Good morning. Welcome to PowerFleet's First Quarter and 2020 Conference Call. Joining us for today's presentation is the company’s CEO, Chris Wolfe; and CFO, Ned Mavrommatis. Following their remarks, we will open up the call for questions. Before we begin the call, I would like to provide PowerFleet’s Safe Harbor statement that includes cautions regarding forward-looking statements made during this call. During the call, there will be forward-looking statements made regarding future events, including PowerFleet’s future financial performance. All statements other than present in historical facts, which include any statements regarding the company’s plans for future operations, anticipated future financial position, anticipated results of operation, business strategy, competitive position, company's expectations regarding opportunities for growth, demand for the company’s product offering, and other industrial trends are considered forward-looking statements. Such statements include, but are not limited to the company’s financial expectations for 2019 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 conditions, demand for the company’s products and services, competitive factors, emergence of new technologies and the company’s cash position. The company does not intend to undertake any duty to update any forward-looking statements to reflect future events or circumstances. Finally, I would like to remind everyone that this call will be made available for replay in the Investor Relations section of the company’s website at www.powerfleet.com. Now, I would like to turn the call over to PowerFleet's CEO, Mr. Chris Wolfe. Sir, please proceed.

Thank you, Josh. Good morning, and thank you for joining us today. I hope you're all safe and healthy during this extraordinary time. The COVID-19 health crisis requires remarkable efforts from people, communities, organizations, and governments to keep our people healthy and safe. This crisis has impacted companies and people all over the world and our thoughts go out to all those affected. Internally, our top priorities remain keeping our employees and community safe, maintaining the health and viability of our business, and ensuring our customers keep food and goods - going where they need to get to. Across our businesses and geographies, we have adhered to the CDC guidelines and local Health Ministry recommendations while continuing to operate as an essential business as designated by the U.S. Department of Homeland Security. Our Israeli operations were also designated as an essential service because our technology supports emergency responders and critical logistics infrastructure. We spent a considerable amount of time over the last two months accelerating cost saving synergies, right sizing our business units as the pandemics impact, and government responses have varied considerably in doing so, while ensuring our companies and employees safety. Fortunately, our business continuity plans and IT infrastructure were effective and flexible and allowed us to continue helping our customers and partners meet the challenges of today's remote work environment. I continue to be impressed daily by our team's determination and productivity while navigating these uncharted waters. Our uninterrupted operational execution in Q1 is a testament to their unwavering commitment to helping our customers and partners in a time of increased need. And our steady financial performance for the first quarter highlighted by $30.8 million in total revenue, $17.6 million in high margin recurring and services revenue, and $2.8 million of operating cash flow we generated demonstrates…

Thank you Chris, and, good morning, everyone. Our financial results for the first quarter of 2020 include consolidated results, [technical difficulty] I.D. Systems and Pointer Telocation Ltd., which were acquired on October 3, 2019. Keep in mind that the comparable year ago period only includes standalone financial results from I.D. Systems. Now with those qualifications, let's look at the numbers. Revenue for the first quarter of 2020 increased to $30.8 million from $13.6 million in the same year ago period. High margin recurring revenue was $17.6 million or 57% of total revenue, compared to $6.4 million or 47% of total revenue in the same year ago period. Product revenue which drives future services revenue was $13.2 million or 43% of total revenue, compared to 7.3 or 53% of total revenue in Q1 last year. Gross profit increased to $14.9 million or 48% of total revenue from $7 million or 52% of total revenue in Q1 of last year. Now turning to our expenses for the first quarter of 2020, total operating expenses was $18.3 million compared to $9.2 million in Q1 last year. Looking at the various components of OpEx selling, general, and administrative expenses were $13.4 million, compared to $7.2 million in Q1 of last year. Research and development expenses were $3.2 million compared to $1.7 million in Q1 of last year, and depreciation and amortization expenses were $1.7 million compared to $358,000 in the same year ago period. As Chris mentioned in March, we proactively implemented several cost saving measures, of which we expect to see the financial benefit starting in the second quarter. Some of the cost saving measures already implemented include a reduction in force, eliminating mostly all third-party contractors and imposing a temporary hiring freeze. In certain geographies, we reduced to a four-day work week…

