May 7, 2012
Executives
Jeffrey Jagid – Chairman and CEO Ned Mavrommatis – CFO and Treasurer Darryl Miller – COO Ken Ehrman – President
Analysts
Morris Ajzenman – Griffin Securities Matthew Hoffman – Cowen & Co Mike Cikos – Sidoti & Co
Operator
Good day ladies and gentlemen and welcome to the ID Systems Incorporated First Quarter 2012 Conference call. At this time all participants are in a listen-only mode.
Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder this conference call is being recorded.
I would like to introduce your host for today’s conference, Mr. Jeffrey Jagid, you may begin.
Jeffrey Jagid
Thank you. Welcome to ID Systems’ fiscal 2012 first quarter conference call.
Thank you for joining us today. I am Jeffrey Jagid, the Chairman and CEO of ID Systems.
Joining me today are our CFO, Ned Mavrommatis; our Chief Operating Officer Darryl Miller; and Ken Ehrman, the President of ID Systems. I will provide a brief overview of our results for the quarter.
Ned will detail our financials. Darryl will update you on our operations and the performance of our AI subsidiary, and Ken will review the highlights of our vehicle management business.
We will then open the call to your questions. Before we begin, let me reiterate the Safe Harbor statements under the Private Securities Litigation Reform Act.
The following discussion contains forward-looking statements that are subject to risks and uncertainties, including but not limited to the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results and other risks detailed from time to time in ID Systems’ filings with the Securities and Exchange Commission. These risks could cause the company’s actual results for the current fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.
2012 began on a positive note for ID Systems with first quarter revenues of $9.8 million, up 25% from the first quarter a year ago. This was our ninth consecutive quarter of year-over-year revenue growth.
Revenue contributions in Q1 2012 came from a balanced mix of market segments, products and services led by strong increases in sales of both vehicle and transportation asset management systems which Ken and Darryl will discuss in more detail shortly. Our revenue was also derived from a relatively balanced mix of new product sales and service contracts with recurring revenue representing 43% of total revenue in Q1.
Our gross margin remained strong at 50% in the first quarter, consistent with historic levels. As a result, our net loss improved year-over-year in Q1 as Ned will detail in a moment.
We remained focused on the growth strategy that we executed successfully in 2011. We are expanding business with core customers in vertical markets and across geographic regions especially Europe.
We are diversifying revenue sources by expanding our customer base both through direct sales to large enterprises and through channel partners. And we are maintaining our market leadership position by continuing to develop unique products and features including many enhancements to our patented systems for securing, tracking, and managing vehicles, trailers, and containers.
As industrial vehicle management increasingly becomes viewed as a best practice in supply chain operations, as we continue deploying our rental car management technology, and as the transportation asset management market continues to mature, this strategy puts ID Systems in a strong position for further organic growth. With our healthy balance sheet, we also continue to evaluate growth opportunities through strategic acquisitions.
Our criteria for potential acquisitions include strong fits with our recurring revenue and margin models, complementary technology and operating profiles, and synergies in customers and target markets. As we grow, we will continue to exercise discipline on expenses as we have for example, by recently consolidating the sales forces of our subsidiaries.
We’re working hard to continue the positive momentum we achieved in 2011 and Q1 2012 with our ultimate aim to build shareholder value. Thank you for your time today.
I look forward to your questions later on the call. Now let me turn the discussion over to Ned Mavrommatis to detail our financial results for the fourth quarter and full-year 2011.
Ned Mavrommatis
Thank you Jeff, and hello to everyone on the call today. As Jeff noted, revenue in Q1, 2012 increased to $9.8 million, up 25% from $7.8 million in the first quarter a year ago.
High margin recurring revenue was $4.2 million, up 4% from $4 million in the corresponding quarter a year ago. Recurring revenue represented 43% of total revenues in Q1 2012, consistent with 2011 when recurring revenue was 42% of total revenue for the year.
Our vehicle management business contributed $5.3 million of revenue in Q1 2012, a 35% increase over Q1 2011, while our transportation asset management business contributed $4.5 million, up 17% from the first quarter a year ago. As Jeff mentioned, our gross margins in the first quarter of 2012 remained robust and consistent 50%.
