CAMP4 Therapeutics Corporation (CAMP) Q1 2018 Earnings Report, Transcript and Summary

Welcome to the CalAmp First Quarter Results 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] I would like to introduce your host for today's conference call, Nicole Noutsios, Investor Relations for CalAmp. Nicole, you may begin your conference.

Good afternoon and welcome to CalAmp's First 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, 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 implied by these forward-looking projections. These risk factors are discussed in the earnings release, which was issued today and are available on our website and our periodic SEC filings. 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. Rick Vitelle 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 pleased with our first quarter performance as we report a strong start to fiscal 2018. Building on the momentum from last quarter, we saw strong sequential revenue growth for both core telematics products and subscription services. We reported solid consolidated financial results in the quarter with revenue of $88.1 million and record gross margin of 42.5%. MRM telematics product sales were a clear bright spot for the company in the first quarter, up 8% sequentially and 17% year-over-year. Overall, we have made considerable progress since last year by driving increased growth from our core customer base while also developing new customer relationships both domestically and internationally. We are also pleased to report that during the first quarter, we saw increased adoption of MRM telematics products by several of our LoJack international licensees, a trend we expect to continue in the coming quarters. All across the company, we continue to make investments in new technologies, nurture our strategic relationships, and expand sales channels in new and existing markets. A prime example of the payback on these investments is our evolving relationship with Caterpillar. Caterpillar was a solid contributor in the first quarter, accounting for Q1 revenues of $9.9 million, approximately 12% higher than the comparable quarter last year. As we stated during our last earnings call, we expect current year revenues with Caterpillar will grow in the range of 10% to 20% over last year. Indeed, we are gaining confidence that we may approach the higher end of this range as we broaden our relationship with this important customer by investing in new programs to further facilitate its global connecting machine strategy. We also continue to make steady and meaningful progress in the development of software subscription and service opportunities and we expect to maintain momentum throughout this fiscal year. In the first quarter, recurring revenue was up nearly 6% sequentially, driven by growth in fleet subscribers domestically and at LoJack Italia. Our wholly-owned LoJack Italian licensee continues to be a standout with first quarter revenue growing 23% over the prior year. We remain bullish on our Italian operation as it continues to evolve its services to include telematics-based offerings for both consumer and enterprise applications, all built atop the CalAmp Telematics Cloud. International growth has been and continues to be a key growth driver for the company and the first quarter was no exception. In Q1, we delivered record international revenue of $24.2 million, driven by continued strength in Europe and Latin America. Our past investments in establishing international sales channels are clearly bearing fruit and we look to leverage these channels and our increasing global brand recognition into additional strategic opportunities. Finally, on the technology front, in the first quarter, we had our first commercial Crashboxx Instant Crash Notification Services deployed with two key launch customers, one domestic and the other international. Also in the quarter, we announced the availability of enhanced Crashboxx Services for automated accident reconstruction and predictive vehicle damage assessments. Early feedback from our customers has been incredibly positive and they have been very impressed by the performance and the reliability of the technology. We expect a growing number of additional customers will roll out Crashboxx in the coming quarters. In summary, overall, it's been a great start to the fiscal year. With that, I will turn the call over to Rick Vitelle, our Chief Financial Officer for a closer look at our first quarter of 2018 financial results and Q2 guidance.

