Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q2 2014 Results Earnings Conference Call

August 7, 2014; 04:45 p.m. ET

Executives

Ken Ehrman - President & Chief Executive Officer

Ned Mavrommatis - Chief Financial Officer

Norman Ellis - Chief Operating Officer

Analysts

Jaeson Schmidt - Lake Street Capital

Morris Ajzenman - Griffin Securities

Josh Nichols - B. Riley & Co.

Bryan Prohm - Cowen & Co.

Operator

Good day ladies and gentlemen. Thank you for standing by. And welcome to I.D. Systems, second quarter 2014 conference call.

At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will follow at that time (Operator Instructions). As a reminder, this call may be recorded.

I would now like to turn the conference over to our host Mr. Ken Ehrman. You may begin.

Ken Ehrman

Thank you. Welcome to I.D. Systems, fiscal 2014 second quarter conference call. Thank you for joining us today. I’m Ken Ehrman, President and CEO of I.D. Systems. I will be providing you with a summary of our Q2 results and then Ned Mavrommatis our CFO will detail our financials quarter for the quarter. Then I will provide more details about the progress we are making in key areas of our business. Finally, I would like to introduce you to our new Chief Operating Officer, Norm Ellis who will then join Ned and I for the Q-&-A session at the end of our call.

Before we begin, let me remind everyone about forward-looking statements. The following discussion contains forward-looking statements within the meaning of federal securities laws, which are subject to risk 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.

While I am pleased to report that I.D. Systems in the second quarter of 2014 achieved record revenue of $11.4 million, up 22% from Q2 last year. More importantly however, this was our first full quarter of I.D. Systems 2.0, our strategic initiative to establish a new foundation for sustainable, predictable, revenue growth and profitability.

We have a world-class customer base and patented technology. Our objective now is to develop the right product mix, the right set of scalable implementation processes and the right customer support structure to drive financial results that are commensurate with the opportunities our customers provide sooner rather than later.

I am pleased to report that in the second quarter we made tangible progress on every one of the two dozen projects we initiated under I.D. Systems 2.0, which I will go into some detail in a few minutes.

First, I want to summarize the reasons we are redefining I.D. Systems. As you know, today we track more than 200,000 assets every day for roughly have the Fortune 200. However in our core markets alone, we estimate that our existing customers have an additional 750,000 assets and on top on that there are about 7.5 million assets that our existing technology could be applied to, for both industrial vehicles, as well as containers, chassis, as well as trailers. The keys to capitalizing on these opportunities are the primary and immediate focus of I.D. Systems 2.0.

We are enhancing our ability to win new enterprise accounts, as well as maintain and expand our existing customer relationships with our core enterprise customers. We are developing a strong sales channel through vehicle OEMs and dealers to put many more feet on the street selling I.D. Systems solutions, including the key addition of Toyota Material Handling Group.

We are shifting our go-to-market strategy to a more service and software oriented model, with a cost barrier to customers initial investment is lower, but there is a significant recurring revenue stream for licensing our software and intellectual property, hosting our systems in the cloud and providing remote support and upgrades through out technology.

We are developing and launching great new products that match well with our go-to-market strategy and we are applying best practices to improve virtually every aspect of our operations to enable us to scale our implementation and support services, to keep paced with the most demanding customers in the world. We are confident that our markets our prime for I.D. Systems 2.0.

Industrial Vehicle Management Systems or VMS has clearly become a best practice and the market is becoming much more mainstream. If you are a Fortune 1000 company with supply chain operations and don’t have a wireless vehicle management system on our Material Handling Equipment, you are definitely lagging behind your peers.

We see that the VMS market today with penetration of only around of 5% of the addressable assets has the most obvious short term opportunity for sales growth. That notion is most convincingly supported by the fact that every major forklift manufacturer in the world is now offering some form of Vehicle Management Systems to its customers.

The first Toyota, as well as Raymond, the third largest are all working with I.D. Systems. So everywhere industrial vehicles are being sold. The end users are being told they need Vehicle Management Systems.

