Ituran Location and Control Ltd. (ITRN) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran’s First Quarter 2017 Results Conference Call. All participants are at present in listen-only mode. [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 contact Ituran’s Investor Relations team at GK Investor and Public Relations at 1-646-688-3559, or view it in the News section of the company’s website, www.ituran.co.il. I will now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please.

Thank you, operator. Good day to all of you and welcome to Ituran’s conference call to discuss the first quarter 2017 results. I would like to thank Ituran management for hosting this conference call. With me on the call today 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 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 cover 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 first quarter. We present our results which are at record levels, especially in terms of our profit with strong growth across the board. Reported first quarter revenues of $57 million, up 21% versus last year. This ongoing revenue increase is built on the back of our subscriber growth which added 97,000 net subs over the last 12 months, predominantly in Brazil and Israel. But our U.S. business is also showing nice growth. Focusing on revenue from subscription fees, this was at around $39.7 million, up 24% versus last year. Looking at the gross margin on subscription revenues is worth 66.1%, a full percentage point higher than last year at 65.1%. This is due to the inherent operating leverage built into our business model which translates our top line growth into much stronger growth in profit as the incremental cost to our business of adding one new subscriber on the existing Ituran infrastructure is minimum. We believe that as our subscriber base continues to grow over the coming years, our margins should be able to continue to trend upwards. I do note that the product gross margins tend to fluctuate based on the mix of products sold in the various geographies each quarter and it was lower this quarter at 10.6%. The expected range is typically 10% to 15%. The quarter subscriber growth was 25,000, we are pleased that this has returned toward the high end of our expected range which we have talked about in the past between 20,000 and 25,000. I would like to now cover the trends we are seeing in our main geographies. In Israel, our business continues to perform well and we are seeing solid subscriber growth in both our traditional SVR business as well as through our penetration of the lower segment's of the market. In Brazil, there have been clear improvements in the economy in the first quarter. The expectations are that the economy grew by around three quarter of a percentage point in Q1 after nine quarters of contraction. We are pleased that a negative effect of the weak Brazilian economy of the last two years seems to be behind us and we believe this will further support our business growth there as well as our IRT joint venture. IRT has performed ahead of our expectations. We reached a cash flow breakeven level ahead of plan at the end of last year and already this quarter. IRT made a positive contribution to our bottom line. IRT has significant potential to bring us hundreds of thousands of additional subscribers using our services, positioning us as clear market leaders in Brazil. As a leader in SVR and vehicle telematics with over a million subscribers globally, Ituran is well positioned to make a significant contribution in what is very exciting and emerging mobility technology space. Already over the past few years, Ituran has been actively seeking out an investing in some of the companies which are building tomorrow’s mobility technology and solutions. Bringg is one of those companies founded by impressive entrepreneurs in 2013 with many previous successes to their names. Bringg is software as a service, next generation supply chain and delivers technology platform for enterprises. During the first quarter, we made a capital gain of $2.3 million due to a capital raising round at Bringg. The company raised $10 million, bringing in new investors including Coca-Cola as well as venture capital firms, Alef and Pereg. This capital gain is an example of the initial fruit of success from an early stage investment that we have made. During March 2017, we made two additional investments in two Israeli startup companies, both in the transportation sectors, one of which is a mobile app and the other machine vision company. And these investments amount in to about $1 million in total. We also recently invested and partnered in the launch of the DRIVE innovation center and startup incubator in Tel Aviv to promote the development of smart mobility technology. Our partner in this venture are Mayer Cars and Trucks, as well as leading car manufacturers, Hertz, Honda and Volvo. Our goal is to assist local entrepreneurs in our field by providing them with our experience in tools and bring future drive [indiscernible] solution into the use of our customers around the world. For Ituran and our partners, we will gain early access to some of these most advanced ideas and technologies that are borne with this company. I see tremendous importance in the investment and development of new technologies that will drive Ituran in the long term to the forefront of technological advancement in an ever changing and now fast developing market. In summary, we are pleased with our performance in the first quarter of 2017 with record revenue and strong profitability. Looking ahead, as always, Ituran's core business remains well positioned and continues to benefit from an ongoing growth in subscriber base. We also look forward to IRT's positive contribution in the short term and growing contribution thereafter. Looking further out, Ituran has taken very positive steps to become a serious player in the emerging mobility technology space. As always, we are working hard to continue our success and most importantly sharing that success with you over the long-term, our loyal shareholders with a stable and growing dividend. I will now hand the call over to Eli for the financial review.

Thanks, Eyal. Revenues for the first quarter of 2017 were $57.1 million, up 21% when compared to revenues of $47.2 million in the first quarter of 2016. Revenue breakdown for the quarter was $39.7 million coming from subscription fees, a 24% year-on-year increase. Product revenues were $17.4 million which were a 15% increase over the same quarter last year. The geographic breakdown of revenues in the first quarter was as follows; Israel 53%, Brazil 36%, Argentina 7% and United States 4%. Gross margin in the quarter was 49.2% compared with a gross margin of 60.4% in the first quarter of last year. As Eyal noted earlier, while our gross margin on subscriber revenues increased, the gross margin on product revenues was lower this quarter due to the mix of product cost. Operating profit for the first quarter of 2017 was $13.8 million, an increase of 20% compared with an operating profit of $11.5 million in the first quarter of 2016. EBITDA for the quarter was $17 million, an increase of 21% compared to an EBITDA of $14.1 million in the first quarter of 2016. During the quarter, share in affiliates net was an income of $4 million versus a loss of $0.7 million in the same quarter of last year. The majority was due to a capital gain from an investment round at Bringg, one of Ituran's early stage mobility technology companies, and Ituran's joint venture in Brazil, Ituran Road Track, made a positive contribution. Net profit was $13 million in the quarter or fully diluted EPS of $0.62. This is compared with a net profit of $7.1 million or fully diluted EPS of $0.34 per share in the first quarter of 2016. Cash flow from operation during the quarter was $3.1 million. As of March 31, 2017, the company had net cash of $26.9 million or $1.28 per share. This is compared with $31.5 million or $1.50 per share as at December 31, 2016. For the first quarter, a dividend of $5 million was declared. The dividend's record date is June 27, 2017 and the dividends will be paid on July 11, 2017, net of taxes and levies at the rate of 25%. And with that I would like to open the call for the question-and-answer session.

