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MiX Telematics Limited (NYSE:MIXT)
Q4 2020 Earnings Call
May 28, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the MiX Telematics Fiscal Fourth Quarter 2020 Earnings Results Conference Call. [Operator Instructions] It's now my pleasure to turn the call over to John Granara, Chief Financial Officer. Mr. Granara, please go ahead.

John Granara -- Chief Financial Officer

Thank you, and good morning everyone. We appreciate you joining us to review MiX Telematics Earnings Results for the Fourth Quarter and Fiscal Year 2020, which ended on March 31, 2020. Today, we will be discussing the results announced in our press release issued a few hours ago. I'm John Granara, MiX's Chief Financial Officer, and I'm joined by Stefan Joselowitz or as many of you know him as 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 included our current report on Form 8-K that was filed today, all of which are available on the Investor Relations section of our website.

As previously announced, we became a domestic filer as of April 1, 2020, and we now report our financial results in US dollars and on a US GAAP basis. We have provided supplemental information in the earnings release that provides the historical GAAP financial results. We will also be referring to certain non-GAAP financial measures. There is a reconciliation schedule detailing these results currently available in our press release, which is located on our website and filed with the SEC.

With that, I will turn the call over to Joss.

Stefan Joselowitz -- President and Chief Executive Officer

Thanks, John. I would like to thank you all for joining the call today. I hope you and your family is all safe and healthy. The COVID-19 pandemic represents an unprecedented global health and economic situation. Our first priority, as a company, is the health and safety of our employees and continuing to support our customers through this challenging time. I'm pleased with how quickly we were able to move our global workforce to work from home, which was a significant logistical challenge in certain regions. Our team is adapted to these changed circumstances and is performing well. I would like to use this opportunity to thank our teams across the globe for their hard work and dedication to MiX, which we truly appreciate. I'm very proud that we have not seen any disruptions to our service and have continued to deliver on our commitments to our customers.

On today's call, we will review our fourth quarter results, update you on the state of our business and provide a high level thinking on expectations for fiscal 2021. To start, I want to remind you of some of the key characteristics of our business and management team. First, we have an experienced and long-tenured management team who have led through other challenging cycles and understand how to approach these situations. Second, we have great technology that enables us to generate significant value for our customers. Whether it is by driving cost out of their business, enhancing the safety of their drivers, while maintaining compliance with legal and regulatory mandates, we provide high ROI and mission-critical services for our customers, many of whom considered as an essential to their operations. Third, we have a highly diversified business with vehicles in more than 120 countries, clients in a wide variety of verticals, and a healthy spread of subscribers across our asset tracking, light and premium fleet solutions. While the currency environment is impacting many of our target verticals, we are confident our diversified business provides multiple avenues for medium to long-term growth.

Fourth, we have a strong balance sheet with more than $16 million of net cash. Despite external headwinds, we recently declared our fourth quarter dividend of ZAR0.04 per ordinary share, bringing our total dividend payments in fiscal 2020 to ZAR0.16. Our intention in fiscal 2021 is to evaluate dividend payments on a quarter-by-quarter basis depending on business and market conditions at the time, but we have a highly scalable business model that has generated substantial profitability in recent years. And finally, the majority of our customer agreements are multi-year contracts that provide future committed revenue and reflect the strategic nature of our work with many of our clients. These attributes give us confidence we will successfully manage through the most challenging market environment in our history and come out stronger on the other side, having further enhanced our position as the most reliable customer success-driven company in the telematics market. That is how we have performed through other challenging periods during our 25-year history and that remains our focus today.

COVID-19 has also exacerbated the challenges we have discussed on previous earnings calls in the oil and gas market. The pre-existing supply challenges in the market have been compounded by the demand shock from the economic impact of COVID-19 and has led to a rapid and historic decline in oil prices. Prior to the onset of COVID-19, we were tracking above our revised plan in January, February and into early March. The near global shutdown that began in March led a number of customers to pause on making buying decisions, and we certainly expect this to result in the elongation of sale cycles over at least the short term. To provide some context on the impact of the business, March was one of only a few negative months to subscriber growth in the Company's history.

