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Executives

Jeffrey Jagid – Chairman & CEO

Ned Mavrommatis – CFO & Treasurer

Darryl Miller – COO

Ken Ehrman – President

Analysts

Morris Ajzenman – Griffin Securities

Matthew Hoffman – Cowen and Company

Kenneth Traub – Ethos Management

Walter Schenker – MAZ Partners

I.D. Systems, Inc. (IDSY) Q3 2010 Earnings Call Transcript November 4, 2010 4:45 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the I.D. Systems third quarter 2010 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

As a reminder, this conference is being recorded. I would like to introduce your host for today, Mr. Jeffery Jagid. Sir, please go ahead.

Jeffrey Jagid

Thank you. Welcome to I.D. Systems fiscal 2010 third quarter conference all. Thank you for joining us today. I’m Jeffrey Jagid, the Chairman and CEO of I.D. Systems. With me are Ned Mavrommatis, our CFO; Darryl Miller, our Chief Operating Officer; and Ken Ehrman, the President of I.D. Systems.

I will provide a brief overview of the quarter. Ned will detail our financials. Darryl will update you on our Asset Intelligence and I.D. Systems’ overall operations, and Ken will review sales and technology highlights of the quarter. We will then open the call to your questions.

Before we begin, let me reiterate the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following discussion contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results and other risks detailed from time-to-time in I.D. Systems’ filings with the Securities and Exchange Commission. These risks could cause the Company’s actual results for the current fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

For the third quarter ended September 30th, 2010, I.D. Systems revenues increased sequentially to $6.5 million. We saw renewed growth trend in sales of our core wireless vehicle management system during the quarter, a positive indication that the market for industrial fleet management is rebounding from last year's global economic downturn. We also saw continued solid performance from our Asset Intelligence subsidiary with a steady stream of recurring revenue from service contracts for tracking and managing fleets of cargo containers and trailers.

Another cause for optimism is that we were able to surpass our expected expense reduction goals for the quarter. After acquiring the Asset Intelligence unit from GE in January of 2010, our aggregate overhead expenses were over $31 million. Our goal was to that by $8 million annually through staff consolidations and other cutting measures.

For the third quarter, our combined SG&A and R&D expenses decreased almost 30% sequentially from the second quarter for an annualized expense reduction of approximately$9 million. As a result, I.D. Systems’ net loss for the third quarter of 2010 decreased more than 50% to $1.9 million from $4 million for the second quarter.

Looking ahead, we have introduced a new go-to-market strategy for our wireless vehicle management business with a product we call PowerBox. As Ken will discuss in more detail, PowerBox is a simplified version of our industrial industry-leading power fleet wireless vehicle management system, with a host of subscription models similar to the recurring service contract model of Asset Intelligence. We believe this host of subscription approach removes significant bottleneck in our sales cycle by avoiding any implementation burden on the customers’ IT organization and eliminating the need for any upfront capital outlays. The simplification of the product also makes channel sales effective. Consequently, we expect that PowerBox will drive more rapid growth in our industrial vehicle management segment and generate smoother stream of recurring revenue for the company.

We remain committed to stimulation revenue growth, strictly controlling costs and maintaining strong gross margins with the goal of achieving profitability in 2011. As a reflection of the confidence we have in our future, I am happy to report yesterday, November 3, 2010, our Board of Directors authorized the buyback of up to $3 million worth of I.D. Systems common stock, which we think is a great long-term investment for the company, as well as the near-term enhancement of shareholder value.

On a final note, I.D. Systems will be hosting an Analyst Day on November 16th in New York City, and I would like to invite all of our listeners on the call today to attend. It will be a happy event, including a working lunch. We will be providing further details on our strategic direction, product developments and sales highlights, as well as provide an opportunity for analysts to interact closely with I.D. Systems’ senior management team. If you are interested in attending, please contact Ned Mavrommatis or Lindsay Estelle at I.D. Systems’ corporate offices for more event details.

Thank you for your time today. I look forward to taking your questions a little later on the call. Now, let me turn it over to Ned Mavrommatis, our CFO, to detail our financial results.

