MIX Telematics Ltd (MIXT) 2021 Q2 法說會逐字稿

Thank you and good morning, everyone. We appreciate you joining us to review MiX Telematics' earnings results for the second quarter of fiscal year 2021, which ended on September 30, 2020. Today, we will be discussing the results announced in our press release issued a few hours ago.

I'm John Granara, MiX’s 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 and 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 is 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 will 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 second quarter performance showed some modest signs of improvement compared to the first quarter and was highlighted by profitability and cash generation that were ahead of our expectation. Overall, our results remain under pressure due to the challenges presented by COVID-19. And on today's call, I will provide some more detail on what we are seeing in various parts of our business.

I will quickly summarize our financial and operational results for the second quarter. Subscription revenue was $27.6 million, a 7% decrease year-over-year in constant currency. Adjusted EBITDA was $8.9 million at a 29% margin, which was well ahead of our expectations and reflects good cost discipline throughout the business. We ended the quarter with 767,000 subscribers, which was a decline of 20,000 compared to Q1.

While new subscriber additions continued to be well below historical levels, we did see some sequential improvement in our premium fleet and light fleet segments. The gradual reopening of economies around the world is positively impacting fleet activity in most of our end markets, where miles traveled are nearly back to pre-COVID trends. However, the high level of uncertainty that remains in global economies is still elongating sales cycles.

Fleet size contraction continues to be a headwind to the business, although we showed improvement compared to the first quarter. In particular, light fleet and premium fleet performed comparatively better, while asset tracking had an increase in contraction, largely from our hard-hit car rental customers. It's important to note that even during this period of subscriber contraction, our large-customer retention rate remains above 99%.

From a demand perspective, we do see continued growth in our pipeline of opportunities, particularly amongst larger fleets. We believe there is a clear desire on the part of many large fleet operators to manage the assets more efficiently and safely as their businesses return to normal. A comprehensive telematics platform can provide significant competitive differentiation and tangible ROI for any fleet operator. While it is difficult to forecast when this will translate into faster sales growth for MiX, we are confident it ultimately will.

I would like to take a moment to provide an update on what we are seeing in some of the other key verticals. Oil and gas, which is approximately 25% of our overall business, continues to be our most challenging market and is still experiencing subscriber contraction due to lower oil prices and subdued end market demand due to the pandemic's effect on travel. To give you an idea of the unique dynamics we are seeing in this industry, miles driven by our customers, which is a proxy for activity level, are still down 30% to 35% from pre-COVID levels. This is substantially lower than any other vertical that we operate in.

We have seen fleet contraction in this vertical in the first half of the year, though not as severe as we originally anticipated. We believe this is largely a function of timing. And we do expect to see additional contraction in oil and gas in the second half of the year that will bring the full year roughly in line with our expectations.

We are encouraged by the ongoing conversations we are having with our customers. We signed a number of renewals in the quarter that extend our exclusive contracts for the next several years. These ongoing commitments are an important indication of the strategic value MiX provides for these energy customers.

I want to reiterate our confidence that we fully expect that this sector will rebound and return to growth for MiX. We have been through multiple cycles similar to this in our history. And as macro conditions improve, we would expect many of these dormant vehicles to be returned to service, which will drive increased revenue for us.

We started to see a rebound in the bus and coach vertical in the second quarter. The broader reopening of the global economy picked up throughout the quarter, and we saw a steady, gradual improvement in this market. Usage trends have rebounded to 85% to 90% at pre-COVID levels, which was well above the 40% decline we saw at the height of the pandemic. This is driving quarter-on-quarter growth in this segment as fleets return to the road and our near-term concessions made to customers expire.

Most of our other verticals are tracking the broader economy. The number of trips improved throughout the quarter and are largely back to pre-COVID levels, which should have a positive impact going forward. This is encouraging and helped drive some positive new sales activity.

One example from the quarter was a new premium fleet customer win in Australia with a large utility company. This customer has started implementing MiX solutions to its 800-vehicle fleet, and full implementation is expected in this fiscal year. The customer loved MiX' focus on driver safety and our track record of service and reliability.

We also continue to make progress with our growth initiatives, including investments in our product portfolio. Our development teams have worked remotely for the past 2 quarters with great effect. We have completed a record number of system releases and continue to deliver enhancements to users of our SaaS platform, integration services and mobile apps. We recently announced the availability of a new flexible scoring module, which gives customers the ability to score their drivers using a virtually limitless choice of metrics, including efficiency, productivity and compliance and not only the traditional safety factors.

We were excited that MiX Telematics was named as a leader by ABI Research in both the innovation and implementation categories of its Commercial Telematics Vendors study, the results of which were published in September 2020. In the individual categories of the study, MiX is delighted to be named in first place in terms of geographic coverage and vehicle driver and cargo monitoring. MiX is also pleased to be top ranked in the categories of user interface and user experience.

