Micronet Enertec Technologies Inc. (NASDAQ:MICT)
Q1 2016 Earnings Conference Call
May 16, 2016 9:00 am ET
David Lucatz - President, Chief Executive Officer
Shai Lustgarten - Chief Executive Officer, Micronet Ltd.
Tali Dinar - Chief Financial Officer, Enertec Electronics
John Nesbett - IMS
Hamed Khorsand - BWS Financial
Mike Hussy - Tagamount Capital
Mike Vermut - Newland Capital
Ladies and gentlemen, thank you for standing by. Welcome the Micronet Enertec First Quarter 2016 Results conference call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded.
I would like to hand the call over to John Nesbett of IMS. John, please go ahead.
Good morning and thank you for calling in to review Micronet Enertec’s first quarter 2016 results. Management will provide an overview of the results followed by a question and answer session. Importantly, there is a slide presentation which management will use during the overview. This presentation can be found on the Investor Relations section of the company website under Events and Presentations. You may also access a PDF copy of the presentation by clicking the link in the company’s press release regarding these financial results issued this morning and then clicking a second link labeled Investor Presentation. Callers accessing the PDF copy of the presentation will need to manually scroll through the slides as management goes through the presentation.
I will now take a moment to read the Safe Harbor statement. During the course of this call, management will make express and implied forward-looking statements within the Private Securities Litigation Reform Act of 1995 and other U.S. federal securities laws. These forward-looking statements include but are not limited to those statements regarding our future revenue growth, our pipeline and backlog, increased volumes and demand in the markets in which we operate, our product offering and future market opportunities, and market potential of our command and control defense system, the roll-out of our new TREQ317 all-in-one wireless platforms, the expected market potential created by the ELD mandate in the U.S. and Canada, and expected new opportunities for the company and anticipated company growth resulting from the ELD mandate. Such forward-looking statements and their implications involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ materially from those projected.
Forward-looking statements contained in this presentation are subject to other risks and uncertainties, including those discussed in the Risk Factors section and elsewhere on the company’s annual report on Form 10-K for the year ended December 31, 2015 filed with the SEC. Please note the date of this conference call is May 16, 2016 and any forward-looking statements that management makes today are based on assumptions that are reasonable as of that date. Except as otherwise required by the law, the company is under no obligation to and expressly disclaims any obligation to our update or alter its forward-looking statements, whether as a result of new information, future results or otherwise.
During this call, in addition the GAAP financial measures, management will discuss non-GAAP financial measures as defined by the SEC Reg. G, including non-GAAP net loss and income. These non-GAAP measures exclude both share-based compensation expenses, the amortization of intangible assets, as well as additional items. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to GAAP results, and we encourage you consider all measures when analyzing Micronet Enertec’s performance. A reconciliation of these non-GAAP measures to the applicable GAAP measures is included in today’s press release regarding our quarterly results and can be found on the Investor Relations section of our website at www.micronet-enertec.com/ircompany. The slides containing the first quarter reconciliation can also be found in the Investor Relations section of our website.
On the call this morning, we have David Lucatz, Chairman, President and CEO; Shai Lustgarten, CEO of Micronet Limited and Tali Dinar, CFO of Enertec Electronics. Again as a reminder, management will be referring to a slide presentation that can be accessed via the Investor Relations section of the company’s site or the link in the press release.
With that, I will now turn the call over to David, who will begin the presentation on Slide 4. Please go ahead, David.
Thank you, John, and good morning everyone. During Q1, we continued to gain traction with our product in the marketplace, resulting in a solid 14% increase in revenue and a margin improvement to 32%. We focused on controlling costs and are pleased to have reduced our operating expenses from $2.6 million in the first quarter of 2015 to $2.4 million in first quarter of 2016.
