PowerFleet 2027 Q2 Earnings Call

Thank you, operator, and good morning. With me today are Steve Towe, Chief Executive Officer, Paul Lalljie, President and Chief Financial Officer, Jeff Lautenbach, Chief Revenue Officer, and Jonathan Bates, Chief Marketing Officer. Earlier this morning, PowerFleet issued its earnings release for the second quarter ended September 30th, 2026, which was furnished on a Form 8-K and is available together with a slide presentation for this call in the Investors section of our website at ir.powerfleet.com.

During this call, management will make forward-looking statements within the meaning of federal securities laws, including statements about the company's fiscal 2027 outlook, expected fourth quarter fiscal 2027 revenue on an adjusted basis and adjusted EBITDA margin, third quarter revenue mix and margins, expected capital expenditures, cash interest, and cash taxes, leverage and free cash flow, the timing, pace, and contribution of the South African National Treasury contract deployment, the South African device financing facility, including its completion, terms, and expected benefits, the recovery from the production constraint disclosed last quarter, the effects of foreign exchange, including the South African rand, pipeline bookings and customer expansion, and estimated addressable markets and expected revenue from new products, including Unity Foresight and Unity Asset Intelligence. These statements are based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially.

Important factors that could cause such differences are described in the cautionary note regarding forward-looking statements in today's earnings release and under risk factors in the company's annual report for the Form 10-K for the fiscal year ended March 31st, 2026, and its subsequent quarterly reports on Form 10-Q. Forward-looking statements speak only as of today, and the company undertakes no obligation to update them except as required by law. We will also refer to non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, free cash flow, net debt, and adjusted net debt to adjusted EBITDA. These measures should be considered in addition to and not as a substitute for GAAP results. Reconciliations to the most directly comparable GAAP measures are included in Annex A to the earnings release and in the appendix to the slide presentation. I will now turn the call over to Steve.

Good morning, everyone, and thank you for joining us. Q2 was an important quarter to deliver effectively, following the deliberate decision we made to direct revenue focus, capital allocation, and operating resources towards our largest-ever contract win, expected to accelerate high-quality recurring revenue over future periods. Delivering against these strategic priorities, we demonstrated disciplined execution against our plan in Q2, achieving a solid top and bottom line quarter, reinforcing our confidence in the business trajectory for the second half of fiscal 2027 and FY 2028. I'm particularly pleased that the enhanced and energized leadership group evolved over the last few quarters is making an immediate impact on the performance and outlook for the business. Next slide, please. Let me start with our second quarter results. We achieved a record $115.7 million of revenue, representing 4.4% sequential growth.

Services revenue was $95.2 million, an increase of 7% year-over-year, with an improved mix within total revenue to 82%. Adjusted EBITDA was $24.9 million, an increase of 16% from the first quarter, with adjusted EBITDA margin improving to 21.5% from 19.4% in Q1. There are three specific items I'd like to call out. First, we are delighted to have agreed terms for a proposed device financing facility with RMB to support the rollout of our South African National Treasury contract, which will enable us to deploy a hardware-as-a-service model with the ability to scale our rollout costs with demand. Importantly, we expect this to improve working capital efficiency, support operating cash flow, and strengthen our ability to convert growth into free cash flow. Second, I'm particularly pleased with the recovery of our manufacturing operations following the specific component challenge on one high-running item late in Q1.

In Q2, we delivered a 25% sequential growth in product revenue. This was a key execution priority coming into the quarter, and we delivered against our plan, with the remaining portion of the recovery expected to be realized in Q3. Third, our second half plan remains firmly on track, with strong growth in new logo and existing customer demand for the remainder of FY 2027, and exciting opportunities to compound growth in FY 2028. Next slide, please. Our South African government contract has naturally been a key focus within our recent communications. However, we want to spend time today highlighting growth we are seeing across the business. We're seeing significant traction in three high-quality growth engines: our On-Site business, AI Video, and IoT and connected services. Deliberately, these now account for 75% of our future pipeline. On-Site brings AI-powered safety, compliance, and productivity into warehouses, facilities, and other complex On-Site environments.

