PowerFleet Inc

TASE:PWFL

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the fireside chat. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, David Wilson, CFO of PowerFleet, Inc. David, the floor is yours.

[David Wilson, executive]

Good morning, everyone, and welcome to today's fireside chat. My name is David Wilson, CFO of PowerFleet, Inc., and I am joined on today's call by Steve Towe, PowerFleet's CEO.

I'll begin the call by sharing our safe harbor statement. The information shared on today's call contains forward-looking statements within the meaning of federal securities laws. All statements contained in this presentation that do not relate to matters of historical fact should be considered forward-looking statements. For example, forward-looking statements include, without limitation, statements regarding our preliminary financial results for the 3 months ended June 30, 2024, and our preliminary pro forma results for the 12 months ended March 31, 2024. Hence, the integration of our MiX Telematics businesses and the ability to recognize the anticipated synergies and benefits of our business combination with MiX Telematics.

These forward-looking statements are based on management's current expectations. These statements are neither promises nor guarantees and are subject to risks. Uncertainties and other factors described from time to time in our periodic filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove to be incorrect, actual results may vary materially from those indicated or anticipated by these forward-looking statements.

Forward-looking statements included in this presentation are made only as of the date of this presentation. And unless otherwise required by applicable law, we assume no obligation to update any forward-looking statements and expressly disclaim any obligations to do so, whether as a result of new information, future events or otherwise.

With the forward-looking statements shared, I'll start by briefly addressing the delay in our Q1 fiscal 2025 earnings call and related filings. We received a Comment Letter from the SEC on July 30 regarding the designation of PowerFleet, Inc., as the accounting acquirer under ASC 805 Business Combinations, in our recent combination with MiX Telematics Limited. This accounting matter does not directly impact our cash flow.

The matter raised by the SEC was carefully reviewed and deliberated on by both PowerFleet and MiX Telematics in close collaboration with their external advisers during the preparation of the S-4 and other necessary regulatory filings in connection with the transaction. While relative shareholding is a factor in identifying the accounting acquirer, it's important to recognize that ASC 805 outlined several other considerations under U.S. GAAP that must be evaluated. These include, but are not limited to, the composition of the Board of Directors, management control, any control premium paid and the relative sizes of the 2 entities involved in the merger.

After a comprehensive analysis of all relevant aspects of the transaction, both companies concluded that PowerFleet had gained control over MiX Telematics. Consequently, PowerFleet was identified as the accounting acquirer in this transaction. While we are working closely with our auditors and legal advisers to resolve this matter within the month of August, timing is ultimately dependent upon the SEC review process. As a result, this ongoing review will delay our ability to file our transition report on Form 10-KT for the transition period from January 1, 2024, to March 31, 2024, and our Form 10-Q for the fiscal first quarter ended June 30, 2024.

Our preliminary results for the June quarter have been prepared with PowerFleet identified as the accounting acquirer. This includes additional amortization expenses related to intangible assets, primarily customer relationships, identified during the purchase price allocation, offset in part by a reduction in the amortization of capitalized commission. While we are confident in the rigor of our evaluation process and believe this conclusion aligns with guidelines provided by U.S. GAAP, we understand the importance of the SEC review process, and we'll work closely with them to conclude this matter.

I'll now turn the call over to Steve to provide an overview of our first quarter operating and preliminary financial performance. Steve?

[Steve Towe, executive]

Thank you, David, and thank you all for joining us today. I'd like to start by acknowledging that. Due to the matters David just discussed, there has been no longer than usual gaps into our last formal earnings call. However, during this time, we've been deeply focused on executing our strategy and driving meaningful results.

Our first quarter financial performance is a strong indicator of the progress we've made and very positive momentum we're seeing across the business. Success is clearly evident in the topline performance, where we expect a 10% year-over-year revenue growth on a pro forma basis to approximately $75 million. This growth underscores robust demand for our solutions, particularly driven by the strength of our differentiated in warehouse safety solutions and the ongoing traction of Unity in North America and growth in our subscriber base, which increased by 11% year-over-year to 1.95 million.

