Fleetmatics' CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Fleetmatics Group (FLTX)

Fleetmatics Group PLC (NYSE:FLTX)

Q4 2012 Earnings Call

February 20, 2013, 5:00 p.m. ET


Stephen Lifshatz – CFO

James M. Travers – CEO


Ramio Lenschow – Barclays

Tom Roderick (Chris) – Stifel Nicolaus

Jaimin Soni – Bank of America

Laura Lederman – William Blair

James Faucette – Pacific Crest

Robert Breza – RBC Capital Markets


Good day and welcome to the Fleetmatics' fourth quarter and full year 2012 earnings release conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Steve Lifshatz, Chief Financial Officer. Please go ahead.

Steve Lifshatz

Thank you and good afternoon everybody and welcome to the Fleetmatics' preliminary fourth quarter and full year 2012 earnings call. Today, we'll be discussing the preliminary results announced in our press release issued after the market closed today. I'm Steve Lifshatz, Chief Financial Officer of Fleetmatics. And with me on the call is Jim Travers, Fleetmatics' Chief Executive Officer.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in the prospectus file for Fleetmatics with the SEC on January 31st, 2013 and the company's other filings with the SEC.

During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures exclude both stock based compensation expenses as well as the amortization of intangibles related to acquisitions and certain non-recurring items. These non-GAAP measures are not intended to be considered an isolation from, a substitute for, or superior to our GAAP results. And we encourage you to consider all measures when analyzing Fleetmatics' performance. A reconciliation of GAAP to non-GAAP measures is included in today's press release regarding our preliminary fourth quarter and full-year 2012 results.

In addition, please note that the date of this conference call is February 20th, 2013. And any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

And with that, I'll turn the call over to Jim. And I'll come back a bit later to provide some further details regarding our financials and our forward-looking outlook. Jim.

James M. Travers

Thanks, Steve. I would like to thank everyone for joining us on the call today. We are very pleased with our execution during the fourth quarter, which led revenue and profitability that were both ahead of our guidance.

It was a strong finish to a record year for Fleetmatics. During 2012, we saw considerable market demand for our highly differentiated software to service fleet solution for SMBs. Due to our ability to provide fleet owners with what we believe to be the industry's most powerful set of tools to help them optimize performance, reduce costs, increase productivity, and enhance revenues.

Looking ahead to 2013, we believe that Fleetmatics remains in good position to capitalize on the under-penetrated large market opportunity and fleet tracking for small and medium sized businesses. As Steve will detail in a moment, we have increased our revenue expectations for 2013 based on strong fourth quarter preliminary results and positive business momentum.

With that background, I will now review our summary level financial results for the fourth quarter.

Total vehicles under subscription increased 40% year-over-year to 231,000. And our total revenue of $35.8 million grew 38% year-over-year and was at the high end of our original guidance range. We continue to grow our subscription revenue at a much faster rate than the market, which further validates our position as the clear category leader in the SMB market.

From a profitability perspective, our preliminary adjusted EBITDA of $11.8 million increased 77% compared to the prior year period and exceeded the high end of our guidance range. The strength and breadth of our local fleet management solution combined with our efficient go-to-market strategy resulted in record subscription growth, continued low churn, and better than expected profitability.

Now I would like to provide some highlights from the quarter starting with our continued momentum with our core SMB customers. As a reminder, we believe we are the clear category leader in providing software to service fleet management solutions to SMBs. Our mobile software platform transforms our customer's fleet operations by providing unique real-time actionable business intelligence, which enables them to increase productivity and reduce costs. We do this through an intuitive graphical user interface, which is purpose built for the SMB fleet operator and provides visibility into vehicle and driver behavior.

We continue to focus on local fleets delivering a service within 100 mile radius of their headquarters location. Today, the majority of our target market businesses have no fleet management solution in place. And the owners have little to no visibility into how inefficiently their mobile assets are operating.

Our platform in solutions address the significant operational challenges of the SMB fleet operator such as inefficient routing and excessive idling, which results in wasted fuel, lack of visibility into hours worked and manual time keeping, which results in inflated payroll, and unproductive worker behavior resulting in a loss of billable hours leading to decreased revenue.

During the fourth quarter, we are very pleased with the ongoing momentum of our add-on vehicle activity, which we view as a leading indicator of the health of our SMB customers given the greater than 20% of new subscriptions during the quarter were sold into the install base. We view this trend favorably since we are insuring that our customers derive the maximum benefit from our offerings.

We also continued to expand our SMB customer base at a healthy pace bringing us to over 18,000 revenue generating customers by quarter end. In fact, we found we were able to continue to increase the size of the customers we close through our web sales activities including several that were over 100 vehicles in size. Looking at the numbers, our average customer in 2012 would have about 18 vehicles in their fleet, which is trending up. So we remain steadfastly focused on the SMB marketplace.

