CAMP4 Therapeutics Corp (CAMP) 2020 Q3 法說會逐字稿

Welcome to CalAmp's Third Quarter 2020 Financial Results Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Joel Achramowicz of Shelton Group, CalAmp's Investor Relations firm. Joel, you may begin.

Thank you. Good afternoon, everyone, and welcome to CalAmp's Fiscal Third Quarter 2020 Financial Results Conference Call. I'm Joel Achramowicz, Managing Director of Shelton Group, CalAmp's Investor Relations firm. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek, and Chief Financial Officer, Kurt Binder. Before we begin, I'd like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAmp's best current judgment, they are subject to risks and uncertainties that could cause actual results to differ materially from those implied by these forward-looking projections. These risks and factors are discussed in our periodic SEC filings and in the earnings release issued today, which are available on our website. We undertake no obligation to revise or update any forward-looking statement to reflect future events or circumstances. Now Michael will begin today's call with a review of the company's financial and operational highlights, and Kurt will provide additional details about the financial results and outlook, followed by a question-and-answer session.

With that, it's my great pleasure to turn the call over to CalAmp's President and CEO, Michael Burdiek. Michael, please go ahead.

Thank you, Joel. Our third quarter consolidated revenue of $96.6 million exceeded the midpoint of our guidance for the third consecutive quarter and reached a quarterly record.

Software and subscription services revenue also reached a record at $33.4 million, which was up 68% year-over-year and represented 35% of total revenue for the quarter and moving us closer to our long-term target of 40%.

Our Telematics systems business was slightly up sequentially, highlighted by the expected rebound in our network and OEM products business with increasing orders from our top enterprise customers as well as significant sequential growth from our largest customer, Caterpillar, in support of their 3G-to-LTE product upgrade cycle.

Our solid results this quarter were driven once again by our software and subscription services business as a result of strong performance from our recent acquisitions and, in particular, Synovia Solutions, combined with strong growth from LoJack Italy and our Supply Chain Integrity services. In fact, LoJack Italy's revenue was up more than 20% over the prior year period. And our emerging SCI business was up more than 40% year-over-year, albeit from a relatively low base. We're seeing continued momentum from Synovia Solutions' Here Comes The Bus application. As it directly appeals to major school districts across the United States, including recent installations in Minnesota, Florida, North Carolina, New York, Virginia and Georgia, among others, to enhance student safety and bus route optimization.

Here Comes The Bus now has more than 1.9 million users, and we're working on many additional opportunities with more school districts and municipalities across the nation. Our Tracker U.K. subsidiary is also adding new recurring subscription opportunities with its SmartDealer and SmartDrive applications including a recent partnership with Auto Capital in London to manage its aftermarket fleet and provide customers with in-van connectivity solutions and automated intelligence.

Additionally, Tracker's Smart Fleet application saw success with a large fleet customer NG Bailey that's adopting our solution to manage and monitor its fleet of 240 service vehicles to improve driver behavior. Further, CalAmp's LoJack Mexico subsidiary, recently announced a strategic alliance with Volkswagen Group's Truck & Bus manufacturing division, MAN Truck & Bus, Mexico to deliver advanced telematics video services across its range of Truck & Bus vehicles sold in Mexico. LoJack Mexico developed a robust and customized connected vehicle solution built on top of the CalAmp technology stack that focuses on security, improved road safety and operational efficiency for MAN Truck & Bus fleet customers and drivers. As part of the agreement, MAN Truck & Bus will also offer its customers LoJack Stolen Vehicle Recovery services on all vehicles, which is the only SVR service supported by law enforcement throughout Mexico as a result of our state-of-the-art technology and best-in-class security services.

Turning to our Telematics Systems business, revenue for the third quarter was $63.2 million or up 2% sequentially. As mentioned previously, network and OEM products revenue increased during the quarter due to a return to growth from our largest customer, Caterpillar, which ramped orders for our next-generation LTE-based product family. We expect this product transition to provide a tailwind for our business across our installed base in the coming quarter and throughout 2020. Another area that will be important to CalAmp going forward is our supply chain integrity opportunities, deploying our SC iOn tags and onboard diagnostic equipment. We recently entered into an agreement with Pallet Alliance to utilize these powerful tags in combination with our gateways and the CalAmp Telematics Cloud to track wooden pallets throughout the logistical road map from dock to dock. This is only one example of the types of applications that can benefit from the use of our iOn tags. The opportunities for intelligent supply chain automation and global commercial accounts are extensive, and I believe this technology could meaningfully contribute to CalAmp's growth in the years ahead.

