May 5, 2017
Executives
Chris Wolfe – Chief Executive Officer Ned Mavrommatis – Chief Financial Officer
Analysts
Jaeson Schmidt – Lake Street Capital William Gibson – Roth Capital Partners Dan Weston – West Capital Management
Operator
Good afternoon. Welcome to the I.D.
Systems First Quarter 2017 Conference Call. My name is Britney.
I will be your lead operator for today's call. Joining us for today's presentation are the company's CEO, Chris Wolfe; and CFO, Ned Mavrommatis.
Following their remarks, we will open up the call for your questions. Before we begin, I would like to provide I.D.
Systems' safe harbor statement that includes cautions regarding forward-looking statements made during this call. During this call, there will be forward-looking statements made regarding future events, including I.D.
Systems' future financial performance. All statements other than the 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 expectation regarding opportunities for growth, demand for the company's product offerings and other industry trends, are considered forward-looking statements.
Such statements include, but are not limited to, the company's financial expectations for 2017 and beyond. All such forward-looking statements imply the presence of risks, 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 statements. Factors that could cause actual results to differ materially could include, amongst others, SEC filings, overall economic and business condition, 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. I would like to remind everyone that this call we made available for replay in the Investor Relations section of the company's website at www.id-systems.com.
Now I would like to turn the call over to the I.D. Systems CEO, Mr.
Chris Wolfe. Sir, please proceed.
Chris Wolfe
Welcome, everyone, and thank you for joining us today. After the market closed, we issued our results for the first quarter ended March 31, 2017, in our press release, a copy of which is available in the Investors section of our website.
Our revenue for the first quarter came in lower than we expected, primarily due to VMS orders that slipped into Q2. Two of the significant orders were recently secured and in consistent major wins with two leading automotive manufacturers, and we expect to start shipping this quarter.
From an operational perspective, we continue to make progress in executing on key initiatives we started in December. This involves significant improvements in product development, cost management and organizational structure.
Our success in these areas was highlighted by the launch of new software and analytics products, of flattening of our organizational structure to reduce operating expenses as well as the improvement in our balance sheet, specifically our working capital and cash positions. Not only were we able to reduce our operating expenses for the prior quarter, the efficiency improvements we implemented helped expand our gross margin to a healthy 52%, which marks the highest level since Q2 of last year.
But perhaps the most notable accomplishment in Q1 was the multimillion-dollar agreement we secured at Avis Budget Group to deploy our proprietary wireless rental fleet management system. This major win builds on our longstanding and a successful technology collaboration with Avis Budget and uniquely positions I.D.
Systems to realize our vision of revolutionizing the car rental industry. But before I go on further, I'd like to turn the call over to our CFO, Ned Mavrommatis, who will provide more details and insights into our numbers for 2017 in the first quarter.
Then I'll return to talk more about our partnership with Avis, our progress of our other two business segments, as well as all the other key initiatives we have scheduled for 2017. Ned?
Ned Mavrommatis
Thank you, Chris, and good afternoon, everyone. Turning to our financial results for the first quarter ended March 31, 2017.
Our revenue for the first quarter decreased 13% to $8 million from $9.2 million in the prior quarter. Recurring revenue for the first quarter of 2017 was $4.8 million, which was up 9% from the prior quarter.
VMS revenue for the first quarter was $4.1 million, which was down from $5.3 million in the prior quarter. As Chris mentioned, the decrease was primarily due to orders that slipped into the second quarter.
Two of those orders were already secured in this quarter. TAM revenue was $3.7 million, down slightly from $3.8 million in the previous quarter.
Our gross margin for the first quarter of 2017 improved to 51.9% from 47.4% in the prior quarter. The improvement was primarily due to lower cost to build the company's VAC4 S product, increased efficiency from the VAC4 S installation, as well as higher margin analytics software revenue.
Selling, general and administrative expenses for the first quarter of 2017 were $4.8 million, down from $5.3 million in the previous quarter. Our research and development expenses for the first quarter were $1.2 million, up slightly from $1.1 million in the previous quarter.
Our GAAP net loss for the first quarter of 2017 totaled $1.9 million or $0.14 per share. And excluding stock-based compensation, depreciation, amortization and foreign currency translations, our non-GAAP net loss for the first quarter of 2017 was $1.1 million or $0.08 per share.
For more detail on our non-GAAP results, please see the reconciliation to GAAP terms included in the supplementary table of today's press release. Now turning to our balance sheet.