Another driver of our strong growth was the continued progress penetrating the larger fleet market with our SageQuest brand. For example, we continued to roll out our solution to Comcast vehicles in the U.S. market during the fourth quarter. We also installed UK based Virgin media during Q4. As a reminder, we announced this relationship last quarter, which was our first SageQuest brand sale outside of North America.

In addition, we added three new larger fleet contracts this past quarter including McNicholas Construction, Express Energy Services, and TruGreen all of which are 1,000 plus vehicle contracts. Specifically, McNicholas Construction is the leading provider of services to the UK's utility industry helping to develop and maintain the UK's infrastructure. And they've been in business since the 1940's. They provide construction and maintenance services to the United Kingdom's electric, gas, water, communications, cable, and rail utility. We were selected after one year industry study to be deployed on all of their 1,100 service vehicles. This serves as another significant UK based customer when an approve point of international expansion potential for our SageQuest branded offering.

In regards to Express Energy Services, they are a U.S. based diversified oil field service company with over 30 locations across the United States. Express offers a myriad of drilling services and also offers completion and production services including well testing, water transfer, and pumping services.

TruGreen Landcare also became a Fleetmatics customer during Q4 contracting for the SageQuest offering to the U.S. fleet of lawn care professionals.

As previously communicated, we believe we have a significant new unit opportunity with our SageQuest brand in the 100 to over 1,000 fleet market. These three wins are all testimony to the strength of this offering.

On the operational side, one of the challenges in our business is the timely conversion of a sales order into an installed unit. We have developed an operationally excellent process for reducing the time to install within our business that is helping drive our strong subscriber growth.

A good example of the effectiveness of this process was with Virgin Media when we received an order for 2,600 vehicles at the end of September, 2012. And we installed 100% of these vehicles by December, 2012. We believe that this type of operational execution is a key differentiator for the company.

As a result of our significant subscriber growth, we continue to grow our big data asset. The number of position points we are collecting continues to grow as evidenced by the approximate 35 million data points per day collected from our subscribers during the fourth quarter, which is up approximately 32 million per day, which was the number in Q3. As our subscriber base continues to grow, we are receiving billions of position points monthly. And this information is received every 90 seconds. So it is high velocity and real time. We continue to believe that the power of this data allows us to quantify the best practices we observe within and across our customer's industries. And our benchmarking capability allows us to reflect those best practices to our users in a very meaningful actionable way. Since inception, we have aggregated approximately 35 billion data points. And as we grow our subscription base, the amount of historical information continues to add significant value to our big data asset, which we believe will provide increased ARPU and competitive advantage over time.

Finally as we start 2013, I would like to review our key growth drivers. To start, the market for fleet management solutions is large, growing, and underpenetrated. We estimate that the market we serve represents more than 61 million vehicles or an approximate $30 billion market opportunity.

We also estimate the market to be only penetrated approximately 9%, which provides the company with significant opportunity to maintain our growth. We believe that our ability to leverage our highly efficient web sales model will enable Fleetmatics to continue to gain market share.

During 2012, 57% of new SMB sales were generated over the web. We also see a significant opportunity to increase sales to existing customers. We have a dedicated set of resources focused on selling add-on units, up-selling additional features, and renewing customers, and generating referrals. As I mentioned earlier, greater than 20% of new subscriptions during the quarter were sold into the install base.

Another key aspect of our growth strategy is expanding our international presence given that over 50% of our target market is outside the United States, particularly in mainland Europe and Latin America.

And finally, Fleetmatics remains committed to investing in new product development in order to extend our leadership position and our role as a market innovator. We remain focused on reinvesting in the business and committed to our new product execution of build, buy partner strategy. Our recently released Fleetmatics 9.0 was the largest released in the company's history. And we believe it set the standard for fleet management with its wide array of new features and tools.

During 2013, we also have a key product development initiative underway that will combine our product code base to a common software architecture, which we expect will result in improved long-term operating leverage with more efficient development delivery, hosting, and data mining costs.

In addition, as we have already begun in 2012, we will continue our technology refresh of our AT&T related end-vehicle devices due the announced network change to 3G planned for 2016.

So in summary, we are very pleased with our strong execution, which resulted in a great finish to the year. And we enter 2013 with good momentum, a strong and diverse customer base, and are in very good position to benefit from the large underpenetrated market opportunity worldwide.

With that, let me turn it over to Steve for further financial details. Steve.

Steve Lifshatz

Thanks, Jim.

So we're very pleased with the company's strong preliminary fourth quarter results and our ability to meet or exceed our expectations across all of the key operating metrics including revenue, adjusted EBITDA, and adjusted earnings.

As mentioned in our press release, we still have final taxation numbers open at this stage. We believe that the numbers that we have presented herein are the most conservative scenario.

