Ituran Location and Control Ltd (ITRN) 2008 Q1 法說會逐字稿

Welcome to the Ituran first quarter 2008 results conference call. (Operator Instructions). As a reminder, this conference is being recorded May 14, 2008. I would like to remind everyone that forward-looking statements for the respective Company's business, financial condition and results of its operations are subject to risks 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 and 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 97236074717. I will now hand the call over to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

Thank you. Good day to all of you and welcome to Ituran's conference call to discuss the first quarter 2008 results. I would like to thank Ituran's management for hosting this conference call. With me today on the line are Mr. Eyal Sheratzky, co-CEO; Mr. Eli Kamer, CFO; and Mr. Udi Mizrachi, VP of Finance. 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 would like to remind everyone that the Safe Harbor statements in the press release today also cover the contents of this conference call. And now, Eyal, would you like to begin please?

Thank you Kenny. Welcome everyone. Thank you for joining us today and thank you for your interest in our Company. Our first quarter was a fantastic start to 2008 in terms of revenue and subscriber growth for Ituran and we see it as a culmination of all the hard work and investments we have made over the past year.

Know that given that we saw sold Telematics at the end of December last year, myself and Eli Kamer will be analyzing the results on a pro forma basis which focus on the core business excluding Telematics and removes Telematics' contribution to last year's results. We believe that this enables investors to better compared Ituran's historical results with current results on a similar basis.

We saw strong growth, recording revenue of $32.8 million in the quarter. This represents a year-over-year growth of 41% which was driven by the continued and strong growth in this Australian base and increasing our ARPU. And it also includes the contribution by Mapa, a business which we purchased in the middle of last year, and the strength of the real and shekel against the dollar.

In addition, by the fact that we grow by a net 20,000 subscribers in the quarter for which at least since our IPO is a record you can see that organically our business grew strongly in the quarter, and this was driven by the strong growth in our customer base, particularly in Brazil and Israel. We see this as reaping the fruits of our increased investment in marketing and sales as well as building our platform for growth in the second half of last year.

In Israel, we are also being helped by the strong local macroeconomic environment which is pushing up new car sales, leading to a growth in our potential client base. On top of that, our recent acquisition of Mapa has provided us with strong value added services for our existing customer base. We're seeing good traction and our customers are broadening the suite of services to which they subscribe to.

In addition, in Israel, we increased focus on customer retention in order to reduce churn and we were successful. This is particularly true given that we also increased our monthly service fee in Israel at the beginning of the year, which had minimal effect on churn and was another contributing factor to our ARPU growth and increased revenues.

In Brazil, in which we now have nationwide coverage combining GPRS and our location based technology, our services are gaining traction around the country. In fact, in Brazil, our net addition of subscribers during the first quarter of 2008 were more than twice the average quarterly net increase in subscribers that we saw last year.

Through last year we spent significant time and effort building strong relationships with the insurance companies and car manufacturers, and we're beginning to see the rewards of this effort now. Brazil, in particular is a significant growth engine for us, as we see a strong catalyst which can accelerate our growth in the form of business regulation requiring all new cars from June 2009 to include location technology. As one of the leading suppliers of these technologies in the country as well as the relationships we have in our [collective] we believe we are in prime position to capitalize on this.

Before moving over to Eli, I would like to take a little time to discuss our unusually high financial expenses during the quarter. The weakening of the dollar had distorting effect on our bottom line. While it affected all lines of the P&L, the main effect was a hit to our financial income. Financial expense in the quarter was $4.4 million, while given our strong cash position of almost $86 million it should be reasonable to expect the financial income.

The unusually high financial expense is a result of the strong devaluation of the US dollar against the Israeli shekel during the quarter. Given that our functional currency in Israel is the Israeli shekel, for reporting purposes, the Company's accounting account in Israel are prepared in shekels and then translated to US$. Given the fact that most of our cash is held in dollars, in shekel terms, this amount was reduced by approximately NIS16 million, equivalent to US$4.3 million in the quarter.

Thus, we had to record a financial charge of US$4.3 million in the quarter despite the fact that our cash didn't change in value in dollar terms. We could avoid this financial charge by keeping our cash in shekels. However, given that the primary purpose of our cash holding is for the acquisitions of synergetic businesses which are priced in US$, it is our firm belief that it is strategically prudent to maintain our cash holding in US$ in order to hedge against currency fluctuations which may affect a real strategic ability to make potential acquisitions.