As part of these efforts, we recently announced the availability of our iOn Suite for fleet management, which embodies the latest CalAmp microservices technologies as an integrated safety bundle. This next-generation of CalAmp iOn Suite includes the latest version of CrashBoxx technology as well as additional services for driver scoring and our innovative iOn tag asset visibility service. These technologies in combination provide comprehensive real-time visibility on fleet vehicles, their locations and content anywhere and at any time.

With the iOn Suite, fleet operators can now monitor the safety of drivers and receive instant notification of crash incidents or respond in real-time to the potential loss or theft of the fleet vehicle or any of its contents, which can all be electronically tagged at low cost. The iOn Suite with the iOn tag microservices uniquely addresses the tools on the truck use case, thereby increasing ROI for CalAmp's fleet customers by mitigating lost hours spent searching for lost or stolen tools or other valuable fleet assets.

The iOn Suite offers a preview of CalAmp's telematics device microservices road map, including our plan to release the iOn tag micro services and iOn driver scoring for our installed base of telematics device customers later this fiscal year. These micro services will be available on an à la carte basis or as an aggregated subscription bundle and activated through CalAmp's Telematics Cloud services.

Now I would like to highlight a customer case study related to one of many developing connected car telematics services opportunities that we're pursuing in concert with our LoJack International operations. We recently made an announcement on the strategic alliance with Hertz Mexico locally represented by AVASA, a Hertz, Dollar, Thrifty, Firefly and Carshop franchise operator. As part of this engagement, Hertz Mexico will leverage LoJack Mexico's stolen vehicle location assist in connected car telematics to reinforce driver safety and bring peace of mind to its rental car customers. LoJack Mexico telematics technology will be installed in select Hertz fleets at more than 170 offices throughout Mexico with completion by calendar year-end 2020. We were selected for this opportunity after undergoing a thorough selection process, which highlighted 3 of CalAmp's strengths: First, LoJack's brand reputation in Mexico; second, the power and scalability of our telematics technology; and third, the solid and consistent operating performance and financial strength of CalAmp. It's also instructive to know that we replaced an incumbent who was not able to meet Hertz exacting performance and reliability expectations.

This important new customer will utilize telematic services to support operational efficiency initiatives, including vehicle tracking, logistics, inventory management and recovery assistance on stranded or stolen vehicles. The LoJack telematics solution is supported by the full CalAmp technology stack and will enable data collection on miles driven, speed alerts, travel history and vehicle status. Deployments commenced at the end of our most recent quarter and are expected to ramp to several thousand units by the end of the current fiscal year. The initial contract value is estimated to be just under $1 million, with the opportunity to expand over time.

Now before passing the call on to Kurt for his financial review, I wanted to point out something that elucidates CalAmp's unique strategic value in the telematics industry. For a long time, we mentioned the CalAmp Telematics Cloud, or CTC. This is the platform service that underpins all of our proprietary SaaS applications and supports delivery of our current and future microservices. We built CTC to be extensible, powerful, reliable and globally scalable. As we mentioned in a recent social media blog around Mobile World Congress Americas, Amazon Web Services has built one of its mission-critical business applications onto our proprietary CTC platform, which is a significant endorsement of our telematics cloud strategy. We believe this vote of confidence from the world leader in B2B and B2C Internet commerce is a validation of the exceptional work our technical team has accomplished over the years in building this resilient, powerful and flexible telematics application enablement platform.

In closing, I am pleased with our consistent performance over the last 3 quarters, having navigated through significant global trade uncertainties and supply chain transition challenges. Based on our fourth quarter guidance, we expect continued growth to close out the fiscal year, thus placing CalAmp in a strong position for further growth in the new year. We remain focused on serving our global enterprise customers with industry-leading telematics software solutions as we drive our continued transformation to a global SaaS solutions provider. With that, I will now turn the call over to Kurt for a closer look at our fiscal third quarter financial results and fourth quarter guidance. Then we will open the call up to questions. Kurt?

