Ituran Location and Control Ltd (ITRN) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran third-quarter 2007 results conference call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded November 19, 2007.

I would like to remind participants that forward-looking statements for the respective Company's business, financial condition, and results of its operations are subject to risk and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product or technology development, and the effect of the Company's accounting policies, as well as certain other risk factors which are detailed from time to time in the Company's filings with the various securities authorities.

You should have all received by now the Company's press release. If you have not received it, please call GK Investor Relations at 1-866-704-6710 or 9723-607-4717. I will now hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Thank you. Good day to all of year and welcome to Ituran's conference call to discuss the third-quarter results and the news out earlier today that the Company signed an agreement for the sale of its subsidiary, Telematics.

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 Mizrachi, VP Finance. Eyal will begin with a summary of the deal and the quarter results, followed by Eli with a summary of the financials. We will then open the call for the question-and-answer session. Now, Eyal, would you like to begin, please?

Thank you, Ehud. Welcome, everyone. Thank you for joining us today and thank you for your interest in our Company. As you know, we signed an agreement for the sale of Telematics, our 95.5% owned subsidiary, which holds our location technology. I would like to explain the rationale behind this sale.

About eight years ago, we purchased Telematics for around $10 million. In Ituran's early days it was important to own and have full control over our technology, as we were constantly developing and improving it, and we were in the early days of implementation and growing our business.

Now, as this technology has become more established, we came to the conclusion that we should focus our efforts on our core competencies, which are providing location-based services (technical difficulty). There is no longer a strong strategic reason for us to control and own the technologies; and our efforts to market and sell our technologies outside of our primary regions take management's time, effort, and focus.

Since the acquisition of Telematics eight years ago, we succeeded in leveraging the R&D capabilities of Telematics for other product lines which are not a part of the core business of Ituran, including the AMR and RFID. However, we were not looking just to divest and realize a capital gain from this business. We wanted to maintain exposure to the significant upside potential we see and, at the same time, find a buyer which can take our technology and leverage it to the next level.

We believe that we have found this buyer. ST Electronics is a leading Singaporean company with diversified activities across Asia-Pacific, with a market cap of around $7 million. We have negotiated a share in the upside. Over, the next five years we will receive, based on various parameters, between of 5% and 8% of the revenues generated by the Telematics business both in Korea and China.

Finally, over the next 10 years, Telematics will remain Ituran's provider of its location technology; and Ituran will continue to provide Telematics with consultation and know-how in return for royalties, as has been the case in the past and on the same terms. This ensures that there will be no potential disruption in the near future in using its technology.

Just to give you some of the metrics, in principle Telematics will be sold at the valuation of $90 million, which may still be subject to some minor adjustments. Given we purchased the business for around $10 million eight years ago, this is a strong demonstration of the significant economic value that we have created, and we are very proud of this.

We expect that the contribution to Ituran's cash position from this deal will be closer to $60 million net of taxes. [Levies] and other expenses and EPS contribution from this sale will be around $2.30 per diluted share.

In the first half of 2007, the Telematics business contribution to Ituran was $9.6 million in revenue, $2.8 million in operating profits, and $2 million in net profit. In the third quarter, while the expense level within Telematics remained more or less flat with prior quarters, revenue from China and Korea was not significant, mainly due to technical issues in Korea, which has temporarily delayed revenues.

The deal, as I said, is still subject to final closing conditions including obtaining various regulatory and other approvals. But following the closing, the results of Telematics will cease to be consolidated within those of Ituran. We expect final closing toward the end of the year.

Now to the results of the third quarter. We saw strong growth to record revenue of $31.6 million in the quarter. This represents a year-over-year growth of 21%, the majority of which is organic due to our continued growth in subscriber base.

However, the profitability levels seen in this quarter were below the levels seen in the last few quarters due to higher operating expense. Most of this we had anticipated and planned for, such as higher marketing expenses. Eli will go later into more details.

We have grown our marketing expenses for a number of reasons. We recently launched an Ituran GPS in Israel making use of the extensive synergies between our technology and the MAPA business. In the third and fourth quarter, we launched a marketing campaign to introduce the product into the market, and we are already seeing traction.

