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Edited Transcript of IDSY earnings conference call or presentation 1-Aug-19 8:45pm GMT

Q2 2019 ID Systems Inc Earnings Call

WOODCLIFF LAKE Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of ID Systems Inc earnings conference call or presentation Thursday, August 1, 2019 at 8:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Adam Wolfe

I.D. Systems, Inc. - CEO & Director

* Ned Mavrommatis

I.D. Systems, Inc. - CFO, Treasurer & Corporate Secretary

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Conference Call Participants

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* Gary Frank Prestopino

Barrington Research Associates, Inc., Research Division - MD

* Glenn George Mattson

Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research

* Michael Joshua Nichols

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* William Tennent Gibson

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon. Welcome to I.D. Systems Second Quarter 2019 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 up the call for questions.

Before we begin, I would like to provide I.D. Systems' safe harbor statement that includes cautions regarding forward-looking statements during this call. During the call, there will be forward-looking statements made regarding future events, including I.D. Systems' 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 result of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's product offering and other industries, industry trends are considered forward-looking statements. Such statements include, but are not limited to, the company's financial expectations for 2019 and beyond. All such forward-looking statements imply the presence of risks, 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 in any forward-looking statements. Factors that could cause actual results to differ materially could include, amongst others, SEC filings, overall economic and business conditions, demand for the company's products and services, competitive factors, emergence of new technologies and the company's cash position. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances.

Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company's website at www.id-systems.com.

Now I would like to turn the call over to I.D. Systems' CEO, Mr. Chris Wolfe. Sir, please proceed.

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [2]

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Thank you, Victor. Good afternoon, and thank you for joining us today. After the market closed, we issued our financial results for the second quarter and 6-months ended June 30, 2019, and a press release, a copy of which is available in the Investors section of our website. The second quarter continued the acceleration of our growth strategy as we delivered another quarter of solid results and made significant progress executing on our near- and long-term growth plan.

From a financial standpoint, Q2 was highlighted by a record quarterly revenue, which was up 20% sequentially and 10% year-over-year. We also achieved our second consecutive quarter of adjusted EBITDA profitability, demonstrating our continued focus on driving profitable growth. Overall, we believe these results are a solid reflection of the building operational momentum in our business.

I look forward to sharing more details on our progress. But first, I'd like to turn the call over to Ned, who'll walk us through on financial results for the second quarter and the first 6 months of 2019. Ned?

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Ned Mavrommatis, I.D. Systems, Inc. - CFO, Treasurer & Corporate Secretary [3]

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Thank you, Chris, and good afternoon, everyone. Turning to our financial results for the second quarter ended June 30, 2019. Revenue for the second quarter of 2019 increased 20% to a record $16.3 million from $13.6 million in the prior quarter and increased 10% from $14.8 million in the same year ago period. The increase revenue -- the increase in revenue compared to the prior year was driven by our Industrial Truck segment, which increased 14% compared to the prior year second quarter. And our Logistics Visibility segment, which increased 24% compared to the prior year second quarter. Product revenue for the second quarter of 2019 was $10.6 million compared to $10.8 million in Q2 of last year. The decrease in product revenue was primarily due to timing of unit deliveries to Avis, which vary from year-to-year.

Services revenue for the second quarter of 2019 were $5.6 million compared to $4 million in Q2 of last year. The increase in services revenue is due to development service revenue related to the program with Avis, as well as an increase in high margin recurring revenue. Recurring revenue for the second quarter of 2019 increased 10% to $5.4 million from $5 million in Q2 of last year. We expect that growth and recurring revenue to continue to grow as every unit we sell in all 3 of our segments comes with a long-term recurring revenue contract. Gross profit for the second quarter of 2019 increased 10% to $7.1 million or 43.4% of total revenue from $6.4 million or 43.3% of total revenue in Q2 of last year.

Turning to our expenses. Selling, general and administrative expenses for the second quarter of 2019 were $6 million, up slightly from $5.8 million in Q2 of last year. The increase in SG&A expenses was primarily due to the inclusion of expenses from CarrierWeb U.S., which were absent in the year ago period. Research and development expenses in the second quarter of 2019 were $2 million, up from $1.5 million in the same year ago period. The increase in R&D expenses was due to program development timing of Avis projects and finalizing LV Series field trial projects, as well as the inclusion of R&D expenses on CarrierWeb U.S., which were absent in the year ago period.

And finally, acquisition-related expenses for the second quarter of 2019 were $1.6 million compared to $149,000 in Q2 of last year. The increase in acquisition-related fees was due to nonrecurring costs related to our pending acquisition of Pointer and the acquisition we completed of CarrierWeb U.S.

