PowerFleet, Inc. (NASDAQ:PWFL) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Good morning, and welcome to PowerFleet’s First Quarter 2023 Conference Call. Joining us for today’s presentation is the company’s CEO, Steve Towe; and CFO, David Wilson. Following their remarks, we will open the call for questions. Before we begin the call, I would like to provide PowerFleet’s Safe Harbor statement that 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 2023 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 statements. 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, you may proceed.

Steve Towe: Good morning, and thank you for joining today. It’s a pleasure to share our first quarter performance review. Our positive start to the new year reflects our unwavering focus on driving growth, profitability and SaaS recurring revenue expansion, all while facing challenging macroeconomic pressures and highly significant FX headwinds. On a constant currency basis, our total revenue increased by 4% year-over-year, and our high-margin recurring service revenue was up 17% compared with Q1 last year. We’re also delighted to report a 15% gross profit expansion in Q1 with margins in the quarter exceeding 50%, up from 43% in the prior year. Our U.S. business is seen as a major contributor for our future growth story, a thesis that continues to be validated with a 20% increase in recurring revenue versus the prior period last year.

We also improved our bottom line metrics notably versus the prior year, which David will highlight shortly. Our key change efforts aim to optimize PowerFleet’s business and concentrate our capital on areas that deliver superior returns to shareholders. This includes our revenue mix, geographies, competitive advantage and allocating capital and resources to drive faster growth and increased profitability. As part of this transformation strategy, we’re actively working to divest low margin, low growth and sub-scale business units. We’ve made good progress on finding potential new homes for our Argentinian, Brazil and South African business units, continuing hardware-only purchases through our Cellocator sales channel and terminating loss-making contracts.

This exercise naturally moderates our overall total revenue growth in the short term but allows us to focus on value enhancing recurring revenue expansion, which in turn drives attractive gross margin expansion, improved cash flow and EBITDA. The most concrete indicator of the progress of our transformation efforts is the excellent gross margin performance of our go-forward core businesses in Q1. For these business units, we expanded our total gross margin to 53%, and our high-quality service margin increased to 71%. This impressive and exciting margin profile for our core business going forward, provides us with an excellent platform to drive accretive shareholder value. In addition to the major transformation activities we executed in Q1, we successfully closed the Movingdots acquisition, launched a major new value-added module on our Unity platform and secured several major customer sales wins.

Before I dive deeper into our operational progress 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. To begin with, I would like to provide an overview of our company’s financial priorities after my first 90 days in the role. Priority number 1 is to accelerate our strategic transformation while staying within the limits of our current balance sheet. As Steve noted, we recently completed the Movingdots acquisition, which brought an additional $8.7 million in liquidity. This move also onboards a talented team of engineers and data scientists to help accelerate the rollout of Unity, brings complementary technology that meets the high-performance standards set by one of the world’s largest insurance providers and expands our presence to accelerate growth in the EMEA region.

As we transition existing activities to the Movingdots team in the second quarter, we expect to spend $1.5 million, resulting in a short-term hit to EBITDA. In parallel with the transition, we are also executing a series of cut to cover actions, including our $3 million OpEx challenge to bring EBITDA impact of absorbing the Movingdots business down to breakeven as we exit Q3. Priority number 2 is to improve the underlying operating leverage of our business by implementing a common and scalable software platform across all key geographies. We currently have an assortment of ERP systems, resulting in a massive amount of manual working costs. During my first 90 days, we made the decision to pivot from the initial ERP rollout plan that would have taken us deep into 2024 to complete to an accelerated more cost-effective plan B, which we expect it to complete by year-end.

In addition to saving time and money with ERP rollout, the project will address the root cause issues that currently result in G&A spend being well above our peers and our longer-term operating targets. We expect to see substantial savings from this project in the P&L from Q1 2024 onwards. Now on to our financial performance, where I’m pleased to report that our Q1 results demonstrate solid performance despite economic challenges and FX headwinds. Total revenue for the quarter ended March 31, ’23 was $32.8 million compared to $33.2 million last year, with the planned decline in low-value product revenue, offset by growth in higher-value service revenue. On a constant currency basis, total revenue would have been $34.6 million, an annual increase of 4%.