Our strong results continue to be driven by our ability to add new customers in addition to providing further penetrating existing customers due to the breadth of our local fleet offering and the significant ROI achieved by our customers.

Now turning to our preliminary fourth quarter results starting with the P&L. Total revenue was $35.8 million, up 38% year-over-year at the high end of our guidance range. The primary driver of our growth continues to be net additions to vehicles under subscription, which grew 40% year-over-year to approximately 331,000.

During the fourth quarter, we had record installations, which were partially driven by the high level of activity with our larger fleet customers that Jim mentioned earlier.

It's important to remember that there isn't an expectation of winning customers the size of Comcast or Virgin Media every quarter. So these quarters with large customer deployments should still be considered the exception and not the norm.

Our net churn was 1.6% in the fourth quarter. And as a reminder, we calculate our net churn for a period by dividing the number of vehicles under subscription, which were added from existing customers over the period, less the number of vehicles under subscription lost from existing customers during the period by the total vehicles under subscription at the beginning of the period.

During the quarter, our gross churn or churn as you know it was 2% or 8% annualized compared to 1.9% or 7.6% annualized during the fourth quarter of 2011.

Now turning to expenses and profitability for the fourth quarter, on a non-GAAP basis, our total gross margin percentage was 74.6% during the fourth quarter, up 110 basis points from Q3 and up from 70.8% during the same period last year.

Now similar to Q3, the year-over-year increase was primarily due to reductions in telecommunications program costs and the effective scalability in our data centers. And while we're very pleased to deliver gross margins at the high end of our long-term target range of 73% to 75%, we expect gross margins to be slightly below this range in 2013 due to short-term incremental costs related to the combination of our product code base to a common architecture in addition to the technology refresh associated with AT&T that Jim mentioned earlier.

Once these activities are complete, we expect gross margins to trend towards second half, 2012 levels as the company realizes the efficiencies of being on a common architecture. We believe that these investments are key to maintaining our competitive advantage longer term.

In terms of our operating expenses, we continue to invest in both sales and marketing and research and development to support future growth. During the fourth quarter, non-GAAP sales in marketing expense increased 26% over the prior year period to $10.1 million representing 28.1% of revenue. The increase in sales and marketing reflects our continued investment in our web based sales infrastructure as well as our internal customer renewal team.

Now non-GAAP research and development expenses increased 30% year-over-year to $2.1 million accounting for 5.8% of revenue and reflecting our continued focus on enhancing and expanding our solutions. And of note, we capitalized $233,000 of R&D during the quarter. So on a like-for-like basis, we're still looking at approximately 29.5% growth year-over-year taking into consideration capitalization for both periods.

Now-GAAP general and administrative expenses were $5.5 million compared to $4.2 million last year. The year-over-year increase was primarily due to the cost associated with operating as a public company. Additionally, as you'll see from our reconciliations to adjusted earnings and adjusted EBITDA, excluded in these numbers are non-recurring costs totaling $1.2 million associated with litigation and settlement expenses including the expected of the PJC litigation and then defending ourselves against the Florida U.S. Prisoner Transport litigation as well as a final $50,000 in expenses related to the MSA, which was settled in Q3. As these expenses are not part of our normal operational activities, we separately identified them as an adjustment on both our non-GAAP earnings reconciliations.

Now GAAP operating income was $6.6 million, up from $2.4 million in Q4 of 2011. Non-GAAP operating income was $9 million for the quarter, or 25% of revenues compared to $4.5 million or 17% of revenues during the fourth quarter of 2011.

Preliminary non-GAAP diluted adjusted earnings per share was $0.18 based on 35.4 million. Pro forma-weighted average diluted share outstanding was at the high end of our guidance range. Now, this compares to $0.09 per share based on 29.1 million pro forma weighted average diluted shares outstanding in the year-ago period.

And again, I want to point out, the fourth quarter 2012 non-GAAP adjusted earnings includes one-time expenses of approximately $1.2 million related to litigation and settlement expenses. And also, the preliminary effective tax rate for both the current quarter and last year’s fourth quarter was 33.3% in Q4 of ’12 against 38.4% in 2011 on a GAAP basis. We’ve taken a conservative stance with this preliminary Q4 tax rate and believe that, you know, this is really a conservative view on that and it can only improve as we move towards finalization.

As a reminder, our effective tax rate benefits from Fleetmatics group being incorporated in Ireland and as a result, we expect our long-term normalized non-GAAP tax rate to be within the 12 to 15% range. And during Q4, our effective tax rate has been partially driven by a transfer we enacted during the quarter of certain of our U.S. intellectual property to Ireland and also by NOLs in certain jurisdictions for which we received no benefit. But we continue to reserve for uncertain tax positions for FIN 48 allowances until statutory periods are closed.

