CAMP4 Therapeutics Corp (CAMP) 2018 Q3 法說會逐字稿

Welcome to the CalAmp Third Quarter Results 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 call, Nicole Noutsios, Investor Relations for CalAmp. Nicole, you may begin your conference.

Thank you, operator. Good afternoon, and welcome to CalAmp's Third Quarter Fiscal Year 2018 Financial Results Conference Call. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek; and Chief Financial Officer, Kurt Binder. 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 implied by these forward-looking projections. These risk factors are discussed in our periodic SEC filings and in the earnings release issued today, which are available on our website. We undertake no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Michael Burdiek will begin today's call with a review of the company's financial and operational highlights. Kurt Binder will then provide additional details about the company's financial results and outlook. 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 for joining our call today. We are excited to share our third quarter operating results, as we experienced record revenue and strong profits, while also making steady progress on our strategic initiatives. We reported Q3 consolidated revenue of $93.7 million, up 12% year-over-year, and at the high end of our guidance range. Our revenue growth was driven principally by our Telematics Systems business, which grew by building upon our existing base of blue-chip customers, including Caterpillar. Additionally, our Software and Subscription Services business strengthened, as we broadened our technology portfolio with new and enhanced product solutions that are uniquely positioned in the connected vehicle and industrial Internet of Things marketplace. The Telematics Systems business had an exceptional quarter with revenues of $77.8 million, up 5% sequentially and 15% year-over-year. MRM Telematics products revenue was a strong contributor to this business, posting revenue growth of 3% sequentially and 24% year-over-year, with broad-based demand across our diversified customer base. The revenue performance in the OEM and heavy equipment market was also remarkable, driven by another strong quarter with our largest customer, Caterpillar. Caterpillar's revenues grew 24% sequentially to $13.2 million, a new quarterly record. This was above our expectations in Q3 and is anticipated to moderate a bit in the fourth quarter. We expect demand to remain robust through the next fiscal year based on the recovery in the CAT core business, as well as through an expanding partnership. Additionally, shipments with our new global heavy equipment OEM, which commenced in the prior quarter, were in line with expectations, contributing approximately $1 million to revenues in Q3, with sequential revenue growth expected into Q4.

Also contributing to the strong performance of our Telematics Systems business was our formal channel partner program, which was put in place earlier this year as part of our global sales realignment. During the third quarter, we announced that Synnex, an industry leader in IT distribution and customer care outsourcing services had joined our partner program, supporting the launch of our CalAmp V-Series ELD bundled solution. Channel relationships, like the one with Synnex, help broaden our reach through expanded global distribution for both our Telematics products and Software and Subscription Services.

During the third quarter, we continued our steady and meaningful progress in the development of our Software and Subscription Service business, with sequential revenue growth to $15.9 million. We feel good about our momentum in this business, as we have now formally armed our global sales organizations with a comprehensive suite of SaaS applications including AssetOutlook, GovOutlook, FleetOutlook and the Supply Chain Integrity command center, which provide go-to-market opportunities in multiple market verticals. We are starting to see the benefits of these investments amplify our sales pipeline, a vivid example being the SaaS Asset Management program with a global freight transport customer that we discussed on our last earnings call. We recently commenced shipments to this customer on a program that represents the largest SaaS contract in the company's history and will provide increased visibility on the movement of mobile assets across North America. This SaaS project is ramping rapidly, and we are happy with its progress. We are also pleased to report that subsequent to the end of the third quarter, we commenced the deployment of services on another significant SaaS program with a large state government agency, that is expected to contribute over 5,000 new fleet management subscribers over the next several quarters. Looking more broadly, global expansion remains a principal focus of ours, and we are making steady progress leveraging our integrated network of sales resources, including channel partners and international licensees. We feel that our investments in this area are bearing fruit, as we achieved record international revenues of $26.2 million in the third quarter, representing 28% of consolidated revenues, driven by ongoing strength in Europe and across Latin America. Once again, our wholly-owned LoJack Italian licensee had a solid quarter and grew revenues for the fiscal 2018 third quarter by 13% over the same period last year. Our Italian operations have exhibited leadership in driving innovative solutions built atop the CalAmp Telematics Cloud for both consumer and enterprise applications, the model that we plan to emulate in other markets.

