Ituran Location and Control Ltd

NASDAQ:ITRN

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Second Quarter 2024 Results Conference Call. [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 EK Global Investor Relations at 1-212-378-8040 or view it in the News section of the company's website, www.ituran.co.il.

I will now hand the call over to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin?

[Kenny Green]

Thank you. Good day to all of you, and welcome to Ituran's conference call to discuss the second quarter 2024 results. I would like to thank Ituran's management for hosting this conference call. With me today on the line are Mr. Eyal Sheratzky, CEO; Mr. Udi Mizrahi, Deputy CEO and VP Finance; and Mr. Eli Kamer, CFO of Ituran.

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'd like to remind everyone that the safe harbor statement in today's press release also covers the contents of this conference call. And now Eyal, would you like to begin, please?

[Eyal Sheratzky, executive]

Thank you, Kenny. I'd like to welcome all of you to our second quarter 2024 call. And I would like to thank you for joining us today.

We are pleased with our second quarter results, especially the ongoing growth in revenue across the geographies in which we operate, with continued improvement in profit. We are also pleased with the solid level of additional net subscribers we brought in the quarter, which came in at the high end of our expectations.

These achievements come despite the negative impact of the sharp devaluation against the U.S. dollar in the quarter, which lowered our local currency denominated results presented in U.S. dollars. In fact, we measured in local currencies, we have seen accelerated growth in most of the geographies in which we operate.

Our results reflect ongoing solid demand growth for our broad location-based products and telematics services and especially increased traction from many of our new [ initiatives ]. Our subscriber base added 38,000 subscribers in the quarter, at the high end of our expectations of between 35,000 and 40,000 net new subscribers per quarter. This is due both to our more diverse global footprint as well as the new services and initiatives we are continuing to bring to our end markets.

Over the past few years, we've launched a number of new initiatives and have seeded growth engines, driving accelerated subscriber growth. We are actively engaged in new verticals adjustment to our core business of providing telematics services. At the same time, we are taking the successful initiative, which have been limited to one of our geographies and expanding them to our other geographies.

You may remember that we signed a landmark agreement with Santander Bank a year ago, and we are actively looking to broaden our solution into new markets with existing and other finance customers.

Our SaaS technology for all-in-one [ vehicle ] sharing helps fleet owners smartly and flexibly use shared vehicle fleet through efficient matching of unused vehicle with demand. We have been gaining solid traction, and we are now leveraging the technology to other geographies, including Israel and the United States.

We see significant demand for this type of service from car rental businesses, leasing companies as well as corporate fleets, which are looking to more effectively and efficiently share the use of their fleets of vehicles.

Also, as you may have seen, a few days ago, we put out a press release with regard to our collaboration with Porsche and Microsoft for the Porsche Carrera Cup in Brazil, and I encourage all of you to watch the video of our technology in action. We are incredibly proud to be a part of this and associated with such industry leaders.

Additionally, the fact that it runs telematic unit is at the heart of the Porsche racing car telemetry system under the most demanding conditions demonstrates our technology leadership.

One of our goals in being involved in a project such as this, apart from the honor of being associated with Porsche and Microsoft, is to bring these latest technologies used in motorsports down to Ituran subscribers, and we are already looking to leverage the new capabilities developed for this project over the past year throughout our business and make it more attractive to OEM players.

I want to thank our team in Brazil for the exceptional work they are doing for the Porsche Carrera Cup. We recently launched a new motorcycle telematics product with strong potential, given a very significant total addressable market throughout South America with a strong motorcycle culture. We are already seeing interest from OEMs and insurance companies, and we are in active discussions.

We are also in active discussions with a number of major OEM car manufacturers, in addition to the 2 majors that we already work with. At the same time, we are looking to broaden the scope of services we provide to our existing OEM partners, which are focused on limited geographies, in order to broaden our service to additional countries in South America.

The goal is to provide to the OEM manufacturers with a suit of telematics in stolen vehicle recovery services. We see growth potential to bring in many new subscribers via this initiative.

From a financial perspective, looking ahead to the remainder of 2024, earlier this year, we provided EBITDA guidance in addition to the guidance on subscriber growth, which we always used to do. Today, we reiterate that for 2024, our guidance is full-year EBITDA of between $90 million and $95 million.

Looking further out, our short-, midterm milestone is to cross the $100 million EBITDA landmark in 2025. We continue to expect subscriber growth at around 35,000 and 40,000 net new subscribers each quarter. Even with the currency headwind in this quarter, we remain on track to meet our targets.

Given the strong net cash position of over $63 million, our ongoing cash generation and continued solid profitability, we continue to share a strong quarterly dividend of $8 million with our shareholders. This dividend is in line with our current policy. It is at the same level that we issued last quarter and 60% increase over that of the year-ago quarter.

Our dividend yield on an annualized basis represents a return of over 6%, which is a very solid return from a strong [ company ]. We see our ongoing dividend as reward to our shareholders for their loyalty and long-term support of Ituran.

