MIX Telematics Ltd (MIXT) 2024 Q2 法說會逐字稿

Good morning, everyone, and thank you for participating in today's conference call to discuss MiX Telematics financial results for the second quarter of fiscal 2024 ended September 30, 2023. Joining us today are MiX Telematics, President and CEO, Stefan Joss; and the company's CFO, Paul Dell.

Following their remarks, we'll open the call for any questions, you may have. Please note this event is being recorded. I'd now like to turn the conference over to MiX Telematics, Chief Financial Officer, Paul Dell, as he reads the company's safe harbor statement regarding forward-looking statements. Paul, please go ahead.

Thank you, and good morning, everyone. Before we continue, I'd like to remind all participants that 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 reconciliation schedule detailing these results currently available in our press release, which is located on our website and filed with the SEC. With that, I would like to turn the call over to MiX Telematics as President and CEO, Stefan Joselowitz. Josh?

Thank you, Paul, and good morning, everyone. It's been an exciting few weeks since we announced our proposed business combination with Powerfleet. This merger of equals will result in one of the largest global providers of connected vehicles, SaaS solutions and I firmly believe that this is the ideal path forward for our organization and shareholders.

In addition to the benefits of a direct Nasdaq listing, which will provide us with significantly increased market exposure and an expanded investor base. The combined entity is expected to unlock further shareholder value through synergistic activities and leveraging our combined best-in-class SaaS solutions to further capitalize on the significant global market opportunity.

I'll dive into more details regarding the transaction a bit later, but let's first review our performance during the second quarter of fiscal 2024. We delivered another strong quarter with record subscriber growth and increased profitability and solid free cash flow. With the macro environment remaining uncertain and volatility persisting across many of our markets, our model continues to be resilient and our balance sheet remains a strategic asset.

We continued to accelerate subscriber growth, adding a record 47,400 subscribers in the quarter, and we expect this trend to continue. Subscription revenue of $32.4 million, which represents 86% of total revenue, increased 10% year over year on a constant currency basis. And I'm pleased to report that our adjusted EBITDA margin expanded by 550 basis points from a year ago. We generated free cash flow of $2.1 million in the quarter, and we anticipate our performance in this regard main positive through the remainder of our fiscal year and beyond.

Our solutions are at the forefront of helping customers address multiple key business issues, including improving safety, energy and cost efficiency and monitoring of ESG initiatives. We continue to see growing global demand for investment into our premium fleet solutions and accelerated demand for our integrated AI video platform from both new and existing customers.

We also expect the future combination with Powerfleet product suite to significantly increase our ability to compete with and acquire new customers in our regions and expand service revenue within our existing customers.

In terms of notable wins and called out from the quarter, Africa continues to be our strongest performance with broad-based sector growth and increasing momentum in the light fleet market. We added some exciting new customer programs that bolstered new subscriber acquisition in Europe, LATAM, and Australia. We also continued to acquire new customers in the US and increased our momentum with the onboarding of the nationwide fast food company. We discuss recent calls.

Whilst the quarter yielded many positives, we were disappointed to receive notification from an energy sector customer that they would not be renewing their contract, which comes to an end in December this year.

On the technology front, we are on track migration and integration of the Trimble FSM, customers to the MiX platform. We should soon be able to leverage the new features and enhancements from this project to enter the construction vertical in other geographies and expand our offerings to existing MiX customers.

During the quarter, we released further enhancements to our AI year telematics offering as well as our data insights and visualization platform. Furthermore, our teams continue to deliver on strategic initiatives that are expected to bolster new customer acquisition in the short term.

Now let's talk more about the proposed business combination with PowerFleet. As I've referenced on prior calls, we've added dedicated teams searching for accretive M&A opportunities over the past year. After evaluating a number of strategic opportunities, we strongly believe that PowerFleet unity strategy and our combined scale perfectly positions us to transform the connected fleet SaaS industry and drive growth globally.

On closing, the combined business would have a starting base of more than 1.7 million subscribers with the ability to cross-sell and upsell additive software solutions to a truly global set of customers. The combined R&D capabilities will accelerate our AI advancement and data integration capabilities.

I'll let Paul, walk through the details of the transactions, that we believe that joining forces with PowerFleet will dramatically accelerate our time line towards stronger growth and scale in the United States and other key geographies, while also providing our combined and loyal customer base, with increased value through a wider product offering.

Organizationally, we see a symbiotic culture. Each organization has a high net employee retention rate with motivated, energized and deeply experienced teams. These are all key ingredients for ensuring customer satisfaction. The best part towards inflation, best-in-class customer experience at the heart of our approach and our unification will be founded on not only maintaining but also continuing to enhance our customer experience.

We will also be very focused on optimizing systems and processes. We expect to reach the best of both businesses to combine and accelerate operational efficiencies. Australian extensive due diligence period and digging even deeper into power its operations over the past few months, we are confident this will be a smooth, an efficient integration process.

