FleetMatics Group's (FLTX) CEO James Travers on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Fleetmatics Group (FLTX)

FleetMatics Group PLC (NYSE:FLTX)

Q2 2014 Earnings Conference Call

August 6, 2014 5:00 PM ET

Executives

Jenna Marvel – Investor Relations

James M. Travers – Chairman and Chief Executive Officer

Stephen Lifshatz – Chief Financial Officer

Analysts

Kash Rangan – Bank of America Merrill Lynch

Brad Erickson – Pacific Crest Securities

Matt Van Vliet – Stifel Nicolaus

Matt Swanson – RBC Capital Markets

Matt Pfau – William Blair & Company

Alex Potter – Piper Jaffray & Co.

Howard Smith – First Analysis Securities

Operator

Good day and welcome to the Fleetmatics Second Quarter 2014 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

Thank you. Good afternoon and welcome to Fleetmatics' second quarter 2014 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 10-K filed with the Securities and Exchange Commission on March 17, 2014, as updated by a furnished or filed quarterly reports on Form 10-Q, annual reports on Form 10-K 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 consider all measures when analyzing Fleetmatics' performance.

A reconciliation of GAAP to non-GAAP measures is included in today's press release regarding our second quarter 2014 results. In addition, please note that the date of this conference call is August 6, 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.

James M. Travers

Thanks, Jenna. Good afternoon, everyone, and thank you for joining us today. And we’ll start by covering our second quarter results, highlights from the quarter, and an overview of our major initiatives. Steve Lifshatz will share to proceed with details regarding our second quarter financial results and we will conclude with our outlook for the remainder of 2014.

First, we are pleased with the results for the second quarter. Our vehicles under subscription grew by 29% year-over-year to over 499,000 active subscriptions. And of course, as of today we have over 500,000 active subscribers utilizing our solutions, and this is a significant milestone for the company and supports our positions as the clear global category leader.

During the quarter, revenue grew by 30% year-over-year to $55.3 million, near the high end of our guidance year. As you saw, non-GAAP gross margin was 74.5% for the quarter. Our adjusted EBITDA was $15 million for the quarter, which continues to be driven by the investments we detailed the past two quarters, including new product initiatives, increased investments in marketing and expansion into new geographic areas.

During the quarter, we announced the acquisition of KKT, the developer of Routist, a SaaS-based, intelligent vehicle routing solution for businesses looking to optimize the utilization of their fleets and mobile resources.

Routist uses a complex and flexible optimization engine that is able to take into consideration locations, vehicles, time windows, technician skills, costs, and capacities while remaining simple and intuitive for customers to use. We believe this mobile-driven solution can be sold to net new customers as well as to our existing customers.

Our plan is to fully integrate routing with our Fleetmatics REVEAL and Fleetmatics WORK products. We expect to sell this feature in the $10 to $15 per vehicle per month range as a feature enhancement, not as a standalone application.

As the FleetMatics WORK we have additional product development integration to do here so this will be a first half 2015 sales initiative.

Let me now discuss our geographic expansion activities. We continue to invest in our sales expansion into Mexico, Netherlands and Australia. As previously communicated, we are implementing the same sales operational process, we are currently using within North America and the U.K.

While it’s still early in our launch, we believe we can be effective with our current business processes adapted for specific cultural differences. We continue to ramp sales volume and ARPU levels remain encouraging.

Let me remind you with our SaaS revenue model, it will take time for unit volume and these new markets have a material impact. Now, let me touch on our marketing and branding activities. As we have communicated, we increased our marketing spend in 2014 to support our global branding initiatives for the launch of the Fleetmatics REVEAL and Fleetmatics WORK product offerings.

We also launched our new website added new geographic marketing enhanced our PR activities as well as initiated a new national radio campaign. As a result of these initiatives, we delivered a significant increase in lead volume into our sales funnel through Q2 along with the significant increase in traffic to our website.

Also, we saw our aided and unaided awareness increased significantly, which ultimately will help lead flow. We also launched new websites and tailored marketing campaigns in our new geos. So, I would say promising initial results, but it’s still early. Some of these costs will be one time in nature, others like radio or longer term investments. We continue to measure these investments closely and we will be amending the mix of our marketing activities as we move throughout the back half of the year.

As related we continue to see healthy sales from our SMP sales activities, which drove our total customer account to over 23,000. In the quarter, our web sales team is responsible for 78% of our total new subscribers, this is a little higher than previous quarters.

