MiX Telematics Limited (MIXT) CEO Stefan Joselowitz on Q2 2019 Results - Earnings Call Transcript

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About: MiX Telematics Limited (MIXT)
by: SA Transcripts

MiX Telematics Limited (NYSE:MIXT) Q2 2019 Results Earnings Conference Call November 1, 2018 8:00 AM ET

Executives

Paul Dell - Interim CFO

Stefan Joselowitz - President and CEO

Analysts

Mike Walkley - Canaccord Genuity

Matt Pfau - William Blair

Brian Peterson - Raymond James

Brian Schwartz - Oppenheimer

David Gearhart - First Analysis

Paul Dell

Good day, and welcome to MiX Telematics’ Earnings Results Call for the Second Quarter of Fiscal Year 2019, which ended on September 30, 2018. Today, we will be discussing the results announced in our press release issued a few hours ago.

I’m Paul Dell, Interim Chief Financial Officer, and joining me on the call today is Stefan Joselowitz or as many of you know him, Joss. He’s President and Chief Executive Officer of MiX Telematics.

During the call, we will also 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 subject 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. We will also be referring 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. Finally, we are discussing our subscription in total revenue growth, will be referring to constant currency growth rates.

All U.S. dollars amounts referred to on the call have contemplated at an average exchange rate of R14, $0.14 to the U.S. dollars, which was the rand-dollar exchange rate reported by rand.com as of September 30, 2018. With that, let me turn the call over to Joss.

Stefan Joselowitz

Thanks, Paul. I would like to thank you all for joining the call today. MiX reported another very strong quarter with Q2 exceeding expectations across all key operating metrics. In particular, I’m very pleased with our over 18% year-over-year subscription revenue growth and adjusted EBITDA margins exceeding 30%. Our EBITDA margin expanded more than 570 basis points compared to the prior year’s comparative. We are confident the strength of our diversified portfolio of subscribers will enable us to maintain our market momentum for the balance of fiscal 2019 and beyond. Our second quarter performance is further validation of MiX with attractive combination of strong growth and a highly scalable business model, which is leading to solid cash generation.

During the quarter, we generated R93 million in free cash flow after investing R62 million in in-vehicle devices for bundled contracts. Due to the ongoing layering of high ARPU bundled contracts combined with expansion in our adjusted EBITDA margin, we are confident in our ability to generate significant free cash flow in future quarters even as we continue to invest in bundled deals.

Turning to summary of our second quarter and first half fiscal 2019 performance. Our subscription revenue of R420 million or $29.7 million was above our guidance and grew over 18% year-on-year. Our strong performance was driven by the ongoing demand from our higher ARPU premium fleet customers globally across all multiple verticals highlighted by 62% subscription revenue growth in North America in the first half of fiscal 2019.

We added more than 22,000 net new subscribers during the quarter, increasing our subscriber base to more than 714,000. This is a year-over-year increase of 12%. Given the strong pipeline of committed orders and sales opportunities globally, we remain confident in our ability to maintain the momentum.

For the first half of the year, we are extremely pleased that all of our regions, grew subscription revenue by double digits, while expanding EBITDA margins. Our Africa, Americas and Brazil operations performed particularly well. Our Africa team executed strongly despite of challenging economy, with subscription revenue of over 11% year-over-year and adjusted EBITDA margins of 45.4% for the first half of fiscal 2019. As our largest business unit, Africa continues to demonstrate the economies of scale that we believe are achievable in all our operations, as they grow towards critical mass. Our Americas team continues to outperform, evidenced by the subscription revenue growth of 62%. And more over, bundled deals drove adjusted EBITDA to 49.6% for the first half of fiscal 2019, almost doubled from the prior year. Our Americas business is now 17% of subscription revenues and continues to benefit from strength in the energy market as well as early impact from the investments we have made in the region to diversify into additional verticals.

