Novatel Wireless Inc. (MIFI) Q2 2016 Results Earnings Conference Call August 3, 2016 5:00 PM ET
Michael Sklansky - IR
Sue Swenson - CEO
Mike Newman - EVP and CFO
Jaeson Schmidt - Lake Street Capital Markets
Mike Walkley - Canaccord
Kevin Dede - Rodman and Renshaw
Cobb Sadler - Catamount
Welcome to the Novatel Wireless Second Quarter 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this conference is being recorded.
I'd now like to turn the conference over to Michael Sklansky, Head of Investor Relations. Please go ahead.
Thanks William. During this call, non-GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release, which is available on the Investors section of the Company's website. An audio replay of this call will also be archived there.
Please also be advised that today's discussion will contain forward-looking statements. These forward-looking statements are not historical facts, but rather are based on the Company's current expectations and beliefs. For a discussion on factors that could cause actual results to differ materially from expectations, please refer to the Risk Factors described in our Form 10-K, 10-Q and other SEC filings, which are available on our website.
Now I'd like to turn the call over to Sue Swenson, Chief Executive Officer of Novatel Wireless.
Thank you, Michael. Good afternoon and thanks to everyone for participating in todays call. We really look forward to sharing our Q2 results and updating you on our continued progress we’re making in our transformation and our hardware only provider of wireless communications equipment to a provider of comprehensive IoT solutions with a high margin SaaS software and service offerings.
While there is obviously still work to be done to complete this transformation, I'm very pleased with the changes we’ve made today. And our results are showing that we are moving in the right direction.
Looking back to Q2 last year, we have seen the following significant improvements in our key metrics. Number one, quarterly adjusted EBITDA has improved by $4 million to positive $1.7 million from a negative $2.3 million.
Number two, non-GAAP gross margin has improved to 37.9% from 30.9%. And number three, subscribers have increased to 557,000 via the acquisition of Ctrack and FW.
This year we expect these improvements to result in increasing adjusted EBITDA in every sequential quarter in 2016 and EBITDA of more than $4 million in the fourth quarter along continuing to improve throughout 2017.
For those of you on the call who are new to the Novatel Wireless story, I began my tenure as CEO at the end of October 2015. It was very clear to me from day one that we needed to quickly focus on two things. One was to identify areas of the business which were best positioned to drive revenue and profit growth and two was to streamline or sell business units which did not fit our vision of being a leading player in IoT SaaS services and solutions.
Over the past few months strategic planning began to rapidly transition to implementation. We divested our cellular module business to Telit on April 11 and just last week completed the targeted substantial restructuring of our MiFi and Telematics hardware businesses.
In our MiFi business we’re clear that we’re not longer pursing unprofitable projects at carriers other than Verizon. Instead we’re increasing focus and resources on our largest and most profitable customer. With these other projects now completely phased out, we were able to narrow our MiFi business in late July.
In our Telematics hardware business known to many you as Enfora, we made the decision to streamline the business to focus on manufacturing and developing hardware for Ctrack. I am pleased with the extent of the business transformation at Novatel since I became CEO last October and want to thank all of our team members across the globe for working to make this transformation a reality. We’re now well positioned and laser focused on SaaS services and solutions and well positioned in high growth verticals of IoT.
Turning to Ctrack, our Telematics SaaS services and solutions business including fleet management, the pace of subscriber growth has greatly accelerated each successive quarter since acquiring Ctrack. We see three key differentiating factors for Ctrack contributing to this accelerating growth.
Number one, Ctrack is well positioned in global regions experiencing rapid Telematics growth. Number two, Ctrack's board portfolio aligns well with market opportunities and number three, Ctrack has strong relationships with wireless carriers and automotive OEMs.
As far as Ctrack being well positioned in regions that are growing rapidly in the Telematics space we’re bullish on the prospects for robust growth for Ctrack in Africa, Australia and the Middle East. We believe these regions are in the early stages of rapid and sustainable growth. One important partnership win with MTN the largest carrier in Africa is a key differentiator for us facilitating broad regional penetration.
Ctrack’s product portfolio is being leveraged in regions when and where it makes sense. Whereas most of Ctrack's competitors have a fix set of products, Ctrack’s broad portfolio and end-to-end expertise enable Ctrack to meet customer demand for both established and emerging Telematics solutions.
In order to meet the needs of utilities customers, Ctrack has customized its core fleet management platform to meet the very specific software and hardware needs of this particular vertical market. And as a result Ctrack is having great success with utilities customers in the U.K. and Australia.
In South Africa, Ctrack has developed a pioneering usage based insurance solution which leverages Ctrack’s sophisticated driver behavior algorithm. The platform has many innovative use cases and Ctrack has partnered with VUM insurance to deliver an on demand pay by the mile usage based insurance offering for UBER drivers.