As we have mentioned on previous calls, we believe the MRM market represents a strategic growth opportunity as our state-of-the-art technology and solutions meets the needs of a wide variety of MRM customers. Our backlog in the MRM grew to $3 million in the quarter and as of today stands at $4.4 million. Our pipeline is strong as we are consistently growing and diversifying our customer base and strengthening our reputation as a provider of reliable rugged solutions.
We are still considering new opportunities for our products related to recent federal ELD mandates requiring electronics logging devices for truck and bus fleets. Following the close of the quarter, we announced a $2 million order, and I’ll provide specific details on the order later in the call. We remain focused on diversifying our customer base and have been encouraged by the increasing interest from new customers.
Moving to Slide No. 5, on Slide 5 you find the ELD mandate opportunities. This mandate represents important growth potential for our company as it requires [indiscernible] corporate and private truck owners use ELDs rather than paper logbooks to log driver hours and other safety data. In early December 2015, the U.S. Department of Transportation Federal Motor Carrier Safety Administration, or the FMCSA, issued its final rule and implementation schedule for the ELD mandate. Full enforcement of the regulation will begin in 2017 and fleet operators have already begun their compliance efforts. As a result, the mandate is driving increased demand for our products, particularly the TREQ317 because it provides an easily adopted and compliant solution. With full implementation of the rule, industry analysts anticipate that the number of ELD-equipped trucks will increase from 1 million today to approximately 2.7 million in 2017. We are working with our customers as they prepare for the law’s impending enforcement, and we believe that our comprehensive solutions are among the most competitive in the market.
Moving to Slide No. 6, we are encouraged by the growing market interest in all our products, and we’ve had very positive feedback regarding the field performance of the TREQ317. As we expected, the ELD mandate is driving significant interest in all of our products as the transportation industry makes preparations to meet the requirements of the mandate. Our backlog and pipeline are growing, and we believe that this is being driven by the industry focus on the mandate. Following the close of the quarter, we announced a $2 million from a major telematics company for our TREQ317 rugged Android tablet for use as part of the solution for local and long-haul fleet ELD compliance. We developed a solution that enables the tablet to be removed from the cab for DOT - Department of Transportation review if necessary. That capability in addition to its processing power makes our [indiscernible] TREQ317 an effective device for ELD compliance, and we look forward to capitalizing on new opportunities as the marketplace begins to feel a greater sense of urgency to put the ELD solution in place.
On Slide No.7, in addition to leveraging that [indiscernible] product, we developed a new product and additional solutions in order to broaden our product line and penetrate additional market segments. We are working on a solution targeting the need for the bring-your-own-device, or the BYOD market segment. This is a unique solution that combines ELD compatibility with strong computing power running on the Android operating system. The introduction of the new solution to a new market segment is designed to further expand our already large market opportunities.
Moving to Slide No. 8, on Slide No. 8 we’ve also had some significant developments in our aerospace and defense business. Just after the close of the quarter, we were awarded a $5.8 million three-stage project for the production of computer-based command and control defense systems from a multi-billion dollar aerospace and defense contractor. The first order of $3.4 million has already been received and we expect to receive additional orders toward the end of 2016. This is by far the largest project ever received by Enertec and we strongly believe that it demonstrates our growing reputation as a dependable and innovative provider of state-of-the-art command and control defense systems.
Moving to Slide No. 9, on Slide No. 9 we highlight the trends that are beneficial to our business. The local fleet vertical, which represents the majority of our MRM revenue, is subject to the ELD mandate and is expected to grow significantly over the next several years. Our unique solutions are compliant and competitive, and we believe we are all positioned to benefit from this growth and legislative changes. In our A&D business, the demand for our critical missile defense systems continues to provide a consistent stream of business that remains a key component of our core offering. We are seeing increasing market interest in our product in this segment of our business as well, and we believe we are positioned well to have growth going forward.
