PowerFleet Q2 2026 Earnings Call Transcript

PowerFleet (NASDAQ:AIOT) reported second-quarter financial results on Monday. The transcript from the company’s second-quarter earnings call has been provided below.

This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.

Access the full call at https://www.webcaster5.com/Webcast/Page/2467/54708

Summary

PowerFleet reported a record Q2 revenue of $115.7 million, with a 4.4% sequential growth. Services revenue was $95.2 million, marking a 7% year-over-year increase. Adjusted EBITDA increased by 16% from Q1 to $24.9 million, with the margin improving to 21.5%.

The company highlighted its strategic focus on its largest contract with the South African National Treasury, with current mandates exceeding 94,000 and 40,000 units under aggressive deployment with the South African Police, ahead of schedule.

Significant focus and growth were reported in three areas: on-site business, AI video, and IoT connected services, which now account for 75% of PowerFleet’s future pipeline.

Future guidance remains strong with fiscal 2027 revenue expectations between $468 to $473 million and an annualized revenue run rate of $495 million exiting Q4, with a 27% adjusted EBITDA margin.

Management expressed confidence in the business trajectory, citing disciplined execution, strategic investments in high-growth areas, and the successful resolution of prior production challenges.

Full Transcript

OPERATOR

Good day everyone and welcome to PowerFleet second quarter 2027 earnings call. At this time, all participants are placed on a listen-only mode. If you have any questions or comments during the presentation, you may press star one on your phone to enter the question queue at any time, and we’ll open the floor for your questions and comments after the presentation. It is now my pleasure to hand the floor over to your host, Carolyn Capaccio. Ma’am, the floor is yours.

Carolyn Capaccio (Investor Relations)

Thank you, operator, and good morning. With me today are Mark Steven 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 30, 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 on Form 10-K for the fiscal year ended March 31, 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 of the earnings release and in the appendix to the slide presentation. I will now turn the call over to Steve.

Mark Steven Towe (Chief Executive Officer)

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 FY28.

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. And third, our second half plan remains firmly on track, with strong growth in new logo and existing customer demand for the remainder of FY27 and exciting opportunities to compound growth in FY28. 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 areas: 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 operations. 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. Geoff 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’ve 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.

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’ll now hand over to Paul Lalljie, who will take us through the results and our affirmed full-year outlook and his perspectives on the growth opportunity for the business. Paul, over to you.

David Wilson (Chief Financial Officer)

Thank you, Steve, and good morning, everyone. I’m 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’ll cover revenue and the underlying growth of the business, then margin and profitability, some context in 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 includes 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 couldn’t 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’ve 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. Product gross margin is where we can see the recovery: 28%, up 7 percentage points from 21.3% in the first quarter as deferred orders shipped.

Operating expenses were $60.5 million, down from $60.9 million in the first quarter. Excluding acquisition, integration, restructuring, and litigation costs, SG&A was 44% of revenue, a 240-basis-point improvement from a year ago. And we did that while increasing sales and marketing spend by $3 million. We’re funding growth and still generating operating leverage, and we’re not finished on cost. The quarter also included $3.6 million of restructuring and one-time costs as we continue to optimize the organization.

Profit from operations was $1.4 million, more than five times the first quarter. Interest expense was $6.2 million, down 11% year over year. Adjusted EBITDA was $24.9 million, up $3.4 million, or 16%, from the first quarter at a margin of 22%. We believe the path to a 27% margin in the fourth quarter is clear. It’s built on three things: continued activation of South African mandates, an improving revenue mix towards services, and continued cost discipline.

Now for a little context on Q3. First, product mix: our manufacturing ramp continues, and we expect strong product revenue in the third quarter. Product carries a lower margin than services, so we expect Q3 margins to reflect that mix temporarily. The good news is that we expect the hardware we ship in Q3 to begin generating recurring services revenue as it is activated in Q4 and beyond. Second, foreign exchange: a meaningful portion of our recurring revenue is earned in international markets.

If currency volatility continues, you may see some translation impact on reported US dollar revenue, even with no change to our underlying contracts and pricing. After quarter end, we have agreed terms for a device financing facility with Rand Merchant Bank for up to 560 million rand, or approximately $34 million, to primarily support the rollout of our South African National Treasury contract. You’ve heard us talk about hardware as a service. We expect this facility to support that model at scale. For example, our customer pays us monthly for the device and the services together over the life of the contract.

