Fleetmatics Group's CEO Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Fleetmatics Group PLC (FLTX)
by: SA Transcripts

Fleetmatics Group PLC (NYSE:FLTX)

Q1 2013 Earnings Conference Call

May 08, 2013 5:00 pm ET

Executives

James M. Travers - Chief Executive Officer

Steve Lifshatz - Chief Financial Officer

Analysts

Raimo Lenschow - Barclays

Chris Koh - Stifel Nicolaus

Jamin Soni - Bank of America

Robert Breza - RBC Capital Markets

Brendan Barnicle - Pacific Crest Securities

Operator

Good day and welcome to the Fleetmatics' First Quarter 2013 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Steve Lifshatz, Chief Financial Officer. Please go ahead, sir.

Steve Lifshatz

Thank you and good afternoon and welcome to the Fleetmatics' first quarter 2013 earnings call. Today, we'll be discussing the 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 20-F filed for Fleetmatics with the SEC on March 29, 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 share based compensation expenses and the amortization of intangible assets as well as non-recurring items. These non-GAAP measures are not intended to be considered in 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 first quarter results.

In addition, please note that the date of this conference call is May 8, 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 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 strong execution during the first quarter, which once again led revenue and profitability that were above our guidance. It was a strong start to the year for Fleetmatics which was primarily driven by the continued market demand for our solutions. Given our growing brand recognition, differentiated go-to-market strategy, the scalable platform, and strong capital structure, we continue to be in a position to capitalize on the large underpenetrated market opportunity in fleet tracking for small and medium businesses. As Steve will detail shortly, we have again increased our revenue expectations for 2013, given our strong first-quarter results and ongoing positive business momentum.

Now, I will provide a summary level review of our strong financial results for the first quarter and share with you how we will continue to execute on our growth strategy. Total vehicles under subscription increased 39% year-over-year to 356,000 and our total revenue of $38.4 million grew 38% year-over-year and was above the high end of our guidance range. We continue to outpace the market growth with our new subscriber acquisition rate and our subscription revenue growth. Regarding profitability, our adjusted EBITDA was $11.1 million, an increase of 81% compared to the prior year period, and significantly above the high end of our guidance range.

Now I would like to describe some business highlights from the quarter, starting with our continued strong momentum with our differentiated web selling strategy to our targeted SMB customers. We continue to see strong growth selling over the web. Over 60% of our net new SMB subscribers were sold over the web in the quarter. Our web selling strategy continues to be a highly efficient process for reaching the most underpenetrated part of our market. We continue to add additional sales headcount throughout the quarter within each of our web selling centers. Our focus continues to be on local fleets delivering a service within 100 mile radius of their headquarter location. The majority of our target markets are businesses that currently have no fleet management solutions in place and the owners therefore have little to no visibility as to how inefficiently their mobile assets are operating. Our platform and solutions address the significant operational challenges that the SMB fleet operator faces.

Specifically, our recent customer research showed that vehicles operating without a fleet management solution were idle for 696 minutes per day on average, but by implementing a GPS fleet tracking solution, SMB fleet owners can reduce vehicle idle time by 25% on average leading to significant fuel savings and reduced emissions. These are visible, measurable hard dollar savings which our customers are benefiting from deploying our solutions, and is the key driver of why we win, why we grow, and why we have confidence in our business model.

Here is a case in point. At the Field Service Show in Palm Springs a few weeks ago, the Head of Service for Comcast's West Division, which consists of about 5,500 vehicles, presented to the audience how they reduced over $750,000 a month from their fuel and overtime costs since deploying our solution. Overall, they are saving approximately $25,000 per day in this one division which represents about 25% of Comcast entire fleet. They are seeing real hard dollar savings, and additionally, the solution is helping them drive their customer appointment windows from four hours down to two hour windows, making them much more efficient and improving their customer service. It's hard dollar savings like these that demonstrate the power of our return on investment model.

