TrackX Holding Inc. (OTCPK:TKXHF) Q1 2019 Earnings Conference Call February 28, 2019 5:00 PM ET
Gene McConnell - CFO
Tim Harvie - Chairman and CEO
Conference Call Participants
Mark Niemi with KMS Financial
Keith Schaefer - Oil and Gas Investments Bulletin
Good day, everyone, and welcome to today's call to discuss TrackX Holdings results for the first quarter Fiscal 2019. All participants are in listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session.
You may register to ask a question at any time by pressing the star then one on your telephone keypad. Please keep in mind, today's conference is being recorded. I will be standing by should you need any assistance.
It is now my pleasure to turn today's program over to CFO of TrackX Holdings, Gene McConnell, and Chairman and Chief Executive Officer, Tim Harvie. Please go ahead.
Thank you, Miranda. Good afternoon, I'm Gene McConnell, CFO of TrackX Holdings. Thank you for joining our first quarter 2019 Earnings Call.
TrackX CEO, Tim Harvey, will begin to call by providing an overview of the quarter's results. I will then follow Tim to provide more detail around our financial results.
After I finish, Tim will talk about our business strategy, outlook, and progress we have made against the goals we have established for 2019. We will end the call with questions and answers. But, before we talk about results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature.
These statements involving known, unknown risk, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements.
For caveats about our forward-looking statements and risk factors, please see our MD&A for the year ended September 30, 2018, which can be found in our Company's profile on sedar dot com.
Now, I'd like to pass over the call to Tim Harvie, President and CEO of TrackX Holdings.
Thanks, Gene. Good afternoon, everyone. Thanks again for joining TrackX's first quarter Fiscal 2000 Earnings Call. I appreciate you taking time out of your day to join us.
For those of you who are new to the Company, TrackX, based in Denver, Colorado, it's an enterprise asset management company deploying SaaS-based solutions to large companies for the comprehensive tracking and management of their physical assets.
Our core solution platform is called Global Asset Management for Enterprises. We affectionately call it GAME. GAME is a suite of secure hardware-agnostic asset management tools that are predominantly deployed on a SaaS monthly subscription basis.
This comprehensive solution platform helps customers track, manage, utilize, and optimize their physical assets. It delivers value to those customers by analyzing data from various IoT sensor technologies used to tag these assets in order to drive efficiencies in security, labor, business processes, and asset utilization.
Some of the technologies that we utilize to track high value assets include RFID, GPS, Bluetooth, low energy, cellular tags, a growing number of IoT sensors – and even our age-old friend, the barcode. Our GAME platform is a flexible solution that meets the needs of numerous vertical and horizontal markets.
It serves the needs of our currently targeted industries by offering support for yard management, returnable asset tracking, and high value asset tracking. Our high degree of configurability not only allows us to track any type of enterprise assets within an industry, but allows us to easily leverage this technology in support of new industries without enduring significant modification.
In the first quarter of 2019, we realized some strong revenue growth as we continued to implement solutions for previously announced customer engagements. As we detailed in our fiscal year-end conference call this past January, several implementations anticipated for fall into the fourth quarter of Fiscal 2018 were delayed into Fiscal 2019. We'll continue to see revenue beyond Q1 and for those implementations.
The first quarter results saw a significant total revenue increase of 113% year-over-year, and 246% over the prior quarter. More importantly, recurring revenue, a major focus for our company increased 31% year-over-year.
As the metric, we continue to focus on throughout 2019. Recurring revenue as a percentage of total revenue was lower than same quarter a year ago due to higher hardware sales in the quarter; about half a million in Q1 2019, versus 73,000 in Q1 2018. While hardware sales carry lower margins, I think that's important to remind you on the call.
They are a leading indicator to future recurring revenue. Even with a higher amount of hardware revenue in the quarter, gross margin remains strong at 40% as compared to 42% in Q1 of Fiscal 2018.