As previously communicated, our core sales focus is on the SMB customer, which is best represented in the three to 500 vehicle fleet size. While, we have always been more opportunistic and selective and what we call our 500 plus enterprise activities, by their nature these larger deals are more complex and have longer sales cycles. Our enterprise pipeline continues to build quarter-over-quarter. Including several new prospects developing in Mainland Europe. We continue to be optimistic about the enterprise segment and are encouraged by the deal activity just tough to time deals closing and installing.

We believe there are significant plus 500 unit opportunities to be closed between now and year end. I can also comment that Fleetmatics REVEAL plus, which is our new enterprise version of our new platform has been well received with the new deals that we are targeting.

Now, let me comment on our mid market sales focus which we would define as 100 to 500 in fleet size. We had a very strong quarter in this segment, which is the significant part of our market opportunity. We added over 25 new customers this past quarter that were 100 plus in fleet size, including GoFrac, an oil and gas company, for roughly 500 units Miller Electric, for 300 units, Archer Pressure Pumping for 250 units and Telecom Construction for 300 units. all of which will be implemented on our new REVEAL platform.

Now when taken in total, we closed over 4,500 new units in the 100 to 500 vehicle segment. We believe this middle market is a significant and underpenetrated segment of our target market. So while we did not announce closing in a new 1,000-plus unit deals in the quarter, we continue to close significant mid market new business, which has always been a key focus for our growth strategy. So this is significant new business closed in this segment. So in summary, very strong middle market quarter, and our enterprise plus 500 unit pipeline is building nicely.

Now let me transition toward new add-on business from existing customers. We saw over 20% of our new subscriptions come from existing customers adding on new vehicles, which continues to validate the on going and increasing value our customers receive from our software. We continueto see add-on subscriptions from a broad array of customers including several 100 units added in the quarter by Comcast, which now has over 25,000 vehicle subscriptions under contract.

During April, we released our new global software platform, Fleetmatics REVEAL, featuring several industry-first capabilities and a significant upgrade to our user interface along with features developed over the course of 10 years in both our Fleetmatics and SageQuest offerings, enabling us to meet the needs of all levels of the market through a single code base. We continue to see a very positive response from our new and current customers.

As an update, we have now converted over 85,000 of our subscribers to the new platform as of this date. So things are a little ahead of plan here. As communicated, our plan is to complete our customer transition by mid-year 2015. The FleetMatics WORK product which is a mobile field service application focused on the SMB market, was integrated into FleetMatics REVEAL during the quarter, which gives us an ability to match location-based data with work order information.

Now, this is a very powerful combination for our current and future customers specifically in the SMB space. We continue to witness early success with the FleetMatics WORK product from a sales perspective, particularly in North America and Australia and continue to believe that this can be a meaningful revenue stream for the business overtime.

You may have seen Oracle’s recent announced acquisition of US-based field service company named Tela last week. We believe this further validates of the market opportunity for field service solution. FleetMatics WORK will continue to be a significant investment focus for the business going forward. So as discussed in previous call, we are experimenting with different pricing models with their Fleetmatics WORK product offering. We continue to evolve our product offering to a 12 month contractual commitment. At this stage, we’re encouraged to have seen little price or term resistance to date with this new offering.

Additionally, we now have over 500 active customers in field service at the end of the second quarter up over 60% year-to-date and this growth is without significant impact from selling back to our customer base. It is still early in our product launch the average deal size is on the lower end but we’re pleased with our progress thus far.

So to reiterate our business continues to grow significantly we delivered another quarter to close out the first half of the year and our results highlight the continued demand for our product offering as Fleetmatics continues to grow faster than the overall market. Revenues were up 30% year-over-year and we generated $13.6 million of operating cash flow which once again shows the power of our model to generate cash even during an investment period.

We continue to build upon our new software platform with the integration of Fleetmatics WORK product and acquisition of the KKT Routist product which both have a very large underpenetrated market opportunity and we’ll extend our value proposition to our customers. The combination of these new offerings should give us a good ARPU left overtime.

Although, it is early with our new geos we are encouraged by the early market acceptance of our offering both Mainland Europe and LATAM are large underpenetrated markets and we will continue to be active in growing our subscriber base within these markets. Both organically and through acquisitions. So in summary, very pleased with the quarter.