[Operator Instructions] Your first question is from [indiscernible]. Please go ahead.

First of all, congratulations for a very impressive quarter. I just wanted to make sure the $4 million in affiliate income, is it only [in] [ph] capital gain and the rest is due to the joint venture in Brazil.

The major portion of this $4 million are these two items, yes. The rest are from small items that has no real meanings, yes.

Great. And is the joint venture in Brazil has reached sort of its full profitability and target that you aimed to or it's scaling up?

First of all, it's still scaling up. It's happened earlier than we expected but we have to understand there is always some volatility because there are two different types of contribution. One is selling hardware and second is the services portion of our revenues from this joint venture. But actually it's -- we are really expecting that it will ramp up in the future, yes.

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

Good afternoon. Congratulations on the great results*. My question is mostly on Brazil. If you look at quarter on quarter comparison, Q1 2017 compared to Q4 2016. We see that the bulk of growth came from Israel. 5 million out of 7 million increase. If you look at the numbers from your 20-F, subscriber numbers were also achieved at, for the full year 2016 they were almost twice more* in usage subscribers in Israel than in Brazil. So the question is, what is the trend in terms of net additions in Brazil? What should we expect this year and what is the cannibalization rate from IRT? Thank you. And I have one follow up question on the U.S.

Okay. So I first I will answer this question. During 2016, as you could see on the 20-F and I think that you described it quite well, Israel's contribution were higher than Brazil on the net new subscribers. We had few reasons that I mentioned it on Q4 conference call. Some of it is the economy, some of it is different way of accepting new subscriber based of high [ph] situations in Brazil and premium of the insurance companies that reinsure our program. We faced it during 2016. We changed, we fixed, we overcome some of the situation and without giving any details because we are not public, I really believe that trend in Brazil in 2017 based on the last few months has changed towards having more contribution to the net subscriber growth of our results current and in the future. I hope that it will continue.

Okay. Thank you. And out of 36% year-on-year growth for Brazil in terms of revenue, what is the organic growth and what's the currency impact?

We do not give the specific location or* region, the currencies affect, but basically if you take the currency of year-over-year, from the average point of view you can see that the Brazilian real contributed but not something significantly.

Okay. Got it. Thank you. And the last question is on the U.S. Again from 20-F, we see that the number of subscribers almost doubled and that is something I think you never mentioned separately. So what happened there? You introduced some new product or there was change in marketing or what's the reason for such a growth. And again, what should we expect in 2017?

You are right. In the States during 2016 we grew ourselves very very material. We hope, believe and see that this trend will continue. The way that we are actually have to show it on our P&L is as subscribers since we have some portion of recurring revenues but we have to understand that those subscribers ARPU is a very very limited amount compared of course to Israel, Brazil and Argentina. But what it shows, and this is absolutely right, that we are growing our sales and our business in the States much more materially than in the past, right.

The next question is from Ethan Etzioni of ‎Etzioni Portfolio Management. Please go ahead.

I just want to makes sure I have it clear on the profit from affiliates. So it's $4 million less $2.3 million, so that’s $1.7 million. So what the $1.7 million is representative and there is no non-recurring items there?

You have to remember that the $1.7 million that we mentioned relates to other affiliates such as Bringg, such as IRT. But some of it of course relates to some shifting but basically a majority of this amount relates to the joint venture. Yes.

But this is all recurring profit. This should repeat itself...

No, no. Not exactly. Because you have to remember -- no, not talking about...

The 2.3 -- you are talking about the...

As Eyal explained before, you have to remember that the joint venture is basically splitted or the breakdown of the operation for the hardware, which is a onetime sale, and for the recurring revenue. So a big part of it is coming also from the sales. The sales can be -- it doesn’t mean that it will be the same every quarter. So doesn’t mean that it will run past from the sales point of view. Okay. Two different things. It's a combination.

So what should we look at as a representative figure for the profit from affiliates?

We are not providing a representative number or any forecast for our results but as Eyal mentioned, we do believe and we do see that until the end of the year or going forward in the future, the results from the joint venture will be better.

Better than the 1.7?

Better than what we have in Q1. Not all the 1.7 relates to the joint venture.

Okay. So can you tell how much relates to the joint venture?

No, we can't. We are not providing a...

A specific breakdown.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Sheratzky to go ahead with his concluding statement, I would like to remind participants that a replay of this call will be available tomorrow on Ituran’s Web site, www.itrn.co.il. Mr. Sheratzky, would you like to make your concluding statement.

Yes. I would like to thank all our employees and my team for their strong performance on quarter one 2017 and we look forward to another successful year. On behalf of the management of Ituran I would like to thank you all, our shareholders, for your continued interest and long-term support of our business. I look forward to speaking with you next quarter. Have a good day. Bye.

Thank you. This concludes the Ituran’s first quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.