Pointer Telocation's (PNTR) CEO David Mahlab on Q3 2016 Results - Earnings Call Transcript

| About: Pointer Telocation (PNTR)

Pointer Telocation Ltd (NASDAQ:PNTR)

Q3 2016 Earnings Conference Call

November 17, 2016 10:00 AM ET

Executives

Kenny Green – GK Investor Relations

David Mahlab – President and Chief Executive Officer

Zvi Fried – Chief Financial Officer

Analysts

Sameer Joshi – Rodman & Renshaw

Josh Nichols – B Riley

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Pointer Telocation's Third 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. You should have all received by now the company's press release. If you have not received it, please contact Pointer's Investor Relations team at GK Investor Relations or view it in the News Section of the Company's website, www.pointer.com.

I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin please.

Kenny Green

Thank you, operator. I would like to welcome all of you to this conference call and I'd like to thank Pointer's management for hosting this call. Earlier today, Pointer released its third quarter 2016 results. By now, you should have all received a copy of the press release, which is also available on Pointer's website.

With us on the call today is Mr. David Mahlab, President and CEO; and Mr. Zvi Fried, Chief Financial Officer. David will summarize the key highlights of the quarter followed by Zvi, who will provide a summary of the financials. We will then open the call for the question-and-answer session. Before we start, I'd like to point out that the Safe Harbor statement published in today's press release also pertains to the contents of this conference call.

And with that, I'd now like to introduce Pointer's CEO, Mr. David Mahlab. David, can you go ahead.

David Mahlab

Thank you, Kenny. Good morning, everyone and thank you for joining us today. We are very pleased with our financial results. We continue to demonstrate solid revenue growth showing year-over-year 9% increase in U.S. dollar terms and more in local currency terms, whereby we grew year-over-year by 15%.

Our subscriber revenue grew much faster, up 11% year-over-year in dollar terms and in local currency terms, 18%. This is the rate we are very happy with. This was driven primarily by the subscriber growth over the past 12 months, we should reach 198,000. We added 24,000 subscribers over the past year which has funded our subscriber base by 14%. Taking into account acquisition of Cielo Telecom in Brazil which was closed early October, our subscriber base is now over 214,000, a real substantial number.

I clarified in the previous conference calls, our service revenue are based on a monthly recurring revenue stream for our subscriber base which is using our platform on a software as a service model. I remind all that our business model has been such that we have infrastructure already in place, so the revenue from every new subscriber has a very nice profit margin. Hence, as our business growth we should be able to consistently demonstrate a strong leverage and improved margins. Therefore, another important element of our strategy going forward is to go through acquisition in our target regions, similar of Cielo in Brazil adding additional subscribers to our base which we can support on our existing infrastructure.

In terms of our OpEx, our seldom marketing expenses has grown somewhat [ph]. We also expect to increase our R&D expenses slightly later in the current quarters. Our sector is becoming increasingly important and our target markets are growing significantly, hence we are seeing many opportunities in reals market which leads to capitalize on and our investment in R&D and sales and marketing will allow us to capture and capitalize on some of these opportunities. Our goal is to constantly release additional new mobile resource management product solutions and services for the Internet of Things and asset tracking markets.

The Internet of Things and asset tracking space represents phenomenal market opportunities. Almost consistently, every quarter we are seeing very interesting acquisition, with some as very significant valuation, particularly in the United States. In terms of product development, our CANBUS solution, which is a diagnostic and car monitoring solution, continue to see solid interest and sales growth, and we keep enhancing its capabilities. Our intention is to target during next year the OEM after-market using our innovative solution on top of the existing markets.

Our new product, the Cellocator Nano, get through as value in market has completed the evaluation stage and we already started selling in slow volumes. This innovative device target is good in transit for logistic distribution chain control and allows real-time monitoring of Internet cloud services. We believe this product will become a growing contributor to our revenues in 2017 and even more towards 2018 once we would release our IoT platform for it. Using the IoT platform, we intend to have service revenue for these solution too. Looking further out, we are in the research and development phase of connected car solution which we hope to release in 2017. This area is another one which we foresee a potential growth market for us.

In terms of our cash position, in the third quarter we generated $1.4 million in operating cash flow; and that bringing us to strengthen our balance sheet. Our net debt position at the quarter end stood at $2.2 million to Israeli banks. In summary, we are very pleased with our results. While the weakness in the currency we sell and versus the U.S. dollar continue to diminish our growth in U.S. dollar term. We took continued tonight [ph] progress in all the regions we operate in. We look forward to continued growth for the remaining of 2016 and into the next year.

And now I would like to hand over to Zvi Fried, CFO, for the financial summary. Zvi, go ahead please.