The combined management structure, which will see our talented and experienced MiX executives playing high-profile roles will be led by Powerfleets CEO, Steve Towe; and CFO, David Wilson. As stated previously, I intend to retire at the conclusion of this transaction plan to continue as a long-term shareholder of PowerFleet.

I am impressed by what Steve, is accomplished at PowerFleet, since he took the helm in January of 2022. And I would like to reiterate that he has a proven track record of delivering exceptional results for customers, employees and shareholders. His core skill sets are focused around building world-class organizations, driving innovative go-to-market product strategies and successfully integrating accretive acquisitions.

Overall, I am very confident that this is a great opportunity for both organizations to succeed and in today's rapidly evolving marketplace. Scale is critical, we believe doing something this transformative gets us to the necessary scale very quickly and puts us in an excellent position to continue growing market share, while unlocking value for shareholders.

Before I hand over to Paul, I would like to remind everyone that we are scheduled to host both the MiX and PowerFleet investor and analyst in New York next week, senior executives from both companies are excited to present the market overview, unit platform strategy and AI roadmap together with financial targets for the combined business. The event will also be webcast live and subsequently made available to investors under the Investor Relations section of our website. Paul, the call over to you.

Thanks, Josh. Looking first at our financial results for the second fiscal quarter ended September 30, 2023. Our total revenue of $37.8 million grew 11.5% on a constant currency basis. Subscription revenue increased to $32.4 million, representing 86% of total revenue compared to $30.7 million or 87% of total revenue in the same year ago period.

If it's same business, which we acquired in the second quarter of fiscal 2023 contributed $1.9 million and subscription revenue during the current quarter. On a constant currency basis, second quarter subscription revenue increased by 10.4% year over year, of which 2.9% was attributable to the FSM acquisition.

Most of our revenues are derived from currencies other than the US dollar like the South African rand and British pound. The change in foreign currency exchange rates resulted in a 4.7% decline in our reported subscription revenues this quarter.

We added 47,400 subscribers during the quarter and compared to the same quarter last year, our total base increased by approximately [1,74,400] subscribers or 19%. The growth this quarter was primarily in our asset tracking and light fleet categories. In addition to subscription revenue growth, we were pleased to see constant currency hardware and other revenues grow 19% from the second quarter of fiscal '23.

The growth has been driven by a number of our international regions, including Brazil, Europe, Middle East, and Australasia. A Gross margin in the second quarter decreased 110 basis points to 61.6% compared to 62.7% in the same year ago quarter. A subscription revenue margin decreased 250 basis points to 65.4% compared to 67.9% in the same year ago period. And was impacted by accelerated depreciation of [envious for the buses] following the non-renewal of the energy sector customer just mentioned earlier.

Adjusted EBITDA increased 42% to $8.5 million compared to $6 million in the year ago period. As a percentage of total revenue, adjusted EBITDA margin increased by 550 basis points year over year to 22.5%.

Looking at our cash performance, we gained $8.5 million in net cash from operating activities and invested $6.4 million in capital expenditures leading to free cash flow of $2.1 million compared to cash burn of $5.1 million in the prior period. We ended the quarter with $29.5 million in cash and cash equivalents.

Looking at our forecast payment schedules and investing activities, we continue to expect significant cash to be generated in the remainder of the 2024 fiscal year.

Now I wanted to recap the details of our proposed business combination with PowerFleet. The combined entity will continue to operate under the PowerFleet brand umbrella utilizing their current tickets symbol PWFL on Nasdaq. In addition, the combined company plans to have a secondary listing on the JSE in South Africa.

To ensure that this will be a smooth transition for our South African based shareholders. This is going to be an all-stock transaction with our shareholders exchanging 100% of the outstanding ordinary shares, including MiX ordinary shares represented by MiX American Depositary shares.

For consideration consisting of PowerFleet common shares payable at closing. The number of parties common shares to be issued as consideration will be based on the post-transaction ownership structure. We have our current MiX shareholders will own 65.5% and current policy shareholders will own 34.5% of the combined entity immediately following the closing of the transaction.

The exchange ratio assumes all MiX issued ordinary shares, including those represented by MiX ADSs of exchange for common shares PowerFleet. In connection with the transaction, PowerFleet and MiX are positioned to secure approximately $75 million in incremental debt, inclusive of $60 million in senior secured debt, which the companies anticipate will be fully executed at or before closing.

The proceeds from the refinancing of the combined company's balance sheet will be used to redeem in full the outstanding passive convertible preferred stock held by affiliates of Abriy partners. Transaction related expenses will be paid from cash on the balance sheet. Given the current sources of positive cash generation, we've also structured the transaction so that the go forward path balance sheet includes new Israeli Shekel and South African rand denominated debt, providing a natural FX for USD denominator to investors.

We continue to expect that the transaction will close in the first quarter of the calendar '24 year. The transaction close is contingent upon shareholder votes from each respective shareholder base with MiX Telematics requiring 75% of shareholder approval and PowerFleet requiring a majority shareholder approval as well as other customary closing conditions. We look forward to issuing more details around the shareholder vote in due course.