We continue to invest in both, products and sales to capitalize in the tremendous opportunity we see in this region. We will be hosting an Investor Day in New York City on December 6, and look forward to sharing some of the details about these investments at that event. Result continues to outperform in a very challenging social economic environment, subscription revenues increased 49% year-over-year, as adjusted EBITDA margins grew to 36.8% for the first half of fiscal 2019, up from 34.4% in the prior year. During the quarter, we secured some notable wins, including signing new customers, existing contract extensions and fleet expansions. We secured a contract to supply our premium solution to a major global fast-moving consumer goods company in North America to help increase operational efficiency and reduce excellence by improving driver behavior.

A solution will be implemented across more than 1500 vehicles, including medium and light duty trucks used for transporting goods as well as passenger cars used by its sales force. Given the size and global footprint of this customer, we believe that potentially exist to win much more business with this large multinational, possibly multiples of the opening order. Our partner in Algeria, ATS, will be providing Sonatrach with a fleet management solution to address their safety, efficiency and compliance needs for a 1,000 vehicles. A French contract has been signed, which could also see this contract multiplying tenfold over the coming years. In South Africa, we signed a three-year contract extension with our largest premium fleet customer, who depends on our solution for the efficient management of their fleet operations nationally.

In Latin America, we continue to grab presence in bus and coach and transportation with new customers acquired in both of these verticals. And lastly, back in the United States, we’ve started a 750 vehicle rollout with a launch-diversified oilfield services company, who is implementing our premium fleet management solution across its entire fleet. This company upgraded from a plug-and-play system in order to take advantage of MiX’s advanced VOD features, along with the rest of the benefits the MiX solutions has to offer.

From an industry perspective, the depth and breadth of MiX’s product offering continues to be one of our key competitive differentiators. We continually leverage the power of our premium fleet base and broad product portfolio to generate diversified revenue streams.

Customers are able to subscribe to a range of software applications on top of our core solution, such as, MiX Vision, Journey Management and Hours Of Service, which can each add between $10 and $20 per vehicle per month. This provides significant additional value for customers, while driving ARPU growth and enhance customer retention for MiX. This has been a core element of our strategy and it’s proven to be extremely effective.

The results has been constant ARPU improvement over the past decade, driven by a combination of our ability to sell a range of solutions on top of our core application, as well as our focus on branding deals to our premium fleet customers.

Over the past year alone, our ARPU has improved by approximately 8% in constant currency terms. As a reminder, we expect bundled deals will deliver significantly more cash of the average customer lifetime and contribute around $1,000 more compared to an unbundled deal.

Over 80% of our new sales are now being concluded on a bundled deal basis, and looking at our premium fleet portfolio, approximately 30% are now on bundled contracts versus around 5%, five years ago. We have made great strides in growing our premium fleet business and increasing ARPU, but believe, we have plenty of runway to grow this further, as bundled contracts are renewed and more customers add additional fleet services.

Paul will provide more detail in a minute, but we are raising our fiscal 2019 total and subscription revenue guidance given our strong performance during the first half of the year as well as our pipeline that sell opportunities and firm orders. In addition, we are increasing our adjusted EBITDA margin guidance to 28.8% of the midpoint, up from our previous guidance of 28.5%. Our increased margin outlook, which reflects 300 basis point improvement year-over-year in fiscal 2019, demonstrates inherit scalability of our business model.

Our margins in the second half of fiscal 2019 will continue to show year-over-year growth, even as we absorb an incremental R20 million of new investments in the business, primarily in our Americas sales organization. In recent months, we have begun expanding this team and anticipate that the sales force will more than doubled by the end of calendar year. This expansion will enable us to focus on the sizable opportunities for growth in this region outside of the energy vertical.

We have successfully demonstrated that we can generate very high margins in the Americas. And believe, reinvesting some of that margin into the business to capitalize our new growth opportunities, is a high ROI use of cash that will generate strong return for shareholders. While I’m pleased to have achieved our previous long-term adjusted EBITDA margin target of 30%, we believe we still have plenty of upside from here. We intend to provide an update to our long-term adjusted EBITDA margin target at our upcoming Investor Day.