Our preliminary adjusted EBITDA is anticipated to exceed $13.5 million, representing an increase of over 40% compared to the pro forma adjusted EBITDA from the same period last year. This strength reflects excellence in execution as we delivered strong topline growth while effectively implementing our integration and EBITDA expansion initiatives. It demonstrates operating leverage inherent with our business model and our cost synergy program running ahead of schedule, securing $8.7 million in annualized savings as we exit the quarter.

Looking forward to the future, given our strong start to the fiscal year, we are raising full-year 2025 revenue guidance to exceed $300 million, up from our prior guidance of approximately $300 million. We are also increasing our adjusted EBITDA guidance to exceed $60 million, which includes an incremental $5 million in secured exit run rate cost synergies compared to our previous guidance of approximately $60 million. We believe these results reflect the effectiveness of our integration strategy and our ability to drive our topline growth and operational efficiencies.

Before we open the floor to questions, I want to reiterate that the accounting item with the SEC is not reflective of our operational performance. We're working diligently to resolve this matter, and we remain confident in the growth and resilience of our business performance.

Thank you for your continued support and confidence in PowerFleet. We look forward to discussing these results in more detail on the next earnings call and addressing your questions during the remainder of the session.

Now let's move on to the Q&A session. Operator?

[Operator]

[Operator Instructions] Your first question is coming from Scott Searle of ROTH Capital.

[Scott Searle, analyst]

Nice to see the topline starting to move in the right direction. Dave, maybe just quickly, I want to make sure from the accounting standpoint what we've got is, is from an SEC standpoint determining who the acquiring entity is and then, therefore, that impacts purchase accounting, intangible allocations, et cetera, right? That is a simple noncash aspect of what's happened here.

[David Wilson, executive]

Yes. That's absolutely right, Scott. So it's really about which side of the ledger in terms of PowerFleet or MiX you assigned the intangibles given the price paid would be having the book value of either company.

[Scott Searle, analyst]

Got you. And, Steve, it's nice to see the sales up 10% year-over-year. It's certainly ahead of, I think, the early expectations when you guys first talked about the combination. I wonder if you could provide a little bit of color on that 10% growth in the June quarter. How much was product versus recurring aspects?

And then, as we start to look into the customer base and raising the guidance for the year, where are you seeing that strength? You did reference warehouse, but I'm wondering where else in terms of end markets, geographies. And what you're seeing in terms of existing customers, increasing the number of modules that they're deploying and how Unity platform is doing into the MiX base?

[Steve Towe, executive]

Thanks, Scott, and I'll try and unpack those as we go. So I think ultimately, we wanted to come out of the gate strong. And I think the results really represent the customer sentiment and the market sentiment to the transaction and the disruptive and differentiated solutions that we're now bringing to play to a broader customer base. So we were very, very strong in our Unity safety solutions, which were up 25% year-over-year. And within that Unity, service revenue was up 10% year-over-year. .

David will cover off in terms of the overall numbers, the split on revenue. But what I would say is we're seeing, again, strong traction in North America in terms of those solutions we've talked about. But also, I would say, a good to great performance just across the board. So we're all aware of the macro headwinds. We're all aware of the challenges in the geopolitical issues around the world. But this team has come out very resiliently. And I think you should take this as a strong signal from our customer base just in terms of their response to -- from a MiX perspective, a broader portfolio. And from a PowerFleet perspective, I think it's just more of the same, but we're now getting into a groove with the sales team in terms of turning over those wins. 70% of the business is coming from existing business, 30% from new logo. But just a strong, strong out-of-the-gate performance.

And I think most notably, when companies come together, people are very concerned about that first kind of 3 to 6 months on how performance is going to go. So doing that growth, but doing it also very profitably, I think, is a second plus point for the business. So we're delighted with the start.

David, you might want to just cover off some of the mechanics of the revenue.

[David Wilson, executive]

Yes. So just building on Steve's comments, Scott. So we had an incredibly strong quarter in terms of product revenue. To Steve's point, this is a differentiated sort of safety-centric solutions we're bringing to market. So that resonates well. So we have good traction there. And as you can appreciate, strong product revenue is the precursor to attach services revenue over time. So that gives us a good foundation of results between now and the end of the year. So that was very strong.

In terms of service revenue, it was up year-over-year mid-single digits. A couple of points there. Firstly, if you think back to some of the information that MiX shared previously, they did have some significant sources of churn in their base. And clearly, the growth that we're seeing there has to outpace that and then some. So we feel good about where we are. And then in terms of how services are performing versus our internal plan, it's sort of ahead of plan as well. So a good firm foundation for the rest of this fiscal year.

