MiX Telematics Limited
Q1 2016 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Good day and welcome to the MiX Telematics First Quarter Fiscal 2016 Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Megan Pydigadu, CFO. Please go ahead.

[Megan Pydigadu:]

Thank you. Good day and welcome to MiX Telematics earnings results call for the first quarter of fiscal 2016 which ended on June 30, 2015. Today we will be discussing the results announced in our press release issued a few hours ago. I’m Megan Pydigadu, Chief Financial Officer and joining me on the call today is Stefan Joselowitz or as many of you know him, Joss. He is the President and Chief Executive Officer of MiX Telematics. During the call we will make statements relating to our business that may be considered forward-looking, pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are subjects to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a 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. Also during the course of today’s call, we will refer 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 Web site and filed with the Securities and Exchange Commission. With that, let me turn the call to Joss.

[Stefan Joselowitz:]

Thanks Megan. I would like to thank you all for joining us to review our first quarter fiscal year 2016 financial results and outlook. We again posted solid revenue growth, profitability and operating cash flow and our results for the quarter demonstrate our proven ability to deliver ongoing value to customers across the globe. We continue to take a balanced approach to growth and profits and I am pleased to report that our adjustments to alleviate cost structures are yielding sightings without undermining our productivity. With our growing stability features including flexible analytics and extended mobile capabilities we continue to capitalize on our position as a leading global provider of cloud based fleet management and asset tracking solutions. Megan will shortly take you to the financial details, but let me provide you an overview of the first quarter fiscal '16 results. We posted 15% subscription revenue growth compared to Q1 last year. This was at the midpoint of our guidance. Net of churn we grew our subscriber base 13% over the past year. Our gross margin of 70% was up 4% from the comparative period as subscription revenue currently makes up nearly 18% of our total revenue. More and more customers are opting for our fully bundled offering and as the long-term value of these contracts are higher; we are pleased with this trend. We have posted adjusted EBITDA margin of 19%. The first quarter is seasonally the low point for margins in our fiscal year. We believe our expected annualized margin which is over 20% is a more accurate representation of that current operating leverage. Furthermore we believe there is room for margin expansion overtime. In fact we continue to believe that over the long-term our global business can achieve adjusted EBITDA margins close to those of African region which has achieved higher critical mass and delivers nearly a 28% margin. We ended Q1 with cash and cash equivalents of R959 million, up from R945 million at the end of the last quarter. We generated R35 million in cash from operating activities, while generating free cash flow is a major priority we did invest R38 million capital expenditures. Trading conditions are not easy in some of our markets and the downward pressure on the oil price is impacting our customers in this vertical. Although some fleets are downscaling their operations we are still signing contract extensions and winning new business. In quarter two, we expect to start making significant progress with a rollout of the bundled contracts extensions with two of our major oil and gas customers in the U.S.A. These deals which we announced in last quarter's call will enhance our present statements and contribute towards accelerated subscription revenue growth in the second half of fiscal '16. We are also expecting to commence installations to a sizeable opportunity with a global key account in the construction industry. The pipeline in the Americas is growing and we have further extended our sales team there to capture the opportunity that this market presents. Despite the economic situation in Brazil, our team there continues to secure important wins and we have commenced the rollout numerous premium fleet contracts including [indiscernible] a transport company with 400 vehicles, Transdona [ph]a construction company with over 560 assets and Transcuba, a public transport company with over 300 buses. In Europe we have also closed large deals including a 1,000 vehicle for a large media company in mainland Europe. The bus and coach really continues to deliver steady growth for us with the addition of a new municipal customer in the United Kingdom for 300 buses. The Middle East and Africa, both continue to show strong quarterly growth. The recently acquired global key account based in the Middle East committed to extending that contract by a few hundred additional subscription and a pan African media company is coming to rolling up a MiX premium fleet solution to several 100 vehicles in multiple countries in the coming quarters. We continue to take a balanced approach to producing growth profitability and cash flow. As we have discussed in prior calls, given macroeconomic conditions we took some cost cutting initiatives in the 2015 fiscal year. We have already seen positive effects on profitability in the actions in the EMEA. While the cost savings from streamlining of the African operations we will continue to realized over the first half of the fiscal year. Globally we added 11,000 net new subscribers in the quarter and are continuing to invest in key initiatives that support our growth including the expansion of our sales and marketing teams. We have also increased our investment in innovation and have grown our software development team who are working on new applications and product extensions. Some of the new initiatives that we will launch in a next few months include MiXT insight and agility, a flexible self-serviced analytics add on that give customers the ability to design reports and data using standard tools like Microsoft Excel of MiXT of a flexible android based task management solution for field workers and Minex a web portal and mobile application for drivers to monitor and analyze their driving performance. MiXT Telematics continues to be a prime beneficiary of a trend to leverage -- to facilitate cost effective management. We are well positioned to capitalize on emerging vectors of growth as business has seek to leverage better our systems gather to optimize fleet efficiency, security, regulatory compliance and safety. Our global footprint is a key differentiator and our first quarter performance demonstrates that we continue to execute our - strategic objective of delivering a balanced approach to growth, profitability and cash generation. At this point let me hand it over to Megan for further insights into the first quarter financial results.