I.D. Systems is extremely well positioned in the VMS space, with an estimated 50% market share and market leading intellectual property. But our transportation asset management business is also a market leader, with a diverse portfolio of tracking and monitoring systems for virtually every type of cargo carrying asset, including Dry Van Trailers, Refrigerated Trailers, Intermodal Containers and Container Chassis.

Our asset intelligence subsidiary holds a market share of approximately 25% in this space and the addressable market for our products is estimated to be only about 25% penetrated.

Our rental car management business also remains an evolving unpenetrated market. Although our primary rental car customer to date, Avis Budget Group has not committed to our technology as aggressively as we expected. With approximately 30,000 units currently deployed, we have no doubt that smart wireless managed rental cars are a business model for the future of the rental industry and we have the technology to exploit that opportunity.

All together I.D. Systems is more than 75 patents issued or pending related to our three core business segments with more clams in the pipeline. This is another reason we are optimistic about all the prospects for our company; we have the right people in place too.

In addition to a very talented dedicated group of employees, we have taken steps recently to strengthen and deepen our senior leadership team. In the second quarter of 2014, I.D. Systems elected a new Board of Directors whose expertise is relevant to our business and qualifications to address the opportunities and challenge that lie ahead are unprecedented.

Michael Brodsky is the Executive Chairman of Selectica, a publicly traded provider of cloud-based software. Ron Konezny is the Vice President of Trimble Navigation and CEO of its PeopleNet division, a leading provider of fleet mobility technology. Ron has had a long distinguished career providing wireless M2M technology to the transportation industry. Kenneth Brakebill, is an Intellectual Property Lawyer and Litigator, a former partner at the highly respected firm of Morrison & Foerster; and Tony Trousset, is a founder and the managing member of Atlas Technology Group, a privately-held Silicon Valley-based provider of financial services to technology companies.

Our recent appointment of Norm Ellis as I.D. Systems Chief Operating Officer as announced on July 22 further enhances our team. Norm has more than three decades of experience in M2M technology sales and management and was a key players in making Qualcomm's Omnitrac division a global leader in over-the-road fleet management. Our objective is to achieve the same level of success for I.D. Systems.

Now, I will turn the call over to our CFO, Ned Mavrommatis to review our financial results. But I plan to spend more time later providing you with additional granularity on the progress we’ve made on many of I.D. Systems 2.0 projects, as well as some of our recent sales successes. Ned.

Ned Mavrommatis

Thank you, Ken and hello to everyone on the call. Revenue for the three months ended June 30, 2014 increased 22% year-over-year and 17% sequentially, to a second quarter record of $11.4 million from $9.4 million in the second quarter of 2013 and $9.7 million in the first quarter of 2014. The increase was attributable primarily to increased sales, both industrial Vehicle Management Systems, both domestically and internationally.

Revenue from VMS in Q2, 2014 was $6.6 million up 41% compared to the previous year Q2. Transportation asset management revenue in Q2 grew 3% year-over-year, however sales of new units increased approximately 40% compared to the second quarter of 2013, which will make a positive contribution to recurring revenue going forward.

Recurring revenue in Q2 was $4.5 million or 39% of total revenue compared to $4.4 million or 46% of total revenue in the second quarter of 2013. The decrease in percentage was attributable primarily to a strong increase in product revenue. We expect our recurring revenue will increase at a higher rate over time, as we bring a new generation of products to market, with a model that heavily emphasis recurring revenue.

Selling, general and administrative expenses in Q2 were flat over year at $5.7 million. Research and development expenses increased to $1.3 million from $1.1 million in the second quarter of 2013, primarily as a result of accelerated development of both VMS and TAM products.

Included in expenses, primarily in R&D is approximately $233,000 dedicated to I.D. Systems 2.0. We budgeted approximately $2.5 million for this initiative, currently spread across 24 projects, which are on track for completion by the end of 2014. These are one time expenditures that we expect will help us accelerate growth. We plan to return to our normal operating expenses levels at the beginning of 2015.

In addition, we are continually looking at ways to reduce our general and administrative expenses. Due to the executive management changes in 2014, we were able to reduce our annual operating expense run-rate by approximately $600,000, even with the addition of industry veteran Norm Ellis.

