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Edited Transcript of MIX.J earnings conference call or presentation 1-Aug-19 12:00pm GMT

Q1 2020 MIX Telematics Ltd Earnings Call

Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of MiX Telematics Ltd earnings conference call or presentation Thursday, August 1, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Granara

MiX Telematics Limited - CFO, Executive VP & Director

* Paul Dell

MiX Telematics Limited - Executive Officer

* Stefan Brian Joselowitz

MiX Telematics Limited - President, CEO & Executive Director

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Conference Call Participants

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* Brian Christopher Peterson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Brian Jeffrey Schwartz

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* David William Gearhart

First Analysis Securities Corporation, Research Division - VP

* Matthew Charles Pfau

William Blair & Company L.L.C., Research Division - Analyst

* Thomas Michael Walkley

Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the MiX Telematics First Quarter Fiscal 2020 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Dell. Please go ahead, sir.

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Paul Dell, MiX Telematics Limited - Executive Officer [2]

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Good day, and welcome to MiX Telematics' earnings results call for the first quarter of fiscal year 2020, which ended on June 30, 2019. Today, we will be discussing the results announced in our press release issued a few hours ago.

I'm Paul Dell and joining me on the call today is MiX Telematics' new Chief Financial Officer, John Granara; and 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 also make statements relating to our business that may be considered forward looking pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject 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. We will also be referring 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.

All U.S. dollar amounts referred to on the call have been translated at an exchange rate of ZAR 14.08 to the U.S. dollar, which was the Rand dollar exchange rate reported by oanda.com as of June 30, 2019.

With that, let me turn the call over to Joss.

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [3]

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Thanks, Paul. I would like to thank you all for joining the call today. Before I get into this quarter's highlights, I would like to welcome John Granara as the company's new Chief Financial Officer.

John brings to MiX of his 20 years of broad financial and strategic experience. I'm looking forward to the positive contribution his insight will have on our growth strategy as MiX entered the next exciting phase of its evolvement.

As a reminder, Paul Dell remains an invaluable member of our leadership team and will continue to support MiX in his new role as Head of Finance for the Americas.

Turning to our financial results. Despite the weak start to the quarter that we discussed in our last earnings call, MiX reported a solid result highlighted by double-digit subscription revenue growth, strong subscriber additions as well as continued EBITDA margin expansion and positive free cash flow. These results are further evidenced we are continuing to benefit from our diversified geographic footprint and product portfolio as well as bundled deals. MiX's attractive combination of top line growth and a highly scalable business model was evidenced by another quarter of solid cash generation.

During the quarter, we generated ZAR 11 million in free cash flow, even after investing ZAR 52 million in in-vehicle devices for bundled contracts. This reflects in part the positive impact of our bundling strategy.

In addition, we were pleased with our adjusted EBITDA performance, which exceeded our expectations with 200 basis points of year-over-year margin expansion. Our subscription revenue of ZAR 455 million grew over 11% year-over-year on a constant currency basis and was in line with guidance.

We also added 16,400 net new subscribers during the quarter, bringing our total base to over 766,000, a year-on-year increase of 11% and reflects our fifth consecutive quarter of double-digit net subscriber growth. ARPU has trended up over time as we have expanded our premium services and bundled contracts have become a higher percentage of our subscription revenues. That said, ARPU remains directly correlated to product mix and can fluctuate from quarter-to-quarter.

We continue to be pleased with the broad regional performance as all of our geographies contributed positively to both our top and bottom line. We typically don't provide much geographic detail on our Q1 call, but last quarter, we mentioned a slowdown in South Africa as the build-up to the national elections proved a headwind to buying activity in both March and April. As expected, we saw a thawing in May with a return to a more normal cadence in June, and we were pleased with the momentum in our Africa business exiting the quarter.

