MiX Telematics Limited
Q2 2015 Earnings Call Transcript

Published: 10 Nov 2014

[Operator:]

Good day and welcome to the MiX Telematics Second Quarter Fiscal 2015 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:]

Good day and welcome to MiX Telematics’ earnings results call for the second quarter first half of fiscal 2015 which ended on September 30, 2014. 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 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 website and filed with the Securities and Exchange Commission. With this let me turn the call over to Joss.

[Stefan Joselowitz:]

Thanks Megan. And I'd again like to thank you all for joining us to review our second quarter and first half fiscal year 2015 results. I am pleased to report that relative to the first quarter we experienced an improved demand environment adding 16,600 subscribers, which is 35% higher than our first quarter additions. Despite this improvement, our cumulative adds for the year remained well behind our internal plan. Consequently we have called down our subscription revenue targets for the year by about 4%. Given the relatively fixed nature of our expenses, the impact on earnings is expected to be larger. That said, all of our regions showed net subscriber growth relative to the first half of fiscal year 2015. The Americas and Europe grew subscribers at around 10% with the balance of our operations growing at around 20% or better. We continue to face macroeconomic pressures in South Africa and the Middle East remains volatile. But I want to make this clear. Our team is competing favorably and executing well. Our global business grew 17% year-over-year and the subscription revenue line remains handsomely profitable. As the risk of being repetitive, let me state again because this is the best measure of the current momentum in our business, every region posted year-on-year net subscriber growth; the Americas and Europe around 10% and all the other regions grew subscribers at a rate of around 20% or better. Furthermore, we are taking advantage of strategic opportunities, like acquisition of a key reseller in South Africa which we announced earlier today. This acquisition will be immediately accretive to both our top and bottom-lines and importantly of course we are winning major contracts. For example, late in the quarter Rio Tinto signed on equip an additional 2300 vehicles over the balance of this fiscal year in addition to their 1000 vehicles already on our platform. This type of expansion with an existing multinational client is testimony to our ability to provide actionable intelligence that drives attractive customer ROI. We have been a global business operating in developed and emerging markets throughout our 18 year history. While there are certainly challenges, we have a tremendous wealth of experience and success navigating choppy waters. I would note that the weak rand has acted as a tailwind in our global revenues. This is offset to some degree by higher expenses from the offshore regions when consolidated into rand-based results and overall have an immaterial impact on our profit after tax. The global nature of business continues to provide a natural hedge and we do not employ financing hedging strategies. Even with the volatility in global currency seen through the second quarter, the impact to our bottom-line was R0.5 million or around $50,000. Let me offer a bit of color on important developments in some of our regions. The second quarter performance of our African business rebounded relative to the first quarter. Corporate customers appeared to have returned to a more natural purchasing rhythm and consumers seem to regained some confidence as motor vehicle sales are up. We have seen a convergence in the use of our product lines in Africa. Large fleets are using products originally targeted at consumers and vice-versa. As such you will see in our first half segment results table in the press release, we have opted to consolidate total Africa revenue as opposed to breaking up fleet from consumer revenue and we now have a single leadership team. We do anticipate in the coming months that this consolidation will enable us to drive efficiency through this business, which will result in medium-term cost savings and further improved margins. Our African region already enjoys robust adjusted-EBITDA margins of over 28% as a result of its size. We see no reason that are other regions cannot trend toward similar margins as they to reach critical mass. Since Africa represents over 50% of our business, we are watching the macroeconomic environment carefully and are cautiously optimistic that we can continue to grow well in this key market. While the businesses are consolidated now, I would note that one of the key drivers