Greetings. Welcome to the Power Fleet's first quarter 2027 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, David Wilson, CFO at PowerFleet. You may begin.

Thanks, Alfreda. Good morning, everyone. This presentation contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include statements with respect to PowerFleet's beliefs, plans, goals, objectives, expectations, anticipations, assumptions, estimates, intentions, and future performance, and may involve known and unknown risks, uncertainties, and other factors which may be beyond PowerFleet's control, which may cause its actual results, performance, or achievements to be materially different from future results. Performance or achievements expressed or implied by such forward-looking statements. All statements, other than statements of historical facts, are statements that could be forward-looking statements. For example, forward-looking statements include statements regarding prospects and additional customers, potential contract values, market forecasts, projections of earnings, revenue synergies, accretion, or other financial information, emerging new products and plans, strategies and objectives of management for future operations, including growing revenue, controlling operating costs, increasing production volumes, and expanding business with core customers. The risks and uncertainties referred to above are not limited to risks detailed from time to time in PowerSleet's filings with the Securities and Exchange Commission, including PowerSleet's annual report on Form 10-K for the year ended March 31, 2026, and subsequent 10-Q filings. These risks could also cause results to differ materially from those expressed in any forward-looking statements made by on behalf of PowerFleet. Unless otherwise required by applicable law, PowerFleet assumes no obligation to update the information contained in its presentation and expressly disclaims any obligation to do so, whether as a result of new information, future events, or otherwise. I now hand the call over to Steve.

