PowerFleet, Inc. (NASDAQ:PWFL) Q4 2022 Earnings Call Transcript

PowerFleet, Inc. (NASDAQ:PWFL) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good morning. And welcome to PowerFleet’s Fourth Quarter and Full Year 2022 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 offerings 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 and 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 other 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 and thank you for joining us today. It’s a pleasure to be speaking with you once again. It’s been a rigorous and exciting first year since I joined the company. I’m incredibly proud of the progress the team has made on the journey of transforming PowerFleet towards our mid- to long-term goal of being recognized as a world-class, high growth and profitable SaaS solutions provider. The Board and I are highly encouraged by the progress we’ve made to-date, executing our strategy to turn around the business in the first two years of my tenure CEO. We’re ahead of schedule and executing well on the mission. As a reminder, my initial priorities were as follows. First, we needed to make dramatic improvements to the caliber and experience of the leadership team in order to become a true IoT SaaS company.

Second, we needed to develop a unified SaaS platform strategy that delivers great value for clients to improve our margins and expand the total available market for our solutions. Third, we need to show evidence that we could drive sales execution and topline traction in high-value markets and vertical segments. As we move towards the next phases of our transformation plan, we’ve been focusing heavily on expense containment and rationalizing certain geographies and product lines that we believe are incapable of driving sufficient rates of return and cash flow. In turn, we’ve been creating strategies for redeploying cost savings to accelerate our product and sales plans in the highest ROI business areas. We’ve accomplished a tremendous amount over the last year through roofers and rapid execution, powered by hiring a super talented executive team with deep experience working with high growth SaaS companies, including adding David Wilson, our CFO, who you’ll hear from shortly.

Our profitable growth strategy that we call PowerFleet Reimagined and which was first introduced at our inaugural Investor Day last June has been very well received by employees, customers, partners and investors alike. From a technology perspective, in November, we launched PowerFleet Unity, a new game-changing fleet intelligence platform that unites people, assets and data together to transform the way its customers do business. Unity will be the cornerstone of our future shareholder value creation and is ahead of schedule and gaining traction with new customers, highlighted by our recent announcements with Kearney and FEMSA. Even with the dramatic business transformation efforts and fundamental operational business change in 2022, we were still able to drive topline growth, improved gross profit and enhance profitability, an ambitious objective I articulated to all of you at the beginning of 2022.

Our encouraging financial results, we’re also achieving in the face of ongoing macroeconomic pressures and significant supply chain headwinds. David will discuss our Q4 and 2022 results in detail, but at a high level in 2022, we delivered 7% topline revenue growth, 8% growth in high margin services revenue and grew our subscriber base by 8% to 664,000. From a profitability perspective, we improved gross profit by $4 million, reduced loss from operations from Q4 2021 to Q4 2022 by 65% and grew adjusted EBITDA 19% in 2022. We faced significant FX headwinds in 2022, but on a constant currency basis, our annual total revenue growth was 10%, with services revenue growing 11% for the full year. One of the key thesis questions was, could we improve our growth in the U.S. market in the year 2023.

We proved our thesis by delivering total annual revenue growth in the region of 12% and a service revenue growth of 13%. A key driver of our success was our U.S. Industrial business segment, which grew 33% in the second half of 2022 versus the corresponding period in 2021. We’re also excited by the performance of our Mexico business unit, which achieved 34% growth year-over-year in total and 33% in services revenue. Perhaps our progress is most telling and best measured when we compared our financial results for the second half of 2022. For the second half of 2022 versus the first half of 2022, high margin services revenues increased 5% to $40.3 million. On a constant currency basis, the sequential increase was 8% or an impressive 16% on an annualized basis.

Overall, gross margins expanded from 45% to 50% with our gross profit increasing by $3 million or 10%. Additionally, the success from our products and reengineering initiatives expanded our product gross margins from 20% to 29% in the second half of the year. From a profitability standpoint, we realized a 54% or $2.9 million improvement in loss from operations, as well as a $2 million or 76% improvement in adjusted EBITDA. Compared to the same period last year, we increased gross profit by $4 million or 13%, improved our operating losses by $3.5 million or 59%, as well as saw a $2.7 million or 132% improvement in adjusted EBITDA. During the fourth quarter, we saw double-digit growth in our key regions, including a 20% increase in the U.S. Industrial segment and a 37% increase in revenue in Mexico, driven by both Unity sales and initial sales of our Industrial Solutions in the region.