Ned Mavrommatis

Thank you, Jeff and hello to everyone on the call today. As Jeff noted, I.D. Systems revenue grew 8% to $6.5 million for the three months ended September 30, 2010, compared to $6 million for the three months ended June 30, 2010. The increases were attributable primarily to increased sales from our industrial vehicle business.

Revenues from the industrial vehicle business in the third quarter was $2.8 million compared to $1.8 million in the prior year third quarter, and $2.1 million in the second quarter of this year.

Our gross margin for the quarter remained at 52%. As Jeff mentioned, during the third quarter, we achieved our goal of reducing our annual operating expenses by approximately $8 million. When we purchased Asset Intelligence in January of 2010, the combined annual operating expenses were approximately $31 million. Our current annual operating expenses are approximately 22 to $23 million.

Total operating expenses in the third quarter were $5.5 million, a 29% reduction from the second quarter operating expenses of $7.8 million. Net loss for the third quarter decreased 54% to $1.9 million or $0.17 per basic and diluted share, compared to $4 million or $0.36 per basic and diluted share for the second quarter of 2010.

Our balance sheet remains strong. As of September 30, we had no debt and cash, cash equivalents and marketable securities of $28.3 million, which equates to approximately $2.50 per share outstanding as of September 30.

During the quarter, we generated approximately $1.5 million in cash from operations and increased our total cash balance by $1.2 million. I look forward to reporting to you in the future on further improvements in our financial results as we continue to strictly control cost and build revenues, particularly a larger, more consistent stream of recurring revenues from growing subscriptions sales and service contracts.

With that, I would like to turn the call over to Darryl Miller, our COO, to briefly review discuss recent highlights of our Asset Intelligence business.

Darryl Miller

Thanks, Ned, and thanks to everyone joining us on the call today. During the third quarter of 2010, our Asset Intelligence unit introduced two new products, continued to produce solid recurring revenue, met our cost reduction targets and continued to integrate operations successfully with I.D. Systems.

To further expand our sales opportunities in transportation management space, we launched VeriWise Track & Trace, an affordable, effective location tracking system designed for quick, easy installation on a wide variety of cargo-carrying assets from drive vans and flat trailers to chasses and containers.

Track & Trace is the only product available to be mounted underneath an asset for truly covert installation. It has a magnetic mount option so that it can be easily moved between assets. It also employs patented power management technology for a five-plus year battery life, which is an important competitive advantage.

Initial adoption of VeriWise Track & Trace has been strong. In the third quarter, ContainerPort Group, Ford Air and Garner Transportation were among the first customers to deploy Track & Trace on their fleets of containers and chassis. All three companies tested several other systems before selecting Track & Trace. Common reasons for choosing the product included ease of installation, maintenance-free operation and superior reliability, all of which contribute to a low total cost of ownership. Our other newly introduced product is the VeriWise intermodal container management system.

The primary technological challenge of tracking containers is they never connect to a power source. So, there is no opportunity to charge a tracking device's battery. To overcome this problem, we’ve developed new technology for the VeriWise intermodal system, and GE utilizes solar panels and advanced power management logic. VeriWise intermodal installs in a wide variety of container types and provide key features like automatic trip detection, cargo loaded and unloaded status and satellite communication to provide the coverage needed on even the most remote railways across the United States. I look forward to reporting on the growing market penetration of these products in the future.

On the operations side of I.D. Systems business, I'm pleased to report that we met our aggressive cost reduction targets for the third quarter, while pursuing several operational improvements – improvement initiatives to better serve our growing customer base. We're reorganizing and streamlining our customer service organization to provide better overall responsiveness and quicker issue resolution. We're also consolidating our contract manufacturing , which will result in better product quality, greater inventory controls and better fulfillment, which is critical as our sales continue to increase.

The most significant news of the quarter for our Asset Intelligence business unit was that Wal-Mart extended its contract for our VeriWise over-the-road trailer management systems through 2012. As Jeff mentioned, this contract is worth about $10 million over its term. With Wal-Mart also a major user of I.D. Systems industrial vehicle management systems, this transaction reflects our ongoing close relationship with Wal-Mart and the significant value that they continue to derive from our company solutions.

