I.D. Systems' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: I.D. Systems, (IDSY)

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

Q3 2013 Earnings Conference Call

November 7, 2013 4:45 PM ET

Executives

Jeffrey Jagid - Chairman and CEO

Ned Mavrommatis - Treasurer and CFO

Kenneth Ehrman - President

Analysts

Zachary Ajzenman - Griffin Securities

Bryan Prohm - Cowen & Co.

Operator

Good day, ladies and gentlemen and welcome to the I.D. Systems' Q3 2013 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I will now introduce your host for today's conference, Mr. Jeffery Jagid. Please go ahead.

Jeffrey Jagid

Thank you. Welcome to I.D. Systems fiscal 2013 third quarter conference call. Thank you for joining us today. I'm Jeffrey Jagid, the Chairman and CEO of I.D. Systems. Joining me today are our CFO, Ned Mavrommatis; and Ken Ehrman, the President of I.D. Systems.

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

Before we begin, let me remind everyone regarding forward-looking statements. The following discussion contains forward-looking statements within the meaning of federal securities laws, which are subject to risks and uncertainties, including, but not limited to; the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results, and other risks detailed from time to time in I.D. Systems' filings with the Securities and Exchange Commission. These risks could cause the company's actual results for the current fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.

For the three months ended September 30, 2013 ID Systems' generated a non-GAAP profit of approximately $700,000 on revenue of $11.2 million, driven by growth in our core industrial vehicle management business. Revenue was up 20% sequentially over the second quarter of 2013. Year-over-year Q3 revenue from our industrial vehicle management segment increased 60% and recurring revenue grew 3%, based in part on the contributions of our transportation at the management segment.

These gains, partially offset a decrease in Q3 revenue from our rental car management business, which contributed significantly to a record third quarter revenue in 2012, when Avis Budget Group rolled out our wireless technology on approximately 20,000 vehicles. That rollout, brought the total number of systems we have deployed with Avis Budget to about 30,000, which continued to generate recurring revenue for us. Avis Budget has been our exclusive customer in the rental car market, and we continue to negotiate on further expansion of our technology across their global fleet.

We remain committed to bringing I.D. Systems' patented technology to the global rental car market, where we are seeing growing demand for smarter vehicles, that require less human support to rent to a wider range of consumers. We are also committed to vigorously protecting our intellectual property in this space.

We continue to work hard on our overall strategic objectives, to drive long term revenue growth. We are focused on expanding business with core enterprise customers, diversifying our customer base with a variety of new customers, utilizing channel partners to complement our direct sales team, and controlling operating costs.

In the third quarter, our selling, general and administrative expenses decreased 9% compared to Q3 in 2012. At the same time, our gross margin in Q3 was 52%, consistent with historical levels and in line with our goals. We continue to occupy leading positions in the markets we serve, for wireless control tracking and management of high value enterprise assets, with a strong M2M portfolio of application solutions, featuring our unique combination of hardware, software and services.

Thank you for your time today. I look forward to reporting on our continued progress in the future, as well as your questions later on the call. Now let me turn the discussion over to Ned Mavrommatis, our CFO, to detail our financial results for the period.

Ned Mavrommatis

Thank you, Jeff, and hello to everyone on the call today. As Jeff noted, revenue for the three months ending September 30, 2013, was $11.2 million, up 20% sequentially from $9.4 million in the previous quarter. Year-over-year revenue from our industrial vehicle management business increased 60% to $6.5 million, including contribution of $1.1 million from our European subsidiaries. This partially offset a 96% year-over-year decrease in revenue from rental car management systems, reflecting Avis Budget Group's rollout during the third quarter of 2012, as Jeff mentioned.

Recurring revenue in the third quarter increased to $4.5 million, and represents 40% of total revenue. Gross margin in Q3 was 52%, which is consistent with our historical levels, and reflects a healthy mix of direct and channel partner sales. SG&A and R&D expenses were $5 million and $1.1 million respectively in the third quarter of 2013, down 9% and 1% respectively compared to the third quarter of 2012.

Net loss for the quarter was $76,000 or $0.01 per basic and diluted share. Excluding stock based compensation and depreciation and amortization of intangible assets, our Q3 non-GAAP net income was $692,000 or $0.06 per basic and diluted share. Our balance sheet remains strong, as of September 30, we had cash, cash equivalents, and marketable securities of $30.6 million and no debt.

Thank you for dialing in today. I look forward to your questions and reporting further on our financial progress in the future.

With that, let me turn the call over to Ken Ehrman, President of I.D. Systems, to review highlights of our sales and operations.

Kenneth Ehrman

Thank you, Ned, and thanks again to everyone joining us on the call today. I'd like to cover a few highlights from the third quarter of 2013. On the VMS side of our business, we continue to expand our systems with many large enterprises, including Caterpillar, Domtar, Ford, International Paper, John Deere, Meijer, Nestlé, Procter & Gamble, Toyota, the U.S. Department of Defense, the U.S. Postal Service, Walgreens, and Walmart, among others. These world class organizations clearly continue to gain substantial benefit from our technology, which drives their ongoing investments in our solutions.

