Please ensure Javascript is enabled for purposes of website accessibility

MiX Telematics Limited (MIXT) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribers – Jul 30, 2020 at 6:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

MIXT earnings call for the period ending June 30, 2020.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

MiX Telematics Limited (MIXT 1.09%)
Q1 2021 Earnings Call
Jul 30, 2020, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings. Welcome to the Mix Telematics Fiscal First Quarter 2021 Earnings Results. [Operator Instructions]

At this time, I'll turn the conference over to John Granara, Chief Financial Officer.

John Granara -- Chief Financial Officer

Thank you, and good morning, everyone. We appreciate you joining us to review MiX Telematics' earnings results for the first quarter of fiscal year 2021, which ended on June 30, 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, 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, including our current report on Form 8-K that was filed today, 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 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 families are all safe and healthy. Our first quarter performance was relatively solid, given the challenges presented by the COVID-19 pandemic. To quickly summarize our financial and operational results for the period: Subscription revenue was $25.9 million, a 6% decrease year-over-year in constant currency. Adjusted EBITDA was $7.5 million, or a 27% margin, which was well ahead of our expectations and reflects good cost discipline across the business. We ended the quarter with 787,000 subscribers, which was an increase of 21,000 year-over-year, but a decline of 30,700 subscribers compared to the fourth quarter. The biggest impact from COVID in the first quarter was in our ability to sign up new subscribers. Due to global shutdowns, we saw very little economic activity in the first two months of the quarter. And although June was an improvement on April and May, new subscriber additions were still well below June of 2019.

The other negative impact we contended with was fleet contraction in a number of key verticals, which affected both our subscriber count and subscription revenue lines. As the effects of the pandemic eventually subside and economic conditions improve, we expect many of these subscriptions will return. In the near term, the slowdown due to COVID and the uncertainty on when conditions will improve, is likely to cause many customers to take a more cautious approach toward making new telematics investments or expanding their fleets. While new customer wins are currently down, we are very encouraged by the growing pipeline of opportunities. In particular, we are seeing a significant amount of market activity among larger fleets. We believe recent events have underscored for many companies that a comprehensive telematics platform that can provide fleet intelligence, promote driver safety, and increase efficiency is a high ROI and mission-critical investment for their businesses.

In the long run, we believe our business will benefit from an increased focus on fleet management in our various end markets. As we discussed on our last earnings call, our key priorities in fiscal 2021 are to, firstly, maintain our sharp focus on customer success and reinforce our value as a strategic partner; secondly, to prioritize investments in our product portfolio and go-to-market organization that are part of our long-term strategic plan; and thirdly, to preserve profitability and ensure we are well positioned for medium and long-term revenue growth. We did well against each of these objectives in the first quarter. From a cost perspective, we have taken steps to adjust our overhead structure, while continuing to invest in our growth initiatives. These are challenging times, and one of the many actions we took to manage expenses was the difficult step of laying off approximately 80 of our staff from various offices. This was a very tough decision and one that we didn't take lightly, but we believed it was necessary in order to best weather the storm and ultimately achieve our strategic objectives.

I would once again like to take this opportunity to thank all of our team members across the globe for their focus and dedication in these trying times. We made good progress on our growth investment initiatives. We continue to scale our investments in digital marketing programs and are on track to deliver all of our key scheduled R&D projects in the coming quarters. We are confident these investments will enhance our market position and ability to grow, especially once economic conditions normalize. Our better-than-expected profitability performance in the quarter helped to drive strong cash flow. We generated $7.2 million of free cash and ended the quarter with $25.3 million of net cash. The strength of our balance sheet and our cash flow performance gave us the confidence to recently declare a Q1 dividend of four South African cents per ordinary share. We will still evaluate our dividend on a quarter-by-quarter basis this fiscal year based on business and market conditions. I would like to take a moment to provide an update on what we are seeing in some of our key verticals.

First, as expected, we had a challenging quarter in the oil and gas market and experienced subscriber contraction as customers were severely impacted by the economic fallout from COVID. It's important to note that we have strong relationships with our customers in this sector and did not lose any significant customers. Based on current market trends, we do not believe that we have yet reached the bottom in this sector. Remember that we have been through multiple cycles in our history, and as macro conditions improve in this market, we would expect most of these dormant vehicles to be returned to service, which will drive increased revenue for us. Secondly, we have yet to see a rebound in our bus and coach vertical. The global shutdown in response to COVID-19 has lasted longer than originally expected, and in certain geographies, reopenings have been more gradual.

