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Fleetmatics Group PLC (NYSE:FLTX)

Q4 2013 Earnings Conference Call

February 20, 2014 17:00 ET

Executives

Jenna Marvel - Investor Relations

Jim Travers - Chairman and Chief Executive Officer

Steve Lifshatz - Chief Financial Officer

Analysts

Chris Hogan - Barclays Capital

Tom Roderick - Stifel

Bhavan Suri - William Blair

Brad Erickson - Pacific Crest Securities

Kash Rangan - Merrill Lynch

Operator

Good day and welcome to the Fleetmatics Fourth Quarter and Full Year 2013 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Jenna Marvel, Investor Relations analyst. Please go ahead, ma’am.

Jenna Marvel - Investor Relations

Thank you. Good afternoon and welcome to Fleetmatics’ fourth quarter 2013 earnings call. I am Jenna Marvel, Investor Relations analyst for Fleetmatics. Today, we will be discussing the results announced in our press release issued after the market closed. To access the press release and the financial details, please see the Investor Relations section of our website. As a reminder, today’s call is being recorded and a replay will be available following the conclusion of the call.

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 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 fourth quarter and calendar year 2013 results. In addition, please note that the date of this conference call is February 20, 2014. 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.

Jim Travers - Chairman and Chief Executive Officer

Thanks, Jenna. Good afternoon, everyone and thank you for joining us today. We are eager to share the results of the final quarter of fiscal 2013, which resulted in a strong finish to a transformative year for Fleetmatics. Today, I plan to cover three key subjects: Q4 results, highlights from 2013, and a view into our business initiatives we have slated for 2014. And Steve Lifshatz will follow his financial discussion with our current outlook for the first quarter and full year 2014.

First, Q4 results. Our vehicles under subscription grew by 34% year-over-year to over 445,000 active subscriptions. That makes us the clear category leader targeting the SMB space, as well as the fastest growing subscriber base in the fleet management industry. Total quarterly revenue grew by 40% year-over-year to $50.1 million, which is a direct result of our sustained growth, scalable subscriber base and the power of our SaaS platform. Our annual revenue of $177.4 million was up $49.9 million or 39% over the prior year. And as you saw, we attained a gross margin of 77% for Q4 and 75% for the full year, up about 300 basis points each over the comparable periods last year.

Our adjusted EBITDA of $16.1 million for the quarter increased by 36% versus Q4 of last year, it was substantially above our guidance. And this drove an adjusted EBITDA of $56.5 million for the year, up 67% from 2012. Once again, we saw good performance with our core SMB web sales channel. The selling model continues to allow us to sell to the smaller fleet customers efficiently. Over 62% of our net new subscribers excluding enterprise were closed over the web. In addition, we closed three new larger fleet contracts in the plus-700 vehicle range, which is testimony to the strength of our larger fleet solution. We entered 2014 with a lot of momentum. Steve will provide more details on to the financials for the quarter and the year.

Turing to the year 2013, demand for our solution for SMBs remained strong. 2013 was a great year for our company and let me reiterates some our key accomplishments. Full year reported revenue was $117.4 million, an increase of 39.2% over 2012. Significant gross margin improvements to 75.8%, net income of $30.5 million and adjusted EBITDA for the full year of $56.5 million, an increase of 66.7% year-over-year.

We added 4000 new customers bringing our total customer count to approximately 22,000 at year end. Significantly, we closed several larger fleet customers who deliver their services locally including household brands such as Comcast, Time Warner, Virgin Media, Johnson Controls and Oils States International, with C&J Energy, TDS Telecommunication and Scientific Game being some of the larger customer wins added in Q4. We will expand our larger fleet focus in 2014. Additionally, our 20% of our new subscriptions consistently came from existing customers, which is testimony to the value our customers are receiving.

We continue to make progress with our churn rate as our trailing 12-month net churn number was 7.9%. As Steve will detail these metrics represent both the powerful add on opportunity and retention characteristic of our customer base. In addition we have modestly grown our revenue faster than our subscriber growth during the year through increased customer offerings coupled with high customer satisfaction. We even increased the average 36-month contract term slightly.

During 2013, we added product capabilities for driver logs, a major new application with the Connect2Field acquisition, which is our mobile application for field service management and saw a deeper penetration of our existing customer base with driving style and fuel card integration. And of course, as previously announced we have added Mexico, Australia and as of early Q1 Holland to our active selling geographies. Early results had been promising as we have closed new customer in all three markets, including a plus-100 vehicle contact for Formway Group, a Queensland-based metering company in Australia. We remain optimistic that our targeted new geographies will add to our growth story.

However, it’s important we remain it is SaaS, so we will take time to scale significantly in these markets. Our powerful web selling model continues to drive a considerable percentage of our net new subscriber growth sustaining our ability to significantly outpace the growth of the overall market. And as related this past quarter we saw 62% of our total new sales activities excluding enterprise, driven through our web channel. This remains a very efficient process and is very productive. We collected greater than 4.8 billion data points of live data during the year, allowing us to quantify the best practices we observed within and across our customers industries and geographies in order to create accurate and reliable benchmarks to present our customers actionable business intelligence to reduce costs and improve productivity. This type of fleet intelligence and insight will be a key part of our new platform.

Now let me discuss our 2014 key initiatives. First, let me say that we are looking at 2014 as a significant investment year to build growth for the company over the longer term, not just in 2014, but 2015 and beyond. We will be delivering our new software platform investing heavily in our field service management product Connect2Field, entering new geographies and creating a new market brand of message supporting our position as the clear category leader. All of these initiatives are focused on taking full advantage of the large market opportunity before us. This opportunity is significant, so we must investment to win.