The overall topline results in Q4 reflect the decisive actions we took to deemphasize underperforming product lines and territories, and terminate unprofitable contracts, measures I alluded to in our Q3 call. To put this into context, unrecognized revenue related to the termination of unprofitable contracts and the de-emphasis of lower margin products was approximately $2.5 million in the quarter. Nevertheless, our tight cash management produced the highest cash collections quarter in the company’s history. While we’re encouraged by our operational and financial progress, especially in the second half of 2022, there is still much more work for us to do to achieve the level of performance we believe is possible for our company. Although the speed of cleanup has exceeded our internal expectations, the operating state of the business when I assumed the CEO position was far more challenged than expected and there are still crucial areas that need to be improved.

Along that line, earlier this quarter, the leadership team enacted on a focused plan to optimize further our business. When completed, the plan will reduce our OpEx by an additional $3 million annually, which we expect to drive bottom-line improvement. This is in addition to the $5 million we took out of the business in 2022, some of which allowed us to pivot and grow our software sales and development teams. Before I discuss our 2023 initiatives and our business outlook, I’m going to invite David to walk through our financial performance for Q4 and 2022 in more detail. David?

Photo by Remy Gieling on Unsplash

David Wilson: Thanks, Steve, and I’m pleased to connect with many of you for the first time on this call. This week marks my second month with PowerFleet and my time on Board has reaffirmed two key reasons I chose to join the team. Firstly, there’s a rich set of complementary assets of PowerFleet that have a massive amount of latent value. Secondly, the team that Steve has put in place are aggressive change agents who have the drive and experience required to realize PowerFleet’s full potential. The third key reason I joined PowerFleet is patent recognition. Prior to joining PowerFleet, I was the CFO of ACS, a regional telco, which was an amalgamation of acquired companies that had a newly installed management team taps returning the business around and creating a huge amount of value for stakeholders.

While the road at ACS was more rocky and smooth in the early quarters, during my tenure, we outperformed the sector by 16 times, turning ACS from a valuation laggard to a valuation leader. I look forward to playing my part in achieving similar success with PowerFleet. Now on to our fourth quarter results for the year ended December 31, 2022. Total revenue was $33.1 million, compared to $34.4 million in Q4 2021. As Steve noted earlier, the step down in revenue was by design, with increasingly sharp focus on the quality versus the quantity of revenue. In the quarter, we sidestepped approximately $2.5 million in available sales in non-core underperforming product lines and territories. Venturing the business around high margin SaaS revenue is a central tenet of PowerFleet Reimagined, with the fourth quarter mix of service revenue increasing to 60% or $20 million in 2022 from 56% or $19.1 million in 2021.

Product revenue, where the quarter’s sales were focused on deals with a high attachment of SaaS service revenue was $13.1 million versus $15.3 million in Q4 last year. Gross profit was $16.4 million, compared to $15.4 million. Importantly, gross margin expanded by 5% to 49% of total revenue, up from 45% last year. Fourth quarter service gross profit was $12.8 million, with margins of 64% of total service revenue in line with expectations. This compared to $12.4 million or 65% of service revenue in Q4 last year. Product gross profit was $3.6 million, compared to $3.1 million in the same year ago period. While deal discipline was a primary driver of quarterly product gross margins expanding to 28% of product revenue, up from 20% last year, 2022 performance was adversely impacted by $600,000 or 5% gross margin for inventory and warranty reserve adjustments and out-of-period charges.

Looking at expenses, OpEx was $17.6 million, compared to $18.9 million in the same year ago period. 2022 operating expenses benefited from foreign exchange translation gains of $1 million, which is a reverse to calculated adjusted EBITDA and $0.7 million in incremental stocks and audit professional fees, which flows through to adjusted EBITDA. In terms of profitability metrics, net loss attributable to common stockholders totaled $2.9 million or negative $0.08 per basic and diluted share. This compares to a net loss attributable to common stockholders of $7.9 million or a loss of $0.23 per basic and diluted share in Q4 last year. And finally, adjusted EBITDA, a non-GAAP metric in the fourth quarter of 2022 totaled $1.4 million, compared to an adjusted EBITDA of $1 million in the same year ago period.