Fourth quarter adjusted EBITDA increased 77% year over year to $11.8 million and was above our guidance of 9.8 million to 10.6 million. As a percentage of revenues, adjusted EBITDA was 33% compared to 26% the same quarter last year. As I mentioned earlier, we’ve adjusted out a total of 1.2 million in non-recurring expenses during the quarter.

On a GAAP basis, preliminary GAAP net income per share for the fourth quarter was $0.13 per share based on 32.3 million weighted average diluted shares outstanding. This compares to GAAP net income per share of $0.03 per share based on 2.4 million weighted average diluted shares outstanding in the prior-year period.

Now, let me quickly run through the summary financial results for the full year. Total revenue for 2012 was 127.5 million, up 38% year over year. GAAP gross margin was 72.1% for the year, driving GAAP operating income of $12.4 million. Non-GAAP gross margin was 73% and contributed to non-GAAP operating income of 23.7 million, which was up 71% year over year.

Preliminary non-GAAP diluted and adjusted earnings per share was $0.55 for the year based on 30.8 million pro forma weighted average diluted shares outstanding, up 90% compared to $0.29 per share based on 28.7 million pro forma weighted average diluted shares outstanding in 2011.

Adjusted EBITDA increased 56% year over year to $34 million and as a percentage of revenue was 27% compared to 24% in 2011. A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in our press release.

Now, turning to the balance sheet, we ended the year with $100.1 million in cash and $24.1 million in debt. And during the fourth quarter we completed our IPO which generated net proceeds of approximately $93.4 million, $8.3 million of which was used to pay down debt.

The company generated $9.8 million in cash flow from operations and had capital expenditures of $6 million, which resulted in overall free cash flow of $3.8 million in Q4 compared to negative $2 million during the same period last year. And we ended the fourth quarter with an accounts receivable balance of $8.9 million, resulting in DSOs of about 23 days, which was consistent with last quarter and in line with our expectations.

Our deferred revenue balance of $26 million was down 0.4 million compared to the year-ago period and up 1.2 million versus the third quarter of 2012. And this was largely driven by the deferral of revenue recognition against payment associated with larger customers whose orders may not be fully complete.

As a reminder, we do not view deferred revenue as an indicator of our business activity for three primary reasons. First, if you remember, we had some deferred revenue that’s related to legacy customer prepayments. We had third-party leasing companies that had ceased at the beginning of 2011 and the bulk of this has been consumed now.

Secondly, we’ve historically allowed customers to prepay full and periodic amounts towards their subscription to improve our cash flow in exchange for discount and while up-front payments still occur, they’ve sharply declined in frequency as the cost of our capital and corresponding discounts has decreased.

Lastly, as our billing is often ahead of our ability to recognize revenue, particularly with larger customers, a portion of the deferred revenue relates to that timing difference and is recognized over the term of revenue recognition, generally 36 months. And this is what primarily drove the increase in Q4.

As a result, we expect the overall trend for deferred revenue to continue to modestly decline for the next several quarters and then essentially stabilize and we’ll therefore not focus on it in the future as a key metric for Fleetmatics.

Now, I’d like to finish with some thoughts regarding our financial outlook for 2013 starting with the full year.

We’ve entered the year with good momentum and Fleetmatics remains in a position to increase market share and extend our leadership position as we continue to leverage both our web-based SMB focus sales model as well as our larger fleet market direct selling capability. We’ll also continue to invest in new product and feature development. And while there continues to be some level of volitility globally, we are increasing our revenue outlook for the full year 2013 as compared to the initial views that we shared on last quarter’s call. And we expect to provide quarterly updates to our outlook over the course of the year as we continue to gain more data points and visibility.

So from a full-year 2013 perspective, we expect total revenue to be in the range of 162.5 million to 164.5 million and that represents year-over-year growth of 28% at the midpoint, an increase form our previously-announced preliminary guidance for baseline growth rate of at least 25% in addition to being off of a higher base due to the over performance in Q4.

We expect 2013 adjusted EBITDA of 45 million to 46 million, which represents an adjusted EBITDA margin of 28% at the midpoint, consistent with our previously-announced preliminary guidance and we believe that there’s material leverage in our m, but we’re focused on reinvesting the business in the short term to drive increased penetration and revenues from our highly profitable customer base.

We expect full-year non-GAAP diluted adjusted earnings per share, which excludes stock-based compensation and amortization of intangibles, among other things, to be in the range of $0.69 to $0.72 per share based on an approximately 36.9 million weighted average diluted shares outstanding and a tax provision of approximately 5.7 million, excluding FIN 48.

While I’m mentioning tax, let me remind everybody that we expect to reverse $16 million in FIN 48 reserves from our GAAP numbers in Q4 of 2013 or net amount of 14.5 million for the year and that’s driven by certain statutory periods expiring for which we’ve been accruing reserves. So this non-GAAP tax provision is net of that reversal but I want to point out that tax piece.