While the start of the marketing campaign has cost us a significant amount in our sales and marketing expenses, we anticipate this level falling as the Israeli market becomes more educated with regard to our product, which we believe will be in another two to three quarters from now.

We have also begun marketing directly to the car manufacturers in South America, in the aim to have Ituran pre-installed or as a service provider for the new models. This has also contributed to our higher marketing and sales expense level, but we are seeing interest from potential customers.

We see our increased expenses as an investment, as the potential from even one deal with a major car manufacturer will more then pay for increases in marketing and sale expenses. We very much hope to see some fruits of our efforts in the coming future. With that, I now will hand over to Eli.

Thank you, Eyal. As for the financials, revenues for the third quarter of 2007 reached $31.6 million. This represents a 21.2% increase compare with revenue of $26 million in the third quarter of last year. Revenue breakdown for the quarter was $16.5 million coming from subscription fees from our location-based services, which showed a year-over-year growth of 19.2%; and $15.1 million coming from product sales, which showed year-over-year growth of 23.5%.

The geographic breakdown of revenues in the year was as follows. Israel 51%; Brazil 26%; United States 15%; and Argentina 8%. Far East projects, none.

In terms of subscriber numbers, we reached a total of 430,000 at the end of the third quarter of 2007, compared with 383,000 at the end of the third quarter of 2006. We added 12,000 net subscribers in the quarter.

Gross margin in the quarter was 44.5% compared with 48.7% in the third quarter of 2006. The gross margin in the current quarter was affected by the delay in South Korea; the change in the product mix during the quarter; some increased labor cost compared with last year; and in the Israeli the depreciation of the US dollar against the Israeli shekel in the quarter increased expenses relative to revenues which are linked to the dollar.

Operating profit for the third quarter of 2007 was $5.3 million or 16.9% of revenue compared with $6.3 million or 24.1% of revenue in the third quarter of 2006.

Operating expenses were significantly higher than last year in part due to a previously forecast increase in marketing and sales expenses in the quarter. It also includes depreciation of the purchase price allocation of MAPA in the amount of $0.25 million.

EBITDA for the quarter was $7.3 million, which represents 23.1% of revenue, compared to $7.4 million, which represents 28.4% in the third quarter of last year.

Financial expenses in the quarter were $27,000 as compared with a financial income of $563,000 in the third quarter last year. The decrease was mainly as a result of a decrease in gains from investment in marketable securities, and the decrease in interest income due to a lower net cash level following the recent acquisition of ERM and MAPA.

Net profit was $3.6 million in the third quarter of 2007 or 11.6% of revenues, compared with $4.9 million or 18.8% of revenues as reported in the third quarter of 2006.

Fully diluted earnings per share in the third quarter of 2007 was $0.16 compared with $0.21 per fully diluted share in the third quarter of 2006. At the end of the third quarter, we had $23.4 million in fully diluted shares.

Cash flow from operating during the quarter was $3 million. As of September 30, 2007, the Company had a net cash position including marketable securities of $44.3 million compared with $59.4 million on December 31, 2006. The decrease was mainly due to the recent acquisition of ERM and MAPA and dividends issued through the year. With that, I would like to hand you back over to Eyal. Eyal?

Thank you, Eli. While 2007 has been a year in which we grow our revenue strongly, our expenses also grow at a faster pace, and the operating leverage in our business was not apparent. We also suffered from a big decrease in our margin due to the delay in revenues from South Korea project, which typically represent a higher margin (inaudible).

After the sale of Telematics, we will enjoy only the upside. We see 2007 as a year of an investment and transformation. We bought two businesses which are already contributing positively to the top line as we fully realize the synergies. We launched new products and increased our investment in growing and retaining our greatest asset, our subscriber base.

We have now sold Telematics at what I believe is a fair price. This sale enables us to focus on our core competencies going forward of providing location-based services and applications to an ever-growing long-term subscriber base. We see 2008 as a year in which we will reap the fruits of our investments and growth in the top and the bottom line.

