CAMP4 Therapeutics Corp (CAMP) 2014 Q3 法說會逐字稿

Greetings and welcome to the CalAmp third-quarter fiscal 2014 results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Lasse Glassen of Addo Communications. Thank you, Mr. Glassen. You may begin.

Thank you, operator. Good afternoon and welcome to CalAmp's fiscal 2014 third-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 response 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 in the Company's wireless and satellite markets, the timing of customer approvals and new product designs, intellectual property infringement claims, interruption or failure of our Internet-based systems to wirelessly configure and communicate with the tracking and monitoring devices that we sell, 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.

Michael Burdiek will begin today's call with a review of the Company's financial and operational highlights. Rick Vitelle will then provide additional details about the Company's financial results, and Michael will then wrap up with CalAmp's business outlook and guidance for the fiscal 2014 fourth quarter. This will be followed by a question-and-answer session.

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

Thank you, Lasse, and good afternoon everyone. Thank you for joining us today to discuss CalAmp's fiscal 2014 third-quarter results.

CalAmp's Wireless Datacom segment is on track for a very strong second half of fiscal 2014. During the third quarter, Wireless Datacom segment revenue increased 37% year-over-year. In addition, Satellite segment revenue improved 72%, compared to the third quarter last year.

On a consolidated basis, revenue for the third quarter was $63.5 million, up 43%, compared to the third quarter last year. At the bottom line, we earned $0.12 per diluted share on a GAAP basis, and $0.23 per diluted share on a non-GAAP basis. Cash flow provided by operating activities in the third quarter was $5.6 million, and we ended the quarter with a cash balance of more than $31 million, and, for the first time in over 20 years, no bank debt.

Within the Wireless Datacom segment, our Mobile Resource Management, or MRM, products continued to experience strong demand from our fleet management and asset tracking customers. Meaningful contributions from the emerging auto insurance telematics vertical also helped drive growth in the third quarter.

Our Wireless Networks business, which comprises the remainder of our Wireless Datacom segment, benefited from strength in the energy markets. In addition, solid revenue growth and improving margins in our Satellite segment helped further expand CalAmp's overall cash flow and bottom line profitability. Our growing cash balance allowed us to pay off our bank term loan during the third quarter.

Now, I would like to review our operational highlights for the quarter. The Wireless Datacom segment posted record revenues in the third quarter, with MRM products accounting for more than 60% of total Wireless Datacom revenue, and Wireless Networks products and services accounting for nearly 40%. Similar to recent quarters, we are continuing to experience very strong customer demand for our MRM products, particularly within our core verticals.

Fleet Management, which continues to be the largest application within MRM, along with asset tracking, stolen vehicle recovery, and the vehicle finance verticals, are all growing at a healthy rate. We continue to be optimistic about insurance telematics as a future growth driver of MRM products business, and we are seeing encouraging signs as we continue to actively support a handful of customers who are in the early stages of launching their insurance telematics-based insurance offerings.

Our third quarter results included first meaningful quarterly revenue contributions from insurance telematics products, and we expect revenue in this vertical to continue to ramp in the fourth quarter, and beyond. We believe our products are competitively positioned, both in terms of functionality and price, and we are closely monitoring this developing ecosystem, so that we can rapidly respond to opportunities to provide value beyond just the hardware component. As our technology matures, and our customers validate their business models, revenue from insurance telematic applications could become a significant growth catalyst for CalAmp in the coming years.

Moving to our Wireless Networks business, third-quarter revenues remained relatively flat on a sequential basis, with strength in the energy and automotive segments offset by continued softness in our government and transportation sectors. We continue to be quite pleased with our performance in the energy vertical, where in the third quarter, we benefited from our execution of previously-announced contract wins, as well as contributions from an OEM customer in the commercial solar power industry. We expect business with the solar OEM to remain strong in the fourth quarter.

In the heavy equipment sector, our development activities with Caterpillar for cellular and satellite-based mobile telematics devices remains on track. We are now moving from a design phase to a production phase for Caterpillar, to provide hardware and specialized embedded software that enables the collection, transmission, and analysis of critical vehicle data.