I also want to draw your attention to a new incentive plan approved by the Board of Directors, which authorized a supplemental share award under the MiX Telematics Limited long-term incentive plan to certain company employees. This grant is 100% performance-based, and only based on the achievement of June targets for accumulative subscription revenue and adjusted EBITDA in the fiscal 2019 and 2020 years.

The Board believes this incentive provides an additional mechanism to align company leadership with the interest of shareholders. Under this program the Board has designated 8 million ordinary shares or the equivalent of 320,000 American depository shares to be awarded to eligible employees, if the company achieves both of the following constant currency targets at March 31, 2020. Firstly, accumulative subscription revenue for fiscal 2019 and fiscal 2020 of R3.6 billion and accumulative adjusted EBITDA for fiscal 2019 and fiscal 2020 of R1.3 billion. Half of the supplemental equity grant has been now, and the remaining half will be awarded at the beginning of fiscal 2020, if the Board of Directors believe that company remains reasonably on track to meet divesting targets listed above.

Furthermore, these performance shares will not vest unless both targets are fully achieved in the specified time frame. To be clear, these incentive plan targets are well above our current financial forecast and by no means easily achievable. The incentive targets are also well in excess of the current and implied guidance we have provided to investors. This grant should be viewed by investors as a stretch target, that the board and management believes is potentially achievable, if market trends remain favorable and the company executes at an extremely high level. As I mentioned earlier, we were very pleased with our cash generation during the quarter, having generated positive free cash of R93 million or $6.6 million, even after investing R62 million or $4.4 million in in-vehicle devices.

We anticipate that our scaling profitability will drive improvements in cash flow on an annual basis. I would like to reiterate that we are laser focused on utilizing our free cash flow to maximize intrinsic value per share. Through this end, subsequent to the end of the quarter under review, we repurchased the equivalent of approximately 366,000 American depository shares for $5.2 million under our general share repurchase program. We continue to actively evaluate possible acquisition opportunities, but believe buying back our own stock at current levels is the most effective way to generate shareholder value through our strong cash flow.

So in summary, our strong second quarter results are further evidenced that our strategy is working and we are seeing margin accretion, as we derive benefits of scale from a growing subscription revenue base. MiX remains well positioned to maintain the momentum for second half of fiscal 2019 and beyond, given the strong and growing pipeline of opportunities worldwide.

With that, let me hand it back over to Paul to run through the details on the quarter.

Paul Dell

Thanks, Joss. I will now review over second quarter fiscal year 2019 performance. And recall that our reporting currency is the South African rand. For convenience, we have translated our results into US dollars both, for the 2019 and 2018 periods, using a September 30, 2018 spot rate. You can find these conversions in our press release. In addition, please note that our results are presented on an average basis, unless, otherwise noted. In the second quarter, total revenue came in at R497 million. Of this total, subscription revenues were R420 million, up over 18% on a constant-currency basis and above our guidance range. This strong performance was driven by the ongoing positive traction from our board subscriber portfolio, including our premium fleet customers across all geographies and vertical markets. We added 23,100 subscribers in the quarter and ended with over 714,000 subscribers, an increase of 11.5% year-over-year. Hardware and other revenue was R77 million, an increase of 23.7% year-over-year. The large increase in the quarter was due mainly to strong orders in our European, Middle East and Australian Asian businesses. Overtime, we’ve continued to expect ongoing shift towards bundled deals to increase our subscription revenue as a percentage of total revenue, which will provide us both, improved visibility and higher margins. That said, if the customer wants to earn the hard way, we will continue to support our customers in whatever purchasing decision they make.

Our gross profit margin in the second quarter was 67.8%, up 230 basis points from last year. As a reminder, gross profit includes depreciation charges related in-vehicle devices and high-value peripherals used for certain of our bundled fleet contracts. These contracts generate higher offerings and as regards to contract renewal cycles [Indiscernible] to drive an increase in gross profit margins, which we expect to train towards 70% in the longer-term.

Operating expenses were 50% of total revenue compared to 55% of revenue in the second quarter last year, which highlights our ongoing commitment to cost controls and scales in the business. Recall that our general and administration cost, include research and development cost not capitalized. For those of you interested to see our historical capitalization and development cost expense, we have provided a table in our earnings press release.

