Good day ladies and gentlemen and welcome to the ID Systems Inc. second quarter 2015 conference call. At this time, all our 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 will like to now introduce your host for today's conference, Mr. Ken Ehrman, President and CEO. Sir, you may begin.

Good afternoon. Welcome to ID Systems' 2nd Quarter 2015 conference call. My name is Ken Ehrman, ID Systems' President and CEO. Before we begin the call, I'd like to provide ID Systems' 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 ID Systems' future financial performance. All statements are in 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 offering and other industry trends are considered forward-looking statements. Such statements include but are not limited to the company's financial expectations for the remainder of 2015 and beyond. All such forward-looking statements involve 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 by any forward-looking statements. Fact is that it could cause actual results to differ materially, could include amongst others, SEC filings, overall economic and business conditions, demand for our products and services, competitor facts, emergence of new technologies and the company's cash position. We do not intend and undertake any duty to update any forward-looking statements to reflect future events or circumstances. Joining me for today's call is our CFO, Ned Mavrommatis and our Chief Operating Officer, Norm Ellis. Following their remarks, we will open the call up for questions. I would like to remind everyone that the call is recorded and made available for replay via link on the website. After the market close, we issued our results for the second quarter ended June 30, 2015 in a press release, a copy of which…

Thank you, Ken, and good afternoon everyone. Now to our financial results for the second quarter ended June 30, 2015. Revenue decreased 13% to 9.9 million from 11.4 million in Q2 last year. The decrease was primarily due to a 32% decrease in vehicle management system sales as we transitioned sales and deployments to our new VAC4 product. Service revenue in the second quarter of 2015 increased by 16% to $4.9 million which was primarily the result of higher revenue from VMS services. Recurring revenue increased to $4.7 million or 47% of total revenue in the second quarter, this compares to $4.5 million or 39% of total revenue in the year ago quarter. We expect recurring revenue to increase over the time as we continue to transition VMS solutions based on a recurring revenue model. Recurring revenue from VMS increased 62% to $898,000 in Q2, compared to $553,000 in the prior year second quarter. Our gross margin was 42% compared to 45% in the second quarter of 2014. The year-over-year decrease was consistent with our expectations and primarily attributable to the higher VMS installation and implementation cost and the VAC4 SaaS based pricing model which has a lower upfront price. On a sequential basis, gross margin increased by 600 basis points from the first quarter of 2015. As illustrated by the sequential improvement, we expect gross margins to continue to improve as unit sales increase and customers sign long-term higher margin service contracts. Turning to our expenses for Q2 2015, SG&A expenses increased 10% to $6.2 million from $5.7 million in the second quarter of 2014. The increase was primarily due to higher payroll and related expenses and stock-based compensation expenses, partially offset by lower amortization expenses. During the quarter, we made a strategic decision to invest at time and…

During Q2, we completed a significant pilot for our new VAC4 VMS solution for a Fortune 50-company. We were able [indiscernible] the unique deliverables leveraging our analytics platform to effectively analyze the company’s material handling activity. I am pleased to report that this company has recently selected I.D. Systems as their North American telemetry partner. Their choice validates how our solution meets the enterprise needs of the world’s largest company. Our strategic partners also continue to make important contributions to our revenue with sales and users across a diverse range industries. These relationships remain a critical element of our long-term growth strategy to capture market share and drive revenue growth. Specifically Toyota industry equipment and Raymond Corporation offer I.D. Systems access to both small and medium businesses and enterprise class customers. It is important to note that revenue from our channel partner Raymond Corporation decreased 64% to $571,000 from $1.6 million in Q2 2014. This was primarily due to the completion of a major implementation for another Fortune 50 end user. Toyota Industrial Equipment is adding aftermarket distribution to the original factory install option. Our results in Q2 did not meet expectations but the pipeline and development activities look very encouraging. Our TAM business met our Q2 budget and had strong repeat and new customer activity. Ashley Furniture, Duncan & Sons, Knight Transportation, Logistics One, Roly's Trucking, US Trailer Holdings and Wal-Mart are some of the customers expanding their relationship with I.D. Systems. Of significant importance is the comprehensive plan we are embarking on to improve our overall performance. This plan includes the following key items; number one the reduction in force completed on July 31st; number two, emphasis and focus on quality and business process improvement activities; three, realigning pricing model to improve bottom-line; four, focus sales activity on large enterprise opportunities, feed channel partners small and medium business opportunities; five, revamp customer service approach focusing on the larger sites and enterprise rollouts, small and medium customers will be offered several alternatives including channel support, new knowledge based tools and hourly service pack options, effectively train and deploy all customer facing associates with both pre and post sales data analytics and ROI skills. Finally, seven organizational restructure to effectively align and allow for better execution capability. As part of this restructure we have engaged the former colleague of mine Chris Wolfe, he was a Divisional President at Qualcomm. He is an accomplished engineer, Six Sigma trained and a proven leader. He will be working closely with me and our various engineering teams. I will now turn it back to Ken.