Normally that means we pay for the hardware and the installation upfront and recover the costs over several years. Under the proposed facility, the device costs will be funded upfront and repaid from the contracted customer payments over time. We keep the customer relationship and continue to manage the services and the billing. In practical terms, we expect the cost of each device to be funded as it’s deployed so that rollout costs scale with demand rather than with our balance sheet.

We expect this facility to allow us to scale the Treasury rollout as quickly as demand allows. For the first six months of fiscal 2027, net cash provided by operating activities was $4.8 million, compared to $10.2 million in the prior period. Cash used in investing activities totaled $21.8 million, primarily reflecting capital expenditures of $12.6 million, driven largely by the upfront investment in devices to support the deployment ramp of the South African National Treasury contract, and capitalized software cost of $9.6 million. Cash provided by financing activities was $4.5 million.

The device investment is expected to be largely funded on a go-forward basis through the new RMB facility. We ended the quarter with $26.8 million of cash and cash equivalents, plus $3 million of restricted cash and $19.1 million of available borrowing capacity under our revolving credit facilities. Net leverage ratio was 2.65. Looking ahead, the device financing facility and growing adjusted EBITDA should improve our free cash flow materially in the second half of the year.

Next slide, please. We are affirming our fiscal 2027 guidance of $468 to $473 million of revenue and $111 to $114 million of adjusted EBITDA. We expect to exit the fourth quarter at an annualized revenue run rate of $495 million at a 27% adjusted EBITDA margin. Our guidance assumes South African mandates continue on or ahead of their current trajectory, the de-emphasized operations continue to wind down, and product revenue is strong in Q3 with services mix increasing in Q4 as activations flow through.

We expect fiscal year capital expenditures of approximately $52 million, cash interest of approximately $27 million, and cash taxes of approximately $10 million. Let me close with a few thoughts. This quarter demonstrated our ability to execute against our commitments. We delivered record revenue, resolved the product challenges we discussed last quarter, and grew adjusted EBITDA by 16% sequentially. But what gives me even greater confidence is the underlying trajectory of the business. The areas we’re investing in are delivering double-digit growth. Our recurring revenue base continues to expand, and we’re seeing the benefits of greater operating discipline and leverage as we enter the second half.

Our priorities are clear: accelerate growth in our strategic markets, convert that growth into stronger profitability and cash flow, and continue strengthening our financial position. We remain confident in our full year outlook and our ability to exit the year with $495 million of annualized revenue run rate and a 27% adjusted EBITDA margin. We are executing against our commitments, investing where the opportunities are greatest, building a stronger and more profitable business.

With that, let me turn the call over to Jeff Lautenbach, our Chief Revenue Officer, to take you through our growth amplification story, the stuff that excites us.

Jeff Lautenbach (Chief Revenue Officer)

Thank you, Paul. And now I want to take you through three shining lights and our greatest areas of go-to-market investment. I’ll walk you through the customer activity behind those engines, the bookings and pipeline we’re building, the global enterprises we’re winning, and how innovation is expanding the opportunity. I’ll begin with On Site. Next slide, please. On Site is a particularly differentiated part of our portfolio. It addresses the environments where goods are manufactured, handled, and moved, and where safety, compliance, and productivity are critical. Trailing 12-month industrial revenue grew 23%, services grew 29%, and one-off services grew 42%.

The first driver is large enterprise adoption. Across the last 12 months, 73 Fortune 500 and Global 500 companies adopted our On Site solutions at 263 sites. The second driver is AI video safety. AI safety accounts for 30% of sales, and average tickets are 10 times larger than conventional orders. Fortune 500 accounts contributed 91% of industrial AI video revenue. Third, our platform is extending into 10 additional asset types and environments, including cranes, ports, mining, airports, and transit depots.

That broadens both the customers and applications we can serve. This combination of enterprise adoption, high-value safety solutions, and market expansions gives On Site a strong opportunity to compound growth. Next slide, please. Three customer relationships show the high level of growth and revenue opportunity we have with our On Site business. In major multinational accounts, at a leading global manufacturer, we generated more than 12.5 million in total contract value in the last 12 months from 84 orders across 36 sites in the U.S., U.K., and Mexico. Our solutions support site safety, inspection, automation, and operator access. At a global beverage company, we secured more than 11 million in total contract value with 16 orders and expansion to eight new sites in the past year.