of subscriber growth in South Africa is being Beam-e operate. Beam-e is a real time car source platform. It has proven effectiveness for many different asset tracking applications and we are seeing it just broaden in South Africa. Uptick is strong for both the original consumer vehicle recovery application, as well as in incremental asset tracking markets such as trailer, container and even cargo tracking. As many of you know, we identified the Brazilian market as one with the strong need for this type of solution and partnered with Sascar, an established local player in the telematics space. We believe that partnering with them would enable us to enter this promising market far more rapidly and cost effectively than if we’ve attempted to go it alone. Unfortunately, while we have delivered on outside of the bargain, Sascar is being distracted with corporate activities which ultimately resulted in sell of their business to the Michelin Group. To the best of our knowledge, this deal closed at the end of September. We are almost a year behind our original target launch date and are extremely frustrated with the lack of attention to our project at this time. Clearly something needs to change and in parallel with trying to engage with Michelin, we are considering our options. We continue to believe that this is a tremendous opportunity for us but do not expect it to contribute to revenue in this fiscal year. Elsewhere on our own M&A front, as announced earlier today, we’ve acquired one of our resellers. Compass FM is our largest reseller in South Africa. We are paying around $5 million in cash for the acquisitions of business which will be immediately accretive to both top and bottom lines and see a consolidation of our value chain. We also welcome strong sales team to the fold and anticipate meaningful contributions from this business going forward. While we remain on the lookout for a larger scale acquisition, we recognize that there may be low hanging fruit amongst our 130 plus resellers and remain looking out for similar opportunities. In 2008 we executed a similar transaction with a reseller in the Middle East and this became the hub of our regional office there. In reality we would only pursue consolidation of those dealers that have reached meaningful scale and/or bring a strategic competitive advantage to the group. There are only a handful of resellers that currently fall into this category. Let me also update you on the progress we are making on R&D front. Last quarter we announced that we had completed the development of a new software platform on which all future products would be booked. The rollout is being managed carefully and we are steadily taking on more customers. Feedback is positive and I’m pleased to say that we have already recompleted the development of an additional application on this platform, namely a complete revamp for the hours of service initiative for the U.S. market. This product is now in testing and we plan to stop the rollout thereof early in the new calendar year. In September, we exhibited at the IAA International Motor Show in Hannover, Germany. Held every two years, this is the world’s largest commercial vehicle show. Over 400 key industry executives visited outstanding -- creating existing and potential clients, supplies and business partners. At this event we showcased our new products including, an update on our MiX vision product which now includes infrared and in car audio recording. We are already seeing that the addition of these features is boosting sales of this operating [ph] housing attachment. Overall as I stated upfront, our team is executing well in a challenging environment. We are controlling the things we can control. We have a long history of profitability and are committed to building on our proud heritage of consistently growing our bottom line. As such, while are investing in sales and marketing, we are taking actions to square out an administrative expense structure with the current demand environment; the streamlining of the infrastructure of the African region being a good example. While it’s clearly below our original plan for the year, our global business grew 17% year-over-year on the subscription revenue line and is yielding solid profits. We are competing favorably and adding subscribers across all regions. We remain confident we have what it takes to capitalize on the growing demand for fleet management solutions globally. We have booked what we believe to be the industry’s largest global distribution capability and broadest range of solutions and we intend to maintain our balanced approach to delivering growth, as well as solid profitability and cash flows. At this point, let me hand it back to Megan to offer a bit more color on the numbers.