Thanks, Norm. In summary, we are repositioning our efforts on our customers with the greatest opportunity for growth. And with the investments we made in I.D. Systems 2.0 together with that new focus, we have everything we need to achieve our profitability goals. We have now ready to open your call for questions.

[Operator Instructions]. And our first question comes from the line of Morris Ajzenman with Griffin Securities. Your line is now open.

Just curious, again you made these changes internally and then you have talked about the support in the quarter that just ended. Is this going to be a work in progress and how long would it take, whether it’s large customers stepping up and rolling out before DCs or working with the channel partners, again will this be a number of quarter initiative where top-line can get back to growth because you had very good growth over the last year or two. Just curious from your perspective, how long this turnaround takes if turnaround is the proper word?

We are 100% committed to making it happen as soon as possible and we believe what's going to expedite that is by focusing on the biggest customers who are telling us that they want to rollout. Obviously we are happy that we were selected by a very large company that Norm referred to that's going to help but I do not want to sound like I am complaining because actually the facts are that when in 2004 and 2005 when we achieved the greatest level of profitability and revenue growth in our company's history, it was through supporting and serving very big customers who had significant opportunity. We essentially tried to recreate that but do it beyond the two customers that we had but that the customers' intentions and plans drive that revenue growth. So because we invested in 2.0 we should be able to do it at a significantly lower cost and much more efficiently and by instead of focusing on kind of trying to 270 VMS customers happy and focusing on the top ones who are telling us that they are very interested in implementing the systems sooner rather than later, we should hopefully be able to even accelerate the revenue growth beyond 15%. But we do not know how long that's going to take but we have started and we are 100% committed to making that happen.

In the quarter that just ended, I am just trying to understand reading your release and your discussion here, was the shortfall small customers, large customers or both?

Well, I mean the biggest noticeable shortfall was in Raymond, specifically as a channel partner, but pretty much every customer, I think I have mentioned it before, we only had seven customers in Q2 that had more than $100,000 in revenue but we serviced over 100 customers. So that's why the shift almost everybody under-ordered because the level of service we were giving to them was not what they needed. So therefore they didn’t the place the orders that we would have wanted.

And our next question comes from the line of Josh Nichols with B. Riley. Your line is now open.

I’m just highlighting Raymond really briefly because this is [indiscernible]. The revenue drop was significant, I know you’ve been partner with them a long time but that seems like by far the lowest revenue at least I have on record per quarter for Raymond. Are you working with them exclusively, is there any other reason why the revenue would drop that low despite just finishing up one large implementation given the company’s pretty consistent history with Raymond?

What they’re telling us is that the reason the revenue drop was because they had a very-very soft quarter so as well as first half of the year frankly. So what we’re trying to do to improve the relationship with Raymond is on their big-big accounts like the one that we did last year provide a significant amount of revenue for our company is collaborate more get them expose to our analytics tool and actually go out and meet with those key accounts, while at the same time work on fortifying the processes, so that they can support the smaller accounts. So again we have to do kind of the same thing, we were doing internally with Raymond which is to focus them on the big accounts and let their channel support the smaller ones.

