PowerFleet, Inc. (PWFL) Q1 2022 Earnings Call Transcript

PowerFleet, Inc. (PWFL 2.61%)
Q1 2022 Earnings Call
May 10, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to PowerFleet's first quarter 2022 conference call. Joining us for today's presentation is the company's CEO, Steve Towe; and CFO, Ned Mavrommatis. [Operator instructions] Before we begin the call, I would like to provide PowerFleet's safe harbor statement that includes cautions regarding forward-looking statements made during this call.

During the call, there will be forward-looking statements made regarding future events, including PowerFleet's future financial performance. All statements other than present and historical facts, which include any statements regarding the company's plans for future operations, anticipated future financial position, anticipated results of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company's product offering and other industry trends are considered forward-looking statements. Such statements include, but are not limited to, the company's financial expectations for 2022 and beyond. All such forward-looking statements imply the presence of risks and uncertainties and contingencies, many of which are beyond the company's control.

The company's actual results, performance or achievements may differ materially from those projected or assumed in any forward-looking statement. Factors that could cause actual results to differ materially could include, among others, SEC filings, overall economic and business conditions, demand for the company's products and services, competitive factors, emergence of new technologies, and the company's cash position. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances. Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company's website at www.powerfleet.com.

Now I would like to turn the call over to PowerFleet's CEO, Mr. Steve Towe. Sir, please proceed.

Steve Towe -- Chief Executive Officer

Welcome, everyone, and thanks for joining our call. During the first quarter, we built on a solid uplift in revenue from the prior quarter and delivered an encouraging 14% year-over-year revenue growth. The double-digit growth momentum we generated in the first quarter was driven by further commitment from some of our major customers, including Walmart, Albertsons, and American Intermodal Management. And more broadly, we saw growth across our core international verticals and markets, particularly in Mexico and our pointer operations, both of which are realizing solid growth with new and existing partners.

It's been a little over four months now since I joined PowerFleet, and my experience and interactions continue to exceed my expectations. The company has solid technology, a strong reputation, a world-class customer base, and the committed global team. Our updated strategy has been very well received by customers, partners, and employees alike. Additionally, our team and key partners are excited about the direction of the business and the increasing role PowerFleet is playing across our customer supply chain to solve the unparalleled need for high visibility and insight through unifying their operations.

Before I discuss our growth strategy, operational initiatives and business outlook, I would like to thank Ned for his valuable contributions he has made to PowerFleet over the years. Ned has been a great business partner since I joined the company, and I greatly appreciate his support as we search for our next financial leader to help us build on the operation and financial momentum and capitalize on the growth opportunities on the horizon. On behalf of the board and leadership team, I wish Ned a great success in his next endeavor. In the interim, our global controller, Joaquin Fong will manage the day-to-day global finance operations until the CFO search is completed.

And with that, I'll turn to Ned to cover our financial results for the first quarter of 2022. Ned?

Ned Mavrommatis -- Chief Financial Officer, Treasurer, and Secretary

Thank you for the kind word, Steve. I look forward to supporting the company not only in a consulting capacity over the coming months, but also as a shareholder and a friend of the PowerFleet's family for the years ahead. Turning to our financial results for the first quarter ended March 31st, 2022, total revenue increased 14% to $33.2 million from $29 million in the same year-ago period. High-margin recurring and services revenue was $18.8 million or 57% of total revenue.

This was an improvement on a dollar basis compared to $17.6 million or 61% of total revenue in Q1 of last year. Product revenue, which drives future services revenue was $14.4 million or 43% of total revenue. This compares to $11.4 million or 39% of total revenue in Q1 of 2021. Gross profit was $14.4 million or 43% of total revenue, compared to $14.5 million or 50% of total revenue in the same year-ago period.

Services gross profit was $12 million or 64% of total service revenue, an improvement, compared to $11.2 million or 64% of total service revenue in Q1 of last year. Product gross profit was $2.4 million or 17% of total product revenue, compared to $3.3 million or 29% of total product revenue in the same year-ago period. Product gross profit was negatively impacted in Q1 2022 by product mix, higher costs associated with supply chain issues and electronic component shortages, and inflation. During Q1 of 2022, we incurred approximately $1.3 million in purchase price variance or PPV related to supply chain issues and electronic component shortages which impacted our product gross profit by 9%.

Looking at our expenses. Total operating expense were $18.1 million, down from $18.9 million in the prior quarter, but up from $16.4 million in Q1 of last year. A key initiative of our transformation strategy is to rationalize costs in non-core areas, the benefit of which we expect to see starting in Q2. Looking at our profitability metrics.

