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MiX Telematics Limited (NYSE:MIXT)
Q3 2020 Earnings Call
Jan 30, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to MiX Telematics third quarter fiscal year 2020 earnings results conference call. [Operator Instructions]

At this time, I'd like to turn the conference over to your host, John Granara. Mr. Granara, you may now begin.

John Granara -- Chief Financial Officer

Thank you and good morning, everyone. We appreciate you joining us today to review MiX Telematics' earnings results for the third quarter of fiscal year 2020, which ended on December 31, 2019. 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 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.

Stefan Joselowitz -- President & Chief Executive Officer

Thanks, John. I would also like to thank you all for joining the call today. Our third quarter results were highlighted by continued subscription revenue growth and strong subscriber additions. We are delivering solid results against the backdrop of a challenging macroenvironment in certain geographies that has led to more cautious customer buying behavior and elongated sales cycles. Furthermore, our adjusted EBITDA margins remains in the 30% range and in line with our plan.

We remain confident that our diversified global footprint and the breadth of our product portfolio can support our attractive combination of meaningful growth and substantial profitability.

Turning to a summary of our third quarter performance. Our subscription revenue of ZAR476 million or USD3.9 million grew 8% year-over-year on a constant currency basis and was in line with guidance. We generated revenue growth across all of our geographies. The Americas and its concentration of oil and gas customers was the region most impacted by macro uncertainty. We added 23,200 net new subscribers during the quarter. This increases our base to more than 812,000 and reflects our 7th consecutive quarter of double-digit net growth. The growth in subscribers this quarter saw contributions from all three of our product categories.

With our asset tracking portfolio being the strongest performer. We saw solid new premium fleet customer additions, which was somewhat offset by higher than expected contraction in the energy sector. The combination of this and our strong performance in asset tracking caused our blended ARPU to decline modestly this quarter. 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 solutions to generate diversified revenue streams. The breadth of our product mix as well as our flexible go-to-market strategy in different regions does cause our ARPU growth to fluctuate from quarter to quarter. As we have discussed in our most recent earnings call, we continue to see more cautious buying behavior among some of our multinational energy customers, driven by oil price volatility and the global trade environment. Whilst we did see contraction in this sector in the quarter, we did conclude two significant contract renewals and we secured a large new customer in the United States.

Fleet size contraction in this vertical is not uncommon in periods of cyclical stress and as evidenced by our historical performance, we do expect these subscriptions will be reactivated as conditions improve. Overall, much of our business performed well in the quarter. In fact, had we expensed a normal performance in the energy sector, this would have been a great quarter by subscriber and subscription revenue growth. This is a powerful indication that our diversification strategy of region, product and customer type is working and puts us in a good position to drive accelerated revenue growth once the macro situation improves.

In the near term, however, the headwind from the energy sector, which we flagged as a potential risk at the beginning of this fiscal year has been somewhat more pronounced than originally expected. The trends we saw in the first half, including a combination of the more muted outlook of some of our larger customers and uncertainty from global trade tensions that has been leading to longer sales cycles have continued into the fourth quarter. As a result, we are modestly reducing our full year subscription total revenue targets.

I would like to briefly touch specifically on the Americas; accelerating growth in this geography remains a core part of our growth strategy and we intend to execute that through vertical diversification and new product categories such as MiX Now. We have demonstrated in other regions that we can be successful in light fleet and asset tracking across multiple industries, and we are confident we can do the same in North America.

With regards to MiX Now, we continue to add subscribers and make progress on refining our go-to-market strategies, especially in the digital marketing and other lead generation tactics. As part of this process, we are making changes in our sales leadership in this region in order to add greater experience in scaling and maturing a high velocity selling model. This exercise has taken longer than we initially expected but we are hyper-focused on getting the best system in place before ramping our marketing spend.

Looking more closely at our third quarter performance, we secured some notable wins, which included signing new customers as well as extending or expanding existing contracts. In the USA, we won a competitive bid for several thousand vehicles with a new customer, National Oilwell Varco, also known as NOV. NOV is a leading worldwide provider of equipment, components and services to the energy sector, and over the next few quarters, we will be deploying our premium fleet solution to their entire light fleet duty fleet across the United States and Canada. Despite the energy sector challenges that we have spoken about, in the Middle East we renewed multiyear contracts with two major oil and gas customers cementing our leadership position in this very important vertical and geography.