From a cost and profitability perspective, I am very proud of how the entire team pulled together to operate more efficiently while continuing to deliver exceptional customer service and investing in our strategic growth areas. I strongly believe that the quality of service we are providing to customers and spirit of partnership during this difficult time will further cement relationships, which will positively impact our business for years to come.

The cost-saving initiatives undertaken early in the year have reduced our operating expenses by approximately 10% year-over-year and enabled us to deliver better-than-expected profitability. Adjusted EBITDA margin of 28.7% was well ahead of our expectations and only modestly down year-over-year. This is helping to drive impressive free cash flow of $8.8 million, and we now have nearly $34 million of net cash on our balance sheet.

This combination enabled us to once again declare a Q2 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.

Turning to the second half of the year, the improvement in activity in many of our verticals is encouraging and helping to drive new sales. That said, it's too early to tell when that will translate into sales activity that is back at pre-COVID levels. Similarly, based on current trends, we don't anticipate the short-term improvement in oil and gas market conditions, and we do expect further subscriber contraction in the third quarter.

We are still managing the business under the assumption constant currency subscription revenue could decline between 10% to 20% for the full year. However, based on our performance in the first half and expectations for the rest of the year, we think it is unlikely we will finish the year in the worse half of that range.

From a profitability perspective, we now expect adjusted EBITDA for fiscal 2021 will be in the low to mid-20s compared to our prior expectation of 20%-plus. While we have had an exceptionally good profitability performance in the first half of the year, we would not necessarily expect the same margin performance in the second half. We do expect revenue will decline further, and we are not currently planning on material changes to our cost structure, although that is something we will continually evaluate. Our profitability performance in FY '21 has been a bright spot for MiX and reinforces the inherent strength of our business model. As we look beyond the current situation, we remain confident our business can grow subscription revenue 15% to 20% and deliver adjusted EBITDA margins of 30%-plus in a normalized economic environment.

To summarize, MiX’s second quarter performance showed some modest improvement amidst the challenging economic environment. We believe we are doing a very good job managing the business through the current situation, while ensuring we are best positioned to achieve our long-term financial objectives once the economy improves.

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

Thanks, Joss.

I'd now like to turn to our financial results for Q2. Please keep in mind that all figures refer to the second 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 15% against the U.S. dollar compared to the second quarter of fiscal year 2020, contributing to a 6.9% decrease in reported subscription revenues and to a 6.5% reduction in reported total revenue.

Starting with the P&L. Total revenue came in at $30.9 million and subscription revenues were $27.6 million, a decrease of 9% and 7% on a constant currency basis respectively.

The decline in subscription revenue was primarily due to contraction in the company's subscriber base. We ended the quarter with over 767,000 subscribers, a decrease of 3% year-over-year and quarter-over-quarter. Substantially all of the decrease in the quarter related to the churn attributable to our asset tracking business, which are our lowest-ARPU subscribers. This mix shift caused ARPU to slightly increase in the quarter. Hardware and other revenue of $3.3 million were down 27% year-over-year.

Moving on to gross margin and operating expenses. Gross margin was 66.7%, up 60 basis points from last year. We were pleased with our gross margin performance, which was driven by meaningful improvement in subscription margin, which was over 72% in the quarter.

Operating expenses before restructuring charges were $15.9 million and were down 10% compared to prior year. Our cost performance reflects the cumulative impact of the actions we have taken to streamline expenses over the past year. We have currently implemented most of the targeted cost actions contemplated in our operating plan, though we continue to evaluate the business and are prepared to make additional changes if conditions warrant.

Adjusted EBITDA was $8.9 million or 28.7% of revenue compared to $11 million or 29.9% of revenue last year. We had a strong margin performance in the quarter and have performed above our expectations on this front so far year-to-date.

Non-GAAP net income for the quarter was $3.2 million, down from $4.5 million in the year-ago period. The company's effective tax rate was 22% and compared to 48% in the second quarter of fiscal 2020. Ignoring the impact of foreign exchange gains and losses, the tax rate was 28% compared to 30% in the prior year.

Turning to the balance sheet, which remains strong. We ended the quarter with $33.8 million of cash and cash equivalents compared to $18 million as of March 31, 2020. We have significantly strengthened the balance sheet in recent quarters, nearly doubling our cash position since the beginning of the fiscal year.

Our increased cash balance is being driven by very strong cash flow performance. In the second quarter, we generated $11.4 million in net cash from operating activities and made $2.6 million investments in capital expenditures, leading to a free cash flow of $8.8 million. The use of cash includes investments in in-vehicle devices of $1.6 million.

Before I wrap up, I would like to provide some additional perspective on how we expect the year to play out. We've done an excellent job executing against our strategic objectives for fiscal 2021. Profitability is tracking well ahead of our initial expectations, and we have significantly strengthened our balance sheet while still investing in our long-term growth initiatives. We expect further subscriber contraction in the third quarter, primarily driven by oil and gas and asset tracking subscribers. We believe our disciplined performance this year demonstrates the resiliency of our business model and sets us on a path to deliver

(technical difficulty)