MIX Telematics Ltd (MIXT) 2021 Q3 法說會逐字稿

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

I would now like to turn the conference over to your host, Mr. 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 third quarter of fiscal year 2021, which ended on December 31, 2020. 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. I would like to thank you all for joining the call today. I hope you and your families are all safe and healthy.

Our third quarter results were well ahead of expectations on both the top and bottom line and reflect continued modest improvement in many of our end markets as well as some timing benefit to revenue. While we continue to navigate the challenges resulting from the COVID-19 pandemic, we believe we are executing well, given the circumstances, particularly from a profitability and cash generation perspective.

I will quickly summarize our financial and operational results for the third quarter. Subscription revenue was $29.1 million, a 7% decrease year-over-year in constant currency. Adjusted EBITDA was $9.5 million at a 28% 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 of $8.7 million was particularly strong for the second consecutive quarter, and we ended the quarter with over 749,000 subscribers, which was a decline of 18,000 compared to Q2.

Outside of South Africa, where economic conditions worsened materially during the quarter as the country went into a second COVID locked down in December, we experienced sequential improvement in subscriber trends. In South Africa, our largest car rental customers unexpectedly reduced their fleets by 6,000 subscribers, and we preemptively churned around 12,000 nonpaying consumer asset tracking subscribers. As a reminder, these are our lowest-ARPU customers at around $5 per month and have a relatively immaterial impact on our financial performance.

At a high level, the trend experienced in the third quarter was similar to the second quarter. New business activity again showed modest sequential improvement in our premium and light fleet segments but remained below historical levels. We continue to see positive demand-generation activity and are engaged in exciting strategic conversations with larger fleet operators about the critical role Telematics will play in their future operations. In fact, we have seen our sales pipeline grow throughout the year. This demand activity is very encouraging for our long-term growth prospects. But in the near term, we continue to see elongated sales cycles. Nevertheless, we continue to see strong renewal activity and signed important new agreements with customers in a number of markets.

I'd like to highlight a few key third quarter wins, which show early success in converting some of the large opportunities in our pipeline. (inaudible), a global energy pioneer, has chosen MiX Telematics as its long-term global connected fleet partner for more than 6,000 vehicles in Spain, the United Kingdom and North America. Following a highly competitive process, they selected MiX due to our superior technology offering and proven track record of managing large global key accounts. Project rollout has already started in Spain.

Total, a long-standing global key account with over 5,000 premium fleet subscriptions in multiple countries, added our video solution MiX Vision to their fleet of 550 vehicles in Nigeria. Total has now upgraded to MiX Vision in more than half of its global fleet. This is a great example of our ability to upsell additional value-added services that drive greater value for customers and enhance ARPU for MiX.

And finally, a large integrated logistics customer in Australia has committed to extending our premium fleet solution to a further 500 of their vehicles in New Zealand.

Overall activity amongst the majority of our enterprise customers showed continued modest improvement for the second consecutive quarter and are at pre-COVID levels in some verticals. I would like to give a brief update on 3 of our key verticals, which, combined, represent approximately 50% of our fleet business. Transportation and logistics, which is our second largest vertical, has largely returned to pre-COVID levels. These customers experienced a shallower decline in activity than others and have seen steady improvement throughout the year. Some transporters have benefited from the increase in e-commerce activity and changes in logistics processes caused by the disruption.

Oil and gas showed minimal sequential improvement and remains well below prepandemic trends. As we discussed in our last earnings call, we expected to see an increase in contraction with some of our largest oil and gas customers in the second half of the year. Very little of that contraction occurred during the third quarter, but we continue to believe this will occur either in the fourth quarter or early next fiscal year. We are confident conditions in the oil and gas market will improve as economies reopen, and that we will start to see customers expanding their fleet again. We have been through multiple cycles in the oil and gas industry in our 25-year history and know how to best position MiX to benefit when the market does turn.

