MiX Telematics Limited [MIXT] Conference call transcript for 2021 q4
2022-02-03 13:53:05
Fiscal: 2022 q3
Operator: Greetings and welcome to the MiX Telematics Fiscal Third Quarter 2022 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host Mr. John Granara, Chief Financial Officer. Thank you sir, you may begin your presentation.
John Granara: Thank you and good morning, everyone. We appreciate you joining us to review MiX Telematics earnings results for the third quarter of fiscal year 2022, which ended on December 31, 2021. 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 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 will turn the call over to Joss.
Stefan Joselowitz: Thanks, John, and thanks to all of you for joining the call today. I would like to start by thanking many of you who have reached out offering condolences on the recent passing of my mother back in South Africa. Turning to our third quarter results. Our performance reflected strong execution by the entire MiX team. As we continue to meet our objectives to return to sustainable revenue growth. Underlying sales momentum in our business continues to improve and we’re encouraged by the increasing deal activity in most of our key regions and in markets. We have done so despite the continued presence of COVID and the emergence of Omicron during the quarter, which did have some impact on performance. We added 20,300 subscribers to end the quarter with a base of over 790,000. This is our best performance since before the pandemic. And all three of our solution categories contributed to the strong growth, including solid new premium fleet customer additions. We have successfully executed on our objectives to return to sustainable revenue growth. And we are increasingly optimistic on our ability to deliver over the longer term our financial targets of 15% to 20% constant currency subscription revenue growth and 30%-plus adjusted EBITDA margins. Of course, we will continue to manage the business with a balanced approach. However, our performance so far in fiscal 2022 and the demand indicators we see across the business are giving us confidence to lean into our key investment priorities that will support our long term growth targets. I would now like to quickly summarize our financial and operational results for the third quarter. Annual recurring revenue ended the quarter at $119 million, up 1.3% sequentially, and 6.3% year-to-date. I would note that our ARR result was impacted by two items. Firstly, a sizable energy customer in the U.S. liquidated as part of its bankruptcy process, removing approximately $500,000 from ARR. Secondly, we had a strong bookings quarter, but with much of it coming at the end of the period. As a result, we have more committed backlog waiting to be implemented than is typical. Subscription revenue was $30.3 million, a 3.5% increase year-over-year in constant currency. Adjusted EBITDA was $7.1 million, at a 19.6% margin, which was modestly below our expectations for the quarter, due to a very large unbundled win where the customer is paying for the hardware upfront. As we rolled out this fleet, this low margin hardware sale was steadily converting to high margin subscribers. Our premium fleet performance was particularly encouraging and reflected a couple of important trends. Firstly, as we noted in recent quarters, demand for enterprise opportunities has been strong and lead to meaningful pipeline growth, renewals and subscriber expansion in both Q1 and Q2. In this latest quarter, we saw an increase in large deal activity, as evidenced by the following premium fleet wins across multiple verticals. We signed a significant transaction with an emerging mobility fintech company that provides revenue based vehicle financing to entrepreneurs across parts of Africa, Europe and Asia. Under this multi-year contract, they will deploy our premium fleet solution including MiX vision AI to move in 12,500 vehicles, and will be purchasing the associated hardware upfront. This is an example of the opportunity MiX has to be the technology partner of choice to cutting edge companies who are introducing new and disruptive ways of doing business in multiple geographies. In South Africa, we were awarded a significant contract expansion by an existing MiX customer and the country's largest utility provider, who is adding a MiX vision AI solution to their fleet of more than 11,000 vehicles. A key differentiator in this one was the value our video telematics solution delivers for driver and passenger safety. In the United Kingdom, Monks Contractors, a waste management company chose MiX as their new telematics partner, operated for over 25 years, the company wanted a telematics solution that can provide real-time driver coaching that would enable more efficient fleet management and improved road safety. And finally, in Brazil, we signed a leading public transport company for over 350 vehicles with an opportunity to add an additional 1,000. The reliability of our solution to lower fuel consumption and increase efficiency, together with our best-in-class customer support make MiX the chosen partner. We also continue to make good progress in our product roadmap. In Q3, we are further extended the integrated dashboard solution model launched last quarter. The solution now includes embedded analytics, specifically relating to driver performance, leveraging our standard scoring algorithms, as well as unique client configurable scorecards. We will continue to ramp up our investment in data engineering, analytics and AI over the years ahead to provide ongoing value and insights to our subscriber base, and MiX's internal operations. As we approach the end of fiscal 