Looking at Fleet Management Solutions, move to 2.0

We see a maturation at the high end of the North American fleet management solutions market, specifically heavy trucks and enterprises with 1,000+ vehicles, which we expect to spur increased vendor differentiation, continued consolidation, greater churn, and a move by some players to attack the less-penetrated SMB market.

We also believe the proliferation of low-cost, high-quality in-vehicle devices is generating a telematics data stream that will be increasingly integrated with data from multiple parts of the enterprise for analysis as part of a larger set to produce additional actionable insights (an area we call FMS 2.0), creating both opportunities and threats for existing fleet management solutions vendors.

We believe companies with scale combined with an appreciation for data analytics – either developing or planning to offer such capabilities – are in a better position to take advantage of these changing dynamics and capture share than vendors lacking these attributes.

Combining trade show thoughts with industry commentary

This report is an amalgamation of thoughts synthesized from our conversations at the spring NAFA Fleet Management Association conference and many follow-up interactions with public and private players competing in this market, as well as industry observers.

High-end/enterprise market maturing

We believe the high end of the North America (U.S., Canada) fleet market, which includes large fleets operating 1,000+ vehicles as well as long-haul carriers (Class 8 trucks) and smaller heavy commercial fleets (Class 6-7), is maturing with an estimated connectivity/telematics penetration rate of around 65% (vs. our ~14% estimate for the total market; see Appendix 1 for our detailed estimates and discussion). This part of the market is typically considered high-end because the solutions catering to these customers offer the most features, and users rely on more advanced functionality such as hierarchy capabilities (ability to segment by regions or groups of trucks, with user access and reporting made accordingly), benchmarking, third-party software integration, workflow, and analytics as part of day-to-day operations. Advanced features are often ignored by or simply not available on solutions targeting the less-penetrated small- and medium-sized (SMB) accounts.

Many larger, better-capitalized vendors compete at high end

While the fleet management solutions market features hundreds of providers competing for business, many of the larger, better-known companies primarily focus on the enterprise market, which accounts for the bulk of their installed subscriber base. This is largely a function of market development, as the main buyers many years ago were these higher-end customers, and it is only more recently that the SMB market started adopting fleet solutions in earnest.

Notable names that compete heavily in the enterprise market include CalAmp (through its acquisition of Wireless Matrix), Fleetmatics (with its purchase of SageQuest), GPS Insight, inthinc, Omnitracs (accentuated by its recent acquisitions of Roadnet Technologies and XRS Corp.), Zonar Systems, and, on a more international basis, MiX Telematics and TomTom. Of course, some of these companies have additional businesses either in other parts of the fleet market, consumer-oriented space, or areas that leverage overlapping telematics technology. For example, Fleetmatics derives the vast majority of its revenue from its SMB customer base.

Ramifications spur market change

We see several ramifications of a maturing at the high end in the fleet management industry: 1) greater churn with more competitive wins and losses, 2) a move downstream by some players historically focused on the high end, intensifying competition in the SMB market, 3) a move to further differentiate positioning within the high end on a variety of metrics, and 4) continued, perhaps accelerated, consolidation. Finally, 5) we think the market will ultimately evolve to analytic-centric solutions, which combine fleet management (telematics) data with additional fleet and other data sets already gathered within and outside an organization to address a richer set of questions and strategic initiatives. We term this latter anticipated development Fleet Management Solutions (FMS) 2.0. Below, we discuss each of these ramifications in detail.

More churn: competitive wins and losses, targeting accounts at renewal

As the high end of the industry matures, we believe fewer greenfield opportunities will be available and expansion within existing accounts will diminish. Because of this, we believe players are increasingly focusing sales teams on the renewal dates of customers using competing solutions. These companies are using a variety of sales strategies and marketing messages to be in a position to win the account upon contract expiration, when it is more open to switching vendors. For the players remaining focused on enterprise, we think success will increasingly be driven by an ability to relay an effective replacement/displacement marketing message as opposed to the historical pitch around the exceptionally high ROI achievable from deploying a solution in the first place.

