we would have a primary listing on -- in the U.S. and really simplify our story in the way we report our business, but there is no plan currently on the table to achieve that objective. We are fully focused on delivering our organic strategy at the moment. And at the same time, we constantly evaluate opportunities and options on how we can advance this business from a simplified perspective or simplicity perspective. So nothing really to add at this stage. It's a statement and a view that I have given before and our view remains the same. Right now, I haven't found the magic wand yet. So we have to rely on old-fashioned blood, sweat and tears.

[Bhavan Suri:]

Okay, and then I guess just turning to the business now. You simply talk enough sort of these deals and you're seeing, we've seen a couple of quarters now, decent size deals. Is there something specific that's happening in the market, do you think it's the sales guys getting traction. The reorg in Europe is driving sort of this larger deal size. There is participation in large deals or do you think it's like just the economy is improving? How should we think about what's driving some of this sort of larger activity?

[Stefan Joselowitz:]

MiX, as you are well aware likes large deals and we particularly love large multinational companies because it really plays to our strengths and generally gives us a competitive advantage. So we are actively pursuing those kind of deals on an ongoing basis. They are great when they comes -- the problem with these large deals is that the sales cycles are long. And I'm pleased to say that we are seeing -- we are seeing deals being signed that have now, but they've been in our pipeline for a long time and it's an ongoing process. So we've got -- we've got a bunch more that we're working on, and hopefully, we will see a steady delivery of nice sized deals as time progresses. Of course the mega deals, we cannot rely on them. They are fantastic when we get them, but they need to be the cream on the top of our business. So whilst we pursuing those very large transactions, there is a significant effort on our bread and butter which are not smoothly per se as many of our competitors would define their target market. But MiX are in the 100s as opposed to into the 1000s.

[Bhavan Suri:]

Got it and one last one from me, as you talk about sort of, you sort of got this large setup of deal chasing and sort of winning now but you also got this ability to cross-sell and up-sell. So as you look in the products, whether it's MiX Tabs, whether its MiX Vision, whether its the Hours of Service. Sort of what are you seeing with the most success attaching the premium fleet solution. When you think about that and you think about sort of if everyone bought everything. What does that opportunity look like?

[Stefan Joselowitz:]

Yes, the opportunity from an operating prospective, and mining our existing base is significant. And it would -- we've got customers on our books now that have per vehicle ARPUs approaching $100. What we need to do is get better at mining existing customers and promoting those attachments in term of course. Not all of that customers need, for instance, MiX Vision but there's certainly a much -- there's a big percentage of untapped opportunity of customers that would derive great benefit from that kind of product. So it's a matter of steadily mining that base and we're getting traction with many of these add-ons. We had a slow start in the beginning with some of them and we're now seeing real traction happening which I'm pleased with. But lots more opportunity and lots more opportunity for us to enhance our blended ARPU with adding on these attachments.

[Operator:]

[Operator Instructions]. We'll go next to Mike Walkley of Canaccord Genuity.

[Unidentified Analyst:]

Hi there, this is Josh [ph] for Mike. Congrats on the strong result. With your strong result and balance sheet, how should we think about your capital preferences going forward from buyback growing the dividend or potential acquisitions?

[Stefan Joselowitz:]

Good question. Capital allocation is something that I and our board and our team revisit and talk about and evaluate on an ongoing basis. Every decision that we make when it comes to capital allocation is really fundamented on what's going to drive the best intrinsic value per share enhancement. And you know that's really what drives our decision making process, it's apparent that we didn't do any share buybacks during the quarter. And the reason for that was, it was a couple of other things that we've been looking at -- that have been interesting. Nothing that's clear in presence, so I want to stretch that, but we decided to keep our powder dry on that basis, despite the fact that we do have approval from our board to do a significant share buyback. And I'd like to just conclude that by saying, we still see significant value in our shares at current levels. And we're going to be hard-pressed to find something that's going to beat our own stock basically in terms of that intrinsic value decision. But we continue to evaluate the situation and will take a look at it on an ongoing basis.

[Unidentified Analyst:]

Thanks and then it looks like the results in the Americas improved quite a bit year-over-year. Are there any other verticals besides energy that drive those improved results. I know in the past you mentioned that -- it -- a big factor is oil and gas, re-subscribing. Is that -- how should we think about that?

[Stefan Joselowitz:]

All-other verticals that are contributing. But I'm not yet happy with our diversification in the Americas. So we have a large exposure to the energy sector, it's a great vertical for us, not only in the Americas, but internationally. And we'll continue to drive opportunities in that vertical, but at the same time, our quest to diversify, because it's really a fundamental part of our DNA, to provide diversified revenue streams in all of our business to derisk our various business units. That quest will continue. And as I said, I'm not yet satisfied with where we are from that position, but we are making from that perspective, but we're making progress.

[Unidentified Analyst:]

And then one final one from me. With low penetration globally still for Telematics, but higher in the U.S. How do you think about -- how does that impact your go-to-market decisions and strategy?

[Stefan Joselowitz:]

We operate in various different geographies and they have varying penetration rates. So you're correct in pointing out that the U.S. in shifting in certain verticals. We are early adopters of some of this technology, so the penetration rate may be higher than in other places in the world. But it's an opportunity, where we're starting off a very -- we started from a 0 base and we're still building off a very low base. So we believe that the opportunities that are present in this market and the broader Americas are plentiful and more than enough for us to bode that element to a component of our business to become a very significant and sizable contributor to our overall group. So we are very happy to continue to invest in this geography.

[Operator:]

We have no further questions. I would like to turn the call back over to Stefan Joselowitz for any additional or closing comment.

[Stefan Joselowitz:]

Thank you all for joining us today. We appreciate your attention and your questions and I did want to mention that we plan to reduce our quiet period, which will now begin at the end of last business day of each respective quarter. This will give us an extra few weeks each quarter to engage with investors and analysts. In addition, we will be presenting at the Raymond James Conference in New York, early December. And I look forward to seeing some of you there. Thanks again and have a great day.

[Operator:]

That does conclude our conference for today. We thank you for your participation. You may now disconnect.