2022, we feel good about how the business has performed and the steps we have taken to position the company for even better financial performance going forward. In particular, bookings are tracking ahead of our expectations for the year, which we believe is the best indication of the underlying health and momentum in our business. In terms of the specific goals we laid out at the beginning of the year, we are now tracking towards subscription revenue growth in the low to mid single-digits, and ARR growth of 9% to 10%. John will discuss in more detail some of the near-term dynamics that are causing a lag between bookings and the time it takes to contribute to ARR expansion and subscription revenue. I want to be clear that this is a solely a function of timing. In fact, we have booked enough contracted revenue year-to-date to comfortably generate double digit ARR growth if the bulk of it can be implemented by year end. At the same time, we are on pace to meet our profitability target of low to mid 20% adjusted EBITDA margins, even as we invest more in our product development and go-to-market efforts. That consistent cost discipline and targeted investment philosophy has served as well through multiple cycles over the past 25 years. And we are confident it will lead to improved growth and profitability in the future. I'd like to end by reiterating that we are tracking well to the objectives we laid out for fiscal 2022. And we're encouraged by the improvements in customer demand in recent months. We believe we are entering a cycle of increased focus on telematics investments and that mix is well-positioned to benefit from this trend. We are confident in our ability to achieve our long-term financial targets and believe we can generate significant value for our shareholders. I want to thank all of MiX’s employees around the world for the efforts that contribute to ongoing success. I would now like to turn the call over to John to review our financial results in more detail. John?
John Granara: Thanks, Josh. I'd now like to turn to our financial results for Q3. We are pleased to report another quarter of strong results. Please keep in mind that all figures refer to the third fiscal quarter of 2022. 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 US dollar. The South African rand strengthened by 1% against the US dollar, compared to the third quarter of fiscal year 2021, contributing to a 1.2% increase in our reported revenues. Starting with the P&L, total revenue came in at $36.2 million, and subscription revenues were $30.3 million, an increase of 5% and 3.5% on a constant currency basis, respectively. We ended the quarter with 790,500 subscribers, a sequential increase of 20,300. The growth of subscribers this quarter was driven by strength in all three solution areas, including solid new premium fleet customer additions. We are encouraged by the broad base strength of our subscriber additions, which speaks to improve demand trends and customer appetite to invest in telematic solutions. ARR, which we believe will be a more meaningful indicator of our growth this fiscal year was $119 million at the end of the third quarter, growing 1.3% sequentially on a constant currency basis. As Josh noted, there were a few puts and takes during the quarter that impacted ARR. To be clear, our bookings performance was well-above our expectations for the quarter. However, two developments weighed on reported ARR in Q3. Basic Energy, a longtime MiX customer declared bankruptcy and liquidated its business. While a portion of its fleet was taken over by other operators as part of the liquidation process, approximately 1,500 subscribers turned off our platform, reducing ARR by approximately $500,000. Second, the two large wins that Josh mentioned were signed relatively late in the quarter, and only a small portion of those fleets have been implemented. As a reminder, a subscriber does not enter our AR calculation until it is installed, active and build on our network. While we always have a contracted backlog of pending installations, this has grown significantly in our most recent quarter. This is solely a matter of timing and these wins will layer into ARR in the coming quarters. Hardware and other revenue of $5.9 million were up 17% year-over-year, representing 16.3% of total revenue, the highest quarterly performance for hardware in the previous four years. Key driver of our recent hardware strength has been the new MiX Vision AI Solution, which is seeing strong adoption. We've also signed a couple of larger wins in recent quarters that did not bundle hardware into the subscription. We expect to see strong hardware performance over the next couple of quarters as we shipped the remaining units for these large wins. Moving on to gross margin and operating expenses. Gross margin was 62% compared to 62.5% in the year ago period. The reduction of gross margin was driven entirely by lower hardware and other margin and the higher hardware revenue mix. Hardware and other gross margin was 16.9% for the third quarter, down from 22.2%, mainly due to product mix and somewhat due to increased supply chain costs. Recurring subscription margin remained strong at 70.8% and is up 140 basis points compared to prior year. Subscription revenue represents the vast majority of our revenue and is the primary value driver in our business. We expect hardware revenue and our blended gross margin to remain at the current level for the next few quarters as we've worked through the backlog of some of the larger wins we mentioned, which include our new Vision AI devices. Assuming no further challenges with the global supply chain, we would expect the blended gross margin