[Megan Pydigadu:]

Thanks Joss. Let me walk through our first quarter fiscal year 2016 performance across each of our key operating metrics as well as our revenue and earnings targets. Bearing in mind that our reporting currency is the South African rand, for convenience we have translated our results into U.S. dollars both for the 2016 and 2015 periods using the June 30 2015 upgrade. 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. Moving to our first quarter results. Total revenue was R344 million, which is a 7.8% increase from a-year ago first quarter. Our first quarter subscription revenue of R272 million was up 14.9% year-over-year. This was at the midpoint of our guidance range of R270 million to R274 million. We added 11,000 subscribers in the quarter and now have 523,344 subscribers for an increase of 13% year-over-year. Subscription revenue is now 79% of our total revenue which is up from 74% a year ago. Additionally, let me remind you that the hardware component of our revenue is subject to quarter-to-quarter variability, as it typically recognized on an upfront basis. The size of the customers choosing to pay for the hardware separately also tends to be large making this large subject to significant volatility, there is no change to our view, that hardware and other revenue will continue to decline as a percentage of our revenue overtime, but this vary quarter-to-quarter. Moving on to P&L. Our gross profits in the first quarter were R242 million representing a gross margin of 70.3% up from 66.3% in last year’s first quarter. Again the primary driver is a higher percentage of revenue from subscriptions. While we are pleased with the recent increase, it remains difficult to predict where the enterprise customers who upped hopefully for pre-bundled contracts in any given quarter. So some volatility is to be expected. That said we continue to target gross margin in excess of 70% in the long run as the mix of revenue continues to shift towards subscriptions and we gain further efficiency to scale. In terms of our operating expenses, our sales and marketing costs were up 2.8% relative to the quarter last year. This line item now represents 13.5% of revenue. We are committed to capitalizing on our leadership position and the fleet management and asset tracking market. And we plan to continue to maintain investment in sales and marketing initiatives at around 11% to 12% of revenue mark. General and administrative expenses were up 12.3% year-over-year largely as a result of the company’s acquisition and the weakness in the rand also contributed to the increase. Operating profit was R53 million representing a 9.5% operating margin, this compares to an operating margin of 7.1% posted in the first quarter last year. To provide investors with additional information regarding our financial results, we disclosed adjusted EBITDA and adjusted EBITDA margin as well as adjusted profit for the period, which are non-IFRS measures. So, we have provided a full reconciliation table in our press release. First quarter adjusted EBITDA was R65 million, up from R52 million last year. This represented a margin of 19% up from 16.3% posted in the year ago first quarter. As Josh noted, we have made significant progress in streamlining our operations, while holding steady on investments in strategic areas like sales and marketing as well as R&D. while our first quarter tends to be the lowest point for our adjusted EBITDA margins, we are peacefully posting solid profits. Profit for the period which include the significant unrealized foreign exchange gains of about R11 million, was R51 million, up 93.5% from the year ago quarter. Profit for the quarter was force by that consent with fully diluted ordinary share compared with R0.02 in the prior year quarter. As previously disclosed, we held the New York IPO proceeds in U.S. dollars as the rand has been volatile. Adjusted earnings for the quarter and adjusted EPS exclude the FX effects of all foreign exchange gains and losses. Adjusted profit for the period was R24 million, which was up from the R16 million profit we posted a year ago. Adjusted earnings per diluted earnings share were R0.03 compared to R0.02 in the first quarter a year ago. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of R959 million, up from R945 million at the end of last quarter. From a cash flow perspective, we generated R35 million in made cash from operating activities and made R38 million investments in capital expenditures, leading to negative free cash flow of R3 million for the third quarter, up from a negative free cash flow of R22 million in the third quarter of fiscal year 2015. Our global structure continues to provide us with the natural currency hit, outside of Southern Africa, we are primarily express to used dollars, Euros and British pounds, on cost are primarily in Rand, but by design the cost of our regional offices are incurred in local currencies. At the bottom-line, the [indiscernible] through the net picture sub exchange rate volatility remains negligible. Finally I’d like to share our financial progress for the full fiscal year 2016 and the second quarter. I would like to reiterate our full year target which remains unchanged. We are targeting total revenue of $1.523 billion to R1.558 billion, which would be year-over-year growth of 10% to 12%. We are targeting subscription revenue of R1.148 billion to R1.168 billion, which would be year-over-year growth of about 15% to 17%. We are targeting adjusted EBITDA between R306 million and R327 million, which would be year-over-year growth of about 11% to 19% representing adjusted EBITDA margins in access of 20%. This would be adjusted earnings per diluted ordinary share of 13.3 to 15.1 representing based 807 million diluted ordinary shares and tax rate of between 30% and 34%. Actual ratio of 25 ordinary shares to one ADS and using August the cost structure. This would increase to any per diluted ADS of 26 to 30 year since. Our intention is to focus primarily on annual targets and this is how our management is focused and we do not wish to close deals on sub-optimal clearance in order to achieve quarterly update. This is most relevant as it relates to the hardware and other revenue line absence in our P&L. The areas of revenue where we have the highest capability and predictability is our subscription revenue which we as we discussed is the largest fastest growing and highest margin components of our business. For the second quarter of 2016, we are targeting subscription revenue in the range of R276 million to R280 million, which was represents year-over-year growth of 14% to 16%. Before we take questions, let me remind you that we are currently trading under the cautionary status as our board is restoring strategic alternatives. When or if we have something material to report, we will report broadly until then we will not comment on the prices. Operator, we are now ready to begin the Q&A session.