Globally, the bus and coach vertical continues to be a strong performer, Bus Eireann, who are seeking a partner to implement fleetwide telematics system more than doubled its existing deployment with MiX by adding an additional 418 vehicles. In the United Kingdom, we extended our premium fleet contract with Translink for an 8th year, which covers a range of connected services across their fleet of nearly 1,500 passenger carrying vehicles. In Australasia, we signed a multinational specialist in resource management that will implement MiX's premium fleet solution in 1,400 heavy goods vehicles across multiple sites, after which the roll-out would extend to an additional 600 light vehicles.

And lastly, we announced an update to our MiX Vision in-cab video solution, which delivers driver and road-facing footage for fleet managers to conveniently obtain an accurate view of their fleet operations. Customers can now subscribe to a live-streaming feature for up to eight cameras simultaneously in MiX fleet manager. Additionally, customers can now opt for a high-definition version, which is also equipped with an LTE modem for seamless global connectivity. I'm also pleased to announce that we intend to convert to a United States domestic filer with effect from the 1st of April 2020 being the start of our new fiscal year. This means that we will be adopting US GAAP Accounting Standards and reporting in US dollars.

As you're all aware, this has been a long-term goal of the company and we are excited to deliver on this milestone. We believe this transition will simplify the MiX story for US investors. But for the sake of clarity and benefit of our South African investors, in parallel we will still be obliged to report in South African rand and subject to IFRS accounting standards in Johannesburg.

In summary, we delivered solid third quarter results and are confident we can do even better 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 over to John to run through the details of the quarter.

John Granara -- Chief Financial Officer

Thanks, Joss. I'll start by first reviewing the financial results for Q3. And then I will discuss our outlook for the fourth quarter and the full year. Please keep in mind that all figures referred to the third 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 ZAR37 million; of this total, subscription revenues were ZAR476 million, up 8.5% or 7.8% on a constant currency basis and in line with our guidance range. Strong demand for our broad and diverse offerings continues to drive growth in subscription revenue toward our long-term goal, now represents 89% of total revenue. We added more than 23,200 subscribers in the quarter and ended with a base of over 812,700, an increase of 10% year-over-year.

Hardware and other revenue of ZAR60.5 million was in line with our expectations, down 10% sequentially and 20% year-over-year. Our gross profit margin was 63.9%, down 180 basis points from the third quarter last year. Gross margin related to our hardware and other revenue decreased 5 percentage points due to the difference in timing of installation costs and the associated revenue. We also saw an increase in the depreciation charges related to in-vehicle devices and high value peripherals used in certain of our bundled fleet contracts.

We continue to expect gross profit margins to trend up toward 70% in the longer term. Year-to-date, our subscription gross margin was 70%. Operating expenses were stable at 49% of total revenue, flat with the third quarter last year. As we discussed, we are planning to make a strategic investment in sales and marketing to accelerate our diversification strategy in Americas across all product categories and verticals and we expect to see the associated expenses ramp in the coming quarters.

We began to see the ramp this quarter with sales and marketing increasing 11% sequentially from Q2. Recall that our G&A costs include R&D cost 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 4% to ZAR162 million or 30.1% of revenue, down 20 basis points year-over-year. We are pleased with our adjusted EBITDA margin, which demonstrates our ability to invest for growth, while successfully leveraging a return on our historical investments. That said in the short term, we expect to see some margin fluctuation as we ramp up our strategic investments. Adjusted earnings for the quarter was ZAR71 million or ZAR0.13 per diluted share, which was up from ZAR57 million or ZAR0.10 per diluted share.

Effective tax rate for the quarter was 3% compared to 34.5%. The tax rate, which is used in determining adjusted earnings, was 28.8% compared to 28.3%. 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 ZAR40 million or $17.1 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 ZAR119 million in net cash from operating activities and invested ZAR94 million in capital expenditures, leading to free cash flow of ZAR25 million. The use of cash includes investments in in-vehicle devices of ZAR67 million, which is driven by the demand for our bundled offering. We generated ZAR75.1 million of free cash year-to-date, which is down 23% compared to the same period last year, primarily due to the investments we are making for the in-vehicle devices and the timing and working capital changes.

