CAMP4 Therapeutics Corporation (CAMP) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by, welcome to the CalAmp Third Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [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 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 IR Web site. 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 Web site, and in our Fiscal 2016 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 margin of 42.1%, the highest in the company's history. Our third quarter bottom line results both for 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 early in the year when macro factors had negatively impacted demand for fleet telematics products in the U.S. 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 U.S. 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 OmniTrax, 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 application such as data logging for hours and service, a key compliance aspect of the intending 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 looked to upgrade to telematics 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 cannot be fulfilled until early in the fourth quarter. We continue to make solid progress in the third quarter in identifying revenue synergies with LoJack customers and we advanced our roadmap 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 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 and SureDrive 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 U.S. and they see clear benefits to the LotSmart application to support their car lot operations. The clear understanding of the value proposition for SureDrive as a consumer sells 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 range of fleet SaaS application rose by more than 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 product sold to OEM customers and under 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 it has been under served by tailored telematics 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 success 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, 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 fiscal 2017 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 SBR 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 last 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 towards 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 fiscal 2016. Our non-GAAP net income in the third quarter was $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 fiscal 2017 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 1.058% [ph] convertible notes that we issued last year. Net cash provided by operating activities for the first nine months of fiscal 2017 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 six times. The acquisition of LoJack has significantly expanded CalAmp's global footprint with 28.5% of consolidated revenues in 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 U.S. and in lower tax rate jurisdictions internationally principally Ireland, our GAAP basis affected tax rate in the latest quarter and nine months year-to-date periods are not meaningful. Our non-GAAP tax rate in the first nine months of this year was about 2% which we expect will be the approximate non-GAAP tax rate for fiscal 2017 as a whole. Now I'm turning to our Q4 outlook, LoJack revenue is anticipated to be seasonally down in the fiscal 2017 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 EBIDTA 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 fiscal 2018. With that, I will 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-term and long-term growth for our novel portfolio of connected vehicle telematics solutions and channels to market. The improving performance metrics and key areas during the latest quarter have boosted our confidence that the macro conditions that affected many parts of the business early in the year are for the most part behind us. We believe, we’ve build the 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. Operator?

Thank you. [Operator Instructions] Your first question comes from the line of Mike Walkley.

Okay, thank you. Michael it's good to hear about the improving visibility for the North American fleet markets. Can you just help us as we -- you talked a lot about increasing momentum, can you help us think about many calendar 2017 with OmniTrax 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. Well we described a sequential quarter increase of roughly 7%. I would expect that perhaps into the next quarter we’ll be looking at similar growth rates. We have become quite optimistic that the worst is behind us in the U.S. 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 a 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 MRM Telematics business. But again we have come through a pretty rough period 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 this momentum is building and we are extraordinarily well positioned competitively to sort of follow through on the growth we saw more recently.

Great thanks. Yes, happy holiday everybody to everybody on the call. And yes, best wishes to Rick as you move on to the next stage of your retirement here. But a follow up question, just with some of these, the two larger licensing deals that got -- licensing customers, sorry, for LoJack that got pushed out of quarter. Can you help us what that might been in terms of impact to this quarters 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 respected 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 in now in your guidance quarter, can you just help us to remind about the seasonality of LoJack? You talked about it down sequentially, but overall growth in other businesses, can you just 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 of LoJack 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 from me and I’ll pass it on. Just post the election, you talked about infrastructure investment and you are working on some new programs with Caterpillar, how could you think about maybe sizing the Caterpillar opportunity for calendar '17? Do you think its back to maybe 7 million plus potential quarterly basis?

Boy, that’s a great question. I don’t think that the election is necessarily going to have a direct impact on our business with Caterpillar next calendar year. However, economic growth and optimism in businesses that suggests 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 quarterly run rate that we had guided the Caterpillar opportunity to some time ago. Actually, we expect to be sort of in that range in Q4. And we expect follow through into the next calendar year.

Great. Thank you very much.

The next question comes from the line of Mike Crawford.

Thanks, can you talk about more specifically what some of the new programs you are doing with your other new large telematics customer?

I can't give you the detail 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 OmniTrax over time, which would mean that they are 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 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.

Alright, 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 the 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 could you just remind us what is the level of the LoJack Italia revenues? You gave some nice directional numbers out there.

