MIX Telematics Ltd (MIXT) 2019 Q2 法說會逐字稿

Greetings, and welcome to the MiX Telematics Second Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Paul Dell, Interim CFO. Please go ahead.

Good day, and welcome to MiX Telematics' Earnings Results Call for the Second Quarter of Fiscal Year 2019, which ended on September 30, 2018. Today, we will be discussing the results announced in our press release issued a few hours ago. I'm Paul Dell, Interim Chief Financial Officer, and joining me on the call today is Stefan Joselowitz or as many of you know him, Joss. He's President and Chief Executive Officer of MiX Telematics.

During the call, we will make statements relating to our business that may be considered forward-looking pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our results, please refer to those contained in our Form 20-F and other filings with the Securities and Exchange Commission available on our website at www.mixtelematics.com under the Investor Relations tab. We will also be referring to certain non-IFRS financial measures. There is a reconciliation schedule detailing these results currently available in our press release, which is located on our website and filed with the Securities and Exchange Commission. Finally, when discussing our subscription and total revenue growth, we will be referring to constant-currency growth rates. All U.S. dollars amounts referred to on the call have been contemplated at an average exchange rate of ZAR 14, $0.14 to the U.S. dollars, which was the rand-dollar exchange rate reported by oanda.com as of September 30, 2018. With that, let me turn the call over to Joss.

Thanks, Paul. I would like to thank you all for joining the call today. MiX reported another very strong quarter with Q2 exceeding expectations across all key operating metrics. In particular, I'm very pleased with our over 18% year-over-year subscription revenue growth and adjusted EBITDA margins exceeding 30%. Our EBITDA margin expanded more than 570 basis points compared to the prior year's comparative. We are confident the strength of our diversified portfolio of subscribers will enable us to maintain our market momentum for the balance of fiscal 2019 and beyond.

Our second quarter performance is further validation of MiX, with attractive combination of strong growth and a highly scalable business model, which is leading to solid cash generation.

During the quarter, we generated ZAR 93 million in free cash flow after investing ZAR 62 million in in-vehicle devices for bundled contracts. Due to the ongoing layering of high ARPU bundled contracts combined with expansion in our adjusted EBITDA margin, we are confident in our ability to generate significant free cash flow in future quarters even as we continue to invest in bundled deals.

Turning to the summary of our second quarter and first half fiscal 2019 performance. Our subscription revenue of ZAR 420 million or USD 29.7 million was above our guidance and grew over 18% year-on-year. Our strong performance was driven by the ongoing demand from our higher ARPU premium fleet customers globally across multiple verticals, highlighted by 62% subscription revenue growth in North America in the first half of fiscal 2019.

We added more than 22,000 net new subscribers during the quarter, increasing our subscriber base to more than 714,000. This is a year-over-year increase of 12%. Given the strong pipeline of committed orders and sales opportunities globally, we remain confident in our ability to maintain the momentum.

For the first half of the year, we are extremely pleased that all of our regions grew subscription revenue by double digits while expanding EBITDA margins. Our Africa, Americas and Brazil operations performed particularly well.

Our Africa team executed strongly despite the challenging economy, with subscription revenue up over 11% year-over-year and adjusted EBITDA margins of 45.4% for the first half of fiscal 2019.

As our largest business unit, Africa continues to demonstrate the economies of scale that we believe are achievable in all our operations as they grow towards critical mass.

Our Americas team continues to outperform, evidenced by the subscription revenue growth of 62%. And moreover, bundled deals drove adjusted EBITDA to 49.6% for the first half of fiscal 2019, almost doubled from the prior year.

Our Americas business is now 17% of subscription revenues and continues to benefit from strength in the energy market as well as the early impact from the investments we have made in the region to diversify into additional verticals.

We continue to invest in both products and sales to capitalize on the tremendous opportunity we see in this region. We will be hosting an Investor Day in New York City on December 6 and look forward to sharing some of the details about these investments at that event.