At quarter end, we had $8.6 million in cash, cash equivalents and marketable securities, which was up $1.7 million from $6.9 million at the end of the prior quarter. The balance outstanding on our $7.5 million credit facility at quarter end was $1.3 million, which was down from $3 million at the end of the prior quarter.
Lastly, during Q1, we generated net cash from operations of $2.3 million. We continue to see improvements in our cash flow and balance sheet.
And in fact, as of today, we have approximately $10 million in cash, cash equivalents and marketable securities and zero balance outstanding on our credit facility. This completes my financial summary.
For a more detail analysis of financial results, please reference our Form 10-Q, which we plan to file by May 15. Chris?
Chris Wolfe
Thanks, Ned. As many of you know, I was appointed CEO back in December.
My first major initiative was and continues to be furthering I.D. Systems' transformation into a company known for building and delivering professional-grade solutions with impeccable quality.
During Q1, we released VisionPro, our latest cloud-based fleet management software program. Also, an increasingly important differentiator for I.D.
Systems is our data analytics platforms. Earlier this year, we launched the latest installments of PowerFleet IQ 2.0 and VeriWise IQ 2.0.
These are our next-generation analytics software that provides our customers with real-time insights to help them make informed business decisions. Our software services and data analytics platforms position I.D.
Systems as a true Software-as-a-Service provider, whether we hosted or whether we hosted behind the customer's firewall. In addition to delivering professional-grade hardware and software solutions, my second major initiative as CEO is to unlock the tremendous potential in our core vehicle management systems business.
There are nearly 2.8 million vehicles in the market that could benefit from our industry-leading solution. We've dissected the myriad of reasons as to why this market remains relatively un-penetrated, and we will be focused on several key initiatives to unlock this potential while servicing and growing our enterprise accounts.
I.D. Systems' prior experience uniquely positions us to support enterprise-scale deployments, and we are optimistic about our ability to win future work for these accounts over the next several quarters such as United States Postal Service.
In fact, we have already secured two of those orders, as mentioned earlier, including the global automotive suppliers and manufacturers that slipped into Q2. While our direct sales efforts have been mostly focused on the enterprise market, market research reveals that there exists considerable opportunity in what we call the mid-tier market, which is a smaller 15 vehicles to 35 vehicles per customer site.
Part of our strategy going forward is to more aggressively target this market through direct inside sales efforts and expanded channel partnerships. Turning to our Transportation Asset Management business or TAM business.
This segment of our business provides us with a steady and predictable revenue stream. In fact, we achieved the lowest quarterly device churn in several periods.
We believe a key reason for this accomplishment is because of our new software offerings, FleetView and VeriWise IQ, which we launched in the second half of 2016. As I mentioned on our last call, while we don't believe the TAM market is poised for rapid growth, we are confident that we can grow our market share due to our differentiated software and the variety of asset tracking platforms that we have.
And finally, but most notable, is the recent multimillion-dollar purchase agreement we secured with Avis Budget Group in Q1. This agreement is a culmination of more than 10 years of working with Avis to develop a truly innovative product that streamlines and automates the vehicle data collection and billing process of rental fleets.
The first phase of this agreement will incorporate our technology into 50,000 Avis Budget vehicles. As part of the agreement, we received an upfront payment at signing, which is not reflected in our Q1 cash position.
These monies are allocated toward development and additional system enhancements as well as ramping production, with the goal of delivering 2,500 units per week starting in Q4 of 2017. In summary, successfully executing on key operational initiatives during the first quarter has made I.D.
Systems a much stronger and more focused organization and set the stage for success, both in 2017 and the years ahead. Our collective efforts remain focused on the significant growth potential within our existing VMS customer base, maintaining our TAM market share and delivering on our contract with Avis.
We intend to achieve both our near and long-term financial objectives through improved operational discipline and more focused sales efforts. Our success in these initiatives will help us realize our goal of achieving non-GAAP profitability in 2017.
Over the long-term, we will solidify I.D. Systems as the industry standard for delivering innovative, high-value, high-quality technology to the markets we serve.
And with that, we'll open the call for your questions. Operator, please provide the appropriate instructions.
Operator
Thank you. [Operator Instructions] And our first question will be from Josh Nichols from B.
Riley.
Unidentified Analyst
This is actually [indiscernible] on for Josh. How are you?
Chris Wolfe
Great.
Unidentified Analyst
So I just need a quick follow-up question on the VMS order slippage into kind of Q2. So if you can kind of maybe quantify that a little bit more.
