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

Q2 2012 Earnings Call

August 7, 2012 4:45 PM ET

Executives

Jeffrey Jagid – Chairman and CEO

Ned Mavrommatis – CFO

Darryl Miller – COO

Ken Erhman – President

Analysts

Matthew Hoffman – Cowen

Zach Ajzenman – Griffin Securities

Operator

Good day ladies and gentlemen and welcome to the I.D. Systems Inc. second quarter 2012 conference call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Jeffrey Jagid. Sir, you may begin.

Jeffrey Jagid

Thank you. Welcome to I.D. Systems fiscal 2012 second quarter conference call. Thank you for joining us today. I’m Jeffrey Jagid, the Chairman and CEO of I.D. Systems. Joining me today are our CFO, Ned Mavrommatis; our Chief Operating Officer, Darryl Miller; and Ken Ehrman, the President of I.D. Systems.

I will provide a brief overview of our results for the quarter and year to date, Ned will detail our financials, Darryl will update you on the performance of our Asset Intelligence subsidiary, and Ken will review the highlights of our vehicle management business. We will then open the call to your questions.

Before we begin, let me reiterate the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

The following discussion contains forward-looking statements that are subject to risks and uncertainties including, but not limited to, the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results, and other risks detailed from time to time in I.D. Systems filings with the Securities and Exchange Commission.

These risks could cause the company’s actual results for the current fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.

The second quarter of 2012 continued a positive trend for I.D. Systems. Revenue increased from Q2 of last year to $8.7 million, marking our 10th consecutive quarter of year-over-year revenue growth. For the six-month period, revenues were up 14% to a first-half revenue of $18.5 million. So we are on pace to make 2012 our second year in a row of record annual revenue.

Revenue contributions in Q2 of 2012 continued to come from a balanced mix of products and services across multiple market segments led by increased sales of both vehicle and transportation asset management systems. As a sign of our growing diversification of sources of revenue, I am pleased to report that only one of our customers accounted for more than 10% of our revenue in the first half of the year.

The predictability of our revenue stream was also a positive. Recurring revenue was 49% of total revenue in Q2 and 46% of total revenue year to date. Our gross margin remains strong, at more than 50% in both the three and six month periods, consistent with historic levels. As a result, our cash flow from operations was positive in Q2, and our net loss for the first six months of 2012 improved over last year, as Ned will detail in a moment.

Overall, we are making progress toward our long-term strategic growth objectives, and we look forward to building on this positive momentum for the remainder of this year and into 2013. Our outlook for the rest of 2012 is especially strong due to expected deliveries of rental fleet management systems to Avis Budget Group.

In July of 2012, ABG confirmed delivery orders for the approximately 20,000 units representing the balance of the 25,000 systems earmarked for the northeast US and Canada, under the first phase of our master agreement with ABG. We expect to deliver all of these units in Q3 of 2012. In fact, we have already shipped a significant portion of the units.

We are working diligently to build shareholder value, and I look forward to reporting to you further on our continuing progress. Thank you for your time today, and I will be pleased to take your questions later in the call. Now let me turn the discussion over to Ned Mavrommatis to detail our financial results.

Ned Mavrommatis

Thank you Jeff, and hello to everyone on the call today. As Jeff noted, revenue for the three months ended June 30, 2012 increased 4% to $8.7 million, compared to $8.3 million in the second quarter a year ago, with 49% of all revenue coming from predictable recurring sources. For the six months ended June 30, 2012, our revenue increased to a record $18.5 million, up 14% from $16.2 million in the same period a year ago.

Our revenue growth in the first half of the year was driven by increased sales of our wireless vehicle and transportation asset management systems. Recurring revenue for the six months was $8.4 million, or 46% of total revenue. Gross margins in Q2 2012 was a solid 52.4% once again meeting our expectations.

SG&A expenses for the quarter were $5.7 million, relatively flat both year-over-year and sequentially from Q1 2012. Excluding stock-based compensation and depreciation, amortization, non-GAAP net loss in Q2 was $1.2 million, or $0.10 per basic and diluted share, compared to $1.1 million or $0.10 per basic and diluted share in the second quarter a year ago.