SG&A expenses in Q1 2012 were $5.6 million, up 9.5% over Q1 of 2011, but only 1.5% up sequentially compared to Q4 2011. R&D expenses in the first quarter were $1.1 million compared to $906,000 in Q1 2011 and $931,000 in Q4 2011.
Excluding stock based compensation and depreciation and amortization, our non-GAAP net loss in Q1 2012 improved to $840,000 or $0.07 per basic and diluted share, compared to a non-GAAP net loss of $852,000 or $0.08 per basic and diluted share in Q1 2011. The GAAP net loss in the first quarter improved 7% to $1.6 million or $0.14 per basic and diluted share from a net loss of $1.8 million or $0.16 per basic and diluted share in the first quarter of 2011.
Our balance sheet remains strong. As of March 31, we had $21.1 million in cash, cash equivalents and marketable securities and no debt.
Thank you for dialing in today. I look forward to your questions and to reporting further on our financial progress in the future.
With that let me turn the call over to Darryl Miller, our Chief Operating Officer to review highlights of our operations and transportation asset management business.
Darryl Miller
Thanks Ned, and greetings to everyone on the call. The most notable development in ID Systems operations during the first quarter of 2012 was the consolidation and restructuring of our sales organization.
We have fully integrated the vehicle and transportation asset management sales teams to maximize cross-selling synergies, which was the last area we combined after the asset intelligence transaction. We’ve also clustered outside sales, inside sales, project management, and performance services resources to provide deeper team coverage in each geographic territory.
In Europe, to streamline sales and project management, we have merged our U.K. operations into our ID Systems subsidiary in Continental Europe.
Our revenue in Europe grew 50% in 2011 over the prior year with business expanding across the region from Iceland to Egypt, and we believe this management consolidation will help us to manage continued rapid growth internationally. On the transportation asset management side of our business, customer adoption of our VeriWise solution continues to be strong.
Our suite of VeriWise products range from the basic low-cost, high value Track and Trace system to the industry’s most advanced cargo monitors and reefer management systems, for which we have significant patent protection and competitive advantages. VeriWise solutions are reliable, high quality and have significant value propositions.
It provides customers with real-time, web-based visibility of in-transit freight to increase the velocity of materials throughout the supply chain. In quarter one 2012, we received a significant volume of repeat orders from current core customers include BASF Corporation, CH Robinson Logistics, Marten Transportation, Star Leasing, Knight Transportation and Wal-Mart.
We also shipped a number of initial orders to new customers including two large regional U.S. shipping companies.
As Ned mentioned, sales of VeriWise transportation asset management systems more than doubled in quarter one compared to the same time period a year ago, from about $750,000 to $1.6 million. Thank you for your time and attention today.
I look forward to bringing you further updates in the future. On that note, I’ll turn the discussion over to President and Co-Founder of ID Systems, Ken Ehrman.
Ken Ehrman
Thank you, Darryl, and thank you everyone for joining us on the call today. As Jeff noted, we continued to achieve strong sales growth across all product categories in the first quarter of 2012 with a healthy mix of business from core new customers through both direct and partner channels.
Our industrial vehicle management system is anchored by two patented wireless solutions, PowerBox which is our most common system, which has a straight forward value proposition which focuses on an access impact and OSHA checklists, and PowerFleet which is a uniquely flexible and configurable option for our largest customers that have options like vehicle location tracking and advanced operator productivity. Together the two systems hold an estimated 50% market share for the wireless industrial vehicle management market.
Core customers that expanded business with ID Systems during the first quarter included Ford Motor Company, Hy-Vee Stores, John Deere, Nestlé, Procter & Gamble, Toyota North America, the U.S. Postal Service and Wal-Mart to name the most prominent.
Toyota was especially noteworthy ordering PowerFleet for material handling equipment at two of the largest U.S. plants.
One facility is upgrading a fleet of approximately 500 industrial trucks originally equipped with an ID Systems’ Vehicle Management System in 2002. The second site will be deploying our system for the first time.