Thank you, Michael. My commentary will include reference to the non-GAAP financial measures of adjusted basis net income, adjusted EBITDA, and adjusted EBITDA margin. Our adjusted basis net income excludes intangibles amortization expense, stock-based compensation, litigation provisions, acquisition and integration expenses when applicable, and includes certain other adjustments. Our adjusted EBITDA excludes interest expense, investment income, taxes, depreciation, amortization, stock-based compensation, litigation provisions, acquisition and integration expenses, and includes certain other adjustments. A full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in the press release announcing our first quarter earnings that was issued earlier today. Consolidated revenue for the fiscal 2018 first quarter was $88.1 million, a decrease of 3% year-over-year. However, excluding last year's revenue at the satellite business, which ceased operations effective August 31, 2016, revenue in the latest quarter, was up 6% from $82.7 million in the first quarter of fiscal 2017. Telematics Systems revenue in the fiscal 2018 first quarter was $57.2 million, up 10% year-over-year. Sales of MRM telematics products account for 62% of this revenue amount, with LoJack's stolen vehicle recovery products accounting for the remainder. Software and subscription services revenue was $16.1 million in the first quarter, up 3% year-over-year, largely due to the contribution of LoJack Italia, and up 6% sequentially from $15.2 million. An additional $0.9 million of non-recurring service revenue is included in the Telematics Systems' first quarter results. Across all of our SaaS and recurring service platforms, we had approximately 653,000 unique subscribers at the end of the first quarter compared to approximately 628,000 at the end of the immediately preceding quarter. Network and OEM product revenue was $14.8 million in the first quarter, which includes sales to Caterpillar of $9.9 million. Consolidated gross profit for the first quarter was $37.4 million, an increase of $2.6 million over the same quarter last year. Consolidated gross margin was 42.5% in the first quarter of fiscal 2018, up from 38.2% in the first quarter of fiscal 2017. These improvements in gross profit and gross margin performance in the first quarter were primarily attributable to the fact that last year's gross profit and gross margin were impacted by the inclusion of the lower margin satellite business and by purchase accounting adjustments related to the LoJack acquisition. In OpEx, our R&D, sales and marketing, and G&A expenses in the first quarter as percentages of revenue were 6.6%, 14.4%, and 18.6%, respectively. Excluding a $6.1 million provision for the Omega patent infringement judgment that we recorded in the first quarter, G&A expense was 11.7% of revenue. For fiscal 2018 as a whole, we expect that R&D will be about 7% of revenue, sales and marketing will be about 14% of revenue, and G&A will be about 11% of revenue excluding the effect of the patent infringement charge recorded in Q1. The GAAP basis net loss in the first quarter was $2.7 million or $0.08 per diluted share compared to a net loss of $2.7 million or $0.07 per diluted share in the fiscal 2017 first quarter. GAAP basis results of operations in the latest quarter were adversely affected by the aforementioned patent infringement accrual of $6.1 million, which net of tax was a charge of $0.11 per diluted share. Notwithstanding this litigation accrual booked in the first quarter, we are continuing to pursue all legal remedies and management believes that CalAmp will ultimately prevail in this matter. Non-GAAP net income in the first quarter was $10.4 million or $0.29 per diluted share compared to $11.1 million or $0.30 per diluted share in the first quarter of last year. Excluding the satellite business, non-GAAP earnings in last year's first quarter was $0.26 per diluted share. Adjusted EBITDA was $13.2 million in the latest quarter with an adjusted EBITDA margin of 15.0% compared to adjusted EBITDA of $13.7 million and an adjusted EBITDA margin of 15.1% for the first quarter of the prior fiscal year. Now, moving on to our liquidity position and balance sheet, at the end of the fiscal 2018 first quarter, the company had total cash and marketable securities of $109 million and total outstanding debt of $149 million, which represents the carrying value of our 1.625% convertible unsecured notes that we issued in 2015. Net cash provided by operating activities was $10.9 million during the first quarter. Subsequent to the end of the first quarter, we received a positive ruling by a Hong Kong arbitration tribunal in a contractual dispute that began in 2014 between LoJack and a battery supplier. About two weeks ago, shortly after the arbitration ruling, we entered into a settlement agreement with the supplier and its controlling shareholder that called for LoJack to receive approximately $46 million net of legal fees and an insurance subrogation payment. Approximately $12 million of this $46 million has been received by LoJack thus far this month with another $3 million due before month end. We expect to record these receipts as GAAP basis income in our second quarter financial statements. The remainder of the settlement amount is scheduled to be received in three more installments over the next 12 months. Additional details of this settlement are included in the legal disclosures of our first quarter 10-Q. Our consolidated accounts receivable balance was $65.5 million at the end of the first quarter, representing an average collection period of 60 days, while total inventory at the end of the first quarter was $32.8 million, representing annualized inventory turns of approximately six times. Our cash conversion cycle was 55 days at the end of the latest quarter, which is unchanged from the preceding quarter. For Q1, our GAAP basis effective tax rate was 31.8% compared to 32.3% in the first quarter of 2017. For the full year in fiscal 2018, we expect that our GAAP basis effective tax rate will be approximately 28% and our non-GAAP tax rate will be about 3%. Now, turning to our Q2 outlook, we expect second quarter consolidated revenue in the range of $86 million to $91 million. At the bottom-line, we expect second quarter GAAP basis net income to be in the range of $0.32 to $0.38 per diluted share, which includes a contribution of approximately $0.30 from the receipt of the initial installments of the legal settlement with LoJack supplier. We also expect second quarter non-GAAP net income in the range of $0.23 to $0.29 per diluted share and adjusted EBITDA in the range of $10.5 million to $13.5 million, both of which exclude the effects of this legal settlement. It also bears mentioning that our Q2 earnings outlook contemplates a roughly 10% sequential quarter increase in R&D expense in support of strategic program rollouts with key customers that are expected to contribute to revenue in the coming quarters. Looking further ahead to fiscal 2018, we expect our business to strengthen as the year progresses, driven by broad-based growth centered around our core MRM telematics business which expect to reach a record level in Q2. With that, I'll turn the call back over to Michael to provide some final comments before we open the call to questions.