To provide investors with additional information regarding our financial results, we disclosed adjusted EBITDA and adjusted EBITDA margin as well as adjusted earnings for the period, which are non-operate measures. So we have provided full reconciliation tables in our press release. Second quarter adjusted EBITDA increased 48% to R153 million or 30.8% of revenue compared to R103 million or 25.1% of revenue last year. This represented a 570 basis points improvement in the adjusted EBITDA margin. The continued improvements in our adjusted EBITDA margin highlights our ability to grow margins year-over-year, as it scaled the business globally by successfully leveraging a return on our historical investments, while remaining focused on cost management throughout the business.

Adjusted earnings for the quarter was R61 million or R0.10 per diluted ordinary share, which was up from R31 million or R0.05 per share we posted a year ago. From a cash flow perspective, we generated R179 million in net cash from operating activities and invested R86 million in capital expenditures, including investments of approximately R62 million in vehicle devices. This led to a positive free cash flow of R93 million for the second quarter compared with free cash flow of R4 million during the same period last year. As Joss mentioned, we are very pleased with our ability to generate cash given the ongoing investments in in-vehicle devices driven by the demand for our bundled offering.

Now turning to our financial outlook. Due to our strong first half results, as one of our expectation for the management subscription revenue growth to continue. We are increasing our expectations for fiscal 2019. At the midpoint of our third revenue guidance, we expect fiscal 2019 revenue of R1,947,000,000 which would represent constant currency growth of 11.85%, an increase from our previous guidance for constant currency growth of 10%. At the midpoint, we expect subscription revenue to be R1,689,000,000 which represents constant currency year-on-year growth of 15.75%, an increase from our previous guidance for constant currency growth of 14.25%.

We remain confident in our ability to achieve this, given the first half performance as well as strong topline of firm orders and sales opportunities. At the midpoint of our guidance range, we are now targeting adjusted EBITDA of R560 million, which represents an adjusted EBITDA margin of 28.8%. Adjusted EBITDA margin guidance at the midpoint represents an increase of 30 basis points from our previous guidance of 28.5%, and is up 300 basis points compared to last year.

Our increased margin guidance demonstrates our ability to continue expanding margins year-over-year, while investing in the business to drive future growth. As Joss mentioned, we will be updating our long-term adjusted EBITDA target at our Investor Day in December.

With regards to adjusted diluted earnings per share for fiscal 2019, we are increasing our expectation to R36.5 from our previous guidance of R32.2 at the midpoint of the guidance range. Our new guidance was based on R583 million diluted ordinary shares and an effective tax rate of between 28% to 31%. Please note that the costing impact from the long-term equity performance grant will be excluded from our adjusted EBITDA and adjusted diluted earnings per share.

As I’ve previously discussed, our intention is to focus on annual targets, as this is how our management is focused, and we do not wish to close deals on suboptimal terms in order to achieve quarterly objectives. This is most relevant, as this relates to the hardware and other revenue line items in our profit and loss. The area of revenue, where we’re at the highest level of visibility and predictability is our subscription revenue, which, as we have discussed, is the largest, fastest growing and highest margin component of our business.

For the third quarter of 2019, we are targeting subscription revenues in the range of R429 million to R434 million, which would represent year-over-year growth of 13.3% to 14.6% on a constant-currency basis.

In summary, MiX reported another quarter, as we continue to benefit from our current market momentum and our margin accretion strategy. As a result, the company remains well positioned to maintain the momentum for the second half of fiscal 2019 and beyond. I will hand it back over to Joss for some closing remarks.

Stefan Joselowitz

In closing, MiX is executing strategy of achieving double-digit subscription revenue growth in parallel with strong margin accretion, as evidenced by the second quarter performance of over 18% subscription revenue growth on a constant currency basis. In total profitability, this is our ninth consecutive quarter of year-on-year adjusted EBITDA margin improvements. We exceeded 30% in our latest quarter. A new high, since listing on the New York Stock Exchange in 2013. I would like to make one further point. In regards to long-term incentive plan, the board believes it appropriately incentivizes management to focus on delivering at balance of continued strong subscription revenue growth, while at the same time, generating additional margin expansion.