While most competitive displacements are out of the public eye, publicly traded companies such as Fleetmatics can offer a glimpse into this dynamic. Fleetmatics possesses a competitive high-end offering (Reveal+), despite its focus and the bulk of its business being SMB. It announced its first enterprise customer loss in Q3 2014, explaining this particular customer wanted a low-cost solution, but Fleetmatics did not wish to start competing on price. We believe it lost another similar-sized account earlier this year. What we find encouraging for Fleetmatics and more representative of our argument is that it has more than offset enterprise losses with competitive wins at companies like DirecTV, Brinks France, Clean Harbors, and Tri Wire Engineering Solutions. At its analyst day in May, Fleetmatics was open about its enterprise strategy of targeting specific accounts around renewal times where it thinks it has the reference base and battle plan to win. We are hearing of similar puts and takes and some account targeting from some of the private companies we interact with, which was not the case a year or more ago.

Moving down market where more greenfield opportunities still reside

Our research indicates the overall penetration rate of telematics or connected fleet solutions in the U.S. and Canada is just over 14% (see Appendix 1); research firm Berg Insight comes to a similar conclusion, recently pegging it at 16%. With the high-end market maturing, the overall low penetration rate means the SMB market is much less penetrated. We estimate the very small fleet market (1-4 vehicle fleets) represents over 50% of the potential market and is only lightly penetrated (2% by our estimates). While we don’t see many companies yet targeting fleets this small, the next layer up, fleets of 5-100 vehicles, appears to be a target-rich greenfield environment. 

Supporting this conclusion of a ripe SMB market are the First Analysis fleet management solutions provider surveys (published April 29, 2015 and Oct. 8, 2014), which are SMB-centric and indicated more than 50% of vendors are getting 75% or more of their new subscribers from accounts that did not have a solution previously. We have also spoken with several traditionally high-end players who either have or are contemplating targeting the SMB market more aggressively. In some cases, this involves developing a lower-priced, but also lower-featured solution so as not to upset customers paying higher prices for the enterprise version. A challenge we see to this strategy is that the sales path and message for SMBs is often different from the enterprise, and we think some of the companies trying to expand in this way will struggle with cost-effectively targeting SMBs with a message that resonates. 

Differentiated offerings, positioning

We also expect companies to increasingly specialize their offerings in order to cater to a certain segment of the market. Historically, while competitors may have played up their strengths, there was no clear segmentation to the enterprise market in the classic sense. This is changing, and while there still is no established language around segmentation or who fits where, we provide some thoughts of our own:

Value positioning. An example is Azuga (part of Danlaw), which still has its high-quality, made-in-America hardware message but is clearly banking on its affordable, less-than-70-cents-a-day (~$21/month/vehicle) price message to win customers and carve out a place in the market.

High-end. With roots in flexible data architecture from the finance industry, GPS Insight pairs quality support with flexible data flows to position its offerings to those desiring comprehensive high-end features, service, and flexibility.

Niche players. These are companies that have a solution with many general capabilities but play up a specific feature or area where they excel to carve out a disproportionate share at customers focused on that capability. Examples include IndusTrack, which highlights its core field service worker software tightly integrated with traditional fleet management solution software, and both Greenroad and Cartasite, which excel at driver behavior monitoring and modification techniques.

Will someone own OEMs? We also highlight Telogis, already a leader in the enterprise market, which has been aggressively partnering with OEMs such as Ford, GM, Volvo, and Mack to be the exclusive or preferred telematics providers for trucks right off the assembly line. While the benefits of this position are still emerging, we believe Telogis is close to becoming “the OEM solution.”

Consolidation: more to come

We also believe consolidation will continue as the maturation of the enterprise market encourages companies to look for scale and easier ways to achieve it than battling account by account. A sampling of recent industry deals involving the purchase of enterprise-focused players is shown in Table 1. We exclude transactions involving players without an enterprise focus or with a predominant focus on non-fleet areas such as stolen vehicle recovery (SVR) and usage-based insurance (UBI).

