CAMP4 Therapeutics Corp (CAMP) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CalAmp third quarter earnings release conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Nicole Noutsios, Investor Relations for CalAmp. Nicole, you may begin your conference.

Thank you for joining us on today's conference call to discuss CalAmp's third quarter 2017 financial results. This call is also being broadcast live over the web and can be found on the IR section of our website. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek, and Chief Financial Officer, Rick Vitelle.

Before we begin, let me 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 materially differ from those forward-looking projections. Risk factors that could cause CalAmp's actual results to materially differ from its projections are discussed in the earnings release which was issued today and is available on our website and in our FY16 annual report on Form 10-K that was filed on April 20, 2016 with the SEC. With that, I'll turn the call over to Michael Burdiek.

Thank you for joining our call today. We reported third quarter revenues of $83.4 million, up 12% year-over-year, with GAAP basis gross margins of 42.1%, the highest in the Company's history. Our third quarter bottom-line results, both the GAAP basis net loss of $0.04 and the non-GAAP net income of $0.21 per diluted share, were adversely impacted by higher than anticipated legal expenses and foreign currency exchange losses, which Rick will address later in the call.

We've become more optimistic about our near-term growth, as visibility has improved markedly from earlier in the year when macro factors had negatively impacted demand for fleet telematics products in the US. During the most recent quarter, our MRM telematics product sales reached the highest level of the past four quarters, with telematics device sales for fleet and connected car applications reaching an all-time high.

Furthermore, we sense increasing optimism among our US customer base. This, along with the market catalyst of the impending electronic logging device, or ELD mandate, create what we believe is a more favorable market backdrop than what we've experienced domestically for some time. More than 1 million commercial transport vehicles will be required to comply with the ELD mandate, which we expect will drive incremental demand for new in-vehicle displays and telematics devices over the next two to three years. Internationally, we also see reason to be optimistic, as revenue from international customers reached 28.5% of consolidated results, an all-time high for the Company.

Looking at our Q3 results in some detail, sales of MRM telematics products were up 7% sequentially and we now have a vastly improved opportunity pipeline as compared to just a few quarters ago. The business with Omnitracs, one of our newest key customers, is on course; and we are now launching new programs with another key customer related to the win we announced during our last earnings call.

On the product front, early in the third quarter we announced the availability of the MDT-7P, our second generation Android-based ruggedized mobile data terminal designed to integrate with CalAmp's family of telematics devices and application services. The MDT-7P is targeted at in-cab fleet applications, such as data logging for hours of service, a key compliance aspect of the impending ELD trucking industry mandate. We believe that the ELD mandate bodes well for not only the MDT-7P, but for our entire range of higher end higher ASP MRM telematics systems, as customers look to upgrade their telematic suites to meet compliance requirements and future proof their fleet management solutions.

Sales of LoJack stolen vehicle recovery, or SVR products, were slightly below expectations in Q3, as anticipated orders from two large international licensees were received late in the quarter and could not be fulfilled until early in the fourth quarter. We continued to make solid progress in the third quarter in identifying revenue synergies with LoJack customers and we advanced our road map to launch various telematics programs through our LoJack channels. We are in active dialogue with several LoJack licensees on their various telematics initiatives and we believe that CalAmp is well positioned to become the supplier of choice for both telematics devices and services.

As an example of progress made on our LoJack strategic roadmap, we recently announced our LoJack branded LotSmart ensured drive telematics applications at CTIA, and we began onboarding our first LotSmart auto dealership customer last month. Historically, this customer has been one of the largest LoJack partners in the US, and they see clear benefits to the LotSmart application to support their car lot operations with a clear understanding of the value proposition for SureDrive as a consumer sell through application.

Looking more broadly at software and subscription services, we are pleased to report that SaaS revenue grew 6% sequentially, driven by solid fleet subscriber growth and outstanding performance from LoJack Italy. Our wholly owned LoJack Italian licensee grew more than 60% over the prior year and is expected to maintain momentum into next year.

Net subscribers for our range of fleet SaaS application rose by more 4,000 during Q3, one of the best quarters on record. With refined channel focus on municipal governments, equipment rental, and the construction equipment companies, we are seeing a robust pipeline of opportunities and are well positioned with our differentiated software solutions.

Moving on to our network and OEM products, which includes products sold to OEM customers and other industrial sectors, Caterpillar revenue was in line with expectations, with shipments of just over $6 million this quarter. We feel optimistic about future growth prospects in the industrial machine market, which is largely unpenetrated and has been underserved by tailored telematic solutions.