Yes, thanks for the financial overview Ned. In the midst of the COVID induced market disruption, our team has done a tremendous job executing against our organizational and program integration plans and targeted cost savings. As I mentioned in my opening remarks, as country and state shutdowns were initiated we took proactive actions to keep our employees safe, reduce expenses and maintain uninterrupted operational capabilities. The slowdown also forced us to look at critical priorities in our strategic plan, including temporarily shelving some initiatives that I talked about nearly seven to eight weeks ago, while we pulled other initiatives forward. Taken together, this has accelerated cost savings across the organization. As product volumes returned to pre-COVID levels, we anticipate we will realize even greater savings from our consolidated supply chain. In terms of product development and engineering, we've been executing on our Software-as-a-Service platform consolidation efforts and expect to be in beta by the end of Q3 which is on track with our internal schedule. The consolidation work will allow us to save over $1 million annually once finalized in 2021. Simultaneously, this gives our customers full visibility of their assets and real time incidents regardless of asset type and whether the asset is in a facility, in the yard, at a job site or over the road. Our weight on axle R&D initiative is being tested by a major customer with encouraging results today, giving us confidence that we can commercialize this product over the next several months. The first iteration of this product can tell if a container is loaded onto a chassis and as well it can tell if the container is loaded and empty. We're striving to get to legal weight on axle in future iterations which would be a game changer in the logistics market.…

[Operator Instructions] Our first question comes from Mike Walkley with Canaccord Genuity. You may proceed with your question.

So just on the higher margin recurring revenue services, can you help us just walk through your customer base? What areas of the business are holding up better that are more sticky, given that you're critical and maybe some other services like in Avis that you might have some under-utilized assets maybe temporarily shutdown out of service for those markets. Are we just trying to look at how much of the business is stable and how much might come off in the short-term? Thank you.

That's a very good question. It's really interesting that we've not seen actually, hardly any I would say it's very marginal, any reduction our recurring revenues, except for with Avis where we gave them a slight discount for a period, it's very limited, it's for three months to hopefully get them through what we call the belly of the crisis. And again, they are partnered with ours, but it's more of a discount, they're still under contract for the whole 125,000 units and committed to a 60-month term and they've been paying religiously. So they've been a great partner. Our other businesses they are all under long-term contracts. We've seen maybe just a couple of people asking for deferral, not asking to be shutdown. So again, that's very promising. And I'd say that's across the board, whether it's industrial, or logistics or in our fleet management businesses and that's also globally. We're not really seeing much impact at all to our 70 plus million dollars in recurring services, recurring and services revenue.

And just building on that given the critical needs especially in the food and other areas, are you seeing any kind of uptick in business or they're just so busy executing right now, it's hard to pull assets offline to add hardware, and it's just kind of steady in some of those critical businesses that are probably quite busy right now.

Yes again, some of the customers I mentioned are phenomenally busy right now. So the good thing is they're making a lot of money right now and they're actually saving money because of fuel costs at the same time. So I do think a lot of those companies are going to be phenomenally stronger and able to do capital expenditures here, once things I think normalize if there is going to be a normalized. But the other side of the logistics puzzle or in even in our industrial truck side, is, if you're doing heavy manufacturing or automotive - those industries have basically gone dormant. So, I think it's an interesting balance between the two, like that large logistics company I mentioned, their plan was to aggressively rollout our technology this year. They're rolling out three sites in Q2, but they have hundreds of sites. So again it's just a - there's slow rolling and a little bit at the front end just to wait and see until the states open up because some of the facilities they manage have actually been shut down.

Understood. I know it's tough in this environment with the pulled guidance, can you just maybe give us some high level color. How are some visibility and conversations maybe here in mid May versus April, when everything's shutdown. Are there signs of things starting to come back with Israel and different states opening up or is it just too early still, everybody's still kind of just figuring things out?