I know Gene is going to discuss the details of the financial results shortly. But before I turn it over to him, I want to provide some detail about how we performed operationally. I'd like to begin by reiterating a few of our key business strategies.
Many of you have heard me talk before about our 'Land and Expand' strategy. We will address some of the growth we've had there over the last quarter. We will continue to talk about growth in our partner network as a strategy. We continue to product enhancement and our focus on operating efficiency as core strategies.
Let's spend a couple of minutes on our progress with 'Land and Expand." Our 'Land and Expand' strategy is predicated upon us landing top-tier logos within an industry to gain a strong position within that industry; executing on the initial deployment and expanding to multiple locations for our customers.
Then, expanding across additional asset classes and additional business processes for those customers; and then finally, leveraging our success with these initial customers to target other companies within the same industry.
It's not happenstance that we have top-tier accounts in each of the industries we serve. That was very much targeted. Now, we're able to leverage that success to drive additional growth in 2019. From that standpoint, the Company has completed three implementations of GAME to one of the largest appliance manufacturers in the United States.
The initial deployment is one of the largest completed by TrackX to date. It manages more than 15 yard trucks simultaneously, more than 1,000 trailers daily in and out of that facility. From the success of our first implementation, this customer has already committed to expand this solution to eight additional facilities in 2019.
The Company also announced the contract with Anheuser-Busch a bit earlier for tracking of beer kegs. This first implementation has begun at their Houston, Texas brewery, and is expected to expand beyond the brewery to AB's distribution partners and large retailers. Anheuser-Busch will gain real-time data and business intelligence related to their keg fleet.
That will need enable them to drive efficiencies throughout their entire supply chain. The Company has also continued to expand the number of installed facilities with the world's largest – actually, the second largest processor and marketer of beef, pork and poultry from eight installed locations, to a total of 17.
This expansion is expected to be completed in Fiscal 2019. We are already in discussions with this customer regarding additional expansion for yard management within their poultry division; and, for the tracking of additional assets, including livestock hides and returnable racks used for the meat processing operation.
TrackX has also continued to expand its implementation of GAME for a leading insurance provider across 16 total administrative facilities and data centers. Currently, we're managing 115,000 IT assets for this customer. This constitutes more than a 1.5 million transactions per day running on our GAME platform.
We have successfully delivered a new module to integrate with BMC's Helix Remedy solution. They're an industry leading Help Desk solution. This development represents a new module within GAME that will provide further differentiation for TrackX as we service other customers who are using BMC Helix Remedy within their enterprise.
The Company completed the first implementation of GAME for SEM and for a leading baked goods manufacturer at its first location. The successful integration and customization completed for the first site has already driven commitments to deploy TrackX solution at additional facilities.
Then, many of you have followed us and our progress with Carvana, one of the fastest growing leading online used car retailers. They continue to expand at their utilization of the TrackX GAME platform for vehicle inventory and processing throughout their enterprise.
GAME has now been deployed at more than 80 locations for Carvana. As they continued to execute on their significant growth objectives, we certainly expect that will be integral to that growth and see incremental recurring revenue from this opportunity in 2019.
Another core strategy for us is obviously to continue to target growth and expansion within our partner network. The Company, TrackX, has continued to focus on expanding and leveraging this network.
The Company and Impinj, a leading provider and pioneer of RAIN RFID solutions continue to enhance their strategic relationship through joint marketing and collaboration initiatives, targeting new customer opportunities within specific industries.
TrackX has expanded its relationship with BarcodesInc as well, and established a series of webinars, and joint marketing activities that will introduce TrackX solution offerings to thousands of Barcodes's existing customers.
We also formalized the strategic partnership with Velociti, a leading provider of technology deployment and support services. Velociti's nationwide installation and service coverage will be leveraged to augment TrackX's existing implementation and delivery capacity, allowing us to implement more customer opportunities simultaneously.
Another key strategy for us is to continue to enhance our product, and continue to add new features, and functions. We have continued to expand our GAME enterprise platform with new workflows and analytics for high value asset tracking.