With the said, let me discuss several of these initiatives in more detail. The first and perhaps most relevant is that during Q2, we will be releasing our new version of our software platform. This release has been in a beta test in Europe and in North America with several hundreds of our current customers putting it through its paces on a daily basis. The initial response has been very favorable and we remain optimistic that this new release will extend our competitive advantage at the product level. Implicit in this new release will be new functionality that takes advantage of the power of our big data asset specifically the historical trending information and industry benchmarking capability. We believe this can provide a strategic competitive advantage over time. In conjunction with this new release we will also be investing significantly in our Fleetmatics marketing and branding. Our goal here will be to position Fleetmatics as the clear category leader in the mind of our target customer. Improved market awareness will be critical to our growth objectives in 2014 and will be a significant investment area for the company.

Continued globalization and geographic expansion will be a key area of focus this year. As related we have expanded our sales footprint into Mexico, Australia and into mainland Europe through Holland. To that end, we have already closed new customers in all these markets. Revenues outside of North America increased 25.3% year-over-year during the fourth quarter. International expansion will be a key area of focus during the year especially given that over 50% of our addressable market is outside the United States, particularly in mainland Europe and Latin America. We believe it is the opportune time for us to enter these markets as fuel costs continue to rise and the need for fleet management becomes increasingly more prevalent.

It is important to note that we are entering these new geographic areas with our current business system that we are using effectively in North America the UK and Ireland. At this juncture, we do not see any impediment to selling and delivering our current product into the new markets we are targeting other than product localization. Monetization of our customer base will be another significant initiative for the company in 2014. Our customer experience function, which was launched in 2012, has demonstrated success up selling to our existing customers. Adding new features and applications like Connect2Field will be a key focus for our product strategy. Build, buy or partner will be how we will continue to think about this area in 2014. And we will not hesitate to buy new product if it fits our software platform and accelerate subscriber growth.

As we have seen in 2013 the industry has been consolidating, we will continue to evaluate all potential combinations that could improve our global competitive position. That said our core focus will continue to be organic growth. Additionally expanding new channel partnerships that are focused on accelerating our ability to secure new subscribers within and outside of our current target markets will be another focus. Relationships like Verizon are a good example of how we think about these future partnerships in this area especially geographically.

So to recap on 2013, we delivered another strong quarter to end the year and our positive results emphasize the continued demand for our SaaS fleet management solutions for SMBs as Fleetmatics continues to grow faster than the overall market. Revenues for the year were up 39% year-over-year, adjusted EBITDA for the year was up 67%, which once again shows the power of our model. I might add there are very few publicly traded SaaS companies growing revenue plus 25% with EBITDA margins over 20% and also generating positive annual cash flow. We believe we are in a very strong position as we enter 2014. The key to 2014 will be four fold, continued focus on building new subscribers within all targeted markets, successful delivery of our new software platform, taking advantage of our field service management and new product opportunity and accelerating our market position of Fleetmatics as the clear global leader. We have multiple opportunities to continue to scale the company.

So with that let me turn over it to Steve to provide additional commentary on the quarter and on guidance. Steve?

Steve Lifshatz - Chief Financial Officer

Well thanks, Jim. And today I will be speaking to our results for Q4 and fiscal year 2013, while blending in some color for 2014 some specific areas. We will wrap up with our current outlook for Q1 and the full year of 2014. Overall, Q4 and FY ’13 as a whole were a huge success, highlighted by consistent execution and year-over-year improvements. During Q4, we attained quarterly records for revenue, gross margin and of course adjusted EBITDA. We entered three new markets during the quarter while still maintaining strong growth momentum in North America. Relating to the income statement, total revenue was $50.1 million, up 39.8% year-over-year and of course exceeded our guidance range of $48.6 million to $49.2 million.

Total revenue for 2013 was $177.4 million, up 39.2% year-over-year. Now peeling that back a layer, net additions to vehicles under subscription grew 34.4% year-over-year to over 445,000 paying subscriptions. As you know our business is predominantly SMB focused. As a result, we saw 16 to 17 average subscriptions per customer for new sales on a year-to-date basis. We ended the year with approximately 22,000 unique customers.

Our quarterly net churn rate was 1.3% in the fourth quarter compared to a net churn rate of 1.6% in the fourth quarter of 2012. Now this means we continue to add more vehicles from existing customers than we lose from those customers. What’s really impressive however is that our net churn on a trailing 12-month basis is 7.9% annualized. So that means that we have continued to grow our existing customer set by almost 8% on a net basis, and that’s after taking into consideration the effect of any non-renewals, subscription count reductions or terminations due to customer’s financial challenges. Now during the quarter our gross churn rate was also 1.3% or 5.2% annualized, an improvement over the fourth quarter of 2012 gross churn of 2%, validating the continued stickiness of our product.

Now, turning to expenses and profitability for the fourth quarter on a non-GAAP basis, our total gross margin grew to 77.8% during the fourth quarter, compared to 74.6% during the same period last year. Reductions in telecommunication program costs continued to drive the cost of services down, although I think we pretty much hit the peak now for the next year. For 2013, our gross margin was 75.3% compared to 72.1% in 2012 and on a non-GAAP basis was 77.8% for the quarter and 75.8% for the year.