Steve? Good morning, everyone, and thank you for joining us. The momentum we've been building over the last several quarters has accelerated. Our pipeline is strong and customer demand has exceeded our expectations. Next slide, please. Let me start with the breadth and scale of new business. In Q1, we were selected as vendor of choice by a European headquartered construction leader operating across 26 countries to significantly expand its deployment with us into AI premium video, both on the road and in the yard. A multi-million dollar ARR deal and a strong proof point of the land and expand model we've built. Our on-site business continues to gain traction with strong cross-sell expansion quarter over quarter as we drive adoption across our existing customer base. Predominantly in North America, we secured a $2 million expansion with a Fortune 500 manufacturing leader, a $1.3 million deployment with a national transportation and logistics enterprise, and a $1 million win with a national automotive technology leader. Twelve Fortune 500 companies expanded their onsite footprint this quarter, and 10 global Fortune 500 customers broadened their AI video adoption. AI video bookings increased 20% sequentially. Sixteen diverse industries delivered enterprise wins above $100,000 in total contract value this quarter. On to the next slide, please. The major South African contract has seen material acceleration since the last time we spoke, a testament to the strength of our solution capabilities and strong execution of our sales efforts. We came into this contract expecting $20 to $30 million in ARR to ramp over an 18 to 24-month period. We now have in excess of $27 million in ARR required for near-term activation with more pipeline building. On a five-year basis, That puts the potential total contract value above the top end of our original expectations. To put this in context, at this point in the year, we'd originally anticipated 10,000 assets to be set for installation. As of today, we have over 70,000 vehicle installations to deploy in the near term, and we expect this to increase to between 80,000 to 90,000 assets over the next couple of quarters. That represents roughly seven to nine times the deployment volume we originally expected to be addressing at this stage of the program. It's a substantial and exciting undertaking that requires focus to ensure smooth execution. This velocity presents choices. We therefore have taken the decision to forego a portion of the current and projected revenue base, predominantly in South Africa, that we have deemed to be non-strategic. It frees more capacity to deploy 90,000 vehicles at the pace this contract demands. It de-risks delivery on our largest and most important customer relationships in the region, and it removes the operational complexity that would otherwise compete with this rollout for our team's focus. This targeted reprioritization from lines of business that are consuming operational capacity, working capital, and management attention maximizes our ability to deliver well. Sharp execution on the first 90,000 vehicles increases our odds of winning more of the 150,000 total addressable fleet and gives us room to sell incremental services to this new base. Turning to Q1, the underlying performance was solid and bookings were strong. Normalizing for the South Africa actions I just described, we delivered double-digit ARR growth. In addition, we expanded gross margin and adjusted EBITDA year over year. The reported numbers this quarter reflect two discrete items. Neither changes our underlying trajectory. Firstly, South African revenue was approximately $1.6 million lower as the company began the reprioritization I've just described. Secondly, late in the quarter, we experienced a production constraint affecting a single product line related to a compatibility issue with a new component. This delayed approximately $3.2 million of product revenue in the quarter. We've identified the issue and the solution, and production is being restored. Importantly, the underlying customer demand and orders remain intact, and this issue does not impact the deployment of our major South African contract. Given the timing of the recovery, the company anticipates that some associated Q2 revenue may shift into Q3, With the full amount expected to be fully captured within the fiscal year. David will shortly update you in detail on the in-year guidance amendment. Our revised guidance reflects a single item. Our deliberate decision to forego some non-strategic revenue ahead of the ARR ramp from the substantially larger new contract. Our updated guidance reflects that timing gap. We believe this decision strengthens the quality, scale, and long-term economics of the revenue base we are building. We also expect the revenue CAGR from fiscal 2026 to fiscal 2028 to remain consistent with our prior expectations, with stronger growth in fiscal 2028 fueled by the ramp of the South African project. We anticipate annualized Q4 27 revenue of approximately $495 million, With adjusted EBITDA margins of approximately 27%. Overall, our land and expand strategy is compounding, bigger deals, broader adoption, and deeper wallet share with the customers we already have. Our response to the acceleration in South Africa demonstrates the operating discipline we're bringing to the business, prioritizing resources towards the opportunities with the greatest strategic and economic return. Our optimization programs are running to schedule, With our focus remaining on cash flow and deleveraging. As we continue to compound the business, investing in talent is also a key component for future success. Next slide, please. We continue to strengthen our executive team, and I'd like to share two important additions. Firstly, I'm delighted to announce that Paul Walty joins PowerFleet this week as our president and CFO. Paul brings 25 years' experience in finance and technology, including as both CFO and CEO of 2U and CFO of Newstar. Paul has acted as a strategic advisor to the business over the last few months, and I'm delighted that he's able to hit the ground running to help spearhead our future growth. As President and CFO, Paul will combine financial leadership with a broader mandate around operating execution, capital allocation, and the enablement of the next phase of profitable growth. I want to sincerely thank David Wilson for his significant contribution and partnership through a period of extensive transformation for the company. David will serve in a consultancy role for the next few months to support Paul with a smooth transition. Secondly, I'm excited to announce that Vishal Vallabha has joined PowerFleet as Chief AI Officer. Vish has also been acting as a strategic advisor to the business in recent months on AI transformation. Vish brings over 20 years of experience as a senior technology and AI executive. He's held CTO and chief data and AI officer roles at large global businesses, including Freeman Company, Lumen Technologies, and he has significant domain expertise from his time as CTO of TomTom Telematics. He's led enterprise AI, cloud, and platform modernization programs tied directly to commercial growth and margin expansion. Most recently, as founding partner and CTO of NextGen AI, he's led AI-enabled transformation engagements for major clients, including Microsoft and Bain Capital. This is going to be central to how we scale our AI-first platform strategy. So as we execute on the plan, we're delighted to be able to attract this caliber of talent. Both Paul and Vish have already added significant value to the business, having worked closely with the team as trusted advisors over the last few months, and we're thrilled to now have them on board. With that, I'll turn it over to David.