The breadth of those applications create a differentiated proposition with major enterprises. AI Video turns real-world video into actionable intelligence, helping customers run safer, smarter, and more efficient operation. This is an area where we're seeing stronger bookings, channel demand, and enterprise expansion. IoT and connected services builds on our differentiated value propositions to deliver operational intelligence, greater efficiency, and expanded recurring revenue opportunities. This is where we are choosing to concentrate resources and investment, differentiated solutions with proven customer value and scalable long-term opportunity. Jeff and Jonathan are going to give you more details after Paul's financial review. Next slide, please. Our South African National Treasury program continues to progress ahead of schedule. In August, we reported that we'd reached mandates for 72,000 vehicle implementations, and as our first quarter update, we outlined a target for reaching 80,000 to 90,000 signed mandates by the end of Q4.

Today, we have already achieved that target with mandated installations now standing at more than 94,000, well ahead of schedule. As part of this, 40,000 units are now in aggressive deployment with the South African Police Service. The magnitude, velocity, and high-profile nature of this program is exactly the reason we took the actions to deprioritize less valuable business in the region. This progress demonstrates PowerFleet's ability to execute complex, large-scale programs and deliver ahead of our commitments, and reinforces our confidence in achieving our full-year objectives and medium-term outlook. Our focus remains on disciplined execution and activating the contracted services, ensuring that deployment translates into strong recurring revenues over future periods. I will now hand over to Paul Lalljie, who will take us through the results, our affirmed full-year outlook, and his perspectives on the growth opportunity for the business.

Paul, over to you. Thank you, Steve, and good morning, everyone.

I am pleased to be with you today. This quarter is a good example of the business doing what we told you it would do. Last quarter, we were upfront with you about a production challenge with one of our product lines. Within the quarter, we resolved the incompatibility issue with the new component, shipped a substantial majority of the deferred orders, and you can see the recovery clearly in our sequential numbers. Next slide, please. Total revenue for the second quarter was a record $115.7 million, up 4% sequentially and year-over-year. Services revenue grew 7% to $95.2 million, approximately 82% of total revenue. Product revenue was $20.5 million, up 25% from the first quarter. Adjusted EBITDA was $24.9 million, up 16% sequentially, and margin improved 210 basis points to 22%.

Net loss was $6.9 million, or a loss of $0.05 per share, an improvement from a loss of $0.06 per share last quarter. In a nutshell, durable revenue growth, EBITDA compounding quarter-on-quarter, and a new financing being finalized to support our largest growth opportunities. Today, I will cover revenue and the underlying growth of the business, then margin and profitability, some context on the third quarter, our funding and balance sheet, and close with our full-year outlook. Let me start with the recurring revenue engine of the business. Services revenue was $95.2 million, up 7% year-over-year, and recurring services revenue was $91.3 million, up 7%, driven by our Unity platform, which include On-Site, AI Video, and IoT and connected services solutions.

For the first half of the fiscal year, services revenue made up 84% of total revenue, up from 81% a year ago. Quarter after quarter, more of our revenue is recurring and high quality. Product revenue was $20.5 million, a strong rebound of 25% from the first quarter. As we said last quarter, the shortfall was about timing, not demand. Orders were in hand, they just could not ship. Once we resolved the compatibility issue with the new component, product revenue came right back. Year-over-year, product revenue was down 8% as a result of the ramping timeline of manufacturing. If we had a full quarter of manufacturing, we believe we would have been slightly up on last year. In my initial review of the business, I have been energized by getting under the hood of the growth profile of the company.

Our reported revenue was up 7%, and services grew 10% on a trailing 12-month basis. These numbers blend two different trajectories, areas we are investing in and areas we have retired. Underpinning this positive dynamic are three strategic areas that are delivering particularly strong velocity. These areas are where we are concentrating the majority of our investment, and Jeff will take you through their performance and the opportunities ahead. Total gross margin was 53% compared with 56% a year ago. I want to be clear about what's driving that. Services gross margin was 59%, down from 62%, primarily due to higher amortization of capitalized software and acquired intangibles. Those are non-cash charges that reflect investments we've already made, not pricing pressure. They're excluded from adjusted EBITDA, which is why adjusted EBITDA grew even as reported gross margins came down.