Nov 12, 2017
Executives
Chris Wolfe - Chief Executive Officer Ned Mavrommatis - Chief Financial Officer
Analysts
Jaeson Schmidt - Lake Street Cap Mark Josh Nichols - B. Riley FBR William Gibson - Roth Capital Partners Dan Weston - Westcap Morris Ajzenman - Griffin Securities
Operator
Good afternoon. Welcome to the I.D.
Systems Third Quarter 2017 Conference Call. My name is Dilam [h], and I will be your 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 the call, I would like to provide I.D. Systems' Safe Harbor statements that includes cautions regarding forward-looking statements that made during this call.
During the call there will be forward-looking statements made regarding future events, including I.D. Systems' 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 positions, anticipated results of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for 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 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 economics 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.
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.id-systems.com. Now I would like to turn the call over to I.D.
Systems CEO, Mr. Chris Wolfe.
Sir, please proceed.
Chris Wolfe
Good afternoon, everyone. And thank you for joining us today.
After the market closed, we issued our results for the third quarter ended September 30, 2017, in a press release a copy of which is available on the investors section of our website. As you can see our financial performance for Q3 was very encouraging, representing a continuation of the operational momentum we experienced last quarter.
The results were driven by solid execution across our three divisions and more importantly, were not dependent on one large deal as they have been in the past. This improved revenue diversification not only produced a healthy 35% year-over-year increase in our top line, but our optimized cost structure also helped to drive our second consecutive quarter of positive non-GAAP net income.
In addition to our improving financial performance during the quarter, we acquired substantially all the assets of Keytroller, a manufacturer and marketer of electronic products for managing forklifts and construction vehicles. This accretive acquisition gives us a full suite of product offerings capable of covering any size fleet and budget.
The integration is proceeding as planned. In fact, Keytroller sales are above plan for August and September.
I'll talk more about this acquisition and how it augments our organic growth strategy in a few minutes. But before I go further, I'd like to turn the call over to CFO, Ned Mavrommatis, who will provide more details and insights into our numbers for the quarter.
Then I will return and talk more about our growth strategy, operational execution as well as our outlook. Ned?
Ned Mavrommatis
Thank you, Chris, and good afternoon everyone. Turning to our financial results for the third quarter ended September 30, 2017, our revenue increased 4% to $11.1 million from $10.7 million in the prior quarter and increased 35% from $8.2 million in the same year ago period.
Both, the sequential and year-over-year increase were primarily due to higher VMS revenue and rental fleet revenue from our agreement with Avis Budget Group as well as contribution from Keytroller, which we acquired in August. Recurring revenue increased 5% to $4.7 million from $4.5 million in Q3 of last year.
VMS revenue for the third quarter was $6.7 million, which was up 66% from $4 million in the third quarter of last year. Transportation asset management revenue was $3.5 million, down from $4 million in Q3 of last year.
And rental fleet revenue was $953,000, which was up from $236,000 in the third quarter of last year. Our gross margins remained strong at 50.8%, which was up from 48.7% in Q3 of last year.
Looking at our expenses, SG&A expenses were $5.2 million, up slightly from $5 million in Q3 of last year. The increase was due to expenses related to the Keytroller acquisition.
Research and development expenses were $958,000 compared to $1.1 million in the same year ago quarter. Turning to our profitability measures, GAAP net loss totaled $586,000 or $0.04 per basic and diluted share, an improvement from a net loss of $2.1 million or $0.16 per basic and diluted share in Q3 of last year.
Excluding stock based compensation, depreciation and amortization, foreign currency translation losses and acquisition-related expenses, our non-GAAP net income totaled $287,000 or $0.02 per basic and diluted share. This was a significant improvement from a non-GAAP net loss of $1.4 million or $0.11 per basic and diluted share in the same year-ago quarter.
As Chris mentioned, Q3 marked a second consecutive quarter of non-GAAP profitability. For more detail on our non-GAAP results, please see the reconciliation to GAAP terms, including the supplementary tables of today's earnings release.
Now turning to our balance sheet. At quarter-end, the company had no debt and $17.4 million in cash, cash equivalents and marketable securities, which equates to $1 per share outstanding.
We also eliminated our line of credit during the quarter. And finally, for the nine month period ended September 30, 2017, net cash provided by operating activities was $3.9 million compared to net cash used in operations of $1.3 million in the same period of 2016.
This completes my financial summary. For more detailed analysis of our financial results, please reference our Form 10-Q, which we plan to file by November 14.
Chris?
Chris Wolfe
Thanks, Ned. In addition to our improving financial results during the third quarter, we continued to make progress on our plan to further scale and strengthen our business.