We believe that considering this non-GAAP financial information is relevant to an evaluation of our overall operating performance. Net loss in Q2 was $2.1 million, or $0.18 per basic and diluted share, compared to $2 million or $0.19 per basic and diluted share in the same period a year ago.

Our balance sheet remains strong. During the second quarter of 2012, we generated positive cash flow from operations of $54,000. As of June 30th, the company had no debt, and $20.9 million in cash, cash equivalents, and marketable securities, which equates to $1.73 per share. Also in Q2, we repurchased approximately 43,000 shares of our common stock, at a total cost of $183,000, at an average price of $4.30 per share.

As of June 30th, we had purchased a cumulative total of 308,000 shares at an aggregate cost of approximately $1.3 million. Our stock repurchase program allows us to purchase up to $3 million in outstanding shares.

Thank you for dialing in today. I look forward to your questions and reporting further on our financial progress in the future. With that, let me turn the call over to Darryl Miller, our COO, to review highlights of our transportation asset management business.

Darryl Miller

Thanks Ned. I’d like to say hi to everyone on the call as well. Our asset intelligence unit is one of the world’s top transportation asset tracking and management businesses. Our VeriWise technology provides real-time, web-based visibility trailers, containers, and the freight they carry, to help reduce transport costs, improve customer service, and increase supply chain velocity.

Our VeriWise product line is comprehensive, ranging from the low-cost, high-value track and trace system, to the industry’s most advanced cargo monitoring and refrigerated trailer management systems. In the first half of 2012, asset intelligence unit sales were up 65% due primarily to our successful penetration of the intermodal container segment and the continued popularity of our VeriWise Track and Trace product.

In Q2, we continued to expand business with existing customers, most notably, BASF, and CH Robinson Worldwide. BASF, the world’s leading chemical company, expanded its deployment of the track and trace solution to manage its diverse fleet of trailers, totes, and rail cars.

The keys to winning this business were our patent and power management technology, which translates into exceptionally long, reliable, maintenance-free product life, and the intrinsic safety of our product. Track and Trace holds underwriters laboratory certification for safe use to proximity to hazardous goods, which is essential to meet the government’s safety and security standards applied to sensitive materials transported by BASF.

CH Robinson, one of the world’s largest logistic service providers also expanded its Track and Trace system deployment to a large fleet of intermodal containers. The system enables CH Robinson to pull and dispatch containers more efficiently, update load status in real time, and proactively manage customer service expectations.

The ease, quality, and robustness of our device installations were key factors in CH Robinson’s decision to go with VeriWise Track and Trace. Domestic intermodal containers travel by boat, truck, and rail through all types of environmental conditions, so the long-term survival of the device is critical.

Track and Trace is the only product that flush-mounts inside the corrugated sides of an intermodal container, to optimize protection and durability. We further fortified our leadership in the intermodal market by winning a major new customer in quarter two, Swift Transportation, one of the largest truckload carriers in North America.

Swift executed a five-year, $3.1 million contract to roll out our VeriWise satellite system, with advanced motion and cargo sensing. Our patented motion-sensing technology identifies the start and end of each drive segment for detailed operational analysis and our patented cargo sensor monitors the full length of containers to accurately determine its load status.

This system provides Swift with real time visibility of the last mile of cargo deliveries, showing when and where freight is taking too long to offload, and pinpointing empty containers.

With this information, containers can be turned around quicker, to reduce chassis rental cost, minimize deadheading, maximize revenue, and optimize the financial return on our investment in each container.

Thank you for your time and attention today. I look forward to bringing you further updates in the future. On that note, I will turn the discussion over to the President and Co-Founder of I.D. Systems, Ken Erhman.

Ken Erhman

Thank you, Darryl, and thank you to all of our listeners for joining us on the call today. As Ned noted, a large share of our revenue growth in the first six months of 2012 was attributable to our wireless vehicle management systems for industrial trucks, which helped material-handling operations reduce costs, increase productivity, and improve safety.

We increased sales of both PowerBox, our entry level wireless system with core functions and a streamlined deployment process, and PowerFleet, our best in class system, with the industry’s most flexible, functional options and configurability. Together, these two systems hold greater than 50% share of the growing market for wireless industrial vehicle management.