to return to the 64% to 66% range when hardware revenue mix normalizes. Operating expenses were $19.9 million, and we're up 22% compared to prior year. The year-over-year increase primarily reflects the investments in product development and go-to-market efforts and the return of expenses that were reduced as part of our response to COVID-19 in fiscal 2021. Sales and marketing expenses in the third quarter were $4 million or 11.1% of revenue compared to 8.5% in the year ago period, representing the continuing investments in our sales and marketing growth initiatives. Research and development costs that are included within administrative and other expenses were $1.6 million and represent an increase of 60% compared to the previous year as we continue to drive investment in our solutions. Through the first nine months of the year, we’ve increased our investments in sales and marketing and research and development by over 40% compared to the prior year. Administrative and other expenses include non-recurring legal costs of $530,000, which has been excluded from adjusted EBITDA. Adjusted EBITDA was $7.1 million or 19.6% of revenue compared to $9.5 million or 28% of revenue last year. Through the first nine months of the year, adjusted EBITDA margin was 21.8%, in line with our full-year outlook. The sequential decrease in the adjusted EBITDA margin during the quarter was due to the high percentage of hardware and other revenue. Non GAAP net income for the quarter was $1.6 million, down from $3.4 million in the year-ago period. The company's effective tax rate was negative 76% compared to negative 18.7% in the third quarter of fiscal 2021. Ignoring the impact of foreign exchange gains and losses, the tax rate was 35.5% compared to 34.3% in the prior year. Turning to the balance sheet, which remains strong and provides us with significant flexibility going forward. We ended the quarter with $35.9 million of cash and cash equivalents. In the third quarter, we generated $4 million in net cash from operating activities and invested $5.5 million in capital expenditures leading to a negative free cash flow of $1.5 million. The use of cash includes investments in, in vehicle devices of $3.7 billion. On a year-to-date basis, the use of cash includes approximately $5 million for our New Vision AI cameras. The growth in IBD expenditures reflects our improving subscriber trends, particularly with enterprise customers, it is a positive leading indicator for our business. Our strong balance sheet enabled us to once again declare a quarterly dividend of ZAR 0.04 per ordinary share. We announced in December, that we increased our stock repurchase program, which allows us to repurchase up to R160 million or approximately $10 million of the company's outstanding shares. During the quarter, we repurchased 1.6 million ordinary shares for $0.8 million. Before I wrap up, I'd like to provide some additional perspective on our expectations for the fourth quarter. We have performed well during the first nine months of the year. We have signed several large and important wins that has resulted in a significant contracted backlog and enterprise orders. As Joss mentioned, due to the timing, size and nature of these deals, we are expecting to deploy some devices in the field for implementation over the next two to three quarters. As a result, we are now expecting constant currency subscription revenue growth in the low to mid single digits. As we think about the fourth-year comparison, please recall that we had a one-time non-recurring fee of approximately 1.1 million related to a contract renewal that was included in subscription revenue. As for ARR, we attracting towards 9% to 10% growth for the full year. If we adjust for some of the items mentioned earlier, we would be comfortably delivering double digit ARR growth. The bottom line is that, from a new sales perspective, we’re attracting above our expectations for the year. From a profitability perspective, we remain on track to deliver adjusted EBITDA margins in the low to mid 20s for the full year. To wrap up, we delivered strong third quarter results and are seeing clear improvement in customer demand. The large wins in the quarter and our growing backlog of pending installations provides good visibility to future growth. Now, we'd like to open up the line for questions, operator.
Operator: Our first question comes from line of Matt Pfau with William Blair. You may proceed with your question.
Matt Pfau: Hey, guys, thanks for taking my questions. And Joss sorry to hear about your mother. Yeah, absolutely. In the quarter for the subscriber additions, which were quite strong, maybe just, it would be helpful, if you could just break it down a little bit in terms of the drivers there between attrition improving and then gross new subscribers coming onto the platform?
Stefan Joselowitz: Sure. The indicators that we're seeing is that, we are seeing strong new wins coming into our business. And as John, I think alluded to the two big ones that are referred to are not in our subscriber numbers yet or certainly the majority of them are not in the subscriber number. So what we're pretty pleased about is that, we strike balanced contribution from – from really all three of our product portfolios. So we're definitely seeing an increase in new contracts coming in, at the same time, we've seen normalization I guess of the – of the churn process. So we're not seeing as much of the headwind as we faced in our – in our kind of prior financial year. That was the one big exception, of course, being the bankruptcy that – that John referred to, which had both a subscriber, a negative subscriber and -- our impact in the quarter.
