I.D. Systems, Inc. (NASDAQ:IDSY) Q3 2018 Results Conference Call November 8, 2018 4:45 PM ET
Chris Wolfe - Chief Executive Officer
Ned Mavrommatis - Chief Financial Officer
Jaeson Schmidt - Lake Street Capital
Josh Nichols - B. Riley FBR
Glenn Mattson - Ladenburg Thalmann
William Gibson - Roth Capital Partners
Dan Weston - Westcap Management
Matthew Galinko - National Securities
Good afternoon, welcome to I.D. Systems Third Quarter 2018 conference call. My name is Tiffany, and I will be your operator for today's call. Joining us for today's presentation, I have the company's CEO, Chris Wolfe; and CFO, Ned Mavrommatis. Following their remarks, we will open up the call for your questions.
Before we begin the call, I would like to provide I.D. Systems' safe harbor statement that includes cautions regarding forward-looking statements made during this call. During the call, there will be forward-looking statements made regarding future events, including I.D. Systems future financial performance.
All statements other than present and historical facts, which include any statements regarding the company's plans for future operations, anticipated future financial position, anticipate results of operations, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's product offerings and other industry trends that are considered forward-looking statements. Such statements include, but are not limited to the company's financial expectations for 2018 and beyond.
All such forward-looking statements imply the presence of risks, uncertainties and contingencies many of which are beyond the company's control. The company's actual results, performance or achievements may differ materially from those projected or assumed in any forward-looking statement. Factors that could cause actual results to differ materially could include, amongst others, SEC filings, overall economic and business conditions, demand for the company's products and services, competitive factors, emergence of new technologies and the company's cash position.
The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances. Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company's website at www.id-systems.com.
Now I would like to turn the call over to I.D. Systems' CEO, Mr. Chris Wolfe. Please proceed.
Thank you, Tiffany. Good afternoon everyone, and thank for joining us today. After the market close, we issued our financial results for the third quarter of 2018, and a press release, a copy of which is available in the Investors section of our website. The third quarter and the first 9 months of 2018 marked another period of solid financial performance for I.D. Systems. In addition to 21% growth, we achieved for the quarter, our top line revenue for the first 9 months of the year not only marked a record for the period but also exceeded our total revenue for 2017. Complementing our top line results, we also maintained healthy gross profit margins and generated meaningful cash flow for the quarter, reflecting inherent leverage in our model.
Our financial results were driven by the growth in our Connected Vehicle Solution business with the delivery of all 50,000 unified telematics platform units to Avis Budget Group. In addition, we also realized strength in our industrial truck management segment as our product strategy paid dividends with the renewal and PowerFleet enterprise refresh by Walgreens.
Our Logistics Visibility Solutions business, continue to be stable and profitable contributor to our overall business, as we ramped up product development and marketing efforts ahead of our exciting product launch in late October at the American Trucking Association. I'll talk more about this in a minute but first, I'd like to invite our CFO, Ned Mavrommatis, to provide more details and insights into our financial performance, afterwards I will provide an update on our 3 businesses and our outlook. Ned?
Thank you, Chris, and good afternoon, everyone. Turning to our financial results for the third quarter ended September 30, 2018. Revenue for the third quarter increased 21% to $13.4 million from $11.1 million in the same year ago period. The increase in revenue was driven by higher Connected Vehicle Solutions and Industrial Truck Management or ITM revenue. Breaking down our total revenue by source for the third quarter: ITM revenue was $8.2 million, a 23% increase compared to $6.7 million in Q3 of 2017. Logistics Visibility Solutions, or LVS, revenue was $3.3 million, down slightly from $3.5 million in Q3 2017. And lastly, Connected Vehicle Solutions revenue totaled $1.9 million, up from $953,000 in Q3 2017.
Recurring revenue for the third quarter of 2018 increased 5% to $5 million, up from $4.7 million in Q3 of last year. Our gross profit for Q3 of 2018 increased 21% to $6.8 million from $5.6 million in the same year ago period. The increase in gross profit was due to higher total revenue in the period. As a percentage of total revenue, gross profit for the third quarter remained strong at 50.8%, which was consistent with Q3 of last year.
