I.D. Systems, Inc. (NASDAQ:IDSY) Q2 2019 Earnings Conference Call August 1, 2019 4:45 PM ET
Chris Wolfe - Chief Executive Officer
Ned Mavrommatis - Chief Financial Officer
Conference Call Participants
Josh Nichols - B. Riley FBR
Glenn Mattson - Ladenburg
Gary Prestopino - Barrington Research
William Gibson - Roth Capital Partners
Good afternoon. Welcome to I.D. Systems Second Quarter 2019 Conference Call. Joining us for today's presentation is the company's CEO, Chris Wolfe; and CFO, Ned Mavrommatis. Following their remarks, we will open up the call for questions.
Before we begin, I would like to provide I.D. Systems' Safe Harbor statement that includes cautions regarding forward-looking statements 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, anticipated result of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's product offering and other industries, industry trends are considered forward-looking statements. Such statements include but are not limited to the company's financial expectations for 2019 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 statements. 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. Sir, please proceed.
Thank you, Victor. Good afternoon and thank you for joining us today. After the market closed, we issued our financial results for the second quarter and six-months ended June 30, 2019, and a press release, a copy of which is available in the Investors section of our website. The second quarter continued the acceleration of our growth strategy, as we delivered another quarter of solid results and made significant progress executing on our near- and long-term growth plan.
From a financial standpoint, Q2 was highlighted by a record quarterly revenue, which was up 20% sequentially and 10% year-over-year. We also achieved our second consecutive quarter of adjusted EBITDA profitability, demonstrating our continued focus on driving profitable growth. Overall, we believe these results are a solid reflection of the building operational momentum in our business.
I look forward to sharing more details on our progress. But first I'd like to turn the call over to Ned, who will walk us through on financial results for the second quarter and the first six months of 2019. Ned?
Thank you, Chris, and good afternoon, everyone. Turning to our financial results for the second quarter ended June 30, 2019. Revenue for the second quarter of 2019 increased 20% to a record $16.3 million from $13.6 million in the prior quarter and increased 10% from $14.8 million in the same year-ago period. The increase in revenue compared to the prior year was driven by our Industrial Truck segment, which increased 14% compared to the prior year second quarter, and our Logistics Visibility segment which increased 24% compared to the prior year second quarter.
Product revenue for the second quarter of 2019 was $10.6 million compared to $10.8 million in Q2 of last year. The decrease in product revenue was primarily due to timing of unit deliveries to Avis which vary from year-to-year. Service revenue for the second quarter of 2019 were $5.6 million, compared to $4 million in Q2 of last year. The increase in services revenue is due to development service revenue related to the program with Avis, as well as an increase in high margin recurring revenue.
Recurring revenue for the second quarter of 2019 increased 10% to $5.4 million from $5 million in Q2 of last year. We expect that growth in recurring revenue to continue to grow as every unit we sell in all three of our segments comes with a long-term recurring revenue contract. Gross profit for the second quarter of 2019 increased 10% to $7.1 million or 43.4% of total revenue from $6.4 million or 43.3% of total revenue in Q2 of last year.
Turning to our expenses. Selling, general, and administrative expenses for the second quarter of 2019 were $6 million, up slightly from $5.8 million in Q2 of last year. The increase in SG&A expenses was primarily due to the inclusion of expenses from CarrierWeb U.S., which were absent in the year-ago period.
Research and development expenses in the second quarter of 2019 were $2 million, up from $1.5 million in the same year-ago period. The increase in R&D expenses was due to program development timing of Avis projects and finalizing LV Series field trial projects, as well as the inclusion of R&D expenses on CarrierWeb U.S., which were absent in the year-ago period.
And finally, acquisition-related expenses for the second quarter of 2019 were $1.6 million compared to $149,000 in Q2 of last year. The increase in acquisition-related fees was due to non-recurring costs related to our pending acquisition of Pointer and the acquisition we completed of CarrierWeb U.S.
Turning to our profitability measures. GAAP net loss for the second quarter of 2019 totaled $2.6 million or $0.15 per basic and diluted share. This compares to a net loss of $1.1 million or $0.07 per basic and diluted share in Q2 of last year.
Adjusted EBITDA, a non-GAAP metric, which we define as earnings before interest, taxes, depreciation, amortization, stock-based compensation, and non-recurring items for the second quarter of 2019 totaled $129,000 or $0.01 per basic and diluted share. This compares to adjusted EBITDA of $290,000 or $0.02 per basic and diluted share in Q2 of last year. And finally, we ended the quarter with $8.4 million in cash, cash equivalents, and no debt.
