PowerFleet, Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good morning, and welcome to PowerFleet’s First Quarter 2021 Conference Call. Joining us for today’s presentation is the Company’s CEO, Chris Wolfe; and CFO, Ned Mavrommatis. Following their remarks will be an open call for questions. Before we begin the call, I would like to provide PowerFleet’s safe harbor statements that include cautious regarding forward-looking statements made during this call. During the call there will be forward-looking statements made regarding future events, including PowerFleet’s future financial performance. All statements other than present and historical facts, which include any statements regarding the company’s plans for future operations, anticipated future financial position, anticipated results of operation, business strategy, competitive position, company’s expectations regarding opportunities for growth, demand for company’s product offering, and the industry trends are considered forward-looking statements. Such statements include, but are not limited to, the company’s financial expectations for 2021 and beyond. Also it’s forward-looking statements imply the risk of uncertainties and contingencies, many of which are beyond the company’s control. The company’s actual results, performance, or achievements may differ materially from those projected or assumed, and any forward-looking statement. Factors that could cause actual results or different materially could include, amongst others, SEC filings, overall economic and business conditions, demand for company’s product and services, competitive factors, emergence of new technologies, and company’s cash position.

[Chris Wolfe:]

Yes, thank you Matthew. Good morning, everyone, and thank you for joining our call. I hope everyone is doing well and staying healthy. During the first quarter, we continue to execute on our long-term strategic roadmap, which has focused on expanding our high value solutions offerings, growing our business in our targeted markets, and continuously increasing our high margin recurring and services revenues. While we delivered consistent financial results in the quarter, our revenues would have been $1.8 million more had we not experienced a third-party electrical component supply issue that impacted some of our product lines, that is impacting many industries globally. Fortunately, our supply chain organization acted swiftly to remediate the issues and were able to build the products, but we are unable to recognize the revenues as these units were not delivered by the quarter’s end. I will discuss the electrical component issue and our remediation efforts during the latter part of our call. Nevertheless, we did see our business pickup to near pre-COVID levels in Q1, albeit still lumpy in certain geographies due to infection rates, vaccination progress, and individual government actions. We are very encouraged by the business strike in Israel and our progress in the U.S. with major upgrades at both Ford and United States Postal Service, and are signing new logistics logos. As Q1 progressed, we saw a sustained and measurable pickup in our new sales activity across our geographic regions, including our U.S. dealer channel, which is seeing record pipeline strength in Q2. Internationally, our team in Israel’s nearly 100% vaccinated and most of our employees are back in the office. Our operation in Israel is home to a significant part of our supply chain, engineering, and software development efforts. So it’s great to have our employees healthy, our operations functioning at 100% of capacity, and the economy they’re reigniting. I will talk more about this after Ned walks us through the financial performance for the first quarter of 2021. Ned?

[Ned Mavrommatis:]

Thank you, Chris, and good morning, everyone.

[Chris Wolfe:]

Hey, thanks, Ned. As I mentioned earlier, delays in getting select electrical sub-components during Q1 impacted our ability to recognize 1.8 million in product revenue. While we’re able to get the impacted products built and make sure we have components for Q2, the current environment of sub-component uncertainty requires real-time monitoring and rapid remediation. We do see this as being a temporary issue as overall industry shortages were exacerbated by fires at the Renesas and AKM factories in Japan over the last 2 quarters.

[Operator:]

Your first question is coming from Mike Walkley.

[Mike Walkley:]

Great. I hope you and your families are well also and everybody on the call. Chris, I guess the first logical question is just with the ongoing industry supply shortages and the 1.8 million impact that could have shipped in a quarter, how is supply looking to meet demand in the upcoming quarters, given your encouraging comments about the measurable uptick in sales activity?

[Chris Wolfe:]

As I mentioned -- by the way, Mike, as I mentioned, our supply chain group was able to actually rectify the situation and get enough supply through Q2 and into Q3. And we are actively, and again, I think it requires daily monitoring, because it’s not just our suppliers, it’s their suppliers, so that’s why I say it’s sub-components. So we’re actually going to increase our inventory levels, and you’ll see that in our numbers over the next quarter, too. Because again, we just want to make sure we have enough supply, and not only supply to meet the demand I mentioned, but we have to have surge potential, right? Because a lot of these larger deals, they’re going to require us to build in supply and volume. So that’s what we’re trying to address right now is get to a position where we can surge.