For example, that would be computer hardware, or lab equipment, and test equipment, and tools inside of a facility; returnable transport item tracking, which would include things such as plastic pallets, beer kegs, synthetic rubber bins, horticultural racks, chemical containers. All of the things that move to, from, and round trip in the supply chain – further extending the Company's competitive advantage as we add features to support on these items.
We have enhanced support for GPS and cellular tags, and added support for a variety of new IoT sensor technologies; which, we expect to gain more widespread adoption within the industries currently served by TrackX.
I think one point worth mentioning is the Company through all of this development has begun to capitalize its research and development cost in accordance with IFRS standards beginning in Fiscal Q1 2019.
Then finally, I want to share with you that another strategy for us is always going to be focused and focused on operational efficiency. TrackX has invested in additional project management and delivery services resources, both internally and through partnerships to better service the accelerated expansion schedules of our customers.
These resources, in combination with the strength of the GAME platform facilitate the scale necessary to accommodate more simultaneous customer deployments, and improve customer service to our customers.
The Company has continued to improve upon its implementation process standards. We are now following very closely, strong performance metrics, ensuring both on time and on budget delivery of our solutions to customers.
Now, before passing the call back to Gene for a detailed review of the financial results, I want to conclude by saying I'm very pleased with our progress, both operationally and financially in the quarter. The investments we have made in expanding our team was done in anticipation of both new customer opportunities and expansion opportunities within existing accounts.
We staffed ahead of those anticipated opportunities. We have begun to realize the benefit of these investments with these people and expect them to continue to drive a substantial increase in recurring revenue throughout 2019.
With that, I conclude my initial comments on the quarter. Gene will now go over the detailed financial results. Gene, back to you.
Thanks, Tim. [indiscernible]. All of the dollar amounts are in Canadian dollars. As Tim mentioned, total revenue for the first quarter of 2019 was $2.19 million, more than double the $1 million that we reported for Q1 2018.
The year-over-year revenue increase was due to the organic growth in existing customers, as well as the recognition of revenue resulting from the implementation of previously announced contracts.
The quarter's recurring revenue increased more than $136,000 to nearly $570,000 for Q1 2018 – excuse me – '19, from the $433,000 for Q1 2018, representing 26% and 42% of total revenue, respectively. The year-over-year decrease in recurring revenue as a percentage of total revenue was due to the increased hardware sales during the quarter.
Quarter-over-quarter, recurring revenue increased 31% for Q1 2019. Gross margin was 40% compared to 42% in Q1 2018, and compared to the minus 54% in the prior quarter.
The first quarter of 2019 saw higher low margin hardware sales, which affected our overall gross margin. Operating expenses were $1.7 million in Q1 2019, verses $1.6 in the first quarter of Fiscal 2018, so relatively flat.
TrackX closed the quarter with $816,000 in net loss, or a penny per share compared to $936,000 net loss, or a penny per share in Q1 2018. The net loss decreased during the quarter due to a combination of higher revenues and flat operating expenses compared to Q1 2018.
Adjusted EBITDA for the quarter was a loss of $295,000 versus a loss of $584,000 in the first quarter of Fiscal 2018. Adjusted EBITDA is a non-IFRS measure. I would encourage investors to refer to our MD&A posted on SEDAR for the calculation of this non-IFRS measure.
TrackX ended the quarter with $900,000 in cash and cash equivalents, down from the $2.2 million disclosed at the end of 2018 fiscal year-end. The cash decreases were largely due to the $396,000 increase in trade receivables, $152,000 of capitalized product development costs, and the net loss for the quarter.
As of December 31, 2018., thanks had only drawn down $2.6 million of its $5.2 million debt facilities that we announced in August of 2018.
This concludes my comments on the TrackX first quarter of Fiscal 2019 financial results. I would now like to pass the call back to Tim. Tim?
Thanks Gene. As you can see, Q1 is an excellent start to a year that is very exciting for TrackX. We continued to execute on our core strategies. The Company is realizing great success from our 'Land and Expand' strategy within multiple industry horizontals; for example, yard management, high value asset tracking, returnable transport item management, and work in process tracking.