I am 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 euro, so somewhat of a detrimental currency exchange direction in Q3 obviously effected that number, but you in know dollar terms still very-very heady growth and nice growth and the prospects are good going forward.

Great, thank you.

Thank you.

Your next question comes from Anthony Spauss.

Hi guys and congrats Rick on your upcoming retirement. Related to your foreign currency loses, can you give us a sense of what your plan is going forward? How you can hedge yourself to try to limit any losses on a go-forward basis. Also Rick if you won't mind maybe reminding us perhaps what percentage of revenues is in U.S. dollars. And Michael of your $84 million to $89 million in revenue guide for next quarter, is this new second last [indiscernible] customer above or below a $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.

Okay, well the -- I think the question was, how much of our revenue is in U.S. 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 [Multiple Speakers]?

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 long 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 that it's going to come anywhere close to reaching a $1 million in that quarter.

Okay, than lastly Michael you commented about the improving visibility in the U.S. What's your outlook outside the U.S. and it know it’s been pretty decent, but do you see any changes to that?

I mean going back to the foreign currency discussion, the exchange rate direction has not worked in our favor as it relates to conducting business in U.S. dollars outside the U.S. in Europe and other parts of the world however is evidenced by our growing success in other parts of the world despite what you might term to be, lack of competiveness, based on the price of products in U.S. 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 straight forward organic fashion today.

Perfect. Thanks guys.

The next question comes from Jonathan Ho.

Hey guys, let me echo my congratulations Rick and best wishes as well. Just starting with sort of the new services that you are launching around LotSmart and LoJack. Can you maybe give us some additional color as to what the initial receptions 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 has 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 role this out into various campaigns around that, and we're actually -- we're still test marking various pricing strategies to make sure that we find a right launch 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 we find others who are very-very focused on SureDrive as an incremental revenue opportunity and sell-through preposition for the consumers and they are not necessarily the same dealers. And I think if we're 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-installed programs as revenue generates for their dealerships in their stores. So it's been different interest for different reasons in different types of dealerships, but in general I think we are very, very pleased with the interest in the application and given the dealerships an opportunity to run more efficient operations, improving the bottom line and also given them incremental revenue generation opportunities with the SureDrive application, thereby also positively effecting bottom line.

Got it. And then you also spoke about potentially converting over some of the LoJack licensees another focus 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 that take place?

Yes, I think there is sort of multiple levels of conversion opportunities you termed it, I mean anywhere from just augmenting our SBR sales relationship with telematics devices which they can bundle with the core SBR technology and offer a more comprehensive applications solution in suite to their end customers. And we have made excellent progress in terms of just the dialog for a captive share of their telematics device business. But we are 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 allow them to redirect their R&D investments at the application layer and/or their OpEx investments more on sales and marketing front without having to build this entire stack themselves. And so obviously we’ve got a couple of interesting channel partners, one captive with LoJack Italy another sort of arms-length relationship with Smart Driver Club in the UK, both of which are moving their application fleet atop our CalAmp Telematics cloud, wrapped around our device portfolio. So we have some interesting pilots underway outside the U.S. and after dialog with some of the most important licensees around the potential of capturing a large percentage of their telematics device business.

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

Well, I think in the near term not a lot of difference in 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 and as it did in Q3 and we have sort of guided to in Q4, that sort of a counter balance to the expansion of gross margin to be driven by the SaaS application. So I think in the near term, probably not a major derivation form where we were in Q3 or Q2. But obviously overtime, medium to long term as we expand our service portfolio, we would hope to see gross margin expansion as well.

Great thank you.

[Operator Instruction] The next question comes from Greg Burns.

In terms of the ELD opportunity, could 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 has 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 is always some chance that could happen, however I think that there's so much momentum behind the mandate and reversing that I think would very -- be very-very difficult at this stage. But you know that being said I mean 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 insurance opportunity and actually I guess underwriting, I think as an insurance underwriter, what are your longer term goals with LoJack globally in terms of incremental applications particularly around insurance is that some model that you could bring to the U.S.?

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 channel.

Okay, and when we think about incremental services being layered into LoJack like maintenance or insurance opportunities, is that like a three to five year kind of 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.

Okay, alright, thank you.

Thank you.

At the 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.