Good day ladies and gentlemen and welcome to the I.D. Systems Incorporated Fourth Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to introduce your host for today’s conference Ken Ehrman, Co-Founder and CEO. Sir, you may begin.

Welcome to I.D. Systems fiscal 2014 year-end conference call. Thank you for joining us. I’m Ken Ehrman, Co-Founder and CEO of I.D. Systems. On the call today, I will summarize our fourth quarter and full year results then Ned Mavrommatis, our CFO will detail our financials and Norm Ellis, our new Chief Operating Officer will detail into our sales and operational highlights. Following our opening remarks, we’ll open the call for questions and answers. Before we begin, let me remind everyone that. The following discussion contains forward-looking statements within the meaning of federal security laws, which are subject to risks and uncertainties, including, but not limited to; the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results, and other risks detailed from time-to-time in I.D. Systems filings with the SEC. These risks could cause the company’s actual results for the current fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company. While it’s been roughly 10 months since we initiated the changes associated with I.D. Systems 2.0. In that relatively short time, I am pleased to announce that we achieved the primary goals of this strategic initiative, which concluded at the end of the fourth quarter. Norm will describe these accomplishments in a few minutes, but I want to emphasize a number of key points. Our investments in I.D. Systems 2.0 were aggressive and focused on projects that will enable us to grow rapidly and profitably to scale and meet the demands of our Fortune 100 customers. Our priorities were quality, repeatability and scalability from product commercialization to implementation and support processes to customer realization of system benefits. With the help of three new TAM products launched in 2014 in roughly have the…

Thank you, Ken and hello to everyone on the call. Revenue for the three months ended December 31, 2014 increased to a Q4 record of $12.7 million, up 12% from $11.4 million in the fourth quarter of 2013. The increase was attributable primarily to increased sales in both the VMS and TAM segments, which grew 11% and 15% respectively from the fourth quarter of 2013. Gross margin in the fourth quarter of 2014 was 35% compared to 30% in the same period a year ago, also result our lower than historical levels due primarily to non-recurring items. In the fourth quarter of 2014 margin was impacted by spare part purchase order from Wal-Mart that would be used to refurbish existing hardware and was a critical part of a $14 million three years contract extension with Wal-Mart. In connection with the three year contract expansion, we extended our product warranty to Wal-Mart and recorded a one-time warranty expense in the fourth quarter. The overall gross margin on the Wal-Mart deal over the three years is in line with our historical gross margins. The gross margin in the fourth quarter was also impacted by the sale of approximately a 1000 units or new VAC4 product, which has been sold primarily under our new recurring service model for VMS Systems. In both cases, the initial lower product margins will be offset by higher margin services over the course of the associated multi-year contract. The margin in the fourth quarter of 2013 was impacted by a non-cash non-recurring inventory reserve charge, reflecting our newest generation of wireless M2M technology, rendering older products up the lead. R&D expenses in Q4 2014 were $2.4 million compared to $1.8 million in Q4 2013, reflecting the formal conclusion of the I.D. Systems 2.0 initiative. SG&A expenses in Q4…

Thank you, Ned and hello to everyone on the call today. 2014 was an extremely busy and productive year and we have much to show for it. As Ken rightly emphasize we concluded our I.D. Systems’ 2.0 strategic initiative in Q4, aimed at building quality, repeatability, scalable processes to support our goal for revenue growth and profitability. So I want to share details about some other projects we completed under that initiative first and foremost we accelerated development and commercialization of four new key products in 2014, bring them to market in about half the time that would have taken under our original project plan. In our VMS business we shipped about 1000 units of our new VAC4 in the fourth quarter of 2014. This fourth generation products decreases our VMS implementation cost by up to 40% compared to the previous generation of our system hardware. It also increases the speed of deployment by over 50% primarily by reducing installation time from as much as four hours to as little as one hour. In addition the VAC4 enable seamless, wireless field upgrades, which helps keep our end users current with our latest software to optimize the value of their system, simplifies our customer support and help end users. In our TAM business we launched and shipped three best in class products in 2014, with significantly expanded and improved on our portfolio of industry leading container and trailer trucking solutions. The GSM-D400, an intermodal container tracking system and the GSM-D150 an intermodal chassis tracking device are designed to address the needs of mobile asset management, which we see as a key growth opportunity in the U.S. transportation industry. The GSM-D300 a dry van management system with an advanced censor endless customers to perform full function asset monitoring, with either satellite or…