Zvi Fried

Thank you, David. In terms of our financial results for the third quarter of 2016, the highlights were as follows; third quarter revenue grew 9% to $15.9 million compared to $14.6 million in the third quarter of 2015. Revenue from services in third quarter grew 11% to $10.5 million compared to $9.5 million in the previous year. In local terms, revenue would have grown overall by 14% while service revenue would have grown by 18%.

Gross margin in the third quarter was 49.2% versus 49.1% in the third quarter of last year. Non-GAAP operating income for the quarter grew 10% to $1.8 million compared to $1.6 million in the third quarter of 2015. Non-GAAP net income from continued operations in the third quarter was $1.4 million compared with $1.3 million in the third quarter of 2015. Adjusted EBITDA continued operation in the third quarter it was to $2 million, approximately the same as in the third quarter of 2016. That ends my summary.

We shall now open the call for questions. Operator, please.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Sameer Joshi, Rodman & Renshaw. Please go ahead.

Sameer Joshi

Good morning and good evening guys. So my first question is related to the Cielo acquisition, it was completed in October; in terms of top line revenues, what kind of impact are you expecting from this and what kind of margins -- are the margins similar to your rest of the business?

David Mahlab

As we already published, we have about Cielo as today around 16,000 in user and service. They are pretty much in line with our user subscription fee and the business rights are positive. So that will be -- that can give you some kind of assumption about revenue level and bottom-line performance.

Sameer Joshi

Is there any one-time charge that we could expect from this acquisition that is significant?

David Mahlab

You can see in the U.S. GAAP reporting some -- about $200,000 expenses related to the inventory [ph] expenses on the deal.

Sameer Joshi

All of that happened in 3Q, nothing in 4Q?

David Mahlab

There will be some additional expenses in the fourth quarter.

Sameer Joshi

And meaning of course, there is -- there must be some synergies that you expect -- do you see overall operating margin increasing in the quarters ahead?

David Mahlab

We do -- there are -- there is a synergy plan but in the type of business that we operate, it will take about a year to implement. The first priority is to maintain the company selling and workings, and synergy plans is mainly around the technology and the technology migration takes time.

Sameer Joshi

And you mentioned during your comments, acquisitions and you mentioned in the U.S.; in what terms are these acquisitions more on the MRM front or are you looking at other technologies like developing IoT through acquisitions?

David Mahlab

Basically all target markets for acquisition is fleet management company, in our business in the existing territories. What I mentioned in the U.S. is actually valuations of deals that happened recently in the U.S. and mainly I mean the recent acquisition of Verizon, of both fleet markets and the lodges [ph] bought at a very nice evaluations. But we are not targeting the U.S. market, the U.S. market usually -- even in the private sector, in the -- even in -- I'll call it small-sized companies, they usually talk about multiples of revenue without any reference to the bottom-line performance, and that sounds to be bit expensive for the type of company that we have.

Sameer Joshi

And just one last one from me; in terms of subscribers, meaning it's nice to see that it's growing year-over-year and adding 22,000 to 24,000 subscribers, but is there a turnover that you experienced -- just trying to understand how many new subscribers are added as against some leaving the subscription?

David Mahlab

There is a churn, in the fleet management business the usual churn in a regular year is about 5%, the only exception that was noted I think in the previous calls in the fleet management business was last year, and a bit at the beginning of this year in Brazil, because of the economic situation some of the customer went on Chapter 11 or bankrupt totally, so we had to remove them from the customer base. In the consumer business, the churn is a bit higher, thrust [ph] is a bit higher but our main focus is the B2B business and the churn there is pretty low.

Sameer Joshi

Okay, that's all for me, thanks.

David Mahlab

Thank you.

Operator

The next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

Yes, thanks so much. Congratulations for the good figures. I just wanted to ask about the -- bit more of regional color on whether you're seeing a stronger growth and if you -- I think you alluded today being growth in all of your markets. Could you give us a bit of color on that?

David Mahlab

Yes, basically we saw a nice growth in most of the market, as well had a great year this year. And Brazil also made a change versus the previous year and we also see the momentum in Mexico and Argentina, and the slowest pace was in South Africa.

Unidentified Analyst

Okay, fine. And just on the working capital side, is there any sort of major changes you might expect in the fourth quarter for forecasting balance sheet?

David Mahlab

Basically, we had the expenses on the Cielo acquisition.

Unidentified Analyst

Okay.

David Mahlab

That we financed from bank loans that already you can see in the balance sheet -- in our balance sheet on the end of the third quarter. So if you can see the difference between the second and the third, we took loan from Israeli banks but since the building closed on September 30, still all the cash was with the company.

