FleetMatics Group's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Fleetmatics Group (FLTX)

FleetMatics Group PLC (NYSE:FLTX)

Q3 2013 Earnings Call

November 6, 2013 5:00 PM ET


Jenna Marvel – IR

James Travers – CEO

Stephen Lifshatz – CFO


Kash Rangan – Merrill Lynch

Raimo Lenschow – Barclays

Tom Roderick – Stifel

Robert Breza – RBC Capital Markets

Bhavan Suri – William Blair

Brad Erickson – Pacific Crest Securities


Good day, everyone, and welcome to the FleetMatics Third Quarter 2013 Financial Results Conference. As a reminder, today’s presentation is being recorded.

At this time, I would like to turn the conference over to Jenna Marvel, Investor Relations Analyst, please go ahead.

Jenna Marvel

Good afternoon, and welcome to FleetMatics’ third quarter 2013 earnings call. Today we will be discussing the results announced in our press release issued after the market closed today.

I’m Jenna Marvel, Investor Relations Analyst for FleetMatics. And with me on the call is Jim Travers, FleetMatics’ Chairman and Chief Executive Officer; and Steve Lifshatz, FleetMatics’ Chief Financial 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 more fully detailed under the caption, Risk Factors in the company’s annual report on Form 20-F filed with the Securities and Exchange Commission on March 29, 2013 as amended on Form 20-F/A, filed with the Securities and Exchange Commission on July 22, 2013. As updated by our subsequently furnished or filed quarterly reports on Form 6-K annual reports on Form 20-F, and other filings that we make with the Securities and Exchange Commission.

During the 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 firm, 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 third-quarter results. In addition, please note that the date of this conference call is November 6, 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 for future events.

With that, I’ll turn the call over to Jim Travers, our Chairman and CEO.

James Travers

Thanks, Jenna. I’d like to thank everyone for joining us on the call today. We’re very pleased to once again announce record performance during the third quarter, as evidence by our ability to exceed the high end of our guidance from both a revenue and profitability perspective.

I often speak about the importance of execution to our business, and this is a quarter where the FleetMatics team just executed. During the quarter our vehicles under subscription grew by 38%, and total revenue grew by 39% year-over-year. While our adjusted EBITDA increased by 49%, which was above our expectations as we achieved record gross margins during Q3.

We also generated positive free cash flow for the fourth consecutive quarter, and are in position to maintain this momentum in Q4 and throughout 2014. Our strong performance continues to demonstrate the power of our financial model as our subscriber base continues to scale. As Steve will detail shortly, we have again increased our revenue and profitability expectations for Q4 and the full year.

Overall we continue to see strong market demand for our software-as-a-service fleet management solution for SMB market. Taking a look at our strong execution during the third quarter, we continue to significantly outpace the growth of the overall market. Our efficient web selling model continues to drive a predominant percentage of our net new subscriber growth.

As I previously mentioned, vehicles under subscription increased 38% year-over-year, which brought our total to over 1417,000 subscribers. And our total revenue up $46.3 million was an increase of 39% year-over-year, coming in above the high end of our guidance range.

Regarding profitability our adjusted EBITDA was $15.1 million, an increase of 49% compared to the prior-year period and above the high end of our guidance range. That speaks to the leverage we’ve been pointing to in our model. In addition we’re also very pleased with our ability to once again generate free cash flow during the quarter, which again demonstrates the strong and increasing cash generation capability of our business model.

Now, turning to some of the business highlights from the quarter, starting with the continued strong momentum with our core SMB customers. Our add-on vehicle activity, which we view as a leading indicator of the health of our customers was again in excess of 20% of new subscriptions sold into the install base during the third quarter excluding enterprise transactions. We believe this continues to validate that our customers obtain their intended value from our solutions, which in turn translates into our ability to consistently maintain our low churn rates.

Our customer experience function that is dedicated to support our customers throughout the contractual period continues to see strong results. This focus will continue to drive improvements in our customer satisfaction and retention, provides us the opportunity to upsell new features and ensures that our customer receives full value from our solution. This initiative will continue to be a significant growth engine going forward.

We added a significant number of new customers during the quarter bringing our total unique customer count to over 20,000. In that regard we continued to see success selling to larger fleets, while we keep reminding you there isn’t a Comcast sized customer each quarter. We continued to see good traction in the plus-500 vehicle market.

As previously relayed, we differentiate our go to market strategy by fleet size. Our mid-market focus is on the 100 to 1,000 fleet size target customer as a key driver of subscriber growth, we added several significant new larger fleet wins in the quarter. One was a large North American outdoor advertising and logo sign operator who placed orders for over 1,000 subscriptions during the quarter.

In addition Arrow Communications a large service provider to leading telecommunications and cable providers across North America, placed orders for over 700 subscriptions. As well as Satellites Unlimited, a leading installer in the direct broadcast services industry who ordered 575,000 subscriptions at 14 branch offices. Our continued sales execution within the cable and telco vertical continues to confirm the leadership capability of our larger fleet solution.