This information will be used to notify Caterpillar equipment users to maintenance issues and service requirements, and to provide the Caterpillar engineering team with vital performance information to aid in new product development. We continue to believe that this important customer could drive meaningful revenue growth for CalAmp starting in the second half of calendar 2014. The heavy equipment sector represents an attractive market expansion opportunity for us, and we are investing in a number of business development initiatives, both directly and with other global heavy equipment OEMs, and through cellular carrier partnerships, to pursue future global growth and opportunities in this important market segment.

On the software services front, during the third quarter, recurring revenues represented 15% of the consolidated revenue, similar to last quarter. At the end of the third quarter, we had approximately 420,000 unique software application subscribers, contributing to an ongoing recurring revenue stream for our Wireless Datacom segment. This is up from 405,000 subscribers at the end of the second quarter.

During the third quarter, we saw steady subscriber growth from small and medium business fleet customers. In addition, the pipeline of new opportunities for fleet and asset management enterprise solutions expanded, as we exited the third quarter and we anticipate new customer wins will support meaningful subscriber growth in the coming quarters.

In other market verticals, demand from our government customers remained weak in the third quarter. One bright spot was a partnership we announced with General Dynamics broadband, to provide customized versions of CalAmp's high-performance multi-carrier broadband routers for use with GD Broadband LTE communication systems, supporting mission-critical public safety, defense, and industrial applications worldwide.

In addition, we expect that the recently-announced RSI acquisition, which I will discuss in more detail in a minute, will nicely augment our existing public safety business with municipal government customers, and expand our reach within this sector. In the rail market, we continue to experience weak demand for PTC radios, although we expect some uptick in shipments in our fourth quarter. We continue to be actively engaged with customers and partners in these markets, and we're becoming somewhat more optimistic that we will see some PTC backlog grow, as we exit this fiscal year.

Turning to our satellite segment, revenue in the third quarter was $13.8 million, up 72% year-over-year. Third-quarter gross margin of [20.6%], compared to 17.7% in the year-ago period, reflects a substantial improvement year-over-year, primarily due to a product mix favoring higher-margin home networking equipment. Going forward, we continue to expect that our satellite business will generate gross margins in the mid to high teens, and contribute meaningfully to our operating cash flow and bottom line profitability.

Before turning the call over to Rick, I'd like to address two events that occurred after the end of our third quarter. Last week, we announced the acquisition of Radio Satellite Integrators, or RSI, a privately-held provider of mobile workforce management solutions, primarily to municipal government agencies, supporting applications such as public works, waste management, transit and public safety.

This transaction improves CalAmp's competitive position and growth prospects in the state and local government market, by augmenting CalAmp's current range of public safety solutions. Importantly, RSI's SaaS-based high-margin revenue is expected to be accretive to CalAmp's overall margins and non-GAAP earnings per share for our coming fiscal year.

The integration of RSI's operations is underway, and we should be substantially complete by the end of our current fiscal year. We look forward to building on their stable base of municipal customers, and expanding our range of integrated and innovative hardware and software solutions targeting unique applications in this important market.

In addition, this morning, we announced the appointment of Amal Johnson to our Board of Directors. Amal brings significant experience in application software, cloud computing, and hosted services, from the perspective of both an executive and a venture capital investor.

We believe that Amal will bring a unique perspective to our ongoing evolution and transformation as a leading provider of higher-margin integrated hardware and software solutions, for a broadening array of M2M applications. We welcome Amal to the Board, and look forward to drawing on her wealth of experience going forward. With that, I will now turn the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at our third-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 third quarter.

Consolidated gross profit for the fiscal 2014 third quarter was $21.0 million, an increase of $7.0 million over the same quarter last year, primarily as a result of higher revenue in the Wireless Datacom segment. Consolidated gross margin improved to 33.1% in the latest quarter, compared to 31.6% in the third quarter of last year, due primarily to the contribution of the higher-margin SaaS revenue from the Wireless Matrix acquisition, and margin improvement in the Satellite segment.

