Ituran Location and Control Ltd. (ITRN) Q3 2016 Earnings Report, Transcript and Summary

Welcome to the Ituran third quarter 2016 results conference call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please call GK Investor Relations at 1-646-201-9246. I will now hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Thank you operator. Good day to all of you and welcome to Ituran's conference call to discuss the third quarter 2016 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the Co-CEO, Mr. Eli Kamer, the CFO and Mr. Udi Mizrahi, VP Finance. Eyal will begin with a summary of the quarter's results, followed by Eli with a summary of the financials. We will then open the call for the question-and-answer session. I would like to remind everyone that the Safe Harbor in the press release also covers the contents of this conference call. And now, Eyal, would you like to begin please?

Thank you Ehud. I would like to welcome all of you and thank you for joining us today. We are very pleased with our results of the quarter. We present our results which are at record levels in revenue and net income with strong growth across the board. Our third quarter revenues of $52.8 million grew by 20% ahead of those last year. I know that this quarter was the first quarter in a long time that currency devaluation didn't have a major effect on our U.S. dollar financials, so this revenue growth is reflective of our true growth since last year. On the bottom-line, we reported net income of $8.2 million or $0.39 per share, our highest ever and 32% year-over-year increase. This solid performance is primarily built on ongoing strong subscriber growth adding well over 100,000 over the past year. This growth was due to the extensive work we have done over the past few years to bring new products to market which expanded our addressable markets by targeting the lower end of the market in Israel and in Brazil. the uninsured segment of the market While every new subscriber add bring us additional revenue, we have an existing operating infrastructure in place requiring minimal additional CapEx which can support them. Thus we can bring much of the incremental subscriber revenues down to the bottom. As we grow our subscribers, our margins should be able to continue to expand. You can see this effect in our gross margin from service revenue, which stood at 65.7% this quarter versus 62.6% in the third quarter of last year. There are two unusual one-time effects in our results this quarter, which cancel each other out. So the net income is fully reflective of our performance in the quarter. However, I just wanted to take this opportunity to mention these two one-time items. We had a one-time expense related with a former general manager in Brazil, whereby we purchased the Ituran option back for $1.2 million to avoid future dilution and increase future cost to Ituran. On the other hand, we saw $1.2 million income from an affiliate due to capital gain in a small start-up we are holding following a capital raising event which was dilutive to us. Our operating cash flow in the quarter was $12 million and we continue to share the fruits of our success with our shareholders declaring a dividend of $4.1 million or 50% of our net income. I would now like to provide you with a brief update with regard to our performance in our two main geographies. Brazil, while it has seen tremendous growth over the last few years, it continues to be a strong growth engine for us. Over the last few months, there has been general uptick in the economic environment there and they are recovering the currency versus the dollar from its lows at the end of last year. Our business still at an early penetration stage in the Brazilian market and we continue to see much potential to grow and to expand our success there. In particular, our Ituran SVR services with basic safety insurance is seeing significant traction in the market, driving our strong accelerated growth in the market. This service is sold direct to the end customer at significantly cheaper than the full insurance alternative. In addition, car owners choose to sign up to this service because they see the value, the churn rate is lower than average. With regard to our 50% joint venture IRT, it remains on track. As you know, IRT has an agreement with one of the major and global auto carmakers in both Brazil and Argentina, providing their customers with telematic services on various new car models they sell. Their services can include vehicle security, personal safety, remote diagnostic, web and app application and concierge services. IRT is a core component of our strategy and very much strengthens our position in our target markets, enabling us to evolve into a growing player within one of the hottest part of the auto market industry, that of the connected car, after the decades of operating in the aftermarket segment only. It has the potential to bring us hundreds of thousands of additional subscribers positioning us as clear market leaders. Following Brazil, Argentina and given our strong relationship with this carmaker, we see potential to expand this business further in South America. Right now, there are some expenses and investments in infrastructure, which are recorded in our share in affiliates line on our income statement as well investment activities in cash. As we mentioned last quarter, we expect the business to become cash flow positive in the beginning of 2017. In Israel, as the major player, our main business continued to grow in line with new car sales in the country which continues to record strong figures. At the same time, we are not anymore relied on the growth in new car sales to grow. We have strongly penetrated the lower segment of the market where only a few years ago we were not active at all through our Ituran Safe Service which is performing very well. Overall we remain pleased with the strengths and stability of the Israeli business and it is also supporting the overall growth in net subscribers. In summary, from a business perspective, the third quarter continued our growth trend, but we are now finally seeing the growth translate into true financial performance. We remain very well positioned to continue to benefit from our strong growth in subscribers and we are working hard to continue our success into next year. I will now hand the call over to Eli for the financial review. Eli?

