PowerFleet, Inc. (NASDAQ:PWFL) Q4 2023 Earnings Call Transcript
PowerFleet, Inc. (NASDAQ:PWFL) Q4 2023 Earnings Call Transcript March 12, 2024
PowerFleet, Inc. misses on earnings expectations. Reported EPS is $-0.13 EPS, expectations were $-0.01. PowerFleet, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Welcome to PowerFleet's Fourth Quarter and Full-Year 2023 Conference Call. Joining us for today's presentation are the company's CEO, Steve Towe, and CFO, David Wilson. Following their remarks, we will open up the call to questions. Before we begin the call, I would like to provide PowerFleet's safe harbor statement, which includes cautions regarding forward-looking statements made during this call. During the call, there will be forward-looking statements made regarding future events, including PowerFleet's future financial performance. All statements other than present and historical facts, which include any statements regarding the company's plans for future operations, anticipated future financial position, anticipated results of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's product offering and other industry trends, are considered forward-looking statements.
Such statements include, but are not limited to, the company's financial expectations for 2024 and beyond. All such forward-looking statements imply the presence of risks, uncertainties, and contingencies, many of which are beyond the company's control. The company’s actual results, performance, or achievements may differ materially from those projected or assumed in any forward-looking statement. Factors that could cause actual results to differ materially could include, amongst others, SEC filings, overall economic and business conditions, demand for the company's products and services, competitive factors, emergence of new technologies, and the company's cash position. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances.
Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company's website at www.PowerFleet.com. Now, I would like to turn the call over to PowerFleet's CEO, Mr. Steve Towe. Sir, please proceed.
Steve Towe: Good morning, everyone, and thank you for joining the call. Today, we'll provide you with a business update that focuses on a review of the key milestones that marked 2023 as a year of stellar transformation for the business, an overview of our strong financial performance in the final quarter and second half of 2023, highlighting increased financial strength and growth trajectory, and demonstrating highly effective results from the strategic operating plan for the year, and a deep dive into the progress and momentum we're making in bringing together the PowerFleet MiX businesses, highlighting the value the combination brings to our shareholders. In 2023, we embarked upon a bold and aggressive transformation plan, designed to inherently change and accelerate the company's ability to elevate itself to a market leadership position at the very top table of the industry it serves.
This plan required us to reshape the revenue profile of the business, fix balance sheet issues that were a major overhang on the company, accelerate a technology pivot to AI and data science-led solutions, create scale to truly give the company the ability to compete with the global leaders in the industry, reignite EBITDA expansion and positive cash flow generation, and drive a unique product and platform strategy to bring differentiated value propositions to the industry. The outcomes achieved in the last six months in particular, notably fact-checked by our strong Q4 performance, categorically underlying true world-class execution the team has delivered, with the undeniable achievement of the major business objectives we have communicated to our shareholders over the last 12 to 18-month period.
Starting with revenue where we embarked on a brave transformation early in the year based on improving the quality of our revenue streams, a strategy typically seen in the private equity space, but in our case, executed in the full view of the public markets. We are grateful to our shareholders for the trust shown in the leadership team's capabilities to execute this bold plan. This pivot included making tough decisions to exit poor quality revenue segments, unprofitable contracts, low performing territories, and non-strategic lines of business. This deliberate pruning of approximately $8 million of annual revenue concentrated in hardware sales, has not only simplified our operations, but also redirected resources towards more SaaS-based revenue and business profitability.
As we predicted publicly, we reached a fast inflection point and a return to top-line growth in mid-2023, with second half performance painting a clear picture of success where total revenue increase by 6% compared to half one, and gross profit followed suit with a 6% improvement. Top-line success is built on our SaaS Unity platform strategy, as evidenced by Q4 ‘23’s high-quality SaaS revenue growing by 16% year-over-year on a constant currency basis. The total revenue performance in Q4 was our best performance in six quarters, growing 9% on a constant currency basis year-over-year, and was particularly pleasing as we absorbed the predicted $2 million revenue shortfall in the quarter to our Israeli business due to the current macroeconomic issues for the territory.