Looking more closely at gross profit performance by reporting segment, Wireless Datacom gross profit was $18.2 million in the third quarter, with a gross margin of 36.5%. Year-over-year, Wireless Datacom gross profit was up by $5.5 million, while gross margin improved by nearly 2 points, primarily due to the shift in revenue mix towards higher-margin subscription-based revenues. However, on a sequential quarter basis, Wireless Datacom gross margin declined from 37.2% in the second quarter, primarily as a result of product mix changes.

Our Satellite business had a gross profit of $2.8 million in the third quarter, with a gross margin of 20.6%. This compares to gross profit of $1.4 million, and gross margin of 17.7%, in the third quarter of last year. These year-over-year profitability improvements in our Satellite business are primarily due to higher revenues, along with a shift in product mix in favor of more home networking products.

Next, looking at bottom line results, GAAP basis net income for the fiscal 2014 third quarter was $4.2 million, or $0.12 per diluted share, compared to net income of $4.2 million, or $0.14 per diluted share in the third quarter of last year. The lower year-over-year GAAP basis earnings per share is due in part to the elimination of substantially all the Company's deferred income tax asset valuation allowance at the end of fiscal 2013, which caused the Company's effective income tax rate to revert to a level that is much closer to full statutory tax rates, beginning in fiscal 2014. Despite this, on a cash basis, the Company's pretax income is still largely sheltered from taxation by NOL carry-forwards, and is expected to remain so for about the next two years.

Our non-GAAP net income for the fiscal 2014 third quarter was $8.2 million, or $0.23 per diluted share, compared to non-GAAP net income of $5.3 million, or $0.17 per diluted share, for the same quarter last year. Non-GAAP earnings exclude the impact of intangibles, amortization, and stock-based compensation expense, and includes an income tax provision for cash taxes paid or payable for the period. For a reconciliation of the GAAP and non-GAAP financial results, please see our third-quarter earnings press 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 third quarter, the Company had cash and equivalents of $31.1 million. Operating cash flow was solid in the latest quarter, at $5.6 million.

Our total outstanding debt at the end of the third quarter was $2.4 million, which represents the carrying value of the non-interest bearing note payable issued in May 2012, as part of the purchase consideration for the product line acquired from Navman Wireless. This note payable is paid in the form of price rebates, as sales are made to Navman, under the five-year, $25 million supply agreement that was entered into, concurrent with the Navman product line acquisition.

As Michael mentioned a few minutes ago, our continuing strong cash flow enabled us to pay off our bank term loan during the third quarter. Our total inventory at the end of the third quarter was $12.5 million, representing annualized inventory turns of approximately 13 times. At the end of the immediately-preceding quarter, inventory was $14.2 million, which represented annualized inventory turns of 11 times.

The consolidated accounts receivable balance was $30.1 million at the end of the third quarter. This represents an average collection period of 43 days, compared to the receivable collection rate of 41 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 current forecast, we anticipate that Wireless Datacom fourth-quarter revenue will increase solidly on a sequential basis, driven by continued demand in our core market verticals, growing insurance telematics revenue, and contribution from RSI.

Due to normal quarterly fluctuations in demand from our DBS Satellite customer, we currently expect Satellite fourth-quarter revenues to be substantially lower on both a sequential and a year-over-year basis, more than offsetting the Wireless Datacom growth. As a result, we expect our fiscal 2014 fourth-quarter consolidated revenue to be in the range of $60 million to $63 million. At the bottom line, we expect fourth quarter GAAP basis net income in the range of $0.08 to $0.11 per diluted share, and non-GAAP net income in the range of $0.19 to $0.23 per diluted share.

In closing, I'd like to recap some key points. First, our MRM products business is showing continued strength. We are pleased with the strong growth we are generating within our core verticals, along with the meaningful revenue generated this past quarter from our insurance telematics products.