[Result] continues to outperform in a very challenging social-economic environment, subscription revenues increased 49% year-over-year, as adjusted EBITDA margins grew to 36.8% for the first half of fiscal 2019, up from 34.4% in the prior year.

During the quarter, we secured some notable wins, including signing new customers, existing contract extensions and fleet expansions. We secured a contract to supply our premium solution to a major global, fast-moving consumer goods company in North America to help increase operational efficiency and reduce excellence by improving driver behavior.

Our solution will be implemented across more than 1,500 vehicles, including medium and light duty trucks used for transporting goods as well as passenger cars used by its sales force.

Given the size and global footprint of this customer, we believe that the potential exists to win much more business with this large multinational, possibly multiples of the opening order.

Our partner in Algeria, ATS, will be providing Sonatrach with a fleet management solution to address their safety, efficiency and compliance needs for 1,000 vehicles. A [frank] contract has been signed which could also see this contract multiplying 10-fold over the coming years.

In South Africa, we signed a 3-year contract extension with our largest premium fleet customer who depends on our solution for the efficient management of their fleet operations nationally.

In Latin America, we continue to grab presence in bus and coach and transportation, with new customers acquired in both of these verticals. And lastly, back in the United States, we've started a 750-vehicle rollout with a large, diversified oilfield services company who is implementing our premium fleet management solution across its entire fleet. This company upgraded from a plug-and-play system in order to take advantage of MiX's advanced VOD features along with the rest of the benefits the MiX solutions has to offer.

From an industry perspective, the depth and breadth of MiX's product offering continues to be one of our key competitive differentiators. We continually leverage the power of our premium fleet base and broad product portfolio to generate diversified revenue streams.

Customers are able to subscribe to a range of software applications on top of our core solution, such as MiX Vision, Journey Management and Hours Of Service, which can each add between $10 and $20 per vehicle per month. This provides significant additional value for customers while driving ARPU growth and enhance customer retention for MiX. This has been a core element of our strategy, and it's proven to be extremely effective.

The results has been constant ARPU improvement over the past decade, driven by a combination of our ability to sell a range of solutions on top of our core application as well as our focus on bundling deals to our premium fleet customers.

Over the past year alone, our ARPU has improved by approximately 8% in constant-currency terms. As a reminder, we expect bundled deals will deliver significantly more cash over the average customer lifetime and contribute around $1,000 more compared to an unbundled deal.

Over 80% of our new sales are now being concluded on a bundled deal basis, and looking at our premium fleet portfolio, approximately 30% are now on bundled contracts versus around 5%, 5 years ago.

We have made great strides in growing our premium fleet business and increasing ARPU but believe we have plenty of runway to grow this further as bundled contracts are renewed and more customers add additional fleet services.

Paul will provide more detail in a minute, but we are raising our fiscal 2019 total and subscription revenue guidance given our strong performance during the first half of the year as well as our pipeline of sales opportunities and firm orders.

In addition, we are increasing our adjusted EBITDA margin guidance to 28.8% of the midpoint, up from our previous guidance of 28.5%. Our increased margin outlook, which reflects 300 basis point improvement year-over-year in fiscal 2019, demonstrates the inherent scalability of our business model.

Our margins in the second half of fiscal 2019 will continue to show year-over-year growth, even as we absorb an incremental ZAR 20 million of new investments in the business, primarily in our Americas sales organization.

In recent months, we have begun expanding this team. We anticipate that the sales force will more than doubled by the end of calendar year. This expansion will enable us to focus on the sizable opportunities for growth in this region outside of the energy vertical.

We have successfully demonstrated that we can generate very high margins in the Americas and believe reinvesting some of that margin into the business to capitalize our new growth opportunities is a high ROI use of cash that will generate strong return for shareholders. While I'm pleased to have achieved our previous long-term adjusted EBITDA margin target of 30%, we believe we still have plenty of upside from here. We intend to provide an update to our long-term adjusted EBITDA margin target at our upcoming Investor Day. I also want to draw your attention to a new incentive plan approved by the Board of Directors, which authorized a supplemental performance share award under the MiX Telematics Limited long-term incentive plan to certain company employees. This grant is 100% performance based and only vests on the achievement of dual targets for accumulative subscription revenue and adjusted EBITDA in the fiscal 2019 and 2020 years.