That concludes my prepared remarks. Prior to turning over the call back to Chris, I want to mention that we'll be presenting at the Canaccord Conference in Boston on August 7. Looking forward to seeing everyone that'll be attending and the presentation will be available on our website for those that cannot attend. Chris?
Thanks, Ned. Similar to our last call, I'd like to review the highlights from our three business segments and then spend the balance of my prepared remarks on the status of our acquisition of Pointer and the evolution to PowerFleet, which will be the rebranded company post closing.
In our Industrial Truck Management business where we sell analytics Software-as-a-Service and purpose-built ruggedized telemetry units, we had a good quarter and missed having a great quarter due to one significant order worth over $1 million that slipped into Q3.
In addition, we were off to a very encouraging start with our new partner Jungheinrich, the third largest forklift manufacturer in the world. To recap the strategic partnership, which we forged in Q1, this affords I.D. Systems an opportunity to provide a sophisticated white label solution to Jungheinrich's customer base.
During Q2, we successfully finished white labeling our SaaS solution; we developed a Jungheinrich-specific telemetry unit, and recently began shipping initial units to their end customers in Europe. We see growing excitement and momentum through the Jungheinrich worldwide dealer network as the product launch is being rolled out and ramped up.
Beyond Jungheinrich partnership, we also secured multiple new wins and follow-on orders across all of our geographies, not only in Europe with Jungheinrich but also in North America with companies like Paccar, Bayer Pharma, Nestlé, and Georgia Pacific.
Lastly, our launch of PowerFleet Essence product is gaining ground. As we mentioned previously, this product is targeting small fleets that are used in stores and small facilities. As planned and hoped, we have entered a large-scale trial with PowerFleet Essence that has significant potential for 2020.
We believe our continued success demonstrates the growing demand for I.D. Systems solutions and how our technology empowers these customers to effectively manage our assets, keep their employees safe, and optimize productivity regardless of their fleet size and budget.
The second quarter also marked another milestone period for our Logistics Visibility Solutions group. Perhaps the most significant achievement during Q2 was the successful integration of CarrierWeb U.S. assets into our business.
Again, to recap for those newer to our story, CarrierWeb is a provider of real-time, in-cab workflow, driver productivity applications, electronic driver devices, as well as two-way refrigerated command and control.
By adding CarrierWeb's comprehensive refrigerated product to I.D. Systems' already robust LVS product line, we substantially bolstered our ability to be more effectively at selling to mixed fleets that are both drive in and reefer fleets. In fact, we currently have several reefer pilots underway representing nearly 19,000 units of potential opportunity. Keep in mind that the average revenue per unit for reefer products tends to be tripled that of those for drive-in devices.
While Ned mentioned that our Q2 operating expenses were higher due to CarrierWeb, we have near-term plans to achieve approximately $250,000 in additional savings in the coming months.
On top of this, we secured multiple wins during Q2 including deals with SNL Transportation for in-cab and American Intermodal Management for chassis tracking. The latter was a significant expansion of 2,700 units scheduled to roll out in Q3.
Also in the quarter after several months of field trials, we commercially released our award-winning LV Series platform and started taking initial orders from various large enterprise customers such as Ashley Furniture, Walmart and NFI.
Lastly, Freight Cam, our patent pending high-definition cargo detection and deep learning system that works with our LV series telemetry units is being viewed as a true game changer and has gotten us into several additional pilots with a pipeline of 125,000 potential units.
Shifting gears to our rental fleet business. During the second quarter, we delivered 18,000 telemetry units to Avis Budget Group. From the development and the certification standpoint, we certified all 70 U.S. make models and years ahead of plan and made significant progress on the remaining development programs that are underway. And step with this we began planning for the certification of Avis vehicles in Europe, which we expect to commence in the third quarter of this year.
Shipments of the remaining units under the current 75,000 unit order will vary based on Avis' in fleeting of new cars, but we see the preponderance of these units shipping before year-end.
In the short-term, however, this has increased our inventory and reduced our cash position but this should flip back later this year. Overall, we're very encouraged by our initial success and positive feedback we've received from Avis, especially our product's high-quality and ease of installation.
One integral part of our success with Avis is our collaboration with Pointer who we've partnered with on building the 75,000 telemetry units. Our commercial relationship with Pointer goes back more than two years. But as most of you know in March, we signed a definitive agreement to acquire Pointer for $72 million in cash and approximately 11 million shares of PowerFleet, a newly created holding company.
