MIX Telematics Ltd (MIXT) 2021 Q4 法說會逐字稿

Greetings, and welcome to the MiX Telematics Fiscal Fourth Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Granara, Chief Financial Officer for MiX Telematics. Thank you. You may begin.

Thank you, and good morning, everyone. We appreciate you joining us to review MiX Telematics earnings results for the fourth quarter of fiscal year 2021, which ended on March 31, 2021. Today, we will be discussing the results announced in our press release issued a few hours ago. I'm John Granara, MiX' Chief Financial Officer, and I'm joined by Stefan Joselowitz, or as many of you know him, Joss. He is President and Chief Executive Officer of mix telematics.

During today's call, we will make forward-looking statements related to our business, which are subject to material risks and uncertainties that could cause our actual results to differ materially. For a discussion of the material risks and other important factors that could affect our results, please refer to those contained in our Form 10-K and other SEC filings, all of which are available on the Investor Relations section of our website.

We will also be referring to certain non-GAAP financial measures. There's a reconciliation schedule detailing these results currently available in our press release, which is located on our website and filed with the SEC.

And with that, I'll turn the call over to Joss.

Thanks, John, and thanks to all of you for joining today's call. Our fourth quarter results once again reflected strong execution by the entire MiX team. Our top and bottom line results for both the quarter and the full year were well ahead of our expectations as we continued to see modest improvement in many of our key end markets. I want to thank everybody at MiX for their extraordinary efforts during fiscal 2021 under very challenging circumstances.

I will quickly summarize our financial and operational results for the fourth quarter and the full fiscal year, which John will review in more detail later. For the fourth quarter, subscription revenue was $30.8 million, a 4% decrease year-over-year in constant currency. Adjusted EBITDA was $11.3 million at a 33% margin, which was well ahead of our expectations and reflects better-than-expected revenue performance and good cost discipline across the business.

Free cash flow was $5.2 million, our fourth consecutive quarter of strong cash flow. We ended the quarter with over 744,000 subscribers, which was a decline of 5,000 compared to Q3 and the smallest quarterly decline in fiscal '21.

For the full year, subscription revenue was $113.8 million, a 6% decrease year-over-year in constant currency. Adjusted EBITDA was $37.2 million at a 29% margin which easily exceeded our initial expectations for the year. And free cash flow of close to $30 million, which was a record year of cash generation.

Overall, our performance in the fourth quarter continued on the path we experienced for much of the year, with modest sequential improvements in subscriber trends in many of our key markets. While we are encouraged by this improvement, new subscriber additions remain below historical levels.

Similar to what we've seen in recent quarters, overall demand and customer engagement remains high across our portfolio and in each region, but some customers remain cautious on spending in the near term. We are confident we will be able to accelerate the conversion of our growing pipeline of opportunities over time as economic conditions improve.

An important transaction signed during the quarter was a multiyear renewal with our largest energy sector customer that extends its exclusive use of our services for several more years. During the quarter, this customer paid us approximately $1.5 million to modify its prior agreement and gain the flexibility to sign a renewal that gives them the ability to dynamically contract their fleet in accordance with the downturn in prevailing market demand, and then expand the game as and when conditions improve. We believe this is a tremendous validation of the strategic value MiX provides our clients. This customer is making a multimillion-dollar upfront investment while continuing its 6-figure monthly subscription commitment to us as it manages through challenging market conditions.

We also view this renewal as an encouraging step forward for our oil and gas business as it provides near-term clarity on contraction trends. We're of the opinion that we have experienced most of the potential contraction in this vertical, even as miles driven, which is a proxy for activity level, remains 15% to 20% below pre-pandemic levels.

We are still confident that conditions in the oil and gas industry will improve as economies reopen and that we will start to see customers expanding their fleet operations again. Having navigated multiple up and down cycles in this vertical in our 25-year history, we know how to best position MiX to benefit when the market turns again.

