MiX Telematics Limited
Q2 2016 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Good day and welcome to the MiX Telematics Second Quarter 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 the MiX Telematics earnings result call for the second quarter and first half of fiscal 2016, which ended on September 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 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 provision 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 website and filed with the Securities and Exchange Commission. With that, let me turn the call to Joss. And we apologize in advance; Joss has had a cold, so hopefully the voice loss for the transcriber.

[Stefan Joselowitz:]

Thanks Megan. I would like to thank you all for joining us to review our second quarter fiscal year 2016 financial results. Megan will take you through the financial details but let me walk you through some of the highlights. I am pleased to report that we had a very solid quarter posting subscription revenue growth of 18% and adjusted EBITDA margin of 18% and operating cash flow of R72 million for the quarter. We saw resurgence in the growth of net new subscribers which were up 64% sequentially. This is the highest level we have achieved in six quarters. Also during the quarter, we completed our strategic review process. This extensive review conducted with guidance from external advisors included the optimization of capital structures and an evaluation of various ownership options with the latter resulting in significant interest from perspective buyers. At the completion of the process, the board of directors concluded that continuing to execute on the company’s existing strategic growth plan was the best path to maximizing long-term shareholder value. We couldn’t be more pleased. The board also authorized to repurchase of 40 million ordinary shares as of quarter end, we have accumulated -- we had cumulatively repurchased 970,000 ADSs and 5 million ordinary shares which together equate to over 29 million ordinary shares representing 3.7% of the outstanding share capital. We believe our repurchases are a reflection of the value we see in our business as well as our confidence in our ability to continue to deliver solid growth, profitability and cash flow. Importantly, in light of the company’s healthy balance sheet and strong cash flows, the board also decided to reintroduce the paying of dividends which going forward will be considered on a quarter-by-quarter basis. During the quarter, we paid an South African R0.08 dividend in respect of the full fiscal year 2015. We paid R0.02 for the first quarter of this fiscal year and the board has just approved another South African R0.02 for this period. And as we have also announced subsequent to the end of the quarter, we landed the largest deal in our history to-date to equip 15,000 of Halliburton North America’s vehicles. As you know, Halliburton is one of the world’s largest providers of products and services to the energy industry and MiX Solutions will enable them to improve safety, efficiency and compliance in their fleet. We note that this was a very competitive bid and this deal helps solidify our position as a premier fleet management solution provider in North America. This project is expected to begin rolling out in November. We grew our base by 18,000 net new subscribers up significantly from 11,000 net adds last quarter. We finished the quarter with a total subscriber base of 541,000, which is up 13% year-over-year. This is particularly gratifying given the continued difficult trading conditions faced by our oil and gas customers. While new customer wins including the Halliburton deal will support to return to growth in our energy vertical, we are seeing some contraction in the fleet sizes of existing oil and gas customers. This contraction effect was at work in the declining revenue and subscriber base we experienced in the North American market where our base was down 6% year-over-year. However, with our North American pipeline now converging steadily to sign deals including Halliburton and others, we expect to see this region delivering healthy growth for the balance of the year and beyond. And a final word on this contraction effect that we have seen. Experience tells us that we'll see the pendulum swing back when oil and commodity prices rebound. What's more since these are happy customers who are renewing, not terminating contracts, it should take very little sales time and effort to add subscribers including contracts when the time is right. Despite this energy crisis, every single key customer in this sector who has come up for renewal with us has re-signed for terms between three and five years and some with even higher options (phonetic). Meanwhile let me reiterate how pleased I am with the resurgence to 18,000 net adds and the various significant wins we have recently secured. I guess that some of our team are listening into this call. So let me take this opportunity to thank them and tell them that how proud I am of their performance over recent quarters. We are executing well, retaining and attracting strong talent and, most importantly, completing favorably. Perhaps the best indication that