MIX Telematics Ltd (MIXT) 2020 Q2 法說會逐字稿

Greetings. Welcome to the MiX Telematics Fiscal 2020 Second Quarter Earnings Results Conference Call. (Operator Instructions)

Please note, this conference is being recorded. I will now turn the conference over to your host, John Granara, Chief Financial Officer. You may begin.

Thank you and good morning, everyone. We appreciate you joining us to review MiX Telematics' earnings results for the second quarter of fiscal year 2020, which ended on September 30, 2019. Today, we will be discussing the results announced in our press release issued a few hours ago.

I'm John Granara, MiX Telematics' Chief Financial Officer; and I'm joined 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 also make forward-looking statements relating 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 20-F and other SEC filings available on the Investor Relations section of our website.

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 SEC.

And with that, let me turn the call over to Joss.

Thanks, John. I would also like to thank you all for joining the call today. MiX's Q2 results highlight another quarter of double-digit subscription revenue growth, continued strength in subscriber additions, as well as adjusted EBITDA margin expansion and positive free cash flow. We remain confident that our diversified global footprint and breadth of our core product portfolio can support our attractive combination of meaningful growth and substantial profitability.

Turning to a summary of our second quarter and first half fiscal 2020 performance. Our subscription revenue of ZAR 471 million or USD 31.1 million grew over 10% year-over-year on a constant currency basis and was in line with guidance. We added 22,600 net new subscribers during the quarter. This increases our base to more than 789,000 and reflects our sixth consecutive quarter of double-digit net growth. The growth in subscribers this quarter was driven by strength in our light fleet and asset tracking businesses.

Our Africa team continued to perform well despite a challenging economic environment, with subscription revenue up 9.8% year-over-year and adjusted EBITDA margins of 44.2% for the first half of fiscal year 2020. As our largest business unit, Africa continues to demonstrate the economies of scale that we believe are achievable in all of our business units as they grow towards critical mass.

Our Americas business performed below our expectation in the quarter and the first half of the year, although subscription revenue grew 11% constant currency and adjusted EBITDA margins of 42.3% remain strong.

As we mentioned on our last earnings call, we have been seeing some more cautious buying behavior amongst some of our multinational energy customers, driven by oil price volatility and the global trade environment. While we continue to add subscribers and generate top-line growth from this vertical, we have seen some new customers becoming more cautious and slower expansions from certain existing fleets. In one instance, we have seen a modest fleet contraction.

A core part of our growth strategy is to expand our vertical diversity in the U.S. and abroad with our MiX Now offering. MiX Now subscriptions are gaining momentum and we are in the refining stages of our go-to-market effort. This includes launching our digital marketing strategies and other lead-generation tactics. Overall, we continue to be excited at the opportunity in the light fleet market.

In the Americas, we intend to accelerate our diversification strategy by increasing our investments in sales and marketing across all product categories and verticals. (inaudible) continues to outperform in a very challenging socioeconomic environment. Subscription revenues increased 22% constant currency year-over-year, as adjusted EBITDA margins grew to 42.9% for the first half of fiscal year 2020, up from 40.3% in fiscal 2019.

During the quarter, we secured some notable wins, which included signing new customers as well as extending or expanding existing contracts. Grupo Logistics, a leading Mexican logistics supplier, adopted our premium fleet solution to enhance compliance across its transportation fleet. This customer is one of the first logistics companies in Mexico to comply with NOM-087, which is similar to the ELD mandate in the United States.

In the U.S.A., we are pleased with the competitive displacement of the Wireline Group with its fleet of nearly 400 heavy and light-duty trucks and trailers. The flexibility of our ELD solution and our ability to meet all of their compliance needs was central to their decision.

We signed a meaningful expansion with a bus and coach customer in Brazil, who added an additional 500 vehicles to its current base of 1,250. This customer has realized improvements in driver behavior, increased efficiencies and reduced fuel consumption through its use of MiX solutions.

A year ago, we announced that Bpost, the industry-leading Belgium postal service, was adopting our premium fleet solution for over 1,000 vehicles. We are now pleased to announce that they will be adding an additional 470 vehicles to our service, bringing the total to nearly 1,700 subscriptions.

Finally, a leading integrated energy company based in Australia is extending its contract with MiX, which was originally signed in 2011, for an additional 3 years. This extension secures more than 800 existing subscriptions to MiX's premium fleet management solution, including value-added services such as MiX Vision.