Now turning to our financial outlook, as Joss mentioned, we are modestly adjusting our full year guidance due primarily to the near-term challenges in the oil and gas vertical in the Americas. For the full fiscal year 2020, we are currently expecting total revenue of ZAR2,104 million to ZAR2,124 million and subscription revenue of ZAR1,870 million to ZAR1,880 million, which represents constant currency year-over-year growth of 8.4% to 9%. Adjusted EBITDA is now expected to be ZAR625 million to ZAR643 million and adjusted EPS of ZAR0.40 at the midpoint of the guidance range.

Based on an exchange rate of ZAR14.58 to the US dollar, this translates to USD0.688 per ADS. This guidance is based on 569 million diluted shares and an effective tax rate of 28% to 30%. For the fourth quarter of 2020, we are targeting subscription revenues in the range of ZAR468 million to ZAR478 million, which would represent year-over-year growth of 4.1% to 6.3% on a constant currency basis.

Finally, it's important to note that the guidance we are providing today is for our IFRS results. As Joss mentioned, we will be a domestic filer as of April 1, 2020 and going forward we will report our financials in US dollars and on a US GAAP basis. Our Q4 results and fiscal year 2020 annual report will be filed on a Form 10-K. We have substantially completed our scoping work and there will be some differences relative to our IFRS results. Most notably, we expect up to a 50 basis point increase in our reported gross margin and a 1 to 2 percentage point decrease in our adjusted EBITDA margin. We do not anticipate any significant differences in net income and we do not expect any impact to revenue. We're still working through some of the balance sheet and cash flow differences, but we do not anticipate any impact to cash, cash equivalents and restricted cash. We will provide more information when we release our Q4 and fiscal year results.

In summary, MiX's third quarter results showed signs of strength in many areas. We are focused on executing on our strategic priorities to ensure the company is best positioned to deliver even better financial results when the market conditions improve.

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

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Pfau with William Blair.

Matthew Pfau -- William Blair -- Analyst

Wanted to ask on the macro issues that you're seeing. So did they worsen in the quarter or did they just persist longer than you originally anticipated? And then in terms of how long you expect these to continue? Is it something that should continue into fiscal 2021 and impact that year as well?

Stefan Joselowitz -- President & Chief Executive Officer

We certainly observed a deterioration in the quarter. So, not significant, and certainly not comparable to what we observed in 2015, 2016. But nonetheless, we had a lot to be positive along in the quarter, strong subscriber growth and as I said, this sort of unexpected muting effect from somewhat larger-than-expected contraction in energy sector.

Matthew Pfau -- William Blair -- Analyst

And then if I remember correctly, last quarter you talked about there was maybe some -- you saw one customer contract but there was also the impact of some deals taking longer to close than originally expected. Did you see some of those deals that were not closed in the second quarter close in the third quarter? Or are you still sort of seeing those deals out there being delayed?

Stefan Joselowitz -- President & Chief Executive Officer

Yeah, absolutely. So we were delighted, now we've just today announced the NOV win, which we haven't started rolling out yet. So that's in the energy sector, it's -- we expect to roll that launch fleet out in the United States and Canada over the next two or three quarters, I guess. And so you know had it been rolled out in the quarter that we're speaking about, it would have more than made up for probably the contraction that we experienced. So lots of good signs from that perspective and, yes, that was one of the deals that we were hoping to close earlier on. I guess one of those that I referenced in that earlier quarter reporting and, of course, there's others in our pipeline that we are feverishly working on.

Matthew Pfau -- William Blair -- Analyst

And then last one from me, just on the calculated ARPU metric. So that was impacted this quarter because of mix with the asset tracking being strong. How should we think about that metric longer term as once we get past some of these macro headwinds and which are primarily, I assume, impacting the premium fleet segment, should we expect ARPU to go up? Or does that mix with the asset tracking hold it back?

Stefan Joselowitz -- President & Chief Executive Officer

No, of course, our expectation and our plan is, of course, a different kind of mix than we experienced this quarter. So with the flux of time and a normalized macro situation, we would expect a different kind of balance that would drive -- continue as we had a long-term track record to continue to drive ARPUs upwards and that's what we're focused on achieving as our business continues to evolve.