The reshaping of top-line performance in the full year to focus on high quality SaaS revenue, resulted in a 14% increase in service revenue year-over-year on a constant currency basis, and a $3 million improvement in annual gross profit from a lower total revenue base. Notably, North America, the leader in adoption of our Unity data ecosystem solution, delivered an excellent performance, with annual growth of 16%. Adjusted EBITDA in the second half of 2023 saw a terrific 141% increase, a gain of $2.9 million versus the first half. It's important to highlight that this EBITDA expansion was achieved despite a full period of Movingdots’ operating expenses, macroeconomic challenges in Israel, and a $1 million one-off charge for inventory-related items in the fourth quarter of 2023.
The 48% sequential adjusted EBITDA increase from Q3 to Q4 2023, and 110% year-over-year increase in Q4, is a satisfying reflection on the output of the aggressive transformation efforts we've completed throughout the year. Moving on to technology in 2023, we successfully tackled the dual challenge of aggressively ramping up investment in our next-generation Unity platform within the challenging landscape of managing near-term liquidity needs and addressing the financial overhang of the Abry preferred notes. The challenge was successfully addressed in very short order with the close of our rapid and strategic acquisition of Movingdots at the end of March. As a reminder, this deal secured a cohesive and high-performing team of over 30 engineers and data scientists with deep domain knowledge, cutting-edge IP in the automotive and safety insurance space, along with robust ESG reporting capabilities to enrich Unity, and was the source of an $8 million influx of liquidity versus a drain on cash.
A key commitment we made to our shareholders at the close of the Movingdots acquisition was to ensure it became EBITDA-neutral within two quarters of close. As David will share, we clearly met this commitment, posting a flat year-on-year spend in adjusted OpEx in Q4 2023, which included $1.3 million of absorbed Movingdots spend. Our greatest accomplishment in 2023 is unquestionably the successful signing of our business combination with MiX Telematics. This milestone not only empowers us to fully realize our vision and strategy, but also significantly transforms our balance sheet, including clearing the Abry preferred instrument from our capital structure. The combined value-creation opportunity this presents makes us incredibly excited about the future of our business.
The MiX deal is also a game-changer in terms of scale, with 12 months training revenue increasing from $134 million to over $280 million, combined EBITDA increasing from $7 million to $40 million. The combination also provides a clear pathway to realize more than $25 million in cost synergies within two years of close. With resounding shareholder approval for the transaction secured for both PowerFleet and MiX, our integration teams, led by Chief Corporate Development officer, Melissa Ingram, will now begin to move from the planning phase to active execution. In deploying a trident tested business integration methodology with a track record for delivering tangible results, the program aims to expedite the integration phase, enabling us to swiftly shift our attention to towards driving increased shareholder value and enhancing our customers’ experience, underpinned by a highly robust EBITDA expansion program.
With 100-day plans in place and the non-negotiable deliverables defined, our teams are ready to embark on implementing key elements of the integration plan. The entire organization is firmly behind this effort, and we can already feel the collective strength of the combined team driving our integration success. We are committed to swiftly and effectively putting the integration stage behind us, emerging as a unified, stronger, and more effective company. Before I dive deeper into our future business opportunities and outlook, I'll turn the call over to David to walk you through our numbers in more detail. David?
David Wilson: Thanks Steve, and good morning, everyone. We are delighted that our progress in transforming the makeup of our revenue base with growth in our differentiated sticky recurring service revenue, putting through product sales where we have increased levels of pricing power. As Steve noted, we have actively shared approximately $2 million in quarterly revenue from the first quarter of 2023, and it is great to see that market success from our next-generation offerings now outpacing these surgical cuts, with fourth quarter revenue of $34.5 million, up 4.2% on an absolute basis, and 9% on a constant currency basis versus the prior year period. As noted earlier, service revenue was the driver here, up 8.2% on an absolute basis and 16% on a constant currency basis.
