PowerFleet, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Good morning. Welcome to PowerFleet's Fourth Quarter and Full Year 2020 Conference Call. Joining us for today's presentation is the company's CEO, Chris Wolfe and CFO, Ned Mavrommatis. Following their remarks, we will open the call for questions. Before we begin the call, I would like to provide PowerFleet's Safe Harbor statement that includes cautions 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 the company's product offering and other industry trends are considered forward-looking statements. Such statements include, but are not limited to, the company's financial expectations for 2020 and beyond.

[Chris Wolfe:]

Hey, thank you, Alice. Good morning, everyone, and thank you for joining our call. I hope everyone is staying healthy and doing well during these very unprecedented times. As you saw from our earnings release the fourth quarter was a solid finish to a very unpredictable and challenging year for companies globally. PowerFleet's focus on driving profitable growth, along with continued execution against our strategic initiatives, enable us to deliver 7% sequential increase in our top line revenues, a 4% sequential increase in high margin recurring services revenue, and a meaningful improvement to our bottom line. These improving financial metrics demonstrate the leverage of our business model and the ongoing benefits from our cost optimizations -- optimization measures, which together helped produce robust gross margins an $8.8 million in operating cash generation for 2020. From a sales perspective, we finished the year strong with several new customer wins and we entered 2021 with a solid backlog of installations and a robust prospect pipeline. During Q4, more recently, we secured and announced a number of notable wins, including Panhandle Transportation Group, Nucor Tubular and McGuire Transportation. These wins contributed to our basic monthly subscription units, which totaled a record 590,000 at the end of Q4. Before I dive into our business segments and outlook, I'll turn the call over to our CFO, Ned Mavrommatis to discuss our results for the fourth quarter and full year of 2020. Ned?

[Ned Mavrommatis:]

[Chris Wolfe:]

Hey, thanks, Ned. Our improving financial performance reflects our global team's continued operational execution and building sales momentum. In our Industrial segment, which includes forklifts and material handling equipment, we continue to see improving sales traction across our strategic direct sales team and our indirect channels, which include our OEM white label product and our expanding U.S. partner network.

[Operator:]

Our first question comes from Mike Walkley with Canaccord Genuity. Please proceed.

[Mike Walkley:]

Great. Thank you. Chris and Ned, I hope you and everyone's families on the call are staying healthy and well.

[Chris Wolfe:]

Thanks, Mike.

[Mike Walkley:]

Just -- Congrats again on another double-digit adjusted EBITDA margin to end the year. Chris, just on the solid backlog entering 2021, can you discuss areas of strength and any update on some of those large opportunities you were chasing? And maybe how you see the business improving throughout 2021 if economies continue to reopen?

[Chris Wolfe:]

Yes. Thanks, Mike. We are actually seeing -- you've seen the traction with new sales, but even coming into 2021, I -- previously we announced the Ryder logistics win. I think it was like June of last year. We only installed six locations at Ryder in 2020, and there's 24 to go. So just on a scale, you can see it's almost a 4x or more just with one customer alone. And we also -- Nucor Tubular, there's upside there in Kautex, which we announced last year on the industrial side. The industrial side was probably the hardest hit in 2020, and the fact that we're seeing that come back and come back fairly strong is phenomenally encouraging. On the very large prospects, we are still pushing those. We do have some progress going on. I'm not quite -- because we are going up for Q4 right now. I don't want to get over my skis. But again, that's kind of some of those wins that I mentioned migrating old customers, like the United States Postal Service, Ford Motor Company. I think when you start seeing us deploy those locations this year, which we hope would start happening before the second half, but we're definitely in the second half, that's when you will start seeing those kind of break free on the industrial side. On the logistics side, those field trials we have are still going on and we expect the culmination here in Q1 and into Q2.

[Mike Walkley:]

Great. That's helpful. And then just on the quarter, another strong net add of 20,000 to get to 590,000. Maybe you can just talk about where you're seeing some strength? And are you still having any customers turning things off just due to impacted industries or is that behind you now and you should see steady growth barring any virus getting worse?