The platform is helping digitize safety, compliance, access, and maintenance. And at a global automaker, 2 million in orders covered 142 orders across 33 plants in five countries, extending across assembly, engine, transmission, and battery operations. In each case, the customer is not simply purchasing a point solution for one facility. It is standardizing operational process across multiple locations, creating a foundation for repeat deployments.

Now to our second growth engine, AI Video. Next slide, please. AI Video is seeing encouraging commercial momentum across bookings, pipeline, and subscribers. Over the trailing 12 months, bookings ARR grew 32%, pipeline build grew 36%, and our North America video subscriber base expanded by 30%. The three lower panels explain what is driving that progress. First, channel- and enterprise-led AI video growth. We achieved 35% year-over-year growth in the first half of FY 2027 with momentum across verticals including public sector fleets. Second, multi-product expansion. Fifty percent of our total year-over-year growth came from existing customers adopting additional capabilities, from 360-degree cameras and AI Safeguard and integrated full-stack camera solutions.

Third, enterprise scale. In the trailing 12 months, we secured 209 deals from Fortune and Global 500 customers. Their average orders were 3.6 times larger than those from the rest of our customer base. Together these signals point to an increasingly repeatable model: win customers, expand the use of the platform, and earn larger, higher-value enterprise order. Next slide, please. Here are three practical examples of that enterprise model at work, following the slide from left to right. First, a global top-50 integrated energy company: AI Video has become a group standard with 1 million in total contract value, 73 orders, and 20 locations; orders accelerated after the first deployment. Second, a Global 500 food and support services group: we have expanded an existing customer relationship through our premium safety stack, including fatigue alerts and driver work diaries, representing 1 million in total contract value and national coverage.

Third, a Fortune 500 vehicle rental company: we have secured 1 million in total contract value as AI Video and fatigue alerts are deployed across multiple branches, supported by a flexible supply-and-install model. What these examples have in common is scalability. We demonstrate value in one part of an enterprise, then expand across sites, fleets, and applications. Next slide. Our channel momentum is improving across several key markets, and this slide shows the breadth of that improvement. Starting on the top left, the high-quality Vision AI pipeline increased 92% year over year. Alongside that, our sellers generated 3,918 opportunities in Q2 FY 2027, the highest quarterly level in the last eight quarters. In one of our key North America channels, three key areas delivered 24% quarter-on-quarter growth in won ARR.

In a key Canadian channel, pipeline ARR rose 25% quarter on quarter, while won deals increased 19%. Another of our key North America channels is rolling out its data-driven image solution, and we expect customer On Site deployments by the end of Q4 FY 2027. And in Australia, pipeline value doubled year over year with increased focus on enterprise-sized opportunities. The message is not simply more leads. We believe our commercial engines are producing higher-quality opportunities across different partners and geographies, and the pipeline is increasingly supporting future recurring revenue.

Let’s move to IoT and Connected Services, our third growth engine. Next slide, please. Our IoT and Connected Services business continues to expand from its established connected vehicle base. Over the trailing 12 months, revenue grew 23%, recurring revenue grew 24%, and one-off services grew 49%. As highlighted at the top of this slide, the lower section shows five areas of practical growth opportunity. Fleet diagnostics and predictive maintenance helps operators spot faults earlier and reduce downtime. Invisible digital protection adds built-in theft prevention, and the Connected Digital Tachograph responds to regulatory needs through connected compliance data. The core strategic point is that we are extending the value of an existing connected asset platform rather than starting from scratch, and building a growing portfolio of recurring and higher-value applications.

That brings us to today’s exciting new product announcements, which Jonathan Bates, our Chief Marketing Officer, will take you through. Jonathan,

Jonathan Bates (Chief Marketing Officer)

Thank you, Jeff. The growth indicators you’ve just seen show that our current solutions are gaining traction. We’re now extending what Unity can deliver with two new innovations that help customers act on operational data and connect many more types of assets. The first is Unity Foresight. Next slide, please. Unity Foresight is an AI-powered operational intelligence offering that takes our proposition to the next level of AI insights. It brings data together across connected operations to show customers what is happening, what is likely to happen next, and what action they should take. As the slide illustrates, that starts with insights—operational visibility hotspots and risk signals across assets and locations. It advances to predictions—anticipating collisions, congestion, equipment failures, and other emerging risks.

