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Edited Transcript of PNTR earnings conference call or presentation 28-Feb-19 3:00pm GMT

Q4 2018 Pointer Telocation Ltd Earnings Call

Givatayim Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Pointer Telocation Ltd earnings conference call or presentation Thursday, February 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Mahlab

Pointer Telocation Ltd. - CEO and President

* Yaniv Dorani

Pointer Telocation Ltd. - CFO

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Conference Call Participants

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* Abba Horwitz

* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Ethan Etzioni

Etzioni Portfolio Management Ltd - CEO

* Michael Joshua Nichols

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

* W. David Fore

Hayden IR, LLC - Director of Research

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Presentation

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Operator [1]

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Greetings, and welcome to the Pointer Telocation Fourth Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Fore, at Hayden Investor Relations. Please go ahead.

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W. David Fore, Hayden IR, LLC - Director of Research [2]

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Great. Thank you, Stacy. [All is well logging] to this conference call and [kudos] mentioned for hosting today. Earlier this morning, Pointer released its full year and fiscal 2018 results, and now you should have received a copy of the press release, which is located on Pointer's website at www.pointer.com. With us on the call today is Mr. David Mahlab, President and CEO; and Mr. Yaniv Dorani, CFO. David will summarize the key highlights of 2018 and of fourth quarter, while Yaniv will provide a summary of the financials. We'll then take questions from analysts and investors.

Before we begin, I have to review the safe harbor business statement. Forward-looking statements in this conference call involve a number of risks and uncertainties, including, but not limited to, statements of the continuous successful execution, upcoming strategy, the company's will to increase its business through organic growth and acquisitions in various territories, continued generation of cash flow, levels of revenue operating margins, levels of investment, trends in the company's markets and the company's sales mix and successful launching of new products and expected delivery times, thereof.

The company does not undertake to update forward-looking statements. The full safe harbor provisions, including risks that could cause the actual results to differ from these forward-looking statements, are outlined in the press release issued earlier today and in the company's SEC filings. In addition, in this conference call, management may refer to certain non-GAAP financial measures, which are provided to enhance the user's overall understanding of the company's financial performance by excluding certain noncash stock-based compensation expenses, amortization of long-lived assets, other onetime expenses of recovery costs and losses and acquisition-related onetime costs. Non-GAAP results provide information that's useful in assessing the company's core operating performance and in evaluating and comparing our results of operations on a consistent basis from period-to-period.

The presentation of this additional information is not to meant to be considered as substitute for the corresponding financial measures provided in accordance with generally accepted accounting principles. Investors are encouraged to review the reconciliation of GAAP to non-GAAP financial measures, which are included in the company's second quarter's earnings release, which again is available on our website.

And with that, I'd like to introduce Pointer CEO, Mr. David Mahlab. David, please go ahead.

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David Mahlab, Pointer Telocation Ltd. - CEO and President [3]

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Thank you, David. Good morning, everyone, and thank you for joining us today. This is another solid quarter. We delivered almost 50% service gross margin, double-digit operating profit and $1.4 million in operating cash flow, despite facing headwinds from foreign currency exchange rate in our market in Latin America, which also impacted the local economies.

During the period, we grew our subscriber base to 276,000, up 7% year-over-year, which increased our service revenue up 8% over last year on a constant currency basis.

As in the previous recent quarters, growth was negatively impacted from the economic situation in Brazil. Also, we made a corporate decision to stop servicing approximately 3,000 very low monthly revenue, low single-digit (inaudible) subscribers from our base, which impacted our subscriber growth in the fourth quarter. These were very low income and low margin customers, and we decided that it was not cost effective to continue servicing them.

In order to continue improving our margin, and we will continue to review the low-income subscription base. Meanwhile, the operating leverage in our service revenue was consistent, with service gross hedging up 58%, which was roughly the same as of the period a year ago.

Also, in the fourth quarter, we continue the trend of positive operating cash flow, despite elevated investment in R&D and sales and marketing to support our North American market expansion.