Some of the key competitive differentiators for MiX are our global footprint and the quality and breadth of our product offering. We continually leverage the power of our international footprint and broad product portfolio of asset-tracking, light and premium fleet subscribers to generate diversified revenue streams. The breadth of our product mix, as well as our go-to-market strategy in different regions, will cause our ARPU growth to fluctuate from quarter-to-quarter. For example, our strong performance with our light fleet and asset-tracking products caused our blended ARPU growth to moderate this quarter.

We are also seeing the benefit of our bundled deal strategy in premium fleet, which is beginning to generate meaningful cash flow. We generated ZAR 50 million in free cash flow in the first half of fiscal 2020, up 35% over the first half of fiscal 2019, even after investing ZAR 122 million in in-vehicle devices for bundled contracts.

During the quarter, we repurchased the equivalent of approximately 550,000 American Depositary Shares for $7.9 million under our general share repurchase program. We continue to actively identify and evaluate possible acquisition opportunities, however, we believe buying back our own stock at current levels is also another reflective way to generate shareholder value.

Turning to the second half of the year. While we are performing well in many aspects of the business, the combination of a more muted outlook of some of our larger customers and the longer sales cycles we are experiencing is resulting in a more cautious near-term outlook. For some of these customers, the increasing uncertainty from global trade tensions is leading to longer sales cycles, as companies defer decisions. Even with these challenges, we still expect to generate healthy subscription revenue growth.

John will provide more detail later. But we are modestly reducing our fiscal 2020 total and subscription revenue guidance and adjusted EBITDA margin guidance. Our margins in the second half of fiscal 2020 will reflect the impact of modestly lower subscription revenues and continued investment in the business primarily in our Americas sales organization.

So in summary, our first half of fiscal 2020 positions us for a solid year based on our unique global presence and the strategic investments we have made over the years. Our updated outlook reflects additional challenges and uncertainties in some of the more macro-sensitive verticals. We expect to deliver another year of revenue growth, 30% plus adjusted EBITDA margins and improving free cash flow. We are confident we can deliver even better results over time, as headwinds in the oil and gas market subside and we further execute on our diversification strategy.

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

Thanks, Joss. I'll start by first reviewing the financial results for Q2 and then I will discuss our outlook for Q3 and the full fiscal year. Please keep in mind that all figures refer to the second quarter 2020 and all comparisons are for the year-over-year changes, unless I say otherwise.

Starting with the P&L, total revenue came in at ZAR 538 million. Of this total, subscription revenues were ZAR 471 million, up 12.2% or 10.7% on a constant currency basis and in line with our guidance range. Subscription revenue continues to trend up on a year-over-year basis towards our long-term goal and now represents 88% of total revenue.

This strong performance was driven by the ongoing positive traction from a broad and diverse portfolio of subscribers across all categories and geographies. We added more than 22,600 subscribers in the quarter and ended with a base of over 789,500, an increase of 11% year-over-year. Hardware and other revenue of ZAR 67 million was flat sequentially and down 12.5% year-over-year. Last year, hardware revenues were higher due to strong orders in our European business.

Our gross profit margin was 55.5% down 230 basis points from the second quarter last year. Gross margin decline was primarily the result from a higher mix of hardware sales that went through our third-party dealer distribution channel.

Subscription margin year-to-date was greater than 70%, consistent with prior year. As a reminder, gross profit includes depreciation charges related to in-vehicle devices and high-value peripherals used in certain of our bundled fleet contracts. These contracts generate higher ARPUs, and as they go through contract renewal cycles, are expected to drive an increase in gross profit margins which we expect to trend up towards 70% in the longer term.

Operating expenses before share-based compensation were 47% of total revenue compared to 50% of revenue in the second quarter last year. The 300 basis point reduction in operating expenses as a percent of revenue highlights the operating leverage in our business. As we discussed, we are planning to make a strategic investment in sales and marketing. We expect to see the associated expenses ramp in the second half of the year.

Recall that our G&A costs include R&D costs 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.

Adjusted EBITDA increased 12% to ZAR 172 million or 31.9% of revenue, a 110 basis point year-over-year improvement. We are pleased with the continued improvement in our adjusted EBITDA margin, which demonstrates our ability to invest for growth while successfully leveraging a return on our historical investment. Keep in mind that in the short term, we expect to see some margin fluctuation as we ramp up our strategic investments in the second half of this fiscal year.