Overall, we continue to grow our customer at a significant pace, bringing us to over 19,000 unique customers by quarter end, as related new sales activities were very strong for our SMB customer set and the average new customer order size during the quarter was about 14 subscriptions which has been trending up sequentially. New customers came from a broad range of our target market with continued expansion across all of our served markets. In this tough economy, prospects are seeing the hard dollar value and rapid return on investment our solution delivers, and as a result, we continue to add sales headcount throughout the year.

During the first quarter, we also were very pleased with the continuing momentum of our add-on vehicle activity which we view as a leading indicator of the health of our SMB customers, given that greater than 20% of new subscriptions continue to be sold into the installed base. This validates our customers are seeing the value and want more, whether it would be from adding new vehicles, new regions, or new divisions. Our add-ons come from customers of all fleet sizes. Most predominantly in the quarter, we saw significant add-on activity with several large SageQuest brand customers.

For example, Johnson Controls, a globally diversified technology industrial company, and they are an existing customer, which was closed in Q3 of 2012, added over 1,600 units during the quarter bringing their total subscriptions to approximately 4,000 across the United States and Canada. Their employees create products, services and solutions to optimize energy and operational efficiencies of automobiles and buildings, including icons such as The Pentagon and The Empire State Building. The expansion was driven by new divisions adding our solution after seeing the benefit being derived by the divisions already subscribed. All of their technicians are now utilizing our solution and it highlights how the originally implemented regions drove the sales to the newly added regions during the first quarter to real measurable hard dollar returns.

In addition, one of our major customers, a leading North American cable company, not only early renewed 9,000 subscriptions with us but they also added our solution to another 2,000 of their vehicles. In addition, they replaced the competitive offering in another division for an additional 4,000 vehicles. So Fleetmatics is now their coast-to-coast fleet management solution provider. Once complete, we will have over 15,000 vehicles installed. When combined with our Comcast win in 2012, Fleetmatics now has the two largest cable media companies in North America under contract for their entire fleet.

So these are a couple of examples of the success of our model. We provide a quality product and customer experience, the customers get measurable returns on their subscribed vehicles and we grow throughout that customer, and this happens across all fleet size customers. That's another way we grow this business, through our land and expand strategy being executed by our customer experience function.

As related, we continue to invest in our web sales force as the majority of our new sales activities during the first quarter came from our SMB web sales team, providing that the customer set we serve remains underpenetrated and extremely focused on saving money and controlling costs. During the quarter, we expanded our web selling centers in Florida as well as our offices in United Kingdom and our sales centers in Cleveland and Charlotte.

In regards to our big data asset, our ongoing subscriber growth momentum continues to result in an increasing number of position points we are collecting. An example of these position points are, attributes such as location, speed, island and driver behavioral information. We collected 41 million position points per day from subscribers during the first quarter, up from approximately 35 million during Q4. 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's high velocity and near 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 customers' industries and that our benchmarking capability allows us to reflect those best practices to our users in a meaningful, actionable way.

Since our inception, we have aggregated approximately 38 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. This data asset contributes to the value our customers receive and in turn our low churn rate. Over time, we believe that the power of this historical data collected will be a strategic competitive advantage for the Company.

Finally, in regards to our progress expanding our international presence, during the quarter, revenues outside of North America increased 17% year-over-year during the first quarter. Despite the tough market conditions in Europe, we continue to believe that international expansion is a significant growth opportunity for Fleetmatics, especially given that over 50% of our target market is outside the United States, particularly in Mainland Europe and Latin America. We continue to evaluate both markets for entry in 2013. While we continue to focus on organic market expansion within our current markets, we remain committed to pursuing additional growth opportunities from additional product additions as well as developing new channel partnerships that can extend our ability to generate new revenue streams for our business. There are multiple avenues for future revenue growth and we continue to evaluate all of them.

An example of our emerging channel partnerships is our recently implemented national referral relationship with Verizon. We have executed a contract and are now a Verizon solutions partner. Verizon's SMB sales force refers qualified targeted customers to Fleetmatics, we pay a small referral fee to their sales representatives and we close the business and execute the contract on our paper. Early indications have been promising. We will continue to look at channel partnerships to allow us to sell in an efficient way and complement our current go-to-market strategy.