Slide No. 10 illustrates our revenue breakdown for the quarter. Revenue increased 14% compared to the first quarter of last year and decreased slightly on a sequential basis. Given the market interest we are seeing, we remain very optimistic about the potential opportunities for our TREQ317 product related to its ability to provide reliable compliance with the ELD mandate. The aerospace and defense segment came in at $2.5 million, a 25% increase as compared to first quarter last year, while revenue declined sequentially compared to the fourth quarter of 2015. We still continue to see solid demand from our customers seeking missile aerospace solutions and we are optimistic about future opportunities.
I will now turn the call over to Tali for the financial review. Tali?
Thank you, David. Revenue in the first quarter increased 14% compared to the same quarter last year. Gross margin was 32% as compared to 31%. R&D was down for the quarter partly as a result of efficiencies and partly as a result of completing various development phases of our new all-in-one platform. As sales grow, we expect a continued decline in R&D expenses as a percentage of sales. Sales and marketing expenses and general and administrative expenses decreased both on a dollar basis and as a percentage of sales as compared to the same quarter last year.
Net loss attributed to Micronet Enertec for the first quarter was $359,000 or a loss of $0.06 per basic and diluted share as compared to a net loss of $705,000 or a loss of $0.12 in the first quarter of 2015. On Slide 12, you will see that on a non-GAAP basis, net loss for the first quarter was $116,000 or $0.02 per basic and diluted share as compared to net loss of $456,000 or $0.08 per basic and diluted share in the same quarter last year.
Turning to Slide 13, you can see that our balance sheet remains strong with $11.4 million in cash and cash equivalents, $13.3 million in trade accounts receivable, $13.1 million of working capital, and $17.3 million in shareholders equity. We feel confident in the health of our balance sheet going forward.
I will now turn the call back over to David. David?
We are very excited about the progress--
We’ll start the--
Okay Operator, questions.
The first question is from Hamed Khorsand of BWS Financial. Please go ahead.
Hi, good morning. Could you talk about your comfort level with your working capital and your ability to collect on your accounts receivable?
Sure. As we mentioned before, we feel comfortable with the working capital, and we don’t see any issues of collecting or anything, so it’s a normal route of business.
Yes, but your accounts receivable is now more than two times revenue, and it seems like the last couple quarters you’re not reducing it, you’re increasing it.
We’re comfortable. If you look, the pattern historically is pretty much the same. There is no difference--you know, it doesn’t go up or down significantly, so this is again the routine way the business runs. Don’t forget, again, it’s two separate businesses and at least one of them, the difference is that we have a longer cycle product, that’s why you have higher accounts receivable. So--but the bottom line to your question, there is no significant change as compared to any time in history.
Okay, and then could you also comment on your sales pipeline with ELD and the requirements here, given that the customer base, there’s been a decrease in trucking activity and the amount of truckers that people--and capacity that these trucking companies want. So how does that play out with what you are trying to do?
So I’d like to understand the question correctly. If I understand you correctly, you don’t ask about the amount of the pipeline, just your question is a general question about the trend in the market. I’m correct?
No, I mean, the general trend in the market is negative, so I’m trying to understand how does that portray into your sales pipeline.
I’m trying to understand, because you know, I think we mentioned the trend in the market is not negative, it’s positive. We see more and more potential customers based on the ELD mandate looking for a solution, which we have and we believe is one of the best in the market. So I disagree with the trend - the trend is positive, not negative.
Okay, thank you.
With your permission, Shai, could you also say a few words about the potential in the ELD mandate?
So if I understand correctly from the question, we do see a positive trend that grows our opportunity pipeline significantly. In the market itself, the potential drivers using or to be compliant with the ELD is of course a very high number. I don’t know if you refer to a negative trend by the enrolling of the solutions out there related to the mandate. If that is the case, then we don’t see any influence about that issue. We don’t see any influence with Micronet. On the contrary, what we see is actually, like we said, the growth in the opportunities. That’s also growth in the backlog that you see today. So it might take longer for companies to enroll the solutions out there to the fleets themselves, but the opportunity and the trend is of course a positive one.