[Megan Pydigadu:]

Thanks Jos. Let me walk through our second quarter performance across each of our key operating metrics as well as our new revenue and earnings targets, Bear in mind that our reporting currency is the South African rand. For convenience we have translated our results into U.S. both for the 2014 and 2013 period using the September 30, 2014 stock 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, total revenue was R351 million which is an 11.4% increase from the year ago second quarter. Our second quarter subscription revenue of R241.8 million was up 17% year-over-year. This was within our guidance range of R240 million to R243 million. As Joss noted, we added 16,572 subscribers in the quarter and now have 479,318 subscribers, an increase of 19% year-over-year. Hardware and other revenue was R109.2 million essentially flat year-over-year as the number of enterprise customers entering fully bundled agreements with us which is paying for the hardware upfront continues to increase. We are especially seeing the shift in our African business. While this shift has the effect on meeting near term revenue growth, the long term energy is at a higher rate and over time will give us more visibility as subscription revenue becomes a more significant component of total revenue. So we are pleased with the shift. The hardware component of our revenue is subject to quarter-to-quarter variability as it is 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 line 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 over time, but this will vary quarter to quarter. Moving down the P&L, our gross profits in the second quarter was R214.1 million, representing a gross margin of 68.4% up from 64.8% last year. Our gross margin benefited from a [indiscernible] cost saving in our Africa business in Q2, but the primary driver is the higher percentage of revenue from subscription. Subscription revenue represents a 68.9% of total revenue, which is up from 65.7% in the year ago quarter. While we are pleased with the recent increase, it remains difficult to predict where the enterprise customers were up for fully bundled contracts in any given quarter. Therefore we expect gross margin to remain in the mid to high 60% range for the near term. From a long term perspective, we continue to expect gross margins to move beyond 70% as the mix of revenue shifts more towards subscriptions and we gain further efficiencies of scale. In terms of our operating expenses, our sales and marketing costs were up 22.3% relative to the second quarter last year. This reflects the continuation of strategic investments into our sales force and this line item now represents about 12% of revenue. We believe there is an opportunity to build on the current momentum of our business and we will continue to invest in sales and marketing initiatives. However, we see this leveling up as a percentage of revenue at around our current level. General and administrative expenses were up 16% year-over-year as we increased our headcount from just over 950 employees to over 1,080 employees to account for future growth in the business. Operating profit was R37.1 million representing a 10.6% operating margin. This compares to an operating margin of 11% posted last year. To providing this 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. Second quarter adjusted EBITDA was R70.7 million representing a margin of 20.2%. Per our strategic decisions to invest in our growth, this margin is slightly down from 21.2% posted in the year ago second quarter. Profit for the period, which includes a significant unrealized foreign exchange gain was R48.9 million up 62% from the year ago quarter. Profit for the period was R0.06 to fully diluted ordinary share compared with R0.04 in last year. As previously disclosed we hold the New York IPO proceeds in U.S. dollars since significant investments are being made in the U.S. and the Rand has been volatile. Adjusted earnings for the quarter and adjusted EPS exclude the effect of all foreign exchange gains and losses. Adjusted profit was R26.4 million which was slightly above the R23.4 million we posted a year ago. Adjusted earnings per diluted ordinary share were R0.03 compared to R0.03 in the second quarter a year ago. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of R904.6 million up from R829.8 million at the end of last quarter. From a cash flow perspective, we generated R61.1 million and net cash from operating activities and made R37.9 million investments in capital expenditures leading to free cash flow of R23.2 million for the second quarter, which is a significant turnaround from the first quarter where we had negative free cash flow of R22.1 million. Finally I'd like to share our financial targets for the full fiscal year 2015. We are targeting total revenue of R1.325 billion to R1.350 billion which would represent year-over-year growth of 4% to 6%. We are targeting subscription revenue of R980 million to R990 million which would be year-over-year growth of about 15% to 16%. We are targeting adjusted-EBITDA between R237 million to R252 million. This would lead to adjusted earnings per diluted ordinary share of R0.12 to R0.135 based on 810 million diluted ordinary shares and a tax rate of between 29% and 33% at a ratio of 25 ordinary shares to 1 AER and using the November tax rate, this would equate to earnings per diluted AER of $0.27 to $0.31. Our intention is to focus primarily on annual target, as this is how our management has focused, and we do not wish to close deals on suboptimal terms in order to achieve quarterly objective. This is most relevant as it relates to the hardware and other revenue line items 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. For the third quarter of 2015 we are targeting subscription revenues in the range of R246 million to R250 million, which would represent year-over-year growth of 12% to 14%. In summary despite the macro challenges we are confident we have the right product and increasingly the right team to capitalize on the growing market for fleets and mobile asset management solutions. Operator we are now ready to begin the Q&A session.

[Operator:]

Thank you. [Operator Instructions]. And we will go first to Brian Schwartz with Oppenheimer.

[Brian Schwartz:]

My questions here this morning. Megan, I wanted to ask you just a quick question on the churn rates. Just wanted to see if that had any impact in the guide that you are giving ahead. Is it possible to update us on the churn rate segmented between your enterprise and consumer customers?