Thank you, Steve, and good morning, everyone. I'm glad to be with you today. I'll start with our first quarter highlights and then provide more details on revenue, margins, operating expenses, profitability, and cash flow, and close with our updated fiscal 2027 outlook, and the bridge to that guidance. Next slide, please. Total revenue for the first quarter was $110.8 million, up 6.4% year-over-year. Adjusted EBITDA was $21.5 million, compared to $20.1 million a year ago, at a margin of 19.4%. GAAP income from operations was $300,000, compared to an operating loss of $2 million in the prior year quarter. Net loss attributed to common stockholders was $8.4 million, or $0.06 per share, an improvement from $0.08 per share a year ago. As Steve covered, two discrete items affected first quarter revenue. First, South Africa revenue was approximately $1.6 million lower, reflecting the early impact of the reprioritization he described. Second, late in the quarter, we experienced a production constraint affecting a single product line. related to a compatibility issue with a new component. This delayed approximately $3.2 million of product revenue. We identified the issue and the solution, and production is being restored. Importantly, the underlying customer demand and orders remain intact, and this issue does not impact the deployment of a major South Africa contract. Given the timing of the recovery, the company anticipates that some associated Q2 revenue may shift into Q3. with the full amount expected to be recaptured within the fiscal year. Next slide, please. Services revenue increased 9.1% year-over-year to $94.3 million and represented approximately 85% of total revenue, while services gross margin expanded nearly one percentage point to 61.1%. Adjusted EBITDA services gross margin expanded by 40 basis points to 75.9%. The South African National Treasury contract is now ramping, with Booking's momentum building behind this recurring higher margin revenue base. Product revenue was $16.5 million, down 6.7% year-over-year, reflecting the production timing issue I just described. Product margin was 21.3%. The deferred shipments were concentrated in our higher margin business, while the lower volume also limited fixed cost absorption. Total gap and adjusted EBITDA gross margins continue to expand despite the pressure on product margin, increasing approximately one percentage point year-over-year to 55.2% and 67.8%, respectively, reflecting the continued shift in revenue mix towards recurring services. Next slide, please. Total operating expenses were $60.9 million, or 55% of revenue, an improvement of roughly one percentage point year-over-year. SG&A was $56.5 million up 5.3% against revenue growth of 6.4%. So we continue to generate leverage on that line. Research and development was $4.4 million or 3.9% of revenue. Gap income from operations was $300,000 compared with an operating loss of $2 million in the prior year quarter. Net interest expense was $6.7 million and accounted for most of the gap between operating income and our net loss. Free cash flow improved by more than $6.5 million year-over-year to negative $500,000 from negative $7.1 million in the prior year quarter. Net debt to adjusted EBITDA was 2.5 times at quarter end, essentially unchanged from fiscal 2026 year-end. Next slide, please. Now let me turn to our outlook for fiscal 2027. We're updating full-year revenue guide to a range of $468 million to $473 million. An adjusted EBITDA guide to a range of $111 to $114 million from our prior ranges of $485 to $490 million and $122 to $125 million, respectively. Here's the bridge. The guidance update is driven by the South African reprioritization Steve described. Relative to the midpoint of our prior guidance, we are reducing projected fiscal 2027 revenue by approximately $17 million as we reallocate capacity to support over $27 million of committed demand. The associated impact on adjusted EBITDA is approximately $11 million, comprising approximately $6 million of flow-through from lower revenue and $5 million of one-time costs. This change in guidance is purely a timing gap rather than a change in our underlying trajectory. We expect the revenue CAGR from fiscal 2026 to fiscal 2028 to remain consistent with our prior expectations, with growth accelerating in fiscal 2028 as the South African National Treasury contract ramps. The near-term financial impact is reflected in the revised revenue and adjusted EBITDA guidance I just outlined. We anticipate annualized Q427 revenue of approximately $495 million, with adjusted EBITDA margins of approximately 27%. The updated adjusted EBITDA outlook also flows through to net loss and free cash flow. Net loss is expected to range from $6 million to $8 million, compared with our prior range of net income of $4 to $8 million. Free cash flow is expected to range from $20 to $23 million compared with our prior range of $30 to $35 million. Our capital allocation priorities remain unchanged, including our commitments to deleveraging. Next slide, please. The bridge from adjusted EBITDA to free cash flow includes capex of approximately $52 million, cash interest of approximately $24 million, cash taxes of approximately $8 million, and restructuring other costs of approximately $8 million. Given the timing variables associated with the South Africa National Treasury Contract, we continue to present its balance sheet impact separately from pre-cash flow. Importantly, favorable payment terms and financing options are expected to substantially offset the upfront investment in in-vehicle device CapEx, resulting in approximately break-even cash performance for the fiscal year. To wrap. Services revenue remains the growth engine of the business, up 9% year-over-year. We expect to exit fiscal 2027 at a Q4 annualized revenue run rate of approximately $495 million, with an adjusted EBITDA margin of approximately 27%, and a wealth addition for accelerating growth as we enter fiscal 2028. I now turn the call back to Steve. Steve?