That was helpful, thank you.
The next question is from Mike Hussy [ph] of Tagamount [ph] Capital. Please go ahead.
Yes, good morning. Could you help us understand your EBITDA for the quarter and how we should think about that going forward?
Yes, sure. Our EBITDA for the quarter is positive as compared to negative EBITDA in the same quarter last year and actually the first three quarters last year. So first of all, we are happy to say that the EBITDA is positive for--so this is the second quarter EBITDA is positive, and we believe that on a yearly basis, it will be also positive.
The next question is from Mike Vermut of Newland Capital. Please go ahead.
Hi, good morning. Can you give us a little more insight into--you know, I know the ELD mandate, it really hasn’t started to kick in yet, and we’ve been bouncing around in the $6 million, $6.5 million revenue range. Just a little bit more insight into who we’re talking to on the software side, the big providers - the Omnitracs, the PeopleNets, the Fleetmatics. Then also on the OE side, are we in discussions with any of the big OEs - Navistar, Paccar, Time [ph] or any of those guys to make the step function up on our revenue line in the MRM space. When does that start to hit and we get to that next level? You know, we’re doing fine, we’re breakeven, slightly profitable now. When does that kick in and start moving us into the next level and increase the predictability of the revenue stream?
Well I’ll start a bit and then I’ll ask also Shai to elaborate a little. So basically we see a trend of more and more big players who started work or started dialog with us, and it takes time because the process of--we mentioned several times in the past, it’s not an off-the-shelf solution. It’s a solution that they need to, first of all, agree the technology and then they need to adapt it and work on it, so it takes time. But definitely we see a trend of potentially more and more of these customers, and this is a major reason--the reason is because of the ELD mandate.
Shai, if you want to take it from here and elaborate further?
Sure, thank you. So hi Michael, how are you?
Good morning, hello.
Good morning. So we had enrolled two new technologies. The company is offering a new technology solution to the market. Of course, it is one of the first ELD compatible solutions and that’s why we see the significant trend within the company as well related to the opportunities coming from the ELD. But this technology actually is compatible or suitable to a much larger market than we served before, and this is the reason why the pipeline is growing so nicely and the backlog as well. It’s not only of course the ELD we’re talking about, the ELD all the time, but we have to remember that there is a lot of other growth engines that we’re working on, which aren’t really affecting the company, and everything is coming from the technology, the unique technology that we’re offering. We’re talking about the 317 all-in-one solution. All the big players you just mentioned in the call are looking on this and the solution for a long time now, and of course our ability to offer that before they can develop it is actually one that creates the dialog between us, the ELD solution everything of course, but the technology is there to respond to their needs and that’s why the dialog with the companies, the 800 pound gorilla you mentioned in the space, is growing not only the dialog but also already some practical business done with them, which I hope that we could of course reveal later on in the year. That’s regarding that.
Regarding the OEMs, yes, we are in discussions with the OEMs out there, some that you mentioned as well. We are trying to talk to all of them to make sure that Micronet is a solution that is coming out of the manufacturing line, as we say. It is advancing mostly with one of them already that had tested our solution and already shipped orders as well, so yes, the OEM discussion is there as well.
Other growth engines we’re working on fully heavily are of course talking and dialoging with the carriers as part of our distribution strategy, and of course peripherals. We are today offering an integration, a very strong integration technology in the market where we could actually hook up to any peripheral out there, if it’s video cameras, if it’s any other type of peripheral. That’s a strength of Micronet that we’re investing a lot of and implementing it together with our customers in field.
Altogether, I know maybe a little bit more information than you wanted, but altogether shows now a very nice backlog that opens up the year nicely, allows us to really focus--continue to focus on our revenue growth together with the lower expenses that we’re demonstrating, and these better margins are coming out of it and we’re just meeting what we’re doing every day, continuing pushing and pushing and pushing in all these directions that I just spoke about to make sure that this year will be a great one.
