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Edited Transcript of PNTR earnings conference call or presentation 15-Nov-18 3:00pm GMT

Q3 2018 Pointer Telocation Ltd Earnings Call

Givatayim Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Pointer Telocation Ltd earnings conference call or presentation Thursday, November 15, 2018 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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* Amit Dayal

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

* Ethan Etzioni

Etzioni Portfolio Management Ltd - CEO

* Michael David Vermut

Newland Capital Management, LLC - Founder

* 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

* 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 Third 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, from Hayden IR. Thank you. You may begin.

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

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Thank you, Racquel. I'd like to welcome all of you to this conference call and to thank Pointer's management for hosting this call. Earlier today, Pointer released its third quarter 2018 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, that's P-O-I-N-T-E-R dot-com.

With us on the call today are Mr. David Mahlab, President and CEO; and Mr. Yaniv Dorani, CFO of pointer.com. David will summarize the key highlights for the quarter, followed by Yaniv who will provide a summary of the financials. We then will cover the questions from analysts and investors.

Before we begin, I'd like to review the safe harbor provision. Forward-looking statements in this 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, the company's ability to increase its business through organic growth and acquisitions in various territories, continued generation of cash flow, levels of revenue and 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 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 a 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 retirement costs and losses and acquisition-related onetime costs, 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 of this additional information is not meant to be considered as a substitute for the corresponding financial measures prepared in accordance with generally accepted accounting principles. Investors are encouraged to review the reconciliations of GAAP to non-GAAP financial measures, 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. - CEO and President [3]

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Thank you, David. Good morning, everyone, and thank you for joining us today. We are pleased with our results for the third quarter of 2018 and our performance thus far this year. This was another solid quarter. We delivered improved service margin, strong earnings and impressive cash flow generation despite facing headwinds from foreign currency exchange rate in our market in Latin America, which also impacted the local economy there.

During the period, we grew our subscriber base to 274,000, up 10% year-over-year, which grew our service revenue up 8% over last year in local currency terms. Growth was negatively impacted from the economy situation in Brazil and Argentina. Meanwhile, the operating leverage in our services revenue was consistent with service gross margin at 60% compared to 58% for the same period a year ago. Overall, we believe our strategy is working well and we plan to continue executing on it.

During the period, we continued to advance our capability in the IoT space and in the safety and driver behavior solution through our machine learning technology. Our platform will harness our real-time driver data to deliver more efficient, cost-effective product and services to our customers, many of whom have already provided positive initial feedback of these upcoming offerings.

Currently, we are beta testing our -- part of our asset tracking solution in North America built to support long-term evolution of LTE networks, and we expect to start shipping before the end of this year. Initial introduction was received very positively by our customers and we hope to see significant ramp-up in our product delivery to North America starting the fourth quarter of this year and during 2019. Having this product in our arsenal and together with our sales channel already secured, we are very confident of our ability to penetrate the North American markets.

In India, as discussed before, we have been officially certified the AIS 140 standard. This places us in a limited group of top telematic technology providers who have successfully certified their hardware solutions. This is a great step for us. The AIS 140 standard was designed to increase safety and efficiency for all public transportation vehicles including industry state transport buses, app-based taxis and ride shares, private passenger carrying buses and non-app licensed taxis.

More relevant to Pointer, it makes it mandatory to install approved certified telematic devices in all public carrying vehicles both new and old. This should drive the substantial increase in telematics adoption in India which is already a large growing underpenetrated market for telematics, and we expect to start delivering our Cello-CANiQ devices in India before year-end.

Meanwhile in Brazil, and in spite of the rough economic situation there, we secured several new contracts during the period and we should see the results in the first quarter of 2019 and onwards. So we expect growth there too.

Looking forward to 2019, we plan to continue expand our customer base and subscriber through both organic and through acquisition of similar businesses that can integrate into our platform. In the long term, we believe our goal to double revenues through both organic and inorganic growth to generate 20% or greater operating margin on a non-GAAP basis within the next 3 to 5 years is very achievable. In summary, we are pleased with our third quarter 2018 results and with our performance thus far this year.

