Fleetmatics Group PLC (NYSE:FLTX)
Q2 2013 Earnings Call
August 7, 2013 5:00 PM ET
Steve Lifshatz – CFO
Jim Travers – CEO
Raimo Lenschow – Barclays
Kash Rangan – Merrill Lynch
James Faucette – Pacific Crest Securities
Bhavan Suri – William Blair
Jaimin Soni – Bank of America
Good day ladies and gentlemen and welcome to the Fleetmatics’ Second Quarter 2013 Financial Results 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, sir.
Thank you. Well good afternoon and welcome to the Fleetmatics’ second 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 are going to 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 filed for Fleetmatics with the SEC on July 25, 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 financial 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 second quarter results.
In addition, please note that the date of this conference call is August 7, 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 little later to provide some further details regarding our financials and our outlook. Jim?
Thanks, Steve. I would like to thank everyone for joining us on the call today. We are very pleased to once again exceed our guidance across all key operating metrics and achieved record performance. During the second quarter, our vehicles under subscription grew by 38% and total revenue grew by 39% year-over-year, while adjusted EBITDA increased by a record 142% substantially above our expectations. We also generated positive free cash flow for the third consecutive quarter.
Following the quarter end, we successfully completed a follow-on offering, which improved our capital structure while at the same time significantly reduced our shareholder concentration. Additionally, we completed a small acquisition last week, which will not only strengthen our overall offering but also expand our sales footprint into a new market. Overall we continue to see robust market demand for our highly differentiated software-as-a-service fleet solution for SMBs and have entered the second half of the year with strong momentum. As Steve will detail shortly, we have again increased our revenue and profitability expectations for 2013 giving our strong execution to-date. We remain well positioned to further capitalize on the large under penetrated market opportunity and fleet tracking as we provide fleet owners with an industry leading solution that allows them to optimize performance, reduce costs, increase productivity and enhance revenues.
Taking a look at our overall strong performance during the second quarter, we continue to significantly outpace the market growth. As I noted, vehicles under subscription increased 38% yea-r-over-year, which brought our total tot over $388,000 and over total and our total revenue of $42.5 million grew 39% year-over-year coming in above the high end of our guidance range.
Regarding profitability our adjusted EBITDA was $14.2 million, an increase of 142% compared to the prior year period and substantially above the high end of our guidance range. In addition, we are also very pleased with our ability to once again generate free cash flow during the quarter, which demonstrates the leverage of our business model.
Now turning to some of the business highlight s from the quartet starting with our continued strong momentum with our core SMB markets. Our add-on vehicle activity, as which we view as leading indicator of the health of our SMB customers was again in excess of 20% of new subscription sold into the installed base during the second quarter excluding enterprise transactions.
This continues to validate that our customers are seeing the value of our solution and a success of our land and expand strategy. Our add-on orders also came from markets of larger fleet size as we also saw a continuation of significant add-on activity with several large SageQuest brand customers during the quarter most notably Comcast, who placed additional orders with us during the quarter for over 7000 new subscriptions. When these new orders are fully installed this will bring our penetration with Comcast to over 23,000 subscriptions. During the quarter, we installed approximately 6000 vehicles with another large North American cable company, which we had announced the orders for during our last conference call. In total, we have installed over 15,000 vehicles coast to coast with that company.
We also continue to see strong momentum with our differentiated web selling strategy as over 60% of our net new SMB subscribers were sold over the web in the quarter excluding enterprise transactions. Our web selling strategy remains an extremely efficient way for us to reach the most under penetrated part of our target market. As a result, we continue to increase our sales headcount throughout the quarter in each of our web selling centers.
In regards to our big data asset, our ongoing subscriber growth momentum continues to result in an increased number of position points collected by Fleetmatics. Examples of these position points are attributes such as location, speed, idling, and driver behavior. We collected 46 million data points per day from subscribers during the second quarter up from approximately $41 million during Q1.
As our subscriber base continues to grow, we are receiving billions of data points monthly and this information is received every 90 seconds so it is 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 then allows us to relate those best practices to our users in a meaningful, actionable way. We’ll continue to see the power of these unique business insights in our future product releases.
