Good day, ladies and gentlemen. And welcome to the I.D. Systems Q3 2012 Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)
I would now like to turn the conference over to your host today, Jeffery Jagid, Chairman and CEO. Please begin.
Thank you. And thank you for joining us today. I’m Jeffrey Jagid, the Chairman and CEO of I.D. Systems. Joining me are our CFO, Ned Mavrommatis; Darryl Miller, our Chief Operating Officer; and Ken Ehrman, the President of the company.
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 third quarter of 2012 met our expectations in every respect. We achieved our highest quarterly revenue to date, 15.5 million and announced our 11th consecutive quarter of year-over-year revenue growth. Revenue was up 37% from the third quarter last year.
At the same time we continue to manage costs, actually reducing SG&A expenses by 4% compared to Q3 2011 which supports our conviction that we can sustain solid short term growth with essentially the same overhead costs as we have today.
Our growth margin grew to 56% in the third quarter compared to 52% in the same period last year reflecting a healthy mix of product and service revenue. Recurring revenue was $4.3 million in the quarter. With our strong revenue growth, cost controls and solid margins, we achieved record net income of $2.2 million in Q3 or $0.18 per share. On a non-GAAP basis, net income more than tripled from the third quarter last year to $3 million or $0.25 per share.
Our third quarter revenue growth was driven in large part by the successful completion of the first major phase of our rental fleet management deployment for Avis Budget Group. With about 30,000 devices now out in the field, we expect our wireless rental vehicle management technology to generate a steady revenue stream for us over the new five years as (inaudible) will expand upon shortly. The success of this major deployment phase also allows us to shift our focus, to capitalizing on additional growth opportunities within Avis Budget’s global rental fleet operations which Ken will review.
Our exclusivity with Avis Budget expires in July of 2013 but would be automatically extended if our system rollout is expanded to Avis’ full vehicle fleet. Our asset intelligence subsidiary which produces the industry leading VeriWise brand of transportation asset management solutions also posted strong results in Q3 as Darryl will detail in a moment. Our deferred revenue grew to more than $10 million at the end of the third quarter driven primarily by VeriWise system sales adding to our solid base of predictable recurring revenue that we will recognize over the next five years.
Our results for the first nine months of 2012 mirrored the strength of the third quarter. We achieved record of $34 million, stable cost and gross margins and non-GAAP net income of $1 million or $0.08 per share. With nine month revenue of $34 million, 24% higher than the same period last year, we remain on pace to achieve a second consecutive year of record annual revenue exceeding last year’s record of just under $40 million. We continue to make progress towards our long term strategic objectives. We remain focused on expanding sales of our vehicle and transportation asset management products with core customers, building a strong recurring revenue base and diversifying revenue sources through a variety of wireless applications, all while sustaining healthy gross margins.
Needless to say we are gratified by the continued success of our gross strategy and pleased to have achieved so many milestones for our shareholders this quarter. We look forward to reporting our further progress through the end of the year and into 2013. Thank you for your time today. I look forward to your questions later on the call.
Now let me turn the call over to our CFO, Ned Mavrommatis to detail our financial results.
Thank you Jeff and hello to everyone on the call. As Jeff noted, revenue for the third quarter ended September 30th, 2012 increased 37% to a record $15.5 million from $11.3 million in the third quarter of 2011. For the nine months period, revenue was up 24% to $34 million compared to $27.5 million for the same period a year ago. Our strong revenue growth in the quarter was attributable in large part to the expansion of our business with Avis Budget Group. As Jeff noted, our rental fleet management system deployment increased to approximately 30,000 units in Q3 from about 10,000 units at the start of the quarter. Recurring revenue for the quarter and nine months period was $4.3 million and $12.8 million respectively representing 28% and 38% of total revenue in the respective periods. We are confident that our recurring revenue stream will continue to grow primarily for two reasons.
Jeff mentioned the strong performance over asset intelligent business which Darryl will also discuss. Each one of the asset intelligence units comes with a long term communication contract which should have a positive effect on our recurring service going forward. In addition, our deferred revenue primarily from our VeriWise transportation management system has grown more than 36% since the end of 2011 to $10.1 million as of September 30, 2012.
Further, adding to our base of predictable recurring revenue is the service component of our Avis business. The 30,000 units currently deployed would generate recurring revenue of approximately $270,000 per quarter over the next five years. Our gross margin in the third quarter and first nine months of 2012 were 55.5% and 53.3% respectively compared to 52.5% and 53% in the corresponding period last year. These healthy consistent gross margins reflect the continued marketability of our systems at a favorable price, a healthy mix of product, of high margin recurring service revenue and our ongoing focus on cost management.