Where the market is headed: FMS 2.0

While the role of fleet management solutions has evolved and different areas of value have received relatively more or less emphasis depending on geographies and the price of fuel and labor, the key value drivers have remained fairly consistent. These center around gathering data for use by the managers of fleet operations for items as simple as knowing where vehicles are to more advanced value propositions such as planning, logistics, compliance, productivity/efficiency, and safety. Savings are generally measured in terms of decreased fuel consumption and improved worker productivity.

After several years of seeing this data in basic visualization packages, fleet managers and occasionally others within an organization are starting to see the potential for increased and more strategic use of the data being gathered. More penetrating questions within fleet operations are being asked, such as:

• How should I change my maintenance and replacement policies to optimize efficiency?
• What explains the differences of my fleet operations to others in the industry, and should I care?
• What would the impact be of moving to electric or hybrid vehicles? Is one model better than another for my specific circumstance?

While these questions are still focused on the department responsible for the fleet, they generally require more detailed data than what is typically gathered and kept by fleet management solutions companies. In addition, to answer these questions, specialized algorithms and data architectures are required that few, if any, of the leading fleet companies possess. Furthermore, combining the GPS and vehicle data from onboard diagnostic system ports (OBD-II; i.e., the way telematics data is gathered by most fleet management solutions vendors today) with data from other data sources within the fleet department such as fleet management information systems (FMIS) and fuel card systems, in addition to data from outside the fleet (e.g., ERP, CRM, financial), could lead to even greater insight into marketing, sales, and other parts of the organization.

TABLE 1: Enterprise-focused fleet management solution providers acquired over the last five years

Source: Bloomberg, Capital IQ, First Analysis estimates, company releases, industry reports.
Notes: (1) Small: estimated revenue <$20M; Medium: estimated revenue of $20M to $50M; Large: estimated revenue >$50M. *North America assets only; excludes Europe, which has an estimated 30-40K active subscribers.

High ROI of telematics creates additional data source

The high ROI from current fleet management solutions allows for increased penetration of relatively low-cost but high-quality hardware devices, which can collect not only location and usage data, but also engine and vehicle diagnostic data. However, most traditional fleet management solutions companies need only a fraction of the data available for their solution and thus don’t transmit or store most of the information available. As a result, while companies have been analyzing many non-telematics, but fleet-related, data sets for years, the intersection and integration of these sets with telematics data is new, with relatively few companies having related solutions.

Blending telematics with other data creates opportunities and challenges

We see the increasing blend of telematics with other data sources as both a substantial challenge and opportunity for the industry. The key challenge, in our view, stems from a general lack of overlap between the necessary components to create this next-generation solution. Most companies with big data analytics expertise that could perform deep analysis on integrated telematics and other data to answer next-generation questions don’t have access to the telematics data or a clear path in the market to get it. Those with access (i.e., existing fleet management market leaders with large and growing customer/subscriber bases) generally do not have the back-end capabilities in terms of database architecture or analytics algorithms and engines. As a result, we think partnerships, joint ventures, mergers, and major internal development efforts are all on the table to move players and, ultimately, the market forward. How the chess game is played between these groups of companies may determine which emerge as category winners and which are commoditized.

Private company profiles: FMS 2.0

Below, we highlight two companies we feel have examples of FMS 2.0-type offerings.

Utilimarc

Founded: 2001
Headquarters: Minneapolis
Funding: Private/founder-backed
Company size: < 25 employees
Subscribers: ~400,000 vehicles

Offering: Application/analytics software (suite with six different modules); device firmware
Available solution features and components: Dashboard/user interface, analytics (predictive), benchmarking, scenario analysis, data integration (third-party; i.e., fuel, human resources, operational, telematics), data normalization and formatting, performance metrics and targets, flexible reporting, visualization, history, hierarchy capabilities, telematics
Pricing: Subscription-based model by either vehicle per month or module annually