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

Stephen Lifshatz

Thanks, Jim and thanks everyone for joining. Today I’ll cover our overall business financial performance for the second quarter followed by our outlook for Q3 and the remainder of 2014. As Jim, mentioned we had a very busy and productive quarter as we successfully rolled out our new Fleetmatics REVEAL platform, made headway on our geographic expansion Fleetmatics WORK sales activities and completed the KKT acquisition while at the same time achieving solid second quarter results.

Now regarding our specific results and turning to the income statement total revenue was $55.3 million up 30% year-over-year net additions to vehicles under subscription grew 29% year-over-year to over 499,000 revenue generating subscriptions. And as a reminder, Q2 year-over-year was a tough compare as we had sold and installed over 6,000 time Warner units in the quarter a year ago. And as Jim mentioned earlier we’ve now crossed that 500,000 unit subscriber threshold.

Now the average daily revenue within the quarter increased to $607 million a day and as a reminder there were 91 days in Q2 and we’ll have 92 days for revenue recognition in each of Q3 and Q4.

As similar to past quarters, we continued to see over 20% of our net adds come from existing customers so that’s an important trend, which has not changed.

Our quarterly net churn rate was 1.1% in the second quarter, compared to 1.3% during the second of 2013, as we continue to add more vehicles from existing customers than we lost from those customers during the quarter. Our gross churn rate was 1.7% or 6.8% annualized, an improvement over the second quarter of 2013 gross churn of 2.1%, validating the continued stickiness of our product.

Now turning to expenses and profitability for the second quarter on a non-GAAP basis, our total gross margin was 74.5% during the second quarter compared to 74.9% during the same period last year and 76.2% during the first quarter of 2014. Now the sequential margin decrease was primarily due to the continued hardware conversions from 2G to 3G as well as some of the investment and infrastructure planned in the quarter as I’ve mentioned on prior calls. And as a reminder, we accelerate the amortization of any unamortized 2G units and capitalize the replacement 3G units as deployed and the mix of the age of the units does vary from quarter-to-quarter as well as the level of customer activity surrounding this.

Now if you recall we viewed Q4 as a near-term key from gross margins, but continue to believe that we can achieve significant leverage during 2015 and into 2016. And just for a consistent view, if you were to remove the effect of the 2G, 3G conversions and those cost associated with the f FleetMatics WORK product, we would be looking at 76.5% gross margin in the quarter.

Now in terms of our operating expenses, we continue to invest heavily in sales and marketing as previously discussed. During the second quarter, non-GAAP sales and marketing expenses increased 61.5% over the prior year period to $20.4 million representing 36.9% of revenue. Marketing continue to incur cost related to our brand messaging around our new platform and products as well as our radio and media campaigns.

And if one were to exclude the non-recurring marketing spend associated with brand and PR activity surrounding our REVEAL release, you would see our subscriber acquisition costs remind essentially flat with that of Q1. And we also continue to invest in sales activities in the newer geographies as well as continue the development of the sale organization with the FleetMatics WORK product.

As we’ve stated our focus in 2014 is to invest across the business to expand our distribution and product capabilities in order to further the position of the company for growth long-term.

Our non-GAAP research and development expenses increased to $4.1 million or 7.5% of revenue compared to $2.2 million or 5.2% of revenue last year, reflecting our investment in new product releases as well as expanding the functionality of our platform and solutions. We capitalized $458,000 of R&D during the quarter, compared to the $504,000 a year ago, both of which are excluded from these numbers.

So on a like-to-like basis, we're looking at approximately 70% growth year-over-year, taking into consideration capitalization for both periods and indicative of the strong investments we’ve been making in our products.

Non-GAAP general and administrative expenses in the second quarter were $7.8 million compared to $6.1 million last year. The year-over-year increase was primarily due to the increase in personnel and infrastructure associated with the growth of the business domestically and internationally.

Now sequentially, G&A expenses were down due to couple of factors, primarily reduced accounts receivable, which drove a reduction in our bad debt expense, and a benefit we received in healthcare-related reserves under our self-insured insurance programs, and lastly, capitalization of customization in development costs related to our internal business systems.

Non-GAAP operating income was $8.9 million for the quarter compared to $10.9 million during the second quarter of 2013. Non-GAAP adjusted earnings per share for the second quarter $0.18 based on 38.4 million weighted average diluted shares outstanding. Now this compares to $0.23 per share based on 36.4 million weighted average diluted shares outstanding in the year-ago period.