[Scott Searle, analyst]

Okay. Great. And if I could quickly follow up, Steve, is Unity remain on track to roll out to the entire MiX base? I think the target was 6 months. And the 30% from new logos is an impressive number. I'm just wondering if you could quickly give us an idea how those ARPUs are comparing. Are guys coming in with a broader service suite that they're signing up for?

[Steve Towe, executive]

Yes. So I think what is also kicking in is the elements of Unity that increase ARPU. So what we've seen as we brought this into the new logo base is people are taking the device and data ingestion, the device-agnostic data ingestion piece. And they're also signing up early on for the unified operations, business systems integration, which helps us on the broader ARPU piece. So that is very strong.

[Operator]

Your next question is coming from Anthony Stoss of Craig-Hallum.

[Anthony Stoss, analyst]

Nice results. I want to follow up on the sub count, 1.7 million subscribers. Can you share perhaps more detail where you're seeing the bulk of those new customers coming online, what products? And David, if you want, or Steve, share kind of a goal in terms of sub count by the end of this year? And then also, I'd love to hear the 5 million of new filing synergies, where is that coming from?

[Steve Towe, executive]

So it's actually 1.95 million, I think, in terms of subscribers. And I think that is being driven in the same -- where the revenue is the subscribers are coming. So -- that's a high alignment in terms of the growth areas versus the subscribers. I don't think yet we've given subscriber guidance for the future. I think that's one for the earnings call when it comes through.

And then in terms of the overall synergy piece, that is actually, I think, a couple of things to note. First of all, we're ahead of schedule. So I think it's $8.7 million of the annualized plan we've already delivered in the first quarter, and this, again, is a testament to the strength of the team and also our integration capabilities. And I think what David is referencing, but he can add on in terms of the 5 years, that's kind of adding in the annualized version of what is taken in the year. So add 5 plus 8, is kind of 13 is the run rate. I think that's where that is.

I'd just like to come back to Scott's question because I realized I didn't answer the question in terms of are we on track for the follow-up capabilities, both hardware and software for MiX customers to consume the Unity services. So we're ahead of track. There is more work to be done on certain elements of it, but we're already starting to get those capabilities into the hands of MiX customers.

[David Wilson, executive]

In terms of the guidance, it's probably just a little bit more complex than it need to be from an EBITDA standpoint. So the guidance we previously gave as recently as the April fireside chat, talked about $60 million of EBITDA, which was really what would we actually post in the year, plus giving ourselves full credit for EBITDA cost realized but not necessarily hitting the ticket for the year. So the rule of thumb was look for about $55 million of posted EBITDA plus an extra sort of $5 million or so in terms of run rate that is in excess of what actually hit the $55 million. So we'll be more straightforward hereon now.

[Anthony Stoss, analyst]

Got it. And if I can just one quick follow-up here. Any comments on changes that you've seen either in churn or also it seems with the much better results that your average sale price is probably going up, more products are being taken by our customers. I'd love to hear any updates you can share on that.

[Steve Towe, executive]

Can you just repeat, you could add to the start of the first part of the question?

[Anthony Stoss, analyst]

If you've seen any changes to churn, and then, again, just kind of average sales size.

[Steve Towe, executive]

Yes. So I think as David articulated earlier on, we were aware of some churn in some customers within the MiX space. We've been able to absorb that. And I think there is renewed energy across our base, both on the PowerFleet and the MiX side to reduce churn over time. And I think we've got some strong mechanisms that we're putting into place to be able to do that. We are seeing a little increase in ARPU, as we've said, come through. But this is really about account expansion where we've got the growth, plus obviously some good new logo wins for us as well. There is no retail business in this growth. So this is nice because it's kind of run rate business.

But it's really that expanding use of our portfolio and the value-added services that we can offer alongside. And I think it's also as well from a device-agnostic perspective, customers deciding to bring all of their hardware business to us as well, knowing that they want to have the Unity one-stop shop and one-single pane of glass. So that kind of increments not only your hardware revenue, but your subscription revenue costs as well.

[Operator]

Your next question is coming from Dylan Becker of William Blair.