And I think as you mentioned before and a couple of people alluded too over the past is, I think a lot of it is focusing on enterprise-wide roll outs on the couple of key customers and some of the smaller stuff as you mentioned too. How are things progressing as far as dealing with the larger customers and what needs to happen if you just start wining some of those large roll outs to really smooth out the revenue, let the company get to the growth curve?

I’ll let Norm comment on a little bit more but again what we really need to do is focus. I mean United has the opportunity to be a huge customer for us, but we were not only working on United this quarter, we were working on a 100 other customers and therefore we weren’t able to get the attention to United that they needed and deserve. So by realigning and refocusing our team on the customers that have the greatest potential for growth as well as the greatest potential for achieving the benefit of their system that’s how we’re going to expedite things. But I’ll let Norm comment, because he is the one dealing with everybody and he has some great perspective.

Yes, Ken’s point is very valid that if we spared ourselves too thin than we really can’t, we can’t deliver the kind of support that the larger enterprise customers are expecting and frankly demand when they want to rollout 100s if not 1000s of units. So just to put a little bit of context, we’re actively working with nine enterprise customers on our enterprise prospects, those nine prospects do not include the Fortune 50 customer that are I mentioned earlier, excluding them, those nine prospects have over 15,000 unit in just nine prospects. So clearly we’re actively engaged with them and as we go to your pilot or first site deployment, we want to make sure that we’re doing everything right, so that they have every incentive to rollout the second, third and fourth sites and not stumble on the first site. And this renewed focus and activity that we are going after that I mentioned and Ken has talked about as well will allow us to do just that and I think it will prove to be very beneficial to us in this quarter and in Q4 and beyond.

And then last question from me, I know the company has also invested good amount and has some strong pilot programs in chassis and intermodal containers, any updates that you could give on the progress to that since the market is pretty deep?

I’ll take that, we haven't had the biggest fish that we are after in that category although we’re actively engaged with them and in both of those cases there in excess of 10,000 to 20,000 units each. So those take a long time in the sales cycle but we are making progress with both of those with very large opportunities but we are selling new customers in the same market space with our products so that the same products that we’ll use for them. So we are getting exposure, we are winning deals in the intermodal chassis, in intermodal container area, we are very-very competitive, solution-wise and we are seeing some great results there. We were at or on plan in that business segment and part of that is in those newer markets that we identified and we are having success there.

Our next question comes from the line of Jaeson Schmidt with Lake Street Capital Markets. Your line is now open.

Ken, do you think some of the challenges you are seeing right now is due to competitive threats or is it simply not having the headcount or the ability to service the guys like you need to?

Well, I think we got a kind of go rent through each market. In the rental car side, I really don't see competitive threat as an issue. In the TAM side, we do have some pretty strong competition there but I believe that our customers and prospects which state that we have the best designs, most cost effective and reliable designs. So I’m pretty pleased with our competitive positioning there. On the VMS side, it is clear by the fact that we have just won this large customer as well as all the accounts that we win that people think that we have by far the best product, the problem is our ability to service and support them has been again spread to them. We have three program, managers, who up until the other day were working on 30 accounts each that was just something that resulted and then not giving enough service and support to any of those 30 accounts. So we are going to make it very clear that our service and support is going to be focused on those who have quantifiable and measurable success criteria and that if we meet we will result in business and the smaller ones, we are not just going to throw them away we are just going to send them with a channel. It took us a long time to get this channel set up and that channel will provide great support for these customers, we will welcome prospects that we are going to send there away. So I do not think it's a competitive situation other than the more we continue to stumble to the extent that we are just spread so thin then those who can actually specifically focused on some specific accounts can say well, we are 100% dedicated here. That's my only concern and that's something that we are addressing.

Okay. Thanks. And then Ned, can you update us on the revenue breakeven run-rate now with the headcount reduction?

Sure. If you look at the current expense structure adjacent with the headcount reduction, we expect by the fourth quarter of this year, our non-GAAP operating expenses in total would be approximately 5.5 million. So we will breakeven at approximately $11.5 million in quarterly revenue by the fourth quarter.

Okay. Perfect. And the last one from me before I jump back in the queue, can you just give us the breakdown between VMS and TAM rev?

