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Edited Transcript of PNTR earnings conference call or presentation 15-Aug-19 2:00pm GMT

Q2 2019 Pointer Telocation Ltd Earnings Call

Givatayim Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Pointer Telocation Ltd earnings conference call or presentation Thursday, August 15, 2019 at 2:00:00pm 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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* Michael Joshua Nichols

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

* Roman Rimsha;Excellence Nessuah Investment House Ltd; Investment Analyst

* 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 Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. David Fore with Hayden Investor Relations. 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, operator. I'd like to welcome all of you to this conference call and thank Pointer's management for hosting this call. Earlier today, Pointer released its second 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 in the second quarter of 2019; followed by Yaniv, who will provide a summary of the financials. We'll then open the call up for questions from analysts and investors.

Before we begin, though, 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 increasing traction of the North American market; potential acceleration of efforts of ID Systems; full integration of the company's businesses; and timing and closing of acquisition, transition of ID Systems; continued positive momentum in the Brazil and of the Latin American markets; and the number of service subscribers; rates of top and bottom-line growth for the remainder of 2019; as well as continued investment in products and solutions; growth in different markets; and the potential and future success of PowerFleet. The company does not undertake to update forward-looking statements. The full safe harbor provisions, including risks that could actual -- 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 costs, or any changes in 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 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 and other financial information which are included in the quarter's earnings release, which is again 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. We are very excited to report record revenue of $21.4 million in the second quarter driven by significant product revenue in North America. We are seeing increasing traction in this key expansion market as we benefit from synergies with our primary partner, ID Systems, and we expect to accelerate our combined effort there as we fully integrate our business and operation post acquisition. We believe that we are on track to close this transaction during October 2019.

Meanwhile, in other major markets, we saw strong growth in Brazil in the second quarter based on wins we announced earlier this year, and we expect to continue this momentum in Brazil and other Latin American markets.

Despite continuous currency headwinds, we delivered positive net income in both GAAP and non-GAAP basis, along with 56% service gross margin and double-digit non-GAAP operating margin. And we continue to reduce our long-term debt. As previously announced, during the fourth quarter of 2018 and the first quarter of 2019, we significantly reduced services to low-margin customers, cutting approximately 15,000 low ARPU subscriber in total in order to enhance our long-term profitability. In the second quarter, we executed our plans and returned to subscriber growth of about 4% quarter-over-quarter. We expect to see continued momentum in our service subscriber growth going forward.

Looking out for the remainder of 2019, we continue to expect to see the growth in our overall business compared to the same period in 2019 ( sic ) [2018]. We should see stronger revenue in the second half from product sales in North America and India, particularly around our asset tracking product, the Nano family, and later, from the ramp-up of other new products launched and continued stable growth in our service business. This, along with the recently announced orders in Brazil, is expected to accelerate our growth in the second half of this year.

On the M&A side, we expect our position deal announced with ID Systems to be closed in October 2019. The merged company should have a return base revenue going forward to 600,000 users, strong technology and global footprint. This will position the new entity, PowerFleet, as leader in the industrial IoT telematics space.

To summarize, we are very pleased with our second quarter 2019 results and our outlook for the remainder of 2019 and beyond.

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 second quarter of 2019, the highlights were as follows: second quarter 2019 revenues were $21.4 million compared to $19.7 million in the second quarter of 2019 ( sic ) [2018] and $18.3 million in the previous quarter. Revenues from services in the second quarter declined to $12.5 million from $13.2 million in the second quarter of 2018 due to foreign currency exchange headwinds. In constant local currency terms, revenues from services grew 5% year-over-year. Revenues from products increased by 36% to $8.9 million from $6.6 million in the same quarter last year. In constant local currency terms, revenues from products increased 37% year-over-year. Our service gross margin was 56% versus 58.7% in the second quarter last year. Our product gross margin was 31.5% versus 39.8% in the same quarter of last year. Our overall gross margin in the second quarter was 45.8% versus 52.4% in the second quarter of last year. Non-GAAP operating income for the quarter was $2.3 million, a margin of 10.6% compared to $3.1 million in the same quarter of 2018, a margin of 16.8%.

Non-GAAP net income in the second quarter was $1.8 million compared with $2.5 million in the second quarter of 2018. EBITDA was $2.9 million compared to $3.4 million in the second quarter of 2018. Adjusted EBITDA was $3.3 million compared to $3.6 million in the same period a year ago. We ended the second quarter with cash net of debt of $2.7 million. Lastly, we have reduced our debt by $3.6 million over the last 5 quarters to $4 million as of June 30, 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) 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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Yes. David, good to see the record revenue. I did want to ask how much revenue is attributable to the company's partnership with ID Systems in North America for this quarter? Were they a 10% customer?

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

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Yes. Revenue was driven by sales to ID Systems as the contract that was announced last December.

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

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Were they a 10% customer in the quarter or under that or anything you...

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

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This specific customer, yes. They were over 10% in this specific quarter, yes.

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

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Got it. And then if you could talk about -- good to see the company's back to some good constant currency growth on the services side. Could you talk a little bit about the expectations for the services revenue growth in the back half on a constant currency basis with some of these new rollouts in Brazil coming online?