Vertical segment focus: Transportation (fleet); cable, energy/utilities, food & beverage, education, government, logistics, telecommunications
Primary regions: North America
Customer focus: Enterprise, government
Sample customers: American Electric Power, AmeriPride Services, AT&T, BC Hydro, City of Sacramento, City of Vancouver, Coca-Cola Bottling, Duke Energy, Pacific Gas & Electric, State of Oregon, Verizon
Partners: Fleet management information systems (FMIS), fleet management companies (FMCs), fuel card companies, telematics solutions providers

Company overview

Based in Minnesota, Utilimarc was founded 14 years ago by three individuals, one with a background in trucking, another in utilities, and a third in IT. They merged these backgrounds with a cadre of data scientists to create software that provides useful insight into fleet operations by combining company-specific fleet usage data (from telematics solutions) with both FMIS and fuel card data. This allows operational and purchasing data (e.g., actual cost of vehicles and repairs, number of unscheduled maintenance issues per month, employee expenses per hour, overtime hours) and broad benchmarking data (e.g., average life and per-mile cost of operating a 4×4 light duty truck purchased in each of the past eight years) to allow precise, strategic, and unique analysis of a company’s fleet operations. Its specialty is the energy/utilities vertical where it has relationships with dozens of well-known customers in addition to municipalities and mainstream companies with large fleets (see below for examples of each). In our view, its ability to normalize and integrate data from three of the larger, more prominent sets of data producers in the fleet space puts it in an intriguing position for future partnering and other developments.

FleetCarma

Founded: 2010
Headquarters: Waterloo, Ontario
Funding: Private (division of CrossChasm Technologies Inc.)/backed by institutional capital
Company size:  < 50 employees
Customers: 100+

Offering: Application software; end-to-end solutions; hardware; professional services
Available solution features and components: Dashboard/user interface, analytics (predictive, personalized), benchmarking, modeling and scenario analysis, diagnostic trouble codes, reporting (fuel economy, emissions, mileage & utilization), driver behavior, location tracking, automated expense reporting

Vertical segment focus: Transportation (fleet); electric vehicles, energy/utilities, government
Primary regions: 60% North America; clients in 23 countries
Customer focus: Enterprise, SMBs, government, original equipment manufacturers (OEMs)
Sample customers: City of Ottawa, City of Prince George, City of Toronto, Florida Power & Light, New Brunswick

Company overview

FleetCarma, a five-year-old division of the eight-year-old company CrossChasm Technologies, provides another example of the intriguing possibilities resulting from telematics information being combined with other data sets. CrossChasm works with automotive/truck OEMs during the vehicle prototyping stage to maximize performance and efficiency of the powertrain across several metrics. As a result, it has an incredible library of data that shows how engines/vehicles perform in various conditions. Large fleet buyers sometimes see vehicle performance that deviates from what OEMS told them to expect during the purchasing process. CrossChasm can combine the driving behavior of a specific fleet (i.e., the telematics data) with the engine data it has on file to answer questions such as why actual performance differs from expectations and what can be done to improve fleet efficiency.

FleetCarma became the branded division that works with fleets to answer these questions. It has since expanded its mission to more broadly answer performance questions of both existing and future fleets. While in some cases it can gather the telematics data from off-the-shelf OBD-II telematics devices used by many existing fleet management solutions, when gathering telematics and performance data from hybrid or electric vehicles, its own in-vehicle hardware must be used. As a result, FleetCarma offers basic fleet management solutions capabilities as well as its more sophisticated engine and efficiency analytics. Due to its expertise in electric and hybrid engine performance, it has carved out a specialty in analysis of fleets to determine the potential gains from switching to hybrid or electric vehicles, as well as which of those vehicles will perform best under the customer’s specific driving patterns. More recently, it has developed a consumer/dealer offering to answer the same question for single/individual vehicle purchases.

