Ituran Location and Control Ltd

NASDAQ:ITRN

Earnings Call Analysis

Strong Performance Amid Challenges

Despite facing a major terrorist attack and subsequent war which impacted the economy, Ituran reported a record year in 2023. The diverse global presence and loyalty of over 2.2 million subscribers have contributed to the resilience and robust financial standing of the company.

Impressive Financial Health

The company's financial health is illustrated by a net cash position exceeding $50 million with minimal debt, demonstrating strong profitability and cash generation. Reflecting confidence in the ongoing growth, Ituran has significantly increased its quarterly dividend to $8 million, up from $5 million in the prior quarter and from the $3 million in the previous eight quarters.

Projected EBITDA Growth

Ituran provided EBITDA guidance for 2024, expecting to report between $90 million and $95 million, and anticipates surpassing the $100 million mark in 2025. Subscriber growth is projected to remain at the current rate of 35,000 to 40,000 net new subscribers per quarter, assuming stable currency levels and global macroeconomic and political situations.

Revenue and Subscription Expansion

Fourth-quarter revenues reached $77.8 million, a 4% year-over-year increase, with subscription fee revenues climbing 10%. Full-year revenues for 2023 hit a record at $320 million, up 9% from 2022. The subscriber base grew by 186,000 over the year, reaching a total of 2,252,000 by year-end.

Geographical Revenue Distribution and Profitability

Revenue from Israel, Brazil, and the rest of the world constituted 47%, 28%, and 25% respectively in the fourth quarter. EBITDA reflected a 7% increase tying at 28.2% of revenue, which affirms operational efficiency.

Net Income Rise

Net income rose to $12 million for the fourth quarter, which means earnings increased by 26% compared to the same quarter last year. This growth translated into diluted earnings per share jumping from $0.47 to $0.60.

Share Buyback Commitment

Staying committed to returning value to shareholders, Ituran bought back $6.6 million worth of shares in 2023 and has $6.7 million remaining under the buyback plan.

Drivers of Subscriber Growth

The subscriber growth in Israel is attributed to increased security system demands driven by rising crime rates. In other countries, B2B focus and heightened security needs due to increased violence and car theft in Latin America are major contributing factors.

Subscriber Growth and ARPU

The past two years have shown a trend that is expected to continue into 2024 with subscriber growth around 150,000. ARPU (Average Revenue Per User) is anticipated to remain stable with an increase in upselling, particularly in Israel, which compensates for lower ARPU services.

Operating Costs and Guidance Conservatism

Operating costs are anticipated to rise slightly due to financing of hardware and R&D investments, and the company maintains a conservative stance in guidance to accommodate these expenses.

Update on Investment in Bringg

Ituran holds 17% in the delivery logistics company Bringg, which two years prior raised over $100 million. There has been no need for additional funding rounds, and the company's business plan is proceeding as anticipated.

Focused Investment Strategy

Outside of stock repurchases, Ituran's investment strategy is concentrated in the acquisition of companies within their industry that synergize and promote consolidation, exemplified by their stake in financial holdings like Bringg and SaverOne.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Fourth Quarter and Full Year 2023 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 over the call to Mr. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to begin?

[Ehud Helft]

Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to discuss the fourth quarter and full year 2023 results. I would like to thank Ituran Management for hosting this call.

With me today on the call are Mr. Eyal Sheratzky, CEO; Mr. Udi Mizrahi, Deputy CEO and Deputy Finance; and Mr. Eli Kamer, CFO.

Eyal will begin with a summary of the quarter results, followed by Eli with a summary of the financials. [Operator Instructions]

I'd like to remind everyone that the safe harbor in the press release also covers the content of this conference call.

And now Eyal, would you like to begin, please?

[Eyal Sheratzky, executive]

Thank you, Ehud. I'd like to welcome all of you to our fourth quarter and full year 2023 call and would like to thank you for joining us today.