Selling, general and administrative expenses for the third quarter of 2018 were $5.9 million compared to $5.1 million in the same year ago period. The increase in SG&A expenses was primarily due to higher sales and marketing expenses related to our introduction of our new Logistics Visibility Solutions products. Research and development expenses for Q3 of 2018 were $1.7 million compared to $1.1 million in the same year ago quarter. The increase in R&D expenses was primarily due to reallocation of internal product development resources to cost of services in 2017 for the development program for Avis Budget Group.
Turning to our profitability measures, GAAP net loss for the third quarter of 2018 totaled $897,000 or $0.05 per basic and diluted share compared to GAAP net loss of $586,000 or $0.04 per basic and diluted share in Q3 of last year.
On a non-GAAP basis, which excludes stock-based compensation, depreciation, amortization, foreign currency translation losses and acquisition-related expenses, net income for Q3 2018 totaled $165,000 or $0.01 per basic and diluted share. This compares to non-GAAP net income of $287,000 or $0.02 per basic and diluted share in Q3 of 2017. And finally, our balance sheet remains strong with $16.3 million in cash, cash equivalents and marketable securities, an improvement from $13.1 million at the end of the prior quarter. That concludes my prepared remarks. Chris?
Thanks, Ned. Our improving financial performances due in part to our improving product quality, expanding products and solution offerings and our successful integration of Keytroller, the acquisition that we completed a little over a year ago.
Looking first at our Industrial Truck Management. In July, we initiated a consolidation of the previous stand-alone Keytroller unit into the core business. This new unit is called the PowerFleet division and will be based in Tampa, Florida, where Keytroller was headquartered. The division combines a strategic account [Indiscernible] of the ITM division and will be focused on building, selling and supporting multi-tier product offerings to the entire industrial truck market through both direct, OEM and dealer channels. I'm encouraged to report that the consolidation and integration efforts are ahead of plan. And as some of you saw, we announced a brand new product called PowerFleet Essence, a new class of industrial truck telematics, PowerFleet Essence offers an ideal blend of size, ease of installation, ease of use and value.
Following the October Introduction of PowerFleet Essence at the National Safety Council Congress and Expo and UniCare's dealer meeting in Miami, we saw significant interest from end customers and more importantly, dealers. With many dealers requesting demo kits. This is the first step to successfully ramp up with the dealer channel and their knowledge of our products so we can begin selling in earnest this solution to their end customers.
Shifting gears to our Logistics Visibility Solutions business. During Q3, we received several large orders from existing customers including AIM, who are actively expanding their chassis fleet. We also released a new line of asset telemetry solutions, a suite of inoperable sensors as well as an interactive voice user interface named Lucy, for accessing the power of I.D. Systems analytics platform. Lucy essentially, gives users an extra set of hands, eyes and brains acting as a virtual psychic assistance and analyst. This product launch includes the first of its kind image-based cargo visibility detector. You can see your freight without opening the door. These robust technological platforms enhance our tracking, monitoring and reporting capabilities to provide freight transportation providers, shippers and the supply chain stakeholders more powerful insights to make smarter, faster decisions for higher overall performance.
The new product line was very well received at the American Trucking Association last month. Many of the top fleets stopped by our booth, and we're excited about our solutions. Engaging in conversations with Lucy and requesting follow-up discussions, which have been happening this week. The market's reception as well as the press coverage exceeded our expectations, and we look forward to engaging in more expensive field trials and ramping up production in Q1 of 2019. You can get an overview of these products and copies of the products list from the logistics visibility of section of our main website or feel free to stop by our offices, I'd love to show you these.
Turning to our Connected Vehicle Solution business. During the third quarter, we successfully delivered the final units under our contract of work with Avis. We also ramped up installation assistance with Avis, and we are now working with them on ways to further streamline the installation process and logistics. We are in the process of certifying vehicles for the 2019 model year in-fleeting, which is happening as we speak. We also began work on several projects covered under our next statement of work with Avis, and while these expenses impacted our Q3 results, we determined it was best to commence the work to ensure our partnerships continued long term success. We're very close to completing the next major statement of work with Avis, which is going through final internal Avis approvals as I speak.
In step with the work we're doing with Avis, we're also pursuing several business development activities geared to taking our proven technology and platforms into other connected car opportunities. However, it's too premature to go into the details at this time.