[Operator:]

[Operator Instructions] And first we’ll here from Terry Tillman, Raymond James.

[Terry Tillman:]

I guess the first question Joss is just what the higher level, most top of the question in terms, training conditions are top out there some sales cycle are probably challenge, because of some of the end market exposure you have. When you talk about updating your guidance for the year, did you think about maybe the scenario of maybe de-risking the model and maybe taking a little bit of air out of the guidance, because of some of these challenges in some of your end markets or what gives you confidence of being able to hit the target did you and previously laid out?

[Stefan Joselowitz:]

Terry, guidance is based on this judgment to the point in time, we’ve clearly analyzed all of the types of available taking into account of course market conditions looking at top-line the orders that we’ve got, booked, the opportunity that represented to us. And at this point, we’ve taken a few, it’s best judgment at this point is that is that as the guidance remains as it is.

[Terry Tillman:]

And on the oil and gas side in the U.S., it sounds like you’ve got a couple of large deals that are going to be bundle deals. Because we got maybe you have mentioned and I understand but could you at least give us some more detail on what is existing customers, but it was just a small footprint and now you’re ready to a more of standardization rollout of the cost the fleet. And how do we think about the rollout of those couple of oil and gas deals as the year progresses as it relates to subs in the model?

[Stefan Joselowitz:]

Terry, it’s a little bit premature to get details for various reasons. We’re certainly given a clear update which is traditionally when we the half and full year when we give the clear [indiscernible] regional performance in more detail. So the two deals that we refer to you in our previous quarter were existing customers, these are our contract renewals, so we obviously go through ongoing cycles of renegotiating our position with customers as our fixed term contract comes to an end, we would like to report then and then, reiterating now that all of our key accounts that we’ve engaged with and opted to renew some of them with full year contract, one I think was a five–year contract, opted to renew the contract for further some other terms and they have opted to take advantage with technology and refresh at the same time on a bundle basis which of course, we’re adding some services to what we’re roughly but in return it will be a effective time for us, so we’re very pleased that it was a strategic objective and it is planning out, but more detail will follow with Tom.

[Terry Tillman:]

Okay. That's fair and the US business itself, you even added more leaderships and congrats on that to the management team and may be now been other folks have been their position for some number of quarters, you have been adding more sales resources, could you give us an update on the benefits that are accruing from the efforts in the U.S. and is it still more like an FY ’17 dynamic or an FY ’16 dynamics in terms of really hitting the model in terms of subgrowth?