In the quarter, LoJack Italia formally announced LoJack Connect, a SaaS fleet management solution, leveraging CalAmp's full suite of telematics technologies including CrashBoxx, targeting car rental agencies and insurance providers throughout Europe. Overall, we remain intensely focused on expanding our technology leadership and our global reach by leveraging product innovations and sales channels in new and existing markets. The company continues to make steady progress on our growth initiatives, and we feel that we are very well positioned heading into the close of the current fiscal year. With that, I will now turn the call over to Kurt Binder, our Chief Financial Officer, for a closer look at our Q3 financial results and Q4 guidance.

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

Consolidated revenue for the fiscal 2018 third quarter was $93.7 million, an increase of approximately 12% year-over-year. Additionally, our adjusted EBITDA was $13.8 million or 15% of consolidated revenues, which represents a 39% increase over the same prior year period. We are pleased with our current financial performance and momentum, as we proceed through the remainder of our fiscal year. In the third quarter, our Telematics Software and Subscription Services businesses realized clear benefits from our fully integrated global sales organization, an organizational structure we discussed last quarter. Our sales team is now fully aligned with the businesses, and our operational efficiencies have improved this quarter leading to solid results companywide. Within our Telematics Systems business, revenue for the third quarter was $77.8 million, up 15% year-over-year. This revenue growth is attributable to strong customer demand for our MRM Telematics products and solid performance in the OEM and heavy equipment markets. Revenue from MRM Telematics products reached another new record of $39.4 million or 51% of our Telematics Systems revenue. The increase is attributable to solid demand and increased sales volume from a well-balanced base of customers for our fleet management and asset tracking solutions.

Sales of LoJack products and services, including Telematic sales to LoJack licensees, were flat to the prior quarter. As previously mentioned, we are seeing LoJack SVR product sales stabilize through the balance of the year, as we gain momentum by augmenting the legacy offerings with new Telematics-based technology solutions through our domestic dealership channel and international LoJack licensee network. Network and OEM products revenue increased 52% year-over-year due to an increase in sales to our largest customer, Caterpillar.

Our revenue to Caterpillar was $13.2 million, up 24% sequentially from the prior quarter. We have a very strong relationship with Caterpillar, which, we believe, is creating new opportunities for us to drive profitable growth. Our focus on our Software and Subscription Services business remains steadfast, as we build a strong foundation of recurring revenue. Software and Subscription Services revenue was $15.9 million in the third quarter or essentially flat year-over-year. The recent announcement of customers using our SaaS asset and fleet management solutions is evidence that our sales pipeline is robust in a number of highly attractive verticals. Overall, our SaaS customer onboarding activity is building and leading to an increase in our base of revenue-generating subscribers. Across all of our SaaS and recurring service platforms, we now have approximately 689,000 unique subscribers compared to approximately 665,000 in the prior quarter. The increase was driven principally by new subscriptions from our fleet management applications and LoJack Italy, which contributed revenue of $4.2 million in Q3, up from $3.8 million in the prior quarter. Consolidated gross profit for the third quarter was $38.2 million, an increase of $3.1 million year-over-year. Consolidated gross margin was approximately 41% in the third quarter, down from 42% last year. Gross margin performance was down primarily due to an increase in cost of sales in our Software and Subscription Services business, as we migrate our SaaS applications from hosted data centers to public cloud service providers. The decline was partially offset by increased gross margin from our network and OEM products due to favorable product mix and lower warranty expense.