These targets were set at budget rate for the year at R13.80 to the U.S. dollar. Clearly, while we’ve done with every drape going forward will end up, the program is designed to incentivize true performance on a constant currency basis. In other words, if the average rate ends up with a rand weaker than R13.80 to the dollar, the acquired targets will be raised appropriately and vice versa. With that, we will turn the call over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is coming from Mike Walkley from Canaccord Genuity. Your line is now live.

Mike Walkley

Just wanted to start with the Americas region, you’ve very strong growth year-over-year for the first half of fiscal ‘19, and it sounds like an area you’re investing sales. Can you update us a better environment, you see Joss? And why you think it’s a great time to invest in sales team to maybe take share in -- maybe, which competitor you might see, if you’re willing to go there? Or just overall, what verticals do you think you’re poised to gain share in the U.S. market or the Americas market?

Stefan Joselowitz

Thank you. It’s certainly no secret that we viewed this geography as a major growth point for us going forward, and we’re certainly putting in the appropriate effort. And of course, we’re still an immature business, let’s call it that from a Americas perspective, it’s a huge geography, and we’re talking about both, North and South America. The opportunities are significant. Having said that, it’s an extremely competitive environment. And we’re certainly used to after over two decades of experience operating effectively in competitive environment. So we’re pleased with the performance of the region. We are seeing progress being made in terms of diversifying ourselves out of our dependency on the energy sector.

Having said that, we have a long way to go. But there is no doubt that there is a number of opportunities, that we feel could accelerate this objective and we’ll be investing in them. We’ll certainly get more specific market at the Analyst and Investor Day in New York, in December. So I don’t want to give up all of our MO before then, in terms of the update we want to give. But I’ve certainly alluded in this call that sales and marketing investments are certainly one of the areas that we’re putting a lot of investment in [indiscernible] stock it in the last few months, and will continue, particularly, into the second half of this year.

Mike Walkley

Just building off that, was some of the U.S. carriers you’re going sunset 3G in a couple of years. Do you see the opportunity, reason to invest now? Is this going to be rip outs of hardware, eventually, so that chance may be to gain share from embedded customers, is that part of the reasoning? Is it now a good time to invest in the U.S. market?

Stefan Joselowitz

Well, I guess, it’s certainly part of the opportunity. The reality is that the advantage of being relatively small in this market and relatively new is that our technology platform in large part to a high standard and to a latest standard. And we certainly see some of our larger competitors that have significantly store basis or going to have to do something with those basis. And at that stage it always creates opportunities for new parties, like ourselves, potentially, to gain some market share. So it’s certainly a part of it. But it’s by no means the driving force of the investments we’re making. We think that there are a multiple reasons and multiple opportunities on why we should be investing in these geographies.

Mike Walkley

Last question from me, and I’ll pass it on. It’s great to see all regions you’re growing revenue and adjusted EBITDA year-over-year. As you look, kind of, at your business pipeline in the second half of the year, are there any regions or end markets that you’re seeing some slowdowns or is it just, kind of, steady good business across the globe?

Stefan Joselowitz

What -- internally, clearly, when you’re running a global business, it’s very rare that all geographies or operating company future plan. But as we reported, I’m certainly pleased that, at least, we were seeing double-digit revenue growth performance, and as we also said that EBITDA margin expansion, which is certainly pleasing from all of our regions. Having said that, most of our regions are operating to plan or ahead of plan, and others have got a little bit of acceleration during the second half. So we don’t focus on short-term objectives. We’re still focused on our annual targets. And our plan and expectation is for all of our regions to deliver on the plans that were approved at the beginning of the year. So that’s how focused we’re going to be.

Operator

The next question is coming from Matt Pfau from William Blair.

Matt Pfau

I wanted you to hit on the Americas region a bit more. And specifically, on the margin that the Americas region posted across the first half of the year. Fairly impressive, especially, even when compared to Africa, you’re the most mature geography. So what drove the substantial margin expansion is the Americas, is that sustainable? I know you’re making some investments there. So perhaps, that’s going to go down a bit. But just some commentary on what you’re, sort of, expecting in future of that EBITDA margin and the region will look like?