Collectively these new customers represent over 2,200 new subscribers in the quarter. Additionally new subscribers came from Comcast and another large North American cable company, who placed additional orders with us during the quarter for over 400 new subscriptions. Bringing our total contracted penetration for each to approximately 25,000 and 16,000 subscriptions respectively. Proving again how satisfied they are with the returns they are realizing from our software.

Our Web selling strategy remains an extremely efficient way for us to reach the most underpenetrated part of our target market. Specifically during Q3 over 60% of our net new SMB subscribers were sold over the web in the quarter. Excluding again, excluding enterprise transactions, and we plan to continue our investment and our web sales infrastructure to support our growth as of previously stated. We continue to see significant demand, for our solution in the five to 100 fleet sized market. This is, the largest and most underpenetrated market opportunity. And our Web selling process continues to be an efficient method of reaching the target customer.

As a reminder our global average deal size is in the 16 to 17 unit range. So this market is at the very core of our strategy. In regards to our big data asset our ongoing subscriber growth continues to result in an increased number of position points collected by FleetMatics.

Examples of these position points are features such as location, speed, idling and driver behavior. We collected 50 million data points per day from subscribers during the third quarter. Up from approximately 46 million during Q2, now this data set uniquely enables us to provide industry specific and regionally valid best practices and benchmarking metrics relevant to our customer base. Something the competitors we see don’t have the critical mass to meaningfully provide.

The historical information contained in our big data asset will continue to be more important to our product offering as we deliver our next generation platform in 2014. And over time will provide the company with sustainable competitive advantage. The monetization of our data sets will continue to be a key investment area for the company.

Revenues outside of North America increased 27.2% year-over-year during the third quarter. Despite the tough macroeconomic conditions, we continue to believe that international expansion is another significant growth opportunity for FleetMatics. Especially given that over 50% of our addressable market is outside the United States, particularly in mainland Europe and Latin America. To that end we will initiate our direct selling efforts over the web into Mexico this quarter.

As a result of our recent acquisition of Connect2Field, earlier in the quarter, we will begin expanding our sales presence in Australia during the first quarter. And we continue to evaluate 2014 entry into mainland Europe.

Additionally we will also look for new channel partnerships that are focused on accelerating our ability to secure new subscribers within our target markets, expanding partnerships and geographic expansion will be important priorities in 2014.

To date the integration of Connect2Field into our business is progressing well, complementing our SaaS model and strengthening our core product. As a reminder Connect2Field brings automation to the field service activity lifecycle to our SMB customers. Including scheduling, dispatch, invoicing, job cost tracking, inventory and service agreement management, delivered through mobile smartphones and tablets.

These are areas where significant portion of our customers have no automation, and then when coupled with our fleet management offering provide a powerful solution for the service provider sector. We believe this extension, of our product offering will not only increase the value of what our customers receive, but will also over time provide a revenue stream for us approaching that of our fleet management solution.

The Connect2Field product is just one example of the extensibility of our base fleet management platform. We remain committed to building a software platform, which enables us to extend new applications and new features to our SMB customers who leverage the core product and boosts our ability to bring efficiencies through the web and mobile devices. So we’re pretty excited about the base fleet management platform as well as our first incremental product offering.

On another note as most of you are aware, we completed two secondary public offerings during the quarter. And Investcorp who has been with us, as our largest shareholder for over five years, is now substantially out. I do want to comment that Investcorp has been a very good partner throughout our relationship, and we wish them much success in the future.

So, in summary we delivered a very, very strong quarter. And our results highlight the ongoing demand for our SaaS fleet management solution for SMBs. As FleetMatics continues to grow faster than the overall market. Revenues were up 39% year-over-year; adjusted EBITDA was up 49%, and we generated $8.5 million in free cash flow, which once again shows the power of our model to generate cash.

It also demonstrates the execution we’ve come to expect from our team. Our ability to transform vehicle, and driver behavioral data into actionable intelligence for our SMB customers positions us, to maintain this momentum and gain further market share in this large under penetrated market, worldwide.

With that let me turn it over to Steve to provide additional commentary, and on our guidance. Steve?

Stephen Lifshatz

Thanks Jim, so we’re very pleased with the company’s strong third quarter execution. During Q3 we achieved quarterly records for revenue, gross margin, net income, adjusted EBITDA, adjusted EPS and free cash flow. As Jim mentioned, we completed two follow on public offerings during the quarter as well as product acquisition earlier in the quarter. So our third quarter has been quite active and our fourth quarter has been off to a busy start as well.

Now turning to the details of our third quarter financial results starting with the income statement. Total revenue was $46.3 million up 39.4% year-over-year and exceeded our guidance range of $44.3 million to $44.7 million. The driver of our growth continues to be net additions to vehicles under subscription which grew 37.6% year-over-year to approximately $417,000.

During the third 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 Comcast. As well as a large outdoor media company and two large independent service installers in the cable and satellite installation industries, the latter three each sold during Q3.

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. However, we do generally see a number of larger transactions, say in the 100 to 1,000 range size, on a quarterly basis.