Thank you, Michael. My commentary will include reference to non-GAAP financial measures of adjusted basis net income, adjusted EBITDA and adjusted EBITDA margin. A full reconciliation of these non-GAAP measures and the closest corresponding GAAP basis measures is included in the press release announcing our third quarter earnings that was issued earlier today.

As Michael mentioned, our third quarter consolidated revenue of $96.6 million exceeded the midpoint of our guidance for the third consecutive quarter as we continued to gain traction on our transformation to a global SaaS solutions provider. This was up 9% from the prior-year period and up 4% sequentially due to another quarter of record revenue in software and subscription services and solid growth in our Network and OEM products business.

Software and Subscription Services revenue increased 68% year-over-year to $33.4 million and a record 35% of revenue driven by increasing contributions from our recent acquisitions, in particular, Synovia Solutions. We also saw strong growth from LoJack Italy as well as our supply chain integrity services revenue. LoJack Subscription Services revenue, which includes LoJack Italy, Tracker U.K. and LoJack Mexico was $11.5 million in the quarter and up 17% sequentially.

Telematics Systems revenue was $63.2 million in the third quarter, up 2% sequentially and down 8% as expected from the prior-year period. Network and OEM products revenue increased to $17.4 million in the third quarter from $12.6 million in the prior quarter driven by a return to growth at our largest customer, Caterpillar. Revenue from CAT increased over 44% sequentially to $13.6 million compared to $9.4 million in the prior quarter and representing approximately 14% of consolidated revenue. As Michael mentioned, CAT began ramping orders of our next-generation LTE-based product family during the quarter, and we expect these orders to continue in the coming quarters in support of their product transition.

Consolidated gross margin was approximately 38% in the third quarter, down from the prior quarter and prior-year period. Our gross margin performance was principally impacted by unfavorable product mix with certain customers, coupled with incremental charges for excess and obsolete inventory and unfavorable manufacturing variances as we proceed with the closure of our manufacturing facility in Oxnard, California over the next 90 days. We expect the impact of these items to diminish over the next few quarters.

In OpEx, our GAAP basis, R&D, sales and marketing and G&A expenses in the third quarter of fiscal 2020 as percentages of revenue were approximately 8%, 15% and 15%, respectively. In general, OpEx increased as a percent of revenue due to higher expenses from our recently acquired businesses, combined with a deferred revenue haircut or purchase accounting adjustments. The revenue haircut from our acquisitions is normalizing, and we expect that our OpEx will begin to decrease as a percentage of consolidated revenue over the next few quarters.

On a non-GAAP basis, OpEx for the third quarter for R&D, sales and marketing and G&A expense as percentages of revenue were 7%, 14% and 12%, respectively. For the full year of fiscal 2020, we expect GAAP basis R&D, sales and marketing and G&A expenses as percentages of revenue to be 8%, 16% and 16%, respectively. And we expect non-GAAP R&D, sales and marketing and G&A expenses as a percentage of revenue to be 7%, 15% and 12%, respectively.

The GAAP basis net loss in the third quarter was $7.4 million or $0.22 per share compared to a net loss of $7.4 million or $0.22 per share for the previous quarter. The current year GAAP basis net loss reflects the adjustment for a $2.4 million charge for the early retirement of debt as well as purchase accounting adjustments that I discussed earlier, along with increases in OpEx due to the acquisitions. Non-GAAP net income for the third quarter was $5 million or $0.15 per diluted share and slightly above the midpoint of guidance as compared to $4.8 million or $0.14 per diluted share in the second fiscal quarter.

Adjusted EBITDA was $10.9 million in the third quarter, with an adjusted EBITDA margin of 11% compared to adjusted EBITDA of $10.6 million and adjusted EBITDA margin of 11% last quarter.

I will now provide some additional details on our balance sheet and liquidity position as of our fiscal quarter end. At the end of the third quarter, we had total cash and marketable securities of $104 million and total outstanding debt of $209 million which reflects the repurchase of $94.9 million in aggregate principal amount of our 1.625% Convertible Senior Notes due in May 2020, plus accrued interest of $0.7 million. Additionally, these amounts represent the aggregate carrying value of our convertible unsecured notes coupled with $15.2 million of amounts "Due to Factors" or Assignees, which was assumed in the acquisition of Synovia.