our current strategy are succeeding is that we continue to win significant new business and are signing meaningful expansions with key customers. We have made tremendous progress in the Americas and in the United States, in particular, and we believe we are finally poised to capture the type of market share here that we see in other regions of the world. As we are at the half-year, let me share some of the highlights from our other global regions; you can find exhaustive details in our earning press release. Comparing the first half of fiscal year 2015 with the first half of this year, our African and European regions reported 14% and 19% subscriber growth respectfully. EMEA grew subscribers 10% year-over-year and Brazil grew subscribers over 30% off a small base. Our business continues to see a strong shift towards bundled deals, so year-over-year comparisons on a total revenue basis are less useful in understanding the momentum of our business. As a leadership team we focus on subscriber and subscription revenue growth. In terms of profits, Africa continues to post adjusted EBITDA margins of 28%. As we have mentioned in the past, we see no reason that all our of our global regions can’t reach a similar level of profitability at that time. We aim to strike a balance between growth and profitability and took some restructuring actions in actions in EMEA which resulted in that regions return to positive territory with a 9.8% adjusted EBITDA and margin for the period. Europe posted small gain while the Americas and Brazil are still loss making as forecast. As you might have seen from a recent press release market Marc Trollet has been appointed to the position of Managing Director for our European division. Marc is a highly experienced industry professional and will now focus his energies on growing our European operations. Marc brings a wealth of fleet management leadership experience and most recently was Managing Director for Masternaut in France. He has also held Vice President and GM roles at Motorola and Celestica. MiX Telematics is one of very few fleet management solutions providers to have scaled the business globally. We surpassed 540,000 subscribers, a rarity in this segmented business. We service customers in over 120 countries in multiple languages through our 15 regional offices and more than 130 channel partners. And whilst this does of course expose us to somewhat more volatile economies, multinational clients increasingly prefer to conflict with a single vendor versus a dozen regional players. Penetration of Telematic solutions overall remain very low and market research indicates that this penetration will likely double in the next four to five years. It is for this reason we believe that the combination of our scale, broad range of portfolio and global reach is a tremendous asset. Now, let me share some of the customer highlights from the quarter. Beyond Halliburton, we enjoyed success with both new and existing energy sector customers. In fact, we were delighted to sign a three-year renewal with one of our longest-standing global key accounts which currently represent some 12,000 vehicles in over 80 countries outside of the United States. Bear in mind that while the energy sector is an important industry for us, oil and gas customers only represent 21% of our subscription revenue and we continue to build our business in a myriad of other verticals. For instance, in South Africa a large bus service called MyCiTi Cape Town chose our premium fleet solution. And South Africa’s largest intercity bus service Intercape also a mix fleet Telematics solution for over 300 vehicles of all types. Intercape's commitment is particularly significant as their solution included combination of RPM-enhancing accessories including MiX Rovi and MiX Vision. It is worth noting that we have seen great solid up take for the MiX Vision at this time including an order in North America. Long-time MiX ethane oil and gas customer Tritoe (phonetic) has taken the decision to add MiX Vision in both the Kenyan and Guinea regions. Our business has seen strong growth, strong wins over the variety of industries in Africa, with wins in multiple verticals including material handling and transportation. Despite the tough economic conditions in Brazil, we saw two extensions to current relationships one with Cubator (phonetic) in the bus and truck sector and other with Della Volpe, a prominent transport and logistics operator and one of our flagship customers in Brazil. Another important trend worth highlighting is the success we are having in using our growth product portfolio to leverage multiple revenue streams. In Africa, our Beam-e offering has developed such a high level of credibility from an asset tracking perspective that we are increasingly seeing uptake by large fleet operators. In some instances, we are sending Beam-e to fleets where it is initially used in parallel with an incumbent fleet management competitor and this is providing us with a significant, current and future cross-sell opportunity which our sales teams are using to full advantage. This is a model that we intend to globalize. At this point, let me hand it back to Megan to offer a bit more color on the numbers.