Yes, this is actually, testament to like our team in Israel, actually in our analytics team here in the States. They took all of our data from all over the world and because we're on the dock, we're actually in the facility - whether it's warehousing or manufacturing, and we're also over the road, whether it's in cars or trucks, and we did activity indexes on every country. And you could actually see the fall off in every country when it happened by time at the beginning of the year. And we actually saw what countries have hit the trough. What I'd say is the canyon and then we've actually seen recoveries, which is great, and by the way, getting to Israel, they're probably I'd say they're like three weeks ahead of us that's kind of the way it’s been tracking. And we're seeing an uptick in business there already. Pent-up car demand is coming back online, which is good to hear. And also in the states inbound inquiries, as I mentioned before, are picking up activities and programs I mentioned that logistics company that's starting to - they're starting to contact us about starting their site deployment. So I'd say right now - United States is kind of variable because every state's opening up at different levels. So it's - we have seen it, like what I'd say hit the canyon here in the states, it's just probably going to be a little bit more jerky here than it is in some other countries.

Great, thanks, last question, and I'll pass the line. Ned, just on some of the cost savings initiatives lowering consultants and headcount reductions and shorter work weeks. Can you help us just quantify how we should think about maybe the spread of those costs where they hit the P&L and what you're thinking about, maybe for a run rate of OpEx - maybe this quarter and then where it could go exiting the year?

Yes, so - thanks Mike. The savings amount to approximately $2 million per quarter. So we should see the operating expenses, starting in Q2 to be reduced by approximately $2 million. The majority of it is in SG&A with a few hundred thousand in R&D. Right now, we have additional plans in place. So we definitely have more levers to pull if things take a little bit longer. But the goal is to keep expenses at this level. We're also managing the company on a cash flow basis and managing working capital very efficiently. So as you can see, from the first quarter we generated, about $2.7 million in cash flow from operations. So, our cash position also remains very strong.

Our next question comes from Scott Searle with ROTH Capital. You may proceed with your question.

I'm glad to hear you guys and your families and teams are safe. Maybe just to dig in a little bit more on Mike's question on OpEx. You talked about some permanently fixed and optimized cost structures as well as some variable like comp structures that would come back. Could you kind of give us an idea about how that breaks down? And also Ned, in terms of depreciation, amortization in the quarter, could you give us quick breakout of what the Pointer Telocation amortization was related to the deal and then I had a couple of follow-ups?

Sure, thanks Scott. So the cost savings, it's approximately $2 million per quarter. We're going to start seeing that immediate in Q2. The majority of it is in SG&A with a few hundred thousand in R&D. When you look at depreciation/amortization out of the $1.7 million in depreciation/amortization that's included in OpEx $1.1 million relates to the amortization of the of the Pointer acquisition related to the intangibles.

And just to follow-up on that $2 million cost reduction. Will we see the full benefit of that in the second quarter or will that be the full benefit of that is in the third quarter? And it sounds like there are some permanent reductions there as well as some variable that would come back compensation or otherwise, could you give us an idea what that looks like provided the outlook and we start to see a little bit of inflection in the second half.

Yes, so the - we have been started seeing immediately in the second quarter. We took action in late March. So the costs were implemented at the beginning of April. So we’re going to see the full benefit of those savings in the second quarter. And when I look at, although you're right some of them are fixed and some of the variable, we don't intend to increase any of those expenses until we start to see a significant pickup in revenue.

Okay. And Chris, maybe just a follow-up you highlighted a lot of your customers that are in more essential industries such as grocery, is there a number that you could put around that in terms of what they represent across the different product lines, to give us an idea by end market about what that looks like? And if you could as well, things certainly started to slow in the March quarter, but could you give us some linearity in terms of how things progressed on a monthly basis through the first quarter and into April, can you give us an idea about where things are kind of troughing to be able to model going forward?