Our direct sales efforts also added several new customers in the quarter including two of North America’s leading food manufacturers, a multi-billion paper and wood fiber products producer, a leading European logistics company, and a global aerospace and defense company. Our channel partners also contributed to our revenue growth in Q1 2012 with a combination of both new and repeat customers including a Fortune 500 retailer, a global oil maker, an apparel brand conglomerate, one of the largest U.S.
manufacturers of specialty building materials and a major food service company, as well as large chain of convenient stores, one of the world’s largest refractory operations, a Canadian logistics provider and a leading European food ingredient processor. We continue to target special verticals within the industrial vehicle market such as airport equipment and Department of Defense vehicles.
For example, we recently hired a former American Airlines executive to spearhead our efforts in the airport markets. This gentlemen, who is responsible for AMR’s system-wide ground support operations oversaw the implementation of our AvRamp Vehicle Management System on American Eagle Airlines ground support equipment at Dallas/Fort Worth and Chicago O’Hare airports, where the system saved AMR about $1 million in the first year of deployment.
As many of you know, we also have a version of our vehicle management system, carried to automotive rental fleet. And we have been rolling out this system for Avis Budget Group at both traditional airport rental lots and our new virtual lots called Avis On Location.
Our technology enables Avis Budget to offer decentralized, charged by the hour car rentals via a smartphone without any on lot staff. Our system allows this service to be deployed quickly, on-demand without requiring customer subscriptions or ID badges and do – not unlike Avis’ competitors, Zipcar and Hertz and their systems.
Our concept with Avis Budget covers system deployment on about 25,000 vehicles primarily in the Northeast. Avis Budget also has highly incentivized options to expand our system across its global rental fleet, so there is significant opportunity for future growth as well.
I look forward to keeping you informed about further developments in our rental system expansion and updates on our other wireless asset management application on future calls. On that note, let me turn the call back over to Jeff for the Q&A segment.
Jeffrey Jagid
Thank you, Ken. That concludes our prepared remarks.
We are now pleased to open the call for your questions. Thanks again for participating on our call today.
Operator
(Operator Instructions) Our first question comes from the line of Morris Ajzenman. Your line is open.
Morris Ajzenman – Griffin Securities
Good afternoon guys.
Ned Mavrommatis
Hi Morris.
Jeffrey Jagid
Hi Morris.
Morris Ajzenman – Griffin Securities
Hi. First question, year-over-year, clearly very good gains, just a question sequentially, I mean you gave us a heads-up last time into this quarter, Avis Budget, just based on timing, we’re going to see – or would have been in this quarter be actually a double amount of deliveries into the second quarter, if that’s still playing out that way.
My question is sequentially revenues were down approximately $2 million. Is the bulk of that sequential decline explained by Avis Budget timing?
Ned Mavrommatis
That’s exactly right, Morris. Last quarter which was the fourth quarter of 2011, there was approximately $2 million in revenue from Avis because we delivered 5,000 units and this quarter we did not have any deliveries.
So the revenue from Avis was minimal.
Morris Ajzenman – Griffin Securities
And a quick follow-up to that, and again we understand business is a little lumpy, and it’s always difficult to see from quarter-to-quarter, but this is the first quarter in a while where on an adjusted basis – adjusted meaning that if you accounted Avis Budget not being in a quarter, nonetheless revenues on a sequential basis were kind of flattish. Am I correct in that assumption?
And secondly, these things do happen I suppose, but if one new business – I guess, other businesses can finished it off. Do you believe we’ll get back in the mode where sequentially we’ll start seeing improving revenues?
Jeffrey Jagid
Morris, this is Jeff. Our plan – we’re very optimistic about the year.
So 2012 is shaping up as well as can be expected. What we’re hesitant to comment on is each quarter at this point, because of some of the uncertainty associated with timing, but from an annual standpoint, we are optimistic from a growth perspective.
And your observation is correct, it’s flat. However, typically we see first quarter as a down quarter.