This was demonstrated by several key wins we secured in various areas of our business especially our industrial truck division, which we've historically referred to as VMS. As some of you may be aware, in August, we received a $650,000 initial purchase order from one of the world's largest online retailers for PowerFleet.
We are currently implementing PowerFleet at 3 of the online retailers European distribution centers in Germany, Italy and France. We are very encouraged by this win because of a very competitive process and the customer ultimately selected I.D.
Systems based on PowerFleet's superior system performance, reporting and analytics capabilities. As some of you may have seen yesterday, we announced a division of Toyota Motor, North America purchase PowerFleet for 11 of its parts distribution centers throughout the U.S.
This agreement builds on our established relationship with Toyota. In Q3, we shipped two of the 11 parts distribution centers.
Shifting to our TAM, or transportation asset management, division, which continues to see stable on air revenue, unit revenue in contribution, this year we launched two key next-generation trailer and container tracking product developments that are scheduled to be rolled out in 2018. We plan to share more news as the programs move into field trials.
In our rental fleet division, it was another busy, but productive quarter, ramping up our partnership with Avis. In addition to meeting all of their program deliverables, we conducted penetration testing, ramp up production capability, and we just entered system acceptance testing.
The fourth quarter is a critical time for this program as we address any items identified during penetration testing and field trials, and we began building our first production units in volume. It's worth mentioning that product deliveries are continued upon us achieving this certain milestones, which we are confident in, but also on Avis's new car delivery schedules.
We look forward to updating you on our progress in the weeks ahead. As I talked about on our last call, while our direct sales efforts in our industrial truck segment over the years have primarily been focused on large enterprise accounts, there's considerable opportunity in the mid tier or customer sites around 50 vehicles or less market.
Keytroller's product suite network of more than 450 dealers allows us to quickly and effectively tap in and capitalize on this large segment. Overall, Keytroller provides our industrial truck business more scale, both from a product and revenue standpoint, and positions us to consistently achieve non-GAAP profitability in our industrial truck segment.
Lastly our EMEA team, which is headquartered in Düsseldorf, Germany, will be set up as an international Keytroller distribution management group and will be signing up regional distribution centers and distributors starting in 2018. And with that, we're ready to open the call up for your questions.
Operator, please provide the instructions. Thank you.
Operator
[Operator Instructions] Our first question comes from Jaeson Schmidt of Lake Street Cap Mark.
Jaeson Schmidt
Hey guys, thanks for taking my questions. Just to start with two quick housekeeping ones.
Wondering if you could give us the units for VMS and TAM? And then the recurring revenue that came from the VMS segment?
Ned Mavrommatis
Sure. Jaeson, this is Ned.
In the third quarter we shipped 2,000 VMS units and 3,000 TAM units. And the recurring revenue from the VMS business during the quarter was $1.2 million.
Jaeson Schmidt
All right, thank you for that. And then just shifting gears to that initial PO for that online retailer.
Obviously, a pretty significant win for you guys. Can you talk about the opportunity to potentially expand further at that customer?
Chris Wolfe
Yes. This is Chris.
I mean, obviously being the world's largest online retailer, there's a significant opportunity for expansion. Right now, I think it's a -- similar to what we do at every large account.
It’s a rollout, verify the process and then check the return on investment. So we're kind of in that phase.
So I think we'll see any further opportunity with that customer in 2018.
Jaeson Schmidt
Okay. And I know there were some orders that got pushed out from Q1.
They didn't hit in Q2. Did you recognize any revenue from those in Q3 then?
Chris Wolfe
Actually, the Toyota deal that we signed and actually there's some other work with Toyota that we're doing, those orders that came in Q3, the two sites that we shipped, those were part of the Q1 slippage. That wasn't the full Q1 slippage.
Jaeson Schmidt
All right, perfect. I’ll jump back in the queue.
Thanks a lot guys.
Chris Wolfe
Yes, thanks.
Operator
Thank you. Our next question comes from Josh Nichols of B.
Riley FBR. Please proceed
Josh Nichols
Yes, thanks for taking my question. Could you help us frame the size of the opportunity regarding the recent announcement that Toyota is going to be purchasing some of your PowerFleet VMS software units at 11 distribution centers?
And also if you could kind of add a little bit to the opportunity as far as providing Toyota with a white label offering, coming up here hopefully over the next several quarters?
Chris Wolfe
Yes. This is Chris.
First of all, we currently offer Toyota white label. They sell it; it's called T-Matics.
So they're actually a reseller of PowerFleet under the white labeled T-Matics symbol. So that's actually occurring today and sales through that Channel are actually above plan.
