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I.D. Systems, Inc. (NASDAQ:IDSY)

Q4 2012 Results Earnings Call

March 6, 2013 4:45 PM ET

Executives

Jeffery Jagid - Chairman and CEO

Ned Mavrommatis - Chief Financial Officer

Kenneth Ehrman - President

Analysts

Morris Ajzenman - Griffin Securities

Shai Dardashti - DCM

Bryan Prohm - Cowen & Company

Operator

Good day, ladies and gentlemen. And welcome to the I.D. Systems’ Fourth Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

I would like to introduce our host for today, Mr. Jeffery Jagid, Chairman and CEO of I.D. Systems. Sir, please go ahead.

Jeffery Jagid

Thank you. Welcome to I.D. Systems fiscal 2012 year end conference call. Thank you for joining us today. I’m Jeffrey Jagid, the Chairman and CEO of I.D. Systems. Joining me are our CFO, Ned Mavrommatis; and Kenneth Ehrman, the President of I.D. Systems.

I will provide an overview of our results for the quarter, Ned will detail our financials results for both the fourth quarter and full year, and Ken will review our recent sales and operational highlights. We will then open the call to your questions.

Before we begin, let me remind everyone regarding forward-looking statements. The following discussion contains forward-looking statements within the meaning of federal security laws which are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results and other risks detailed from time to time in I.D. Systems’ filings with the Securities and Exchange Commission.

These risks could cause the company’s actual results for the current fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.

2012 was a year of progress and accomplishment for I.D. Systems. We achieved topline revenue growth across every segment of our wireless technology business, industrial fleet management, rental car management and transportation asset management.

We build up our recurring revenue stream. We maintain strong gross margins. We invested more in our patented technology to further differentiate our solutions from the competition and we continued to closely manage costs.

The result was record annual revenue of almost $45 million, a 14% increase over 2011 and our second consecutive record year. We also achieved non-GAAP net income of $0.06 per share also an annual record.

At the same time, we held SG&A expenses in check with the year-over-year increase of less than 2% compared to 2011. So we remain confident that we can continue to grow up to and beyond $15 million in annual revenue with virtually the same overhead costs that we have today.

We continue to expand our intellectual property portfolio in 2012, bolstering our solutions in every market segment. Our research and development spend grew to $4.3 million from $3.5 million last year, as we added new functionality to our wireless industrial vehicle management system, began work on the fourth-generation of that vehicle management system, deployed our third-generation rental car management device, enhanced our refrigerated trailer monitoring product and launched our new enterprise data mining and business intelligence application I.D. Systems Analytics which we view as a key component of our strategy to expand business across large scale customers.

We also invested in a self-funded lease financing program in 2012 to encourage customers to enter into long-term service contracts. While this increase the amount of cash we used in operations. We believe it was an excellent investment as it removed budgeting obstacles for many customers, shortened our sales cycles and contributed to the growth of our recurring revenue stream.

We grew revenue in 2012 not only in our industrial, vehicle and transportation asset management segments, but also in our rental car management business, where revenue increased more than 85% year-over-year through our relationship with Avis Budget Group.

We have an exclusive agreement with Avis Budget to provide wireless vehicle management systems that automate the car rental products in both traditional airport lots and remote unstaff environments like corporate campuses.

During the third quarter of 2012, we completed the first major phase of that agreement and we now have about 30,000 devices deployed on Avis Budget vehicles in North America.

As part of that agreement, Avis Budget also acquired an approximately 9% equity stake in I.D. Systems and hold warrants to purchase additional shares of our common stock in the future. Obviously, the rental car market and Avis Budget in particular represent significant upside growth potential for I.D. Systems.

It is also a market with the shifting landscape. Most recently, with Avis Budget’s acquisition of Zipcar, the car sharing company which also uses a remote wireless technology to manage its fleet.

There is understandably some concern that this development might effect how Avis Budget works with I.D. Systems going forward. But we are confident that our business will continue to evolve in a positive direction.

As Avis’ CEO, Mr. Ronald Nelson stated publicly. He doesn’t think that the acquisition of Zipcar is going to impact Avis Budget’s agreement with I.D. Systems. Mr. Nelson noted that our system is delivering benefits independent of the car sharing model by automatically reading fuel level and mileage, and providing a seamless experience for renters without human intervention.

Mr. Nelson also pointed out the increase fuel revenue generated by our system alone pace for Avis Budget’s investment in the solution. He went on to say that he expect both I.D. Systems and Zipcar to deliver big benefits.

Our exclusive agreement with Avis Budget expires in July of this year, so we expect to have greater clarity on the next phase of our rental vehicle management business before then.