The board believes this incentive provides an additional mechanism to align company leadership with the interest of shareholders.

Under this program, the board has designated 8 million ordinary shares or the equivalent of 320,000 American depository shares to be awarded to eligible employees if the company achieves both of the following constant-currency targets at March 31, 2020: firstly, accumulative subscription revenue for fiscal 2019 and fiscal 2020 of ZAR 3.6 billion and accumulative adjusted EBITDA for fiscal 2019 and fiscal 2020 of ZAR 1.3 billion.

Half of the supplemental equity grant has been made now, and the remaining half will be awarded at the beginning of fiscal 2020 if the Board of Directors believe that company remains reasonably on track to reach the vesting targets listed above.

Furthermore, these performance shares will not vest unless both targets are fully achieved in the specified time frame.

To be clear, these incentive plan targets are well above our current financial forecast and by no means easily achievable. The incentive targets are also well in excess of the current and implied guidance we have provided to investors. This grant should be viewed by investors as a stretch target that the board and management believes is potentially achievable if market trends remain favorable and the company executes at an extremely high level.

As I mentioned earlier, we were very pleased with our cash generation during the quarter, having generated positive free cash of ZAR 93 million or $6.6 million, even after investing ZAR 62 million or $4.4 million in in-vehicle devices.

We anticipate that our scaling profitability will drive improvements in cash flow on an annual basis. I would like to reiterate that we are laser focused on utilizing our free cash flow to maximize intrinsic value per share. Through this end, subsequent to the end of the quarter under review, we repurchased the equivalent of approximately 366,000 American depository shares for $5.2 million under our general share repurchase program. We continue to actively evaluate possible acquisition opportunities but believe buying back our own stock at current levels is the most effective way to generate shareholder value through our strong cash flow.

So in summary, our strong second quarter results are further evidenced that our strategy is working and we are seeing margin accretion as we derive benefits of scale from a growing subscription revenue base.

MiX remains well positioned to maintain the momentum for the second half of fiscal 2019 and beyond, given the strong and growing pipeline of opportunities worldwide.

With that, let me hand it back over to Paul to run through the details on the quarter.

Thanks, Joss. I will now review over second quarter fiscal year 2019 performance. And recall that our reporting currency is the South African rand. For convenience, we have translated our results into US dollars both for the 2019 and 2018 periods using the September 30, 2018, spot rate. You can find these conversions in our press release.

In addition, please note that our results are presented on an average basis unless otherwise noted.

In the second quarter, total revenue came in at ZAR 497 million. Of this total, subscription revenues were ZAR 420 million, up over 18% on a constant-currency basis and above our guidance range.

This strong performance was driven by the ongoing positive traction from our board subscriber portfolio, including our premium fleet customers across all geographies and vertical markets.

We added 23,100 subscribers in the quarter and ended with over 714,000 subscribers, an increase of 11.5% year-over-year. Hardware and other revenue was ZAR 77 million, an increase of 23.7% year-over-year. The large increase in the quarter was due mainly to strong orders in our European, Middle East and Australian Asian businesses. Over time, we'll continue to expect ongoing shift towards bundled deals to increase our subscription revenue as a percentage of total revenue, which will provide us both improved visibility and higher margins. That said, if the customer wants to own the hardware, we will continue to support our customers in whatever purchasing decision they make.

Our gross profit margin in the second quarter was 67.8%, up 230 basis points from last year. As a reminder, gross profit includes depreciation charges related to in-vehicle devices and high-value peripherals used for certain of our bundled fleet contracts. These contracts generate higher offerings and as regards to contract renewal cycles are expected to drive an increase in gross profit margins, which we expect to trend towards 70% in the longer term.