So, in summary, we are very pleased with our strong revenue growth and execution during the first quarter which was primarily driven by the ongoing demand for our core SMB customers. 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 revenue, continues to facilitate our continued growth rate. In addition, we continue to invest in new product development, new sales channels, and operational efficiencies which we expect to further position Fleetmatics 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. Now we are very pleased with the Company's strong first quarter results and our ability to exceed our expectations across all of the key operating metrics, including revenue, gross margin, adjusted EBITDA, adjusted earnings, and free cash flow. Our strong results continue to be driven by our ability to add new customers in addition to further penetrating the existing customers due to the breadth of our local fleet offering and the significant return on investment achieved by our customers.

Now turning to our first quarter financial results, let's start with the P&L. Total revenue was $38.4 million, up 38% year-over-year and exceeded our guidance range of $37.2 million to $37.6 million. The primary driver of our growth continues to be net additions to vehicles under subscription which grew 39.1% year-over-year to over 356,000. During the first quarter, our installation activity was primarily driven by the continued strong activity with our core SMB fleet customers that Jim mentioned earlier. To a lesser extent, installation activity continues to benefit from the larger fleet customers such as Johnson Controls. And as a reminder, there isn't an expectation of winning customers in the multi-thousand unit range each quarter, so these quarters with large customer deployments should still be considered the exception and not the norm.

Our quarterly net churn was 1.3% in Q1, 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. So during the quarter, our gross churn rate was 2.2% or 8.8% annualized and that's compared to 2% or 8% annualized during the first quarter of 2012.

Now turning to expenses and profitability for the first quarter, on a non-GAAP basis, our total gross margin percentage was 74.2% during the first quarter compared to 70.1% during the same period last year. Now similar to the past couple of quarters, the year-over-year increase was primarily due to continued reductions in telecommunication program cost and the effective scalability in our data centers, and while we are very pleased to deliver gross margins within our long-term target range of 73% to 75%, we do continue to expect gross margins to trend slightly below this range in the latter part of 2013 due to short-term incremental costs related to the combination of our product code base to a common architecture in addition to the ongoing technology refresh associated with AT&T. Once these activities are complete, we expect gross margins to trend back towards the higher 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 first quarter, non-GAAP sales and marketing expense increased 30.6% over the prior year period to $11.9 million, representing 31.1% of revenue. The increase in sales and marketing reflects our continued investment in our expanding sales infrastructure as well as our internal customer renewal team.

Non-GAAP research and development expenses increased 29.1% year-over-year to $2 million, accounting for 5.3% of revenue, and reflecting our continued focus on enhancing and expanding our products and solutions, and of note, we capitalized $400,000 of R&D during the quarter versus $235,000 a year ago. So, on a like-for-like basis, we're looking at approximately 34.4% growth year-over-year taking into consideration capitalization for both periods. Non-GAAP general and administrative expenses were $6.7 million compared to $5 million last year. The year-over-year increase was primarily due to the costs associated with operating as a public company.

As you'll see from our reconciliations to adjusted earnings and adjust EBITDA, excluded in these numbers are non-recurring non-operating costs with $0.4 million in additional costs associated with litigation expenses in defending ourselves against the Florida class-action litigation. We also had $0.6 million of expenses related to our secondary offering during the quarter. Now as these expenses are not part of our operating activities, we separately identified them as an adjustment on our non-GAAP earnings reconciliation.

Non-GAAP operating income was $7.9 million for the quarter or 20.4% of revenues compared to $3.8 million or 13.8% of revenues during the first quarter of 2012. Non-GAAP diluted adjusted earnings per share was $0.15, based on 36.2 million weighted-average diluted shares outstanding, and was above our guidance range. Now this compares to $0.10 per share based on 29.2 million pro forma weighted average diluted shares outstanding in the year-ago period.