In the United States, we delivered another quarter of growth, however, we have begun to see some more cautious buying behavior amongst our energy and some multinational companies. We believe this reflects the uncertainty created by the current global trade environment and recent oil price volatility. It is too soon to tell how this may impact our growth in the U.S., if at all, but it is something we are monitoring closely. As for MiX Now, we are continuing to make progress building out our sales organization and laying the foundation for future growth. It still remains early in the process, but we continue to be excited at the market opportunity for MiX Now and the important role it can play in our growth and our diversification strategy in the United States and abroad.

I would like to highlight a few strategic victories that demonstrate our success around the world. In Mexico, we enhanced our go-to-market strategy by establishing a direct presence to work more closely with our channel partners and customers.

MiX Telematics has been indirectly serving customers in Mexico through a long-term channel partner for over 10 years. And while the strong relationship remains in place, the size of the addressable market justifies a more direct presence to seize greater opportunity. Furthermore, an industry-leading Mexican based recycling company will be using MiX's solutions to manage its fleet of heavy commercial vehicles. This customer wanted to enable a culture of safe and socially responsible drivers through adopting MiX Telematics' premium fleet management solution. We continue to expand our footprint within a large global FMCG, with the addition of over 100 vehicles in Malaysia. We started with this customer more than 2 years ago and now underpin their commitment to safety and efficiency in close to 1,000 vehicles throughout Africa, Europe, South America and Asia.

And finally, a large global humanitarian organization will be expanding their reduction of MiX Telematics' solutions. Their fleets in Senegal, India, Papua New Guinea and Central African Republic will be equipped with a combination of MiX's light and premium fleet solutions.

On a nonfinancial note, our Central Services Organization was recently certified to the ISO 27001 international standard for information security management. This further demonstrates our strong commitment to protecting the confidentiality, integrity and availability of the information we gather, process and deliver to our customers. Most Telematics companies rely fully on the certifications of their car providers, and few, if any, have achieved both ISO 27OO1 and 9001 certification themselves.

So in summary, we started fiscal 2020 with a solid first quarter, which reflects our unique global presence and the strategic investments we have made over the years. As a result, I continue to believe we are executing on an opportunity to create a large global company with a compelling financial profile driven by double-digit subscription revenue growth, enhanced scalability and growing cash flow.

With that, let me turn it over to John to run through the details on the quarter.

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John R. Granara, MiX Telematics Limited - CFO, Executive VP & Director [4]

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Thanks, Joss. Before I review the financial results, I wanted to share that I'm excited by the opportunity to take on the role of CFO as we move into our next stage of growth. I'm thrilled by both the tremendous global opportunity we have in front of us and the platform strategy we have in place to achieve it. I'm looking forward to sharing the MiX story and getting to know all of you better in the months ahead.

I'll start by first reviewing the financial results for Q1, and then I'll discuss our outlook for Q2 and the full fiscal year. As a reminder, our reporting currency is the South African Rand and our results are presented on an IFRS basis unless otherwise noted. For convenience, we have translated our results into US dollars in our press release using the June 30, 2019 spot rate. Please keep in mind that all figures refer to the first quarter 2020, and all comparisons are for the year-over-year changes unless they say otherwise.

As Joss mentioned, we're pleased to start the year with solid first quarter results. Starting with the P&L. Total revenue came in at ZAR 522 million. Of this total, subscription revenues were ZAR 455 million, up 16.5% or 11.1% on a constant currency basis and in line with our guidance range. Subscription revenue continues to trend up on a year-over-year basis towards our long-term goal and now represents more than 87% of total revenue. The strong performance was driven by the ongoing positive traction from our broad subscriber portfolio, including our premium fleet customers across all geographies in key vertical markets. We added more than 16,400 subscribers in the quarter and ended with nearly 767,000 subscribers, an increase of 11% year-over-year.

Hardware and other revenue of ZAR 67 million was essentially flat. Our gross profit margin was 65.7%, down 120 basis points from the first quarter last year. The gross margin decline was primarily the result from a higher mix of hardware sales that went through our dealer distribution channel where we share our profit margin.