Operating expenses were 50% of total revenue compared to 55% of revenue in the second quarter last year, which highlights our ongoing commitment to cost controls and scale in the business. Recall that our general and administration cost include research and development cost not capitalized. For those of you interested to see our historical capitalization and development cost expense, we have provided a table in our earnings press release.

To provide investors with additional information regarding our financial results, we disclosed adjusted EBITDA and adjusted EBITDA margin as well as adjusted earnings for the period, which are nonoperate measures. So we have provided full reconciliation tables in our press release. Second quarter adjusted EBITDA increased 48% to ZAR 153 million or 30.8% of revenue compared to ZAR 103 million or 25.1% of revenue last year. This represented a 570 basis points improvement in the adjusted EBITDA margin. The continued improvements in our adjusted EBITDA margin highlights our ability to grow margins year-over-year as we scale the business globally by successfully leveraging a return on our historical investments while remaining focused on cost management throughout the business.

Adjusted earnings for the quarter was ZAR 61 million or ZAR 0.10 per diluted ordinary share, which was up from ZAR 31 million or ZAR 0.05 per share we posted a year ago.

From a cash flow perspective, we generated ZAR 179 million in net cash from operating activities and invested ZAR 86 million in capital expenditures, including investments of approximately ZAR 62 million in in-vehicle devices. This led to a positive free cash flow of ZAR 93 million for the second quarter compared with free cash flow of ZAR 4 million during the same period last year.

As Joss mentioned, we are very pleased with our ability to generate cash given the ongoing investments in in-vehicle devices driven by the demand for our bundled offering.

Now turning to our financial outlook. Due to our strong first half results as well as our expectation for the management subscription revenue growth to continue, we are increasing our expectations for fiscal 2019.

At the midpoint of our current revenue guidance, we expect fiscal 2019 revenue of ZAR 1,947,000,000, which would represent constant-currency growth of 11.85%, an increase from our previous guidance for constant-currency growth of 10%. At the midpoint, we expect subscription revenue to be ZAR 1,689,000,000, which represents constant-currency year-on-year growth of 15.75%, an increase from our previous guidance for constant-currency growth of 14.25%.

We remain confident in our ability to achieve this, given the first half performance as well as our strong top line of firm orders and sales opportunities. At the midpoint of our guidance range, we are now targeting adjusted EBITDA of ZAR 560 million, which represents an adjusted EBITDA margin of 28.8%. Adjusted EBITDA margin guidance at the midpoint represents an increase of 30 basis points from our previous guidance of 28.5% and is up 300 basis points compared to last year.

Our increased margin guidance demonstrates our ability to continue expanding margins year-over-year while investing in the business to drive future growth. As Joss mentioned, we will be updating our long-term adjusted EBITDA target at our Investor Day in December.

With regards to adjusted diluted earnings per share for fiscal 2019, we are increasing our expectation to ZAR 36.5 from our previous guidance of ZAR 32.2 at the midpoint of the guidance range. Our new guidance is based on ZAR 583 million diluted ordinary shares and an effective tax rate of between 28% to 31%.

Please note that the accounting impact from the long-term equity performance grant will be excluded from our adjusted EBITDA and adjusted diluted earnings per share.

As we have previously discussed, our intention is to focus on annual targets, as this is how our management is focused, and we do not wish to close deals on suboptimal terms in order to achieve quarterly objectives.

This is most relevant as this relates to the hardware and other revenue line items in our profit and loss.

The area of revenue where we have the highest level of visibility and predictability is our subscription revenue, which, as we have discussed, is the largest, fastest growing and highest margin component of our business.

For the third quarter of 2019, we are targeting subscription revenues in the range of ZAR 429 million to ZAR 434 million, which would represent year-over-year growth of 13.3% to 14.6% on a constant-currency basis.

In summary, MiX reported another strong quarter, as we continue to benefit from our current market momentum and our margin accretion strategy. As a result, the company remains well positioned to maintain the momentum for the second half of fiscal 2019 and beyond. I will now hand it back over to Joss for some closing remarks.

