Good morning. Welcome to PowerFleet's Second Quarter 2023 Conference Call. Joining us for today's presentation is the company's CEO, Steve Towe, and CFO, David Wilson. Following their remarks, we will open up the call for questions. Before we begin the call, I would like to provide PowerFleet's 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 PowerFleet's 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 results of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's product offering and other industry trends are considered forward-looking statements. Such statements include, but are not limited to, the company's financial expectations for 2023 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.powerfleet.com. Now, I would like to turn the call over to PowerFleet's CEO, Mr. Steve Towe. Sir, please proceed.

Good morning, and thank you for joining us today. It's a pleasure to share our second quarter performance with you. We've executed extremely well in Q2 and the first half of 2023 with dramatic transformation across the business, and we remain ahead of schedule in our strategic plan. The first half of 2023 has been focused on aggressively implementing the changes required to give the company the foundations for high-scale, profitable SaaS growth. Our overriding priority is clear, to build a superior value business centered on high-quality, sticky, recurring SaaS revenue. And while we are still relatively early in our journey, strong proof points are now evident in the shape of our P&L, our mix of revenue, and associated service growth rates of 12% for the quarter and 15% for the half on a constant currency basis. Our core go-forward business is currently focused in North America and Israel, which generates 83% of total services revenue, with Europe identified as the key additive market for geographical expansion in 2024. Double-clicking into these markets, service revenue in our North America business grew by an impressive 16% in the first half of 2023, while our Israeli business grew by 10% on a constant currency basis. The recurring services gross margin in our core go-forward business in Q2 was an impressive 71%. These metrics, in combination with a strong pipeline, coupled with early strategic customer wins since the commercial release of our Unity data intelligent platform strategy, are highly encouraging. Switching gear to macro trends, we continue to see a slowdown in the logistics market segment as some customers continue to recalibrate their post-pandemic asset needs, while Israel continues to be buffeted by geopolitical events resulting in tempered new product demand and foreign currency headwinds. Despite the macro headwinds, we're confident in our…

Thanks, Steve, and good morning, everyone. To begin with, I will provide an update on the key strategic priorities that I called out on our prior call, which will provide helpful context to digest our second quarter financial performance. Priority number one is to accelerate our strategic transformation while staying within the limits of our current balance sheet. The acquisition and integration of Movingdots is the primary project that's consuming a significant portion of execution bandwidth in the second and third quarters of 2023. As a reminder, the acquisition provided multiple benefits, including $8.7 million in liquidity, a talented engineering team for Unity, complementary high-performance technology and an expanded presence in the EMEA region. On our last call, we committed to mitigating the impact of Movingdots business by driving down the EBITDA impact to breakeven before the end of Q3. We have successfully executed our $3 million OpEx challenge, complemented by an extra $1 million in cost reductions. I am pleased to announce that we have taken all necessary steps to achieve the upsized target of $4 million in savings with these costs scheduled to be eliminated from run-rate expense by mid-September. As expected, the acquisition was the source of significant headwinds in Q2 with an EBITDA burn of $1.2 million, plus an additional $450,000 in transaction and restructuring costs. Priority number two is to improve the underlying operating leverage of our business by implementing a common and scalable ERP platform across all geographies. As I noted on the Q1 call, rolling out NetSuite across our core businesses is a cornerstone in meeting the expectation that we expect an additional $10 million in run rate cost savings through the course of 2024. I am pleased to report the ERP project is proceeding according to plan with the rollout in Mexico…

Thanks, David. As we articulated on our last call, our 2023 operating plan focuses on four key strategic objectives we are laser-focused on delivering. Objective number one is optimizing our OpEx base and operating structure to enhance profitability. As discussed through rigorous cost reduction management, we successfully reduced operating expenses by an additional $4 million annually in the last five months, allowing us to onboard Movingdots engineering capacity. While it may be easy to say, executing this brave change is a challenging task. I'm immensely proud of the team's exceptional skills and unwavering commitment, which enabled us to swiftly bring on board the Movingdots' industry-leading capabilities for the insurance, safety and sustainability solution markets. Additionally, we have rapidly expanded our talent pool in critical areas such as data science, AI, cloud architecture and data integration services. This initiative has also positively impacted our underlying EBITDA performance in Q2, and we expect it to support further EBITDA expansion as we drive growth in the second half of the year. Additionally, our midterm seismic shift projects, which include hardware rationalization and integrated global supply chain, a common ERP and shared service centers are progressing well and on schedule. These strategic initiatives are expected to result in an incremental $10 million of annualized EBITDA with tangible results beginning in early 2024. Objective number two is centered around driving robust organic growth in key regions, fueling high-quality recurring revenue expansion. As compelling proof of our efforts, we've achieved strong SaaS sales momentum in the US and Mexico. Our SaaS recurring revenue for North America grew by an impressive 16% in the first half of 2023 compared to the same period last year. Our industrial vertical remains very strong, and we have some great news to share in terms of new logo wins in the…