I want to emphasis that we are committed to monetizing the patents we hold on wireless rental car management whether through direct sales or the licensing of our technology and we intend to vigorously protect our intellectual property in this area. In fact, we are conducting a review of competitor solutions to determine where infringements of our patents maybe occurring.

I should add that our first patent application for an automated vehicle rental system was filed in 1999, which we believe predates the commercialization of many competitive products.

I.D. Systems remains committed to executing the growth strategy that has led us to two consecutive years of record revenues and we’re focus on deepening the penetration of our solutions with core customers, especially through our new enterprise Analytics software.

We will strive to continue diversifying revenue sources by winning new customers, through both direct sales and channel partners. And we will continue our efforts to extend our market leadership through product and service innovations, vertical market focus and international expansion.

Thank you for your time today. I look forward to your questions later on the call and to reporting our further progress in 2013. Now let me turn the call over to Ned Mavrommatis to detail our financial results.

Ned Mavrommatis

Thank you, Jeff, and hello to everyone on the call. I’d like to detail our fourth quarter numbers first and then review our full year financial results. Revenue for the three months ended December 31, 2012 was $10.7 million, compared to $11.8 million in Q4 of 2011.

The decrease in revenue was due to lower sales of rental car management systems reflecting the fulfillment of our first phase of work for Avis Budget Group, which culminated in the third quarter of 2012.

During the fourth quarter, revenue from our industrial vehicle management business increased 10% to $5.4 million, compared to $4.9 million in the same period last year. Recurring revenue also increased by 10% in the fourth quarter to $4.5 million, compared to $4.1 million in the same period a year ago, and deferred revenue increased to $10.6 million at the end of the year.

Gross margin for the quarter was 45% slightly lower than the historical levels as a result of short-term increase in production and shipping costs to meet year end demand and a one-time sales of surplus inventory built several years ago exclusively from the U.S. Postal Service.

SG&A, and research and development expenses were $5.7 million and $1 million in Q4 respectively, compared to $5.5 million and $900,000, respectively, in the same period a year ago.

For the 12 months ended December 31, 2012, revenues increased 14% to a record $44.6 million from $39.3 million in 2011, driven by year-over-year sales increases across all of our product segments.

Rental car management revenue increased 86% to $8 million from $4.3 million in 2011. Industrial vehicle management revenue increased 7% to $19.1 million versus $17.9 million a year ago.

Transportation asset management revenue increased 2% to $17.6 million, compared to $7.2 million in 2011 and deferred revenue attributable primarily to transportation asset management hardware sales increased 42% to $10.6 million from $7.4 million a year ago. In addition, recurring revenue increased 5% in 2012 to $17.3 million from $16.4 million a year ago. Our gross margin for the year was 51% consistent with historic levels.

Selling, general and administrative expenses were $22.4 million, an increase of less than 2%, compared to $22 million in 2011, as we continue to closely monitor our labor and other overhead costs.

Research and development expenses increased 23% to $4.3 million from $3.5 million a year ago, reflecting the company’s investment in solution enhancement and new product development. Excluding stock-based compensation and depreciation and amortization, non-GAAP net income in 2012 was $748,000 or $0.06 per basic and diluted share compared to a non-GAAP net loss of $485,000, or $0.04 per basic and diluted share in 2011.

Our net loss for the year improved to $2.6 million, or $0.22 per basic and diluted share, compared to a net loss of $4 million or $0.36 per basic and diluted share in 2011. Our results for both the fourth quarter and full-year 2012 include an income tax benefit of $662,000 from the sale of a portion of I.D. Systems’ New Jersey net operating losses.

The fourth quarter and full-year 2011 results include an income tax benefit of $390,000. Our balance sheet remained strong. As of December 31, 2012, the company had $15.8 million in cash, cash equivalents and marketable securities, which equates to a $1.30 per share in stock.

During the year, our cash decreased due primarily to our decision to invest the company’s cash in self-funded lease financing program for customers. At December 31, 2012, note and lease receivables were $13.9 million, up from $5.3 million at the end of 2011.

Thank you for your time today. I look forward to continue reporting our financial progress to you in the future.

With that, I’d like to turn the call over to Ken Ehrman, I.D. Systems’ President.

Kenneth Ehrman

Thank you, Ned and hello to everyone on the call. I’m glad you could join us today. I’d like to begin by first mentioning that in the fourth quarter of 2012, I.D. Systems was named to Deloitte’s Technology Fast 500 Ranking of the fastest growing technology companies in North America. This award which was based on our five-year revenue growth of 130% is a nice token of achievement to end our second consecutive year of record annual revenue.