As you may know ride sharing is starting to get traction in many geographies with several OEMs. In the U.K., Ctrack has deployed three successful instances of a ride sharing application. And as mentioned on previous earnings calls for the U.S. and several other regions, we’re currently overhauling the user experience and user interface of its fleet management platform to develop an [indiscernible] intuitive platform specifically designed for small and mid-sized businesses. We have received very, very good feedback from potential customers some of them are using somebody else's product. They were so impressed with what they saw, they’ve expressed interest in becoming one of our customers when the product becomes available.
In addition to our direct channels, we believe our strong relationships with wireless carriers and automotive OEMs will help drive long-term growth. Ctrack has won three partnership deals with global carriers over the past few quarters and is in discussion with two additional carriers. For some of these carriers such as MTN, Ctrack white labeled the product.
You may recall from our announcement a couple of months ago that MTN is one of the largest global carriers with 300 million subscribers across Africa to Middle East, Europe and Asia. For the other carrier dealers, the carrier self Ctrack branded product to both its existing wireless subscriber base and new customers.
Based on our ongoing discussions with automotive OEMs, we believe this channel remains committed to exploring aftermarket solutions or fleet management and other Telematics Solutions. Ctrack was the pioneer in the development of Telematics Solutions for automotive OEMs in the past and we've been quite encouraged with some recent early-stage discussions with new potential automotive customers.
Turning to FW our IoT services business we are very pleased with the progress we’ve made transitioning FW from a consulting and integrator business model into a scalable, more profitable solutions focused IoT business. The common themes for these products is combining hardware, provisioning logistics and support, device management and recording and data plans into a unified offering. By doing so we’re giving our customers a simple solution that previously was time-consuming and complex.
We now give customers a bundled solution with a single point of contact taking the hassle out of the process making them more productive and reducing their cost. Recent experiences we’ve had with customers such as Fastenal, Milwaukee, the City of San Francisco and Heartland Payment Systems, as well as Omaha Steaks makes us optimistic about the market demand for these offerings and scalability of this business moving forward.
In fact the service offering has gotten enough interest that we’ve landed a partnership with the Tier 1 U.S. wireless carrier. We believe this partnership will be unique in the marketplace and we really look forward to telling you more about this partnership later this quarter.
What’s important to me and helpful to our transformation growth and scale is that the infrastructure that we’ve been working on for these service products will provide a framework for all recurring revenue and subscription products for Novatel's U.S. operations including the launch of an SMB fleet management platform in the U.S. by the end of this year.
Turning to mobile broadband and MiFi post our recent streamlining efforts, this hardware business is an important piece to growing our SaaS services and solutions businesses. We the expect stable revenue and consistent profitability for this business will fund our portfolio of IoT SaaS and services opportunities.
Our plan for MiFi hasn't changed and it remains very simple. Continued focus on delivering cutting edge mobile broadband devices to Verizon and working strategically with Verizon to support their network transitions and our plan is working. We continue to estimate that more than 25% for Q4 '16 revenues from Verizon will be driven by non-hotspot products highlighting the diversity efforts already underway.
Our second half '16 product launches at Verizon remain on track. Clearly our strategic direction, initiatives and execution are firmly taking hold. Ctrack is firing on all cylinders. FW is in the midst of an exciting new product launch with a major carrier. And MiFi is seeing both growth and diversification opportunities. This is truly a dynamic period in Novatel's history. We are very excited and optimistic about our future and we hope you are too.
With that, I will turn the call over to Mike Newman.
Thanks, Sue and thanks to everyone for joining us on this call. I'm excited to be here today discussing another quarter of significant transformational progress for Novatel Wireless. Our second quarter performance was at the high-end of our revenue, gross margin, EBITDA and EPS guidance ranges while the company's overall subscriber base grew to 557,000 subscribers which includes 389,000 Ctrack subscribers.
Our balance sheet and financial condition also strengthened considerably. As our cash balances increased by more than $10 million to a total of $18.5 million at the end of Q2, while we simultaneously paid off the entire outstanding balance on our Wells Fargo credit facility.
All of this progress stems from the company's dedicated focus on transitioning our business model toward higher margin, recurring SaaS software and services revenue. Our objective in these subscriber-based businesses is subscriber growth and we're successful across the board.
In the second quarter our Ctrack fleet subscriber base grew at an annualized rate of 24% ending the quarter with 174,000 Ctrack fleet subscribers. Our others Ctrack's Telematics subscriber base grew at an annualized rate of 17% to 215,000 subscribers. While our FW subscriber base grew at an annualized rate of 10% to 168,000 subscribers.
Collectively this group of subscribers generated $13.7 million in SaaS software and services revenues in the second quarter of 2016 representing 21.8% of the company's total second quarter revenues. To put our corporate transformation in perspective that $13.7 million in Q2 SaaS software and service revenues this year compares to only $2.4 million of SaaS software and services revenues in Q2 of last year prior to our acquisition of Ctrack. I cannot emphasize this transition enough.