In the second quarter of 2012, many core customers continued to expand their business with us, including 3M, Altela, American Eagle Airlines, Audi, Continental Tire, Ford Motor Company, General Mills, John Deere, Nestle, Proctor & Gamble, the US Postal Service, Walgreens, Wal-Mart, and Xerox, amongst others. This speaks clearly to the ongoing value and durability of our solutions in the eyes of these important customers.

Among the new customers we established in Q2 to our direct sales effort was Detroit Diesel, one of the world’s largest engine and axle manufacturers. This further enhances our strong position in the automotive vertical, where Audi, Ford, Toyota, and others are longtime customers.

Detroit Diesel is a subsidiary of the global automotive giant, Daimler AG, so we expect to pursue additional opportunities internationally, across the Daimler enterprise.

Our channel partners also made significant contributions to Q2 revenue with a combination of both new and repeat customers across diverse industries including the automotive, building products, food and beverage, electrical and industrial products, logistics, and wholesale distribution industries.

I am sure most of you know we have tailored our vehicle management system in addition to monitoring industrial trucks to the car rental industry, and we entered into a contract with Avis Budget Group in 2011 to deploy this system at both traditional airport rental lots and new virtual lots called Avis On Location.

We did not ship any new rental fleet units in the second quarter of 2012, but we did work hard with Avis to prepare the infrastructure for the next trench (ph) of delivery orders.

In July, Avis Budget Group released orders for approximately 20,000 of our rental fleet systems, representing the balance of the 25,000 units earmarked for deployment across the northeast United States and Canada in the first phase of our contract with Avis Budget Group.

As Jeff noted, we recently delivered a substantial portion of these units and we expect to complete the deliveries in the third quarter or 2012.

I’d like to conclude by mentioning an exciting new product offering we are introducing to the marketplace, I.D. Systems Analytics. This is the data mining and analysis platform that provides a single, integrated view of industrial vehicle and operator activity across multiple facilities, generating sight by sight comparison and enterprise-wide benchmarks of material handling operations.

We believe this offering has substantial revenue potential, as well as the potential to accelerate enterprise-wide adoption of our systems. Manufacturing and distribution operations tend to have a sight-centric focus on industrial vehicle activity, with limited or no ability to manage at a true enterprise level.

By providing a bird’s eye view of enterprise activity, our analytics offering provides significant value to executive management at our current customer base.

On that note, let me turn the call back over to Jeff for the Q&A segment of the call.

Jeffrey Jagid

Thank you, Ken, that concludes our prepared remarks. We are now pleased to open the call to your questions. Thanks again for participating on our call today.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Matthew Hoffman from Cowen. Your line is open.

Matthew Hoffman – Cowen

Hi. Thank you, and congrats on getting the order for Avis finally on the tape there, guys.

So, I think there’s – we’re going to have to spend a few questions here on looking to the shape of the opportunities, obviously, of a major portion of your back half optimism here, and Ned I think you said it was all coming in the third quarter. I think some of us had – I don’t think you even knew when you were going to get the order. Some of us had some in June, some of us had December.

So let’s just kind of go through the size and think about how the impact it might have on the income statement of the third quarter, it’s kind of an open-ended question. Can you – the rest of the business is stable, are we looking at an $8 million to $10 million one timer here in 3Q? Thanks.

Ned Mavrommatis

Yeah Matt, it’s Ned. The delivery of the remaining 20,000 units to Avis should bring and additional, approximately $8 million in revenue during the third quarter.

Matthew Hoffman – Cowen

Okay. And we should assume that’s a standard margin business?

Ned Mavrommatis

That is correct. As we disclosed in the past, the program was priced to yield a margin that’s comparable to the company’s historical margins.

Matthew Hoffman – Cowen

Okay. So then let’s look out to the fourth quarter. Historically, that’s a good quarter for you guys. In this case we might see a seasonal decline in the fourth quarter or is this the type of thing where you’re able to – there’s only so many resources the company you’re pushing other business out in the fourth quarter.

Jeffrey Jagid

Matt, this is Jeff. Let me respond to that. It would not be unreasonable to see decline in light of the Avis deliveries. However, the pipeline is fairly strong. We continue to convert leads into orders, so the business is progressing nicely. I just want to point out, and it’s an observation you made, that on something with the program with Avis.