FMS 2.0 impacts on public IoT companies

CalAmp (CAMP)

As the leading hardware provider for the MRM industry, which includes fleet management solutions, CalAmp could potentially benefit from the industry’s demand for enhanced data integration and analytics by adding increased data gathering capabilities to existing products as well as infrastructure software that makes integration more flexible and aids data analysis. Its hardware is used not only for vehicle-centric fleet management solutions (i.e., the front of the truck) but also in asset tracking and logistics of trailers/containers (i.e., the back of the truck). It may find paths to foster increased connectivity between these two data sources, which it could monetize over time. 

In terms of CalAmp’s direct presence in the fleet management solutions industry (through Wireless Matrix; acquired March 2013), we believe its relatively small size makes it a secondary choice for algorithm and other product providers seeking market penetration. That said, it does have a solid position in the government/municipal vertical market. We believe some companies with complementary products also focus on this smaller subsegment of the fleet market, meaning CalAmp could help create and participate in a potentially nice ecosystem. Furthermore, we think CalAmp has an awareness of the importance of data integration and analytics as evidenced by its recent purchase of Crashboxx (April 2015) to complement its usage-based insurance (UBI) offering, hinting things could play out in intriguing ways for CalAmp within the fleet management solutions space.

Fleetmatics (FLTX)

We believe Fleetmatics is in an enviable place to address Fleet 2.0 because of its culture and leading position in North America. Regarding culture, we have always found Fleetmatics to be more software and data-centric in its thinking than many of its competitors. Though it does not currently materially monetize its vast data set (>80B data points collected to date, as of May 2015), it has consistently viewed data as one of its most strategic long-term assets. Further, at its analyst day in May, management increased its long-term target of R&D as a percent of revenue (to 8-10% from 5-6%) and referenced anticipated initiatives around data as a key reason for the change. We believe acquisitions like KKT Srl/Routist (June 2014), which added specialized data analysis algorithms to the core solution, are a model of how it thinks about adding increased data-centric functionality long term. Routist and some of its other offerings (e.g., Work, fuel card) encourage integration with third-party data sets/systems such as accounting. We think these examples, along with management statements about needing to become stickier with clients through integration with more parts of their organizations, demonstrate a line of thinking that will serve it well in partnering with or acquiring companies possessing the ability to create or analyze other complex data sets beyond those generated by Fleetmatics.  

As the leading solutions provider in North America, Fleetmatics, in our view, is in a good position to address market shifts. Companies with intriguing and highly valued complementary offerings, but with a challenging path to market, will most likely seek out companies with leading positions to market or acquire their solutions. In terms of existing momentum for traditional (i.e., non-FMS 2.0) functionality, it has some exposure at the high end, and we think can become increasingly competitive there via its selective account targeting. Its bread-and-butter, however, is in the less-penetrated SMB segment. We think its tightly honed message and efficient SMB marketing tactics will serve it well, in spite of the potential of the higher-end players who are increasingly in this market. 

MiX Telematics (MIXT)

MiX’s half-million-plus subscribers, most of which are on its fleet management solution as opposed to its stolen vehicle recovery (SVR) offering, make it a player with a large installed base other companies with complementary products may wish to target for partnering initiatives. The fact that these subscribers are spread among 120+ countries and are primarily in lower-ARPU geographies relative to North America may limit MiX’s appeal to some, but this could make the company highly prized for those trying to expand to these sometimes challenging-to-reach markets. While our discussions with management indicate MiX understands the long-term potential value of its data, the company is currently focused on balancing profitability with growth, such that substantial investment in data analytics is not in the cards near term.

We see the high telematics penetration rate in North America among enterprises as less of an issue for MiX given its international strategy (~88% of FY15 revenue was outside the Americas), which exposes it to many regions with a far lower incidence of connected solutions at the high end, implying more expansion opportunities relative to region-bound peers. We note, however, MiX is making a greater push in North America compared to prior years. In addition, while MiX doesn’t target SMBs, it has a simplified offering for such accounts and takes on this business as it presents itself, giving it an ability to quickly move down market if high-end enterprise opportunities prove hard to come by or to displace from competitors.