[Dylan Becker, analyst]

Nice job here, both on kind of revenue and profitability. I'm wondering first, to what extent are you guys seeing that outperformance come from kind of the core stand-alone businesses just given we're early in the integration phase? Or is it kind of early traction in some of the synergies, some pull forward, anything there, especially maybe as the theme of kind of vendor platform consolidation starts to play out, at least how that's kind of resonating in some of your early conversations?

[Steve Towe, executive]

Yes. So I think this is a few things. I think, first of all, we were highly prepared and very experienced at doing integration. So we've hit the ground running beyond fast, which has allowed us to take the team on a journey, and I think there's a huge amount of positive energy in both businesses, around the company strategy, around the momentum we can create in the market and ultimately creating a business which is going to sit at the very, very top table. So I think energy focus has really helped. And I think there's a reinvigoration of both companies off the back of the transaction.

But the expansion in EBITDA, I think, is definitely coming from what we've already put out in terms of the execution plan to be able to do that. I think this isn't just the stand-alone businesses doing a better job, this is definitely the 2 companies together from a product portfolio, from a go-to-market perspective, from a, I think, a sales discipline perspective. And really, I think from a customer's perspective, understanding that this is a new company with broader capabilities, with much improved scale, but having the right attitude in terms of coming for a long-term relationship with customers. So I think we've got those messages out, both into our customer base and into our partner base. And I think we're starting to see the outcome of that.

And I'd just remind everyone on the call, this is something that was cornerstone to the strategy that we set out, and we wanted to make sure we hit the ground running. I'll come back to the point that in the first 6 to 9 months of most -- combinations of this size, it can be a very, very challenging period. So I'm very proud of the fact that we haven't skipped a beat operationally. We've enhanced our overall internal and external approaches. And we've seen a very, very strong results focused achievements. So that's something that we feel good about. We've got a lot of work ahead, much more work to do to get where we want to, but a very solid start coming out of the gate.

[Scott Searle, analyst]

Okay. That's great. That's helpful. Maybe 2 -- I know you guys, as a part of the transaction, had brought on a lot of engineering talent. I guess how should we think about this maybe more so as a leading indicator of what's to come on platform innovation, the ability to address kind of probably what I would assume as a lot of customer inbound for that additional platform functionality to be built out. Unity, obviously, and then probably a number of other solutions on top of that as well.

[Steve Towe, executive]

Yes. So look, PowerFleet in March 2023, which is only 14, 15 months ago, had 50 engineers within its group. We now have 300. So our ability to transform our innovation, our speed and quality of products and solutions is seismic compared with where it was. So we're doing this in terms of the broader portfolio we have today, plus the introduction of the Unity strategy as we're able to evolve, and I think it was Scott who mentioned better AI capabilities, more modules, the ability to do things faster in terms -- and scale in terms of both sets of device and data ingestion plus the third-party integrations, is only going to bring goodness for us moving forward.

So what excites us is that we've got this traction and this momentum, and then, it does take longer for engineers than 90 days to kind of kick in, in terms of its output. But the teams are working on a very discrete roadmap that's been put together for the future. And those guys are mobilizing and starting to execute well against that plan.

[Operator]

[Operator Instructions] Your next question is coming from Alexander Sklar of Raymond James.

[Alexander Sklar, analyst]

Steve, just in terms of revisiting the growth opportunity now 4 months or so post the merger, can you just talk about how you feel about the coverage of your TAM and the pipeline? And then even maybe some of the productivity stats you're observing from a rep standpoint. Any changes to how you're viewing the growth opportunity just given the strong Q1 results?

[Steve Towe, executive]

No. And look, we'll cover more of in the earnings call. We're also planning to do an Investor Day in the fall, and we'll be a lot more granular in terms of that output and that execution. Over time, the TAM will increase for the business because we're able to serve more verticals, more markets, more geographies at scale. And we'll kind of take our shareholders on a journey towards that. I mean the one data point that I think is important to add is we're adding 28 quota carriers to the business. We're currently recruiting those folks as we go, and that's in sales and revenue-led customer success across the business, which is a significant increase for the business.