And it leads to prescriptions—recommending interventions, training priorities, and operational adjustments that teams can act on. We consider the commercial opportunity to be significant. By bringing these AI-driven capabilities to existing On Site and On Road relationships, we can expand the value delivered per asset, attract new customer groups, and create incremental recurring revenue over time, as well as approaching a whole new prospect base.

We believe this is how our established platform becomes a source of even higher-value intelligence. Moving now to our second product announcement, which significantly broadens the range of assets we can serve and deepens our competitive moat. Next slide, please. Unity’s Assets Intelligence category extends our reach beyond vehicles to a considerably wider range of assets within customer and prospect operations. Think here about pallets, containers moving through distribution centers, trailers, generators and equipment in yards, people and mobile industrial assets across sites, and port and terminal equipment—all types of both powered and non-powered assets.

These are central to customers’ daily operations, yet many sit outside the traditional systems that track vehicle movements and operational performance. Our new solution brings these assets into one connected view in Unity, combining asset identification, location and utilization data with operational information and risk. This helps customers understand not only where vehicles are, but also which assets, equipment, and other resources are available, in use, missing, or at risk.

We believe the scale of this opportunity is compelling. We estimate a total potential market of more than 100 million additional assets and over $30 billion in additional addressable opportunity globally. It also opens the door to more asset-based subscriptions and broader relationships with customers already using our platform, as well as new customers—extending differentiated propositions like our On Site portfolio. Significantly, we see a pathway to growth both through more connected assets and through intelligence that makes those connections more useful.

Taken together, both these innovations are an exciting step forward for PowerFleet and for our customers. Moving to our final slide, please—so in closing, our growth engines are showing tangible commercial momentum across On Site, AI Video, and IoT and Connected Services. Large enterprises are adopting our capabilities across more sites and applications, and our two new Unity offerings create opportunities to connect more assets, deliver more predictive intelligence, and further broaden our recurring revenue. Those themes are consistent with the growth strategy outlined today and with the full-year outlook affirmed by the company.

With that, I’ll hand back to Steve, Paul, and the operator as we open the call for questions. Thank you, operator.

OPERATOR

Certainly, everyone, at this time we will be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you’re listening on speakerphone to provide optimum sound quality. And once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Scott Searle from Roth Capital.

Your line is live.

Scott Searle (Analyst)

Hey, good morning. Thanks for taking the questions. Nice to see momentum building into the second half of fiscal ’27. Hey, Steve, maybe to start—lot going on here—but now as you start to free up some resources from the South African Treasury deployments, I was wondering if you could give us a quick update in terms of the relationships with tier-one MNOs, how that channel is doing, and in particular with the announcement today of Unity Asset Intelligence, I’m wondering if you could expand a little bit more about it.

It starts to make you look more Samsara-like in certain respects in different verticals, but also would love to know kind of how you’re thinking about it in terms of attach rates and, as we think about fiscal ’28, how big of an opportunity that could be. And I had a quick financial follow-up.

Mark Steven Towe (Chief Executive Officer)

Thanks, Scott. In terms of the MVNOs, then that’s all within Jeff’s slide. So I think he talked about, you know, a North US channel and the Canadian channel and a new Canadian channel which is launching. So I think you can see there the traction that we’re starting to get in, the momentum that we’re starting to get across the North American market. We have to pick our battles. So, you know, there’s a lot of capital out there. I think we’re being very smart in terms of where we’re spending our time, where we’re investing, and how we go to market.

So the channels, particularly within the over-the-road space, remain extremely strategic for us, as does our on-site capabilities. And then coming to your second point, and I’ll ask Jonathan to give you a bit more detail in terms of the asset intelligence platform. But if you look at where we can expand, if you look at the wallet share opportunity, if you look at the fact that we’re being trusted now by many Fortune 500 customers, we’re in a place where I think people are saying, bring us more, do more for us, connect our data together. And that’s where the asset intelligence platform, that’s where the Unity Foresight proposition from an AI perspective all build that mission criticality.

So we see it as potentially extensive, both from a new logo acquisition, a volume perspective in terms of recurring revenue, and really expanding those major relationships that we have. And I think we’re finding our sweet spot, we’re finding our rhythm, and we’ve talked an awful lot about the South African contract, quite rightly, but we very much wanted to demonstrate the energy and excitement that we’ve got for those propositions that we have, the uniqueness of propositions, and the channels that go alongside it. So, you know, we haven’t quantified numbers in terms of what we think that will deliver upside into 2028, but we see 2028 as a real acceleration of growth for us.