We also remain committed to pursuing additional growth opportunities via new product additions and new channel partnerships both of which extend our ability to generate further revenue streams for our business. Specifically, we are pleased to announce that we recently acquired Australian based Connect2Field a privately held cloud-based provider field service management applications currently serving customers in Australia, United Kingdom and the United States. Connect2Field has developed and it’s currently selling a mobile app, which allows the field user to track and complete jobs assigned to them, capture job details and sync this job data to the cloud.
The company also offers a web app for the user, which allows an administrator to create, schedule, dispatch and invoice jobs as well as track orders through the workflows. There is no hardware associated with the solution and the app connects directly with a number of accounting software programs such as QuickBooks, which allow the small business to smoothly integrate the billing process into their financial back office. It is important to note that Connect2Field targets the small to medium size business market. This is not an application that is focused on nor built for large enterprise level of fleets.
We will continue to partner with enterprise level field service providers such as (Teva) and Arris to deliver an integrated solution to targeted enterprise companies did mange very large fleets. Our focus we’ll be providing this application to our core SMB customers typically managing a fleet of 18 to 20 vehicles. So, this is our first offering, which brings transformative change to the SMB mobile worker but concurrently brings automation and efficiency to many back office tasks to the small business operator.
Once integrated with our fleet management solution, we believe this will further improve the customers return on investment as well as the value proposition of our solutions. As you can tell, we were pretty excited about the long –term prospect of this solution. The benefits will bring our customers and the affect it will ultimately contribute to our business.
I think it is important to highlight that Connect2Field is a product related acquisition and we plan to offer the cloud-based application to our existing customers beginning in the first half of next year once we expand the product and then upgrade it to our platform. In addition, the acquisition will further facilitate the broadening of our sales footprint into the SMB fleet management market in Australia, where we can offer our complete solution for the first time while Steve will provide some additional details in h his remarks we do believe that over the longer-term this new mobile application can be a significant growth driver but the short-term financial impact to Fleetmatics will be immaterial.
Finally, we continue to show progress in expanding our international presence as revenues outside of North America increased 21% year-over-year during the second quarter. Despite the tough macroeconomic conditions, we continue to believe that our international expansion is another significant growth opportunity for Fleetmatics especially given that over 50% of our addressable market is outside the United States and particularly in Mainland Europe and Latin America as we have mentioned previously. As I just mentioned, we are pleased to have an opportunity to begin expanding our presence in Australia and continue to look for ways to expand into other new markets as well.
We are also pleased to announce the addition of Kathleen Finato to our Senior Management team as Fleetmatics’ Chief marketing officer. Kathleen comes to us with a proven track record of success in marketing to the SMB customer. She has held Senior Global Marketing Positions with InterCall Corporation, Motorola mobility and with SBC now part of AT&T Global. Kathleen will be very focused on expanding and establishing the Fleetmatics brand as the clear category leader serving the SMB market globally.
So, in summary, we are very pleased with the strong revenue and profitability growth and overall execution during the second quarter, which was again driven by the ongoing robust demand for our industry leading solution. We have entered the second half of the year with considerable momentum and a diverse customer base and we remain in position to benefit from the very large under penetrated market opportunity worldwide.
With that, let me turn it over to Steve for further financial details. Steve?
Well thanks, Jim. So, we are very pleased with the company’s strong second quarter execution and during the quarter, we achieved records for quarterly revenue, gross margin, net subscriber additions, quarterly net income, quarterly adjusted EBITDA and adjusted EPS. As you are aware, we also just completed a follow-on offering in late July as well as closed the product acquisition last week as Jim just mentioned. So, our second quarter was quite active and our third quarter has been off to a busy start as well.
So, now turning to the details of our second quarter financial results starting with the income statement. Total revenue was $42.5 million, up 39.1% year-over-year and exceeded our guidance range of $40.8 million to $41.2 million. The primary driver of our growth continues to be net additions to vehicles under subscription, which grew 38.1% year-over-year to approximately 388,000. During the second quarter, our installation activity was largely driven by the continued strong activity with our core SMB fleet customers coupled with very strong deployments associated with the second largest cable company operating in the U.S. as well as some other like Johnson Controls both announced last quarter. As a reminder, our business is predominantly SMB focused with 16 to 17 average subscriptions per customer for new sales on a year-to-date basis. So, keep in mind there isn’t an expectation of adding individual customers in the multi-thousand subscriber range each quarter or for receiving multi-thousand subscription add-on orders from them. The timing of revenue recognition associated with these large orders is subject to the customers’ installation availability. And for instance the Comcast order, which Jim shared earlier, has anticipated to be deployed more towards the end of the year rather than in Q3.