Public transport sector improvement stalled during the quarter. Europe and Brazil are our largest markets in the bus and coach vertical, and the travel restrictions reinstituted in these regions impacted activity levels. As we have said from the beginning of COVID, the decline in this sector is temporary and we expect it to snap back relatively quickly when economies fully reopen.

As we continue to manage the business through near-term challenges, we have remained keenly focused on the things that are within our control. We laid out 3 core objectives at the beginning of the year, and I'm proud to say that we have been incredibly successful on each of these goals.

The first was to focus on customer success and strengthen our position as a strategic partner. We reacted quickly to enable our customers to maintain their operations under conditions that they have never experienced or planned for. We are proud that even in this environment, we have not seen any material increase in enterprise customer churn. The entire MiX team has done an extraordinary job of building customer relationships, and I believe this effort will pay important dividends to our business for years to come.

The second objective was to preserve profitability and maintain a strong balance sheet. We have been phenomenally successful in this regard. Adjusted EBITDA margin of 28% in the quarter continued to track well above our initial expectations and was actually up fractionally year-over-year despite the decline in revenue. We continue to benefit from the cost-saving initiatives we undertook in the early part of this fiscal year. This has been a key part of our terrific year-to-date free cash flow performance of $24.7 million. This has allowed us to more than double our cash balance to $44 million and provides additional capital to fund our growth initiatives.

Our third objective was to continue investing in the business to maximize our long-term opportunity. We continue to invest in building out our sales and marketing infrastructure and in strategic technology projects. Today, we're excited to announce the first of these initiatives, MyMiX Tracking, an important and significant new addition to our product portfolio. This app leverages mobile phone technology to track and manage driver behavior using the driver's smartphone, negating the need to install in-vehicle hardware. While fixed installed devices will continue to be a more appropriate enabling technology for many premium fleet use cases, this new solution provides a practical and cost-effective option to expand management coverage to more of their fleet, including vehicles not owned by the customers themselves. Examples are leased vehicles, subcontractor fleets and gray fleets. The product has been released to select pilot customers this month, with a full launch later this quarter.

Our success on each of our stated objectives would enable us to finish with better results than we expected at the start of the year. Based on our year-to-date performance and outlook for the fourth quarter, we expect subscription revenue to decline approximately 10%, which is the lower end of our original range of 10% to 20%. We continue to expect adjusted EBITDA margin in the mid-20s compared to the original goal of 20% plus. Taken together, we believe our expected results for fiscal 2021 reflect the resilience of our operating model and our ability to effectively manage the business through challenging circumstances. However, we recognize that we still face meaningful headwinds in the near term. We also have limited visibility to the timing of an improvement in new sales activity, given the level of uncertainty in the market. In our view, it is a matter of when, not if, conditions improve and our business returns to top line growth.

Our performance in FY '21, the product innovation we have introduced and will be introducing in the coming quarters and the growing strategic importance of Telematics makes us confident in our ability to grow subscription revenue 15% to 20% and deliver adjusted EBITDA margins of 30%-plus in a normalized economic environment. We are hopeful the introduction of COVID vaccines means the world is nearing the end of this terrible phase. MiX Telematics is looking forward to capitalizing on the opportunity that lies ahead.

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 Q3. Please keep in mind that all figures refer to the third fiscal quarter of 2021 and all comparisons are 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. As expected, the weakening of the South African rand had a negative impact on our reported revenues due to the disruption from COVID. The South African rand weakened by 6% against the U.S. dollar compared to the third quarter of fiscal year 2020, contributing to a 2.9% decrease in our reported revenues.

Starting with the P&L, total revenue came in at $34.1 million and subscription revenues were $29.1 million, a decrease of 3.6% and 7.3% on a constant currency basis, respectively. The year-over-year decline in subscription revenue was primarily due to contraction in the company's subscriber base. We ended the quarter with over 749,000 subscribers, a decrease of 8% year-over-year and 2% quarter-over-quarter. Substantially, all the decrease in the quarter related to the churn attributable to our asset tracking business in South Africa, which are our lowest-ARPU subscribers. This mix shift caused ARPU to slightly increase in the quarter.