Finally, we anticipate using approximately $35 million for capital expenditures. In addition, we continue to expect our free cash flow to turn positive in Q4 of 2013 as we achieve additional scale in the overall business. And then we expect our free cash flow to begin scaling nicely on an annual basis in 2014 and beyond. And as a reminder, our subscriber base has a powerful free cash flow profile where we generate strong cash contributions per unit over the lifetime of the subscription.

Turning to the first quarter of 2013, during the first quarter, we’re targeting total revenue of 37.2 million to 37.6 million or growth of 34% to 35% year over year. Now, it’s important to note that the Q1 revenue growth rates are being compared against the quarter, which had no Comcast or Virgin Media revenue. And as a reminder, our full-year 2013 guidance implies year-over-year growth rate of 28% at the midpoint.

Now, we’re currently targeting adjusted EBITDA of 8.7 million to 9.1 million for the first quarter, representing an adjusted EBITDA margin of 24% at the midpoint. The sequential decline in adjusted EBITDA margin in Q1 to Q4 represents our typical increase in costs early in the year associated with payroll taxes, sales kick offs higher marketing budgets and in addition to the increase in incremental costs related to development and launch of new platform we mentioned earlier.

Non-GAAP diluted adjusted earnings per share, which excludes stock-based compensation and amortization of intangibles among other things is expected to be in the range of $0.12 to $0.14 based on approximately 36.2 million weighted average diluted shares outstanding and a tax provision of approximately $850,000.

So in summary, our fourth quarter results exceeded our expectations across all of our key metrics. We’ve proven our model. Our momentum is continued into 2013 and we continue to expend our market leadership position through our differentiated Software as a Service Fleet Tracking platform for the SMB market.

And with that, we’d be happy to take any of your questions at this time. Jim.

James M. Travers

Can we open for questions?

Question-and-Answer Session


Thank you. (Operator instructions). We’ll take our first question from Ramino Lenschow of Barclays.

Ramino Lenschow- Barclays

Hey. Thanks for taking my question, and congratulations to a great second quarter as a public company. Quick one from me: If you look about the growth drivers, you mentioned that you’re not about big deals, but obviously saw a nice increase. And I was wondering especially about the European side. You quoted a number a pretty big deal in the U.K. Can you just talk a little bit about your plans for 2013, about the product you want to push on the International side, and how we have to think about big deals in general? Thank you.

James M. Travers – CEO

This is Jim, I’ll take that one. Primarily as you can see we have started to gain some momentum specifically in the United Kingdom with the SageQuest brand. With the Virgin Media, when in announcing the McNicholas win in Q4. So, in the near term, we’re going to be very focused on the U.K. market with that brand in 2013. We are continuing to evaluate mainland Europe as a potential adjacent market opportunity for us. At this stage, we have no hard plans to enter mainland Europe in 2013, but we’re going to continue to look at the economic conditions on the ground, continue to evaluate the competitive landscape, and we’ll look at that very thoughtfully in the back-half of the year to determine whether we think the entry is well timed for us.

So, in the near-term, we’re going to be very focused on expanding the SageQuest brand specifically in the U.K. and in Ireland. And obviously the Fleetmatics Core Solution has been there from our inception.

Ramino Lenschow- Barclays

Perfect, thank you.


We’ll go next to Tom Roderick with Stifel Nicolaus.

Tom Roderick (Chris) – Stifel Nicolaus

Hey guys, this is Chris [inaudible] for Tom. Good job on the quarter.

Ramino Lenschow- Barclays

Hi, Chris.

Tom Roderick (Chris) – Stifel Nicolaus

So, just a quick question regarding, you know the assumptions we should be thinking about for 2013. I think you mentioned a gross churn was around 8%, and I didn’t quite catch the net churn number. So if you could repeat that? So, it does seem like, you know, you can get to the guidance range fairly comfortable with, you know a net-add number that is very similar, perhaps even slightly below what you did in 2012? So, just wondering, is that the right way to look at it, and if so, is there something that you’re seeing out there that’s maybe causing you to be a little bit more cautious on the pace of net-adds going forward? Thanks.

Stephen Lifshatz - CFO

Just to get to your question, the net-churn was 1.6% in Q4, and remember that net-churn is a favorable if it’s above zero. So, that means that we’re selling more back into our existing base, than we’re losing. And as Jim mentioned you know that number has consistently been 20% or higher for probably the last eight or more quarters running, so you know, we’re pretty thrilled with what’s been going on relative to the existing customer base.