Sure. VMS was 4.5 million, TAM was 4.4 and there was $991,000 in revenue from Avis.

Our next question comes from the line of Bryan Prohm with Cowen and Company. Your line is now open.

Ken, tell me more about the shift to overweight the top customers. It sounds like there is sort of 80-20 roll, maybe 90-10 roll the way you and Norm sort of called it out. Do you think you can still grow at a double-digit year-over-year pace with that focus on 100,000 plus customer accounts? I mean if you not giving guidance to understand, but I am trying to get a sense of, it sounds like you still believe that, that potential exists. It’s just the question of timing but is that timing near term, next couple of quarters, where you would see that growth rate pushed pass the non-GAAP breakeven run-rate that Ned just referred to $11.5 million. Thanks.

So, there's no doubt that this large customer that we just landed and United Airlines alone could take us to the revenue run rate that we need to achieve profitability. So now we're going to be giving them more attention, and that's just two, later we are going to give more attention to Rayman to try to get that, as a reset of our product, more focused on us because we're going to be pushing them rather than just waiting for them to give us the orders, same with Toyota. So when we came up with this plan and it was probably two months in the making and I don't want to ramble on but the question was in light of all the investments we made in 2.0, can we be profitable? We have a great product with a great return on investments, why are we not making money? And, it was pretty clear that we are trying providing too much for too many and as a result, we are under-serving those who could potentially grow the quickest and we were under-serving even the smaller ones that were literally just kind of getting in the way. So, this strategy now that we have the investments that we made in 2.0, to me is the best way to get back on that growth trajectory of 2004 and 2005. And, that's our plan.

Can you speak a little bit more than to the revitalized interest you referred to in the release around the rental car market? It sounded like it actually was a pretty meaningful contributor based on the Ned’s breakout just now over the second quarter.

Well, its pretty clear that the rental car industry is getting pressured significantly by Hoover and others, and as a result they're looking to change their approach to their customer base through the use of technology and right now we're talking with those three major players as we have been, but in the case of at least Avis, they have actually funded the development of that next generation product, we presented them with a prototype last week. They liked the way it looks, so we are definitely on the right path there. But one of the things we are going to do, not just with Avis, but with every customer and every deal, is we're going to focus on profitability. We every single deal that we enter into, is going to be focused on taking our company to where we should be which is a profitable company and that includes any additional deals in the rental car industry but really any deal we take.

Last question for me any Wal-Mart revenue, spare parts revenue rather in the quarter?

No, not this quarter, but we did receive a purchase order that expected to be deliver during Q3, as they continue to refurbish their units and bring them up to the latest and greatest.

And our next question comes from the line of Andrea James with Dougherty & Company. Your line is now open.

What types of training do you guys need to do in the channel to pull them up and/or the things that your team had previously been handling?

That’s a good question. So the channel is probably, I mean based on our experience so far is going to be focused on the most basic functions of our system, access control impact in OSHA. It’s not too much training that needs to be done assuming that the I.D. Systems 2.0 initiatives bear fruit the way we expect. So what I mean by that is we have online training now for VAC4, we have installation training videos for VAC4. So the channel should be able to support the most basic functionality without much additional training beyond what’s available on our website. Where they’re going to need more training is we’re in their selling to those large enterprises for more sophisticated elements of our solution and what we’re planning to do there is getting -- working with them and collaborating them more and how to position it and how to help them articulate the benefits.

Because it’s my understanding that the new customers need a lot of handholding and maybe one-and-one meetings. So it sounds like the channels going to have able to answers those questions alone maybe they have been previously, is that right?

They will, but again the channel is going to serve and support customers who want the most basic for functionality that won’t require the level of training that an enterprise customer like United or where we just landed will require but absolutely having scalable training that’s one of the investments of 2.0 that we need to leverage.

And then just for Ned, I know you did give us your expenses in Q4 [indiscernible]. What the expense level associated with the workforce? So you’re cutting extra amount of expenses?

Yes, so the workforce cuts are going to yield on an annual basis approximately $3 million in annual expenses. We’re also reducing all other expenses by another million dollars. So overall we expense through, we expect by the fourth quarter of this year to reduce our annual operating expenses by $4 million, which will be a million dollar per quarter.