In closing, MiX is executing strategy of achieving double-digit subscription revenue growth in parallel with strong margin accretion, as evidenced by the second quarter performance of over 18% subscription revenue growth on a constant-currency basis. In total profitability, this is our ninth consecutive quarter of year-on-year adjusted EBITDA margin improvements. We exceeded 30% in our latest quarter, a new high since listing on the New York Stock Exchange in 2013. I would like to make one further point. In regards to the long-term incentive plan, the board believes it appropriately incentivizes management to focus on delivering a balance of continued strong subscription revenue growth while at the same time generating additional margin expansion.

These targets were set at a budget rate for the year at ZAR 13.80 to the U.S. dollar. Clearly, while we don't know whether every drape going forward will end up, the program is designed to incentivize true performance on a constant-currency basis. In other words, if the average rate ends up with a rand weaker than ZAR 13.80 to the dollar, the required targets will be raised appropriately and vice versa. With that, we will turn the call over to the operator to begin the Q&A session.

(Operator Instructions) Our first question today is coming from Mike Walkley from Canaccord Genuity.

Just wanted to start with the Americas region. You have very strong growth year-over-year for the first half of fiscal '19, and it sounds like an area you're investing sales. Can you update us -- that environment you see, Joss? And why you think it's a great time to invest in sales team to maybe take share in -- maybe -- which competitor you might see if you're willing to go there? Or just overall what verticals do you think you're poised to gain share in the U.S. market or the Americas market?

Thank you. We -- we've -- it's certainly no secret that we viewed this geography as a major growth point for us going forward, and we're certainly putting in the appropriate effort. And of course, we're still an immature business, let's call it that. From a Americas perspective, it's a huge geography, and we're talking about both North and South America. The opportunities are significant. Having said that, it's an extremely competitive environment. And we're certainly used to after over 2 decades of experience opposite -- operating in -- effectively in competitive environment. So we're pleased with the performance of the region. We are seeing progress being made in terms of diversifying ourselves out of our dependency on the energy sector. Having said that, we've got a long way to go. But there is no doubt that there is a number of opportunities that we feel could accelerate this objective, and we're investing in them. We'll certainly get more specific market at the Analyst and Investor Day in New York in December. So I don't want to give up all of our ammo before then in terms of the update that we want to give. But I've certainly alluded in this call that sales and marketing investments are certainly one of the areas that we're putting a lot of investment in. It certainly started in the last few months and will continue, particularly into the second half of this year.

And just building off that, with some of the U.S. carriers you're going sunset 3G in a couple of years, do you see the opportunity, reason to invest now if there's going to be rip-outs of hardware, eventually, so is that a chance may be to gain share from embedded customers? Is that part of the reasoning is it's now a good time to invest in the U.S. market?

Well, I guess, it's certainly part of the opportunity. The reality is that the advantage of being relatively small in this market is -- and relatively new is that our technology platform is in large part to a high standard and to a later standard. And we certainly see some of our larger competitors that have significantly installed bases are going to have to do something with those bases. And at that stage, it always creates opportunities for new parties like ourselves potentially to gain some market share. So that's certainly a part of it. But it's by no means the driving force of the investments we're making. We think that there are multiple reasons and multiple opportunities on why we should be investing in these geographies.

Last question from me, and I'll pass it on. It's great to see all regions growing revenue and adjusted EBITDA year-over-year. As you look kind of at your business pipeline in the second half of the year, are there any regions or end markets that you're seeing some slowdowns? Or is it just kind of steady good business across the globe?

What -- I think internally, clearly, there's -- when you're running a global business, it's very rare that all geographies are operating completely to plan. But as we reported, I'm certainly pleased that at least we were seeing double-digit revenue growth performance and, as we also said, EBITDA margin expansion, which is certainly pleasing from all of our regions. Having said that, most of our regions are operating to plan or ahead of plan, and others have got a little bit of acceleration to do in the second half. So we don't focus on short-term objectives. We're still focused on our annual targets. And our plan and expectation is for all of our regions to deliver on the plans that were approved at the beginning of the year. So that's our focus currently.