And with it being remaining flat, I think it’s actually testament to improvement in both the transportation side of the business, as well as the vehicle management side of the business. So the only thing that you didn’t see in the quarter, that we certainly weren’t disappointed by because we expected it and I think we’ve commented on it during our last call was we didn’t see contribution from the Avis deployments.
So the quarter was actually, from most objective standpoints, the quarter was fairly positive.
Morris Ajzenman – Griffin Securities
One last follow-up and I’ll get back in queue, Ned, the question is for you, R&D $1.1 million, in the fourth quarter $930,000, first quarter of last year, $906,000. Is that lumpy in this quarter or should we expect that sort of run rate for R&D?
Ned Mavrommatis
I mean if you look at the fourth quarter, as you said the increase was minimal. We expect R&D to be approximately $950,000 to $1 million per quarter going forward.
Morris Ajzenman – Griffin Securities
Thank you.
Ned Mavrommatis
Thank you.
Operator
Our next question comes from the line of Matthew Hoffman with Cowen & Company. Sir, your line is open.
Matthew Hoffman – Cowen & Co
Thanks guys. It looks (inaudible) for a second, it’s something that you guys have – that we’ve had keep close eye on in the past.
So up sequential in revenue and down pretty sharply here sequentially. Why should we not be concerned that SG&A is not going to start ramping at this point, and kind of as a follow-on here as you – another way to think about that is, Avis comes out of the mix, SG&A stays the same, does that mean that in the 2Q timeframe assuming, Avis, does come back in 2Q, you know when you answer that multipart question here, does that mean your SG&A stays flat and we see leverage on that?
Thanks.
Ned Mavrommatis
Yes, hi Matt, it’s Ned. Absolutely you see leverage on that.
And as we stated in – if you look at the SG&A this quarter and compared to the fourth quarter, it was primarily flat, it went up by 1%. So the SG&A on an absolute dollar standpoint, we expect it to remain at this level, and as revenue goes up, then you see that leveraging the model.
Matthew Hoffman – Cowen & Co
Okay, maybe I’ll ask this, try to go and ask it a different way, Darryl, maybe it’s certainly a question for you at this point. So you spearheaded up sales force integration and typically with the cost coming down on the sale side, won’t you undertake one of those integrations?
So help us think about that sales force cost equation moving forward. Are you taking bodies out or you just reallocating the bodies, should this save money or is this strictly an account to grab more revenue?
Darryl Miller
Yes, I’d point that we did this consolidation, wasn’t a point to drive cost out. As you can recall early in the year, we did our big integration that included all of our areas with exception of sales.
Sales was the last piece that we had to consolidate. And this piece was not done in a position to reduce costs.
It was done in position that can grow revenue and grow sales. So you won’t see as a direct result cost coming out of this consolidation.
However we do expect it to have an impact on our sales as we have our entire team trained now to cross-sell on those sides of the business, versus what we’ve done in the past as far as turn leads over and hand leads over. So we’re excited about it and we expect that to make an impact as well.
Matthew Hoffman – Cowen & Co
Did you have any one-time costs to do the integration in the 1Q numbers and otherwise, we still presume that the SG&A run rate from here forward?
Ned Mavrommatis
Matt, no there was not any real one-time cost. The SG&A on an absolute dollar standpoint should run above this approximately at this point [ph] going forward.
Matthew Hoffman – Cowen & Co
All right, so let’s move forward here. Looks that [ph] on that Avis contract, is zero obviously a low point here?
How does that contract look at obviously in meaningful part of the revenue? I hope that you can comment on that as a specific item, how does in Avis look for the second in quarter and then into the rest of the year.
And Jeff, last year I don’t know which quarter it was, you gave peak into the full-year, anything that you know ultimately that you thought you had backlog to do kind of the numbers, you had $45 million, $50 million. How does that same number look this year?
Thanks.
Jeffrey Jagid
I am going to answer the last part of your question first. From a guidance standpoint, I am hesitant to give definitive guidance again because of some of the uncertainty.
We obviously want to get into a position where we can have a higher degree of certainty and give that level of guidance, but I will say that based on the activity with the Avis Budget Group. And I assume everyone saw their results today.