During 2014, we would expect a slight decrease from the current quarter gross margin with flat to up for the year-on-year margin. And this was impacted as we continued to invest specifically in further infrastructure for upcoming product release, which will be on a separate server farm instance in both redundant server locations in North America and in Europe. In terms of our operating expenses as stated last quarter, we invested heavily in sales and marketing with some initial investments in new marketing programs, which will continue throughout the year. So we have been continuing to explore methods and currently hone our models, we have always done. We have identified some investments in marketing which exceed our ROI hurdle.

On the fourth quarter non-GAAP sales and marketing expenses we saw increases of 47.5% over the prior year period to $14.8 million, representing 29.6% of revenue. For the year, non-GAAP sales and marketing expenses increased 36.8% over the prior year to $52.3 million, representing 29.5% of revenue. As we have stated repeatedly, as you should consider in your 2014 models, our focus is to invest across the business and to expand our distribution and product capabilities for the future even at the expense of a short-term profitability impact. So as noted we will be investing in some new marketing programs and of course we will see continue to expansion and investment in our sales operations particularly in our new geographies as well as for our field service offering. For context, this means that we will spend about $8 million during 2014 just for these specific geographical and product expansions.

Non-GAAP research and development expenses increased 42% year-over-year to $3 million, accounting for 5.9% of revenue and reflecting our efforts on our upcoming product release as well as expanding the functionality of our products and solutions. For the year, non-GAAP research and development increased 38.6% year-over-year to $10 million, accounting for 5.6% of revenue. Of course we capitalized $729,000 of R&D during the year versus $233,000 for R&D a year ago, which are excluded from these numbers. So for on a like-to-like basis, we are looking at approximately 59.2% growth year-over-year taking into consideration capitalization for both periods.

As we think about 2014 remember we have got a combination of new product and new releases followed by a set of increased functionality focused on BI attributes of the product. The base product R&D investment will grow approximately 60% during 2014 plus we will be investing the further $3.5 million to $4 million in R&D for our field service product, which we continue to be very enthusiastic about.

Non-GAAP general and administrative expenses in the fourth quarter were $8.9 million compared to $5.5 million last year. For 2013 non-GAAP G&A expenses were $29.7 million compared to $23.3 million in the prior year period, an increase of 27.4% year-over-year. The year-over-year increase was primarily due to incremental rent costs, systems implementation consulting fees and public company related expenses that we have incurred.

If you recall, Q4 was a quarter for a large portion of our operational, procurement and invoicing internal systems to cut over to our new accounting system. So that drove a number of expenses on the consulting front as well as some incremental short-term personnel cost associated with the conversion. The second phase of the conversion is now complete. And during 2014, we will be cutting over our smaller European activities as well as our SageQuest division activities to the system. The new accounting system will enable us to be significantly more scalable than our prior systems and those future cut overs will leverage the full experience set gain to date. And we’ll anticipate a more time and cost efficient process.

As you can see from our reconciliations to adjusted earnings and adjusted EBITDA, excluded in these full year 2013 numbers are non-recurring, non-operating costs totaling $1.6 million associated with litigation and of course stock-based compensation expense of $7.5 million. Non-GAAP operating income was $12.3 million for the quarter or 24.6% of revenues compared to $9 million or 25.2% of revenues during the fourth quarter of 2012. For the FY ‘13 non-GAAP operating income was $42.5 million or 24% of revenues compared to $23.7 million or 18.6% of revenues in 2012. Non-GAAP adjusted earnings per share for the fourth quarter was $0.24 based on 38.3 million weighted average diluted shares outstanding, so above the high end of our guidance range and compares to $0.21 per share based on 32.2 million weighted average diluted shares outstanding in the year ago period.

For the year, non-GAAP adjusted earnings per share was $0.86 based on 37.1 million weighted average diluted shares outstanding compared to $0.57 per share based on 30.8 million pro forma weighted average diluted shares outstanding in 2012. The effective annualized GAAP tax rate is a benefit of 15.6% or cost of about 26.6% excluding discrete items compared to 33.3% expense from the year ago period on a GAAP basis. Of note, during the quarter, we released approximately $11.1 million of FIN 48 UTPs, or unknown tax positions as a specific item. As the statute relating to that amount has expired, as previously shared, this FIN 48 reserve has non-operating and non-cash implications and therefore the impact of it has been adjusted out of our adjusted EBITDA and adjusted earnings numbers for the quarter and the year.

For 2014, we should expect to see an overall tax rate of approximately 20% to 22%. Our fourth quarter adjusted EBITDA increased 36.4% year-over-year to $16.1 million and was significantly above our guidance of $14 million to $14.4 million. As a percent of revenues, adjusted EBITDA was 32.2% compared to 33% for the same quarter last year. For the year, adjusted EBITDA increased 66.6% to $56.5 million compared to $33.9 million in 2012.

And on a GAAP basis, fourth quarter operating income was $8.2 million, up from $6.6 million in Q4 of 2012, an increase of 23.9%. GAAP earnings per share for the fourth quarter was $0.42 per share based on 38.3 million weighted average diluted shares outstanding. This compares to GAAP net income per share of $0.14 based on 32.2 million weighted average diluted shares outstanding for the fourth quarter of 2012. And for the full year 2012 on a GAAP basis, operating income was $29.5 million, up from $12.4 million in 2012, an increase of 138.2%.

GAAP earnings per share for the full year 2013 was $0.82 per share based on 37.1 million weighted average diluted shares outstanding compared to GAAP earnings per share of $0.50 based on 10 million weighted average diluted shares outstanding for 2012. Reconciliation of GAAP to non-GAAP financial measures has been provided with financial statement tables included in the press release.