[Operator Instructions] Your first question for today is coming from Jaeson Schmidt at Lake Street Capital Markets.

Hey, guys. This is Max on for Jaeson. I saw the subscriber count up 9% year-over-year. I was wondering if you guys could break that out between existing customers and new customers? Thank you.

Yeah. Obviously, there's significant growth from new more so than there has been historically. But in terms of providing that level of transparency, that's not something we'll be doing at this point.

Okay. And then, looking out at the North American segment in Israel, you guys gave first half growth rates of 16% and 10%. I was wondering if you could share that growth for Q2 and your expectations going into 2023.

Yeah. So, the 16% was for North America. The 10% was for Israel on a constant currency basis. We did see an acceleration in growth in Q2. So, in terms of actually breaking it out, we're not breaking it out, but to give you a sense in terms of just how that is trending, that should give you good insight in terms of the trend.

And I think our overall view is, we expect those trends to continue. It's very solid growth. And I think both from our customer base and internally, we've really made the shift now that transition to SaaS, and we have very strong growth prospects through Q3 into Q4 and then into 2024.

All right guys. That's it for me. Thank you.

Thank you.

Your next question is coming from Gary Prestopino at Barrington Research.

Good morning, Steve and David, a lot to unpack here. First of all, as I read your press release and what you talked about, Movingdots is still going to be a drag on EBITDA in Q3, but you should be EBITDA neutral for all of Q4. Is that correct?

That's correct, Gary.

Yeah. And just to put some color on that, as we said on the last call, we were taking substantial actions in our business cut to cover. Those actions have been completed. We actually went a little deeper from $3 million to $4 million annualized. And those savings will just take a little bit of time to flow through as we obviously take the costs out through Q2 and Q3. So -- but yes, you're right. From Q4 onwards, we'll be EBITDA neutral, September.

Okay. Thank you. So, in terms of the Unity platform, you have two modules out right now. Is that correct? One you discussed and then one wasn’t -- what was the one in Q1?

That was the safety module. Obviously, you're hearing a lot in terms of our wins in the safety space. They're dominating our wins in terms of customer drivers to do so. So safety in the first quarter and sustainability in the second quarter.

Okay. And then what's the cadence for the rest of the year? Can you make that public?

Yeah. So, first of all, we're getting a lot of traction with the device agnostic ingestion and also with the integration into third-party applications. So, we've pivoted some resource and expense into really kind of scaling those because of the level of demand on both. So that's our priority number one. And that will be followed later in the year with more modularity around advanced fuel and also compliance.

Okay. So, as I look at what you reported here, which is nice that you've been able to break out everything, in terms of this core markets number, you still have not -- you still have these countries that you're in. You have not sold them or jettisoned them yet, right? You're planning to do that in Q3, as I recall from your narrative.

That is correct. So, we expect to give an update on the next call, a substantive update on the next call. If you look at our core margin -- sorry, our core territories, which is obviously North America, which is Mexico and the US, plus Israel and then our 2024 kind of added segment is Europe, then we are currently in terms of SaaS revenues at 16% growth year-on-year for North America, 10% for Israel on a constant currency basis. Our services gross margin for that core business is at 71% and overall gross margins at 53%. So if you think about where we're going to center our efforts, investments and focus, then those are the kind of metrics that we should be looking at for the go-forward business.

Okay. So -- and then, in terms of integrating Movingdots, you said you've gotten the senior management out. What other things are you doing there on the cost side in terms of integration that's going to help you get to EBITDA breakeven?