Finally, the cash from the Telematics sale will significantly strengthen our balance sheet and increases our ability to make more significant acquisitions. In this regard, we are continuing to pursue opportunities which will broaden our scope and ability to provide location-based services and enter new territories. I look forward to reporting on our progress. With that, I would now be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS) Paul Coster of JPMorgan.

Yes, can we just go back to the divestiture for a moment? Can you just repeat, please, because I missed it, what the total revenue to date from the Telematics business is -- or was, rather -- and what the margin on that business was approximately?

For the six months the revenues of Telematics was $9.6 million, while the operating profit was $2.8 million and the net profit was $2 million.

How does it compare on a gross margin basis to the residual business? Was it higher or lower gross margin?

The business of Telematics is, as you know, the segments that they are representative, such as the AMR, which is a higher -- on that product segment, I'm talking about -- is a higher margin. You have to remember that the profits from selling the [end] units is profit with almost 100% gross margin; and the revenues are being a canceled on the intracompany P&L. So, this is the effect that will be on Ituran.

Right, can you just sort of repeat, what is impact this has on the AMR business?

From now on, the AMR will not be consolidated in our consolidated P&L. From the closing time, of course.

I'm sorry, can you repeat that?

The AMR is a part of the Telematics operation; and therefore after the closing the AMR will not be in the numbers of Ituran consolidated report.

Okay, got it. In terms of outlook, are you prepared to provide any outlook for '07, the residual '08?

We are by the policies of our Board, Paul, we are not providing guidance. But usually we provide a general forecast, as I just did regarding 2008, which I said that we are -- we believe that we will show growing in the revenue and in the profits.

All right, got it. The gross margin, do you think they are abnormally low at the moment? In the mid to low -- in the mid-40s? Or do you think that this is what we should be expecting through '08?

If I would consider mid- and long-term, since we are going to focus and we are now sold Telematics, it should show in the future a higher profit margins. But since we had, as I mentioned, some cost/investment in order to maintain our customers, our subscriber growth, and to penetrate new segments such as the car manufacturers in Latin America, and since we start to consolidate MAPA and ERM which have a lower margin, so I think that in the short term the margins will not be higher as it was a year ago. But mid- and long-term I believe that it will improve and it will be higher margins.

Okay, got it. Then finally, the competitive landscape in South America for your LB service, how has it changed in the last quarter, if at all?

As I said, it is not yet something that we can prove through our subscriber growth that ended with 12,000. But as we see it on the ground, and as I see our efforts and our new investments in specific divisions that are working toward two main segments that in the past we didn't touch.

One of them is the car manufacturers, because today we can offer a solution which is a nationwide in Brazil and nationwide in Argentina, which is based on GPS/GPRS that we derived from ERM.

Second is the opportunity to work nationwide and it is [interest] to the car manufacturers that this is part of their criteria to work with companies such as Ituran. If in the past we were localized in Sao Paulo and in Rio, today we can offer -- and that is what we are doing.

So actually, the competitive landscape as we see it today, as we see as a potential result, is on a status quo. But Ituran today offers much more applications and products than in the past. So I believe that toward the next year and ahead of it, we believe that we can increase our subscriber growth in Latin America stronger than we did this year.

Okay, thank you very much.

Jim McIlree of Collins Stewart. The next questioner is Ziv Tal of Oscar Gruss.

Hi, Eyal, Udi, Eli. Can you please detail what exactly is associated with the $30 million gap between the selling price and the net proceeds of the sale?

First of all, since we mentioned that the cost that is in our balance sheet with regard to Telematics is less than $10 million, so it is almost the entire price for selling the company is taxable. Meaning corporate tax in Israel, which is a -- should be, currently is about 29%. So the whole total is between 25% to 29%, this by itself reducing the net margin.

Add to this a cost or expenses of creating such a big deal, which include advisors, include bankers, and include bonuses, this will result with of course lower net than the brute -- than the total.

Okay, thank you. What is the appreciation of the real versus the US dollars? How much did that contribute to your revenues?

The real of course increased compared to the dollar in the last quarter. If you are talking about compared to last year or compared to the second quarter?