Adjusted earnings for the quarter were ZAR 67 million, or ZAR 0.12 per diluted share, which was up from ZAR 61 million or ZAR 0.10 per diluted share. The effective tax rate for the quarter was 50.3% compared to 37.7%. The tax rate which is used in determining adjusted earnings was 30% compared to 29.4%. We have included a reconciliation of adjusted earnings in the financial tables which accompany the press release.

Our balance sheet continues to be very strong. We ended the quarter with ZAR 292 million, or $19.3 million of cash and we have no debt. We believe our balance sheet is a strategic asset for the company and provides us with the flexibility to pursue opportunities to create shareholder value.

From a cash flow perspective, we generated ZAR 138 million rand in net cash from operating activities and invested ZAR 98 million in capital expenditures, leading to free cash flow of ZAR 39 million. The use of cash includes investments in in-vehicle devices of ZAR 71 million, which is driven by the demand for our bundled offering. We generated ZAR 50.4 million of free cash in the first half of the year, which is up 35% compared to the same period last year.

Now turning to our financial outlook. As we have discussed previously, 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. The area of revenue where we have the highest level of visibility and predictability is the subscription revenue, which as we have discussed is the largest, fastest-growing and highest margin component of our business.

Before moving on to our guidance numbers, a few quick comments. First, as we talked about earlier in the call, our Q2 results were in line with guidance. As Joss mentioned, we are seeing some more cautious buying activity in fleet rollout schedules from certain customers. While we still maintain a strong pipeline of firm orders and sales opportunities, we are expecting a similar dynamic in the second half of fiscal 2020.

For the full fiscal year 2020, we are currently expecting total revenue of ZAR 2.119 billion to ZAR 2.144 billion and subscription revenue of ZAR 1.886 billion to ZAR 1.901 billion, which represents constant currency year-over-year growth of 9.3% to 10.2%.

Adjusted EBITDA is now expected to be ZAR 650 million to ZAR 665 million and adjusted EPS of ZAR 0.434 at the midpoint of the guidance range. Based on an exchange rate of ZAR 14.58 to the U.S. dollar, this translates to USD 0.744 per ADS. This guidance is based on 570 million diluted ordinary shares and an effective tax rate of 28% to 29%.

For the third quarter of 2020, we are targeting subscription revenues in the range of ZAR 475 million to ZAR 480 million, to represent year-over-year growth of 7.8% to 9% on a constant currency basis.

In summary, MiX reported solid second quarter results that demonstrate the benefits of our diverse strategy. We are focused on executing on our strategic priorities to ensure the company is best positioned to deliver even better financial results when the macro headwinds in certain markets subside.

I will now hand it back over to operator to begin the Q&A session.

(Operator Instructions) The first question is from Brian Peterson of Raymond James.

So Joss, I appreciate all the color on the macro. There were some comments made on oil price volatility and global trade. I'm curious if maybe more of the cautious buying, is that specifically in the oil and gas vertical or have you seen anything on the premium fleet side that extends into other vehicles as well or others areas as well. Can you talk about that?

It [should mean], I think, broader than purely oil and gas. So as far as our multinational customers are concerned, I think there's a general concern around slowing global growth. Of course as far our business is concerned, the impact is much more observable within the energy sector, because it represents 25-26% of our business. So of course, it's magnified from that perspective.

Got it. And I think the numbers still came in above our model on subscription revenue and subs. And obviously you referenced the light fleet and the asset tracking is doing pretty well. Can you talk about what the mix is between premium fleet, light fleet and asset tracking and maybe the expectations for those businesses as we think about the second half of the year?

Sure. As you know, the ARPU is very different for our fleet primary category, so our premium fleet ARPU is the highest, then our light fleet and then obviously asset tracking. So we have a slowdown in premium fleet, so our premium fleet portfolio performed reasonably well during the quarter, but it was certainly below where we were hoping it could be at the start of this fiscal year. So that has an overweight impact on generating subscription revenue. Our fastest performing vertical or portfolio in the quarter we just reported was our light fleet portfolio, which is globally doing nicely for us. And it's not by accident. We're putting a lot more effort into our light fleet portfolio. John, correct me if I'm wrong. I think we grew it sort of mid-teens in our light fleet, 16%, 17%, something like that?

That's correct. That was our fastest-growing segment or category year-over-year. And with relation to the spread of the revenue coming from those, it is still consistent, Brian, with what we reported in December at the Investor Day. So it's about 63% premium fleet, 20% light fleet and 17% asset tracking. So that's part of the reason why you haven't seen meaningful movement in the ARPUs, because those percentages have maintained relatively the same.

