Good morning. Welcome to PowerFleet's Third 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, everyone, and thank you for being here today. In today's call, I will share an update on our Q3 performance, as well as spending some time reviewing progress on the strategic pillars of the business. Turning first to our Q3 performance. We're delighted to report a strong set of Q3 financial results. Our commitment to evolve into a high-quality SaaS business required us to take brave decisions to manage existing revenues in ways where our success will become clear in quarters rather than months. In essence, we've been executing a private equity style transformative playbook in the public market. Central to this strategy is building a pipeline of high-margin product sales that pull through sticky, high-margin SaaS revenue, while shedding non-core and non-profitable product business. We have been clear that executing this transition would result in revenues coming down through early to mid-2023, before reaching an inflection point where higher product revenue would begin to flow through the P&L in the second half of 2020. I'm pleased to report this inflection point is now evident in our numbers. Our Q3 total revenue performance was our best result in four quarters. Total revenue increased by 7% sequentially. Q3 product revenue increased quarter-over-quarter by an impressive 19% at a much improved gross margin. At the same time, our service revenue increased by 11% on a constant currency basis year-over-year. Looking at adjusted EBITDA, we made a commitment that we would take the necessary steps to absorb the cost and cash burn of our investment in engineering talent following our Q1 Movingdots acquisition. Clear success here is evident in our Q3 numbers, with sequential adjusted EBITDA increasing threefold to $2 million. David will dive into more details on our financial performance shortly. I view the quarterly earnings cycle as an opportunity…

Thanks, Steve, and good morning, everyone. Continuing the spirit of transparency and accountability, I'll firstly provide an update on the key strategic priorities that I called out on our prior call before providing additional insight on the numbers. Strategic priority number one is to accelerate our business transformation, while living within the limits of our current balance sheet. Our October 10 MiX business combination announcement is a game changer, while the realized results from our current activities are moving up with adjusted EBITDA tripling sequentially demonstrate a team that can execute decisively and at pace. While these initiatives are major wins, they naturally created some headwind in our short-term financial results with $1.4 million in onetime transaction and rationalization expenses incurred in the quarter. Priority number two is to improve the underlying operating leverage of our business by implementing a common and scalable software platform across all geographies. The central talents of this initiative is the rollout of a global ERP system, and as I'm sure you can appreciate, our business combination with MiX significantly increases the scale of this endeavor and presented us with alternative pathways. Based on initial review, we concluded that the most expeditious option to get the entire global business on a single ERP instance is to standardize our MiX Dynamics 365 solution that is actively being rolled out. A global ERP is of critical importance, both for realizing millions of dollars in spend efficiencies and building out a rich set of SaaS metrics that provide proof points on the durability of revenue and operating leverage inherent in our business model. ERP is a major work stream for integration planning and execution and we will continue to provide regular insights and updates on future calls. Now on to our financial performance for the quarter. Starting with…

Thanks, David. Our Q3 financial results are a testament to the exceptional execution by our global team. These on-plan results are particularly impressive when you take into consideration they were achieved in the midst of an immense effort to sign our transformative business combination with mix. Moving back to the overall view of the business. We continue to gain strong traction. This is especially true as we witnessed the resounding success of Unity, our safety-driven industrial solutions and our connected car offerings. In Q3, we are delighted to announce new logo wins in North America with the likes of Valvoline, Summit Construction and Development, OI Glass and CMC and major account expansion projects with the likes of Napack, Brink's, General Motors, Georgia Pacific and FEMSA. From a market development perspective, safety remains at the very heart of what we do. Here are some examples of what we achieved in Q3. PowerFleet expanded its existing relationship with Mitsubishi Logisnext America, MLA, the fourth largest forklift manufacturer in the world. We signed a white label agreement creating a competitive advantage for MLA and an additional revenue stream for PowerFleet. The U.S. Department of Transportation launched an initiative and subsequent campaign to reduce the rising number of serious injuries and deaths on America's highway roads and streets. After an extensive review process, PowerFleet in our Unity platform was selected as a partner to join the U.S. Department of Transportation's efforts to improve road safety. ABI Research, a leading analyst in the IoT industry released a competitive report that compared vendors of video safety solutions to provide a third-party assessment in ranking. After a full assessment process, which includes innovation criteria like solution options, user experience and use cases PowerFleet was named as a top innovator and ranked within the top five providers in…

Thank you. The floor is now open for questions. [Operator Instructions] And our first question this morning is coming from Scott Searle at ROTH MKM. Scott, your line is live. Please go ahead. Q – Scott Searle: Hi. Good morning. Thanks for taking my question. Nice job on the quarter, guys. I know it's a difficult macro backdrop. David, maybe just quickly for clarification, my audio was a little choppy. I wanted to clarify if there was $1.4 million, I thought transformation costs in the quarter, wanted to confirm that. It sounds like the ERP systems that you're going to use going forward are going to be MiX want to just clarify that as well. And then immediately in the December quarter, how are you expecting things to trend sequentially? I know there are some macro headwinds out there particularly in markets like Israel, but just wondering if you could quickly comment on how you see things progressing in the intermediate term or near term before we start to see the combination impact from MiX.