In the third quarter of 2013, we also received initial purchase orders from a diverse range of new enterprise customers, representing additional opportunities for growth, including one of the world's largest industrial manufacturers, one of the world's largest tobacco companies, a leading North American packaging manufacturer, a major U.S. dairy products producer, an international specialty logistics company, and the U.S. Defense Logistics Agency.

Our implementation with the DLA at the Warner Robins Air Logistic Center in Georgia, is particularly exciting, because they are deploying a secure, encrypted Wi-Fi version of our PowerFleet vehicle management system, compliant with the Department of Defense's FIPS 140 wireless security standard. This capability means that our systems are able to operate on the DoD's existing wireless network, which is essential to many government applications of wireless vehicle management.

I'd like to emphasize the role that our new analytic software is making in our industrial vehicle management business, with both new and existing customers, particularly those with large enterprises.

I.D. Systems Analytics is a data driven cloud-based software, that provides a single integrated view of industrial fleet activity across multiple locations, and generates enterprise-wide and industry benchmarks, as well as deeper insight into material handling operations. I.D. Systems has built an unmatched database of historical asset activity for more than 50,000 vehicles over a long period of time, across diverse facility types and industries. The unique depth and breadth of this data, enables analytics users to compare both industry and facility type benchmarks, to the performance of their own sites and enterprise.

We are currently engaged with more than a dozen organizations on applying Analytics to their businesses, and we expect growing revenue from analytics, as we move forward. Perhaps even more important, analytics provides us with a significant point of differentiation from our competitors, and enhancement to the value and return on investment of our solution, and the ability to reach decisionmakers higher up in the customer's corporate management chain, as well as the ability to integrate with our customer's strategic initiatives, to optimize their supply chain processes.

In the third quarter of 2013, we had significant revenue contribution from channel partners, as well as our direct sales team. Our partnerships with industrial truck manufacturers and their dealers, generated business from a variety of end users, including a Fortune 100 specialty retailer, a Fortune 100 grocery chain, a Fortune 500 discount retailer, two leading global consumer products companies, one of the world's largest apparel producers, the largest makers of outdoor power equipment, a leading global tire manufacturer, and one of the biggest logistics companies in North America.

On the transportation asset management side of the business, we generated third quarter revenue from both existing core customers, like Meijer and Wal-Mart, as well as several new customers. We entered the final stages of product development on a new intermodal container tracking system, based on cellular communications, which is currently being tested by many of North America's largest intermodal carriers.

In this market segment, our asset intelligence subsidiary, continues to be a top three player, and our VeriWise product family is the industry's broadest, ranging from basic, easily installed tracking systems, to advanced refrigerated trailer and intermodal container management solutions.

As far as our rental car management business, Jeff provided you with our current status. Obviously, our position with Avis Budget and other global players in the rental car market, is continuing to move in a very positive direction. Our goal remains to expand penetration of our patented wireless solutions in the global rental car market, far beyond the 30,000 vehicles currently deployed by Avis Budget.

Now let me turn the call back to Jeff, to open thee Q&A segment of the call.

Jeffrey Jagid

Thank you, Ken. That concludes our prepared remarks. We are now pleased to open the call for your questions. Thanks again for participating on the call today.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Morris Ajzenman of Griffin Securities. Your line is open.

Zachary Ajzenman - Griffin Securities

Thanks. This is Zack, calling in for Morris. How is it going?

Jeffrey Jagid

Hey, how are you doing?

Zachary Ajzenman - Griffin Securities

Good, good. Few questions. First off, of the 20% sequential increase, can you break down what proportion or distributable to new customer business versus existing?

Jeffrey Jagid

Sure Zack. The primary growth came from the VMS business, and if you break it down, 80% of that growth came from existing customers. If you look at our strategy and what's happening with the vehicle management business, we have been very good, signing up very large organizations to use our system. However, the majority of those organizations, they bought the system for a partial facility or a couple of facilities, because they want to use the system and quantify the benefits, and because of these large return on investment that they are getting, they are starting to transition to larger enterprise-wide orders, and that's really where our growth is coming from.

Zachary Ajzenman - Griffin Securities

Okay. And next, can you give us any visibility or, maybe some anecdotal conversations you are having with existing customers regarding material rollouts? Has there been a common theme across customers pertaining to their sort of reluctance of a significant ramp for their respective fleets?

Jeffrey Jagid

I would actually characterize a little bit differently, and I think it's reflected in our performance. We actually saw fairly healthy growth, especially in the VMS segment, both year-over-year and quarter-over-quarter. So I think the adoption is relatively strong. The market penetration as a whole is somewhat light, but I think that that really provides us with significant opportunity for growth. So we are not deeply concerned about that.

I will also mention that, if you look at a snapshot today of our current pipeline across the multiple business segments, you would see well over 180,000 pieces of equipment in the addressable market, both with existing customers, as well as new prospects.

Zachary Ajzenman - Griffin Securities

Okay, great. And last question, just trying to get any more color on the car rental situation in Avis, can you give us sort of a timeline, hypothetically, how long the conversations with Avis can take, or any other conversations you might be engaged with, with other car rental companies at this time?