[Megan Pydigadu:]

So Brian in terms of all churn rates that we have seen there haven’t been a significant change to that what we reported at March for our full year-end. So that doesn’t have a significant impact in terms of the growth, but overall we have on a linked basis grown our subscribers by over 16,000 for this quarter, which is comparatively about 35% up on last quarter, which we're pleased about. This probably to add and in terms of a consumer base in South Africa probably what we have seen is that there has been probably a lot more pressure on the consumer perspective and there has been a slight increase in terms of bad debts but it hasn’t been significant. That’s probably the interim that we have noticed that's slightly a bit different than results in churn, but it hasn’t made a significant impact on our churn numbers.

[Stefan Joselowitz:]

Brian If I could just add to that, if I'm reading a question that the churn that resulted in the net additions being down according to claimers, simple answer is no. Our new sales have fallen below plan. So that’s been the primary contributor.

[Brian Schwartz:]

Thank you. And Jeff, I was hoping to dig in a little bit into just kind of the new sales trend, and just hoping to get little more color on the dynamic that you're seeing out there. [Technical Difficulty] demand environment out there or just an area on that [Technical Difficulty] there. Are you seeing some [Technical Difficulty]? Thanks.

[Stefan Joselowitz:]

Brian we never heard question and I'm hoping it’s not our line. Operator we were the only ones having difficulty with that call breaking up.

[Operator:]

No sir, it’s coming from his line.

[Stefan Joselowitz:]

Brian can you try and repeat your question? Can you try and repeat the question? Your line is breaking up. So try again.

[Brian Schwartz:]

Yes, can you hear me okay now or is it still breaking out Jos?

[Stefan Joselowitz:]

No, right now I can hear you fine.

[Brian Schwartz:]

Terrific, I wanted to dive into the demand environment and just kind of the adjustment on the guidance here and I was just hoping to get more color just to drill down on that and I’m just wondering is the -- where you are according to plan here. Is that reflective of being behind on sales reps hiring in the past and or you’re a little bit behind in those reps coming up productivity curve. Is it a question to invite the demand environment out there? Has that changed at all or what I really wanted to ask about also is the pricing environment out there. It sounded to me like your commentary that there is maybe some [indiscernible] U.S. pricing behavior out there in the market and you’re deciding for the right move for the long term of the business of walking away from deals that don’t make sense from the financial perspective. So just trying to get a little more color on kind of the drivers of the adjustment on the guidance, at least from the top line.

[Stefan Joselowitz:]

So I think I've got two questions there and let me start with the first one which is around the drivers. We've grown by 28,000 plus minus subscribers as you know in the half year and I've made it no secret that I’m disappointed with that number. It is below our plan and I can tell you that it’s not because of the not getting sales people on board [indiscernible]. The primary impact to the macroeconomic situation in our South African business, which was impacting business generally but it’s clearly -- we haven’t been immune to that, although we're still seeing growth out of our business here. It wasn’t as high as we’ve anticipated and so that's precisely the one reason. And the other one was volatility in the Middle East which had a particular impact on some deals that we in fact booked and were unable to execute on. I’m not going to elaborate on specifics but you can imagine that in certain territories it’s just not it’s become unsafe to execute a contract and we have to wait for things to settle down before we can do that. So that’s I guess the two primary drivers around it. The second question was around processing or is that we’re facing [indiscernible] processing. Bear in mind that we are one of the few truly global telematics players. We booked at a very large global distribution network which we view as a competitive advantage. So our competitive environment does vary from territory to territory and the questions we face does different because we face different competitors in different territories. I will say that we -- in my entire 18 year history in this business, I've seen immature or aggressive or reckless processing really since the beginning from certain instances and we’ve tended to just steer away from a deal that we believe doesn’t make sense to us. It’s not a new thing. We are very experienced. We know what it takes to service of customer. Remember we have a very high focus on premium customers. We’ve got very good cases where we walked away from deals where a premium customer has gone [indiscernible] to a competitor and has ended up in a pretty short time frame back with us paying a prospect we originally quoted because we understand what it takes to provide services to these customers in multiple territories around the world et cetera, et cetera. So hope that answers your questions.

[Brian Schwartz:]

It does Joss and then last one for me and I'll pass. Just talking about the future here, as you think about expanding the sales force and your sales and marketing efforts further, can you give us a sense of where you’d like to segment those future investments by geography and market price? Thanks.