Great. Thanks, Scott. So in terms of the choppy audio, the $1.4 million that referred to onetime costs incurred in the quarter both in terms of the transaction cost for the MiX deal in addition to certain rationalization costs attached to the ongoing cost reduction to cover moving docs. So that was the $1.4 million that was referred to in the prepared remarks. Yes. And in terms of ERP, we've obviously evaluated both the NetSuite pack that we were on as well as the Dynamics 365 pack that the MiX team were on. And as we've looked at it, the most expeditious and the quickest way for us to get on a common platform is actually the move with the Dynamics platform. So again, that will be a very important piece of work that we'll be planning for between now and close and aggressively executing I suppose. So we're there in terms of that piece. And then in terms of looking forward to future financial performance, the key issue is obviously Israel. It is obviously a very important piece of our business. As I referred to in the prepared remarks, the vast majority of that revenue is recurring in nature. It is also an essential need as opposed to a discretionary need. So last quarter, Israeli business was just north of sort of $10 million, so around about $2 million in product, $8 million recurring services. We expect the recurring services piece to hold up very well. So other than FX issues, and obviously, the FX rate has actually improved over the last week or so, but it was clearly weaker earlier in the quarter. There'll be some exposure there. And then from a product standpoint, a fair amount of that product revenue is actually sold to the consumer through dealerships. And you can appreciate that's a piece of the market that will be definitely sort of softened in terms of demand, just given what's going on in the country. So that's the sort of key headwind. But in terms of the fundamentals of the business, we're performing well, obviously, very clear in our Q3 numbers. We're building up a very nice head of steam. So the fundamentals are very, very strong, and we think we can absorb these ready headwinds.

Very good. And Steve, if I could, from a high level, it seems like you continue to add more logos. You get add-ons with existing customers. And you had 11%, I think, growth in the services side year-over-year in constant currency. Could you comment a little bit in terms of what that total TCV opportunity pipeline looks like? I think over the last couple of quarters, you had some relatively big growth on a sequential basis. How is that trending? Also kind of the initial cut when you start to look at the combination with mix and upsell opportunities, what does that look like? And also just competitively, now you're a different company, when you add the mix scale in terms of reach and product breadth. How are you doing in terms of getting to the table now with Samsara and Geotab, is that changing the dialogue out in the marketplace in terms of how you guys are perceived. Thanks.

So firstly, Scott, I don't think we've ever given a full TCV pipeline number. We've talked about the growth sequentially. It's continued so around about net around $35 million to $40 million of new pipeline has been added, which is great. I think in terms of customer sentiment towards the business, it's extremely strong. So both this PowerFleet as long you've seen every quarter, we come out with the new logos and the account expansions. You see the broader market appreciation that we're starting to receive now. And that kind of linked in as well to the positioning with mix in terms of being a business at scale. So we've already seen more inbound interest. I think this takes us to almost the very top table. And I think we are now seeing ourselves in a position where we will fight more business against the biggest boys in the industry. And we're confident about chances in those interactions as well.

Great. Thanks so much. I'll get back in the queue and look forward to seeing you guys next week at our conference and the Analyst Day. All the best.

Thank you, Scott.

Thank you. Your next question is coming from Mike Walkley from Canaccord Genuity. Mike, your line is live. Please go ahead.

Thank you. Congratulations on the strong results. And best wishes to your Israel employee base. I guess to start off, very strong quarter in gross margin, which has been part of your strategy. I guess, David, on the hardware side, is 30% kind of a good number to think about going forward? Or is there anything we should think about mix for your standalone business in terms of gross margin trends?