GAAP net loss attributable to common stockholders totaled $4.1 million or $0.12 per basic and diluted share. This compares to GAAP net loss attributable to common stockholders of $3 million or $0.09 per basic and diluted share in Q1 of last year. Non-GAAP net loss and non-GAAP metric totaled $2.2 million or $0.06 per basic and diluted share, compared to non-GAAP net income of $61,000 or $0.00 per basic and diluted share in the same year-ago period. Adjusted EBITDA loss and non-GAAP metric totaled $993,000, compared to adjusted EBITDA of $1.4 million in the same year-ago period.

At quarter end, the company had $20.9 million in cash and cash equivalents and $40.5 million of working capital. That concludes my prepared remarks. Steve?

Steve Towe -- Chief Executive Officer

Thank you, Ned. Our company's laser-focused in 2022 on establishing a world-class SaaS and AI platform to maximize the impact we make for our customers and increase the wallet share that we can derive in the future. PowerFleet is well-positioned to capitalize on this opportunity due to the depth and breadth of our solutions, specifically the rich history of innovative platform devices and sensors, our suite of software applications and data, coupled with the growing need for real-time AI-based solutions across our SaaS platform. Our strategic road map has been finessed with several go-forward data-centric initiatives.

As we started to capitalize on the rapid transformations taking place in our industry, we're driving forward a modular enterprise application methodology to help our customers prioritize and implement their digital transformations at a pace to suit their organization. It will allow them to prioritize and focus on the business problems they are looking to solve across the C-suite. In turn, this will create significant upsell opportunities as we collaborate with our customers to create strategic business change road maps. Another initiative is unifying our platforms to a single set of interfaces, which will remain on track to deliver this year.

The unification will enable PowerFleet customers to access information across their entire asset-based state through a highly intuitive single pane of glass, transforming the way operators can manage their business. We have already enjoyed several fruitful strategic conversations with major customers and key partners about our broader technology roadmap. In parallel, we are ramping up pipeline for the unification of our platforms which will significantly enhance our ability to cross-sell solutions across the organization. The completion of the unification will position PowerFleet as a leading global end-to-end IoT provider, catering to all asset types in a cohesive fashion.

Our mission is to become a cornerstone of our customer strategy to unify their operations. As part of this effort, we have rapidly galvanized our global data and third-party integration capabilities and now have more than 80 data integrations with other best-of-breed partners, which also offer pivotal services to manage our customer supply chains and their business operations. We will continue to add significantly to the growing number of key integration points over the coming quarters. We continue to navigate through the global supply chain and electronic component issues and deliver on our customer commitments, supplying products and solutions that they rely on for their business operations.

As we progress through 2022, we expect product gross profit to gradually improve as we begin to realize the benefits from our operational and product reengineering initiatives. In the longer term, we are confident these measures will give us a better control in cost management leaders for our supply chain. In step with this, we're working hard to expand recurring revenues while reducing operating expenses through even closer integration of our business units. From a sales perspective, the leadership team and I are fully focused on optimizing PowerFleet's global go-to-market growth strategy and better promoting our company's vision to improve safety, productivity, efficiency, and sustainability across business operations with intuitive and innovative IoT SaaS solutions.

Along that line, we recently attended MODEX 2022, the premier industrial supply chain event. The customers and prospects we met within the trade show were very responsive to PowerFleet's positioning as having one of the most comprehensive set of capabilities in the industrial market segment. There is excitement and demand for our newly launched pedestrian and vehicle warning system, which uses advanced AI capabilities to manage safety, prevent accidents and reduce damage in our customer warehouse facilities. The team is fully focused on executing well on driving transformation and accelerating our vision.

The successful execution of our strategic road map will create a highly scalable, repeatable, and profitable global organization. That concludes our prepared remarks. Now I'll turn it back to the operator for Q&A.

Questions & Answers:

Operator

[Operator instructions] Your first question for today is coming from Mike Walkley from Canaccord Genuity. Mike, your line is live.

Mike Walkley -- Canaccord Genuity -- Analyst

Great. Thanks for taking my questions and congrats on a solid start to the year. And Ned, best wishes in your future endeavors. First question from me, Steve, is just on the supply chain, we know it's very challenging.

Can you just elaborate further on what PowerFleet is doing to manage this? And how we should think about the slope of recovery for hardware gross margins over the next several quarters?

Steve Towe -- Chief Executive Officer

Thank you for the question. A good question to start. So in terms of the medium term, we have looked to reengineer a number of potential component challenges out of the estate. And that obviously takes time for us to work through.