Unidentified Analyst

Excellent, that's great. Okay, all my other questions were answered earlier. Thank you very much.

David Mahlab

You're welcome.

Operator

The next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

Hi guys, a few questions. One is, when exactly did the Cielo acquisition close in October?

David Mahlab

October 7.

Unidentified Analyst

October 7, okay. And did I understand you that you already drew down on the debt, so that debt won't increase next quarter simply because of the acquisition?

David Mahlab

The debt will not increase anymore, it already took the loan on September but the cash position will decrease.

Unidentified Analyst

Understood. And then my final question is, could you just refresh my memory on your cash tax situation and what you expect your cash tax rate to be over the next few years?

David Mahlab

First, all the tax expense that you see today in the P&L is the non-cash expense. However, looking at the next three years, we will have a low tax rate due to the merger within Israel. So basically we will pay something around 12% to 15% taxes.

Unidentified Analyst

And then after the next three years?

David Mahlab

Well, that will be again, we will use our -- we will be able to use our NOL and pay zero.

Unidentified Analyst

Very good. Thanks very much.

David Mahlab

You're welcome.

Operator

The next question is from Boris [ph] of Moore Mutual Funds. Please go ahead.

Unidentified Analyst

Thank you. My question is about sales and marketing expenses; so last few quarters with rising -- I just wanted to understand they were exciting, looking for 2017 and also about -- the second question is about subscribers and acquisition costs, whether there are any changes in those due to competition or any other reasons?

David Mahlab

First, we did increase our sales and marketing and there will be additional sales and marketing expenses once we joined the Cielo team, of course. And this is a top priority because of the annual [ph] with interest just lead additional sales and profitable sales. And -- can you please repeat the second question which I'm not sure that I understood.

Unidentified Analyst

You turn your thoughts [ph] to the expenses, but in terms of -- how much it cost you to get a new subscriber; a new account basically? Whether there was any changes from…

David Mahlab

No, there has been never -- there has been no changes. Just remember that we also developed -- are now developing a new line of product for the IoT market and we are now also investing in sales and marketing for that product which I do believe will give us nice outcome over the next years. So now entering to a new market requires additional sales and marketing efforts.

Unidentified Analyst

Okay, thank you.

Operator

The next question is from Josh Nichols with B. Riley. Please go ahead.

Josh Nichols

Hi David, I was just wondering, ballpark, what percentage of the subscribers are these SVR, subs versus some of the higher end fleet management offerings that you guys have?

David Mahlab

We never probably [indiscernible]. However, I can tell you that only SVR business is used well. This business is nice, growing but the B2B business is not the majority of the revenue in the service.

Josh Nichols

Yes. And so it looks like the company's ARPU is around $18 a month. I'd assume it's fair to say that the ARPU on the SVR business is significantly lower than that -- anything you could tell me proudly about some of the differences in fees for those?

David Mahlab

It's definitely lower, and also as I mentioned before, the churn is also higher but we're still growing this business.

Josh Nichols

And then as a follow-up, I know you talked about this, yes, I'm -- go ahead.

David Mahlab

And then we might have one notion, basically on the SVR business, we also expect that the ARPU -- due to competition the ARPU will drop to -- and while during the B2B business, either we'll maintain it or even increase it.

Josh Nichols

Yes, I guess it's fair to say that the ARPU on the fleet management business is probably a multiple of the SVR business?

David Mahlab

Well, it depends on what kind of multiple you're talking.

Josh Nichols

Okay, thank you. And then I have real quick, I know you mentioned a little bit about sales and marketing and R&D with the new product launches, those are probably going to go up. But do you have any specific targets, either a dollar value for sales and marketing and R&D or maybe as a percentage of revenue. So think about over the next year or two.

David Mahlab

Of course. We're now in the process of building budget for next year, we didn't finish it here and still underwork.

Josh Nichols

Okay, thanks David.

David Mahlab

Welcome, John.

Operator

The next question is a [indiscernible] of B. Riley. Please go ahead.

Unidentified Analyst

Hi David, just a couple of follow-ons. The 24,000 subscribers that you added in the past year, that's a net number -- what's the churn overall in the business, annual or monthly?

David Mahlab

On the B2B business, the churn, the annual churn is about 5%. In the SVR business, the churn is about 30%.

Unidentified Analyst

14 or 40?

David Mahlab

No, I said in the B2B business, 5%. In the SVR business, 30%.

Unidentified Analyst

30, okay, thank you. And then you have this 200,000 subscriber base, and what is the contribution margin on new subs that you will layer in on top of this?

