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

I.D. Systems agreement with Avis Budget Group Call

August 23, 2011 10:30 am ET

Executives

Jeff Jagid - Chairman, CEO and Director

Ned Mavrommatis - CFO & Treasurer

Analysts

Matthew Hoffman - Cowen & Co.

Walter Schenker - MAZ Partners

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the conference call on the I.D. Systems agreement with Avis Budget Group. 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. (Operator Instructions) As a reminder,this conference maybe recorded. I’d like to introduce your host for today Mr. Jeff Jagid, Chief Executive Officer. Sir, please go ahead.

Jeff Jagid

Thank you and thank you to everyone for taking the time to dial in today and welcome to our conference all on I.D. Systems agreement with Avis Budget Group as announced in our press release yesterday afternoon. I am Jeff Jagid, the Chairman and CEO of I.D. Systems. With me is Ned Mavrommatis I.D. Systems’ CFO.

We are very pleased and excited to talk to you today about this transaction with Avis Budget which we believe is another significant transformational milestone for I.D. Systems as a company. I have some opening remarks and Ned will detail the financial aspects of the agreement. Then we will then open the call for your questions.

Before we continue, let me reiterate the customary Safe Harbor statement. The following discussion contains forward-looking statement 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 & 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.

As many of you know, we’ve been engaged with Avis since 1998 in developing the rental fleet management application of our wireless technology. We’ve significantly evolved this technology into a leading edge system, earning two major patents along the way which provides unique vehicle management capabilities in both traditional airport lots and the new virtual lot environments where reservations, vehicle access and billings are executed remotely and automatically via smartphone.

Our technology is the enabling force behind Avis Budget foray into the virtual rental world which Avis launched yesterday under the name Avis on Location. This allows Avis Budget to offer a de-centralized charge-by-the-hour car rental service to its customers without any on lot staff. The service can be deployed quickly wherever demand dictates with as few or as many vehicles as needed. Customers can then self-manage rentals through their smartphones for a more convenient, cost-effective, time-saving experience. Among the many advantages this technology gives Avis Budget over competitors like Zipcar is that you don’t need a subscription to access the service or a special card to access the vehicle. Everything is controlled through a smartphone accessible web interface, our wireless communications technology and our in vehicle intelligent devices which do everything from recording vehicle usage to unlocking and locking the car doors. By many accounts the vehicle car rental space is the fastest growing segment of the car rental industry.

Auto Rental News has estimated that the market will exceed a billion dollars in the next decade. For Avis Budget virtual rentals are especially important for its dedicated corporate business. In fact Avis Budget has already deployed I.D. Systems technology in thousands of vehicles, on the corporate campuses of several of its Fortune 500 customers and the success of those implementations was a major driver behind the agreement we signed yesterday.

Our technology also brings significant value to Avis Budget’s traditional airport rental lots. Our system automates vehicle data collection without human intervention, streamlines billing and has demonstrated through tens of thousands of rental transactions, a substantial positive impact on Avis Budget’s fuel-related revenues.

As reported in our joint press release yesterday afternoon, the agreement between I.D. Systems and Avis Budget includes the following financial and strategic highlights. I.D. Systems received the $14 million purchase order from Avis Budget to deploy our system on 25,000 Avis Budget rental vehicles primarily in the Northeast United States. The agreement also gives Avis Budget an option to expand system deployment across its global fleet.

Avis Budget has a number of significant incentives to exercise this global deployment option as Ned will detail in a moment, including the $4.6 million equity investment in I.D. Systems, warrants to purchase additional shares of I.D. Systems' stock in the future and the prospect of extended, exclusive use of our technology.

On the technical side of the transaction, our system is fully integrated with Avis Budget's existing rental management systems, including the Wizard Reservation System, which enables any and all vehicles equipped with our technology to be utilized in either virtual or traditional airport setting. This gives Avis Budget maximum flexibility in allocating vehicles to meet shifting market demand and it gives Avis Budget customers a seamless experience no matter where they pick up or drop off their vehicle.

I.D. Systems will provide all system hardware, software, maintenance and support services for this program, while Avis Budget is hosting the system in its IT centre using I.D. Systems' software.

I now want to turn the call over to Ned Mavrommatis, our CFO to fill in more the financial details of the transaction for you.

Ned Mavrommatis

Thank you, Jeff. And thanks to everyone for taking the time to join us on the call today. As Jeff noted the agreement we have entered into with Avis budget is the result of an extensive and extremely successful pilot program in which I.D. Systems' technology was deployed in thousands of rental vehicles in both traditional airport locations and corporate campuses.