Overall, we continue to see strong renewal activity and signed important new agreements with customers in a number of geographies. I'd like to highlight a few key wins from the fourth quarter. Reading Buses, a leading U.K.-based public transport operator, renewed its agreement with MiX for 3 more years. Reading utilizes MiX' solutions to monitor driving performance and continually improve operational efficiency.

Imperial, a leading provider of integrated market access and logistics solutions in South Africa and a long-standing MiX customer, is expanding the adoption of MiX' premium solutions to improve risk management. Until recently, MiX' penetration of Imperial's fleet was around 65%, with some of their divisions still utilizing other telematics solutions. They conducted a group-wide evaluation of its 4 independent telematics providers and chose to consolidate their entire fleet on MiX due to the superior value we provide. Imperial has also subscribed to some of MiX' value-added services, including MiX Vision as part of its program to ensure safer vehicles and driving operations.

In Australasia, we signed multiyear contract renewals with 3 large fleet customers in the logistics, mining and energy verticals, securing over 7,000 premium fleet subscriptions across the region. These customer renewals are great examples of our consistently high retention rates and the significant opportunity to drive growth from our existing customers. It is worth noting that in most years, our existing customers typically generate about 1/3 of our overall growth. Although this was obviously not the case in fiscal 2021 due to the contraction experienced in many fleets, going forward, we believe there's a meaningful growth opportunity embedded within our existing customer base as their businesses improve and fleet sizes start growing again.

As we close out fiscal 2021, I am pleased with how the company managed through the most challenging environment in our history. We spent the year focused on 3 core goals, and we have executed exceptionally well against each. The first was to focus on customer success and strengthen our position as a strategic partner. Many of our customers faced significant challenges in the operations in the past year and needed vendors they could trust and rely upon more than ever. Our willingness to work with our customers to ensure the best long-term outcome for both parties is essential to how we do business with MiX. I'm confident this philosophy will accrue to our benefit in the coming years.

The second objective was to preserve profitability and maintain a strong balance sheet. By every metric, we were phenomenally successful in this regard. Due to prudent and proactive measures we took to manage our expense structure we were able to modestly expand adjusted EBITDA margin in fiscal '21, even as revenue declined. While some of this benefit was temporary in nature due to COVID-19 cost savings, our ability to manage expenses while continuing to invest for growth is an excellent example of the scalability of our business model. Our strong profitability performance helped drive a record year of cash generation with nearly $30 million of free cash flow. We exited fiscal 2021 with a cash balance of close to $46 million, which is up 2.5x from the prior year.

Finally, our third objective was to continue investing in the business to maximize our long-term opportunity. We made significant progress throughout the year investing in key sales and marketing initiatives as well as in our product development road map. Most recently, we launched MiX Vision AI, an extensive update of our video telematics offering. By leveraging machine vision technology, MiX Vision AI can significantly improve driver and road safety by monitoring numerous potential hazards inside and outside the cab in real-time so that corrective action can be taken before an incident occurs.

We believe this product is a great example of how we can leverage emerging technologies to enhance the value we deliver to customers, and we're already seeing strong demand. In fact, subsequent to quarter end, we secured our first MiX Vision AI deal for a fleet of 2,500 vehicles, which will rollout over the coming quarters.

While fiscal 2021 was challenging, we have come through it as stronger, more resilient company. We enter fiscal 2022, with the worst hopefully behind us, focused on returning the business to growth and progressing towards our long-term financial targets of 15% to 20% subscription revenue growth and adjusted EBITDA margins of 30%-plus in a normalized economic environment.

I will repeat that our primary focus in fiscal 2022 is returning the business to growth. We are leaning into the possibilities ahead of us. And investing in several areas to capitalize on our substantial market opportunity. First, we will invest in our sales and marketing and distribution efforts throughout the world. We see great potential in making high-return sales and marketing investments, including expanding demand generation projects, growing our sales team, further extending our indirect channels and enhancing our customer retention efforts. We believe there is growing interest amongst light fleet and premium fleet operators for sophisticated telematics solutions, and we are well placed to benefit from this trend.