[Mike Walkley:]

Got it. That makes sense. And maybe just a follow on to Ned, given the tight supply, should we expect any adverse impact, maybe in gross margins, as you have to expedite shipments or pay up to get ready for this potential service demand, or given the industry knows how tight supply is, some of these costs can be passed on to customers.

[Chris Wolfe:]

Yes, I mean, right now we’re not passing, because again, the sub-component price increases by the way, so in the whole bill of materials, it’s not as consequential. But again, we’re not passing that along today because it’s not as significant as one might think on a cost perspective. Ned, do you want to add to.

[Ned Mavrommatis:]

Yes. I just want to say that it does have a very, as Chris said, a very slight impact on the gross margins. But when you look at the gross margins on product, around 29% to 30%, we feel comfortable going forward, take that into consideration.

[Mike Walkley:]

Okay, great. And last one from me, I’ll pass the line. Just want to dig in a little more on your initiative for the 30,000 non-subscription units from your old industrial solution. Yes. Congratulations on Ford and the 4,500 units. Just on that 30,000 backlog, how many are you engaged with now and how quickly do you think you can transition those 30,000 units over and for Ford and with that large number and all their sites, how long does a transition with a Ford take?

[Chris Wolfe:]

Yes, that’s a very good question. The good thing is we have a lot of experience doing this. We did a Walgreens just last year and it went actually flawlessly, they’re actually a good reference account for us. We’ve already done 2 sites at Ford in Q1. So again, that tells you the pace that we can move, we can actually do more than that. The gating factor, even with Ryder, it’s really their logistics and timing, not ours. So we do have the opportunity, we have installers, we can scale, but as the United States Postal Service, just between a Ford and the United States Postal Service, we’re getting to the point of getting ink on paper with the United States, postal service planning to start deploying sites at the end of Q2, very early Q3. And one of those sites by the way is a site we’re not even in; so it’s not even a migration. It’s part of those 100 that we’re not even in today. So that’s actually even better news, but we’ve actually done the United States Postal Service before. I mean literally 15 years ago. So it’s a 2 year initiative for the United States Postal Service at 80 sites. And it could be the same on Ford, depending on how fast they want to roll out.

[Operator:]

Your next question is coming from Jaeson Schmidt.

[Jaeson Schmidt:]

Just curious if you could comment, on the recent momentum you’re seeing in order activity is coming from new customers or expanding at existing customers.

[Chris Wolfe:]

It’s primarily new customers, I mentioned a lot of the tenders that we won on the police tender in Israel. That was a brand new customer. Actually insurance, that was a new customer last year. So Ryder Logistics, to me, that’s still a new customer, we’re in the initial deployment of the first orders, like with AXA, like with Ryder. And also I mentioned Kovacs. So those are brand new customers, panhandle brand new customers. So I’d say the preponderance of all of our growth and activity is all brand new logos. Now that being said, Ford and the United States Postal Service, which we’ve been working on for years, trying to get them to move and migrate and really now’s the time they have to do it. I think everyone had that pause through 2020, and you’re seeing a lot of things starting to break loose. So I think it’s going to be a blend in 2021, between new and old, primarily just because of the scale of the United States Postal Service and Ford, but a lot of the new logo activity. Matter of fact, our dealer network, I mentioned in the U.S., we have 500 dealers that represent us and our products again is probably the best pipeline I’ve ever seen and I’ve been here 4 years.

[Jaeson Schmidt:]

Okay. That’s helpful. And just curious if you’re seeing any timetables from customers and their launches get pushed to the right at all.

[Chris Wolfe:]

Not really. Actually it was kind of surprising that I mentioned the tender for the rental car company, they actually contacted us. That’s the best way to get involved in a tender. So we’re actually seeing people be more aggressive than last year. There was a lot of pushing going on last year just because you couldn’t get into facilities, you couldn’t get into headquarters, you couldn’t get POS done by the purchasing group. And you’re seeing that all starting to break free this year, which is good. I mean I think right now we’re seeing it across the board.