These tend to smooth the installs versus the peaks of a Comcast sized order. As a reminder, the timing of revenue recognition associated with these large orders is generally subject to the customer’s installation availability. For instance the Comcast order which we spoke of during the last earnings call, was anticipated to be largely recognized during Q4. Yet we were able to install approximately 6,600 of them by the end of Q3, leaving a balance of approximately 1,900 after additions during the quarter the majority of which we expect to install during Q4.

Now as previously mentioned, our revenue is recognized on a day’s sales basis, which means we recognize daily for the installed units. We now recognize over $500,000 each day from current customers. And it’s important to note that this year each of Q1 and Q2 have 90 and 91 days respectively to recognize revenue, and Q3 and Q4 each have 92 days of revenue recognition. Revenue recognition generally commences when installation obligations to the customer has been satisfied, however keep in mind that customer payments generally begin at 45 days.

Now this can have an effect of slightly increasing or decreasing our deferred revenue balances, due to the timing of the revenue being recognized, versus the timing of the cash being received. And as such, we do not derive much insight from the deferred revenue balances on a quarter-to-quarter basis.

Our quarterly net churn rate was 1.1% in the third quarter. And as a reminder, we calculate our net churn rate for a period by dividing the number of vehicles under subscription. Which were added, from existing customers during 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.

A positive net churn in each period means we’ve added more vehicles from existing customers than we’ve lost from those customers during the particular period. During the quarter, our gross churn rate was 1.9% or 7.4% annualized, compared to 2.2% or 8.8% annualized during the third quarter of 2012.

Now turning to expenses and profitability for the third quarter on a non-GAAP basis, our total gross margin percentage was 75.9% during the third quarter, compared to 73.5% during the same period last year. The strong performance continued to be due to reductions in telecommunication program costs, and the continued scalability of our data centers.

I wouldn’t expect too much additional headroom in the short-term on the gross margin metrics. And as I’ve noted previously, we’ll continue to invest as appropriate, as well as remain focused on cost and efficiency maximization. And as a reminder, the components of our cost of subscription revenues include telecommunications costs, mapping, and other third party data costs, the costs of our data centers and certain service and support-related costs, including customer training.

Also embedded in our GAAP cost of subscription revenues, is the amortization and depreciation of acquired in-process R&D, such as that acquired in our recent Connect2Field acquisition, as well as the depreciation of in-vehicle devices.

While on the point of depreciation of in-vehicle devices, we apply the basic matching principle under GAAP as required for any incremental cost item which correspondingly generates revenue. A third-party valuation firm periodically reviews and analyzes our business operations and customer relationships thoroughly, and in turn determines, an expected life of a customer relationship.

This is the period that GAAP drives us to amortize or depreciate the cost of the income-generating attributes. Which in this case is the capitalized in-vehicle devices and corresponding installation costs. Currently, the expected life of a customer relationship is between six and eight years. And we utilize the more conservative six years to amortize the expense.

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 third quarter, non-GAAP sales and marketing expenses increased 37.0% over the prior year period to $12.9 million, representing 27.9% of revenue.

The increase in sales and marketing reflects our continued expansion of our sales infrastructure. And continued investment in marketing activities, our capitalized commission costs are amortized over the non-cancelable typically 36 month agreements, consistent with U.S. GAAP.

Now getting back to our sales and marketing expenses, I want to again remind everyone that we are, and we continue to be focused on driving revenue growth, even at the expense of incremental profitability. And we’ll continue to invest in our sales and marketing prospects as we see opportunities for returns.

Now non-GAAP research and development expenses increased 52.1% year-over-year to $2.8 million, accounting for 6.0% of revenue. Reflecting our continued focus on enhancing, and expanding our products and solutions. Of note, we capitalized $592,000 of R&D during the quarter, versus $178,000 a year ago. So for on a like-to-like basis we’re looking at approximately 68.2% growth year-over-year, taking into consideration capitalization for both periods.

And as we previously shared with you, we’ve been working on a significant product release, and are investing heavily in that activity at this time. Further, we’re investing in the newly acquired Connect2Field product from both a product enhancement perspective, as well as with respect to very tight integration into our fleet management solution.

Non-GAAP general and administrative expenses were $8 million compared to $5.7 million last year. The year-over-year increase was primarily due to incremental rent cost to accommodate our growing headcounts, along with our public company related expenses that we have incurred.

As you’ll see from our reconciliations to adjusted earnings and adjusted EBITDA, excluded in these numbers are non-recurring, non-operating costs. Including 0.4 million of expenses during the quarter related to our two recent secondary public offerings. As well as $0.3 million of acquisition remitted transaction costs. And $0.9 million relating to an expected settlement amount and corresponding legal and administrative fees associated with our Florida litigation. As these expenses are not part of our normal operating activities, we’ve separately identified them as adjustments, on our non-GAAP earnings reconciliations.

Non-GAAP operating income was $11.4 million for the quarter, or 24.7% of revenues, compared to $7.5 million or 22.4% of revenues, during the third quarter of 2012. Non-GAAP adjusted earnings per share was $0.25, based on 37.6 million weighted-average diluted shares outstanding, and was above our guidance range. Now this compares to $0.19 per share based on 29.5 million pro forma weighted average diluted shares outstanding in the year-ago period.

