CAMP4 Therapeutics Corp (CAMP) 2014 Q1 法說會逐字稿

Greetings and welcome to the CalAmp first quarter of fiscal 2014 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lasse Glassen. Thank you, sir, you may begin.

Thank you, operator. Good afternoon and welcome to CalAmp's fiscal 2014 first quarter results conference call. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek, and Chief Financial Officer, Rick Vitelle. Before I turn the call over to management, please remember that our prepared remarks and responses to questions may contain forward-looking statements. Words such as "may," "will," "expect," "intend," "plan," "believe," "seek," "could," "estimate," "judgment," "targeting," "should," "anticipate," "goal," and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those implied by such forward-looking statements due to a variety of factors, including product demand, competitive pressures and pricing declines on the Company's wireless and satellite markets, the timing of customer approvals of new product designs, intellectual property infringement claims, interruption or failure of our Internet-based systems used to wirelessly configure and communicate with tracking and monitoring devices that we sell, integration issues that may arise in connection with the Wireless Matrix acquisition, customer response to this acquisition, and other risks and uncertainties that are described in the Company's annual report on form 10-K for fiscal 2013 as filed on April 25, 2013, with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The Company undertakes no obligation to update any forward-looking statement whether as a result of new information, future events, or otherwise. With that, it is now my pleasure to turn the call over to CalAmp's President and CEO, Michael Burdiek.

Thank you, Laase. Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2014 first quarter results. I will begin today's call with a review of our financial and operational highlights. Rick Vitelle will provide additional details about our financial results, and I will wrap up with our business outlook and guidance for the fiscal 2014 second quarter. This will be followed by a question-and-answer session.

Overall, we are off to a strong start in fiscal 2014. In the first quarter, our Wireless DataCom segment revenue increased 29% year-over-year driven by continued momentum from our mobile resource management or MRM products business and contribution from our Wireless Matrix acquisition that was completed in the first week of the quarter. In fact, MRM product revenues were at an all-time high for a single quarter and MRM product bookings during the quarter were the strongest in history. As a result, revenue growth in these areas more than offset the lull that we experienced at rail shipments along with slow government sales. Our Wireless DataCom segment gross margin improved to 39.1% due mainly to higher margin application subscription revenue from the Wireless Matrix acquisition. And rapid progress on the integration front during the first quarter resulted in lower than expected operating expenses from the acquired operations of Wireless Matrix.

In our satellite segment, we saw improving margins along with some growth resulting in a meaningful impact to the bottom-line results. On a consolidated basis, revenue for the first quarter was $53.7 million, up 22.5% compared to the first quarter last year, with Wireless DataCom revenue increasing 29% to $40.9 million and satellite revenue up 6% to $12.9 million. At the bottom line, we earned $0.05 per diluted share on a GAAP basis and $0.16 per diluted share on a non-GAAP basis, just above our non-GAAP guidance range for the quarter. Cash flow provided by operating activities was $5.8 million, and we ended the quarter with a cash balance of $24.5 million.

Now I would like to review our operational highlights for the quarter. The Wireless DataCom segment posted record revenue results in the first quarter with MRM products accounting for approximately 55% of total Wireless DataCom revenue and wireless network products and services, which included contribution from the Wireless Matrix acquisition, accounting for the remaining 45%. Consistent with what we've seen in recent quarters, we are continuing to experience very strong customer demand for our MRM products in the fleet management, asset tracking, stolen vehicle recovery, and vehicle finance verticals. Notably, the investments we have made to grow our international presence continued to bear fruit. We are now seeing meaningful growth with key customers in Latin America, Europe, and South Africa, as well as significant recent orders for stolen vehicle recovery products in Brazil, that should drive growth in our second quarter.

