Ituran Location and Control Ltd. (NASDAQ:ITRN) Q3 2022 Earnings Call Transcript November 21, 2022
Ituran Location and Control Ltd. beats earnings expectations. Reported EPS is $0.49, expectations were $0.46.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Ituran third quarter 2022 results conference call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. For Operator assistance during the conference, please press star, zero. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Ituran's Investor Relations team at EK Global Investor Relations at 1-212-378-8040, or view it in the News section of the Company's website, www.ituran.co.il. I will now hand the call over to Mr. Kenny Green of GK Global Investor Relations. Mr. Green, would you like to begin?
Kenny Green: Thank you. Good day to all of you and welcome to Ituran's conference call to discuss the third quarter 2022 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, CEO, Mr. Udi Mizrahi, Deputy CEO and VP Finance, and Mr. Eli Kamer, CFO of Ituran. Eyal will begin with a summary of the quarter's results, followed by Eli with a summary of the financials. We will then open the call for the question and answer session. I would like to remind everyone that the Safe Harbor in the press release also covers the content of this conference call. Now Eyal, would you like to begin please?
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Eyal Sheratzky: Thank you Kenny. I'd like to welcome all of you and thank you for joining us today. We are very pleased with the achievements during the third quarter. Apart from our excellent results, we surpassed the goal that we have had for many years at Ituran, that is surpassing a subscriber base of 2 million globally. Given our continued strong subscriber growth adding a net of 48,000 new subscribers in each of the past few quarters, we achieved this goal earlier than expected. This is because it is quite clear that the aftermarket subscriber growth rate has accelerated in recent quarters. In the second half of 2019 prior to the corona area and even over the past two years, apart from the shutdown of our Q2 2020, our aftermarket growth run rate was approximately 20,000 net new subscribers per quarter.
Today we have shared with your our new aftermarket growth expectation going forward. Based on the recent run rate, we increased our expectations for the growth rate of our global aftermarket subscriber base ahead, expecting 180,000 to 200,000 net new subscribers annually. I want to add that we are not making any predictions in the OEM subscriber base growth rate as this doesn't depend on us. It can vary quite a lot and is harder to forecast. The recent strong subscriber growth is starting to be reflected in the current quarter subscription revenues, which continued to grow despite currency headwinds due to the dollar strength. Revenue growth of 10% year-over-year and 13% when calculating in local currencies, and we have all the reasons to believe that this trend will continue well into 2023.
The gross margin on the subscription fee also grew and demonstrates some of the operating leverage in our model becoming more apparent. We recorded gross margin of 57.2%, up from 56.5% in Q3 last year and 56.8% last quarter. This increase in subscribers came from the growth in our traditional aftermarket business and was also boosted by the various growth engines that we have seeded over the past few quarters across all our geographies. One growth engine I would like to highlight this quarter is our service to financial firms active in the secondhand car market in Latin America. Because of the shortage of components and ultimately new cars, the secondhand car market has grown stronger everywhere. New fintech start-ups as well as major banks have come into provide financing to this growing market, however they all need a way to track the collateral on the loans they provide, which is the car, and Ituran provides the perfect solution with its location-based and connected car technology.
We have already started working with financing customers in Latin America and we are also talking to some major financial institutions in those markets which we hope to close in the near future. We are constantly looking to bring in new financing customers and broaden the service to additional geographies. We are excited about this business and see great potential for additional growth in the coming years. In summary, we are very pleased with our performance in the quarter that is both the financial performance and in particular the continued strong subscriber growth which has led to the milestones we announced to do of servicing 2 million subscribers. Both ongoing solid performance in our traditional aftermarket business and especially our growth engines are driving this subscriber growth.
The subscriber growth will ultimately translate into increased subscriber revenue growth and faster growing profitability in the years ahead, and we can already see the initial fruits of that in the current quarter. It is clear that our subscriber growth rate has accelerated and today we increased the expectation going forward. We now expect the aftermarket subscriber annual growth rate at between 180,000 to 200,000 net. All in all, I am more excited now than ever with our long term potential and look forward to a strong Q4 and 2023 ahead. With that, I hand over to Eli. Eli, please go ahead.
Eli Kamer: Thanks Eyal. I note that the summary results I present will all be on a GAAP basis. Revenues for the third quarter of 2022 were $72.7 million, an increase of 11% compared with revenues of $65.7 million in the third quarter of 2021. Revenues from subscription fees were $53.1 million, an increase of 10% over third quarter 2021 revenues. The strong appreciation of the U.S. dollar versus the currencies in the geographies that we operate over the past year impacted the revenues as reported in U.S. dollars. In local currency terms, third quarter revenues grew by 13% compared with that of the third quarter of last year. The subscriber base amounted to 2,020,000 as of September 30, 2022, an increase of 48,000 net over that of the end of the period quarter, which includes a net increase of 50,000 in the aftermarket subscriber base and a net decrease of 2,000 in the OEM subscriber base.
Product revenues were $19.5 million, an increase of 12% compared with that of the third quarter of 2021. In local currency terms, third quarter revenues grew by 16% compared with that of the third quarter of last year. The geographic breakdown of revenues in the third quarter was as follows: Israel 51%, Brazil 25%, rest of world 24%. Gross profit for the quarter was $34.6 million 47.6% of revenues, a 7% increase compared with gross profit of $32.2 million or 49% of revenues in the third quarter of 2021. The gross margin in the quarter on subscription revenues improved to 57.2% compared with 56.5% in the third quarter of 2021. The gross margin on product was 21.5% in the quarter compared with 28.3% in the third quarter of 2021. The product margin was impacted by higher components prices and we expect this impact to ease in the fourth quarter and early 2023.
Operating income for the quarter was $14.7 million, 20.2% of revenues, an increase of 6% compared with $13.9 million, 21.1% of revenues in the third quarter of last year. In local currency terms, third quarter operating income grew by 9% compared with that of the third quarter of last year. EBITDA for the quarter was $19.6 million, 27% of revenues, an increase of 6% compared with $18.5 million, 28.1% of revenues in the third quarter of last year. In local currency terms, third quarter EBITDA grew by 9% compared with that of the third quarter of last year. Financial expenses for the quarter was $0.7 million compared with the financial expense of $2.7 million in the third quarter of last year. Net income for the third quarter of 2022 was $10.1 million, 13.9% of revenues or earnings per share of $0.49 compared with $7.3 million, 11.1% of revenues or earnings per share of $0.35 in the third quarter of last year.
Cash flow from operations for the third quarter of 2022 was $11.4 million. As of September 30, 2022, the company had cash, including marketable securities of $30.5 million and a debt of $16 million, amounting to a net cash of $14.5 million. This is compared with cash including marketable securities of $54.7 million and a debt of $31.4 million, amounting to a net cash of $23.3 million as of December 31, 2021. For the third quarter of 2022, a dividend of $3 million was declared. This is in line with the board's current policy of issuing at least $3 million on a quarterly basis. Under the current buyback program announced in August 2021, 79,816 shares amounting to $2 million was repurchased in the third quarter of 2022, and approximately $6 million remains under the current program.
The share repurchases, if any, will be funded by available cash and repurchase of Ituran's ordinary shares will be made based on SEC Rule 10b-18. With that, I'd like to open the call for a question and answer session. Operator?
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