Our balance sheet remained strong in the quarter with $18 million of cash and cash equivalents. The company’s working capital position at quarter end was $35.5 million. Shifting gears to our financial results for the full year ended December 31, 2022. Total revenue was $135.2 million, an improvement compared to $126.2 million in 2021. High margin services revenue was $78.8 million, compared to $73.2 million in 2021. Product revenue, which drives future services revenue was $56.3 million, compared to $53 million in 2021. Gross profit was $64.2 million or 48% of revenue, compared to $60.2 million or 40% of revenue in 2021. Services gross profit was $50.5 million or 64% of total service revenue, compared to $46.6 million or 64% of total service revenue in 2021.

Product gross profit was $13.7 million or 24% of total product revenue, compared to $13.5 million or 26% of product revenue in 2021. Operating expenses were $72 million, compared to $68.2 million in 2021, while net loss attributable to common stockholders totaled $11.9 million or negative $0.34 per basic and diluted share in 2022, which compares to a net loss tribute to common stockholders of $18.8 million or negative $0.52 per basic and diluted share in 2021. Adjusted EBITDA, a non-GAAP metric, totaled $7.3 million, compared to adjusted EBITDA of $6.2 million in 2021. That concludes my remarks. Steve?

Steve Towe: Thanks, David. One of my stated goals on joining the company has been to substantially increase the revenue share of our SaaS and recurring revenues, which has the benefits of increasing our visibility, margins and relative competitive advantage. We’ve built a great team at PowerFleet and the concentration of this talent around the best and highest quality revenue and profit opportunities as a result of a dynamic capital allocation strategy to yield the highest potential returns to our shareholders, employees and customers. In this spirit, we have decided to entertain strategic alternatives for our Argentina and Brazil and South Africa business units. As background, there have been third parties who have expressed interest in these business units and we’ve decided to evaluate these potential opportunities with these partners.

In parallel to our organic growth strategy, we are continually evaluating balance sheet accretive M&A opportunities to enhance our capabilities and augment our ability to scale more rapidly. Along that line, this morning, we announced the acquisition of Movingdots, a German-based telematics provider, a fully-owned and operated subsidiary of Swiss Re. Since 2015, Movingdots has served a Swiss Re’s technology hub in the automotive and mobility space. For those not familiar with Swiss Re, they are one of the world’s leading providers of reinsurance and insurance. Movingdots spent the last decade designing and perfecting data science algorithms with insurers to provide risk-based drive style analytics for fleets and personal auto risk. Backed with actuarial insights, Movingdots enables data-driven insurance proposition for insurers, car manufacturers and mobility platform players worldwide.

By focusing on customer safety and security needs and by providing transparent and comprehensive monitoring, Movingdots combined insurance analytics with AI and ML technology to drive an individual risk assessment. Movingdots has also developed leading-edge technologies for the sustainability and ESG reporting space. Swiss Re and Movingdots have been searching for the right strategic growth partner to deliver these precisely architected insurance solutions to the global market in a sustainable, profitable and scalable way. From a customer perspective, Movingdots bodes several Blue Chip insurers as customers and works with major automotive OEMs as partners and also serves more than 160 enterprises in the European market. Movingdots checks all the boxes of a highly complementary and synergistic acquisition.

First, it accelerates PowerFleet entrants into Europe by providing a meaningful beachhead with major reference customers and a network of Tier 1 partners. Second, PowerFleet presents a significant opportunity to cross-sell Movingdots solutions into our base of customers and partners and vice versa. Third, the acquisition brings strong technically advanced data science IoT solutions for the insurance and sustainability markets, which present distinct competitive advantage and credibility in a highly strategic end market for PowerFleet. Fourthly, the acquisition enhances our Unity Platform with Movingdots focus on delivering innovative automotive and mobility safety solutions and ESG reporting that will enrich PowerFleet SaaS enterprise applications.