On the usage-based insurance front, we continue to actively support a handful of customers who are in the early stages of launching their insurance telematics offerings. We believe our products are competitively positioned, both in terms of functionality and price, and we now expect meaningful revenue from insurance carriers in the second half of the year. As we mature our technology and as our customers validate their business models, revenue from insurance-based applications could become a significant growth driver for CalAmp well into the future. We continue to focus our investments on unique technologies to give CalAmp sources of competitive advantage in the developing MTM space. We are increasing our R&D investments in such areas as usage-based insurance to maintain technology leadership and are protecting our innovations through patents when possible. As an example, this month we were awarded a patent involving a wireless detection of ignition status to enable simpler device installations, an invention that has applicability across a range of mobile telematics applications. This is one of many technology innovations that CalAmp has developed and will roll out in various MRM products in the coming quarters.

Turning to our wireless networks business, first quarter revenues were at an all-time high based on contribution from our Wireless Matrix acquisition. Recurring revenues represented close to 18% of consolidated revenues, and at the end of our first quarter, we had 395,000 unique software application subscribers that provide an ongoing recurring revenue stream for our Wireless DataCom segment. The integration of our Wireless Matrix acquisition has been progressing ahead of plan resulting in better-than-expected first quarter bottom-line contribution. We are on track to hit our accretion and incremental EBITDA targets for this acquisition and continue to believe it will accelerate our growth prospects and strengthen our competitive position within key verticals in the coming quarters and years.

In our energy vertical, we started to execute against our contract win with Pepco Holdings, one of the mid-Atlantic region's largest energy delivery companies. In addition, during the quarter we generated initial revenues with a new OEM customer in the commercial solar power industry that represents an alternative energy market expansion opportunity for our wireless networks business. In our rail vertical we experienced expected lull in demand for Positive Train Control or PTC [radias]. Also revenues in our government vertical were weaker than expected due to some lingering uncertainty around the first net LTE deployment rule-making and interoperability compliance processes. That said, we continue to believe that the longer-term opportunities for both PTC in our public safety products are unchanged and that we are well-positioned with our offerings in these verticals when the market develops.

In the heavy equipment sector, we continue to make progress on our development agreement with Caterpillar, the world's largest heavy equipment manufacturer, with cellular-based and satellite-based mobile telematics devices. We continue to believe that this important customer could drive meaningful revenue growth in the coming years although the timing of any production ramp is unclear. The heavy equipment sector represents a tremendous market expansion opportunity for CalAmp in a sector that we are better prepared to pursue as we further integrate and leverage the asset tracking and fleet management application expertise that we acquired with Wireless Matrix. We are investing in business development initiatives both directly and through carrier partnerships, to identify future growth opportunities in this important market segment. Overall, we are pleased with the strategic direction of our wireless networks business and its potential for growth with multinational enterprise customers where we can leverage CalAmp's unique portfolio of hardware, software, and service content.

Turning to our satellite segment, revenue in the first quarter was $12.9 million, up 9% sequentially and nearly 6% year-over-year. The first quarter gross margin of 19.6% reflects a 370 point -- basis point improvement year-over-year primarily due to a product mix favoring higher-margin home networking equipment. We expect that our satellite business will continue to generate gross margins in the mid to high teens and contribute meaningfully to our profitability going forward. With that, I will now to the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at our first quarter financial results.

Thank you, Michael. I will provide a summary of our gross profit performance, income tax position, working capital management, and cash flow results for the fiscal 2014 first quarter. Consolidated gross profit for the fiscal 2014 first quarter was $18.5 million, an increase of $4.8 million over the same quarter last year, predominantly as a result of higher revenue in the Wireless DataCom segment. Consolidated gross margin was 34.4% in the latest quarter compared to 31.2% in the first quarter of last year. The increase in the consolidated gross margin percentage primarily reflects the higher proportion of total revenues represented by the Wireless DataCom segment in fiscal 2013 versus the prior year, including the contributions from our Wireless Matrix acquisition.