In summary, the second quarter of 2024 is another quarter of solid performance, which is especially clear when we remove the noise of FX and look at our results in local currencies. We believe that we will continue on this trend in 2024. And given the many growth initiatives highlighted, I would expect the growth to accelerate as time passes over the mid- to long term.

Our constantly growing subscriber growth will ultimately translate into increased revenue, increased gross profit with faster growing profitability over in the long term due to the operating leverage inherent to our business. I look forward to updating you further as some of our initiatives mature.

And with that, I hand over to Eli. Eli, please go ahead.

[Eli Kamer, executive]

Thank you, Eyal. I will provide a short summary of the financial results. You can find the more detailed results that we issued in the press release earlier today.

Second quarter revenue were $84.9 million, a 4% increase compared with revenue of $81.6 million last year. The strengthening of the U.S. dollar in the second quarter versus the various local currencies in which Ituran operates in impacts the revenues when translated into U.S. dollars.

In local currency, revenue grew by 6% year-over-year. Revenue from subscription fees in the quarter were $60.4 million, an increase of 2% year-over-year and in local currencies, an increase of 5%.

Product revenues in the quarter were $24.5 million, an increase of 9% year-over-year and in local currency, an increase of 10%. The subscriber base expanded to 2,329,000 by the end of the second quarter, an increase of 38,000 from the end of the previous quarter. The geographic breakdown of revenues in the second quarter was as follow: Israel, 51%; Brazil, 24%; Rest of World, 25%.

EBITDA for the quarter was $23.1 million or 27.2% of revenue, an increase of 6% compared with EBITDA of $21.8 million or 26.7% of revenue in the second quarter of last year. In local currencies, EBITDA grew 9% year-over-year.

Net income for the second quarter was $13.1 million or diluted earnings per share of $0.66, an increase of 7% compared with $12.2 million or diluted earnings per share of $0.61 in the second quarter of last year. In local currency, net income grew 10% year-over-year.

Cash flow from operations for the second quarter of 2024 was $22.9 million. As of June 30, 2024, the company had cash, including marketable securities, of $63.3 million and a debt of $0.2 million, amounting to a net cash position of $63.1 million. This is compared with cash, including marketable securities, of $53.6 million and a debt of $0.6 million, amounting to a net cash position of $53 million as of year-end 2023.

The Board of Directors declared a dividend for the quarter of $8 million. The current dividend takes into account the company's continued strong profitability, ongoing positive cash flow and strong balance sheet.

And with that, I'd like to open the call for the question-and-answer session. Operator?

[Operator]

[Operator Instructions] The first question is from Chris Reimer of Barclays.

[Chris Reimer, analyst]

Congratulations on the solid quarter. I was wondering if you could talk about some of what contributed to the stronger product growth this quarter?

[Eyal Sheratzky, executive]

Mainly, if I remind you that we have a subsidiary, which is a focus -- a company called ERM, which is, first of all, our main supplier, but also as many third-party customers, which they are mainly focused on hardware; and they had a strong quarter.

Since they are selling almost only hardware, we have to remember they have some volatility among quarters because it's really depend on different customers from around the world.

[Chris Reimer, analyst]

Got it. And on pricing, I was wondering if in this macro environment, you're seeing any pricing pressures or changing -- changes in the pricing environment in any of your geographies?

[Eyal Sheratzky, executive]

No. The answer is no. We have to, again, to remember that Ituran, the main revenue source is the subscriber fees. We have to understand that the average ARPU is about $10. So the sensitivity among the end user, as much as I can say, is quite low. Regards the hardware itself, if you look on our historical numbers, the margin that we sell are very low in order to get more and more subscribers. And in that case, our prices are quite low by definition, and we don't see pressure in this field as well.

[Chris Reimer, analyst]

Got it. And just one more housekeeping and I apologize if I missed this on the press release, but you previously had been giving the aftermarket and OEM breakout for subscribers. So I didn't see it this quarter. Is that a change in reporting?

[Eyal Sheratzky, executive]

Actually, I'm not sure that we did it constantly. But yes, we will try to do it. I think because the difference is -- when the differences are very high, we are divided. I think that it was more balanced this quarter, probably.

[Operator]

The next question is from Sergey Glinyanov of Freedom Capital Markets.

[Sergey Glinyanov, analyst]

Pretty good results. Maybe could you provide your outlook for product sales growth rate for the foreseeable future?

[Eyal Sheratzky, executive]

Again, I would like to remind that our product sales mainly done all by our subsidiary that I mentioned or by the Israeli company. In the Rest of the World, which is more than 50% of our revenues, we almost, I can say, lease and we sell it as a program with the monthly fees.

And when I talk about our subsidiary and about selling hardware to our, let's say, to our distributors, it's something that always had some volatility between quarters because it's mainly dependent on their inventory pressure, inventory decision, et cetera.