I'd like to spend a few moments reviewing our business through our three product segments. Our premium fleet segment, which as a reminder, is the largest contributor to our subscription revenue is where we are seeing the most pressure on our business and a few examples are as follows. We have been working with energy sector customers who are reducing their fleets to address to new demand levels resulting in subscriber contraction. Overall, we would expect our business with oil and gas customers to remain under pressure and experience declining revenue until the oil market stabilizes. As a reminder, we have been through multiple cycles in the energy sector and know how to manage through them. We are confident this business will bounce back as it has in all previous cycles, which will eventually drive a rebound in revenue growth with limited sales effort on our part.

A different phenomenon is evident in our bus and coach vertical. Due to the global COVID-19 shutdown, our public transport customers have seen massive near-term reductions in demand, given the shelter-in-place orders in effect in much of the world. We have worked with these customers to provide some aide by reducing their subscription fees during this process period. This is a temporary phenomenon, and we would expect to see revenues from these customers rebound quickly once the world economy begins to reopen.

Of course, some verticals are thriving, and we are seeing some notable signs of strength in some pockets particularly in the transportation and logistics vertical. Many of these global customers are experiencing record demand and need to react quickly to a rapidly evolving market. This complexity presents great opportunities for MiX to continue to establish itself as the strategic telematics partner of choice.

In the midst of this crisis, we still continue to sign and implement large wins. For example, a major European postal and parcel delivery service will more than double its engagement with MiX by rolling out our premium fleet solution to its entire 5,000 vehicle fleet. The material savings we have already generated for this customer through substantial fuel savings, improved driver's safety and reduced risk made standardizing on MiX the logical choice. Another example is in Africa with one of our largest customers in the transportation sector. They have multiple business divisions across their company, some using different competing telematics solutions. Based on the quality of our data and information and the service levels we provide, they have now signaled their intent to standardize on our solution across their group.

In our light fleet business, many of our customers are small and medium businesses. Trends in the sector are less clear at this point, but we do expect a more challenging environment, given the number of businesses not currently operating due to government restrictions. We continue to see a substantial opportunity in the light fleet market, particularly in the United States, but the timing of improvement is difficult to ascertain.

Our asset tracking business is also facing near-term challenges, given the dramatic decline in global travel. Car rental fleets, in particular, are a meaningful portion of our asset tracking business, and we are seeing operator shrink their fleet sizes to align with current demand trends. We have a long and successful track record with these customers, most of whom have contracts that renew annually automatically and we are confident this business will begin to recover as government restrictions ease and travel starts to resume.

As already outlined, we enter our fiscal 2021 year with a heightened level of uncertainty and a challenging market environment. There are a range of potential outcomes for the year depending on how quickly economies reopen from the COVID restrictions, future developments in the oil and gas market and how both of these dynamics impact customer-buying patterns and renewal rates. Given the number of variables and our limited visibility, we will not be providing quarterly or annual guidance at this time. As visibility improves, we will reevaluate our position on providing guidance going forward.

While we aren't providing specific financial guidance, I would like to give you some high level context for our expectations for the year. First, our core focus this year will be preserving profitability and ensure we are well positioned for medium and long-term revenue growth. Second, as a management team, we are operating under the assumption that subscription revenue could potentially decline by as much as between 10% and 20%. Third, the expected decline in revenue will be driven by a combination of reductions in new customer wins, limited expansions with existing fleets and an increase in both customer churn and fleet contractions.

Fourth, we expect that both subscriber count and blended ARPU will shrink year-over-year with ARPU declining faster, due to the challenges in the premium fleet market. We have a well-diversified and sticky subscriber base, and we expect most of the reductions in fleet size will reverse as market conditions improve. Fifth, we continue to take the necessary steps to adjust our cost structure to align with our lower near-term revenue expectations. We are committed to remaining profitable and are targeting at least a mid-teens plus adjusted EBITDA margin for fiscal 2021. John will discuss in more detail some of the cost actions we have taken across the company. Finally, we expect to be free cash flow positive for the fiscal year.