Excellent. So normally, I guess fleets lower their purchasing and capital expenditures in the first quarter. I assume that affects on the MRM and telematics side. Should we be assuming that the same is true with Micronet, and then quarter to quarter to quarter there is increases on revenue and then margin and profitability throughout the year?
So you are correct about the seasonality of Q1. That is correct. I’m happy that still although the seasonality, we’re able to show better performance from the first quarter of last year, better run rates on all the lines in the P&L. Going forward, like I said, we are doing everything to continue the sequential growth in every line as well. That’s what we’re going to do, and I can’t--David, I don’t know if you want to elaborate, but I can’t tell you exactly what’s going to happen but we do see the strong backlog growth, we do see the strong pipeline growing as well, and we do see the enrollment of our solutions going higher, in a higher rate, in a higher pace because of the ELD push from all ends. So I believe that our efforts will be successful.
Excellent. Now just moving on to the A&D side, what are some other areas and other discussions we have? Is this going to be a growth engine for the company, or is it a steady state cash generator? And then another point--you know, I can ask this together with it or after. Does it make sense to keep these businesses together? You know, we have two businesses, right now we have about $25 million of revenue and should be growing nicely, and we have a $12 million market cap, so is there confusion being created by having a Tel Aviv listing, a U.S. listing, and an MRM business and an aerospace and defense business all combined?
Well Mike, it’s a short question for a very long answer, so I would just address it in general. Again, we’ve been discussing it several times in the past, and our strategy is to grow the businesses, to make money, and we don’t want to limit ourselves at this moment to do this or that. Of course we’re looking to maximize everything. This is in regard to the strategy of either sell one of the units or grow it. One more comment - you know, you mentioned that Enertec, the different side is cash generating or a growth engine. I can see a third option, which is both of them. You know, you can also have a business that generates cash and grows [indiscernible].
That was my point I was getting to, really, is that--you know, is this going to be a real growth business?
I think from what we see right now and I think this significant and very important project which we just received gives us better visibility of the future, and we see a better potential for growing the business, okay? We still need to wait, I would say a few more months to evaluate what’s going to be the rate of the growth, but at this very moment we are optimistic about it because as we mentioned in the past, this project is just the first one. We expect to get additional orders. We also penetrated and entered some new areas, as we mentioned - you know, the command and control shelters, so we need to see what’s going to be the outcome and how it is going to be transforming to orders.
So I think--you know, it’d be a very good question to raise in the next quarter or the third quarter. We’ll be in a much better position to tell you about the potential of the growth, but basically we are very optimistic and have been changed in that sense as compared to the similar year last year.
Back to your question regarding the [indiscernible], we tend or we believe we should invest money in maximizing it, so we think investing in our Micronet shares is a good investment, so we always look for the right price to increase our shares, and we mentioned this several times in the past it’s a strategy. But clearly it also depends on the market conditions, as we mentioned.
Right, okay. Well good luck and here’s to a great year ahead.
At this point, there are no further questions. Before I ask David to make his concluding statement, I would like to remind participants that a replay of this call will be available within two hours. In the U.S., please dial 1-888-269-0005. In Israel, please dial 03-925-5929. Internationally, please dial 972-3-925-5929.
David, would you like to make your closing remarks?
Sure, thank you. We are very excited about the progress we are making and about the strong market-based interest in our products. As we mentioned, the ELD mandate provides the potential to drive growth in the MRM business as demonstrated not only by our revenue growth this quarter but also by our solid backlog and the strength of our pipeline. We believe that our data with major telematics companies provides a potentially significant growth engine for Micronet and demonstrates the continual market interest and acceptance of our new all-in-one technology. We look forward to providing our technology to meet the compliance needs of new and existing customers.
I would like to take this opportunity to thank our dedicated team of employees and managers, and I look forward to speaking with you next quarter. Thank you.
Thank you. This concludes Micronet Enertec Technologies’ first quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.
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