Net cash generated in operating activities was $3.7 million for the third quarter of fiscal 2020, which reflects our net loss of $7.4 million adjusted for certain noncash items, such as depreciation, amortization and stock-based compensation as well as changes in working capital.

Our consolidated net accounts receivable balance was $83.5 million at the end of the third quarter, representing an average collection period of 70 days.

The total inventory at the end of the third quarter was $44 million, which was down $5.5 million sequentially and represents annualized inventory turns of approximately 5.4x.

Our cash conversion cycle time was 76 days at the end of the third quarter compared to 79 days last quarter. Additionally, our deferred revenue balance was $64 million at quarter end compared to $61.9 million last quarter. For the third quarter, we recorded an income tax benefit of $2.6 million, which is attributable to our pretax loss, along with available R&D tax credits partially offset by other discrete items.

For the same period last year, we recorded an income tax benefit of $778,000 for similar reasons that I just cited for the current quarter. For the remainder of fiscal 2020, we do not expect any material changes to our cash taxes due to our remaining federal net operating losses ("NOLs") and other available tax credits.

Now turning to our fiscal 2020 fourth quarter outlook. We expect the fourth quarter consolidated revenue to increase to a range of $95 million to $100 million, representing year-over-year growth of 16% at the midpoint. Our fourth quarter outlook reflects continued momentum across our SaaS business and expected tailwinds from the 3G-to-LTE upgrade cycle.

At the bottom line, we expect fourth quarter GAAP basis net loss to be in the range of $0.19 to $0.13 per share and non-GAAP net income in the range of $0.10 to $0.16 per diluted share. We also expect fourth quarter adjusted EBITDA to be in the range of between $8.5 million to $13.5 million.

With that, I'll turn the call back over to Michael to provide some final comments before we open the call up for your questions.

Thank you, Kurt. I'd like to reiterate once again that we made great progress this past quarter, expanding our Software and Subscription Services revenue as we continue to transform CalAmp into a leading SaaS service provider. We expect to finish the year with additional growth, and we're excited about our prospects in the new year.

With that, I would like to open up the call to questions. Operator?

(Operator Instructions)

Your first question comes from Mike Walkley of Canaccord Genuity.

Question for me, just on the telematics systems business, especially on the MRM piece, Michael, there's been some soft trends in new truck builds and trailer builds. Can you talk about, kind of, what you're seeing from your end customers in that business? I know you talked about from 3G to LTE, but can you talk about kind of trends in that business? And overall, just how we should think about the run rate for telematics systems going forward given some bundling going on, and you bought a couple of your end customers?

Sure. Sure. Thanks for the question, Mike. So as we explained in the prepared remarks, our telematics systems business was up sequentially. And I think it's important to point out that we were addressing a number of significant headwinds as we worked our way into Q3. Specifically around our supply chain transitions and the tariffs that went into effect September 1, which were applied to a significant portion of our products imported to customers in the United States from our manufacturing base in China. But despite those headwinds, we did see incremental growth in revenue. Our bookings activity during Q3 was probably a little bit better than expected given the tariff headwinds that we faced. And we saw a nice recovery with Caterpillar in the quarter related to their various LTE upgrade initiatives and new product builds. So all in all, I would say it was a good quarter. And as it relates to some of the macro factors that you described, I'm not sure we saw any significant deterioration in end markets as it relates to some of those factors. And I would say, overall, we're very encouraged going into Q4 given our improved revenue outlook.

Great. And a follow-up for me. Some of the things you talked about and the headwinds and mix. How should we think about just gross margins within that business trend? Where do they kind of dip to in Q3 and maybe stay in Q4? And how should they recover over time?

Sure. Well I'll talk about it qualitatively, and Kurt can get into more details. But as Kurt explained in the prepared remarks, and we had some significant expenses -- actually, unexpected expenses as it relates to some of the activities related to our U.S. manufacturing facility wind down. That facility has been in business and producing product for CalAmp for almost 2 generations. And as we wound that down, obviously, we're cleaning up a lot of pass ins and addressing things on a very proactive way as we move some of that activity to our Tier 1 manufacturing partners in other parts of the world. So we expect that Q3 was probably the bottom in terms of gross margin, and we would expect to see things improve incrementally over the course of the next few quarters and get us back to where more or less where we were a couple of quarters ago. And especially, consider the fact that as the deferred revenue haircut, headwinds sort of dissipate as it relates to some of the purchase accounting around the acquisitions, that should also provide somewhat of an impetus for continued margin expansion as we work our way into the next fiscal year.