Whilst near-term outlook is challenging, our responsibility as a management team is to focus on those things we can control and ensure we are well positioned for medium and long-term success. I want to be clear that we continue to believe our business can grow subscription revenue 15% to 20% in a normalized economic environment. Our key priorities this year include maintaining a sharp focus on our customer success and reinforcing our value as a strategic partner, prioritizing investments in our product portfolio and go-to-market organization that are part of our long-term strategic plan.

I want to stress that the adjustments we have made to our cost structure do not include any reductions in strategic investments. We are still proceeding with the key R&D projects that we have identified prior to the COVID-19 pandemic. We have made no meaningful cuts to our global sales organization. And we continue to ratchet up our investments in digital marketing. We believe the long-term trend of increased intelligence and connectivity of fleets of all sizes will only be strengthened by the new operating reality facing many of our clients. We believe there is a significant opportunity to enhance our strategic value to customers as markets improve. We are committed to making the investments necessary to capitalize on these opportunities.

Before I turn it over to John, I just want to reiterate that we have a detailed plan to manage through the current situation. We are confident we can successfully balance adjusting to near-term challenges, while still properly positioning the business for the long term. I strongly believe that the positive trends that have powered this business for more than 20 years will strengthen as we emerge from this situation. Fleets of all sizes were required for greater intelligence and a greater commitment to driving community safety in the future. I believe MiX will be a primary beneficiary of these investments over time.

Now, I'd like to turn the call over to John to review our financial results.

John Granara -- Chief Financial Officer

Thanks, Joss. Before I review our fourth quarter results, I want to begin by highlighting some of the strengths of our financial model and steps we have taken to adjust to the lower near-term outlook. First, as Joss mentioned, we have a strong balance sheet. Second, we have been and we expect to continue to be free cash flow positive. Third, the majority of our capex is directly tied to the growth of our business. So we would expect in-vehicle device investments to decline materially in fiscal 2021. In addition, we've also deferred non-essential internal capex investments. Fourth, we have a high gross margins and a highly flexible cost structure, which allows us to quickly make adjustments as needed. To that end, we have taken some initial steps to adjust our cost profile to more closely aligned with our expectations for revenue in fiscal 2021 and position the company to generate a mid-teens plus adjusted EBITDA margin.

In addition to substantial reductions in international and non-essential domestic travel due to government travel restrictions, we have taken the following steps: a hiring freeze across the business; deferred salary increases; significant reductions in discretionary spend, including third-party consulting and professional services; and in certain geographies, we have implemented a headcount reduction and/or furlough program.

I want to reiterate Joss's earlier comment regarding investing in the business. We have taken great care to ensure that we are able to continue making targeted growth investments in R&D and sales and marketing that are essential to the long-term growth prospects for our business. We've always taken a long-term view and that will remain true in fiscal 2021 and beyond.

As a reminder, we became a US domestic filer as of April 1, 2020. And going forward, we will report our financials in US dollars and on a US GAAP basis. As discussed on our last call, there are some differences between GAAP and our historical IFRS results. Specifically, gross margin on the GAAP is about 50 basis points higher and adjusted EBITDA margin is 1 to 2 points lower. The difference is primarily related to product development costs and interest payments related to operating lease liabilities, which are both treated as operating expenses under GAAP. While the treatment of these two items reduces our cash generated from operations, our net cash balance remains the same. We have included the impact of adopting GAAP on the P&L and cash flows, including a detailed description of all the reconciling items in the press release.

A final point related to the adoption of GAAP as noted in the press release, there was no impact on revenue and on the constant currency growth rates. However, now that we report in US dollars, the strengthening or weakening of the South African rand, which represents approximately 50% of our total revenue will have the opposite effect on a reported revenues than it had on our IFRS financials. For example, our reported revenues will be negatively impacted in periods where the rand has weakened. In the near term, this will have a negative impact on our reported revenues as the rand has depreciated more than 20% on average against the US dollar in recent months, due to disruption from COVID. Before March, the rand was relatively stable on average over the last three or four years. From an expense standpoint, the lower rand reduces our reported operating expenses and is a natural hedge from a profitability perspective. We have included historical reported revenue as well as constant currency growth rates in the tables in our press release.