Finally, Movingdots has built a hub of software and platform excellence in Germany and beyond. Movingdots employees will strengthen PowerFleet’s current tenured and talented team, all striving to deliver on the promise of people powered IoT. From a consideration perspective, we’ve agreed to acquire Movingdots for €1 and issued 800,000 warrants to Swiss Re that have an exercise price of $7 per PowerFleet common share. Swiss Re has agreed to fund €8 million in cash at close to ensure continuity of Movingdots telematics offering and a seamless transition for the company’s talented 50 employees, as well as its value customers and partners. Equally important to Swiss Re was a continued strategic commercial alliance with PowerFleet. Looking to the future, we anticipate generating sequential revenue growth in Q1 despite the expected revenue reduction as a result of our strategic rationalization efforts, driven by robust double-digit growth from our U.S. Industrial segment, a trend we expect to continue through 2023.

In summary, we’re focused on realigning and restructuring our cost base to realize the potential of an increasingly robust and competitively differentiated high growth SaaS offering. Movingdots has an important role to play, enriching our Unity offering, while simultaneously providing a leading position in the strategic insurance vertical and enhancing balance sheet liquidity. That concludes our prepared remarks. Now I’ll turn back over to the operator for Q&A.

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Q&A Session

Operator: Thank you. Thank you. Our first question is from Scott Searle with ROTH. Please proceed with your question. Scott, is your line on mute?

Scott Searle: Oh! My apologies. Hey. Good morning. Thanks for taking the questions. Steve a lot going on this morning, I wanted to quickly clarify a couple of things and then dive into Movingdots. But $2.5 million in sales in the quarter, fourth quarter were lost related to basically walking away or terminating bad contracts, I want to confirm that? And then the $3 million reduction in OpEx, I want to understand if that is going forward off of the fourth quarter levels? And then I had a bunch of follow-ups on Movingdots.

David Wilson: Yes. So in terms of the OpEx, I’ll start at that first one, it’s David Wilson. I know it’s got the first time you would have been on the call. That’s primarily a reduction in terms of go-forward spend. There was also some planned investments we’re going to do this year, which is a piece part of it, but the vast majority of it would be a reduction in terms of ongoing spend. And in terms of $2.5 million in contracts, Steve, again, I think predates me, but on the Q3 call, he was talking about just being a lot more disciplined in terms of the deals that we do. So there were some low margin business, which would require investment in inventory that we chose not to do. There’s also the roll-off of certain contracts we have, particularly, in EMEA, where we have chosen not to pursue that business, so that’s falling off as well. So it’s a combination of both hardware sales in addition to some reduction in terms of recurring services revenue.

Scott Searle: Great. And then on Movingdots, it sounds very exciting, but I want to make sure I’ve got a couple of the basic metrics understood. Your — the purchase price is €1. You’ve got 800,000 warrants at $7. They’re going to give you $8 million in cash. But I’m not sure if I heard the employee number, correct. Was it 50 employees or was it 115 employees? What’s the revenue run rate that you got with Movingdots coming in? It sounds like you’re bringing a very powerful data science team that’s got some specific domain expertise in the insurance market, but how quickly do you start to monetize that, how quickly can you get that integrated into the Unity Platform?

Steve Towe: So great question, Scott. So, first of all, it’s 50 employees that we’re bringing in. And if you look at Movingdots, I mean, previously stated, we wanted to get a European beachhead. We want to take a leading position in safety and sustainability and insurance. We believe that is a key market driver. We wanted to bring in some great talent to drive and expedite Unity and our data science capabilities and we’ve done that in one false soup. So we feel very good about that. And obviously, that’s supported with an ongoing relationship with Swiss Re and then providing $8.5 million in cash towards the future growth together. We’ve taken some good time to look at the go-to-market approach. That will take some time to get revenues moving.

They’ve spent an inordinate time almost a decade perfecting the solutions, which if you think about it for the insurance market to be robust stand by and ensure the risk profiles that are being put forward, it has to be bulletproof. So it’s an amazing product, it’s got modest revenues today and we look to expand in the future. We’ll give more details on the financials. We’re still under confidentiality through to close on any kind of more detail on the financials, but we’ll update that at our next call.

Scott Searle: Got you. But, Steve, the expected closing is in the current quarter. Is that correct or is this going to go into the second quarter?

Steve Towe: So 31st of March, 1st of April, I’m not sure which date yet, but very soon, three weeks to four weeks from there.