In summary, our financial performance for the first 9 months of 2018 reflect our successful execution of our growth strategy, we implemented well over 1.5 years ago. We believe that our vision, execution, exciting product offering and strong balance sheet have established a significant momentum for us. And for our success in 2019 and beyond.
But before we get ahead of ourselves, and we remind ourselves of this every day, we have to deliver on Q4 and execute against our key milestones as we've been doing in the past. I'd like to thank our employees, shareholders and customers for their continued support. And with that, we're ready to open the call for your questions.
Operator, please provide the appropriate instructions.
[Operator Instructions] And our first question comes from Jaeson Schmidt with Lake street Capital.
I just want to start with the new products in the LVS segment. Chris, could you talk a little bit about how you view these new products opening up or expanding your addressable market? And what sort of the revenue opportunity could be longer term?
Yes, that's great. Jason, so if you look at the whole suite of products, it's really an ecosystem but it also allows us to go into parts of the market we typically have never been in before, like lessen truckload which is my background or parcel. So you'll see organizationally, we've actually been staffing up to allow us to branch on, beyond chassis, beyond intermodal. And actually be a major player even in the very high end, what we call, dry van space as well. So if you think about our sensors suite, it gives you what I call figurative visibility into your Tire Inflation System, into your antilock braking system, into whether or not your trailer lights are activated or not.
And the reason for getting pulled over on the road is trailer light is out. So if we can proactively let you know that before it happens, obviously, you're going to avoid a lot of delay and cost. The platforms, which really great about them is, under the covers, they are all inoperable. So you could have a chassis with our LV 100, you could have a container with our LV 500 and what really differentiates the platform is installability, price, performance, but what's interesting is all the sensors are operating.
And lastly, one product that was a big hit, and it's a game changer for, I think, the market is what we call Freight Cam. Freight Cam which is our LV 710, lets you actually look inside the trailer, we're not just giving you loaded and empty, we're actually giving a little image of the freight but we're actually doing image -- deep learning on the image, and we can tell you the percent uploaded. Matter-of-fact we can take those images back to deep learning on them and tell you how it's loaded. So for inbound planning, so again, you could have people just buying Freight Cam by itself, because Freight Cam, does have a recurring component to it. It does integrate with our telemetry platforms for getting the images back.
But the bottom line is we have solutions now that actually open up visibility beyond the asset and into the cargo. One other solution set we offered out was cargo tracking itself, so down to the pallet level. And the nice thing about that is we can do it very economically. We can do it for $36 a shipment, versus data recorder today, or close to somewhere between $56 and $84 a pallet. There are 26 pallets in a trailer. So if you just do the economics on that, we could almost do it for slightly over $1.50 per pallet. And that's to me is also a game changer that we announced. So again it was a phenomenal acceptance of the products at the ATA. And Lucy, what's great about Lucy, ties it all together. So it's one thing to talk about technology, it's another thing to have Lucy actually tell you what the technology is telling, what the technology is being interpreted as how you run your business. Literally, she can help you like having an extra person sitting at your desk and helping you do the analysis on the side.
Okay, that's very helpful. And then just to clarify your comments. I know you mentioned, you're working on the next statement of work with Avis, and there was exclusivity with Avis. So these other business opportunities in the rental car market. Should we assume that's also with Avis, or are those with additional customers?
I would not assume they are in the rental car market. So we are excluded to be in rental and car sharing and opportunities that we're currently engaged in are not in those spaces.
And the last one from me and I'll turn back into queue. Just a housekeeping question, who were the 10% customers in the quarter?
Sure, Jason, this is Ned. Avis budget was 14% of revenue, Walgreens, Toyota and Walmart were all at approximately 10% each.
Thank you. And our next question comes from Josh Nichols with the B. Riley FBR. Please proceed.
Thanks for taking my question. Looks like healthy top line growth for the quarter, I want to ask, I know you went through some of the 10% customers. But outside of Avis, was there any big like one-time revenue or re-orders from customers for things like spare parts or whatnot that we've seen before that was helping revenue, or what's really driving the delta aside from Avis?
Thanks for the question. The big delta is the success we're having in this industrial truck business. Chris mentioned in the prepared remarks that due to the improvement in the quality of the product we're seeing demand pick up. And you see the industrial truck business increase by 23% in the quarter compared to the previous quarter.