Turning to our profitability measures. GAAP net loss for the second quarter of 2019 totaled $2.6 million or $0.15 per basic and diluted share. This compares to a net loss of $1.1 million or $0.07 per basic and diluted share in Q2 of last year. Adjusted EBITDA, a non-GAAP metric, which we define as earnings before interest, taxes, depreciation, amortization, stock-based compensation and nonrecurring items, for the second quarter of 2019, totaled $129,000 or $0.01 per basic and diluted share. This compares to adjusted EBITDA of $290,000 or $0.02 per basic and diluted share in Q2 of last year. And finally, we ended the quarter with $8.4 million in cash, cash equivalents and no debt.

That concludes my prepared remarks. Prior to turning over the call back to Chris, I want to mention that we'll be presenting at the Canaccord Conference in Boston on August 7. Looking forward to seeing everyone that'll be attending and the presentation will be available on our website for those that cannot attend. Chris?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [4]

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Thanks, Ned. Similar to our last call, I'd like to review the highlights from our 3 business segments and then spend the balance of my prepared remarks on the status of our acquisition of Pointer and the evolution to PowerFleet, which will be the rebranded company post-closing.

In our Industrial Truck Management business, where we sell analytics Software-as-a-Service and purpose-built ruggedized telemetry units, we had a good quarter and missed having a great quarter due to one significant order worth over $1 million, that slipped into Q3. In addition, we are off to a very encouraging start with our new partner Jungheinrich, the third largest forklift manufacturer in the world. To recap the strategic partnership, which we forged in Q1, this affords I.D. Systems an opportunity to provide a sophisticated white label solution to Jungheinrich's customer base.

During Q2, we successfully finished white labeling our SaaS solution, we developed a Jungheinrich-specific telemetry unit and recently began shipping initial units to their end customers in Europe. We see growing excitement and momentum through the Jungheinrich worldwide dealer network as the product launch is being rolled out and ramped up. Beyond Jungheinrich partnership, we also secured multiple new wins and follow-on orders across all of our geographies, not only in Europe with Jungheinrich, but also in North America with companies like Paccar, Bayer Pharma, Nestlé and Georgia-Pacific.

Lastly, our launch of PowerFleet Essence product is gaining ground. As we mentioned previously, this product is targeting small fleets that are used in stores and small facilities. As planned and hoped, we have entered a large-scale trial with PowerFleet Essence that has significant potential for 2020. We believe our continued success demonstrates the growing demand for I.D. Systems solutions and how our technology empowers these customers to effectively manage our assets, keep their employees safe and optimize productivity regardless of their fleet size and budget.

The second quarter also marked another milestone period for our Logistics Visibility Solutions group. Perhaps, the most significant achievement during Q2 was the successful integration of CarrierWeb U.S. assets into our business. Again, to recap for those newer to our story, CarrierWeb is a provider of real time in-cab workflow, driver productivity applications, electronic driver devices, as well as 2-way refrigerated command and control. By adding CarrierWeb's comprehensive refrigerated product to I.D. Systems' already robust LVS product line, we substantially bolstered our ability to be more effectively -- at selling to mixed fleets that are both dry van and reefer fleets. In fact, we currently have several reefer pilots underway, representing nearly 19,000 units of potential opportunity. Keep in mind that the average revenue per unit for reefer products tends to be triple that of those for dry van devices.

While Ned mentioned that our Q2 operating expenses were higher due to CarrierWeb, we have near-term plans to achieve approximately $250,000 in additional savings in the coming months. On top of this, we secured multiple wins during Q2, including deals with SNL Transportation for in-cab and American Intermodal Management for chassis tracking. The latter was a significant expansion of 2,700 units scheduled to roll out in Q3. Also in the quarter, after several months of field trials, we commercially released our award-winning LV Series platform and started taking initial orders from various large enterprise customers, such as Ashley Furniture, Walmart and NFI.

Lastly, Freight Cam, our patent-pending, high-definition cargo detection and deep learning system, that works with our LV series telemetry units, is being viewed as a true game changer and has gotten us into several additional pilots with a pipeline of 125,000 potential units.

Shifting gears to our Rental Fleet business. During the second quarter, we delivered 18,000 telemetry units to Avis Budget Group. From the development and the certification standpoint, we certified all 70 U.S. make, models in years ahead of plan and made significant progress on the remaining development programs that are underway. And step with this, we began planning for the certification of Avis vehicles in Europe, which we expect to commence in the third quarter of this year. Shipments of the remaining units under the current 75,000 unit order will vary based on Avis' in-fleeting of new cars, but we see the preponderance of these units shipping before year-end. In the short term, however, this has increased our inventory and reduced our cash position, but this should flip back later this year.

Overall, we're very encouraged by our initial success and positive feedback we've received from Avis, especially our product's high-quality and ease of installation. One integral part of our success with Avis is our collaboration with Pointer, who we've partnered with on building the 75,000 telemetry units. Our commercial relationship with Pointer goes back more than 2 years. But as most of you know, in March, we signed a definitive agreement to acquire Pointer for $72 million in cash and approximately 11 million shares of PowerFleet, a newly created holding company.