[Megan Pydigadu:]

Thanks Joss. Let me walk through our second quarter fiscal 2016 performance across each of our key operation metrics as well as our revenue and earnings targets. Our focus primarily on our quarter results that are half year results are posted in detail in our press release which we issued earlier today. Additionally, please bear in mind that our reporting currency is the South Africa Rand. For convenience we have translated our results0 in to U.S. dollars both for the 2016 and 2015 periods using the September 30, 2015 spot rates. 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 second quarter results. We are pleased to have exceeded our guidance for the quarter and have raised our guidance for subscription revenue for the full year. Please note that while the Halliburton deal did not contribute to the second quarter results, it has been part of our full year forecast since we initiated 2016 guidance. Total revenue was R358 million which is a 2.1% increase from the year ago second quarter as our business had seen a significant shift to fully bundled deals. As Joss noted, a more meaningful metric for assessing the momentum of our business is subscription revenue. Our second quarter subscription revenue of R285 million was up 17.8% year-over-year. As I noted, this was R5 million above our guidance range of R276 million to R280 million. We added 18,002 subscribers in the quarter and now have 541,346 subscribers for an increase of 12.9% year-over-year. Hardware and other revenue was R73 million, which is a 32.8% decrease from the year ago second quarter. Again, as we continue to see a shift toward more bundled deals in our business, this had the effect of meeting near term revenue growth. As Joss noted in the statement commentary revenue from the Americas region, we were in fact down year-over-year as it had a pronounced effect to both our top and bottom line from the shift. That shift to long-term annuity is at a higher ARPU and over time this will give us improved visibility as recurring revenue becomes a more significant component of total revenue. Subscription revenues represented 79.5% of total revenue in the quarter which is up significantly from 68.9% in the year ago quarter. Moving down to P&L, our gross profit in the second quarter was R241 million, representing a gross margin of 67.3% down a bit from 68.4% in the year ago second quarter. Increasing subscription revenue continues to be the primary driver of our gross margin. While we are pleased with the recent increase, it remains difficult to predict whether enterprise customers will opt for fully bundled contracts in any given quarter. We continue to expect gross margin to move towards 70% as the mix of revenue continues to shift towards subscription and we gain further efficiencies of scale. In terms of our operating expenses, our sales and marketing costs were up 16% relative to second quarter last year. This line item now represents 13.5% of revenue, a bit higher than our stated target of between 11% and 12% of revenue. This is a function of our successful investments in the Americas. We continue to believe there is an opportunity to build on the current momentum of our business and market opportunity globally, and as we’re seeing strong returns on our efforts, we will from time to time make elevated investments in sales and marketing initiative, but let me repeat our target is to maintain sales and marketing investments at around the 11% to 12% of revenue mark. General and administrative expenses were up 3.3% year-over-year. There were unusual items in both periods but the costs from investigating strategic alternatives incurred this year were lower than the non-recurring litigation costs we posted in the second quarter last year. Operating profits was R27 million representing a 7.6% operating margin, this compares to an operating margin of 10.6% posted in the second quarter last year. We are comfortable trading a few point of margins in the near term to position the growth for future success. 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. We have provided our calculation of adjusted EBITDA and the related margin. The impact is negligible but for consistency stake we now also net the foreign exchange impact of realized gains out of adjusted EBITDA. We had been including an adjusted EBITDA but netting it out of adjusted EPA by previously including realized gains and losses the figure does not always accurately reflect operating results for the period. So for simplicity the new calculation provides focused solely on operating performance for a particular quarter. Adjusted EBITDA and adjusted earnings now remove all foreign exchange effects. Second quarter adjusted EBITDA was R63 million, down from R71 million last year. This represents a margin of 17.7% down from 20.3% posted in the year ago second quarter. We are to some degree a victim of our own success. Our strategy to drive bundle deals more aggressive has a direct effect on our near term results both at the top and bottom lines but positive long term impact more than make up for the short term pain. IFRS profits for the period which includes a significant unrealized foreign exchange gain of about R92 million before tax was R80 million up 62.9% from the year ago quarter. Profit for the quarter was South African R0.10 per fully diluted ordinary share compared with South African R0.06 in the prior year quarter. Adjusted profit for the quarter was, therefore, R19 million which was down from the R26 million profit we posted a year ago. This was affected by tax rate of 34% in the quarter compared to 33% in the year ago quarter. The tax rates will vary primarily as a function of geographic origin of the revenue and whether that region is profitable. Adjusted earnings per diluted ordinary share were South African R0.02 compared to South African R0.03 in the second quarter a year ago. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of R886 million, down from R940 million at the end of last quarter. This was as a result of paying dividends of R79 million and repurchasing R92.7 million of our shares representing just under 30 million ordinary shares or approximately 1.2 million ADSs. From a cash flow perspective, we generated R72 million in net cash from operating activities and made R61 million investments in capital expenditures, leading to free cash flow of R11 million for the second quarter, down from free cash flow of R23 million for the second quarter of fiscal year 2015. As our business shifts to more bundled deal we incurred cost earlier [indiscernible] cash, so you can see that our operating and free cash flow are negatively impacted. Again, as bundled deals have a long-term net positive on our business; we are happy to make the trade. Our global structure continues to provide us with the natural currency hedge. Outside of Southern Africa, we are primarily exposed to U.S. dollars, euros and British pounds. Our costs are primarily in Rand, but by design the costs of our regional offices are incurred in local currencies. At the bottom-line, the net effect to us of exchange rate volatility was insignificant. Finally, I’d like to share our financial target for the full fiscal year 2016 and the third quarter. Keeping in mind the impact that the shift to more bundled business is having on our financial results we are raising our subscription revenue target for next quarter and for the year a decrease in our total revenue outlook for the year. Our new subscription revenue target is R1.155 billion to R1.172 billion, which would be year-over-year growth of about 16% to 17%. Our total revenue target for the full year 2016 is now R1.44 billion to R1.468 billion which would represent year-over-year growth of 4% to 6%. As we discussed, the shift towards bundling impacts on near term profitability, so we are now targeting adjusted EBITDA between R278 million and R296 million, which would result in a decrease of between 2% and an increase of 5% compared to fiscal year 2015. Note that foreign exchange is excluded from the adjusted EBITDA figures in both periods. This would lead to adjusted earnings for diluted ordinary share of South African R0.11 to South African R0.125 based on 788 million diluted ordinary shares and a tax rate of between 31% [sic] and 35%. At a ratio of 25 ordinary shares to 1 ADR and using the November 3 spot rate this would equate to earnings per diluted ADR of $0.20 to $0.23. Again, foreign exchange is excluded from the adjusted EPS guidance as well. Our intention is to focus primarily on annual target as this is how our management is focused and we do not wish to close deals on suboptimal returns in order to achieve quarterly objectives. This is more relevant as it relates to the hardware and other revenue line assets in our P&L. The area of revenue where we have the highest level of visibility and predictability is our subscription revenue, which, as we discussed, is the largest, fastest growing and highest margin component of our business. Consequently, we offer quarterly guidance on our subscription revenue earnings. For the third quarter of 2016, we are targeting subscription revenues in the range of R294 million to R300 million which would represent year-over-year growth of 16% to 18%. Operator, we are now ready to begin the Q&A session.