As it relates to the mix factor, we launched 2 new LTE products in Q3, and they ramped much more strongly than we had anticipated with a couple of key customers. Each of those products were launched at, I would say, a non-optimized cost profile and launched with new partners in other parts of the world. And so we really haven't had an opportunity yet to really cost optimize those products. And that will be an effort that will be underway over the course of the next couple of quarters, which should also help. Even if the current mix of demand stays roughly the same going into Q4 and the first part of next fiscal year.

Great. That's helpful. And last question for me, and I'll pass it on. You talked about some good momentum with Synovia and the overall SaaS business. How is the pipeline in that business? Any seasonality we should think about into year-end? And just overall outlook for growth in that business going forward?

Sure. I would expect that there will be a little bit of seasonality as it relates to some of the LoJack International operations. We're coming off an exceptional quarter in LoJack Italy. We expect Q4 to be a little bit softer. LoJack Mexico was also quite strong in Q3. We've got some new programs ramping, but we wouldn't expect to see the same sort of growth that we saw in Q4 carrying into -- I'm sorry, in Q3, carrying into Q4. But overall, the pipeline of opportunities is terrific on, really, all fronts across our Software & Subscription Services portfolio.

The only thing I would add there, Mike, also is in the network and OEM products category, we saw a nice rebound with CAT in the third quarter. And as we look into the fourth quarter and they move more rapidly through the 3G-to-4G transition, the bookings seem very strong there, and we're really pleased with the way that is progressing as well.

Your next question comes from Jonathan Ho of William Blair.

I guess I wanted to start out with your comments around China. And just given that there's a recent trade deal out there. Is there any way you could maybe quantify or help us understand what potential impact there could be on your business if we do see a resolution here?

Well, hello, Jonathan, thanks for the question. As I mentioned, we were impacted by tariffs in Q3. And about -- somewhere between 40% and 50% of our MRM products shipped to customers in the United States were affected by tariffs. As we've talked about on earlier conference calls, we've had an initiative underway for some period of time to try to transition away from that supplier concentration in China to other partners around the world. And that transition program is well underway and on track. So we -- even if there isn't a relaxation of the current tariff rates on our products that are imported from China into the United States, we expect that the percentage of affected products is going to drop off pretty considerably in Q4 and be almost de minimis in Q1 of next fiscal year. The so-called Phase 1 trade agreement, which we have a few details on, supposedly, supposedly, would reduce the tariffs that went into effect on September 1 to a rate lower than the 15%, but we don't have any specific details on that. If those tariffs are reduced, obviously, it's a plus for us. But our trajectory in terms of transitioning away from suppliers in China to other parts of the world is going to continue under any circumstance.

And Jon, just to add there, when we started the September month, we did institute a pass-through program with our customers. And I'm pleased to say that, that was well received. I think with all of the guidance and feedback we have given to our customers over the past year on this program, they were anticipating it. And so we had some first -- well, actually, good success and accomplishment in that pass through.

Got it. And then just as a quick follow-up. You mentioned an opportunity with AWS. Can you maybe quantify that or give us a little bit of a sense of what you'll be doing in conjunction with AWS? And maybe what types of opportunities that could open up?

Sure. Well we had talked anecdotally and somewhat anonymously about an opportunity to work with a public cloud service provider on providing a tracking solution for high-valued servers being moved from one data center to another. I think we've explained who that customer is. We have to be pretty careful about how public we are as it relates to the details around that engagement. But needless to say, it's an exciting opportunity. We're talking about the world's leader, not only in cloud services but increasingly, in transportation and logistics, and as many people know, that's a key area of focus for us and an investment area, and hopefully, a great opportunity for growth well into the future.

Your next question comes from Anthony Stoss of Craig-Hallum.

I just wanted to drill down a little bit more on the gross margin. And Kurt, maybe you can -- of the 200 basis points gross margin being lower, how much of that was from product mix versus inventory? And also, if you can just give us a glimpse of what you expect the gross margin might be in the February quarter? And then I had 2 follow-ups.