The shareholder meetings are scheduled for August 29, and we expect the transaction close in early October. The I.D. Systems' and Pointer leadership teams are working closely on integration planning to ensure seamless transition across every facet of the combined business. As part of this, we've already started our rebranding efforts to PowerFleet, including launching a new more functional and informative corporate website.

All together, we remain confident in our ability to achieve our 12-month financial outlook as a combined business, which we believe has the potential to generate more than $150 million in total revenue, double-digit organic growth and adjusted EBITDA margins of between 15% and 20% of total revenue. Clearly, our vision of creating PowerFleet as a global IoT telematics software and solutions provider is materializing. We believe our ability to realize this vision will translate to a significant shareholder value to global scale and elevated market position and also sustainable profitability and cash flow generation.

And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Josh Nichols from B. Riley FBR.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [2]

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Great to hear things are moving along pretty quickly with Jungheinrich. I was wondering if you could help frame a little bit more about the size of this opportunity longer term as we think about: one, how many of these materials handling units Jungheinrich is selling? And what the ultimate penetration rate of this white label solutions could be as we progress through this year and next?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [3]

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Yes. Thanks, Josh. Our deal with the Jungheinrich, which we signed initially, is for a minimum of 2,000 units a year for the next 2 years. To be quite honest with you, I think both companies would be, I would say, disappointed would be the least of what I would say. Jungheinrich ships about 150,000 forklifts and material handling trucks a year. We believe and I hope our goal is that we'll shoot at the 10% penetration rate of what they ship out a year. However, we have to earn that. We have to get the channel up and running. We have to train their people. But right now, the excitement is there to be successful.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [4]

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And then, is that right, you said the LVS segment was up 24% year-over-year in 2Q? Did I hear that right?

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Ned Mavrommatis, I.D. Systems, Inc. - CFO, Treasurer & Corporate Secretary [5]

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Correct. The Q2 -- Q2.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [6]

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Great. And then, I guess could you just -- that segment seems to be performing quite well. Could you just talk a little bit about the expectations a little bit for the Industrial Truck in the second half? And how things are going?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [7]

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Yes. I think in the Industrial Truck, the pipeline looks very strong. Actually, through the dealer channel is -- I'm not mentioning the OEM channel with Jungheinrich, if you're talking Industrial Truck, right? So the strategic accounts looks strong. The dealer channel looks strong. So again, I feel fairly confident in the rest of the years, holding very good numbers. And we haven't -- we didn't ship one Jungheinrich private labeled unit in the first half. So all those units will start coming in the second half.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [8]

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And then last question for me, then I'll hop back into the queue. Great to hear -- seems like things are moving along, proxy is out for the acquisition with Pointer. I guess how are things going as far as the integration planning front and opportunities that you think -- that you could talk about as far as Pointer and some of the 4G product offerings? And how you maybe incorporate some of that into your existing offerings?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [9]

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Yes. That's probably important for everyone to know that the $150 million target is really based on the current growth plans for both companies, and that -- it doesn't take into consideration any, what we call, cross-selling opportunities, which -- there are some fairly significant opportunities for us to pursue. Number one, taking our Industrial Truck products and selling them through geographies the Pointer and Cellocator are in today. And number two, looking at their fleet management systems, that they sell globally and bringing those back into the United States. And a matter of fact, we're already starting some pilots in the states with those products. And just so you understand what those products are, that really goes after smaller vehicle fleets for service and utility and delivery. Typically, what we call, the Class 1 to 5 fleets. There is 25 million to 30 million of those vehicles in the U.S. market. And historically, in our Logistics Visibility side, as an example, we typically go after the Class 7 and 8, which you -- most people would consider like a semi-truck and tractor. So again, it's brand new opportunities on selling on both of those sides. We've had in the last 2 months, what we call, speed dating sessions between all the business leads to come up to speed on all the business activities across all geographies and verticals, as well as product road map meetings, et cetera. I mean there is a lot of opportunity for us to consolidate platforms. We already have people working on the strategies there, as well as even where -- or our hosting. The good thing is we're both on the same technology stack. So we're a Microsoft stack, technology wise, and so is Pointer and Cellocator. So that actually helps us out quite a bit.