In OpEx, our R&D, sales and marketing and G&A expenses in the third quarter as percentages of revenue were 7%, 14% and 12%, respectively. Our R&D expenses increased year-over-year due to increased engineering headcount to support strategic customer engagements and our Telematics technology and solutions roadmap. For fiscal 2018, we expect that R&D, sales and marketing and G&A expenses as percentages of revenue will be approximately 7%, 14% and 14%, respectively. We remain focused on keeping our cost aligned with revenue and rationalizing all investments to deliver long-term profitable growth. However, we do expect G&A expenses to increase by approximately $1.5 million in Q4 due to additional professional services related to resolution of certain existing legal matters and preparing for the adoption of new accounting standard ASC 606, which will become effective March 1, 2018. The GAAP basis net income in the third quarter was $11.8 million or $0.33 per dilutive share, compared to net loss of $1.5 million or $0.04 per dilutive share in the same prior year period. The increase in GAAP basis net income is due to the $13.3 million gain on a legal settlement for a battery claim with a former LoJack supplier previously announced.

Non-GAAP net income for the third quarter was $11.2 million or $0.31 per dilutive share compared to $7.6 million or $0.21 per dilutive share in the same prior year period. The increase in non-GAAP net income is due to an increase in gross profit attributable to revenue growth coupled with operational efficiencies realized during the quarter. Adjusted EBITDA was $13.8 million in the third quarter with an adjusted EBITDA margin of 15% compared to adjusted EBITDA of $10 million and an adjusted EBITDA margin of 12% in the same prior year period due to the same factors cited for higher non-GAAP net income.

I will now move on to our liquidity position and balance sheet. At the end of the third quarter, we had total cash and marketable securities of $151.2 million and total outstanding debt of $152.4 million, which represents the carrying value of our convertible unsecured notes that we issued in 2015. Net cash provided by operating activities was $58.7 million through the first 9 months of fiscal 2018, which is attributable to our strong cash flows from operations plus the $28.3 million of net proceeds from the favorable settlement earlier this year with a former LoJack supplier. Pursuant to the settlement, we expect to receive approximately $18 million of additional net proceeds over the next 3 quarters, thereby further contributing to our strong free cash flows. Our consolidated net accounts receivable balance was $70.2 million at the end of the third quarter, representing an average collection period of 61 days, while our total inventory at the end of the third quarter increased to $39.1 million, representing annualized inventory turns of approximately 5.6x. The increase in inventory is attributable to the timing of Chinese New Year in late February 2018, and our efforts to meet expected customer demand at the end of our fiscal year. Our cash conversion cycle time was 60 days at the end of the latest quarter, compared to 47 days in the prior quarter. For the 9 months of fiscal 2018, our GAAP basis effective tax rate was 21%. For the same prior-year period, we recorded an income tax benefit representing 4% of our reported GAAP basis net loss. Our effective tax rate during the year is attributable to over half of the $28.3 million gain from legal settlement being taxable in the United States.

Now turning to our Q4 outlook. We expect fourth quarter consolidated revenue in the range of $91 million to $96 million. At the bottom line, we expect fourth quarter GAAP basis net income to be in the range of $0.26 to $0.32 per dilutive share, which includes the contribution of approximately $13 million from the expected receipt of the third installment of the legal settlement with LoJack's former supplier. We also expect fourth quarter non-GAAP net income in the range of $0.27 to $0.33 per dilutive share and adjusted EBITDA in the range of $12 million to $15 million. The ranges for these non-GAAP measures exclude the effects of the expected fourth quarter receipt under the supplier legal settlement. With that, I'll turn the call back to Michael to provide some final comments before we open the call up for questions.

Thank you, Kurt. In closing, we are very pleased with our outstanding third quarter financial results and feel that we are well positioned heading into the next fiscal year. We believe we are seeing positive momentum on multiple fronts with catalysts on the horizon to drive long-term profitable growth. With that, I would like to wish you all a very happy and healthy holiday season, and we will now open up the call to questions. Operator?

(Operator Instructions) And your first question comes from the line of Mike Walkley of Canaccord Genuity.

Michael, just off the strong results and kind of the flattish guidance for the fourth quarter, are there any big changes in any of the businesses? Or is it kind of stable across the business lines, and particularly, Caterpillar coming of those strong results, how should we think about that business opportunity going forward?