[Stefan Joselowitz:]

Sure. We’ve made some pretty significant investments. So it has been growing more or less according to plan as with any recruitment of sales people. Not all of them pan out. So it’s an ongoing process of pruning to make sure that you've got the right wins. We are in a business where the sales cycles can be pretty long and then you get instances where regional turmoil can delay a process even further. But having said that, you can see in our subscriber numbers that as I anticipated, when we reported Q1 we had seen and uptick in July and that’s why we’re waiting to see and simply as carried on through the quarter that the demand environment did improve. If we look at our businesses in their entirety, in this month that has just passed -- we are talking about the quarter but we see some strong demand in the first month of Q3. So that trend appears to be continuing. I’m not giving any sense forward than that because I don’t have a crystal ball. But we are seeing an improvement in that regard and we do have a pipeline that is pretty exciting from a premium perspective. We’ve seen some big deals that we’re taking long time start to fall and if we start layering in more than one of those on top the other, on top of our usual run-rate, then it becomes pretty exciting. So that gives you I guess a picture of the demand environment. In terms of where our spend is being weighted, I've said it before and I'll say it again, we are weighting our spend on sales tenants and we've not 100% finished that exercise yet towards the Americas.

[Operator:]

We will go next to Mike Walkley with Canaccord Genuity.

[Sid Sinha:]

This is Sid on for Mike. Joss you've talked about in your updated guidance that the Middle-East was -- certain deals out there that you had already booked, but hadn't closed. Besides that, were there other any major deals in other regions that were a surprise to you and that probably didn't pan out the way you were thinking about them?

[Stefan Joselowitz:]

It's not -- it's been an ongoing thing in our business that it's not always a perfect science to predict when you're going to close a deal. So we have generally good feel for when we are -- close to a closing stage on a deal. Remember with the guidance if I talk about our premium fleet business let's ignore the small fleets and the consumer business where we've got a very fast run-rate the sales cycle, you can measure in days and sometimes hours or minutes, but the premium fleet business, which is a big focus of our business, we're investing -- we're refocusing the bulk of our investment. It does tend to take a lot longer because it's -- you're generally facing a much bigger decision point in often a bureaucratic process. And ultimately a lot of these premium fleets have very sophisticated procurement department. So generally with the bigger fleets [indiscernible] wanted to do a trial to prove the efficacies of your product and I prove that a new customer now and once you've demonstrated that, once you've proven that, you have a long way down the road now towards doing a deal. Before you do a trial, you've a submitted an indication of your pricing. So they've gotten ideas of what it is and you've been able to demonstrate a very strong return on investment during the trial process. So it should generally be an easy matter at that point to get to a closing position. A lot of these instances the payback is saving the customer very clearly in the fights, but of course we do face -- customers have their own issues and they have an approval structure that varies from customer to customer and then sometimes, some external factor will delay them making a decision. So they will promise you we expect to sign this off by such and such a date and there can be some turmoil in their industry that it just goes lower down the priority list. So we've gotten used to that and we have to put our product and then sometimes you get a flurry of them coming through. So the reality is it's just the nature of our business and what I am pleased to say is that we've got a bunch of very large deals that are in a phase where we believe we are in extremely strong position to close because we've done -- we've ticked all the boxes that we need to do to convince the customer that this is a great return on investment.

[Sid Sinha:]

And then just quickly on the Brazil Beam-e rollout, the commentary you made that it's been delayed for a year now and the partnership with Sascar, it's -- just around that. Basically you're considering other options. What are the options to the extent you can talk about it with that [indiscernible] by yourself or partnering with somebody else? Any color on that would be helpful. And what level of investments would that entail some of those options?

[Stefan Joselowitz:]

Yes, so, so it's very difficult to give out but you've highlighted the -- really the options open to us. First prize would be that the new owners of Sascar Michelin get ready behind us, which if I understand the nature of the product and look at the numbers, there's no reason why they shouldn't and because of course we've covered some ground with them. So definitely first part we get then fully behind us and we catch up some lost ground and get this project coming. If we're unsuccessful in doing that then only two options open to us is going alone, which is an option and we've got an operation there and we know how to do it or partner or the JV with somebody else. Clearly the risk profile going it alone changes, but of course the forward upside is much better. You're not sharing an attractive profit package with anybody else. So we're open minded but I can't give you any more color than that.