The effective tax rate for the current quarter and last year's first quarter were 41.6% and 41.2% respectively, and as a reminder, our effective tax rate benefits from Fleetmatics Group PLC being incorporated in Ireland. As a result, we continue to expect our long-term normalized non-GAAP tax rate to be within the 12% to 15% range. During Q1, our effective tax rate was partially driven by a transfer we enacted during the previous quarter of certain of our U.S. intellectual property to Ireland and also affected by additions to our FIN 48 reserves and the accounting of certain tax credits. And just for reference, the organic operational rate, which would exclude specific items, was approximately 23%. We'll continue to incur additions to our FIN 48 reserves until certain statutory periods are closed.

First quarter adjusted EBITDA increased 81.1% year-over-year to $11.1 million, and was significantly above our guidance of $8.7 million to $9.1 million. As a percentage of revenues, adjusted EBITDA was 28.8% compared to 21.9% for the same quarter last year, and as I mentioned, we've adjusted out a total of about $1 million in non-recurring, non-operational expenses during the quarter.

On a GAAP basis, GAAP operating income was $5.8 million, up from $2.1 million in Q1 of 2012. GAAP earnings per share for the first quarter was $0.08 per share based on 36.2 million weighted average diluted shares outstanding, and this compares to GAAP earnings per share of $0.03 based on 2.6 million weighted-average diluted shares outstanding for Q1 of 2012. 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 quarter with $102 million in cash and $24.4 million in debt. During the first quarter, we completed a follow-on offering of 8.1 million ordinary shares, of which the Company did not receive any proceeds since they were sold by existing shareholders. During the first quarter, the Company generated $12.1 million in cash flow from operations and had capital expenditures of $8.5 million, which resulted in an overall free cash flow of $3.5 million compared to negative $0.9 million during the same period last year.

We ended the first quarter with an accounts receivable balance of $10.2 million, resulting in DSOs of 25 days, which was partially driven by timing of invoicing on annualized payments. Our deferred revenue balance of $29 million was up $2.9 million compared to the year ago period and up $3 million versus 4Q of 2012, driven by a combination of the deferral of revenue recognition against payments associated with larger customers whose orders may not be fully complete, as well as billings for customers on annual payment plans, and as a reminder, we do not view deferred revenue as an indicator of our business activity, and that's for the following reasons.

Firstly, if you recall, we've had some deferred revenue that's related to legacy customer prepayments via third-party leasing companies. That ceased at the beginning of 2011 and the bulk of that's been consumed now. We also allow customers to prepay full or periodic amounts towards their subscription in exchange for some minor discount. And lastly, 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 the contract.

We finished with 516 employees on March 31 with just under 300 of them in sales and marketing roles, just over 60 of them in research and development, and the balance in operational and G&A roles. This is an increase of approximately 40 employees, mostly in sales roles, since December 31.

Now, I'd like to finish with some thoughts regarding our financial outlook for 2013, starting with the second quarter. During the second quarter, we are targeting total revenue of $40.8 million to $41.2 million, a growth of 33.5% to 34.8% year-over-year. We are currently targeting adjusted EBITDA of $10 million to $10.4 million for the second quarter, representing an adjusted EBITDA margin of 24.9% at the midpoint. Non-GAAP diluted adjusted earnings per share, which excludes share-based compensation and amortization of intangible assets among other things, is expected to be in the range of $0.15 to $0.17 based on approximately 37.2 million weighted average diluted shares outstanding and a tax provision of approximately $1.2 million.

Now, turning to the full year 2013, we are pleased with the continued momentum in the business and we remain at a position to increase market share and extend our leadership position. Now there continues to be some level of volatility globally but given our strong performance in the first quarter, we're increasing our revenue outlook for the full year of 2013 as compared to the guidance we shared on last quarter's call. Specifically, we expect total revenue to be in the range of $165 million to $167 million, which represents year-over-year growth of 30% at the midpoint, an increase over our previously announced guidance of a range of $162.5 million to $164.5 million.