I would like to hand over the 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 discussing our results on a non-GAAP basis. Please refer to the press release from earlier today for our detailed GAAP numbers.

In terms of our financial results for the third quarter of 2018, the highlights were as follows: third quarter 2018 revenues were $18.7 million compared to $20.2 million in the third quarter of 2017. Revenues from services in the third quarter declined to $12.8 million from $13.3 million due to foreign currency exchange headwinds. In local currency terms, revenues from services grew 8% year-over-year. Revenues from product declined to $5.9 million from $6.9 million. Our services gross margin was 59.7% versus 57.5% in the third quarter of last year. Our product gross margin was 40% versus 40.9% in the third quarter of last year. Our overall gross margin in the third quarter was 53.5% versus 51.8% in the third quarter of last year.

Non-GAAP operating income for the quarter was $3 million, a margin of 15.3% compared to $3.1 million in the third quarter of 2017, a margin of 15.3%. Non-GAAP net income in the third quarter was $2.6 million compared with $2.3 million in the third quarter of 2017. EBITDA was $3.1 million compared to $3.6 million in the third quarter of 2017. Our balance sheet keeps strengthening. We ended the third quarter with cash net debt of $2 million. Last, we have reduced our debt by $3.8 million over the last 9 months to $6.3 million at the end of the third 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 the line of Josh Nichols with 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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I was going to ask, the company secured a few contracts in Brazil, you know they're going to have a favorable impact on 2019. Could you elaborate a little bit as far as how many units the company may be deploying? I'm assuming these are fleet management contracts recurring ARPU as well?

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

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Basically, the contracts that we secured were around the driver behavior and driver safe fleet on major fleets. The installation period can take you now from December till the end of the first quarter. This is the plan. So the full impact will start to be in the second quarter. We will -- now it will -- I think it will improve the numbers of users in service -- continue to grow the user of service numbers that we structured in the third quarter in Brazil. After the fuel prices in Brazil, we had a reduction in user service, but we are happy with this new contract that will put us back in work in Brazil.

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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 good to see the company receiving the certification in India. How much of a top line impact do you think that could have looking out to next year?

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

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Basically, if you look at our product terms, this year, we had a decline in revenue due to 2 main reasons. First, the change in North American market to LTE networks. Actually, we stopped selling in North America this year, almost stopped selling. And the new standard in India also slowed down the sales in India business significantly. The outcome that you see is a slow in revenue of product this year in the third quarter and also in the second quarter. We believe that we will exceed the first and second quarter numbers nicely next year. And this is the impact of both solutions that we introduced, both for North America and for the AIS 140.

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

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And then last question for me, you've been beta testing the CelloTrack Nano with good feedback and you noted in your comments that you expect a significant ramp in North America in 2019. Could you talk a little bit to help frame that as far as how many units you think you may sell, revenue associated with those units on a per unit basis?

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

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I'm not sure that I fully understood. But to elaborate more on this topic, basically, we are launching 4 derivatives of the Nano product from the North America all supporting LTE. The first derivative is running through a beta, and we do hope to start shipping this quarter. The other 3 derivatives we'll see how -- we finish the beta somewhere in the first and the second quarter next year, and we will start shipping those products too. Altogether, it should make a nice impact on the product (inaudible).

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Operator [8]

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Our next question comes from the line of William Gibson with ROTH Capital Partners.

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William Tennent Gibson, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Post -- or forgetting the new contracts you got in Brazil, are you noticing any change yet in the business environment postelection there?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [10]

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Bill, the atmosphere in Brazil is more positive. I had to say that compared to the atmosphere that we had in the second and third quarter this year with the fuel rate over there, with the huge truck strike that they had over there, we have seen a very negative impact on our customers. But the new contracts, together with the feeling that I'm getting from the team over there, we are more positively for the growth in 2019.