[Sid Sinha:]

And just one last one for me. Given the lower revenue -- subscription revenue guidance and you talked about streamlining general and administrative expenses in South Africa. I guess what other levers you have on the OpEx side that you can perhaps speak to perhaps drive better margins or growth in both in the near term and maybe longer term?

[Stefan Joselowitz:]

Well, I'm going to hand over to Megan to give you a little bit more detail there, but it's -- before I do that, we've been doing this a long time. So we really know the hot points to push. We also know that if you put -- plans don’t always come together and we are not part of [indiscernible] in our current plan but it hasn't come together perfectly. And as an experienced management team you then need to adapt and tweak some other things to get some of the key metrics in alignment and we're in the process of doing it. Do you want to add anything further, Megan?

[Megan Pydigadu:]

I think probably just to add that in terms of our guidance, we obviously have total adjusted-EBITDA down, and that's driven primarily from the drop in revenue. But we did see a little bit of hit in terms of our cost and administrator reliance and that's really the part of the business that supports the ongoing business. And that ongoing business haven’t come through the door yet. So we just need to pull up the break in terms of that spend and we do have the ability to do that. And we are going through prices of looking maybe for the efficiencies and the benefit will be in our adjusted-EBITDA and operating profit margin improving. But that being said we still are at very good margins in terms of our adjusted-EBITDA at 20%, but we do believe there's room to grow in terms of that.

[Operator:]

Next question comes from Terry Tillman with Raymond James.

[Terry Tillman:]

Megan first in terms of the reseller that you acquired, I would like to know the financial impact both from a revenue on an annualized basis and anything you can say about how the accretes and how material that is?

[Megan Pydigadu:]

So in terms of the reseller that we've acquired. We believe that on an annualized basis we can probably get the benefits of $3 million on the top line and then 1 million profit impact. So they're currently outselling our products in South Africa but I think one of the other things too that can really be a benefit to us is that they do offer enough premium service and there is an opportunity to start selling that service into our current base in South Africa and getting uplift.

[Terry Tillman:]

Okay, thanks for that. And then I guess in terms of streamlining and trying to be more efficient, given just the nature of the macro-environment and some challenges in closing business, what I would like to -- I appreciate that, what I would be curious is product, product sharing headcount. Is that that up from the last couple of quarters or year-over-year or has that actually been trending lower and that is one of the areas also you're looking for efficiency?

[Stefan Joselowitz:]

We're not fiddling with the sales and marketing line in looking for efficiency. So we continue with those investments. So that’s trending upwards. So we're not adjusting our strategy. Our strategy is remaining on course. The efficiency that we believe is that every business needs to be looking at on ongoing base any event is really admin and other costs to maximize the efficiency in a business, and the reality is we did get little bit ahead ourselves based on an higher expectation of the run rate that we were historically experiencing and we believe would continue as far as though the concern. But I must make it clear that there's a very good sound reason. It makes good business sense for our customers to put these businesses together. There has been a genuine convergence of the solutions that we offer our premium fleet customers and we've got a large number of premium fleet customers that are taking what were traditionally consumer solutions over and above their premium key applications, based on asset trucking, whether it would be trade or cargo trucking over and above the efficiency management and driver performance enhancements that our flagship products offer. And these businesses are positioned ideally to be converted into one operation under single leadership et cetera, et cetera. So it just makes great sense from a customer service sales perspective on top of the fact that it's more efficient and will drive margins upwards.

[Terry Tillman:]

Okay. And I guess on the vertical diversification front, oil and gas is obviously one of your most robust segments and there is leadership in that segment. Jos, whether it relates to the Americas or the broader business, could you give us an update on some give us some positive data points that suggest the vertical diversification playing out or is that still more of a future thing. Thank you.