These SaaS software and services revenues are driving our business towards profitability and positive cash flow for three reasons. First, SaaS software and services revenues have much higher gross margins in hardware revenues. Our SaaS software and services revenues achieved 74.2% non-GAAP gross margin Q2 of 2016 driving our overall corporate non-GAAP gross margins to a record 37.9% for the quarter.
Second, SaaS software and services revenues are much stickier than hardware revenues because the services being provided become an essential business tool as the customer manages costs and employee efficiency with our solutions. Third, the recurring nature of our SaaS software and services revenue provides reliable monthly cash flow with the consistency that allows for better investment planning and expense management.
Now I’ll move on to the details of our strong second quarter results. Total revenue in the second quarter of 2016 was at the high-end of our guidance range at $62.8 million up 21.5% from $51.7 million in the second quarter last year. Our Ctrack operations significantly contributed to these results with Ctrack revenues of $15.7 million which increased 4.7% sequentially from $15 million in Ctrack revenue in Q1.Hardware revenues in the second quarter of 2016 declined less than one half percent to $49.1 million from $49.3 million in the second quarter of 2015 which is as we expected and planned.
At the beginning of the second quarter, we sold our cellular modules business to Telit so that transaction effectively reduced Q2 hardware revenues. In line with our strategy we're now squarely focused on improving our mix of overall revenues towards SaaS software and services.
Non-GAAP gross margin exceeded the high-end of our guidance range in the second quarter of 2016 with 37.9% non-GAAP gross margin increasing by 7% from 30.9% in Q2 a year ago driven by the additional revenues and profitability generated by our Ctrack and FW branded SaaS and other recurring revenue solutions.
As I mentioned earlier our non-GAAP gross margin for SaaS software and service revenues increased to 74.2% in the second quarter of 2016 up sequentially from 71.5% in the first quarter of 2016.Our non-GAAP gross margins from our hardware revenues declined slightly to 27.8% in the second quarter of 2016 compared year-over-year to 28.5% in the second quarter of 2015 primarily as a result of increased sales of lower margin legacy mobile computing products in the second quarter of 2016.
Our non-GAAP gross margins for Ctrack products which I will remind you are a mix of both hardware and SaaS software and services sold as bundled Telematics Solutions grew to 67.1% in the second quarter up from 63.7% in the first quarter of 2016 and up from 60.5% in the fourth quarter of 2015.
I do know that some of you still like to track the quarterly performance of our IoT products versus MiFi products. We believe the categorization of our SaaS software and services revenues versus hardware revenues is much more meaningful as you evaluate our performance and future prospects but for historical continuity for those who are interested our IoT versus MiFi metrics are contained in today’s press release.
Our non-GAAP operating expenses were $24.3 million in the second quarter, up from $19.3 million in Q2 last year prior to Ctrack but down from $24.4 million in the first quarter of 2016.
Here is where I will pause for a moment to discuss our other announcements in our press release today. Our corporate restructuring that we undertook last week over the past several months gradually been reducing costs. Among other actions we closed our R&D facility in Richardson Texas and manufacturing operations in Durban South Africa. These were significant cost savings measures that positively impacted our bottom line over the past several quarters. However, today’s announced restructuring actions are quite different from these prior cost rationalization activities.
The company’s current restructuring actions are intended to improve our strategic focus on our most profitable business lines while deprioritizing certain hardware only product lines to non-carrier customers. These actions slowly impacted Novatel Wireless employees and products and not Ctrack or FW employees or products and were precipitated by our ongoing desire to transform the company into subscriber based business focused on delivering high margin SaaS software and service solutions.
The company’s R&D sales activities for hardware only product lines including our flagship MiFi mobile hotspot products will now be directed toward our largest carrier customer.
These restructuring activities are expected to yield approximately $8 million in annual cost savings commencing in the fourth quarter and including reducing the company’s headcount by 45 which represents approximately 24% of total Novatel Wireless workforce when you exclude Ctrack or FW workforces.
Now I’ll get back earnings and cash. Our adjusted EBITDA in the second quarter was $1.7 million higher than the $1.3 million that we achieved in the first quarter of 2016 and nearly $4 million higher than the negative $2.3 million adjusted EBITDA from Q2 last year.
The company has now generated positive adjusted EBITDA of nearly $4 million the first half of 2016 which in just six months is higher than any adjusted EBITDA achieved by the company for a full year since 2009. And as I’ll describe shortly we expect to have significantly higher adjusted EBITDA in the second half of this year as compared to the first half. So this upward trajectory is expected to continue.
Ctrack alone generated $2.4 million of positive EBITDA in Q2 of 2016 towards the high end of our Ctrack guidance range. We continue to drive the rest of our consolidated business toward increased profitability with our transition towards the higher margin revenue mix and our corporate restructuring activities.
I think most of you know how we calculate our non-GAAP financial results and a reconciliation of our GAAP to non-GAAP financials is contained in our press release. So I won’t go into detail on this call.
Our non-GAAP net loss per share in the second quarter was toward the high end of our guidance range at negative $0.06 per share as compared to a non-GAAP net loss per share of negative $0.08 in Q2 last year.