And maybe with that, Jonathan, maybe just give a broader kind of sense in terms of some of the capabilities within the asset intelligence platform.

Jonathan Bates (Chief Marketing Officer)

Sure. Thank you. Thank you, Stephen. Hi, Scott. So I think some of the interesting pieces when it comes to asset intelligence are not only the on-road space, which we can address with this asset tagging proposition, but also a more comprehensive asset intelligence capability. We can also extend that into the on-site piece. So I think that’s part of the really exciting opportunity for us and highly differentiated, as we’ve been able to accelerate our on-site momentum.

Now bringing in asset intelligence as well allows us to extend what we already do in the warehouse, in the distribution space. Just to give you a kind of idea on the size of assets that that could mean: we think that on a conservative level, perhaps for every one forklift truck in a warehouse, there could be as many as 50 to 100 other types of powered and non-powered assets. And so with this proposition, we’re able to identify those assets, look at the location and movement of where those assets are and where they’re going and where they should be.

But then the asset intelligence piece, which goes beyond the tagging, is also looking at things like the condition and utilization of the assets, understanding what operating conditions they’re going in, and then also being able to connect the assets with the vehicle, the operators, zones and jobs, and things like cargo movements. And then, as Steve said, overlaying things like the AI Foresight capabilities on top, which start to do more analytics and then predictive capabilities.

So I think you can see how it goes very quickly from an asset tagging proposition, which some of our competitors have launched into the market, into asset intelligence and extending both on-road and in the warehouse space as well. So I think that’s the exciting, differentiating part of the opportunity. Opportunity for us.

Scott Searle (Analyst)

Great, thank you. Very helpful. And if I could, for Paul, you know, looking at the guidance for fiscal 27, the exit rate, you’re starting to get to over annualized EBITDA north of 130 million. And it looks like, you know, SaaS recurring services growth getting to that double-digit number again, with a lot of reacceleration going into fiscal 28. So is there any reason to believe that your recurring revenues are not growing double digits in fiscal 28?

And given some of the new product cycles, is there any reason to believe that there is a step function up in terms of OPEX investment to support that, or should we continue to see more operating leverage as we’re going into fiscal 28? Thanks.

Paul S Lalljie (See remarks)

Thank you, Scott. Let me start with the operating leverage. I think as you get into 2028, you’ll continue to see operating leverage in the business. You’ve seen the restructuring line. That is a good indication of costs that are coming out of the business. We will continue to do that to optimize the business. We’ve talked in the past about simplification. There is a significant element of simplification in the business, particularly around the back office, that will allow us to continue to see that improvement as we go forward, particularly in areas like G&A. And to the first part of your question, as we exit the year and into 2028, we expect to continue to see improvement or year-over-year growth in the double-digit area, particularly for the recurring services that we’re investing in. I think Jeff did a fantastic job of pointing out those areas that we’re seeing tremendous velocity in the business, and we will expect to see those things continue into 20.

If we look at the run rate, the 495 that we set as a target on the last call and affirmed on this one, that represents the trade-off and tries to draw a comparison to show how better off we will be with the trade-off that we’re making as we enter 2028. When we provide guidance for 2028, we will provide context around where those numbers should be. But we expect that to be our baseline. Once we have the 27 million of ARR from the South African contract come in, then you can see where that baseline is, and then we can see what the impact would be for things like recurring services as we get into 2028. So it’s a little premature to have that conclusive view on what recurring revenue growth will be in 2028, but we expect it to continue to do well as we get into 2018.

Scott Searle (Analyst)

Great, thanks so much. You know, nice to see the momentum building into the back half. I’ll get back in the queue.

Mark Steven Towe (Chief Executive Officer)

Appreciate it, Scott.

OPERATOR

Thank you. Your next question is coming from Tony Stoss from Craig-Hallum. Your line is live.

Tony Stoss (Analyst)

Good afternoon, or excuse me, good morning, guys. Nice, nice progress, Steve and crew. Could you care to comment on how you expect to charge for the new software products, the Foresight and the asset intelligence? And then, Steve, maybe give us a sense of if you think your carrier partnerships are now up to speed on all the products, or is there still a further learning curve to help them in the sales process?