Now, turning to the balance sheet, we ended the quarter with $137.2 million in cash and $23.8 million in debt compared to $139.8 million in cash and $23.3 million in debt during Q3 of 2013. During the fourth quarter, the company generated $2.1 million of cash flow from operations and $41.9 million for the year. Free cash flow was a negative $7.1 million for the quarter and a positive $5.5 million for the year. During the quarter, our accounts receivable grew sequentially by $8.8 million largely driven by two items.

Firstly, as a result of our systems conversion which I mentioned earlier certain customer billings were delayed within the quarter, which we attribute about $6.6 million of the total. Secondly, we have certain incremental new business and annually invoiced accounts, which drove about $2.2 million of that growth. So, based on these items, you can anticipate that we have had a very strong cash collections to-date during Q1. We’d expect to see AR in the $13 million to $15 million range by the end of the first half of 2014. Had we not had billing delays specific to our systems conversion, our operating cash flow – free cash flow during the quarter would have likely increased by $6 million to $7 million, but we will see those benefits manifest during 2014.

During the quarter, we incurred capital expenditures of $8.5 million and capitalized software expenses of $700,000, which along with the systems conversion billing delays drove the negative cash flow of $7.1 million compared to a positive $3.6 million during the same period last year. And again, we would expect to see free cash flow turn positive during the first half of 2014 and remain positive for the year. Our deferred revenue balance of $31.5 million was up $5.5 million compared to the year ago period and up $1.9 million from last year – last quarter, excuse me. We ended with approximately 660 employees on December 31, an increase of approximately 70 employees since September 30 and an annual increase of approximately 180 employees since December 2012. As a reminder, we often initiate hiring in Q4 in advance of our budget for the following year to ensure productivity. As you can see, about 39% of our annual hiring did occur during Q4 to help make sure that Q1 is off to a strong start.

Now, I will finish with some thoughts regarding current 2014 financial outlook followed by some specifics regarding Q1. From a full year perspective, we expect total revenue to be in the range of $228 million to $230 million, which represents year-over-year growth of 29.1% at the midpoint, an increase from our previously announced guidance range of $225 million to $227 million. We expect 2014 adjusted EBITDA of $61 million to $62.5 million, which represents an adjusted EBITDA margin as a percentage of revenue of 27% of the midpoint of the range. 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 $0.80 to $0.85 based on approximately 38.7 million weighted average diluted shares outstanding.

Capital expenditures for 2014 will be in the range of $46 million, with about $6 million specifically relating to R&D activities surrounding infrastructure investment for our products, about $1.5 million were standard PP&E throughout the business and $38.5 million which is a combination of capitalized in-vehicle devices for both new customers as well as continued activities surrounding the 2G/3G conversion activities, which if you recall, we plan to have complete by the end of 2016.

Now, turning our guidance to the first quarter of 2014, we are targeting total revenue of $51 million to $52.5 million or growth of 32.8% to 37.5% year-over-year. We are currently targeting adjusted EBITDA of $12.5 million to $13.5 million for the first quarter, representing an adjusted EBITDA margin of 25.1% of the midpoint. 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 $0.14 to $0.16 based on approximately 38.5 million weighted average diluted shares outstanding. And that’s a lot of content on 2014, but let me remind you that as we view 2014 as an investment year for 2015 and beyond as Jim stated.

While still growing revenue in the 28% to 30% range and driving adjusted EBITDA margins in the 26% to 27% range, we are investing specifically in four things as we shared previously, new products and customer functionality, additional geographies, scalable sales efficiencies and our customers future as it relates to 2G/3G investment activities. And this is how we will continue to grow in future years by investing in our future while maintaining healthy margins across the board.

Now, getting back to my wrap up, our fourth quarter results exceeded our expectations across our key metrics other than the timing exception on our AR. We continue to execute on the business to strengthen our market leadership position through our software as a service fleet tracking platform by providing hard measurable value to our customers each and every day.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we first go to Kash Rangan from Bank of America.

Unidentified Analyst

Hi, this is (Nick Altobelli) for Kash Rangan. My first question is about the new software platform and I am curious about the impact on existing customers how disruptive that could be from technology point of view? Secondly, the up-sell opportunity as a result of the upgrade to the new platform and any ARPU and churn dynamics that might result – as a result of the upgrade?

Jim Travers

This is Jim Travers. It should not be, we are planning it – it’s not going to be a disruptive conversion as we are viewing it. Primarily, we are going to announce the new release of the software and really focus on net new customers with that platform as we would go out. And then very thoughtfully and logically transition existing customers to the new platform over time. So there is no reason for us to do a force march. Our customers are getting a lot of value from the current product we are delivering, so it’s going to be something that we will be somewhat in control of and we will gait that transition as we go looking at certain vertical industries and certain sets of customer, in logical ways as we go out through the year. We have been very careful and we have learned a lot in the beta test sites about that conversion. And we think that there is going to be a good transition for our current customers based on usage and what we have learned in the betas. So we think that can be done in a very transitional way without a lot of disruption from our customer base as we would move through 2014. And again, the biggest upside there is going to be to net new customers as we believe we have got some real competitive advantage in the product that’s going to help us as we go out and secure net new business. So, that’s on that one.

On the up selling side of things we continue to see good opportunity to up sell to our customers. As I mentioned we have a lot of opportunity with this release. This release is not just going to be for our core location based product for fleet management, but it really will be the release that we end up integrating our Connective2Field service application into, which will give us a great opportunity to sell that back to our customer base much more aggressively than we have done thus far. So the key attribute of that release is going to be the integration of Connect2Field into our core location base product, which we think is going to have a lot of interest to our current customer base. So we are going to take full advantage of that through our customer experience function back to our customer base as we move into the second half of the year.