They were very, very positive results from that business as well as the strength of the rest of the pipeline, we’re certainly in a position to grow well beyond what we did in 2011. So that’s absolutely what we are working towards and obviously with an eye to the bottom line.
So I hope that answers the second part of your question. As far as the timing for Avis, we are absolutely in the process of – as I mentioned, we delivered the 5,000 units by year-end of 2011.
We’re in the process of deploying those units. It’s a very exciting opportunity.
It’s extremely innovative. They are using the technology across 100 different makes and models of automobile.
So it’s very, very compelling. And we are well positioned to move to the deployment of the additional 20,000 during this calendar year.
We anticipate that some of those units would be deployed during the second quarter, but the bulk of those units would be deployed beyond the second quarter. And what we try to do is match the, what they call the in-fleeting of the vehicles with the shipment of the units.
And that should take us through, conservatively speaking through the end of the year. At that point, assuming things goes smoothly, remember what we’re doing this for is not $1 million or $2 million in revenue per quarter, but this transaction could serve to be transformational for our business.
It’s very strategic and of course as you know or as you recall, it’s strategic for Avis as well. And in fact, they did make an investment along with the purchase of the product and that really is a testament to the strategic nature of the transaction.
So for us it’s not really about, are you going to deliver the units by June 30 or, it’s really about getting into a position so that we can ensure that we’re doing all that’s necessary to put the company in a spot where we can get their full fleet deployed. And in order to do that, we need to work very closely with Avis to ensure that their car rental experience for their customer is a very positive one.
So we’re working very closely with them to ensure that.
Matthew Hoffman – Cowen & Co
Okay, that’s a good growth message there, Jeff. I just wanted to make sure you were still on track for – that the vision was still out there to see the significant growth here in 2012.
So I do have one last housekeeper and it’s for Ned, or it could be for Ken. But Ken, you noted Wal-Mart on the list of customers who had come back and upgraded or renewed, I am not sure what the exact terminology was.
Is that for the full 65,000 trailers that you have out there? And if so, is there any impact on the forward income statement?
That’s it. And I’ll let the other questions go with you offline.
Thanks.
Ken Ehrman
So there were – let me take a stab at responding to that, I know you directed it to Ned, and maybe he can put some numbers behind it. We are currently – we currently have about 55,000 Wal-Mart trailers under management.
And we are in a renewal period, so we are working that the contract goes through year-end, but when Ned mentioned Wal-Mart as a key contributor, he was talking about the existing Wal-Mart business as well as some add-on revenue contribution from Wal-Mart. The reason I answered the question that way is because we’re also very pleased.
We’re cautious, but we’re also optimistic about our ability to move the relationship with Wal-Mart forward on the transportation side, but as well as the vehicle management side. And I think again that underscores one of the reasons why we consolidated the sales forces because – and Wal-Mart is a prime example of a company that where there is real cross-selling opportunity.
Matthew Hoffman – Cowen & Co
All right, good luck guys. Thank you.
Ken Ehrman
Thanks Matt.
Operator
(Operator Instructions) Our next question comes from the line of Mike Cikos with Sidoti & Company. Sir, your line is open.
Mike Cikos – Sidoti & Co
Hi guys, good afternoon. Just a quick question for you regarding the gross margins that we saw this quarter from both the products business and the services business.
If we’re looking at it just on a sequential basis from the fourth quarter of 2011 into the first quarter of 2012 now, both of those segments actually saw declines in the gross margin. And I wanted to know what contributed to that margin contraction?
Ned Mavrommatis
Sure Mike. If you look at the margins, the breakdown, all the margins were very strong with the exception of some product sales that we made in our asset intelligence business that we included – it was a competitive bid, so we took a little bit of below margin pricing that affected this quarter.
I mean if you look at the services for asset intelligence, the gross margins were at 67% and if you look at the VMS margins combined, they were at 54%. So it was just the one contract on the asset intelligence product that affected us.
We expect going forward in the next quarter and beyond that we should see the margins go up by a couple of percentage points up, 52% to 53%.