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

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Basically, we expect -- basically, we've got -- we announced 3 big deals in Brazil. Altogether, that should grow the business significantly in Brazil. We finished installation of about 50% -- about 20% in June, about additional 15% in July, and we do hope to finish the installation of all the new contracts by October this year. And we do have additional deals in the pipeline. So altogether, that should make a very significant growth in Brazil. Besides that, we had nice wins, not that significant, both in Mexico and in Argentina. So overall, we do expect very nice growth in the service revenue.

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

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Great. That's good to hear. And with some of these like the larger wins that are coming online in Brazil, do you expect -- what type of impact do you think that will have to the company's ARPU? Looks like around $15 for service ARPU right now. Is that going to trend up or flat? How should we think about that?

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

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Well, it's very much affected by the currency issues in Latin America. So with the recent deals in Argentina, we will continue to be affected.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [10]

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And I guess, at this -- we probably reached a point where the revenue from Argentina is getting to be relatively less of an impact because of currency devaluations over the last 12 or 18 months. Is that kind of fair to say?

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Yaniv Dorani, Pointer Telocation Ltd. - CFO [11]

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Yes. But there still has some nice numbers on the -- in the business service. And even though in local currency, they're doing very nicely, translation to dollar becomes insignificant. So that has an impact.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [12]

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Right. I mean the dollar is obviously...

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

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(inaudible) Yes. Look at today at the exchange rate, it was about ARS 60. If I look at last year, ARS 40; 2 years back, ARS [68], same quarter, it was one quarter, just because of the exchange rate.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [14]

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Yes. And then if you could talk for a minute. You've already hit on some of the regions a little bit about what you're seeing in some of the core regions, particularly a commentary of what you're seeing in Israel. You've talked about Brazil, but also if you could comment a little bit on like maybe Mexico and South Africa as well.

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David Mahlab, Pointer Telocation Ltd. - President & CEO [15]

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Yes. Mexico, I mean, economy is stable. We do see more and more demand. Everybody is afraid of the coming elections that might affect the currency exchange rate. But overall, in Mexico, things are stable. In South Africa, the situation is still vague, and we just started there. So.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [16]

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And lastly, in Israel.

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

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What was the question?

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [18]

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Yes. In Israel, the last part of the -- your home market in Israel, how things are trending there.

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David Mahlab, Pointer Telocation Ltd. - President & CEO [19]

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The market is good, but the overall car market is slowing down in Israel. We expect to see slowdown in the market in Israel, and that will affect the growth in Israel. But we are launching new services. And overall, I do expect to have also a nice growth in Israel but less than last year.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [20]

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And then last question, and I'll hop back in the queue. I guess the products margin coming in at 31.5%, I guess fair to kind of trend that over the back half of the year given the increased products revenue to ID Systems. And similarly, expectations for service revenue to kind of remain around this 56% level for the back half or is that going to change much?

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David Mahlab, Pointer Telocation Ltd. - President & CEO [21]

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It all depends on the currency and the distribution. I do believe that as long as we continue to grow and especially post acquisition after we complete all our synergy plan, margins would continue to improve. That's on the service side. On the product side, of course, that was part of the strategy when we did the bid together. And actually, when we engaged together a few years back because we looked at the market, the North American market a significant one and already we see the initial fruits, so I'm happy with it.

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Operator [22]

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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 [23]

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David, actually my question is what Josh just touched on, on the product gross margin. So basically, that 31.5% is a good number going forward?

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

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No. Because at the end, if we look at it together, you have to look at it as of today, in today's reports that the margins are split between the 2 companies. So going forward, I think that on the combined entity, once the deal is approved, the margins should be better.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [25]

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Oh, no, no. I understand the combined. I was speaking just Pointer pre the combination?

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

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No. We should also improve as we see more -- as we will start shipping more and more of the asset Nano tracking family.

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Operator [27]

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(Operator Instructions) Our next question comes from the line of Roman Rimsha with Excellence Nessuah Investment.

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Roman Rimsha;Excellence Nessuah Investment House Ltd; Investment Analyst, [28]

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David, you already just touched the margin question, the gross profit margins. And just to understand better the decline this quarter, both in products and services gross profit margins, is it mostly due to merger or maybe the change of the products and services you provide to your clients?

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

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Most on the product side. When we had the first order that was announced last year, we took the big order because we understood that the margins need to be split. So overall, I think that when we look at it, at the combined company, it will definitely improve and significantly improve because it's part of the synergies that we planned. On the service side that you asked, we're a bit affected by some, I would call it, salary increases in the services. That will continue with us. But again, as I mentioned earlier to the previous question, once we consolidate the operation, the margins should come up.

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Operator [30]

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Our next question comes from the line of [Arthur Lee] with [Canucks].

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Unidentified Shareholder, [31]

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I am a U.S. shareholder, and I am not asking for any tax advice, but I'm asking a factual question. In the proxy, it discusses the letter, the application that the company made to the ITA regarding withholding taxes. And it is not clear to me whether or not your letter requests or deals with the issue of withholding for U.S. shareholders, really all foreign shareholders. Could you kindly answer my question, whether your application includes that request?

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

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It's actually Yaniv, the CFO. Yes. We are discussing this and applying to the tax authorities here in Israel. Basically, there is no view in Israel. There is a defined treatment for such occasions. But yes, we are going -- we are looking to get a formal -- looking at saying that this would be also the treatment here for -- in our view.

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Operator [33]

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Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Mahlab for any final comments.

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

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On behalf of the management of Pointer Telocation, I would like to thank you for the continued interest and the long-term support, and I really do hope in the next call (inaudible). Thank you very much.

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Operator [35]

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