[Chris Wolfe:]

Yes, barring any virus getting worse, we are seeing -- it stabilized really in Q3, thank goodness, and then we're just seeing that stabilization. We are not seeing any major customer issues at this time as far as people in that kind of financial straits that they need to turn off units in mass. And by the way, we're actually getting to the 20,000 net add. It's just across the board, which is actually good for us. I think if anyone who followed our story early on, it was always continued on one or two customers making or breaking the quarter. And now I think just the breadth of our company helps us just weather those kind of situations much better. So we are not really beholden to one particular customer in a quarter, but again, it's really been across the board.

[Mike Walkley:]

Great. Last question for me and I'll pass it on. Ned, product sales were a bit higher than expected. Most of those that had been turned on or converted to subs or that give you some visibility into sub growth already into the March quarter. And then the 35% gross margin, I know mix can fluctuate quarter-to-quarter based on hardware. But is that kind of a good gross margin for 2021 on hardware as you look at kind of your backlog for 2021?

[Ned Mavrommatis:]

Sure, Mike. Yes. The first part of your question is absolutely. Every piece of hardware that we sell comes with the long-term service contracts. So it's the high product revenue today gives us more visibility into growing service revenue. On the product margins, it's primarily mix. We have products that generate 20% gross margin. And then we have products that generate 45%. So it's really the mix. I think between 30% and 35% on the product side, we feel very comfortable going forward.

[Mike Walkley:]

Great. Thanks for taking my questions and best wishes for a successful '21.

[Chris Wolfe:]

Thanks, Mike.

[Ned Mavrommatis:]

Thanks, Mike.

[Operator:]

Our next question comes from Jaeson Schmidt with Lake Street. Please proceed.

[Jaeson Schmidt:]

Hey, guys. Thanks for taking my questions. Just curious if you could comment on what you've seen from an order pattern standpoint here in January and February, if some of the momentum you saw late last year has continued here in the first two months of the quarter?

[Chris Wolfe:]

Yes. I mean, again, we are not done and typically, a lot of our sales, like a lot of companies, they come in at the last month of the quarter. But again, we haven't seen it slow down. A matter of fact, if anything, we've seen business activity picking up and -- which is good, especially in our indirect channels because that -- they’ve more touch points in the overall global economy, especially like in the U.S. economy, which is the biggest markets that we are in. So again, the activity level has been high. I myself attend almost every sales pipeline call. And it's probably the strongest calls I've been in probably in the last two years, even pre-COVID.

[Jaeson Schmidt:]

Okay. That's helpful. And then could you just give us an update on where you're at with the other rental car company?

[Chris Wolfe:]

Conversations continue, and matter of fact, there is a third-party that's just recently started an RFP in that area. So another rental car company that's also major. So again, we are participating in that RFP as well. So conversations continue there. Again, I think it's going to be slow going with that major rental car company, but I -- the interest level is still there, and we just keep them updated on what we are doing. And it's just really up to them when they want to -- and when they can do a program, right, because they need to do what we call a large scale field trial and we have a proposal in front of them right now to do that.

[Jaeson Schmidt:]

Okay. And the last one for me, and I'll jump back into queue. Ned, how should we think about OpEx ramping here in 2021?

[Ned Mavrommatis:]

We are going to slightly start investing a little bit more in sales and marketing. As Chris mentioned, we are beginning to see a significant increase in the activity and people doing business. So we are going to start investing a bit, but again, very conscious. Our goal is to have profitable growth.

[Jaeson Schmidt:]

Okay. Thanks a lot, guys.

[Chris Wolfe:]

Thanks, Jaeson.

[Operator:]

Our next question comes from Scott Searle with ROTH Capital. Please proceed.

[Scott Searle:]

Hey. Good morning. Thanks for taking my questions. Hey, just to follow-up on the gross margin front, Ned, I know that there is volatility quarter-to-quarter depending on mix, but we've seen a lot of component issues throughout the industry and the supply chains with other vendors. Are you seeing any issues on that front? How is that impacting not only your gross margins, but your ability to ship in service or are you seeing any push outs on that front?