Finally, before turning the call over to Rick Vitelle, I'd like to take this opportunity to thank him for his 16 years of service as our CFO. We just announced that Rick will be retiring from the Company and that he will continue in his role as CFO as we work to find a suitable successor to ensure a smooth and orderly transition. Rick has been a key member of our leadership team throughout the years and has played an integral role in our growth and expansion, including helping us successfully acquire and integrate LoJack.

So with that, I will now turn the call over to Rick for a closer look at our third quarter financial results and Q4 guidance.

Thank you, Michael. My commentary will include reference to the non-GAAP measures of adjusted basis net income, adjusted EBITDA and adjusted EBITDA margin. Our adjusted basis net income excludes intangibles, amortization expense, stock-based compensation, acquisition and integration expenses, and includes certain other adjustments. Our adjusted EBITDA excludes interest expense, taxes, depreciation and amortization, stock-based compensation, and includes certain other adjustments. A full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in our third quarter earnings press release that was issued earlier today.

Consolidated revenue for the third quarter was $83.4 million, up from $74.7 million in the third quarter of last year. Third quarter revenue included $29.9 million from LoJack products and services, while revenue in last year's third quarter included $11.8 million of revenue from the Company's satellite business which was shut down at the end of the FY17 second quarter. Telematics systems revenue was $55.3 million in the third quarter, of which 57% represents sales of MRM products and the remainder represents the contribution of LoJack's SVR products business.

Software and subscription services revenue was about $15.9 million in the third quarter, up 51% year-over-year as a result of LoJack's contribution, along with revenue improvement in both fleet and auto aftermarket applications. Across all of our SaaS and recurring service platforms, we had approximately 621,000 unique subscribers at the end of the third quarter, compared to approximately 605,000 subscribers at the end of the immediately preceding quarter.

Network and OEM product revenue was $12.2 million in the latest quarter. Sales to Caterpillar in the third quarter were $6.2 million, up approximately $300,000 sequentially.

GAAP basis consolidated gross margin was 42.1% in the third quarter, which is a new record, compared to 35.6% in the third quarter of last year. This improvement is due not only to the inclusion of LoJack products and services in the latest quarter, but also to a substantial increase in the year-over-year gross margin of our MRM products.

In OpEx, our R&D, sales and marketing, and G&A expenses in the third quarter as percentages of revenue were 6.4%, 15.4%, and 13.6%, respectively. Although we have been streamlining our operations since the LoJack acquisition, we incurred significantly higher legal expenses in the latest quarter to protect our intellectual property, which adversely impacted G&A and EPS. Legal expense in the latest quarter was about $1.6 million higher than the comparable period last year and was higher than our expectations. We anticipate legal expenses will begin moderating to more normal levels toward the end of this year. Our Form 10-Q that was filed with the SEC today contains a detailed description of pending IP-related legal matters.

The third quarter earnings were also impacted by foreign currency exchange rate losses of $576,000 that were primarily associated with LoJack's international operations. The GAAP basis net loss in the third quarter was $1.5 million, or $0.04 per diluted share, compared to net income of $3.9 million, or $0.11 per diluted share in the third quarter of FY16. Our non-GAAP net income in the third quarter with $7.6 million, or $0.21 per diluted share, compared to $11.4 million, or $0.31 per diluted share in last year's third quarter.

Adjusted EBITDA was $10.0 million in the third quarter of FY17, with an adjusted EBITDA margin of 11.9%. This compares to adjusted EBITDA of $12.8 million and an adjusted EBITDA margin of 17.2% in the third quarter of last year.

Now moving on to our liquidity position and balance sheet, in the latest quarter we had total cash and marketable securities of $101 million and total outstanding debt of $145 million, which represents the carrying value of the $172.5 million face amount of our 1.875% convertible notes that we issued last year.

Net cash provided by operating activities for the first nine months of FY17 was $19.8 million, of which $0.5 million was generated in the third quarter. Our consolidated accounts receivable balance was $67.0 million at the end of the third quarter, representing an average collection period of 64 days, while total inventory was $31.5 million, representing annualized inventory turns of about 6 times.

The acquisition of LoJack has significantly expanded CalAmp's global footprint, with 28.5% of consolidated revenue from the latest quarter generated internationally, up from 18% in last year's third quarter. Also, MRM product sales in Europe in the third quarter were up 60% year-over-year, thereby contributing to CalAmp's strong international revenue growth.

Because of the mix of our pretax income or loss in the US and in lower tax rate jurisdictions internationally, principally Ireland, our GAAP basis effective tax rates in the latest quarter and nine-month year-to-date period are not meaningful. Our non-GAAP tax rate of first nine months of this year was about 2%, which we expect will be the approximate non-GAAP tax rate for FY17 as a whole.