The effective annualized GAAP tax rate was 32.3% compared to 27.9% from the year-ago period. Excluding discrete items, it was 26.1% and this is primarily driven by where we earn the profits. But we continue to drive towards an overall tax rate of approximately 20% to 22% excluding discrete items and longer term towards that 15% tax target.

Now our second quarter adjusted EBITDA was $15 million compared to $14.2 million for the same period last year. As a percentage of revenues, adjusted EBITDA was 27.2%.

On a GAAP basis, the second quarter earnings were $0.08 per share based on 38.4 million weighted average diluted shares outstanding. Now this compares to GAAP net income per share of $0.16 based on 36.4 million weighted average diluted shares outstanding for the second quarter of 2013. And a reconciliation of GAAP to non-GAAP financial measures have been in the financial statement tables included in our press release.

Now turning to the balance sheet, we ended the quarter with the $155.5 million in cash and $23.8 million in debt compared to a $148.2 million in cash and $23.8 million in debt at the end of Q1 of 2014.

During the second quarter, the company generated $13.6 million in cash flow from operations and invested $11.2 million between capital expenditures and capitalize software resulting in free cash flow of positive $2.4 million. And for those of you who had chance to glance at the cash flow statement, you’ll note that we had an $8.7 million non-cash reduction to the operating cash flow during the quarter as we determined that we utilize excess tax benefits on share based awards, which will provide a future cash tax benefit.

Now this non-cash accounting during the quarter shows us a cash source and the cash flow from financing activities. Had we not made the determination of usability of this future benefit, our operating cash flow and free cash would have each appeared $8.7 million higher within the quarter. As expected we had strong accounts receivable collections, ending the quarter with a net balance of $14.7 million compared to $18.5 million in Q1 of 2014 and resulting in DSO’s of 26 days.

So large cash source outside of earnings was the reduction in AR, we had a few items which also affected the consumption of cash. We purchased KKT, the developer of Routist which you see primarily reflected by increases in our intangible assets and goodwill. We also had a blip of activity surrounding our 2G to 3G device conversions during the quarter with about $2.5 million capitalized during the quarter however we won’t expect that run rate to continue through the year.

And we ended the quarter with just over 780 employees on June 30 an increase of about 60 employees since March 31. And now I’ll finish with some thoughts regarding our financial outlook for 2014 starting with the third quarter. As we’ve shared many of our investment expenses were front half loaded. And for the third quarter we targeting total revenue of $58.2 million to $59.5 million. Our growth of 25.7% to 28.5% year-over-year. And we’re currently targeting adjusted EBITDA of $16 million to $17 million for the third quarter representing an adjusted EBITDA margin of 28% at the mid-point.

Our non-GAAP adjusted earnings per share which exclude share based compensation expenses and amortization of intangibles among other things is expected to be in the range of $0.21 to $0.23 based on approximately $38.7 million weighted average diluted shares outstanding. And from a full year perspective we’re maintaining our revenue guidance range of $228 million to $230 million, which represents year-over-year growth of 29.1% at the midpoint.

We are however revising our full year adjusted EBITDA to $62.8 million to $65.3 million, which represents an adjusted EBITDA margin as a percentage of revenue of 28% at the midpoint of that range. And we therefore expect full year non-GAAP adjusted earnings per share, which excludes share-based compensation expenses in the amortization of intangible among other things to be in the range of $0.82 to $0.87 based on approximately 38.7 million weighted average diluted shares outstanding.

So in summary, we're very pleased with our second quarter execution and ability to meet or exceed expectations across all the key operating metrics. We have entered the second half of the year with firm momentum and remain confident and Fleetmatics ability to grow market share due to the ongoing measurable value we continuously provide to our customers.

And so with that, we'll be happy to take any of your questions at this time. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first question from Raimo Lenschow with Barclays.

Unidentified Analyst

Hi guys this is Harry on the line for Raimo. Thanks for taking the question. I was hoping you could dig a little bit more into kind of your pipeline for deals aboard, I know you guys talked about LATAM and Australia a little. What are you seeing in terms of customer attraction and where do you see that going forward?