Mark Steven Towe (Chief Executive Officer)

Yeah, so the majority of the revenues from the new launches will be recurring. So, you know, there’s a small fee for the asset tagging piece, but the majority of it is recurring. And the AI intelligence, Foresight, is very much based on recurring software revenues. So this will bring nice momentum. If you think about the layers, RT46 building in the ability for us to charge monthly fees and amortize the hardware in a different way. You look at where Jeff’s coming from, you look at those, you know, 75% of our pipeline and the recurring revenue growth within there.

Then adding these new solutions, I think we feel good about the momentum for the recurring line. In terms of the channels, I still think there’s—you know, I mean the progress is very solid. You’ve seen that in numbers today and you’ve heard it from Jeff in terms of his excitement for the future. There’s still more we can do. So I think, you know, as we launch new solutions, as people get more accustomed to selling, as we kind of bed in more in terms of the pre-sales and the solution consulting opportunity, there’s much more expansion we can do.

But we’re starting to get asteroid now and I think it just takes a little bit of time to get these things going. So I think good progress but definitely more to come.

Tony Stoss (Analyst)

Got it. If I could just follow up with Paul, expectations around December gross margins and OPEX and maybe kind of on a go-forward basis. I know you made a cursory call on gross margins kind of being similar, maybe, but just any help on OPEX or gross margins, not just December but on forward would be helpful. Thanks.

Paul S Lalljie (See remarks)

Tony, on the gross margin piece, I think it’s important to point out that if we look at the things that are impacting gross margin, it is not customer contracts, it is not pricing. It is really the non-cash items, which is the amortization of capitalized software from prior periods and then the amortization of acquired intangibles as we go forward. Those two things, we expect them to continue at the levels as we move forward. That’s point number one.

Point number two, we expect product to be a more important contributor to our growth in the second half of the year, particularly the third quarter. So we do expect the margins to remain the same as we get through this year, and then as we get into next year we can expect some improvement. But as we go through the next six months, we should expect it to be the same. And then we can update you as we get into next year. On the operating expense side of the equation, I pointed out earlier that we do expect more operating leverage as we get to the second half of this year and into next year, and particularly around the simplification of the business, particularly around G&A. I think sales and marketing as a percentage of our revenue is still relatively low compared to the industry. But if we can continue to improve the back office, the use of automation, the use of AI, the use of those types of things, particularly in areas such as finance, then I think we can continue to see that improvement as we get into next year.

Tony Stoss (Analyst)

Great, thank you.

OPERATOR

Thank you. Your next question is coming from Gary Prestipino from Barrington Research. Your line is live.

Gary Prestipino (Analyst)

Hey, good morning. All right, again, great to see progress here. Hey, Steve, I want to refer to the slide that you say here ahead of schedule on the South African contract miners. As I read this, these are mandates, but could you give us some idea of where you stand in terms of implementations? I seem to recall that there was a—you needed to get to a certain level of implementations by, I think, the end of the fiscal year to possibly kick in more endpoint sales going into the following fiscal year.

So could you give us an update on that?

Mark Steven Towe (Chief Executive Officer)

Yeah, sure. So let me just make sure I cover it comprehensively. So on the last call, I think we were 72,500 mandates that we’d received the orders for. A mandate means order, mandate means go, implement, you know, as we can. And within that there was 40,000. We talked about a specific agency. We’re able to name that agency today as the South African Police. So when we talk about the timelines on these things, you know, you can understand, you know, we’ve got to work very feverishly and at the behest of the customer in terms of, you know, how and when we can complete these installations. And that has, you know, now kicked off aggressively. Their timeline is aggressive in terms of wanting to bring the new solutions in in terms of pure installations. Today, as I look at my screen, it’s 18,250 have been completed, which is where we would want it to be in terms of the numbers that we’ve projected through this financial year.

And it’s important that we keep that rate. We then said in terms of orders, we hope to be at 80 to 90,000 by the end of Q4. So that was our revised target after, obviously, we had this major influx of orders ahead of schedule through last quarter. As of today, we’re at orders, mandates of now more than 94,000 right now, which is we are obviously well ahead of the end of Q4 schedule. So we will continue to play away. I’m delighted with the progress and the efficiency that we’re now getting to scaling those operations, putting those resources in. You know, we’re getting better productivity every week. And, you know, we just have to remain a little cautious around, you know, these government agencies and when they can make vehicles available. But we’re super, super happy with the progress, super happy with the commitments, and super happy in terms of, you know, our ability to achieve the numbers that we’ve put forward.