Gross margin in Q2 was 45% compared to 52% in the second quarter of 2013. The decrease was attributable primarily to a channel partner incentive program, which led to a 67% year-over-year increase in channel sales, which had lower margin than sales to direct end users.

We expect that the conclusion of this incentive program, as well as the full commercialization of our new VMS hardware product will restore margins to historical levels going forward by the end of the fourth quarter.

Excluding stock based compensation and depreciation and amortization, non-GAAP net loss for the quarter $1.1 million or $0.09 per share compared to $851,000 or $0.07 per share in the second quarter last year. Net loss in Q2 was flat year-over-year at $1.7 million or $0.14 per share.

As of June 30, I.D. Systems had $14.6 million in cash, cash equivalents and marketable securities and no debt, compared to $14.1 million and no debt at December 31, 2013. Cash, cash equivalence and investments was also up sequentially form $13.4 million at the end of Q1.

As we continue to executive on our I.D. Systems 2.0 plan, we have made a commitment to proactively communicate our story to the institutional investment community. As such, we will be presenting at four upcoming financial conferences. These include the Canaccord Genuity Growth Conference on August 14 in Boston, the Cowen Global Transportation Conference on September 3 in Boston, the Liolios Group Gateway Conference on September 4 in San Francisco, and the Euro Pacific Capital Global Investment Conference on September 9 in New York. We have found conference like this an effective and efficient way for us to meet with new and existing shareholders.

Thank you for your time today. I look forward to our Q&A later and to reporting further to you on the near future as we continue to make progress on our I.D. Systems 2.0 investments and our financial results.

With that, let me turn the call over back to Ken.

Ken Ehrman

Thank you, Ned. As I mentioned, I’d like to drill down a little bit more and provide a little bit more granularity on some of our sales successes in the second quarter, but also again most importantly, our progress on the I.D. Systems 2.0 initiative.

As Ned indicated, our record revenue this quarter was driven by VMS system sales. We received purchase orders for initial VMS deployments from a number of new customers with enterprise expansion potential, including one of the largest automotive manufacturers in the world, a Fortune 500 tobacco company, a major new airline and a leading global appliance manufacturer.

The 250 vehicle pilot program with the auto manufacturer we announced in July is an especially important win. A rollout with this customer would involve thousands of vehicles and with our history of success in the automotive industry, we are very optimistic about our prospects with this account.

We have also been receiving a steady stream of orders from our growing core of existing customers, including Audi, Caterpillar, CNH, Cummins, Deere, Ford, General Mills, Kellogg's, Nestlé, Procter & Gamble, Postal, Walgreens and Walmart.

One of the highlights of the second quarter was the on-time shipment of our VMS product to China for one of our existing enterprise customers. This will be our first VMS deployment in China, the world’s fastest growing forklift market. Those orders were received in Q1 as we announced in February 10, 2014.

Also our channel partners in the VMS market, the forklift manufacturers and their dealers had a strong quarter. Including a series of orders, aggregated value at over $2 million to expand our deployment of our VMS technology across multiple distribution centers of a Fortune 100 end user.

Our channel partners help us diversify the industries in which we are deploying our solutions, as well as the end users who benefit from our technology. In the second quarter, our partners won business across a wide range of the industries, including apparel, building products, consumer goods, food distribution, home appliances, industrial supplies, pharmaceuticals, power equipment, logistics, mining and retail distribution.

Ned mentioned our channel partner incentive program, which contributed to a 67% year-over-year increase in VMS channel revenue. Although this had a short-term negative effect on gross margins in Q2, and will impact Q3 margins as well, it absolutely helps us get more representatives selling our solutions we expect will be positive for our results longer term.

As I noted in my remarks last quarter, we now have a reseller agreement with Toyota, the world’s largest forklift OEM, and we are looking forward to the launch of a joint marketing program later this year. We will be engaged with about 70 Toyota forklift dealers across North America and Toyota will be selling our latest generation of Vehicle Managed Solutions, so we expect big things from this program.