Unidentified Analyst

Thank you and one more for me. Can you remind us the nature of your relationship with Verizon?

Jim Travers

Yes, as I mentioned that it’s a relationship that essentially has them referring business to us. Their sales force gets compensated 100% for the data wireless revenue that they will be getting since we would be delivering that customer that we would close on the Verizon network. We write the business on their paper and it’s a referral, essentially it’s a referral mechanism between the two companies. But it’s been a reasonably productive one for us. It’s one that allows us to do most of the selling. But we do it in concert with the Verizon sales rep. They get fully compensated for at the quota level and so does our sales force. So it’s a good win-win type of relationship.

Unidentified Analyst

Thank you.

Operator

And we will next go to Raimo Lenschow with Barclays.

Chris Hogan - Barclays Capital

Hi, guys, it’s actually Chris Hogan on for Raimo. I just wanted – two quick clarifications. So the first was on gross churn, I believe Steve you said that it was – do you say it was 1.3% in the quarter?

Steve Lifshatz

Yes, I believe that I said it was 1.3% in the quarter.

Chris Hogan - Barclays Capital

Okay, alright.

Steve Lifshatz

Which was also the same amount as the net churn so, I try to explicitly say that it was the same just a negative as suppose to positive.

Chris Hogan - Barclays Capital

Okay, got you. And then you – Steve, I may have missed heard you, but it sounded like you said the EPS for the quarter was above the high end of the guidance range, or maybe I just missed – could have misheard you, I want to make sure I’m clear.

Steve Lifshatz

Our EPS for the quarter was $0.42.

Chris Hogan – Barclays Capital

Was – it was 40 – it was 20 – in the press release is shows $0.23 for non-GAAP EPS.

Steve Lifshatz

Sorry, for non-GAAP EPS.

Chris Hogan – Barclays Capital

Okay. So that was – okay so that’s at the high end, okay. And then just on, obviously on the profitability guide, so I guess it was a lot bit surprising given probably where most of the street was, completely understand where the investments are going. Within R&D, that was helpful color that you provided, I guess once the platform is released in Q2, where will that spending, I mean, is there really no kind of spending release there once that’s out. I guess what happens within R&D once the platform goes out and why is the spending so high after that?

Jim Travers

Here’s – it will run through a transition in 2014 where in essence for a period of time, we’re going to be supporting three products, right. You’ve got the SageQuest platform today, you’ve got the core Fleetmatics product and then you will have the new product being released. The plan is going to be the transition to one platform – core platform, as we move through the year of moving to 2015. So, it is just a transition period from which as I mentioned the question previously where we don’t want to force March current customers onto the new platform. We’re going to have a very logical transition for that. So, in ’14, we are carrying a little baggage from the standpoint of we’re going to have multiple datacenters in system supporting three products until we get to the core product that we’re going to be selling as we move into ’15. So, really the issue you’ve got going onto ’15 is that transition.

Now, I think as we get the new platform out. I think we probably can move customers reasonably quickly based on our data site so far. So, I think over time, those costs will come down and as we move in the ’15, I think we’ll have full benefit of that. To the end state of this gain would be one based platform supporting all of our products, which is what the one of the initial design goals for the software development project was. It’s just the matter of the transition between where we’re today and where we want to get to with the new platform fully.

Chris Hogan - Barclays Capital

Got you. Okay, that makes sense. And then the last one on the field service opportunity, have you thought through, and I’m sure you have, around pricing relative to what Connect2Field was being sold for previously or is that still in flux at this point?

Jim Travers

Well, we’re going to, it’s Jim. We’re testing – going to be testing here as we release the – have the new release come out. And by the way, we are releasing some very significant new functionality with connective field in concert with the new platform. We’re going to test regionally some different pricing concepts. As I’ve said in previous call, this industry is still in its early stages. The pricing approaches are kind all over the map if you look at those that are out there selling a solution to the market. So, we’re going to do some testing, but our base assumption is that we’re trying to drive this application towards respective revenue to the company on a monthly basis. It’s not inconsistent with what we’re getting from location today. So, endgame driving the pricing release says that today if you think about it and such that we’re getting closed to $40 per vehicle per month, average customer 10 vehicles, it’s more than 15 to 18 today, but take a 10 vehicle customer that’s $400 a month paying us for the core service. We would like to see the pricing for connective field generate somewhere in the $300 to $350 per month fully in on a weighted basis per month. So, that’s why we’re thinking about it. So, as we would scale that business, we think it can be a significant revenue generator to the company. But that again, it is such – it’s going to take time for that to ramp in terms of numbers of users, but we feel pretty good at the return of what we will deliver we’ll support that kind of pricing.

Chris Hogan - Barclays Capital

Got it. That’s great. Thanks guys.

Operator

And we next go to Tom Roderick with Stifel.

Tom Roderick - Stifel

Hi, guys. Thanks for taking my question. Steve, sorry to beat a dead horse here, I know the question was just asked, but I want to clarify, I’m confused and I think some other people are as well. The churn, the gross churn metric you cited, I think the – I know the press release said 2.0% for the quarter and I thought I heard you clarify 1.3%. So is the press release just wrong and the number is 1.3% or am I...

Steve Lifshatz

That is correct.

Tom Roderick - Stifel

Okay, 1.3% is the right number?

Steve Lifshatz

Correct.