As far as the opportunity we just signed with them, it's really for their parts distribution. It's actually for their use of the system and that was a total of 900 units in opportunity, and we've shipped 200 to date.
Josh Nichols
That's helpful. And just curious, do you have the breakout for revenue for the quarter as far as what Keytroller contributed?
Ned Mavrommatis
$1.3 million during the quarter.
Josh Nichols
And then, last question from me is, could you talk a little bit about where the company stands or any updates on the potential United States Post Office VMS refresh?
Chris Wolfe
Yes, I think every -- I know myself. I'll just speak for myself in waiting on that for since July to be able to tell you.
The RFP actually came out two weeks ago. Responses have to be in.
I mean, we're preparing ours, need to be in by next Friday. I think on the 20th is when they'll start reviewing the RFP responses.
Josh Nichols
Thank you. That’s helpful.
Chris Wolfe
Thank you.
Operator
Our next question comes from William Gibson of Roth Capital Partners. Please proceed.
William Gibson
Are we going to be rolling out any Avis budget in the fourth quarter?
Chris Wolfe
Yes. This is Chris.
Right now, we're in system acceptance testing. We have plans to roll out units in the fourth quarter, but obviously, it's contingent upon system acceptance.
We also have a [Indiscernible] falling in. Right now, we -- it's like until we actually hit those milestones and we can actually say the deal is done, we have 50,000 unit order.
We just have to deliver on the last milestones.
William Gibson
Good. And then just one follow-up.
I missed the number for rental fleet revenue in the quarter. What was that?
Ned Mavrommatis
$953,000, Bill.
William Gibson
Thank you.
Operator
Thank you. [Operator Instructions].
Our next question comes from Dan Weston of Westcap Management. Please proceed.
Dan Weston
Hi. Good afternoon, guys.
Thanks for taking the questions. Most have been answered already.
But Ned, could you tell us who were the top 10 customers in the quarter, please?
Ned Mavrommatis
Sure. So as Chris mentioned in the opening remarks, it was a very diverse quarter.
We only had one customer that was over 10% of revenue. And that was Wal-Mart with 15% of revenue for the quarter.
Below that, they were all below 10%, but big customers in the quarter were, obviously, Avis Budget Group, Toyota and the European operations retailer that we announced in the third quarter as well. We also had some orders from the Postal Service as well as General Motors.
So it was a very diverse quarter.
Dan Weston
Very good. Yes, on Toyota.
Chris, you've talked a little bit about the white-labeling product from a previous questioner. And I remember going back maybe two years or so ago, you guys originally signed this master service agreement.
Can you talk a little bit about what's happened in that? I know you worked with the company at that time, but from the time the original MSA was signed and then it just kind of fell off, the way I understood it.
Is it being reignited now? And if so, how and why did that come about?
Chris Wolfe
Yes. And actually, I don't think it fell off.
It kind of went into hibernation, which, I guess, could be the same thing. Really had to do with some product issues that we had at the time, and those have been addressed.
At the same time, I think Toyota -- it's one of those when you want to be a channel of the telematics product, there's a learning curve on both sides, us supporting them and they're being able to adequately represent the product. And I think that was a learning curve both teams had to learn.
And it's -- that and the quality improvements have gotten it back on track, and actually, it's above plan this year, which is great.
Dan Weston
Was -- just relating specific to the white-label product, was Q3 the first quarter this year that you actually produced revenue out of that contract? Or has there been a little bit of ancillary revenue in Q1 and Q2?
Chris Wolfe
No, it's actually -- even last year, we had revenue out of the T-Matics product line. It's just that this year, quarter-over-quarter there is growth in that channel.
Dan Weston
Okay. Very good.
And then relating to Avis, as you guys get closer and closer here, have you seen any quantitative signs on their part? In other words, have they actually given purchase orders and asked you to purchase inventory ahead of this potential rollout, yet?
Chris Wolfe
Yes. Part of the agreement with Avis is what you call, long lead time part risk, and they accepted that risk a long ago.
We have executive meetings with them every month, because in the electronics business, long lead time parts -- actually some are actually phenomenally hard to get now with the iPhone launch, the iPhone X. So we talk with them almost on a weekly basis, so committing to like right now putting boxes together, right.
We could have the PCBs built, which are actually the boards. But when you actually put them in the box, you can't really sell parts anymore.
So we're already moving forward with that. And they're engaged with us, because they want the units and they need to get the units for a very tight delivery window next year.
So everyone on both teams is working very hard to get through system acceptance, which is a 30-day period.
Dan Weston
I think when you guys originally announced the winning of the contract; you were projecting that shipments would start in, I think mid-part of November, which we're coming up on next week. Is that maybe going to be slightly lower than anticipated as you kind of ramp up here and then kind of drive through the first part of the year?