[Ned Mavrommatis:]

I'll just talk a little bit about the gross margin, and then Chris can talk a little about the supply chain. When you look at our service gross margins, they're very consistent at 65% and growing. In Q4, the product gross margins were not impacted at all by the supply chain issues. It was just primarily mix. And as I mentioned before, we feel comfortable looking at it going forward. The product gross margins being anywhere from 30% to 35%. As we look forward, the supply chain is an issue not only for us, but the whole industry. So Chris, maybe you want to take that?

[Chris Wolfe:]

Yes. There's -- to be very specific, there's a couple of components, actually module shortages that have been going on that have not necessarily impacted us as of yet, and we are in the middle of, like, making sure they don't. So by pulling in orders, you will probably see some of our inventory go up just to make sure that we have ample supply for -- and for also for surge, getting back to the other question about large field trials that come to culmination. For modules and supercaps, the long lead times. So that's what we're trying to do right now. It's just remediate any risk and make sure that we can take advantage of upside by pulling in subcomponents and modules early. We don't have to do the build-out of the full product that we can pull in the parts so that we have ample supply. But it is concerning, and some of the long lead times are getting into like 6 months, right?

[Scott Searle:]

Okay.

[Chris Wolfe:]

So you have to plan ahead.

[Scott Searle:]

Got you. And just to follow-up on some earlier comments for clarification with the United States Postal Service. It sounds like now that is moving ahead. It's just a timing issue. And to follow-up on your comment on Budget, is Budget now just specifically through Pointer in Israel or is that expanding out to Budget globally?

[Chris Wolfe:]

Yes, Avis Budget Group -- I mean, by the way, Budget is part of Avis. So in the U.S., some of the 120,000 units they took or could be in the Budget portfolio. This is a licensee of Avis Budget Group. So again, every -- our contract with Avis actually allows us to sell to the licensees, which there's quite a few, like in most of the international countries. So we've had been approached by other countries as well like Mexico, et cetera. And so whether or not they go with our Avis product directly or they go with a different product that we get -- got from the Pointer acquisition, we are approaching them with like our portfolio of products, and that was a win using one of the Pointer products but it's still a great win for a licensee.

[Scott Searle:]

Got you. And U.S. Postal Service?

[Chris Wolfe:]

Yes. I think you're -- I don't want to get too far ahead yet, but there's great conversations going on there and great planning going on. So once you start seeing -- we will basically put out an announcement when we can -- when we start deploying at facilities, and we hope that will begin a couple of months.

[Scott Searle:]

Great. And lastly, if I could, just given the mix of business and where you're shifting, you're moving to more value, I'm kind of wondering how you're thinking about recurring revenue from an ARPU standpoint as you start to win some of these higher-value opportunities, including weight on axle and other weight sensor-driven initiatives. And also as you're kind of moving into some different directions, cold chain keeps coming up a lot. I'm wondering if the competitive list of vendors or the short list you're fighting against is changing at all. Thanks.

[Chris Wolfe:]

Okay. So when it gets back to like weight on axle and somewhat like -- again, I mentioned our freight camera as well. Those are very high value type of products that we offer, our freight camera. People don't know we actually do machine learning on imaging. We can tell how trailers are loaded, if there's been a shift in transit. We can actually help you tell you how to unload a trailer now for the first time versus just loaded and empty. That's tied to weight on axle. And you can tell we have more visibility, which can help our customers increase their velocity, and that's actually the whole issue with the industry in general, is there are certain choke points that we are trying to address specifically, like at the point of -- the port of Los Angeles and the chassis container issue out there, or it's the getting trucks in and out of yards faster by really knowing where trailers are in the proper location or chassis or containers. So with that, our price point is more of a solution sale now. So what we do is we go into sell a solution to solve a problem, and that does typically include a hardware sale just because there's a hardware component to it in edge computing, but it also includes our analytics and our software. So getting back to the ARPU, it kind of depends on the vertical you're in and the actual solution. But, yes, the ARPU is typically going to be higher than our standard would be for -- like a chassis tracking product right now is typically $4 to $5 a month. And then this could be $5 or $6 added on for the extra weight data. And the same with our freight camera, you get an extra dollar. At the same time, by the way, as we move to 5G, we get the added benefit of the lower data rates, and so we can actually send more data, more sensor data through the pipeline. And lastly, on the cold chain question, that's a great question. We are now competing on projects with systems integrators. So by the way, we are now also partnering with the systems integrators. I mentioned Tata Consulting Services. They're the largest in the world, I believe, today. If not the largest, the second. So for us to actually partner up with Tata is just a phenomenal opportunity for the company. So we can either do it ourselves, which we’ve done this like with the American Intermodal Management, which we did with Avis, like we did with the United States Postal Service years ago, or we can partner up with a stronger partner and go after IoT wins that way. But again, I think our capability is to be nimble. And I think being an innovatively nimble technology provider in the IoT space is our differentiator. So we can naturally go in, listen to what the problem is, fix the problem, and for that, get remunerated for it.