Well, you referenced relatively flat outlook in Q4. I would like to point out that Q3 was much stronger than we anticipated. And some of the opportunities, specifically, in the OEM area, we expected to hit a little bit later in the year than they did. And so we were able to benefit from that in Q3, and some of that will not be recurring in Q4. But I -- as it relates to the business outlook across the company, I mean, everything feels strong. We've got good momentum on most fronts. I would say the only exception to that is really on the Caterpillar accounting Q4. Although the outlook there being down sequentially will still be quite strong relative to the prior year period, so overall, I would say, the outlook is quite bright.

I just meant -- kind of just walked through the sequential, but yes, the Q3 was quite strong. And just building off that, as you, kind of onboard the SaaS deals, and you talked about a strong pipeline for the Solutions, can you kind of walk us through how the SaaS revenue might start to ramp over time? And what that means for your adjusted EBITDA margins longer term?

Great question. So we saw a pretty substantial increase in subscribers in Q3. Those are recorded subscribers, about half of them could be attributed to LoJack Italy, which clearly had pretty strong sequential growth as well as strong year-over-year growth. And then the other half, roughly, of the increase came from our global freight transport customer. Those were activations which had not yet resulted in revenue in Q3 but will contribute to revenue in Q4. So we expect that revenue to start flowing, sort of, in consort now with the subscriber increases we experienced in the fleet area specifically in Q3. So overall, I would say, we expect stronger growth in the SaaS area in Q4 and potentially into the new year than we'll see across the rest of the company.

So as your business mix changes over time to a higher mixes, software say to 25% longer term, did you have any, kind of longer-term adjusted EBITDA targets that would go with that type of changing mix?

Well, 25% or more would be nice. Yes, I mean, our SaaS margins are higher than our average product margins. But as Kurt pointed out in the prepared remarks, for the near term, we are going to have some pressure on margins even in SaaS, as we move all of our applications and platform services to public cloud service providers. So we're going to be running with some duplicate costs, some of which are going to affect cost of sales and some are actually going to be a burden on our G&A expenses, as we work our way through that transition process. So once that process and transition are complete, I would expect to see some acceleration as it relates to margin expansion in SaaS, which will then obviously, have a good influence, positive influence on our consolidated margin results.

And your next question comes from Jonathan Ho of CalAmp Corp (sic) [William Blair & Company L.L.C]

Can you hear me?

Jonathan.

Yes, can you hear me?

Yes, we can.

Oh, okay. So just wanted to start out with your thoughts around this Synnex opportunity. How large of a contributor could that channel be over time?

Well, Synnex is a pretty large distributor. What we like about Synnex and others like Synnex is that they can essentially represent our entire portfolio for product and service. And we really are focused on onboarding channel partners that give us leverage. Not just in one product category but across the entire portfolio of CalAmp and LoJack offerings. And more importantly, the ability to do that on a more global scale. And so Synnex clearly meets many of those criteria.

And we're very pleased with the maturing channel program that we put in place coincident with our sales realignment earlier this year. It's very formal, regimented, disciplined, and it's leveraging all of our CRM tools and other processes, which I think is going bear fruit down the line. I wouldn't want to estimate what Synnex is going to contribute specifically, but again we're looking for people that can help us scale and that means that they're not going to be trivial contributors to our overall revenue flow.

Got it, got it. And then just relative to ASC 606, I think you gave us, maybe, some of the expenses that would be incurred there along with the legal side, but how should we think about the impact from the 606 relative to your thoughts around having to restate around that?

Hey, Jonathan. It's Kurt. Thanks for the question. And yes, we are currently in the process of evaluating the provisions within ASC 606. As we've mentioned in the prerecorded comments, we're required to adopt that effective March 1st, and we're well on our way to meeting that deadline. All that being said, at this point in time, we're not prepared to provide any thoughts on the exact adjustment we're looking at other than to say that we've been working very closely with our advisors and feel good that we'll be in a good position to meet that effective date.

Got it. One last one for me. Any thoughts in terms of the recent passage or tax legislation and how that would impact your tax rates going into next year?