Sure. Well, let me start off and say, first off, we were extremely pleased with the gross margin around our Software and Subscription business. And as you know, as that business becomes a larger portion of our revenue, it will start to trump our margin profile within the telematics services division. But just to touch on your comments. So we noted in the earlier remarks that there were really 3 areas that impacted margin. First off, we did have a product mix change over where a number of our customers started to move into higher volume but lower-margin products in the quarter, and we incurred some start-up costs associated with those new products. So I would characterize that as probably 1/3 of the overall margin impact. The next 1/3 was around manufacturing variances and the last 1/3 was around E&O costs. As Michael pointed out, we started the Oxnard facility back in 2004. So we've been there for quite a long time. And we set a goal for ourselves of exiting that facility by the end of this calendar year. We'll be close to achieving that goal. But as you can imagine, as we've moved out a ton of that inventory, and we've either sold it through or we're moving it to other assembly facilities, there's added costs that have arisen. And those were somewhat of a surprise in terms of the magnitude. We expect that to dissipate over the next, say, 60 to 90 days once that facility is completely shut down. But we want to be mindful of that going into Q4.

So in Q4, we do expect that some of the manufacturing facility costs will continue. We do think that will mix up into Q4 and into Q1, which will result in us overall ticking up slightly from where we ended the third quarter here at 38%.

Tony, to add one other thing. This is a very, very minor factor, but it is a factor. And that is, Kurt mentioned earlier that we had instituted a tariff pass-through program for those products and those customers affected by the tariffs that went into effect on September 1. So our objective was not to turn that into a profit center to be fair and transparent with our customers and pass those through at close to 0 margin. So there was a very minor effect there, but not as substantial as these other factors that Kurt just described.

Got it. And then, Michael, if you wouldn't mind, and I'm not looking for guidance on gross margin, but do you think you can get back above the 40% level in either May or August quarters? I know you've said several quarters, I'm curious. And do you expect Caterpillar to be up sequentially? Clearly, they were one of the negative impacts on gross margins. Do you expect them to be up sequentially, February quarter?

Sure. So it relates to the gross margin guidance. We want to be pretty careful. We do expect gross margins to tick up from where we were in Q3. I don't think it's unreasonable to expect that by the midpoint of next year, we would be back to sort of where we were in recent history. And then as it relates to CAT, I think the outlook is good for Q4. And I would say, more or less, in line, could be a little bit higher, it could be a little bit lower, but it should be solid and consistent with where we were more or less in Q3 with somewhat of an improved margin profile given some of the cost reduction activities we have around some of these newly launched LTE products.

If I could sneak in just one more. You mentioned your Hertz Mexico engagement could amount to about $1 million. Is that primarily product revenue? Or is there some recurring revenue attached to that?

No, that's a bundled subscription arrangement.

Your next question comes from David Gearhart of First Analysis.

I wanted to start with a couple of housekeeping questions. Can you give us the subscriber count for fiscal Q3? And then also, can you give us the acquired revenue in the quarter?

Well, the second question is going to be hard to answer. The first one is easier. Our subscriber count was right at 1.3 million in Q3. And in our prior quarter, I think we talked about roughly 1.3 million subscribers as well. But that was a rounded figure. We were up sequentially right around 35,000 subscribers. And I think it's worth pointing out, it was spread almost across every single subscription category. And so that's a very encouraging, obviously, forward-looking opportunity for us in terms of revenue growth. As it relates to acquired revenue, it was certainly up sequentially. But I think it's worth pointing out that it's going to be increasingly difficult for us to be able to discriminate the sources of revenue from recent acquisitions and though the pre-existing subscription revenue streams that we had before we acquired Synovia Tracker and LoJack Mexico.

Yes. I would just add that we mentioned, too, in the previous quarters that the range we had for the quarter was $7 million to $13 million, I believe. We're -- as I mentioned in the last quarter, we're at and slightly above the high end of that range right now. And we would expect that rate to continue into the fourth quarter, especially as the purchase accounting adjustments are starting to dissipate.

And just given that comment with fiscal Q4 and on the Software and Subscription. You're at the high end of that $7 million to $13 million range. You have seasonality coming into play for fiscal Q4, LoJack Italy. Is it fair to consider it roughly flat from fiscal Q3? I know you're not guiding specific to that level of specificity, but I just wanted to double check that.