Knight Transportation, another key Asset Intelligence customer expanded its deployment of VeriWise trailer management systems during the second quarter to more than 1500 additional trailers. Knight is one of North America’s largest and best-run truck load carriers. And the additional assets we’ll be monitoring include a significant number of refrigerated trailers, or reefers, which is the first time they’ve deployed our system on this type of asset. So, this represents a nice new opportunity for growth for us.

Knight derives significant ROI VeriWise as they locate available trailers more quickly to minimize the time drivers spend searching for trailers and maximizing time they spend productively on the road. For Knight’s reefers, VeriWise also assures the quality of temperature-sensitive freight and helps monitor and reduce fuel consumption.

To further expand our sales opportunity in the remote asset tracking space, we completed the development of a new addition to the VeriWise product line during the second quarter, which we announced to the marketplace in July, 2010. This product is called VeriWise Track & Trace. It’s an affordable, effective, easy-to-deploy location tracking system designed for quick, flexible installation on a wide range of cargo-carrying assets, everything from dry vans and flat beds to intermodal containers, chassis, and storage containers. This product will help organizations with basic asset tracking needs, quickly drive out cost and efficiency out of the trailer and container fleet operations as well as increase the security of those assets.

We are pleased that Ford Air, a current Asset Intelligence customer, has agreed to upgrade to VeriWise Track & Trace from their current one-way device for their fleet of trailers. They have seen substantial benefits during the pilot of this solution and believe that it will help position our company for substantial while minimizing their number of assets.

Another enhancement we are deploying for our suite of asset management solutions is a more powerful business analytics offering. We are working with Teradata, one of the world’s leading providers of enterprise data warehousing on a new enterprise analytics service, which we will think will help freight carriers see deeper into their operations and react more quickly to real-time development, resulting in fewer operational blind spots and higher fleet productivity.

On the vehicle management side of the business, we announced in the second quarter that we entered into an agreement with Garmin, the global leader in navigation and communication devices to distribute a new product to the airport vehicle market, SafeNav Powered by Garmin. SafeNav is an on-vehicle, GPS-based navigation and alert system designed to provide airport vehicle operators with real-time situation awareness with a goal of avoiding accidental runway incursions.

This product is geared to address the concerns of the National Transportation Safety Board and the Federal Aviation Administration, which have made avoiding runway incursions among their highest priorities for improving U.S. transportation safety. We think SafeNav will not only assist experienced vehicle operators at night and during periods of low visibility, it will also service as an important safety tool for new or transient vehicle operator who are unfamiliar with airports’ taxiways, and runways. SafeNav will be available both as a standalone safety device and as a complementary extension of our AvRamp Wireless Vehicle Management System, which provides safety controls, maintenance monitoring, and utilization analysis for fleets of airport vehicles.

Also in the second quarter, we packaged a new version of our vehicle management technology called PowerBox, which is an out-of-the-box I.D. Systems hosted solution designed to simply systems acquisition, deployment achievement for customers with a small to medium fleets, or larger fleets with basic vehicle management requirements. Ken will describe this further in a moment.

Thank you for your time and attention today. I look forward to bringing you further updates in the future. With that, I would like to turn the call over to Ken Ehrman, our President to review some of the other highlights of the quarter.

Ken Ehrman

Thank you, Darryl, and thanks again to everyone joining us on the call today. The increase in sales of our wireless industrial fleet management systems in the third quarter of 2010 was highlighted by expansion of our business with existing customers, like Ford, Nestle and Walgreens; initial implementations of our wireless vehicle management solutions with Boar's Head, Campbell Soup and other new customers; a growing channel sales through our marketing partner, the Raymond Corporation; a leading industrial truck manufacturer with initial system deployments for a Fortune 500 retailer; a Fortune 500 healthcare supplier; and many other new end users.