That gross churn number of 8% annualized that I mentioned, really reflects, you know, if you we’re to look at it in a traditional manner – listen, when we lose customers, the bulk of the time it’s generally because they’re going out of business. We’re dealing with quite a few SMB’s here. You know, they run into their challenges, we work with them, but we also know when to say goodbye, and we’re running a business here.

So, that number is probably going to remain reasonably constant depending upon what happens in the economy. We can’t see around corners, we’re bringing up our guidance as you heard, and I think that’s really the way that we want to think about it. For the time being, were pretty optimistic, but we did have some unique drivers remember in 2013, the likes of Comcast the likes of Virgin Media that were a bit of a step curve in the growth.

And I’ll say it again, I did say it earlier. We’ don’t necessarily have one of those that you can expect each and every quarter.

Tom Roderick (Chris) – Stifel Nicolaus

Got it, great. So, I guess just piggy-backing on Ramino’s question. So, is Comcast pretty much entirely installed at this point, or close to it? And are there any other kind of accounts like that, that are “back logged” into FY13?

James M. Travers – CEO

This is Jim. To give you some ideas of where we stand with Comcast, we’ve got orders for over 14,000 vehicles in 2012. We’ve installed slightly over 12,500 of those, so we do have a little bit of hangover, which will carry over – I should say that we’ll get in this quarter.

To answer your question, there are not many Comcast sized deals available, certainly in North America and really globally. And certainly not ones that we overtly target. That win allowed ourself to have a good match with our product capabilities.

So, that said, if you noticed what we announced, the three deals: TruGreen, and the other opportunities, McNicholas in the Q4, they were more of where I would say you’re going to see us really focus when we get to the larger fleets, which is really focusing on fleets that are between 100 and over 1,000. In that particular case, those three new contracts were in the thousand plus range. So, I think we feel very good about that 100 to 1,000 plus fleet size market with the SageQuest brand as it serves itself well competitively. And that’s more likely where you’re going to see us quarter-over-quarter, you know, be performing, as opposed to the Comcast 14,000 plus type of opportunities.

Tom Roderick (Chris) – Stifel Nicolaus

Great. Thanks for the clarification. Thank you very much.

James M. Travers – CEO

Thank you.


We’ll go next to Jamin Soni with Bank of America.

Jamin Soni – Bank of America

Hi, thanks guys. Just want to – Jim, I just wanted to quickly ask you a couple of questions. Regarding the penetration within the [inaudible] It’s good to see that you guys continue to do that very well. Is there any way to kind of (fine) the opportunity here, in terms of how penetrated you guys are roughly within the base of customers you have?

And secondly, you talked about the number of key elements that you continue to capture, and how the growth – and see that as a driver of ARPU. I wanted to understand that a little bit better, because my understanding is that you don’t charge for the benchmarking today. Is there any additional pricing, price increases you get for providing customers that information?

James M. Travers – CEO

Well let me handle your first question, which was the penetration of the customer base. You know, as I mentioned and, Steve reiterated. You know, we’re seeing north of 20% monthly numbers of net new vehicles sold back to our customer base, which we see as very healthy given what’s happening.

So, we don’t have a real good gage on, you know, exactly saying “Well, of X amount of vehicles that are there, how many do we really have with our customers”. So, that’s not something we track. What really is happening here, a lot of the cases, is it’s really the health of our customers that we’re adding vehicles to their fleets based on their feeling good about their business and the new contracts that they have.

So, with that said, we’re cautiously optimistic that that number will continue to operate within that 20% plus range. And in fact we have a dedicated set of resources focused on helping us make that happen. So, we still will see that as a very fertile ground for us going forward and a healthy one.

On the data element side, you’re correct in that today, there aren’t any specific business intelligence type of features that we’re selling back to the base that I can highlight. Where we’re getting, you know, X amount of incremental ARPU for.

Now having said that, we’re looking at it at this stage of really continuing to provide the customer with some unique capability of features that we think can have a lot of value over time, and starting to release those, not charging for them, but it’s giving us a great opportunity to see how the customer is using that feature, and what the uptake is.

So, as we look at our product management of the whole BI suite over time, and taking the value of that data asset and monetizing it. I think we’re going to start to see in the back-half of 2013, as we get into some new releases, that we might have a good opportunity to start to monetize some of those BI features back to the customer base, that can help us increment ARPU.

So, right now I would say we’re doing a lot of customer intelligence if you will, about how they’re using and thinking about some of those capabilities, the historical information we’re using. And I think that’s going to guide us very nicely from a product management perspective on how we might configure some capability in the back-half of ’13.

Jamin Soni – Bank of America

Got it. Thank you very much. And I’m assuming that’s not part of your guidance right now, is that correct?

James M. Travers – CEO

That’s correct.

Stephen Lifshatz- CFO

It is not.

