Welcome to the CalAmp Third 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] 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. Our 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 the 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 it 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…

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 System and Software and Subscription Services businesses realize clear benefit from our fully integrated global sales organization and 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 MRM Telematics products and solid performance in the OEM and heavy equipment market. 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 Telematics 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…

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?

Thank you, sir. [Operator Instructions] And your first question comes from the line of Mike Walkley of Canaccord Genuity.

Great. Thank you. Michael, just – of 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 off 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 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.

Yes. I just make – kind of just walk through the sequentially – the Q3 was quite strong. And just building off that, as you kind of onboard the SaaS deals and you talked about the 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 concert 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 mix of software say to 25% longer-term, do 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, our SaaS margins are higher than our average product margins. But as Kurt pointed out in the prepared remarks, for the near-term, we're going to have some pressure on margin 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 is 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.

Great. I’ll pass on the line and happy holidays to everybody on the call.

And your next question comes from Jonathan Ho of CalAmp Corp.

Can you hear me?

Hello, Jonathan

Yes, can you hear me?

Yes, we can.

Okay, so just wanted to start out with your thoughts around the SYNNEX opportunity. How large of a contributor could that channel be over time?

Well, SYNNEX is a pretty large distributor and 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 coincided 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 it’s going to 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. 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 606 relative to your thoughts around having to restate around that?

Hey, Jonathan. How are you doing? 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 1, and we're well on our way to meeting that deadline. 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 will 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 has come out just recently through Congress hasn't been signed into law just yet, but we have been looking at it. 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 and 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 with enacted, but as it relates to any transition tax or taxes going forward that still remains to be seen.

Thank you.

Thank you.

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

Thank you. I was hoping you could provide additional breakdown or color about the composition of the $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 viable by LoJack Italy. So hopefully is 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. Thanks Michael. And then I guess in fleet, would you include these what – I think is still hasn't addressed much beyond pilot stage LotSmart, SureDrive initiatives in primarily North America?

That really falls more into the audio category and 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 that’s behind us now. So we saw a nice uptick in LotSmart take rates in 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 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’ve CrashBoxx technology embedded and SureDrive, and also in LoJack Connect, what about in your UK venture?

I'm assuming you're referring to SmartDriverClub?

Yes.

Yes. So I would broaden that question related to SDC to – I’d say give an overview of their business performance to-date and I would say they've made excellent progress as relates to onboarding insurance customers, Telematics-based insurance customers through aggregator channels in the UK, 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 ratio is relatively low as they've onboarded even larger numbers of 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 to extent maybe a little unexpected is the success they've been having onboarding Telematics-based subscribers through aggregator channels. And that’s the program they expect to expand actually based on that success today.

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 a kind of one-time legal matters and new accounting standard prep?

Yes. That guidance actually includes those costs. They haven't been pulled out as one-time items. They have not been pulled out.

Right. That's what it sounds like. Thank you very much.

Thanks Mike.

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

Hi, good afternoon. 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 verses 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've 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 the 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 in building or designing hardware. So I think for – as a tailwind for CalAmp, I think that's going to be in play for a long period of time.

All right. That's it for me. Thank you.

Thank you.

Your next question comes from Paul Coster of JPMorgan.

Yes. Thanks for taking the question. 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? I think it’s a related 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, that are exceptionally difficult to predict, but as it relates to the near-term matter or related to the LoJack licensee that should be behind us some time 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 out our legal expenses. In the near-term, the biggest driver of legal expense that we would say, it’s little unusual always is the LoJack licensee litigation.

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

Yes.

Okay. Thank you very much.

You're welcome.

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 though that turn into orders and could you size the opportunity for CalAmp in regards to FirstNet, and maybe give us a sense of who you're competing against for those – in that market?

Well, hello. 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.

Okay. Thank you.

You're welcome.

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

Good evening. On the big freight SaaS deal when will that be fully deployed?

Over the next several quarters…

Okay.

It will take the better part of a year or two to rollout all of the devices and onboard them.

And then it's seems like for your Software and Subscription business that there's a number of potential drivers there. I guess are more of these type of kind of large asset tracking deals like with the freight customer, the biggest driver or is it more LoJack Italy or it short drive next year or hard to 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, I mean 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 topline as the large freight SaaS deal and LoJack Italy.

Okay. And in terms of potential new bookings like new customer bookings with that is the right order too?

Absolutely.

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

Well, LoJack is a little bit hard to assess. As we've talked about in the last couple of calls, it's being becoming fuzzier and fuzzier as a 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're looking at LoJack these days is really it's a channel. For all things legacy LoJack, in all things CalAmp and is relates to sales through LoJack channels in Q3 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 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.

Okay. Thank you.

You're welcome. End of Q&A

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.