We are pleased with our 2023 results, which was a record year for Ituran. We are all more pleased given that we achieved these strong results despite difficult fourth quarter in which our country faced a major terrorist attack at the start of the quarter, which resulted in a war, which effectively paused economy for a few weeks. This new challenge, followed by many challenges that everyone has faced over the past few years, including the corona pandemic, supply chain issues and recently a slowing global economy. As our strong financial results demonstrate, our business is in very good shape and reside against challenges.

I want to also highlight this part of the reason for our reliance is that Ituran is a global diverse business based on a loyal subscriber base of more than 2.2 million customers, primarily in Israel and Brazil, but also in many other countries in Latin America as well as elsewhere in the world. And therefore, any impact in one specific region will have a limit effect on Ituran's overall business. The initial impact of the war on new car sales in Israel, which drives our new subscribers in that country and aftermarket product sales temporarily caused a complete pause in the local car market. However, this pause was relatively short lived. And as of end of January 2024, new car sales in Israel continue at a former long-term trend, and new car sales were up 3% year-over-year. Our subscriber base continued to show strong growth, adding 42,000 subscribers in the quarter, well ahead of our expectations of between 30,000 and 35,000 that we shared with you last quarter. This is still well in advance of the long-term rate we had in 2021 and earlier of between 20,000 and 25,000 per quarter.

Overall, as you can imagine, we are pleased with our relative strength in Q4. And furthermore, the overall picture in 2023 is very strong.

Looking at our balance sheet strength. We ended the quarter with over $50 million in net cash with almost no debt. Given our ongoing growth, our solid profitability, our strong cash generation each quarter and our strong net cash level for the second quarter in a row, we have decided to increase the dividend. Last quarter, we increased the ongoing dividend from $3 million to $5 million per quarter. And this quarter, we are further increasing the quarterly dividend to $8 million per quarter. We are very pleased to share the fruits of our success, and we see our dividend as well as our ongoing buyback program as a reward to our loyal shareholders for the long-term support of our company.

Starting from 2024, given the stability of our business and our ability to continue performing even during challenging time, we have decided to provide EBITDA guidance ahead. For 2024, we currently expect to report full year EBITDA of between $90 million and $95 million and expect to cross the $100 million EBITDA landmark in 2025. We expect the subscriber growth to continue growing at around current rate of approximately 35,000 to 40,000 net new subscribers per quarter. I note that the expectations are as of today. Our EBITDA expectation are based on the relevant currency levels remaining at around current average rates and also assumes that current global macroeconomic situation globally and political situation, specifically in Israel, doesn't significantly worsen.

In summary, 2023 was a solid year of performance for Ituran in all respects, and we believe that 2024 will continue on this trend. I want to add that I'm very proud of the courage and commitment of the Ituran team, both in Israel and globally, especially in the challenging time we have had recently and wish to personally thank them for their resilience and dedication during these times. As has been true throughout our long history and will continue to add over the long term, our constantly growing subscriber growth will continue to translate into increased revenues with faster growing profitability over the long term due to the operating leverage inherent to our business.

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

[Eli Kamer, executive]

Thanks, 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. Fourth quarter revenues were $77.8 million, a 4% increase compared with revenue of $74.9 million last year. Fourth quarter revenue was somewhat impacted by the out break of war in Israel on October 7th. Furthermore, the revenue as demonstrated, denominated in U.S. dollar terms was impacted by a significant devaluation of the Argentine peso as well as the temporary weakness in the Israeli shekel against the U.S. dollar during the quarter. In local currency terms, fourth quarter revenues grew by 6% compared with that of the fourth quarter of last year. Revenues from subscription fees in the quarter were $59.4 million, an increase of 10% over the fourth quarter 2022 revenues. In local currency terms, the increase was 12% compared with that of the fourth quarter of last year.