Under the agreement we signed yesterday, the next phase of the expanded system deployment would put I.D. Systems' technology into more than 25,000 Avis Budget vehicles largely in the Northeast. This phase is valued at $14 million for I.D. Systems over five years, with revenue generated on a recurring, monthly, per vehicle basis as we deliver and install our vehicle hardware. So we expect to see substantial steady upward growth in recurring revenues over the coming quarters, especially in 2012.

Avis Budget’s option to expand system deployment across its global fleet of vehicles can be exercised at any point during the initial five year term of the program and as Jeff noted, this expansion would increase the overall value of the contract dramatically covering hundreds of thousands of the Avis Budget vehicles worldwide.

In connection with the agreement, Avis Budget had purchased 1 million shares of I.D. Systems' common stock at a price of $4.60 per share based on the 20-day average share price as of yesterday August 22, 2011. This gives Avis Budget an immediate equity stake in I.D. Systems of approximately 9% of the company.

In addition, as part of the agreement, Avis Budget received warrants to purchase up to 600,000 additional shares of I.D. Systems' common stock at a price of $10 per share. A 100,000 of the warrants vest immediately at the signing of the contract and 500,000 of the warrants vest, if and when Avis Budget exercises its global system deployment option, a significant incentive for Avis Budget to exercise that option.

The agreement also provides Avis Budget with a limited term of exclusivity for the use of I.D. Systems' patent technology in the car and truck rental industry. As an additional incentive for Avis Budget to exercise its global deployment option, this term of exclusivity is expanded automatically upon such exercise.

The agreement with Avis Budget not only reaffirms the value of I.D. Systems Wireless Vehicle Management technology for rental fleets and a faster, strong upside growth potential for I.D. Systems in this market, it also advances our strategic goal of building revenue model with higher percentage of predictable, recurring revenue.

In the second quarter, half of our revenue came from recurring sources primarily from our Asset Intelligence’s trailer and container fleet management business, which generates stable high margin monthly service revenue. The Avis Budget agreement, obviously, solidifies and expands our revenue stream and substantially increases the proportion of our total revenue generated by recurring sources. The system expansion of 25,000 cars will generate approximately $700,000 in recurring quarterly revenue for I.D. Systems.

On that note, I would like to turn the call back over to Jeff to open the call for Q&A.

Jeff Jagid

Thank you, Ned. That concludes our prepared remarks. I would now like to invite our listeners to ask any questions they may have. Karen?

Question-and-Answer Session

Operator

(Operator Instructions) Our next question comes from the line of Matthew Hoffman from Cowen & Company.

Matthew Hoffman - Cowen & Co.

All right. Congratulations guys on the deal. The first question here is as you think about the conversation we had now two weeks ago on the earnings call, you were talking about a north of $10 million run rate leaving the year; was that already factored – will this be already factored in to guidance at that point or is this incremental was a surprise that you got the deal signed when you got to sign?

Ned Mavrommatis

Hey Matt, it’s Ned. There’s a portion of the Recalls that would be delivered this year that was factored in the run rate. But the majority of the Recalls will be delivered next year so it’s an upside for our 2012 numbers.

Matthew Hoffman - Cowen & Co.

Thanks. So as we look at the contract and you’ve gone through a bunch of math here and I am sure will put it out more in the days and some, but basically $14 million over five years, $700,000 per quarter run rate. How does that split out hardware versus services; what is the cost per unit on a hardware basis?

Ned Mavrommatis

Hey Matt, its price as a subscription model so they pay per month, per vehicle that includes the system maintenance and support and some other services. We do not break it out sort of what’s hardware or services or what maintenance. We’re providing a service and a benefit to Avis to use this system to improve their service and win corporate accounts.

Matthew Hoffman - Cowen & Co.

And help me think about working capital implications of the new business model; the ASP base model, who’s going to pay for this? The hardware upfront how does that work out; will you be deploying a lot of your cash here to get it in the initial units?

Ned Mavrommatis

We are going to be paying and we are going to deploy some cash obviously with investment we raise that capital and that capital we’ll probably use to build and deliver the hardware which will be capitalized and amortized over the life of the contract.

Matthew Hoffman - Cowen & Co.

Would you anticipate fully diluted shares outstanding will be at the end of the third quarter now?

Ned Mavrommatis

We would increase the second quarter shares by 1 million shares approximately.

Matthew Hoffman - Cowen & Co.

Okay, how will we work to warrants and only [Willy Markman] if you are at $10 or more?

Ned Mavrommatis

That’s correct

Matthew Hoffman - Cowen & Co.