Barry

Okay, thank you, that’s helpful. And then with this new financing agreement that you’ve got, let me understand this, is that you guys, you will still be selling the device and booking, you know, your normal gross profit on those sales. And then you sell that to RMB and then you just act as a conduit for the payments from the South African government to RMB for this product. I just kind of get an idea of what are the implications on your income statement for this new financing agreement that you’ve got starting to put in place.

David Wilson (Chief Financial Officer)

Yeah. So Barry, I think at its highest level from an architecture perspective, we will still be selling a bundled service to the customer. We will still be recognizing revenue as such. Third, I would say the ownership of that customer relationship, the billing, the collecting, even the ownership of the hardware still resides with us and will be recorded on our books as such. The difference is we will have the RMB upfront financing or funding for that particular hardware component of that sale.

And it will be mainly a balance sheet transaction, if you will. The impact on a cash flow statement is you will probably see the contributor of cash at the end of the day coming from investing activities versus operating activities. And that will be something that we will discuss and reflect as we go forward. The ideal way to do this is to have it reflect in operating, but we have to follow the guidance and do that in accordance with GAAP.

Barry

Okay, thank you.

OPERATOR

Thank you. Your next question is coming from Dylan Becker, from William Blair. Your line is live.

Dylan Becker (Analyst)

Hey gentlemen. Really nice job here. Kind of wanted to go back. I know you called out product strength in 3Q. But Paul, maybe if you can remind us how that gives conviction, product leading kind of the recurring services component of the business as we talk about acceleration and maybe Steve too within that. I think you called out of the three pillars anywhere from 25 to 30% kind of bookings momentum, exiting the year at 10%, not putting a number on it, but how that kind of gives conviction in that reacceleration trajectory for 2028.

Thank you.

Mark Steven Towe (Chief Executive Officer)

Yeah. So two things I think in terms of products. So firstly, you know, we had the challenge in Q1, we fixed it, you know, we were in the process of moving back to manufacturing. I think as we spoke on the last call. And we were able to get a large part of the backlog introduced into revenue in the quarter with the remaining being recognised this quarter on. We’re also seeing a lot of strength in that on site business. I think Jeff called out two or three major customers who are putting significant product based orders into the business, all of which would come with recurring services.

And Jess talked also as well in terms of the number of sites that we’re expanding to from a revenue perspective. So that all leads into, you know, that product strength brings recurring. But obviously, you know, we take the hardware in that element of the business as a product sale and then we get the recurring over time. But if you look at the three major areas including that warehouse where I think we’re getting recurring revenue, revenue increase year over year of nearly 30% and then we’re launching and the foresight capability, we’re launching the asset intelligence ability. And if you look across there from then into AI video on the road and then you look into the iO2 solutions, they are all based on recurring revenue. So it’s kind of, there’s a little bit of positive lumpiness coming off the back of the fact that we’re pivoting to that on site space.

We talked earlier about where do we pick our battles, where do we find our sweet spots, where do we have our differentiation and where is the strong customer demand that powerfully in relation to its competition has a right to win, a right to play and a strong set of win rates. So we’ve pointed those out today in those areas which we feel very confident about, which then gets us well into double digit growth rate. And Paul also talked at the start in terms of the trajectory of the business.

So if you look at the majority of our base, where this pipeline is and the pipeline has turned into realities and orders, there’s a few stragglers of things that we’ve retired, things we’ve talked about previously which kind of dampen those growth rates. So as that inflection changes, then we get the acceleration in growth rate as RT46, you know, this big complex implementation comes to bear, we’ll get an acceleration in recurring revenue growth.

So put all those things together, that’s where we feel pretty confident or very confident in terms of going into FY28 and beyond and really kind of accelerating that recurring revenue growth.

Dylan Becker (Analyst)

Got it. Okay, very helpful. Thanks, Steve. And then I thought it was pretty interesting too on the enterprise momentum, but kind of Fortune 500 Global 500. Now to your point, you have more products to sell, you’re adding and connecting more assets, you’re adding and connecting more sites. But how you’re thinking of and I think these are landing larger in one of the slides as well too. But how you’re thinking about that enterprise momentum contributing, given that they have a higher propensity to kind of buy more modules and you’re solving for greater complexity effectively in that regard.

