MiX Telematics' (MIXT) CEO Stefan Joselowitz on Q3 2016 Results - Earnings Call Transcript

| About: MiX Telematics (MIXT)

MiX Telematics Ltd (NYSE:NEU)

Q3 2016 Earnings Conference Call

February 04, 2016 08:00 am ET


Megan Pydigadu - Group Chief Financial Officer, Executive Director

Stefan Joselowitz - Chief Executive Officer, Executive Director


Terry Tillman - Raymond James

Bhavan Suri - William Blair

Mike Walkley - Canaccord Genuity

Daniel Greenfield - Oppenheimer

David Gearhart - First Analysis


Good day, and welcome to the MiX Telematics Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Megan Pydigadu, CFO. Please go ahead.

Megan Pydigadu

Good day, and welcome to the MiX Telematics earnings result call for the third quarter of fiscal 2016, which ended on December 31, 2015. Today, we will be discussing the results announced in our press release issued a few hours ago.

I am Megan Pydigadu, Chief Financial Officer, and joining me on the call today is Stefan Joselowitz or as many of you know him, Joss. He is President and Chief Executive Officer of MiX Telematics.

During the call, we will make statements relating to our business that may be considered forward-looking, pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

These statements are subjects to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our results please refer to those contained in our Form 20-F and other filings with the Securities and Exchange Commission available on our website at www.mixtelematics.com under the Investor Relations tab.

Also, during the course of today's call, we will refer to certain non-IFRS financial measures. There is a reconciliation schedule detailing these results currently available in our press release, which is located on our website and filed with the Securities and Exchange Commission.

With that, let me turn the call to Joss.

Stefan Joselowitz

Thanks Megan. I would like to thank you all for joining us to review our third quarter fiscal year 2016 financial results. Megan will take you through the financial details, but let me frame the current operating environment, how we are responding and the results we are achieving.

MiX Telematics continues to post mid-teen subscription revenue growth and high-teens adjusted EBITDA margins in the face of increasingly difficult trading conditions.

Oil prices have plunged to levels not seen in over a decade. Consumer confidence in South Africa has been low all year and was further shaken in December, when the Finance Minister was unexpectedly replaced. This further exacerbated the weakness in the Rand. In fact, the Rand has depreciated against the U.S. dollar by over 30% in the past year.

While we are performing quite well, these headwinds are creating difficult conditions in certain key markets, where there are dampening demand for new fleet management subscription as well as driving a reduction in the fleet sizes of some existing customers, but make no mistake, we have not lost a single energy sector customer. They are renewing on schedule and we have even added major new oil and gas clients, most notably, Halliburton, in the quarter.

In addition to macro headwinds, I would like to point out that a key positive trend is presenting itself as a negative. Accelerating acceptance of bundled contracts, which is a long-term positive for our business has negative short-term impacts on our growth rates, profitability and free cash flow. Let me unpack this a bit.

Typically, we need to install an onboard device to harvest the data we need to provide for our services. It is the customer's choice whether to bear the cost of this device and its installation upfront all up for a higher monthly fee, which has these expenses, bundled in. There are benefits for us in each structure. However, the lifetime value of the customer is significantly larger with bundled contracts.

We secured a long-term annuity with a higher ARPU, and after an initial dip, adjusted EBITDA margins are higher. Therefore, beginning last year, we embarked on an initiative to encourage the uptake of fully bundled contracts and we have had excellent results.

The demand has exceeded our expectations. We are happy to absorb the near-term P&L effects and we believe funding the upfront cost is an excellent uses of cash as the returns are very attractive.

Even with the macro headwinds and the short-term distortion of our financial performance caused partly by the increasing bundled deals, we posted 16% year-over-year subscription revenue growth. We added 9,400 net new subscribers and delivered a 19% adjusted EBITDA margin in the December quarter.

Oil and gas is about 22% of our subscription revenue, so there is no hiding the fact that we feel the pain when there is an oil crisis of this magnitude. Some of our existing customers in this sector, particularly in North American and Middle East are making significant layoffs, which result in fleet contraction and a slowdown in their investments.