Second, emerging opportunities, including those in the energy and heavy equipment sectors, the insurance telematics vertical, and international expansion initiatives, are expected to be growth catalysts for the remainder of fiscal 2014 and beyond. Third, we are pleased with the recent acquisition of RSI, and expect this transaction will improve CalAmp's reach and growth prospects in the state and local government market.

And finally, we firmly believe our unique hardware, software and service portfolio, supported by established channel partnerships with global reach, give us the leverage to win a disproportionate share of opportunities, and drive broader adoption of emerging M2M applications.

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

(Operator Instructions)

Our first question is from Mike Walkley of Canaccord Genuity. Please go ahead.

Congratulations on the strong results. Just want to dig in a little bit, Michael, on the guidance. I think we all realize the Satellite business can be lumpy, given the customer concentration, and you've talked in the past about this being roughly a $40 million annual business. Based on my math you did just over $38 million in the first three quarters of the year. When you talk about sharp seasonality down in Satellite, can you give us some color? Is it down 30% or more sequentially, and what might that mean for your gross margin, lack of leverage implied in your guidance?

Sure. Well, Satellite, we've talked a lot about being roughly a $40 million business, or $10 million a quarter, plus or minus a couple million. Certainly, that was the case over the last couple of fiscal years. Through the first three quarters of this year, we've been exceptionally blessed by having three consecutive quarters of more than $10 million of revenue. Actually, three of the best quarters we've seen in quite some time. Obviously, Q3 was quite a blowout quarter for us, in the Satellite business.

Our customer was -- had given us some forecasts earlier on, and that was obviously reflected in our guidance, given last quarter, where we expected the last couple of quarters of the year to be relatively even-loaded. Some of that demand which we expected to fall into Q4 was actually pulled forward into Q3, which really drove an exceptional number this last quarter. Obviously what was taken out of Q4 was brought into Q3, which makes the sequential quarter comparisons for Satellite somewhat anomalous, I think.

In terms of exact percentages, in terms of sequential quarter decline, we haven't specified that. From a margin perspective, because the Satellite business is very much a turnkey outsource model at this point in time, we don't expect to see a significant deterioration in Satellite margins, although they may be slightly lower than what was reflected in the Q3 results. And I think, given the mix shift between Wireless Datacom, away from Satellite, going into Q4, we would certainly expect the gross margin profile on a consolidated basis to improve.

But back to the $10 million, plus or minus a couple million dollars a quarter, we think that the Q4 estimate probably suggests that Satellite would remain in that $10 million, minus $2 million sort of range, within that window.

Okay. Great. That's very helpful. That's what I was thinking based on the initial guidance to get to it. That helps in the modeling. Just on the broader picture, the insurance telematics market, you've discussed in the past, six customers, and you announced the deal with HIMEX. Can you give some color, because it sounds like they have three customers, or is this included in your six insurance customers, or is this an incremental new customer? And then if you could just provide some color on the implied growth in that business, heading into your fourth quarter. Thank you.

Sure. For the last couple quarters, we talked about a couple of active insurance programs. One of them was the RAC, which we've discussed. And the other was a domestic-based opportunity. That opportunity was through HIMEX, as you might assume, given our recent press release. HIMEX has a number of different insurance clients. Only one I would say is at a ramp stage at this point in time. And there may be a couple of others that will be coming online in the next quarters.

But we do have another customer, another partner, not unlike HIMEX, that is bringing an insurance client on-board, and we've just begun ramping to that client. So we really have three different opportunities right now, which are contributing to revenue. Of those three, really only two contributed to revenue in Q3, so we're obviously expecting some incremental growth going into Q4.

That's helpful. And then given the insurance base, telematics could be more consumer interfacing over time, I know you have talked in the past we're just in the early stages, I think you used a baseball analogy of preseason or spring training or something along those lines.

Batting practice.

Batting practice. Okay. Thank you. As you look out a couple years, do you think this business can be as large as your fleet business in a two to three-year horizon, given the opportunities in this market?