The shareholder meetings are scheduled for August 29 and we expect the transaction close in early October. The IT systems and Pointer leadership teams are working closely on integration planning to ensure seamless transition across every facet of the combined business. As part of this, we've already started our re-branding efforts to PowerFleet, including launching a new more functional and informative corporate website.
All together, we remain confident in our ability to achieve our 12-month financial outlook as a combined business, which we believe has the potential to generate more than $150 million in total revenue, double-digit organic growth and adjusted EBITDA margins of between 15% and 20% of total revenue.
Clearly, our vision of creating PowerFleet as a global IoT telematics software solutions provider is materializing. We believe our ability to realize this vision will translate to significant shareholder value through global scale and elevated market position and also sustainable profitability and cash flow generation.
And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.
Of course. [Operator Instructions] And our first question comes from the line of Josh Nichols from B. Riley FBR. You may begin.
Yeah. Thanks for taking my question and great to hear things are moving along pretty quickly with Jungheinrich. I was wondering if you could help frame a little bit more about the size of this opportunity longer term as we think about; one, how many of these materials handling units Jungheinrich is selling and what the ultimate penetration rate of this white label solutions could be as we progress through this year and next?
Yeah. Thanks, Josh. Our deal with the Jungheinrich, which we signed initially is for a minimum of 2,000 units a year for the next two years. To be quite honest with you, I think both companies would be, I would say disappointed would be the least of what I would say.
Jungheinrich ships about 150,000 forklifts and material handling trucks a year. We believe and I hope our goal is that we'll shoot at the 10% penetration rate of what they ship out a year. However, we have to earn that. We have to get the channel up and running. We have to train their people, but right now the excitement is there to be successful.
Thanks. And then is that right you said the LVS segment was up 24% year-over-year in 2Q? Did I hear that right?
Correct. That’s Q2 -- Q2.
Great. And then, I guess could you just -- that segment seems to be performing quite well. Could you just talk a little bit about the expectations a little bit for the industrial truck in the second half? And how things are going?
Yeah. I think in the industrial truck, the pipeline looks very strong. Actually, through the dealer channel -- I'm not mentioning the OEM channel with Jungheinrich, you're talking industrial truck, right? So, the strategic accounts look strong, the dealer channel looks strong.
So again, I feel fairly confident in the rest of the years holding very good numbers. And we haven't -- we didn't ship one Jungheinrich private labeled unit in the first half. So, all those units will start coming in the second half.
And then last question for me, and then I'll hop back into the queue. Great to hear -- it seems like things are moving along, proxies out for the acquisition with Pointer. I guess how are things going as far as the integration planning front and opportunities that you think that you could talk about as far as Pointer or some of the 4G product offerings? And how you could maybe incorporate some of that into your existing offerings?
Yeah. That's probably important for everyone to know that the $150 million target is really based on the current growth plans for both companies and that -- it doesn't take into consideration any what we call cross-selling opportunities, which there are some fairly significant opportunities for us to pursue.
Number one, taking our Industrial Truck products and selling them through geographies that Pointer and Cellocator are in today. And number two, looking at their fleet management systems that they sell globally and bringing those back into the United States. And a matter of fact, we're already starting some pilots in the states with those products. And just so you understand what those products are that really goes after smaller vehicle fleets for service and utility and delivery.
Typically, what we call the Class 1 to 5 fleets. There is 25 million to 30 million of those vehicles in the U.S. market. And historically, in our Logistics Visibility side as an example, we typically go after the Class 7 and 8, which you -- most people would consider like a semi truck and tractor.
So again, it's brand new opportunities on selling on both of those sides. We've had in the last two months what we call speed dating sessions between all the business leads to come up to speed on all the business activities across all geographies and verticals as well as product road map meetings et cetera. I mean there is a lot of opportunity for us to consolidate platforms. We already have people working on the strategies there, as well as even where people are hosting. The good thing is we're both on the same technology stack. So, we're a Microsoft stack the technology wise and so is Pointer and Cellocator. So, that actually helps us out quite a bit.
Thanks, guys. I will hop back in the queue.
Okay, thanks, Josh.
Thank you. And our next question comes from the line of Glenn Mattson from Ladenburg. You may begin.