We had been prudent as the macroeconomic environment has deteriorated and have been tightening our belts throughout the year. We do recognize that we will have to take further action if the situation continues to decline, but given our market position, our financial strength and our experience navigating choppy waters, we are not deviating from the strategies we have put in place at the start of the fiscal year.

Furthermore, as Megan will review in more detail later, we continue to believe, we can deliver on the revenue guidance we provided last quarter with only about 2.5-point reduction to our adjusted EBITDA margin.

The value of their offering and the strength of their customer relationships is at work here. MiX Telematics is one of the very few fleet management solution providers to have scaled their business globally.

For those of you new to the story, we have surpassed 550,000 subscribers, a rarity in this fragmented business. We service customers in over 120 countries in multiple languages through our 15 regional offices and more than 130 channel partners. What this does expose us to the somewhat more volatile economies, multinational clients increasingly prefer to contract for the single vendor versus a dozen regional players and we are uniquely well-positioned to serve them across the globe.

Penetration of Telemeter Solutions overall remains very low around 10% and market research indicates that not only is this penetration likely to double in the next four to five years, increasing regulation is driving growth in the total addressable market.

Therefore, our overall strategy is unchanged. We are confident that we can perceive [ph] through the cycle sustaining both, growth and profitability and intend to maintaining our focus on the initiatives that have made us a global leader in fleet management and driver safety.

Our first initiative has been to leverage and extend our leadership position in Africa. We have been facing difficult trading conditions in South Africa, for some time, but we have sustained our focus on performance and run a highly successful business here.

Keep in mind our African business has limited exposure to the world classes. Although, we have been clear that we are waiting our investments towards expansion in the Americas, Africa still represents a bit over half of our business.

The independent market research group Berg Insight recently confirmed that we are the largest fleet management solution provided in South Africa. We are growing subscribers and subscription revenue and it remains our most profitable region despite the headwinds re-price.

Our second initiative has been to accelerate our expansion outside of Africa, having a balanced establish for our client and product portfolio is critical to our long-term success and we have made excellent progress strengthening our business in the Americas this year.

Not only we secure the most converted deals, but we stand to be a prompt beneficiary of the increasing regulatory requirements being instituted in the United States and elsewhere for that matter.

For example, the ELD legislation recently adopted in the USA will see millions of additional vehicles needing to be equipped with approved Telematics devices. This is intended to help companies and drivers comply with out of service regulation and do away with manual paper logs.

We have decades of experience in this domain and have several initiatives underway to capitalize on this opportunity. The power of our software platform enables us to continuously adapt and extend our offerings as market demands change.

Another key initiative has been to continue to extend our technology advantages. One of the best examples of our leading edge technology is our low cost asset tracking solution called Beame. Beame is thriving in South Africa and off to start in Brazil we have recently began to put in to place the infrastructure to bring Beame to the Americas.

We have carefully managed our cost throughout our history, but not to the detriment of innovation and we remain committed to sustaining our position as a technology trailblazer even in tough markets.

During the quarter, we released the industry's first fully integrated journey management solution globally. This offering is another example of our ability to meet the requirements of the market and push the technology envelope.

After successful trials demonstrating the power of integrating journey management with our premium fleet management solution, we are now up selling some key global customers to this add-on.

The solution is design for fleet operators seeking an easy and automated way to keep the drivers and passengers safe and secure whilst reducing journey-related business risk.

Additionally, more than 80 customers are already benefiting from our Big Data offering mix Insight Agility, which I first mentioned earlier this year and which we formally launched in November. By giving users the ability to perform data analytics in a simple yet powerful way, customers can leverage the huge amount of data we collect to optimize their business decisions around safety and fleet utilization.

In summary, our will response the difficult trading environment is that we will continue to take an efficient balance approach to growth and profitability and we will keep doing the things we believe we need to do to grow and flourish.

For us the best indicator that we should stay the current course is that while winning the largest and most competitive deals intended today. We are successful in renewing contracts and we are lending new customers.

On the topic of winning it [ph] repeating that during the December quarter, we ended the largest deal in our history [ph] over 15,000, Halliburton North America's vehicles. Importantly, Halliburton opted for a fully bundled contract. We have started the rally after the fleet and expect to see accelerated deployment over the coming quarters.