While we could have avoided the short-term fluctuation in the Company's profit and loss statement, we see this issue as purely cosmetic short-term issue which [bears] against long-term strategy considerations.

With that, I will hand over to Eli.

Thank you Eyal. As Eyal said, I will be using pro forma numbers which exclude the contribution of Telematics to Ituran in 2007. Revenues for the first quarter of 2008 reached $32.8 million. This represents 41% increased compared with pro forma revenues of $23.3 million in the first quarter of last year. Revenue breakdown for the quarter was $19.8 million coming from subscription fees from our location based services, which showed a year-over-year growth of 36% and $30 million coming from product sales which showed a year-over-year growth of 50%.

The geographic breakdown of revenues in the quarter was as follows. Israel, 58, Brazil 32, United States 3% and Argentina 7%. In terms of subscriber number we reached 464,000 as of the end of March, a net increase of 20,000 in the last quarter. Gross margin in the quarter was 46.1% compared with pro forma gross margin of 45.5% in the first quarter of 2007.

Operating profit for the first quarter of 2008 was $6.3 million or 19.1% of revenues compared with a pro forma operating profit of $4.6 million or 19.7% of revenues in the first quarter of 2007. The operating margin was slightly lower than that at last year due to the previously announced increased investment in sales and marketing and building Ituran's platform of growth which started in the second half of last year, as well as a significant devaluation of the US$ against the Israeli shekel. Excluding the effect of the weakness -- weakening of the US$, the margin would've been higher than that of the first quarter last year.

EBITDA for the quarter was $8.5 million, 25.9% of revenues compared to pro forma EBITDA of $5.9 million or 25.2% of revenue in the first quarter of last year. As Eyal explained, we had a financial expense in the quarter of $4.4 million as compared with a pro forma financial income of $331,000 in the first quarter of last year. The decrease was a result of the stronger devaluation of the US$ against the Company's functional currency in Israel, the Israeli shekel.

GAAP net profit was $862,000 in the first quarter of 2008 or 2.6% of revenue compared with a pro forma net profit of $3.5 million, 14.9% of revenue in the first quarter of 2007. Fully diluted GAAP EPS in the first quarter of 2008 were $0.04 compared with $0.15 in the first quarter of 2007. Excluding the above-mentioned financial charge, net profit in the quarter was $4.0 million or 12.2% of revenue and fully diluted EPS was $0.18.

At the end of the quarter we had 21.9 million in fully diluted shares, but our average fully diluted number of shares for the quarter was 22.1 million. The difference is due to the shares that we bought during the quarter. During the quarter we repurchased 1.1 million shares for a total of $13.2 million. Cash flow from operations during the quarter was $1.8 million. Excluding the above-mentioned financial charge, cash flow from operations was $6.1 million.

And with that, I would like to hand you back over to Eyal.

Thank you Eli. In summary, in the first quarter of 2008 we have already been rewarded for our efforts and investment last year. While we had a strong start to the year, I expect that we will continue to show sequential quarterly growth in revenues and profits throughout 2008.

Moving forward we are a leaner business with a strong focus on what we do best, that is providing location based services and related applications with catalysts for additional growth potential. As we have shown, we're very much focused on sharing the rewards of our success with our shareholders and we hope to continue to share our success with our shareholders through the coming years. With that, I would now be happy to take your questions. Operator?

(Operator Instructions). Maynard Um, UBS.

Congratulations on a good quarter. I guess three questions if I could. First, on ARPU, is that being driven by new products -- things like Mr. Big, or can you just talk about the driver there and the sustainability in 2008?

Regarding ARPU, we have several reasons, and some of them are in Israel of course, some of them in Brazil. It's -- in Israel, we increased the price per customer for all the customers which is very close to 200,000 subscribers which started in January, so by definition it's increasing our ARPU even dramatically. Add to this some exchange rates for the dollar in Brazil, which is the real, which the real becomes stronger and stronger. So also we have influenced by that.

Add to these two items, of course, what we call here in Israel Mr. Big and what we call the added value services in Brazil and Argentina, which has continued to grow even sharply by percentage but it's still not big numbers. But of course, it provides some favor influence to the ARPU as well.