We also ended the second quarter with a substantially strengthened balance sheet. Cash and cash equivalents were $18.5 million an increase of $10.2 million compared to $8.3 million at the end of the first quarter. Also in the second quarter we fully paid off the $3.4 million that was outstanding on our revolving credit facility at Wells Fargo.
During the second quarter we received $9.3 million in cash payments from Telit relating to the divestiture of our cellular modules business. It is important to highlight that our net cash position in Q2 improved by $13.6 million so we gained substantial cash in addition to the asset divestiture transaction. And as I mentioned earlier now no amounts are drawn down on our Wells Fargo revolver. The company is in its strongest cash position in more than year.
In other balance sheet items on a sequential basis I note that inventories declined by $14.0 million and accounts payable declined by $7.8 million both related to our inventory management efforts as well as the reduction of nearly $3.5 million in inventory related to the asset divestiture to Telit.
Finally on our share count, our weighted average shares outstanding was 53.6 million shares in the second quarter a modest increase from 53.3 million shares in the first quarter. Now very briefly I’ll summarize our third quarter guidance. We’re providing a revenue guidance range of 60 to $66 million for the third quarter and in the third quarter we expect continued strength in SaaS software and services revenues with our portfolio of Ctrack and FW products and solutions driving sales for IoT businesses. In particular Ctrack solutions are expected to contribute 15 to $17 million of revenue to our third quarter with expected non-GAAP gross margins for Ctrack products up 63 to 68%.
With our continued focus on SaaS software and services revenues for our Ctrack and FW solutions we expect that non-GAAP gross margins in the third quarter will remain strong in a range of 36.5 to 38.5%.And on the expense side with our restructuring not fully impacting our cost structure until the fourth quarter we anticipate Q3 non-GAAP operating expenses to be 23 to $25 million. Adjusted EBITDA should remain positive for the third quarter in a row as our increased mix of high margin SaaS software and services continues to improve our P&L profile.
We expect positive adjusted EBITDA in Q3 of 1.3 million to 2.3 million driven by our expectation for positive adjusted EBITDA in Q3 from Ctrack of 2 to $3 million. We also anticipate Q3 non-GAAP loss per share will be between negative $0.04 and negative $0.07 based on an expected 54 million weighted average shares outstanding in Q3.I would like to add that there's an incredible amount going on at Novatel Wireless to be excited about as we build momentum in our SaaS software and services businesses growing subscribers and associate revenues at an accelerating rate.
Getting back to positive adjusted EBITDA was obviously critically important to our future and equally vital is the sustainability of that progress. At the midpoint of our guidance range we expect continued adjusted EBITDA improvements again in Q3 and then with the full impact of our restructuring efforts adjusting EBITDA should increase further in the fourth quarter to at least $4 million. That's the kind of steady positive growth in earnings that leads to positive cash flow in the short, medium and long terms. I thank all of our employees for their hard work and dedication in driving our transformation forward.
I’m now going to turn the call over to the operator for questions.
[Operator Instructions] Our first question is from Jaeson Schmidt with Lake Street Capital Markets. Please go ahead.
Hi, guys. Thanks for taking my questions. I was wondering if you could first talk about the product or end market that you're working on with the Tier 1 U.S. wireless carrier, wondering if you can provide any additional color on that project?
Yes, I'm happy to Jaeson. This is something where we had as I said taken the capability and assets and customer and market experience of FW and basically productize it into what we are really called business continuity. I talked about the fact where you take all those disparate parts that customers have to deal with today with different vendors. And we've been able to aggregate those and partner with that Tier 1 carrier to deliver that in a simple bundled package for the customer to make it simple for them.
And we’re really targeting the small and medium business who frankly don't have the time to run around and deal with all these vendors. So based on the conversation with the carrier their focus on this particular market and our capability I think it's a great match of two companies who will do some pretty interesting things in the market. So that's where we’re targeting.
Okay, great. And then I just want to be clear I think earlier this year you guys were targeting kind of 7 million in adjusted EBITDA by Q4 and now while still increasing in Q4 I think that number is now over 4 million, can you help us understand what maybe has changed?
Sure. This is - thanks for the question, Jaeson. So this is Mike, obviously not Sue. So you know what changes when we put that 7 million out there, we were trying to figure out how fast and how high we could drive EBITDA by the end of the year. As the years evolve and as we’ve continued our transition, we’ve realized that the markets are right the customer markets are right for investment in our higher-margin businesses. And specifically we're talking about what we’re driving towards with our – what would be our new SMB offering for Ctrack in the SMB fleet space, they have an offering now but this will be a little bit newer and with fresher look and we’ll launch in the U.S. as well.
And then also as Sue was describing this new offering from FW which will also be sort of first Tier carrier is a nice combination of hardware unit to get the service going. But essentially a recurring revenue stream from software SaaS and services and it just the more we thought about we realized that we’ve got to take advantage of these opportunities when they’re there. And if that means that it's - we only quote and unquote only have 4 million of EBITDA in the fourth quarter instead of seven, that's what makes sense as we continue to grow EBITDA throughout 2017.