Orbcomm (ORBC)

Orbcomm has avoided acquiring or developing in-vehicle monitoring/control capabilities up to this point, which explains its lack of presence in the traditional fleet management solutions market. Instead, it has focused on the assets vehicles pull or tow to facilitate goods transport, such as trailers (e.g., refrigerated, dry van, flatbed) and intermodal containers, marketing a handful of turnkey solutions. Its presence in this area is material, particularly in refrigerated (reefer) fleets, where it has a leadership position around transporting temperature-sensitive goods. The data set captured from this asset class is another type that will be logically integrated with telematics data and other sources to derive further actionable intelligence. Controlling this data stream, in our view, puts Orbcomm in a good position for FMS 2.0. Strengthening this position is Orbcomm’s acquisition of InSync Software earlier this year. This gave Orbcomm an application development platform and a professional services team focused on building end-user applications. Orbcomm could leverage InSync’s software development capabilities to create tangential applications it lacks, such as fleet management, and even extend its offering into new areas using InSync’s expertise around RFID, barcode, and Wi-Fi, methods new to Orbcomm. This would give Orbcomm broader exposure to the transportation and logistics market, enabling it to capture more unique data sets that feed into FMS 2.0.

Appendix

We estimate the combined U.S. and Canada market is just over 14% penetrated, with 5.5M vehicles out of a potential 39M under an active subscription to a bundled, end-to-end fleet management solution (see Table 2). To get to our 5.5M estimate, we used two different methodologies. First, we looked at the subscriber data accumulated from 60 pure-play full solution providers. These providers represent 20% of the total number of vendors operating in the region by our estimate, inclusive of the largest ones based on subscriber counts. Because some operate internationally, we had to back out an estimate of foreign subscribers for those players to be left with the remaining U.S. and Canadian business. We note our adjusted data has the top 10 vendors possessing a combined 50% share of the market, corresponding to Berg’s estimate. To our U.S. and Canadian subscriber total, we then assumed an 80/20 rule (reasoning the 20% of vendors we have data for control 80% of the outstanding subs) to yield 5.5M subscribers. Second, we looked at data and directional commentary from CalAmp, a major M2M hardware supplier to the fleet management solutions market. CalAmp has about 5M active MRM devices in service (as of May 31, 2015), of which we believe between 2.5-3M represent devices sold to fleet solution vendors. Because management believes it has about 50% share of the North America fleet hardware market, it implies 5-6M devices in the market, supporting the above estimate.

TABLE 2: U.S., Canada – Estimated total connectable fleet vehicles, telematics penetration, vehicles with telematics (2014)

Source: First Analysis estimates.
Notes: Data derived from below sources; assumes 0-1% CAGR on 2013 actuals for each line. (1) Federal Highway Administration; registrations. (2) Automotive Fleet; U.S. Fleet Statistics by Industry Segment (2014). (3) American Trucking Associations; Reports, Trends & Statistics. (4) Statistics Canada.

Because granular data on penetration rates is not readily available on well-defined categories, the more subjective portion of our analysis is the allocation of penetration rates among the various commercial and government (publicly owned) fleet categories. We rely on directional guidance derived from our conversations with numerous solutions providers and industry participants, augmented by our surveys. Acknowledging actual category penetration rates may differ from our estimate, we think the exercise still provides high-level insight. We assume modestly higher penetration rates for the commercial categories relative to government due to the budgetary and bureaucratic decision-making process, constraints that tend to slow government adoption. We assume truck/tractor (Class 6-8) has the highest penetration rate overall (65%) since it has been targeted by solutions vendors the longest and the potential ROI from adopting a solution is the greatest; the group features higher-value assets, typically greater fuel use, more substantial regulation, etc. Other assumptions include: lower penetration in fleets operating less than 15 units due to general difficulty in cost-effectively reaching/selling to this part of the market, particularly the 1-4 unit fleets, which few currently actively target, greater penetration rates among trucks relative to cars in fleets of the same size due to differences in potential ROI, and solid relative penetration in the bus category from safety and timetable transparency initiatives.