Stefan Joselowitz

Matt, as you identified, we are making investments and we certainly expect in the short term that, that’s going to have a little bit clump on that margin expansion. But the investments we’re making, obviously, we are expecting for those to deliver a top line acceleration in the future years. And then, ultimately, make up for the investment that we’re making in -- with interest. We’re expecting a short-term clamp, but then a return to strong margin accretion. And we don’t expect this to take a long time, particularly, for this to happen. So the margin that you’ve seen is spectacular. And as you pointed out, even compared to Africa be remind of course, the Americas is mainly bundled deals, which is in large part aided the margin expansion story, but also I appreciate that the depreciation line in the Americas will be quite a bit higher than our African business. And I hope I’ve explained that correctly. Paul, if I haven’t, you’re welcome to jump in.

Paul Dell

No, you got it right there.

Matthew Pfau

And then, just following up on the Americas region a little bit more. So you got certainly been an area of focus and investment since your listing in the U.S. But it seems like now, perhaps, there is a bit of doubling down or pouring more investment and they’re [Indiscernible] little bit. So is there something you are seeing in the market that has put the switch? And maybe think that now is the right time to double down on these investments and really try to gain some traction in verticals outside of your standard [Indiscernible] in Americas region?

Stefan Joselowitz

Yes, I have seen is a specific thing that happened now. It’s part of our plan, in fact that we had in placed for a while. And we’ve been making -- it’s not any solid investments, we’ve been making some in product investments that we’ll talk more about in December, that are now rock for the picking, so to speak. So we’ve got some products that are now ready for -- market ready. So that’s part of some catalyst for some of the investment. But I’m happy to say, it’s been part of what we’re doing now is what’s planned, quite a while back. And it’s just been a sequential process of getting all of the pieces in place to take the next step.

Operator

Our next question is coming from Brian Peterson from Raymond James.

Brian Peterson

Joss, just you’re the premium fleet momentum this year it looks like it’s really taken off and it’s clearly diversified beyond just energy. Can you talk about maybe the 1 or 2 big factors that have really driven that acceleration over the last couple of quarters? And then, as you bulk a lot of those customers, does that improve your visibility into the revenue growth that we’re seeing, as we look ahead?

Stefan Joselowitz

Yes. The big change and in fairness it’s not so much a change -- what’s changed is that we don’t have that drag that we had couple of years ago, when we were seeing this big contraction from what was and remains our biggest vertical. So you’ll remember, we still grew through that period, but our growth was muted by the fact that we weren’t getting this fleet contraction. We’re now in a phase, where most of our verticals are experiencing growth, and it is broad based, it’s not a single vertical, it’s a lot of verticals that are growing. And we don’t have any drag from any particular vertical. So what’s pleasing is that -- of course, we continue to sign new sales and that’s a big focus about business. But at the same time, our customers -- our underlying customers are in many instances doing well. And they are expanding their fleets. And that adds to the momentum. And so, we’re very pleased about that. But, of course, on top of that you asked about the visibility of these bigger deals that we are signing. And of course, we are very excited about some of these deals that are coming on and some of them provide more visibility than others. We have had this discussion before. We get some deals with sort of hunting license, global hunting license. And we have to make’s sort of judgment call on the pace of rollout. Some of the recent ones we have done our firm commitment call a fixed number of vehicles and of course, that’s much more visible because it’s much more a less of a judgment issue and much more of a logistics issue and how quickly we can roll them out. So certainly, as we continue to layer on these deals with amounts some of them we mentioned all of them in the call but we had some that we were specific on. Those as a layer on and we get more and more -- we develop more and more visibility to -- in our future pipeline. Because generally these are ARPU deals and like our asset tracking business, which is high-volume, very high paced business but they generally low our peers so we have visibility, it doesn’t have the impact as much of moving the needle at the topline as I launch premium fleet deals with it.