Tom Roderick - Stifel

Great, thank you. Okay, good. The second question, whoever wants to take this can jump in. I guess the main concern in looking at these investments, particularly on the sales and marketing side is that the cost of acquisition is going up as you are having to spend more money to attain a similar set of customers. I know you don’t guide to a net addition type of number. But can you give us some directional thoughts as to where that net subscriber addition number might go to a quarterly basis or annual basis? In other words should we see this cost of acquisition metrics sort of hold steady with where it’s been and therefore the net adds will sort of chase up into the 30K range pretty consistently or how should we think about that as we go through the year? Thanks.

Steve Lifshatz

Let me answer it a little bit differently and that was that I try to provide some color on some incremental spending particularly in sales and marketing and if you recall we’re doing geographic expansion that certainly has a several million dollars of expense around that and we’ve got field service product that we already addressed the R&D piece which we said was $3.5 million to $4 million, but we’re also investing in sales and marketing of that product, a very similar amount on that as well. So, some of these initiatives that we have going on during 2014 kind of think of a startup activities that under SaaS model will start really showing throughput come 2015 and certainly 2016. Remember in the SaaS model, it takes a while before you have meaningful revenue, we’ve been saying that quarter-after-quarter. We’ve been designing 2014 because we really want to make a very strong statement in 2015 and 2016. We’ve been consistently stating that our investments are going to be at the expense of short-term profitability as long as they provide long-term margin expansion. So, overall, well, there might be some modest creep in our customer acquisition cost just because we’re doing incremental marketing and things of that nature. We’re also making sure that we’re investing for tomorrow, not just for today and we think that we’re investing very wisely along these lines.

Jim Travers

Yes, let me – this is Jim, add to that. The other thing that I think we need to explain and will explain as we move forward here is the Connect2Field acquisition which we did in 2010, which again was not meaningful to us in 20 – excuse me, not 2010, in 2013. It was a product acquisition that we knew needed investment. And the other thing we’re doing with it is making sure that product was tightly coupled with our new platform, which we were in the middle of developing. So, the end state here is going to be very powerful when we get to the market, but as Steve mentioned, this is application to itself. It definitely can be sold over the web so, we think there’s leveragability from our current information to sell it very effectively, but it is going to be a little bit of a different sale to the same customer, but in terms of its ROI characteristics. So, it’s going to be a startup phase business that we’re going to have to build. Now, we believe that can be a significant revenue generator to the company and we’re already seeing that with some of the growth of – some of the subscriber base that we’re seeing over the last three to four months. So, we’re encouraged with what we’re seeing, but it’s going to be a year of where we’re going to have to really invest both the product level for functionality that it needs, invest in marketing and experimentation of how we sell it effectively. There is going to be some effective of that in terms of what we do to our margins as we get that ready to be a very significant revenue contributor as we move into ’15.

Tom Roderick - Stifel

Great, thanks for the detail, appreciate it.

Operator

And next we move to Bhavan Suri with William Blair.

Bhavan Suri - William Blair

Hi, guys. Thanks for taking my question. I’m going to unfortunately continue in the same vein, but I guess here is a fundamental question. So margins coming down sort of with the investments obviously in the new products and marketing the new products make sense. Would it be fair to say that now back in ‘15 when we look forward, we should start seeing that reverse and maybe start getting back to some margin expansion?

Steve Lifshatz

Yes, a couple of things. Let me dissect the margins here for you. We’ve got a couple of things going on with gross margin, 2014, I think I guided that it’s going to be sitting closer to the range that we have for the full year of 2013 that where we excited the quarter necessarily, but we should certainly see that we’ve got opportunity coming out of latter part of 2015 for that. One of the things that striving that we’ve talked about this on a quarter-to-quarter basis is concurrent with all of these things we continue to execute on our 3G, 3G conversion. So, that’s going to have a slight impact on our gross margins. If you think that through, that’s got tremendous leverage coming out into ’16 when all of that activities done. So, that’s the first part. Second part is when you think about these investments that we’re doing on the geographical pieces. There is point of which you gets breakeven in all of the sudden, your margins start growing quite nicely. At SaaS, we’ve all seen a model, we all understand it, but it takes a while to get there and we’re investing very thoughtfully. As Jim shared with you that we’ve essentially entered three new geographies this past quarter. We’ve had sales to-date and each of those three geographies. So, we’re pretty excited by that. We’re very thoughtful about where we invest, and Jim and I together probably two the most parsimonious people you know and this is not a – let’s go while here, this is a very thoughtful and planned execution here. We know what our task is as far as running the business. We know what this business can deliver. We have consistently said we’re going to invest in the short-term at the risk of profitability for short-term as long as we know we can get those returns long-term that we’re very confident that we can.

Bhavan Suri - William Blair

That’s really helpful. No, that is. And I think the next question I have is so then you’re investors, we are going to say okay so what do we get for that additional investment and we look at the ‘14 guide and it’s great, but it’s not sort of outsized on that. So let’s look forward to ‘15 and ‘16 and is it fair to say its sustainability or potential acceleration of a 25%, 30%, 35% plus type of growth rate. I’m not asking for a guide, but how should we think about the returns.

Steve Lifshatz

I think the answer is yes, yes, I mean, we’re building sustained the revenue growth rates, but we’re also sustaining what we’re look at in that EBITDA margin as Jim mentioned to you. There aren’t a lot of companies out there that are growing north of 20% a year, delivering adjusted EBITDA north of 20% a year either. So, we think that we’re managing through this very well, but we’re being opportunistic. It is a marketplace with a lot of opportunity right now and we certainly want to take that first move or advantage, and we’re going to continue to do so. And we know what our roadmap is for 2014, what we expect 2015 and stay tuned during 2014, we’ll start showing some of our thoughts about 2015.