I'd now like to turn to our preliminary financial results for Q4 and full year fiscal 2020. Please keep in mind that all figures refer to the fourth 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 $36.2 million, up 6% on a constant currency basis and above the high end of our guidance range. Of this total, subscription revenues were $31.5 million, up 5.6% on a constant currency basis and toward the upper end of our guidance range.

As Joss mentioned, we were tracking above our expectations through the beginning of March before we started to see the impact of COVID and oil price volatility. We ended the fiscal year with over 818,000 subscribers, an increase of 9% year-over-year as we added over 5,700 subscribers in the fourth quarter. Hardware and other revenue of $4.8 million was above our guidance, up 16% sequentially and up 4.5% year-over-year.

Moving on to gross margin and operating expenses, gross margin was 57.4%, down from 67.3% from last year. During the quarter, we incurred charges related to the accelerated depreciation of in-vehicle devices, due to the contraction in certain fleets in the oil and gas segment. Removing that effect, our subscription gross margin would have been over 70%, which is more in line with our expectations. We also incurred inventory obsolescence charges related to COVID-19 reducing demand. Operating expenses were 49.4% of total revenue compared to 49.9% of revenue in the fourth quarter last year and were down sequentially in all categories. Operating expenses included a year-over-year increase of $1.1 million in our allowance for bad debt, which was largely related to COVID-19 and the macroeconomic conditions in South Africa. As discussed, we have taken steps to adjust our cost structure going forward.

Adjusted EBITDA decreased 6% to $10.6 million or 29.2% of revenue compared to $11.2 million or 31% of revenue last year. The margin decline was primarily driven by the lower gross profit. Non-GAAP net income for the quarter was $2.9 million or $0.13 per diluted share, down from $5.6 million or $0.24 per diluted share.

Before I turn to the balance sheet, I do want to touch upon our effective tax rate, which was abnormally high in the quarter. This was the result of a $3.5 million non-cash deferred tax charge related to a US dollar intercompany loan. Ignoring the impact of the deferred tax charge and foreign exchange gains and losses, the tax rate, which was used in determining non-GAAP net income, was 28.7% compared to 18.7% in the fourth quarter of fiscal 2019.

Turning to the balance sheet. Some of our key metrics were impacted by the global shutdown in the second half of March. We ended the year with $18.7 million cash, cash equivalents and restricted cash, compared to $27.8 million as of March 31, 2019. Accounts receivables were impacted by the delay in collections due to the global shutdown. We have subsequently collected larger amounts of cash in the first quarter. Based on what we know as of today, we believe we have appropriately accounted for any uncollectible amount with the allowance that we recorded in Q4.

From a cash flow perspective, for the full year 2020, we generated $28.2 million in net cash from operating activities and made $20.4 million investments in capital expenditures leading to a free cash flow of $7.8 million. The use of cash includes investments in in-vehicle devices of $13.6 million. Similar to what we saw in revenue, we were tracking ahead of our plan during the first two months of the quarter before the COVID impact hit us in March.

As Joss mentioned, we've decided to not provide financial guidance for fiscal 2021 at this time, due to the high level of uncertainty in the market. To provide you with some context as the ability [Phonetic] to model, I would keep the following in mind. We are operating on the assumption that the majority of the revenue contraction will be in the first half of the year with Q1 feeling the greatest impact. We would expect earnings to follow the same cadence. From a foreign currency perspective, we expect the rand will be a significant headwind to our reported financial results. As I mentioned earlier, on average, the rand is down 23% compared to this time last year, due to COVID-19.

The cost actions I discussed previously will result in year-over-year decline in operating expenses. In terms of capex, we are anticipating we will invest roughly half as much as we did in fiscal 2020. This will be driven by a combination of less in-vehicle device purchases and the deferral of non-essential internal capex investments.

To summarize, MiX is well positioned to navigate the challenging market environment we are facing. We have a demonstrated track record of delivering value for our customers and supporting their businesses throughout economic cycles. We have taken and will continue to take precautionary steps to maintain a strong financial position, while continuing to invest against the substantial long-term opportunity we are targeting. We are confident MiX is well positioned to meet our long-term growth and profitability objectives as the impact of the COVID-19 pandemic and associated economic slowdown subsides.