How much did it contribute this quarter to the top line?

To the top line it contributed, let's say, a couple of hundreds of thousand dollars on the top line, especially on the service fee.

Okay.

Compared to last year, of course.

Don't forgets our costs are with the same currency which is the real. So the influence, whether it is bad or whether it is good, is more on the profit lines than in the other.

Sure.

That was offset a little bit by for example the [peso] (inaudible) weakness compared to the dollar.

Okay, thank you. Can you please tell us a little bit about the customer retention efforts in Brazil and how is that progressing? You detailed a little bit about that during the last call. How is that progressing?

We are, as I said before, once (inaudible) side, penetrating new segments is that we succeed to retain better our customers. Although it is a few months, we are reaping the fruits. It not yet contribute to Q3, but our feelings and what we are seeing on a daily basis recently, is that we are succeed to achieve better achievement in that field, which of course will allow us to show higher growth of net subscribers next year in Latin America market.

Okay, thank you very much.

Jonathan Ho of William Blair.

Good morning, guys. The first question I have is, can you repeat the geographic percentage split for revenue?

Israel is 51%; Brazil is 26%; USA is 15%; Argentina is 8%; and the Far East is zero. Just to give you one point on that, Israel for example is 51%. One of the reasons, of course, is the contribution of MAPA, which was consolidated for the first time this quarter.

Since the Far East project becomes zero the first time during the last two years, each one of the other geographies is [taking these paths] when you are talking percentagewise.

Okay. My first question would be with regard to the Ituran GPS, can you give us a little more color on what your initiatives are there? Particularly with the car manufacturers, are you going to be going in there with an aftermarket product? Or will this be part of the, I guess, option package?

We are -- currently have an absolute advantage with the new Ituran GPS in the markets that we are using our established assets, such as the dealers, such as the aftermarkets, and the car importers in Israel and manufacturers in Brazil and Argentina.

We are offering today two kinds of systems. One system is a system that it's a part of the in-car screens. And the other one is a very familiar system, like if you are more familiar with Garmin or TomTom in the market that Ituran are not involved with such as Western Europe and North America.

We are more concentrating in our markets and in emerging markets as a service provider, based on location and based on mapping to our customers. Of course, as long as this becomes more and more focus of our business, we felt that we cannot ignore the requirements for navigation systems.

So currently what we offer is a navigation system which is a hardware, which is very common. But we are adding something that our competitors, even in the Israeli market are not using.

We're leveraging our control centers, our 24 hours operation, for those customers that buy this hardware and find problems. It operates on online. Such as accidents in the roads, such as trucks that working and expanding the roads.

So with their system, it is not only the hardware. They can call what we call Mr. Big Mr. Big; or you may be familiar with the OnStar control center. It allows the customer for Ituran GPS to get real-time services.

This together seems to us part of the synergy. And this together is something that Ituran -- that want to be the leaders of a driver services -- it is something that we must penetrate it.

Currently, beside the [partly] gross margins, we still are facing an expansion of expenses in this item, because this is the first time and we are not the first in the market. When usually in the past we were the first, so we had the beginners' advantages, now we have to cover a gap between us and the beginners. So we are using a lot of advertisement in Israel currently. This is part of why our sales and marketing expenses increased.

Okay, sounds like a pretty solid opportunity there. Can you give us a quick update on what is happening in South Korea? With the sale of Telematics does this kind of completely remove you from South Korea and China?

I think that part of the advantages for Ituran in this deal is that is a win-win situation. Up until now, as you could see in Q3, Korea and China didn't contribute to us in terms of revenues and profits. The recent -- the last three quarters South Korea, because of objective interference for the frequencies, didn't contribute to us almost at all. China, the contribution was quite slow than we expected two years ago.

Why it's a win-win situation? Because the buyer of Telematics, which will be responsible for expanding the operation in Southeast Asia first, but second has a lot of power in China and in South Korea, should take this project maybe stronger with his capabilities and with his relationships (inaudible) with authorities, regulators, and business parties in those two markets.