Now our quarterly net churn rate was 1.3% in the second quarter net of the new Comcast orders 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 rate was 21% or 8.4% annualized compared to 2% or 8% annualized during the second quarter of 2012.
Now turning to expenses and profitability for the second quarter, on a non-GAAP basis, our total gross margin percent was 74.9% during the second quarter compared to 71.3% during the same period last year and above our expectations. The better than expected performance was primarily due to the accelerated realization of certain reductions in telecommunication program costs coupled with the continued effective scalability in our data centers, and while we are pleased with the leverage, the business is delivering we will continue to invest as appropriate as well as continue to focus on cost and efficiency maximizations concurrently. To-date, incremental investments, which would otherwise depress our gross margin have been more than offset by the continued cost reductions we received. As a result, we expect gross margins to now remain within our targeted 73% to 75% range for the remainder of the year.
Now 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 second quarter, non-GAAP sales and marketing expense increased 31.2% over the prior year period to $12.6 million, representing 29.7% of revenue. The increase in sales and marketing reflects our continued investment in our expanding sales infrastructure. As a reminder, we are focused on driving revenue growth at the expense of incremental profitability and we will continue to invest in our sales and marketing opportunities.
Non-GAAP research and development expenses increased 28.9% year-over-year to $2.2 million, accounting for 5.2% of revenue, and reflecting our continued focus on enhancing and expanding our products and solutions. And of note, we capitalized $504,000 of research and development during the quarter versus $238,000 a year ago. So, on a like-for-like basis, we’re looking at approximately 39% growth year-over-year taking into consideration capitalization for both periods. As you know, we have been working on a significant product release and are investing heavily in that activity at this time.
Non-GAAP general and administrative expenses were $6.1 million compared to $7.1 million last year. The year-over-year decrease was primarily due to reduction in professional fees associated with the preparation of the company for its public offering predominantly, audit and tax related.
And as you’ll see from our reconciliations to adjusted earnings and adjusted EBITDA, excluded in those numbers are non-recurring non-operating costs including $0.3 million of expenses during the quarter related to our recent secondary offering as well as $0.1 million associated with acquisition related transaction costs. And as these expenses are not part of our operating activities, we separately identified them as adjustment on our non-GAAP earnings reconciliations.
Non-GAAP operating income was $10.9 million for the quarter or 25.7% of revenues compared to $3.4 million or 11% of revenues during the second quarter of 2012. Non-GAAP adjusted earnings per share was $0.23 based on 36.4 million weighted-average diluted shares outstanding, and was above our guidance range. Now this compares to $0.05 per share based on 28.2 million pro forma weighted-average diluted shares outstanding in the year-ago period.
The effective GAAP tax rate for the current quarter was 27.9% or about 22% excluding discrete items. As you are aware, our effective tax rate benefits from our Incorporation in Ireland. We continue to expect our long-term normalized non-GAAP tax rate to be around 15%.
Second quarter adjusted EBITDA increased 141.7% year-over-year to $14.2 million, and was significantly above our guidance of $10 million to $10.4 million. And as a percent of revenues, adjusted EBITDA was 33.5% compared to 19.3% for the same quarter last year. And as I mentioned, we’ve adjusted out a total of about $0.3 million in non-recurring, non-operational expenses during the quarter.
On a GAAP basis, GAAP operating income was $8.6 million, up from $1.1 million in Q2 of 2012. GAAP earnings per share for the second quarter was $0.16 per share based on 36.4 million weighted average diluted shares outstanding, and this compares to GAAP net loss per share of $0.99 based on 1.5 million weighted-average diluted shares outstanding for Q2 of 2012. A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial tables included in our press release.