With that, we would now like to take your questions. Operator?

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Mike Walkley from Canaccord Genuity. Your line is now live.

T. Michael Walkley -- Canaccord Genuity -- Analyst

Great. Thank you for taking my question. I hope everybody at MiX is staying healthy also.

Stefan Joselowitz -- President and Chief Executive Officer

Thanks, Mike. And I also appreciate that. Thank you.

T. Michael Walkley -- Canaccord Genuity -- Analyst

Thank you. Yeah, so just first question, we are [Phonetic] two months into the quarter, I imagine the acceleration maybe to the downside with some people contracting fleets likely to continue, and it sounds like from your guidance, you're seeing that for the first half of the year. Is there anything you can qualitatively share with us, maybe how April and May trended in terms of those trends? Are we starting to see things bottom, any signs with things starting to open up that maybe things are starting to stabilize at a lower level here in May? Any kind of color, Joss, you can share kind of what you've seen so far in Q2 -- or June quarter, your Q1 would be helpful.

Stefan Joselowitz -- President and Chief Executive Officer

Thanks, Mike. As you can appreciate, there's a significant amount of uncertainty around the global situation and many, many moving parts. And I guess, it's -- we have in the one hand, we've certainly withdrew guidance, but that we have provided, I guess, some context on the steps we have taken or the position we've taken. We had to at least directionally decide where we're going with this business, how we can manage our cost price appropriately. And that's -- based on lots of information and some guesswork and some feedback with customers in various verticals, we've taken a view, but certainly there is the -- I guess, there is a couple of variables at play, a couple of impacts at play.

The first is the -- what's happening, while shutdown, and that's a very specific dynamic. So remember, we do have a large subscription revenue base and certainly to a large part, that continues. We have had -- we have got clearly some customers that are in distress in this shutdown period that will bounce back very quickly once the shutdown in various geographies ends, and I did refer to an example in my remarks this morning. So I won't repeat the example, but you can certainly refer to it when I referred to, let's call it, the bus and coach industry. There's another one, I guess, in the tourist related in the car rental industry. Bus and coach, we expect to bounce back very quickly once normal go-to-work activity resumes and in certain geographies, that's clearly already starting to happen. Some of it's going to take longer to track up. So, we've got a view on how long is the shutdown going to last and we've made some guesses; I guess, the time will tell.

Then there is the recovery phase. And I guess, again nobody knows how long this recovery is going to take. We've taken a position internally and that has, I guess, formed our guidance, but it's -- in our minds, it's very clear in the guidance that we've given that the pain is front-loaded. So we do expect as the situation begins to ease that our situation will gradually improve and ultimately return to growth trajectory, and that's sort of baked into our thinking. So I hope that helps.

T. Michael Walkley -- Canaccord Genuity -- Analyst

That's helpful. And a follow-up question for John, just in the short term with the tough end markets for some of your customers and some things getting temporarily contracted, how should we think about gross margin due to ongoing accelerated amortization in the short term for some of the in-vehicle devices and then, with the GAAP reporting, a little shift in how some capitalized costs run through the P&L, so maybe you could update us as things return to normal, maybe longer-term gross margin targets. So I guess, just first, short term should be even a lower gross margin, as you're going to have a full quarter of kind of the impact versus just March and then, it's slowly recovers from there.

John Granara -- Chief Financial Officer

Sure. So with the items that I talked about in the quarter, the acceleration and the obsolescence charges, which were largely COVID-related, if you were to take those out, we would have been where we were tracking and where we had guided, which you may recall in the second half of the year, we were thinking 64% to 66% on the gross margin line. And so, we actually would have ended right in the middle of that. It's tough, Mike, to quantify what if any impact will have going forward. That's part of the uncertainty. But I would say that normalized, we would expect to be in that 64% to 66% range at the moment. Our long-term goals would remain the same and that subscription revenue would be over 70% and as -- and we eventually like to get the consolidated gross margin up over that 70% as well, but obviously, the environment we're in right now, that's impacting the timing of when we achieve that. But I would say, normalized, 64%, 66% gross margin is probably about right before any potential items related to COVID, which again at this time, we just don't have visibility into that.