[Jaeson Schmidt:]

Okay. And just the last one for me then I’ll jump back into queue. Ned, you mentioned some of the OPEX coming back this year after it being relatively muted from COVID last year. How should we think about OPEX trending throughout this year? Kind of just steady growth as revenue grows?

[Ned Mavrommatis:]

That’s exactly right. Primarily, we expect to spend slightly a little bit more so in marketing, as Chris mentioned. Right now, there’s a 3G Sunset in the U.S. and we believe we can capture a lot of the markets so then aggressively pursue some marketing. So some slight growth quarter to quarter.

[Operator:]

Your next question is coming from Scott Searle.

[Scott Searle:]

Just to dig in a little bit on the product front, certainly constrain this quarter from a component availability standpoint, but you can build in a big pipeline there. And I think going back about just before COVID, the close of The Pointer, Tel Location acquisition, you guys peaked it. $16 million or so on product revenue. Chris, is that something that’s attainable this year when you’re looking at that pipeline? And then I guess as part of that, we’ve moved from a demand constrained environment and COVID to COVID really driving the demand for the overall supply chain and logistics visibility. We’ve had some component issues on top of it, but now are we moving to an area where there are deployment issues? Possibly in terms of your capacity or your partners’ and integrators’ availability and capacity to deploy solutions?

[Chris Wolfe:]

No, I kind of mentioned that on a prior answer, but we actually have really good capabilities with surging our implementation capability. So whether it’s installers, we use third-party installers, we do train the trainer. So again, when it comes to actually implementing our solution, it’s typically just working around our customers’ schedules, right? And again, now we’re seeing them being a lot more flexible because they can be, with the people getting vaccinated, places opening up. Our only constraint is going to be, if there’s a surprise in the supply chain of being able to get product. We’ve addressed it so far, but again, the whole industry is facing it. And I mentioned those 2 fires at those 2 factories, obviously, fires are horrible. Thank goodness nobody was injured, but it put them out of commission for a while. Now those kinds of problems can be rectified pretty quickly. They can actually stand up plants and move production, and that’s what they’ve been doing. And so I see that again, like I said, temporary, but again, the overall parts shortages and just the restrictive nature of it right now, we’re spending a lot of time right now, just making sure our supply chain is intact. That’s the only constraint.

[Scott Searle:]

So Chris, can you get back to those peak kind of product levels?

[Chris Wolfe:]

By the way, just, again, if you think about the United States Postal Service and Ford, that’s our high end products. I mean those products, they’re very good margins, they’re over $1,200 a unit. It’s not like a trailer tracking product for $300 or $400. So they have very good high margin products and so every one of those that’s ship USPS, that’s almost a 4X of a trailer or a chassis or container in value to us. So we can get there as Ford ramps up, as the United States Postal Service signs and starts moving, you’ll see us get back to those numbers.

[Scott Searle:]

Got you. And then Chris, maybe to follow-up on Mike’s earlier question related to product gross margins. I think Ned, you said 29% to 30%, which is where you were this quarter. It’s below where you’ve been historically. But when you think about then the favorable mix that could be coming on the horizon, how should we be thinking about gross margins late this year and into ‘22?

[Ned Mavrommatis:]

Yes, that’s a great point, Scott. So mix has a lot to do with it, especially this first quarter. Our logistics business was very strong. That tends to have a lower product gross margin by its nature. But as Chris mentions, a lot of this pipeline in the industrial truck business, that product has a much higher gross margin where we can see the product gross margins go into the mid-30s, depending on mix.

[Scott Searle:]

Great. And maybe just to follow up geographically as well, Chris. certainly COVID issues have been accelerating certain parts of the world and certain parts of Europe remain a little bit locked down on that front. You’ve been doing well in Israel, it sounds like you’re doing well in Mexico, despite some of the health headwinds there. So I’m wondering if you could just broadly talk about what you’re seeing in Latin America in demand there and the European theater in general. And then I had 2 follow ups.