Bhavan Suri - William Blair

Awesome, no, that’s very, very helpful. Thank you, guys. And then one last for me, in Europe, as you expand that market and maybe a little bit in Mexico, could you share with us how the competitive environment looks there because obviously you’ve done that for us in the U.S. and sort of familiar with that? But a little bit about the competitive environment in those two markets?

Jim Travers

Yes, this is Jim. Both markets – we feel very good about what we’re doing it, I mentioned in my talking points that we are using the same business model and one of the advantages we think we have in both of those markets in fact, all three of them both going into Holland, Australia, and Mexico is the fact that, it’s a very fragmented market, a lot of smaller regional competitors there that are not selling the all in model as we do, which we can leverage the strength of our balance sheet to allow us to do that. So, we think the business level in terms of how we package, we’ve got a nice advantage there and then obviously selling over the web which is the way we’re doing it in all markets by the way and our case is we’re actually selling over the web initially with all three of those markets. We think we’ve got a real opportunity to change the way things are being sold in a way that favors us. So, there is nobody competitively there, not with our competition much like here that we see is a problem and we think the strength of our model and the product should serve us very well as we continue to expand.

Bhavan Suri - William Blair

Okay. Obviously TomTom in Holland seems to be – that’s a core market there, so that where I was thinking how that plays out. And then one quick one, just you’ve got a lot of initiatives, you’ve got three really big initiatives, I guess just a little color on sort of do you worry you’re spread a little too thin, do you worry that – is it too much or sort of some level of how comfortable you guys are with that given the size and then the bench?

Jim Travers

Well look here is the way I look at this, right. You can’t time markets. And right now I’m looking at this right now is we had developed clear category leadership, we’re growing a lot faster than anybody else in this industry with a great business model and we’ve got a really great opportunity to globalize this business and really secure significant market share. So I feel very strongly that 2014 is a very pivotal year from the standpoint of us really establishing ourselves globally. So it’s our job to execute, I feel good about where we are at the product level, I feel good about the model we’re using again. I want to emphasize that we’re not changing our business model as we enter these geographies. The good news is here. We believe the way we sell, the way we deliver the product is the same that we’re using, obviously there was localization of the product in those new geographies. For sure we’ve got to be sensitive to that. But other than that the same business process we’re using is the one that we’re also implementing there.

So there is not much risk there from the standpoint that we’re changing a lot of what we’re doing as we enter those markets, it’s very much what we know and would perfect it. So I think that reduces risk from the standpoint of what could be done there outside of market pressures. So I feel pretty good that look we’ve got the team in place, we’ve got a very senior team with a lot of work in the products I feel really good about where that is as we move forward. So definitely have a lot of key initiatives to execute but feel pretty good that we know we got to do.

Bhavan Suri - William Blair

Great. Thanks guys. Thanks, Jim, thanks, Steve.

Operator

(Operator Instructions) Next we go to Brad Erickson with Pacific Crest Securities.

Brad Erickson - Pacific Crest Securities

Thanks for taking my questions. A few from me. In terms of penetration of the fleet management market globally, there is lots of numbers thrown out. Can you just give us a quick update on where you see current penetration levels as we’re starting out 2014?

Jim Travers

This is Jim. I haven’t seen the latest one. So I mean the way that we’re looking at things is the U.S. is probably that based on the numbers we’ve seen from different sources and if you look at again commercial vehicles delivering a service locally. It’s penetrated in the 17, 18 percentage basis across all fleet sizes. The last numbers that I saw for Europe from someone like Berg Insight and a few others would have that be somewhere in the 14 percentage range in Europe is actually less penetrated. Mexico when you start looking at the lower end of the fleets that we’re in is penetrated probably in that 10% range as we would look at it. And Australia probably more in the 15% plus range if you look at across fleets of the size that we would sell to say from 3 up to over 1000 is the way that I would see. I have not seen any published data as a result of 13 now being done some of those reports are a little bit dated. So that’s based on the last set of reports that I saw.

Brad Erickson - Pacific Crest Securities

Great. That’s really helpful. And then just in terms of the guidance, can you just kind of talk generally about your ARPU assumptions for the Ford Germany, it looks like you guys basically just grew ARPU, it looks like somewhere between 3% and 4% annually. Is that kind of a reasonable assumption going forward as you continue to layer on the existing add-on services or just kind of – if you could talk through what the ARPU assumptions are within the guidance for 2014 that would be helpful?

Steve Lifshatz

Yes, Brad. So this is Steve. Here is the thing and you’re right. We have been growing our overall effective ARPU. We’ve been successfully doing that. What we believe to be true is that, that is not necessarily the case with many of our competitors and this is really a place where Fleetmatics stands apart from the competition in that we sell value, we sell on ROI, we sell on quality and our customers are very pleased with what we’re doing. That said our assumptions do not inherently include any growth of ARPU in the guidance at this stage. So think in terms of flat ARPU from where we exited 2013 as we look forward in 2014. So does that conceivably provide some upside? Sure, am I willing to bet on that at this stage probably too early to tell..

Brad Erickson - Pacific Crest Securities

Great. That’s helpful. And then finally just in terms of retention rates lately that you’ve been seeing and if you could just talk about any meaningful changes, good, bad or other be helpful? Thank you.