Also during the quarter, we continued development of our PowerBox product, as Jeff mentioned, which is targeted at the largest segment of the industrial truck management market, small-to-medium-sized fleets, which is 15 to 40 vehicles or so, as well as larger fleet with the most desired vehicle management needs. PowerBox is extensively pre-configured for essentially out-of-the-box benefit delivery from the moment it's installed. The system is also remotely hosted by I.D. Systems to take the customer's IT organization out of the equation, which simplifies the sales cycle, makes systems deployment smoother and makes it much easier to provide system support and maintenance further reducing our costs.

In addition, PowerBox is sold as a multi-year subscription similar to the way our Asset Intelligence business sells its service contracts. This can eliminate a customer’s capital budget constraints and simplify their ROI justification since they are essentially pay as they face with no upfront outlay. Ultimately, the PowerBox subscription model should also help smooth out I.D. Systems quarter-to-quarter revenue stream.

Another area in which we made progress in the third quarter was the expansion of our intellectual property portfolio. We were awarded several new patents on mobile asset management, including three new patents covering fundamental wireless vehicle management functions, which include access control, checklists and maintenance control, which we have widely deployed.

In addition, three patents that extend the scope of our solutions for mobile RFID tag reading were awarded, including automatic RFID reads based on vehicle activity and determination of whether a vehicle is transporting items or merely in their vicinity. We believe these patents significantly strengthen the competitive advantages of our wireless vehicle management solutions.

One final note. I'd like to provide an update on our initiatives in the rental fleet management market. We continue to support active system deployments in both virtual rental and traditional airport rental environments for one of the world’s leading rental car companies.

Our airport deployment at a major hub in the northwestern United States automates the tracking and billing of fuel usage and has incrementally increased fuel revenue for the retanl car company by an average of more than $2.50 per rental transaction.

We anticipate that this substantial economic benefit will stimulate additional opportunities for us in the rental fleet market.

With that, I would like to turn the call back over to Jeff to open the call for questions.

Jeffrey Jagid

Thank you, Ken. We’ll be pleased at this time to open the call to whatever questions you may have. Karen, you there?

Question-and-Answer Session

Operator

Yes. (Operator instructions) Our first question comes from the line of Morris Ajzenman of Griffin Securities.

Morris Ajzenman - Griffin Securities

Hi, guys.

Ned Mavrommatis

Hey, Morris.

Morris Ajzenman - Griffin Securities

Hey, first question is, sequentially, second to third quarter, service revenue is down about 5 to 6%. Can you just expand on that a little more, please?

Jeffrey Jagid

Yeah, from a revenue standpoint, the revenue drop would be from our resigning of our Wal-Mart contract. We re-signed for an additional two years on Wal-Mart and with that signing, we had some revenue reduction from the 59,000 assets that we currently have installed with them.

Ned Mavrommatis

However, I would want to point there, Morris, is based on the new prices we are able to maintain our margins. However, as Darryl said, the price per unit went down a little bit, so the AI service revenue for the quarter was 3.1 million, which was down about 200,000 from the 3.3 in the previous quarter.

Morris Ajzenman - Griffin Securities

Okay, and that basically – was that the big reason for the decline in gross margins from 60% in the second quarter to 50% in the third quarter?

Ned Mavrommatis

No. Like I said before, from a service standpoint, our gross margin is strong as they previously were.

Morris Ajzenman - Griffin Securities

Okay.

Ned Mavrommatis

The decline in the gross margin in the quarter is we did sell some spare parts that we had in inventory during the third quarter, which had lower margin, affected the overall margin. In addition, as we continue to sell new units for AI, right, and they go into deferred revenue and then we advertise the deferred revenue is going to have a – an effect on the margin. And as I previously stated, we expect our long-term gross margin to be at the 50 to 55% level, and that’s where we are in this quarter.

Morris Ajzenman - Griffin Securities

And so then modeling going forward, we should be using that rate you just gave, 50 to 55%, over the ensuing quarters as gross margins.

Ned Mavrommatis

Exactly.

Morris Ajzenman - Griffin Securities

Okay. And one last question there; on the operating expense side for the quarter in total with R&D 5.5 million, you said there's more you can do there. You want to give us any sort of granularity of what that might be like over the next couple of quarters?