Fleet's a big business for us right now, it's more than half of our MRM product revenue. Two to three years down the line, I think that's possible. I think to get to the size of our fleet business, though, we would probably be doing more than just selling hardware into that market application.

You're still not going to talk about that until something's launched?

Until something -- there's something more tangible to discuss.

Okay. Great. And then Michael, last quarter you talked about certification with new carriers, and Sprint being important. I think that makes sense, given the HIMEX announcement also. But do you have more carrier certifications coming, and does that add anything to near-term operating expenses?

Good question. I mean, we have so many certifications under way with so many carriers in so many different parts of the world, it has driven some of our R&D expenses up. As you expand your global footprint and introduce new products for new and existing applications outside the United States, that's just a cost of doing business. But in terms of a significant increase in expenditures on carrier certifications going forward, we don't see anything that would be outside the bounds of what we've been experiencing the last couple of quarters.

Okay. Great. So on margin, is it fair to think about modeling, absent some sequential lumpiness in Satellite, that overall business trends would be -- revenue should grow faster than OpEx on a year-over-year basis?

We would expect over the medium term that revenue would outgrow OpEx, but let me go back and address the carrier certification question. There is one exception to what I just said and that would be the carrier certifications or the country certifications required to support the Caterpillar roll-out. As you probably know, and as we've discussed before, the products that we will or hopefully will be supplying to Caterpillar next year are intended to be operational on any carrier network, almost anywhere in the world. And to operate on a carrier network, obviously you're obligated to certify those products in each of those respective countries.

Would that be a one time large expense as you get close to the launch date, and maybe -- ?

Well, it will be -- it will drive up some of our carrier certification expenses. We expect to get compensated for that, so it's just not an expense. There should be some offsetting revenue for that expense.

Okay. Great. Then just on the fleet vertical, you had quite a strong year in terms of trends. As you enter calendar 2014, do you see any changes in terms of the competitive landscape, or the overall growth drivers of that division?

From an application service perspective? Or from a hardware perspective?

I guess on both, as that's becoming your large vertical. How do you see that market developing, any changes in the competitive dynamics entering 2014 calendar year?

From a hardware perspective domestically, we don't foresee any fundamental changes in the competitive landscape. Internationally, we'll be exposed to different competitors as we penetrate additional markets around the world, but we think we're very well positioned to compete. And, we see opportunities obviously to displace internal developments as an outsource partner for a number of fleet service providers outside the United States, who today still source their own hardware. So on the hardware side, not radically different outlook, in terms of competitive landscape.

On the fleet services side, obviously most of our business activity is domestic. The competitive dynamic for RSI is a bit different than what we inherited through the acquisition of Wireless Matrix, given RSI's focus on the municipal government space. There, I would say it's a little less competitive, because it is a -- it's obviously a market that requires a great deal of discipline and perseverance, in terms of pursuing opportunities that tend to take a long time to gestate. But that being said, it also means that those customers are probably a little more sticky than they might be for certain types of commercial fleet applications. So I think RSI potentially introduces a slightly different kind of competitive dynamic into the CalAmp fold, which we think is a positive.

Sounds like it. And then just speaking of international, Rick, do you have the percent of sales international? I think you shared that last quarter. Just seeing how that business is tracking.

Yes, I do. I think --

I can give it to you. It was between 16% and 17%.

Okay. Great.

This past quarter.

And one last question, I'll pass it on. I think you made some comments about the PTC, maybe some visibility or improving backlogs as you exit the fiscal year. Can you just give a little color what the revenue run rate has been the last quarter or so, relative to the peak in the earlier stages?

Well, last quarter, Q3, was well under $1 million.

Okay.

So considerably lower than where we were in Q3 last year where I think we reported roughly $3 million of rail revenue. We expect that to improve in Q4, as we stated in the prepared remarks. In fact, we may be ahead of where we were in all of Q3, already this quarter.

And then has there been any kind of pick-up in conversations just given -- it's been in the news more with what happened in New York with that tragedy, has there been any improved visibility or conversations about things picking up again into next year?