James M. Travers

This is Jim here. In terms of the larger fleet sizes as we said, we would define enterprise being 500 vehicle and above, I would say the pipeline that we see improving pretty good quarter-over-quarter is more driven towards North America than it is towards Europe. That said, as we’ve said on previous calls we have not actively sold in Mainland Europe is the largest fleet size historically. With the REVEAL launch in April, it has given us the ability to kind of revisit that, so my reference is that we have begun to see some new deals enter our pipeline from Mainland Europe based on that new platform. But on a percentage basis so that total pipeline, it is still very weighted towards the US market.

Unidentified Analyst

Got it, great and just a quick follow-up, you guys have kind of talk a little bit about your expectations for operating expenses going forward. Could you take a little bit more into G&A and kind of what you see in the coming quarters and if you expect any fundamental changes to that, because I know it was down pretty meaningfully?

Stephen Lifshatz

This is Steve. from a G&A perspective I think you’ll see G&A more consistent with what you’ve seen in prior quarter’s as we go forward through the back half of the year. as I mentioned on the call, this quarter we did have a couple of unique things bad debt was down significantly as a result of the reduction and accounts receivable as well as couple of other things that happen including a credit that we received on our healthcare reserves we have self insurance healthcare and we were able to reduce that significantly based on the analysis that our third parties do. So those were kind of the two big components in this quarter that – took that down.

Unidentified Analyst

Great, thanks.

Operator

And we will take our next question from Kash Rangan of Merrill Lynch.

Kash Rangan – Bank of America Merrill Lynch

Thank you for taking my question. Nice quarter, guys. I just wanted to drill into the economics of customer acquisition. I think, Jim, you mentioned that the cost to acquire subscribers stayed relatively flat, and if we stepped up the sales and marketing, which is something that you would have to do to enter new regions, I am wondering when we should expect the payoff, because I would assume that you should start to see some kind of a trending up of the net new sub growth rate.

And also, coupled with that, it looks like your attrition is going down, which is pretty remarkable. I'm wondering if you will boil this down into the ultimate conclusion. Are we headed for next year better operating leverage than would otherwise be the case, or are you emboldened by what you see in your pipeline that you're going to have to reserve the right to do something with your OpEx and step up your investment and continue with the growth story? Thank you so much.

Stephen Lifshatz

Hi, Kash this is Steve. First comment on the CAC, and clearly we’re seeing that the subscriber acquisition cost if we do take some of the branding and other one off things this past quarter was very similar to last quarter and last quarter, you saw that we had the increase that in order to start investing in these other geographies we will continue investing on the marketing side in these other geographies too early to talk about next year at the stage. But we obviously pay close attention to our subscriber economics and we’re monitoring it closely and as Jim mentioned it’s early days in these geographies but we remain quite optimistic.

James M. Travers

Yes, I think the point I’d make there with the new geos is that we looked at this is a started up entry and as for example when we say mainland Europe we were talking about the Netherlands, which on a weighted basis looking mainland Europe as a fairly small country relative to number of fleets available to. So while we’ve engaged in mainland Europe through the Netherlands it’s not a large market opportunity, but that said we believe it was a good opportunity for us to learn about selling in a new marketplace given the fact that there is cultural difference on Mainland Europe I would say that we have learned a lot through that process, both in the Netherlands and in Mexico. Those markets are indeed a little bit different based on where they are relative to the evolution of where fleet management is. So, we would expect as we continue to move through the back half of the year that unit volume would ramp, and that should help us support the growth of the business we move into early part of 2015.

Kash Rangan – Bank of America Merrill Lynch

Got it. Jim, and if you don't mind, a last question. How do you see pricing in the marketplace? Obviously, Oracle acquired this company and some of the bigger companies have been doing consolidation. Do you feel that you can maintain your price or do you feel like you have enough leeway in your business model to respond to the competition, or maybe you don't see the competition? Just wondering what your thoughts are. Thank you.

James M. Travers

This is Jim. Our ARPU overall has been very, very stable for at least eight quarters now, really going back. So, from that standpoint on a competitive basis as we look at our core GPS offering, we have seen those prices be very, very stable on an overall blended basis. So we have even pleased with that and obviously, our intent, as we drive some of these new product features, is to hopefully see some increment of that as we move into 2015 with products like the routing product and also the field service product. So far we feel pretty good that we have got a pretty stable environment relative to ARPU.

Kash Rangan – Bank of America Merrill Lynch

Nice to hear that. Thank you very much.

Operator

And we’ll take our next question from Brad Erickson of Pacific Crest Securities.