In our core business of wireless industrial vehicle management, the fourth quarter of 2012 was strong with revenue up 10% year-over-year as Ned mentioned. We continue to receive repeat orders from many of our core enterprise customers such as Ford Motor, General Mills, Kelloggs, Nestle, Procter & Gamble, Walgreens and Wal-Mart, which is a reflection of the ongoing value our systems provide.

Our technology is truly a best practice to optimize material handling safety, efficiency and improve velocity for large enterprises. Procter & Gamble is especially notable and that they are gradually expanding the use of our PowerFleet systems globally, which represent a significant growth opportunity for I.D. Systems.

Having reference installations in Asia, the Middle East and Africa, as well as the Americas and the EU that should ultimately help us capitalize on the growing demand for material handling information technology in international markets. We expect Procter & Gamble and many other enterprise customers to continue to expand their use of our solutions in 2013.

In the fourth quarter of 2012, we also won business from new enterprise customers with significant expansion potential, including one of the world’s largest tire producers, a leading global manufacturer of heavy equipment, a major European automaker, a multi-national packaging producer, a major U.S. food producer and a multi-billion dollar manufacturer of machine components.

I.D. Systems’ channel partners also deployed our solutions for new customers during Q4 across a diverse range of industries. In our transportation asset management market segment, our Asset Intelligence subsidiary continues to perform well.

Our VeriWise product family is the industry’s broadest, ranging from basic, easily installed tracking systems to the world’s most advanced refrigerated trailer and intermodal container management solutions. The battery solutions that they have are second to none.

The fourth quarter of 2012 was a very good quarter. As Ned noted, our recurring revenue in Q4 increased 10% year-over-year, thanks in a large part to our Asset Intelligence customers. During the quarter, we won new business through referrals from satisfied customers and in direct competition against competitors like SkyBitz and QUALCOMM.

Key wins announced in Q4 included U.S. Trailer Holdings and Freymiller, both privately held transportation companies with large fleets of diverse types of trailers. With respect to our rental car management business, I just want to reemphasize the market potential and reiterate the strength of our intellectual property in this area, which Jeff mentioned.

Avis Budget Group, currently our exclusive customer in this market, has stated that it now operates nearly 500,000 vehicles worldwide. Overall, we estimate the rental market may have more than four times that number of vehicles. With a proven track record of delivering compelling financial results, our rental car management system is enabling technology for this market and we’ve received a great deal of interest ahead from parties around the world.

In the first quarter of 2013, we were awarded our second patent, pertaining specifically to rental car management. This patent is for wireless, fully automated, remotely controlled vehicle rental system, enables a renter to reserve a vehicle via the Internet or smartphone, confirm a specific vehicle availability in real time by means of a wireless device inside the vehicle, automatically unlock the doors with a remote authorization signal and return the vehicle without the aid of any other person.

We are very pleased with the award of this patent. We believe our inventions will be a cornerstone in revolutionizing the car rental industry, just as electronic ticketing and checking transform the airline industry. We envision consumers taking more control of their own car rental experience and rental companies enjoying significant cost savings and revenue enhancements through wireless automation of their operations based on our intellectual property.

As Jeff mentioned, our first patent application was filed in 1999. So we are truly pioneers in the field. To further enhance this IP, we have also filed several additional related patents that are pending. Jeff noted some of the major technology enhancements, we executed were initiated in 2012, including a fourth-generation VMS product, third-generation rental car management device and a new and improved refrigerated trailer monitoring system as well as I.D. Systems analytics.

I want to talk a little bit more about analytics, as we view it as a key component of our enterprise customer expansion strategy. I.D. Systems analytics is data-driven, cloud-based software that provides a single, integrated view of industrial vehicle and trailer activity across multiple locations and generates enterprise wide benchmarks, peer industry comparisons and deeper insight into operations of our customers.

As one of the world’s leading providers of wireless management systems, we adopted unmatched database of historical asset activity from more than 50,000 industrial vehicles and about 150,000 trailers over a long period of time across diverse facility types of industries. The unique depth and breadth of the data enables analytics users to compare both industry and facility benchmarks to the performance of their own enterprise.

I’m happy to report that in the fourth quarter of 2012, we executed our first customer licensing agreements for I.D. Systems analytics. It is attracting the attention of both, long-time customers and new prospects with multi-sight enterprise environments. We look for analytics to make a growing contribution to revenue, further differentiate and add value to our solutions and help keep us at the forefront of the asset management markets that we serve.

On that note, let me turn the call back to Jeff, so he can open up the call to questions.