Ned Mavrommatis

On the – during the next quarter, we shouldn’t see a much of a change. We expect SG&A to remain approximately at that level. As we go into 2011, there is further opportunities. It’s still a little bit too early to disclose, but we expect to see that number further reducing in 2011.

Morris Ajzenman - Griffin Securities

Thank you.

Ned Mavrommatis

Welcome.

Operator

Thank you, sir. (Operator instructions) And our next question comes from the line of Matthew Hoffman of Cowen and Company.

Matthew Hoffman - Cowen and Company

Hi. Good afternoon, fellows. Look, the OCF was a little bit better than expected, especially looking at the profit line here. So as I look to the balance sheet real quick, it looks like your accounts receivable, the AR was strong. Inventory, you pulled that down. You did mention the parts there, Ned. First, is this a sustainable trend? You don't give us quite enough disclosure here to figure out exactly what is coming out of AI hardware and what's being amortized – or what’s being deferred. So it's tough to tell exactly what the cash in, cash out is on a quarterly basis. So step us through that as much as you can and then what impact those parts were within the overall framework of inventory reduction. Thanks.

Ned Mavrommatis

Sure. I mean, if you look at inventory, Matt, compared to the beginning of the year for I.D. Systems and since the date of acquisition for AI, we were able to reduce that number by approximately $1 million. And the reason being, we said that we have enough inventory on hand and now it’s about selling that inventory. So, we expect that number to continue to be reduced during the quarters moving forward.

In addition, the receivables, it could vary depending how big contracts are in the timing when then come in, but our goal is to continue to reduce our DSOs, and we have a very aggressive plan and we’re going to continue that going forward.

When you look at – another bib piece that has an effect on cash is new units for AI sales, and there I want to point you to the deferred revenue number, it went up from 3.3 million in Q2 to 4.3 million in Q3 and that’s a number that it’s going to continue building as we continue to sell new units, and it’s going to continue help us build our recurring revenues and move forward.

Matthew Hoffman - Cowen and Company

Okay, so as we think about the $10 million in original inventory, how much of the 8 million that's left is original inventory? In other words, what are your turns? Is there a new inventory coming in, old going out? How much of the original 10 have you moved through? And what is the sustainable level here for inventory days once you start working that number down?

Ned Mavrommatis

It’s a little different for the two businesses. If you look at the I.D. Systems inventory, which was approximately 3.5 million, that’s all finished goods that’s going to go out with new orders. So, that number is going to continue to decrease. The Asset Intelligence inventory, which was approximately 4.5 million, is primarily components, so when we get huge unit sales reduce a portion of that inventory, but we also have to buy some additional components to make it finished goods.

I think the goal is to continue to use the existing inventory and we got to get this 8 million down to 4, 4.5 million, and that should be a sustainable level for the combined business going forward.

Matthew Hoffman - Cowen and Company

To roughly cut it in half?

Ned Mavrommatis

Exactly.

Matthew Hoffman - Cowen and Company

All right. And what are the prospects for doing so? What's that depending on? Is that depending on – if – in other words, if that goes up, that means the hardware sales for AI are better. We should expect that deferred revenue – we should model the deferred revenue line to go up as well.

Ned Mavrommatis

Exactly.

Matthew Hoffman - Cowen and Company

All right. I want to drill down to the previous question there on expenses; obviously, much better SG&A. A couple of questions on that line; any one-time helpers in the June quarter? Are we at sustainable level? Or can it get even better? Well, I shouldn't say even better. Can it get better from here?

Ned Mavrommatis

This third quarter, there is no one-time helpers. This is a sustainable level, and as I said before, we have the opportunity to further reduce our expenses in 2011 due to the introduction of the PowerBox product, it’s a little bit – it takes a lot little – less work to implement. And that should allow us to further reduce those expenses in 2011.

Matthew Hoffman - Cowen and Company

All right. And last question for you, Ned, and I'll move on to Ken; customer concentration in the quarter, can you go through the top customers?

Ned Mavrommatis

There was only one customer that was over 10% of the revenue, and that was Wal-Mart. They were 25% of their combined revenue. Other big customers in the quarter that was below 10% was Ford Motor Company, GE, their trailer fleet services division and also the Raymond Corporation.