Operator

The next question is coming from the line of Mike Walkley with Canaccord Genuity.

Michael Walkley -- Canaccord Genuity -- Analyst

Congrats on the strong sub results even with some contraction going on in the oil and gas industry. So just building on that, Joss, you're talking about some contraction in the US market or the oil and gas in general, can you give us an indication, is it kind of 5% of the base shutting down or more? Or also historically, when you had it a couple of years ago, when they slow down what percent of their fleets do they shut down before they come back on, do you have any kind of metrics for us on that?

Stefan Joselowitz -- President & Chief Executive Officer

What we haven't done, I guess, is put a specific number on the subscribers in that sector. I mean, we've been pretty clear. That's about 25% of our revenue base globally, subscription revenue base. I think that gives you some fear of it. The contraction that we've experienced in recent quarters is nowhere near what it was from a subscriber percentage in 2015/'16 and the macro situation is different. I can't predict the future, but most of our customers in this sector remain profitable and are dealing with lots of global uncertainty. I don't view it as the crisis that we saw several years ago. So what we need to focus on is continuing to build our business across multiple verticals and multiple opportunities and that's what we're doing. I will remind you that we've just secured a significant win in the sector. And, of course, other wins outside of the sector. So -- and despite the headwind, we did have over 23,000 subscribers this quarter. So overall, had it not been for this, this contraction effect, it would have been a spectacular quarter all in all by just about every measure. So there is lots of stuff in our business that I'm really excited about. Of course, always disappointed to see some contraction from customers but the counterpoint to that is again a new win and multiple renewals in the sector in the quarter, which is equally important for us. So I'm generally feeling good about the business.

Michael Walkley -- Canaccord Genuity -- Analyst

And John, just couple of questions from me on the income statement, you talked about the long-term gross margin still on its way to 70% in the -- I understand some hardware and other revenue was kind of a headwind this quarter. How should we think just about gross margin in the intermediate term? Is it going to stay at these lower levels or does it start to bounce back already toward that longer goal?

John Granara -- Chief Financial Officer

I think the near term future, we've been bumping around 64%, 66% and that's kind of where I see things going probably in the next one to two quarters. But as we continue to increase subscription revenue as a percentage of revenue, I would expect to see that the blended gross margins will start to increase toward the longer goal. But I would say it's probably looking out more than a year for us to get to that 7% just given where we're at. If that provides you with enough level of color.

Michael Walkley -- Canaccord Genuity -- Analyst

Last question from me, and I'll pass the line. Just you talked about new opportunity and investment in the US market. How should we think just about opex or marketing growth over the next couple of quarters? Is it going to continue to be kind of a double-digit sequential growth as it ramps? Or it will maybe a little slower off the 11% you just grew?

Stefan Joselowitz -- President & Chief Executive Officer

So we certainly, as we've indicated, we're intending to ramp our strategic spend base. So a big focus around sales and marketing and I expect that to be happening over the next -- starting this quarter. And so we will certainly -- we'll bake that into our guidance for Q4, but certainly carrying on into the new fiscal year. We are actively in more than one geography looking to put more salespeople in place. We are also starting to ramp up our digital marketing efforts to increase in-bound lead generation and I think that combination in terms of the way you think about the business, I think you should see us, or think about us, see that line as a percentage of revenue certainly increased. I guess certainly the short to medium term.

Operator

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

Brian Peterson -- Raymond James -- Analyst

So wanted to hit on the strong sub numbers, which were better than I had modeled and impressive especially what we're seeing in the energy vertical. Maybe, you know, what drove the asset tracking shrink this quarter? And are you seeing some synergies in terms of deals that's really helping you just related to have -- having a presence in a lot of different geographies. Any help on that, Joss?

Stefan Joselowitz -- President & Chief Executive Officer

When you say synergies, are you referring to cross product portfolio synergies, Brian?

Brian Peterson -- Raymond James -- Analyst

No, I'm just talking about having a true global presence. So being in a lot of different geographies and are we seeing the benefits of that in terms of -- with some of these large global fleet customers? Or are you seeing more opportunities in different regions? And I'm just curious where we are in the synergies --?