On that front, in 2018, we announced some major wins that will materialize in 2019 and beyond. In December, we received an 8.5 million orders from a single customer. This is the largest order we have ever received. We also began shipping some orders to customer in U.S. in the fourth quarter, and we expect delivery to ramp up this year as (inaudible) quarter is expected to be completed in third quarter 2019.

Meanwhile, in Brazil, we secured several new contracts, but we have a significant impact on -- in the second half of 2019 as well as with -- once we complete the installation.

Looking back on 2018, the strength in our balance sheet resulting the company from to a near -- from -- to a positive from a negative -- from a net debt to net cash, the first time in more than a decade, ending the year with over $3 million in net cash.

We invested in our product and service platform to support the 4G LTE market expansion. We enter the North American market with new product offering that will drive growth in 2019 and beyond.

We also invested in the LTE platform and hope to so enjoy the fruits this year.

Overall, we believe our strategy is working well, and we plan to continue executing on it.

Looking forward to 2019, we plan to continue to expand our customer base and subscribers through both organic and through acquisition of significant business that we can integrate into our platform. We expect to see double-digit growth in our overall revenues, driven in part by 30% or greater product growth this year.

In the long term, we remain confident our goal to double the revenue through both organic and inorganic growth and to generate 20% or greater operating margins on a non-GAAP basis within the next 3 to 5 years.

In summary, we are pleased with our fourth quarter year-end results, our performance in 2018 and our outlook for 2019.

I would like to hand over the call to Mr. Yaniv Dorani, our CFO, for the financial summary. Yaniv, please go ahead.

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Yaniv Dorani, Pointer Telocation Ltd. - CFO [4]

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Thank you, David. Unless provided for otherwise, I will be discussing our results on a non-GAAP basis. Please refer to the press release from earlier today for our detailed GAAP number. In terms of our financial results for the fourth quarter of 2018, the highlights were as follows. Fourth quarter 2018 revenues were $18.4 million, compared to $18.9 million in the fourth quarter of 2017. Revenues from services in the fourth quarter declined to $12.7 million from $13.4 million, due to the foreign currency exchange headwinds.

On constant currency basis, revenues from services grew 8% year-over-year.

Revenues from products increased to $5.7 million from $5.5 million in the same quarter last year.

Our service gross margin was 57.9% versus 58% in the fourth quarter last year.

Our product gross margin was 48.9% versus 40.6% in the fourth quarter of last year.

Our overall gross margin in the fourth quarter was 52.6% versus 53% in the fourth quarter of last year.

Non-GAAP operating income for the quarter was $2.5 million, a margin of 13.6% compared to $2.7 million in the fourth quarter of 2017, a margin of 14.2%.

Non-GAAP net income in the fourth quarter was $2.1 million, compared with $2.2 million in the fourth quarter of 2017.

Adjusted EBITDA was $3 million, compared to $3.2 million in the fourth quarter of 2017.

Our balance sheet keeps strengthening. We ended in the fourth quarter with cash net of debt of $3.5 million.

Last, we have reduced our debt by $5.1 million over the last 8 months to $5 million at the end of the fourth quarter.

That ends my summary. We shall now open the call for questions, operator, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Amit Dayal with H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [2]

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In terms of the product ramp, you are anticipating the growth, how is this going to take place in terms of sort of quarterly flow through? And then what is driving this ramp? Is it LTE or is it something else? Could you just give us any color on that, please?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [3]

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Basically, we see 2 growth engines on the product price for this year. First, the U.S. penetration and I'd say we secured a few customers that, together, we have, I would say, defined some new products, which we are launching and we mentioned the latter should be completed this quarter. And they have a very positive outlook. And we're basing actually our growth on that. Secondly, the big purchase order that we have received, announced in December. And on second market that we are optimistic about is the Indian market, with the new standard location, there's still some ambiguity in that market regarding the new implementation of the new standard. But we see and we are hoping to see initial ramp in the first quarter. But basically, it was postponed by a quarter, and we will start selling those products in during March time. So it was a big delay in India because of Indian ambiguity about the new startup in the customer, but now we've started to see initial orders coming and we need to supply them in March time. So it will partially be recorded in the first quarter and ongoing from there.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [4]