We also had a strong VMS contribution from our international subsidiaries in the second quarter. We are currently supporting implementing customers in 25 countries, including China as I mentioned. We will be leveraging our inroads into the China market by systematically targeting Asia sites for our VMS enterprise accounts, as well as attending the CeMAT Trade Fair in China this fall, as well as exploring distribution partner opportunities in Asia.

We are also leveraging channel partners in Europe. For example, with the United Kingdom’s largest forklift training service provider with whom we are producing a series of fleet management seminars.

I spoke earlier about our intellectual property. We announced the award of two more patents in the second quarter of 2014, one of which we believe is specially powerful in the VMS market, because its filing date precedes the development of many of our competitive systems, and because it addresses many functional aspects of the Wireless Industrial Vehicle Management Systems.

On the transportation asset management side of our business, we won a number of new important customers and deals as well. We entered into multiple contacts for our new intermodal container tracking systems aggregated value at more than $1.3 million. Customers include a national fright carrier and new railroad customer.

In addition, our new chassis tracking system also had a positive commercial launch. Our initial pilot programs have been aggregate upside potential of hundreds of thousands of assets, an opportunity even bigger than Avis.

Existing TAM customers, including Forward Air, Knight Transportation and U.S. Trailer Holdings continue to generate follow-on orders in Q2 and have positive signs from other long-term customers such as Walmart and Osterkamp Trucking that they will also be renewing our expanding their business with us.

Our rental fleet management business contributed $275,000 in Q2 revenue, consistent with previous quarters, representing the recurring service revenue from the 30,000 units we have deployed with them.

The second new patent that we announced in Q2 relates to remote wireless management of car rentals. Processes covered in this patent include monitoring fuel and mileage, tracking the location of the vehicles when they are on the lot; automatically updating vehicle readiness in the rental system and enabling remote rental checkouts. This patent also covers a method to avoid radio frequency interference from multiple vehicles communicating at the same time in the same place and we think it’s a critical aspect of this application.

As with our VMS related patent, we believe this IT provides I.D. Systems with strong protection in rental fleet management space. We do remain actively engaged with Avis Budget, as well as the other two major brands, exploring ways to commercialize our rental fleet management technology.

Let me just switch gears now and address I.D. Systems 2.0 projects specifically. There are 24 distant projects and they are improving the scalability and replicable quality of our products, internal processes, implementations and customer sport. To allow them to expand our solutions more efficiently and rapidly across their enterprise.

One of the most significant objectives in terms of impact in total revenue, recurring revenue and profitability has been the accelerated development of new products that are easier to install and support, with a lower upfront investment for the customer. But also with an emphasis on licenses and services that will drive higher margin, more predictable stream, a recurring revenue for the company.

The basic version of our fourth generation VMS hardware VAC4 passed beta testing in Q2 and is now in active use by customers who have paid for the system. The WiFi version of the product is in beta test now, as well as various other options that will be in beta shortly. That four reduces our cost, enhances functionality, provides a seamless, scalable platform for upgrades and takes about an hour to install, 75% faster than our previous generation. We will definitely begin shipping significant commercial quantities of VAC4 by the fourth quarter of 2014.

In addition, our two new transportation asset management products that generated substantial revenue in Q2, the GSM-D150 and GSM-D400, both use low cost cellular technology to track respectively trailer chassis and intermodal containers, two very large untapped market opportunities for I.D. Systems 2.0.

Our TAM product sales have been improving for last year as Net noted, with new unit sales volume in Q2 up 40% year-over-year. Accordingly, we have worked with our manufacturing partner to ensure we have a safety stock (ph) available to us over and above our quarterly forecast.

If you have attended previous I.D. Systems conference calls, you’ll know that one of our key strategic products is analytics, which has a unique number of attributes that it can contribute, both directly and indirectly to our sales process and our revenues.

In addition to the key product development, another focus of I.D. Systems in the second quarter was establishing new internal processes and metrics to improve our installations and support responsiveness and enhance our customers experience with our solutions.

We formed a process excellence team, a Lean Six Sigma Black Belt, augmented selectively by temporary resources, to apply best practice methodologies and drive continuous improvements across every part of our company, including engineering, product development, sales, production, implementation, training and customer service.