Subscription margin was greater than 70%, consistent with prior year. As a reminder, gross profit includes depreciation charges related to in-vehicle devices and high-value peripherals used in certain of our bundled fleet contracts.

These contracts generate higher ARPUs and as they go through contract renewal cycles are expected to drive an increase in gross profit margins, which we expect to trend up towards 70% in the longer-term. Operating expenses were 50% of total revenue compared to 52% of revenue last year, which highlights our improved economies of scale and ongoing cost management initiatives.

Recall that our G&A costs include R&D costs not capitalized. For those of you interested to see our historical capitalization and development cost expense, we have provided a table in our earnings press release.

Adjusted EBITDA increased 22% to ZAR 155 million or 29.7% of revenue compared to ZAR 126 million or 27.7%. As Joss mentioned, the 200 basis point year-over-year improvement exceeded our expectations. We are pleased with the continued improvement in our adjusted EBITDA margin, which demonstrates our ability to invest for growth, while successfully leveraging a return on our historical investments. As a reminder, typically Q1 is our seasonally lowest adjusted EBITDA margin quarter and it then increases over the course of the year.

Adjusted earnings for the quarter was ZAR 61 million or ZAR 0.10 per diluted share, which was up from ZAR 49 million or ZAR 0.08 per diluted share. The group's effective tax rate for the quarter was 19.5% compared to 78.7%. The tax rate, which is used in determining adjusted earnings, was 29.1% compared to 28.4%. We have included a reconciliation of adjusted earnings in the financial tables which accompany the press release.

Our balance sheet continues to be very strong. We ended the quarter with the ZAR 345 million or ZAR 24.5 million of cash and we have no debt. We believe our balance sheet is a strategic asset for the company and provides us with the flexibility to pursue opportunities to create shareholder value.

From a cash flow perspective, we generated ZAR 91 million in net cash from operating activities and invested ZAR 80 million in capital expenditures leading to free cash flow of ZAR 11 million for the first quarter, an improvement compared with negative free cash flow of ZAR 56 million during the same period last year. The use of cash includes investments in in-vehicle devices of ZAR 52 million, which is driven by the demand for our bundled offering. 32% of our premium fleet subscriber base are now bundled subscribers.

Now turning to our financial outlook. In regards to our expectations for fiscal 2020, we are maintaining the guidance we provided on our last earnings call. As a reminder, our current guidance is for total revenue of ZAR 2,197 billion, which would represent constant currency growth of 9.7% and subscription revenue of ZAR 1,945 billion, which represents constant currency year-over-year growth of 13.4%. We remain confident in our ability to achieve this given the momentum in the first quarter as well as the strong pipeline of firm orders and sales opportunities. At the midpoint of our guidance range, we are targeting adjusted EBITDA of ZAR 691 million, which represents an adjusted EBITDA margin of 31.4%. In regards to adjusted diluted EPS for fiscal 2020, we are expecting ZAR 0.477 at the midpoint of the guidance range. Based on an exchange ZAR 14.23 to the U.S. dollar, this translates to USD 0.837 per ADS. This guidance is based on 585 million diluted ordinary shares, an effective tax rate of 28%.

As we have discussed previously, our intention is to focus on annual targets as this is how our management is focused, and we do not wish to close deals on suboptimal terms in order to achieve quarterly objectives. 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've discussed is the largest, fastest growing and highest margin component of our business. For the second quarter of 2020, we are targeting subscription revenues in the range of ZAR 465 million to ZAR 471 million, which would represent year-over-year growth of 10.4% to 11.8% on a constant currency basis.

In summary, MiX has gotten off to a strong start in fiscal 2020. We are pleased with the subscription revenue growth, continued improvement in our adjusted EBITDA margins and our free cash flow in the first quarter. Looking ahead, we believe that MiX is well positioned to continue the momentum in fiscal 2020 and beyond given our industry-leading integrated telematics platform, diverse product portfolio, ongoing traction in key verticals and geographies and our commitment to sustaining profitable growth.