During the quarter we also saw the leverage in the model. We were able to keep expenses flat and a result of our revenue growth, net income was $2.2 million in the third quarter or $0.18 per basic and diluted share compared to a net loss of $214,000 of $0.02 per basic and diluted share the same period a year ago. Excluding stock based compensation and depreciation amortization, non-GAAP net income increased 349% in Q3 to a record $3 million or $0.25 per basic and diluted share from a non-gov net income of 700,000 or $0.06 per basic and diluted share in the third quarter a year ago.
Our balance sheet remains strong, as of September 30, we have cash and cash equivalent of approximately $18.9 million which equates to a $1.56 per share outstanding and no debt. Thank you for your time today. I look forward to continuing reporting our financial progress to you in the future. With that, I will turn the call over to Darryl Miller, our COO to review the recent highlights of our asset intelligence transportation.
Thanks Ned and thanks to everyone for joining us on the call today. Asset intelligence sales remain strong. As the third quarter of 2012 was the fifth consecutive quarter in which unit sales of our VeriWise brand trailer and container management systems exceeded our target volumes.
Third quarter sales were up more than 80% sequentially from the second quarter of 2021. For the first nine months of the year, VeriWise unit sales increased more than 47% compared to the same period last year. due primarily to this increase, the company’s deferred revenue has grown by more than $2.7 million or 36% since the end of 2011 to 10.1 million at the end Q3 as Ned noted. This recurring revenue will be recognized over the next five years.
Perhaps our most important win in Q3 was National Retail Systems or NRS which is global logistics services company specializing in factory to retail store supply chain management. This is a world class organization. It has been named the top 100 supply chain partner for exemplary customer service and supply chain efficiency and is one of only two US transportation service providers certified for full compliance with the nation’s new tracking security requirements program.
NRS executed a contract with us to deploy our VeriWise Track and Trace system on a large fleet of trailers. The contract is valued at 1.7 million over five years. NRS has equipped a fortune of its trailer fleet and VeriWise solutions for more than 10 years. Management chose us for this rollout based on our past performance because they feel VeriWise Trace and Trace is the most reliable, cost effective; easy deploy system available for real time trailer tracking invisibility. NRS projects the 10 to 15% improvement in trailer fleet utilization through our system as well as enhanced stability to deter cargo effect which is a multi-billion dollar problem worldwide.
Other key wins in the third quarter included US trailer holdings and (inaudible) both proudly held transportation companies with large fleets of diverse types of trailers. US trailer holdings which has been freight transportation; a storage leader for 25 years recently acquired a significant number of trailers from GE Trailer Fleet services which is a long time asset intelligence customer. Based on the historical performance of the VeriWise previously installed on GE's trailer fleet, US Trailer Holdings is extending its contract on our installed base of equipment and exploring the expansion of our system to additional assets.
(Inaudible) is a current customer that’s expanding our VeriWise refrigerated trailer monitoring and control solution to a fleet of newly purchased reapers. (Inaudible) is a family owned business with more than 40 years of success in the transportation industry that prides itself on high level efficiency and customer service which our technology helps them achieve.
The asset intelligence division of I.D. Systems remains the top three providers of wireless transportation asset management systems. Our VeriWise product family is industry’s broadest with solutions ranging from the basic, quick install, Track and Trace system to the world’s most technology advanced reaper and intermodal container management solutions. Our broad VeriWise product line translates into a significant competitive advantage as we consistently win a majority of opportunities when competing against other solution providers. We are therefore confident in our position for continued success, not only by increasing our market share with new customer wins but also by retaining our core customers in the transportation asset management market like C.H. Robinson, Swift, Knight Transportation and Wal-Mart.
Thank you for your attention today. I look forward to bringing you further updates on our operations and transportation asset management business in the future. With that, I’d like to turn the call over to Ken Ehrman, our President to review additional I.D. Systems’ highlights for the third quarter of 2012.
Thank you Darryl and hello to everyone on the call. I am glad you could join us today. Clearly the most important development of the third quarter of 2012 was as we expected the fulfillment of all outstanding delivery orders to Avis Budget Group under SOW1 of our master agreement. As noted earlier, the 20,000 rental fleet management units we shipped in Q3, increases the total deployed to 30,000 across the North East United States and Canada.
The center piece of our Avis program is the development of a patent pending virtual car rental technology called Avis On Location. Built on our wireless intelligent platform, our in-vehicle computers and our software integrated with Avis’ backend corporate systems, Avis On Location does everything from remotely unlocking car doors at the start of a rental to reporting vehicle usage at the end of a rental. Our system enables renters to manage their own experience through a smartphone accessible web interface. Among many advantages that has over other virtual rental solutions like ZipCar, is that you do not need a subscription to access our service or a special car to access the vehicles which results in an easier, more convenient transaction. Installation also takes minutes and does not require a modification at all to the vehicles. Avis On Location has already been deployed at the campuses of Microsoft, United Technologies, Research in Motion and others.