In an ending customer Halliburton, we see strong evidence that our customers play significant value on our services. To spark the pre some of them are under, they continue to invest in what they consider to be essential services.

Further examples of engagements, we recently secured include a larger order with an existing energy sector customer in Russia to do a technology refresh on 750 vehicles fleet.

We also signed the three-year extension with the large oil and gas producer in Eastern Europe for the 30,000 vehicles fleet. Importantly, we are also making progress in new verticals in the America's, a key goal we have set for ourselves.

In Mexico, we are running at the larger 950 vehicles deployment for an existing global key account in the construction vertical. Our investments in the America's are bearing fruit and we feel well-positioned to execute an opportunities here.

We are making good progress even in difficult conditions. If history is an indicator, we will see a significant reacceleration in our subscription growth when large customers increased their fleet sizes again and with very little expense on our court.

We are continued to be pleased with the performance of our team in these times. We are managing our operating cost navigating the revenue mix shift of our business towards more fully bundled deals, launching innovative solutions unmatched in the industry today and building important new relationships with ecosystem partners.

At this point, let me hand it back to Megan to offer a bit more color on the numbers.

Megan Pydigadu

Thanks, Joss. Let me walk through our third quarter fiscal year 2016 performance across each of our key operating metrics as well as our revenue and revised earnings target.

Bear in mind that our reporting currency is the South African Rand. For convenience, we have translated our results into U.S. dollars both for the 2016 and 2015 periods using the September 31, 2015 spot rates. You can find these conversions in our press release. In addition, please note that our results are presented on an IFRS basis unless otherwise noted.

Moving to our third quarter results, total revenue was R379 million, which is a 7.7% increase from the year ago third quarter. Our third quarter subscription revenue of R394 million was up 16.1% year-over-year. While this was so solid year-over-year growth it was at the low end of our guidance range. We added 9,400 net new subscribers in the quarter and now have 550,765 subscribers to an increase of 11% year-over-year.

Hardware and other revenue was R84 million, which is a 14% decrease from the year ago third quarter. This is the function of the shift toward more bundled deals in our business. We are comfortable with the shift as the long-term annuity is at a higher and over time this will give us both, improved visibility and higher margins.

Subscription revenue is now 77.8% of our total revenue, which is up full 5.6 percentage points from a year ago.

Moving down to P&L, our gross profits in the third quarter was R258 million, representing a gross margin of 68%, up from 65.6% in last year's third quarter. The primary driver of gross margin expansion continues to be a high percentage of revenue from subscriptions.

While we are pleased with the recent increase it remains difficult to predict whether enterprise customers will opt for fully bundled contracts in any given quarter. That said, we continue to expect gross margins to move towards 70% of the mix of revenue continues to shift towards subscription and we gain further efficiencies of scale.

In terms of our operating expenses, our sales and marketing costs were up 22.7%, relative to the third quarter last year. This line item now represents 14.1% of revenue, largely higher than our stated target of between 11% and 12% of revenue. This is the function of our successful investments in the Americas.

We still believe there is an opportunity to build on the current momentum of our business and market opportunity globally. As we are seeing strong returns on our assets, we will from time-to-time make elevated investments in sales and marketing initiatives. However, I want to reiterate that our target is to make sales and marketing investments at around the 11% o 12% of revenue mark.

General and administrative expenses were up 7.4% year-over-year and represent 45% of revenue. We believe that over time as the business become fully scaled this should reduce to below 40%.

Operating profit was R54 million, representing an 8.9% operating margins. This is about even with the operating margins of 8.8% posted in the third quarter last year. To provide investors with additional information regarding our financial results, we disclosed adjusted EBITDA and adjusted EBITDA margin, as well adjusted profit for the period, which are non-IFRS measures, so we have provided a full reconciliation table in our press release.

As a reminder, last quarter we refined our calculation of adjusted EBITDA and the related margin. The impact was negligible, but for consistency stake both, adjusted EBITDA and adjusted earnings [ph] all foreign exchange effects. Third quarter adjusted EBITDA was R71 million, up from R69 million last year. This represented a margin of 18.8%, down from 19.7% posted in the year ago third quarter.

IFRS profits for the period, which includes a large unrealized foreign exchange gain of about R69 million before tax or R58 million, up 81.6% from the year ago quarter.