As you may know, or as you may recall, that program gave Avis the ability to take delivery of any time of 25,000 units through January of 2013, and the fact that, and they have been pretty vocal about their requirements and about what their goals were, and their goal has always been, or what they have been saying their goal has been to deploy the 25,000 units through the summer of 2012. So we’re on track for achieving that.

And for us, what’s most important obviously, and I think I made this comment after Q1, is not necessarily exactly when we deliver those units, and what quarter they get deployed in, but more importantly, ensuring that the roll out of those units is successful, that Avis’s experience is very positive, that they derive the anticipated economic benefit, and most importantly, that the Avis customer gets a real benefit and has a very good experience in interacting with the solution, because that will then position us to talk about continued business with avis. And obviously that would be transformational for us.

Matthew Hoffman – Cowen

Right, and that’s going to lead me to a combo question here which is, can you share exactly the operational metrics that have come out of the Avis, have they said anything publicly about the benefits of the product? And then obviously, the follow on is that leaves 3 to 300,000 plus vehicles out there in the fleet to go after. What are the prospects for those in 2013 and 14?

Jeffrey Jagid

They have, let me answer the first part of your question first, they have not publicly disclosed any return on investment data. We do work pretty closely doing our own analysis, and then we work with them on kind of shared approach of the analysis of the data and it looks fairly promising.

I don’t want to create the impression that they’re automatically going forward with a Phase 2 but that’s certainly what we’re trying to get in a position to discuss with them. When we had negotiated the arrangement with them for the first phase, it was always contemplated that there would be a Phase 2 which would cover the whole fleet but it certainly is not automatic.

We have to go continue to demonstrate that benefit and work with them to ensure that the – any type of burden or cost associated with further deployment is far outweighed by the benefit.

So I think we’re in a good position to do that. There are a number of incentives in place on the program to have them move forward but it really is – almost works as an option. I mean, it really is their decision.

Matthew Hoffman – Cowen

Good and last question is a housekeeper. Ned, can you give us the splits, VeriWise and PowerFleet, Hardware and Software, the four revenue lines?

Ned Mavrommatis

Sure. The VeriWise product revenue was $1.4 million. The service revenue for VeriWise was $2.9 million for a total of $4.3 million. And on the VMS side, the product was $3.4 million and the service was $1 million for a total of $4.4 million and that makes up the $8.7 million in revenue.

Matthew Hoffman – Cowen

Thanks, guys. Good luck.

Jeffrey Jagid

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Zach (ph) Ajzenman from Griffin Securities. Your line is open.

Zach Ajzenman – Griffin Securities

Hey, one quick question. Excluding Avis Budget contributions, what can we use as a reasonable or sustainable top line growth rate going forward? I know there’s lumpiness in there but can I sort of get some normalized idea of things?

Jeffrey Jagid

Well, let me respond, Zach, and I appreciate the question. I don’t know if you’ll love my answer but I definitely appreciate the question. But the six-month period, revenue was up 14%. We continue to build the infrastructure and build the pipeline to facilitate real growth in the business.

We haven’t disclosed growth rates but we are on pace to – for another record revenue year, so I’m not sure if that necessarily answers the question. I’m hesitant to give growth rates but you could see some of the growth historically. It’s been pretty compelling year-over-year and while we continue to see some quarterly unpredictability, we feel pretty good from the standpoint of an annual growth rate.

Zach Ajzenman – Griffin Securities

Fair enough. Thanks a lot.

Jeffrey Jagid

Thank you.

Operator

Thank you. I show no further questions at this time and would like to turn the conference back to Mr. Jeffrey Jagid for closing remarks.

Jeffrey Jagid

Thank you very much. I appreciate everyone participating on today’s call. I think from my vantage point, the key takeaways for the quarter are that while we continue to meet our short-term objectives, I think most importantly we’re making real progress towards our longer-term strategic goals.

Obviously Avis is on everyone’s mind. That program continues to progress very nicely, right on schedule and there are a number of other very key initiatives that we’re working on.

We look forward to continuing to build on that positive momentum for the remainder of the year going into 2013 and we look forward to continuing to report to you on our progress. So again, I thank you all for participating on today’s call.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.

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