The next question is coming from Matt Pfau from William Blair.

I wanted you to hit on the Americas region a bit more, specifically on the margin that the Americas region posted across the first half of the year, fairly impressive especially even when compared to Africa, your most mature geography. So what drove the substantial margin expansion in the Americas? Is that sustainable? I know you're making some investments there. So perhaps that's going to go down a bit. But just some commentary on what you're sort of expecting the future of that EBITDA margin and the region to look like?

Thanks, Matt. As you've identified, we are making investments, and we certainly expect in the short term that that's going to have a little bit of clamp on that margin expansion. But the investments we're making, obviously, we are expecting to -- for those to deliver topline acceleration in future years and then, ultimately, make up for the investment that we're making with interest. We're expecting a short-term clamp but then a return to strong margin accretion. And we don't expect this to take a long time particularly for this to happen. So the margin that you've seen is spectacular and, as you pointed out, even compared to Africa. Be remind of course, the Americas is mainly bundled deals, which has in large part aided the margin expansion story but also appreciate that the depreciation line in the Americas will be quite a bit higher than our African business. And I hope I've explained that correctly. Paul, if I haven't, you're welcome to jump in.

No, you got it right there.

Great. And then following up on the Americas region a little bit more. So it's certainly been an area of focus and investment since your listing in the U.S. But it seems like now perhaps there is a bit of doubling down or pouring more investment in there. So is there something you're seeing in the market that has flipped a switch and made you think that now is the right time to double down on these investments and really try to gain some traction in verticals outside of your standard [business] in the Americas region?

I think -- I don't think it's a specific thing that happened now. It's part of our plan in fact that we've had in placed for a while. And we've been making -- it's not any sales investments, we've been making some product investments that we'll talk more about in December that are now ripe for the picking, so to speak. So we've got some products that are now ready for -- market ready. So that's part of what the catalyst is for some of the investment. But I'm happy to say it's been part of what we're doing now was planned quite a while back. And it's just been a sequential process of getting all of the pieces in place to take the next step.

Our next question is coming from Brian Peterson from Raymond James.

Joss, just the premium fleet momentum this year it looks like it's really taken off, and it's clearly diversified beyond just energy. Can you talk about maybe the 1 or 2 big factors that have really driven that acceleration over the last couple of quarters? And then, as you book a lot of those customers, does that improve your visibility into the revenue growth that we're seeing as we look ahead?

Yes. We've -- the big change -- and in fairness, it's not so much a change -- what's changed is that we don't have that drag that we had a couple of years ago when we were seeing this big contraction from what was and remains our biggest vertical. So you'll remember, we still grew through that period, but our growth was muted by the fact that we were getting this fleet contraction. We're now in a phase where most of our verticals are experiencing growth, and it is broad based. It's not a single vertical. It's lot of verticals that are growing. And we don't have any drag from any particular vertical. So what's pleasing is that we're -- of course, we continue to sign new sales, and that's a big focus about business. But at the same time, our customers -- our underlying customers are in many instances doing well. And they are expanding their fleets. And that adds to the momentum. And so we're very pleased about that. But of course, on top of that, you asked about the visibility of these bigger deals that we are signing. And of course, we are very excited about some of these deals that are coming on, and some of them provide more visibility than others. We've had this discussion before. We get some deals with sort of a hunting license, global hunting license. And we have to make sort of judgment call on the pace of rollout. Some of the recent ones we've done are firm commitments for a fixed number of vehicles. And of course, that's much more visible because it's much more less of a judgment issue and much more of a logistics issue and how quickly we can roll them out. So certainly, as we continue to layer on these deals with amounts -- some of them -- we didn't mention all of them in the call, but we had some that we were specific on. Those -- as those layer on, we get more and more -- we develop more and more visibility to -- our future pipeline because generally these are high-ARPU deals. And like our asset tracking business, which is a high-volume, very high-paced business but generally low ARPU, so although we have visibility, it doesn't have the impact as much of moving the needle at the top line as a large premium fleet deals would do.