Jeffery Jagid

Thank you, Ken. That concludes our prepared remarks. We are now pleased to open the Q&A segment of the call. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Morris Ajzenman from Griffin Securities.

Morris Ajzenman - Griffin Securities

Hi, guys. First question, you talked about gross margins in the quarter of 45%. Can you just put a little -- help us little with the -- actually dollar amount of the some, increase on cost of goods sold. So the short-term increase in production shipping cost and secondly, what the one-time sales of inventory, what that would cause to the income statement?

Ned Mavrommatis

Hey, Morris. It’s Ned. The sale to United States processor was for $220,000 and the additional expense that came regarding production and shipping expenses had a lot to do with a big percentage of our orders that came in during the quarter, came in December. So we needed to stack up our production capabilities to make sure we get the product out. If you exclude those two items, the margins would’ve been very close to historical levels of 51% to 52%.

Morris Ajzenman - Griffin Securities

All right. And then a follow-up is, that SG&A of being up sequentially about $200,000 or whatever the amount is sequentially, is that part of this build up you were discussing right now?

Ned Mavrommatis

No. Not in the SG&A. The build up was temporary that allowed us to get some shipments in December and it’s not permanent. It was just a temporary shipment build-up. So the SG&A as you can see year-over-year and even quarter-over-quarter is primarily flat.

Morris Ajzenman - Griffin Securities

All right. So then the 5.4, 5.5 run rate is what’s the run rate going forward?

Ned Mavrommatis

That’s exactly right.

Morris Ajzenman - Griffin Securities

Okay. And last question, I think I know the answer, last year the fourth quarter, was AVIS budget by $2 million revenues?

Ned Mavrommatis

I’ll give you the exact number. $1.8 million.

Morris Ajzenman - Griffin Securities

1.8. I’ll get back in queue now. Thank you.

Ned Mavrommatis

Welcome.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Shai Dardashti from DCM.

Shai Dardashti - DCM

Thank you so much for hosting the call. I really want to thank you for the opportunity to ask the question before anything else. It’s appreciated. Well, you used the word cornerstone, where you described the patent in February. I’m obviously very excited by this word. I’m curious how I should think about it in terms of setting appropriate expectations. Would you comment what this means from a bird’s eye view, please?

Jeffery Jagid

Absolutely Shai. And I appreciate you asking the question because it provides me with an opportunity to once again highlight the significance of the patent. I think that if you follow closely what’s happening in the car rental industry. What you quickly conclude is that both large and small entities are moving in the direction of technology deployment to streamline the customer experience.

And this is something that I think will prove to be very valuable for us because we’ve been working in this space as Ken noted. And I think I might have mentioned in my prepared remarks, we were -- I think filed for our first patent in 1999.

We believe that we have a technology that’s very innovative, that’s unique and that will be very important as companies move toward automating the car handling process in that industry. So obviously, we’re proud of what we’ve done with AVIS. But I think as a result of the strength of our patent portfolio, I think the impact goes well beyond AVIS budget.

And as I mentioned in my prepared remarks, the board of I.D. Systems has made the decision to start the process of monetizing that patent portfolio. We are evaluating what’s happening with the competitor solutions. And we will proceed to vigorously and force our patent rights.

Shai Dardashti - DCM

And I’ve a follow-up.

Jeffery Jagid

Sure.

Shai Dardashti - DCM

If there’s going to be enforcement going forward. Should I -- should I budget -- is there any cash expenses for legal proceedings or is it premature to have that conversations?

Jeffery Jagid

I don’t know how premature it actually is. Obviously, we’re going to go about it in an intelligent manner. And we want to continue to be revenue driven. So it’s not really an emotional decision. However, if theirs is an -- if we are being damaged by infringement, if there was an opportunity to generate revenue than absolutely it’s an investment that we would make.

Shai Dardashti - DCM

And I see you have 71 patents from a Google search. Are there any appropriate case studies of other patents you’ve previously tried to enforce using force?

Jeffery Jagid

We’ve had success on a smaller scale with some of our patents over the course of several years. But I believe that in light of the patent protection awarded to us on the car rental application that it’s a bit more prevalent. And I firmly believe again without having the benefit of doing the detailed study at this point that we are going to be in a position where we’re going to be enforcing that -- the protection of those inventions.

Shai Dardashti - DCM

All right. Thank you very much. Good luck.

Jeffery Jagid

Thank you.

Operator

Thank you. And we have a follow-up question from the line of Morris Ajzenman from Griffin Securities.