I will now hand it back over to Joss for some closing remarks.

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [5]

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Thanks, John. In closing, we got off to a solid start to the fiscal year in the first quarter. We delivered double-digit subscription revenue growth, strong subscriber additions as well as continued EBITDA margin expansion and positive free cash flow. These results are further evidence that our strategy is working, and we remain confident in our ability to achieve our long-term adjusted EBITDA margin target of 35% plus. Furthermore, as John pointed out, our untapped balance sheet is a powerful strategic asset and provides us with flexibility to pursue opportunities to create shareholder value.

With that, we will turn the call over to the operator to begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Matt Pfau from William Blair.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [2]

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Wanted to start out, Joss, with perhaps -- can you give us an update on the MiX Now and how that's progressing relative to your expectations?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [3]

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Thanks, Matt. And with regards to MiX Now, we are certainly making progress as the months have progressed. Still relatively early for us, but we are perfecting our guess, the new go-to-market strategy or process rather that's new from our perspective in terms of internal sales team building out and generating subscribers through a combination of dialing out and obviously lead generation. And I'm pleased to say, we are making progress we've -- we're -- we've got a long way to go, but we are excited about the opportunity and remain convinced that it'll be an important part of our growth and diversification strategy, not only in the United States but globally as well.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [4]

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Great. And then I just wanted to ask a follow-up on the comments around the energy customers in the U.S. So is the caution you're seeing related to new purchases? Or are existing customers also reducing their fleet count with you? And then is this just isolated energy customers within the U.S.? And are you seeing this trend with energy customers anywhere else in the world?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [5]

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So let me start by saying that we did grow in that sector in the quarter. So we haven't observed any contraction that you have referred to from existing customers. What we are seeing is certainly a slowdown in the pace of growth or the pace of the fleet expansion. So that's one of the observations that we've seen. We are seeing, with regards to new customers, our guessing could be described as a elongation of sales cycles. So sales cycles have got a little bit longer. And it's not just the U.S., I guess, this is a -- when it comes to the energy sector, it's certainly a global observation. But I will close that we are saying again that we did grow in that sector during the quarter.

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Operator [6]

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Our next question today is coming from Mike Walkley from Canaccord Genuity.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [7]

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And John, look forward to working with you.

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John R. Granara, MiX Telematics Limited - CFO, Executive VP & Director [8]

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Yes. Thanks, Mike.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [9]

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Yes, just build on that last question. In the U.S. market, there have -- we have seen a lot of the industrial bigger and large companies have tough earnings and there seems to be some excess inventory of trailers and other things kind of slowing adoption. So just maybe dig in a little more Joss, are you seeing any other verticals outside of energy in the U.S.? Or maybe can you just discuss if you guys talked on the call here with a strong pipeline, maybe if you can just -- maybe discuss that pipeline if there's been any change to that in terms of customers may be slowing purchases or pushing things out within that pipeline?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [10]

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Thanks, Mike. The -- certainly, the-- when it comes to large global multinationals, not only U.S. based, but in other geographies as well, the conversations that I've been having is there's definitely an enhanced nervousness around global growth prospects, and I think that concern probably emanates -- or definitely emanates out of the tariff war concerns. But this is really just conversations. And I guess time -- we'll have to see how it plays out with time. But the outside of the energy sector, our other multinational customers in other sectors, we had a decent performance during the quarter. So that's our current position.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [11]

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And maybe just go into South Africa, it sounds like things are improving there. Can you just talk about maybe -- it sounds like it ended the quarter stronger than it begin and that -- if that momentum, is it going to continue now for the rest of your fiscal year?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [12]