We have secured multi-site expansion opportunities with several large multinational organizations that are leaders in their respective industry verticals. At this juncture, these accounts alone are expected to result in more than 20 new implementations for us in the Fiscal 2019.
TrackX is not only realizing expansion now beyond the initial implementation to multiple locations, tracking similar assets for these customers. But, it is now seeing the GAME platform being leveraged to track new assets and additional processes within these enterprises. As these implementations are completed, the Company anticipates a substantial increase in recurring revenue run rate by the end of 2019.
We will continue to grow and leverage our partner network. Not only do partners provide implementation resources, but they have access to very large potential customer bases. Through joint marketing activities and collaboration supported by new resources on our team, this growing partner network is expected to drive new business and additional revenue at a much more significant rate for TrackX in 2019.
We have continued to build and strengthen our team as I have mentioned previously. Additional resources in sales, marketing, delivery service, and engineering will enable the Company to address the customer opportunities which we have visibility to in 2019.
As the Company is able to convert these opportunities into customer contracts, again we anticipate significant growth in our higher margin recurring SaaS revenue through Fiscal 2019.
The IIoT platform GAME, our core platform will continue to expand its functional reach by providing additional support and development of new APIs, or application programming interfaces with tight integration of the GAME solution to market leading ERP systems. Like SAP, Oracle; BMC, which we've integrated to, Salesforce, and others as required by or large enterprise accounts.
In addition, we'll leverage recent developments in support of IoT sensors, cellular tags, BLE tags. Much more support for additional mobile devices to not only provide expansion of opportunities much more easily for our customers, but to reduce the overall cost of solution implementation, providing a much higher and rapid ROI for those customers.
TrackX is actively expanding its GAME platform with workflows and analytics as I mentioned previously. Yard management opportunities will continue to emerge, and certainly represent, still a strong piece of a revenue.
But, throughout 2019 the Company will focus more on high value asset tracking and the returnable asset tracking related opportunities, which are growing significantly within our pipeline. Within enterprise accounts, opportunities in these areas are important to us. Because they address typically a large volume of assets.
They generate a very rapid ROI to our customers, and are really easy for our partners to implement, and represent large revenue opportunities with higher gross margins, and minimal support of costs. We are excited about how 2019 has started for TrackX and our prospects going forward.
Many large customers and leaders in their industries have engaged with us with enthusiasm discussions that now significantly expand the scope of the solutions and the opportunities TrackX has with these customers. I'd like to express my thanks to the whole team at TrackX for all of the hard work in creating such a unique asset management platform and suite of solutions.
That has driven significant value for our customers. I would also like to thank our customers. Because they have been incredibly supportive and have given us significant expansion of business within the past year.
I'd like to thank our partners for their diligent efforts, and obviously our shareholders for supporting the Company's vision. I'd now like to hand it over to the operator to open the call for questions. Miranda?
Certainly. [Operator Instruction] We'll take our first question of the day from Mark Niemi with KMS Financial. Please go ahead.
Hey, Tim. I have got a couple of questions for you.
The first one, the last announcement that you had put out for a new customer was back on October 1st. Have you picked up any new customers in the past five months?
Yes, we have.
Q –Mark Niemi
Okay. How many customers do you currently have?
Yeah, right now, we're approaching 20 customers.
Okay. From the type of company that you're dealing with –
It's about [Indiscernible] what they're giving you [Indiscernible].
– It sounds like that you're going after a lot of these home run type of customers. Are you going after the smaller ones, the singles and the doubles?
Yeah. We are. I mean, I think we needed to establish ourselves. Again, as I mentioned, it's intentional for us to go after top tier accounts within the industry. We solved a lot of the most complex problems first. I think, for us, it was a validation of our platform.
Now, these accounts are much more willing to give us use cases and case studies. We're pushing them to make sure going forward, we could continue to utilize, or more effectively utilize their names, and announce these accounts by name.