Morris Ajzenman - Griffin Securities

Hi. Clearly, there is a lot of buzz in the air with AVIS budget and again these new patents that you have been awarded. And clearly we’re going to extrapolate, however, we want it but let’s get back to the base business, the VMS and Asset Intelligence. Going forward, I know business is lumpy but if we look out over next year or two, should we able to have a sustainable growth rate that they purchase double-digits on the top line and again understanding the lumpiness to it.

But looking at the base business and again understand wild card clearly, it’s the technology you have vis-à-vis potential upside to that technology with this AVIS budget and the patents there. But let’s talk at the base business and what is the sustainable growth rate over next few years?

Ned Mavrommatis

Well, if you look at history, what you’d see is that the deferred revenue attributable to our transportation asset management sales increased 42% during 2012. So the short answer to your question is absolutely you should expect to see double-digit growth. The pipeline today is a strong as it’s ever been. It’s not stronger that could support and facilitate that growth. And obviously, we have a lot of work to do to bring in those orders.

Morris Ajzenman - Griffin Securities

Thank you.

Jeffery Jagid

Sure.

Operator

Thank you. And we also have a question now from the line of Bryan Prohm from Cowen & Company.

Bryan Prohm - Cowen & Company

Hey, thanks. Good afternoon gentlemen. Jeff, you’re actually segue perfectly into my questions because I was going to ask you question about the growth outlet for ‘13. Since specifically I ask you to comment on the pipeline. So pipeline has to be in a position to drive double-digit growth, if I can just read between the lines of your last statement.

Is there any particular area that’s going to grow more meaningfully over the course of ‘13 amongst the product segments that you outlined in their prepared remarks. Obviously, rental car management was up the most on a year-over-year basis in ‘12. But I’ll hand it over to you now.

Jeffery Jagid

Yeah. The pipeline as I mentioned a moment ago is pretty robust. It can certainly facilitate double-digit growth. I would expect and what we’re seeing is significant demand in the vehicle management side of the business. Ken mentioned in his opening remarks and it’s a very important piece of the puzzle here was the release of an analytics product.

And that’s gaining some momentum that’s resulting in increased VMS sales. We’re now beginning to deploy it on the Asset Intelligence side of the business as well. And I would expect to see growth on VMS as a result primarily of analytics as well as Asset Intelligence. And then of course as you mentioned in framing your question, there is a business that we’re doing with -- in the rental car space.

And as I said in my comments that exclusivity goes through July. Ken alluded to the fact that we’ll be getting significant enquiries from a number of players in the space around the world, obviously as a result of our agreement with AVIS. We’re not very responsive to those enquiries but there’s a lot of opportunity there. And the program with AVIS budget continues to move into a nice positive direction.

Bryan Prohm - Cowen & Company

Great. Thanks for that. Quickly, Ned, could you go through the revenue breakdown for the quarter between asset intelligence and PowerFleet by hardware and services?

Ned Mavrommatis

Sure. The asset intelligence revenue for the quarter was $4.4 million, $3 million came from services and $1.4 million came from product. The vehicle management business for the quarter was $5.4 million, $600,000 came from services and $4.8 million came from product. And the rental car revenue for the quarter was $887,000, $270,000 came from services and $617,000 came from product.

Bryan Prohm - Cowen & Company

Great. Thanks a lot. I’ll talk to you guys soon.

Jeffery Jagid

Thank you.

Operator

Thank you. And we have another follow-up from the line of Shai Dardashti from DCM.

Shai Dardashti - DCM

Hi. I’m still fixated on patent. So I’m sorry to go back to see moments. I’ve realized that AVIS acquired Zipcar. And there clearly is a strategic relationship with AVIS. So I’m wondering how the AVIS ownership of Zipcar impacts your thinking and your strategy from a high level?

Jeffery Jagid

I’ll take that Shai. Well, let me start by saying like you, we’re also fixated on the patent and the rest of patent portfolio. And as it’s specifically pertained to AVIS and Zipcar, they’re obviously a very important customer of ours. We have no intention of pursuing any type of infringement against the very key customer.

But we’re certainly not okay with any one stealing our inventions. So to the extent that there is infringement beyond the customer, we will vigorously pursue the protection of our patents. But it’s -- right now, AVIS is a very key customer. And I don’t believe that it would be beneficial to the shareholder community for us to start fighting with the customer of ours.

Shai Dardashti - DCM

Okay. Thank you.

Jeffery Jagid

Absolutely.

Operator

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Jeffery Jagid for any concluding remarks.

Jeffery Jagid

Thank you. I would just like to thank everyone for participating on the call today. And we look forward to continuing to report on our progress throughout 2013. Thank you very much everyone.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a good day.

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