The effective annualized GAAP tax rate is 26.6%, or about 18.9%, excluding discrete items. Of note, during the quarter we released approximately $450,000 of FIN 48 UTPs as a specific item, as the statute relating to that amount expired. And as a reminder, there’s expected to be a FIN 48 UTP reversal of approximately $12 million to $14 million during Q4. Also relating to the expiration of statute periods associated with those reserves. And of course, both of these are, or will be adjusted out of our non-GAAP numbers to mollify the effect, although they are, or will be reflected in our GAAP numbers.

Our third quarter adjusted EBITDA, increased 49.5% year-over-year to $15.1 million, and was significantly above our guidance of $13.9 million to $14.3 million. As a percent of revenues, adjusted EBITDA was 32.5%, compared to 30.3% for the same quarter last year. And as I mentioned we’ve adjusted out a total of about $1.6 million in non-recurring, non-operational expenses during the quarter.

On a GAAP basis, operating income was $6.9 million, up from $2.5 million in Q3 of 2012. GAAP earnings per share for the third quarter was $0.15 per share, based on 37.6 million weighted-average diluted shares outstanding. This compares to GAAP net income per share of $0.04, based on 2.8 million weighted average diluted shares outstanding for Q3 of 2012. A reconciliation of GAAP to non-GAAP financial measures has been provided with the financial statement tables included in our press release.

Now turning to the balance sheet, we ended the quarter with $139.8 million in cash and $23.3 million in debt. As a reminder, during the quarter we raised $32.1 million, net of offering costs, in our July public offering. During the third quarter, the Company generated $16.6 million in cash flow from operations. And had capital expenditures of $8.1 million, and that resulted in an overall free cash flow of $8.5 million, compared to a negative $6.0 million during the same period last year.

Now these results validate the free cash flow generation of the business model. We ended the third quarter with an accounts receivable balance of $11.5 million, an increase of $3.6 million versus the year-ago period, and an increase of $0.3 million from last quarter, and resulting in DSOs of 22 days.

Our deferred revenue balance, of $29.6 million was up $4.8 million compared to the year-ago period, and consistent with last quarter. Again any quarter fluctuation in deferred revenue should not be afforded much attention as there is always components moving in and out during our quarter. As one customer installs, another customer crosses over into the 45 day payment threshold. We ended with approximately 590 employees on September 30th. This is an increase of approximately 35 employees since June 30th.

Now I’ll finish with some thoughts regarding our financial outlook for the fourth quarter. Despite domestic or global volatility, and given our strong performance in the third quarter, we are again increasing our revenue and profitability outlook for Q4 and the full year 2013, as compared to the guidance we shared on last quarter’s call. Specifically, during the fourth quarter, we are targeting total revenue of $48.6 million to $49.2 million, or growth of 35.8% to 37.4% year-over-year.

We are currently targeting adjusted EBITDA of $14 million to $14.4 million for the fourth quarter, representing an adjusted EBITDA margin of 29.0% at the midpoint. And as a reminder, we typically invest and add our sales and marketing costs in Q4 in anticipation of Q1 each year.

Our 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 $0.21 to $0.23, based on approximately 38.3 million weighted average diluted shares outstanding. So for the full year of 2013 with this updated Q4 guidance, we expect total revenue to be in the range of $175.9 million to $176.5 million, which represents year-over-year growth of 38.2% at the midpoint, an increase from our previously announced guidance of a range of $171.2 million to $172.7 million.

We expect 2013 adjusted EBITDA of $54.3 million to $54.7 million, which represents an adjusted EBITDA margin as a percentage of revenue of 30.9% at the midpoint, and an increase from our previously announced guidance range of $53.1 million to $54.1 million.

We expect full year non-GAAP adjusted earnings per share, which excludes share-based compensation expenses and the amortization of intangibles among other things, to be in the range of $0.83 to $0.85, based on approximately 37.3 million weighted average diluted shares outstanding, and a tax provision of approximately $8.3 million.

In addition, we expect to continue to see positive free cash flow through Q4, and to begin scaling nicely from there on an annual basis in 2014 and beyond, as previously noted. And for those of you who’re working on your FY14 models already, well we’re still in the planning process for 2014, we currently expect preliminary revenue, to be in the range of $225 million to $227 million, or an increase of 28% to 29% year-over-year, compared to our current guidance.

Now we believe that this represents a strong outlook, particularly considering the fact that we’re still a few months away from the beginning of the year, and it’s on top of our just increased FY13 guidance. We’ll be roughly providing more detailed information around the margins and earnings on next quarter’s call.

So in summary, our third quarter results exceeded our expectations across our key metrics. We continue to prove the viability of our model, and our strong momentum has extended through the third quarter of 2013. We continue to broaden 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 as Jim stated earlier, it’s all about execution.

So with that, we’d be happy to take any of your questions at this time. Operator?

Question-And-Answer Session


[Operator Instructions] And we’ll go first to Kash Rangan with Merrill Lynch.