[Operator:]

[Operator Instructions]. We'll go first to Terry Tillman of Raymond James.

[Brian Peterson:]

Hi, this is Brian Peterson in for Terry. Just wanted to understand the mechanics on the full year guidance. It looks like the subscription revenue upside this quarter actually outweighs the increase to your full year guidance. What is the impact to the back half? Is it FX related? Is it something with renewals? Just trying to understand why that wouldn’t go up a little more.

[Megan Pydigadu:]

Yes. So in terms of our guidance for the full year, we have seen the benefit of a weaker rand over the first half of the year. So that does have a impact as to where we see our guidance ending because we're not too sure as to where the rand will go for the remainder of the year.

[Brian Peterson:]

Is that the only factor, is it predominantly FX?

[Megan Pydigadu:]

Yes, it's predominantly FX.

[Brian Peterson:]

Okay. And can you talk about the health of your business in Africa. I know you've mentioned some macro concerns there in the last few quarters, 14% subscription growth rate for customers actually looks pretty good. So just wanted to get an update there.

[Stefan Joselowitz:]

Absolutely, Brian. We're really happy with the performance of the African business under still difficult trading conditions so, we’re winning business. We’re competing well. We’re winning business across, really across all vehicles and across all sectors of our business both in the premium fleet sector of the business as well as our asset tracking and consumer Telematics side of the business. So we’re really happy with the performance of that business and the trends are looking good in that business as well. The team has worked really hard to put in place some new channels to market which are starting to pay dividends now and we’re happy with it.