Now, turning to the balance sheet, we ended the quarter with $105.2 million in cash and $23.6 million in debt. Subsequent to the end of the quarter, we raised $31.6 million in a secondary offering and therefore on a pro forma basis we had about $136.8 million in cash. During the first quarter, the company generated $11.1 million in cash flow from operations and had capital expenditures of $9 million, which resulted in overall free cash flow of $2.1 million compared to negative $5.2 million during the same period last year.
We ended the second quarter with an accounts receivable balance of $11.2 million, resulting in DSOs of 24 days. Our deferred revenue balance of $29.5 million was up $4.3 million compared to the year ago period and up by $0.5 million versus Q1 of 2013, driven predominantly by the differential when we can – when we recognize customer, when we receive customer payments versus when we can actually recognize the revenue.
Now we finished with 555 employees on June 30th with approximately 300 of them in sales and marketing roles, approximately 70 of them in R&D, and the balance in operational and G&A roles. This is an increase of approximately 40 employees since March 31st.
And now, I’d like to finish with some thoughts regarding our financial outlook for 2013, starting with the third quarter. During the third quarter, we are targeting total revenue of $44.3 million to $44.7 million, a growth of 33% to 35% year-over-year. We are currently targeting adjusted EBITDA of $13.9 million to $14.3 million for the third quarter, representing an adjusted EBITDA margin of 31.7% at the midpoint. Non-GAAP adjusted earnings per share, which excludes share-based compensation expenses and amortization of intangibles among other things is expected to be in the range of $0.20 to $0.22 based on approximately 37.6 million weighted average diluted shares outstanding and a tax provision of approximately $2.1 million.
Turning to the full year 2013, we are pleased with the continued momentum in the business as Fleetmatics remains in position to increase market share and extend our leadership position. And while there continues to be some level of volatility globally given our strong performance in the second quarter, we’re again increasing our revenue and profitability outlook for the full year 2013 as compared to the guidance we shared on last quarter’s calls. And specifically, we expect total revenue to be in the range of $171.2 million to $172.7 million, which represents year-over-year growth of 35% at the midpoint that’s an increase from our previously announced guidance of a range of $165 million to $167 million.
We expect 2013 adjusted EBITDA of $53.1 million to $54.1 million, which represents an adjusted EBITDA margin as a percentage of revenue of 31.2% at the midpoint that’s an increase from our previously announced guidance range of $46.5 million to $47.5 million. We continue to believe that there is material leverage in our model, which is reflected in our long-term target model of 30% to 35% adjusted EBITDA margins, but we’ll continue to focus on reinvesting in the business in the short term to drive increased penetration and revenues from our highly profitable customer base.
And we expect full-year non-GAAP adjusted earnings per share, which excludes share-based compensation expenses and amortization of intangibles among other things to be in the range of $0.79 to $0.82 based on approximately 37 million weighted-average diluted shares outstanding, and a tax provision of approximately $8.7 million. And in addition, we are able to report positive free cash flow in Q1and Q2. We should now continue to see modest positive free cash flow through the year 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. Remember, our subscriber base has a powerful free cash flow profile, where we generate strong cash contributions per unit over the lifetime of the subscription.
And lastly Jim mentioned that we acquired Connect2Field during Q3. I do want to underscore that this was a product acquisition and while Connect2Field does currently market the offering the revenue contributions from Connect2Field’s existing customer base are not material to our financials currently and the associated operating expenses that we’ll take on will be accommodated by our ongoing hiring and spending plans already considered in our updated guidance here. So, as a result the acquisition, the acquisition will have no discernible impact on our income statement for the balance of this year.
So, in summary, our second quarter results exceeded our expectations across all of our key metrics. We have proven the viability of our model, and our strong momentum has continued into the second half of 2013. We continue to extend 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 this time. Operator?
Thank you. (Operator Instructions) We’ll take our first question from Raimo Lenschow with Barclays.