The 100,000 that the best in [yearly].

Ned Mavrommatis

That is correct. The warrants have to be in the money for it to affect the fully diluted shares and they are priced at $10 per share.

Matthew Hoffman - Cowen & Co.

Okay. The exclusivity wording accounts like your are exclusive to them, but are they exclusive to you in other words are you the only M2M if you were a module supplier or a service supplier in the Northeast or can they try to deploy other solutions in other regions on a trial basis?

Jeff Jagid

Matt this is Jeff, let me take a step with that one. Avis had conducted an extensive competitive analysis they have done on many tests over a long period of time and they had ultimately selected our solution. I don’t know I would also suggest if anyone on the call is interested, they also made an announcement yesterday regarding the launch of their Avis On Location product; I would urge you will take a look at that and we are the enabling technology behind that solution globally. So the short answer to the question is that it’s exclusive in both directions and they had already engaged in their competitive analysis before moving in our direction.

Matthew Hoffman - Cowen & Co.

And the Avis On Location product is again an ASP model?

Jeff Jagid

No, the Avis On Location model is intended for Avis to offer a service to customers so that they can increase market share and drive additional revenue through their car rental business and in order for them to do that they need to purchase the service from us and then package it and deploy it to their accounts.

Matthew Hoffman - Cowen & Co.

Okay. So is that business is a different business model for Avis and I.D. Systems then what was announced in the Northeast?

Jeff Jagid

Right, let me clarify a bit. What Avis is doing and of course I would urge very anyone on the call to contact their Investor Relations department. But what Avis is doing is they are deploying technology to more efficiently handle the automobile in the traditional car rental and airport environment. So the concept is that when the vehicle is returned our device would automatically without any human intervention convey to the wizard system, fuel level and odometer information and would automatically complete the rental transaction without reliance on again human data collection and what’s called the Roving Rapid Return System.

In addition, the system then provides a logistics tool to help get vehicles from the return area to the ready line in the airport environment a bit more efficiently. One of the driving forces behind their purchase decision was in addition to streamlining the processes in the airport they wanted to be able to offer this concept of Avis on Location which is a virtual rental and what that basically means is they can take vehicles out of their fleet and they can dynamically allocate those vehicle to corporate customers.

So let’s say XYZ company is a big corporate account of Avis Budget Group, Avis can deploy a thousand cars at XYZ company’s corporate campus and XYZ company employee can access a reservation system on their smartphone, can pick a vehicle, can pick a time of day, can then approach the vehicle, hit a button and our system will automatically unlock the vehicle and enable the driver to start using the automobile. So that’s a business, that is a growing market. It’s been estimated to reach over a $1 billion in the coming years and it’s very much reliant on technology. If you don’t have technology, you’re unable to operate in the virtual rental environment and that’s why Avis is moving in that direction.

So they don’t intend to charge necessarily in ASP, but they intend to win business so they otherwise would not be able to win without the enabling technology.

Matthew Hoffman - Cowen & Co.

All right, and last question for me. In the traditional Northeast traditional car rental business and the Northeast business you won, so these 25,000 units that are going out the door, rental fleets historically have been high velocity I guess the, I don’t know what the average around car analyst, my guess is they flip over every six months to six months to a year or maybe six months to 18 months, maybe they are going to longer. The equipment that you deploy in the Northeast, can it be reformed or is it junked, scrapped at the end of the unit and what is the cost to get it out and if it can be reused, what’s the cost of getting out of one vehicle and into the next.

Jeff Jagid

I appreciate that’s a great question and I am glad you asked it because it highlights one of the uniqueness of our approach and one of the driving forces behind Avis’s decision to move in our direction and that is that the device is essentially plug and play. It interfaces with the onboard diagnostic port in the vehicle. It’s something that is extremely innovative and it absolutely has to be in order to be cost effective, has to be able to be reused and very easily installed and uninstalled. It is a negligible expense to install and uninstall the automobile, the device in the automobile.

Operator

Thank you and our next question comes from the line of Walter Schenker of MAZ Partners.

Walter Schenker - MAZ Partners

A couple of questions. First Avis and I looked it up and I may have looked it up wrong during the call. You are under 25,000 cars is under 10% of their North American fleet. I believe and so you are only initially going into a small part of their fleet I reassess primarily in the Northeast, I didn’t try and break down their fleet to the North East. Does this work in virtually across their fleet of passenger calls, only certain brands and certain types of vehicles?