Mike Cikos – Sidoti & Co
Okay, that’s very helpful. And the – so it’s more just a function of you not necessarily lowering your price, but I guess for lack of better word you were discounting to get this new customer in the door?
Ned Mavrommatis
Yes, that was one deal. There was a competitive bid and we decided to discount a little bit further than we normally do to bring the deal in the door.
It was a strategic decision that we made.
Mike Cikos – Sidoti & Co
Okay. And the operating expenses, I know some other callers had asked about it, are you already incurring additional costs that you would need once you got to that $50 million run rate?
Is that why we’re seeing this whole uptick in the SG&A line from the first quarter – in the first quarter from the fourth quarter of last year?
Ned Mavrommatis
I mean I just want to stress it again, I know I mentioned it before, when you look at the expenses in comparison to the fourth quarter, they were primarily flat, I mean they went up by 1%. So the increase was minimal.
During the year, we did add – if you’re comparing it to the prior year, during the year we did add a couple of people in sales and marketing, in the area of analytics and inside sales, but like I said before, if you look at for example the second, third and fourth quarter of last year the expenses are very similar to this first quarter. So we didn’t see a significant increase in the expenses.
And going forward we expect the expenses to remain at this level.
Mike Cikos – Sidoti & Co
Okay. The only reason I asked is because I understand that, I don’t know, on a total dollar basis it is pretty similar but at the same time sales on a sequential basis did take a dip.
And I thought that the costs would have gone down with that as well.
Ned Mavrommatis
Well it’s interesting, if you look at our operating expenses, with the exception of sales commissions, they are primarily fixed. So they don’t really get adjusted with the top line and what’s good about that one is the revenue goes up, they don’t go up with it, and you see a lot of that going to the bottom line.
Mike Cikos – Sidoti & Co
Okay. There was – I guess there was a comment from Darryl I believe talking about, in 2011 there was a year-over-year increase in the revenue you are currently getting from Europe.
It was up 50% in 2011. Have you guys broken out how much revenue was derived from Europe in this quarter?
Ned Mavrommatis
We didn’t break it up. And I don’t have it in front of me, but the thing I can tell you is during the first quarter in comparison to the prior year first quarter, we saw an increase in all of our businesses.
So vehicle management in North America was up, the European business was up significantly, as well as the transportation asset management. So what was great about this quarter, it came from a very diverse, not only a diverse customer base but from the different entities and different product lines as well.
Mike Cikos – Sidoti & Co
All right. And as for as the acquisition opportunities, that you guys are looking at, are you currently looking at any targets right now or is that just something that would come down the line as you guys found something appealing?
Jeffrey Jagid
I think we would – I am hesitant to give a specific response but what I can tell you generally, as I have mentioned in my opening remarks, we would continue to be somewhat opportunistic on the M&A side and as long as it met certain criteria in financial, technical, and otherwise, we would give a very careful consideration.
Mike Cikos – Sidoti & Co
I see. And then just one other comment and I’ll hop back in the queue was regarding the Avis deal.
So in the fourth quarter of last year, you delivered about 5,000 units. Have any of those been deployed yet?
Are you starting to see the service revenue from those units yet?
Jeffrey Jagid
Those units are deployed. And Ned can comment on our revenue recognition regarding that particular program.
Ned Mavrommatis
Yes. We started collecting and recognizing service revenue in some of those units.
But as I said before, the contribution from Avis in the quarter was not significant.
Mike Cikos – Sidoti & Co
All right. Are all 5,000 of those units generating service revenue for you at this time?
Ned Mavrommatis
Not all of them but most of them.
Mike Cikos – Sidoti & Co
Okay, all right, thank you guys.
Jeffrey Jagid
Thank you very much.
Operator
I am not showing any further questions at this time. I’d like to turn the call back over to Jeffrey Jagid for closing remarks.
Jeffrey Jagid
Thank you very much. I appreciate everyone’s participation on today’s call, and we look forward to continuing to report on the progress of things move forward.
Thank you very much everyone.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program.
And you may all disconnect. Everyone have a great day.