Now turning to our Q4 outlook, LoJack revenue is anticipated to be seasonally down in the FY17 fourth quarter, but more than offset by continued revenue growth in our other core businesses. With this in mind, we expect fourth quarter consolidated revenue in the range of $84 million to $89 million. At the bottom line, we expect fourth quarter GAAP basis net income to be in the range of $0.05 to $0.09 per diluted share and non-GAAP net income in the range of $0.25 to $0.31 per diluted share. We also expect adjusted EBITDA in the range of $11 million to $15 million.

As Michael indicated a few minutes ago, our visibility on the near term outlook has improved and we expect our core business to steadily strengthen as we exit the year, with growth momentum building as we enter FY18. With that, I'll turn it back over to Michael.

Thank you Rick. In closing, I would like to make a few comments. We are very encouraged by the progress made in the third quarter across the enterprise. We see many catalysts on the horizon to drive near- and long-term growth for our novel portfolio of connected vehicle telematics solutions and channels to market.

The improving performance metrics in key areas during the latest quarter have bolstered our confidence that the macro conditions that affected many parts of the business earlier in the year are, for the most part, behind us. We believe we've built a sound foundation for a very bright future.

And finally, I would like to wish you all a very happy and healthy holiday season. With that, I am pleased to open up the call to questions.

Thank you.

(Operator Instructions)

Mike Walkley.

Thank you. Michael, it's good to hear about the improving visibility for the North American fleet market. Can you just help us, as you talked a lot about increasing momentum, can you help us think about calendar 2017 with Omnitracs and improved visibility, what do you think is the one-to two-year growth rate for the MRM fleet business? Thank you.

Hello, Mike. Happy holidays.

Thanks.

We described a sequential quarter increase of roughly 7%. I would expect that perhaps into the next quarter, we'd be looking at similar growth rates. We've become quite optimistic that the worst is behind us in the US market. And as we described in some of the international activities and milestones we achieved last quarter, we've got nice steady progress being made there, as well.

If I was going to try to extrapolate that into a growth rate for calendar 2017, I would probably try to modulate it little bit from the type of growth we've seen over the last quarter. And I think, given some of the tailwinds that we described in our prepared remarks, I'm optimistic that we'll be back into the low to mid single-digit growth rates for our MRM telematics business. But again, we've come through a pretty rough here over the last few quarters, and I think we should be somewhat cautious in terms of our outlook. But I have to say, we're quite optimistic that some momentum is building and we're extraordinarily well positioned competitively to follow through on the growth we saw more recently.

Great. Thanks, and happy holidays to everybody on the call. And best wishes to Rick, as you move on to the next stage of your retirement here. Follow-up question, just with some of the two larger licensing customers for LoJack that got pushed out a quarter. Can you help us maybe size what that might have been in terms of the impact to this quarter's pro forma EPS or revenue from those deals pushed?

I wouldn't want to characterize it necessarily as a push. It ended up being some logistical challenges between our licensees and their respective freight forwarding companies. But if either one of those two transactions would have counted or impacted Q3 revenue, it would have easily pushed us up to the midpoint of our prior guidance of around $84 million, and potentially north of that, with either one of those customers being recorded as Q3 revenue.

Okay. Great. And just building on that, since it looks like it's coming now in your guidance quarter. Can you help us remind about the seasonality of LoJack? You talked about it down sequentially, but overall growth in other businesses, can you help us think about seasonality in the overall LoJack business?

Well, I think if you looked at our guidance and you looked back a couple of years at LoJack's seasonality, you would expect that they would be down modestly, maybe $2 million-plus in Q4. And that's being more than offset, obviously, with incremental growth in our other businesses, primarily in the MRM area. So I think that suggests somewhat acceleration in some of our core businesses, setting aside the LoJack seasonality expected in Q4.

Great. Last question for me and I'll pass it on. Post the election, a lot of talk about infrastructure investment, and you're working on some new programs with Caterpillar. How could you think about sizing the Caterpillar opportunity for calendar 2017? Do you think it's back to maybe $7 million-plus potential of quarterly basis?

Boy, that's a great question. I don't think that the election's necessarily going to have a direct impact on our business with Caterpillar next calendar year. However, economic growth and optimism in businesses that suggest they're going to invest more than they have in the recent past is a positive thing, obviously. And as it relates to that $7 million to $8 million a quarter run rate that we had guided the Caterpillar opportunity to some time ago, actually we expect to be in that range in Q4 and we expect follow through into the next calendar year.

Great. Thank you very much.

Thank you.

Thanks, Mike.

Mike Crawford.