I think now, we know that our solution can handle the most complex of the business processes and asset management challenges these companies have. Addressing some of the mid-sized to certainly large accounts in that industry is going to be our target.
In a lot of cases, and I'll tell you, Mark. Given the number of opportunities we have in the pipeline, we will, for the foreseeable future continue to work on some of the larger opportunities, which represent significant revenue growth for us going forward, and a lot of expansion opportunities.
We certainly like that business once we get into an account. We know that the opportunity for us to generate revenue, the revenue opportunity for us, Mark, is about five times the initial implementation within that initial solution set. I guess at a broader level when we look at of all of our solutions, typically what we've seen are those accounts in terms of revenue opportunity represented with 10x the initial implementation.
We certainly want to be able to leverage the sales effort we put into to earning that first account opportunity or that first solution opportunity within an account to gain this expansion opportunity. It's our fastest way to revenue.
It is to service the accounts we already have. In Q1, we did a lot of that. We met with a large home appliance manufacturer and a very large producer of meat pork, beef pork, and poultry, a large snack food producer.
Certainly, ongoing expansion within our Caravana business while we began the implementation for Anheuser-Busch…. In Q1, five very significant accounts accounted for a large percentage of the revenue that you see in those numbers.
I got it. What kind of a quarterly revenue run rate would it take for you to show a profit?
In terms of recurring?
Yeah. Right now, you're running at a loss. Let's say for breakeven, and breakeven or show a minimal profit for the quarter, an estimated revenue run rate.
Yeah. I think right now, we're not very far from that. I think we staffed a lot in Q4 and Q1, Mark, with regard to new resources. They're now starting to generate a lot of value, which you can see in the Q1 numbers in terms of revenue.
I think we're not more than a few hundred thousand. Half a million, let's say in recurring revenue additions beyond our current run rate to get to a cash flow positive situation.
Thank you very much. Those are my questions.
Thank you, Mark.
As a reminder, it is star then one to ask a question today. We'll go next to Keith Schaefer with Oil & Gas. Please go ahead.
Hey, guys, this is not Keith. But, I have got a few questions for him.
The first question is pretty much asked. He wanted to know if $3 million Canadian will get you to cash flow breakeven on a quarterly run rate?
Yes. We would get there. Yes.
Okay. The 20 customers now, what would you have had last quarter and then one year ago?
Yeah. Just to be clear, we have more than 20 customers, but we have 20 major customers responsible for a lot of the revenue right now. Okay. I should clarify that. I'm sorry, the other part of your question again?
Yeah. Where would you have been a year ago in terms of, I guess, major customers?
We would have been probably 13 to 15 a year ago.
Okay, and one quarter ago you'd have been 20 or so, right?
A little more than that, yeah, but in terms of large customers, yeah, 20.
Okay, the next one. Could you discuss your revenue model for high value assets that have been tracked versus smaller, not nearly as material?
Yeah. The revenue model doesn't change much based on the value or the asset. Our business solutions, the pricing around each of our business solutions changes around the industry. If we're tracking returnable transport items, we try to price a little bit more around value.
But, our core pricing is built around four things. One, in every case for then a subscription based model or a recurring revenue model, we charge based on the solution set that we're delivering. We charge for GAME.
Then, we charge a business template on top of GAME; which is either yard management, or supply chain management, returnable transport items, or high value, or enterprise assets like IT assets. Each of those is a business template running on top of GAME.
There's a base monthly fee for game. There's a base monthly fee for the solution set. That varies, but based on solution set. Then, there is an increase in revenue based on the number of read points.
The number of read points are fixed readers, mobile readers, antennas, handheld units, vehicle mount units that are used to track or read these tagged assets throughout an enterprise's core business processes, the operating processes. At each read point, we deem that the customer is generating additional value through the use of our solution.