So obviously, VMS orders were down probably in Q1 relative to Q4 of last year. But of the slippage into Q2, how – would you say it's 1:1?
But do you expect a subsequent increase in Q2 VMS sales? Or how should we kind of think about the VMS orders in Q2?
Chris Wolfe
Actually, both of these were significant orders for us. Initially, it's two plants for both suppliers.
And actually, we expect Q2 to be – right now, there's obviously a lot of other work that has to go on besides those accounts, but those were landed early in Q2. So again, had those roll into Q1, Q1 would have been phenomenally better.
Again, significant size, major automotive providers, both of those committed to full-on rollout of the system.
Unidentified Analyst
Got you. So the expectation for VMS in Q2 will be significantly upwards sequentially and on a year-on-year basis?
Chris Wolfe
I wouldn't say significantly up because we still have a ways to go through the quarter. We – Q2 right now is tracking on plan.
But again, we have to make a lot of sales come in to basically make sure that happens.
Unidentified Analyst
Got it. It makes sense.
And I guess the other question we had is just looking at the gross margins, congratulations on hitting that 52% gross margin number, significant increase based on the efficiency you guys alluded to in your prepared remarks, we were just wondering on our end how sustainable that increase in gross margins is and how – what kind of gross margin levels we can kind of expect on a going forward basis given the efficiency initiatives.
Ned Mavrommatis
Sure. This is it Ned.
Those gross margins are sustainable. We expect them to continue for the rest of the year.
As we continue to see VMS recurring revenue grow in the first quarter of this year, it actually was over $1 million compared to $800,000 in the fourth quarter, that's going to help with improving the gross margins beyond this level as we move into next year and beyond.
Unidentified Analyst
Got it. That makes sense.
And I guess the kind of final one on mine before we kind of hop back in the queue is on the Avis deal. I think in your press release, you kind of noted you expect to recognize revenues from the ramping of the Avis deal starting in Q2.
How should we kind of think about the ramp-up in revenues incremental to your existing VMS and TAM revenues from like Q2 to Q4 as we kind of think about modeling it in the next few quarters?
Ned Mavrommatis
Sure. We expect rental car revenue to increase significantly in Q2, Q3 and beyond.
Rental car revenue in the first quarter was only of $100-plus thousand. We expect that number to increase to over $1 million in Q2, $1 million in Q3.
And then there's – that relates to the development work that we're going to do for Avis. And then as we delivered the hardware in Q4 and Q1, there's approximately $8.5 million related to hardware for the 50,000 units that's going to be recognized in Q4 and Q1 of next year.
Once the 50,000 units gets installed, each and every one of those units are – is going to contribute $3.40 per month in recurring revenue. So that equates to approximately $2 million per year in recurring revenue above and beyond the hardware revenue.
In addition, obviously, that all relates to the first 50,000 units. Once we expand beyond that, every 50,000 units would equate to approximately an additional $20 million in revenue between the hardware and the ongoing service.
Unidentified Analyst
That’s helpful. Thank you so much for the color.
And I’ll hop back into the queue.
Ned Mavrommatis
You’re welcome.
Operator
And our next question comes from Jaeson Schmidt with Lake Street Capital.
Jaeson Schmidt
Hi guys. Thanks for taking my questions.
Just a quick housekeeping one. How much recurring revenue did you generate from the VMS segment in Q1?
Ned Mavrommatis
$1.1 million. That was up from $860,000 in Q4.
Jaeson Schmidt
Thank you. And then, Chris, wondering if you could just talk about your current customer engagement pipeline, how that has tracked over the past three months and maybe more so, how we should think about some of the potential revenue opportunities within that.
Chris Wolfe
Okay. Actually, the two deals that just closed, since we were focused primarily and have been for the last probably year and half on the enterprise accounts, so the very largest customers out there in the marketplace, except for our channels, like our Toyota channel, the issue is it's very choppy performance based on when they take the units, when they get approvals, et cetera.
So, I mean, we've kind of gone through that in the past. So our engagement is probably better than it's ever been, especially with the release of VisionPro.
Up until this quarter, VisionPro was a future. Now it's real.
It has been through beta. We're showing it to customers.
There's an excitement. A matter of fact, our testing with United States Postal Services, going to be with VisionPro.
Accounts that we can refresh now are actually getting to touch it and feel it. But again, with the VAC4 S being easier to install, easier to use, higher quality, and with the VisionPro, which is a lot easier to use as well as just the phenomenally better user experience, our engagement is phenomenally high right now with all those accounts.