Profit [ph] for the quarter was R0.08 per fully diluted ordinary share compared with South African R0.04 in the prior quarter. Adjusted profit for the quarter was R16 million, which was down from the R20 million profit we posted a year ago. This was effected by a tax rate of 44% in the current quarter compared to 37% in the year ago quarter.

The higher tax rate was primarily the result of the geographic origin of our profits and losses. Adjusted earnings per diluted ordinary share were R0.02 South African compared to South African R0.03 in the third quarter a year ago.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of R907 million, down from R935 million at the end of last quarter. We generated R27 million in operating cash and invested R67 million in capital expenditures, primarily associated with bearing the upfront cost associated with fully bundled contracts.

This yielded a negative free cash flow of R40 million for the third quarter, compared to positive free cash flow of R29 million for the third quarter of fiscal year 2015. Recall that as our business has shifted to new bundle deals, we incurred cost [ph] cash. Again as bundled deals have a long-term net positive on our business, we have taken a decision to make this capital allocation.

Our global structure continues to provide us with the natural currency hedge. Outside of Southern Africa, we are primarily exposed to U.S. dollars, Euros and British pounds. Our costs are primarily in Rand, but by design the cost of our regional offices are incurred in local currencies.

At the bottom-line, the net effect to us of exchange rate volatility continues to be negligible. Finally, I would like to share our financial targets for the full fiscal year 2016 and the fourth quarter. Given the performance we have sustained, despite that oil crisis, but keeping in mind that the impact that the shift to more bundled business is having on our financial results. We are maintaining our full year total revenues and subscription revenue targets, by reducing our margin expectation a bit.

We are targeting total revenue of R1,440 billon to R1,468 billion which would represent year-over-year growth of 4% to 6%. We are targeting subscription revenue of R1,155 billion to R1,172 billion, which would be year-over-year growth of about 16% to 17%.

As we discussed the shift toward bundling impacts on our near-term profitability, so we are now targeting adjusted EBITDA between R245 million and R260 million, which would results in a decline of 8% to 13% compared to fiscal 2015, but yields in adjusted EBITDA margin are between 17% and 17.7%.

Note that ForEx is excluded from the adjusted EBITDA figures in both periods. This would led to adjusted earnings per diluted ordinary share of R6.9 to R8.4 based on 783 million diluted ordinary shares and a tax rate of between 37% and 41%.

At a ratio of 25 ordinary shares to 1 ADR and using the February 1 spot rate, this would equate to earnings per diluted ADR of U.S. $0.11 to U.S. $0.13. Our intention is to focus primarily on annual targets as this is how our management to focus and we do not wish to close deals on suboptimal returns in order to achieve quarterly objectives. This is most relevant as it relates to the hardware and other revenue line items in our P&L.

The area of revenue where we have the highest level of visibility and predictability is our subscription revenues, which as we discussed is the largest fastest growing and highest margin components of our business. Consequently, we offer quarterly guidance on our subscription revenue earnings.

For the fourth quarter of 2016, we are targeting subscription revenues in the range of R304 million to R321 million, which would represent year-over-year growth of 14% to 21%.

With that, we are ready to take questions, operator?

Question-and-Answer Session


Thank you. [Operator Instructions] We will go first to Terry Tillman with Raymond James.

Terry Tillman

Megan Pydigadu

Hi, Terry.

Stefan Joselowitz

Yes. Hi, Terry. How are you?

Terry Tillman

Good morning or good afternoon or good evening to you guys. I guess, the first question Joss is, you framed it well, 22% of your business is oil and gas and then for where do you use this crisis. Can you give us a little bit more color on the initiatives around the non-oil and gas part of the business in terms of you talked about few deals, but are there any verticals, where you are starting to get some critical mass or you are seeing the pipeline actually ship more to where oil and gas will be lower exposure going forward? Just a little bit more color on those non-oil and gas initiatives. Thank you.

Stefan Joselowitz

Thanks, Terry. I assume your question is probably around Americas and possibly even the USA, so bear in mind that globally, we are successful in a number of different verticals some of which have already had good critical match for us on a global basis, so we continue to pursue all of those opportunities, any opportunity available to us obviously aggressively.