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Yes. That categorizes it well. We -- as you know from our prior earnings call from 3 months ago, we were pretty disappointed with the way we started the quarter, particularly in that geography. And we attributed to the build-up to the national elections, which impacted the closing month of our prior year and opening month of this year. And the results of those elections, we're positive, we believe. And as we expected and as we alluded to, business started normalizing. So we definitely saw it thawing out in the second month of the quarter and a strong finish to the quarter. So we were very happy with the momentum that we exited the quarter on and -- yes, bearing in mind, the economy in that region is a tough economy and has been for a number of years, where we continue to be pleased with the performance of our team there and happy with the way we've finished the quarter and the way we -- we're feeling that it's probably a more normalized cadence now for the balance of the year and time will tell.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [13]

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Okay. Last question for me, I'll pass it on. Just as you continue to scale the business in new market, can you discuss any new opportunities you're seeing? It sounds like your New Mexico's one that you see a direct channel to invest in, but are you seeing opportunities? And any -- maybe change in competition that you see some opportunities to take advantage of -- in different regions?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [14]

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No. I appreciate it, thank you. And yes definitely we're fortunate to be in a space where, to a degree, we spoke for choice. So we're a wish with opportunities as you mentioned one of them being Mexico. We're making good progress in that geography, and it really plays to lot of our strengths in terms of -- if you look at the pillars of our -- the primary pillars of our product offering, the combination of very strong data fleet management and security plays very well, safety and security in that geography. So we believe that's going to be a good investment for us as we look to engage more directly than we had been in the past with a number of our large customers in that geography.

And certainly, there is other opportunities in other geographies and other verticals in various parts of the globe that we're pretty excited about. So -- and including the United States. So overall, we're pleased with I guess the myriad of options we have to grow our business going forward.

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Operator [15]

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Our next question today is coming from Brian Peterson from Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [16]

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Just maybe first on the Mexico opportunity. Joss, is there any way to frame how big that market is relative to the other markets today. And anything longer term on how that could contribute to revenue? I know it's early days, I'm just trying to put that opportunity into context.

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [17]

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It is early days, but bear in mind that it is a very large economy and there a lot of verticals that we have a lot of strength in and that we've been successful many other geographies. It's a market where, for instance, public transportation is a big factor, much more than it is in the United States by a way of example. So certainly the use of public transport in that market is a huge opportunity for us. And there are a number of very large fleets, some of which have engaged with us prior to establishing a direct presence and asking when we were considering doing that. So I guess we sort of followed a similar process to what's taken us into other geographies in the past is that, to a degree, it's been some customer motivational influence in terms of getting us there. So we've established an office, we're at this stage, it's a sales and marketing presence. And we'll build it out from there. We still have our dealer relationships -- third-party relationships, which we will continue with in that territory, but we now do definitely have a opportunity to engage directly there. And I see -- with time, it's not going to happen overnight and it will take some years. I see it evolving our guess to a similar degree that our Brazilian business has evolved, where it'll steadily become a meaningful piece of our business from a percentage perspective.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [18]

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Joss. And maybe just a follow-up for me on M&A opportunities. You guys haven't been shy about indicating your desire to expense or M&A, particularly in the Americas. Any update you can share there in terms of those efforts?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [19]

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Thank you. We continue to engage in possible opportunities, and our -- all of our decisions around capital allocation is really based around one fundamental principle is what's going to drive the best enhancement in intrinsic value per share. And it still makes us tough -- it makes it tough for us to do deals. We recognize there's incredible value in our own stock. We've looked at stuff, we've bid on some opportunities and -- but the reality is that we're -- as we demonstrated over many years, we are pretty measured in our approach to capital allocation. And if we find something that we believe is going to deliver fair value and from a -- and it's going to be accretive in the short-term from a shareholder perspective. We'll certainly take a hard run at it. But in the meantime, we remain patient and we'll continue looking.

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Operator [20]

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Our next question is coming from David Gearhart from First Analysis.