Thank you, David. So let me leave you with three things. Customer demand is strong and broadening across our platform. The South Africa opportunity is developing materially faster and at a greater scale than we originally anticipated, and we're deliberately reallocating and investing resources to capture it effectively. We remain confident in the underlying growth, margin expansion, and cash generation trajectory of this business. The opportunity ahead of us continues to grow across geographies, verticals, and the Unity Suite. We have the team, the platform, and the financial foundation to capture that opportunity and deliver sustainable, profitable growth. Operator, let's open the line for questions.

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star 1 to ask a question. One moment please while we poll for questions. Your first question for today is from Scott Searly with Roth Capital.

Good morning, good afternoon. Thanks for taking the questions. Dave, I want to wish you all the best in your future endeavors. It's been a pleasure working with you over the past couple of years. Maybe just to dive in, in terms of the cadence over the course of this year, could you just kind of take us through a little bit? It sounds like there might be some headwinds in the second quarter, but acceleration then into the third and fourth quarter. And I'm not sure if I heard a SAS number In terms of growth for fiscal 27, I'd love to get your thoughts on that. And I just want to make sure to clarify a couple of numbers. I think you said $495 million is the exit rate in terms of fourth quarter revenue, but I think from a 27% EBITDA margin standpoint, that's looking at over $30 million in EBITDA, so an exit rate of north of $130 million. I want to make sure that's correct. And then SAS growth into fiscal 28, it sounds like we're We're accelerating into, you know, double digits, you know, low teens, mid-teens kind of number. I wonder if you could comment on some of those items.

Yeah, sure, Scott. I'll keep you honest as we work through the list. In terms of timing, think about the revenue growth sequential quarter about 4% each quarter between now and Q4. So that would be the way to think about that. In terms of the services revenue, It'll be sort of obviously higher than the growth imputed in terms of our annual guide. So sort of high-ish single digits would be the way to think about that. And then in terms of as we go into next year, it is going to accelerate. So in essence, there's a lot of $27 million of national treasury revenue that will be up and running. Obviously, we won't get a full year's benefit of that. But as we build that book up, we're going to get many months worth of revenue next year than we did this year. So do expect services revenue to be growing comfortably north of 10% as we go into fiscal 2028. So that'd be the key points there. And just keep me honest in terms of your list. In terms of EBITDA, yes, it would be north of $30 million in terms of where we would be exiting the year. So we'd be north of 130 on a run rate basis.

Gotcha. And just to clarify, David, in terms of the South African contract starting to kick in from a services standpoint, a lot of implementation this quarter. Do you get full contribution in the third quarter or is that ramping up into the fourth quarter?

Yeah. So in terms of the current guide, the current guide holds that revenue pretty consistently with what we had in our initial guide. There is upside to that. For the moment, it really is a question about getting everything installed. So we're working on sort of opening up those capacity constraints so we can do more. But in terms of where we'd be, it will start flowing through. It's too early to be sort of definitive now in terms of when it's all going to start flowing through. But we're working hard to get as much in as possible. And obviously, that will be a boost both for this year as well as the jump-off point for next year.

Sorry, Scott. Just how to frame it is, you know, the down spike of Thank you very much. So, you know, these are big, gnarly, complex contracts with government departments that take time, probably six to nine months to kind of really ramp that all the way through. And it's really hard to predict the actual smoothness of the revenue incline because ultimately, you know, you've got to go and, you know, these are, you know, tens of thousands of vehicles per government contract and work that through. So it's just a challenging period in order to get, you know, it's not a smooth kind of pure sash. You turn a button off and you turn a button on. We've taken the decision to reprioritize. We're pushing everything we can towards the new revenue. And then that comes with a sharp incline. So what we're kind of saying is, you know, it's almost like shifting our previous expectations to the right by one quarter as we ramp through the remainder of 2027 and into 2028. I would also kind of just for, there's a lot of focus on the South Africa contract, but at the start of the call, we talked about, you know, a number of contracts, you know, predominantly in North America with Big Land and Expand, Big Fortune, 500 expansion, plus this other major contract, you know, a vendor of choice to deploy both over the road and in the yard across 26 countries. You know, this is a result really of, you know, we're actually selling much better and there's phenomenal demand for our products and services and our strategy is resonating. The hard part with such a kind of, you know, big growth transformation is to make it linear and that's kind of where we've taken these decisions. And, you know, once all this flows through, we'll be, you know, far more consistent.