Matt Pfau: Got you. That's helpful. And then in the energy segment, obviously, there's the one bankruptcy that you called-out. But, in that segment, overall, excluding that customer has – the attrition stop there and, with demand for energy holding up and, prices staying high. Has that helped out in terms of any customers bringing some of their fleets back online?
John Granara: Yeah. Matt, this is John. So yeah, we have seen, so absent basic energy, which I've made reference to. We've actually seen growth both in oil and gas, including the current quarter. So we're now starting to see some return to growth within the existing customer base. It still not at historic levels, so I should mention – still well below the pre-pandemic levels, so there's still some headroom there for additional growth as we move forward. But we are starting to see positive growth within the existing oil and customer base – oil and gas customer base.
Matt Pfau: Okay. Great. And then just last one for me on the AI vision product, you seem to call that out a decent amount this quarter. Maybe you could just give us an idea of, what sort of percent of – of deals are picking this functionality? And then, the customer is adopting that with the premium fleet offering, what is the impact to the average revenue per subscriber?
Stefan Joselowitz: Thanks. It's – certainly the impact is starting to becoming – to become increasingly significant. So, clearly at any impacts on one portfolio premium portfolio and just thinking back on the quarter, certainly the – the majority of the big deals that we did, increase included the requirement for – for vision on top of our traditional Telematics offering. And we've also mentioned another deal where we upgrading a large customer to include Vision. So we're seeing more and more of that as well. The impact on all three depending on the size of the deal, you could kind of run an average around mid-teens US dollars is the kind of ARPU uplift that we would expect out of a Vision product.
Matt Pfau: Very helpful. Thanks, guys. Appreciate it.
Operator: Our next question comes from a line of Mike Walkley with Canaccord Genuity. You may proceed with your question.
Mike Walkley: Great. Thanks. And, yeah, Joss, condolences to you and your family.
Stefan Joselowitz: Thank you, Mike.
Mike Walkley: Just given some of these large deals and sounds like momentum exiting the quarter and maybe Omicron and other things even a little bit? Should we expect some growth coming off the strong results to trend higher over the next several quarters as somebody who loves deals get activated?
Stefan Joselowitz: Well, that's certainly what we're hoping to see. And I've been pleased with the performance, the steady performance this year. So, we're confident that we've returned back to a traditional growth phase, remember, really I think in our previous financial year -- the first year in our long history that we've seen negative topline contraction, so it certainly was out of our comfort zone. And when we look back at the year that we're currently reporting, we see steady improvement quarter-on-quarter as we -- as the years progressed in terms of absolute subscriber growth numbers. So, we did make -- mention earlier in this call that our bookings are higher than would be typical. So, these are contracted bookings that haven't been installed yet. And bear in mind, that doesn't make as John made clear, it doesn't hit our ARR line at the same time, it doesn't even hit our subscriber line. So, we don't count it until it's fully implemented. And in fact, we're billing these subscribers. So, that's giving us certainly a nice platform for increased momentum. And we of course had to build on it as recorded progresses and as we head into the next fiscal year.
Mike Walkley: Thanks. Then I guess given that backlog in the global supply challenges, John can you just talk about how you're able to meet the demand. Are there any supply shortages causing issues? And then, as we model out, it sounds like some of these large deals taking hardware up front should have similar levels of hardware-only sales for the next two to three quarters?
John Granara: Yes, thanks, Mike. So, I think we said before that we had taken steps earlier in the year to purchase long lead-time items and components, which protected us from a supply standpoint through the rest of the year. And where we stand today, we believe we've done that as we're not anticipating any significant issues in the next few quarters. Beyond that, it's still a very evolving and as you said, I think as Joss has mentioned before where we're monitoring it not only on a daily basis, but on an hourly basis. So, I preface that -- I'll preface that by saying things can change at a moment. But right now, we believe we've secured and have enough inventory to hit -- or to meet our backlog -- our contracted backlog. So, as we move forward, you made reference to how that's going to impact the hardware. So, typically what will happen is with these large wins and some are bundled and some are unbundled. But in particular, what we saw this quarter was we had some shipments related to the unbundled deals where the customers are paying for the hardware. We are expecting that trend to continue for the next two to three quarters. And typically, you'll see the hardware revenue show up in one month and then the following month, after the installation happens, you'll start -- you'll see that show up as an ARR and subscriber. So, there is a scenario -- so there is including in the current quarter, a significant amount of hardware revenue that is not yet shown -- not yet been installed and deployed. So, there's going to be that timing difference. And so I expect that to continue for the next two to three quarters. But right now the level of hardware revenue is expected to be higher than normal. I would not expect it to get back to normal levels until probably our second fiscal quarter. And that is absent any new orders, obviously, which we hope -- we were hoping to continue to keep booking large ones. So we'll be able to provide you with updates as we move forward.