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Okay, got it. But you're expecting more of this to come through in the second half of the year, it looks like?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [5]

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I would say that we see most of the ramp in the product side coming on -- starting in the second quarter and on.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [6]

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Okay, got it. So as this product ramp takes place, how does that impact your subscriber growth? It looks like you are shedding or dropping the low-margin subscribers, but at the same time, your product ramp is looking positive. So how should we think about subscriber growth in 2019?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [7]

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Basically, in all the territories -- we are -- we see a positive outlook in most of the territories, except South Africa. As I spoke earlier, we secured some very nice contracts, a significant contract, that's a better way to say, in Brazil and also in other territories. So we expect nice growth on the subscription base and going forward, both in Brazil, in Mexico, less in South Africa and in Israel, too, sorry. But we still will continue to look at the low margins, and we intend to continue eliminating the low margins customers, that require a lot of management attention and doesn't really benefit. So you'll see 2 trends, actually growing the high ARPU base, like I mentioned in Brazil and in Israel, and on the other hand, dropping low margins, especially around the insurance guys that are fully paying.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [8]

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And as your product ramp starts to take place, should we expect operating expenses to increase or remain stable at the levels we saw in 2018?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [9]

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Basically, if you look at the fourth quarter expenses, we increased, as we already spoke even earlier, we already expand R&D and sales and marketing, especially around (inaudible) location and the penetration of the new product and the IoT. And this trend will continue, like in the fourth quarter, will continue in the -- and even grow a bit in the first -- throughout 2019.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [10]

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Understood. Just last one for me, David. You mentioned a number around your non-GAAP margins. I couldn't hear it, could you please repeat what you had given out in terms of the expectations?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [11]

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No, we didn't mention the expectation. I said that we had a double-digit growth on revenue this year, but we didn't mention expectations.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [12]

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I'm talking about the margin. You mentioned a number around the margin, I didn't catch that.

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David Mahlab, Pointer Telocation Ltd. - CEO and President [13]

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On the margins? Let me just -- actually, if you talked about the long-term growth, if you talk about -- if you refer to that, we believe that once we grow the company and the numbers of subscriber as we expect and double it, we will reach more than 20% operating income margins. But that's not based on our forecast to double the company, if that's what you referred to in your question.

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Operator [14]

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Our next question comes from Josh Nichols with B Riley.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [15]

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I did want to ask -- good to see the large award from a U.S. customer for $8.5 million. Could you talk about, are the gross margins on that going to be similar to what the company has historically achieved on the product side around the 40% range?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [16]

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Basically, I mean, we succeeded to maintain the 14% and north on the product revenue. But due to the size of this order, the margins are lower and they look more so less than on the 25% or less -- a bit less, 24%.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [17]

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And then I know you've talked about it before and on this call that you received some significant recurring revenue business that's going to be ramping in Brazil and be a nice tailwind for the company. Could you frame that a little bit as far as -- how many units you may be ramping and is that going to be a second half story? Or when are those installations going to be done?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [18]

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We're starting installation in March after the carnival in Brazil. The expectation is it will be in the numbers of, I will say, close to 5 digits altogether.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [19]

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And then last question for me. I know a lot of times, especially with the company's new offerings for 4G LTE ramp, that products' revenue growth can precede services revenue growth as you start to layer in some services revenue. Could you talk about the opportunities with your new offerings and the hardware to begin layering in some service revenue growth with that and how long that may take?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [20]

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Basically, when we look on the global market outside of the existing territory, we are looking for whether a PSP, so the market service provider that will require a full package, or an end-user that had some ability to do the first-level support. And with this, actually, we see [a] few opportunities, and we will target to have additional customers levels. And on this side of the story, it will be a lower margin than the usual subscription base, because we don't do the first-level support and we don't have a call center in -- for the global account as we do in the local entities that we have. So we -- I would expect to have 1 to 2 significant customers in the thousands range a year.