We bill them an additional monthly fee. Then, if you look at what we just said. We have got GAME core platform on a monthly basis, the business template on a monthly basis, the read point on a monthly basis. Then, we add additional monthly fees for analytics and for integration into the back end system.
For a lot of our device management components, each of those are billed separately on a monthly basis. As we add new modules like the recent module we just bill for our large insurance company with integration to BMC.
That's now a module that other companies leveraging BMC will buy on a subscription basis along with the other things that I just mentioned. Does that help?
Yeah. It sure does. Thank you. One last question, based on what your current visibility is, how much more do you think you'll draw down the credit line?
I'm not sure that we will. I mean, if we can approach our cash flow positive in the next quarter, next quarter and a half, we would be able to not have to draw down on that. We would be producing cash to meet our operational goals.
Yeah. From our perspective, and with the opportunities we have in the pipeline. The forecast we've got against – that we've set budgets on, it wouldn't dictate an additional requirement to draw down on additional cash from that facility.
Okay. That's it for me. Thanks, guys.
We'll go next to John Lucatucci [Ph] with Echelon Wealth Partners. Please go ahead.
Yeah, hi, guys. Good evening and congrats on a good quarter here, and just a quick question. Have you guys modeled out your cost of customer acquisition and your average lifetime value of an enterprise sub?
We have. We put together some preliminary models on that. I think there is still some work we have to do on that, frankly.
As part of the ongoing focus around business process optimization and our operating efficiencies, we're putting metrics around many more of our business processes than we've had a year ago.
Okay, great. Is it safe to assume for the balance of Fiscal '19, your $2 million kind of consolidated top line is the new run rate for the business this year?
I think, again, and without giving too much away. I think we have a lot of opportunities in the pipeline that could that move those numbers substantially beyond that.
Okay. Then, just turning a gear to gross margin. I mean, at this point in time, how much more hardware do you have contracted to be sold this year that could adversely impact gross margin compared to the higher margin associated to the SAS recurring revenue?
I think to answer that. We have, as I mentioned, more than 20 commitments – or more than 20 implementations this year committed. As we continue to leverage our partners, we expect that a lot of the hardware costs associated with those implementations would be handled by our partners in favor of us recognizing more of those deployments more quickly.
We bring in a lot of that revenue opportunity forward in the year. Obviously, changing the mix of revenues such that we have a higher percentage of recurring revenue and services versus hardware.
Again, with that said, I will tell the folks on the phone. We're still going to grow, obviously, the number of new customers and the new logos in the business. As that happens, we're going to see some peaks in hardware.
But again, I think that the thing to watch is the amount of recurring revenue that grows. To know that when we do see hardware coming into a quarter, it's a really strong indicator of future recurring revenue behind it, right?
The customers are not buying hardware unless they're going to use our software to drive or derive value from their investment in the hardware.
Right. I noticed that on your balance sheet. There was an uptick in deferred revenue in the quarter sequentially. Can you talk a bit about where that's coming from?
Yeah. As of October 1, 2018, the IFRS changed its recognition of hardware – contracts, and revenue, and contracts. We went back and we had to review all of our customers for the previous year.
Actually, the previous couple of years to make sure that we now meet the new guidelines that went into effect 10/01/2018. Some of those effects were pulled out of the prior years and pushed into 2019; thus, increasing our deferred revenue amount.
Alright. Thanks guys, and a good quarter. Thanks and a good quarter. Thanks.
Thank you very much.
As a reminder, it is star one for questions today. We'll pause to allow questions to queue. We have no further questions at this time. I'll return the floor back to our speakers.
A - Tim Harvie
I hope that everybody is excited about TrackX in 2019 Fiscal Year as we are following this call. Certainly, if there are other questions, reach out to us, or reach out to Sean Peasgood at Sophic Capital to answer any additional questions.
But again, I would like to thank you all for taking time out of your day to join us on this call. I look forward to continuing to show you progress throughout future quarters, and continuing to show [indiscernible] both new accounts and expansion opportunities in response to the strategies that we shared with you during this call.
Thanks again. That's really all for me.