Mike Walkley: Okay, great. Thanks. I guess, the last one for me, just on the gross margin then. If it goes back to more, kind of, the bundle deals longer term, can you just remind us what you said in the script about where gross margins on a blended basis return back to?
John Granara: So, I expect -- we expect the gross margins, blended gross margins to be at the existing levels for the next two to three quarters, as we shift and implement the backlog, which includes a significant portion of hardware revenue. And so -- and after these large wins have been installed and deployed, we would expect it to get back to the 64% to 66% range, which is typically what we what we see. And so -- and that's why we always point to the subscription margin, which has been the same, in fact it was up 140 basis points year-over-year, that that really is the focus from a gross margin perspective. And we're happy with the levels that were -- that that has been at.
Mike Walkley: Great. Thanks for taking my question and great to see the trends improving.
Stefan Joselowitz: Thank you, Mike
John Granara: Thanks, Mike.
Operator: Our last question comes from a line of Alex Sklar with Raymond James. You may proceed with your question.
Alex Sklar: Thanks. Also, I’ll add my condolences as well.
Stefan Joselowitz: Thank you, Alex.
Alex Sklar: Following up on Matt’s subscriber question, the commentary around balanced growth across solutions that you made a number of times, can you just talk about how that mix compares to recent quarters. And then, with that, just an update on the overall pricing environment for your different solutions.
Stefan Joselowitz: So, in terms of balanced growth, it’s certainly been a hallmark of our business, really since inception. I did make the point in the earlier remarks that we are leading into some investments. So we have see a increase in our strategic investments, both sales and marketing and investments in R&D. And we expect that to continue and bear in mind, we are seeing that the strategic investment convert into benefit in terms of, we're starting to pick some fruit off that. So we expect to continue to make those investments, certainly for the balance of this fiscal year. And, I guess, as we as we update you when we report in Q4 on what our views are for the next fiscal year, I think, we’ll give a clearer idea of the picture we're kind of seeing there. But -- and I'll reiterate that our focus this year was returning to sustainable growth. We recognized we needed to ramp up our investments. We’ve cut back a little bit in the previous fiscal year and we have done that ramp up. And I think we -- I'm happy that we've achieved by and large the objectives that we set out at the beginning of this fiscal year and of course, we're hoping to continue to pluck their fruit as the quarters progress. The one other point I would make on these unbundled deals, I would also remind everybody that not all of our deals are unbundled, we are doing big deals and continue to do big deals with customer up sort of bundled basis, but of course, we have got this one very significant deal that John has been referring to that we will have the hardware impact certainly for the next couple of quarters, as he referred to.
Alex Sklar: Okay, great. Okay, great. And then so on the spread between the booked and then installed subscribers, it does seem like a short-term phenomenon. But does that kind of increasing number, increase your urgency around more OEM partnerships? I'm just curious how your conversations of that channels -- those channels are progressing? Thanks.
Stefan Joselowitz: Absolutely. We -- in terms of OEM channels, it's certainly an important component of how we see the future of our business and we fully expect to be able to make more positive announcements in coming quarters. We're having really meaningful conversations with a number of significant OEMs. And there's no doubt in my mind, at least some of those are going to translate into deals that we can offer additional services to our mutual customers in on services. And it's certainly a additional channel that we were putting a lot of focus into.
Alex Sklar: Okay, great. Thank you.
Stefan Joselowitz: Appreciate it. Thanks.
Operator: Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Joss for closing remarks.
Stefan Joselowitz: Thanks so much, Laura. And thanks to all of you for joining us today. We really appreciate your interest in MiX Telematics. I do want to reiterate how pleased we are in the progress we have made during the quarter and throughout this year. And we look forward to speaking with many of you in the coming weeks. In the meantime, I hope you and your family continue to be safe and healthy. And thanks again for your time and have a great day.
Operator: Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.