Right. Another good question. As you probably know, this proposal or this guidance which has come out just recently through Congress hasn't been signed into law just yet, but we have been looking at it. It's -- I would say that we're still evaluating that as well. I'll also reference that we do have a very well-structured international tax planning strategy in place. There are also some NOLs in foreign tax credits that we could use, so we're still evaluating the impact. We do know that it will have an impact on our deferred tax assets and that will happen in the period in which it's enacted. But as it relates to any transition tax or taxes going forward, that still remains to be seen.

And your next question comes from Michael Crawford of B. Riley FBR.

I was hoping you could provide additional breakdown or color about the composition of the near $16 million quarter run rate in SaaS revenue.

Well, we haven't really broken that down in great detail. Fleet is the biggest contributor, LoJack Italy is the second largest contributor and then we have vehicle finance and some other smaller revenue streams. But most of our leverage is in the fleet space, which is why we're excited about that global freight transport customer opportunity. And our margins in fleet are about as high as any other revenue stream within the SaaS business unit, kind of rivaled by LoJack Italy. So hopefully, as that revenue grows and we can shed some of these duplicate expenses around infrastructure, we should be able to see some nice earnings leverage generated by that fleet revenue stream.

Okay. And then, I guess, in fleet would you include these -- what I think is -- still hasn't progressed much beyond pilot stage, LotSmart SureDrive initiatives in primarily North America?

That really falls more into the auto category. And I wouldn't -- I would say, we have made progress. We talked on our last earnings call about ironing out some of the wrinkles around the product launch for LotSmart and the customer onboarding processes and I'd say, we -- that's behind us now. So we saw a nice uptick in LotSmart take rates and those customers who have been early adopters of LotSmart have been actually quite effective in terms of selling through the SureDrive app. And I would say for the first time, we've actually had measurable revenue coming from the LotSmart and SureDrive, although, much less than $1 million in the most recent quarter. But the trends there are actually pretty positive.

Okay. Great. And then along the same vein, what about -- so you have CrashBoxx technology embedded in SureDrive and also in LoJack Connect. What about in your U.K. venture?

I'm assuming you're referring to SmartDriverClub?

Yes.

Yes, so I would broaden that question related to SDC to I think give an overview of their business performance to date. And I would say they've made excellent progress as it relates to onboarding insurance customers -- telematics-based insurance customers through aggregator channels in the U.K., which is the primary mode of purchasing insurance there. As we talked about on the last earnings call, SDC early on had very attractive KPIs, as it relates to the performance of their insurance book, meaning that their loss ratios were relatively low. As they've have onboarded even larger numbers customers, those KPIs will remain pretty stable and their loss ratios are extraordinarily attractive. So overall, as an insurance entity, they're performing exceptionally well. And Telematics is a critical part of that success equation. As it relates to dealership onboarding, they've had fits and starts and made a bit of progress beyond what we talked about on the last earnings call, but to date, their primary source of revenue and probably the biggest upside for them and to the extent maybe a little unexpected, is the success they've been having onboarding telematics-based subscribers through aggregator channel. And that's a program they expect to expand actually based on that success to date.

Okay. Great. And then final question, maybe more for Kurt, but in the EBITDA guidance you gave for the Q4, does that include or exclude this additional $1.5 million in G&A for kind of onetime legal matters and new accounting standard prep?

Yes, that guidance actually includes those costs. They haven't been pulled out as onetime items. They have not been pulled out.

And your next question comes from David Gearhart of First Analysis.

My first question, I just wondered if you could give us a quick update on ELD, the ELD mandate, volumes that you're seeing there and kind of your general expectations for the next quarter or so and how that's shaping up versus your expectations.

Well, thanks, David. Really, our outlook there hasn't changed much since we talked about this on the last earnings call. We've never believed that the mandate was going to drive everybody running for the exits at the same time in exceptional sort of near-term demand. We've seen an increase in bookings activity around ELD-related products. But it was a relatively minor contributor to revenue in Q3. The outlook is slightly higher for Q4, but not substantially. And we do have backlog that's hanging off into our next fiscal year. So as we've talked about, we expect it to be a very minor catalyst in the short term. And we believe that the product categories that we launched to support ELD-related compliance will be products that will have long lives, meaning well beyond customers adopting them for ELD specifically, and more importantly, they'll be able to serve multiple applications down the line.