Looking more closely at gross profit performance by reporting segment, Wireless DataCom gross profit was $16 million in the first quarter with a gross margin of 39.1%. The year-over-year Wireless DataCom gross profit was up by $4.2 million, while gross margin improved by approximately 2 percentage points, primarily due to the shift in revenue mix towards higher margin subscription-based revenues associated with the Wireless Matrix acquisition. Our satellite business had a gross profit of $2.5 million in the first quarter with a gross margin of 19.6%. This compares to gross profit of $1.9 million and gross margin of 15.8% in the first quarter of last year. These year-over-year profitability improvements in our satellite business are primarily due to a shift in product mix.

Next, looking at bottom-line results, GAAP basis net income for the fiscal 2014 first quarter was $1.7 million or $0.05 per diluted share compared to net income of $4.2 million or $0.14 per diluted share in the first quarter last year. The lower GAAP net income is due in part to the elimination of substantially all of the Company's deferred income tax asset valuation allowance at the end of fiscal 2013, which caused GAAP basis income tax expense to revert to a level that reflects full statutory tax rates beginning in the first quarter of fiscal 2014. Despite this, on a cash basis, the Company's pretax income is still largely sheltered from taxation by net operating loss carry forwards and is expected to remain so for the next few years.

Our non-GAAP net income for the fiscal 2014 first quarter was $5.6 million or $0.16 per diluted share compared to non-GAAP net income of $5.3 million or $0.18 per diluted share for the same period last year. Non-GAAP earnings excludes the impact of intangibles, amortization, stock-based compensation expense, as well as acquisition-related expenses of $640,000 for the first quarter, and includes an income tax provision of $32,000 for cash taxes paid for the first quarter. For a reconciliation of GAAP and non-GAAP financial results, please see our first quarter earnings release that was issued today, which is available on our website.

Now, moving on to the balance sheet, at the end of the fiscal 2014 first quarter, the Company had cash and equivalents of $24.5 million. Operating cash flow was strong in the latest quarter at $5.8 million. Our total outstanding debt at the end of the first quarter was $7.5 million, comprised of $4.8 million under our bank term loan and the $2.7 million carrying value of the non-interest-bearing note payable issued in May 2012 as part of the purchase consideration for the Navman Wireless asset purchase. The Navman note payable, which had an original face amount of $4 million, is payable in the form of sales price rebates as sales are made to Navman under the five-year $25 million supply agreement.

Our total inventory at the end of the first quarter was $12.4 million, representing annualized inventory turns of approximately 11 times. At the end of the immediately preceding quarter, inventory was $13.5 million, which represented annualized inventory turns of 10 times. The consolidated accounts receivable balance was $25.5 million at the end of the first quarter. This represents an average collection period of 42 days, which compares to our receivables collection rate of 38 days during the previous quarter. With that, I'll now turn the call back over to Michael for our guidance and some final comments.

Thank you, Rick. Now let's turn to our financial guidance. Based on our latest projections, we expect fiscal 2014 second quarter consolidated revenue in the range of $53 million to $57 million. We anticipate that Wireless DataCom revenue in the second quarter will be up moderately on a sequential quarter basis and up significantly year-over-year. We expect satellite second quarter revenues to be down slightly on a sequential basis but up year-over-year. At the bottom line, we expect second quarter GAAP basis net income in the range of $0.04 to $0.08 per diluted share and non-GAAP net income in the range of $0.14 to $0.18 per diluted share. We continue to expect that the second half of fiscal 2014 will be stronger than the first half of the year as several previously announced opportunities begin ramping and expense reductions associated with Wireless Matrix integration take hold.