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David William Gearhart, First Analysis Securities Corporation, Research Division - VP [21]

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First question I wanted to ask about the gross margin down sequentially and you mentioned greater volume of things going through the dealer channel. Just wondering, how we should think about the cadence for the rest of the year for gross margin. Is this a one-time step down in the quarter? Should we see it progress from here? Do I know -- you said longer term moving towards 70%, but just if you can give us some color on the cadence for the year.

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John R. Granara, MiX Telematics Limited - CFO, Executive VP & Director [22]

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David. So we are looking at this -- as Joss mentioned, this can have some lumpiness in terms of quarter-to-quarter, but we are expecting to be 66.5% would probably be for the year. So we're looking at it on an annual basis, the timing quarter-to-quarter can vary though.

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David William Gearhart, First Analysis Securities Corporation, Research Division - VP [23]

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And then with the guidance for Q2 in the subscription revenue side and then taking the full year in context, it implies a pretty strong ramp or an acceleration in Q3 and Q4. And with Joss's commentary around some hesitation, some longer sales cycle. Just wanted to dig in a bit more in terms of what gives you the confidence for hitting the number for the rest of the year?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [24]

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Thanks, David. It's -- again, guidance is based on, as I've said in the past on numerous occasions, our best judgment at the point in time. So we look at the number of factors not least to which of course is our pipeline of committed orders and then our pipeline of, let's say, uncommitted, but orders that we believe are -- or potential orders that are reasonably close to fruition, and we apply a percentage likelihood to those. We look at the macro environment in our various geographies, and we try to make a judgment call. And as things currently stand -- having a back loaded subscription revenue growth year is not a -- it's not unusual for us, so it's -- we do depending on this -- on ARPUs from various deals, we factor in the layering effect of that. So as things stand today, we're still pretty good about our full year guidance, and we'll certainly review it on a regular basis as we do and update the market accordingly.

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David William Gearhart, First Analysis Securities Corporation, Research Division - VP [25]

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Okay. And then lastly from me, if you can give us an update on the mix of the sub -- gross sub additions between fleet and in the lower value asset tracking as well as just give us an idea or an update on the energy percentage of overall revenue because it's been a while since I think we've heard that metric.

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John R. Granara, MiX Telematics Limited - CFO, Executive VP & Director [26]

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Yes. So I'd say it's actually been consistent with the premium fleet and light fleet representing over 70% and the asset tracking approximately 30%.

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David William Gearhart, First Analysis Securities Corporation, Research Division - VP [27]

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And that's of gross additions for the quarter?

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John R. Granara, MiX Telematics Limited - CFO, Executive VP & Director [28]

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Yes. Yes.

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David William Gearhart, First Analysis Securities Corporation, Research Division - VP [29]

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Okay. And then the energy side?

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John R. Granara, MiX Telematics Limited - CFO, Executive VP & Director [30]

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Energy side is just still a major part of our business in terms of the additions. So there's been no change in the vertical -- composition of our verticals, so it still remains towards the top. So I would say that the vertical -- in terms of the additions, the vertical composition remain consistent with the past.

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Operator [31]

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Our next question today is coming from Brian Schwartz from Oppenheimer.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [32]

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I've got a few here for you Joss. Hey, just a quick follow up on maybe the trends that you're seeing here in that U.S. energy sector in the first month of fiscal 2Q. Maybe just if you're looking at really more of the pipeline activity than the deal activity, are you seeing any improvements or any changes from the trends that you saw in the first quarter?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [33]

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No. No. Pretty consistent with Q1.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [34]

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Okay. And then Joss, maybe diving into it a little bit, I think some of the costs as you talked about it, it sounds like there is some increased uncertainty about the future from these cost burns. But just kind of challenging that a little bit, do you think it's all about the future? Could any of it be either competition or maybe the internal sales processes? Did you annualize that? And just wondering your thoughts.