We expect 2013 adjusted EBITDA of $46.5 million to $47.5 million, which represents an adjusted EBITDA margin as a percentage of revenue of 28% at the midpoint, consistent with our previously announced guidance, and we continue to believe that there's material leverage in our model which is reflected in our long-term target model of 30% to 35% adjusted EBITDA margins, but we're focused on reinvesting in 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 share-based compensation and amortization of intangible assets among other things, to be in the range of $0.70 per share to $0.73 per share based on approximately 37.2 million weighted-average diluted shares outstanding, and a tax provision of approximately $7.4 million before an anticipated estimated $16 million provision benefit for statutory release of certain FIN 48 reserves, mostly in Q4 of 2013.

In addition, we were able to report positive free cash flow in Q1. However, and as a reminder, we expect our free cash flow to be positive on a consistent basis from Q4 of 2013 forward 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 remember, our subscriber base has a powerful free cash flow profile where we generate strong contributions per unit over the lifetime of the subscription.

So in summary, our first quarter results exceeded our expectations across all of our key metrics. We've proven the viability of our model and our momentum has continued into 2013. We continue to expand our market leadership position through our differentiated Software-as-a-Service fleet tracking platform for the SMB market and through providing hard, measurable value to our customers.

And with that, we'll be happy to take any of your questions at the time. I'll turn it over to the operator. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Raimo Lenschow with Barclays.

Raimo Lenschow - Barclays

Congratulations on a great first quarter and sorry about my voice. Let's start first, if you look out, the software earning season was pretty rough for a lot of people and you guys delivered well, as our soft guys did, but can you share a little bit what you see in terms of customer behavior on the midmarket and are there times of concerns or how are you thinking about that? That's the first question. The second question is on the gross margin side. You mentioned that there's obviously some change in the second half that kind of might bring that down somewhat. Can you help us to get a sense of, are we talking like a 1% or 2%, bringing it down to 73% or 72%, just to get a sense on the level here? And then lastly, you mentioned the international expansion. What are the kind of drivers for you to decide on more organic or kind of acquisition and how do you think about that dynamic? Thank you.

James M. Travers

This is Jim. Let me address maybe the first and the third one and let Steve handle gross margin one. Thus far, in terms of looking at our core customer, which is again the SMB customer, certainly in North America, in U.S. in particular, I would classify it as stable. We haven't seen any indication of retraction by the customers that we're selling to based on certainly the economic environment at the moment, and I also think an indicator of the strong return of what we're delivering to the customer is very indicative to our add-on rate. If you take a look at one indication in our business of the health of our customer base, it really is the percentage of add-on units that we get from that basic of customers. And as I related, and Steve did, we saw a very healthy quarter with our add-ons, not only with the large customers that we both mentioned but also with our average SMB customer. So I would say, in the States, in North America, I would classify the market environment as stable, and if anything, we're catching some good tailwind based on the return of our solution.

And I would say that looking at the U.K. and Ireland, I would say that we certainly see it – if you looked at it year-over-year, a little bit more positive certainly in the U.K. as reflected in our revenue growth, but again we're very cautious because that end of the world is still very much at the behest of the Eurozone issues that are being grappled with, but at this stage, we've been pretty pleased certainly against our budget in how we see things. So, at this point in the year, one quarter in, I would say that the macro environment that we're selling into remains pretty stable. I'm going to let Steve address the gross margin and I'll come back and talk about international expansion.

Steve Lifshatz

I mean relative to the gross margin, and we addressed this a little bit in the last call, but we've got a number of activities going on relative to some product activities as well as some of the technology refresh which we're getting ahead of relative to some of the AT&T activities. So, the good news is that as we have scaled this business, we've been very good at negotiating favorable rates and probably meeting or repeating our expectations along that line. I think order of magnitude that we're thinking for gross margin is probably between 50 and 150 basis points if we manage this as well as we believe that we can. And again, this is something that's on an interim basis. We do expect that to rebound once we're done with these activities.

James M. Travers

This is Jim again. Let me address your international question there, geographic expansion. We continue to be in an active evaluation mode, which means looking at the market overall, the competitive landscape, both for Mainland Europe and also looking at Latin America which again we see as the two adjacent geographies that make the most sense. So, at this stage, what I'd be looking at there is we're going to look and see how the second quarter goes and then we're going to look at laying some plans potentially for entering at least in one of those markets before we end the year this year. So I would be disappointed if we didn't enter at least one of those markets in 2013. So stay tuned on that as we go forward.