Our services revenue totaled $20.4 million, up $1.7 million year-over-year and accounting for 62% of total revenue. On a constant currency basis, our service revenue grew an impressive 17%, reflecting the successful execution of our SaaS growth strategy. This strategy is focused on expanding our customer base and driving more value for our existing customers through delivery of high-quality cloud-based services. Product revenue declined by $2 million to $12.4 million or 38% of total revenue, with deal discipline and terminating and profitable contracts, the key drivers. While we continue to invest in new product development, we’ve implemented a more disciplined approach to deal making. This approach has enabled us to focus on higher value, higher margin opportunities, while reducing our exposure to lower-margin business.

Gross profit margin expanded to 51% in Q1 ’23 from 43% in the prior year, driven by an improved mix of high-margin service revenue versus product revenue, field discipline and lower purchase price variances. Our operating expenses increased by $400,000 to $18.5 million compared to $18.1 million in the same year-ago period. Performance in the quarter was adversely impacted by $700,000 in M&A and other nonrecurring and out-of-period costs. Our ongoing focus on cost management is enabling us to shift investment into areas of higher return, including sales and marketing, with compelling results expected to be evident with accelerated revenue growth in the second half of 2023. Net profit attributable to common stockholders inclusive of a $7.2 million gain on bargain purchase for Movingdots totaled $3.5 million or $0.10 per basic share and $0.08 per diluted share, up from a net loss attributable to common shareholders of $4.1 million or $0.12 per basic and diluted share a year ago.

Adjusted EBITDA improved significantly to $1.4 million, benefiting from $2.2 million expansion in gross margin. This reflects our continued focus on profitability and our ability to deliver high-margin services to our customers. At quarter end, we had $25.1 million in cash and cash equivalents and a working capital position of $41.8 million, benefiting from $8.7 million in net proceeds from the acquisition of Movingdots. We believe with our strengthened balance sheet, combined with our focus on delivering high-quality services, we are well positioned to drive growth and value for our shareholders. That concludes my remarks. Steve?

Steve Towe: Thanks, David. Despite the macroeconomic and FX challenges we’re currently experiencing, our team is highly focused on operational execution has enabled us to remain ahead of schedule on our plans to transform PowerFleet into a world-class SaaS solutions provider that delivers high growth and profitability. Our 2023 operating plan focuses on four key strategic objectives we are laser focused on delivering. Objective number one is optimizing our OpEx base and operating structure. In March, we launched Phase 2 of our optimization plan, which is expected to reduce our operating expenses by an additional $3 million annually, providing room to onboard Movingdots sales and engineering capability. We’ve also started further mid-term seismic ship projects.

In terms of hardware rationalization and integrated and centralized global supply chain and shared service centers that we believe will translate into an incremental $10 million of annualized EBITDA, which we’ll begin to realize during early 2024. Objective number two is driving organic growth in our key regions where we can deliver high-quality recurring revenue growth. The proof points we’ve established significant sales momentum in the U.S. and Mexico, where SaaS recurring revenues were up 20% and 33%, respectively, in Q1 versus the same period last year. Our industrial vertical remains very strong with our U.S. team delivering a 25% increase in total revenue for the channel year-on-year, driven by our collision avoidance, advanced pedestrian safety solution.

In Q1, we secured several notable Unity sales deals and strategy validating proof points with customers in the U.S. and Mexico. To expand a little further, in the U.S., Unity has begun to have accelerated sales success in multiple vertical markets with the light of in demand on cart company, selecting the Unity platform and our brand state to integration services to offer full fleet visibility and improve utilization for their assets sustained. Walmart, a long-term partner of PowerFleet has confidently expanded their relationship with us with a multimillion dollar commitment for further Unity subscriptions with new sales orders in Q1 for over 7,000 new assets. Nestle has also expanded their partnership with PowerFleet, selecting the Unity advanced collision avoidance safety solution for 52 warehouse sites.

Additionally, we continue to partner with NACPC to give them a competitive advantage in the chassis rental and leasing markets with a commitment in Q1 for additional 10,000 Unity subscriptions. These successes highlight and validate the value and effectiveness of PowerFleet Unity platform in saving lives, time and money for our customers. We continue to be on momentum in Mexico, where FEMSA who has already selected PowerFleet Unity platform for their entire vehicle fleet to over 6,500 vehicles, has now expanded their relationship with us, adding 1,200 new safety camera solutions as part of the new Unity safety and security module. PowerFleet’s strategic partnership with AXA commercial insurance goes from strength to strength, adding a further 1,500 Unity subscriptions in Q1.