Hardware and other revenue of $5 million were up 23% year-over-year. This was the strongest quarterly performance for hardware in 2 years and was driven by a higher percentage of cash versus bundled deals and a sizable video transaction. We are seeing a growing number of opportunities for our video solution and believe it can be an attractive growth driver over time. Hardware and other revenue can be volatile quarter-to-quarter, and we do not expect it to remain at these levels going forward.

Moving on to gross margin and operating expenses. Gross margin was 62.5%, down a few percentage points from last year. The reduction in gross margin was driven entirely by a lower hardware margin and the higher hardware revenue mix. Subscription margin remained strong at 69.4%, which was in line with the year ago period. Operating expenses were $16.3 million and were down 11% 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 as most of our targeted cost actions were completed by the end of June. While we continue to evaluate the business and are prepared to make additional changes if conditions warrant, we are not expecting to take any additional action at this time.

Adjusted EBITDA was $9.5 million or 28% of revenue compared to $10.1 million or 27.8% of revenue last year. Profitability has been a notable strength for us in fiscal 2021 and continues to track well ahead of expectations. Non-GAAP net income for the quarter was $3.4 million, down from $3.8 million in the year ago period. The company's effective tax rate was negative 18.7% compared to negative 2.4% in the third quarter of fiscal 2020. Ignoring the impact of foreign exchange gains and losses, the tax rate was 34.3% compared to 25.9% in the prior year.

Turning to the balance sheet, which strengthened further in the quarter, we ended the quarter with $44 million of cash and cash equivalents compared to $18 million as of March 31, 2020. Our cash balance has grown by $26 million since the beginning of this fiscal year driven by a strong free cash flow performance. In the third quarter, we generated $10.2 million in net cash from operating activities and invested $1.5 million in capital expenditures, leading to a free cash flow of $8.7 million. The use of cash includes investments in in-vehicle devices of $367,000. Our strong free cash flow reflects both improvements in our cost structure in recent quarters as well as the lower in-vehicle device investment.

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 the fourth quarter. As Joss mentioned, we have done an excellent job executing on our strategic objectives this year and are tracking well against our financial targets. We anticipate our fourth quarter performance would largely track the trends we have seen in the last 2 quarters. The primary difference is we are forecasting an increase in attrition in oil and gas market, which could reduce revenue by up to $500,000 per month. As Joss mentioned, we now expect subscription revenue to decline 10% in fiscal 2021 versus the prior year due to the cumulative impact of subscriber declines.

To wrap up, we are delivering on our objectives for the year and are well positioned to drive a significant improvement in our financial results as market conditions improve. We are confident we can return to our long-term financial targets and generate meaningful value for shareholders.

Now we'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.

First, hoping you can provide a little bit more clarity on the expected churn in the oil and gas segment. Just sort of wondering why this maybe was expected to take place in the third quarter and now maybe it's the fourth or -- quarter or maybe early next year. Just sort of wondering what's driving that dynamic.

Thanks, Matt. Thanks for joining the call. It's -- we can do as much as we can from our side. Of course, we're dealing with sort of a couple of very large enterprise customers that have, I guess, complex decision-making processes. So it's really out of our hands, frankly. It's in the customer's hands. And frankly, it's for the customers' benefit. So if -- the sooner they get it done, the more benefit that will derive out of it. And the reality is we also recognize that they've got lots of other things on their plate that from a impact or size perspective might be of higher significance.

So we believe it's in the pipeline from their perspective. We continue to expect that they will ultimately get to it. I will make the point that these are happy customers that are -- the decision is for long-term renewal of a contract, and we expect that it will happen. So while we're expecting contraction, we're not expecting churn.

Okay. Got it. That's helpful. And then wanted to perhaps get some more details on the conversations that you're having with some of these large fleet operators. Are these new customers, or existing customers? And then you talked about Telematics playing a larger role in their future operations. Just maybe some details on what you mean by that?