Goal here has always been to build a sustainable growing business, growing the high-margin SaaS and services revenues and growing EBITDA. So by no means this is $7 million EBITDA off the table in the future, it’s just not going to be in Q4 as we continue to drive the business in the direction it needs to go.
Okay, that makes sense. And then just the last one and I'll jump back into queue. Just wondering if you could talk about your general visibility for your business and I guess more specifically how we should think about seasonality may be impacting you in Q4 at least directionally?
Yes. So I expect that typically seasonally we - Q1 is the lowest then we step up in Q2, then we flat in Q3 and then we step up in Q4.Two things have happened to change that although I expect seasonality to be fairly similar. One of the things that's happened to change that is that Ctrack and this was of course included in our guidance for Q2,Ctrack’s strong and historical quarter was always the second quarter that was at the end of the fiscal year and the end of the year for government budget cycles in South Africa.
And that of course is taken into our guidance and you see we're guiding higher in Q3. So that business is just growing at this point in regardless of seasonality. The other thing that you know that Q4 seasonality we tend to step up in Q4. We did not experience that last year as our large carrier customer had a shift and how they sort of managed their balance sheet towards yearend and try to lighten up on inventory for yearend. If you recall we had a slightly lower Q4 and then things stepped up in Q1 when as we said they would and expect that they would they kind of rebuild their inventory again.
So in a normal cycle we would expect Q4 to step up over Q3 from a revenue standpoint. Given what happened last year with our large carrier customer we’re not too sure about that. But obviously we are expecting despite what trends may or may not happen at the top line we're expecting our EBITDA to more than double between here and the fourth quarter. So that will continue to step up.
Okay, perfect. Thanks a lot guys.
The next question is from Mike Walkley with Canaccord. Please go ahead.
Great, thank you. And just building on that that question just to help us remodeling the doubling of adjusted EBITDA in Q4, can you walk us through how much of that is OpEx cost reductions you could go from roughly 2 to 4 plus and how much of that would be some revenue seasonal strength, just trying to get a run rate and OpEx as we exit the year? Thank you.
Sure. That’s a good question, Mike. So the starting point is the restructuring activities that we just undertook. So we've - in both our press release and now we've been talking about an $8 million annualized run rate of savings resulting from those restructuring activities and we will get the full benefit of those restructuring activities in the fourth quarter.
So, easy math you get from 17 where we just were in Q2 add 2, and now you’re at 37.So and then obviously continuing to improve our revenue mix will get us the rest of the way. Remember that the Ctrack revenues and FW software services, you look at our software services those gross margins are well over 70%.
So whether our carrier customers at gross margins high 20s whether they buy or don’t buy sort of towards the end hopefully it’s in the realm of the norm but otherwise that EBITDA step up comes from continued pressing forward on those software services revenues as well as that $2 million quarterly savings from out of restructuring activities.
Okay, thanks. And then just as you talked about your seasonal turn so as you get into Q1 of next year would you expect maybe a little bit of lack of leverage and then it just builds again throughout the year. How to think about the longer model?
I think as we go forward over the longer term we start getting into a discussion over the benefits of having a subscription based model. When you’ve got a hard only model you get a lot of lumpiness around when the hardware sells and when it doesn’t sell and frankly selling at a week at the end of the quarter or a week at the beginning of a quarter makes a huge difference to quarterly results in a hardware model much less so in a SaaS or services based model.
So we think the seasonal trends are going to get more muted as we go forward and as we transition increasingly to software and services and almost 25% almost a quarter of our revenue this quarter were software and services revenues. That still means a majority is coming from hardware but some of the hardware is also attached to software and services.
So normal revenue cycle we’ve step up in Q4 and then a slight step down in Q1. We didn’t experience that last year, we’ll have to see this year but we do expect those trends to become more muted. But if I was you and I was modeling it out I would probably model the slight step up in Q4 and then a slight step down in Q1 consistent with historical trends.
Okay great, that’s helpful. And just trying to get my mind around one last time on the backdrop from $7 million then you talked about increased investments but then you talked about this restructuring, so is the restructuring not as deep as you originally planned because of the investments needed or is restructurings more for the hardware business and you’re just investing more in you SaaS business so that’s why you are backing off the $7 million giving us a $4 million run rate to exit the year? Thank you.
Sure so it’s, I’ll clarify again. It’s definitely a combination of what we’ve done with the restructuring activities and investments in some of these additional areas. I mean we are investing in the Ctrack business and we are investing in the FW business the portions of those businesses that we want to grow. We’re talking about market that have CAGRs of 20% plus whoever they are in the world so we want to take advantage of that.