Raimo Lenschow – Barclays
Hey, thanks for taking my question. Congratulations on another great quarter. A couple of questions from me. First, can you just kind of walkthrough again like the contribution from the last things we saw this quarter, you mentioned then do I – if I – do I just have them all of that you have there. And then maybe a comment on the UK deal, the size of it to which it’s going to start doing attending, so that we are able to do a calculation about the growth from the core business ex the large deals? And then on the large deals, you obviously kind of did a great job on penetrating the cable company vendors in the U.S. Are there any initiatives ongoing about doing that for other soft verticals that have a different profile, or doing that internationally? And then maybe a quick update on the acquisition, in terms of what does it bring to you, what does it bring to the table. Thanks. That’s it from me.
Okay. Well, just to remind you, in my prepared comments I mentioned that during the quarter, the activities with that second largest U.S. cable company that we had announced last quarter, if you recall that was about 6000 plus units. Those have substantially installed during the quarter, so by the end of the quarter, we would actually began recognizing revenue with them. And also last quarter we have mentioned that there was some additional sales from the likes of folks like Johnson Controls that were in that 1000 plus range. That had also installed during the second quarter. So, that was a little bit of boost, I always caution everybody that not every quarter is going to have large transactions of this scale.
Now, as Jim mentioned we also had additional sales from Comcast that we received during the quarter, but in my prepared comments I did point out that there is not an expectation that those would necessarily start to install in any material fashion during Q3, I think we’re looking at that just based on conversations with the customer that those are likely to be much more significantly weighted towards the end of the year and we’ve put that into our guidance accordingly.
It’s Jim. I’ll handle the other two questions, Raimo, one was the cable communication market focus since we’ve been able to penetrate significant customers here in the U.S. The answer is at least in terms of that particular vertical we still think globally it’s got a lot of opportunity for the company. Few quarters ago, we had closed our first cable company outside the U.S. Virgin Media, large communication cable company in the UK marketplace. So, we believe that we’re going to start looking at the global market opportunity as we would expand it to do geographies, it will continue to allow us to leverage the relationships that we’ve got with Comcast and the large cable operator in the U.S. and with Virgin Media.
We’re looking at few other vertical markets potentially that have some interest and we may do some focus, but for the most part I think we’ve got a lot more room, we could go globally with that particular area of penetration. In regards to Connect2Field, it’s a very strategic and logical extension to our current offering. If you think about what we’ve been doing for the most part today is really giving great visibility of business intelligence around the vehicle itself. In terms of its time and location, speed, idling, distance, routing and so on. And this application with Connect2Field, we now extend that automation to a mobile device to the actual worker delivering that service.
So, really empowering that field workers what this application does from a standpoint of allowing the field service worker to see work order history, record the work that to be done at the point of delivery and then being able to really see the invoicing and billing of that actual event all the way through the system into their back office which obviously has a great impact to cash flow. So, it’s a great application for us to extend our current visibility in the location to the actual field service worker themselves.
And then allow us to see that transaction all the way through their billing system, and marry that to location, which is very, very powerful. So, we see that as again our ability to bring automation to primarily the small – the medium size business to allow them to get effective leverage both in new revenue opportunities and cost reduction and increased cash flow to this type of application. It’s early in its adoption but we believe it’s got great promise and we have a lot of significant plans for it, not only the balance of this year, but more importantly moving into 2014.
Raimo Lenschow – Barclays
Perfect, very clear. Thank you.
We’ll take our next question from Tom Roderick with Stifel. Please go ahead.
Yes, thank you. This is Matt (inaudible) for Tom. The question was with regard to the mix this quarter, between the large customers and some of the small businesses, just what the mix was, where you’ve seen the trend over the last 12 months and kind of what your expectations are going forward.
Yeah, Matt this is Steve. Look, we’ve certainly have seen very robust activities from our SMB customer set, and those end up getting peppered with the occasional large transaction from the enterprise customer set. Again on the installs this past quarter, we had over 7000 units that cane from enterprise customers that we had announced at the end of Q1. And as far as new orders go we had certainly Comcast as Jim shared with you that came in towards the end of this quarter but like Q1 this was very much in SMB-focused quarter.
Okay. And then maybe some additional color, if you can on the Connect2Field acquisition. And just maybe – if it allows you to expand into any other market verticals or maybe what it can – what it could ultimately do for you, in terms of long-term revenue growth, or is it just something that makes the product more attractive and maybe as an additional selling point?