Hi. Thanks for taking the question. So, jump right in on the Jungheinrich. Nice to see that you've gotten all the work done there to move forward, I guess. Can you talk a little bit about what you think the first deployments would look like? What kind of customers are taking the first ones? Is there like a test period or trial period? And how should we judge success over the first quarter or 2? Like, I know you said expect a minimum of 2,000 a year, hopefully much more than that. But what does it look like in the early stages of the rollout here?
Yes. Just so everyone's aware too, it's probably important to note Jungheinrich's been representing our product to the world's largest online retailer in Europe. So, they have a lot of familiarity with our product and our people and working with us. The only difference is in the products and it's significant. I mean on the white labeling it is a Jungheinrich product. But we actually did some specific vehicle integration to make their product easier to install as well as operate a little slightly differently for Jungheinrich.
So, again, I think the nice thing is, they have a product that actually works phenomenally well with their trucks coming off the line. But, again, they're already familiar with selling our product. They've already been bringing their dealers up to speed. We see their -- basically hitting the ground running. We don't see there is any kind of pilot or field trialing going on.
Okay. So can you give us any sense of what kind of volumes you'd expect in the back half for instance?
Well, I think initially we're probably talking somewhere in neighborhood of 500 units in a quarter potential.
Right. Okay, great. That makes sense. And I missed something you said Chris about the -- an order that slipped that could've -- you said it was a $3 million order that slipped or something?
No. It was just slightly over $1 million.
Okay. And that was in what segment again?
That was in the Industrial Truck segment in North America.
All indications even going into the quarter was we were going to land that. It just pushed out mainly due to vacations in Canada. So...
Okay, great. I will jump back in. Nice quarter guys.
Thank you. [Operator Instructions] Our next question comes from the line of Gary Prestopino from Barrington Research.
Hi. Good afternoon, everyone. You gave segment revenue growth I think two segments. What was the automotive growth? Or did I miss that in your narrative Ned.
Sure. It was actually down slightly. The Automotive business in this quarter it was about $4.7 million. Last quarter, it was $5 million that had to do with last year in Q2 we actually had a big delivery of hardware to Avis for the initial 50,000 units.
Okay. That's great. And then rather new to the story, but I just want to make sure I got this right the 75,000 of telemetry units that's targeted for Avis Europe. Is that correct?
No. That's actually targeted for Avis U.S. and...
Okay. Okay. I just wanted to – and you're doing certification for Avis vehicles in Europe but you don't – you haven't got any orders for anything shipped over there yet, right?
Okay. And then Chris you mentioned something I was trying to write this down. You said there was something 125,000 unit market in your narrative and I couldn't write it down. What is that pertain to?
Yeah. The 125,000 units is actually in our pipeline. So it actually represents a little over seven of the top 100 carriers that are in active pilots right now with our new LVS and Freight Cam platforms. Again, I can't reiterate enough what Freight Cam. Its like – it would be great one of these days to do a show and tell on this line, but maybe not the right venue. It literally when you can see the freight and you can see the behavior of the freight. How it's loaded, whether – how much percent of capacity you had back. Usually, the comments you get back is wow this is really good stuff. And this is like from some of the top logistics players in the field. So, again that, 125,000 is in our pipeline being worked right now as opportunities.
Okay. That's an opportunity nothing signed, right?
No, no but they are piloting, right? So –
Okay. No that's fine. I'm just trying to make sure I get it right here. And then that's in the LVS business, right?
Okay. Thank you.
Thank you. [Operator Instructions] Our next question comes from the line of William Gibson from Roth Capital Partners. You may begin.
Thank you. Chris, we talked about – you talked about CarrierWeb and refrigerated truck – trucks and that business but what did they get on average on their in-cab installations?
So our in-cab product is about $800 retail for the actual hardware. And then the recurring in-cab is about $30 a month.
Okay. And for modeling purpose is – for the combination of PowerFleet is November 1st, a good date?
Hey, Bill, it's Ned. We're really going to push towards the early part of October. The vote is set for August 29. In Israel there is a 30-day waiting cooling-off period post the vote. So you have to wait 30 days prior to closing. And then there is some Jewish holidays in late September. So we're going to push hard for the first few days of October, but that's the plan.
Okay. Good. Appreciate it.
We want to start the fourth quarter as PowerFleet one combined organization.
Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Chris Wolfe for closing remarks.
Yeah. Thank you for joining us today. Again, I'd like to thank our employee's, customer's, partners and shareholders for their support. We look forward to updating you on our next call. Operator?
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.