Matthew Hoffman - Cowen and Company

No USPS?

Ned Mavrommatis

No.

Matthew Hoffman - Cowen and Company

Any prospects there?

Jeffrey Jagid

Absolutely. We – there seems to be some rejuvenation on the interest level coming out of postal. But we certainly have not monetized that yet, (inaudible) guidance as it pertains to postal, but there’s certainly activity there.

Matthew Hoffman - Cowen and Company

Understood. All right, Ken, I'm going to give you one this time. PowerBox, you sound pretty excited about it. It sounds like it's a much different installation process. I'm sure we'll get more about this on the analyst day. But step us through PowerBox and how – what it takes for the IT shop, what it takes for I.D. Systems. How does that actually get installed? Because, previously, the old Power Fleet product, you had to go out there and install a bunch of beacons. How does this one differ in terms of the architecture?

Ken Ehrman

That's a very good question. And a lot of this was born out of what we did with American Airlines, which is another project that we are continuing with and having real success with. Basically, the way it works is the technology is shipped to the customer with much simpler installation. It basically limits the features and functions of the system to the ones where the customers are getting the most benefit. So we are talking about fleet reduction, impact sensing, maintenance savings, those are really the core focus. So instead of taking eight hours to install all sorts of sensors that were really complicated to use, complicated to maintain and provide the questionable ROI, we're really focused on installation now that can take under two hours per forklift truck. In some of our beta tests, we have shown under an hour. So, it’s something we’re pretty excited about.

As far as the data collection process is concerned, what we do is we have what's called an infrastructure hardware, we call it a WAM or wireless asset manager and you install those throughout the entire facility. In PowerBox, you have one, it has a much longer range, and it's installed in the battery recharge area of the facility. And that has a cellular length, so essentially the vehicle themselves communicate from vehicle to vehicle and ultimately from vehicle to the wireless asset manager and simply plugged in the power and then through the cellular network, sends data to a host of software implementation, which is going to be hosted at SunGuard, one of the premier hosting facilities. So, it’s highly secure, highly reliable and much easier for us to maintain because we don't have to worry about hundreds of different of copies of software all over the place. The entire solution is now web-based.

Matthew Hoffman - Cowen and Company

Sorry, and I guess to drill down there, first, on the forklift trucks, historically, you've been able to tap into the power source, and you have a remote kill. I don't know what the technical term is, but you could kill the power on a forklift. Is that still one of the features? And, well, I'll stop there on that one. And then you talked about the vehicle-to-vehicle contact on the data collection side. Are you actually daisy chaining them? Or is the cellular radio, is it – did – or is it more of a one-mile type of range versus 150 feet in the past in the old product? Thanks.

Jeffrey Jagid

Yeah, in an outdoor environment, it is about a mile. In an indoor environment, it’s about 500 feet, and it’s a daisy chain. So, for example, if you change who can and can't drive what vehicles, if certain of them are in the maintenance shop or in the batter recharge area, and they hear the new information, but they then leave the shop and pass another vehicle that hasn’t got that information, the will pass it along. And as far as the remote shutdown, that is a function that included.

Matthew Hoffman - Cowen and Company

Okay, so how do you shut something down that's outside the one mile or not in contact with another forklift?

Jeffrey Jagid

You wouldn't in that scenario except for when the conditions on the forklift provide for that feature. So what I mean by that is, if you recall, our device is extremely intelligent, so if there is a severe impact, if there is a severe question like, for example, the brakes aren't working, the horn is not working, those are things that operate when they are in or at a range. So the benefit of our architecture is that you don't need to be in constant communication coverage to provide them the majority of the most important features for our customers.

Matthew Hoffman - Cowen and Company

All right, good. Well, thanks, gentlemen.

Jeffrey Jagid

Thanks.

Operator

Thank you, sir. And our next question comes from the line of Kenneth Traub of Ethos Management.

Kenneth Traub - Ethos Management

Hi, thanks. And congratulations on what appears to be good progress.