Product revenues in the quarter were $18.4 million, a decrease of 13% year-over-year. And in local currency terms, product revenues decreased by 9% year-over-year. The decline in product revenue was mainly due to the thousand hardware installation in Israel following the outbreak of war on October 7th. Revenues for full year 2023 were a record $320 million, a 9% increase over the $293.1 million reported in 2022. Revenues from subscription fees were a record $234.5 million, representing an increase of 12% over 2023 -- 2022. Product revenues were $85.4 million, representing an increase of 2% compared with 2022.

The subscriber base expanded to 2,252,000 by year-end, marketing an increase of 42,000 from the end of the previous quarter and 186,000 over 2023.

During the fourth quarter, there was an increase of 38,000 net in the aftermarket subscriber base and an increase of 4,000 net in the OEM subscriber base.

The geographic breakdown of revenues in the fourth quarter was as follows: Israel, 47%; Brazil, 28%; Rest of World, 25%.

EBITDA for the quarter was $21.9 million or 28.2% of revenue, an increase of 7% compared with EBITDA of $20.6 million or 27.4% of revenues in the fourth quarter of last year. In local currency terms, fourth quarter EBITDA grew by 8% compared with that of the fourth quarter of last year. EBITDA for 2023 was a record $87 million or 27.2% of revenue, an increase of 10% compared to $78.9 million or 26.9% of revenues in 2022.

Net income for the fourth quarter was $12 million or diluted earnings per share of $0.60, an increase of 26% compared to $9.6 million or diluted earnings per share of $0.47 in the fourth quarter of last year.

In local currency terms, fourth quarter net income grew by 28% year-over-year.

Net income in 2023 was $48.1 million or fully diluted earnings per share of $2.40, an increase of 30% compared with net income of $37.1 million of fully diluted earnings per share of $1.82 in 2022.

Cash flow from operation for the fourth quarter of 2023 was $21.8 million, and cash flow from operations for the year was $77.2 million.

As of December 31, 2023, the company had cash, including marketable security of $53.6 million and a debt of $0.6 million, amounting to a net cash position of $53 million. This is compared with cash, including marketable securities of $28.2 million and a debt of $12.2 million, amounting to a net cash position of $16 million as of the end of 2022.

The Board of Directors announced another increase in the quarter in the dividend policy. This follows the company's continuing strong profitability, ongoing positive cash flow and strong balance sheet. The company increased the quarterly dividend to $8 million from $5 million in the prior quarter and from $3 million in the 8 quarters prior to that. This represents a 60% increase in the ongoing quarterly dividend payment compared with that of the prior quarter and 167% increase over the dividend paid in the many quarters prior to that.

During 2023, Ituran bought back $6.6 million share as part of its buyback program. As of December 31, 2023, there is $6.7 million remaining under the buyback program. Share repurchases are funded by available cash and repurchase on Ituran's ordinary shares under SEC Rule 10b-18 terms.

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]

I was wondering, first off, if you could talk about some of the drivers behind the subscriber guidance. And maybe what are some of the dynamics you're seeing in the different geographies?

[Eyal Sheratzky, executive]

The main drivers today are coming from, I would say, different drivers in different segments. First of all, in Israel, the cost rate is increasing. It started during 2023 and is continue as we phase it every night, I would say. And in that case, it means that more insurance companies and more car owners are looking for security systems. And since our solution, I think, is the most expense one, so we get more and more requests for new subscribers. This is in Israel. And in other countries, we have; one, the things that we are more and more focused on B2B, such as the financial institutions for having a solution when they provide the loans to new car buyers as well as security needs, which also -- there is an increase in violence and car theft also in Latin America. So this is the main drivers.

[Chris Reimer, analyst]

Great. And just touching on the EBITDA guidance you gave forward for 2025 at about, well, surpassing $100 million, how much -- how many sub adds would that be roughly based on?