And then just really quickly, how is the relationship with Toyota and Raymond evolving? I just wonder if any of the Raymond still have to do with maybe some flux is being owned by Toyota and you have new relationship with Toyota, I just pull out how is that relationship evolving and how is it affected by the operational changes?

Well Toyota and Raymond have a very unique and interesting relationship among themselves. They tend to in the owner but they do compete in the marketplace. But we do see more collaboration and interest on Toyota and Raymond part to work together with I.D. Systems in a more uniform matter, so we’re excited about that. We’re excited about, we’ve had a long-term relationship with Raymond for a number of years and it was Toyota only just over a year now. But as they look to align some other goals we become very integral in that and I think it will bode well for I.D. Systems as those two look to do more together. And we just launch the aftermarket for Toyota, we launched in July, we launched in April was the factory install and there is a significant lead time on those. So the pipeline looks very good as I mentioned earlier for Toyota and I think as the aftermarket comes into fruition in the weeks and months ahead we’ll see some opportunity for growth there.

And our next question comes from the line of Dan Weston with WestCap Management. Your line is now open.

I had a couple of questions, I got in a little late, so apologize if you covered this. But did you talk about or break out any revenue contribution from Toyota material handling specifically and can you do that whether they generating any revenue for you last quarter?

We have received revenue from Toyota but it was from Toyota manufacturing. From the Toyota the dealer it has been very small and we expected to start taking it in the second half for the year.

Any particular reason behind that or they just slow to ramp up or how would you characterize it?

It was, we’ve only focused initially on the OEM install part and there is a longer lead time for that. So I think that was one reason and we just now getting to the aftermarket where the opportunity is much-much larger because all the trucks already out there and operating. So as their sales team approach their end users too have different needs. I think the market opportunity is much-much larger and we will see better opportunities for us to do short term, we’ll have short term wins.

Got it, by the way I assume that was Norm that was speaking just now?

That's correct.

Norman, is that a change from the way you guys initially kind of view this relationship rolling out partnering the fund in terms of, a shift in after-market versus new machinery?

It was planned that way, so we always intended to do after market second because with after market, there is many-many more vehicles involved with on the factory install side it’s just the vehicles that Toyota manufactures at their factory, so it was more concise than we make align better we have to do customization for that, for wiring and labeling and private labeling et cetera. So the aftermarket opportunities much more diverse because they can sell to any customer that had any type of equipment not just Toyota. So it took little more time to provide that on our portal and that now is going to market in July. So we expect to see some better results on the aftermarket side, there was an opportunity prior to July to do that.

Got it, what we’re talking here Norm, again I got in call little late, but you explained some difficulties, I think you characterize some as difficulties in the VAC4 product specifically and I’m wondering, can you talk in a little more detail on specifically what was wrong with VAC for? Why it couldn’t it, why did it have problems and any detail that you can provide there, I mean going forward do you envision VAC4 will be sold kind of as an out of the box solution or it will be much customization on per client basis?

No, I think, I will second part first and come back to your question of the some of the issues. Now the VAC4, when we spend a lot of time bringing into market on the design side, and development side, and I think it is an out of the box product that work very well for enterprise clients because it has the capabilities beyond access control and by abrasion and OSHA it has many other capabilities that enterprise customers typically want. So I think it is the right solution for that strategy that we’re deploying. On the quality side, frankly we were disappointed with some of the quality issues when we put it in the market and so we could step in today, we’re going to focus on, we’re going to up our system test capability and we did that so we put it to a lot more rigor as we’ve got it out now and we have a couple of former releases that we’ve been building and they are ready to go market and I haven't seen any new reports or any issues over the last several weeks. So we are working through the issues that we did have. We have work around for all of them and firmware that will be added to the device. We can do almost all these updates done over the air for the most part with a very few exceptions. So that makes it easier for the customer not to go touch the truck to go do that. But we do not want to set them out, we know that they are going to work exactly where they want. And we are very close to be in that position right now. Hoped that answered your question?