[Brian Peterson:]

Okay, good to hear. A last one from me and I’ll hop back in the queue. You mentioned some lower fleet sizes for some oil and gas customers that are up for renewal, I’m just curious of that book of business how many have renewed recently and are we past the majority of that headwind to the extent that you would expect fleet sizes to actually move higher from here?

[Stefan Joselowitz:]

Yes. So to your first question about the renewals, we had the majority really of our key energy sector customers come up for renewal in the last -- in the past years, two quarters, two to three quarters and I guess it’s a factor of when we moved to the U.S. and started operating a lot of that deal, we closed five years ago. So those have come up for renewal, and as I mentioned in my commentary we have without exception every single key energy sector customer that’s come up for renewal, we have renewed on for lengthy periods of time. So, despite the oil crisis our customers recognize the value that we provide them and they’re not cutting back on spending for our services. Of course, we have seen some contraction in the overall fleet sizes and it’s hard to say whether we hit the bottom yet because lots going to depend on what happens in that with the oil price obviously and that’s going to -- that will drive the behavior of these customers. So strategically we're in great shape because we got lots of long term, very large long-term customers committed to our products and services. As things currently stand I’m not saying that we’re completely through the bottom here coming one of our customers notified us of where they expected their fleet to go and we’re two-thirds of the way through that contraction at the moment with another third to go. So we certainly sucked up the bulk of it but what I’m really happy with is that our new signing, our new business signings in that sector are going to far outweigh the contraction thing that we’re seeing and as I’ve said we expect to see that sector of our business actually delivering from growth going forward, this year and beyond.

[Brian Peterson:]

Great, thanks for the color, Joss.

[Stefan Joselowitz:]

Thank you, appreciate your attendance.

[Operator:]

We’ll go to Bhavan Suri of William Blair.

[Bhavan Suri:]

Good morning guys. How are you, Joss? I have cold too. You people have to excuse me.

[Stefan Joselowitz:]

Yes. It sounds like we’ve been in the same club, Bhavan, nice to hear.

[Bhavan Suri:]

But I didn’t want to congratulate you on the net new subscriber acceleration that was nice to see, just continuing on the line of the oil and gas, Joss, for a second, two things one is you’ve alluded to this pipeline and sort of these new wins that we will see over the next whatever time, who are you displacing and sort of what’s driving these wins in a market today that seen contraction as you put it?

[Stefan Joselowitz:]

Well, if you’re referring specifically to the energy sector, the services that we provide them are extremely valuable services and in fact that we’ve proven in multiple case studies and of course many of the guys in the industry have had first and continue to have first time experience of our services and those that haven’t they would; our success has certainly spread, we are happy hear. Some of the business that we are winning is still remains greenfield but in the sector that’s we are also being successful with our displacement efforts, we just announced the one obviously and others that we signed that we haven’t announced for various reasons. We often need customer permission to in fact in all instances to make name references et cetera. But we have created an extremely powerful brand through a superior service in that space and it’s a strategy that is working successfully for us. And of course the nice thing now when you talk about this contraction, I did allude to it as well in the commentary is that when the cycle turns and it will turn I mean I have been through down cycle before and see when it goes up you we are effectively pregnant with opportunity or pregnant with growth because with no sales efforts we just start adding subscribers as they grow their fleets again. So we see a growth sprout through that phase. Anyway, we are not at that phase yet, but it will come at some stage and then the magic really starts happening.

[Bhavan Suri:]

Yes. And as you look at those renewals you talked about sort of the one that has got sort of two-thirds through that contraction, are there any large oil and energy customers that are up for renewal left to come that we could see that? I know that you have alluded a little bit, but just are there any of the very large ones left to be renewed in the next say time?

[Stefan Joselowitz:]

No, no, no, we’re now through that cycle and it was a nervous patch for me personally as you can imagine because under normal buoyant conditions, I wouldn’t have been worried about it but under the stress that that industry is taking at the moment I did have few nervous nights but every single one of our large key accounts, we got some smaller ones that are that well there is cycle of renewal but for and coincidentally one of large ones came up for renewal really in this calendar year. And we have done every single one in it, haven’t lost one of them, and in some of the instances increased ARPUs through technology refreshes some adding some new features of services on to they've currently got et cetera.