[Chris Wolfe:]

Yes. Actually, I like that question because I really didn’t bring it out in the script, but our sell locator division, if you know what that does. It actually takes our product and sells it to geographies we’re not in. We are in Brazil, we are seeing strength in Brazil, but again, it’s probably other than India, one of the most heavily COVID impacted. So we’re seeing activity there, but it’s definitely impacted by COVID. So we don’t expect a lot of growth in Brazil until they get their COVID situation handled. Argentina for us is growing, but their currency always masks the growth, the currency translation. South Africa, by the way, for us went from not being profitable to profitable because we signed a major customer and deployed them actually throughout COVID. Turning to Europe and our sell locator division, and our Jungheinrich. By the way, Jungheinrich, even with Germany shut down, they’ve been taking their orders and they’re on plan, which is great. And our sell locator division, which sells to all those other telemetry service providers, has the biggest backlog they’ve ever had. And this is for pre-acquisition, which is great. That tells you that there’s strength beyond even our business. Other providers are having strength in their business.

[Scott Searle:]

Great. Very helpful. And just lastly, could you reiterate the opportunity in terms of what you’re seeing in the pipeline for the 3G sunsetting opportunity. And Chris, if you could as well, M&A now becoming a more realistic opportunity. I’m just kind of wondering if you could provide a little bit more detail in terms of the activity and opportunities within the pipeline and the framework or parameters that you put around what you’re looking for.

[Chris Wolfe:]

Okay. Now I’m going to have to remember the first part of your question. If you can repeat it, that’d be great, but I can cover that in. Go ahead. Yes, go ahead.

[Scott Searle:]

3G sunsetting, Chris.

[Chris Wolfe:]

Yes. Thank you. So yes, on our pipeline and I mentioned it, of what’s bringing customers to us right now is the 3G sunset. Ned mentioned it, we have basically campaigns going on, reach out campaigns, advertising campaigns, our marketing spend is up, our insights sales groups working the phones. But basically we’re also having a lot of inbound inquiries because the sunset is literally in 2022. So if you have units, and by the way some of our competitors, one of the companies I used to work for, they don’t even have a replacement product. So they had 250,000 units deployed. So that means 250,000 units have to find a home. And so we’re actually glad to be that home. So we have 75,000 units that we’re currently in field trials on. We just closed 3000 of those. And like I mentioned, the other 300,000 is a mix. But I’ll give you a case and point, we have 2 that are not in that 300,000 number. Two customers that actually total a hundred thousand. So we’re in field trials with them right now. Those two right there could just double our logistics size if they move forward and when they move forward. But again, they’re not going to take 100,000 units on day one, they’re going to take them over a period probably throughout 2022. But again, very strong. I think everybody in the industry. They were delayed because of the ELD HOS mandate that was in 2019. Then they got delayed because of COVID, but the network sunset didn’t get delayed that much. And so it’s definitely like the wall that’s coming up on everyone. Turning the M&A very quickly. Our team when we met actually a year ago and did strategic planning, we actually spent a lot of time saying, "Hey, what part of our portfolio do we need to strengthen? What geography would we like to expand in?" And then obviously, we want it to be immediately a creative, we want it to actually help us with our software as a service capabilities and our applications. So we’re actually looking at technology companies that are in specific geographic regions. We like Europe right now, even though it’s in still kind of a lockdown mode, we think there’s some opportunities in Europe. It’s actually very convenient to Israel. It’s a 2 hour plane flight, maybe 3 hours depending on where you’re at. Actually Eastern Europe, we think the cost structure and just the entrepreneurial spirit is great. The education levels are phenomenal. So again, we’re doing a lot of research and building out our M&A pipeline of opportunities. We do have a couple of opportunities in Israel that we’re looking at on the software side and also in the U.S. So some are more transformational, but the sweet spot for us would be around $20 million to $30 million in revenue and very profitable and the software company. So just to hopefully give you enough color.

[Operator:]

I will now turn the floor back to our hosts.

[Chris Wolfe:]

Okay. Thanks, Matthew. Thank you for joining us today. I’d like to thank our employees for their diligent efforts and our customers were putting their trust in our products and services, and also our investors for their support of our vision. And then I will be attending several upcoming financial conferences, including the 16th Annual Needham, Virtual Technology and Media Conference on May 19 and the Rock Capital Virtual London Conference on June 23. Please stay healthy and we look forward to speaking with you again soon. Operator?

[Operator:]

Thank you for joining us today for our presentation. You may now disconnect.