So in the meantime, there are -- there is a shortage of components. There are components that are nearing end of life or got to end of life. And prices in the market are being sent off the back of that. We've taken a philosophy where we can practically to continue to implement those solutions with our customers provide the products.

And that's where you've seen the hit in gross margin. So that will start to ease because we are seeing a slight improvement, I would say, in the situation over the coming quarters, plus the reengineering work. So as we kind of glide to the end of the year, we should see our sales rebound quite steadily.

Mike Walkley -- Canaccord Genuity -- Analyst

Great. Thanks. And I know focus is growing AI and SaaS revenue. Maybe you can talk about or elaborate more on how is your sales team adopting to this? What might be changing in terms of your go-to-market strategy and discussions with your customers?

Steve Towe -- Chief Executive Officer

Yeah. So I think we've talked before, this is an on-demand strategy. So it's -- first of all, let's get as many devices and subscribers as we can into the market and then focus on the expand strategy to really kind of cement ourselves with the data solutions that we provide. So from a sales team perspective, this has been very well received because they have more solutions now to go and sell to customers, both in terms of data sets that we're able to provide, but also the breadth across the different asset types.

What we are obviously looking longer term to do is make sure we can be a very good one-stop shop across all of those asset types. So we have a number of conversations now going on with different members of the C-suite within the organizations to make sure that we're looking at appropriate solutions across the business as a whole rather than maybe in a particular segment.

Mike Walkley -- Canaccord Genuity -- Analyst

Great. Last question from me, and I'll pass back to the line. Just as you think about the model, obviously, you want greater mix of SaaS revenue longer term, but there's also some cost cutting, I guess, initiatives or efficiency initiatives going on. So should we think about overall operating expense dollars declining over the course of the year? Or do you need to hire a new sales team with the changing go-to-market strategy?

Steve Towe -- Chief Executive Officer

Yes. It's a bit of a balancing of both. So obviously, we feel there's a really good market opportunity, and we need to put some further feet on the street for the market segments we've talked before about bringing the Pointer solutions as an example to the U.S. market in quite a large way.

So I think we'll be adding people. At the same time, the cost reductions and integration efforts will take time to come in. So there might be some costs go up before we see the full fruit of the reductions. But at the same time, there are some quick wins as well from a cost reduction perspective.

Mike Walkley -- Canaccord Genuity -- Analyst

Great. Thanks for taking my questions and best wishes for success this year.

Steve Towe -- Chief Executive Officer

Thanks a lot.

Operator

Your next question for today is coming from Jaeson Schmidt with Lake Street. Jaeson, your line is live.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

Hey, guys. Thanks for taking my question. Really nice momentum on the revenue line in March. Just curious about what you're seeing from an order pattern standpoint here in April and early May?

Steve Towe -- Chief Executive Officer

Yes. So we're seeing good momentum remain in our pipelines. I think that the Q4 was a strong revenue quarter, Q1 was a strong revenue quarter, and we're seeing demand continue. I think customers are, again, thinking of us now in a different light.

So not only near-term pipeline but also longer-term pipeline as to how PowerFleet can be a partner on a broader basis. As I said in the note, we're feeling that those conversations are fruitful and that helps both the short term and the long term.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

OK. No, that's really helpful. And then -- just looking at the equipment gross margin line. I know you expect improvement this year as some of the initiatives kind of flow through.

But just curious if some of this improvement is also assuming the supply chain backdrop overall improves?

Steve Towe -- Chief Executive Officer

A lot of it, as I've said, is our reengineering, and obviously, we've been putting that act into execution from midyear last year through the rest of this year. We are seeing slight improvement, but I wouldn't say anything that makes us feel totally confident that, that pattern is going to continue at this point in time.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

OK. And then just last one from me, and I'll jump back in the queue. I know you spelled out in Mexico in the release. But from a geographical perspective, any other areas that jump out, either positive or negative?

Steve Towe -- Chief Executive Officer

So I mean, what's great is the improvement is being spread around the globe. So our Israeli team saw good growth, our Mexican team, as we said, and also our U.S. team as well. So those three territories, I would say, are leading the way for us.

I wouldn't say anything from a negative perspective, but they're really standing out as getting market share and market gain.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

OK. Great. Appreciate the color. Thanks, guys.

Operator

Your next question for today is coming from Scott Searle with ROTH Capital. Scott, your line is live.

Scott Searle -- ROTH Capital Partners -- Analyst

Hey. Good morning. Thanks for taking the questions. Ned, I want to wish you all the best of luck going forward.