Steve, maybe just quickly follow up on that and then I'll get back in the queue. But some of the other areas of development, you mentioned some of the Fortune 500, but you also have other strategic relationships in terms of M&O ramps, right, and getting those sales forces trained. And I think you were pursuing some M&O opportunities in other geographies, as well as the Accenture relationship. I wonder if you could give us some quick thoughts on that in terms of how that ramps up. And just from a global perspective, you know, in terms of where you guys think you sit from a share perspective, because we've got some one-time items here that I think are obscuring The core growth capabilities, but, you know, you know, win rates or kind of how you see your global share perspective. Thanks.

Yeah. So, I mean, if we stand back from this and we appreciate there's a lot of noise and ins and outs, and there's been a confluence of a couple of things, you know, all at once. But the reality is, so all these decisions we're making have in mind exactly what you just said. The expansion of the MNOs, both with our current and further MNOs, The Accenture relationship that we talked about and moving that to a global basis and that's getting some very nice traction. We're winning more business. We're winning bigger deals, as I said, and we're doing that on a global basis. So, you know, it's kind of we put these three companies together. We scaled the organizations and then it was all about could we produce the products and services that resonate well with customers for us to improve our growth. We brought Jeff Loudon back in kind of around about this time last year. We've been talking about talent, and I think Jeff is a great example where we've brought better talent, Jeff's brought better talent, better rig a bigger process from a sales perspective, and now we're really seeing those opportunities come to fruition. So our win rates are growing, as I said, our share is growing. We're growing in the geographies that we want to as well in terms of some of the high Thank you very much. I'll get back in the queue.

Your next question is from Anthony Stoss with Craig Hallam.

Hey, Steve. I wanted to follow up on the component shortages. Was this a new supplier to this component, or you just got a bad batch and then had a couple of follow-ups?

It was purely Tony. We had an end-of-life component for a Wi-Fi chip. We put the new component in. We thought it was good. It wasn't. It's been a pain and frustration for a few weeks We need to get the operability much better than it was. We've now solved the problem. We're starting production back. It was one product line, painful in the quarter, just got to ramp back up, but nothing else, nothing more substantial than that. Painful and frustrating in the short term, but we're through it now.

Then to follow up on Scott's question, what kind of incremental impact are you seeing from AT&T, Rogers, and others For instance, maybe this is a tough question to answer right now, but how much revenue do you think was attributable to those folks in the quarter? And then lastly, I'd love to hear kind of your traction still in your in-warehouse solutions.

Yeah. So I think we talk a lot about the over-the-road and in-warehouse stuff in terms of the wins that we've had. So again, the differentiated solutions are what are driving our growth. If we pro forma for the South African thing, we remained in double-digit growth from our services, and that is coming from and being helped and supported by those channels. And our North America growth is improving off the back of those channels as well. So doing what it said on the tin, lots more to come from those guys. If you look at the AI video bookings growth, a good part of that can also be attributed to those channels.

Thank you.

Your next question for today is from Gary Prestopino with Barrington Research.

Hey, good morning, everyone. I just want to understand exactly what's going on here, Steve. I'm trying to write it down and keep up with you. You're seeing an acceleration in the South African business with the government contract. But you're walking away from some revenues in South Africa and deploying those resources towards the new contract. Is that the best way to read this?