And I will add on to that, it's, we actually have a stated goal for refresh accounts. Obviously, our new technology is software-as-a-service oriented. Walgreens is a great example where they were basically running our old software, this refresh actually includes their moving from behind the firewall to our hosted solution offering.
And then as we get in later into the year, you obviously have a great mix of logos, a lot of which are large Fortune 500 entities are starting to work on their budget process. And I think if we go back a year or 2 ago, those were one of the issues that the company was focusing on was getting in front of some of these bigger customers that will be incorporated into the budget process from an earlier stage. Are you noticing any material difference for you with the new product offerings and some of the other things that you have done to enhance operational sales looking into '19 on that front?
Right now, I would say our, especially on the ITM side and also LVS, because we just launched the brand-new product, it's just, the news is just getting out in engagement. But on the ITM side, I would say our pipeline right now and our mix of not only on the dealer channel but it's very strong. It's like we have a lot of good opportunities there. And Refocusing our inside sales in biz dev to really push, what we call the land and expand. The concept we've had but we've just have not gotten into saturation. And where we are seeing some really good progress with that.
And then also, with the acquisition of Keytroller, you've been focusing more on distributors and pushing that front to even in Europe outside North America. Any updates on progress there?
Right now, before the, what we called PowerFleet essence availability, what is just now coming off the line was all set the stage. And so there is distributors in Europe that are lining up and actually we -- Terry Wickam, the owner that we acquired Keytroller from, he has actually taken a position with us to help us with other international distributor set up. And so it's not just Europe, it's worldwide that we are going. But our European base is actually gearing up right now to get demo kits out to distributors to get the channel ramped up.
At the same time, there's ancillary products that we had from the Keytroller acquisition that we're getting a lot of interest in Europe. So it's kind of nice because that kind of gets us in the door and some of those are like crane lights, which is the safety product, but that's a great leading product then to go to telemetry, right? So once you're a trusted supplier then that seems to be working out really well in Europe.
Thank you. And our next question comes from Glenn Mattson with the Ladenburg Thalmann. Please proceed.
Yeah, thanks for taking the question. So I'm trying to drill down on the kind of growth in the industrial truck segment versus organic versus some of the Keytroller growth. So I guess if you back out what was Connected Vehicle Product revenue maybe of $1.5 million or $1.4 million is my guess. And then you -- I think you got an extra month this quarter of Keytroller, if I'm not mistaken. I think it was acquired in July last year. So I guess I'm wondering are the organic growth sales like -- more like mid- to high single digits. And so can you just explain is that correct? And then is that growth coming from existing or Keytroller or mix of both, and just a little more color there?
Sure. So the Connected Vehicle revenue for the quarter, Glenn, was $1.9 million. You're correct that we closed the deal. So we -- there's an extra month in Keytroller. So if you look at the growth rate excluding that extra month, it was just under 20% in the high 18%. And it's been pretty diverse, we had some success with existing customers, Toyota continues to buy the product and continue to grow. As Chris mentioned, we had success with Walgreens, which was an existing customer to -- where we offered an upgrade program so they took the latest product. And we're beginning to see Keytroller, where they had their first $2 million quarter, so we're seen success there as well.
Right. Right. I guess sort of trying to figure out, so 18% is growth including Connected Vehicle, right? I'm just trying to script that out, the product revenue out of that portion, I think $1.9 million is total, and some of that is service, right?
If you look at the industrial truck business, it grew 23% year-over-year. If you exclude just that 1 month of Keytroller that was...
It will be 18%, okay.
I mean that helps with that. And it's a solid mix, you said. So what about -- and when you're at the Connected -- I'm sorry, on the other side the Logistics business the -- could you update us kind of on your thoughts on the timing of the 3G to 4G changeover, and whether or not that's going to be a catalyst in the next, say, 12 months to some of these guys upgrading?