Following are some of the projects we are working on with key results thus far. We simplified the Dota board in our VAC4 product, resulting in a substantial cost reduction. We established a new audit process to improve out-of-the-box quality and reduce issues during initial system deployment. To streamline our implementation efforts and scale them more effectively, we finalized an initial contract with a third party organization to provide field service engineering services and create a new online resource scheduling tool.

We also created online tools to simplify data collection and sharing from the field. We created many, many elements of a scalable web based training program, eliminating the need for classroom training and site visits for basic implementations.

Every one of these items were items that we talked about when we moved forward with the I.D. Systems 2.0 Initiative. There’s many more I could talk to you about, but at this point sufficed to say that these efforts will make I.D. Systems scalable and quality, which is something that’s long overdue.

That concludes my opening remarks. Now, I’d like to give the floor to Norman Ellis, our new COO to speak briefly on his introduction to I.D. Systems.

Norman Ellis

Thanks Ken. As you can imagine, with all the activity going on at I.D. Systems, I’ve been absorbing a tremendous amount of information in my two plus weeks here. It’s been very exciting. Meeting my new colleagues face to face has confirmed what I learned in my due diligence during the recruitment process, that we have great people.

It’s clear to me that our accomplished team is eager and ready to take this company forward and I’m fortunate to be able to be part of it and contribute to our success. I’ve been in the transportation, logistics and telemetry technology business for 35 years, most recently with Qualcomm Omnitracs. I’m going to do my best to leverage all my experience and my C-Level transportation contacts to help each of our core businesses realize its potential.

As COO I’ll be working with all of our customer facing teams from marketing and sales to implementation, training and support, to help make I.D. Systems 2.0 Initiative a success, and fully capture our bundled opportunities for growth in the markets we serve. I look forward to meeting our listeners in the future and answering any questions you may have for me during the Q&A.

Let me turn it back over to Ken.

Ken Ehrman

Thanks Norm. At this time we’d like you to ask any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question coming from the line of Jaeson Schmidt of Lake Street Capital. Your line is open.

Jaeson Schmidt – Lake Street Capital

Hey guys, thanks for taking my questions and congrats on a really strong quarter. I just wanted to get your thoughts on where you think the near term growth will be coming from? Do you look for it from new customers or are you really focusing on penetrating your existing customer base?

Ken Ehrman

Well, the main focus at I.D. Systems 2.0 is to go after those 750,000 additional assets that our current customers have; that’s our primary focus. But through the relationship with Toyota, that opens up another 80 or so dealers – I think its 70 actually, but that will be selling our product everyday through their customer base. So, I believe that too should really expedite the growth of the sales of our business.

Jaeson Schmidt – Lake Street Capital

Okay, and you mentioned the Toyota opportunity. Is that currently live now or when will they begin kind of reselling?

Ken Ehrman

No, we’re in kind of the get everything in place that’s necessary to do a broad push through their dealer channel. The plan is to have it really launched in Q4.

Jaeson Schmidt – Lake Street Capital

Okay. And any change to the competitive landscape out there. Are you seeing any kind of aggressive pricing at all?

Ken Ehrman

There’s so many different markets we are talking about. I would say we are seeing some competitors in the rental car industry. There are some other people coming in and talking to the larger rental companies, but as far as the TAM space, as well as the VMS space, really nothing has changed in those areas.

Jaeson Schmidt – Lake Street Capital

All right, perfect. I’ll jump back into queue. Thanks a lot guys.

Ken Ehrman

Thanks Jason.

Operator

Our next question is coming from the line of Morris Ajzenman of Griffin Securities. Your line is open.

Morris Ajzenman - Griffin Securities

Hey guys.

Ken Ehrman

Hey Morris.

Morris Ajzenman - Griffin Securities

Hi. Clearly getting traction on the top line, your starting to really have some consistent growth there, which should bode well. I guess the question that kind of lingers with me is, unfortunately there is profitless prosperity in this quarter again and the next couple of quarters, you have this channel partner incentive program, which is impacting gross margins.