Kash Rangan – Merrill Lynch

Hi guys, thank you very much guys for the level of disclosures you’re providing. It occurs to me that you’re one of the very few, maybe the only, SaaS company out in the universe that is actually growing top line 38%, 39%; generating free cash flow, has very attractive subscriber acquisition and retention economics. And so you’re poking a lot of the myths that the SaaS universe cannot actually generate profits, by generating these profits.

So the question for you is, congrats on a job well done, but if you look at your guidance for next year, I have a run rate your Q4 guidance, your next-year guidance looks extraordinarily conservative. It’s about a 10% low 12% uptick on top of the run rate for Q4. The question for you is, since you proved that the economic model works, and you’ve got one of the probably the best SaaS models in the industry, why not just go for continued acceleration of new subscriber activity and rev up and get bigger as quickly as you can. That’s it for me. Thank you very much?

James Travers

This is Jim, Kash, good questions. Well look, first of all, I think as Steve mentioned in his commentary that we’re not adverse of trading off EBITDA margin and putting more expenses to work to generate new subscribers. So from our view, we’re not done with the planning for 2014. We’ve got a great opportunity globally to continue to extend our platform not only here in North America, but also in the markets we’re not in. And we’re going to be doing a lot of work to make sure we’re taking full advantage of those market opportunities as we move into ‘14.

So at the same time look, we do have some tough compares year-over-year. We’ve got a Comcast business that, as we said multiple times, there aren’t many, as we’ve mentioned in our commentary, we’re at just slightly over 25,000 subscribers with Comcast. Which obviously was meaningful to us, specifically in 2013 in terms of net new adds.

So, given the fact that our average deal size is 16 to 17 as we’ve reiterated, we’ve got to be mindful of the fact as we grow, that’s a tough compare in terms of that size of customer. So that’s just one data point to consider.

With that said, as we look at our operating expenses and trading it off in terms of net new subscribers, we certainly are going to be mindful that we’re going for growth. This is a greenfield opportunity as we’ve discussed. And we’ve got multiple ways we can continue to grow the business.

Kash Rangan – Merrill Lynch

Thank you, and congrats on being an anomaly in generating profits while showing us nice topline growth and generating cash. Keep it up. Thank you.

James Travers

Thank you Kash.


And our next question comes from Raimo Lenschow with Barclays.

Raimo Lenschow – Barclays

Hey thanks and congrats on the quarter, and thanks for the disclosure on the accounting standards again. Quick question, maybe a follow-up on Kash, at the time of the IPO, we know you focused a lot on the kind of the SMB low end of the market, because that’s your bread-and-butter business. And we’ve had a couple of kind of large deals, but I’m hearing more and more kind of the, that the SageQuest acquisition helped you in that 100 to 1,000 vehicle space. My first question would be, can you talk a little bit about the opportunity there, that the different competitive nature that is out there whether the opportunity obviously as well? And what needs to happen in the distribution and sales capacity to kind of get a good kind of runway there? And I have a follow-up then afterwards.

James Travers

Hi Raimo this is Jim. Again, as we talk about it we’d like to think about our segmentation in that way. So we look at it as kind of five to 100 as our lower end, as I discussed, which again is a huge opportunity for us where the web selling model really helps us. And then we want to clearly take ground in that 100 to 1,000 call it mid-market as we would look at it. We clearly like customers who are over 1,000 but again that’s a smallest part of the market.

So we are very much focused from a marketing perspective, and a product perspective to take full advantage of, in this case, the SageQuest brand, in that middle market because we see a great opportunity to do that. So we’re tailoring our marketing message along those fleet sizes to make sure we’re taking full advantage of the opportunity to position the strong integration capability of our SageQuest branded product, which is the most important thing when you start to get into that middle market.

So we see a great opportunity, in that size customer to continue to leverage that brand. And we’re going to be doing a lot, moving into ‘14, around our market message, and how we’re going to go off and cultivate leads in that market space specifically, because that’s really where we want to see us move up logically from that five to 100 over time.

Raimo Lenschow – Barclays

Yeah okay. Yeah that’s what I would see as well. And then just one thing, given that you were so successful and that kind of it invites a lot of followers. There’s been a lot of extra transaction in the market now with private equity, but also with other companies, kind of buying assets in your space. Can you maybe comment a little bit, so Teletrac is gone, but also now and served with another company; but also now FleetCor is entering the market. And especially around FleetCor, how does that change the dynamics for you? You’ve been partners as well, and there was being a nice up-sell and cross-sell opportunities. Talk a little bit about the competitive dynamic that’s playing out now. Thank you.

James Travers

Okay. Again, good set of questions. Well, look, first of all, we think it validates the market opportunity that we have. So from that perspective, it’s not a surprising phenomenon to us. We knew consolidation would happen, so that’s number one.

In regards to – and I would say this, the competitive environment has not changed much, so looking at it from quarter-over-quarter, we have not seen any significant change at the product level or the pricing level from our competitors, so that’s number two. Three, you mentioned FleetCor, couple of things with FleetCor. First, we’ve had a good partnership with FleetCor over last few years. And, again, I want to remind everyone that, that relationship is basically built on us reselling their fuel card, along with our fuel reporting capability in our product. We do not get lead generation the other way.