In closing, I'd like to recap some key points. First, our MRM products business is showing continued strength with the potential for accelerated growth based on recent bookings activity. We are pleased with the progress we are making on the international front and are now keenly focused on successful deployments of our usage-based insurance products through the rest of the year. Second, the execution of our Wireless Matrix integration has been ahead of plan, resulting in better-than-expected first quarter bottom-line contribution. With most of the integration risk behind us, our focus is shifting towards growing the opportunity pipeline and setting the stage for revenue growth in fiscal 2015. Third, emerging opportunities for our products in the energy usage-based insurance and heavy equipment sectors, as well as expansion of our international footprint, position CalAmp for solid revenue and earnings growth in the second half of fiscal 2014. And finally, we believe our unique hardware, software, and service portfolio, supported by established channel partnerships with global reach, has given us the leverage to win an increasing share of the MTM market opportunities as they emerge.

That concludes our prepared remarks. Thank you for your attention. And at this time, I'd like to open the call up for questions. Operator?

Thank you.

(Operator Instructions) Mike Walkley with Canaccord Genuity

Great, thank you. Michael, congratulations to your team on the Wireless Matrix integration and cost reductions ahead of plan. My question to focus on is just on the strong bookings and the second half visibility. Can you walk through some of the areas that you're seeing the strong visibility and how do you view the usage-based insurance market, given its potentially large consumer market? Is that a area you are seeing strong bookings already or how should we think about that opportunity in particular?

Thanks, Mike. Well, we've seen very strong bookings over the last quarter and over the last few weeks. In fact for MRM products in Latin America generally and in Brazil specifically. So I think in terms of near-term impact on revenues, certainly that bookings activity is probably going to have more an effect on driving revenues into the second quarter than I would say insurance would. However, we have built a little bit of insurance telematics backlog. And we expect to see some insurance-related revenue mostly from Europe sometime later in the second quarter but probably building through the second half of the year. I mentioned Brazil being strong in the second quarter, the prospects in Brazil are actually quite good also for the balance of the year, but we expect that insurance in the second half of the year would probably be the stronger driver of growth in our MRM products business.

Outside of that, it's the same stated growth initiatives that we expect to have some impact in the second half, more importantly in the coming year that relates to the Pepco Holdings smart grid project. Obviously the hope that we'll build some PTC backlog and actually see some PTC revenue in the second half of the year. And also Cat, maybe not so much this fiscal year but certainly next fiscal year, could be a strong driver of growth. In terms of backlog, there is very little on the Cat front yet outside of what we're doing on the development project. We have booked a little bit of additional project business with Pepco this last quarter and we expect that to contribute in the second half. And we have built a little bit of PTC backlog, about $2.5 million, that we expect to ship in the second half year. So those are some of the highlights.

Okay, great. And then just in terms of, say, a Caterpillar deal, that is one that is more into the fiscal 2014 timeframe, is that right? Just trying to categorize the growth opportunities.

You mean fiscal 2015?

Yes, thanks for the clarification.

Yes, fiscal 2015 we would expect that to be more of an impactful event than it will be at any point during this fiscal year.

Great. And then just on the Brazil strength, just so I understand is that -- that is just overall MRM your current solutions or is this usage-based insurance the backlog there?

That backlog is mostly stolen vehicle recovery related similar to the other business we've had across Latin America over the last year or so. About a year ago, we made some direct sales and marketing investments in Brazil and we didn't -- we expect that to be a long-term project. But it appears to be bearing fruit sooner than we expected it to. And obviously, Brazil is a big economy. And safety and security are big issues in that economy and amongst the growing middle-class population. And so there appears to be a significant amount of demand for after market products, telematics products and a stolen vehicle recovery solutions in particular.

Okay, great. Have you seen any regulatory environment requiring some of these emerging economies to have more of a stolen vehicle recovery type thing in their cars because that seems to be another potential driver in some of these emerging economies. (Indiscernible; multiple speakers)

Yes, in Brazil, there has been some legislation that has been debated and bantered about over the last few years. And it appears that it may be coming closer to becoming an actual regulation in that country. But I don't believe that's necessarily driving our near-term demand there. I think that could sustain demand over the longer term but for the moment that's not a big influencing factor.