It's been fun working with you over the years. Maybe just to follow up on a couple of the earlier questions on the gross margin front. Steve, you're going through product redesigns. I'm wondering what that entails in from a certification process, if you could put some time frames around that? And then as we start to think about the recovery on the product side, what are -- what should we be expecting kind of exit rate in '22? And what are the ultimate targets here? This used to be a business that ran at 30% plus, we're at 17%.

Is that still an achievable number subject to mix?

Steve Towe -- Chief Executive Officer

OK. So let's take those two in separation. So in terms of the certification, some we do need certifications, some we don't, in terms of the minor designs and everything that we're changing. So that has all taken place where it needs to and will continue to take place.

We see really the fruits of that -- of the full engineering work to take place in Q4 this year. So that's the first part. In the second part, I think getting back to mid-20s is a good short-term target for us, 30% plus. I mean, there's a lot of macroeconomics that we need to look at to be able to be certain of that moving forward.

But we expect to improve on that mid-20s later in the year and early next year.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. Very helpful. And on the opex front, up sequentially, I'm wondering if there are any onetime items in there to call out? I know at the beginning of the year, you got things like FICA and otherwise. But if is there anything to highlight in terms of that base level opex that we're starting from?

Steve Towe -- Chief Executive Officer

Ned, do you want to take that one?

Ned Mavrommatis -- Chief Financial Officer, Treasurer, and Secretary

Sure. It's actually down slightly compared to Q4, but not anything specific. During the first quarter, there's few hundred thousand of onetime items that gets hit in the first quarter that should not be there in the second quarter.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. OK. And lastly, Steve, if I could. You've talked about the evolution of the platform more modular and identifying some partners.

It sounds like you've gotten further along on that front. And I think you had, in the past, talked about starting to see some of the initial betas rolling into the marketplace with those partners in the second half. Are those metrics, are those time lines still tracking? And I'm also wondering from a metric standpoint going forward as you think about the business of how you're going to be reporting the business going forward? And lastly, if I could, I know you guys had talked before about an Analyst Day. Is that something that we should still be thinking about? Or is that kind of looking more like in the third quarter, fourth quarter kind of time frame? Thanks.

Steve Towe -- Chief Executive Officer

And from the first one in terms of the integrations, those 8 integrations are live now. So the team have done a fantastic job to move very quickly. So I think that's a fantastic start for us, and we'll now be really publishing that from the second half of the year and getting our go-to-market teams behind it. In terms of -- can you just explain your question more in terms of reporting of the business?

Scott Searle -- ROTH Capital Partners -- Analyst

Yes, Steve. I'm just -- in terms of metrics of subscribers enterprises that you're working with or otherwise, how you're thinking about I guess, measuring the business both internally and what you're going to be reporting to the Street going forward? I know it's a little early in your tenure, but is there any early thoughts in terms of how we should be thinking about the business, particularly on the SaaS side?

Steve Towe -- Chief Executive Officer

I don't think we would be saying anything different to what we've been saying before or looking at the business in a different way. Obviously, we're going to go very strong on recurring revenues and the metrics around that. And I think quality across the organization is something that throughout the organization internally, we're making sure that we're at the top of our game. So maybe a bit more strength around those particular mix.

But the general running of the business, I think we have good metrics today. In terms of your third question, yes, we are hosting our Analyst Investor Day on the 14th of June in New York City.

Scott Searle -- ROTH Capital Partners -- Analyst

Great. Thanks so much.

Operator

There are no further questions in queue. I would like to turn the floor over to Steve for closing remarks.

Steve Towe -- Chief Executive Officer

Thank you to everyone for the insightful questions, and thanks today for joining the call. As I just mentioned, we are hosting an Investor and Analyst Day in New York City on Tuesday, June 14th, from 12 noon to 3 p.m. Eastern Time. The event will provide an opportunity to meet the expanded leadership team and gain insight into our strategic growth drivers and long-term outlook, and to really spend some time with the heart of the business.

The RSVP for the event, please contact Matt Glover via [email protected]. In closing, I'd like to thank our employees for their diligent efforts and operational execution, extend a thank you to our valued customers for putting their trust in PowerFleet, and thanks to our investors for your continued support and confidence in our ability to realize our vision.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Steve Towe -- Chief Executive Officer

Ned Mavrommatis -- Chief Financial Officer, Treasurer, and Secretary

Mike Walkley -- Canaccord Genuity -- Analyst

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

Scott Searle -- ROTH Capital Partners -- Analyst

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