But given some sort of roadmap on what’s the revenue run rate, what kind of leverage do we need to get profitability, at least on a pro forma basis if not on a GAAP basis? Because we talked about a year or so ago we’re looking at $11 million revenue run rate to be at a breakeven or maybe profitable, but again, I understand its becoming more promotional with your channel partners.

But help us understand, how this roadmap looks and when we can become profitable, what sort of revenue run rate – that changes in the first quarter ’15 when this incentive program moderates. Just help us understand the growth of profitability.

Ned Mavrommatis

Sure. Hey Morris, it’s Ned. As we discussed during our last conference call, we made a decision to make this investment of $2.5 million, which is really geared to getting into having more predictable revenue and accelerate our growth rate, because over the last few years although we were growing, we weren’t growing at a rate that everyone was happy with.

The goal here is once we finish this initiative, is to get back to our historical operating levels in 2015, which would bring us back to the goal of getting profitable on a non-GAAP basis, $10.5 million to $11 million.

In addition, when you look at the gross margin decrease that came from the channel, the goal here, although the channel has a lower gross margin, it does have a much lower cost of sale. So what it’s going to allow us to do is to really keep the operating expenses flat and allow us to bring an additional significant revenue stream.

The third thing is, when you look at the introduction of VAC4 into the market, fourth quarter of this year, that product is going to have a much lower cost, which should improve our overall gross margins. So when you put all that together, the goal for 2015, the breakeven point is a $10 million to $11 million or $10.5 million and obviously as we increase the growth rate and we see that increase in the top line, you get to see a lot of that go into the bottom line.

Morris Ajzenman - Griffin Securities

And then just as a follow-on here, I don’t know how you can answer it, but its hypothetical. Lets say you running at $12 million revenue run rate and its next year. Based on that hypothetical, what sort of profitability can we have on a quarterly basis?

Ned Mavrommatis

I think at those levels we should see on a non-GAAP basis, which excludes stock based compensation and amortization of intangible assets. You should see an operating margin of approximately 10% at those levels.

Morris Ajzenman - Griffin Securities

Thank you.

Ken Ehrman

Right, I just want to add and I normally wouldn’t want to do this, but we are absolutely setting ourselves up to be profitable in 2015. We’re spending the money now that we need to spend to put us in a position to accelerate the adoption of our technology by our core customers. If we didn’t spend that money, that would just push out and the more it pushes out, the more that pushes out our profitability, where we 100% have a product and a market that would support significant revenue growth and profitability and predictable revenue growth and in order to get there, right now we need to make these expenditures to set the infrastructure in place to achieve our objectives.

Morris Ajzenman - Griffin Securities

Thank you.

Ken Ehrman

Thank you.

Operator

Our next question coming from the line of Josh Nichols of B. Riley & Co. Your line is open.

Josh Nichols - B. Riley & Co.

Hi. Real quick I was looking at Toyota. Given the size and comparing it to Raymond and where they are as a customer, how long do you think it would take Toyota with all the 70 to 80 dealerships to really scale up into where they could be 10% customer?

Ken Ehrman

It’s kind of a hard to predict. The only thing I would say to kind of answer that question to the best I can is that they don’t have a VMS system that they can offer their customers today.

So every other major forklift manufacturer has a solution. Raymond offers our system; Crown offers their own homegrown system; NACo offers their technology provider from Australia, so there’s probably a lot of pent up demand that they have in their customer base. But if each dealer in 2015 could do $1 million, which is not a big number, you’re talking about adding $70 million to our business through that channel opportunity alone. So that’s more than we’ve done in revenue for the last few years.

So the more we’re going to put into Toyota, the more we’re going to get out of it. I have already a fulltime person dedicated to that relationship, but as we start launching, we are going to probably have to invest more in it. But I think the more we put into it, if we can achieve the numbers I was just talking about, it could be transformational for us.

Josh Nichols - B. Riley & Co.

Great. And real quick I guess, looking at the recurring revenue, which is obviously one of the big emphasis for the company and the VAC4. How much of effect do you think that’s going to have in really driving your recurring revenue up once it gets released in Q4 and I would assume is that going to be replaced in the PowerFleet and PowerBox?