Brad Erickson – Pacific Crest Securities

Thanks for taking my questions. First, can you just talk about to what degree some of these bigger deals you referenced in the prepared remarks may or may not be baked into your guidance? Just any quantification or magnitude around that would be helpful.

Stephen Lifshatz

Yes, Brad this is Steve. That’s a good question and as we have shared previously, when looking at these larger transactions, it is very hard to tell when they are going to close very challenging to actually forecast, not only the close date, but also the installed date in the customer. So, for lack of better words we haircut any potentiality quite materially in any guidance that we are providing. So, one might look at that is some relative upside.

James M. Travers

The one thing I would caution. Brad, is that the timing of converting, so even if we were to close in one of these larger deals in third quarter or early four. The timing of the conversion of those installs, as we’ve seen in the past say year and a half since we have been public, the timing of converting that sales rendered into an install can be a fairly long tail relative to really true revenue generation. So there is a bit of caution there well, even if we announced some of these of when the impact of revenue would be.

Brad Erickson – Pacific Crest Securities

Great, that's helpful. And then just to kind of follow up on a previous question, obviously with some of the M&A, can you just talk about the competitive landscape, particularly for these large deal opportunities? Are you bumping into kind of the same guys on these RFPs or are there new competitors that are getting more aggressive in the competitive landscape, particularly for the larger enterprise?

James M. Travers

This is Jim, Brad again much like my commentary on the competitive environment with our ARPU very consistent set of competitors. So I would say looking at this couple of quarters into the year here, really no new surprises there in a competitive front we see the same competitors that we’ve seen through 2013. So again no real change to the competitive environment.

Brad Erickson – Pacific Crest Securities

Great, and then, lastly, can you talk about – you mentioned the gross margin leverage out into 2015 and 2016, I believe. Is it fair to assume that you're characterizing expansion from kind of the levels we saw last year?

Stephen Lifshatz

Well, looking initially Brad, this would be getting back to the levels that we saw in the back half of the year – last year. So I think it’s the point we had said we didn’t really see it going much beyond there in the short-term, but longer term we taught that there was going to be a little bit more breathing room. And that’s really, probably, end of 2015, 2016 area before you start to seeing really start hitting those leverage points.

Brad Erickson – Pacific Crest Securities

Great, that’s helpful. Thank you.

Operator

And we will go next to Tom Roderick at Stifel.

Matt Van Vliet – Stifel Nicolaus

Yes, hi, thank you. Matt, Van Vliet on for Tom this afternoon. A question around the net adds and kind of where we can see those moving forward. You have a new product out there. You are running some new geographies as well. Looking at maybe a target around 30,000 per quarter or something in that range, how soon can both the new products as they build up and the new geographies start to contribute a couple thousand per quarter to kind of push it over that threshold at this point?

Stephen Lifshatz

So this is Steve, a couple of things and I want to remind everybody, when you are starting in the new geography it’s SaaS it does take some time before you built some momentum and before you’ve grow some real consistency quarter-to-quarter. So that's both the good thing and a bad thing and that it eases into the business. So we have kind of looked at the business as really getting into its groove beginning in mid-2015 order of magnitude timeframe, so that we can really start to size what the growth would be from the specific geographies. And we see each of these geographies growing at slightly different rates once we get to that point, per our plans currently. So, we have got some time left. It is early days still. We’re really talking six months of activity in these geographies. So it is too early to really call it on anything. But as we mentioned earlier, we’re pretty optimistic about where things are looking and what we are seeing so far.

Matt Van Vliet – Stifel Nicolaus

Okay, and then in terms of the conversion to the REVEAL product, what kind of financial impacts or benefits can you see once you have the customers on the new platform? Are you following up with them immediately to look at some upsell and cross-sell opportunities, or what’s kind of the sales strategy is there in terms of how quickly you're going to re-engage with the customer once they have had a chance to use the product?

James M. Travers

This is Jim. We are taking a very thoughtful approach to this. There is no reason to do a forced march. The current product offering or our former product offering is still very competitive. But that said, now that we've had the product out there a quarter and as I said we’ve already got 85,000 subscribers over including by the way one of our larger enterprise customers, Johnson Controls made the decision to move over, which was over 4,700 units that we're in the process of doing, so we are moving selectively the enterprise-level customers over as well.

And to your point, one of the real advantages of that conversion as we do it is that it will give us an opportunity to really go back and upsell Fleetmatics WORK and eventually routing, once we get to it in the first half of 2015, back to that customer base, since we really focused on integrating those new applications and feature sets back into that platform.