I would say 12 months to 18 months and absolutely a catalyst. And I think our timing that's -- our timing was all based on that catalyst. So I think we're hitting the market at the right time, but not just with replacement products
just with replacement products that are LTE. At the ATA, it was really interesting our competition, basically they had the same tired stuff. It's like I'd be bored if I just came out here and said well, I got an LTE version of what I gave you last year. So like this year complete redo. And when I say redo, we're moving way beyond the asset, it's like you can actually get little in-figurative view of your freight, you can actually look at the status of the freight as well as your asset in-transit or dormant. And I think it's a true game changer on the LVS side.
And next question comes from William Gibson with Roth Capital Partners. Please proceed.
Ned, what you think the trend is on R&D spend, both on the fourth quarter and next year. Does it taper off with the[development we've done to date or do you -- are you finding new things to develop?
Yes, our goal is to keep it flat at this rate. It was slightly higher this quarter then last quarter by $100,000 because, as Chris mentioned, we started to do some work related to the next version of the Connected Visibility product. But our goal is to keep the expenses flat and then grow the top line and see the leverage in the bottom line.
And our next question comes from Dan Weston with Westcap Management. Please proceed.
Chris, first you're going a little fast on some of the LVS stuff. I'm interested in hearing some repetition on your comments relating to the economics. You were talking about cost per pallet economics, could you run through some of the main points there for me again, please.
Yes. So right now, if you're doing cold chain management, let's say, pharmaceuticals and you want to -- you have a data logger, and this data actually comes from one of my competitors. You have different value props. If its high-value pharmaceuticals, the data logger that you buy that goes on the pallet could run you $84 a pallet, okay? If you have less valuable, less time-sensitive, you can get to buy with about $56 per pallet.
The pallet, keep in mind, if your pharmaceuticals could be worth millions of dollars, or $0.5 million range. So what we're doing, our sensors are obviously, I can show it to you visually, perhaps it would be a lot better. To think about it, some master-slave kind of concept where we have freight tags which are very economical, they go on every pallet. And we have a master tracker that goes on one pallet. Those all communicate together; all feeding sensor data either directly from the master tracker or through our telemetry platforms on the asset itself.
So again, we actually -- our -- we differentiated our product too, so a lot of those data loggers it's after the fact. So they don't get real-time information, its -- they record the data, the pallet arrives at the destination, they download it, and it says, Oh there's problem. Ours is a real time. So it's like, I got a temperature, I have a shock, I have a tilt, I have a barometric pressure of humidity problem. And the driver can be notified, the dispatcher and everybody can be notified. Immediately they can take corrective action. So and then you talk -- you put on top of that the Freight Cam, where cargo claims is really critical.
So when the door opens at the destination. And they open the door and it looks like something happened in there. Like, let's say, a gorilla got lose, no one knows where it happened. I mean today, we're going to have bookings. And if you think about it, when you shut the trailer, you'll get a photo, and we'll actually analyze the photo. If the trailer has a tilt or a shift, a vibe of that will give you a photo. And when it gets to the tail end, you'll get a photo before you open the door. So it's like cargo claims and who did it, the who done it forensics is going to be a thing of the past.
Secondarily with this, if you think about fast path border security, so we're already working with legislators and pushing through, and we've got customers interested from the ATA to help us, you can get fast pass border crossing. Why do you need to open the trailer, you can look inside the trailer, right? Matter of fact, you can look inside the trailer, and you can also see sensor data inside the trailer. So you know they are not smuggling people, and you know that the load left the way it was loaded. So again, I think once this capability gets out into the mainstream, it's going to change the way a lot of logistics problems are handled today.
That's a great explanation. Just the closed outlook on the cost per pallet economics, you were talking about $84 per pallet with a typical high-end data logger and then $56 per pallet on maybe a lower end, what would the cost come down to by deploying your solution?
Yes, this is going to be a brand new business model for us. So as we deploy it, we're going to, our going in position, and the feedback we're getting is to deploy it with our customers. So it's a value-added service our customers can offer to the shippers initially. It will be by the shipment. So it's a completely different, it's not by the tracker or tag, right?
Very good. Okay. Before you actually formally launch the products, you had ongoing field trials for some of the larger customers. How are those field trials progressing and realistically, not to hold you in a particular guidance but realistically, when do you think you could start generating orders from the new LVS products.