Jeffrey Jagid

Thanks.

Kenneth Traub - Ethos Management

If you could clarify a little bit; you talked about the 8% increase in revenue quarter to quarter, but breaking that down into components, as you pointed out earlier, service was flatter, slightly down due to a little bit of a change in Wal-Mart while the product revenue is up pretty significantly, almost 40%. And that's before the introduction of your PowerBox. Can you give some sense of the continuing trend in products revenue and what kind of impact you think PowerBox will have? And, secondly, as you're increasing products revenue, what proportion of that revenue would you expect in the future would translate into service revenue?

Ned Mavrommatis

Sure. Hey, Ken, it’s Ned. I'll just answer the first part of the question and then I’ll just turn over to Jeff. The increase in product revenue was due to the increase of sales for our industrial vehicle business. So, we saw the industrial vehicle business go from 2.2 million in revenue from the June quarter to 2.8 million in this quarter. The way that’s going to translate into recurring revenue is through maintenance and support agreements, which were usually about 14% of the system cost per year. Now, I can turn over to Jeff to talk about PowerBox which we’re going to introduce early next year, that is going to be a software as a service model where instead of the customer paying it upfront, they will us a monthly fee per asset and once we start building up those sales, then we’ll start see our recurring revenue build on top of what Asset Intelligence already has.

Jeffrey Jagid

Right. The only thing I would add, Ken, to the – to address the latter part of your question is point of clarification, which is the third quarter results do not reflect the introduction of PowerBox. So, PowerBox, during the third quarter we worked on restructuring our go-to-market strategy to develop the completion of the development of PowerBox that’s currently filling through beta. We are very pleased with the progress and we plan on essentially launching PowerBox towards the latter part of Q4, with generating some – or impacting the financials as Ned mentioned next year.

Kenneth Traub - Ethos Management

Right, I understood that. But even before that introduction, it looks like it's a 40% increase quarter to quarter in product revenue.

Jeffrey Jagid

That’s right. So, we are – a couple of things are happening. There seems to be a renewed interest on the core power and industrial vehicle market, so there is definitely some traction there. It seems like our prospecting activity is bearing fruit primarily around Power Fleet. And again, we also see that there’s significant opportunity through the channel in PowerBox. And I don’t know if – I don’t think we mentioned it in the announcement – Ned didn’t mention it during the breakdown of revenue answer to the question, but we also generating significant business now through our relationship with Raymond that obviously took a little while to mature. So I think that’s what – to what I would attribute the growth in core business for Q3.

Kenneth Traub - Ethos Management

Thanks.

Jeffrey Jagid

Sure.

Operator

Thank you, sir. Does that conclude your questions?

Kenneth Traub - Ethos Management

It does for me.

Operator

Thank you. Our next question comes from the line of Walter Schenker of MAZ Partners. Sir, your line is open.

Walter Schenker - MAZ Partners

Hey, guys. I'll just start with two comments and then a question. The first comment is, hopefully, you will webcast the Analyst Meeting for those people, i.e. myself, who will not be able to make it to New York that day. That also solves any issues relating to FD. If you weren't thinking of it, I would really hope you would consider it. It also allows a – the ability to archive it for people who may become new to the story and would like to hear what you said. That's first point.

Second point, on the stock buyback, which some of us have thought was a wonderful idea for some time, and I guess I shouldn't look a gift horse in the mouth and say it should be bigger, but it should have been. Hopefully, given that you have 215 million cash and much larger book value, this is something that is meant to be actually accomplished as opposed to shut me up for three months.

And now onto my question; is PowerBox going to detract from your current efforts at selling to your Power Fleet customers? Or, really, at this point, the Power Fleet guys who you've worked on for some time and who have it in place, hopefully, as per the third quarter should continue to provide a decent level of business and PowerBox really be for newer customers.

Jeffrey Jagid

So, let me address that. As far as – first of all, let me respond to two of your points. The point one, even though it wasn’t a question, I think it’s good advice. We are certainly considering it, so we will continue down that path regarding webcasting the Investor Day. Obviously, disappointed that you are not going to make it.