Thank you, Rick. In closing, I'd like to reemphasize how pleased we are with the progress we have made thus far in fiscal 2018. We expect to build on our recent momentum with further expansion of our sales channels, strategic partnerships, and international footprint all supported by ongoing product and service innovations. We are exceptionally well-positioned as an unrivaled leader in the global connected vehicle market and the broader industrial IoT landscape. The pipeline of strategic opportunities for the company is robust setting the stage for a very bright future. Operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Mike Walkley with Canaccord Genuity.

Hey guys, this is Josh for Mike. Congrats on the strong quarter. I just wanted to start off, get some more color on how the AssetOutlook has been doing ramping in different vertical markets and what you guys are seeing with that initially here?

Yes. Well, thank you, thank you for the congratulations. The AssetOutlook application we launched just a few months ago, I believe, and we're making excellent progress in developing prospects within the construction equipment market, specifically with construction companies and construction equipment rental companies and the resonance there has been quite strong. We haven't lit up a lot of incremental subscribers on that specific application or platform, but certainly, that's going to be the area of focus for us going forward not only in terms of asset tracking and monitoring, but also in terms of evolving AssetOutlook into our core fleet management application platform. So, the reception in the market has been outstanding and there are number of great opportunities in the pipeline, large, medium and small and so I think there's a very bright future there.

Okay, great. And I think in the past -- last quarter you mentioned that a lot of the growth from Caterpillar was going to be due to new programs versus possibly growth in their overall business. Is that the right way to think about the strong results in this quarter, you had a lot of new programs?

I think as it relates to the guidance we gave and just updated on this call, for us to hit the upside of that 10% to 20% growth range, clearly, we're going to need new programs to contribute. But a second order effect, obviously, is the ongoing progress Cat's been making in rebounding its business in various parts of the world and specific vertical markets.

Okay, great. And then last one for me. Can you just talk a little bit more, it sounds like moving the international licensees to telematics -- the CalAmp telematics equipment's going well. Can we get some more color on that?

Sure. I would say Q1 was the first quarter where we actually categorized the revenue contribution from licensees as material. But we've been a little bit surprised with the level of the ramp or at least the slope of that ramp. And so I think we're now -- I think we have the outlook with a reasonable level of confidence that we could be driving maybe several million dollars of incremental MRM telematics product sales into the LoJack licensee channel this fiscal year.

Okay, great. Thank you.

You're welcome.

And your next question is from Howard Smith with First Analysis.

Yes, good afternoon gentlemen. Thank you for taking my question. I want to start following up on some of the strength internationally. You've had tremendous success in penetrating the North American market in telematics to support fleet management applications and the like and we've talked about international is behind in terms of adopting third-parties like yourself. And I'm just curious, if you're seeing substantial movement of that or if the strength was more from other areas or just some update on where we are on that expected transition of kind of the overseas players.