Brian Peterson

Got it. And just maybe on the Americas investments that you alluded to. Is there anything that you can share that help us to put in the context? How big is your sales team today? Or what percentage of sales reps are based in the Americas? Just trying to understand the magnitude of that investment. And if we think about the return, if you were to higher some sales people in the next quarters, when should we really think about in terms of driving incremental bookings?

Stefan Joselowitz

So I would prefer to give -- point of that deep dive is, I prefer to defer it until December because as they are interlinked pieces that will make a care to understand that they’re diluting the call that the investment is in the second half is plus minus R20 million. And I guess, that’s part of the explanation with [indiscernible] I think, over EBITDA margin guidance would have been higher. But we’re making the investment. We believe it’s important investments to make. We’ve given some indications of the, kind of, scale of it. So it’s not in insignificant for the six months. And some of the investments that focused on different verticals. And we expect some of these verticals to take longer than others. But certainly, some of them we’re expecting a shorter, kind of, payback. But typically, it’s six to nine-month, kind of, exercise to start seeing a decent return from the kind of investments that we are making. So we are not expecting a return in this fiscal year. We certainly would be -- will be expecting a return in the next fiscal year.

Operator

Our next question is coming from Brian Schwartz from Oppenheimer.

Brian Schwartz

I want to build, kind of, follow-up on the topic, the question you just talked about reinvesting some of the margin upside that you have here. Without getting a granular, is it possible to maybe stack rank the mix between investments and sales wraps, increasing capacity there versa marketing spending versa new offices in the America? And then, I have a follow-up.

Stefan Joselowitz

Sure, it’s a very easy answer. The bulk of expend is in sales overhead, it’s certainly a much smaller piece in marketing. And offices, we are switching our assets. So we had a long debenture around it we’ve just taken a view that we’re very focused on costs, we’ve just taken a view. We’re going to make do with what we’ve got. We’re going to squeeze more people into our existing spaces. And we will get fine -- so it’s fine. I mean, I’ve even made a kill, I’m happy to give up some of my office space for self capacity. So the bulk of investment I’ve alluded to is in personnel sales skills that are designed, that are employed to grow our revenue base.

Brian Schwartz

And then, in regards to just the demand in the business activity here, that’s really strong. Couple of questions there. The first just is on ARPU left that you’re saying, I think, it was up 8% a year-over-year. It’s a very strong improvement there. Is the greater percentage of the left -- of the extension ARPU, is that coming from bigger initial deal sizes with these larger fleets versus up selling new products within the base? Just wondering if it is possible to parse, which is the bigger driver of the increase in the ARPU?

Stefan Joselowitz

Brian, yes. I think it’s primarily a combination of bundled deals as opposed unbundled deals, which is, obviously, the one competent, coupled with much stronger traction we’re seeing in these add-on products and services, and it’s really that combination, that’s contributed to that. And if I too give a percentage, it’s roughly, you could say roughly 50-50 is probably the contributing factor between bundled deals, which are inherently at a higher ARPU and adding on additional products and services, which drove ARPU up.

Brian Schwartz

And then, Joss, what’s to take your take on kind of thoughts on how tariff could potentially impact the business. I’m just wondering if that is the topic of conversation at all with your customers. Clearly, it’s in the news that maybe there could be some changes to how businesses are thinking about supply chains. And I’m just wondering if you are hearing that in terms of either the prospects of the customers they are thinking about that and then if you think about that, is that may be a potential payout and to your business given how you said in terms of supply chain of these businesses.

Stefan Joselowitz

I missed the very first part. The first part of the question right at the beginning, what? The potential of what?

Brian Schwartz

We’re just trying to gauge that, if you have a worst-case scenario here and all these tariffs stay in place throughout 2019. It could cause businesses here to rethink their supply chains. And I’m just wondering, if that could potentially be a tailwind here, as they think about the input cost increasing that they could be looking at other areas of their operations to optimize like their fleet management? So I’m just wondering, if you are hearing that all if people are thinking about that as a the topic of discussion. And then, just, kind of, you opinion, if that could be a potential tailwind?