Yes, so just off the top of my head - we don't usually break it out by food and grocery and distributions and put it into an aggregate number, like across all geographies. But in the U.S., it probably represents about 25% of our business as far as users and service. And I would say like in Mexico it varies it's probably like 30%, because they have a huge business going on with Coca Cola, which is not necessarily an essential service, but obviously, it's in food and grocery distribution. So again, it varies by geography, but I'd say it's around the 25% to 30% range of total users in service. Looking at the geographies Mexico again, it's really hard to understand where they are in the COVID-19 situation because I don't think they report their numbers quite as accurately as other countries. But that being said is, we’re seeing a lot of pickup and activity in Mexico. We mentioned that one tender that we won, surprisingly enough South Africa I mean it's had a pretty bad basically economy for a while. But winning a 3,000 unit tender down there basically - almost changes our business in South Africa overnight. And we are seeing that - basically it hit the bottom and coming out. Argentina has just been steady, even with a shutdown the business there has been pretty good. Israel is the one where it again, it's a preponderance, it's a large part of our, it's almost equal to the states and the same size as revenue. And that's the one we're seeing a lot of pickup activity starting. We're seeing it actually in the data, right. And the same in the U.S., we've actually started to see, pockets like in the certain areas, like industrial truck is starting to pick up and then certain parts of logistics kind of flat lined, but now they're starting to pick up. So it's great.

Okay yes very helpful. And Chris lastly, if I could just, you gave a lot of qualitative examples and data points related to inbound and customers. Is there a way to quantify the backlog or the pipeline in terms of what you're seeing, and it sounds like really, the trick here in the near term is the ability to get in and install and close some of these contracts? What's going to be the real milestone or catalyst? It sounds like, it's going to vary region-by-region, even state-by-state, but what should we really be paying attention to when we're starting to get back into full swing, your ability to get into a warehouse, to get into an enterprise, to be able to install against that backlog? Thanks.

Okay. So I would say right now - like the one logistics company in the - I don't want to keep relying on them because it was a huge deal that we signed in Q1. We're rolling out in Q2 and throughout 2020. We're going to see so that backlog we've only I think installed 100 units. So we have 900 units to go there. Jungheinrich by the way is well ahead of plan and Jungheinrich brought us into their U.S. affiliate and they're the ones that brought us into the world's largest online retailer. So implementing those sites in Q2 so again, but keep in mind that online retailer, those sites are brand new sites, they're brand new warehouses. So it's really easy to get into something like that versus somewhere where there's lots of people and they're trying to, keep external influences out. They tried it, there's no reason to have COVID, contact tracing and have other vendors walking into your property. That we do see lessening up matter of fact, our field installers for the first time, that's probably an interesting data point are field installers right now are booked all the way through July. They're fully booked. Now again, we contract out a lot of field installing, but I think that's pretty telling. So the sales backlog is good - deals that are signed and units that we need to ship, these - huge prospects that we're working on. Again those were - that's where the big opportunity is for us. And again, the deals haven't stopped and I mentioned that U.S. government agency won 5,000 units might not sound like a big account, but it's literally almost a $19 million opportunity, because it includes a lot of software engineering and a lot of software implementation. Hopefully that helps.

[Operator Instructions] Our next question comes from Jaeson Schmidt with Lake Street. You may proceed with your question.

Just curious if you're seeing any pushback on, pricing from any of your business lines, just given the current environment?

I'd say in the logistic side, more than like industrial and obviously one part of our business, it's about - like I'd say its maybe 10% of our businesses, hardware only sales, because we sell to the rest of the world, our product where we don't actually run operations, that's been impacted. But I would say I don't know Ned would you add onto that?

Yes, I think on the logistic side, transportation I think some of the competition out there is everyone is trying to close deals. So we are seeing some pricing pressure there. On the industrial side, we haven't seen any of that yet.

Okay, that's helpful. And then following up on the online retailer, should we expect a rollout in the U.S. to sort of follow the same trajectory you saw with this customer over Europe?

The online retailer is actually putting units in when I say units - let's say vehicles. So they're putting vehicles in their warehousing facilities. If they pick a vehicle that does not have a telemetry like in other words, the OEM doesn't provide their own telemetry unit then we have a huge opportunity. And the partner with Jungheinrich here in the States their affiliate here that got us in, they expect to get more warehouses which would be great for us. But let's say if they pick OEM like Raymond or they pick Crown for a facility, we're probably not going to get that because Raymond or Crown have their own telemetry device. So it would be an OEM supplied product that they can subsidize when they sell the forklift. Our claim is the same and where we usually win 100% of the deals is in a mixed fleet environment, which that's the preponderance by the way. So but this online retailer likes - they did the forklift against each other and then they'll take and go 100% Crown or 100% Raymond or 100% Toyota so if it's Toyota or McBay or MC then will be in that site. But if it's the other guys, then we might not.