[Stefan Joselowitz:]

Thank you Terry. In terms of our vertical offerings, we've been successful as an organization in many, many different verticals. It so happens that the Energy 6 as you pointed out is certainly one of our largest verticals. It’s certainly in the top two, but we've got a myriad of others in terms of leasing construction equipment, public transport bus and coach et cetera, et cetera. So really the only territory where I guess -- and I've said it before that we really need to drive more diversification is in our Americas business, and specifically the USI business, which by its nature as being an industry pretty specialized when you look at the competitive environment. But nonetheless we have identified other opportunities. We've got a great leader, sales leader in place there now. He is finally free of distraction. And it’s been a frustrating couple of quarters to just get rid of some of those frustrations or distractions rather, but they’re behind us and it’s all systems go now. So I’m expecting some big improvements in that regard.

[Operator:]

We’ll go next to Brian Peterson with Raymond James.

[Brian Peterson:]

A quick follow up on Terry’s questions. Could you give us a little bit of an update on cash flow projects for the year? It was obviously better this quarter but we obviously have a lower sub-revenue outlook and just looking to get some color on some of the drivers there. Thanks.

[Megan Pydigadu:]

So, this is Megan and just in terms of guidance, we don’t give guidance in terms of our cash flow projections. We only give it on the numbers that we’ve given on revenue subscription revenue, adjusted EBITDA and adjusted earnings.

[Operator:]

At this time we have one question remained in queue. (Operator Instructions) Your next question is from Bhavan Suri with William Blair.

[Bhavan Suri:]

Just touch on couple of things. Joss, you touched on some deals that were pushed up because of geopolitical issues. I just wanted to clarify that. So many of the deals were pushed out, sort of do you still run the business and it’s just a matter of timing or is there more risk of those projects?

[Stefan Joselowitz:]

Yes, so it’s I guess a combination but certainly there are elements of deals that we’ve won and we currently execute. So we current book of revenue. So it’s but -- as things currently stand we still got the deal and with the influx of product at the appropriate moment we’ll execute on those. Now I don’t for one minute to give you the impression that the -- on the [indiscernible] we saw massive needle movers from a group perspective but they're important deals from our regional operation perspective and they do have a contribution but from a top line and a bottom line perspective. So in our plan we’ve booked them. We’re expecting them and we can get them. So, that’s the one element. That same kind of turmoil of course that does push out your pipeline in those kind of regions. But again I don’t want to blame that because that’s not a new thing for us. It’s not like we’ve -- this is the first -- we’re new to operating in that region. We've been operating in emerging markets and in tough neighborhoods for many, many years and this is not a new thing to us. That’s a cycle that we have to go through and that’s why we've got to drive -- further building our global business, getting all of our businesses to be stronger contributors. So when you get one of them that are running into bit of hot water, it doesn’t have a big deal on your group impact. So really I don’t get paid to make excuses. I get paid to deliver the results and I’m not making excuses. I’m disappointed with where we are at guidance -- our internal plan. I can’t control all of the regions and I’m focused on controlling the things I can focus on and we’re really focusing ahead on that focus and that’s tricky. Some internal things, we're upsizing our cost base to match our plan where applicable but most importantly, growing our top line efforts to turn MiX Telematics into a truly global force not only in Africa but in the first world well and most important in the Americas and North America.

[Bhavan Suri:]

Okay, and then I wanted to open Terry’s question a little bit about North American investment. You’ve talked about macro and certainly Europe is questionable; potentially sort of Eastern Europe, Russia et cetera and maybe even the Middle East. But sort of in the U.S. while macro is definitely an overhang somewhere, and some of the oil and gas guys are sort of taking it, have the U.S. efforts even from a pipeline perspective started to meet your internal expectations or are those still sort of lagging a little bit?

[Stefan Joselowitz:]

Well when we talk about the U.S. we’ve had some leadership issues to get that business, get the right focus in that business and we spent a lot of time. Eventually we found a great guy that we know with lots of industry experience and there's always some risk in that kind of uptake and we ended up as you know in the process with a bit of unanticipated distraction, which put us behind where I would like to being right now. I will put that distraction behind us. So I’m referring to our litigation with one of our competitors over that appointment and that matter has been settled and we’ve now got unencumbered, unrestricted focus on our business and I’m very happy to finally be in that position. So again, I’m not using this to make an excuse, but our business is not yet where I intend to get it and it’s not where we wanted to be, but we booked a great business and all our regions have grown despite the various challenges that they faced and we want to ramp up those growth rates across the board effectively.