Thanks. Can you talk about more specifically what some of the new programs you were doing with your other new large telematics customer?

I can't give you the details or specifics around those programs. But this customer, we've suggested, is a potentially large customer to potentially rival the level of business we expect to come from Omnitracs over time, which would mean that they're a fairly large telematics service provider player in the fleet market and they generally focus on very large fleet opportunities with multinationals. And so any new program would probably be associated with some enterprise that's got a global footprint, in other words, a fairly meaningful opportunity, and we're pleased to be able to in participate in those programs. And obviously, as we're able, we'll be able to hopefully provide more detail and color around what those opportunities actually are.

All right. Thanks. And then it looks like you bought back another $13.5 million of stock in the quarter, if I'm not mistaken, which would bring you right up near your full authorization. What's the Board's feeling on ROI of further buybacks at these levels?

Well, we still have a little bit of capacity left on the $25 million authorization. I think the Board is pleased that we authorized that buyback a couple of quarters ago. And I think that move at that time, and I think even more so now, suggests that there's a lot of optimism, not only at the Board level, but across the Company on what our future growth prospects are.

Okay. Great. And then last question, can you just remind us what is the level of the LoJack Italia revenues? You gave some nice directional numbers there.

I'm not sure if we described specifically, but LoJack Italy during Q3 was right around $3.5 million, $3.6 million. They conduct business, obviously, in euros. So somewhat of a detrimental currency exchange direction in Q3 obviously affected that number. But dollar terms, still very, very heady growth and nice growth, and the prospects are good going forward.

Great. Thank you.

Thank you.

Anthony Stoss.

Hi, guys, and congrats, Rick, on your upcoming retirement. Related to your foreign currency losses, can you give us a sense of what your plan is going forward, how you can hedge yourselves to try to limit any losses on a go forward basis? Also, Rick, if you wouldn't mind maybe reminding us perhaps what percentage of revenues is in US dollars. And Michael, of your $84 million to $89 million in revenue [GAAP] for next quarter, is this new second large M2M customer above or below $1 million of that guide? Thanks, guys.

Sure. Tony, if you don't mind, I'll let Rick address the foreign currency hedging strategy, and then I'll try to answer your last question here in a couple of minutes.

I think the question was how much of our revenue is in US dollars. It's a substantial majority, Tony, probably in the vicinity of 95% to 97%.

And then what can you do to hedge yourselves going forward so you don't have another $600,000 impact?

That foreign currency loss that we had in the third quarter of approximately $600,000 was primarily related to the currency fluctuation between the Canadian dollar and the euro. And because of the nature of our operations in Canada, we have limited alternatives to hedge that. But we are taking a look at the situation to see if we can reduce the exposure to fluctuations going forward.

Yes, obviously that situation can cut both ways, and it cut us in the wrong way in Q3. As it relates to this new strategic customer and what their contribution might be in terms of our increased outlook for Q4, I would say that the outlook for Q4 is only modestly impacted by that incremental opportunity, in other words, not much contribution. Certainly, no expectation it's going to come anywhere close to reaching $1 million in that quarter.

Okay. And then lastly, Michael, you commented about the improving visibility in the US. What's your outlook outside the US? I know it's been pretty decent, but do you see any changes to that?

Going back to the foreign currency discussion, the exchange rate direction has not worked in our favor as it relates to conducting business in US dollars outside the US, in Europe and other parts of the world. However, as evidenced by our growing success in other parts of the world, despite what you might term to be lack of competitiveness based on the price of products in US dollars, I think we're very, very optimistic. And obviously, if the currency exchange rates stabilize and potentially start working more in our favor, that's even better and would potentially create a tailwind for us beyond the progress we're making in a very straightforward, organic fashion today.

Perfect. Thanks, guys.

Thank you.

Jonathan Ho.

Hello, guys. Let me echo my congratulations, Rick, and best wishes, as well.

Thanks, Jonathan.

Starting with the new services that you're launching around LotSmart and LoJack, can you maybe give us some additional color as to what the initial reception has been and maybe some thoughts in terms of how quickly that could ramp to become a meaningful revenue stream for you?

Very, very good question. I think the reception's been very, very positive. The dealership we described in our prepared remarks is actually a 1,200-vehicle rollout. So that endorsement all by itself is fairly substantial. We're trying to be very deliberate in terms of how we roll this out and the various campaigns around that. And we're still test marketing various pricing strategies to make sure that we find the right ones for the right types of dealers in the right regions around the country.