That's a great question, Howard. I would say it's more steady progress than it is a breakout. But obviously the trend is very positive there and we're very bullish on our international opportunities. As it relates to international opportunities, as we obviously try to pull some of the strategic partners to cross the finish line as it relates to generating incremental revenues, some of these people are global players, so they play more region -- more than one region in the world and have global prominence. And so some of those customers that may be categorized as U.S.-based companies have global operations. And as is the case with Caterpillar, some of the fulfillment with that company is actually done direct to some of their international operations. And so we would expect more Caterpillar-like opportunities would involve regional fulfillment, as has been the case there.

That's great color. And then my other question is Crashboxx. Now that it's launched with a couple of customers, you're getting some feedback; can you give us some more color on the business model? Is that going to be the same for all customers? Are you still kind of playing around depending on what type of application is -- just anything you can add there to give us some insight?

Sure and we really haven't talked about that much in the past, so it's really a timely question. We have, I think, settled very firmly on an incident-based pricing model. Again, this is sort of the standard sort of go-to-market approach that's been established for Crashboxx and it's been rolled out with the two customers we talked about in the prepared remarks. But incident-based pricing based on crash events with data monetization rights, both primarily with those customers who pay us on an incident basis for those various incremental services such as accident reconstruction or damage estimation and the opportunity to take that further into the connected vehicle ecosystem, including to insurance companies and others that are involved in crash response. So, that's the current go-to-market approach and one we're very settled on at this stage with the Crashboxx rollout.

Perfect. Really appreciate that insight. Thank you.

You're welcome.

Your next question is from Mike Crawford with B. Riley & Co.

Thank you. Could you provide some more color on what R&D projects in particular you're working on that you expect will drive future revenue growth?

Well, I think Rick was about as detailed as we can be. Its strategic programs with a number of different customers and not necessarily the same customers we've talked about in the past.

Okay. So, you don't want to tip your hand?

No, I'm not in a position to tip my hand.

Okay. With dealers, what additional feedback have you seen regarding LotSmart and SureDrive? Is it still primarily just a LotSmart take up?

That's where we've seen the most progress today. In fact, great progress over the last quarter with -- for the adoption of LotSmart. We've, I think, deployed incrementally about 2,000 or 3,000 additional installations just over the last two or three months. And those dealers that are most advanced in terms of adopting LotSmart have also been the most successful in terms of selling through the SureDrive application. So, I think if we continue to focus on the deployment of LotSmart for the dealer enterprise, the SureDrive opportunity will follow naturally and has been with those dealers that have deployed LotSmart.

Okay, great. And then final question is on Crashboxx. We know you have a lot of proprietary IP around the crash analytic algorithms. We've also seen some similar product offered by Pointer Telocation that they developed in conjunction with Tel Aviv University, but I guess hasn't really patented their IP. What further, I guess, differentiates what CalAmp has in terms of abilities to provide more detailed analysis on crash-related events?

Well, I think, first and foremost, its proven reliability. We had done a lot of work around qualification and testing and testing and certification by various independent industry organizations, such as CESVIMAP and others. So, we have the confidence, I think, of the insurance industry and ecosystem. We also have the confidence -- through our own deployment in our test fleets, we also now have the confidence of its reliability from our two launch customers that we talked about in the prepared remarks. I think it's also important to remember what the genesis of this technology is. I mean this technology has some serious pedigree, given it was developed by airbag engineers who had worked in the automotive industry for 20 years or more each and had developed this technology and committed essentially their lives to building a reliable aftermarket crash detection, crash reporting system that could obviously not only support enterprise customers, but can play a role in consumer telematics and perhaps ultimately save lives. And so we think we are in a very, very unique position with this technology and certainly our ability to deliver it over the top to our existing customers who've adopted CalAmp Telematics devices as well as those customers who we own from a subscription standpoint. And further down the line, our ability to leverage Crashboxx as part of the SureDrive suite into the law enforcement ecosystem, I think, is an extraordinarily unique capability built around, I think, very interesting and unique and highly reliable technology.