Thanks. And then secondly on the net adds, obviously it was much stronger than expected and you talked about revenue and profit sequential growth. But is this -- I think two years ago you kind of talked about the 15,000 to 20,000 per quarter being the run rate that you were looking at, and then I think things had turned, in terms of net adds, lower. Is the 15,000 to 20,000 kind of the new level of net subscriber adds we should be looking for, like we saw two years ago?

I think 15,000 to 20,000 it's the right estimation. Of course, our vision and our expectation is to be more close to 20,000. But of course, I wouldn't say and I don't want to create any expectation that 20,000 is the average. The first quarter was very strong in net addition. I believe that it will continue to be stronger than 2007 and stronger than 2006. But still, I think that the range should be between 15,000 to 20,000 per quarter.

Okay. Is there any seasonality related to that as we go through Q2, Q3 and Q4?

There is specific seasonality but I think that today since Israel and Brazil are the most generative for new net subscribers, so, it's [edgy charter] because the seasons in Israel are the opposite to the seasons in Brazil. So actually, I wouldn't say that on a consolidated basis of subscribers we have any seasonality.

And then lastly, you talked about the regulation in Brazil that that would help you. Can you just help us understand how the government is creating that regulation? Would it come installed in all the cars so you need to strike deals with the auto manufacturers? Would it be with the insurance companies where you buy the car and then go get it installed like in Israel? Or can you talk about that and where you are in terms of any conversations or deals signed or in the pipe with the auto manufacturers or the insurance companies? Thank you.

Okay, okay. First of all, the regulation and the changes in the market we can talk much more than this conference call, but I will try to provide the bullets. This regulation is only regard the hardware which required each car manufacturer or car importer to install in the car a location solution for security/recovery. In that segment by itself we are not expecting to become the major player because of many reasons.

First of all, and specifically after selling Telematics, we don't consider ourselves as the manufacturer or as a technology pure oriented Company. On the other hand, in order to become an OEM player, you have to be more worldwide OEM player because the margins are very, very, very low. Which we're not -- we can't get used to a so low margin as the business definition. But on the other hand, the issue which we today can show, and in the past and in the future I believe we will show it again, the subscribers' services is what I think attractive in Ituran's model.

So, actually what we are facing in Brazil is first of all, the car manufacturer now, as well as the market as well as the insurance companies, are very, very, I call it hot because there is now changing in this industry. What we are expecting is Ituran is, besides the market will become bigger, is that just as an example, today the insurance companies have to subsidize the price of the product because all they're buying it all or they provide discount. A major part of the cost of this unit and the service is the cost of the unit.

Let's assume that in one year from now, the insurance companies will not pay for the unit. So if today they decide to require it for X quantity of cars, under their needs they can double or triple because it the costs will go down. Now, they need a service provider to recover the cost. And in that case, Ituran is the marketer there in Brazil. In that case, I think that the new situation will create much more opportunity than much bigger markets for these services for Ituran.

But I don't want anybody to think that the regulation is regarded services. But actually what the regulation will create much more interest from insurance companies, much more interest to turn the problem of the car manufacturer because it's a problem for them today to try to change it from a problem to an opportunity. And the opportunity is meaning to provide services, additional services, like let's call it -- we did even in Israel the car importers that we today became the cost centers for their needs, for their customer needs. So I think that the regulation indirectly will influence very strongly on Ituran.

Okay thank you. And then just your discussions currently with those insurance companies, can you just talk about where you are with them? Are they coming to you with a lot more interest and saying we're going to have hardware in these vehicles that we'd like your service? Can you just talk about the relationship and the ongoing discussion there? Thanks.

We mentioned it in our PR as well as through what I said on this conference speech is that our relationship with insurance companies are strongly to today and with more insurance companies, and this first thanks to the idea that we are today offering services as well as product all around Brazil. Let me remind you that Brazil is more than 200 million people. The size of Brazil is the largest -- almost the largest in all America but for sure in Latin America, one of the biggest economy today in the entire world.

And by offering today services on a nationwide basis, we can provide solutions for insurance companies that are not concentrating only in Sao Paulo and the needs also for car dealers out of Sao Paulo and Rio as well. So this is part of the reason that we mention much stronger relationship with the insurance industry in Brazil. Add to that the regulation, which is not yet very strongly at the insurance industries still, for us as the marketing and sales catalyzer, this is of course helping us. And I believe the influence will be much strongly once the regulation will be enforced, I mean in the end of 2009 and hopefully in the next years.

So currently there is two influence. The first is that we became nationwide for all the insurance companies and for all the regions, and second is that the market today is more aware to this solution.

Paul Koster, JPMorgan.

Latin America, first of all, you said about 200,000 subs originally in Israel so we should calculate about 260,000 there in Latin America. Could you break that out across Argentina and Brazil at all? Can you give us some sense of the relative net growth rates for the two countries?

Paul, sorry to disappoint you. But our policy we are providing this specific data only during the 20-F which with regard 2007 is very close to publish it. Regard the quarterly basis, we're not providing because of commercial reasons. But actually, I think that among my words it's very clear that what is the big change between 2007 and 2008 is the Brazilian market because don't forget that in Israel, 2007 was a very, very -- a success market.

The economic situation in Israel, it was the highest -- the year that the highest car imported to the country. So, Israel was very strong last year. Brazil we suffered from some reason which was the specific insurance company retention that was during the first half. In Brazil, we had to spend a lot of efforts to expand our business which is -- it's required more costs and sometimes we failed with customers.

But, no doubt that the big change for this 20,000 from an average of 12,000 last year -- I don't want to address the exact numbers as I said, but the main growth of net subscribers comes from Brazil.

Did Argentina actually grow?

Of course. Argentina grew but in Argentina, the growth numbers are quite flat. There's no exponential growth. And this is how I think mention it as an expectation for the market that during the last year and I will say it again, Argentina is growing. The subscriber base in Argentina is growing but it's not growing exponentially.

What do you I think, maybe talking to Eli for a moment, the business model now that you've got a little bit of handle on the new focused business, you have a sense of how the business model would change during the year and longer-term? Gross and operating margin?

The business model -- the main business model, regard the subscribers, business is not going to change. What actually change is the combination between subscribers and products. But in that case, every product that we're selling as you can see with a very low margin because we no longer sell any product independently. All our products are being sold to push subscribers' fees. And in that case I think that I don't want to, again, to provide any specific numbers projections.

But I think that in the future it seems that subscribers revenue will continue to grow and product sales will grow, but much less dramatically. So the mixture between the profits on the service side will grow toward the service part and actually the margins, in other items including gross profit, and EBIT should grow.

And I think or I prefer to mention that when you compare this quarter to the first quarter of 2008, and it seems like the first quarter of 2007 was a little bit higher in the EBIT margin, I think that it's only a onetime situation. Because if you will take 2007, you'll see that we had a dramatically low EBIT margins, as well as gross margins. And hopefully from the coming quarters in the future, I mean from Q2 and ahead, we will show again that year-over-year it's much stronger margins this year. And this is thanks to the model based on subscribers and no longer mixed with the Telematics business which is no longer with us.

Got it. Do you think the sales and marketing is pretty much kind of -- we're at the right run rate now, 2.64 million just sort of gradual growth from this level?

Actually I think so. Again, based on our budget I think that the expenses will continue to increase. But, as it was regular or general increasing in costs but not dramatically as building the new channels and infrastructure etc. as we did in 2007. So I think that the numbers of the cost will increase, but much lower than it was in 2007.

Nearly finished. CapEx for the year and tax rate for the year, if you could just give us some sense.

So regarding CapEx, we have to explain again we did it I think in the past. But our CapEx is not the entire $2.6 million per quarter. This CapEx includes a model of selling products by leasing it to the insurance companies and the big industries in Brazil and Argentina. And on an accounting basis, when you -- when we are lease it to them, instead of selling it and getting revenue and cost of goods, is that we have to keep it in the balance sheet.

So, the cash that we pay for the product is like a CapEx. But it's actually a way of accounting policy of US GAAP and not because it's a pure CapEx. Pure CapEx of Ituran meaning to maintain the infrastructure, to maintain the computers, the communication lines and the offices. This is about -- should be about $1 million per quarter or $4 million a year, not more than this.

Regarding the tax question, I believe going forward the tax is about 30%.

James McIlree, Collins Stuart.

I just want to make sure I heard that tax question answer correctly. You said 3 0 -- 30% for the rest of the year?

Correct. This quarter, by the way, I know that it's a little bit blinking, is because of the small number -- this is the only reason that we're showing 41%.

On the loss of the currency change in Israel and Israel had the tax rate of 27%, and because the proportion of the Israeli profit went down because of it then the tax rate went up. But the average should be around the 30% that you mentioned.

Great. And again on the previous question about the CapEx, you were saying that CapEx ex -- CapEx excluding the investment in products in Brazil is somewhere around $4.0 million a year.

Yes.

For kind of like the maintenance of your facilities?

Let's try to differentiate between the accounting methods and the cash flow numbers or the real operational part of Ituran. When we're selling to insurance companies, as an example, what we called in Latin America [comodato] which is kind of a leasing, we have to consider it as an investment because it stayed in our balance sheet. The Ituran products stay in our balance sheet.

So when you are increasing your fixed assets in the balance sheet it's like a CapEx. But actually this is only accounting issue. Actually, it's a real part of the operation of the business. So that's what I tried to explain. Hope that it's clear. So you are seeing about $10 million a year. But among this $10 million, only $4 million is a real CapEx.

That sounds great. And then, on the operating expenses, this quarter's total of 8 -- close to $9 million it doesn't sound like there's anything out there that should make that number move significantly. Maybe sales and marketing goes up a little bit but it sounds like $8.8 million, $8.9 million per quarter is kind of a good run rate going forward. Is that correct?

Yes, actually yes. I think that you mention it very clearly. There will be some increasing but it will be not significant and on the other end, hopefully the growth of the revenues will be more dramatically. So this is why I said that margins are -- should at least, and I believe that it will happen because I try to base on assumption the margins will increase as well.

Okay. And then on the leased equipment in Brazil or leased equipment anywhere, how much of the product sales is coming from leases right now? Because I'm assuming that over time if you have a bigger lease portfolio that product sales will be very stable revenue line also.

This way of pushing product to insurance companies or this model, by the way, like the cellular operators is only in Latin America. So in Latin America, it's become more material -- about 35% of the total products. But when you talk on a consolidated basis, including Ituran in Israel, which in Israel we're not using this way. So it's about 15% of the total sales of quarter.

Great, that's very helpful. I think -- one more thing, the share buyback program -- are you done with that? Or does that -- has that continued during this quarter?

Actually with the last buyback program we're done with. Of course we're keeping, let's say, the right to give the Board of Directors to make the decision if they want to renew it or I mean to make more or not.

And I lied. I do have one more question. The special dividend that was paid in April, correct? So the 84 -- $86 million in cash, we should actually look at that as more like a $56 million?

Yes, a little bit even less. But you are right.

[Ziv Tal], Oscar Bruce.

I just want to understand, what was the currency effect on the top line? Can you try and isolate that?

Please, can you repeat? Sorry.

Yes, what was the currency effect on the top line -- exchange rate effect on the top line?

First of all, regarding this part, so some of it is hedging between the countries because as we said in Israel, we're charging based on dollar and the dollar becoming weaker here in Israel, in Brazil by real. We think that it's between $1 million to $2 million.

And in terms of revenue from Mapa, was it significant this quarter?

Sorry, what?

Sorry, revenue from Mapa. Was it significant revenue during the quarter?

No. Because the size of Mapa compared to the total the operation or the total main model of Telematics is not very material. We're not providing the exact number. But let's assume that it's less than a double-digit in percentage from the numbers of Ituran.

Great. And with regards to gross margins going forward, should we assume the same kind of gross margins?

As I said, I think that based on the model that become and will be in the future more stronger regard the service part of the business, so I think that the gross margin should grow. I don't think that it will go down. But I prefer to be conservative and say that in the gross margin, this number is represent the current situation or the coming quarters. I believe that we will succeed even to increase it.

Jonathan Ho, William Blair and Company.

Was there a specific city or region in Brazil that you guys saw strength?

First of all, Sao Paulo -- as long it's more a traditional geography that Ituran has operated. Don't forget that we started with Sao Paulo. And add to this that Sao Paulo is the largest metropolitan in Brazil. It has a high percentage of the total economy of Brazil. But, Sao Paulo is very strong with Ituran historically and the current situation.

What's new today is that the new regions in Brazil and the entire regions become new for our results. So, I would say that always Sao Paulo will be a strong region. But today, add to this the entire Brazil. So it provides us an engine.

Are you continuing to see strength I guess with uninsured motorists or other segments that you guys have been targeting?

What did you ask?

Are you continuing to see strength with the uninsured motorist population or other segments that you guys are targeting outside of the insurance companies?

We're penetrating to the same segments as we did in the past, the insured population through the insurance companies and the uninsured. The mixture between them is quite stable, which is about 25% to 30% uninsured and the rest is insurance companies. We believe that in the future it will be the same. Of course, maybe the new regulatory will change it or the insurance companies that will have much less costs, as I said, for the product itself. It will be in the car already. They will have to maintain only the monthly fees.

[Effie Wool], GFI Investment Counsel.

Sorry I missed it. Can you give me the breakdown of the revenue by geography again?

58 percentage in Israel.

3% in US. In Brazil, 32% and Argentina, 7%.

Okay and presumably you see kind of the growth in Israel and Brazil continuing. And the US, I guess how much focus are you going to put on the US? And I assume Argentina will continue to see your attention in dollars. But on the US side, how tight is competition there and where do you see yourselves on the road?

First of all, US is different, has different market drivers than Latin America and other markets. We are in the US are trying to change our model a little bit and try to work through car dealers and the car industry, less through insurance companies. We're offering more fleet management than in the Latin American market. It's more --has more market drivers in the US. US currently we make the changes in the management of the Company. And, we're more focused in added value services.

I think that we're starting from zero with the interest to try to change the penetration rates because up until now, since we're there, it's not a secret that we're not succeeding in the US as we are doing in Latin America and in Israel. Although we have a customer base, although we have some brands specifically in the Florida area we want to leverage it and try for the coming two to three years to be more aggressive in the US. But if you ask me today what is my expectation for the short-term, I would say it will not be material or material influence on the Ituran results.

Fair enough. One follow-up. In terms of Brazil, what are you seen in terms of competition? You mentioned that you think you are the market leader. What would be your market share and what would be the market share of kind of the next few competitors? And do you expect to see some kind of margin contraction in the coming years?

In Brazil, first of all, to make it clear, there are many companies -- different than in Israel for example. In Israel, Ituran holds between 75% to 80% market share and the second one is [Pointer], there are no other players -- maybe another small one. Because the market potential is small specifically when there is a one player like Ituran. Brazil is much bigger market and there are many small players.

But if I want to consider who are the main players and which we find as competitors, first of all is LoJack Brazil which is historically much more yields there than Ituran. When we entered the market, LoJack already was there. I'm talking about the local franchise of LoJack. It's not LoJack US. It's a local franchise player. After the two of us there is a company called -- there are many other companies that are smaller than us. And this is why I think that our position is a market leader.

Our growth, by the way, is bigger than LoJack. But historically, they had some customer base when we entered the market. This is why we think that we are in a position that for the new regulation and the new market drivers, we are in a good place.

Is there any talk about potential acquisition of some of those smaller competitors you are talking about in Brazil?

Yes. Because in the past we sought to expand not only the customer base but only the geographies to become more worldwide players. But today, we try to identify specific regions. And since the new regulation in Brazil and the new market situation in Brazil, which we see how it grow in the economy of Brazil, we are not -- we're very positive regard looking and negotiating acquisitions in Brazil. Yes.

Andrew Spinola, Needham.

Can you provide some color on the revenue that you're generating from your GPS navigation devices out of Israel and maybe an update on what that opportunity looks like?

Regarding navigation, it's growing very dramatically, but again, we're talking about low numbers yet. And here, I also want to address some expectation to the market that the navigation in Ituran it's mainly because of contributing and supporting the Ituran main business, which is subscriber-based through channels such as the car industry or car dealers. We create -- through this we create bundling. It's identified as location-based services plus navigation and it's more supporting our main focus.

I wouldn't and I don't want the market to expect that navigation will be a material profit unit in the group. But it will be very material to the bundling, marketing and penetration and creating channels through this product since Ituran is a location-based services company. We acquired Mapa in Israel in the past. We're now doing a lot of navigation and we are increasing the revenues. But we also spend a lot of the expenses toward this because it supported whole Ituran business. So in terms of profits, the navigation, which is already breakeven, is not material and will not be material this year.

Did you start recognizing any royalty revenues from your relationship with your former subsidiary Telematics during the quarter?

Very, very little because we're not yet -- the buyer has not yet succeeded to execute the plans or expectations. Hope that it will take time just making all the consideration.

So that's not going to be a sort of smooth recurring number. It might just be than on certain quarters you will recognize a larger onetime success-based royalty?

I wouldn't count on a future royalty as profit engine for Ituran. This can be cherry on the cake but no more than that.

Got it. Eyal, just in general, regarding this mandate in Brazil, it seems to me that if all of the cars that are insured or whatever, or if all of the cars that are sold in Brazil require some sort of location device, doesn't that then create a situation where people that are involved in stealing cars know that to steal a car you have to disable the device and then essentially makes the service not valuable?

First of all, I think that you touch a very important point. As much as this will aim to curb the thieves, they will become more sophisticated and the best example is Israel. In Israel, during the 13 years that we're operating, we had to change the modus of operation in terms of recover the car, in terms of enforcement power and in terms of the unit capabilities to shut down the engine for example, to make it much more difficult for the thieves.

For example, in Israel today, every car equipped with two units. One of them is a digital. The next step is the that Telematics will provide us, as a supplier this time, not as our company, with the new generation of a product which will be much better and will fit Brazil as well as the back up to the GPS/GPRS dual mode solution. We're not sleeping and not doing anything.

We understand that as soon as the market every car will be equipped with this, the thief will do their best for every car to eliminate the system. We had it in Israel because in Israel it's like every exclusive and four-wheel-drive in a commercial car equipped with Ituran for many years. So they know it. So they know what to look for and they know what they have to do. But we found the solution and we will continue to find solutions from a technical part and from a modus of operation to solve it.

But the question is right. I think it is only we provide an advantage to Ituran because the other players are more a product part of this business. We are in the service part. We have the modus of operation based on a lot of policy of being enforcement company. So I think that it will help us to penetrate because of our advantages.

Last question from me. What is the number of years that you use to depreciate your capital expenditures for the leased units? And then just in general, there's no reason for us to be concerned about this new law coming into effect with your current [free lease] program because you will still be able to service those cars when -- even after that law comes into effect.

This lease does not mean -- usually because most of it is within insurance companies, it's a way of -- a cash flow way of model from their side. It's not that they are -- that they don't need the systems and tomorrow it will happen. First of all, we are amortizing it on a three-year basis. Second, compared to the total numbers with the assumption that 3 million cars a year or 4 million cars a year will be equipped with, we're talking about so low numbers today of some 10,000 so this is not the issue.

I prefer that they will not use my products anymore at all, but [they give me sale] of the 3 million to provide a service. It's like zero for us. So, when you put it on those true values, of course the value of providing services for higher share of the market it's dramatically better than the worst-case and will bring us back the product. So, this is actually the situation. Today, as it happened, it's only a way from their part to make it easier on their balance sheet. That's all.

You just used the number 3 million. Is that the addressable market of cars?

You mean in Brazil? In Brazil, every year during the last three years it was between 3 million to 4 million always grow. So, the expectation by the way, but the Brazilian association is 2008 only -- before the regulation is 5 million cars including motorcycles of course.

Ziv Tal, Oscar Bruce.

With regard to motorcycles, does the regulation also include motorcycles?

Yes.

And my last question is with regards to your deposit again with regard to financial expenses. For the moment, how should we look at it for the quarter? Should we just consider the exchange rate at the beginning of the quarter and the current exchange at the moment?

Yes, actually because we're not a speculative Company. We don't want to manage the money for the professional shareholders as you. We only want to keep it as a resource for execute our acquisition and future operation. So we'll keep it in dollars and to make it easy, yes, as long as it stays in our bank accounts here in Israel, you'll have to take the first day of the quarter of the quarter and the last one and see what is the expense.

Effie Wool, GFI Investment Counsel.

Pardon my ignorance but I just wanted to ask one follow-up question. When hardware gets put on cars in Brazil, if it's not your specific Telematics hardware, is there any problem in terms of putting your service on hardware that's not yours?

No. Because since we're decided to start putting on the shelf GPS/GPRS solution, which is much more common, it started about a year ago and we start sell it about two or three quarters ago. So, it's become much more open standard. I'm not saying that every unit on the first day will be. But it's only an issue of adaptation of software issues in our control centers, which is up until now whenever we had to do it, because we are running different products so we succeed. And it's a very -- it's a not material problem today.

(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 in three hours on Ituran's Web site, www.Ituran.co.il. Mr. Eyal Sheratzky, would you like to make your concluding statement?

Thank you joining our call today. As always, I'd first like to thank all of our employees for their hard work in the quarter and I hope that I will say it quarter-over-quarter. 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 first quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.