We would expect next year to be better than this year, because this year's obviously been very weak. There are a few factors. Number one, the deadline hasn't been moved, so the current mandate stands, that the PTC technology must be deployed by the end of calendar 2015. Obviously the unfortunate accident, recent accident in New York, has probably deflated to a great extent the lobbying efforts the rails have been making with Congress to push the deadline out, and not by a little bit but by quite a lot. The date being bantered about was 2020. Had that happened, I would say it probably would have been a de facto killing of the original mandate.

So our suspicion is that the deadline probably won't get pushed for some period of time, and if it does, it will be for a lot shorter period of time than what was being discussed. And so I think that should lead to some increased demand for PTC radios going into next year. But we were already seeing improvements in demand, in terms of new budget cycles and quoting processes, as we were winding down this calendar year, looking into next calendar year. And we do believe that our backlog will build as we exit this year, and go into calendar year 2014, and our fiscal 2015.

Congratulations on a successful calendar 2013, and I'll pass it on for questions.

The next question is from Mike Crawford of B. Riley & Company. Please go ahead.

Thank you. I'll try to limit myself to less than 16 questions. (laughter)

Seriously, with the heavy equipment sector being more important, and your Wireless Networking business historically being the strongest margin business for CalAmp all together, as the Caterpillar ramps towards the end of, call it, calendar 2014, do you expect that fact alone to outpace what's happened with the growth in the Fleet Management and the other MRM business? Do you see an uptick in Wireless Datacom gross margins overall, or is it too close to call?

Simple answer to your question is yes, we would expect Cat shipments to begin to drive Wireless Datacom gross margin improvements, all by itself.

And would you expect that the routers and other equipment you're selling to Cat to have historically similar gross margins to your Wireless Networking business? Or higher or lower?

Let's say it would be consistent with our blended Wireless Datacom margin target of 40%.

Okay, thank you. And then, last question relates to usage-based insurance. So it sounds like you have some great growth opportunities delivering the platform and architecture to companies that are developing applications, but are you also developing your own applications to be delivered as a service for that vertical as well?

Well, yes. We are in the process of developing a set of platform services to support a number of different customers' insurance-based telematics applications. So I guess in short, we're building the platform elements necessary to wrap around our hardware devices, to enable the more rapid adoption of insurance telematics solutions than may be possible today. If someone had to integrate a raw hardware device in with their applications, which is sort of what the market dynamic is today.

Okay. All right. Thank you very much.

The next question is from Anthony Stoss of Craig-Hallum. Please go ahead.

On the Wireless Datacom side, you talked about gross margins being down sequentially, due to mix. Could you elaborate a little bit on the mix, and also what you expect going forward, and if this is a one-time event? Also, love to hear more on -- you mentioned OEM win on the solar side under the energy sector, love to hear what the opportunities are there. Thanks.

Sure. In terms of Wireless Datacom gross margin, it was down sequentially. And a big part of that obviously is a mix shift or the blend between MRM products and Wireless Networking products and solutions. Wireless networks is a higher margin business. It was flat on a sequential quarter basis, and so all of the Wireless Datacom growth in Q3 was in the MRM products area, which generally represents gross margins across the product portfolio on a blended basis in the low 30s.

We talked about ramping on some of the insurance telematics opportunities. As we've talked about, I think, on previous calls, as we go out of the gate with some of the new product offerings for insurance telematics applications, in some cases we have to forward price in order to secure these large longer term opportunities, but we believe on the insurance telematics product front, even though we may come out of the gate with slightly lower gross margin than, say, the blend of the portfolio, we believe we have the opportunities to cost reduce those products as they begin to ramp in serious volume. So over time, we would expect margins to improve for that product category.

As Wireless Networks grows, both in terms of fleet services and in terms of some of the product offerings for government and rail applications, we would expect Wireless Networks margins to improve as well, and then on a blended basis, of course, as you roll all of that up, overall better Wireless Datacom margins. We think that, at least at this point in time, we believe that Q3 should represent the near-term low point in terms of gross margin profile for our Wireless Datacom segment.