This does not change our expectation that the slowdown in this market is temporary and that we will see a sharp rebound with these customers as pandemic related shutdowns ease. And finally, in our other verticals, we are generally seeing business track the broader economy. Our data revealed a significant decline in customer trips in April and May and a recovery beginning in June. The number of trips in these markets are still below pre-pandemic levels but are well ahead of the April lows. Some exciting wins we had in the quarter included a new win with one of the most prestigious sugarcane producers in Brazil. We will be implementing our solution in 500 commercial vehicles to support their efforts to improve driver behavior and vehicle availability. This customer is replacing its existing telematics provider with MiX due to our superior performance, as demonstrated in the proof-of-concept project. Another important win in Brazil was with one of its most prominent engineering companies, who will rely on MiX for optimized management of its 276 cranes operating at one of the world's largest ore mines. MiX's solution is a core part of the customer's efforts to enhance operational safety and reduce maintenance and fuel costs, while also preventing overuse of its assets.

We have also been successfully rolling out some of our prior wins, despite the restrictions in place in most countries during the quarter. For example, we successfully implemented close to 1,000 of the new vehicles from the European postal and parcel delivery service we discussed last quarter. Despite most businesses in this region being closed during the quarter, this essential-service customer deemed us, in turn, essential to their operations, allowing us to proceed. We think this is an excellent example of the value we provide to customers. As we look ahead to the balance of the year, we continue to expect a challenging environment. We are continuing to manage the business under the assumption that constant currency subscription revenue could decline by between 10% and 20%. We were able to do better than that in the first quarter, but based on current trends, we expect the second quarter will show further decline. We anticipate that recovery in the business will be more gradual over the course of the back half of the current fiscal year.

Based on our first quarter performance and current expense trends, we are now targeting adjusted EBITDA margins of 20%-plus in fiscal 2021, which is up from our prior target of mid- to high teens. The scalability and flexibility of our business model is one of MiX's core strengths, and we are confident in our ability to generate meaningful profitability and positive cash flow, even in a period of declining revenue. Longer term, we remain confident our business can grow subscription revenues 15% to 20% and adjusted EBITDA margins of 30%-plus in a normalized economic environment. To wrap up, Mix's first quarter results reflect the challenging backdrop facing the global economy. We are doing a good job staying focused on executing on the things we can control and continuing to invest in our long-term growth areas. We are encouraged by the expansion and quality of our pipeline and believe we are well positioned for improved performance as the economy begins to improve.

I would now like to hand over the call to John to review our financial results. John?

John Granara -- Chief Financial Officer

Thanks, Joss. I'll now turn to our financial results for Q1. Please keep in mind that all figures refer to the first quarter of 2021, and all comparisons are for the year-over-year changes, unless I say otherwise. As a reminder, the majority of our revenues and subscription revenues are derived from currencies other than the U.S. dollar. As expected, the weakening of the South African rand had a negative impact on our reported revenues due to the disruption from COVID. The South African rand weakened by 25% against the U.S. dollar compared to the first quarter of fiscal year 2020, contributing to a 12% reduction in reported subscription revenues and to an 11% reduction in reported total revenue. Starting with the P&L, total revenue came in at $27.5 million, a decrease of 13% on a constant-currency basis. Of this total, subscription revenues were $25.9 million, a decrease of 6.1% on a constant-currency basis. The decline in constant currency subscription revenue was primarily due to contraction in the company's subscriber base as a result of the economic conditions attributable to the COVID-19 pandemic, as well as the impact of temporary pricing concessions granted to customers in certain verticals.

We ended the quarter with over 787,000 subscribers, an increase of 3% year-over-year, but our subscriber base contracted by 30,700 subscribers in the first quarter, or 4% sequentially. As a reminder, contraction from premium fleet customers has a disproportionate impact on our overall ARPU. Hardware and other revenue of $1.6 million were down sequentially and year-over-year by 66% and 65%, respectively. Moving on to gross margin and operating expenses, gross margin was 68.8%, up from 66.3% last year. Overall, we had a strong gross margin quarter, driven by the increased mix of subscription revenue. Operating expenses before restructuring charges were 56% of total revenue, compared to 51% of revenue in the first quarter last year and were down 16% compared to prior year and 10% sequentially, reflecting the partial impact of the cost actions taken during the quarter, including headcount reductions, deferred salary increases, a hiring freeze across the business, and significant reductions in discretionary spend.