I think that's a reasonable outlook given the seasonality factors could have ground in.

Okay. And then lastly for me, on the Device as a Service program, wondering if you could provide us some color on the take rates and plans in the next coming quarters near-term for expanding that to other product lines as we should think of -- and how we should think about just the telematics systems revenue, offset from that dynamic or program?

Sure. Given that we really only have 1 full quarter under our belt and only 1 full quarter domestically under our belt, we're just now rolling that program out internationally. So it's really, really premature to give you statistics on take rates, much too early. As it relates to expanding that to other products. Obviously, we're looking at all of our options and opportunities there. But right now, there's no imminent plan to start to apply that sort of a program to additional SKUs in our portfolio. As it relates to impact on our telematics systems revenue, I would say the biggest impact that we've seen this year is around, obviously, the elimination of revenue and consolidation of some of our former key customers. And obviously, the soft quarter we had in Q2 with Caterpillar, but hopefully, that's all behind us. And I think going forward, considering the Device as a Service program and other factors, I think that the outlook is reasonably positive in terms of some level of growth, but not substantial given some of the factors in play. We do believe that the bulk of the 3G-to-LTE upgrade cycle is still in front of us. And as we've talked about on prior calls, there is a substantial number of CalAmp telematics devices in service that are 3G in nature. In the most recent quarter, I think we talked about around 1 million units. It turns out that, that estimate is a little bit low because not factored into that population are all of the legacy CDMA devices that are also in service, which are nearly 400,000. So there's an addressable upgrade opportunity there of something in the neighborhood of 1.4 million CalAmp units that are still in service with customers in the United States. So at some point in time, hopefully, that's going to become a pretty significant tailwind for us. But the timing of that is really uncertain.

Your next question comes from George Notter of Jefferies.

I guess I wanted to go back to the purchase accounting impact on deferred revenue and how that rebuilds going forward. Can you just walk us through the mechanics of that? I guess, are those 1-year contracts that as customers come back and renew post the close of the deal, then they start flowing through for you guys. I guess I'm trying to understand when the impact is kind of done and then how much incremental revenue you would pick up as that process plays out? And then separately, I wanted to ask about your NOLs and tax credits. I understand that some of the NOLs run off in 2021. Is that correct? And then what does the normalized tax rate look like once those NOLs are consumed?

Right. Okay. So first, let's start off with the purchase accounting. So the way that the purchase accounting works is that when we acquired the businesses, we had to take a haircut at that point in time. That was recorded on the opening balance sheet as an offset to the already recorded deferred revenue to essentially eliminate the gross margin or margin that was earned, let's say, prior to our acquisition date. That total adjustment then gets basically amortized over a period of time, which equates to the remaining weighted average useful life of the contracts that came over at the date of acquisition. So most of those may have a period of, say, anywhere from, I don't know, 16 to 18 months. But it varies between the 3 acquisitions. So we haven't given any specific guidance on the exact numbers because each acquisition is different.

What I can tell you is that looking at the 3 businesses, and in particular, the larger one and the largest revenue contributor, Synovia Solution, that purchase accounting adjustment will dissipate and be essentially gone by the first quarter of this upcoming new fiscal year, fiscal 2021. The others too, it might burn off over a little bit longer period of time. But generally, we should be at a very nominal rate going into the first to second quarter of next fiscal year. Those businesses, as I mentioned before, when we were -- we bought Synovia, it was somewhere in the range of $28 million, $29 million annual run rate. The two other acquisitions were anywhere from $11 million to $13 million, and we indicated that the growth rate on those would be for Synovia, the mid-teens. And for the other two, we thought mid- to high-single digits. So that should give you some visibility. We, again, haven't announced the exact adjustment, but we expect them to dissipate or be gone over the first 2 quarters of fiscal 2021.

George, I would add one other thing and that is, obviously, not only was there an impact as it relates to reported revenue. Obviously, there is a dilution of gross margin related to the reduction of revenue and then that flows through all the way to adjusted EBITDA. And based on our assessment and our fourth quarter guidance as it relates to adjusted EBITDA, we -- the purchase accounting adjustments, all of the required adjustments in GAAP accounting have more or less masked off somewhere between $4 million and $5 million of true adjusted EBITDA, which obviously, we can't report. So that gives you some idea of what the bottom-line impact would have been had we been able to bring the financials through with all the various accounting adjustments that were in place on the opening balance sheet.