Jeffrey Jagid

Absolutely Zack. I will take a stab at that. As you may recall, our relationship with Avis was exclusive, and the exclusivity period was extended one time through the end of September. As the end of September was approaching, and we were engaged in this continued dialog with Avis, we started to receive inbound inquiries from other participants in the market. We firmly believe that the car rental industry is moving in the adoption of automating data collection, I mean, it just makes way too much sense. The ROI is extremely compelling, and we continue, obviously -- we are very pleased with the relationship with Avis, and that negotiation continues. The conversation is really around pricing, quantity, as well as an evaluation of potentially additional functional requirements, based on things that were learned through the initial program.

So I think that Avis is certainly being thorough in their analysis. I have no issues with the way they are conducting the negotiation, and I feel pretty pleased with the positive nature, continued nature of that relationship.

What I am hesitant to do, is provide any sort of guidance regarding the timing. Obviously, we are approaching now thanksgiving and the holidays, but the discussion is ongoing, it is positive, and in fact, interestingly, at the end of October, on October 22, Avis issued a press release entitled Avis Budget Group tests new fuel measuring/billing system, and while our company name wasn't mentioned in it, it's a fairly positive look at one specific element around fuel collection obviously of our technology.

So Avis is starting to get out there, they are starting to talk about what it is that they are doing, and we believe that that is all very much a positive indication, and then just to summarize, we also are, and that is a very important point, we have absolutely taken advantage of the fact that our relationship is no longer exclusive, and we have begun to deploy our go-to-market strategy.

Zachary Ajzenman - Griffin Securities

Great. Thanks guys.

Jeffrey Jagid

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of Bryan Prohm of Cowen & Company. Your line is open.

Bryan Prohm - Cowen & Co.

Hey, good afternoon gentlemen, congratulations on the quarter.

Jeffrey Jagid

Thank you.

Bryan Prohm - Cowen & Co.

So just following up on some of those questions that have already been asked, let me ask a big picture question. What exactly is -- assuming that other rental fleets are in the addressable market for you now, what's the true TAM here? I mean, we have heard a number in the 300,000 plus range for the Avis Budget fleet. This just feels like, about 1 million plus cars that could be equipped in time, just to get a sense of where the market really could be, three or five years down the road?

Jeffrey Jagid

In the US, there are about 2 million vehicles in the addressable car rental space. And as you know, from prior comments that we have made as well as disclosures, we have a very innovative approach to automating many processes associated with the car rental industry, and we have obviously IP around those innovations, and we believe we are very well positioned to capture a large part of that market.

Bryan Prohm - Cowen & Co.

Great. So I guess then, help me understand one more time, are the negotiations around Avis centered -- I know you may not be able to answer this, based on where you are in the negotiations process, but is it primarily a function of technology? Is it a function of price, is it a function of timing, volume, where do we stand on all this?

Jeffrey Jagid

I think the timing is really driven by our ability to agree on the other elements. So the other elements would be in fact price, price is a very big one. Price is obviously driven by quantity, but it's also driven by functional requirements. So to put it very bluntly, we have a price, and they want to pay less, and we have to -- and they want to figure out ways to pay less, and you have standard negotiation, and it's all moving, they are not doing anything nefarious or untoward, and it's moving in a very positive direction, but they are also a very large organization, and things generally take time.

I think it would be naïve of me to think that another player in this space would leapfrog where we are with Avis, because we have invested significant time and effort in that relationship, but as I said, we are in active dialog with other parties in this space.

Bryan Prohm - Cowen & Co.

Okay. Then another question in sort of a different area. The company has been very bullish on the Analytics product, and you alluded to it in your prepared remarks today, it's in the press release as well. Where can sales really go for this product in the next -- in the medium term?

Jeffrey Jagid

All right. So let me take a stab at that. The Analytics product is currently in beta, with some very large users. Beta will run through year end, and we will officially release I.D. Systems Analytics some time during the first quarter of next year. Analytics is going to do two things, one, it's going to build our recurring revenue, and that we are going to price it per unit per month, so it's a SaaS model pricing. And in addition, we believe it's going to accelerate market penetration, primarily in VMS, because it's going to enable us to sell higher up within the target prospect.

So right now, when we said we will prospect, we are really primarily talking about benefits to be derived in a specific facility. There are instances when we will talk about benefits that can be derived or extrapolated through the enterprise. But Analytics now gives us the ability to benchmark material handling performance, which company spend significant amount of money on, against industry standards. So we believe, that that's going to get some visibility at the higher level, and will accelerate not only recurring revenue contribution, but also sales of our VMS product line, and then shortly behind that, we will deploy it for our transportation asset management product line as well.

Bryan Prohm - Cowen & Co.

Great. That sounds like there is a lot of potential there. I will drop back into the queue, and hand it off. Thanks guys.

Jeffrey Jagid

Okay. Thank you.

Operator

I am not showing any further questions at this time. I would like to turn the call back over to Mr. Jeffrey Jagid for closing remarks.

Jeffrey Jagid

Thank you everyone for participating on the call today, and we definitely are optimistic about the initiatives we are working on, and we look forward to reporting to you again in the near future. Thank you very much everyone.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!