The United States, particularly is a much more specialized market for all players and our beachhead in our position have extreme strength is obviously in oil and gas sector, which despite the situation as I mentioned we are renewing critical customers sometimes at higher ARPU, actually most instances in signing business.

We also recognize that it is critical that we broaden our vertical focus and we are making progress. In a few verticals in fact, but none of which takes the pressure off and unlock you too in the short-term certainly from our exposure to oil and gas, which is a very big slug of our North American business and I guess the same can be said for our Middle East business.

Although we had been non-energy sector customers, their percentage is relatively low to the exposure that we had to the oil and gas and exploration wise.

Terry Tillman

Well, the Halliburton win that is great. Good validation of your strength, and despite of the trends in the industry there, but with 15,000 vehicles, what kind of risk at that is not even 15,000, because you talked earlier Megan touched on it too I think. First, it is tough to find new business in this environment with the headwind, but also there are some employee downsizing, not trying to get to guarantying anything here, but Halliburton is this $15,000 vehicle order, pretty resilient in terms of taking into account the CapEx changes in the fleet downsizing.

Stefan Joselowitz

The short answer is there is no guarantees and we do expect that there will be some contraction still in that fleet, so at one point it was higher than the 15,000, so our deal with the customers hold a fleet and whatever that fleet may be.

It is going to depend like all of our customers in that sector on what the situation looks like going forward. We are planning flexibility into our business, but what we do know is it is going to be huge deal for us even with a bit of contraction at store, it is still a monumental deal from our perspective.

Terry Tillman

Got it. In terms of the innovation, if you guys have touched on shorting management, the Insight agility, it seem like given the challenges in signing new business and even the our fleet are under pressure of the size in up fleets.

What are you doing with these products in terms of how aggressively are you able to focus on going in and selling them in these install bases of smaller routine like this would be a nice opportunity to try to shore up your growth by just selling more into a sticky installed base, so how formula to selling effort there is more opportunistic and how material could these add-on product fee in terms of helping drive growth for maybe improving next year.

Stefan Joselowitz

Yes. Great question, and it does really highlight the obvious opportunity in our business that it is much easier sell to an existing customer than to get a new customer on board, and we recognize that and a lot of these initiatives or operating answers although that can be used to attract new customers. Their primary intention is to drop ARPUs within an existing customer base and I am happy to report that we are seen uptake of all of them.

We have got a bunch of customers now seriously trying out and paying for it, the journey management facility and the beauty about that one is if they take it on board, that can't take it, but can't do it for 5% of their fleet. The whole purpose of the process is to automate the way journey decisions are made, so we are very excited about that one.

Digging a little bit in history, although we had a very slow start to things like mixed vision, that is improved dramatically in the latter half of this year and we have had a number of successful wins with some new customers, but a lot of successful wins with existing customers starting to add mixed vision onto those offerings that currently use from us, so it is definitely going in the right direction and the opportunity must be significant and of course it is our focus area is to revisit existing customers with increasing our value add.

Terry Tillman

My last question and then I will just let others get on board here. Just relates to understanding where it was about 12 months ago. Where it is in the most recent quarter and how you think about it going forward, just generally speaking from a planning standpoint in terms of the mix of new business that is bundled versus not bundled. Just trying to understand where it is actually on that spectrum at this point and should we continued to see that step up or is the majority of the preponderance of the business now bundled. Thank you.

Stefan Joselowitz

Thanks Terry. There is no doubt that we have seen [ph] I guess towards bundled deals. From our planning perspective, we expect this shift to continue going forward. We have not stopped and won't stop offering our customers the choice on who base the cost of that upfront hardware and installation they stay together in the loss.

By design, - to encourage more of an uptake on bundled deals has exceeded our expectation and it will continue and there will be a point in time in the future where the hardware component to their business will become irrelevant. The financial hardware component, there is always hardware of course, but should bundled one, bundled deals, but the financial the way we treat that financial treatment in terms of upfront hardware revenue, I believe, they will get to a point where in the not too distant future and certainly I am not talking about months, but probably the medium-term in years it will become irrelevant and we will have transitioned to pretty much a full service model.


We will take our next question from Bhavan Suri with William Blair.

Bhavan Suri

Hey guys. Hey, Charles. Hey, Megan. Thanks for taking my question.