Jaeson Schmidt
Okay, that's helpful. And then wondering, just looking at the VMS segment, if you've seen any changes in the competitive landscape.
Chris Wolfe
That's a great question. I think there's – actually, I've seen 1 or 2 competitors actually get weaker over the last probably a year.
There's – segment's out quickly, OEM providers and non-OEM providers. And among the non-OEM providers, obviously, we're the largest person in the market, I mean, the largest provider.
Then there's a couple of others out there. Right now, at the enterprise-scale level, we don't really come in to a lot of competitors that can do what we do at the scale we can do, with the function and feature set that we've had.
I mean, we have 20 years of function and features and 20 years of industry experience deploying at that level, and that takes a long time. That's a pretty good competitive hurdle to get over.
Jaeson Schmidt
Okay. And then just the last one for me.
Ned, wondering if you can provide the unit store, both the VMS and TAM.
Ned Mavrommatis
VMS units shift in the first quarter was approximately 1,500 and TAM units, 3,800.
Jaeson Schmidt
Alright, thanks a lot guys.
Ned Mavrommatis
You’re welcome.
Chris Wolfe
Thank you.
Operator
And our next question comes from William Gibson with Roth Capital Partners.
William Gibson
Hi. I think I heard when you were talking about the mid-tier marketing about outbound calls.
Now was that something you would do with an internal force yourself? Or is that through your channel partners?
Chris Wolfe
This is Chris. Actually, we would do our direct lead generation outbound calling and campaigning.
We might outsource that. We don't necessarily have to have our own people doing that role.
But we want to control the message and we want to control the go-to-market position. That being said, we do have channel partners, and we have to be cognizant of not [indiscernible] over our partner.
And the market segment is out pretty quickly. You can do direct sales, and we know who our dealers are and what area.
And when in doubt, the dealer or the channel partner wins in that situation. But right now, we don't really do that much outbound marketing.
We really relied on inbound marketing because we're focused on enterprise accounts. But now with the VAC4 S and VisionPro a lot of users install and implement, it allows us to open up that mid-tier market space.
William Gibson
Thanks Chris.
Chris Wolfe
Okay.
Operator
[Operator Instructions] And our next question comes from Dan Weston with West Capital Management.
Dan Weston
Yes hi. Thanks very much.
Couple of questions. Some of them have been answered at this point.
But to clarify, Chris, you were talking about the two orders that slipped into Q2 in the automotive sector. Just to clarify that, were those existing customers or new customers?
Chris Wolfe
One was – well, actually, both were existing customers. But one was in a more of a pilot stage at multiple sites, I'd say, a fairly extensive pilot that decided to roll out.
The other one was an existing customer, just one site, but now they're rolling out and expanding.
Dan Weston
That second one that you mentioned, was that the – is that the contract that you signed about a year ago, it was a top 10 auto manufacturer or something that you clarified in your press release?
Chris Wolfe
Yes, it is. Yes.
Dan Weston
And did they give you any kind of a go-forward road map in terms of what kind of visibility you can expect from that particular customer this year?
Chris Wolfe
Yes, they did. I mean, we're not really – until we see the POs and the orders come in.
But we do have a commitment on substantial orders, again, it's up to us to execute on, and hopefully, we'll see that coming in, in Q2. And what I'd like to make sure everyone is just aware of, especially in the automotive manufacturing, is deployment schedules are tough because you have to take their vehicles out of service, and there's only certain windows you can do that.
That being said, we are looking at that right now with both players on when we can get to the vehicles, when we can install them. And it's usually when they're taking their plants off-line for a period of time.
Dan Weston
Yes. No, I appreciate that.
Ned, in – relating to the balance sheet and your cash, would you mind walking us through exactly what changes have happened relating to your balance sheet? Because I think Chris mentioned that the – I guess, the payments from Avis did not get reflected in your Q1 balance sheet.
So maybe can you just take us through the changes in your cash position and your debt position from the end of Q4 until today?
Ned Mavrommatis
Sure. At the end of the year, we have $6.9 million in cash.
At the end of the quarter, it was $8.6 million. And then as Chris mentioned, that did not include the Avis bill that we subsequently collect as of today.
We're sitting approximately $10 million in cash, and today, there's no – 0 outstanding on the line of credit.
Dan Weston
Right. I got those.