Ken Ehrman

Yes, it completely replaces it. What’s interesting is the model we’re using is the model that both Norm and Ron used in the trucking industry. So we’re not trying to kind of recreate the wheel here. I mean we have basically the two leaders in the trucking, tracking space between Ron and Norm and between the two of them they are very instrumental in not just the pricing, but the entire process we are going to put in place for the VAC4 product launch.

Josh Nichols - B. Riley & Co.

Right. So as it stands right now, the new VAC4 customers would have a bit of a recurring revenue component to it, instead of just being more traditional like won and done that you kind of had it with a lot of the PowerFleet and PowerBox before. Correct?

Ken Ehrman

That is 100% correct.

Josh Nichols - B. Riley & Co.

Then just looking at everything, whenever I look at the revenue ramp and I know say $10.5 million or $12 million this year, are you expecting given the promotional that you had, are you expecting sales to drop off at all in two quarters or would you expect them to be able to continue to increase from this point forward, even though you had some promotions going.

Ken Ehrman

The whole purpose of this 2.0 initiative is to expedite our sales with our current customers. So the best measure of the success of 2.0 is going to be the recurring revenue and the ongoing orders from our existing customer base, so absolutely.

While we really should truly expect to see the results of I.D. Systems 2.0 in 2015, because that’s really when it will be complete, you know its not just the beginning and an end. There’s going to be incremental improvements that we are making along the way that should definitely and have already had an impact on our revenue.

Josh Nichols - B. Riley & Co.

Right. Yes, whenever I look at the top line your already close to $12 million and then I think of the 5% margin on VAC combined with the VAC4 release and a couple of other things, but the production started in Q1, the $2.5 million and I get where your going with that I think.

Ken Ehrman

Great.

Josh Nichols - B. Riley & Co.

Yes, okay. Thanks a lot.

Ken Ehrman

Thank you.

Operator

Your next question coming from the line of Bryan Prohm of Cowen & Co. Your line is open.

Bryan Prohm - Cowen & Co

Two more questions and also a formal congratulations to you Ken on the CEO role.

Ned Mavrommatis

Thank you very much.

Bryan Prohm - Cowen & Co

Hey, so guys the top line growth as we’ve heard from a couple of guys already looks great. How much of that is attributable to the channel partner incentive program in the quarter.

Ned Mavrommatis

So during the quarter, if you look at the overall revenue, about 14% came from the channel. That was up as we said from the previous year, about 6% to 7%. However that’s not one time due to the incentive. I mean in Q3 the channel continues to be strong, as well as we expect it to continue for the rest of the year. I mean Ken touched a little bit upon it with Toyota, but it’s becoming very prevalent that this forklift manufactures OEM and dealers provide a telemotics product and it’s helping our channel sales a lot.

Bryan Prohm - Cowen & Co

Okay, got it. So sort of building on the last question, it’s entirely possible that revenue could be up sequentially as channel partner incentives continues to play forth and VMS sales remain strong.

Let me ask you a question Ken. So, after the first quarter of 2.0, how was your customer growth outside the installed base? How many incremental customers did you get in the quarter that weren’t previous customers and then more importantly, was that in line with your expectations for what you could do in the first full quarter of 2.0? Thanks.

Ken Ehrman

Well, we added one large auto manufacturer and we definitely added one large airline and those were two big accounts that we added during the quarter. Realistically though, if you look at what we’ve had to deal with this year, there’s been a lot of changes, lets just put it in the nicest possible way.

So new CEO, new Board, new Head of Sales, those are big, big changes for a company like us and the fact that we’ve been able to kind of not just weather those, but meet or exceed the goals that we set in place before any of those changes happened, while also at the same time implementing I.D. Systems 2.0 is something I’m very proud of, but this is not the end game here.

There’s so much potential with our current customers and if we can really just kind of get out of our own ways so to speak. I’m hoping that the calls that we’re having are going to be about much bigger numbers very soon. So I don’t think we’ve seen really much of an impact yet from I.D. Systems 2.0. I think the best is definitely yet to come.

Bryan Prohm - Cowen & Co

Okay, great, thanks. Hey, a couple more. On transportation and asset management growth, it’s been low to mid single digits through the first half of the year. What are your expectations for the impact of the new products coming at the end of the year? Is that something that’s going to push us into double digits?