Before, I turn the call over to the operator for Q&A, I wanted to touch on our outlook for fiscal '24. At the combined Investor and Analyst day next week, we plan to provide further financial details of the combined entity, which will include high-level revenue and EBITDA targets.

On a stand-alone basis, we'd like to advise that the loss of the energy sector customer referenced earlier is expected to provide headwinds in the second half of the fiscal year, while we replace the revenue with new customer acquisition. We now anticipate that both constant currency, organic subscription revenue and ARR growth will be in the mid-single digits with the full year adjusted EBITDA margin approaching the mid-20s.

Overall MiX Telematics expects to continue to maintain a disciplined approach to growth with a focus on delivering strong profitability and cash flows while progressing towards Rule of 40 performance in the medium term.

This concludes our prepared remarks. And I'll now hand the call back to the operator for Q&A.

We will now begin the question and answer session. (Operator Instructions)

Matt Pfau, William Blair.

Great. Thanks for taking my questions. First wanted to ask on the energy customer that didn't renew any more details that you can provide as to why that customer elected to not renew?

Thanks, Matt. The primary reason is that they want a bring your own device ELD solution. We don't currently have that it is on short-term road map that our current VOD solution requires a proprietary in-cab device, which didn't suit it current requirements.

Okay. Got it. Is this something that's unique to this customer, you hearing the same sort of requests from other customers as well?

And it shouldn't be appears specific to this particular customer, of course, is as I said, it is on our short-term roadmap. So we certainly expect to launch [app-based] for refund based ELD solution within this coming year. They are trade-offs that come with it so it's not as robust solution. So there are certainly significant benefits with a proprietary device, but it's certainly something that we know that we need on our product lineup and so we're making the investments to deliver.

Got it. And then wanted to ask on the light fleet segment and that you called out some strength there. Maybe just some more details on what's driving the strength and likely excitement?

It's really a trend that's been apparent in our business for some time, we've got particularly in our African operations, some new channels to market, which are reaping good rewards from the investments that we're making and we're certainly pleased with the traction that we're seeing and in building a large fleet, subscribe to this.

Great. Thanks, guys. Appreciate it.

Thanks, Matt.

(Operator Instructions) Alex Sklar, Raymond James.

Thank you. Josh, you called out new go-to-market efforts across Europe, LATAM, and Australia. Can you just elaborate a little bit more what you're doing there, what's incremental versus before?

No, Alex it's a what we're doing is we're seeing, as I think I've referenced on earlier calls, we've seen a strong top line development in most of our regions, and we are pleased with the execution that we're seeing, particularly in those territories and of course, I've already referenced the strong growth in our African business, but to the teams there of -- I'll show you solid the conversion of pipeline into the committed contracts and paying subscribers. And I think the takeaway is that we will continue and are continuing to build pipeline. But most importantly, we can continue to convert pipeline into contracts, and that's pleasing.

All right. Great. I don't know, apologize to want to take this one, but just as you operate kind of ahead of the merger and there's going to be a lot of differences perhaps in between different strategic priorities, operating combined, but any change in priority with MiX Telematics stand-alone back towards growth or should we expect a similar level of investment cadence and focus on profitability as if you were standalone? I think, I heard in the commentary positive free cash flow to continue. So I just wasn't sure if there's anything at the margin.

Yeah, Thank you. We should meet, as you've heard from me, very excited about this transaction, I think it's exactly right for our business and our stakeholders. But it's not done until it's done so we have a regulatory approvals process that we're in process with ultimately, our shareholders on both sides, we'll decide on the deal. In the meantime, I've stressed to my team that it's business as usual. We have to continue executing on the objectives that we set ourselves at the beginning of this fiscal year as a stand-alone business and trying to participate as far as possible and to stay extremely focused on those objectives.

As you can appreciate a transaction of this nature is distracting and we're trying to keep as far as possible our operational team and insulated from any distractions, and the firmative message from me is business as usual and execute on our plans and continue to build our profitability and our cash flows.

All right. Great. And then maybe one last one for me, just commentary seems like a really another strong quarter of visionary eyes, the cross-sell you called out accelerating demand. Is this at all tied to any particular geos that across the customer base? And then if you can just update us like how early are we in terms of adoption of this solution?

Yeah. It's pretty broad-based we're certainly seeing demand for our [video AI] solutions across the globe. And that's pleasing, there's no doubt we have a significant customer base that enables us to upsell, and with certainly actively involved in those efforts within that base, while at the same time working to acquire new customers, I would say in terms of where it is in the product last cycle it's pretty early.

So our exposure to our heavy camera solutions within our existing customer base is still a very relatively a small percentage of that base, which gives us a pretty long runway of opportunity for us for several years to come as we currently see things.

Thank you, [all for the color]

Appreciate it. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to you, Stefan Josh, for any closing remarks.

Thank you, Dave. Appreciate your assistance, and I would like to take this opportunity to thank everyone for listening to today's presentation. As a reminder, we are holding our joint Investor Day in New York next week. We have many exciting things to share regarding the business combination between MiX Telematics and PowerFleet. And I look forward to seeing you there. Thank you and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.