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William Tennent Gibson, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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And could you remind us the various features that you offer on the CelloTrack Nano in the U.S.?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [12]

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Basically, most of the features are, from the point of view of the user, are staying the same. Now with the multi-sensors having temperature, humidity, light, barometric pressure, all are being kept, but it can serve over LTE networks. That's the major change. On the other derivative of the product, we added extended battery life. And so we can serve from -- on the different derivatives from a 2-year battery life, 10-year battery life and also longer term. So altogether, I think that we bring the full suite of solution depends on the use case to all the different -- to whatever we saw as the demand from a non-carry device that can be recharged every few weeks until a device that can last almost forever.

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William Tennent Gibson, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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And then, lastly, you've got -- you have the one taxi fleet in New York, any progress on securing other customers?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [14]

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We are negotiating another 2 potential customers. We can't say, at this stage, what will be the outcome.

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Operator [15]

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Our next question comes from the line of Amit Dayal with Rodman and Renshaw (sic) [H. C. Wainwright].

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [16]

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Most of my questions have been asked. Could you talk about how much impact from foreign exchange this quarter? Last quarter we saw around $1 million, is it similar or was this quarter a little better?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [17]

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Amit, Yaniv will answer that question about the currency impacts.

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Yaniv Dorani, Pointer Telocation Ltd. - CFO [18]

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About this quarter, Q3 2018 comparing to Q3 2017, the impact is $1.8 million, which is out there in our PR.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [19]

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$1.8 million, you said?

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

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$1.8 million.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [21]

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Okay. Appreciate it. And then in regards to catalyst for 2019, it looks like LTE in North America, things happening in India, what sort of growth rates can we expect? I mean, you already are doing relatively well given these currency headwinds. But with these new products coming to the market next year, what sort of growth rates can we assume for the next 12 to 24 months?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [22]

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If -- I'm picking -- as it pains me to see, because our sales channel today give us a very nice focus, but forecast is not -- is nothing secured. So we do believe that we will have a 2-digit growth on -- more than 2-digit growth on the product side. Sorry, 2 digits, nice 2 digits.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [23]

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Understood. And we haven't shipped any LTE in North America so far, right? So you expect there's at least small amounts in December and will this reflect in the fourth quarter results? Or will this only come through in the 1 quarter for -- sorry, the first quarter of 2019?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [24]

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Major numbers will come in the first quarter. The fourth quarter, we will start shipping. On December, we start shipping, but it's a low quantity and will not have any major impact on the product.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [25]

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Understood. That's all I have, guys. Looks like a pretty strong operating performance given some of these headwinds. I'll take my other questions off-line.

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David Mahlab, Pointer Telocation Ltd. - CEO and President [26]

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Thank you, Amit. And yes, we really suffered from the currency exchange rates. You see that number is not insignificant.

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Operator [27]

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Our next question comes from the line of Ethan Etzioni with Etzioni Portfolio Management.

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

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Congrats on a good quarter. I wanted to ask about the tax. The tax is higher last 2 quarters than I've been modeling. Is it a cash tax or just a charge, or -- can you explain, please?

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

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The tax expense is mostly noncash. In Brazil, we are paying a cash-based tax. And in Israel, we started paying tax at a low level because we are a full enterprise. We will continue paying 50% of the tax impact in Israel through 2019. And as of 2020, the cash portion of the tax in Israel will decline again because we'll be able to use the NOL that we have.

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Yaniv Dorani, Pointer Telocation Ltd. - CFO [30]

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When we look at figures, there may be -- beyond the numbers in consideration. The noncash for this Q were $240,000 out of the $530,000 expense that we're having in our ARPU units. This is fortunately of the U.S. as we expect also for the future in the next 2 years.

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

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Till the end of 2019.