Ned Mavrommatis

Yes, you know Bryan, its Ned. If you were at the introduction of the new products with the intermodal and chassis product, those are untapped market opportunities that have huge potential, as well as the addition of Norm, who is a veteran in the transportation industry. Our goal is to get the transportation business growing into double digits and away from the singe digits that has been growing over the last couple of years.

Bryan Prohm - Cowen & Co

Great. Hey, any update on the postal service IDIQ contract?

Ken Ehrman

I think they are going to end up extending that contract, because getting the funding is taking a little longer than they want. So to the extent that they can hit that $4 million ceiling, that’s just all upside for Q3. But it’s hard to say yet what they are going to contribute from a Q3 revenue standpoint.

Bryan Prohm - Cowen & Co

Understood. All right, last question for me. Ken, you talked a lot more about the rental car market in your remarks than on the previous couple of calls. Should I read anything into that, not that I am reading anything into that or is there something specific in 2.0 that’s applicable to eliminating the growth bottlenecks in that market in particular, maybe low cost cellular. It sounds like you’ve got a solution that’s getting close to market.

Ken Ehrman

I think that almost everything we’re doing in 2.0 will help. I mean a company like Avis, Enterprise or Hertz. When your talking about implementing something, the type of scale that these companies are looking to implement, our ability to support that and support that in a way that justifies hundreds of thousands of assets being tracked is critical to convincing people to move forward with us, as opposed to maybe someone else.

So there’s an impact that the 2.0 initiative has all three of our industries that we’re pursuing and frankly, I’m optimistic about rental, but I’m certainly not focused on it. I think that it remains a key opportunity for our company, but chassis tracking and intermodal containers have me just as excited about it.

I mean, that’s the thing; with all these opportunities in front of us, again I’ll go back to the same point. If they could happen in a month from now or six months from now, why not do everything you can today to make them happen sooner rather than later.

The opportunity is really now for us to capitalize on our technology, the market and the market needs. So just pushing things out by potentially slowing down spending or potentially not solving the problems that we know exist, really makes no sense.

Bryan Prohm - Cowen & Co

Understood, great. Thanks for all your time and answering all my questions. Good luck guys and talk to you soon.

Ken Ehrman

Thank you.

Operator

(Operator Instructions) We have a follow up question from Morris Ajzenman from Griffin Securities. Your line is open.

Morris Ajzenman - Griffin Securities

As a follow-up question to the car rental business and particularly to Avis Budget, as times goes on and they have not rolled out beyond 30,000 vehicles, should we be less and less confident or are you less and less confident that anything will transpire with the Avis budget?

Ken Ehrman

I’ll tell you how I would characterize now the relationship with Avis Budget. What they have told us, they are kind of in a strategic pause was the word they used. So they know they need to do something, but they don’t really have the catalyst to do it now.

I mean look, if they would have just simply implemented our system after we installed the first 30,000, they would have received the ROI already for our technology. So this continued kind of pause absolutely allows them to make perhaps a better decision about what technology to deploy across their fleet, but they are also leaving a tremendous ROI opportunity on the table, so…

From my standpoint, like Enterprise and like Hertz, they are large potential users of telematics technology that today are not tracking or monitoring their assets. But if you are a C-Level executive from a company that owns and operates hundreds of thousands of assets, and don’t have tracking technology on it today, a lot of people are going to be asking why that is.

Because the Internet of things and M2M is getting a lot more visibility in the C-Suit and the technology exists and its cost effective to track and monitor those assets and the ROI in doing so is well understood.

So its just again back to – we got to continue to press ahead and not divert resources from other opportunities that might be more immediate, but still be well positioned when the time comes for this industry to go forward with telematics.

So I think that was the last question, because I’m looking at the veterview and there are no more questions.

So at this point I’d like to thank everyone for participating in the call today and we look forward to meeting with people as we move to the investor conferences and look forward to reporting to you in the near future. Thanks.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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

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

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

Source: I.D. Systems (IDSY) CEO Ken Ehrman on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts