Ituran Location and Control Ltd (ITRN) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran first-quarter 2011 results conference call. All participants are present in listen-only mode. Following the management's formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded May 17, 2011.

You should have all received by now the Company's press release. If you have not received it, please call CCG Investor Relations at 1-646-201-2946. I will now hand over the call to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, 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 2011 results. 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 Mizrahi, VP Finance.

Eyal will begin with a summary of the quarter results followed by Eli with a summary and more details of the financials. We will then open the call for the question-and-answer session.

Just before we begin, I would like to remind everyone the Safe Harbor in the press release also covers the contents of this conference call. Now, Eyal, would you like to begin, please.

Thank you, Ehud. I would like to welcome all of you and thank you for joining us today. We are again pleased with the results of the first quarter of 2011. We had revenues of $40.4 million growing 15% over last year, and net income of $6.5 million growing 35% over last year.

It is important to note that our product revenues decreased from the levels of the prior quarter due to lower sales from our non-core businesses, ERM and Mapa in Israel. We are very pleased with our strong margins across the board in the quarter, a demonstration of the significant operating leverage inherent in our business model.

We also generated strong operating cash flow amounting to $10.1 million in the quarter. We ended the quarter with over $66 million in net cash, an indication of the strength and the health of our business. In terms of subscriber numbers, we added 11,000 subscribers, ending the quarter with 615,000 subscribers.

In Brazil, we are increasing our focus on selling to the private sector, which will enable us to show significant increased margins. Hence, going forward this year, we expect subscriber growth to remain in the lower part of our 10,000 to 15,000 per quarter range.

I would just like to mention that the 245 regulation was delayed again, and the new date now is January 2012. We believe that Brazil with its robust economy will remain a growth engine for our company for the foreseeable future. Our strong performance there combined with a strong market in general underlies our continued optimism in this region.

In Israel, our business remains strong, continues to grow, and we are very pleased with our progress. New car sales remain strong. In terms of subscriber numbers we added 11,000 subscribers, contributing to our subscriber growth. Israel remains an increasingly strong cash-generating business for us.

In summary, our business performance remains solid, and Ituran is on the right track for continued growth and expanded profitability over the coming quarters and years. As our subscriber base continues to grow, we expect to increasingly benefit from the inherent operating leverage in our business.

I will now hand the call over to Eli for the financial review. Eli?

Thank you, Eyal. Revenue for the first quarter of 2011 reached $40.4 million, representing 15% growth over revenues of $35 million in the first quarter of 2010. Revenue breakdown for the quarter was $30.3 million coming from subscription fees from our location-based services and 16% increased year-on-year growth. Product revenues were $10.1 million, which was a 15% increase over the same quarter last year.

The geographic breakdown of revenues in the quarter was as follows -- Israel 49%, Brazil 40%, United States 3%, Argentina 8%. Today we are presenting the installation revenues in the service segment rather than the product sales segment as it has been in the past. Thus, to enable a like-for-like comparison, we have also moved last year's installation revenue into the service segment.

Gross margin in the quarter was 49.3%, compared with a gross margin of 49.1% in the first quarter of last year. Operating profit for the first quarter of 2011 was $8.8 million or 21.8% of revenues, an increase of 22% compared with an operating profit of $7.3 million or 20.8% of revenues in the first quarter of 2010.

EBITDA for the quarter was $13.4 million or 33.1% of revenue, an increase of 22% compared to EBITDA of $10.9 million or 31.2% of revenues in the first quarter of 2010.

Financial income in the first quarter of 2011 was $200,000, compared with the financial expense of $100,000 in the first quarter of 2010. Net profit was $6.5 million in the first quarter of 2011, or 16% of revenues, compared with a net profit of $4.8 million or 13.7% of revenues as reported in the first quarter of 2010.

Fully diluted EPS in the first quarter of 2011 was $0.31 compared with a fully diluted EPS of $0.23 in the first quarter of 2010. Cash flow from operations during the quarter was $10.1 million.

As of March 31, 2011, the Company had net cash including multiple securities and deposits for short and long-terms of $66.1 million, or $3.15 per share. This is compared with $60.9 million or $2.90 per share as of December 31, 2010. Our average fully diluted number of shares for the quarter was $20.98 million.

With that, I would like to hand you back over to Eyal. Eyal?

Thank you, Eli. Looking ahead, I remain excited with regard to 2011 and beyond. There are many catalysts in the coming year which we are looking forward to, as we continue to build our business in Brazil and grow in Israel. We remain very well-positioned as the leader in our main two markets. I believe we will continue to grow in 2011 at a double-digit rate over 2010.

With that, I will now be happy to take your questions. Operator?

(Operator Instructions). Gilad Ben Avi, Union Bank.

Hi. First of all, good luck for your results. I have a question with regard to the gross margins, subscription services sector. I would like to know why -- what is the reason for the decline in the gross margins, compared to Q1 2010? What is the reason for this?

As we said on the script, what we did starting this quarter is actually presenting the installation revenues in the service segment instead rather than the product segment. And therefore, in the installation, the margin is quite low. And therefore, it was a little bit effect on the service margin. You can see that on the total gross margin, actually, that it even went up from 49.1% to 49.3%.

Okay, and will it keep on like this in the future, in the next quarter or next years?

Yes.

You say this kind of thing -- okay. So you have maybe a new target for the gross margin for the product sector? Did you raise it up or something? It is supposed to be between a 15% and 20% gross margin?

We would be prepared to be conservative and keep it on those levels of a 16% gross margin.

Of how? Of what?

16% gross margin on the service segment.

Okay. With regard -- I have another question with regard to the results in the product (inaudible) segment, which was -- there was a growth there of 8%. I want to know if the growth is mainly of the product of the non-core like ERM or Mapa, or it is also the installation of new products of the car industry in Israel? I would say what is the breakdown between the segments, in this product segment?

As I mentioned before, the reason that this gross margin went up for the product segment is as we shift to the installation revenues and costs from the product segment to the service segment, this gross margin represent the sales of units, mostly the sales of units that we have here in Israel.

No, it is not about the gross margin but the revenues of the segment, of the product segment. What is -- there is a growth in there in the revenues because of a non-core product like ERM and Mapa. And I would like to know what more contributed in this quarter for the growth in this segment?

As we mentioned, the decrease compared to the previous quarter was mainly to the non-core business or Israeli businesses such as Mapa and ERM. I can tell you that more or less the levels that we expect that will be in the future. And it depends, of course, on the sales that will be in the market in the future, which we do not know at this moment.

As I said, looking forward we believe that we will continue to show a double-digit growth. And this will come mainly for our core business, the SVR and subscriber services. And this effect that hit us a little bit this quarter probably will no longer will have this kind of effect. So generally speaking, the revenues will continue to grow, of course.

Okay. The growth is like double-digits in both segments or mainly on the subscription (inaudible) segment? Double-digits?

We are talking about total revenues of the Company. You should understand that our business model counting a lot on the service portion of our revenues. This is where you can see the highest gross margins.

As Udi mentioned a few minutes ago, we changed a little bit the accounting method of realized these kind of revenues from one-time hardware or installation sales to recurring revenues. So it is something that affected this quarter.

But again the main important revenues are the subscribers revenues. Even in the past, our hardware margins always were low. This is a tool for us to increase the subscriber base. This is a tool to provide the services for the customer. So, of course, as long as we can have margins there as well, we will continue to do it. But the service portion of our revenues has much more attractive margins.

Okay, thank you.

(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 the call will be available tomorrow on Ituran's website, www.Ituran.co.il.

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

Yes, thank you. On behalf of the management of Ituran, I would like to thank you for your continued interest in long-term support of our business. I do look forward to speaking with you and updating you again next quarter. Have a good day. Thanks.

Thank you. This concludes the Ituran first-quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.