Stefan Joselowitz -- President & Chief Executive Officer

Thank you for the clarity. And absolutely, those synergies and the strength of our global platform, I believe, will continue to drive large multinational wins for us. And as I said, it's been taking a little longer to get some of these done, but we've got some really exciting projects in our pipeline and in fact hope to be making some announcements. I guess, in the short term is really what our plan is. And some of these things have been in the pipeline for a couple of quarters longer than we were hoping -- were expecting them to be. So we've certainly announced some multinational wins in the quarter. We just reported on but expect to see more flowing in coming weeks or months and we'll certainly keep you posted in that regard. But there is no doubt that when it comes to these multinational customers, there's definitely an increased hunger for centralized data across their operations and they are increasingly starting to recognize the value of that. So we're -- it puts us in an exciting competitive position.

Brian Peterson -- Raymond James -- Analyst

And so maybe just hitting on the energy vertical a bit. I just want to make sure it's clear you referenced some extended sales cycles and some of the contraction on renewals. Is that specifically isolated to the energy vertical? I know that global trade tension has been in other verticals as well, I'm curious how are sales cycles and retention rates looking outside of the energy vertical?

Stefan Joselowitz -- President & Chief Executive Officer

So I think the contraction effect that we've seen is just pretty much isolated to the energy sector. So most of our other verticals appear to be still in a decent growth mode, which is good. And by the way, I will remind you that even in the energy sector when we go through these kind of phases, I believe we will -- this pent-up growth developing in those fleets, because -- they won't turn, and I believe those vehicles will be reactivated with time and we will start seeing this natural growth expansion with very little sales effort, which is always a good future thing to think about. In terms of the elongated sales cycles, It's definitely an effect that we've seen, I guess, outside of -- it's not just in the energy sector, I think there's definitely -- we've seen a nervousness around -- a decision paralysis kind of impact from lots of larger global players that are slowing down decisions because of global trade concerns. And so it's just taking longer to get deals done, and it's not the first time we've observed this kind of phenomenon and we are not paid to make excuses, I've said this before. We've just got to drive hard to get these deals closed. And there's a compelling ROI case to present to the customer to get it done even if the economy weakens from their perspective. Our offering, in fact, puts money on their bottom line. So it is a compelling case and there is no reason why we shouldn't be closing some of these deals, albeit it's taking a bit longer.

Brian Peterson -- Raymond James -- Analyst

And maybe just last one from me. Well, I didn't -- sorry if I missed this earlier but were there any shares repurchased in the quarter? Any update?

Operator

It appears we've lost Brian offline. We're going to move on to the line of David Gearhart with First Analysis. David, please hold on one sec. Ladies and gentlemen, please standby, we are experiencing technical difficulties. Please remain on the line, we will resume momentarily. John, you may continue. And we had the David Gerhart in the question queue for a question.

David Gearhart -- First Analysis -- Analyst

Hi, this is David Gearhart, First Analysis. I guess I'm up. I wanted to revisit the gross margin question. I think in your prepared remarks you had mentioned timing difference between installations and revenue is part of the impact, but can you talk about other impacts on the gross margin, is there an effect with mix in terms of asset tracking, subs versus the premium fleet impacting gross margin as well as go-to-market via partners, via direct?

Stefan Joselowitz -- President & Chief Executive Officer

Yes. I mean, all of those things have an impact. But just to hit the mix of the after tracking as we did say, we did have a moderate decrease in our ARPU, so that certainly will impact the subscription gross margin. The second thing I did mention is the depreciation charges related to the in-vehicle devices related to the bundled contracts. And so that is a fixed expense. And so regardless of the levels of revenues, you're still recognizing the same level of expense. And so when you have periods of contraction, the IDG depreciation actually will increase as a percent of subscription revenue. So there was that effect this quarter as well. But we would expect as we continue to grow the subscriber base in particular with all of the product types that we would begin to see that gross margin expand again.