[Stefan Joselowitz:]

So, first thing obviously we would focus on premium fleets and typically large fleets we know from many years we have started experience that trade cycles are often long and we have to effect that into our model. So the first churn of success that we look at for measuring any claim as the expansion the growth of the top-line and we’ve been very pleased with how that spending out not only in our current, how we focus and there echo but also putting efforts to expand that really cool focus and I made the points repeatedly to our team that their top line doesn’t pay the full and I’m pleased to report that the efforts have been translating into sales and we expect more to fund that and of course this has booked into our guidance for the year. So its definitely U.S. performance, or performance out of that America’s business has definitely corded out in past ’16 performance plan as such no longer than 2017 our deal that was there the foundation building was in the last fiscal year, this year we’re expecting results.

[Operator:]

And now we’ll move to a question from Matt Pfau with William Blair.

[Matt Pfau:]

Hi guys thanks for taking my questions. First on the vehicle additions for the quarter, the 11,000 was a bit lower than we’ve seen on a quarterly basis and some time, is there any different factors that impacted that was there perhaps mix shift in the customers that had been more skewed for its premium fleets versus consumer?

[Stefan Joselowitz:]

Yes, the impact was effectively out of one [indiscernible] industry in South Africa which have been adopting a fleet every recent months to should be economic up-look that are their price. So we saw some free contraction out of a couple of out calling for companies in South Africa, in fact pretty much all of them, so it was all of them took steps to balance their fleets, so we saw that our fleet exposure come down by about 2000 units in that [indiscernible]. Remember these are low ARPU the box is typically, the impact on revenue is much less impact on the subscribers. So the gross churn, but churn to fleet size construction other than losing a customer. They are all very happy customers and remain with us, but they have diminished fleet their size. So that is pretty much the difference between what we would expect a normal quarter to look like and certainly looking like compared with Q1 last year to this year. I hope that answers the question.

[Matt Pfau:]

It does. And then on the guidance for this year, when you look at the revenue guidance, it seems like it may be a bit more backend loaded than even tip of layer. Is there any particular reason for that, is that something that you view that few of these large fleet rollouts that you have talked about in the call?

[Megan Pydigadu:]

The business it does so based on looking at our cost side and our claims and the fact that we are going with bundled deal on the - in our ARPU and subscription revenue. So therefore the reason for the backend of the revenue.

[Stefan Joselowitz:]

Got it. And last one from me. On the previous call you mentioned a bit about potentially expanding the - to additional geographies so any update there on that?

[Stefan Joselowitz:]

We have been - to report on results we have been finding - in our relationship with such -- we now have fleet to hopefully find -- partners on -- economy to be anybody at the moment. But nonetheless we will pursue that avenue that we are - we hope to in fact might have the formal announcement. I do not want to get too premature on these announcements. We have been talking to people and potential partners and customers in multiple geographies in the Americas and I am in fact pretty confident that we will be in a position to make an announce of we believe - during our next earnings call. So needless to say we have been very active in pursuing opportunities to globalize this great technology.

[Operator:]

And now we will take question from Mike Walkley with Canaccord Genuity.

[Mike Walkley:]

Thank you. Just moving on some of those questions in your full year guidance. In size of a big ramp in hardware sales, is there a reason the first quarter is weaker in hardware the last two years and should we expect kind of similar pattern to last in terms of the sequential ramp in hardware in the guidance for the September quarter?

[Megan Pydigadu:]

Traditionally our Q1, it has been low quarter for hardware and other revenue. And going forward I would expect that the seasonality you have seen in prior quarters to stimulate in this current financial year. And but we always are at the end of our customers and will be decide to go bundled or unbundled, but currently based on our current outlook, we believe that --

[Mike Walkley:]

Great. Thanks. And Joss, just a question on the industry dynamics there's been a larger competitor consolidating trying to create larger platforms get stable then, have you seen any changes in pricing environment because of this or maybe any new competitors approaching from your end markets that are - had been.

[Stefan Joselowitz:]

We have not yet, but as you pointed out, the environment is definitely, is definitely a shift and then the end we do expect to change with it - some time. When it comes to this product competition, I am always preferred certainly over the many years that we have been in this industry and in other industries to compete against larger player and small regional player, a lot of small regional ones are getting acquired and consolidated into bigger platforms. And the reason I say that you get more rational competition with the larger players that are not worrying about how they are going to be make payload at the end of the month and then in a lot of the regions in which we operate, we have had over many years the tough competition from small players that sometimes other practically you are seeing the rational thing. So the each consolidation, I think it’s a good thing and I think it will tied-up the industry to come.