So it really is not going to affect us in terms of the fact that they went off and bought, what was a competitor, called NexTraq. I think it, again, it validates the importance of what we’ve been doing with them. Now, from my understanding with FleetCor, they’re going to very much focus down that acquisition on their customer base to demonstrate their ability to sell it back to that specific customer base; which, in the end, I think we might have a byproduct of actually competing with them less than we see them in the broad market, but that’s left to be seen how that plays out. But the bottom line is that partnership has been successful. In fact, we’ve just recently expanded it into Canada.

It’s been a good relationship for them and for us. And, again, we get an economic fee for every time we sell a card, so that’s been beneficial for us. And from our standpoint looking at the overall market, we think it’s an extraordinarily large market opportunity. And we feel very good about our go-to-market strategy in competing at the product level. So, from that perspective, we’re very much focused on what we’re going to do, and less worried about what our competitors are doing at this juncture.

Raimo Lenschow – Barclays

Yes. And if I may squeeze in one last one. You talked about the international expansion and that’s being a, has been a focus for 2014. Share with us like your views on how you think about organic versus acquisition there, and what you see in terms of potential asset prices out there, as well, I guess?

James Travers

Well. Look, our organic growth for next year is pretty much as Steve stated it. If we look at acquisitions, we’re going to obviously look at that from the standpoint of our ability to give us additional subscriber growth; but also, obviously, more importantly, give us a new geographic footprint, to the extent that we would acquire a company in a new geography. So and when it comes down to pricing, look, we’re going to be very careful about that. We know we’ve done one acquisition through the history of the company, which has been an absolute superb model.

Well, Connect2Field, sorry. I was thinking of SageQuest as the major one, but Connect2Field most recently. So, two. But the meaningful one was SageQuest. And that one is one that we look at and say, look, the nice thing about that acquisition is we bought product that we didn’t have, and we actually bought a very good set of customers that fit very nicely into what we do.

So, from that perspective, that would fit very nicely. And I would say that, that would be a template for how we would think about it going forward. Valuations – it’s always a difficult attribute when you’re looking at acquisitions and what you pay for one. We’re going to be careful in that regard. But we’re not going to be bashful if we see something that makes sense, that can give us both product and geography going forward.

Raimo Lenschow – Barclays

Perfect. Thank you. And well done, again.


And from Stifel, we’ll go next to Tom Roderick.

Tom Roderick – Stifel

Hey, Jim. Hey, Steve. Good afternoon. So, maybe I’ll jump out of the weeds for just one second. I wanted to ask kind of a high-level question as it regards the web selling model. And I know I get a lot of questions about this; I’m sure you do. With respect to the web sales model, can you just give a little bit more detail about that model as a strategic differentiator? In other words, what do you do better than your peers? How sustainable do you think that advantage is? And then how do the leads flow into the high-end of the model of the large fleet opportunities, as you sort of segment greater than a 100, and lower than a 100, fleet units out there? Thanks.

James Travers

Okay. This is Jim. Well, look, we do it very thoughtfully. The lead generation model for our larger fleet is somewhat different than the lower end. Where on the lower end, we go after it very much on a broad digital basis. But paid search, for example, would be much more prevalent in that 5 to 100 marketplace in terms of lead generation. So Google AdWords and other paid search ways of getting leads would be more prevalent in the lower end; as well as email, and the organic type of web linking, and a lot of other things would be important there.

As you move up to the middle market, paid search still is productive, but it’s much more direct messaged to a more sophisticated user where email and more media-related type of marketing becomes more important in terms of that lead flow into our funnel. And to answer your question about the lower end, and how we think about our differentiation, look, we’ve been perfecting that web sales model since 2006.

We have a lot of man years of perfection into it of what works and what doesn’t. And we have a very prescriptive way of measuring a lead coming into our funnel all the way through to the time we sit that customer, and a very prescriptive way that we approach that customer with a very strong return on investment model, and a very hard close at the end to go in and get them productive.

We do a lot of real-time training in our centers. We continue to work on our outbound model, in terms of how we book an appointment in to that funnel. We use a lot of automation, both from salesforce.com, using Eloqua for demand generation, to measure very specifically every lead through that funnel, all the way through to close.

So, we have a lot of man years in that. And I can tell you that while it sounds easy as we’ve described it, for those that know this market and how to sell over the web, it is a very, very difficult thing to do efficiently. So we feel very good at this stage that we’ve got a real leadership position in that regard. And, obviously, we’re going to continue to build off of it.

Tom Roderick – Stifel

Great. That’s helpful, thanks. Okay, now I’m going to dive back down in the weeds. So, some of the numbers you gave, I wanted to make sure I had these right. Steve, I heard you say 6600 of the 29K net adds this quarter came from Comcast, I think. So I wanted to be sure that was accurate. And then relative to some of the other opportunities or some of the other wins, Jim, that you mentioned I think the aggregate was maybe 2200 new-subs across three customers. I wasn’t clear if those went into this quarter or if they go into next quarter. Maybe you could just be a little bit more clear with me about what goes into which quarter?