And we -- so in terms of the savings that we are creating from the EBITDA expansion plan, on top of that, we're having the capability to invest more feet on the street. And this is all part of -- I've articulated previously, both businesses, for different reasons, have had to be playing defense for a long, long time. This is us now getting on that front foot, starting to play offense and getting more visibility in the market and getting deeper into those markets. So that is going to grow. That's going to continue to grow. It's going to be an evolving strategy, which will ultimately open more doors for us, both in terms of pipeline.

What I would say in terms of the conversion rate from sales, from reps, we have seen an increase in the last 90 days. And I think that is just across the board and intensity, I think confidence within the sales teams and the reinvigoration of our sales teams being a bigger company with a broader portfolio and be able to create better value for customers. And those sales teams really being able to see the wallet share opportunity that's ahead of us with the redefined proposition.

[Alexander Sklar, analyst]

All right. That's great color. I appreciate all that, Steve. And then maybe just one follow-up for you, David. Just in terms of what you saw on the sequential trends from the separate entities kind of in March versus the combined company in June, you gave us the preliminary full-year number. Can you just talk about the linearity of growth and then any FX impact between the 2 quarters to call out? It just seems like a really nice uptick in the June quarter. And I'm just kind of curious is that -- was that on the services side as well? Or is that kind of all on the product side in terms of sequential improvement?

[Steve Towe, executive]

Yes. No, it's across the board. So there's strength across the board. To Steve's earlier point, we really did use the companies coming together with springboard, and we're definitely seeing sort of an acceleration in terms of both the numbers that we're posting in addition to the head of steam that we're building out for future quarters.

So, again, we're delighted with what we're able to accomplish. It's a testament to these 2 organizations coming together in coalescence as opposed to sort of moving apart, which quite often happens under M&A. So, again, it's -- there's huge opportunity here. It's very clear what we need to focus on when we get down, when we got traction regarding it.

[Operator]

Your next question is coming from Greg Gibas of Northland Securities.

[Gregory Gibas, analyst]

Steve and David, congrats on the quarter. I think most -- everything has been addressed. But I wanted to get a sense with kind of the cost synergies seemingly tracking ahead of expectations, do you still kind of on a longer-term basis have the same visibility to recognize $27 million EBITDA uplift that you previously discussed?

[Steve Towe, executive]

Yes, we feel totally confident in that number. It's always better to have execution behind you and to be able to say that when you're significantly within the plan. And as I said, this year, it's going to be north of 50% of it executed by the time that we get through this year. But we were very confident in being able to deliver it, but it takes a lot of hard work. It's tough stuff to do. Yes, there's some low-hanging fruit, but we've gone well past the low-hanging fruit into the more challenging things and couldn't be more delighted with the attitude and approach, but also the skill and the ability of people to make that happen for us. So we feel very good about that number. And as I articulated earlier, we've gone past that in terms of actual savings in the business, which is allowing us to repurpose more into our go-to-market.

[Gregory Gibas, analyst]

Okay. Great. And I wanted to get a sense of how pricing with new logo growth has trended. And maybe how gross margins trended in the quarter?

[David Wilson, executive]

Yes. So to Steve's earlier point, in terms of new people coming in, they tend to be primarily drawn by the promise of Unity, and that is a higher margin, higher ARPU differentiated service. So that's working well. In terms of the margin, to the point earlier, this is differentiated solutions, safety solutions, it is healthy margin business. So certainly from a product gross margin standpoint, we saw a nice sort of pick up sequentially in terms of profit -- gross margin on the product side of things. And in terms of service side of things, it continues to perform well. So again, we feel good about where we are from a gross margin standpoint.

[Operator]

Well, we appear to have reached the end of our question-and-answer session. I will now hand back over to Steve for closing remarks.

[Steve Towe, executive]

So we just like to say thank you, everybody, for your continued support. It feels like a very long time since we've been able to come and update on the business. So we're delighted to be able to have done so. We will provide more color once we're through this process with the SEC. We take it very seriously in terms of making sure that we follow that process, and we're very confident in the way that we're approaching that process. So we appreciate the ongoing dialogue. We always want to be very upfront and straightforward and be there for our shareholders to ask questions. So these sessions are super important to us. And we look forward to keep updating now and for our shareholders to feel and understand the momentum and the positivity and the excitement that we have for the business moving forward. So have a great day. We'll be back in touch very soon, and we appreciate your support. Thank you.

[Operator]

Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.