While our gross profit margin for the quarter reached 50%, reflecting a modest improvement of one percentage points over the prior year, these figures only partially reflect the underlying progress we've achieved in expanding margins. It's important to note that within the quarter, we absorbed $1.1 million in non-recurring inventory adjustments. Without these one-time costs, our gross margin would've been 53% or four percentage points higher than the prior year. Improved margins were driven by the continued evolution of revenue, with high-margin service revenue now comprising 63% of total revenue, up from 60% in the prior year, and absolute service margins expanding to a historic high of 67% versus 64% in the prior year period. Product margins were 22% on an absolute basis, and 30% when adjusted for non-recurring inventory charges, up from 27% in the prior year period.
Now, onto OpEx, which was $21.3 million on an absolute basis and $17.6 million after adjusting for $3.7 million in transaction expenses, and in line with the $17.6 million incurred in the prior year. Flat year-over-year OpEx provides a compelling proof point of meeting our commitment that Movingdots would be EBITDA-neutral within two quarters of closing the transaction, with cut-to-cover activities absorbing $1.3 million of OpEx incurred by Movingdots in the quarter. Moving on to adjusted EBITDA, which more than doubled from $1.4 million to $2.9 million, with a $1 million increase at the gross margin level, a lower cash op spend year-over-year key drivers. Net loss attributed to common stockholders totaled $4.6 million or $0.13 per basic and diluted share, inclusive of additional $1.5 million gain on bargain purchase arising from the Movingdots transaction.
Adjusting for transaction costs and the gain on bargain purchase, net loss attributed to stockholders was $2.4 million or $0.07 per basic and diluted share. Closing with cash, we reacted the quarter with cash of $19.3 million on the back of strong generation, with cash from operations totaling $4.5 million in the quarter, inclusive of $1.2 million in cash-settled transaction costs. I'll now provide an update on closing the MiX transaction, with a focus on funding and the underlying capital structure. We have finalized $100 million credit agreement with Rand Merchant Bank in South Africa, and renewing a $50 million credit agreement with Bank Hapoalim in Israel. in terms of timing, and as a condition for the merger to be declared effective in South Africa on April 2nd, we will draw down $85 million of debt from RMB on March 13th in order to demonstrate we have unfettered access to the necessary capital to pay down the $90 million owed to Abry at close.
We also plan to draw down the full $30 million of term loan from Hapoalim and pay down $23 million of existing Hapoalim debt on March 18th. In terms of the makeup and the cost of debt, $30 million in term loans from Hapoalim will be denominated in new Israeli shekel, providing a natural hedge for USD-denominated investors for cash flows generated in Israel. $90 million will be denominated in USD, which differs from our earlier intention to have $50 million denominated in ZAR. While we were ultimately enabled to obtain exchange-controlled relief in South Africa to borrow in ZAR and remit to PowerFleet Inc. In USD, we are exploring entering into an FX swap to essentially obtain the same hedging benefit for USD-denominated investors by alternate means.
The blended annual cost of debt is expected to be $11 million, an effective cash coupon of 8.8%, with interest rate fixed on $85 million of USD-denominated debt. While this cash coupon is approximately 1.7 percentage points lower than the effective rate included in the January 2024 S4 filing, we expect this saving to be effectively consumed by the contemplated FX swap. Total and net debt at close is forecast to be $125 million and approximately $110 million, respectively. Total liquidity at close is forecast to be approximately $40 million, inclusive of $25 million in undrawn revolver capacity. In terms of the underlying business, it is performing in line with the numbers shared at our November Investor Day, with expected trailing 12 months revenue and EBITDA of the combined business at close to be approximately $285 million, north of $40 million, respectively.
Some additional context here. When overriding focus in the first quarter has been on aligning both organizations so we have a running start on aggressively realizing revenue and cost end user close. While this is undoubtedly the right call from a shareholder value-creation standpoint, it necessarily requires taking some focus away from maximizing top-line performance in the first couple of quarters, as well as investing back into OpEx to ensure we have the right team and skillset in place to meet and beat our prior guidance on the timing of synergies. Building on this, in order to provide investors with a comprehensive understanding of our joint operations, our first quarter 2024 earnings call and release will concentrate on the financial outcomes of the merged entity rather than just standalone figures for legacy PowerFleet, which will appear in the 10-Q filing.
A final note in the first quarter of 2024. Israel continues to be impacted by the challenging macroeconomic backdrop, which is more pronounced in the first quarter, which has historically been the strongest quarter for new business car sales and associated revenue. That concludes my remarks, Steve.