And then to the second part of your question, George, yes, we do have NOLs. We've also instituted a number of tax planning strategies, which essentially ensure that our cash basis tax rate will remain relatively low out into beyond fiscal '22 and into '23. Obviously, it's heavily contingent upon whether we are a taxpaying entity, and that will dictate the speed at which those burn off. But currently, our cash basis tax rate is forecasted or in the range of somewhere between 3.5% to 5.5%, and we look like -- and it looks like that will be consistent through the remainder of this fiscal year. We did have a slight uptick in Q2 and Q3, mainly because when we purchased Mexico, Mexico does have cash tax obligations and the performance around the Mexico acquisition has been a bit better than we had anticipated, at least from a taxpaying standpoint. And so that's a favorable thing. But given our NOLs and our glide path around that as well as other tax planning strategies, we don't anticipate any major changes in our overall cash basis tax rate into fiscal '21 and '22.

(Operator Instructions) Your next question comes from Scott Searle of Roth Capital.

A couple of quick cleanups here. I'm not sure if I heard a Synovia number in the quarter. I was wondering if you could provide some color on that? And then given that we're getting through a majority of the impact on the purchase accounting for Tracker Mexico and Synovia, the normalized run rate now that we should expect from a growth standpoint within the services business, it'd, what, be mid- to low-teens kind of on a blended basis now as we're going forward?

Well, first, Scott, on your first question for Synovia. We haven't actually quoted the revenue contributions by acquisition. Again, what we had indicated is the combined 3 acquisitions were contributing at or slightly above the $13 million range for the past 2 quarters. So we were extremely pleased with that. Based upon, as I mentioned before, the annual run rate of, say, $28 million, $29 million for Synovia, $10 million to $12 million, $13 million for each of the other two, you can kind of guesstimate what the relative allocation is by acquisition. So I'll let you figure that out.

Your other question, in terms of ongoing service, I think, you meant SaaS run rate...

SaaS revenue growth in general. Yes.

Yes. I think our expectation is that the mid-teens seems to be reasonable based on what we're experiencing right now. And the overall contribution that these acquisitions are providing is giving us additional visibility on what that growth rate should be.

I would add -- I'm sorry, I would add, Scott, that, that growth rate, I would say, is a medium- to long-term expectation given the enterprise nature of some of these SaaS platforms, Synovia being a good example, it won't necessarily come in a linear fashion. But we're pretty optimistic that we can sustain the recent growth that we'd experienced with Synovia and some of these other SaaS revenue streams.

Got you. And then just to revisit the gross margin questions from earlier. It sounds like once we get through some of the manufacturing and other issues that you're experiencing, new product introductions, particularly on the LTE front. By the middle of next year, we're back to normalized gross margins in the 39 percentage-ish kind of range, Mike, is that what we should be thinking about? And also, as part of those assumptions, what have you factored in from a tariff standpoint? I know you said 15% kicked in on September 1. But is that part of those assumptions when you're talking about getting back to the normalized gross margins?

We didn't say 39. I mean last quarter, we were just over 40. So I would think that, that's a medium-term expectation for so-called normal gross margins. And then hopefully, expansion from there as some of the deferred revenue haircut dynamics burn off, and we continue to see growth in our Software and Subscription Service business broadly, which obviously has better than 40% gross margins.

The tariff reference you made of 15% was not the pass-through rate for the most part for the customers who bought products from us that were imported from China. Those customers who direct imported might have had to pay 15% on the purchase price. But because of the -- we pay a tariff based upon the import cost that's the effective rate that we passed through to our customers. And so obviously, the 15% applied to cost is not 15% pass-through to customers. It was quite a bit less than that. So therefore, the headwind wouldn't be as significant as that 15% headline might lead you to expect.

As I mentioned earlier, we expect that the tariff impact will start to dissipate. Even if the current rates stay into effect as we continue to transition more and more manufacturing activity away from our legacy suppliers in China.

(Operator Instructions) There is no further question at this time. I would now like to turn the call over back to Michael.

Well, thank you for joining our call today. Happy holidays, everyone, and we look forward to speaking with you after our fourth quarter year-end.

This concludes today's conference call. Thank you for participating. You may now disconnect.