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Yaniv Dorani, Pointer Telocation Ltd. - CFO [32]

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Till the end of 2019.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [33]

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So just about half of the tax that was expensed is actual out-of-pocket cash, did I understand right?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [34]

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Yes. That's correct. It relates to the merger we did at the end of 2014 that according to the tax laws in Israel, you can use only 50% of your NOL to deduct or reduce the cash 5 years post the merge, 5 years ends at the end of 2019. And if you remember, we put a onetime tax asset profit at the end of 2017 that we will use over time over the next year.

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Operator [35]

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Our next question comes from the line of Mike Vermut with Newland Capital.

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Michael David Vermut, Newland Capital Management, LLC - Founder [36]

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Couple quick questions here. On the Nano side, it's going to be through channel partner and then we're going to be doing our own direct marketing or how do you see that rolling out in '19?

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

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Basically, we will have both solutions active. The first one is the product sales and that's a full channel. And then once we sell a full solution, that should include recurring revenue.

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Michael David Vermut, Newland Capital Management, LLC - Founder [38]

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Excellent. And then, looking at the model, what percentage of this should be recurring revenue versus just product sales?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [39]

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The recurring revenue on the Nano product is just starting. We already secured 2 small contracts with recurring revenue for long term, but it takes time until the numbers start to accumulate and become significant. So we will have nice revenue next year, but it's going to have a big impact on the portion of the nonrecurring revenue. On 2019, it's not yet. It will come a year later or 2 years later as we continue to build the customer base, and it will take time.

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Michael David Vermut, Newland Capital Management, LLC - Founder [40]

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Excellent. Can you just give us a quick look into the -- how the outlook is for penetrating some fleets in the U.S.?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [41]

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Basically, we don't have boots -- a lot of boots on the ground in the U.S. We have a small sales office in the North America. So the way that we look at it today in the fleet business is that we are looking at big customers that have the ability to do the first level support. This is the type of solution that we succeeded to secure with limo fleets -- limousine fleet in New York. We started with close to 4,000. And today, I think that we have 6,500 with those guys. But we need to look for customers that has the ability to do the first level support themselves, and we will just give them licenses together with the hardware solutions. These are type of customers we are looking on the fleet side.

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Michael David Vermut, Newland Capital Management, LLC - Founder [42]

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Excellent. Okay. And then, finally, it seems like the growth rate should step function higher in 2019, right? We've been waiting through this year for the product introductions. You've been doing great on the services side. So we're sort of at a base case of, I would think, margin here of profitability, of revenue and '19 looks a lot better. We're basically trading at the lowest valuation of any SaaS play that there is out there, telematics play that I can find. Is there a point where you say we take some of the balance sheet now and try to buy back stock at under 10x earnings?

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David Mahlab, Pointer Telocation Ltd. - CEO and President [43]

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We don't have any play of buyback. Basically, we would like to use the cash that we have in order to find additional service company that we can buy and integrate onto our platform and improve profitability over time. That's basically the strategy of the company. And when I say that our target is to multiply the company, part of it is organic growth and part of it is inorganic, but we have to be very careful with the inorganic growth. So basically...

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Michael David Vermut, Newland Capital Management, LLC - Founder [44]

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But how out there -- I've looked at many companies out there, there's nothing in the ballpark of our valuation. So there, obviously, becomes a point where buying back our own company makes a lot more sense than going to look and paying 10x EBITDA for something else out there.

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David Mahlab, Pointer Telocation Ltd. - CEO and President [45]

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It makes -- no, sometimes it makes sense. But at this stage, I think that we should first become a very big player. That's what we are striving today and I would like to become a big player. Today, most of the other companies that we know are bigger than us, and I would like to become a significant player in every territory before I start to do a buyback.

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Operator [46]

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There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

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David Mahlab, Pointer Telocation Ltd. - CEO and President [47]

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Thank you, operator. On behalf of the whole Pointer team, I would like to thank you for your continued interest and the long-term support of our business. I look forward to speaking with you and updating you again next quarter. And also, for those attending, we will be presenting in Los Angeles at the next LD Micro event early December. Have a great day. Thank you very much.

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Operator [48]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.