Okay. And then the final one from me, I know it's hard just given overall visibility. But do you have a sense if a lot of these delays are being pushed into the second half or are more being pushed out to 2021?

No I'd say the second half. I think right now we're in a critical time, it's like the United States is just now opening. Israel's opening and by the way. It's great to see the traction that's starting there as quickly as it is on the business side. Everyone needs to - remember that we are a B2B player, right. So that kind of, it's like the B2C space in some aspects unless you're a telco and you're just providing data, that's pretty immune. Because everyone's on their cell phone and everyone's using, go to meeting and all that. But in the B2B space, we’ll be the first ones to get the benefit I think, because I start lighting up factories as they start getting trucks back on the road, that's when they'll start moving faster, with us. So I think what we've seen so far is very encouraging, I think in the States I don't - the deals I'm talking about have not been pushed out into next year. Matter of fact the United States government deal, their process is just slow. Anybody that's ever worked with the government knows that, but we think they're fast tracking this and we do expect to get, if we're successful we'll get that deal in Q3, announced in Q3.

Our next question comes from Josh Nichols with B. Riley FBR. You may proceed with your question.

Yes thanks. I was just curious could you talk a little bit about one, where are we on the Avis unit delivery front in regards to the 75,000 units under contract today?

Yes Avis - they are under contract and have - they needed to take every unit by October of this year. And so they've taken every - of the 75,000 they've taken about 71,000 roughly. So there's - little over 4000 units left for Avis to take. And so right now, they're contractually obligated to take those by October. So we're just - right now we're just looking and seeing how their business recovers - over the summer.

I think can you talk a little bit I know for Pointer like strong U.S. dollars typically been a little bit of a headwind? Are you seeing much impact there as a temporary headwind in places like Argentina, Brazil, Mexico, given the strength of dollar?

So Josh obviously, as part of the combined company, those geographies are much smaller part of our revenue, so the impact is not as significant. However, our expenses are also in those currencies. The change in the foreign currencies does have an impact in our bottom line, but it could have an impact in our revenue. But approximately 50% of our revenue today is in the U.S., and a majority of the remaining is in Israel. So we're not impacted as much by the changes in those currencies.

Thanks. And then just to dive into that a little bit more like, how much of Pointer’s business or the legacy Pointer of business in Israel is really related to like, more basic, like standard vehicle recovery solutions that they used to offer this kind of tied a little bit more to like auto sales and any additional color you could provide on what you're seeing over there would be great.

Yes, a big percentage of the business in Israel comes from that segment of our business to-date has been very resilient. The monthly billing remains strong in the - throughout COVID-19. We're waiting to see how it's going to impact our new units. But so far, it's been very resilient that piece of our business.

I know it was always hard, but any idea for potential timeline with the U.S. government for this 5,000 unit opportunity? I know that like I said, it's hard, but is there any type of formal RFP or anything else the deadlines that you could kind of point to help guide us when this might be awarded?

Yes, they call it par, and that par is already in process and we've supplied them like all the - basically, we've responded to their RFP already. The good thing is its sole source because it's actually a replacement proposal. So initially, if everyone remembers, like three years ago or two years ago, they went out with the par they selected a competitor, and they're not happy, right. So they came to us and asked - just this year they came and said hey, we'd like you to come in and see if you can help us out. And so by them, making it a replacement par, there's over 80 facilities that need to be installed. They're moving from decentralized IT to centralize which basically, we can do very well, that's what we do. We basically have Software-as-a-Service. So again, that's where a lot of the money for this program is being generated as well, because we will be both behind the Firewall, it's a U.S. government agency - they're not going to run in the cloud. So there's some implementation dollars et cetera to go into that. There's equipment replacement dollars, and then there's recurring for the first time for this customer. They've never been on a recurring situation. So again, the timeline they've given us is Q3 and so, we're all marching to that right now.

Your next question comes from Gary Prestopino with Barrington Research. You may proceed with your question.