Jeff Jagid

The product is universal and it works across their fleet. Their fleet size fluctuates. It can be high as 340,000 cars to as low as 240,000 cars. So the fleet size absolutely fluctuates but the 25,000 represents a very small portion of their complete fleet and what’s exciting about this opportunity, obviously we’re excited about building the recurring revenue but Avis’ intent is to roll this out very broadly across their entire fleet with the first phase being the deployment in the Northeast.

Walter Schenker - MAZ Partners

And have you indicated roughly how long is it and this is new somewhat, it will take you to role out 25,000 cars in rough terms?

Jeff Jagid

Yes, as Ned mentioned, and I don’t think Ned gave specific quantities. We will be deploying a small portion of the 25,000 by year-end and the balance will be deployed based on Avis' delivery schedule through 2012. So the requirement is that all 25,000 will be delivered in next calendar year. That doesn’t necessarily -- you know that we’re capable of delivering all of them by June of next year. But again, it’s going to be a function of Avis' ability to digest them as well as their demand during that, what I would call, delivering window.

Walter Schenker - MAZ Partners

Okay. And are you willing to give us any sense as to since you are amortizing the course of the installation and over times, pointed out the average life of a rental car and rentals is fairly short over the five-year term, that each module may be in multiple cars? Is the margin on this closer to your services side, your product side, somewhere in between?

Ned Mavrommatis

Yeah, Walter, this is Ned. While I can't give the specific gross margin, what I can say is that we priced the system to maintain our gross margin profile. In addition, we also gave Avis, we provided them with very favorable pricing and it’s really a truly a win-win.

Walter Schenker - MAZ Partners

And last question why did you sell them stock? I mean you have the cash unless, I mean I thought Ned indicated that without actually saying it that the cost in working capital is in the ballpark of the cash they are giving you, not multiples thereof and so why do we want to sell stock at $4.60.

Jeff Jagid

Walter, I will handle that. You are absolutely right. The sale of the stock had little to do with any capital needs. It was really a testament to the fact that this is not the typical vendor or customer supplier relationship. It’s very much strategic in nature. They are essentially going to change completely the way they handle a key part of their business, which is the renting and returning of automobiles.

So it’s really a marriage if you will and I think the investment from a strategic standpoint is great for our shareholders. It aligns everyone’s interests and it could be obviously a big game changer for Avis. So the short answer is that it was not really about raising money but it was more about the marriage and was very much strategic in nature.

Walter Schenker - MAZ Partners

Albeit, if you look at the last quarter, Wal-Mart is a very large marriage for this company on all sides of our business and we don’t have them owning our stock?

Jeff Jagid

Sure, on a different forum I would be prepared to distinguish the two, but both customers, you’re absolutely right are extremely important to the company. It was just a different thought process going into the Avis transaction. I would tell you that the sale of 1 million shares at the price which we sold them to I think will prove to be very beneficial to them obviously as well as to us, because what we need to do now is deploy the 25,000 units and more importantly transition to the next phase of the program which is a global deployment across their fleet. And I think that by them becoming a shareholder of the business, I think creates a interest that are very much inline.

Operator

(Operator Instructions) Our next question comes from the line of [Jeffery Perdy from Mobile Tracks]

Unidentified Analyst

Congratulations to you guys. Could you talk a little bit about the platform, the operating system and the wireless connectivity issues and tell us a little bit about that? Thank you.

Jeff Jagid

Sure. This is a technology that’s very much the same as our hardware platform that we deploy in multiple applications. So it’s very much software controlled and by modifying its form factor as well as the firm where that resides on the device you’re able to accommodate a very broad base of applications. One of which is the automation of the rental and return of automobiles, so the device gets installed into the vehicle as I mentioned earlier, it pulls data and controls certain aspects of the automobile through the on-board diagnostic port which is standard.

When the device gets in range, it’s not being tracked over the road so there is no satellite, there is no cellular communications that customers not being monitor as far as they are driving activity, it’s a what I would characterize as a closed radio frequency identification based system. When the device gets in range of a reading device there is automatic, bi-directional communication and that the concept is a proprietary system and it’s one that we have been awarded a patent protection on both from a broad sense as far as putting the intelligence into the automobile and on to the reading units but then also in a very specific manner in its application into the car rental industry.

Karen, I am not sure if there are no additional questions but I think that that might have covered it.

Operator

I see no further questions in the queue at this time sir.

Jeff Jagid

Okay thank you. In closing, I would like to thank Avis for their faith in our technology, the I.D. Systems team for their dedication, hard work and tenacity and of course our shareholders for their continued support and thank you everyone for joining us on the call today.

Operator

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

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