In terms of the Satellite OEM opportunity, we mentioned this on the last earnings call that we had been involved in -- solar, excuse me, the solar power opportunity, we're engaged with a Company that focuses on the solar power industry, by building solar power plants. They have a solar controller assembly that was their own design, which they brought to us to help cost optimize, and also enable certain types of wireless communication functionality. So we've had an ongoing relationship with that Company for nearly a year, and have been producing that solar controller assembly for them for the last quarter or so. That activity will ramp into our Q4 before probably moderating somewhat going into Q1, but we hope to be well-positioned to support them on future projects that they're involved with, well off into the future.

Okay. Lastly, Michael, more of a big picture question. On the recurring revenue subscriber side of your business, are you seeing larger deals coming your way, or are they just more plentiful, smaller deals? Love to hear your view going forward, how you see things, if there's a lot of momentum there.

In Q3, I would say most of the action was on the smaller -- small and medium business front. However, we have seen some recent strong pipeline activity for more enterprise-class customers, both in the utility market as well as for certain municipal government agencies, outside of the RSI acquisition. So the pipeline's been healthy, and we've been notified of at least one reasonably large size municipal government agency award for fleet services.

Great. Thanks a lot. Appreciate it.

The next question is from Scott Thompson of FBR. Please go ahead.

A couple of quick questions. We talked last quarter about quite a bit of sell in to Brazil. That may have made some of the vehicle theft and some of the other opportunities we have in Brazil a little light this quarter. Do we expect that to come back? How's the sell-through in Brazil looking? Also wanted to get an update on Royal Auto Club, what kind of sell-through should we expect from that opportunity?

Sure. You are quite correct, Brazil was very large in Q2. We characterized that as channel fill. It tapered quite a lot in Q3, although we did have some follow-on revenue in Brazil for stolen vehicle recovery solutions. However, in the rest of Latin America, we saw pretty strong demand, in fact sequential quarter uptick in demand for stolen vehicle recovery solutions in other parts of Latin America outside of Brazil.

In terms of the longer-term Brazil opportunity, as you know and most people know, there's this Contran 245 legislation, which when fully implemented, will dictate that all new vehicles produced, or all new vehicles imported and sold in Brazil, must come equipped with stolen vehicle recovery technology, which will allow the tracking of the vehicle and the disablement of the vehicle, if it is reported stolen. We've felt for some period of time that Contran 245 wouldn't result in any direct demand for our stolen vehicle recovery solutions. And that law or the implementation of that law, would stimulate a lot of aftermarket demand for our product, which may have been what drove the significant demand in Q2.

However, the outlook is changing a little bit, in that we're involved with a couple of major suppliers to the automotive OEM companies, who are looking for telematics solution partners to help them support their customers in complying with the 245 legislation. So whereas before we didn't really see too much of a direct OEM opportunity, we're now starting to see that as a potential pipeline opportunity, as the automotive OEMs start to position their product platforms for full compliance with the 245 legislation.

In terms of RAC, RAC did represent about a third of our insurance-related revenue in Q3. We expect RAC to further ramp into Q4. I don't believe RAC is ramping at quite the pace that they thought they would. What they thought they would be ramping at was a lot more than what we thought they could support. I think our expectations have been pretty consistent with what's been playing out in terms of reality. RAC's a great customer. They represent a large opportunity for us, and we're going to support them as best we can, as they ramp their program out more broadly to their very large population of clients.

So the channel fill in Brazil, do you still have some of that channel fill set to sell through, or have you burned through some of that in the quarter? Do you have any insight there?

I don't have a great deal of channel visibility there personally. I know a good deal of that has been sold through. There was some follow-on business with our channel partner there in Q3. And I really can't predict how that's going to play out into Q4.