Stephen Lifshatz

Sure. Yes, you did hear correct on Comcast on the 6600 that were installed this quarter. Now, if you recall, we actually had, I think, about 7000 that were sold last quarter, as well as a little bit of overhang from prior orders. And Comcast, as you know, typically adds a little bit from periodic periods. So we ended up the quarter with about 1900 yet to be installed, I believe, was the number. Now, as far as the other three that you mentioned, those all were sold and installed during the quarter as well.

Tom Roderick – Stifel

Sold and installed. Okay. So, I know you don’t guide quarter-on-quarter with the subs themselves, but directionally I know, coming off a quarter we had some really big, chunky stuff, would it be prudent to sort of think about our models as sort of down directionally? Or is there a seasonal element we ought to think about? Maybe just any sort of direction you can offer as we build our models from a sub count perspective would be great.

Stephen Lifshatz

Yeah, there’s two factors that one has to consider. One of them I tried to be very explicit about is the number of days of revenue recognition within each quarter. So, for Q3 and Q4, for instance, there’s 92 days to recognize revenue. But one of the other very important pieces which somewhat counterbalances that is that it really is all about selling and install days. And when you think about Q4 in particular with Thanksgiving, with Christmas holidays, New Year’s, the number of shops that actually shut down, you can actually have some challenges both addressing the customers, as well as having them make the vehicles available for installation; which, of course, then triggers the rev rec. So there is some seasonality in there.

Tom Roderick – Stifel

Okay, perfect. I’ll jump back in the queue. But, thank you, guys.


Our next question comes from Robert Breza with RBC Capital Markets.

Robert Breza – RBC Capital Markets

Hi. Thanks for taking my questions. First of all, great quarter, guys. Jim, maybe just pulling back here a little bit. You guys talked about the kind of the new, next-gen platform in 2014. And I was really kind of curious on how you think about that when you go back and look at this last quarter here. 20% of the new subscriptions had add-on sales. I would assume the next-gen platform’s going to kind of hopefully juice some of that. So I’d really like to get some insight from you on how you think about the next-gen platform really affecting the kind of the sales process over the next 12, 18, 24 months. Thanks.

James Travers

Again this is Jim. Look, we’ve done a lot of work in terms of the new platform coming out. And we’re really looking at the fact that we have to have a base set of capability that can support a broad spectrum of users, as we do today with two brands. So the important thing for us with that project was getting to a unified code base globally. Up to this point, they are two discrete, different products; very successful for the customers that they serve. But it was important for us strategically to leverage a common code base so we can get additional optimization from our development spend. And it gives us the ability to really put the features in, tailored very well for the target customer we’re off supporting.

And the other base set of things that we’ll do with that platform, as I mentioned in my interaction here in terms of my commentary, was the fact that we’re going to leverage a lot of our big data and our business intelligence capability back in to that product in a way that we think can be unique to the customer. So, from that perspective, I think that’s where you’ll start seeing some of the attributes of the big data assets that we have, in a very unique way, back through that platform.

So, we look at it as primarily and initially targeted towards net new subscribers. And then, over time, we will convert our existing customer base over to the new platform. We’re going to be mindful that that’s not a forced march, because customers are satisfied today with what we are delivering. So that is something we’ll do in a very systematic way over the course of time. But the bottom line is we’d like to think of that platform in terms of some new features and functions that will give us differentiation in the market and the ability to sell additional features and products like Connect2Field.

Robert Breza – RBC Capital Markets

Great. Thanks for the color. Maybe a follow-up here is – the international markets were up 27% year-on-year. You talked about entering Mexico, and then a few other international areas. How do you think the international markets should grow here over the next 12 to 18 months? Do you think it will pace kind of overall revenue growth? Or how should we think about that just on a relative basis? Thanks.

James Travers

Well, I can just tell you that in the case of Mainland Europe specifically and if we look at the other markets, Mexico is a pretty substantially sized market; probably represents around 8 million to 9 million-plus kind of commercial vehicles. Australia is really a market that’s the size of Canada around 2.5 million. So both those markets are not insignificant markets. But compared to Mainland Europe, that is a market that’s actually larger than North America in commercial vehicles, it’s just a really good opportunity for us as we would think about entering it in 2014.

Now, what that could mean to us in growth, obviously Europe is still separate countries, so we have to be mindful of that. So in terms of how we would engage. So the pace of that engagement and how we would enter Mainland Europe and what it would mean to us, I think is going to be something that will be a slower ramp-up through the year, as we would engage with it. But, that said, I think, over time, Mainland Europe should be an appreciable part of our global overall percent of revenue.

Stephen Lifshatz

Right. And one of the things I just want to add to it. This is Steve, is that it’s a SaaS model. So it really takes some time until you start building up some real traction, as far as the size of the revenue there, until it becomes meaningful as part of our overall existing base

Robert Breza – RBC Capital Markets

Okay. Thank you, guys.