Megan Pydigadu

Hi Bhavan.

Stefan Joselowitz

Hi, Bhavan.

Bhavan Suri

Just to follow-up on Terry's before I dive into some numbers here for a second. I guess, as you guys look at the business and you look at some of the macro headwinds, you are seeing sort of the CapEx expression some of the core verticals. Obviously, the other verticals are doing well.

Just Joss, how do you think about sort of what the growth rate is and sort of you know given that just the confidence level even in the full year guide sort of maintaining that. Just help us understand pipeline visibility a little bit, so we get a sense of sort of Q4, but more importantly sort of if we look 12 months out, growth rates and things like that, how do you sustain those and how do you feel about those.

Stefan Joselowitz

Bhavan, thanks. From the Q4 guidance, as always we used our best judgment taking into account all the factors that we are aware of in our business, including the current headwinds that we face, including the tailwinds that we have got in to bags and we take all of that into account and we come up with what we believe is reasonable guidance based on our best judgment, so that is how we dealt with Q4 and it is the same as we deal with all of our guidance.

In terms of the year going forward, you are going to have to wait a while before we publish guidance for the year going forward, so obviously we are right in the middle of that exercise at the moment. We are analyzing, again, taking into account all of the factors that we have got for us and against us, focusing on the stuff we can control and the next time we talk to you we will put forward our peer review I guess or a definitive view of our thoughts for the year going forward. The fiscal 2017 year.

Bhavan Suri

Okay. Then just turning to vehicle additions, you sort of had 9,000 sort of adds in the quarter, it seemed a little light to us. Was there churn there or any delayed customer adds? Was that below your expectations?

Stefan Joselowitz

I will answer your second question first. It was below our expectations. Churn is probably in the current situation that we are in probably not the right descriptive width, but the net effect of the same. We are seeing contraction in some of our large premium fleet customers, where we are seeing the fleet sizes coming down. We are not losing the customer. Customer is happy with us as I highlighted and I will repeat again. We renewed every single energy sector customer. We were in a time when you would have thought we were most vulnerable in the midst of this oil crisis, where undoubtedly they all have directed from the boardroom to cut cost to the bone wherever possible. They opted not to terminate our services, but in fact to renew them for extended periods of time.

Typically, 45 years, so that is a very encouraging sign in our business, but what we have seen and it was higher than we had anticipated. We have seen fleet sizes come down, which either took the power out of the new sales we would achieve and that is a situation, where we have been one carry on indefinitely, but it is out of our control. As I said, we have to focus on what we can control and we will continue to do that, but I am never going to be happy with quarterly subscription growth at that level.

Not to say it will never happen again, I am just saying we have got bigger expectations than that for our business.

Bhavan Suri

Got it. Then one quick one for Megan maybe here, so I am just trying to understand, if we take the lower vehicle additions and then we couple with more bundled deals. I am trying to understand why hardware revenue was up and CapEx was also up, because I get the bundling, which means CapEx is up, but then the hardware piece suggests that there was not as much. Just help me reconcile those couple of things.

Megan Pydigadu

Are you looking at quarter or at the guidance, Bhavan?

Bhavan Suri

Just in the quarter, yes. Trying to understand sort of the fact that CapEx was there because of bundled deals and then sort of hardware was also up.

Megan Pydigadu

What happened in Q3 is that we did have a bit of a uptick in terms of our hardware and other revenue, compared to some of the previous quarters, but when you bundled deals, the CapEx, we also have a lead time in stock delivered to the various regions and they will be holding that stock in anticipation of rolling out and that specifically relates to our North American region, where they have spent a lot on CapEx and that all been set aside for the roll out of Halliburton, so that is why you see the uptick in CapEx there as well, so those unsubscribe [ph].

Bhavan Suri

So, it is sort of a leading indicator of subscription revenue?

Megan Pydigadu

Yes. That is generally what we look at in the business. When you saw [ph] the increase the amount in vehicle device - I think it is three times what it was a year ago, so that is a good year indication of the amount of bundled deals coming through the past.

Bhavan Suri

Got it. That is really helpful. Guys, thank you for taking my questions.

Stefan Joselowitz

Thanks, Bhavan. Appreciate it.