So I think that we are not expecting any specific growth. I think that the average number is on an annual basis. You have to judge it on an annual basis.

[Sergey Glinyanov, analyst]

Okay. Is it related to all the markets when -- or where you have presence?

[Eyal Sheratzky, executive]

No. Because what you see in our P&L is that it's divided to services and product. More than 50% of the geography of our revenues is -- the hardware is integrated to our services. We lease it.

So what you see is you see it, in one hand, in the CapEx, okay, in the CapEx in the cash flow report. And here, it's part of the service revenues. So you don't see the sales in more than 50% of our total revenues. What you see is only in Israel and our subsidiary, which is a supplier of hardware.

[Operator]

The next question is from Eli Goldberg of Oppenheimer.

[Eli Goldberg, analyst]

I want to know if you guys provide could some more insights about the motorcycle product you guys -- that you just launched? And how should we think about that, going forward?

[Eyal Sheratzky, executive]

I think that I mentioned it also in our call in the Q1, but I will -- of course, we'll do it again. We just started, a few months ago, to launch our solution in, I would say, two main channels.

One is insurance companies in Brazil. We realized that Brazilian market, and I would say, even mentality; is that motorcycle is very common, and there is a high portion of the motorcycle market with expensive and high-end motorcycles by Yamaha and by Honda. And in that case, insurance companies didn't or wasn't happy to provide insurance to those kind of vehicles because the risk of theft is very high.

Thanks to our solution, which show that it's reduced the risk, insurance companies are more interested in selling insurance policies to motorcycle owners. And in that case, we are now in discussions or we already start to sell our solutions for motorcycles.

So I wouldn't say that it's not -- the contribution currently is high. But like we started with the ICS for cars, in the past, it starts to ramp up. And I believe that in a year or 2, it can be much more material in the revenue and profit size.

The second segment, it's OEM, which I cannot yet report for a final contract or a deal, but this segment is something which we are putting also focus in discussions with motorcycle manufacturers in order to convince them and in order to show them what we did with a car connectivity as an OEM and what benefits their customer can get from a telematic solution in a motorcycle. So this is something else, which we now have to offer.

I want to add that in Israel, for example, in the last -- more than a year, and this also contributed to our growth in subscribers, we already have a solution. It's a different solution than I -- now offering in Brazil, something which is more simple solution, mainly and only for cars -- for motorcycles theft. We already have sales of thousands of motorcycles. And in Israel, by the way, [ motorcyclists ] do not insure their motorcycle.

So instead of having nothing because they don't insure, the insurance here is very, very expensive; so they decide to find a solution which reduce their risk as a motorcycle owner by installing Ituran and, of course, join our customer base.

[Eli Goldberg, analyst]

Okay. And another follow-up, how would you say investors to look at the growth going ahead, talking about '25 even, for Ituran? What should we look at?

[Eyal Sheratzky, executive]

I'm always considering our growth in the profit side, the EBIT and the EBITDA, because it's very important when we are kind of a SaaS company, and we have a customer base of close to 2.4 million subscribers. Even if we grow [ 100,000 ] to 180,000 a year, the influence on the revenue is not so dramatic. But since we have an operating leverage model, it means that we're expecting to grow, first of all, our profit margin and second, our EBIT and EBITDA.

And in that point, we already provide kind of guidance for 2024. And also, it's not a guidance, but still, it's something that we put as a goal. And if we put as a goal, I believe -- we believe that we will achieve it is to get EBITDA in 2025 of $100 million.

Now, I have to put a note here. Since our operation and our revenues comes from different currencies type, and most of them are currencies of emerging markets, it's something that we don't have any way to predict or to control the -- like happened, by the way, in Q2. So when I say $100 million, of course, it's based on the currencies as is now. But in terms of gross profit, I think that it's quite -- this is a very impressive goal.

[Operator]

The next question is from Boris Schneider of More Investment House.

[Boris Schneider, analyst]

My question is on the ARPU this quarter, which declined compared to previous quarters that are -- obviously, there was roughly 12 quarters of growth. So what else is going there besides the depreciation in the currency against the dollar? Is it because of more sales to OEM or other lower ARPU margin products?

[Eyal Sheratzky, executive]

I think that if we eliminate the FX, you would say that the ARPU for Q2 is even higher. So this is the only reason that you see a lower ARPU. In local currencies, we have higher ARPU.

Although you're right, the OEM is lower, there's some application that we sell like big data solutions for car dealers, it's lower, but still, the variety is still taking our ARPU up in local currencies.

[Operator]

[Operator Instructions] 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 a concluding statement?

[Eyal Sheratzky, executive]

On behalf of the management of Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. In the coming months, we will be meeting with investors and presenting at 2 conferences [ LD Micro ] and Needham, and we hope to see some of you there. If you are interested in meeting or speaking with us, feel free to reach out to our Investor Relations team. And with that, we end our call. Thank you, and have a good day, guys.

[Operator]

Thank you. This concludes the Ituran second quarter of 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.