This is Jim. Let me address that. There is multiple points that the application does for us, not just the application itself which again gives us a chance to extend value to that target customer we sell to today aligns very well towards the field sales worker. If you think about our customer base are 19,000 customers today, 65% to 70% of those are delivering a service of some sort which means there is a billable person going into a company or a residence delivering that service. So, being able to extend automation to that field service worker which today is under automated. It’s got substantial leverage to the target customer we sell through.
So, we think there is great leverage selling back to our current customer base and we think that there is a great opportunity to continue to provide that integration into our current offering to allow someone to see a good system of record all the way through not only location of where that physical asset is but all the way through the driver delivering that service which again has got great impact into the work order itself and eventually generating cash flow by getting to bill out to the customer in much quicker way.
So, lots of leverage there. We also intend to begin selling our core GPS offering in Australia. We’re putting together the plans to do that, that will likely be later this year of launch but we think it’s got – we have got a great market opportunity take that we currently obviously we’ll integrate that into Connect2Field as well for the Australian marketplace but we also will now leverage this acquisition with a good physical location into the Asia Pacific Rim area, which we also see over time is a very good logical area for us to grow. So, a lot of different multiple ways that we can leverage this acquisition both with our current product and obviously with this new application.
Okay. Thank you.
We’ll take our next question from Kash Rangan with Merrill Lynch.
Kash Rangan – Merrill Lynch
Hi. Thank you, very much for taking my question. I was wondering, Jim and Steve, if you could talk about your billings trend that granted that you seem to be developing a bit of a backlog of large deals that are not quite going into production. I’m just wondering if you could qualitatively or quantitatively, to the degree that you can, share with us the trend in backlog. And more of a qualitative question on the Connect2Field acquisition, is it too early to talk about what kind of pricing, roughly ballpark, you would be able to command for something like this, relative to your own core products? And what rough percentage of the installed base of your 388,000 subs are applicable for an offering like this? That’s it. Thank you very much.
Yeah. Kash, this is Steve. Thanks. And just relative to backlog, we certainly don’t provide backlog numbers, we don’t think about the business that way. If you recall for SMB customers it’s not unusual for us to have them signed up and installed within 14 days. So, for a large part of our customers that is not an issue, the challenge really comes with many of these larger customers where they have their own scheduling and deployment challenges of making the vehicles available for us and having us address them accordingly.
There are some customers that there is a large cable company over in Europe that was able to facilitate a very, very rapid deployment and that’s the unusual side on one end of the band you saw that this past quarter with Time Warner which was announced last quarter. They were able to make their vehicles available to us very quickly during the quarter but we work with these customers, we try to facilitate what makes best sense for them and of course we’re always trying to accelerate that revenue recognitions quickly and feasible because obviously we can’t recognize the revenue until all of those are installed.
So, we work with the customers as best we can, there is no consistent or a predictable mechanism or percentage of our sales from quarter to quarter, it’s really a little bit more ad hoc. And for that reason yeah we try to guide you accordingly. And again that’s it’s just to reiterate my comments on, it appears as it Comcast will largely be towards the end of Q4 rather than something that we see much in during Q3 although they will begin at some level during Q3.
This is Jim. I’ll address the other two questions about the Connect2Field application pricing and opportunity. On the pricing side of things, it is early in this market space in the lower end SMB market for this application to really determine exactly we’re at a pricing structure is likely to go, it will likely be a user based type of pricing structure, we’ll tell you obviously we’re very vehicle based. So, it’s got that dynamic to where which we think probably make sense, that’s the way they’re selling it today. So, think of it in terms of the field service worker having a per monthly amounts that they would pay for each service worker using the mobile device. And then have a more of an administrative license for a user that would do the dispatch in servicing of it in the head core location as a base structure.
But after that what it can mean to us I think it’s something we’re going to have find more as we connect it back to location in the real value points back to the customer but we – again are encouraged, we think there is significant return. On the opportunity sides, I would think about it in terms of our customer base where today we’ve got 19,000 revenue generating from customers. If you cut that base by those customers that are delivering a field service doable event if you will to a customer. Over 65% of our current customer base aligns with those verticals.