And the other question on acquisitions is, look, we continue to be very thoughtful, the primary focus for us is organic growth as you mentioned. So the way we're thinking about it is looking at it both from an organic perspective and a perspective of where we can potentially look at acquiring product that we could sell back into our channel which leverages the location-based service that we're delivering today, and also looking at that from a geographic perspective would be kind of our top two priorities as we go.

Operator

We'll take our next question from Tom Roderick with Stifel Nicolaus.

Chris Koh - Stifel Nicolaus

This is Chris for Tom. Good job on the quarter. So just a quick follow-up on the large deals. I know you mentioned that you don't really expect that on an ongoing basis but given that you have the second-largest cable operator's backlog of 4,000 units I think you mentioned as well as if you can remind us how much you have remaining to deploy on the Comcast side, just so we can get an idea of kind of what large deal backlogs you have in the pike?

James M. Travers

Okay, the large cable company that we referred to, which was the 4,000 additions, will be hopefully mostly implemented in the second quarter. So that's a look forward implementation side based on wining that business in the quarter. And in terms of looking at it from the Comcast perspective, we continue to be at the tail end of those implementations. I think we're close to 15,000 installed now, given the orders we have in hand. We still believe there's additional units to get from their fleet. They have over 20,000 vehicles when you count their contractual arrangement. So we do anticipate of getting some additional units. But the large percentage of that fleet is now installed with potentially 4,000 to 5,000 range left to get in the balance of 2013.

Steve Lifshatz

This is Steve. Just to add to that, I don't want too much focus on backlog. We do have quite a few customer orders that come through, we install them pretty quickly at these large customer orders where we're really driven by the customers on install plan. So those are a few that are a little bit beyond our control, we feather them in and they kind of get spread out over the course of the quarter.

Chris Koh - Stifel Nicolaus

Great, thanks. And then, if you look at the sales hiring you mentioned, so if I look at the 20-F, it looks like you ended December at 247 and if the hiring was a net 40 from 476, is it safe to say the vast majority of the 40 additions this quarter was sales and marketing? If that's the case, how should we think about your expectations for ramping up that particular segment for the rest of the year?

Steve Lifshatz

Of the 40, and I did mention that that was predominantly sales and marketing personnel. As Jim shared with you, we've done a number of activities this past quarter of expanding a number of our offices. We're going to continue to invest in sales and marketing and be opportunistic. We believe that the market is there and we've got a model that works very well. So we're thoughtful but we are aggressively also adding to that, and we don't want to get into too many specifics on a quarter by quarter basis on what our hiring plan is at this point.

Chris Koh - Stifel Nicolaus

Okay, great. And then lastly, in terms of the Verizon deal that you mentioned, the partnership, that certainly sounds like something that could be fairly auspicious, but if you could maybe give us some guidance relative to what kind of volume you would be expecting out of something like that and maybe how much the overall, like if you have any other partnerships, how much they contribute?

James M. Travers

Specifically as it relates to Verizon, we are in the early stages of the relationship, as I mentioned in my commentary. We do have some early indications, which means we have had real referrals com into the Company which would close business. So we definitely have seen real business as a result of it. I would say at this stage, it's very early for us to handicap to say how significant that could be on a percentage of new unit basis going forward. So I would say, we need another quarter or two to really understand what we think that line looks like, but as I said, initial results are promising.

In terms of other channel partners, nothing to announce at this stage. We continue to look for partnerships much like I outlined there where we want to maintain that contract between us and the customer. So the wonderful thing about the Verizon relationship is that that contract is on our paper, the relationship is between us and that customer. We want to think about future channel partnerships in a similar way where we maintain that relationship with the customer and that contract. So nothing that I can tell you is in the queue at this stage but we continue to look for good global tech relationships that could be meaningful to us in terms of new subscribers.

Operator

We'll take the next question from Jamin Soni with Bank of America.