Mark Steven Towe (Chief Executive Officer)

Well, first of all, I want to give Geoff great kudos in terms of really maneuvering us towards that enterprise space. Geoff, why don’t you take that, you’re living that every day and doing a phenomenal job.

Jeff Lautenbach (Chief Revenue Officer)

Yeah, thanks, Steve. So what we’re seeing is we’re landing with six figure deals and we’re expanding with seven and sometimes eight figure deals. And that’s worked out really, really well for us. You know, you can see the amount of sites that we’re expanding to and you can see that the value props. And you made a great point. You know, it’s several products right now. So you know, it’s with the launch of Unity Foresight, that’s another solution which is going to provide immense value and add to that recurring line in the industrial on site space.

And we’re starting to see this kind of expansion into verticals too, which is really important. You see the diversity of verticals both in the on site and then a different set really in the video on road. So I’m really encouraged and I do think we’ve got great enterprise momentum and I appreciate you pointing that out. The strategy is working, we’re adding to it and I think, you know, the way we’re going after it with kind of a combination of really good product expertise and scale. Right. So a lot of these are global customers as well. So we’re starting to see more global implementations as the slides point out. And we’re one of the few companies that can really go end to end with the customers across their, across their global landscape and that’s meaningful and that’s what’s helping us win.

Dylan Becker (Analyst)

Great, thank you.

OPERATOR

Thank you. And once again everyone, if you have any questions or comments, please press Star then 1 on your phone. Your next question is coming from Alexander Sklar, from Raymond James. Your line is live.

Alexander Sklar (Analyst)

Great, thank you. Maybe for Steve or Jeff, just on the partner channel, can you elaborate on what drove some of the positive unlock in second quarter as it relates to that seller activity you referenced? What parts of the market are you seeing higher activity? And then maybe how are you seeing close rates and sales cycles evolve for those indirect channels in terms of driving a larger mix of bookings? Thanks, Jeff. Do you want to say that?

Jeff Lautenbach (Chief Revenue Officer)

Yeah, sure. So, good question. So, yeah, look, I mean you’re seeing the two things kind of go hand in hand. We’re improving and increasing the pipeline. That’s very, very clear. We’re improving the quality of the pipeline. One of the things we’ve really focused in on is quality pipe and that’s coming through in terms of both conversion and win rates. Those are also increasing as well right now to you know, in my opinion, like I just stated, I think, you know, moving up market is really, really important.

We’ve channel business great channel velocity. I’m really excited to see that channel velocity also move to other sectors. Like you heard about public sector, for example, in that, in that vision AI and in that channel space. That was a really important kind of lever for us as we think about new market, new market opportunity. Like I mentioned before, you see the vertical expansion too. I think that’s a really important indicator where we’re maniacally focused. You saw auto, you saw food and beverage, you saw kind of manufacturing, industrial. Those three, those three verticals are critical and where we’re seeing the most opportunity kind of on this global landscape as well. That’s what’s driving the growth.

But it’s kind of leading to us getting much more targeted, much more focused and you know, getting that concentration on these key verticals is really helping us with the win rates as we know exactly how to exploit them, what to go after and what our winning differentiated value proposition is.

Alexander Sklar (Analyst)

Okay, thanks for that color, Jeff. Maybe a follow up for you, Paul. You spoke to the services revenue down line telling that blended story. So you’ve got the core growth and it’s offset by the deemphasized ARR. How much of that 17 million of deemphasized revenue is kind of in this run rate second quarter today versus still to come in the back half of the year. Thanks.

Paul S Lalljie (See remarks)

Well, a couple of things. I think it is not as black and white because as we think of the deemphasized revenue, we want them to naturally come down, we don’t want them to, we don’t want to force that reduction. So we will see what I would describe as a soft landing on that deemphasized revenue as we go through the year here. So we should expect to see very similar numbers at least for the next quarter and then we start to see a reduction as we get into fiscal 2028.

Alexander Sklar (Analyst)

All right, thank you all for the time.

Mark Steven Towe (Chief Executive Officer)

Appreciate it, Alex,

OPERATOR

Thank you. That concludes our Q&A session. I’ll now hand the conference back to Steve Toh for closing remarks. Please go ahead.

Steve Toh

Thank you, everyone.

OPERATOR

This concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.