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Edited Transcript of PNTR earnings conference call or presentation 23-May-19 1:00pm GMT

Q1 2019 Pointer Telocation Ltd Earnings Call

Givatayim Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Pointer Telocation Ltd earnings conference call or presentation Thursday, May 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Mahlab

Pointer Telocation Ltd. - President & CEO

* Yaniv Dorani

Pointer Telocation Ltd. - CFO

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Conference Call Participants

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* William Tennent Gibson

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

* 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. Welcome to Pointer Telocation First Quarter 2019 Conference Call. (Operator Instructions) Please note, this conference is being recorded. I'll now turn the conference over to David Fore from Hayden IR. Mr. Fore, you may now begin.

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

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Great. Thank you, operator. We'd like to welcome to all of you to this conference call and thank Pointer's management for hosting this call today. Earlier, Pointer released its first quarter 2019 results. By now you should have received a copy of the press release, which is also available on Pointer's website at www.pointer.com.

With us on the call today are Mr. David Mahlab, President and CEO; and Mr. Yaniv Dorani, CFO. David will summarize the key highlights of the first quarter of 2019 while Yaniv will provide a summary of the financials. We will then open the call up for questions from analysts and investors.

Before we begin, I'd like to review the safe harbor provision. Forward-looking statements in the conference call involve a number of risks and uncertainties, including, but not limited to, statements about the continued successful execution of the company's strategy; timing and the closing of the merger transaction of ID Systems; the expected business of the combined company and success and level of growth thereof; continued expansion in the North American and Brazilian markets and related impact on levels of revenue, expected duration of cash flow, levels of revenue growth and operating margins in 2019 and specifically, in the second half of 2019; levels of investment; trends in the company's markets and in the company's sales mix and successful launch of new products; growth in subscriber base and timing of the shipping of products.

The company does not undertake to update forward-looking statements. The full safe harbor provisions, including risks that could cause 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 will be referring 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 and acquisition-related onetime costs, this changes results based on local currencies without giving effect to exchange rate fluctuations.

Non-GAAP results provide information that is 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's additional information is not 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 reconciliations of GAAP to non-GAAP financial measures and other financial information, which are included in the quarter's earnings release, which is available on our website.

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

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

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Thank you, David. Good morning, everyone, and thank you for joining us today.

This was another solid quarter. Despite continued currency headwinds and difficult comparability due to exceptional volume of products over the year ago, we continued to deliver positive net income on both GAAP and non-GAAP basis, along with almost 60% service gross margin and double-digit non-GAAP operating margins. We also continued to reduce our long-term debt.

During the period, we witnessed our sales decline in our total subscriber base due to removal of approximately 12,000 low single digit average revenue per unit or ARPU; low-margin subscriber, which basically demonstrates the strength in our business as the net decline was only 4,000 subscriber in the first quarter and the net total service revenue grew 2% on constant currency basis year-over-year.

We started this initiative in the first quarter. And now we consider this effort to be completed. We got approximately 15,000 low ARPU subscriber in total in the fourth quarter last year and the first quarter this year without any major impact, and we expect to see a return to growth in our subscriber base in the current second quarter.

Meanwhile, the operating leverage in our service revenue was consistent with service gross margin at 58% compared to 59% in the same period a year ago and 58% in the prior quarter. Also in the first quarter, we continued our trend of positive EBITDA despite elevated investment in constant currency in R&D, sales and marketing to support our North American market expansion.

In December, we received an $8.5 million order from a customer in the U.S. This is the largest order we have ever received. We have started shipping product to this customer in the U.S. under this purchase order in the first quarter, and we expect deliveries to ramp in the second quarter. We are also very optimistic about our assets -- product line in the -- for the North American markets and expect to start shipping in volume in the second half of this year.

Meanwhile, in Brazil, we secured several new contracts, including the one we announced last week where it was up to approximately $6.5 million, our largest single-service order ever. And together with the 2 other contracts secured, we expect a significant impact in the second half of this year as well.

Looking out for the remainder of 2019, we continue to expect to see double-digit growth in our overall business, revenues and profitability. We should see stronger revenue in the second quarter from product sales in North America and later ramping other new product launch and continue the stable growth in our service business. This, along with the recently announced orders in Brazil, will accelerate growth in the second half of this year.

On the M&A side, we expect the acquisition deal announced with ID System to be closed at the third quarter of 2019. The merged company should have a recurring base revenue of 600,000 users, strong technology and a global footprint. This should position the new entity, which will be named PowerFleet, as a leader in the industrial IoT telematics space.

In summary, we are pleased with our first quarter 2019 results and the outlook for the rest of the 2019.

I would like to hand over this call to 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 disclosing our results on non-GAAP -- 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 first quarter of 2019, the highlights were as follows.

First quarter 2019 revenues were $18.3 million compared to $20.9 million in the first quarter of 2018 and $18.4 million in the previous quarter. Revenues from services in the first quarter declined to $12.4 million from $13.8 million in the first quarter of 2018 due to foreign currency exchange headwinds. In constant local currency terms, revenues from services grew 2% year-over-year. Revenues from product declined to $5.9 million from $7.1 million in the first quarter of last year. In constant local currency terms, revenues from services declined 40% year-over-year.

Our service gross margin was 57.8% versus 58.7% in the first quarter last year. Our product gross margin was 35.8% versus 40.2% in the first quarter of last year. Our overall gross margin in the first quarter was 50.7% versus 52.4% in the first quarter of last year.

Non-GAAP operating income for the quarter was $2.1 million, a margin of 11.5% compared to $3.1 million in the first quarter of 2018, a margin of 14.8%. Non-GAAP net income in the first quarter was $1.7 million compared with $2.5 million in the first quarter of 2018.

EBITDA was $1.9 million compared to $3.3 million in the first quarter of 2018. Adjusted EBITDA was $2.2 million compared to $3.4 million in the same period a year ago. We ended the first quarter with cash net of debt of $2.5 million. Last, we have reduced our debt by $0.7 million over the last quarter to $4.3 million as of March 31, 2019.

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) Thank you. Our first question today is from the line of William Gibson with Roth Capital Partners. Mr. Gibson, your line is open for questions. Perhaps your line is muted.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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Yes. I'm here. Excuse me. What sort of acquisition-related costs do you expect in the second quarter?

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

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It will be in the level of $300,000.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. And in terms of the combination in the PowerFleet, could you comment or give us some color on the cross-selling opportunities for your products, particularly with the transition to LTE in the smaller truck market and also Connected Cars?

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

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Yes. Basically, currently, we see customers, opportunity that we are testing the new solution introduced in the first quarter. There is interest of customers, each one of them, in the volume of thousands of units. And if successful, I mean some of them might go even for tens of thousands of units. So I mean even one of them is successful, that should be a very nice impact on us.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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And then in terms of just gross profit margin on products, should that improve versus the first quarter?

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

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We will start shipping in volume the big product line. And this product line definitely has a lower margin than the usual. So we will -- we should expect a very nice growth on the top line. But the gross margin volume itself, it should improve in volume, less in percentage.

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Operator [8]

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(Operator Instructions) Thank you. At this time, I will turn the floor back to management for their closing remarks.

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

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Thank you also, ladies and gentlemen. And at this time, I would like to thank you on behalf of the management of Pointer. And I would like to thank you for the continued interest and the long-term support to our business. To those who wish to meet us, we will present today at B. Riley FBR Investor Conference and next week at the Ladenburg Thalmann Technology Expo and Cowen Conference. Have a great day. Thank you.

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Operator [10]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.