It's interesting, I think, that we find some dealer groups being keenly interested in LotSmart to help them optimize their dealer operations. And then we find others who are very, very focused on SureDrive as a incremental revenue opportunity and sell through proposition for the consumers. And they're not necessarily the same dealers. And I think if we're are going to try to correlate the interest in either one and profile the dealerships themselves, it tends to be the larger multi-brand dealers that have keen interest in LotSmart and it tends to be the traditional LoJack dealers and partners who have been very, very successful in one-off sales campaigns and not necessarily pre-install programs as revenue generators for their dealerships and their stores.

So it's been different interest for different reasons in different types of dealerships. But in general, I think we're very, very pleased with the interest in the applications and giving the dealerships an opportunity to run more efficient operations, improving the bottom line, and also giving incremental revenue generation opportunities with the SureDrive application, thereby also possibly affecting the bottom line.

Got it. And then you also spoke about potentially converting over some of the LoJack licensees and other folks to your technology stack. I just want to understand how large that opportunity could be. And again, maybe timing in terms of when that would be likely to take place.

Yes, I think there's multiple levels of conversion opportunity, as you termed it, anywhere from just augmenting our SVR sales relationship with telematics devices which they can bundle with the core SVR technology and offer a more comprehensive application solution and suite to their end customers. And we've made excellent progress in terms of just the dialogue for a captive share of their telematics device business. But we're also starting to see some positive reception to potentially moving over to more comprehensive elements in our technology stack, including our CalAmp telematics cloud service, which allows them to redirect their R&D investments at the application layer and/or their OpEx investments more on the sales and marketing front without having to build this entire stack themselves.

So obviously, we've got a couple of interesting channel partners, one captive with LoJack Italy, another arm's length relationship with Smart Driver Club in the UK, both of which are moving their application suite atop our CalAmp telematics cloud wrapped around our device portfolio. So we have some interesting pilots underway outside the US and active dialogue with some of the most important licensees around the potential of capturing a large potential of their telematics device business.

Got it. Got it. And just one final one from me. You guys spoke about an improvement in the gross margin as some of the market conditions continue to pick up. Where should we be thinking about gross margin trends, both near term and longer term?

Well, I think in the near term, not a lot different than what you've seen over the last quarters. We have puts and takes. Obviously, our SaaS business has performed well in Q3, which gives us some optimism that we can continue to see that grow, which is obviously a very positive thing for gross margin accretion. But we also expect our MRM business to grow, as it did in Q3 and we've guided to in Q4, and that's a counterbalance to the expansion of gross margins being driven by the SaaS application. So I think in the near term, probably not a major deviation from where we were in Q3 or Q2. But obviously over time, medium to long term, as we expand our service portfolio, we would hope to see gross margin expansion, as well.

Great. Thank you.

Thank you.

(Operator Instructions)

Greg Burns.

Good afternoon. In terms of the ELD opportunity, can you just give us the idea of the timing of that, when you start to expect to see demand start picking up for that opportunity? And then secondly, there's been a lot of talk about reducing regulations. Have you heard anything in terms of the ELD mandate getting either delayed or scrapped?

That's a great question. As it relates to potential impact or tailwinds from the ELD mandate, I think we're starting to see that reflected in our outlook. And I think the release of the MDT-7P ruggedized tablet was perfectly timed, as it relates to being able to capture some incremental opportunities around that mandate.

As it relates to the possibility of the mandate either being squashed or extended, I think there's always some chance that could happen. However, I think that there's so much momentum behind the mandate, and reversing that, I think would be very, very difficult at this stage.

But that being said, the original deadline for many aspects of the mandate was the end of calendar 2017. We've never believed that you would see 100% compliance for those million vehicles by that specific deadline. That's why we describe an opportunity being two to three years in timing, as it relates to incremental opportunity.

Okay. And then in terms of Smart Driver Club, I know they're focused on the insurance opportunity and actually underwriting, acting as an insurance underwriter. What are you longer term goals with LoJack globally in terms of incremental applications, particularly around insurance? Is that a model that you could bring to the US?

If the Smart Driver Club and Smart Driver Insurance is successful, we would hope to be able to emulate that model in other parts of the world through our various channels

Okay. And when we think about incremental services being layered in through LoJack, like maintenance or insurance opportunities, is that a three- to five-year horizon when we should start thinking about that, or is that something that we could be talking about sooner?

I think as it relates to maintenance, potentially sooner than three to five years. As it relates to a comprehensive insurance offering targeted at various demographics, I think that's probably in that three- to five-year time horizon.

All right. Thank you.

Thank you.

At this time, there are no further questions. This concludes the question-and-answer session.

Well, thank you for joining us today. And I wish, again, happy holidays to everybody.

Thank you for your participation. This concludes today's conference. You may now disconnect.