[Scott Searle:]

Great. Thank you.

[Chris Wolfe:]

Okay. Thanks.

[Operator:]

Our final question is from Gary Prestopino with Barrington Research. Please proceed.

[Gary Prestopino:]

Hey. Good morning, everyone. I just want to clarify. You had 590,000 on air subscriber units at the end of the year?

[Chris Wolfe:]

Yes.

[Gary Prestopino:]

Okay. And then, Chris, what -- could you maybe give us an idea directionally? I mean relative to the end of last year, what has been the growth in your backlog overall?

[Chris Wolfe:]

I mentioned earlier, I think it's been more broader across the board. Like in Israel with our -- right now, I mean 2 years ago, there was not any IoT programs going on in Israel -- in our Israel operation. It was all vehicle sales through OEMs and doing SVR. Now 10% of the revenue out of Israel is just all IoT projects. So I mean that's normal 2 years. So we actually see that trend continuing, and it's a focused initiative. And at the same time, in our logistics segment, which we invested heavily in the Panhandle Group, the 6,000 unit container fleet at the McGuire. And you will -- we are seeing very good traction uptake. And by the way, we don't even announce like when current customers refresh in that necessarily. But again, that's -- you're seeing a nice, steady progression of sales on the logistics side. And the industrial side has always been the lumpiest part of the business because their CapEx is all -- it's a cost center, right? The warehouse and the shipping facility is usually a cost center. So when the economy goes down, you're not going to add cost to a cost center, typically. That's going to be the first thing hit, and so that's what hit us last year. But we're seeing that nice again, because of that business activity picking up, more things being built. So our manufacturing segment in the industrial side is starting to recover, like I mentioned, Toyota manufacturing. Everything was put on hold at Toyota all -- right at the end. So now we're starting to see that come back to life, which is awesome.

[Gary Prestopino:]

Okay, great. And then lastly, Ned, can you provide us with the components of non-GAAP net income for all of the quarters for 2019 and 2020 for modeling purposes?

[Ned Mavrommatis:]

Sure, I can. Obviously, it's in the press release, there's a table, Gary, that has the GAAP to non GAAP. So I don't want to read it over the conference.

[Gary Prestopino:]

No, I'm looking at the press release, and I'm seeing it for December and for the year, all right, quarter and the year. Maybe I don't have the full press release popped up here. But I'm -- there is a breakdown by Q1, Q2, Q3 for 2019 and 2020 of all individual components.

[Ned Mavrommatis:]

Yes, and I will point that out to you after the call if that's okay.

[Gary Prestopino:]

Okay. I'm sorry. I'm looking at this on two separate screens here. So all right, I'll take a look at it. Thank you.

[Ned Mavrommatis:]

Okay. Thanks.

[Chris Wolfe:]

Thanks, Gary.

[Operator:]

We have reached the end of the question-and-answer session, and I will now turn the call over to Chris Wolfe for closing remarks.

[Chris Wolfe:]

Thank you for joining us today. I'd like to thank our employees for their diligent efforts and great results and our customers for putting their trust in our products and services and our investors for their support of our vision. Please stay healthy, and we look forward to speaking with you again soon. Thank you.

[Operator:]

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