David Gearhart -- First Analysis -- Analyst

And then lastly, I wanted to ask about the fiscal Q4 guide. If you take the midpoint of guidance for both subscription and hardware, on the subscription side you're expecting to be down at the midpoint in the quarter. And looking back at your history, usually you grow sequentially quarter-over-quarter as you'd expect with the SaaS model. I think I found one quarter where you were down actually sequentially on fiscal Q4 and just in general on the quarter side. Is that more of a function on the subscription revenue side of contracting higher ARPU premium fleet and then you're replacing it with lower ARPU asset tracking, that's what's driving the effect because like I said typically you guys do not contract sequentially on the subscription side. And then also with the hardware revenue, you're expecting a level that we haven't seen at the midpoint for a quarter. So I just wanted to see if you could provide a little additional color on that Q4 guide?

John Granara -- Chief Financial Officer

Sure. So let me let me start with the subscription revenue first. You are correct. We actually are guiding to slightly down. Some key factors there, one that we touched upon but I'll elaborate a little bit further. With regards to the contraction that we saw in Q3, it happened throughout the quarter. And so we are entering the quarter at actually a much lower base because we will have the effect -- the full quarter effect of the contraction that we experienced throughout the quarter in Q3. And so with that, most of that decline is coming in the Americas. So as we look ahead, we are expecting that particular region to decline sequentially. In addition, we are forecasting some additional contraction in the Americas as a result of the conditions that we see. That decline is being offset by the growth in all of the other areas, all of the other regions. And we also have about a ZAR3 million headwind related to FX. So on a constant currency basis, we're actually gaining subscription revenue to be flat quarter-to-quarter. But that additional ZAR3 million of FX hit is causing the decline. With regards to the hardware and other, it is dependent on the timing of when the deals come into play, there are certain areas where we are recognizing the hardware revenue and potential installation before the subscription. And so it's just based on where we see things in the pipeline now and the timing of that. And so we feel like we've provided an appropriate range for both and we feel pretty good about the guidance. But that being said, clearly our focus is on the subscription revenue.

David Gearhart -- First Analysis -- Analyst

And then lastly for me, Joss, I wondered if you could talk just qualitatively a little bit about the pipeline. In the past, you've talked about it being healthy not a lot of deals falling out of the pipeline or being lost to competitors. I just wondered if you could just give us a quick qualitative overview of the pipeline?

Stefan Joselowitz -- President & Chief Executive Officer

Sure. My view on that really hasn't changed, you summarized it quite well. I'm clearly frustrated that we -- some of these larger deals are not happening quickly enough and certainly been spending time with the team delving into where we with some of the larger ones. I'll remind everybody, we did add 23,200 net subscribers. So there's many aspects of the business that are performing well, and those subscriber additions, a lot of that happened from smaller transactions either individual sales or smaller fleets, small and medium-sized fleets. So pleased with that aspect. But, of course, we're -- the more vials [Phonetic] we can put on board, the easier it is to achieve our ideal growth objectives and we just announced a really important one NOV, which I referenced earlier. And it's taken a lot longer than we expected. That's a great example of that kind of elongated sales cycle that I was talking about. But we were confident it was going to happen, and despite the frustrations it did happen. There's others in the pipeline that we feel equally confident about, and hopefully in the very near future, we'll be making announcements about some other exciting ones that will start rolling us toward, again, the growth rate despite some of the challenges, macro challenges we face, the growth rate that we want to deliver out of our business.

Operator

The next question is coming from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz -- Oppenheimer -- Analyst

Most of them have actually been answered. But, Joss, I missed something. I think in your introductory comment you mentioned that, that you're bringing in a new sales leadership or maybe the hiring was taking a little long longer than planned. I just had two questions around that. Number one is, I apologize if I missed it, but can you clarify where that position is that you're failing on that new sales leadership? And then the second question I wanted to ask, you did mention plans to ramp up investment once you get that leader in place, and typically what type of lag do you have that you typically bring in a new leader and then immediately start the investment profile or does it take a quarter or two for them to get around and see the customers and etc.. So just hoping get a little more color on the future of that commentary?

Stefan Joselowitz -- President & Chief Executive Officer

And great question. It's -- the position, the primary position we're looking to fill is in our United States operations. We're in the middle of a process to do that. And in terms of the ramp up, we're also in parallel, we're not waiting for that appointment to be made, in parallel we're aggressively recruiting additional sales people as well. So we don't expect that necessarily to be a lag in the spend. We really want to get more feet on the street in a shorter time frame as we can.