So we will enjoy -- part of the -- based on part of the agreements between us and the buyer, for revenue sharing. Of course, it is a minority share. It is not something that we are going to consolidate. But on the other hand, there is no risk related with this deal.

So if there will be upside, we will enjoy. If the situation will continue as is, so we gave up for the risk. Actually, I have a lot of beliefs on the buyer that he can take the delays and move forward strongly than Ituran would do in those two markets.

Great. Thank you.

Jim McIlree of Collins Stewart.

Thank you. My apologies for the last time. On the geographic split, was that for the quarter year-to-date, those percentages you gave?

That is for the quarter, for the quarter.

Third quarter.

For the quarter, okay. Great. Secondly, going forward without Telematics, will your product gross margins be about this 23% or are they going to be lower or higher? It seems like they would be lower than your current 23%.

Regarding the product segment, the product segment (inaudible) the gross margin they of course will decrease as a result of this segment that represents three types of product, the AMR, RFID, and the AVL. And of course the project in China and South Korea, and those projects and the AMR and the RFID represent a higher margin than what we are selling the AVL today. Therefore, it will decrease.

But when we are talking about the gross margin of the Company, both of the segments, I believe that in the mid -- as Eyal mentioned before, in the mid- and long-term, we are a -- it will go higher, and the effect is not that big.

On the operational margin, again, there is almost no effect.

Right. How long will the royalties last on the sales to Korea and China?

Five years.

The net amount you said was about 5% to 8% for the total sales of the products to the end-user?

Yes. It includes products. It includes also base stations. It is not only for the end-users. It includes part of a turnkey project, but this is a rough number as it is more complicated scans.

That's great. Okay, thank you very much.

Andrew Spinola of Needham & Co.

Thank you. For the first half of '07, just if I were to look at those revenues pro forma for the acquisition, is my understanding correct that 100% of the LBS revenues is still yours?

Then as far as the wireless revenues go, can you tell me what revenue from that first half is yours now going forward and what isn't? Meaning -- I know, I understand $9.6 million of that $27 million --

You have to cut the $9.6 million from the wireless products; and you see what is the additional wireless product [serves]. And this is the number.

Understood. So, the remaining business is your selling AVL products to your markets; meaning not Korea and China. So your sales of those products in Israel, US, Brazil, and Argentina.

Yes, and this is part of the reasons why the wireless product from now on after the closing can be with the lower margins. Because as I always said, as a service provider, we are using the terminal, the wireless product, only in order to recruit customers.

Because it is like in the cellular markets. In order to provide the services, we must give the customer a hardware. So as long as we can have some profit, it's okay.

But if you are asking me for the future if we will have to sacrifice more of the profits on the hardware, we will do it. Because there is no doubt that subscribers that are paying us five to seven years, and the recurring revenue is a huge advantage, we will -- as we did in the past, we will continue to sacrifice some of the margin of the product.

Sure, that makes sense. Eyal, just I am trying to understand the evolution of Ituran. You are talking more about location-based services and applications. Are you thinking stolen vehicle is still going to be the important one? Is fleet management still important to you? Or do you think GPS and personal navigation is really going to become a much bigger part of your future?

Actually I want to ask you, how does this all tie into your acquisition strategy, now that you're going to have $100 million going forward?

First of all, I am sure that we don't have enough time to explain all the evolution of Ituran. But as somebody know the background or know the Company since 1995, I think we have become a mature Company.

Up until recently, we had a hybrid model, which meant we were at the beginning of the mid-'90s, we were -- just started with services; and we had some millions or few tens of millions of revenues from the business. So we tried to create a hybrid model until the moment just arrived to understand what we want to focus on. This happened not today, but recently, a year or two years ago.

Today, to focus on location-based services to car for Ituran is still primarily services, it's SVR. This is what we're doing the best in the world. This is what we can offer insurance companies. This is what we can solve problems specifically in emerging markets. This is the markets and the geographies that we are concentrating and we will concentrate when we will make the acquisitions probably.

Regarding additional services, we are -- our secondary customer base is the fleet management.

The third one, which is quiet, pre-mature yet in the world and in Ituran as well, is the added-value services. By acquiring MAPA, we made the first step for the Israeli market. Now for Brazil and Argentina, by using the GPRS, GPS for ERM, we will be in a position to offer other services.