Jamin Soni – Bank of America

Okay. Thanks guys. Steve, just one really quick one for you. Just thinking about the (NASDAQ:ADNT) and the network [inaudible] you’re going to be working on next year. Is there anything that we should think about specifically in terms of CapEx that goes in there?

Stephen Lifshatz- CFO

Yes. You know, I shared that the CapEx number is going to be $35 million. One of the things to keep in mind is that we really, you know, started this during 2012. So, it’s become part of the internal workings of the way that our numbers are already working. Now, we’re going to be certainly making sure that we’re focusing on that in the future, probably to a higher degree as we get closer and closer. We’re probably unique in that we’re, you know, ahead of the game here. We’re being very thoughtful about the way that we’re managing it. But I don’t think that there’s anything unique at this stage that you should have to consider other than the numbers that I’ve already shared.

Jamin Soni – Bank of America

Got it. Thanks guys, and great quarter. Thank you very much.

James M. Travers – CEO

Thank you.


We’ll go next to Laura Lederman with William Blair.

Laura Lederman – William Blair

Thank you for taking my questions, and good quarter. Can you talk a little bit about the competition? May be give us an update of who you see at the low end, who you see at the high end, any changes there? For example: Any changes in pricing? Are you seeing certain competitors more? Just a general update on what you’re seeing out there?

James M. Travers – CEO

This is Jim. On the competitive basis, Laura, really if you take a look at it from, you know, our last call to this one, no real change competitively that we’ve seen. You know, most of the competitors in the low end, in the U.S. we would compete against Teller Track we see pretty consistently, as one particular company that competes with us specifically in the kind of the 5 to 100 range. There’s not been any real change there. ARPU continues to be pretty stable, if you look at it from a quarter-over-quarter perspective.

So, on a general basis, we see the same competitors, and we haven’t seen anything from them that is, you know, that I would have to note between the last quarter, last time we talked.

Laura Lederman – William Blair

Can you talk a little bit about, you mentioned long-term you’d want to go International, when you look at that in the second half of the year to think of timing. Would that be through acquisition more likely to go to Central Europe, or is that something that you would build out organically? Maybe talk about what you’re thinking strategically when you do go into Europe.

James M. Travers – CEO

I would say that the way that we’d be thinking about it at this stage, is doing it organically. As you know, we’re already in the region in the U.K. and Ireland with a good subscriber base there. We have a full data center in Dublin that can support, you know, the implementation of our solution in mainland Europe, if we were to go there.

So, the way that I’m thinking about it, primarily is doing it organically. That said, if there was an opportunistic acquisition, it might make sense. Regionally we obviously would consider it. But primarily I’d be looking at it doing it organically.

Laura Lederman – William Blair

Final question for me; Was there any part of the business that came in well above the what you thought, anything that was slightly below what you thought? In other words what variances did you see versus expectations?

James M. Travers – CEO

Well, if you take a look at it, again part of our core strategy, I think it’s [inaudible] noting, is the fact that we have really focused on taking our solution and tailoring around brands for sizes of markets that they were best served to go after.

So, that is served us extraordinarily well. So, we’ve got a very good efficient process through our Web sales model and with the Fleetmatics branded product, in its intuitive nature to go after that 1 to 100, which again is the most underpenetrated part of the market. We have seen very good consistent growth from that effort.

And then certainly, blending into, which was the strategic rational when we acquired the SageQuest product, which again proved our thesis out. Which is, we believe we bought the best in class product for that 100 to 1,000 plus kind of market. And we’ve seen significant growth from that brand as well. Obviously as you can see, some of the wins that we had in 2012 in Q4,

we expect that to continue, so really, at the overall level, I feel really good that we’ve got really good solutions, best in class, for the two parts of the market we’re actually attacking.

Laura Lederman – William Blair

Thank you so much.


We’ll go next to Brendan Barnicle with Pacific Crest

James Faucette – Pacific Crest

Thank you very much. This is James Faucette for Brendan. Guys, I just had a couple of questions. First, can you give us any insights about attach rates on some of the incremental value-added services like Garmin Integration and Gas Card, et cetera in the existing sub base thus far?

James M. Travers

Yeah, you know, we kind of look at this on a couple of different dimensions. One is, you know, what is the take rates relative to new customers and what is the ability when we are selling to an existing customer that they’re going to add this one while we’re touching that existing customer for renewal as well as, you know, just kind of generally speaking about the overall base. And from the overall base perspective, we’re probably below 15% penetrated for products. Having said that, we’re seeing that typically when we sell a new customer, probably about 30% of those customers are taking one or more of the incremental products. And interestingly, when we’re going back and renewing or upselling an existing customer, we’re seeing those rates in the 40 to 50% range because we have an opportunity to speak to that customer and really share with them the value that we can provide them and they’re already a user of the product, they’re seeing great ROI so this is just one more thing that seems to make a lot of sense.