[Bhavan Suri:]

That’s great, Joss, thanks for the color. And then as you look at the vertical, the Americas you have changed leadership, add leadership, expanded sales dramatically, have you had some success or little color in success outside of the oil and gas verticals, just sort of how do you think about those businesses in the Americas outside of the energy sector?

[Stefan Joselowitz:]

Yes, we have. So I’m pleased that our top line which we’ve been working on diligently for a long time in that region is now converting solidly to converted deals, signed deals and committed orders. And we’ve recently closed some deals that are outside of the sector, one in particularly is a really nice size deal, we’re probably at some stage when we’ve got more, a bit more mixed quarter of security with the fleets, Megan mentioned of it but we’re not yet, there yet and of course we haven’t matured in another vertical yet so we’re still diligently working on doing that. But yes, definitely orders from outside of the sectors, so efforts are starting to convert into revenue streams, so that’s really good. Of course with our recent wins in the energy sector in the Americas and Halliburton is just one that I mentioned, there have been others as well but growth in that vertical in the Americas is going to in the short to medium term dwarf anything else that is happening, that is a high class problem, I am very happy to deal with that. So we got our work cut out for us now over the next 12 to 18 months to roll out the business that we have signed. These are complex roll outs and there are many, many vehicles over multiple depos over a very large geography. So it's an exciting phase and we are very pleased with the way it has gone.

[Bhavan Suri:]

Great, and then one last quick one for Megan. Megan, as you see these bundle deals are become more common we obviously talked about, this is beating that issue to death over many quarters, but are you seeing contract lengths change or customers willing to pay upfront, are you seeing any interest in that at all or does it stay relatively fixed to the original contract length, sort of monthly billing cycles?

[Megan Pydigadu:]

So generally, they are relatively fixed to between three and five years when we are doing these bundle type of deals and also consistently getting monthly paid as opposed to upfront annually. So the majority still are paying on a monthly basis.

[Stefan Joselowitz:]

Yes, I could probably add this because I remember the time when we first signed these guys and when the sector was flying so to speak with a very profitable oil price from their perspective there was definitively much more appetite to do upfront deals and even I recall we did a few cash up front deals because of the cash flushness and etc, etc, but in the current cycle it's really been the reverse experience where they are very happy to conserve cash from their side and engage with a bundle deal on a monthly payment scheme.

[Bhavan Suri:]

Got it, that is really helpful guys. Thank you so much for taking my questions.

[Stefan Joselowitz:]

Thanks. Feel better mate. Thank you.

[Operator:]

We will go to Mike Walkley of Canaccord Genuity.

[Mike Walkley:]

Great. Thank you. Hopefully I won't catch a cold over the phone here. Joss, I guess just a couple of quick questions maybe on the model. Congratulations on the Halliburton win and some of the opportunities are sitting in the U.S. market and, Megan, how should we think about this overall operating expense trends? You would still expect a slight increase over the next several quarters as you invest for growth or do you think it is more stable?

[Megan Pydigadu:]

I think it is that we went to at the end of last year in terms of restructuring our Middle Eastern or South African business are starting to pay dividends in terms of the cost growth from just admin and other costs line. So that I mean that only grew up 3% on quarter-on-quarter. And I think that the business is doing well to contain costs and I would expect it to continue going forward. I do not think there will be a domestic increase in terms of costs. The one thing that does play effect there is obviously dependent on our hardware revenue and if you are looking when you start looking at margins the impact of the dropped portion hardware revenue does have an impact in terms of our margins and what our operating expenses look like as a percentage of revenue, but on an absolute basis I would not see it growing significantly.

[Mike Walkley:]

Thanks, and just a follow up on that on hardware revenue. If your hardware volumes are falling off these bundle deals does it impact to gross margin on the hardware line at all or is that still relative stable?

[Megan Pydigadu:]

No, both our subscription revenue margins and our hardware revenue margins have stayed consistently stable over the last few years. We haven't seen a significant change in terms of that.