Stefan Joselowitz

It’s a great point that you’ve raised. And frankly, I mean, to apply my mind more to it, I haven’t had, specifically, that kind of feedback, but you’ve raised a very good point. And should -- it’s -- we’re always on the lookout for tailwinds and opportunities. And it’s certainly some I think we should be giving more consideration for. So [indiscernible] thanks for the heads-up.

Brian Peterson

Sounds like it’s not a big topic yet people still taking away then say-- last question from me, Joss, just to get it out there, because the quarter and the results were so strong here. Did anything get pulled forward in -- pulled forward from Q3 into Q2 that maybe a surprise to you?

Stefan Joselowitz

And no, nothing got pulled forward. And frankly, we wanted things that always disappointed, got pushed out. But it was a strong quarter on its own legs without any assistance from next quarter.

Operator

Next question today is coming from David Gearhart from First Analysis.

David Gearhart

First question. I, kind of, wanted to talk about your core vertical, oil and gas. I’ve asked about in the past and where we’re in terms of oil and gas fleets. Reactivating or getting up to in more normalized fleet capacity. Just wondering, if you could talk about where we are in that trend or cycle. Is that just steady-state additions or are we getting an accelerated increased since oil and gas prices have been better?

Stefan Joselowitz

We’re certainly seeing continued fleet expansion. Our legacy customers, [indiscernible] customers are not yet back to their peaks. So whether that’s is a measure or not I’m not sure part, but it certainly a fact that they’re not back to their peak size again. As you know, we added a lot of new customers as well and those customers are growing. What is encouraging, we are seeing early signs of life in the industry in the Middle East. In this call we announced a deal in the region for energy customer through ATS and its -- we’re certainly seeing signs of life there. That would certainly be a boost trust as well if some of these customers started investing again. And as I said, we’re seeing early signs of it.

David Gearhart

And then, next you’ve talked about the pipeline and is giving you the confidence in the second half and growth in 2019 and beyond. Just wondering, if you could talk a little bit about the add-on modules or software, as a portion of your signed deals? Can you give us any perspective on how that’s trending in terms of tariff rates? I think that would be helpful.

Stefan Joselowitz

It’s not specific numbers and I think we’re probably, as part of December effort, we will probably give you a clearer picture then in terms of getting more specific but we continue to see good traction with our add-ons and having said that our penetration rate as a percentage of fleet size is timing. So the runway opportunity is significant. And off the top of my head, I will say, penetration rate I don’t think is the teens yet. And if it’s in the teens, it’s in the low teens. So we’ve got a long way to go with our existing customer base. And that’s an exciting runway.

David Gearhart

And then, the last from me is, gross margin was up nicely in the quarter, just wondering how should we think about gross margin in the back half of the year? I know you said that marching toward 70% longer-term. Should we assume slightly higher rates in the second half or should moderate? And if so, what would be driving that?

Stefan Joselowitz

Sure. Paul, I’ll give you an opportunity.

Paul Dell

Sure. I think the gross profit margins taken of the year should stay pretty similar to where they are on the first half of the year. I think what we’re excited about is the renewals on the lost bundled fleet contracts, which will increase margin when the depreciation expense are down, but that’s going to but that’s going to happen probably, in about 18 to 24 months’ time, at the earliest, the renewal scheme will now cost more so for the rest of the year it will be static.

Operator

We’ve reached at the end of our question-and-answer session. I would like to turn the floor back over to management for any further closing comments.

Stefan Joselowitz

Thank you all for joining us today. We’re really appreciate your attention and your questions. In addition, as I alluded to earlier on the call, I’m pleased to announce that we will be hosting an Investor Day in New York City on Thursday, December 6, 2018. Attendees can look forward to some of MiX’s senior executive providing a deep dive into our business, including our financials and technology. We’re also pretty excited that will add some extra customers presenting a case studies and direct experiences with MiX. A formal invitation and registration will arrive shortly, space will be limited and entry will be on a first come first serve basis. And really hope to look forward to seeing some of you there. Thanks again for you time and attendance. And look forward to chatting soon. Have a great day.