So, that's a real advantage for us as we move into 2015 relative to potentially upselling it. So, we are going to have a very thoughtful approach to that, and as I said, our plan still is to complete the conversion roughly by the middle of next year. We think that's doable and we feel pretty good based on what we have seen so far and the feedback from our customers.

Matt Van Vliet – Stifel Nicolaus

Great. Thanks for taking my questions.

Operator

And we’ll take our next question from Matt Hedberg at RBC Capital Markets. Your line is open.

Matt Swanson – RBC Capital Markets

Thanks. This is actually Matt Swanson on for Matt Hedberg. I'm going to go back to the international stuff. I know it has been early days, but in these initial meetings, have you seen anything unique by geography as far as features or additional product enhancements that have been coming up that might affect future R&D decisions or possible M&A?

James M. Travers

Good question, this is Jim. The Australian market, the answer would be nothing that is obvious at this stage. And I would say at this stage pretty much the same for Mexico. There will be a need, which we have already got in our sights. So the answer is we haven't found anything that we weren't already anticipating. There is need potentially, if we scale up to larger customers in Mainland Europe, to do more engine diagnostics, vehicle diagnostics through a CAN bus interface that we would probably have to do, but that's not something that we didn’t already have considered as we looked at our roadmap. So at this stage I would say that we haven’t found anything that all of a sudden was an a-ha that would lead us to have to do something unnatural with our product development.

Matt Swanson – RBC Capital Markets

Thank you. That's all I got.

Operator

(Operator Instructions) We will take our next question from Matt Pfau of William Blair.

Matt Pfau – William Blair & Company

Hi guys, thanks for taking my question. Just a hit on the international segment one more time here. What have you guys been seeing there as far as competition and how would you compare it to the US? Would you say it's more competitive, less competitive, or relatively the same?

James M. Travers

Well, I think a couple of things I would mention here. Number one, Europe obviously is a broad term, we’re already in the UK and Ireland. So we’ve been existing in that market since the inception of the company so we pretty much know the competitors a lot of the major ones, that are pan-European based and we continue – we do see those as well and obviously Netherlands, which is where we are today, the only country we’re focused on.

There are smaller local competitors within the geos specifically the Netherlands which we expected to take place, but they intend to be smaller under capitalized local type of companies. Other than that I would say the same competitors we tend to see in the UK – TomTom, Masternaut – to name a couple we also have seen in a Netherlands as an example. So, nothing really new based on the fact that we’re in the Mainland Europe part of the geography.

Matt Pfau – William Blair & Company

Got it, and then to hit on the midmarket segment, what have you guys – has there been an inflection that has increased these deals that you have seen or what has really been driving the growth in that business?

James M. Travers

Well, we have always focused on that segment, but we overtly, as we moved into the year, really targeted that middle market that 100 to 500 really it’s a core market opportunity in terms of both number of vehicles and it’s penetration rate and believed that we had a great opportunity do potentially accelerate some sales there. So we’re very much tailored marketing campaigns towards getting to that size of fleet. So that’s one of the things that with done some of the spend that we’ve being doing has been very targeted and we’re starting to see some benefit of that would be the primary reason.

Matt Pfau – William Blair & Company

Got it, and how would you characterize the return on those customers versus your smaller ones that are more the mid-teens vehicle fleet size?

Stephen Lifshatz

As far as what we see from our side, when you’re selling customer level of effort maybe slightly higher than that size but you’ve got more vehicles over which to amortize that. So the economics workout similar to slightly more favorable.

Matt Pfau – William Blair & Company

Got it. And last one for me, when you look at the vehicles that were added in the quarter, were they pretty even or were they back-end loaded? Anything we should be aware of with the way the vehicles came in?

Stephen Lifshatz

No, I think during this quarter, we saw things pretty ratable throughout the entire quarter.

Matt Pfau – William Blair & Company

All right, great. Thanks for taking my questions.

Stephen Lifshatz

Thanks.

Operator

We will go next to Alex Potter of Piper Jaffray.

Alex Potter – Piper Jaffray & Co.

Hi guys, was wondering if you could elaborate a little bit more on a comment earlier. You said you are starting to learn now how these customers in these international markets differ from their counterparts domestically here in North America. Was wondering if you could just share a little bit of light on how and why you think they differ?