In terms of the restructuring cost look we’ve been making ongoing changes. I mentioned shutting down Richardson Texas, I mentioned the manufacturing operations in Durban. This latest round of restructuring affects nearly one in four of the sort I’ll call it legacy Novatel Wireless employees. Obviously everything falls under Novatel Wireless right now but I didn’t touch this particular, I didn’t touch Ctrack and FW and this is a big change that we’re going through and kind of trying to step away from that legacy and for our business we don’t want to overdo it.
The goal here is not to touch or kiss a certain EBITDA level and then step back. The goal is really sustained improvements and sustainability for the long run and just like we want to make investments in these growing business lines we also want to be careful as we’re driving efficiencies that we don’t do anywhere something breaks and causes us to take a few steps back when we’re trying to take a step forward.
So I think we feel pretty good about where we are. Obviously anytime here you are letting go employees it’s always a tough thing to do but deemphasizing non-profitable business lines with some that we just had to do. And I’ll note that I commented that our EBITDA in the first half of this year was our highest EBITDA in just six months than had been in any fully since 2009.
And not surprisingly 2009 was the year before Novatel Wireless acquired Enfora and I think with these restructuring actions was a pretty significant internally but we’re officially sort of moving past Enfora now and again not surprisingly unfortunately moving from the negativity that of the Enfora back to positive growth, positive EBITDA and so but it’s a big change here as a company. We’re enthusiastic about making it and it’s been fun to do it.
Okay, that's helpful. Best wishes for the ongoing transformation and look forward to seeing in Boston next week.
Next question comes from Kevin Dede with Rodman and Renshaw. Please go ahead.
Good afternoon. Thanks for taking my question. Sue could just sort of elaborate on the direction of investment. I mean you mentioned Ctrack in the Middle East, you mentioned some auto OEMs. Do you have any brand names you could add and just sort of color in where this investment is going and why?
Well Kevin thanks for the question. One of my comments I think was really focused on the fact that Ctrack really has a nice portfolio of products that I think serves us well in different regions and the investments are really based on those regions where the opportunities are.
So for example in the U.K. and in Australia we’re having great success with counsels and so the opportunity there in any kind of investment that’s required to better serve those counsels we enjoy a nice place in the marketplace with those counsels. So we have very targeted verticals in different regions and we’re now spreading those products across all regions just like peanut butter we’re really targeting those for who's in the market, who the competition is and what our capability is.
So it’s probably different in every region in terms of what the best opportunities are counsels being one. Obviously stolen vehicle the UBI car sharing as I talked about, car sharing as you know is growing across the world in terms of its attractiveness. There is interesting statistics about the actual total addressable market and the attractiveness of that particular vertical. So it really depends on the regions and the market and we’re really focused on just those markets and verticals were we think it makes sense.
Additionally obviously we’ve been talking about the small and medium business market in the U.S. We still think that’s attractive but we also that is just not the work that we’re doing jointly across the company on the refresh to the interface using Ctrack’s robust backend. Their engine is really will be the foundation for that product. That investment has applicability not only in the U.S. but across the globe. So there is a variety of investments that we’re making but we’re doing it on a very targeted basis and where we believe we’ll be successful.
Okay, so you spelled out Australia and the U.K. What’s going in the Middle East and where?
There is really a lot of fleet opportunities in the Middle East. We have relationships with companies there actually from our legacy Novatel experience and so we’re leveraging those legacy opportunities into Ctrack applications and so there are a number of companies in the Middle East that has indicated an interest and in fact are deploying in the Middle East. So it’s primarily fleet in that particular region right now.
Okay. Now you also talked about developing a unified offering. I guess I’d sort of size that up to something more similar to what Fleetmatics does. Can you talk about the development invested there and what your targets are?
Sure. Actually it’s actually different from fleet. As I said if you look - it’s the capability that we acquired through FIMI they’ve been quite successful on and I think I’ve talked to you about this before on other formal call that I think FIMI really approach the customer and really brought their capability to bear individual customer by customer basis.
And so what we’ve done is taken that capability along this great relationship that we’re going to have with this Tier 1 carrier and actually bundled that capability and we call it productizing it and actually putting it into bundle that makes it easy for the customer to understand, easy to purchase and get support for.
So it actually hasn’t required a significant investment. We are continuing to add resources to support that but because we have that capability in FW, we haven't had to make significant investment in that particular opportunity which is a great position to be in very frankly. And it’s actually kind of exciting to see to be able to reverse that from starting with the customer back we’re actually identifying the vertical market where this offering we think is interesting and like I said FIMI has actually had experiences before so we feel pretty clear that this is the right opportunity.
As you know the carriers are becoming quite interested in IoT. So this relationship with this carrier I think you are going to find quite interesting when we’re able to announce it.
Okay. So I just assume here that it’s more of a broad based IoT offering versus a strict Telematics solution.
It is an IoT offering that’s a bit, that really focuses on I’d call it business connectivity that’s what we’re really starting with and we’re also are approaching different companies with this business connectivity need. So it’s not really fleet, it isn’t fleet. It’s actually using, it’s bundling all of these capabilities as I said we’re bundling the hardware, the reporting and also the logistics and connectivity through the carrier.