Great. Thank you, Michael.

You're welcome.

Your next question is from Jonathan Ho with William Blair.

Good afternoon. I just want to start out with the lawsuit settlement. Was this somewhat of a windfall that you guys were not expecting? And what sort of uses of cash are you looking at for that settlement?

I don't think it would be appropriate to characterize it as a windfall. I think it's important to remember where LoJack was before we acquired the company. I mean it was a beaten-down enterprise. And part of the reason the company valuation and the brand have been tarnished is because of some of the issues they've had with product reliability built -- probably based fundamentally around the issues they'd had with this one particular supplier. So, we have a lot of work to do as the steward of that brand now in terms of rebuilding the brand and rebuilding the reputation that had been lost based on some of those product issues the company had experienced. So, I think it's a fair return or at least cash that we can use to invest in any number of ways to pursue that rehabilitation.

Got it. Thanks for the color. And then just in terms of the MRM strength that you referenced, I think the commentary was that this was going to strengthen over the course of the year. What are you seeing to underpin that strength in the market?

Well, I think general recovery in the U.S. market in the fleet space, that's one key factor. Ongoing penetration in international markets, as we talked about earlier on this call, that's another factor. But I think also the power of scale, our growing brand recognition around the world, our advanced portfolio of telematics devices, our ability to segment the market from very low end to very high end fleet and asset tracking applications, I think, is quite unique. And in many ways, I think, certainly, in the fleet space, we've become somewhat of a de facto standard. So, I think strength begets strength, scale begets scale and I think we're benefiting from that.

Great. Thank you.

You're welcome.

Your next question is from Mike Latimore with Northland Capital.

Thanks. Yes, on the -- nice quarter, by the way, nice quarter. On the -- you just mentioned the U.S. recovery in fleet. I guess, can you talk a little bit more about that? Is that largely economic-driven or what's causing the recovery do you think?

Well, our assessment was that the decline in U.S. business investment starting three or four -- probably four or five or six quarters ago was a key factor. When businesses aren't investing, they're not investing a lot of things including fleet management applications and so we think that was a primary factor. And perhaps, to a certain extent, the market has gotten ahead of itself in terms of extrapolating on past growth rates. So, I think those two issues combined were a key factor, but I think we're well into the recovery phase at this stage.

Great. And then on the MDT product, as it relates to the -- I guess, the ELD mandates, are you seeing any improving pipeline there or what are the kind of the prospects for that this year?

Very good. And yes, the pipeline is very robust. We talked about this on the last earnings call in that we had, had built a fair backlog around MDT-related products in our portfolio. That outlook for the back half of the year is very strong. In fact, we've continued to carry significant amount of backlog for the back half of the year around those sorts of products. We also anticipate that a few months down the line, we'll be introducing additional products and potentially additional content partners that we will partner with as it relates to more of a bundled solution to support many aspects of the ELD mandate.

All right. Okay, great. And then on the software services business, I guess, you talked about you're expecting your overall business to see kind of building strength throughout the year. Would you include that in the -- would sort of software and services be included in that commentary? And then if so, what would be the key driver for that business segment?

Definitely, it's included in that commentary. We're very bullish about AssetOutlook as we talked about earlier on. We also are very bullish on LoJack Italy and that being a contributor to subscription revenue growth. We're starting to see nice adoption by CTC, that's the CalAmp Telematics Cloud, with various channel partners, both U.S. and outside the U.S. So, I think it's -- I would characterize it as broad-based commentary around SaaS opportunities.

Okay. Thanks.

Yes. You're welcome.

Your next question is from Andrew DeGasperi with Macquarie.

Thanks. I guess, first, maybe can you lay out for us what the delta would be in the revenue number -- guidance you laid out for 2Q, what could potentially bring you in at the low end or the high end of that number?

Excellent question. I think the answer to both the low end and the high end question is the same, and its MRM telematics product sales.

Got it. And maybe we can just talk about the ELD mandate and the adoption rates there. Are you seeing anything that is pushing it one way or the other as far as accelerating or decelerating? And then maybe can you discuss this -- are you seeing any incremental competition in that space from new entrants?