One of the limitations that we have with the RF technology is [adaptor]. Our technology that Telematics provides us is the best technology and will continue to be the best technology for stolen vehicle recovery; and we will make our best to use that technology.

But in order to provide added-value services such as data, traffic data, such as pay-as-you-drive solutions, we must count on cellular, on GPRS, or 3G bandwidths.

So I think that if you ask me for the future, the SVR will continue to be our leg in the door, but once we enter through this door we will offer additional services. Like as I mentioned, we will start with this OnStar kind of solution in Israel by Mr. Big brand, which is growing very fast. Brazil, Argentina now, we start to offer, and it seems to us that the market reaction is very promising.

Got it. Can you possibly give us the MAPA revenue for the quarter? Also was there anything related to the acquisition that might have impaired the margins from that business just in this quarter?

We are not providing the exact numbers for commercial reasons. But I can tell you as we publish the MAPA revenues for '06, which is about $7.2 million, I can tell you that the MAPA this year is a growing company.

Were there any charges associated with the acquisition?

Of course, there is. There is according to accounting principle rules, there is what we call the PPA, purchase price allocation, of the MAPA acquisition. That increased our expenses in about -- the depreciation of that was about $0.25 million in the quarter.

I would like to add here -- and this is something that everybody has to bear in mind -- that since we are continue our efforts to make acquisition, and we made an acquisition in the past, we are now -- and it's important more than in the past, to establish an EBITDA numbers and to provide, if there will be needed, a pro forma number.

Because the amortization and the depreciation based only on accounting policy will create high numbers of those and will influence the EBIT. But as you know, in terms of cash, in terms of EBITDA, and in terms of economic aspects this amortization, it's not actual numbers.

Got it. Last question. Was there any benefit to Ituran from having Telematics from a tax perspective? Do you expect a similar tax rate going forward, or will it possibly be higher?

According -- Telematics on the solo basis, there is a benefit because Telematics is an approved enterprise. But according to the US GAAP rules, we are making an accrual above Telematics. So it means that we are using the same tax rate as in Israel with no benefits.

Okay, thank you very much.

Maynard Um of UBS.

Thank you. Just going back to the MAPA, did you recognize a full quarter of revenue for that, or was that only partial?

Yes, a full quarter revenue.

Okay. Can you then talk about the subscriber ARPU trends? Assuming that you are probably seeing further ARPU trend declines based on a full quarter of MAPA, which I think is in the location base there. So can you talk about the trends there on your ARPU?

Of course MAPA, as we mentioned in the past, has a subscriber -- we're splitting the revenue into a sales and into a monthly fees. Just to give you a rough idea, a part of it, it is less than the majority, about -- let's say about 30% goes to the monthly fees; and therefore the ARPU of the monthly fees is increasing, but of course because of that. We did not have (multiple speakers).

How about on the core (multiple speakers) on the ARPU for the subscribers?

Exactly. We did not add the number of [nine] subscribers that we mentioned, that is only for the SVR and fleet management, does not include MAPA subscribers inside.

Okay, but you're not yet reaping any of the benefits from higher ARPU from these additional services that you are rolling out?

You mean in MAPA?

No, ex the MAPA.

We have. We have some of the subscribers fees are growing based on additional services. But since it is still a minority among this more than 400,000 customers (inaudible) around 430,000, so it is not influenced yet dramatically.

Okay, but would you say ARPUs ex-MAPA have stabilized? Or are they continuing to decline?

Yes, more or less stabilized, yes.

Stabilized? Okay. Then assuming the Telematics was, say, somewhere around the 4, $4.5 million in sales a quarter, your product revenue was higher than what I expected. Is this a function using pricing pressure or higher unit volumes? Can you just talk about that a little bit?

The product revenue? You mean the revenues on the product segment? As I mentioned a part of it or a big part is the MAPA contribution.

Okay, with the MAPA. Okay. Then the royalty side, the 5% to 8%, should we assume those are pretty much pure profit, 100% margin businesses?