[Operator:]

And next we’ll here from Brian Schwartz with Oppenheimer.

[Brian Schwartz:]

Joss or Megan can you maybe update us at all on how your sales higher, it has been going, maybe if you look back over the, I guess year-to-date here specialty in the U.S., how your investments in terms of on-boarding sales reps have been and we’re exactly all in terms of the sales productivity curve or maybe some of those new reps that you’ve on-board here over the last 6 to 12 months. I’m just trying to see there is an expectation from productivity improvement from the sales force here in the second half of the year? Thanks.

[Stefan Joselowitz:]

Thanks Brian. I guess this is a bit conversion of a question and yes we do expect as I said that the first step with the new sales person. Because when you hunting for premium fleets with you can’t expect traditional monthly quote or applications in the first 6 to 9 months of new reps last stock with us, last stock is not practical major, because the sale side is just longer than that typically. So we got to look at, we got to analyze the pipeline which we do on a regular basis on ongoing basis and we’ve been pretty pleased with that’s playing out. But where we are now in the last cycle is that we were expecting last year and really up until now has been a clearly the building pipeline and pipeline doesn’t pay though it will generally profits we now need to expect to convert to productive sales.And this is something that we expect in this fiscal year. And we’ve exceed pretty interrogated the pipeline expecting to some perspective customers are being firstly involved in a lot of that, I’m feeling good about where we are or we are expecting productivity this full year.

[Operator:]

David Gearhart with First Analysis has next question.

[David Gearhart:]

My first question goes back to BME [ph]. A side from the geographic opportunities that was you are talking about earlier. Have you seen any attraction with selling or offering BME with specific large client like for example in oil and gas it has large concentrated fleets?

[Stefan Joselowitz:]

We certainly got some excitement with existing customers and perspective customers as well. And we expect to anticipate that would translate into deal flow with the attractive fund. And we haven’t seen any immediate traction or any traction up or pulling down not yet but it’s relatively early days for our iconic customers who are engaging with each perhaps source infrastructure so that’s very nice, there we need launch fleets and these fleets fleet typically need about tricking to make that compatible that’s not a complex exercise. I’m assuming, I’m talking about fleets that we’ve already low in terms of rolling out new fleets of course we would rolled that being, immediately being compatible that makes a lot easier. But we expect this to be an ARPU contributor throughout business and not just in future I’m not talking about long-term, we expected to be contributed.

[David Gearhart:]

And you mentioned some new products and it sounds pretty exciting the mix inside, mix-in inside and my mix, Can you provide a little more color on those products or they’re going to be available on for additional revenue per vehicle fleet. And is there any opportunity to read with those offering in a sales opportunity.

[Stefan Joselowitz:]

Yeah. So a lot of the applications that we are designing now, always this has been a lot of new instruments are designed to be ARPU enhances. So as I mentioned in some instances we have to develop ongoing enhancements or additions to our service. Just stay current with our technology currently in the market and what's available. So we now charge extra for every new feature that we bring up. So is current customers happy and - and of course it helps us to attract new customers. But in other instances we are putting a lot of focus into offer enhancement. And so the ones I spoke about the typical one MiXT go with full into the offer enhancement product category. We have got some customers already engaged in Southern Africa and using product and that paying extra for us and we think it justifies an additional fleet per user what it does and what it provides and how to integrate - certain mobile work that they are tracking to overall Telematics information platform. So as an example it would be next vision so getting traction now and we have got several thousand customers that are using that product and paying a bit more for it. So simply we have got a balanced approach to keeping our technology into the curve and bringing up new and charge a little bit more for.

[Operator:]

Ladies and gentlemen this does conclude your question and answer session for today. I will turn the call back over to your host for closing remarks.

[Stefan Joselowitz:]

Well, thanks for joining us today. We really appreciate your attention and your questions of course. Just to reiterate, we remain confident that we have what it takes to capitalize ongoing demand for fleet and mobile asset management solutions worldwide. We have booked the industry's largest level distribution capability we have a broad range of solutions and are able to maintain a balanced approach to delivering growth as well as - profitability in cash flow. We really look forward to further discussions in the coming day. And of course many of you would have the opportunity to meet with our Chief Operating Officer Charles - and our Group Financial Manager - next week at Oppenheimer and Canaccord Genuity conferences in Boston. Until next quarter have a great day.

[Operator:]

Ladies and gentlemen, this will conclude your conference for today. Thank you for your participation.