Got it. And just maybe on the Americas investments you alluded to. Is there anything that you can share that help us to put in the context? How big is your sales team today? Or what percentage of sales reps are based in the Americas? Just trying to understand the magnitude of that investment. And if we think about the return, if you were to hire some salespeople in the next few quarters when should we really think about that in terms of driving incremental bookings?

So I would prefer to give -- part of that deep dive is -- I would prefer to defer it until December because they are interlinked pieces that will make it clearer to understand. I did allude in the call that the investment is -- in the second half is plus-minus ZAR 20 million. And I guess that's part of the explanation. Without that, I think our EBITDA margin guidance would have been higher. But we're making the investment. We believe it's important investments to make. We've given some indications of the kind of scale of it. So it's not insignificant for the 6 months. And some of the investments they focus on different verticals. And we expect some of these verticals to take longer than others. But certainly, some of them, we're expecting a shorter kind of payback. But typically, it's 6- to 9-month kind of exercise to start seeing a decent return from the kind of investments that we're making. So we're not expecting a return in this fiscal year. We certainly would be -- will be expecting a return in the next fiscal year.

Our next question is coming from Brian Schwartz from Oppenheimer.

I want to build -- kind of follow up on the topic, the question you just talked, about reinvesting some of the margin upside that you have here. Without getting granular, is it possible to maybe stack rank the mix between investments in sales reps, increasing capacity there versus marketing spending versus new offices in the America? And then, I have a follow-up.

Sure, it's a very easy answer. The bulk of that spend was in sales -- in sales overhead. It's certainly a much smaller piece in marketing. And offices, we are switching our assets. So we've -- we had a long debate around it, and we've just taken a view that we are on a -- we're very focused on costs. We've just taken a view we're going to make do with what we've got. We're going to squeeze more people into our existing spaces. And we'll get by. So it's fine. I mean, I've even made it clear I'm happy to give up some of my office space for sales capacity. So we -- the bulk of the investment I've alluded to is in personnel sales skills that are designed -- that are employed to grow our revenue base.

That's good. And then in regards to just the demand in the business activity here that's really strong, a couple of questions there. The first just is on ARPU lift that you're saying, I think, it was up 8% year-over-year. It's a very strong improvement there. Is the greater percentage of the lift -- of the expansion ARPU is that coming from bigger initial deal sizes with these larger fleets versus upselling new products within the base? Just wondering if it is possible to parse which is the bigger driver of the increase in the ARPU?

Thanks, Brian. Yes, I'd say -- it's primarily a combination of bundled deals as opposed to unbundled deals, which is the one -- obviously, the one component, coupled with much stronger traction we're seeing in these add-on products and services. And it's really that combination that's contributed to that. And if I'd to give a percentage of that -- it would be roughly -- you could say roughly 50-50 is probably the contributing factor between bundled deals, which are inherently at a higher ARPU, and adding on additional services -- products and services which drive ARPU up.

And then, Joss, love to take your take on -- kind of thoughts on how tariff could potentially impact the business. I'm just wondering if that is a topic of conversation at all with your customers. Clearly, it's in the news that maybe there could be some changes to how businesses are thinking about supply chains. And I'm just wondering if you're hearing that in terms of either the prospects or the customers they're thinking about that. And then if you think about that, is that may be a potential tailwind to your business given how you set in terms of the supply chain of these businesses.

Brian, I missed the very first part. The first part of the question right at the beginning, what -- the potential of what?

I'm just trying -- we're just trying to gauge that if you have a worst-case scenario here and all these tariffs stay in place throughout 2019 it could cause businesses here to rethink their supply chains. And I'm just wondering if that could potentially be a tailwind here as they think about the input cost increasing that they could be looking at other areas of their operations to optimize like their fleet management. So I'm just wondering if that -- if you're hearing that all if people are thinking about that as the topic of discussion. And then just kind of your opinion if that could be a potential tailwind?