Yes.

Yes.

Okay. How much of the existing contracts and commitments that you have for Korea and China are still remaining in the existing contracts?

What we had to get from the Korean project, while Phase 2 and 3 will turn on again -- -- it is about -- should been about $10 million. But I think that the upside is not only from this $10 million.

The upside is that once they resolve the problem in Korea, and once the Chinese market will get some more power from ST, so I believe that the sales of end units, the expansion to other provinces in China will allow Ituran hopefully to get additional upside.

Okay. Specifically when you say in China, moving to other regions, are you talking about the Guangzhou region?

One of them that makes sense. There is discussion in this area, yes.

Okay. Then I guess just can you just talk about your target, longer-term target gross and operating margin businesses as you see it, excluding the Telematics? I know you talked about kind of them growing. But is there a longer-term target that we should be thinking about?

I don't want to get into numbers. We have also to analyze all the influences, because it is also in terms of a mixture between the products and the potential deals that we believe that we will finalize in the coming quarters.

But when we are talking longer terms, I can or I have a strong confidence that the margins will be higher. I'm talking about mid to long terms. I don't want to promise that it will appear in one to three quarters from now. Hopefully, we will succeed to do it; but I prefer to be conservative now.

Okay, thanks. Last question, what is your actual cash tax rate? Not GAAP, but cash. Then for modeling purposes, should we continue to use that 29% in our models going forward? Thanks.

For accounting, as you mentioned, we have mentioned that will be around the 29%, 28%. The range of 28% to 30%, that is reasonable. For cash basis, it is in the range of between 20% to 22%.

Great, thank you.

(OPERATOR INSTRUCTIONS) Ziv Tal of Oscar Gruss.

Two more questions. Has Rio reached profitability this quarter?

It didn't reached profitability this quarter. But today, as I mentioned -- and again we will be more clear I believe in the beginning of 2008. Since we are seeing or we are facing a very strong growth of selling GPS/GPRS end units in the Brazilian market, so it has a little bit reshuffled our past region in Brazil. Because today there is no more only Sao Paulo and Rio. We're working today with all the insurance companies on a nationwide basis.

Rio as a specific unit is not yet at profit. But we had to add part of the costs that are related to another cities in Brazil that sit in Rio, for example. So it's a little bit reshuffled to give you an answer of whether Rio is profitability or not yet.

But in terms of subscribers in Rio, we are very close. I don't want to say that next month, but in the next one or two quarters Rio as a specific unit will be a breakeven and in the profit side.

But again, I think that you should now look on Brazil as a nationwide market for Ituran. and I believe that we could prove it. We can prove it next year by the growing of subscribers in a nationwide basis.

Fair enough. Are you planning additional campaigns in Israel this quarter?

Yes, we are. As I said in my first speech, I will repeat that our Ituran GPS, which is only the first launch in the first penetration efforts, is include a plan for additional two to three quarters, which will include each quarter about the same rhythm of marketing and sales as it was in Q3, which is about $500,000 per quarter for advertising.

Thank you very much.

James Warner of Baupost.

This is Rob Bralower from Baupost. On the capital expenditures, how much of the Company's CapEx was related to the businesses that were sold, and what is the expected ongoing run rate for CapEx going forward?

Bear in mind our CapEx [company] is a pure R&D company, and CapEx that was generated by them was very close to zero.

Okay. On the amortization front, what is the total amortization of intangibles that you have running through your P&L from both the MAPA and other acquisitions on a quarterly basis?

Up till now we have about $300,000 that derived from these two acquisitions. The majority of it comes from MAPA. Third quarter, of course.

Okay, 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 be available in three hours on Ituran's website, www.ituran.co.il.

Mr. Sheratzky, would you like to make any concluding statement?

Yes. Thank you for joining our call today. I would like to thank all our employees at Telematics for their hard work over the years and look forward to a continually fruitful working relationship over the coming years. To our investors, I look forward to speaking with you next quarter. Thank you and have a good day.

Thank you. This concludes the Ituran third-quarter 2007 results conference call. Thank you for participation. You may go ahead and disconnect.