[Bhavan Suri:]

And then one last one for Megan. Megan you talked about sort of how the bundling of hardware and subscription is playing out quite nice and you see continued growth sort of trend in that direction in Africa. Are you seeing similar trends in Europe and the U.S. or are some of those larger deals still bundling a hardware from the subscription?

[Megan Pydigadu:]

Yes, I think primarily we see a really rapid shift to bundling. In the Africa fleet business. And it has seen the most significant day. I think in the Middle-East -- we still generally in Middle-East and Australia -- we don’t tend to do large enterprise type of deals there and there we're still doing generally hardware sales. So just to give you a bit of flavor in terms of what we're seeing in terms of bundled. So in terms of our new subscriber growth related to the fleet side of the business, over 20% of that was bundled, which is up about 50% as a percentage from the prior year. But that being said, it still is a very small portion of our total fleet base.

[Stefan Joselowitz:]

If I can add to that, just to give you I guess the full picture that we do expect that that ratio is going to grow. I do expect that we're going to see a bigger uptake in our other markets for bundled deals and including I think some of the larger enterprise customers potentially and we're certainly seeing more interrogation around the auction with some of our larger deals that we're quoting on and despite that interrogation, most of them have still gone with the other option. But I do expect with the afflux of time for that to change and that will have an impact on our cash generation line going forward, but remember, we're happy to move in that direction because of the higher ARPUs, the margins trend upwards with the influx of time and it is consistent with our strategy going forward.

[Bhavan Suri:]

That's helpful Jos. And then one quick last one for me. You clearly brought the distributor in Africa. Would you consider larger acquisitions, either to get footprint or technology? Sort of how big could you potentially look at acquisitions? What size would you sort of think that it would be within reach and what would be out of reach?

[Stefan Joselowitz:]

Yes, it's not the size that scares me. It's really the valuation. So clearly technology is -- we've got a great technology base. We've got a, in my view the broadest line of solutions, great product range and the kind of acquisitions we've been looking -- we're looking over time. So it's not a matter of lack of effort in that regard. It would be something that's accretive. Our earnings is accretive and I guess you guys know that in our industry there is not many players that are profitable number one, and it's one of the key metrics that we happen to like. So that's marginally an issue for us. But we're looking to add scale to our subscriber base ideally. It could be ideal for it to be in one of the markets where we need to scale up. As you can see in our accounts, our African businesses showing adjusted EBITDA and margins of 28% plus and we think it's capable of doing better than that. And we see no reason and I'm repeating myself little bit. We see no reason why other regions, given the rock scale, can't trend towards similar margins. And so I would love to do for instance a North American acquisition, but I'm not the -- it's going to be an evaluation that makes things to us. And so if the right thing comes along we'll take a look at it. So size wise, in my history I've done -- when we acquired our new bridge eight years ago, it was a similar size business to mine at that time. So it was pretty much a like-for-like. It was a big pill to swallow and we did it successfully as we've got extremely well for us. And so I guess in this how big would we go; we would go -- anything up to our size would be within our comfort range.

[Bhavan Suri:]

Thanks for taking my questions guys.

[Stefan Joselowitz:]

Ladies and gentlemen, I'd like to thank you for joining us here today. While we're plenty below our regional plan for the year, our global business does continue to grow well. It's yielding solid profits and we've got the experience and discipline to align our costs with the demand environment. I do want to reiterate that we continue to compete favorably across the globe with wins. I think we have an example of the Rio Tinto deal discussed earlier. We are attracting strong talent into our business and we continue to enhance our standardized offerings. As such, we continue to be well positioned to be a prime beneficiary of the increasing use of Telematics in fleet management globally. We look forward to follow-up discussions with you all in the coming weeks. Thanks for your time.

[Operator:]

This concludes today's call. Thank you for your participation.