David Mahlab

Basically for every new subscriber, we have two major expenses. I put aside on the acquisition costs. First is the data which we have to due to -- that we need to pay for the cellular operators. And secondly, the equipment cost if it is on the lease model. Actually we have to queue also the -- sorry, the additional -- I would call it expenses on the web services; but web services data and amortization of equipment in case of lease. In the B2B business, we see tendency to move more and more to lease model that will require additional working capital from our point of view, and basically it's the major expense on our products.

Unidentified Analyst

Right. So then if you fund all together that web services expense, the data cost, I mean the equipment I presume you're going to make your money back on the lease of -- what really call that necessarily an expense but that incremental contribution margin, right is -- should be much higher than 20% or so EBITDA margin for the business overall, right?

David Mahlab

Yes, it's supposed to be north of 50.

Unidentified Analyst

Okay, great. And the last question is on two; one, what is it that will be unique about the IoT platform that you intend to release in 2018?

David Mahlab

We intend to release the IoT platform for the nano-capabilities due 2017. We do expect to see revenue for that in '19. But the issue is actually how to handle for every small SMB, full capability to leverage the capabilities of the nano which is real-time monitoring of -- we have about $0.05 off from temperature, humidity, light -- so all the sensors are basically the overall idea is that we'll be able to leverage -- we'll try the sensing capabilities.

Unidentified Analyst

Okay, thanks. And then the last question is similar for the connected car solutions.

David Mahlab

Connected car solution actually –what we would like to provide and that's mainly for our SVR business, is additional services over the infotainment systems. So basically this is -- I'll call it a development mainly targeting IoT and IoS systems that we will embed in infotainment systems. And therefore gain additional revenue as on a service level and also on the apps level.

Unidentified Analyst

Okay, great. Thank you.

Operator

The next question is [indiscernible]. Please go ahead.

Unidentified Analyst

Yes, hello. I just wanted to follow-up on the question about taxes, the rate of 12% to 15% taxes going forward. Was that a cash tax memo or a reported tax number?

David Mahlab

Till the end of 2017 that will be reported non-cash for 2017. And for 2018 and 2020, that will be in cash due to taxes in Israel.

Unidentified Analyst

So 2017 that will be the reported tax rate and then in 2018, no cash tax, zero cash tax. Okay, so 12% to 15% is the reported tax rate. And then 2018 to 2020, then you're expecting what reported rates, if I can ask?

David Mahlab

Again, sorry -- 2018, 2019 and 2020, that will be cash and the average tax rate for Israeli income is about 15%.

Unidentified Analyst

Okay, lovely. Thanks very much.

Operator

The next question is a follow-up from Josh Nichols. Please go ahead.

Josh Nichols

Real quick, given that new subscribers have about 50% EBITDA contribution, is there anything -- does the company have any goals as far as next few years, as far as EBITDA margin targets? You're already at 15% but it sounds like that could move up significantly over the next couple of years with subscriber ads given the leverage?

David Mahlab

We will definitely improve our finance -- we intend to improve our financial results. We use part of the additional gross margin generated in order to partially invest in R&D in terms of marketing OpEx and part of it to improve the bottom line performance and turned additional loans from the banks, as we did over the last years.

Josh Nichols

And last question, you said all the regions were growing but South Africa was growing the slowest. Could you just tell us a little bit about what you're seeing in that market?

David Mahlab

We have to remember that in South Africa we finished the technology migration during this year. And the legacy system was a bit inferior, but the new system helps us in the competition phase going forward. But the competition in South Africa is not easy over there, and that's the main reason and together with the economy situation there, that's the reason slow growth.

Josh Nichols

Thanks, David.

David Mahlab

You're welcome.

Operator

[Operator Instructions] The next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

Hi David, I have one question; it's regarding -- what you view your revenue and the profitability sensitivity to the new car sales in Israel. Assuming this year we'll reach big sales and next year sales will be down by say 10% to 20%. Thank you.

David Mahlab

As the market in Israel will slow, we will sell maybe a bit less products in Israel but since we've got the subscription base very nicely, I do hope that we will continue to increase the profit because the subscription base is growing and will continue to grow.

Unidentified Analyst

All right, thank you.

David Mahlab

You're welcome.

Operator

There are no further questions at this time. Mr. Mahlab, would you like to make your concluding statement?

David Mahlab

On behalf of the management of Pointer, I would like to thank you all for your continued interest and long-term support of our business. I will be in Los Angeles early December at the LD Micro Conference. If you wish to meet with me, please contact my Investor Relations team. And for the rest of you, I look forward to speaking with you and updating you again next quarter. Have a great day. Thank you.

Operator

Thank you. This concludes the Pointer Telocation's third quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.

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