We will realize the full benefit of these actions in the second quarter and beyond. I would note that as part of the headcount reductions in the quarter, we did incur an $844,000 restructuring charge. Adjusted EBITDA was $7.5 million or 27.1% of revenue compared to $10.1 million, or 27.7% of revenue, last year. We are pleased with the margin performance in the quarter, which reflects the proactive steps, with our cost structure, mentioned above, offsetting much of the impact of lower revenue. Non-GAAP net income for the quarter was $1.8 million, down from $4.4 million in the year-ago period. Company's effective tax rate was 3.7%, compared to 18.6% in the first quarter of fiscal 2020. Ignoring the impact of net foreign exchange gains and losses, the tax rate, which was used in determining non-GAAP net income, was 30.2%, compared to 27.4% in the first quarter of fiscal 2020. Turning to the balance sheet, which remains strong, we ended the quarter with $25.3 million of cash, cash equivalents, and restricted cash, compared to $18.7 million as of March 31, 2020. Accounts receivable improved sequentially, but DSO remains elevated. We continue to believe we have appropriately accounted for any uncollectible amounts with the allowances we have recorded.

From a cash flow perspective, for the first quarter, we generated $9.4 million in net cash from operating activities and made $2.1 million investments in capital expenditures, leading to a free cash flow of $7.2 million. The use of cash includes investments in in-vehicle devices of $1 million. The significant increase in free cash flow reflects the working capital benefits, as well as lower capital intensity, due to fewer in-vehicle device installations. Before I wrap up, I would like to provide some additional perspective on how we expect the year to play out. As Joss mentioned, we continue to manage the business assuming constant currency subscription revenue could decline as much as 10% to 20%. We continue to expect that the majority of the subscriber contraction will be in the first half of the year.

However, we now expect the contraction to be more balanced across the first two quarters. From a profitability perspective, we are very pleased with our cost discipline and how we manage expenses while investing for growth. As you think about costs, second quarter costs are expected to be lower than Q1 and relatively flat thereafter. We are confident we can deliver at least 20% adjusted EBITDA margins for the year. To summarize, we are executing on our core priorities in managing the business through the current environment well. Our updated profitability target for the year reflects our operating discipline and the strength of our business model. We remain confident we will deliver on our long-term growth and profitability objectives as market conditions normalize.

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

Questions and Answers:

John Granara -- Chief Financial Officer

[Operator Instructions] Our first question comes from the line of Matt Pfau with William Blair.

Matt Pfau -- William Blair -- Analyst

Hey guys, thanks for taking my questions. First, Joss, I wanted to start off with the comments that you made around the traction you're seeing with large fleets in the pipeline. Maybe you can just give us some more detail on that comment. What types of fleets? Is there a trend there? And any specific geographies that you're seeing strengthened.

Stefan Joselowitz -- President And Chief Executive Officer

Yes, it's almost counterintuitive, but considering the circumstances that we're facing, but our pipeline and the kind of conversations we're having with many large fleets from in various verticals, in various geographies is as exciting, probably, as I've ever seen it. I mean, we're involved in a lot of very exciting bids. Of course, we've got to get them across the line, but we've always backed ourselves when we're in this kind of situation. And it's pretty encouraging, particularly considering the world that we're currently in.

Matt Pfau -- William Blair -- Analyst

Got it. And is there anything specifically that's sort of driving these discussions? Are they viewing maybe a slower economic time as a good opportunity to implement a fleet management solution or change one out, or anything regulation else that's sort of driving these discussions?

Stefan Joselowitz -- President And Chief Executive Officer

Yes, I think there's a growing recognition among larger fleets that centralized data and the value that it unlocks in a mobile from a mobile asset perspective is significant and accretive to their businesses. And I think that recognition and realization is driving these conversations. And I think it's exciting from an industry perspective, and particularly exciting from our perspective, as it applies to global fleets, that we are almost uniquely positioned to be able to, I guess, solve some pieces of this puzzle for them.

Matt Pfau -- William Blair -- Analyst

Got it. And then I wanted to ask one on the pricing concessions that you mentioned. I think if we go back to the last earnings call, there was a discussion around specifically in the bus and coach vertical, with some of those operations being near completely shut down, that you were giving some of those customers some breaks? Is that what the pricing concessions are related to, or are they more broad-based than that?

Stefan Joselowitz -- President And Chief Executive Officer

Well, I think it's sometimes more it's certainly more broad-based than just necessarily a particular vertical. So of course, we're acquired and where appropriate, we're working with our customers. We generally endeavor to get future concessions as part of that process. And generally, we are not in all instances, but generally, I think we're successful in achieving that.