Okay. And with the Caterpillar opportunity, there's been a lot of talk of Caterpillar maybe having a little more difficult year than people might have expected, with potential growth rates declining in China and other areas. Do you see those kinds of issues impacting your opportunity at all, or is your opportunity more or less variable than maybe their sell-through?

Well, I think if Caterpillar were fully ramped, we would have some exposure to that volatility, but we're not ramped yet. And the ramp up to some steady state, whatever that is, is a significant growth opportunity for us.

Okay. That's important. Thanks. One last question. With RSI, can you talk to us a little bit about what that's going to look like, when you integrate it into the rest of the Company? Are those government opportunities, opportunities you're going to pursue and quickly grow, or do you think it's going to take time to integrate the rest of the platform into RSI?

Well, in terms of first-year revenue growth, in our press release we talked about RSI having recognized roughly $5 million of revenue over the past 12 months. Their accounting methodology is slightly different than what CalAmp will employ. RSI historically had recognized revenue for hardware sales when the hardware was sold, even if it was part of a bundled solution.

Going forward, any hardware sell that's coupled with a of software subscription will be amortized over the minimum period associated with that subscription. So our expectation is, in the first year of CalAmp ownership, revenues will probably not grow, be relatively flat, but we expect billings to grow, and they have a very healthy pipeline of opportunities. They also recently acquired a significant municipal government customer that was just beginning to ramp, so there is some built in billings growth we believe that came with the acquisition, which is a very positive situation, obviously.

Okay. Great. Thank you.

(Operator Instructions)

The next question is from Mike Latimore of Northland Capital. Please go ahead.

Very nice quarter. Michael, you mentioned that -- I think you said Wireless Matrix recently had a municipal government win. One, is that right? Two, is that big enough to grow Wireless Matrix 5% to 10% next year? And then can you clarify how Wireless Matrix works in the municipal government segment than versus what RSI is doing?

Sure. If in terms of the wireless -- it was a Wireless Matrix win; that's correct. And in terms of potential subscriber growth, it's not a 10% customer. It would be what I would call a typical size enterprise customer of at least 1,000 potential vehicles under management. And in terms of how that works along side RSI, obviously we intend to integrate RSI and focus in on the municipal government marketplace.

So into the future, the sales resources that we will inherit through the RSI acquisition will be the ones focused on municipal government sales, no matter what the platform element, or what the product offering may be for that specific application. So we expect the government sales team, which will be mostly made up of RSI personnel, will be driving sales for their legacy platform, the fleet outlook platform, which we acquired through Wireless Matrix, as well as our hardware products, including our Fusion LTE broadband router product.

Thanks. And then just to be clear, the Satellite business, we should still think long-term that's in the $40 million a year range, something like that long term? Is that the way to think about it?

Depends on your definition of long term. Short to medium term, I think that's a reasonable expectation.

Got it. And then the international segment, it's been growing nicely. I guess what percent of revenue do you think that is over time? Are we going to see it grow from here, or is sort of the overall business growing, so it stays in this 16% to 17% range?

Well, I think it should grow as a percentage of revenue. Obviously, all of our Satellite revenue is domestic. So if we just grew our Wireless Datacom segment geographically the way it's grown, it's going to drive up consolidated percentage of international revenue, obviously all by itself. But we have a significant amount of effort going into expanding our Wireless Datacom businesses around the globe, so we would expect Wireless Datacom revenue percent from international customers to increase over time. It won't be a steady state, or a steady linear growth, but we would expect it to grow over time.

Just last question. I think you said the UBI segment when it has a solid traction would be I think $3 million to $4 million a quarter, I believe. But just want to clarify, that's still the way you're thinking about it.

Let's go to the glossary. We talked about meaningful revenue being roughly $3 million a quarter or $1 million a month. We were very close to that in Q3, we expect it to be better in Q4. And we hope to see it ramp from there.

Okay. Thank you.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for any additional remarks.

Thank you. Thanks again for joining us today. We look forward to speaking with you at the end of our fourth quarter.

Thank you. Ladies and gentlemen, this does consistent conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.