[Operator Instructions] And we’ll go next to Bhavan Suri with William Blair.

Bhavan Suri – William Blair

Hey, guys. Thanks for taking my question. Just on Connect2Field, two quick questions. One, just remind us, of the 417,000 odd vehicles, how many of those would you classify sort of services businesses or involved in the services business?

James Travers

Roughly, as we would look at it today, think of it in terms of roughly 40% to 50% of that customer base would be a target.

Bhavan Suri – William Blair

And then the follow-up to that was, have you had any sales in the U.S, of the Connect2Field product? Or is that still in the integration phase?

James Travers

No, we have. Specifically, Connect2Field does have customers in the U.S., and we continue to add additional customers. So the answer is we do have customers for Connect2Field in the U.S. market.

Bhavan Suri – William Blair

That’s great. And then as you look at the big data products and, again, I’m not asking for guidance or anything but as you look, you talked Connect2Field could drive ASPs up to the range where it might be as much as the existing ASP today. When you think of the business of intelligence products, what level of lift could we see from that?

James Travers

Well, to be correct, I don’t know we said it would be the same level of – how we’re pricing the current, the GPS offering today. It was more of the market size opportunity is equivalent to what we’re doing today, because it is a different priced model. It’s more of a user price model today than where we are today, is a fixed price on a vehicle basis. Just to be clear. So, look, over time, you take a look at what we’re trying to do here, and it really fits nicely from the standpoint that the service worker is really an hourly paid employee.

So billable hours and how you optimize the efficiencies of that field service worker is a very critical attribute, again, to more than 50% of our current installed base, as well of net new subscribers going forward. So we look at it as a logical extension to what we are delivering today. And, again, we think about what we’re doing as a base platform that we’re building and putting good applications across that platform, leveraging location. So, now, how big that can be over the course of time, we think it can be a pretty sizable business inside the company. But to Steve’s point, it is SaaS, so it’s going to take a while to build it appreciably at the scale we’re at to really move our needle. But I can tell you that we think that’s an area that we’re going to put significant investment in, moving into next year.

Bhavan Suri – William Blair

And just one quick housekeeping question. Any update on the Verizon reseller business? And how did that do in the quarter?

James Travers

We didn’t mention that specifically. We continue to see lead generation from that relationship, so it remains productive. But it’s not hugely material to us in terms of net new subs. But it is, it continues to perform pretty well.

Bhavan Suri – William Blair

Great. That’s helpful. Thanks for taking my questions, guys.


And from Pacific Crest Securities, we’ll go next to Brad Erickson.

Brad Erickson – Pacific Crest Securities

Hi, guys. Thanks for taking my questions. First, I know you talked about the churn earlier. But can you give us a sense, just generally, on how you saw retention renewal rates develop during the quarter directionally, as well as how we should be thinking about that going forward, particularly on the small and medium-sized business segment.

Stephen Lifshatz

Yeah, and look, most of the churn that one would see really does almost fully come from the SMB side of the segment. The larger customers, we become much more ingrained; as part of the water supply, so to speak. We see about a third of those customers who do not renew for any reason, or who renew out, or who do not renew out of sequence. In other words, when they’re not even up for renewal, they will leave us because of financial instability with the firms.

Now, we’re dealing with small businesses. These are SMB customers, and some of them just to have some financial challenges, or go out of business from time-to-time. So we’re pretty pleased with the overall churn numbers. We fed you the gross churn numbers. And as you can see, those are extremely respectable, and down a little bit quarter-on-quarter, even. And, again, a third of those would be subscriptions that did not renew that were not expected to even be up for renewal. So you’ve got to keep that in mind as you think about the whole churn piece.

Brad Erickson – Pacific Crest Securities

Great, that’s helpful. And then just on the ARPU front, within the results, your ARPU levels continue to be really resilient, it seems. Can you talk about kind of the underlying dynamics there? I guess the degree to which you added a few less from the larger subscribers which obviously come at the discount. But then obviously it seems like you’re seeing improving traction and adoption for these add-on services. So any color on just what the underlying pricing dynamics you saw, and how we should be thinking about that going forward would be helpful? Thank you.

Stephen Lifshatz

Yes. Look, we’ve been seeing pricing stay within a pretty tight band. One of the things that we have going on is, we’ve got features that we can go back and sell through a dedicated team we have here, and upsell those customers for these incremental features, at an incremental fee on a monthly basis. It takes quite a lot of that to even move the needle slightly. But you see, I think for the second quarter here, where our revenue has slightly outpaced our unit volume growth. When you look at it on a year-on-year basis so there’s clearly some traction there. But it’s really all about having this fundamental platform where we can add component pieces and make sure that we’re selling back into that base.

Brad Erickson – Pacific Crest Securities

Great, that’s helpful. Thank you.


And at this time, there are no further questions in the queue. I’ll turn the call back to Mr. Travers for closing remarks.

James Travers

Okay. I thank everybody for joining the call today, and we appreciate your time. Thank you.


And, ladies and gentlemen, that does conclude today’s conference. We thank you for your participation.

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