But I think it's in time of crisis that there's an opportunity to really cement customer relationships and show that you're a willing and I guess empathetic partner to help the customer through the situation. And we've learned that from previous situations, although this is this one is pretty unique. We've been through other economic fallout before, and we have worked with our customers, and we've generally found that cooperating, not just relying necessarily on the absolute letter of the contract, but showing empathy and cooperating on finding a way to get through the hard times together pays long-term dividends.

Matt Pfau -- William Blair -- Analyst

Got it. Thanks for taking my questions guys. I appreciate it.


[Operator Instructions] Our next question is from the line of Brian Peterson with Raymond James.

Kevin -- Raymond James -- Analyst

Hi guys. Kevin here on for Brian. I think you said that new subscriber activity improved toward the end of the quarter, and I'm wondering if there's anything else you could say around the cadence for the quarter. And, maybe, how have you seen retention trend across some of your key verticals?

Stefan Joselowitz -- President And Chief Executive Officer

Yes, so I'll probably, in terms of the retention, pass it over to John. But in terms of the cadence, the first two months were really unprecedented. We were facing almost a total shutdown in multiple geographies. And I guess new economic activity was roughly, and I'm just giving you an idea of the cadence, was running at something like 20% of normal. In June, we saw it, as some geographies started opening up, rising to something resembling 50% of normal. And I guess that's a, in terms of a broad brushstroke kind of view, that can certainly give you a feel of the cadence. John, do you want to comment on churn versus contraction?

John Granara -- Chief Financial Officer

Absolutely. And with regards to the contraction, I would say the and just qualitatively say the majority of the subscriber contraction came from customers with large fleets where we did not lose the customer. We actually retained the customers. In terms of customers lost, the majority of those were consumer-based or very small fleet operators. So, importantly for us, we retained the majority of the customers, and it was really just a result of them reducing their fleets during the pandemic.

And more importantly, we as we have seen before in the past with recoveries, the important point there would be that we would expect, at some point, those vehicles to come back online.

Stefan Joselowitz -- President And Chief Executive Officer

Yes, I suppose if I can just finish up on that answer is, so new economic activity was significantly down. Contraction was up. And as far as regular churn, let's call it, and particularly in our smaller asset-tracking consumer kind of businesses, that was about about par, so that ran as normal. No significant change to the regular cadence of that.

Kevin -- Raymond James -- Analyst

Got it. That's helpful. Maybe one other one. I think you said previously that previously, it was where you're seeing some of the really bigger contractions. Was that still the case this quarter, and were there any differences to call out between that versus some of the asset or light fleet products?

Stefan Joselowitz -- President And Chief Executive Officer

So from a contraction perspective, and again, differentiating from churn is that contraction with the customer is happy. We continue with our relationship with them. And it's been other there's been a reduction in fleet size. And if we compare to the same quarter a year ago, most of our key verticals contributed expansion to our positioning 12 months ago, whereas this quarter, they were contraction. Was it all out of premium fleet? No. We did see significant contraction, as would be expected out of our in our asset-tracking business, primarily from our leasing vertical, car rental companies who have experienced, obviously, a lot of pain through the absence of tourism due to the pandemic and related shutdowns.

Kevin -- Raymond James -- Analyst

Very helpful. Thanks guys.


Thank you. So At this time, we've come to the end of our question-and-answer session, and I will turn the floor back over to Mr. Stefan Joselowitz for closing remarks.

Stefan Joselowitz -- President And Chief Executive Officer

Yes, I just want to, again, thank everybody for joining the call today. And we're not going to be seeing anybody, so to speak, at conferences in the near future, but we are participating in some virtual events. I think the next one we've got coming up is with Canaccord, if I'm not mistaken, and we're looking forward to that, John.

And in the meantime, until we talk again, please wish we wish everybody and their families all the best through this crisis and look forward to returning to a world of normality in the not-too-distant future. Thanks for your time, everybody.


[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

John Granara -- Chief Financial Officer

Stefan Joselowitz -- President And Chief Executive Officer

Matt Pfau -- William Blair -- Analyst

Kevin -- Raymond James -- Analyst

More MIXT analysis

All earnings call transcripts

AlphaStreet Logo

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

MiX Telematics Limited Stock Quote
MiX Telematics Limited
$7.80 (1.09%) $0.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.