Okay, great. Just maybe a question for Rick or -- on the gross margin by your key division, do you expect those type of trends to be stable or satellites -- just an unusual mix this quarter and that is why it was above -- at the very high-end of your range and for the large division would -- is that 39% what you expect now that you have Wireless Matrix incorporated or how could that go up or down going forward?

Hi, Mike. Yes, we think both of those gross margin results in the latest quarter are fairly representative of the -- our outlook for the next few quarters at least. I think we've stated for a while now that we expect to get back up to around the 40% level on the addition of the Wireless Matrix business. And we got fairly close in the latest quarter.

And the Wireless DataCom.

Yes, right.

That make sense. Okay. One last question for me and then I'll pass it on. As you look at just your overall -- some of these different growth opportunities in PTC was that down this quarter from last quarter, but you're starting to see some bookings so that starts to grow again in the second half of the year? Is that how we should think about that?

Oh, it was definitely down as compared to Q4 by almost $3 million in fact. Our PTC revenue in Q1 was about $0.5 million. When we talked on the last earnings call, I think we projected we would be in the few hundred thousands of dollars of revenue in Q1 and that that outlook could be similar to our Q2. That outlook hasn't changed.

Okay.

So our existing PTC backlog we think will ship mostly in the second half of the year and obviously we are hopeful that we can book some additional business, but I think it is important to remember that that PTC production business, at least in the early days, is fairly low margin, in fact, in the lower end -- lowest end of the margin range for all of our Wireless DataCom businesses.

And just as a reminder, what was the quarterly run rate when the businesses was at its peak in the trial stage?

Well, on the -- during the development project, the peak was actually Q1 last year where we were close to I think $4.6 million. Not only was that the peak in terms of revenue, it was also by far the peak in terms of marginal gross profit contribution. That was very profitable business. The production business is considerably lower gross margin.

Okay. Do you think you can reach those type of quarterly levels once it goes commercial -- the whole rollout? Is that something you can see in long-term visibility as a potential outcome?

Well, things are developing slowly. We would hope to get to that level of quarterly revenue run rate in terms of PTC radio shipments. But we are nowhere close to that right now both in terms of backlog or in terms necessarily what we have in the pipeline.

Okay, thanks. Congrats on the strong results and the international growth such as Brazil and I'll pass it on to Q&A.

Thank you.

Mike Crawford, B. Riley & Co.

Thank you. I think you gave the MRM units track at did you say 395,000, did you also give a PULSE units in service?

No, we did not. But it's obviously an unofficial number, but approximately 2.3 million units installed and active with customers in various applications.

Okay, thanks, Michael. That has been growing pretty consistently a couple hundred thousand a quarter.

Yes, it has, but that could actually accelerate with some of these initiatives related to insurance and also what we have developing in Brazil.

Right, so with your new location monitoring unit that you are showing at CTIA, that's good for the telematics applications. I think at the time you indicated you expected to start shipping to your insurance customers in July and you also -- did I hear that you actually started booking some -- taking some bookings for UBI telematics for European customers already?

Not only for European customers, but also for domestic customers. However, the European opportunity is likely to ramp faster.

Okay. And I think the adjective you described was meaningful in terms of insurance revenue for the second half of the year. So can you put any numbers closer to what meaningful means?

Well, on our last earnings call I believe I mentioned meaningful being sort of a few million dollars a quarter in terms of incremental growth opportunity. I would think that's achievable.

Okay. Great. And then on the heavy equipment side, what -- how would you describe the progress with Caterpillar? I think you said that you haven't had a lot of bookings yet with them and we know that is something that is probably going to kick in more next year. But what is happening between now and the end of the year to get that business moving forward?