Secondly, we will continue to invest in product development and expanding our solution portfolio. We had great success bringing new products to market last year with the release of MyMiX tracking and MyMiX Vision AI. And we have a robust pipeline of innovation we are working towards. The feedback from our customers is that they are looking for more ways to harness actionable data-driven insights to achieve even greater efficiency and safety gains in their fleet operations, and we are ideally positioned to do this for them. Our role as a trusted partner puts MiX in a great position to expand our footprint with our customers.

And lastly, we will continue to take a balanced approach to investing for growth and profitability, and we have a proven track record of doing this over many years now. This discipline has served us well and is a core operating philosophy for the business.

At a high level, we believe that we will generate mid- to high single-digit constant currency subscription revenue growth in fiscal '22 and low double-digit annual recurring revenue growth even as we continue to manage through the lingering impact of COVID-19. The timing of when sales activity will show more meaningful improvement is still tough to estimate, but our recent performance makes us increasingly confident we will benefit when it does.

We also expect to deliver another strong year of profitability with adjusted EBITDA margins in the low to mid-20s. As John will outline later, profitability in 2022 will reflect some cost normalization as we move beyond COVID-19 and trigger incremental investments in support of our growth initiatives.

To wrap up, we are incredibly positive about the opportunities ahead of us. We enter fiscal '22 with strengthened customer relationships and increasingly extensive portfolio of value-added solutions, and an improving economic outlook. We are excited about what lies ahead of us and our ability to generate significant value for shareholders.

I would now like to turn the call over to John to review our financial results. John?

Thanks, Joss. I'd now like to turn to our financial results for Q4. Please keep in mind that all figures refer to the fourth quarter of fiscal 2021 and all the comparisons for the year-over-year changes, unless I say otherwise. As a reminder, the majority of our revenues are derived from currencies other than the U.S. dollar. The South African rand strengthened against the U.S. dollar compared to the fourth quarter of fiscal year 2020, contributing to a 2.2% increase in our reported revenues. For the full year, the rand weakened against the U.S. dollar and decreased reported revenues by approximately 5%.

Starting with the P&L. Total revenue came in at $34.3 million, and subscription revenues were $30.8 million, a decrease of 7.4% and 4% on a constant currency basis, respectively. Year-over-year decline in subscription revenue was primarily due to contraction in the company's subscriber base. It was also a onetime item in subscription revenue related to the contract renewal with our energy sector customer that Joss referenced. As part of that contract, we accelerated the recognition of revenue related to the initial bundled contract. This benefited subscription revenue by $1.1 million in the quarter.

We ended the quarter with over 744,000 subscribers, a decrease of 9% year-over-year and less than 1% quarter-over-quarter. To provide some more context on the trends in our subscriber base, despite the subscriber contraction during the year, we continue to have very high customer retention rates, with a 94% retention rate on large fleets and a 98% retention rate for fleets with more than 500 vehicles.

The majority of the premium fleet reduction in the subscriber base in fiscal 2021 was driven by fleet contraction, and the reduction of the average customer fleet size and not due to the loss of customers. It's also important to note that we did grow our fleet customer base during the year, primarily with fleets of less than 50 vehicles. This presents an attractive expansion opportunity with these customers in the future. Hardware and other revenue of $3.6 million were down 25% year-over-year. As a reminder, hardware and other revenue can be volatile quarter-to-quarter.

Moving on to gross margin and operating expenses. Gross margin was 64.5% compared to 57.4% in the year ago period, which was impacted by some accelerated depreciation related to fleet contraction with some of our Americas oil and gas customers. Subscription margin remained strong at 69.1% compared to 64.9% in the year ago period.

Operating expenses, before restructuring and stock-based compensation, were $15.9 million and were down 5% compared to prior year. Our cost performance reflects the cumulative impact of the actions we have taken to streamline expenses over the past year. Sequentially, costs were essentially flat for the second consecutive quarter as most of our targeted cost actions were completed by the end of June.