So bundling all that in a simple bundled solution for these customers in a simple way to purchase I think is what’s going to be attractive. Did you want to say something Mike?
Yeah, so Kevin so our Telematics offering in the U.S. that we’re focusing on right now is the SMB opportunity that we described earlier for Ctrack. So this FW opportunity is not Telematics. So we’ve got two different things we’re working on right here, one is Telematics, one is non- Telematics both in the IoT segment.
Right two different things.
Fair enough. So Mike the original June 15 number top line was closer to $5 million versus what you are showing as a compare. The difference is probably what roughly $3 million, I am just wondering how to look at that for the balance of the year.
What are you looking at Kevin when you said that June…
I guess it has to do with what you’ve divested. I am just kind of wondering how to look at that for the balance of the year?
So I am still…..
For the balance of 15 that is, yeah okay so I apologize. Maybe this is a better question offline but you are showing are compare for June of 15 on the top line was what 51.7 versus what was originally reported 62.8. I am just wondering if that’s the business that went to Telit and if so was that $3 million sort of a fair revenue run rate.
So we’re reporting – so Q2 of last year was 51.7, Q2 of this year is 62.8. If you are looking Q2 of last year and trying to understand the 51.7 compared to our Q2 of last year press release, in Q2 of last year this relates to I talked about this at the end of the fourth quarter not that I would expect you to necessarily remember. This related to a reclassification of certain revenues that were acquisition related revenues from FW that originally were booked at the full value of the hardware revenue but later on were corrected to book only at the gross margin.
So what we originally reported in Q2 of last year was slightly higher revenue with slightly lower gross margin. That got corrected in Q4 to slightly lower revenue, slightly higher gross margin. The gross profit from Q2 of last year was always 16.0 and that was unchanged mainly of those variances. I think that’s what you are looking at.
Right. I am jus also wondering what those changes entail in the upcoming comparisons for September and December. So I guess December you’ve rectified already.
Yes, so Q3 of last year revenue for Q3 of last year was $54.3 million, revenue for Q4 of last year was $61.5 million.
Okay. All right that helpful. Okay, folks thanks and thanks for that detail Mike and thanks for taking the questions.
[Operator Instructions] Our next question comes from Cobb Sadler with Catamount. Please go ahead.
Hi guys, thanks a lot of taking the question and congrats on the profitability and the trajectory. Had a question on - so the two new Verizon products that you kind of talked about previously one of those is or is not the FIMI Wireless Tier 1 new product launch with a North American carrier?
That is completely separate.
When we talk about Verizon product launches and Q4 of that is not going to do with FW.
Okay, got it. Okay. And so the two - the Verizon - the two new Verizon products those are continuity products or those some other products?
Those are the continued roadmap that we have Cobb with the Verizon in the next generation hotspot and then we're also talking about a product that is really the next generation of home phone connect type product in the market. So it just continues down there strategic roadmap on their network transition.
A good way of thinking about it Cobb is that those launches with products with Verizon that we talked about, those are what we would typically think of as MiFi products. The FW product that we’re talking about or other carrier would be what we’d typically call an IoT product.
Okay. And that was kind of the next question, do you have anything baked in into Q3 probably I think Q3 but maybe Q4 for that product or not?
Well, we certainly have our expectations for new product launches baked into what we talk about for Q3 and Q4. When you’re looking at topline revenues for the launch of subscription based products, remember you tend to grow subscribers faster than you grow revenue, whatever you grow subscribers at one year, you tend to grow revenue at the next year proportionately.
And I mean do you think bigger than the breadbasket type of situation, I mean, do you think - I mean do you expect to be a big product I mean is the carrier excited about it or kind of stick your toe in the water and see what happens and hopes the best?
Things are going very well at the carrier. All indications are that carriers are very excited about it. We're not getting out ahead of ourselves in terms of forecasting and modeling, that excitement into dollars instantaneously hopefully that that happens. But you know where - we’re hopeful we’ll have the successful launch and things will grow sequentially as we go forward.
Cobb I would just add, I think the whole wireless carrier space is really important obviously as you can tell that Ctrack I talked about the existing relationships with carriers, the potential incremental relationships to carriers and all of them kind of look at things a little bit differently, some white label, some brands our brand. But with that scale and that distribution that’s a great relationship to have. So we really are - and as Mike said, the carriers are excited we are too and we’re looking forward to seeing how this can go to market.
As you know the IoT space has been pretty hyped for a while and I think what you see emerging now are the more tangible products that actually customers buys and that are profitable. And so we're excited to be in both the fleet space because obviously that's an emerging IoT obviously product that’s actually quite profitable and quite attractive to people. And the FW opportunity we think is something because we’ve tested it in the marketplace something that people are attracted to.
And as we have purged this SMB small to medium business space, you have to make offers to them quite simple and easy to purchase and easy to support. So I think it's right kind of than we will have.