Chris Wolfe
Yes. I think we said Q4 specifically, but our initial plan to go into system acceptance testing, we're probably two weeks delayed on that, primarily because of advance to, what we call penetration testing.
So you've heard about the Equifax breach, et cetera. It's probably prudent for anyone in the IoT space to be doing probably over-the-top security testing.
And so we just finished black label [ph], what we call, black-box and white-box testing on the product, and passed. So it's just one of those things that, okay, we take 2 weeks out of the schedule to do that, I think was a prudent thing to do.
Dan Weston
Okay. And last two here, just relating to your commentary about the online retailer that you won out in Europe, the -- you mentioned it was a pretty stringent competitive process.
Can you talk a little bit about -- are you able to talk about who the other competitors were that you beat out to win that deal?
Chris Wolfe
No, I can't give the details, but I can tell you that we won the deal actually selling through an OEM in Europe who was actually our competitor.
Dan Weston
Interesting. Okay.
I think that says a lot right there. Okay, my last question is relating to the USPS.
The RFP was issued I think you said two weeks ago. Is there any details that you can provide to us in terms of what the RFP actually called for, either units or total size or time frame or any details?
Chris Wolfe
Yes, it's actually 7,100 units. I can't remember the exact.
I don't have in front of me the site count, but it's like 118 sites. And there's going to be a -- what they do is they do a -- prove out the process and then blast it out.
So there's an initial rollout site, which would be in Q1, follow-on sites in the later quarters of next year. And then the follow-on year is the processes are in place, the training is in place.
Then they're going to basically rock 'n roll in 2019.
Dan Weston
In 2019, is the -- I'm a little confused there. Is there potential for orders and revenue to be generated in 2018?
Chris Wolfe
Absolutely, because you not only have three sites rolling out in 2018, but you also have all the system infrastructure that has to be put in place. So you have to remember that they're behind the firewall installation, so they're on-premise.
Obviously, we offer a SaaS cloud-based solution, but our solution will be implemented behind the firewall. So that's a little bit more complicated, they're a little bit more costly to implement.
Dan Weston
Okay. I really appreciate the color.
Congrats on the quarter and that will do it for me.
Chris Wolfe
Thanks.
Operator
Thank you. Our next question comes from Morris Ajzenman of Griffin Securities.
Please proceed.
Morris Ajzenman
Hey, guys. If you go back towards, I think, the second half of 2015, you were -- and I could be off by a little bit on my timing, you introduced the VAC4 product.
And then 2016, I guess, turned out to be disappointment, because there were bugs you had to work out. And my presumption is that's what's helping drive revenues in 2017.
And adding to that thought, we're looking at some large potential customers, U.S. Postal, if VAC4 is really operating productively, as you would like it to be, does this open up any potential large awards that you've been dealing with customers over the last number of years that haven't really stepped up?
Chris Wolfe
Yes, that's a very good question. I'd like to make sure everyone knows it, we're actually on what we call the VAC4 S and that's actually the -- the VAC4 was exactly the time line you mentioned with the situation that you kind of reviewed.
The VAC4 S, which was deployed last year, it's a stable product. It's been deployed already, thousands of units.
We're ready to deploy at the United States Postal Service with that platform. That being said is, we do have refresh work going on right now with numerous accounts.
So what we call refresh opportunities, right, with the strategic accounts that are on products literally that are over 15 years old, which is a testament that we are known for developing and delivering high-quality products. So, we can do it.
We are doing it.
Morris Ajzenman
On a different front, on the transportation side, the TAM business, I presume the revenue decline is all pricing in that unit? Can you give more granularity there and what the outlook is there?
Chris Wolfe
Yes. Basically, what we see in that business is a churn.
So it's like when contracts come due, that's a very competitive space. So it's like a very tight tough bidding situation.
We also -- and why I mentioned the fact that we have two new product developments underway today is, when you look at the competitive landscape, we know we need to come out with some excitement in this space. And I think you're going to see that next year with these product platforms.
So again, it's very competitive, very price conscious and it's just -- we're holding our own, but we're not getting the deals that we need to get to. And we're going to address that next year.
Morris Ajzenman
Thank you.
Operator
Thank you. At this time, this concludes our question and answer session.
I'd now like to turn the call back over to Mr. Chris Wolfe for his closing remarks.
Chris Wolfe
Yes, thank you. And thank you for joining us in today's call.
I especially want to thank our customers, employees, partners and our investors for their continued support. We look forward to updating you on our next call.
And operator, if you could please end the call, that would be great.
Operator
Thank you for joining us today for our presentation. You may now disconnect.