US President Donald Trump likes to wear a trucker cap at his rallies as he brags about cutting regulation.
But ironically, the trucking industry has been wrapped up in more rules during his time in office - and that's been to the benefit of Eroad, the NZX-listed maker of vehicle-tracking technology.
A law that came into effect in December 2017 required small trucking operators to install electronic logging devices (ELDs) to ensure drivers didn't spend more than the legal maximum time behind the wheel. Large trucking companies are required to comply with the measure by the end of next month.
Eroad founder, chief executive and major shareholder Steven Newman says the law change has helped his company secure two new large clients in the US, which in turn fueled a buoyant first half (he won't name either, but says one was a postal service operator).
This morning, Eroad reported a 35 per cent bump in first-half revenue to $38.5m and a 95 per cent rise in operating profit to $11.9m.
Newman says one of the two big US deals involved around 5500 of his company's tracking units (signed in the previous financial year, but with most installed in the first half just reported) and the other 1650 units.
"North America is now significantly contributing to ebidtda, rather being a drain on cash," Newman says.
He says federal authorities have been loath to prosecute small-time truckers for failing to follow the new ELD law, which would look bad from a PR standpoint. But he sees them going after the larger players in the new year, and he says many are not fully compliant.
The two big US deals contributed to a net gain of 12,990 contracted Eroad hardware units, with 56 per cent of the new business coming out of North America, and attendant growth in monthly subscription revenue for the company's cloud-based software services.
And the US spike also helped Eroad push through the 100,000 connected vehicle milestone for the first time (see chart below).
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Newman has set a new target to hit 250,000 within five years - and he says Eroad will consider acquisitions if necessary to help it reach that target, especially those make its service more attractive by filling gaps in features. Logistics is on his radar.
In terms of the bottom line, he's cagier.
Eroad lost $300,000 in the first half against a first-half 2019 loss of $3.9m, but Newman won't be drawn on when it might move into the black.
But he does offer the general comment that his company is in a land grab. "Shareholders would be unhappy if we made profit at this point at the expense of growth opportunities," he says.
Eroad hasn't even offered ebitda or revenue guidance for the second half, but Newman says there probably won't be any new big-bang customers in North America, but two big deals are likely to be confirmed in the Australian market - which Eroad recently re-entered. He says NZ was "muted" in the first half, but beginning to pick up.
With its reanimated business across the Tasman, Eroad is also mulling an ASX listing. The board will make a decision early next year. If it does pull the trigger, it will be a dual listing, with the company remaining on the NZX.
Jarden's Arie Dekker has just become the first analyst to formally follow Eroad, initiating coverage with an outperform rating and 12-month target of $3.40, saw encouraging signs in this morning's report.
"We view this result as encouraging given the solid operating metrics and operating leverage evident, as well as ongoing traction within the US enterprise segment," he told the Herald this morning.
"The North American business delivered good first-half 2020 profitability following its maiden profit in the second half of 2019, pointing to a stable and likely consistently profitable segment."
Dekker also likes the look of Eroad's latest product.
"The company has developed an asset tracking solution, Eroad Where, that appears to be at an attractive price point and could offer good opportunities in a new market," he says.
An Eroad Where electronic tag will cost $30, then $5 a month to track whatever asset you clip it to. It'll be pitched as an Internet-of-things (IoT) gadget with short-range Bluetooth wireless connecting a tag to the internet when it's in proximity to an Eroad-connected truck (all of Eroad's hardware has a sim card connecting it to the internet).
All going well, Eroad Where - which cost around $1m to develop - will be expanded to Australia and North America. Newman says it will also be upgraded to support 5G mobile networks, which should fuel further growth (5G has expanded capabilities to track multiple widgets; a 5G network can wrangle up to 1 million internet-connected devices per square kilometre).
Eroad shares closed today at $3.17 for a market cap of $216m.
The stock is up 14.34 per cent for the year, making up ground after a slump in 2018 as new business came on board more slowly than expected in North America.
After a brief period of contraction, staff numbers have increased from around 250 to 300 over the past year, with two-thirds based at Eroad's headquarters on Auckland's North Shore (also home of Navman, where Newman made his bones with a series of senior roles during the 2000s). Most of the balance are in Australia or the US.
The Tesla threat
It's easy to make a case for continued growth over the next two to three years.
But what about beyond, when Tesla promises to produce self-driving electric trucks with every conceivable telematic tracking system built in, and more traditional vehicle makers follow suit?
Newman says most of Eroad's customers have a range of vehicle types and will continue to do so.
He says in some cases vehicle fleets will start to use more built-in vehicle hardware along with Eroad's equipment, but he sees his company's software playing an over-arching role long-term, pulling tracking, mechanical, health and safety data from a mix of vehicles, and putting road user charges into the mix if applicable for a given region.
Eroad puts its total addressable market across North America and Australasia, as things stand today, as some 7.5 million commercial vehicles.
It quotes research that predicts compound annual growth in telematics of between 18 per cent and 21 per cent through to 2024, driven by regulatory changes and growing health and safety measures.
Newman also sees significant business in the shift to electric vehicles. He says the rise of EVs - and the anticipated eventual demise of combustion engines - has driven a growing move from petrol taxes to road user charges among local and national governments worldwide. He expects this nascent trend to grow, and to benefit Eroad which has always supported RUCs as a key feature.