Thank you, Norm and thank you everyone for your time on the call today and we’ll welcome any questions you may have at this time.

Thank you. [Operator Instructions] Our first question comes from Morris Ajzenman with Griffin Securities. Your line is open.

Afternoon, guys. First question, these contracts going forward recurring revenue model and again with VMS moving in the same model as the Asset Intelligent Group are all these contracts locked in where current revenue kicks in your gross margins will approximately 60%, is that fair and is that accurate for all these contracts going forward once the recurring revenue model kicks in?

Well I’ll take that one. So if you look at the cost of the hardware versus the price as well as cost of the hosting compared to price over the term of the contract, the margins in the deal are around 60%. So if someone signs a five year commitment to us then over that five year term they’re paying us for that hosting and services capability and the net margin on the deal is as you said 60%.

How does it play out I guess the question for Ned then over the first quarter and the soon quarters of this year is just step up in a more aggressive manner particularly with VMS on the similar current revenue model and your hardware is sold at low prices, what should we expect gross margins on a GAAP basis just gross margins to be for the next couple of quarters?

Sure, hey Morris. The gross margin get impacted upfront because the way its priced out the hardware has a lower gross margin and the services have the higher gross margin. As we look into 2015, we expect the gross margins for the whole year to be approximately 50%. However in the beginning of the year they were going to be in the mid-40s towards the high 40s and then improving to the low 50s towards the back half of the year.

Alright so then for the first quarter the fourth quarter was an anomaly with these onetime expenses based on new model anywhere between 45% and 48% is a realistic expectation for gross margins.

Yes.

Okay.

And one thing I want to add in our model is that we don’t anticipate that every one of our customers will immediately move to the new model. So in the units sold this year we’re exciting roughly half will be on the new model and half will be on the old model.

Okay. And one last question I’ll get back in queue here. What would have told unit shipped in 2014 in asset management and you might have given to us, but for the full year asset management and VMS.

The number on VMS was 8700 I believe and 17500 for Transportation Asset Management.

Okay. So then for ‘15 you expect your revenue growth rate to be similar to ‘14 which is 14%, but unit volume will be greater. Can you give us any idea what that unit volume growth rate will be?

We’re expecting a 40% increase in unit volume on the VMS side and roughly 15% increase on the TAM side.

Thank you.

Our next question comes from Jason Smith with Lake Street Capital. Your line is open.

Hey guys, thanks for taking my questions. A real quick Ned could you talk about what the gross margin impact from the Wal-Mart contract was in Q4?

Yeah if you look at the gross margin in Q4 and you backed out the impact of the Wal-Mart impact, the gross margin in Q4 would have been approximately 45%. If you back out the impact of the 1000 units that we sold under the new pricing model than they would have been closer to the 50% range.

Okay thank you. And then with you guys shifting to a more service centric model any change to your gross margin target out there of 54%? And if you could update us on where you think your breakeven run rate is?

Sure the gross margins will be impacted at the beginning as I said before, just because the hardware has the lower margin than the services. So in the beginning of next year our margin will probably be around the mid to high 40s and then towards the back half of the year we expect to be in the low 50s. So for the overall for ‘15 we’re looking at 50% gross margin. Once we go into ‘16 and ‘17 then you can see in the high margin services kick in, we can see them going higher the 54%, 56% level. When you look at the breakeven point once we build the sales, marketing and R&D efforts it will be approximately on a non-GAAP basis $52 million in annual revenue.