Megan Pydigadu

Thanks, Bhavan.


We will go next to Mike Walkley with Canaccord Genuity.

Mike Walkley

Great. Thank you. Megan, just on that last question as it translates from CapEx into the model, how should we think about gross margin trends for the business with more of these bundled deals on a combined basis?

Megan Pydigadu

Mike, we have always said that our objective is to get our gross margins above 70%. With our subscription revenue now trending close to 80% of total revenue, we should start to see that over time bearing in mind that on our subscription revenue, we make in excess of 70% margins and on our hardware revenue, we tend to make just over 50%. The trend should continue upwards from a gross profit margin perspective.

Mike Walkley

Okay. Great. Thanks. Then just on the hardware and other revenue, how should we think about that trend line over time as Joss indicated it is going to be very small over time, but as we look at - is it just going to decline kind of 10% sequentially for a while or how should we think about modeling that line item given the greater mix of bundled deal?

Megan Pydigadu

That is very difficult even for us to tell where that is going to go, because it really is dependent on clients and what they decide to do with it - decide to buy the hardware front in turn to service [ph] or whether they decide to go fully bundled, but I think if you look at the trends over the last two-and-a-half years, you can see that there has been a significant drop-off in terms of our hardware revenue specific this financial years. If that trend is anything to go by and this is some customer that results in terms of hardware revenue. I would expect the trend to continue as it is.

Mike Walkley

Great. Thanks. One last question and I will pass on. Joss, congratulations on exceeding 550,000 subscribers, you had roughly 50,000-plus over calendar 2015. Given some of the headwinds and tailwinds that you talked about, do you think you can add that kind of level in 2016 on a calendar year basis, I guess, Halliburton should be a nice start in the U.S. market, just wondering how you are thinking about that market given some headwinds and tailwinds you talked about?

Stefan Joselowitz

We feel pretty good about our gross sales. In other words, our new sales, our new additions, what we can't control and it is, I won't say a new phenomenon, but it is a phenomenon that have not seen in our premium fleet business for many, many years as those elasticity to the downside that we see from some of their customers, but bear in mind that when the industry turns, we are effectively pregnant with growth, so you will see - we have seen in before stock closes again they have big customers, they hold fleet, whatever the size of that fleet is fitted with our device and with our services they engage with our services on every one of their vehicle, so as much as the fleet is contracted the cycle does turn and they start expanding to meet the demands of their market, we just see this ballooning and growth of subscribers with very little sales effort or expansion.

The downside does come with an upside. Eventually, we just do not when that eventually is, so I did indicate that I was disappointed with the subscriber growth this quarter, so we extrapolate that into a year going forward. As I said, we know what we know and what we know is that the pipeline we have got looks reasonably good. It is just what the impact of this contraction might be to our gross sales and that is what we have no idea. We got to plan by year as we go along.

Mike Walkley

All right. Thank you.

Stefan Joselowitz

Thanks Mike.


[Operator Instructions] We will go next to Brian Schwartz with Oppenheimer.

Daniel Greenfield

This is Daniel Greenfields for Brian Schwartz. Thanks for taking my question.

Stefan Joselowitz

Good morning. Thank you.

Daniel Greenfield

We are all aware of the operating model pressures that exist in the energy vertical today. I know one of your major value proposition is cost savings, so I am wondering is there any view these challenges as an opportunity going forward or are these just a headwind for your future bookings in that vertical. Thanks.

Stefan Joselowitz

In that vertical, I am not saying that cost savings is not important to those customers, and of course it is, and they get that as a natural bond productivity of the services that we provide them, but the big focus for them is operator occupational, workplace safety and they have proved are the many years of use of our services that they enjoy a dramatic reduction in work related injuries and fatalities and that is the big focus and I guess that is why we are viewed as a critical service that even in the midst of this process they are renewing our services and we are gaining new customers, major customers all of the time, so we are short of opportunity in that sector, because we are doing the business and we are growing and becoming strong and a more relevant play within that vertical month-by-month effectively, but what we got control, we are a per subscription vehicle per month model and so we had completely reliant on the size of the fleet.

As those fleets are contracting, we are paying the price for that and of course, when it turns, we are going to see a turbo boost in growth without any asset on the outside. In the meantime, we just got to weather the storm.