Jamin Soni - Bank of America

I just wanted to quickly touch upon a couple of things. First if you can just help me understand, Jim, if there has been any change in the competitive environment, are things pretty much the same as it has been over the past few quarters or do you see any more challenges coming into the play as you try to expand your presence? And secondly, if you can just update us on the split between web sales and direct sales this quarter, how that is trended?

James M. Travers

On the competitive environment side, really no real change quarter over quarter. We've seen essentially the same competitors, so I can't highlight anything different on the competitive environment that's changed since Q4. In terms of that split in terms of web and direct, as I said in my commentary, we averaged 60% of our new subscribers, which includes the SMB customers, so that will be very much the focus. So when I give you that number, we're taking out the enterprise level one-time type of a deal, their multiple thousands of units, which again we don't see a lot of those in a particular quarter. So if you looked at it from a bread and butter perspective, which really is that 14, 15, 18 vehicle sized customer, which is what we really focus on, 60% of those new orders were done over the web. So again, we continue to leverage that model very greatly and again move that field sales rep up to larger vehicle counts as we go forward with lead generation.

Jamin Soni - Bank of America

Got it. Thank you very much, guys. Nice quarter.

Operator

We'll take our next question from Robert Breza with RBC Capital Markets.

Robert Breza - RBC Capital Markets

Wanted to dig into kind of the international side a little bit, wondered if you can talk to us about like the vehicles installed in the activity just kind of outside of just those high level international number that you gave which was I think 17%?

James M. Travers

Historically, as those who track the Company know, obviously we're now a corporate company and the business got its start in Ireland and the U.K. So we have a fairly substantial, although a smaller percentage, on a global basis of subscribers in the U.K. and Ireland and obviously our significant growth over the last four years, five years has been in the North American marketplace. We continue to close reasonably good net new subscribers in the market although that market continues to be somewhat difficult based on the environment, the economic environment, and the conditions that are there. Really Ireland is a very small market. So really that's pretty much inconsequential to our volume going forward. It's really the U.K. that we'll be focused on.

I would say that we've been encouraged the last say two quarters of some of the net new subscriber growth that was seen sequentially in that market, although that said, it's a pretty small percentage of our total net new subscribers as we go forward, but yet one I think that as economy improves there, that well hopefully we will see some additional growth coming out of that market, and then if we extend ourselves obviously into Mainland Europe, that obviously is a market that on a size basis is actually larger than North America in absolute total vehicle terms. So from that perspective, it's very attractive given the fact that our solution would transfer very nicely into that market.

Steve Lifshatz

And just to kind of add on to give you context, I mean we saw in 2012 about 10% of our overall revenue came from outside of North America for Q1. This is really driven by the growth that we have seen in North America. It's approximately 9.5%.

So as Jim mentioned, we saw about 17% year-over-year growth but still smaller percentage of our overall base growth rate.

Robert Breza - RBC Capital Markets

Great. Maybe just a follow-up, as you look at the add-on vehicle activity being 20%, where do you think that can get to given some of the newer module and stuff that you're I guess deploying here and think about adding on to the installed base?

Steve Lifshatz

I mean look, we've got over 19,000 unique customers at this stage, we are seeing very strong add-ons, we kind of use that 20% as a baseline quarter to quarter, it may vary a little bit over that, but it's been very consistent at 20% or higher. I think we've got a great opportunity to sell back into the base, as Jim shared with you some of the examples, from Comcast, from the number two cable operator, and even JCI, just to give examples of larger customers. These customers are getting terrific value and the more opportunity we have to bring them value, not only with their new vehicles but anything else in the future, I think we've got quite open opportunity with these guys.

James M. Travers

I think that there is good opportunity for us to continue improve that percentage. As discussed in previous calls, we've got a dedicated function in the Company that we put in place in 2012 that's focused on taking the customer after we close the initial contract, nurturing that customer through the contractual relationship and really focus on up-selling that customer, and we're seeing some good uptick as a result of that, where in some cases, we try to get all of the fleet in a particular customer but often we may not. So going back in with that function, I think we'll service well over time and as our customer base continues to increase. So I personally believe that's an area that we can continue to see improvement.