Okay. And then the last one from me, Ken it sounds like you guys are off to really good start here this year, wondering your confidence in growth for this year where it’s coming from is it signing up new customers, expanding at existing customers or a combination of both?

Well there’s a lot of things, one, is I certainly anticipate that the impact of I.D. Systems 2.0 will continue our execution time, our time from order to delivery has improved significantly and the sooner we deliver the sooner people will order more, because they certainly want to do that and that was the problem we had which is that we were kind of our own worst enemy there. So the ability to execute better should accelerate that revenue, but in addition adding Toyota as a distributor while we don’t know exactly what the impact that will be, if it’s anywhere near the impact that our Raymond has been, which certainly enable us to achieve the unit targets that we set out to achieve for the year.

Alright, thanks a lot guys.

Thank you.

Our next question comes from Josh Nichols with B. Riley. Your line is open.

Hi guys, how is it going? Just want to go over a couple of things, real quick regarding OpEx now that I guess everything is wrapped up with I.D. Systems 2.0, but the company is still obviously going to make some investments for growth for sales and R&D any idea on what OpEx might be looking like for ‘15?

Sure so the SG&A expenses we expect to be approximately between $23 million and $24 million that include about $3 million in non-cash expenses including depreciation, amortization and stock-based compensation. And R&D expenses we expect to be in the range of $5 million to $6 million for 2015.

Okay. And then looking here at just some of the sales and everything I was wondering do you see much seasonality in the business as far as cyclicality maybe Q4 is low or Q1 or anything like that?

Yeah this is Norm, typically historically Q1 has been slower for us. We’re having good Q1 right now, but I think a lot of customers that work on annual budgets will sometimes flush those budgets out in Q4 and we have a practice of trying to assist them with spending that money as appropriate as you might imagine. So we did have a great Q4 and so Q4 will clearly be slightly behind that but it’s been a highly cyclical I think it’s more based on the budgetary constraints that our customers have, but we’ll accelerate through the balance of the quarters and of course I think we’ll have a very strong Q4 this year as well, it will be a bit little slower in Q1, but it will be growing every quarter as we go through the year.

And then glad to see that Toyota is starting to ramp, so you mentioned 270 dealerships just for reference how many dealerships do they have and any idea as far as how long it taken to scale that out?

I think it was 270 branches and 70 dealers so there is a difference there between the sizes of them, this week they were doing the introduction of our technology to those dealerships so that at ProMat, which is the largest material handling show of the year. The announcements regarding the new release of the product, which by the way is slightly different than Raymond because it’s going to be labeled with Toyota, so it’s going to be a Toyota branded product completely both the hardware and the software is really due to kick in at the end of March.

Okay, let’s see. And then last thing I guess or actually real quick of the 7000 unit Transportation Asset Management sales any specifics as far as how many of those sales were related to the key markets of intermodal or chassis things like that?

No the numbers for the chassis intermodal are just beginning to kind of like we just launched those products in the second half of 2014. So a lot of that business was still in the traditional dry van market space. We have several very large pilots underway right now with some of the leading intermodal providers in the U.S. and those will come to conclusion in the next couple of months and we’re very excited about 2015 and what that will lead to for the intermodal and chassis market.

Yeah great, okay. Well thanks a lot guys.

Thank you.

Our next question comes from Bryan Prohm with Cowen & Company. Your line is now open.

Thanks, good afternoon guys.

Good afternoon.

Hey, congratulations on getting all the 2.0 goals hit into year-end. For me the question is based on everything that’s been asked so far I mean will ask some where do we get from here questions around beyond the impact of 2.0. So today you’ve outlined longer term vision of repositioning VMS as a system as a service adopting a multi-year service model. And Ken you guys have already hinted at $100 million sort of long-term revenue goal for the company long, can you walk me through what that would look like and how the changes you’re making today what is recurring revenue look like in that $100 million pie, is it slightly over 50% is it a substantial majority? What is the big inflection point come or the crossover rather? Thanks.