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [35]

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Brian, I'm hoping I'm understanding the question correctly. But in terms of -- yes, in term of global growth outlook, it's -- a lot of it is I guess around conversations. As I said, we've -- in terms of our product analysis, we've got a reasonable picture of what that looks like and that's what we -- that's what really guides our -- the numbers or the future view that we give the market. So that's certainly one basis -- one way that we formulate that. But it's -- I don't think this is a unique thing. To MiX particularly, I think there is a -- really just a nervousness. I don't think it's anything specific at this stage around whether these tariff wars can be really timeously resolved, and if not, what the longer-term impact might be on global growth. So I'm as we -- we have paid to drive the business successfully -- irrespective of what a -- the macro situation is. So I don't want to come across as making excuses because we're not, I think we're pleased with the way we're building our business. And despite some macro headwinds, it's been holding on us to continue to deliver and that's what we're going to do.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [36]

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Now, that's really helpful, Joss. So I appreciate that. One other area that's been kind of pointed out as weakness from other software businesses this quarter was U.K. in regards to what's happening over there in Brexit. Clearly, your business has a good presence over there in U.K. It's possible just to comment on what you're seeing over there in that market?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [37]

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Yes. We grew in the quarter, so that's always obviously the first key metric for me and for us. And so we grew subscribers and profits specifically in that geography. Again, it's -- there's no doubt that Brexit is another -- from a growth concern perspective globally, it's one of those issues that everybody continues to monitor and certainly something that we monitor, we look at. I'm trying not to sweep the stuff that I can do nothing about. So again, we focus on the opportunities that are presented to us or that we can jump into that will keep us immune from whatever happens there. And we've got to focus on building the business. But so far our business there is continuing to grow. And our view for the year forward -- and we certainly baked in, in our numbers that we're not expecting our best year ever in Europe because of this Brexit issue this year. So that's already baked into our numbers. And we'll continue like everybody to monitor.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [38]

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Last question. And last question, Joss, I wanted to ask you just on the M&A topic that -- that's been a topic here on the call. If I look at the M&A activity in the past, typically -- mostly, it's been technology tuck-in acquisitions, new products through M&A. And I'm just wondering how you're thinking about prioritizing the balance sheet for M&A. If you think about these 3 different categories, using that for growth through consolidation, for using that growth through new products like you've done in the past or using that to potentially enter new markets or new geographies. Can you maybe just share with us how you think about using the balance sheet in terms of the priority between those 3 opportunities for growth?

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [39]

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Thank you. So certainly, buying a third-party business is only one of the options that we have in terms of capital allocation. And as I've alluded to our preferences for at least -- our next one would be to do -- to buy a business with United States revenues and profits that would be by far our preference. So we're certainly not putting a huge amount of effort into analyzing alternate geographies. Most of our efforts are -- have been exclusively on this continent. And our preference if we're going to do a deal -- on the assumption we could find one at the right valuation, if we're going to do a deal, it's to both scaling our Beirut business for again our next transaction. So something that's got that we could consolidate onto our existing platforms, something that would both scale and drive margin, et cetera, et cetera. So that would be our preference. Having said that, we are open to looking at -- let's call it outside opportunities that aren't directly in what we would define as a fleet -- Telematics business, but something that technology, that could be aligned to that. And Brian, we'll continue to evaluate opportunities as they come along. We recognize that there continues to be a huge valuation gap between what these deals are trading at and where we are. And of course, that's something we're very aware of. And as I said earlier in the call, we will continue to remain very measured in terms of our approach to capital allocation. We recognize that we've got a strategic asset in our untapped balance sheet. And we're going to make sure that we leverage that to drive maximum shareholder value at the appropriate time.

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Operator [40]

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We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

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Stefan Brian Joselowitz, MiX Telematics Limited - President, CEO & Executive Director [41]

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Yes. Thank you. And thank you all for joining us today on the call. We really appreciate your attention, your questions. Bear in mind, we will be presenting at the Oppenheimer and Canaccord conferences in Boston next week. And John and I hope to see some of you there. Until then, thanks very much.

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Operator [42]

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Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.