Steve Lifshatz

Yes. Again our gross churn for the quarter and I apologize the press release had a prior quarter number. But 1.6% it was 2% prior previously last year, sorry 1.3% previously 2% last year. So that’s on a gross churn basis. So that means that we’re retaining more customers and more units than we’re losing. We also had net churn of that 1.3% and if you’ve heard my note on a trailing 12-month basis that was approaching 8% growth from our existing customer base. Now even when we lose customers or when we move subscribers we often keep the customer but they maybe retiring a vehicle or two but maintaining the contract. So we’ve actually seen much more stability with our customer set. We’ve seen fewer financial challenges with our customer set of late. And overall I guess it’s directionally moving up albeit slowly.

Brad Erickson - Pacific Crest Securities

Great. That’s helpful. Thank you.

Operator

And we next go to Kash Rangan with Merrill Lynch.

Kash Rangan - Merrill Lynch

Hi, can you guys hear me okay?

Steve Lifshatz

Yes.

Kash Rangan - Merrill Lynch

Okay, perfect. Thank you guys for taking the time. I just had a few questions. Conceptually I think you’ve outlined a framework during your secondary offerings that the present value of a subscriber is a function of the cost to acquire, the cost to serve and also function of attrition. Has anything changed with respect to those parameters?

Steve Lifshatz

Well I think couple of things. And always as we stated if you dissect the actual components of the business, it’s substantially the same. A lot of the cost increases that we see in 2014 do relate to new activities, new geographies and of course the field service management product as well. So overall we’re not seeing marked changes in those economics. As you know quarter-by-quarter our customer acquisition cost is a standalone does vary a little bit, some quarters it’s a little higher, some quarters it’s a little bit lower, but that’s been staying reasonably constant our cost of in-vehicle devices and installation tends to be going down and you see that reflected in our gross margin as well as the amortization cost and the gross margin. So overall I’d say it’s pretty stable and our assumptions are that for 2014 it’s going to remain substantially similar albeit a little bit more marketing costs.

Kash Rangan - Merrill Lynch

Got it, got it. So the incremental cost that we’re talking about that leads to the earnings division downward rather than big models as we build out for expenses related to new geographies. And I would assume that it has nothing to do with depreciation and the depreciation schedules as invested by auditors used to be in the six year range, right, just to clarify?

Steve Lifshatz

No, no, there is no change in our…

Kash Rangan - Merrill Lynch

Okay. Got it.

Steve Lifshatz

Expected life of our customers in fact I can share with you that the third-party who does the expected life analysis has been so kind as to not increase that beyond a palatable range. So you will see that we’re still going to be using six years for accounting purposes.

Kash Rangan - Merrill Lynch

Got it.

Steve Lifshatz

That’s why the business is modified but certainly not going in the other direction.

Kash Rangan - Merrill Lynch

Got it.

Steve Lifshatz

That said and just to clarify that, that said there is a little bit of incremental amortization just associated with some 2011 customers that we want to make sure that in any event those in-vehicle devices are fully amortized by the end of 2016, but it’s really a de minimis amount but I just want to be clear on that.

Kash Rangan - Merrill Lynch

Got it, got it. You guys disclosed a lot of metrics and I really appreciate the transparency, so keep up the nice work.

Steve Lifshatz

Thank you.

Kash Rangan - Merrill Lynch

When I look at the expense guidance for next year guys, if your cost to acquire subscribers roughly the same then you should be able to get even more net new subs next year that is 2014 than you had this year. So if your expense guidance is going up I would assume that there’s both a lag before the net new subs can enter into the revenue stream. But I’m just wondering if we are set up for some pickup in net should we implicitly expect some pickup in net sub add-on activity because your expense guidance is going higher. So although it may not reflect in your P&L right away, that we should expect some positive momentum, the net new sub adds relative to the previous model assumption?

Jim Travers

Look this is Jim. I think at this stage where you’re being you had to look at it from where we are right now which is we enter three new geographies we’re in the first 90 days of entering them. As I mentioned we’re encouraged with close real customers in each one of them so we’re encouraged with our entry. But that’s a difficult thing for us to forecast given the fact we haven’t been in those geographies before to see, okay. How fast can we really scale it compared to what we’ve seen in the states and then what can that mean to us on a net sub basis as we look throughout the year. So I think that’s going to be a little bit of a wild card from the standpoint of how does that scale based on what we’ve seen in the past. So I think we’re just going to be somewhat cautious to make sure we see things there before we look at any other guidance. But we’re going to invest in each one of those geographies to be a substantial player. So I think that will play itself out as we go from quarter-to-quarter.

Kash Rangan - Merrill Lynch

Wonderful. Finally, if I may, any changes competitively I know FleetCor acquired a company in (indiscernible) that competes a little bit with you guys. Have you seen any change or how do you expect that acquisition to play out next to your business? That’s it for me, thank you again, and congratulations.

Jim Travers

Thanks, Kash. This is Jim. We haven’t seen any change again in the past FleetCor is a partner of ours today, we resell their Fuel Card that continues to go well for us and for them. We’ve not seen much change competitively based on their acquisition, they’ve been acting pretty consistent with what they’ve told everybody publicly which was they’re going to sell very much back to their basic customers. So at this stage we haven’t seen any competitive impact based on that acquisition.

Operator

And with no further questions in queue, I would like to turn the conference back over to management for any additional closing remarks.

Jim Travers - Chairman and Chief Executive Officer

I want to thank everybody for participating today. And again we feel really good about where we are and great market opportunity in 2014 and it’s all about execution. Thank you for your participation.

Operator

And that does conclude today’s conference. We do thank you for your participation. You may disconnect. Have a great rest of your day.

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