Well, basically we are chugging along on the development contract. We are in phase two of that development program and as you might recall there are two products that we are designing, one is the cellular-based telematics product and that other is a satellite communications-based telematics product. And these two products have applicability across a broad range of their various product platforms. And Caterpillar has a very deliberate and very rigorous product qualification and development gate process. I'm pleased to say that we are meeting the various product development milestones pretty much on schedule. And things are going according to plan. So in that sense, things are going exceedingly well.

Okay, great, thank you. And final question is on the satellite side, I believe that Caterpillar has chosen Iridium to be its satellite data provider though for your own telematics applications, I'm not sure if that network has enough of a data rate to support the type of traffic that you intend to carry -- convey back for your customers. Is Iridium -- something like Iridium good enough for you or what are you looking for in a satellite provider?

First of all, let me comment with a "no comment" on Caterpillar's satellite service provider selection for future products.

Okay.

But in terms of the various satellite service providers we work for -- work with, it depends on the application, but we work with multiple different satellite service providers.

Okay.

Including Iridium.

Okay. Great, thank you. And final question is I'm not -- I don't think you give these, but do you give a -- I don't think -- you talk about strong bookings and the nice backlog but I don't think you give those actual numbers, booking to backlog numbers?

No, we don't.

Okay. And you don't want to start now. Okay, thank you very much.

You are welcome, thank you.

Mike Latimore, Northland Capital Markets.

Great, thanks, nice quarter there.

Thank you.

On the stolen vehicle recovery opportunity in Brazil, can you talk just a little bit more about that? What's giving you confidence in that near-term opportunity? Are there multiple customers there? Is it through a channel? Just a little more detail would be interesting.

Boy, a number of questions. Let me start with that channel question first. The answer is, yes, we are working through channel partners to supply to multiple different application service providers, targeting not only stolen vehicle recovery but also fleet management. It just so happens that stolen vehicle recovery represents (A) the bulk of our backlog and (B) probably the largest serviceable market for us in Brazil. Fleet is still somewhat of a budding application opportunity for us there. In terms of confidence it is as expressed in our backlog.

And what was the catalyst for this uptick in this particular area?

Well, again those investments we made in sales and marketing resource in country and also the channel partnerships that we've developed and they have been very, very fruitful.

Okay. Great. And then what percent of revenue was international during this past quarter?

I don't know the exact percentage but it was down from Q4 and one main reason for it to be down as a percentage of revenue is that Wireless Matrix obviously contributed to the revenue mix in Q1 and the bulk of their revenue is in the United States. Rick is indicating that we were in the mid teens.

And on Pepco, does Pepco seem to be proceeding a little bit better than you were expecting at the start of the year or is it basically on track?

On track.

On track. Okay. Got it. Great. Thank you.

You're welcome.

Jason Schmidt, Craig-Hallum.

Hi, guys. Thanks for taking my questions and congrats on the quarter and the guide. Most of my questions have been answered but really quickly wondering if you wouldn't mind giving the contribution to revenue from Wireless Matrix in this past quarter?

We have mentioned that our expectation for the full year was around $25 million of revenue and we basically track to that run rate in Q1.

Okay, and then just a clarification. The expectation for growth in the usage-based insurance, was that the second half of this calendar year or is the second half of this fiscal year?

Both.

Oh, okay. And then finally if we look out to fiscal 2014, fiscal 2015, what kind of revenue mix do you expect between the two segments? Would you expect it to be fairly consistent with where it is now?

You mean the two businesses within Wireless DataCom or the two reported segments?

Wireless DataCom versus satellite.

Okay, well, we have stated many, many times that we expect satellite to essentially be a flat business--$10 million plus or minus a couple million on a quarterly run rate. So that would suggest that as Wireless DataCom grows, satellite will be a smaller percentage of consolidated revenues.

All right, thanks, guys.

Raymond Rund, Shaker investments.

Thank you. Can you comment on what your operating model going forward will be. I'm curious as to how much expense in terms of as a percent of sales your Wireless Matrix added and also how much amortization we should expect on an ongoing quarterly basis?