Yeah. So, all the actions are complete, and that was a realigning in terms of our development resources. We had a number of contractors around the globe, and we're kind of exiting those guys out and using the Movingdots resources for that. We've also put three Movingdots resources into senior leadership positions and made some transitions there. And ultimately then, we've driven other efficiencies across the business in terms of how we were running our European organization previously, where we've now got people in country, which has led us to the fact of now we've saved $4 million annualized. Those things are executed upon. The costs obviously have to flow out, and we need to realize that. But everything is being done in five months, which is where I reference I'm extremely proud of the efforts and the skill of our team to be able to do that in such a short space of time.

Okay. And then, just lastly, I mean, you had been reporting your total shares outstanding with the effect of the ABRY, I guess, convert. And this quarter, you haven't. Is there a reason for that? And what would be the shares outstanding with that convert exercise?

Yeah. Gary, let me get back to you on that. So I'm not so familiar with the history just given my tenure with the company, but happy to connect with you on that offline.

All I would say, Gary, there's nothing to read into it. So, nothing has happened, which has led to any change in our philosophy or in our reporting.

No, that’s fine.

Because we were paying the ABRY dividend in PIK versus cash, I know that does have an impact in terms of EPS count. So, I think we have been sort of [$0.04 if we were PIK and we're $0.01 with the PIK] (ph). So we're paying in cash. So that may be the issue. And again, I'm happy to connect with you offline.

Yeah, I think it's about 5 million shares or something like that. And then, lastly, is it possible? I mean, it was great that you gave subscriber counts for the quarter. Would it be possible to get what the subscriber counts were in Q1 and the year-over-year increase?

Yes, we can get that to you, Gary. The year-over-year increase is 9%. The sequential is [3%] (ph).

For Q1 on the subscriber accounts, that's what because you want to start doing like an ARPU number and stuff like that, and that's really helpful. So, the subscriber number for Q1, plus the year-over-year increase would be much appreciated.

Yeah. We will fix that for you.

Okay, thank you.

Thanks.

Your next question for today is coming from Scott Searle at ROTH MKM.

Hey, good morning. Thanks for taking my questions. Nice to see the growth on the services side of the equation. Maybe to quickly just jump in on the cost side, a couple of clarifications. David, are there any onetime charges that are in there, particularly on the cost of goods sold on the hardware front? It seems a little depressed this quarter. I know it's not an area of focus necessarily going forward, but just what should that look like if it starts to normalize, if in fact it does? And then, as it relates to Movingdots moving to breakeven in the fourth quarter, just one clarification. Is that really in reference to the cost-cutting efforts that you have ongoing? Or Steve, are you making a specific reference to the insurance vertical picking up?

So, I'll answer the last one first, and then David can take the financial ones. So this is around the cost exercise. So, ultimately, as you know, the couple of main drivers for us wasn't the revenue that came with Movingdots, it was the talent to bring in 30-plus highly skilled engineers to drive Unity and drive our insurance propositions, plus give us a beachhead in Europe. So, in order to accommodate that within our balance sheet, we've made those cut to cover, and that's the $4 million that we're referencing.

Yeah. And in terms of product margin, Scott, there's no one-time. So, one-time isn't really the major driver here. But what we are seeing is, we're seeing pressure in Israel. So, we're in the sort of position whereby our [indiscernible] costs are in US dollars. So, the bulk of the cost that go into products are in US dollars. Just given the political situation there, given the macro situation there, we're in a situation where to maintain market share, it is very challenging to pass those increased costs on to the end user. So, we think the most important thing to do for long-term value is to maintain share. So in essence, we're getting squeezed from a margin standpoint. And as I said, sequentially, the reduction in margins was concentrated in Israel.

Got you. Very helpful. And if I could follow up, the $10 million in incremental cost savings sounds like largely focused around some of the ERP integrations that you have ongoing. It sounds like that's a little bit ahead of schedule. I'm wondering if you could provide a little bit of color on that relative to your last comments.