T. Michael Walkley -- Canaccord Genuity -- Analyst

Thanks for taking my questions.

Stefan Joselowitz -- President and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. Our next question today is coming from Matt Pfau from William Blair. Your line is now live.

Matthew Pfau -- William Blair & Company -- Analyst

Hey guys, thanks for taking my questions and hope you're all doing well. I wanted to -- yeah, Joss, you've mentioned a bunch of different headwinds that you're seeing or expecting to see within your business. Maybe it would just be helpful if relatively speaking, you can kind of help us size which ones are the most meaningful and I guess, if I were to guess, I would think that the fleet contraction would be the biggest headwind you're seeing, but how are you thinking about the relative size of those different headwinds that you called out?

Stefan Joselowitz -- President and Chief Executive Officer

I think headwinds is -- the headwind is COVID-19 as the -- I guess, is the primary headwind. In fact, in fairness, I think there is the energy challenges we're developing before COVID and have certainly been exacerbated. So I guess, from our business perspective, there is two primary issues. It's the -- the one in our particular vertical being energy and that's certainly a contraction issue. That's the current major challenge. It's something that we have -- a cycle that we've been through a couple of times before, so we certainly know how to manage it and know what to expect. And one thing we do know -- we just don't know how long it's going to take, is that ultimately, it will stabilize and it will bounce back and it will become a tailwind, but right now, we're dealing with a headwind and we will continue to manage that appropriately. And then, there is COVID, which -- and a global shutdown, which has impacted some verticals positively. So again, I referenced one example in transportation sector, many of our customers are moving essential goods, foodstuffs, medical supplies, etc., etc. They are experiencing boom times at the moment. And in fact, we've had to assist some of our customers in very short-term fleet expansions and the logistics around managing some of it. So some verticals are doing well.

The others that during the shutdown are extremely challenged and of course, this doesn't just apply to our business, it applies to most businesses on the planet. But we have to, in a methodical manner, work with those customers to manage the process and we are doing that, I think, reasonably effectively. And -- but in most instances, we see that headwind being -- it's certainly that the intensity -- the current intensity of it easing as the restrictions ease. So as business starts returning to normal, we expect to see that whole process from outside those verticals start to ease. Clearly, the whole world is going to -- how long it's going to take for the global economies to recover is another debate. So, I guess the speed of returning to normality and to pre-COVID growth levels is a matter of guesswork and we've taken a position on it internally just from a planning perspective. But we expect that some verticals recover very quickly, some are going to take longer and we just have to manage the various components appropriately.

Matthew Pfau -- William Blair & Company -- Analyst

Got it. And just sort of curious as you sort of think about how you allocate your investment dollars and your strategy. Any change in thought in terms of attractiveness of various fleet sizes, segments or geographies that you expect to sort of change post the pandemic that may make you sort of rethink how you allocate your investments to those various areas?

Stefan Joselowitz -- President and Chief Executive Officer

Yeah, we are certainly adapting and moving resources around. So clearly, our self-resource in the energy sector currently is better deployed somewhere else. So there is other verticals that we see enhanced short-term opportunities and we are deploying it there, but again, I will reiterate that we haven't made any meaningful cuts to our global sales force. In fact, we've made some increased investment in recent months, and I'm talking about post-COVID months. So I guess that's quite an important differential. And there's other verticals that we think will be potentially beneficiaries of assistance and investment post-COVID, I think there's going to be a lot of infrastructure rollouts based on various governments doing local stimulus. So, we're certainly putting some focus into those kind of areas as well. So, absolutely, we are not cutting back on our strategic investments that are shuffling the pieces on the board, so to speak.

Matthew Pfau -- William Blair & Company -- Analyst

Great. That's it from me guys. Thanks a lot for taking my questions.

Stefan Joselowitz -- President and Chief Executive Officer

I appreciate it. Thank you.

Operator

Thank you. [Operator Instructions] Our next question is coming from Brian Peterson from Raymond James. Your line is now live.