Well, sales and marketing -- incremental sales and marketing expense from Wireless Matrix is a bit of a moving target because we actually will have more in Q1 that we will probably have in any of the other quarters during the fiscal year as we continue to rationalize our OpEx structure there. But in terms of amortization, Wireless Matrix is contributing about $1.2 million a quarter and I think our expectation is for total amortization expense to be around $1.5 million per quarter for the balance of the year.

Okay. Thank you very much.

You are welcome.

Thank you.

(Operator Instructions)

Shai Dardashti, Dardashti Capital Management.

Hello, Michael. I'd like to please follow up on the March 21 press release announcing the LMU3030 release?

Yes.

I'm curious what is appropriate to read into in terms of the timing or the scale of the insurance opportunity based on this public release?

I'm sorry, I couldn't understand about the--

I'm curious if this release suggests that the scale is now larger or the timing is more imminent?

The scale -- the outlook for scale is really no different, but I think that release is indicative of the timing of the opportunity.

Okay. And then you mentioned there are 2.3 million devices on the MRM network. Is it appropriate to assume that all of these devices are on the COLT platform?

No, no. So the application subscribers which we reported at the end of Q1 to be 395,000, those are the subscribers that we manage directly with our device bundled with network services and application software. Those subscribers are on COLT. The other -- the 2.3 million devices in service with various customers are on their own back-end software platforms but they're supported by our PULSE platform, which is a device management system.

So there is two separate technologies, there's COLT and there's PULSE. Is that correct?

That is correct.

And if you describe CalAmp in 2011 and you describe CalAmp in 2013, what is the current vision of the Company and how does that compare to the vision of two years ago?

I think it is safe to say that two years ago, at least from the outside looking in, CalAmp appeared to be purely a hardware company, potentially on a path towards commoditization on a cycle that had been followed multiple times by the Company in its history. That obviously has not been the case and as we've been saying for easily the last two years, our objective is to continue to grow the Company leveraging all of our core competencies and technical resources to build core value atop our hardware platform in a range of different applications, MRM- and MTM-related, for customers around the world. And so we anticipate that going forward certainly there will be a software content layer, there will be platform service layers and device layers in terms of our solutions offered to various customers in our core vertical.

And is there -- I'm trying to understand what COLT becomes over time? Is it an operating system? Is it an ecosystem? I'm trying to figure out network effects and barriers to scale -- barriers to entry.

Not an operating system, ideally, a core element in an ecosystem.

Okay, and how many people or how many units are on this ecosystem then? That would be in the -- that would be below 2.3 obviously.

Well below 2.3. 395,000 subscribers on our existing COLT platform but also the fleet outlet platform which is being migrated over to COLT over the next few quarters.

And the COLT architecture can handle much more scalability, is that correct?

That is correct.

Okay, thank you very much.

You are welcome.

Mike Walkley, Canaccord Genuity.

Great, thanks. Just a quick question on modeling with still taking out some cost in the Wireless Matrix side but investing for growth, does your guidance imply maybe flattish OpEx or does it come down sequentially again just off the current levels?

It could come off modestly off the current quarter.

Okay. That's helpful. But overall you should start seeing leverage on OpEx as a percent of sales in the back half of the year, is that the way to think about the business model?

I think that's a fair assessment.

Okay, great. That's it. That was my follow-up question. Thank you.

Great, thanks, Mike.

Thank you. There are no further questions this time. I would like to turn the call back over to management for closing comments.

Well, thank you, everyone. Thanks for joining us today. CalAmp will be holding its annual meeting of shareholders next month on July 25 in Westlake Village, California. After that we will be on the road presenting at the Southern California investor conference on August 8 in Newport Beach, California. In addition to that conference we will be presenting at the Oppenheimer tech conference on October 14 and the Canaccord conference on August 15, both of which are in Boston. We hope to see you at one of these venues and we also look for to speaking to you at the end of next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.