[Mike Walkley:]

Right. So as you do more bundle bills over time as subscription grows with that 70% target could happen maybe in the calendar '17 potentially?

[Megan Pydigadu:]

It could potentially just depending on the mix of revenues.

[Mike Walkley:]

Great. Congrats on the strong subscription revenue, and I hope everybody feels better.

[Stefan Joselowitz:]

Thank you, appreciate it. Thanks for joining the call.

[Megan Pydigadu:]

Thanks Mike.

[Operator:]

We will go to Brian Schwartz, Oppenheimer.

[Brian Schwartz:]

Yes, good morning and thanks for taking my questions here Joss and Megan. Just have two for you. Just want to circle back again to the strong subscription revenue performance, the bookings came in ahead of my eye estimate and you are raising your guidance which is great. If it is possible to parse out the moment what is causing the outperformance there is, how much, Joss, is coming from just been able to scale the overall distribution being able to scale your U.S. operation? Is the product suite is that starting to open doors for the platform and for new subscribers or is there anything macro that is maybe driving better spending patterns out there for fleets? So if it is possible to parse the momentum behind the strong subscription performance that would be helpful, and then I will have one follow-up.

[Stefan Joselowitz:]

Sure. So, it's certainly a combination of things but it is not macro. It is we are seeing our product suite on both our portfolio and I have got less far revenue streams contributing to after enhanced deals and the African example, which is clearly I guess the most -- it is the one region where we have got established of our revenue streams and I adjust indicate that we intend to globalize this model because it is too good not to. So we are getting into fleets that have competitive fleet management systems in some instances with our Beam-e solution and those customers are so impressed with the performance of Beam-e than asset tracking, trailer management, whatever the case maybe solution and the service that we give them compared to our guests, some of the service they might be getting from their existing providers that we have seen great cost selling -- up-selling and cross-selling opportunity and, as I said, we are using that to full advantage. So we are starting to see that effect, and of course another effect that we are just at the beginning of but we’re going to see an acceleration in the near term is that we are doing larger, high ARPU deals on a bundled basis which is further going to drive that subscription revenue growth line. Of course, as Megan pointed out, on a year-on-year comparison, it’s going to slow down or diminish our hardware sales. But that is a trend that we are very happy to take.

[Brian Schwartz:]

Thank you. And then the one follow-up I had was on the update on any competitive changes, clearly the Halliburton win here in the U.S. that is going to capture some other market competitors attention I imagine. Are you seeing any changes at all especially we’re just talking about the larger fleets in the enterprise markets? Thanks.

[Stefan Joselowitz:]

Yes, thanks. In terms of the competitive environment, there has been a lot of activity as you know in the last year, 18 months. We haven’t yet seen that translate into a change in the battlefield behavior. So, as much as we expect it, we haven’t yet seen it. We of course -- it’s a competitive industry and we’ve been competing favorably for many, many years and it's more like my fair view that we will continue to do so. But there are a lot of different kind of players that are now in the space and some of them are coming from outside our industry and there are different things that drive businesses. So we expect to see some changes, but on the actual battlefield I haven’t seen it yet and we will certainly keep you updated when we see those trends start occurring.

[Brian Schwartz:]

Great, thanks for taking my questions and congratulations again on the strong subscription bookings performance.

[Stefan Joselowitz:]

I appreciate your time, thank you for joining us.

[Operator:]

This time we have no further questions. I would like to turn the call back over to our CEO for any additional or closing remarks.

[Stefan Joselowitz:]

Thanks, ladies and gentlemen. Thank you for putting up with my squeaky voice and thank you once again for taking the time to listen to our quarterly update. We remain confident that we got what it takes to capitalize on the growing demand for fleet and mobile asset management solutions worldwide. We have booked the industry's largest global distribution capability, and we have a broad range of solutions, we intend to maintain a balanced approach to delivering growth as well as solid profitability and cash flows. We really look forward to seeing some of you at the Raymond James Investor Conference in New York in December. Until our next chat, have a fantastic day. Thank you.

[Operator:]

This does conclude our conference for today. We thank you for your participation.