Thanks Eyal. Revenues for the third quarter of 2016 were $52.8 million, up 20% when compared to revenues of $43.8 million in the third quarter of 2015. Revenue breakdown for the quarter was $37.2 million coming from subscription fees, an 18% year-on-year increase. Product revenues were $15.6 million, which were a 27% increase over the same quarter last year. The strong growth in product sales were mainly due to the sales in Israel. The geographic breakdown of revenues in the third quarter was as follow, Israel 53%, Brazil 36%, Argentina 7% and USA 4%. Gross margin in the quarter was 50% compared with a gross margin of 50.2% in the third quarter of last year. The gross margin on subscription fees was 65.7% and the gross margin on product was 12.7%. The slight decrease in the blended gross margin was due to the revenue mix which include a higher proportion of product revenues in the quarter. Operating profit for the third quarter of 2016 was $11.6 million, an increase of 8% compared with an operating profit of $9.8 million in the third quarter of 2015. As Eyal mentioned, we saw a $1.2 million charge related to the repurchase of Ituran options from a former employee in Brazil. Excluding this one-time charge, operating profits would have been $12.8 million, representing year-over-year growth of 30%. EBITDA for the quarter was $14.6 million or 27.7% of revenue, an increase of 17% compared to an EBITDA of $12.5 million or 28.6% of revenue in the third quarter of 2015. Excluding one-time expense, EBITDA for the quarter would have been $15.8 million, 29.9% of revenues, representing an increase of 26%. During the quarter, share in affiliates, net was an income of $753,000 versus a loss of $638,000 in the same quarter of last year. The change was due to a capital gain of $1.2 million, resulting from a dilutive event at an affiliate. Net profit was $8.2 million in the quarter or fully diluted EPS of $0.39 per share. This is compared with a net profit of $6.2 million or fully diluted EPS of $0.29 in the third quarter of 2015. Cash flow from operations for the quarter was $12 million. As of September 30, 2016, the company had net cash of $26.0 million or $1.24 per share. This is compared with $25.8 million or $1.23 per share as at June 30, 2016. For the third quarter of 2016, a dividend of $4.1 million was declared, amounted to 50% of the net income. The dividend record date is December 28, 2016 and the dividend would be paid on January 10, 2017, net of taxes and levies at the rate of 25%. And with that, I would like to open the call for question-and-answer session. Operator?

[Operator Instructions]. The first question is from Ethan Etzioni of ‎Etzioni Portfolio Management. Please go ahead.

Congratulations on a good quarter. I want to ask about the gain in affiliates, the amount of $750,000. Could you please elaborate on that please?

Yes. During this quarter, basically as we mentioned, we had one-time income of #$1.2 million which relates to one of our affiliate that were diluted. So this is the main explanation.

Can you elaborate what affiliates were -- what was your old holding and what is your current holding?

Yes. Basically, we are owning 50% of the joint venture in Brazil and Argentina, the operations that we are making with the car manufacturers and we also have one affiliate which is a start-up that we are holding 40%. Those are the main two affiliate companies.

Did you sell part of your holding?

No. We were diluted. There was money that came into the company by a third-party investor in a higher value.

So shares were issued. So otherwise the affiliates would be a loss of approximately $400,000?

That's correct.

Thank you.

You are welcome.

The next question is from Lena Rogovin of Chardan Capital Markets. Please go ahead.

Hello. Congratulations on the great results. A couple of questions, if I may. So the first question is on subscriber growth, which has slowed down compared to previous quarters and the number of net adds is a bit lower than your soft target which you present of 25,000 in the third quarter. So what was the reason for the slowdown? And if it is a change of the trend or some specific reasons in this quarter? And my second question is about G&A expenses which were significantly higher year-on-year. So the question is, what are reasons for that? Thank you.

Lena, actually regarding subscribers, the difference is quite low, so 23,000. There was some quarters that we had more. There was no specific reason. It's just can be matter of timing. It's not something that we see material. The rhythm is almost the same. There are some things that we are doing here in Brazil in order to achieve more recovery raising on one had, some customers that we cancel because of how they are collecting. So maybe this is it, but it's not something specific.

Regarding the G&A, you are right. There is about year-over-year, you are talking about almost $1.3 million more in increase but if you look at the margin or the percentage of the expense from the revenue, you can see that in last year it was 21.2%, representing the G&A and actually this year it's 20.1%. So this basically shows the current subscriber model that we have. It means that as the percentage we are going down. Of course, as absolute numbers, always we are going up as we have much more subscribers.

Okay. Thank you. And the last follow-up question on low margin in product segment. So I assume that that's mostly because of the change in the product mix but could you give a bit of details on that? Thank you.

First of all, you are right. It's basically is more related to the product mix because we are selling through our subsidiary, which sells different type of products which are not also only relevant to stolen vehicle units and also in Israel we are selling products in different way. So there is no much explanation on that. Basically as you can see, more or less the average of this margin doing this year is about 84%. In this quarter it was 87%, a little bit higher. But there is no specific explanation. It's probably many small things.

Okay. I understood. Thank you.

There are no further questions at this time. Before I ask Mr. Sheratzky to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available tomorrow on Ituran's website, www.ituran.co.il. Mr. Sheratzky, would you like to make your concluding statement?

Yes. On behalf of the management of Ituran, I would like to thank you for your continued interest and long-term support for our business. I would like to mention that myself and the rest of the management team will be in New York next week for Opening Bell Ceremony at NASDAQ. So we will also conduct an investor meeting while we are there. If any of you wish to meet with us, please be in touch with our investor relations team. We look forward to seeing some of you then and to the rest of you, I look forward to speaking with you next quarter. Have a good day. Thank you.

Thank you. This concludes the Ituran third quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.