Daniel Greenfield

Great. Thanks.


We will go next to David Gearhart with First Analysis.

David Gearhart

Hey Joss. Hey, Megan.

Stefan Joselowitz

Hi, David.

Megan Pydigadu

Hi, David.

David Gearhart

How are you doing? My first question relates to your share repurchases program. I just wondered if you can give us an update in terms of where that stands and how much is remaining on that.

If you can give us an update on your plans for cash going forward whether it is in regards to dividends, share repurchases and M&A and if you have seen the change in the environment for some of the properties that you are looking at if your strategy to acquire has changed?

Stefan Joselowitz

Yes. Sure. We completed the share repurchases program the 40 million shares that we were authorized to stick when then during the quarter, so that is now behind us and we were pleased with that. The phase or stage of the here and now, where we were in planning phase for fiscal 2017 and beyond and beyond tightening up all of those numbers getting our model firmed up and the Board will reevaluate capital allocation decisions once we have got a real clear picture of what our plans are for this coming fiscal year and beyond.

In the meantime, our thinking has not significantly changed from where we are. We know that a portion of about cases is going to be required that to fund bundle deals and that is a great use of our cash and we are very happy to do that. The long-term margin accretion is significant for us and our shareholders and that is a good move and we will once we get through the short-term year-on-year comparative negative that get presented on comparing our results and then initial dip in adjusted EBITDA margin related to those bundle deals, it become fantastic, so we are excited about that.

David Gearhart

Okay. You have not talked too much about the consumer side of your business in a while. I know you have the contraction with some of your existing customers in terms of their fleet sizes, but can you kind of talk a little about what is going with the consumers' side of the business? Are you are seeing an elevated level of churn just given the environment?

Just wondering if some of the pressure in terms of net additions in the quarter has a little bit related to the consumers side and just wanted a little color on that end of the business?

Stefan Joselowitz

No problem. In fact, the impact was not on the consumer side. It was really around the contraction of premium customers, primarily in the energy sectors. Our consumer business continues to perform well. We are gaining market shares. We are growing subscribers. I did allude to it in the earnings call earlier on. We are growing subscription revenue.

Yes, of course, there is a dip in consumer confidence. We cleaned and provide for increased churn, driven primarily by affordability issues, so that is the cycle that we weathered many times over the last two decades in our South African market, but by and large pleased with the performance of that business and that is why I remain excited on globalizing that opportunity into other markets.

It diversifies our revenue streams, its leverage go off the same technology, it adds value to our premium fleet business. We see customers transitioning from one typically in an upward direction to the other, and it is a model that is extremely attractive and we intend to get into other parts of the world.

David Gearhart

My last question relates to Beame. I think you mentioned that you have the infrastructure in the America's and new relationship with the distributor. I just wondered if you could give us some color on that relationship and the time table of when you think Beame in the America's could be a material contributor to your financials?

Stefan Joselowitz

Yes. Sure. I will give a lot more color at the next earnings call. We are excited about our relationship that we have put in place. We have started providing some infrastructure, so it is moving in the right direction.

I want to get a little bit more maturity in the relationship behind us and that is why we are going to wait until the next quarter. From a revenue perspective, we do need to roll out infrastructure that Beame requires a mobile network infrastructure and we started that process, but it is not an overnight, so we are not anticipating huge subscription revenue add in the fiscal 2017 financial year.

We are anticipating some, but it won't move the needle in this coming financial year. It is the magic of Beame, because we are probably in the America's start showing in the next fiscal year.

David Gearhart

Okay. That is it for me. Thank you very much.

David Gearhart

I appreciate it. Thank you, David.


It appears there are no further questions at this time. Mr. Joselowitz, I would like to turn the conference back to you for any additional or closing remarks.

David Gearhart

Well, thank you all for joining us today. We appreciate your attention and your questions. I will reiterate that we remain confident that we have what it takes to capitalize in the growing demand for fleet and mobile asset management solutions worldwide.

We look forward to seeing some of you at the Raymond James 37th Annual Institution Investor Conference in Orlando in March. Have a great day. Thank you.


This does conclude today's conference. We thank you for your participation.

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