ON the industrial vehicle management side of the business, we saw repeat orders in the third quarter of 2012 from many core customers including Caterpillar, Deere, Ford, Kellogg’s, MillerCoors, Nestlé, Procter & Gamble, Toyota, Walgreens and Wal-Mart. Notable new customers have indicated for our business in Q3 include Detroit Diesel, the engine manufacturing subsidiary of global automotive leader Daimler AG, which deployed our industry leading power fleet vehicle management system as well as one of the world’s largest medical and consumer product companies which ordered a simplified remotely hosted tower box system. Our channel partners in the industry vehicle market primarily forklift dealers and OEMs also continue to contribute to our business in the third quarter. End users initiating our expanding deployments of our systems through our channel partners included two Fortune 500 retailers, two national food and beverage retail chains, a prominent women's fashion retailer and one of the world’s largest food producers.
So we are continuing our efforts to expand and diversify our revenue sources, one of the pillars of our growth strategy and we have many engagements with large enterprise customers that represent significant growth opportunities in the wireless industrial vehicle markets
Just to reiterate I.D. Systems position in this space and our prospects for growth, we hauled a leading market share winning a majority of the opportunities we encounter against competitors. We estimate there are between 4 and 5 million industrial trucks in North America and Europe plus substantial opportunities in Asia, Africa and South America. But only a small portion of industrial trucks in the world are equipped with any sort of management system. The maturation of this market is therefore essential to our growth strategy. As wireless vehicle management systems are increasingly adopted as the best practice for material handling safety, fleet maintenance and productivity optimization, we expect to capitalize on our pre-eminent market position to drive sustained growth in this business segment.
On a final note, I want to highlight our launch of a new software product in the third quarter called I.D. Systems Analytics. This is a data driven cloud based software offering that provides a single integrated view of industrial fleet activity across multiple locations generating enterprise wide benchmarks, peer industry comparisons and deeper insights into material handling operations.
As one of the world’s leading providers of wireless vehicle management systems, we have accumulated a vast database of historical asset activity from more than 50,000 vehicles over a long period of time across diverse facility types and industries. This unique depth and breadth of data enables analytics users to compare both industry and facility type benchmarks to the performance of their own sites and their enterprise. We are confident that this new value added offering will soon generate a stream of revenue from existing enterprise customers as well as help us with new customers with multi-site deployment.
On that note, let me turn the call back to Jeff so he can open the call for questions.
Thank you Ken. That concludes our prepared remarks. We are now pleased to open the Q&A segment of the call. Thanks again for participating today and I look forward to your questions.
(Operator Instructions). Our first question comes from Morris Ajzenman with Griffin Securities. Please go ahead with your question.
Morris Ajzenman – Griffin Securities
On the service revenues, based on the installment of 30,000 units saved as budget, should we expect to see service revenues stop picking up on a quarterly basis year-over-year. it’s been kind of I guess stuck in flattish trend for a while a year. how should we look at that going forward, starting with the fourth quarter the service revenues?
We should definitely start seeing service revenue going up. Avis is one of the reasons now with the 30,000 units currently deployed. They are all going to start generating service revenue in Q4. In addition, as we mentioned in our prepared remarks, our asset intelligence business units sold has been very strong and as we deliver those units, as I mentioned before, each and every one of those units has a long term communication contract associated with it. So that in addition with Avis, as a combination of those two reasons, should allow us to see a pickup in service revenue going forward.
Morris Ajzenman – Griffin Securities
Will service revenues increase in a single digit basis or will it increase going towards double digit rates as (inaudible) quarters?
Well it’s going to be a steady increase. The Avis obviously, obviously we're going to see the immediate impact and as we start delivering the asset intelligence units, we would see an impact in the service revenue as we turn them on. So as time goes by the growth rate will become even higher.
Morris Ajzenman – Griffin Securities
Okay, switching gears, you didn’t say too much about VMS in this quarter. Any color you can give us on that?
Well I think I covered a lot of it in the script which is that we are continuing to receive orders from our current customers as well as continuing to add new clients through both direct selling as well as our third parties.
Morris Ajzenman – Griffin Securities
And normally you give a breakout of AI and VMS. Do you have that available?
Sure. If you look at the revenue, 59.5 million, 4.4 million came from asset intelligence and 11.1 million came from the core business which includes the VMS and rental car. If you’re looking at only VMS, it was approximately 4 million in revenue in the quarter from vehicle management.
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