Yeah. So, it is absolutely crucial. If you look at just the relative spend that we have, for example, on the G&A side of things, it is high, and that is reflective of, I would say, systems that work against us as opposed to for us. So, we're absolutely driving that. In terms of the time frame, I would say, it's not inconsistent with what we shared on the last call. That said, it is aggressive, but we want to pride ourselves on doing the hard things well and doing them on time. So we're driving towards that. So, the aim would be to finish across our key markets by the end of this year. That's consistent with last time. There's a lot of work to be done, but we have the right people doing that work and the right level of focus. In terms of the $10 million costs, the ERP specifically, we'll start seeing the benefits during 2024. So we'll be working towards that. But there's other sources of savings too, which I think Steve will walk you through.

Yes. So just additive to that, one thing we didn't mention, we couldn't get everything packed into the chat was, we've just completed deals with IONIX and Flextronics to outsource our contract manufacturing to give us far more efficiency in the way we manufacture and distribute our goods around the world, and that is ahead of schedule. So, we will see some of that start to come a little earlier. Plus, in terms of some of our shared service center work in Mexico, we've started aggressively moving, particularly because we are getting some price pressure in certain geographies. And therefore, we've accelerated some of that as well.

Okay, very helpful. And then, maybe shifting to the pipeline of the opportunity. It sounds like there's a lot going on there in terms of building that TCV. I'm not sure if I heard a number, you gave a couple of examples, but was there a TCV number in the quarter? And maybe a TCV pipeline number. I think last quarter, you talked about it growing 47%. I wonder if there's an update on that front? And if you could kind of highlight for us as well some of the ARPUs where they're trending? Obviously, I think they're going up. But when you start talking about safety, sustainability, what does that do into the blended mix of the ARPUs of new business that you're winning? And as we think about 2024, services grew 16% so far year-to-date. You're talking about accelerating as we go into 2024. How should we be thinking about services growth in '24? Thanks.

So, in terms of the pipe, it was up $40 million during the quarter -- net $40 million during the quarter in terms of qualified pipe.

In terms of ARPUs, then we are seeing, as we're doing the Unity deals, that 15% to 20% uplift range that we've talked about before, Scott. And I think overall, once we get into -- we're totally focused on our core markets. Then for 2024, that 15% range plus for overall services growth is something that we feel is highly achievable. Plus, we'll be layering in more growth from the European territory as well, which, again, the way that we're attacking those markets is ultimately with higher value, higher-quality hardware to software revenues, not the commoditized revenues that we've had within the hardware channels previously, which obviously allows us to tick up on the service side rather than on the hardware side. Ultimately, you can see a real shift in our services mix, which is all part of that SaaS strategy. If we layer on top of that, we're winning significant new logo business. We are bringing on the Unity platform with incremental fees in the different elements that we talked about, whether that's the device agnostic OEM integration side, whether that's the third-party application integration side, plus the modularity, which gives us the ability to have more advanced versions of the standard software. This is all ARPU expansion within our customer base. So, we feel very, very confident about that. The proof points are coming in across that strategy. And that's why we feel really satisfied with having done the transformation stuff early and fast and hard. We're now coming out of the phase that we talked about. We came and said on the call, this six months would be a lot of ins and outs and a lot of transition and change. Now it's about tuning the engine. Now it's about really bringing to bear the overall value that we create for our customers, in our numbers and our shareholders.

Great. Thanks so much. I will get back in the queue.

Thanks, Scott.

Your next question is a follow-up question coming from Gary Prestopino.

Yes. I just want to get back to the sales pipeline. You said you added $40 million. Is that sequentially or year-over-year?

That is a sequential number. So, net pipe grew by $40 million in the quarter -- on the TCV.

You were at $125 million. So, year-to-date, it's about $165 million net pipe?

It will be more than that. Again, the number we referred to last time was the increase in pipe. That was an increase in pipe number versus the total pipe number.

Okay. Thank you.

We have reached the end of the question-and-answer session, and I will now turn the call over to Steve for closing remarks.

I'd just like to thank everybody for joining us today. I think we're making significant progress. We've very much tried to have a very transparent view over the last six to 12 months, and we know that, that is complex in trying to understand and unpack everything that we're doing. It's hard for you guys. It's even harder for us in terms of making sure we keep the business moving forward. And I'm very, very happy with the progress that we've made. So thank you for your attention. We look forward to speaking to you next time. Keep safe, keep well. Have a great day. Thanks.

Thank you for joining us today for our presentation. You may now disconnect.