So it is a parallel exercise, and there's a third component to that which I referenced I think potentially certainly in the prepared remarks, and, of course, in the earlier Q&A is around marketing spend. We're certainly planning in the relatively short term to ramp up our digital marketing efforts and, again, we don't expect a significant lag for that to happen, so I hope that helps to answer your question.

Brian Schwartz -- Oppenheimer -- Analyst

It does. Thanks, Joss. And then one question for John, just to ask about just thinking about the ramp in the cash flow. Clearly, you had a real nice ramp here this fiscal year, it looks like you're going to end up here with strong growth. It does sound like you're looking to increase the investment somewhat next year to help drive some business acceleration out there. Can you help us maybe think about the cash flow trajectory as we kind of balance those two initiatives, the big ramp this year and then it does sound like maybe you're going to be spending some more for investments next year.

John Granara -- Chief Financial Officer

Yes. So I think as Joss had said, we're currently at 10% for sales and marketing, so just looking at it from a spending standpoint, we are planning to invest in that area and we would expect that to hit in the 11% to 12% range in the near term, but then probably back to 10% to 11%. So I don't think it will peak much higher than 12% in terms of in the near term. That being said, we are making investments also in other areas of the business. And so we'll continue to do that and will continue to monitor that, but we believe we'll get leverage out of the admin and other expenses as well. So we're going to continue the balanced approach to growth and profitability that the company always has and maintain that discipline. With regards to cash flow, we did say at the beginning of the year, we are actually hoping for free cash to be closer to 10% of revenue. And right now, we're at about 5%. So we are looking to improve the cash generated from operations and on a free cash flow. And we're really going to be focusing on working capital and optimizing that and improving on our efficiency. We'd love to use the working capital to help fund those investments. So we're looking to improve the free cash flow from where we are now at 5%, get that back up toward the 10% level, and on the adjusted EBITDA conversion, I think we're in the high 80s. So we'd love to see that to be at 100% or more. And so that's kind of the way we're targeting it in the near term.

Operator

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

Brian Peterson -- Raymond James -- Analyst

Sorry about that, I got cut off. But just wanted to follow up on the question, so I'm sorry if I missed this, Joss. Well just on the share repurchases this quarter. Did you guys give that number? Were there any buybacks, and maybe an updated thought on capital deployment particularly in light of some of the go-to-market investments you're making. And any thoughts on kind of the M&A pipeline?

Stefan Joselowitz -- President & Chief Executive Officer

We dropped out at the same time. I'm not sure. We're both, John and I, are in Cape Town at the moment, so we're reporting from the southern tip of Africa and maybe there was an underground cable fault or something but nice to reconnect with you. So yes, in terms of share repurchases, I'll remind you in the previous quarter we used -- I think made some strong purchases in terms of buying back some of our stock. My view around our value in fact hasn't changed or if anything, I think it's just become even more confident that it's -- buying back her own stock is an unbelievable use of our cash and very accretive for remaining shareholders. Having said that, from a capital allocation perspective, we are constantly evaluating opportunities and, of course, we can't openly talk about some of these opportunities but we look at stuff and from time to time, we have an internal reason to take a view that we need to keep some powder dry so to speak. And yes, we are in one of those phases, so -- certainly as far as this quarter was concerned. So we will continue when appropriate to update our shareholders on how we're thinking about strategic opportunities, but at the moment it's -- there's nothing that's tangible enough for us to make a statement on.

Operator

Thank you. At this time, I will turn the floor back to management for closing remarks.

Stefan Joselowitz -- President & Chief Executive Officer

Yes, I'd just like to thank everybody for joining the call today. And I apologize again that we had that little drop off. We were cut off. John and I will be presenting at Raymond James' upcoming conference. I think it's early March in Orlando. And I hope to be seeing some of you then. And, of course, I guess we'll be talking to many of our investors in catch up calls over the coming days. So thanks again and wish everybody a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

John Granara -- Chief Financial Officer

Stefan Joselowitz -- President & Chief Executive Officer

Matthew Pfau -- William Blair -- Analyst

Michael Walkley -- Canaccord Genuity -- Analyst

Brian Peterson -- Raymond James -- Analyst

David Gearhart -- First Analysis -- Analyst

Brian Schwartz -- Oppenheimer -- Analyst

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