On the share buyback or if I understood the point, you did make two points really. One was you thought it should be bigger, and the other was that you are hoping that it’s not intended to just sort of keeping you quite. And I will say that our intent is absolutely to deploy the capital in an effort to buy back shares. We decided to do it at this point not in reaction to what the investment community was saying, but rather as sort of a culmination of our confidence around surrounding the PowerBox strategy. So as we modeled it out, we felt more confident with our ability to generate cash going forward and therefore we just – we figured that a very good use of our cash on the balance sheet now would be to purchase the company’s stock. So, we do intend to deploy the capital.

And now for your question, PowerBox is absolutely intended to complement what it is we are doing with Power Fleet. The reality is and what we kind of learned in the hard way is that the market for the management of powered industrial vehicles cannot fully be attacked using the Power Fleet product. Sort of simply stated, there are a significant number of users of fleets of material handling equipment and other powered mobile equipment that simply don't have the level of sophistication as required to deploy Power Fleet. So we will continue to focus on enterprise house accounts. And we will continue to sell Power Fleet to those accounts, and then we plan to complement that revenue creation through the sales of PowerBox both direct and, most importantly, indirect.

Walter Schenker - MAZ Partners

And just one other question; on PowerBox, because it is a subscription model, each new sale will initially have a negative cash implication?

Ned Mavrommatis

That is correct, Walter. The – you're paying – well, at the beginning, some of those sales are going to be funded through inventory. So it would not have a cash implication. But as we use our inventory, we have to build new inventory. It would have that effect. And we already have the – if needed, financing partners in place to help us finance those transactions.

Walter Schenker - MAZ Partners

Okay, and on a multi-year subscription, you would hope to get – to be cash-flow neutral roughly halfway through that?

Ned Mavrommatis

That is correct.

Walter Schenker - MAZ Partners

Okay. Thanks a lot, Jeff.

Jeffrey Jagid

Thank you.

Operator

Thank you, sir. And our next question is a follow-up from the line of Morris Ajzenman of Griffin Securities.

Morris Ajzenman - Griffin Securities

Hey, a question on cash flow breakeven; from operations, not working capital changes, what quarter do you think you'll be able to be able to be cash flow breakeven from operations, again, putting aside working capital changes?

Ned Mavrommatis

You know, Morris, it’s very hard to give you an exact answer because there's a lot of inputs that go into our cash flow statements. AI unit sales, although we do not recognize the revenue upfront, we get paid for it upfront. So that’s a – what I will call difference between income statement and the cash flow. And the new PowerBox units would also affect that cash flow. The important thing I want to point out there – here is that although we can't say that we're going to be cash flow positive every quarter going forward, we did stabilize the balance sheet. We reduced the expenses. And based on this revenue levels, we felt pretty good that we're going to be maintaining this cash balances. So, we are just pretty comfortable with our balance sheet. I hope that answers your question, but it’s very hard to predict exactly when it’s going to be cash flow positive every single quarter.

Morris Ajzenman - Griffin Securities

Okay. But when you say maintain the balance sheet, that to me infers no cash burn. But –

Ned Mavrommatis

Yeah, I mean, like I said, it doesn’t necessarily mean it's going to be positive every quarter because the working capital has a big effect. But I think that at this expense level, we feel pretty comfortable if the revenue continues at these levels and grows that our cash burn will be minimal, and if the revenue grows beyond that, that we will starting generating cash.

Morris Ajzenman - Griffin Securities

Fine. One other question; what was the non-cash component in this quarter?

Ned Mavrommatis

That’s a good question, actually I should have mentioned that. Out of the $1.8 million loss, 800,000 related to stock-based compensation and depreciation and amortization. So, the true cash flows was approximately $1 million.

Morris Ajzenman - Griffin Securities

Thank you.

Jeffrey Jagid

Thank you, Morris.

Operator

Thank you. And I show no further questions in the queue at this time.

Jeffrey Jagid

Okay, thank you Karen. Thank you everyone for your time today. I look forward to reporting on our progress in the future and I hope to see many of you on the 16th in New York City. Thank you very much.

Operator

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

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