Adjusted EBITDA was $11.3 million or 32.9% of revenue compared to $10.6 million or 29.2% of revenue last year. Our fourth quarter profitability performance was an excellent finish to a terrific year. The onetime revenue I mentioned earlier positively impacted adjusted EBITDA by approximately $1 million or 1.8% of additional margin.

Non-GAAP net income for the quarter was $3.5 million, up from $2.9 million in the year ago period. The company's effective tax rate was 47.3% compared to 174.2% in the fourth quarter of fiscal 2020. Ignoring the impact of foreign exchange gains and losses, the tax rate was 41.4% compared to 28.7% in the prior year.

Turning to the balance sheet. We ended the quarter with $45.6 million of cash and cash equivalents compared to $18 million as of March 31, 2020, representing more than 150% growth. It was a key priority for us in fiscal 2021 to strengthen our balance sheet and ensuring we have the financial capacity to invest through this challenging period, so we could fully capitalize on our market opportunity as conditions improved.

In the fourth quarter, we generated $7.6 million in net cash from operating activities and invested $2.5 million in capital expenditures, leading to a free cash flow of $5.1 million. The use of cash includes investments in-vehicle devices of $1.3 million. We are pleased with the consistently strong cash flow performance throughout the year and reflects both the improvement in our cost structure in recent quarters as well as the lower in-vehicle device investment. As the business starts to return to growth, we would anticipate IVD investments to increase from current levels.

Our strong free cash flow and balance sheet enabled us to once again declare a quarterly dividend of ZAR 0.04 per ordinary share. We will continue to evaluate our dividend on a quarter-by-quarter basis this fiscal year based on business and market conditions.

Before I wrap up, I would like to provide some additional perspective on our expectations for fiscal 2022. As Joss mentioned, our plan is to return to growth this year. New business and subscriber trends have shown sequential improvement for a few quarters, and we've worked through much of the potential contraction overhang in the markets that have been most impacted by the economic situation since COVID-19. There's still a good amount of uncertainty in the market, which makes it difficult to know exactly how quickly our business will recover. However, we do have enough visibility to be confident that we will generate constant currency subscription revenue growth.

In prior periods, the growth in annual recurring revenue, or ARR, and subscription revenue have been tightly aligned. However, given the timing of the growth investments and the recurring nature of our model, we expect that ARR will grow faster in fiscal 2022 than subscription revenue and be a more helpful leading indicator. We ended fiscal 2021 with ARR of approximately $120 million, a decline of 9% on a constant currency basis. Our current expectation is that subscription revenue will grow mid- to high single digits and ARR will grow by low double digits in fiscal 2022 on a constant currency basis.

In terms of profitability, we expect to deliver another strong year with adjusted EBITDA margins in the low to mid-20s. The year-over-year change in margin are largely a function of 2 things. The first is simply returning to a more normalized cost structure as we move beyond COVID-19. We undertook a number of onetime items like salary and hire increases, which will not continue in fiscal 2022. In addition, we expect to resume spending on travel this year, albeit not at pre-COVID levels. In addition, as Joss outlined, we will increase our growth in investments in product development, demand generation and sales capacity. We are optimistic about the number of opportunities we have to return to 15% to 20% subscription revenue growth over time.

Looking beyond fiscal 2022, we are confident we'll be able to expand margins and move towards our 30% plus adjusted EBITDA margin target. In terms of the quarterly progression for the year, we will begin making these incremental investments in the first half of the year and expect to start seeing that benefit ARR and revenue growth in the second half of the year.

Before we open it up for questions, I just want to reiterate that we did a great job executing on the things within our control in fiscal 2021. We are now focused on returning the business to growth and fully capitalizing on our market leadership in the telematics market. We are confident we can return to our long-term financial targets and generate meaningful value for shareholders.

Now I'd like to open up the line for questions. Operator?

(Operator Instructions) Our first question comes from the line of Matt Pfau with William Blair.

I wanted to ask about the fleet contraction. And so it sounds like you're through most of the anticipated contraction within your base. But as you look at some of these verticals like public transit or transportation that were also impacted, are you starting to see some of those fleets bring vehicles back into the fleets that were previously shut down?