Yes. So in terms of the 30%, that is definitely a target that we've spoken about in the past. In terms of the quarter itself, clearly, very strong standard in North America, which is sort of at the forefront in terms of gaining traction in terms of the Unity stories. So that's an important piece of it. So I would say 30% is reflective of expectations on a go-forward basis. There's always some -- and that when you use it mix, obviously, mix is a challenging way to use. But within our business there's often sort of mix issues in terms of things that are highly differentiated, for example, like our industrial solution. We have more pricing power there than maybe the logistics side of things. So there's always some sort of fluctuation, but I think on a blended basis, 30% and then growing from there is a good expectation to have

Yes. And just coming over the top of that. As we signaled in terms of taking out the lower product margin business and unprofitable product lines that was the reason that we were down where we were. So this is a great proof point in terms of the newer pipeline that we've built, the execution of that new pipeline and our commitment to do higher-margin profitable business.

Great. That's great explanation on that execution as you're coming out the other side. I guess just a follow-up question, building on some of Scott's question. Just on the pipeline of business sounds like, Israel as expected, products could be a little soft. North America has been a strong business year-to-date. How are you seeing kind of the pipeline and trends for your different regions?

Yes. So I mean if you look at the North American year-to-date and quarterly results, that was our number one focus. It's our number one strategic arena that we think we can get to a very high level in terms of market leadership. And I think that is playing out well. And the pipeline strength there is growing as is our reputation. It took a while for us to be known in the market. And I think now to kind of Scott's earlier question as well, we're starting to see far more inbound interest into the business as we go. So that's very strong. Europe will be a big growth area for us in 2024. So as you're aware, we've invested in Europe. We've got a nice pipeline building there, very confident in terms of our abilities to execute considering, particularly the background and experience that I and others that I bought into the business have of that market. I think our kind of Latin American business was naturally in a place of uncertainty. And since we've now been able to settle the future of that business and we're going to have businesses of scale, with the mix combination, then we're starting to see pipeline grow again. And from an Israel perspective, despite the fact that we naturally in the short-term have some headwinds, the development of pipeline, particularly in the B2B space is still remains strong for the medium-term. So I think if you look overall, we're getting traction there. We're getting the proof point in terms of the new strategy. Unities really coming out of top in terms of being able to get incremental opportunities for revenue. And then if you take the mix combination, then in terms of the solutions that mix have that we don't have, particularly the strong in-cab logistics stuff that we're not so hot on. And then vice versa, in terms of the industrial solutions that will be available to all mixed territories, we can definitely see the path to the incremental growth rates that we're alluding to.

Great and congrats on all the accomplished to-date, and I'll pass the line.

Thanks Mike.

Thank you. The next question is coming from Jaeson Schmidt from Lake Street. Jaeson, your line is live. Please go ahead.

Hey, guys. Thanks for taking my questions. Just given the macro backdrop, curious what you're seeing from a pricing standpoint. If you've seen it get a lot more competitive? I know the telematics space is always fairly competitive. But have you seen any significant changes just given the current macro?

I think we're seeing some competitor desperation is how I would describe it. So business is trying to be on at very low rates. We're not going there. I mean you've seen from our strategy over the last year for us. We would rather take more selective over revenue in terms of maintaining and growing profitability. And I think we're selling far more value. So particularly in the North American market, we have hired a very good set of enterprise software sales folks, who concentrate very much on the value proposition across the C-suite. And that's allowing us to hold pricing. So, no doubt, the pressure is out there. But again, we very -- have very strong conviction in terms of the growth of EBITDA and the growth of revenue alongside it based on the quality of pipeline that we're delivering, and we think there's more than enough out there for us to be comfortable.

Okay. That's really helpful. And then just as a follow-up, are you seeing any meaningful headwinds from the supply chain?

In terms of component supply for our sales?

Correct.

No. We've done an awful lot of work in terms of dual and triple sourcing capabilities. Again, a big share to our Israeli supply chain distribution team, in terms of how they go about sourcing and making sure that we've got enough inventory to fulfill. So very confident again that as long as our sales team can deliver, then we'll be able to supply effectively in the coming quarters.

All right. Perfect. Thanks a lot guys.

Thank you. Your next question is coming from Gary Prestopino from Barrington Research. Gary, your line is live. Please go ahead.

Thanks. Good morning Steve and David. A couple of questions. First of all, David, you called out a couple of one-time expenses related to the gross profit on services. And I couldn't write them down. Could you just go through that again, please?

Yes, absolutely. So, there's two that offset each other. One is a $400,000 pickup in terms of just import duty from prior period, sort of a rebate there that benefited the product margin side of things. We've also been very active in terms of just working the infrastructure side of things as we transform things. There was a catch-up billing that came through to the tune of $400,000 that sort of offset the benefit from the duty standpoint. So, again, from a total gross margin standpoint, this thing is neutral, but that was the pickup that sort of hindered service margins in the quarter.