Yeah, it is. It's the demand has outweighed our original expectations substantially. Right. And with any company that's starting to really get green shoots of growth, and we brought three companies together with heritage sets of revenues, In order to focus and be very disciplined in terms of capital allocation, resource allocation, focusing on business is going to bring us future growth because there is major growth still to obtain a lot more vehicles within the government contract. There's also a substantial opportunity to sell lots more services to these bigger customers so you have fewer customers. So we've looked at our revenue base and said how best do we amplify that When you bring three companies together, you can spread yourself thin in terms of your sources of revenue. So whether that's we've decided to take a throttle off growing some areas of that revenue in order to pivot to getting more from the South African contract, whether that's stopping some product lines, whether that's being able to remove ourselves from onerous contracts, all of that has built itself in. To our abilities to a make sure this goes really really well with this phenomenal new demand and b then maximize that opportunity and use our capital globally to you know really kind of double down where Scott and Tony have been in terms of our over the road and and in warehouse solution capability you know in tandem in terms of our other channel opportunities in terms of our Accenture opportunity So as PowerFleet has transformed organizationally, we're now transforming really from a revenue perspective. And because we're seeing such positivity and confidence and demand for the products and services, we're taking what we think is smart and disciplined decisions to help grow the business in the best possible way and from a consistency perspective and make sure that we get to a consistency of growth both on the ARR line And also less lumpiness in some of the business we do. We think this is a very sound move for us to do. Bought on by the phenomenal demand and the execution of that demand by our sales team from, as I said, we started in our own internal expectations when we first won this mandate, we thought we'd be doing around 10,000 vehicles over the next few months, and we're doing 72,000. And that's a big undertaking. We want to do that super well.

Okay. Thank you for that explanation. It clears it up. So I guess the next question I would have is on this overall South Africa contract. You're going from initially planned 10K to 72K vehicles. What's the total TAM there, and do you have the ability to capture most of that TAM in this contract?

So total TAM is 180,000. Relevant for us, we think, was 150,000. In terms of vehicle opportunity. And then once we're in these accounts, and think about it, Gary, we can kind of chase smaller contracts and smaller customers. We've got captive for the next five years some large customers who we can sell lots more of the portfolio to that have obviously, by the fact that they've signed mandates to take our solution so quickly in the cycle, are excited about further opportunity with us and that's really where we want to concentrate. So, there's an expansion in terms of more vehicles and there's a significant expansion opportunity in terms of more products and services to those customers that we've now captured.

Okay, thank you.

As a reminder, if you would like to ask a question, please press star 1. Your next question is from Dylan Becker with William Blair.

Hey, guys. Appreciate it. Steve, maybe for you, going from 10 to 72 in such short order, I guess, what's driving kind of the urgency or pull forward from the customer perspective there? And then as you're thinking about deploying against those 72, maybe the importance for other customers around kind of proving out the scalability of that, right?

So I think firstly, you know, there's a big shift in the territory for safety and there's a big need for efficiency. So that that bodes well. And I think, you know, some of these customers have had legacy solutions that they've looked at the Unity platform. They've looked at our capabilities and feel that there's a A very big value add. And remember that this was previously a bunch of different contracts and this is the first time it's been consolidated into one kind of umbrella. So I think, you know, those guys coming together, seeing the capabilities, looking at how they can be used for different departments, I think has also helped for that perspective. So, you know, I think this is something that the demand is there and we fit that demand very, very well. And, you know, I'm very proud of The team in South Africa who've been able to bring this to the table a lot faster than we expected. So that's why we want to do this really well. And to your point, it's already starting to emerge other large-scale opportunities. I mean, we talked about some of the deals at the top of the call, which kind of are dwarfed by this, but these are still big deals for the company, including a lot of expansion with Fortune 500. And there's a lot of eyes on us doing this really well because we can see and we have pipeline towards doing more enterprise and pure enterprise deals, which is, you know, these companies have been, you know, Fleet Complete was a mid-market company. I would say Power Fleet and Mix were kind of small enterprise. But we're now, you know, getting more share and more confidence in the larger enterprises. So all of these decisions are based on that forward thinking and what we can see. and you know we've been very proud of the fact and you know throughout the time that we've been in the company we always we will not sacrifice on quality we will not sacrifice in terms of getting customers long-term outcomes and we see the shift we're making is an important stage to ensure we can do that on a much bigger scale and it's it's so exciting for us as a team um but you know we have trade-offs we have to make some decisions to to ensure that we don't Thank you. And then just to kind of clarify one other piece, too, as a part of this, right, all of that reorganization is taking place purely around the South African operations side of the business.