Got it. Understood. And maybe one more from me, just on the new strategic investments you guys referenced. And I think there's going to be a ramp-up in sales and marketing. Any help on understanding if that's going to be limited to the back half of the year or if you're thinking about that continuing into next year as well?

Yes, we could say, we're going to…

Yes, we do expect it to rise generally as a percentage of revenue. But John, maybe you want to just fill in some more detail around it.

We're going to maintain the same balanced approach to the top-line growth and profitability as the company has continued to maintain in that disciplined manner. And our annual guidance still supports that as we're still expecting to expand our EBITDA margin year-over-year, even with those investments that we're planning to make in the second half of the year. So we are planning to ramp up. I would categorize those investments in 2 different categories. You have one is which going to be ongoing, recurring expenses; and two, which will be onetime incremental investments we'd be making. And so from that perspective, I would say that we're going to continue expand and work on expanding our profitability at a faster rate than revenue. That will always be our framework for long-term value creation. But we would expect a portion of the increase. So I think what we've said is 10% to 11% is probably the right long-term model for now.

The next question is from Matt Pfau of William Blair.

I wanted to ask on the investment that you're making in sales and marketing in the Americas. So obviously that segment performed as you said, below your expectations. And that's also an area where you're seeing some of the pressure from these macro headwinds. So I'm just trying to understand where that investment in sales and marketing is going in the Americas, because I guess clearly you must see something that you like there in order to decide to increase that investment.

Yes, we do see something that we like and we still believe that this will be a significant region for us that over time will grow organically faster than some of our more mature businesses. So the investments that we are making are really, as I mentioned in the call, are really across the board, but should be focused on our diversification efforts. So we are putting more people in place in both our premium fleet and light fleet efforts. We believe we've got enough in place in obviously our energy sector and that's extremely well covered. But in terms of areas where we focus on diversifying, we certainly are going to be focusing our efforts and increasing resources as far as that's concerned. And then there's over and above people, there's another area where we're going to be increasing investment and that is on our lead generation tactics. So on the digital marketing side, moving into the second half of this year, we intend to be ramping up our investment as far as that's concerned. And we expect to get a decent return on investment ultimately on that. So that's the direction we're heading.

Great. And then I wanted to follow up on the 2 reasons that you sort of cited for the reduced guidance was the longer sales cycle and then a more muted outlook from some large customers. So those large customers that you're referencing with the muted outlook; is that meaning they're contemplating reducing fleet size, they're just not expanding as fast as you thought? Just some more detail on what's behind that comment would be helpful.

So certainly it's a combination. We've certainly seen whilst we grew in this vertical, as I mentioned in this quarter, it was compared to the last couple of years, much slower growth. So fleet expansion was much more muted. And also reference we have seen some early signs of some contraction. It's not widespread and we'll keep an eye on that closely. But we did finish the quarter with net growth, but growth that was below we were expecting it to be when we planned our year out at the beginning of the year.

The next question is from Mike Walkley of Canaccord Genuity.

Joss, I just wanted to kind of follow up again on the North America market. Can you share with us what you guys are learning from the early stages of MiX Now and how you see that opportunity ramping as you add more salespeople to the market? And then a separate question on the North America market; as you look to grow in that region and invest in sales and marketing, what verticals do you see as most ripe for your solutions to gain share outside of your strong share in the energy market?

Sure. Certainly, as I mentioned, we're heading in the right direction with MiX Now. I'm not yet in a position to report that it's exceeding our expectations, because we're not there yet. But I'm also pragmatic in that this is still a learning curve for us and we are seeing good momentum. So it is certainly heading in the right direction. But we've got more work to do and I will mention that again, I wouldn't expect in any event for it to be a needle mover in this fiscal year. So it's not the cause of where we are right now as far as our current quarter is concerned. As we move forward, we're intending to invest more in that particular area and that's not only in more people. It's certainly a big focus on improving our lead generation, which again is something that we're increasingly getting a handle on.

Great. And just building on that, as you look to growth opportunities, you highlighted a strong balance sheet. Do you think for your solutions to get into, say, new verticals within the Americas market that an acquisition is the fastest way to get there? Or do you see with expanding salesforce just some areas that are ripe for your solution to move into?