That's a great question. So we're in field trials with 5 different fleets, all the way from flatbed to chassis to dry van. We need to get in, what we're getting into is, what we call, extended field trials, which is just a higher quantity, that's what we're moving into today. But to get to the end game, it's really Q1. So in Q, at the end of Q1 I actually see us being able to deploy in volume. So a lot of work to do, just a lot of engagements. We're getting the interest, so that's good.
Very good. Switching gears to the connected car. With Avis it sounds like you guys are getting close on the statement of work number 2. On your last call you talked about some increased development work for some of their internal plans. I think one of them being international deployment. Do you anticipate the statement of work number 2 including international units as well?
Yes, it does. And as a matter fact, that's some of the work we went ahead and started in Q3 before. So again it just, as a good partner as Avis, its better for us to lean forward, and we're in good faith. [Indiscernible] hit the ground running than have to restart the engines, right. So one of them is underway.
Couple of more if I may. Just an update, you had some pretty good color last quarter on Amazon, any updates there either internationally or back here home?
Yes, the color on the largest online retailer is that we continue to expand in their facilities in Europe. And U.S., it looks promising for next year. So the biggest thing, when you're dealing with a large company is you get into what's called the master service agreement or the master purchasing agreement and that's been accomplished. Matter of fact that's been accomplished with a few very large global distributors. So again, that's sort of a run to get to we're okay, now you're kind of the preferred provider and you're on their provider list.
My last one is on the 10% customers specific to Toyota. Is there any kind of -- you are in various different platforms with Toyota now. Was there any one segment inside Toyota, which showed the most strength in this quarter?
It was pretty diverse, Dan. It was very good to see the actual channel sales that they white label our product continues to grow at a very healthy rate. So we feel pretty good. We are with Toyota, and we expect to increase the business next year.
And our next question comes from Matthew Galinko with National Securities.
I might have missed this in the prepared remarks, but when do you expect to start seeing results from the dealer channel and maybe from the PowerFleet Essence product?
What's great about that is and one of the reasons behind our acquiring the Keytroller was they already had, they already have a presence and the already have volumes going to the dealer channels.
So the good side about this is, this product is a lot easier to sell. It's a lot easier to implement. If I don't have to get on the customers Wi-Fi network, it just vastly improves all of that. That's why we're getting so much interest. Because dealers just want to sell product get paid for it. They actually make a lot of money on the installation, by the way, not just on our product. So there's a lot of interest, we actually, like in Q1, you'll start seeing d ramp and then like throughout next year.
Terrific. And then switching gears, you mentioned refreshing Walgreens and bringing them help them behind the firewall so to speak. How significant motivating factor is that for them to kind of refresh the technology? And is there a pipeline of customers that are running premise kind of platforms that you think you could pull into a hosted environment.
Yes, I think it's interesting in our IR deck, we used to basically show what the opportunity space is within our own customer base. And we put out strategy last year to say how do we get them to move to the next level. And part of that is our analytics platform engagement.
So Walgreens and some other large accounts that we're currently actively engaged with to upgrade and basically move over, like Nestlé right now is in the amidst of a migration from customer hosted to ours.
So that's, they are not necessarily doing a refresh on the hardware because they have our newer hardware. They are doing a refresh and moving to our software-as-a-service. So that's as an example. So but we have strategies in place to go after all of our largest accounts. There's a lot of interest, what usually draws them in is the analytics platform and then followed by that is obviously, there's, some are running on fairly old equipments. So with that we offer like trade in, trade up programs and we make it easy as possible for them to make the transition. But as they get -- the software is lot more feature rich as well. So they get lot more value and data out of the new software-as-a-service platform.
Any quantifiable or qualifiable comments on just what the cycle is to get them thinking about that movement over the hosted platform?
Yes, its typically it's probably a year in just Asia, but a lot of these have already been underway, right? So we've been working like on the Walgreens account with a strategy for literally probably a year. So again, when you put in place about 18 months ago, we are starting to see the fruition, which is great to see, right.
Thank you. Okay. At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Chris Wolfe for his closing remarks.
Thank you. And I'd like to thank our employees, our customers and our suppliers for this ongoing continued support. And I just want to say it's been a great quarter and we couldn't have done with a lot of support of the people I just mentioned. And also I look forward to a very exciting Q4 and 2019 ahead.
And with that, thank you very much.
Thank you for joining us today for our presentation. You may now disconnect.