It does sound like 20% quarter-over-quarter video safety, bookings momentum, everything kind of ex-South Africa dynamic seems to be tracking quite well. Just kind of maybe a sense of resource prioritization there and broader kind of business momentum outside of this one segment.

Yeah, so Melissa Ingram, I think, was it last call, took you through some of the centralization pieces we're doing, you know, which is the next place of our optimization, which will support this contract as well. But, you know, this is change predominantly for our South Africa team and their focus. But, you know, what we're making sure that we do is we're bringing the best practice so we can repeat this in other geographies and we can get, you know, as I say, we've kind of two years into that operational cadence and Organizational Change. So, you know, we're making sure that we do a lot of repeatability across the business, which not only supports the South Africa contract, but also as well these other large-scale contracts, you know, that we have going on in North America and Europe and elsewhere.

Very helpful. Thank you.

Your next question is from Alex Sklar with Raymond James.

Great, thank you. Steve, just following up on Gary and Dylan's questions on South Africa, the $17 million of foregone revenue, can you just elaborate? What exactly is that? Is that tied to existing revenue that's churning off? Is that projected bookings that you just can't sell anymore given the reprioritized go-to-market or implementation team? And then as we think about the kind of implied margins of that revenue you put on the slide, we're kind of accretive to the overall business. So maybe just a bit more color on your kind of internal deliberation on why that has to be foregone versus maybe staffing up a bit and trying to delay it. Thanks.

Yeah, let me pick that one up. So in terms of the revenue, it is a combination. So part of it is walking away from certain books of business. The OPEX overhead is so high that it sort of drags things down, and we need to free up that capacity, obviously, for the growth that's coming through. So that's a piece part of it. To Steve's earlier point in terms of spreading ourselves too thinly, we do have to sort of refocus in terms of working through the backlog of the bookings that are coming through the national treasury contract. So that does mean foregoing revenue that we plan to get elsewhere in the market. That's a piece part of it as well. And then in terms of the implied margins, Obviously, there's significant operating leverage from an OPEX standpoint. So in terms of the margin, you're losing a lot of gross margin without necessarily an average recovery in terms of OPEX. So the implied margin would actually be higher as it flows through than you would expect just looking at EBITDA margins by themselves. So that's why it's a relatively high number from an EBITDA standpoint.

Okay, I appreciate that answer and the clarification.

Just to add to that. Sorry, Alex. It's about quality of revenue. It's around cash, right? So, you know, the South African contract comes with more opportunity to improve cash collection as well. So that also was in our minds as we looked and made these deliberations. You can stack it up and you can kind of, you know, think, can you do both? But I think where we've got the weather die on what's going on in the rest of the world and the continued growth there, I mean, we're dominating this call on South Africa quite rightly, but we could also dominate this call on some of the other growth areas. So all of that is not just like an individual kind of balance sheet and P&L view for South Africa. This is a much broader set of deliberations that have brought us to this choice.

Okay, I appreciate that. Maybe let's talk about the rest of the world then. So that 26-country European construction win, you're obviously in a strong competitive position. You've got the global footprint, pretty good differentiation. You have some enterprise customers already. Can you just talk about did that deal start off looking for someone globally across 26 countries or was that the team really able to expand the size of the opportunity? And then you mentioned kind of vendor of choice. Is that a book deal or is that still coming in the next couple of quarters? Those questions. Thanks.

Yep. So it's in contract at the moment. It was a customer who had a smaller footprint with us. But what they wanted on a global basis was someone who can provide safety and visibility both in the yard and over the road. So obviously that is the key differentiation, both nationally and internationally. So that's why, you know, it's been so exciting for us as a vendor of choice because we are the company who can, A, cover that footprint with our global footprint that we have. And secondly, in terms of the unique proposition to give consistency, single visibility, single source of truth through unity, as I say, in a yard and over the road and in a warehouse, that gives us that unique capacity.