Yes, we should be ramping up the pace at which we evaluate opportunities and it's no secret we'd love to do a deal. But it's also no secret we're not going to do a stupid deal in terms of scaling up our U.S. business. So at our current valuation levels, it makes it difficult for us to get our heads around a deal. And we're not going to force anything. So in the interim, we believe that we're awash with organic opportunities to improve the growth rate in this business and we've certainly got some historical support that we can get up well into the double-digit growth rate. And I'm not sure necessarily that we could sustain the 40% kind of growth rate that we were seeing last year. But we can certainly do, in our view, a lot better than we're doing at the moment organically. So we will remain open to opportunities. We've got John on board now, whilst still retaining Paul on our team, which gives us a lot more capacity to work through a pipeline of opportunities, but we're not going to force anything.

Last question from me and I'll pass the line. You've certainly seen a tough industrial market. A lot of industrial companies are slowing truck buying and upgrading fleets, just given some of the macro uncertainty you highlighted. But you did highlight in the quarter displacing some customers and some customer wins. Are you seeing any change in the competitive dynamics in any regions that are benefiting MiX as you guys are still growing quite nicely compared to some others in the group?

Thanks, Mike. There's certainly been a lot of changes in the playing field, certainly from an M&A perspective, so a lot of ownership changes. And whilst that hasn't yet resulted in any conclusive change in the environment on the battlefield so to speak, we do sleep with one eye open and we believe that this consolidation ultimately will have an impact on how people compete in the market. But as things currently stand, there's still a very fragmented market and I believe it probably will remain that way for some time. We need to focus on our many strengths and that's what we do. And we continue to be successful in winning new business, not only greenfield business of which there's a lot of; but we continue to be as successful in displacing some of our competitors, which is always exciting from our perspective. And the deal that we referenced is in the energy space. So I just want to make that closing point that despite the fact that we're in a tough environment in that particular vertical, we're not overexposed to it. We're still expecting to grow on a healthy basis this year. It is 26% of our business. And despite the fact that it's a vertical that's going through some tough times, we're still signing new business in that space. So that's an exciting sign.

(Operator Instructions) The next question is from David Gearhart of First Analysis.

Joss, you just mentioned exposure and I wondered if you could give us a quick recap on MiX's current exposures beyond energy, so we could better appreciate the macro environment and what it could mean for MiX.

Certainly, if I understand the question correctly, the kind of vertical exposure that we have?

Yes, absolutely.

Yes, so energy is still by far our largest vertical in the high 20s, around about 26% of our subscription revenue. We've then got transport and logistics, which is in the high teens. And below that, we've got a lot of different verticals which are really around in the single digits, some of them in the high single-digits and some of them in the low single-digits: bus and coach, construction, mining, et cetera, et cetera. So we've got a very well-diversified business. We look at this quarter that we just reported on. We added close to 23,000 new subscribers and by far the bulk of that was really from smaller fleets in verticals outside of our 2 big ones. So it is a sign of the health of our business and the way we have built a well-diversified business. I will close on that question by saying, we do recognize in the United States we are overexposed to energy, because it still represents 90% of our business. A few years ago it was 100%. But we need to continue to actively -- which we are doing -- invest in initiatives to improve that spread.

Okay. And then on the gross margin side, I think it's been consecutive quarters where you'd kind of been at that 65% range. And I think in the prepared remarks it was mentioned that sales of hardware and exposure to the indirect channel. Is the mid-60s what we should consider the new normal for modeling purposes? I know in the past, upper 60s was contemplated. I just wanted to review that.

Sure. So I think in the short term, I think 65. And I think the last call we did say about 66% would be the right level for this year. In terms of long-term modeling, we're still expecting expansion in the gross margin line. That's going to come from a couple of areas. One is subscription revenue continues to increase as a percentage of our total revenues, since we're now up to 88%. If that continues to increase, we'll get some natural expansion there. Secondly, we've talked about the bundled strategy and how when those contracts go through renewal cycle, we'll see some expansion there as well. And our stated long-term objective is to get to 70% for the total gross margin. So we still think that holds true and we still think that's an achievable goal. That being said, for this year it's probably 66% and we'll see that natural uplift and expansion begin to happen next year and the years after.

We have reached the end of the question-and-answer session. I will now turn the call back over to Stefan Joselowitz for closing remarks.

Thank you. And I'd like to thank you all for joining the call today. John and I will be presenting in New York City early next month at the Raymond James Conference. So hope to see some of you there. Appreciate your time. Thank you.

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