Well that answer the last part, but let me start with the first part which is if you look at the total assets that are currently being tracked today in our markets that we’re serving which is the industrial trust market, the airport vehicle market, the intermodal containers, chassis and dry vans you are talking about net about 5% market penetration. And as I’m sure most of the attendees on this call know the cost and prevalence of cellular communications have come way down and have gotten much more broad. So most of our transportation customers are moving completely away from satellites and to cellular, which is a great thing for us because it means that battery life going to be better as well as the margins should be better and the cost should be lower so the ability for our prospects to deploy becomes much more realistic than ever before. I mean it was only three or four years ago where have might cost us $20 a month per asset for cellular communication, and now it’s less than a $1. So it’s a massive improvement on the macro level. So our basic 2015 focus is to continue our emphasis on reliability, focus on the channel developing like adding Toyota as well as other forklift OEMs. Adding to sales and marketing now that we believe we have a scalable business capabilities from a delivery standpoint, from an implementation partner that we’ve signed up, from its online training that we’ve created as well as the benefits capability through our analytics tool. So we really feel good about adding to our sales and marketing as well as just continued focus on workforce training. So those are our 2015 strategic focuses. But as it relates to the financials let me have Ned answer the about the crossover.

If you look at our recurring revenue today of about $17 million plus it hasn’t really grown at rate that we’re all happy with. We believe with this new model that within three years where we’d be able to double that number.

Great that’s very helpful, thanks. Let me talk a little bit about mix then, a 1000 units of that VAC4 in Q4. How does that mix shift or how does that mix look in VMS going at year end a year from now?

Well our plan for ‘15 is about 50-50. Well actually VAC4 is going to be the new product beginning at the end of Q1 for everybody. But there is still maybe a different pricing models for older customers versus newer customers. So the older customers that we have established pricing relationships and master agreements with are going to be a little bit more challenging to move to the new approach. So in 2015 it’s about 50-50 in 2016 we’re expecting closer to 75% will be on the new model and then 2017 you’re talking about 90%.

Great, that’s really helpful. Thanks for answering my questions guys. Take care, good luck.

Our next question comes from Raymond Young with [indiscernible] Asset Management. Your line is open.

Hi guys, good afternoon. I’ve a question for Ned. Can you comment on your cash used for 2015 given the focus on recurring revenues and the need to finance hardware?

Well we are not going to finance the hardware, we are going to charge an upfront fee for the hardware. It’s lower than we charge now, but it would still be above cost it would just have a lower gross margin. So we believe based on our balance sheet that we do not need any additional capital to execute our business plan.

Okay. I have a question for Norm, can you comment on win rates in 2014, has it been flat or has it been escalating and what are your expectations for 2015?

I think our win rates have been increasing not only the percentage against our competition, which we’ve always done pretty well against current competitor. Our biggest challenge I think in the past has been the no decision for the customer that would just not make the change, but with our business analytics tool that we have today we’re able to show them not only ROI internally, which we’ve been able to do before, but we also now are able to show them comparisons to their peers, respecting confidentiality of course as appropriate. And that really is quite compelling against the no decision one, hey well maybe the ROI I believe it or I don’t believe it or it’s not quite as good as I thought it might be, but if I know my peers are doing things and based on my results I’m lagging behind them, it really does kind of get to uses flowing formed to get pass that no decision and really go forward. So I think in that case we’re doing really well on the no decision side and we’ve always kind of been really strong against our direct competitors when we went head-to-head. But I think the point that Ken mentioned earlier was our speed to close is increasing and that’s the part that I’m most excited about instead of taking 180 days or 200 days six months getting that down to two months. Couple of things come into play one our ability to execute with Surge 2.0 [ph] was really the impetus to do that. So we’re able to execute more efficiently, the implementation is easier on the product 50% reduction in installation time gets us to rewarding the customer quicker. And as I mentioned our business analytics tool so really helpful in driving home that value and understanding for the customer. So I think we should be able to achieve the goal that we talked about today and I’m excited in the future as we get even more training to our people and the market continues to see the benefits of this adoptions in the VMS markets specifically we’ll see good future potential for growth.