While you're saying one thing is for product, one thing for service. I'm trying to understand what you -- you said that there was there was something that impacted the services margin because it was down year-over-year. So, that's what I'm trying to get at. Was that a one-time issue? Or is that something that's going to be ongoing?

There's two issues. So, one is a one-time issue, which is this $400,000 out-of-period infrastructure cost that impacted margins. The other thing that has happened and is more prominent this quarter is an increase -- a significant step up in terms of the amount of depreciation we're taking on the Unity platform. So that was about a $300,000 hit. That will be something that will obviously continue on a go-forward basis. The only thing I'd add there is the amount of operating leverage on Unity is massive just because that's essentially a fixed cost versus the revenue growth that we'll be enjoying on the back of that investment. So there is a pickup in terms of non-cash costs that have impacted gross margin this quarter and it will be an impact next quarter to.

Okay. And then is it safe to assume that most of the impact on the currency dealt with Isrealian shekel?

Yes.

Okay. And then, David, could you -- I'm sorry, Steve, could you maybe talk about the Unity platform? How much is that helping to drive new logos as well as where are you with trying to get the -- your base business, your base customer base to accept or adopt the Unity platform. I assume it's very early stages at this point.

Yes. So it's significantly helping us in the race to win new business. Unity is a consolidation platform. So a lot of our customers have multiple providers because this is a fragmented market. So to be able to see their data and harmonize it in one single place is so protractive to them. They also have too much data, too many operating systems and they are looking for someone to help them simplify that to integrate those data sources into the different ways that people want to consume it, which is fairly unique in this market. So that simplification that ease of use, that ability for us to really kind of take people on a digital transformation journey also is helping us to win new business. Plus then the value-added modules with better, more predictive AI insights on top and making the business benefit case a lot smarter for customers. So that's all in terms of the reasons why we are winning more new logos and why people are now seeing this as a differentiated solution, that's number one. And then number two, in terms of people adopting Unity. So the way that we put Unity together is everyone sees their existing functionality that they previously saw in the heritage platforms on Unity today. So in fact, the customers are on Unity. What they then have the ability to do is take on top of that the value-added services of more device and data ingestion, more integration and the value-added modules that are kind of premium modules on top of the feature functions that they have today. So it's a very easy path. We are fairly early still in kind of the upsell process of that. So we have put together an inside sales team that is now just going out and kind of really kind of having those good conversations. And this is all kind of ARPU uplift, that we will see continue in the future. So that's all part of this strategy. And as I said, the confidence and proof points are very strong to-date.

Okay. Thank you. And then, just briefly comment on your markets, industrial logistics. I believe the third one is transportation. What -- how did they each perform in the quarter? And what would be the outlook going into Q4 for those market segments?

Yeah. So our safety solutions across the board, whether that safety in the warehouse or safety on the road, -- so we look at it not just by vertical, but -- and kind of are we in the warehouse or are we truck or are we like commercial or are we a car? We look at it as kind of the solutions we're delivering. So safety solutions across the piece, we're seeing extremely strong traction pool, a lot in the warehouse in terms of The Pedestrian Proximity alert solutions that we have, and a strong kind of, I think, Sway towards video solutions as we talked about the ABI Research piece. The logistics kind of, I would say, more commoditized stuff is still the clunky area for us. And I think people are still weighing up their overall needs, following the post-pandemic and rationalizing their assets estate. So we don't see a huge growth at that end. But that is more kind of, as I say the lower ARPU revenue that we enjoy today. But it's not kind of the key growth area for us moving forward. So moving into Q4, moving into Q1, we're seeing pipelines around safety, insurance, sustainability and compliance as really strong. And that's where we focused our efforts, in terms of Solution Design, in terms of Marketing and in terms of being the best of the best, because we truly believe that if we win the rate in that space, then where customers want to consolidate have fewer suppliers, then we will win the Traditional Telematics Business alongside it. And so far, the early signs of that strategy are coming through nice.

Thank you.

Thank you. And there are no further questions in queue at this time. And the Q&A session has now concluded. I would now like to turn the floor back to Steve Towe, for closing remarks. Sorry, Steve, just turning the floor back to Steve for closing remarks at this time.

Thank you. Sorry, I had a slight audio problem there. So everyone, thank you for the insightful questions, and thanks again to everyone joining us this morning. As I mentioned, we'll be hosting an Investor Day, alongside The MiX Telematics, Thursday, November 16, at 2:00 PM Eastern Time in New York City. If you're interested in attending this event, please get in touch with our Investor Relations representative, Matt Glover from Gateway Group, who can provide you with all the necessary information. We look forward to seeing many of you at week, until then, take care and talk to you soon.

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