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Operator [21]

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(Operator Instructions) Our next question comes from Ethan Etzioni.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [22]

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David, so I just want to make sure clear I'm clear on the numbers. So looking at the products in the past year were 25% to 30% growth, that's about the approximately the $8 million new order, right? So the rest of the product is more or less stable. Is that correct?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [23]

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I'll state it this way, I always prefer to be conservative.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [24]

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I'm sorry?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [25]

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My preference is always to be conservative, under promise, over deliver.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [26]

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And also -- so looking at the total revenue, you're talking about a growth of double digit. So then that basically -- again, so this one order accounts for almost the entire total revenue growth, is that correct? Or you think there's [more] maybe...

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David Mahlab, Pointer Telocation Ltd. - CEO and President [27]

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Again, I'll give you the same answer. I will give you the same answer. Within target, 10%, let's put it this way.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [28]

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So you think there's some more upside there, perhaps?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [29]

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Definitely, no, with the new contracts that we have and that we just spoke about in Brazil and another [good week] that we had in Israel and others, we will grow revenue more than that, as long as the currency doesn't change.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [30]

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Okay, so from this point, you mean? The currency from this point, [not].

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David Mahlab, Pointer Telocation Ltd. - CEO and President [31]

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Yes. You have to look at it -- Ethan, just to give you the idea. I mean, this year on a constant currency basis, we grew 8% on the services. And I do hope you know with the recent wins and economics of capitalizing in Brazil, in Mexico and in Argentina, that we will have a better performance on that corner, too. But double digit is 10% to note.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [32]

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And now -- so looking -- going to the profitability, so I see your product margins around 40%, and now you're talking about the new order being around 25%, so that's going to impact, obviously, your overall margins. And I see in the fourth quarter was, which more or less represents the current currency environment, you were at 11% before the new order. So with the new order coming in, so the top line is going to go up, but on the margin, at least, on a percentage-wise, it's a -- are you -- we might be looking at the 10% area, overall? Is that fair operational margin, is that fair?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [33]

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No. Overall, we are talking about growth. And that will be incremental on top of what we have to beat today. So it -- so that it will be a -- I do expect nice results on the bottom line, too. Because as you mentioned, that's just -- let's think it will be always on top of what we have today.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [34]

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Right, right. So today, I mean, the operational line it was too. So say that's more or less the current run rate plus the new orders. Is that fair?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [35]

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The new ones, it was the usual growth, let's put it there. It was the usual growth and this is for the short term. And again, stopping in the second quarter.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [36]

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So the first quarter is still going to be more or less (inaudible)

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David Mahlab, Pointer Telocation Ltd. - CEO and President [37]

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Yes, we are still shipping low quantities, as I mentioned, both in India and both in U.S. because the data is not done.

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Operator [38]

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Our next question comes from Abba Horwitz with Old School Partners.

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Abba Horwitz, [39]

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Nice to see the balance sheet in the great shape it is. I wanted to just a few questions here on attrition. Can you -- aside from the self-imposed attrition that you did, could you give us an attrition rate on the overall business?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [40]

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Basically, the churn is, I would say, in the B2B portion of the business, is -- on a regular economic, it's less than 5%. We did suffer this year and I mentioned also in the previous conference call, in Brazil because company went under and that increased the churn rate. On top of it, as we mentioned, we decided to close the low margin -- some of the lower margin customers. And again, so that influenced growth on the top line.

We also -- if you would like to look at the SVR for the consumer portion of the business in Israel, the churn rate over there is higher, is about 25%, but we keep growing because we're installing more than we lose. So there are 2 parts of the business, one is the B2B, which is less than 5% in stable economy, and 25% on the consumer side.

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Abba Horwitz, [41]

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Okay. Is that a change? Or is that pretty much consistent with what you've been seeing for the last couple of quarters?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [42]

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That has been pretty consistent over the last few years. The only change that we witnessed this year was in Brazil, when some companies went under, and we changed the low out. That's basically the change.