James M. Travers

This is Jim, I would say the Australian marketplace, which would be the most like obviously the UK and the U.S. market very little difference from a nuanced perspective. I would say that Mexico is the little bit more driven towards stolen vehicle recovery that has a major issue throughout Latin America maybe more so than our current markets. So the way they think about the returns of what you’ll end upselling are very much color towards that perspective than, say, some of the key metrics, operating leverage metrics that we would see here say the states. And in the Netherlands I think it’s really comes down to us tailoring a little bit more of how we sell and everything I would mention here in that and both of the cases of those two specific geos we are only selling over the web to the lower end of the market.

So we have not taken full frontal approach yet to those market places. So the customers tend to be smaller and I would say the ROI, again the Netherlands is a little bit more weighted towards revenue generations than cost reduction and there is the things that we’re just finding out which again the good news is by doing what we’re doing we knew that would really help us understand those cultural nuances. That said there is no reason we can be effective with selling our core there. Obviously, our closing customers and real business there today but they are just some of the high level things I would say about the Netherlands and Mexico that are a little bit different than the US

Alex Potter – Piper Jaffray & Co.

Okay, that’s helpful. If you could touch, I guess, also on this 2G to 3G transition, how far are you through it? How many vehicles did you have to do? How many vehicles have you done and timing for the remainder?

Stephen Lifshatz

This is Steve. Just to dial back, we started this entire process back in early 2012, so we have been deploying only 3G and CDMA boxes domestically where this would affect us, and this is just a North America issue. This is not a European issue, by any means. So we have been pretty successful at getting a large volume of our overall customers done.

One of the things that happens is certain customers don’t want to be disrupted from time-to-time of having their trucks taken off for the install activity. This past quarter, we happened to have a couple that were very willing to do so and we are very opportunistic. One of the ways that we've actually been going at this is as we have been out at the customer for any other reason, be it that they're adding a new vehicle or be any other reason, we have been trying to touch as many vehicles as possible in that service call to keep our cost down as much as possible. So, it’s been a very continuous and progressive process. We have still got time in the channel here, but we are more than – we are ahead of where we had plan to be at this point, without getting into specific numbers.

Alex Potter – Piper Jaffray & Co.

Okay, very good. Thanks, guys.

Operator

(Operator Instructions) We’ll take our next question from Howard Smith of First Analysis.

Howard Smith – First Analysis Securities

Yes, good afternoon. Congratulations on solid results. Question on the web-based sales, again ahead of your target and what you think is sustainable. I'm curious why you are having such success there and what you think makes it revert more to your targeted levels?

James M. Travers

This is Jim. Obviously there is something that we believe is a real strategic advantage for the company that we have been perfecting for the last six years to seven years as we have engaged with the lower end of the market and experimenting with how we get to it efficiently. So, we would look at that as being a real strategic advantage for the company.

And I would say that we continue to really focus on it, and the lead flow, some of the lead flow that we saw come into the quarter as a result of some of that brand spend that Steve discussed in his talking points again, was very focused on that, say, five to 100 market place lend itself towards the web, and we have got pretty good close ratios in that segment of our business with that model and it continues to execute very well. So that really are the reasons and again that’s the same way we intend to engage and are engaging in the new geos is taken that same process that’s been successful here, amend it for nuances culturally, but we still believe we can do that as well as we extend our reach into new geos.

Howard Smith – First Analysis Securities

So there is nothing specific, other than kind of conservatism and maybe reversion to a mean or something that makes you think this level is not sustainable longer term.

James M. Travers

Well, I think the thing that will fluctuate, the percentage, if you are going back to the percentage of net new subs that I think I mentioned it was 78% done over the web. It really will be a function of how many larger deals we close within a quarter. So what would have changed that potentially the given quarter might be if we had a larger enterprise deal or two that where would have been come into that mix. Then we exclude that from that web selling model we really look at that much more of the lower end of the market. Now we get to it.

So, that could fluctuate a little bit, but that said it’s trended nicely for the last since we’ve been public up and to the right small increments but I think that you would see, if you went back that the trend line on that percentage has been moving up into the right.

Howard Smith – First Analysis Securities

Yes, it's been great. Okay, that's all I had. Thank you very much.

Operator

And there are no further questions in the queue at this time. And I will turn the call back over to you, gentlemen, for any closing remarks. And that does concludes today’s conference, we thank you for your participation.

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