And notably, we were secured a pilot for our Movingdots smartphone-as-a-service insurance solution for the AXA 60,000 strong vehicle corporate fleet of passenger cars. The business aim is to implement safety and efficiency metrics to reduce risk level and improve AXA’s value proposition for the market. The Mexican division of one of the world’s largest FMCG companies who have more than 9,000 employees in the region has chosen PowerFleet’s Unity safety and security model for employee transportation with Airbus fleet, we plan to significantly further expand our relationship in the second half of 2023. Our half 2 2023 sales pipeline is very encouraging, improving by 47% in the first quarter, highlighted by several large strategic opportunities for our Unity platform with notable global enterprises.

As examples, one of the world’s largest sports shoe and accessory manufacturers is actively piloting Unity, evaluating the solution’s ability to meet their visibility and analytics needs across its total organization. One of our large global vehicle rental fleet customers is planned to replicate the success we’ve had in the U.S. by deploying in the APAC region, leveraging the Unity connected car solutions across their estate. On top of this, another top-tier on-demand international car rental company is also currently piloting our Unity solution. We expect this prospect to decide on a preferred vendor by the end of Q2 and roll out the solution during the fourth quarter. Our third strategic objective this year is delivering highly advanced enterprise software modules to the market.

In March, we introduced our safety and security data powered application to our new Unity platform. The new application brings together multiple data sources to enhance driver management, prevent loss and features best-in-class advanced collision reconstruction capabilities. The safety and security application is the first of a number of new and improved module applications to be delivered throughout 2023. Our next release, the sustainability module that centers on next-generation electric vehicle telematics capability and advanced ESG and CO2 reporting is on schedule to be launched at the end of June. Objective number four, is expanding our channels and routes to market to drive new growth opportunities. A great example of this is our highly creative acquisition of Movingdots, providing us with a meaningful beachhead for the European expansion, alongside adding distinct competitive advantage in the insurance vertical with the already established bluechip go-to-market partners.

In partnership with our Movingdots team, we’ve now put off the expansion of our European sales and service teams to launch an aggressive go-to-market plan for the full breadth of our Unity solutions. We’re also evaluating a number of channel partnership offers we’ve received from large mobile assets enterprises in the Middle East. We’re looking to create joint growth propositions for the local markets. In the second half of the year, we also expect to announce new strategic relationships with major transportation and mobile asset providers in the U.S., who are looking to maximize their total fleet in third partnership contractor visibility and performance by integrating data from OEMs from their current telematics deployment with multiple vendors and from PowerFleet’s own data gateways through the Unity platform.

The customer plan is to utilize our advanced data enrichment capabilities to provide enhanced customer service propositions and improve efficiency for their end clients. Combining their information channels and integrating their data sources also gives the customer the ability to optimize the performance of their full suite of business operating systems and to simplify their business processes. We call this unified operations. Our unified operation strategy is at the very hard of the future of PowerFleet and our plan to drive consolidation in the industry. In the immediate future, we will focus on the integration of Movingdots and how we can truly maximize the game-changing market potential with business. In summary, our transformation plan remains on track and we are fully confident in our ability to deliver on our strategic foundational pillars, which will ultimately generate sustainable top line growth, combined with increased profitability and cash flow.

That concludes our prepared remarks. Now I’ll turn it back over to the operator for Q&A. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question is coming from Mike Walkley with Canaccord. You may proceed.

Operator: [Operator Instructions] Our next question is coming from Max Michaelis with Lake Street Capital Markets. You may proceed.

Operator: Thank you. Our next question is coming from Scott Searle with Roth MKM. You may proceed.

Operator: Thank you. Our next question is coming from Gary Prestopino with Barrington Research. You may proceed.

Operator: Thank you. We have reached the end of our question-and-answer session. So I will now turn the call back over to Mr. Towe for his closing remarks.

Steve Towe: Yes. So thank you, everybody, for attending the call. We appreciate your support. Our style is very much to come in a very transparent way and walk through the transformation activities that we’re undertaking as a business. That transformation has been and remains substantial. I think if you look at all the key vectors of our strategy in terms of wanting to become a high-growth, profitable SaaS business, we’re making very solid progress against all those vectors. We appreciate that some of the changes and the volume of changes we’re making, it’s sometimes hard to follow the ins and outs. But ultimately, the execution plan we believe is ahead of plan, and we’re very confident for the future. So thank you for today. Enjoy your day, and we’ll speak to you soon.

Operator: Thank you for joining us today for our presentation. You may now disconnect.