Couple of questions, in terms of how your margins broke out between product and service in the quarter, obviously a big step down because of Pointer, but are those margins particularly on the product side? Are they going to vary considerably either way as we go forward here, or is that somewhere within that 28%, 29% range is that a good number to use?

Gary, it’s Ned. That is a good number to use, we expected because of the fact now that we're vertically integrated, that we would see a slight improvement in those margins to get into the low 30s. However, as I mentioned before, we are seeing some pricing pressure, especially in the logistics business, as well as due to the fact that the product revenue is a lower amount to the COVID-19 situation. So, I expect using that number for the next few quarters is a good way to look at it.

And any slippage in revenue that we're going to see relative to our expectations would be on the product side, right. The services side you're basically contracted out to, so unless.

That is correct.

Yes okay.

Okay, good and then?

I am sorry.

No go ahead, go ahead Ned?

As Chris mentioned to-date our service revenue has been very resilient. We continue to invoice and collect on a monthly basis. We are going to see a slight decline due to some deferrals. But on overall basis, we feel comfortable with the service revenue.

Okay, and then can you kind of possibly if at all just frame this out for us. If this, how much did this COVID impact hit you for in the latter half of March? Have you guys gone through that exercise in terms of revenues?

Yes this is Chris and I probably say it was probably about a $2 million worth of revenue that we would have had, because again, everyone should - this is the way it works. Product revenue is always, it's usually at the end of the year because people have to or at the end of their fiscal year because they want to spend their budget as money, and number two, it's usually at the end of a quarter when our deals usually come in. So it's kind of, I'd say it was probably in the $2 million range that we would have that just got pushed out and it's, you know again, the some of the deals are - all the deals are still in play. It's just customers just said hey - because we got to remember this first - this last two weeks of March, literally everybody just shutdown and it was almost overnight. And they started rising on their own stuff, right, they had to focus on their own COVID-19 actions. So that's a good number to use or to think about.

Okay. And then I would assume that you're saying your pipeline still pretty strong and all that but your sales force is actively out doing outbound calls here, talking to your counterparts in the industry. I mean obviously, nobody is doing face to face meetings. But I mean, just to get an idea of just how well you are operating, are your people able to get potentials on the line on the other end?

Yes, that's a very good question. And for a while, the answer was no, because basically every one - our customers and prospects we're all trying to work from home, et cetera that's eased up. By the way our dealer network, go-to-market strategy they always did it over the phone so which is great. So it's like, they rarely went to dealers and to the end customer because it was a through a channel that's the same with Jungheinrich right. So those were not impacted. On the logistics side, where it's more direct, our inside sales team has always been working over the phone. So that's actually - matter of fact we've gotten some really good leads just recently because I think people have more time to pick up the phone to which is interesting but on the closing the deals, we're closing deals in the logistic side as well which is great but it's a little, it's a little bit more difficult. There's a lot of, sometimes you just got to look at somebody in the face and you can do it on zoom too, but - we're doing it. And it's - I think everyone's kind of getting accustomed to it.

Okay. And then lastly, Chris, this government contract that you're bidding on, did I hear you right, that this is a $19 million contract on an annual basis or is there just some upfront consulting that's done there and then it annualizes on a certain number?

Yes it annualizes at a certain number. I don’t usually know what that was like but I don't have the latest numbers in front of them because they asked for two different models, by the way, right. So that being said - there's the hardware part of that its 5,000 units. And roughly think about that's our high end product - everyone needs to remember an industrial product sells for over $1,000. So it's not like selling a trailer device, which is like a couple hundred dollars.

Okay.

So but there is a recurring on that, which will kick in once the unit's go online.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Wolfe for any further remarks.

Thank you for joining us today. Ned and I are presenting at the 15th Annual Needham Virtual Technology & Media Conference next Tuesday, May 19, at 11:30 a.m. Eastern Time. The presentation will be webcast and available in the Investor Relations Section of our website. Thanks again for everyone's attendance and participation today. Please stay safe and we look forward to hopefully talking to you and keeping you updated in the months ahead. Thank you. Operator?

Thank you. Thank you for joining us today for our presentation. You may now disconnect.