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Abba Horwitz, [43]

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Okay. And in terms of (inaudible)

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David Mahlab, Pointer Telocation Ltd. - CEO and President [44]

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So I was just saying, the top type of business of working B2B creates a lot of stickiness, because we become part of the operational cog of the customer. So that's why the churn is pretty low. And usually, we either grow with the customer or that we decline, it depends. If the customer business grows, we grow with it. If the customer business shrinks, we shrink with them.

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Abba Horwitz, [45]

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Okay. In terms of Q1, can you talk about the currency impact on Q1. Have you seen a change from the weighted impact in Q4? Are you seeing something different in Q1 in terms of, I guess, Brazilian currency, for the most part?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [46]

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Basically, the -- I mean, the changes that we see this quarter versus the previous quarter are pretty minor. I mean, there are some fluctuations, but nothing really significant. We don't foresee the future, so I don't know what will happen in March.

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Abba Horwitz, [47]

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Okay. Are you seeing a noticeable difference in economy there in terms of the business you're able to do now under the new president?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [48]

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Everybody speaks about a more friendly environment.

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Abba Horwitz, [49]

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Okay. And just finally, Yaniv, if you can give the -- no, one more question actually before Yaniv is, David, you always talk getting to that 20% operating margin. And I wanted to understand is, right now you're getting closer to the $100 million points in sales. What do you think you can do on an EBITDA level at the $100 million point? And how long do you think to get to $100 million will take the company?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [50]

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If we put it on organic growth, it will take us maybe 2 years to get there, to be closer to $100 million, but we always talk about inorganic growth [environment]. So I do hope it will be shorter. And also the margin of -- the keeping here, we keep improving as we improved over the last few years.

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Abba Horwitz, [51]

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At $100 million, do you think you'll be close to 20% EBITDA?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [52]

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No, in order to be on the -- sorry, we talked about 20% operating income, not EBITDA. We've already reached -- on the EBITDA side, we've already reached (inaudible) we're already close on the EBITDA side. 6.6 out of 78.

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Abba Horwitz, [53]

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Okay. Also, just finally, are there deals out there that you're looking at? Can you talk about any deals similar to South America kind of deal you did. Any kind of deals out there that you're looking at? Do they exist? And do you feel that you'd be able to do a deal or two this year in 2019?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [54]

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I'm always optimistic, yes, and I would say that both me, Yaniv, and some of the top management are devoting a lot of our time and effort on that channel. And yes, there are some deals. But we will announce once we have something signed.

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Abba Horwitz, [55]

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Would you say that you're the cheapest company right now out there, based on the current prices that people are paying for companies such as yourself?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [56]

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That's my personal opinion, but the market chose better.

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Abba Horwitz, [57]

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Okay. And just finally -- thank you, David, and good luck. Just for Yaniv, the tax rate for the year, what do you think the tax rate will be for 2019?

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Yaniv Dorani, Pointer Telocation Ltd. - CFO [58]

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Pretty similar to what we have now in 2018. About 20%, half of it will be -- we expect in cash and half in the further tax.

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David Mahlab, Pointer Telocation Ltd. - CEO and President [59]

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We leave the tax out of it this year.

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Abba Horwitz, [60]

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Okay. Because this quarter it was around, what, 16% in Q4?

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Yaniv Dorani, Pointer Telocation Ltd. - CFO [61]

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If you -- yes, because change in the specific status was, but supposed to be like the average for the entire year, about 20%, 21%.

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Operator [62]

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I would like to turn the floor over to management for closing comments.

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David Mahlab, Pointer Telocation Ltd. - CEO and President [63]

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Thank you. On behalf of the management of Pointer Telocation, I would like to thank you for your continued interest and long-term support of our business. I look forward to speaking with you and you updating you again next quarter. Also, for those who are attending -- I will be presenting at the World Annual Investment Conference March 18. Looking forward to seeing you there. Have a great day.

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Operator [64]

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