Okay. Last question, Ken can you comment on or give us some comment on Avis?

Avis is definitely continues to be a customer, I mean I’d probably say the same thing I would have said when we first got started. They’re an important customer of ours we’re almost to the end of year three of our five year contract on the 30,000 cars. We continue to execute on that, they continue to use it to increase their fuel revenue and we continue to be in dialogues with them as well as enterprise and heard about their next phase of telematics in their cars.

Okay. But no definitive timeline?

No, not from really any of them. I think that in this industry obviously we have the lead position with 30,000 devices installed, which is more than Zipcar, Hertz On Demand and V Car combined based upon my knowledge and when there is a next step from anyone of the three we think we are extremely well position to be there.

Okay, thank you.

[Operator Instructions] Our next question comes from Dan Wesson [ph] with Westcoast Management. Your line is open.

Hi guys, thanks very much and congrats on the quarter. Most of the questions have been answered, just a couple of quick ones. The recurring revenue piece of the pie could you disclose what you are experiencing in terms of renewable rates on those service contracts?

When you look at the transportation business where the majority of the recurring revenues coming today, the renewable rates are very high, most of our contracts have automatic renewal and the largest customers like Wal-Mart we just announced a three year extension. So when you look at the renewal rate in our transportation business today is very high.

So say like over 90% kind of thing.

Absolutely.

Okay. And then as a follow on to one of the previous questioners in terms of where you expect recurring revenue to shake out I think you laid out a three year plan maybe you could discuss a little bit about where let’s say you would end 2015 on a quarterly basis of recurring revenue?

When you look at this year we ended the year with $17.5 million, I think it’s not reasonable to expect to see a 25% to 30% increase in recurring revenue at the end of 2015.

Okay, that’s great. And the oil prices, I was just wondering what kind of impact if any you are seeing from your customer base in terms of increased CapEx potentially from the lower oil prices we are experiencing now?

I think the biggest one I could point to is probably in the aviation industry, obviously but a lot have hedged their oil pricing or purchasing. So it’s not directly impacted there, but I think that they are definitely doing better financially, so we are seeing more an uptick there. I mean one thing that’s nice is we are kind of insulated because we have so many different industries that we serve. So we are not reliant on the automotive industry or the aviation industry or rental car industry. So certain companies that might be negatively impacted by the price of oil are Sonoco is a customer so I am sure they are not happy so again it kind all these kind of microeconomic changes have both positive and negative impact on our customer base. The macro element that has the biggest impact to our benefit are the cost and prevalence of cellular as I talked about.

Got it, okay. And then finally Ned just refresh my memory the collection of the $5.5 million from Avis, was that cash collected in Q4?

Yes.

Got it. Okay that’s it from me and thanks a lot guys, congrats again.

Thank you.

Thank you. I am showing no further questions, I would like to hand the call back to management for closing remarks.

Sure, I would like to conclude the call by saying that I firmly believe and I am sure Norm and Ned would attest to the fact that the completion of the Surge [ph] has resulted in enthusiasm level at the company that is really never been higher. We are adopting new customers and being able to deliver and execute on that with much fewer bugs and much fewer delays then we had in the past. Although I will say we are not fully at out of the woods yet we still have work to do. So from a short-term standpoint we are going to continue to invest in ensuring we have quality and scalable processes. Medium term our plan is to continue to invest in the sales and marketing to really go after $8 million assets that are unserved and need our technology, time is our enemy in that regard and the sooner we get on them the better. And then long-term to be clear our goal is to be the preeminent company in the internet of things space, we are calling it kind of the internet of supply chain things that’s our plan and we are working everyday to help get our company to achieve it. So thank you again for your time today and we will certainly stay in touch.

Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.