Maybe a little more detail in terms of how you got from the $6.9 million to the $8.6 million. Was there anything unusual there?
It included, I think, some – maybe about half a reduction in your debt balance.
Ned Mavrommatis
There were two major contributors to cash. One is significant improvement – actually, three.
The biggest was a significant improvement in cash collections. So accounts receivable, although on the balance sheet shows that it was flat at the end of the quarter compared to the end of the year, included in there was the $3 million invoice to Avis, which we collected subsequent to that.
So if you exclude that Avis invoice, actually, there was a significant decrease in accounts receivable due to better collections. Inventory has been going down, so much better management of inventory and working capital.
And then there was some stock option exercises during the first quarter that contributed to the positive cash as well.
Dan Weston
Okay. So just to be clear on that, did you say that you collected the $3 million from Avis in the Q1?
Ned Mavrommatis
No. It was invoiced in Q1 and sitting in accounts receivable, but it was collected subsequent to Q1.
Dan Weston
I got you. Okay.
So then that's the delta going from the $8.6 million, up to the $10 million, with the reduction into 0 debt.
Ned Mavrommatis
Correct.
Dan Weston
Got it. Okay.
I appreciate the color there. And then on the post office, Chris, you mentioned that the – some commentary on the Post Office.
Can you update us in terms of when you expect the final decision from the Postal Service? And are there other – would you consider to be legitimate competitors bidding for that job?
Chris Wolfe
The national DAR, which is their approval for the program, is expected midsummer. Obviously, that could move.
But right now, we're tracking on plan. And our current pilot with them with our VisionPro platform or whatever is on plan for this quarter.
They are going to put this out for bid, which they have to do. There are a couple of people that we believe will be in that.
I feel like we have a phenomenally strong opportunity there, where we're the incumbent. We have 5,000 units deployed.
And our newest platforms are even better than the last. So again, I'd say I'm not going to take anything for granted.
We have to earn that business. But – positive our chances with USPS.
Dan Weston
At this point, have they given any formal details on whoever the winner of the bid would be on exactly what type of the rollout schedule, on the size of the potential contract this could be?
Chris Wolfe
It's north of the 8,000 unit markets. So if we're at 5,000 today, it would be around 8,000 units and phenomenally more sites from where we're at today.
It's almost a full system deployment, and they want a fairly aggressive rollout capability. Again, I think that's where we shine and where our expertise is.
So obviously, we'll have to ramp up resources, but we'll have a little runway to do that at the end of the year. So if the DAR is announced in midsummer, then obviously, we'll be scrambling with them to work out a schedule that works for them and us.
But definitely be probably a multiyear implementation.
Dan Weston
Got it. And then lastly, just some clarification on the software products that you're selling out.
The – are you selling any of these new software products as a standalone product? And did that contribute somewhat to your gross margin improvement?
I just want a little clarity on that?
Chris Wolfe
First of all, our products are more or less turnkey, in other words, integrated solutions with our hardware platforms. So usually, you go in [ph] our platform, our hardware and our software and our analytics, they don't stand on their own.
So answer that question directly. However, all new customers are moving to the VisionPro platform.
Existing customers are migrating up to the latest platform, and then they have a choice to move to VisionPro. And we are getting some interest, too, which is actually very good for us.
The customers who we call customer hosted today on our old platform, which is phenomenally hard and expensive for us to support, are interested in talking to us about migrating to our I.D. Systems' hosted side, which that to us has tremendous reoccurring revenue potential as well as lowering our cost to support.
Dan Weston
Very good. I appreciate the color there, Chris.
And then last one for Ned. Ned, can you talk a little bit about who your 10% customers were in the quarter and what contribution that Raymond made during the quarter?
Ned Mavrommatis
Sure. We have three customers that were over 10% in the quarter.
Walmart was at 21%, Raymond was at 10% and Ford Motor Company was also at 10%.
Dan Weston
That’s great. That’s all from me for me.
Thanks a lot guys. I appreciate it.
Chris Wolfe
Thanks Dan.
Ned Mavrommatis
Thanks.
Operator
At this time, this concludes our question-and-answer session. I'd like to now turn the call back over to Mr.
Chris Wolfe for his closing remarks.
Chris Wolfe
Thank you for joining us today and very much appreciate the questions and the participation. I especially want to thank our employees, our partners and investors for the continued support.
And we look forward to updating you again at the end of the next quarter. Thank you.
Operator
Thank you for joining us today for our presentation. You may now disconnect.