Certainly. And it's a combination in terms of these discussions we're having. I think I've made the point over the last 2 or 3 quarters, in fact, that I'm pleasantly surprised by the growth of our pipeline. And some of these are very large deals, one of which we announced today, which is a new customer. So it's a -- certainly a healthy dollop of new customers and, of course, a lot of strategic discussions with existing customers in terms of how we can add additional value to their businesses.

But we continue to work. Our team continues to drive very hard to pull these opportunities through the pipeline and get them to pop out through the bottom. The kind of examples we gave today off the top of my head was really one brand-new customer of large significance over multiple countries. It was a technology expansion with another large customer, and that's a real ARPU-enhancing deal. And that's the kind of opportunity that we're driving with many other existing customers, with not only our existing technology but, as you know, we announced a new initiative today, which is -- which will form part of those kind of discussions. And the last one was an expansion with an existing customer, last example that we gave today where they're expanding the number of vehicles under coverage with us. So I guess, those are all good examples of the kind of conversations at different levels that we're having.

Great. Last one for me, Joss. Just on the new MiX tracking product, is that something that you sort of envision going mostly to your existing customer base with? And then is that something that customers have been requesting? Or I guess, how did that sort of product concept come about?

Yes. I think it's a -- I see it playing a significant role in not only new customers but, certainly, existing customers, in which case, we're having a lot of conversations and, in fact, have -- will be starting our trials in terms of the launch with those customers. But we see a big role for it with new customers as well.

And another big opportunity is that we see it accelerating the proof-of-concept process because what this enables us to do is to show new customers what kind of benefit they can derive from our technology without necessarily going through the complication of doing an in-vehicle install in 50 or 100 vehicles. So we see it not only as a new opportunity but also as a sales accelerant.

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

Congratulations on a good result in a tough environment. Joss, just want to build on some of the comments here. You highlighted your constructive conversations with large fleet operators. Can you give us just a little more color, maybe what products or regions you're most bullish about in terms of longer-term opportunities? And is it more upsell? Or is it the greenfield customers that you have in these conversations with?

Sure. And that's -- it's -- I'm very happy to say that it's a combination of both. It's quite balanced from a geographic perspective. So when we look at our pipeline, we're pleased with what really all of our regions are building in terms of the larger opportunities. So that's pretty exciting. It's not really concentrated in one particular geography, which is exciting.

It is, I guess, more weighted towards our premium fleet solution, although we do certainly see some nice opportunities, large opportunities, again, in our asset tracking business. Bear in mind, the relative impact of a large deal there is somewhat muted compared to a large premium fleet deal. And we continue to see decent growth in our light fleet business.

So I think it's -- overall, it's nicely weighted and nicely balanced, not only from a geographic perspective but from a product portfolio perspective as well. If there's any concentration, it's on the premium fleet side, and that's a concentration I'm always happy to see because of the relative ARPU weighting of that.

No. That's helpful. And John, just a question for you. Just congrats to you guys on hitting the low end of your subscription revenue decline. Can you just help us think about maybe the linearity of the quarter when some of these subs came out? I guess, what I'm trying to get at is, in your guidance, should we see another nice uptick in ARPU just due to the mix? Or do some of these oil and gas subs come out and that hurts ARPU? I'm just trying to get a feel for how to put ARPU into your sell-side guidance?

Yes. So the majority of the contraction came from asset tracking this quarter, which is why we saw the uplift in the ARPU, Mike. In terms of linearity, I would say that it was somewhat even from that perspective. So it wasn't like they all ended at one period in time. We didn't mention it specifically, but essentially, our fleet business, both light fleet and premium, were flat for the quarter. So that -- and I think, ordinarily, we would be looking to that as being a leading indicator. Excluding the oil and gas attrition we're seeing, we did see that somewhat flatten out.