Yes. Thanks. We are certainly seeing in many geographies, a steady return to, what I'd call, normality. Clearly, the global situation is not back to normal yet. So we have countries that are dipping in and out of restrictions as you're aware. But certainly, what we're observing currently in -- certainly in the geographies where we have big exposure to verticals like public transportation is that the picture is certainly looking better than it was 12 months ago when we were at the beginning of the pandemic, so to speak.

Got it. And you mentioned growing the customer base for the year, and that was driven by the sub-50 vehicle fleet segment. So I guess that would imply that you're having some nice success with MiX now in that initiative. Maybe just give us an update on what's going on there?

Yes. Certainly. We're seeing improvements. And the 1 thing worth mentioning is that the improvements we're seeing is not restricted exclusively for argument sake to the United States. We're seeing our light fleet efforts ticking upwards in multiple geographies, which is a good sign. So we continue to work on enhancing our digital lead generation efforts, expanding our sales teams and of course, enhancing our product range. So overall, I think it's a combination of things that are contributing towards the improvement that we're seeing.

Okay. Got it. Last 1 for me, just, just was sort of curious if you're seeing discussions around ESG initiatives play a bigger role in discussions with prospective customers in terms of them looking to adopt your solutions to help them achieve some of those goals?

Thank you, and that's a great question. And the answer is, yes, it is clearly playing a bigger role. The point we've been making since inception is that one of the key benefits we offer customers is a substantial reduction in fuel usage, which as a by-product, obviously, of lowering their carbon emissions. And so not only are we able to help our customers save a lot of money by the improving efficiencies. But it also enables them to improve this forecast in terms of the ESG performance. So it's definitely a key selling feature of ours. And it's certainly, I think, a selling feature that's resonating better with customers now than it was 10 years ago for argument sake. So we're excited about that trend.

Our next question comes from the line of Mike Walkley with Canaccord Genuity.

I hope everybody is well, and congrats on navigating the tough year.

Thank you.

Joss, the question for me is just as you're reinvesting in the business, are there any geographies where you're really ramping sales more than others? Or any end markets or geographies that you're most excited about in terms of the pace of the recovery to get to your growth objectives this year?

So from our perspective, the good news is that we're seeing opportunities in really all of our geographies. So we are making growth investments across our portfolio. I will repeat that the Americas remain a, let's call it, an overweight focus in terms of investments. I think by virtue of the fact that we're still relatively in terms of looking at our history, relatively new here, and we see overweight opportunities here. So we are focusing a lot of effort and attention here.

In terms of recovery, clearly, the United States has done, in recent months, a great job of dealing with the pandemic, and we're very excited about the trends that we're seeing here. Conversely, the sad part is there's other geographies in the world that have done a less stellar job or haven't yet got on top of the issues.

So the picture in some geographies remain murkier as they still grapple on the level of restrictions they're going to impose on the citizens, and hence, the knock-on effect that will have on the economies of those regions. But as a management team, we have to adapt. And so we continue to watch the stats carefully and where necessary, tweak our efforts. But overall, we're excited about a real opportunity that we believe we see ahead of us to return to growth this year.

Great. And John, just a follow-up question, maybe just on some modeling questions. For the quarter, gross margins came in quite strong. How should we think about those going forward? And did this upfront payment give kind of a benefit to gross margin? So should we temper that a little bit to kind of tie into your low 20 adjusted EBITDA guidance?

Yes. I think the 60 -- we said previously 64% to 66% is good on a blended basis with our subs margin. 70% level is typically where we've been running at right now. And I think that those ranges are still good. The onetime discrete event that we made reference to actually had a negative impact on margin, both 50 basis points. And so we actually, I think, would have been at subscription margin over 70%. It's actually closer to 1 percentage point. So it actually had a little bit of a knock on the gross margins we reported this quarter. But moving forward, I think, 64%, 66% on a blended basis with subscription in 70%, I think that will -- that's fair.