Okay. And so maybe come back to that in a second. But I just wanted to make sure we have the time on. So on ridesharing usage based insurance, you announced the insurance company that does deal with Uber drivers in South Africa. I mean how easy is that, so I guess, how does that whole market shakeout?
I mean do you win South Africa and then it’s kind of a desperate situation where you got to move in and I will say Australia somewhere else win that business or can you prove yourself let’s say in South Africa and then get maybe, kind of a global license or global rollout for maybe the insurance company you’re dealing with Uber internationally throughout the world.
I mean how does the easiest is it to scale from one country to global deal because it certainly is interesting that you are associated with the company like Uber and that you do have a big UBI win in South Africa it would be nice if that could scale to other countries?
Yes, it’s a great question. As I said in my comments about Ctrack, is one of the beauty of Ctrack is that some of these things are developed in one region and then as we look at the success in one region and look to scale it across other regions, those are some of the things that the Ctrack organization is currently looking for. I mean some of the - you know some of the products make more sense in one particular region but where there looks like opportunity to engage with a more global organization, we are certainly having those appropriate conversations to see to what degree we can take it to other countries.
You know, part of the reason you become attracted to a company like Uber and others like that is that they see success and your ability to deploy in one country and that helps your opportunity to scale across other region. So we’re doing what we can there and hopefully we will be able to report out in the coming quarters where we’ve been successful in those places.
Okay, that sounds good. And then the U.K. ridesharing, is that an UBI type deal or more like a traditional fleet management type deal because - and how that kind of - that didn't come about from your let’s say from your Uber South Africa deal that was a separate win, I would imagine?
So yes, that was separate and that was done by the folks in the U.K. We have an excellent leader in that particular organization who actually got that idea going and was successful in doing that. And as you - there’s different applications to the car sharing. And this particular on you have people or you have access to the vehicle regardless of where it is, billing that sort of things. So the car sharing applications and how the companies use it it’s a little bit different. But we have the ability to customize that depending on what’s the particular company want.
So that’s been successful and we see other opportunities in that. We think that’s the space that looks pretty interesting. I looked at some data the other day talking about the - looking at the demographics in particular areas and the propensity of somebody to actually use the vehicle like that versus getting a vehicle around. So obviously it's more attractive in some areas than it is another's and that’s where we’re targeting.
Okay. And I’m assuming these deals are contested I mean the usual suspects show up there’s an RFP, there's an break out type situation and you get the award. So that’s going to have to go down?
Let me tell you that it’s always very competitive and we’re delighted to be able to tell you that we’re able to win those deals.
Okay. And then last question just going back to the - I think you said you have five carrier deals, did I get that right? And I know MTN is one you mentioned maybe to announce or announced I'm not - and then you said that maybe you - made some progress in Australia. Can you just reset the data on what carrier deal you’ve announced?
And then I guess the other - via math just so we know and then how those deals work so those are probably contested bake of I'd imagine, you somehow get selected because your product wins, are there other vendors that are also able to do business there and how does the carrier actually convert to revenues?
So does FIMI go in, and kind of co-sell or how do that work because it certainly seems like 300 million subscribers at MTN a lot to double the size of Verizon let's say or maybe more, there looks like there could be a lot of business there. And so how do you convert that into dollars?
Well let’s see if I can remember all your questions. I think it boils down to a couple of things. First of all, those deals are contested obviously they're quite attractive so they’re very interesting to companies like ourselves. So we’re proud that we were able to win them.
Secondly, it depends on what the carrier wants to do MTN is the white label situation. So that’s how they wanted to do there. But there are other carriers where we can actually go in and they use our brands. So it really depends on what the carrier likes to do.
The carrier MTN is the only one that has been announced, the others are not announceable at this time but we are deploying with them. And like I said, Cobb, I think this is an attractive market and the fact that we have experience and success with carriers, I think positions us well for new opportunities where as maybe other companies haven’t have that kind of success.
We know how to work with them, we know what the offer looks like and I think that's why Ctrack frankly has been successful not only in the carriers that they have current relationships with but the potential new carriers that are potentially coming our way.
I think I’ve answered all your questions.
No, that was an excellent report. And you - I mean may certainly goes in but you somehow trained your sales force and the sales force is already up to speed on how to sell. I mean do you kind of co-sell, is there a lot of hand holding in the beginning and then there’s investment upfront and then it kind of takes off, I mean how does that work you think?
Once again it really depends on how the carrier wants to do it. Sometimes their particular teams perhaps will do lead generation and we actually on our end actually get that qualified referral and then we close it and then we manage the customer. Other carriers want to do - have a little more activity at the front end and actually sell but it really depends on how the carrier wants to do it. There's no kind of cookie-cutter approach but regardless of how the carrier, I mean there aren’t many options but I think we can accommodate anything as the carrier wants to do.
Having that kind of reach, you said it Cobb has tremendous reach with 300 million subscribers and it's an attractive channel for us to partner with.
This concludes the question-and-answer session. With that, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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