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Operator [10]

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And our next question comes from the line of Glenn Mattson from Ladenburg.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [11]

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So jump right in on the Jungheinrich. Nice to see that you've gotten all the work done there to move forward I guess. Can you talk a little bit about what you think the first deployments would look like? What kind of customers are taking the first ones? Is there like a test period or trial period? And how should we judge success over the first quarter or 2? Like, I know you said expect a minimum of 2,000 a year, hopefully, much more than that. But what does it look like in the early stages of the rollout here?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [12]

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Yes. Just so everyone's aware too, it's probably important to note, Jungheinrich's been representing our product to the world's largest online retailer in Europe. So they have a lot of familiarity with our product and our people and working with us. The only difference in the products and it's significant. I mean on the white labeling, it is a Jungheinrich product. But we actually did some specific vehicle integration to make their product easier to install, as well as operate a little slightly differently for Jungheinrich. So again, I think the nice thing is they have a product that actually works phenomenally well with their trucks coming off the line. But again, they're already familiar with selling our product. They've already been bringing their dealers up to speed. We see their -- basically, hitting the ground running. We don't see there is any kind of pilot or field trialing going on.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [13]

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Okay. So can you give us any sense of what kind of volumes you'd expect in the back half, for instance?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [14]

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Well, I think initially, we're probably talking somewhere in neighborhood of 500 units a quarter potential.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [15]

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Right. Okay, great. That makes sense. And I missed something you said, Chris, about the -- an order that slipped that could've -- but -- you said it was a $3 million order that slipped or something?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [16]

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No. It was just slightly over $1 million.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [17]

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Okay. And that was in what segment again?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [18]

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That was in the Industrial Truck segment in North America. All indications even going into the quarter was we were going to land that. And it just pushed out mainly due to vacations in Canada. So...

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Operator [19]

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(Operator Instructions)

Our next question comes from the line of Gary Prestopino from Barrington Research.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [20]

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You gave segment revenue growth for I think 2 segments. What was the automotive growth? Or did I miss that in your narrative, Ned.

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Ned Mavrommatis, I.D. Systems, Inc. - CFO, Treasurer & Corporate Secretary [21]

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Sure. It was actually down slightly. The automotive business, in this quarter, it was about $4.7 million. Last quarter, it was $5 million. That had to do with last year in Q2, we actually had a big delivery of hardware to Avis for the initial 50,000 units.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [22]

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Okay. That's great. And then I'm rather new to the story, but I just want to make sure I've got this right. The 75,000 of telemetry units, that's targeted for Avis Europe. Is that correct?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [23]

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No. That's actually targeted for Avis U.S. and...

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [24]

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Okay. I just wanted to -- and you're doing certification for Avis vehicles in Europe, but you don't -- you haven't got any orders for anything shipped over there yet, right?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [25]

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That's correct.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [26]

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Okay. And then, Chris, you mentioned something, I was trying to write this down. You said there was something 125,000 unit market in your narrative, and I couldn't write it down. What does that pertain to?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [27]

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Yes. The 125,000 units is actually in our pipeline. So it actually represents a little over 7 of the top 100 carriers that are in active pilots right now with our new LVS and Freight Cam platforms. Again, I can't reiterate enough what Freight Cam is. It's like -- it would be great one of these days to do a show and tell on this line, but maybe not the right venue. It -- literally when you can see the freight, and you can see the behavior of the freight, how it's loaded, whether -- how much percent of capacity you had back. Usually the comments you get back is, "Wow, this is really good stuff." And this is like from some of the top logistics players in the field.

So again, that 125,000 is in our pipeline, being worked right now as opportunities.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [28]

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Okay. That's a best of opportunity, nothing signed, right?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [29]

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No, no. But they are piloting, right? So...

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [30]

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Okay. No, that's fine. I'm just trying to make sure I get it right here. And then, that's in the LVS business, right?

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [31]

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Yes, correct.

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Operator [32]

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(Operator Instructions) Our next question comes from the line of William Gibson from Roth Capital Partners.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [33]

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Chris, we talked about -- you talked about CarrierWeb and the refrigerated truck -- trucks and that business, but what did they get on average on their in-cab installations.

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [34]

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So our in-cab product is about $800 retail for the actual hardware. And then the recurring on in-cab is about $30 a month.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [35]

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Okay. And for modeling purpose, is -- for the combination of PowerFleet, is November 1 a good date?

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Ned Mavrommatis, I.D. Systems, Inc. - CFO, Treasurer & Corporate Secretary [36]

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William, it's Ned. We're really going to push towards the early part of October. The vote is set for August 29. In Israel, there is a 30-day waiting cooling-off period post the vote. So you have to wait 30 days prior to closing. And then there is some Jewish holidays in late September. So we're going to push hard for the first few days of October, but that's the plan. We want to start the fourth quarter as PowerFleet one combined organization.

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Operator [37]

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And I'm showing no further questions at this time. I'd like to turn the call back to Chris Wolfe for closing remarks.

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Chris Adam Wolfe, I.D. Systems, Inc. - CEO & Director [38]

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Yes. Thank you for joining us today. Again, I'd like to thank our employees, customers, partners and shareholders for their support. We look forward to updating you on our next call. Operator?

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Operator [39]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.