Okay. No, that's helpful. So really indicating to get to your guidance of pretty good OpEx investment, as you highlighted. And I know travel comes back steadily over the year, hopefully, if COVID reduces around the globe. But is it just still front-end loaded and then just continues to grow throughout the year as travel layers on top of your upfront investments. Is that a good way to think about it?

Yes. The majority of the investments you'll see in sales and marketing, we did mention travel as an example of an expense that will come back, but that's not going to have a material impact as much as the investments we're making in sales and marketing. So I think what you're going to see is the uptick in sales and marketing in the first half of the year. And that's why we laid out from a quarterly cadence standpoint, we think we'll start to see the benefit of that in the second half of the year, but the majority of the investments are being made now. And as Joss mentioned, it's worth mentioning, again, we made investments this past year, but we're making incremental investments on top of those.

Got you. And last question for me, and I'll pass the line for, I guess, Joss, just in terms of -- I guess, for both of you, in terms of some of the new products that you're working on, any of that, you expect to impact revenue this year? Or are there more products to drive future growth? Or just kind of thinking about timing of maybe new product introductions coming into the model?

Yes. Certainly, the innovations that we've already announced, we expect it to be revenue-generating in this fiscal year. Bear in mind that mixed vision, AI is an incremental development on top of our existing vision solutions. Nonetheless, we do believe it's opening up a broader market for us. We did make reference in the call to a large fleet, 2,500 units that we started rolling out that solution for, and we think we expect to see, particularly as this year progresses, an increasing impact from the value-added products that we've launched, including MyMiX Tracking, which is an app-based service, which we believe will expand some of our existing -- with some of our existing customers into niche areas of their fleet. So generally, we're excited about the investments we've made.

Our next question comes from the line of Brian Peterson with Raymond James.

Congrats on the really strong quarter that revenue number is way ahead of where I had it. So Joss, maybe to start with you we have seen some M&A in the space, particularly in the U.S. over the last several months. I'd be curious to kind of get your thoughts on M&A and what you're seeing in terms of private company valuations and how you're thinking about that as a growth vector going forward?

Yes. Thank you, and I appreciate the kind words. We're certainly seeing a continued active M&A environment and a number of transactions announced in the quarter. And we have clearly some visibility into valuations, not all the time, but some of the time, there is certainly information available on the metrics. And we remain a strong believer that scale matters, and we've certainly continued to engage in conversations and look at opportunities. It's certainly one of, I would call it, a priority, but it's a priority that we're not going to get stupid about, as I guess, has already been evidenced over our performance over the last 5 years. We haven't rushed into anything, although we have taken a run at a few things. And I think we'll continue to do so. So it's an active market, and we certainly continue to engage in discussions where appropriate, and we'll continue to keep sharp eye out for opportunities.

Good to hear. And John, maybe 1 for you. I know we talked about some of the growth investments that you're making this year, and I can appreciate that T&E is coming back. Maybe directionally, can you help me understand the payback period for some of these growth investments. I know that sales hiring in digital. But should we see those really impact the growth rate this year, maybe back half? Or is that really just setting us up for the long term?

Sure. So we -- it is -- the investments are being made in the front half of the year. I don't expect that we'll start to see a meaningful benefit until the second half of the year, but even more meaningfully, as we go beyond the current fiscal year. So I think you're looking at the investments we're making, typically, they'll have a 6- to 12-month lag between when you start to see the benefit. And that's why we said in the prepared remarks that we will probably see it first in ARR because that's going to be a better leading indicator than subs revenue because the subs revenue is more of a lag in that regard. So that's -- so meaningful benefit will happen towards the end of the year and most meaningfully into the next fiscal year.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Joss for any final comments.

Thanks so much, Melissa, and thanks to all of you for joining us today on the call. We really appreciate your interest in MiX Telematics. We will be meeting investors virtually later this quarter, in fact, next week at the William Blair Annual Growth Stock conference. And we look forward to speaking with some of you then. In the meantime, I hope that you and your families remain safe and healthy. And thanks again for your time.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.