It's a great point that you've raised. And frankly, I need to apply my mind more to it. I haven't heard specifically -- I haven't had that kind of feedback that you raised, a very good point. And should -- it's -- we're always on the lookout for tailwinds and opportunities. And it's certainly something I think we should be giving more consideration for, so -- or too. So thanks for the heads-up.

Yes, fair enough. Sounds like it's not a big topic yet. People still taking a wait and see. Hey, last question for me, Joss, just to get it out there because the quarter and the results were so strong here. Did anything get pulled forward in -- pulled forward from Q3 into Q2 that maybe surprised you?

Thank you. I appreciate the kind words. And no, nothing got pulled forward. And frankly, there were 1 or 2 things that I was disappointed got pushed out. But it was a strong quarter on its own legs without any assistance from next quarter.

Next question today is coming from David Gearhart from First Analysis.

First question. I kind of wanted to talk about your core vertical, oil and gas. And I've asked about in the past where we are in terms of oil and gas fleets reactivating or getting up to more normalized fleet capacity. Just wondering if you could talk about where we are in that trend or cycle. Is it just steady-state additions? Or are we getting an accelerated increased since oil and gas prices have been better?

We're certainly seeing continued fleet expansion. Our legacy customers, pre-the-process customers, are not yet back to their peaks. So whether that's a measure or not, I'm not sure part, but it certainly a fact that they're not back to their peak size again. As you know, we added a lot of new customers as well, and those customers are growing. What is encouraging we're seeing early signs of life in the industry in the Middle East. In this call, we announced a deal in the region for an energy customer through ATS, and it's -- we're certainly seeing signs of life there. So that would certainly be a boost for us as well if some of these customers started investing again. And as I said, we're seeing early signs of life there.

Okay. And then next, you have talked about the pipeline giving you confidence in the second half and growth in 2019 and beyond. Just wondering if you could talk a little bit about the add-on modules or software as a portion of your signed deals? Can you give us any perspective on how that's trending in terms of past rates? I think that would be helpful.

It's not specific numbers, and I think we'll probably -- it's part of our December effort. We'll probably give you a clearer picture then in terms of getting more specific, but we continue to see good traction with our add-ons. And having said that, our penetration rate as a percentage of fleet size is tiny. So the runway opportunity is significant. And off the top of my head, I will say penetration rate I don't think is the teens yet. And if it's in the teens, it's in the low teens. So we've got a long way to go with our existing customer base. And that's an exciting runway.

And then the last for me is gross margin was up nicely in the quarter. Just wondering how we should think about gross margin in the back half of the year? I know you said that marching toward 70% longer term. Should we assume slightly higher rates in the second half or should moderate? And if so, what would be driving that?

Sure. Paul, I'll give you an opportunity.

Sure. I think the gross profit margins in the second half of the year should stay pretty similar to where they are on the first half of the year. I think what we're excited about is the renewals on the large bundled fleet contracts, which will increase margin when the depreciation expense runs outs. But that's going to happen probably in about 18 to 24 months' time at the earliest. The renewals [we're seeing] will now cost more, so for the rest of the year, it'll be static.

We've reached at the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you all for joining us today. We're really appreciate your attention and your questions. In addition, as I alluded to earlier on the call, I'm pleased to announce that we'll be hosting an Investor Day in New York City on Thursday, December 6, 2018. Attendees can look forward to some of MiX's senior executive providing a deep dive into our business, including our financials and technology. We're also pretty excited that we'll have some actual customers presenting their case studies and direct experiences with MiX. A formal invitation and registration details will arrive shortly. Space will be limited, and entry will be on a first-come-first-serve basis. And really hope to look forward to seeing some of you there. Thanks again for you time and attendance. And look forward to chatting soon. Have a great day.