[Eyal Sheratzky, executive]

What actually we show in the last 2 years and what we expect in 2024 is generally speaking, is around 150,000, 10% more or less. And while we're considering this number of subscribers is assuming that the ARPU is not going to change dramatically because some of the services that we provide are generating lower ARPU, but on the other hand, we increased a lot of up sales. For example, in Israel, when we sell SVR, which is -- let's call it, this is traditional and the bread and butter, still very high percentage of those customers are adding, for example, application payments. And in that case, the ARPU in Israel is growing. So overall, we consider conservatively that the ARPU will stay and with this number of subscribers. And by the way, add to this, the operating leverage assumptions, we are not expecting that the growth of our expenses will be -- will decrease, let's say, every year we -- the additional expenses will decrease every year, so we can build this model to provide this guidance.

[Operator]

The next question is from Boris Schneider of More.

[Unknown Analyst]

Congratulations on strong execution. And we appreciate the guidance that you provided. I think that's a great help for the long-term investors as well. Question in terms of expenses. Last quarter, you mentioned that you had some one-off expenses related to the events in Israel. So if you can quantify the number, I know you said it's not very significant, but just to understand what's the impact on the net income this quarter.

[Eyal Sheratzky, executive]

As you can see, we -- actually, when we talked last quarter about the world, actually, we expected or we put in a frame a little bit more expenses and a little bit more, let's say, decreasing in sales in Israel. But generally speaking, without giving the specific number because it's not material anyway, talking about some hundreds of thousands of dollar in expenses, which are directly for contribution to the needs in Israel for the war, which today, of course, we don't -- most of it, we don't have anymore.

[Unknown Analyst]

Okay. And in terms of guidance, so your subscription guidance mentioned roughly 6%. I think that is the lower end. And if I look at the EBITDA guidance, it's lower. So my question is, obviously, the model, your financial -- your business model is based on operating leverage and quite a significant one. So the guidance appears to be quite conservative. But what do you think on this?

[Eyal Sheratzky, executive]

First of all, we have to understand that there is no zero cost because part of this -- we talk here when we say the number about 160,000 talking about the net, don't forget that we have total sale and then the churn. What we provide as a net is after the churn, this is first to understand. So in terms of growth, it's a very high growth, but there is a churn. Regard the cost from 2 reasons, one is the conservative reason. And second is because in order to grow 160,000 net still, it's not zero cost. Some places, we are financing the hardware, which is part of the service, and it appear in amortization. And also we -- from time to time, we have to provide a direct solution to specific customers. So we add -- we have to add R&D. So practically, you're right that it appeared to be higher growth in the EBITDA, which will be more correlative to the growth of subscribers. I believe that I want it to be higher, but when we provide guidance, we have to be conservative with the guidance. So this is the main reason.

[Operator]

The next question is from Abba Horovitz of OSP.

[Abba Horovitz, analyst]

Congratulations on the very nice quarter and just all the all around guidance. I just wanted to know if you could update us on Bringg. It's been a while that we've heard about Bringg. If you could maybe talk about if there's anything new to share.

[Eyal Sheratzky, executive]

Usually, when we spoke about Bringg, since it's kind of a financial holding, we have 17% from the shareholders. It was when we did the round. We know that about 2 years ago, we made a very impressive round when Bringg raised more than $100 million. Since then, the company doesn't need to do another round. So this is why we didn't inform anything because from the operational side -- point of view, we are not allowed since we have only 17%. But the company has its business plan, and it's -- it looks like it's a stick to the business and things are going as planned.

[Abba Horovitz, analyst]

Okay. Very good. Are you guys looking at any other investments outside of your own stock?

[Eyal Sheratzky, executive]

No, except Bringg, which also in the last, I think, more than 7 years, we didn't invest. We did it on the investment as an Angel, Ituran is always investing only in companies, which is in our field. And in the last 5 years, we are doing it, or we will -- we did it when we acquired Road Track or in the future when we go for a full acquisition, again, to create synergy and part of consolidation results. So Bringg is actually -- Bringg and SaverOne is the only financial holdings that we have today.

[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]

Yes. On behalf of management to Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. We hope to be speaking with some of you over the coming quarters, and 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.

[Operator]

Thank you. This concludes the Ituran fourth quarter and full year 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.