It's a broad question. No, we don't detect any acceleration or deceleration from our views of a quarter ago. And as it relates to competition, there are many substitutes. I mean, our ELD solution includes an MDT Android-based tablet device, ruggedized, purpose-built for things like trucks, both light and heavy-duty, but also a refresh portfolio of telematics devices that can support a range of different ELD solutions and fleet management applications. And there are any number of ways of complying with the mandate. Ultimately, they all have to rely on telematics in one form or another, an application to support automated logging of hours of service. You could use consumer-grade Android tablets, you could use ruggedized laptops. There's any numbers of different substitutes for what we offer in the market, but we think ours as a purpose-built solution is one of the best.

Got it. Thank you.

Your next question is from Greg Burns with Sidoti.

Good afternoon. In terms of the customers that are rolling out Crashboxx, what verticals are those two customers serving?

It's a great question. They are both serving fleet, generally small and medium business fleets.

Okay. Thanks. And I wanted to ask about your views on the cold chain market. I know you have the SCI cold chain solutions. I think that's more direct toward monitoring the supply chain. But do you view the cold chain as a potential area of investment from an application perspective, moving up and down that supply chain maybe into retail or other areas of the cold chain? And maybe outside of the cold chain, any other application, sort of verticals that you think might make sense for CalAmp to be looking at or investing in?

Sure. The simple answer to your question is yes. We are focused on cold chain. But most importantly, we're focused on perishable goods and specifically kind of leveraging the SCI pedigree and that is high-value perishable goods, things like pharmaceuticals or high-value foods and other products that over time can obviously rot or be destroyed or, because of the high value, can be stolen or hijacked. So, we're looking at continuing to make progress with not only SCI's current customer set, which is very broad based and generally global customers interested in monitoring supply chain, but also integrating those sorts of capabilities with things that we have built into AssetOutlook to give more of a comprehensive view of the movement of goods from manufacturer all the way through the supply chain to the end user or the purchaser. And I think that would be a unique capability once it's fully realized, and that's an area we're focused on now. And that's that next layer of integration with SCI, SCI iOn Tags, our telematics capabilities and AssetOutlook asset visibility solution.

Okay. Thank you.

Your next question is from Anthony Stoss with Craig Hallum.

Hey Michael and Rick. Following up on the increased R&D spend, Michael, you mentioned that it's several customers or several projects. Can you at least indicate if they're new customers to you guys or a combination of new and existing? Also, once they're fully ramped, what kind of annual revenue contribution do you think you'll acquire? And then lastly, when do you think your R&D spend will back off a bit? Thanks.

So, to answer your first question, it's a combination. But given the urgency of ramping R&D, obviously, there is -- these are relatively new initiatives, things we hadn't necessarily invested in before and by the way, involve both product opportunities as well as SaaS types of application opportunities generally with global players. And so we, in Q1, probably were a little bit starved as it relates to our capabilities around moving some of the strategic projects to the finish line. And so we're going to be very much in catch-up mode in Q2. And then I think our R&D spend, as Rick guided to for the full year, is going to settle in around 7%. But obviously, these are important customers, both new and developing. And we want to make sure we do the right thing by them and we're committed to delivering the solutions that we promised.

When do you think you'll see first revenues from these projects?

We talked about over the coming quarters. So, I would say perhaps a slight bit in Q2 but, more importantly, contributing to the back half of the year and into FY 2019.

Okay. And then also a similar question on litigation expenses here. Done with a couple of items and some more out there, when do you expect your litigation expenses to start to drop off?

Great question. I mean, fiscal 2017 was a little unprecedented -- not a little, it was unprecedented as it relates to the level of legal activity. On the Omega patent front, obviously, we're going to do whatever we need to do there to ultimately prevail. And beyond that, everything else is unpredictable, really. But I would say given the unprecedented nature of the legal spend and the challenges we faced last year, I would hope we wouldn't have another repeat of that this year.

Okay. Thank you.

You're welcome.

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

Well, thank you for joining us on today's call. We look forward to keeping you apprised of our progress throughout the year.