Okay. Thanks for that color. And then lastly, you've talked about it in the past, fleet telematics solutions providers that had been leveraging proprietary hardware platform, just wondering if you can kind of give us a sense of opportunities there and some additional color and that's it for me.

Most of that incremental conversion opportunity exists outside the U.S. And I believe ultimately, that the market will face the reality it doesn't make sense for customers to be -- our customers or TSPs to be doing that sort of engineering on their own. Their value add is in software and applications and channels, not building or designing hardware. And so I think, as a tailwind for CalAmp, I think that's going to be in play for a long period of time.

Your next question comes from Paul Coster of JPMorgan.

Yes. A couple of quick ones actually. First up, how long do you think you'll have this duplicate infrastructure in place for the SaaS business? And I guess it relates to the question, that is how long do you think these legal expenses will be elevated? Should G&A snap lower as we head into the next fiscal year?

On the infrastructure side, I would say, several quarters to transition. As it relates to legal expenses, they're exceptionally difficult to predict, but as it relates to the near term matter related to the LoJack licensee, that should be behind us sometime in Q1 of next fiscal year. And the Omega Saga will probably play out over a number of years, although in the near to medium term, we don't expect that to really drive up our legal expenses. In the near term, the biggest driver of legal expense that would say it's a little unusual is the LoJack licensee litigation.

Do you think it's reasonable to expect G&A to be a slightly smaller percentage of revenue in the next fiscal year?

Yes.

Your next question comes from Greg Burns of Sidoti & Company.

Just a question of FirstNet. I've seen 35 or 40 states have opted in. What's the timeframe of states -- or that turning into orders? And could you size the opportunity for CalAmp in regards to FirstNet and maybe give a sense of who you're competing against for the -- in that market?

Well. Thanks for the question. That one is a little bit difficult to answer, because there are the headlines about states opting into the FirstNet ecosystem, but it's going to take years, we believe, for that network to be rolled out and for there to be real, I'd say, meaningful opportunities for CalAmp in terms of revenue generation.

And your next question comes from Mike Latimore of Northland Capital.

Yes. On the big freight SaaS deal, when will that be fully deployed?

Over the next several quarters. It will take the better part of a year to roll out all of the devices and onboard them.

And then in terms of -- it seems like for your SaaS -- or software and subscription business that there are a number of potential drivers there. I guess, are more of these type of kind of large asset tracking deals like with their freight customer, are they the biggest driver? Or is it more LoJack Italy? Or is it SureDrive next year? Or how do you tell which one will be the main sort of new bookings driver?

Well, if I were going to -- was going to try to rank them, clearly this large SaaS opportunity is probably the biggest driver. LoJack Italy, we expect to continue to grow at a nice pace. That's another key driver. And I would say, SureDrive, LotSmart would be a driver but probably not as large in magnitude to the top line as the large freight SaaS deal in LoJack Italy.

Okay. And what -- in terms of potential new bookings like new customer bookings, would that be the right order too?

Absolutely.

Okay. Got it. And then, do you have the revenue from fleet management hardware and then LoJack in the quarter?

Well, LoJack is a little bit hard to assess. As we've talked about in the last couple of calls, it’s been -- becoming fuzzier and fuzzier, as it relates to our ability to define what was or is LoJack and what was or is CalAmp because there's so much crossover. I think what -- the way we are looking at LoJack these days is really as a channel for all things legacy LoJack and all things CalAmp, and as it relates to sales through LoJack channels in Q3, it was pretty consistent with the last couple of quarters. So roughly running at a flat pace to last fiscal year if you broke it down by quarters. And on the fleet hardware side, it was quite solid in Q3, up a little bit from the prior quarter. The biggest driver of growth in our MRM Telematics products area was really on the asset tracking side, but we see very, very positive trends, as it relates to the pickup in fleet product demand, and we expect that to be continued driver of growth into Q4 and into the next fiscal year.

At this time, there are no further questions. This concludes the question-and-answer session. I will now turn the call back over to Michael.

Well, thank you. Thank you for joining our call today and happy holidays everyone.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.