Robert Breza - RBC Capital Markets

Great. Thank you very much. Nice quarter.

Operator

(Operator Instructions) We'll go next to Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

I just wanted to follow-up on Chris' question on Comcast. On that remaining 5,000 vehicles that are out there, do you have to go to market differently on getting those signed up or those are already in the contract?

James M. Travers

We don't have a contract for those vehicles yet. The initial contract that we had was pretty much fulfilled although based on my commentary there where you could see the power of the ROI with that one division that was seeing significant cost reductions and idling, you might imagine that permeating Comcast's other divisions, and so we're reasonably confident that we will get the remaining vehicles under contract certainly before the end of the year. So it's an ongoing relationship with them as we continue to roll out. They continue to implement the product and see the returns now that some of those divisions have been in starting, I guess we started second quarter last year was our first installation. So some of these divisions had the product in say for nine months, in 10 month's time, we are starting to see the kind of returns that were related by this one division. So we're pretty confident we'll get the balance of those between now and the end of the year.

Brendan Barnicle - Pacific Crest Securities

Great, that's great additional color. And now going back to the comments you made about leveraging big data and developing out best practices, I can see how that improves the existing product. Do you see when you get that to a point where you come out with some new applications around the things you're learning from your big data investments?

James M. Travers

That's a very good question. I think we're in the early stages of that, but yes, I think that there is a large amount of opportunity for us to leverage that historical information in a very significant way. As mentioned in previous calls and related – concerning Steve's commentary today, we have an active development project underway, our next-generation product in a merger of our two code bases today, which is underway, going well. We are thinking a lot about, as we would release that product, how we would leverage that business intelligence and data in a unique way back through that product which would both set us apart from our competitors and also give our customer some very good insight in hard dollar savings in how they're using the product, which could lead us to some other applications that would be adjacent to where we are today that I think could also provide us a good opportunity to sell back to that customer base. So that is an active product strategy and product development initiative inside the Company.

Brendan Barnicle - Pacific Crest Securities

Great, and that leads into my final question which is around that product integration. You mentioned that gross margins would be lower in the back half of the year because of that. Do you expect that that integration will be completed by the end of the year so that we start to see those gross margins return back in the first half of next year?

Steve Lifshatz

From a product integration perspective, we would expect to see that kind of complete by end of year, maybe a slight minor tail into Q1 from an expense perspective, but we would we expecting in 2014 that we'd see the margins return.

Brendan Barnicle - Pacific Crest Securities

Terrific. Thanks a lot, guys.

Operator

We'll take a follow-up question from Jamin Soni with Bank of America.

Jamin Soni - Bank of America

I just wanted to ask, Jim, about the modules that you guys sell in addition to the core offering, if you can give us some idea of how progress has been on adoption of modules and how they have been adding to the ARPU that you get from the customer?

James M. Travers

Good question. The fuel card adoption, I think as we talked before, if you looked at the two modules that have had the most significant take-up with our customer base would be the fuel card capability where we're integrating third-party fuel card transactions into our location-based services to give that customer the ability to marry the fuel transactional data with location, specifically we do that with FleetCor on a partnership basis. That continues to gain acceptance with our customer base in a pretty prevalent way. So the uptick of that I would say continues to be significant as a percent of our total customer base.

And then the other one that's getting some pretty good uptick is our driver safety capability where we have the ability to do actual driver scoring to give the owner insight into how the driver behavior is going between drivers. That one which we released about six months ago continues to gain some nice momentum, not quite as robust as fuel card but gaining some nice momentum. So, those two would be the two that I would highlight that we've gotten the most significant customer uptick for over the last two quarters.

Operator

It appears there are no further questions at this time. I'd like to turn the conference back to management for any additional or closing remarks.

Steve Lifshatz

Great. We just want to thank everybody for joining us today and thank you very much.

James M. Travers

Thank you.

Operator

That does conclude today's conference. We thank you for your participation.

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