Brian Peterson -- Raymond James -- Analyst

Hi, gentlemen. Great to hear from you. Glad you're safe, and thanks for taking the questions. So, Joss, I just wanted to start off -- I heard a comment that you guys were bracing for a potential subscription revenue decline in the 10% to 20% range. I just wanted to make sure I understood in the context and what that was given. Is that the potential headwinds or how we should think about revenue this year and maybe, what sort of recovery scenarios have you thought about it, if that's the potential headwind that we could see on the subscription revenue line?

Stefan Joselowitz -- President and Chief Executive Officer

Thank you. Again, I want to reiterate that the levels of uncertainty are significant. So there is -- we are no different, I guess, to any other leadership team on the planet. There is a lot that we don't know. That is completely out of our control. What we had to do was we had to, I guess, choose a position or estimate a position that we could reasonably manage our cost base around because the big focus for me in previous crisis what's got us through effectively is early action on your cost base and appropriate action on the cost base. And that's been -- our initial focus is to make sure that this business is positioned well from a position of being fit enough to withstand whatever stuff that's out of our control is going to get thrown at us. Yes, to your comment that you're reading that we expect our subscription revenue to be down year-on-year. I think that's a reasonable position. I think we do expect that. And I don't want any of this to be a self-fulfilling prophecy.

We have made a statement that we are operating the business as if we could be down between 10% and 20%. That's the way we're operating our cost base. But of course, we are heavily focused on doing significantly better than that and as far as possible getting into positive territory. In reality, I think we know that what's facing us what's already started happening, I guess, with contraction in our energy fleets number one, and number two, what's now approaching pretty much three months of almost no new sales activity makes for a very difficult year and -- but only in relative terms. Let's not forget we have a significant recurring revenue base that proves and has proven in prior crisis to be an extremely powerful shock absorber. And we've just tried to, I guess, give enough sense on this call having withdrawn guidance that our analysts and our investors have a reasonable picture, what we are thinking about inside our business.

Brian Peterson -- Raymond James -- Analyst

Thanks, Joss. I appreciate that. And so, probably an unfair question for me, so I apologize in advance, but we've always thought that the stock was attractively valued. It's pulled back a little bit here. I know there have been some M&A ambitions. I'm just curious how do you think about value creation either from M&A or potentially looking at your own stock, understanding that we are in uncertain times, but it is a question that we get from investors. Thanks, Joss.

Stefan Joselowitz -- President and Chief Executive Officer

Yeah, sure. Absolutely. And we have -- we certainly believe that opportunities are probably going to be enhanced in this environment. We have a -- both John and I have reiterated, we have a healthy balance sheet. We're sitting on net cash. We are a profitable business with a significant focus on current -- particularly in these times preserving as much of our profitability as we can and continuing to generate cash, which is our current significant focus.

We know that there are businesses out there in our space that are not going to be in the same comfortable position that will -- that there are overgeared that potentially don't have a clear path to profitability, and we think that opportunities will potentially be enhanced. Internally, we've got a team; John, myself and some people are assisting us in continuing and in fact, to accelerate building a pipeline of M&A opportunities. Again, we're not going to do anything silly. So we will continue to maintain our strong disciplined focus as we approach these things, but we certainly are not sitting on our hands. We think that there is -- that these times in fact will unlock more opportunity than potentially before.

Brian Peterson -- Raymond James -- Analyst

Thanks, Joss.

Operator

Thank you. We've reached end of our question-and-answer session. I'd like to turn the floor back over to Joss for any further or closing comments.

Stefan Joselowitz -- President and Chief Executive Officer

I'd like to just extend my thanks to everybody for joining the call today. John and I will be presented at William Blair's virtual new world, it's the world we're in, our virtual tech conference in a couple of weeks. We do look forward to speaking with many of you then. I hope all of you and your families remain safe and healthy during this challenging time. Thanks again for joining us this morning, and I wish everybody a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

John Granara -- Chief Financial Officer

Stefan Joselowitz -- President and Chief Executive Officer

T. Michael Walkley -- Canaccord Genuity -- Analyst

Matthew Pfau -- William Blair & Company -- Analyst

Brian Peterson -- Raymond James -- Analyst

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