Great. Thank you both.

Your next question for today is a follow-up question from Scott Searley. Your line is live.

Hey, Dave, just to follow up a little bit on the cost front, gross margins on the product front down because of component availability and absorption issues. I think it was 21% versus 29% in the prior quarter. What's the recovery look like into the second half of this year? And thinking about that 27% EBITDA margin exiting the year, you know, what do product gross margins look like at that point in time? And also on the OpEx front, a little bit higher this quarter, but you've been going through some integration and otherwise, right, trying to optimize that cost structure. What is the non-GAAP OPEX that we should be thinking about exiting the year? Thanks.

So in terms of the product margins, it will sort of come back in terms of the second half of the year. In terms of expectations, I think sort of 31%, 32% is the right expectation there, Scott, in terms of where we're at. In terms of OPEX, As we said on the last call, we are investing ahead of taking significant costs out. So we've got a target of 12 million of annual costs to come out in the second half. So in terms of what that means from a sort of sales and marketing SG&A standpoint, that will be 19 percentage points or so in terms of sales and marketing. And then expect G&A expenses to come down to much closer to sort of 20% as we exit the year.

And Scott, if I can just be really, really clear on the product margin. So the only reason that it was down at that level was the lateness on the production thing. All of those orders are being fulfilled. They're all intact. It's just a timing thing that will recover either through this quarter or maybe a little bit into Q3. And it's very high margin business, and we're actually seeing a lot of strength in our high margin product line. So just want absolute clarity there that that was the only reason that was down. As production ramps back up, as we're able to fulfill customers, it just springs back.

Great. Thank you.

We have reached the end of the question and answer session, and I will now turn the call over to Steve Towe for closing remarks.

Thank you, Operation. Just before we do, we do have Paul Lalde on the call with us. So we're delighted to have Paul join us as our President and CFO. So, Paul, you might just want to say a quick hello to everybody.

Thank you, Steve. And good to meet everyone on the call. I'm genuinely excited to join PowerFleet as President and Chief Financial Officer. Over the past several months, I had the opportunity to work alongside Steve and the executive team as a strategic advisor. One example that stood out for me was the South Africa opportunity, which grew from an initial estimate of roughly 10,000 vehicles to more than 70,000 in a matter of months. That kind of expansion don't happen by accident. It happens when a differentiated platform addresses a real customer need and when the team behind it knows how to execute. That experience helped make my decision straightforward. I believe in what PowerFleet is building, and I want to help turn the momentum that we're seeing in the business today into durable and profitable growth. A little bit about me. I bring more than 25 years of experience leading finance and operations across technology companies, including more than a decade as a public company CFO. and most recently, as Steve pointed out, CEO of a publicly traded company. I've led businesses through growth, acquisitions, capital raises and transformations. And at times in markets that were anything but easy. Those experiences have shaped three commitments I bring to PowerFleet. Clarity, discipline and delivery. First, clarity means communicating Thank you very much. And third, delivery. Delivery means converting strategy into measurable results. A compelling strategy creates the opportunity. Consistent execution creates value. So what does this mean? You should expect me to be transparent about our progress, rigorous about how we measure performance, and accountable for the commitments that we make. Thank you, Steve, David, and the board Thank you for your confidence and warm welcome. I'm excited to get started and help write PowerFleet's next chapter. Thank you.

Thank you, Paul. We're delighted to have you on board full time. Paul's made a big difference to us already, and both having him and Vish, and we haven't really spoken too much about Vish, but our AI capabilities have won us awards. They're resonating really well. And we think that Vish can help us amplify that on a much broader global stage. So excited about Vish joining us as well, and you'll get to meet Vish next time round. I want to thank the PowerFleet team for their continued execution, our customers for their trust, and our shareholders for their competence. We continue to execute with focus, appreciating that this is sometimes, you know, a bit of a A bit of an in-and-out story, and we look forward to getting to a place of consistency, and we're excited about what's ahead. Thanks, everyone, for your time. Bye-bye.