Steve Towe: Thanks, David. 2023 has been a landmark year for the company, wholeheartedly meeting the objectives I pledge to achieve to the board and our shareholders within the first two years as my tenure CEO. I'm profoundly proud of the substantial progress we've achieved across vital areas on our operating vectors of the business, all completed during aggressive and extensive M&A activity and execution. The transformation of our business from where it stood just a year ago is remarkable. We created an exciting foundation in 2023 that is poised to generate substantial value and rewards for our stockholders starting in 2024 and beyond. The signal from the market and our customers is crystal clear that our Unity platform effectively addresses acute pain points and needs across a broad swathe of the mobile asset market, highlighted by our improved revenue performance from our North America market, which has been the number one priority for the go-to-market activities of Unity.
The acquisition of Movingdots in Q1 and the pending completion of the game changing MiX transaction, massively expand our capacity to accelerate the further development and hardening of this comprehensive SaaS software platform and data ecosystem. The Unity play is not only increasing our share of wallet with current customers, but also attracting new top tier enterprise accounts, which is highly encouraging. Unity will evolve over time into a platform and ecosystem that extends well beyond telematics. In the immediate term, we are scaling up our device-agnostic data ingestion and processing and leveraging AI to empower customers to flexibly consume insights, be it via our own advanced applications or through integrations with other third-party business operating systems they utilize.
The need for these capabilities is opening substantial market opportunities by positioning Unity as a central hub for a broad range of IoT applications and an all-encompassing data highway for our customers enterprise. Feedback on our one-stop shop strategy for providing rich data solutions that cover operations in both the warehouse and over the road is very positive, as larger enterprises look for true mission-critical partners who can help drive their digital transformation and business improvement. In addition to accelerating our technology and go-to market build, we have achieved in a single step the necessary scale and punching power to give us a much stronger ability to execute our long-term vision and strategy for the company. The deal more than doubles the size and the scale of our operations, increasing trailing 12 months revenue to north of $280 million, and EBITDA to over $40 million, with active subscribers going from 700,000 to 1.8 million, resulting in an exceptional medium term cross-sell and upsell opportunity.
Early dialogue with customers focused on the broader value proposition the combination presents, has been extremely encouraging, and provides us with strong confidence that we will accelerate the growth trajectory of the company in the medium term. As the deal is set to conclude at the start of April, we will spotlight key indicators in our future earnings calls to demonstrate the trajectory towards significantly enhancing EBITDA and propelling revenue growth. In the forthcoming update, we will focus on the cumulative annual run rate cost synergies achieved by the end of each quarter, advancements in transitioning MiX'S customer base to the Unity platform, specific instances of how we are expanding our share of wallet with existing customers through cross-selling the comprehensive product lineup resulting from the combination, and also progress in utilizing MiX's extensive global network of 130 resellers to broaden the sales reach of our in-warehouse solutions and advanced safety solutions.
To conclude, we have a team that has undoubtedly proven that it is highly effective at executing brave and highly complex business improvement at pace, and one which will now be bolstered even further by the addition of the talented individuals joining us through the MiX transaction. We have the clarity of vision and mission for the combined team, a disruptive and compelling data-led software strategy, and much improved global market opportunity to build a business centered on highly differentiated, sticky, recurring SaaS revenue that gives us the ability to expect to meet and then beat Rule of 40 performance two years into the closing of the transaction. As we begin to put a sharp focus on executing the next phase of our strategic plan to the highest level in the next two-year period, we anticipate rewarding our shareholders over time through a significant rerate in our trading value from today's pro forma valuation of approximately 1.5x revenue towards the 5x to 8x revenue valuation more typically enjoyed by a Rule of 40 public class company.
The commencement of the new combined business is set to formally go live on April 2nd. We naturally need some time to fully take control and fly the plane for ourselves in the coming months, with the mission to successfully land the combined organization with a highly effective operating rhythm within six months. It is crystal clear we now have all the ingredients we need to drive a very compelling value proposition for the near and long-term for our shareholders, our customers, and our colleagues. I'll now turn it back over to the operator for Q&A. operator?
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