James Faucette – Pacific Crest

That’s great. Do you have any track record yet on retention, particularly among the new customers for those?

James M. Travers

As far as the incremental products?

James Faucette – Pacific Crest


James M. Travers

You know, it’s a SaaS agreement and I don’t want to color it in the wrong way, but you know, when a customer engages with us they’re engaging for a set term, typically 36 months and we certainly try to do that on renewals that we’re touching customers as well. So once they’ve signed up for it, it would be pretty unusual for the customer to determine that they don’t want that particular piece of that. So you know, I’d suggest that more than 99% of the time, once a customer has taken this, it’s going to stick with them.

James Faucette – Pacific Crest

That’s great. And then turning to the larger fleets that you’ve highlighted over the last couple of quarters, Virgin Media and Comcast, are you know fully penetrated into their fleets for all practical purposes or do you see opportunity for additional vehicles within those fleets?

James M. Travers

I would say that Virgin Media, we’ve pretty much penetrated the majority of the vehicles that are going to be available to us. In the case of Comcast, there are some incremental vehicles to expand to, and non-committed to them I might add. So these are not committed orders from Comcast at this juncture based on our original contract, but there are additional vehicles at Comcast that we would obviously like to expand to, but again, uncommitted by them. So there is some additional vehicles with Comcast.

James Faucette – Pacific Crest

That’s great. And then looking at the, you know, you’ve mentioned over the last few months the work to integrate the SageQuest and Fleetmatrics’ platforms during 2013. Can you give us any update on progress or at least how we should be able to keep track of that process as we go through calendar 2013?

James M. Travers

Yes. I mean, it’s been an ongoing initiative inside the company now. We started in the back half of ’12, so the answer is it’s an ongoing activity, a very significant one. It’s the number one ranked program for us inside the company and we would look to get to market with our – say our new architected product sometime in the Q3 time period. So in terms of monitoring progress here as we go, we can update you as we move forward here in the next few calls.

James Faucette – Pacific Crest

That’s great. Thank you very much.


(Operator Instructions). We’ll go next to Robert Breza with RBC Capital Markets.

Robert Breza – RBC Capital Markets

Hi. Congratulations on the quarter, first of all. Thanks for fitting me in here. Maybe just a follow up to the last question. Steve, maybe – how much do you think SageQuest represents, you know, from your full-year outlook for next year? Do you think SageQuest is, I guess, just from a percentage maybe even a range, that would be helpful.

Stephen Lifshatz

Yeah, you know, we really don’t break out the different product lines. You know, the economics are very much the same, the products themselves are similar. While the SageQuest product is geared towards a larger customer set, I think one of the things that we shared with you is that we’re also seeing the Fleetmatics product be able to be sold into appropriate larger customers as well at this stage. So I just don’t want to start committing to break out by product lines at this place. I’m sorry.

Robert Breza – RBC Capital Markets

That’s fair enough. And maybe just one last housekeeping item. What – I’m not sure if I saw it in the press release, but what tax rates will you be assuming for next year?

Stephen Lifshatz

Yeah, I gave you in the release the tax numbers that you should be assuming. I also, you know provided guidance that the long-term tax rate is that, you know, kind of 13 to 15% range and we’ve got some noise going on next year as you start thinking about taxes. We continue to accrue our UTP and FIN 48 balances for the first three quarters of 2013 and then in Q4 when the statute period expires for one of the larger regions, we’re going to be seeing a pretty significant hopefully credit of that tax to the tune of $16 million. So I shared with you that we’ll have 14.5 million net FIN 48 and I believe I also shared a tax number specifically for that that you can think of in terms of when you’re looking at adjusted EBITDA and the like. I think for what we said for the Q1 period was 850 and what we said for the full year period – I’m just looking to make sure I’ve got the right numbers here, it’s about $5.7 million in tax.

Robert Breza – RBC Capital Markets

Great. Thank you for the clarification.

James M. Travers

And just to kind of add to that, you know, you probably noted on our tax at this point that it’s preliminary. We’ve had a lot of moving pieces this past year. We’ve got some pretty interesting opportunities going on from taxing clearly with this retrenchment of the UTPs that are out there. We’ve also had an IP transfers during this past quarter and we’ve had some abilities to apply NOLs to prior periods and we want to make sure that we’re maximizing what the taxes are. So I did want to also comment that relative to Q4 of 2012 and for the year there might be some positive movement on our taxes as we’ve shown you preliminarily as well.


That concludes today’s question-and-answer session. I will turn the call back over to the speakers.

James M. Travers

Okay, thank you. Thanks for taking the call today. As you can see, we’ve had a very strong year and a good Q4 close to the year and we feel pretty good about the momentum we’re building into 2013. So with that, thanks again for participating and look forward to talking to you on our next call.


This concludes today’s conference. Thank you for your participation.

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