So the majority of the contraction was asset tracking. And as we move forward, the ARPU will come down to the extent we do see the oil and gas attrition that I spoke of in the prepared remarks because that is our higher-ARPU customer base. But outside of that, the uplift this quarter was largely due to the contraction in the asset tracking business.

Great. And just a follow-up question, and I'll pass the line. In terms of net sub growth, do you think March quarter returned kind of to net growth? Or with oil and gas, we still should expect some subs to come down before it turns maybe later in the calendar '21?

Yes. I think the oil and gas contraction would most likely cause our total subscriber base to contract for the quarter. Excluding that, we don't see any big movements from that standpoint. So we don't -- Joss made mention of a few of the larger verticals within our customer base. But there are many others, some of them not as large, but -- that have -- actually at or near or above pre-COVID levels, which we feel pretty good about, fast-moving consumer goods, mining, construction, field services. So there are many other industries that are actually doing well. They're just not a big piece of the pie right now.

But -- so we are seeing some growth within the subscriber base. It's just -- they're just not a larger portion of our subscriber base, so we're not seeing that yet. But when we look at these industries individually, we're actually seeing some growth there. And long term, we see some great opportunities to continue to diversify the verticals we're playing in.

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

I'll echo my congratulations on the strong results. So Joss, just maybe a higher-level question, but I know there's puts and takes here in the oil and gas market, but as we see markets go through some turbulence, oftentimes, what we see is rationalization to maybe one vendor. So I know you guys have a global presence. I'm curious, are you seeing any of your customers potentially eliminating other vendors that they might be working with, and other regions? I'm just curious if people are really trying to make a more global purchasing decision given what we're seeing in that vertical?

Thank you for your congrats, and thanks for a great question, Brian. It's absolutely a trend that we're seeing where -- and I think I've mentioned this in previous earnings releases that we are seeing a trend of large customers recognizing the value of centralized big data and moving away from doing bits and pieces towards looking at a single vendor consolidated kind of approach. And again, this announcement that we made today is a great example of (inaudible) where they -- it's partially a greenfield opportunity, partially greenfield win, partially a displacement. They were doing some bits and pieces in their various regions but have made a decision at the corporate level to actually deal with a single vendor that can handle their global needs. And that was a big part of, on top of some other things, like technology stack, our ability to handle large global multinationals was a big part of their decision-making process.

So that is an absolute trend we're seeing, and we're ideally positioned to take advantage of that trend.

That's good to hear. And maybe just one other kind of higher-level question. But as we've gone through the pandemic, and we've seen, obviously, some changes in how the go-to-market models work. Is there anything that you've learned in terms of digital investments or sales investments? How to engage with your customers? Any thoughts on how the go-to-market maybe has changed?

No, appreciate it. And absolutely, there's a lot that we've learnt through this process. It's ironically the last conference -- the last time I stayed in a hotel room was at your conference in Orlando just about a year ago now, coming up to a year ago. I'm hoping that the next one I attend with you will be end of the pandemic, since the last one was really the start of the pandemic, but we can remain hopeful in that regard.

But what we haven't learned in a year where travel effectively came to a full stop, MiX is an organization that based a lot of its customer engagement around face-to-face, a lot of travel, not only from senior executives but down to customer-facing salespeople as well, and that's pretty much come to an end. And -- but what hasn't come to an end is that we've continue to build and, in fact, enhanced customer relationships. And we've learnt that we can do a lot more of that kind of stuff more efficiently. And we've put processes in place that are working well in that, I feel like.

So I think we will emerge from this pandemic with a hybrid kind of approach. We -- I guess, a lot of us are looking forward to being able to travel and engage and break bread with customers again, and that's an important part of the exercise. But there's no doubt that from a sales perspective, MiX will continue to evolve its process, will continue to evolve its internal sales systems, lead generation, et cetera, et cetera. And we continue to pour investments into that area, and I think that's going to pay medium- to long-term dividends for us.

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

Thanks so much, Melissa, and thanks 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 at the Raymond James Institutional Investor 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. Thanks, again, for your time.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.