No, it does. And then in this last quarter with some of the difficulties that you just talked on. Did you get the sense that some of the customers might have happened the pipeline, when somewhere else or did you lose any do you think?

I do not think so. We are very blessed to have some great customers; ones that you have -- whether it was Wal-Mart, US Postal Service et cetera. So there are new opportunities. The nine prospects that I mentioned that have 15,000 units. And it does take a little time to close. So in some cases they were not even exposed to the back for yet, because we are still working on getting the pilot ready to go et cetera. So I guess in one regard it has a slow shipment level in the quarter. One could say boy it's not good of course I am disappointed as well as Ken and Ned. But then other thing is that we shipped another 1,000 or 2,000 of those units, what we have needed to service they were not working properly. So I am disappointed that we did not sale more, but I am kind of relieved that, hey, as they started shipping now, it's going to work well, we have got a great pipeline and we are going to see some good results.

Got it. And do not mind I would like to ask a couple of is, Ken, if you do not mind the way I am understanding is maybe you faced some challenges on the implementation side still and you refocusing as I think you should be on some of the top customers that can produce the most for you. But refresh my memory, did you guys sign on a brand new implementation partner within the last couple of quarters? And if so how is that relationship kind of unfolding here?

We do have implementation partner. They can support the growth as we hopefully start achieving it, because that's clearly the plan of the renewed focus. But for now we would be still service that we have at these levels we can certainly equip our current customers in a timely fashion.

Okay. Fine. Last couple to Ned, you are talking about, based on the restructuring and headcount reductions with the cash could stabilize in the near future. First is, should we expect to see a severance cash outlay charge in Q3, if so how much?

Yes, it will be in Q3 and its $300,000.

Okay. And will that be all that remain on severance or do we see some spillover in Q4 as well?

No that's the entire amount.

Entire amount. Okay and then if cash being down to this level, where it is? Did you expect that the company may need to seek some financing either debt or equity?

Well, I mean if you look at our, the refocus go-to-market strategy obviously the point there is to increase sales. Also, if you look at our balance sheet at the end of Q2, we did build a significant amount of inventory because we expect that some of these deal to close and we pay for that inventory but they are not closing with pushed out. So we already have the inventory on hand, we’re able to ship that we pay for we’re going to collect the cash. We also expect the reduction in the headcount and additional collections of account receivable, we feel that we expect the cash position to stabilize. In addition, we could look to finance our receivables through an ABL line we’re talking to a couple of parties that can further strengthen our balance sheet. But if we’re able to meet our revenue goals as expected we don't see any need that we would need additional cash.

Yes, I don't usually like to jump in but we’re not going to add our shareholders to continue to fund this company. The customers who have their return on investment are going to be funding it, its going to be, we’re going to focus on profitability and the days of raising money from the shareholders to move in that direction are behind us.

Very good, I appreciate that. Ken last question is on the Avis. So, the page in 970,000 buck or whatever was in the quarter and that was specific to you delivering the prototype that you just talked about is that correct?

Yes, with the 750,000 related to the prototype and other 200 and some thousand is service revenue associated with the 30,000 units that are out there.

Yes. Okay, good I’m quite clarified Ned and then so going forward in Q3 and Q4 specifically relating to the prototype, we shouldn’t expect any additional revenue from Avis on that specific area, should we?

Under the contract, an additional 250,000 should be able to recognize in Q4.

Thank you. [Operator Instructions]. Our next question comes from the line of William Gibson with Roth Capital Partners. Your line is now open. [Operator Instructions].

My question got asked and answered. Thank you.

Thank you. And I am showing no further questions at this time. I would like to turn the call back to Ken Ehrman for closing remarks.

Sure. Thank you. We are definitely not pleased with the financial results of the quarter. But on the other hand we definitely are very, we are all by that everyone as a company, this renewed focus on profitability, the focus on the bigger customers who can take us to levels where we absolutely should be and will be. So going forward we are definitely optimistic about the future and I believe that Norm is not only going to leverage his relationships but also his experience in selling these systems to the most demanding customers in the world so we appreciate your continued support.

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.