So, we haven’t done the math to take that into the actual vehicle cab subscriber basis but it’s substantial opportunity when you look at it both from the customer’s perspective number of customers and what our current subscriber base is with those customers. So, we think there is a great opportunity to sell it back to our current basic customers.
Kash Rangan – Merrill Lynch
Thank you, Jim. And if I could just add a quick follow-up. I know that you’ve been getting very good traction of the enterprise and as we know that the due make it very clear that the focus of the company is the SMB. But a lot of sales companies like salesforce.com have started off in the SMB and gone on to the enterprise, more being pulled into the enterprise. Not to put words in your mouth but how long do you think you could stay out of the enterprise market before you’re dragged into it? And are you staffing your enterprise sales force to the degree that you see any strengthening of the pipeline for these large deals? That’s it for me. Thank you.
Okay. Well, that’s a very good question, Kash, which obviously on occasion some companies would start out in the lower and had moved up. But I can tell you that our focus is really on the lower end of the marketplace. Our average customer (Audio Gap) but just look for a little color on what you’re seeing on new customer acquisition through the web channels.
It’s been very consistent with depending on the quarter it runs somewhere in the 30% to 35% range. We have trended some quarters as high as 40% conversion rate, that conversion rate is when we actually fit a customer which means doing an apps live webcast with them as well as we would determine and we call it a fit. Once we could actually fit that customer in a live situation by the web we can convert on average in that 30% level to 35% level depending on the quarter. That will vary in some quarters I think if you plodded the trend over time which is probably a better way of looking at it, it certainly continuing to trend up. Although we think that once you start approaching 40% level given our model over the web I think that’s probably in an area that we’re going to settle in on, we think that will be a very, very strong conversion rate.
James Faucette – Pacific Crest Securities
Great. And then my last question is on international. Clearly, international presents a big opportunity going forward. Just curious, given that international while showing good growth, its growth rate seems to be lagging in the US. I was just wondering how you’re thinking about international contribution, and if you have any sense as to when that may actually start to grow faster in the U.S.? Not saying that there’s anything wrong with the growth rate, just wondering where that mix can mix up, if you will, and how we should think about the impact of international on ARPU and profitability generally?
Well, it’s Jim. On an overall basis look, we have a global business today, we’re in the UK and Ireland. We have a nice market share there, we have seen I’d say modest improvements in the UK relative to the economic situation there which has helped us which has helped the year-over-year growth rate. And we believe that the service that we’re providing today is a global opportunity and again a few looks and then some of our other discussions. The market opportunities there on Mainland Europe is even larger than it is in the U.S. And we don’t see any dominant competitor in the markets we’re serving in Mainland Europe as an example.
So, as we look at the globalization we’ve got the infrastructure in Dublin, to support the product well throughout the EMEA area and even into South America so that the infrastructure is there. So, really the cost in those markets really becomes a sales and marketing question. So, that much more of a timing issue but we believe their strength in being a true global company on leveraging what we’re already doing and like let’s face it markets change right I mean obviously the environment throughout the Euro zone is been very difficult no question, I don’t think anybody is forecasting that to come back very quickly but I do think we see some signs that’s trending in the right way.
I think it’s important to – that we’re there as well as those trends continue to go north. So, that’s one way we’re thinking about it. And so far on the pricing side of things in the way we sell we think that there is an absolute one for one way that we would sell. So, selling over the internet, being able to sell the upper fleet size as we do with the direct field sales force in the U.S. we think can be very applicable to those markets, so no change there. And the ARPUs that we’re seeing have been pretty stable as well so if you looked at it from the U.S. perspective our overall ARPU has been pretty stable. So, we think we can do it very profitably and efficiently and really comes down to timing of making sure we can do it and execute and execute it well.
James Faucette – Pacific Crest Securities
That’s great. Thanks very much.
(Operator Instructions) We’ll take our next question from Bhavan Suri with William Blair.
Bhavan Suri – William Blair
Hey guys. Thanks for taking my question. And nice job there. Just a question, just to follow-up on the previous speaker, did you think about moving more into mainland Europe and Latin America, do you think that the web-based selling approach is what you go with and or do you think you think of a different distribution model there?
No, I think – this is Jim. I think we’ve got good indications certainly looking at mainland Europe given the fact we’re already selling in the UK and Ireland today. We use the same selling model in the UK and Ireland as we use here in the state. So, a very focused web center on the lower end of the market with field sales focused in the higher end. We don’t see any reason, we can apply that same sales strategy certainly in mainland Europe and potentially into Latin America as well. So, we feel pretty good that there is no differentiation on us having to change the way that we’re selling today in the markets we’re serving.
Bhavan Suri – William Blair
Okay. And then, as you look at the Connect2Field acquisition, which obviously now sort of adds some stickiness or more stickiness to the offering. Is there a point in time, you think you acquire some of the backend sort of route optimization, job scheduling, asset management, asset tracking type software, especially for the larger fleets or do you think that’s probably too far of a net to cast?
Well, again as I mentioned based on a previous question, we are very much focused on bringing a SaaS based solution to that small market now there is some good companies providing enterprise level solutions today. We partner with a lot of those and partnered very successfully. That’s not the market we want to go off and compete in, we want to partner with the players out there today as we’ve been doing successfully. And then really bring the automation to that smaller end of the market today that is quite honestly very manual.
Bhavan Suri – William Blair
We believe there is more companies operate today, very paper intensive both from how they bill, how they pay their people. So, there is lots of opportunity for us to really focus on that market and continue to scale the business very nicely. So that’s where you’re going to see our focus not trying to go off and compete at the enterprise level and get way in front of ourselves. We know what we’re good at and that’s what we’re going to focus.
Bhavan Suri – William Blair
Yeah. And then just turning to a couple of quick ones here. In the large deals, just a little color, did you see anyone competitively, or who did you see in some of those deals?
If you’re talking about the Comcast is that when you’re talking about large deals the enterprise level we tend to see in the U.S. Trimble has got an investment in software sector, very enterprise focused, we compete often against them. It is a privately held company in the West Coast called Telegis that they tends to focus on larger fleets. So I would say that more consistently in the U.S. we’d see those two more than any other.
Bhavan Suri – William Blair
And then just a last one from me, as you look at the space, Danaher just acquired Teletrac last week. Any sort of thoughts about that and sort of obviously the space is still big enough for multiple players and you guys pick up the phone and when you talk to someone, who has typically have never heard of a solution like this, but are there any thoughts around sort of what Danaher might be doing in the consolidation on that side?
I wouldn’t want to comment on what they’re doing, it’s early days, they like to sector right so they’re putting months to work. And we would talk pretty cannily that there would be consolidation in our sector, we got a lot of private equity backup for these today, in the sector obviously they’re looking for exists potentially. So, as you say there is plenty of room for us to grow and do what we’re doing. So, at this stage I wouldn’t want to comment on what Danaher strategy is.
Bhavan Suri – William Blair
Okay. Thanks for answering my questions. That’s it from me. Thanks.
We’ll take our last question from Jaimin Soni with Bank of America. Please go ahead.
Jaimin Soni – Bank of America
Thanks guys. Just a quick one here. You talked about expanding in Latin America, and other areas of Europe. This acquisition in Australia, it extends your opportunity in the different part of the world. Should we think that is still focus on Latin America or other European geographies?
Good question. I think Steve said in his comments, I don’t think I did as well. Connect2Field, the features for that and the strategy was primarily product, right. The fact we picked up a nice geography was great but the primary driver for the acquisition was really making sure we thought we had a great application and I think Connect2Field is going to – it’s going to deliver us a great application to build off. And also pick up a nice geographic setting at the same time. So, we’re still thinking that mainland Europe and Latin America the two markets that make the most sense for us based on size and proximity to what we’re doing today with our infrastructure. So, that part hasn’t changed. So, the Connect2Field was a great product acquisition and we were very pleased to pick up a great geographic setting.
Jaimin Soni – Bank of America
Got it. Thank you very much.
Ladies and gentlemen, this concludes today’s question and answer session. At this time I like to turn the conference back to the management team for any additional or closing remarks.
This is Jim. I appreciate everybody’s time today. Look forward to catching up with you next quarter. Thank you.
Thank you. Ladies and gentlemen, this concludes today’s conference. We appreciate your participation.
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