CAMP4 Therapeutics Corporation (CAMP) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the CalAmp Fourth Quarter and Fiscal Year 2019 Financial Results 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, Nicole Noutsios, Investor Relations for CalAmp. Nicole, you may begin your conference.

Thank you, operator. Good afternoon and welcome to CalAmp’s fourth quarter fiscal year 2019 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 statement to reflect future events or circumstances. Michael Burdiek will begin today's call with a view of the company's financial and operational highlights. Kurt Binder will then provide additional details about the company's financial results and outlook. This would be followed by 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, Nicole. We are disappointed that our fourth quarter revenue came in below expectations at $84.4 million, which was below our guidance range. Similar to last quarter, revenue was impacted by ongoing supply chain challenges as well as a decline in domestic MRM Telematics product sales. However, this was balanced with strong profitability with adjusted net income of $0.28 per diluted share and at the high end of our guidance range. Fiscal 2019 was also another year of strong cash flow with operating cash flow of $48 million and free cash flow of $36 million. As we look ahead to fiscal 2020, we remain on track in our transformation to a SaaS solutions provider driven by recent strong organic growth as well as growth from the three acquisitions we recently announced. I will elaborate more on our strategic transformation to a SaaS solutions provider in a few minutes, but first I would like to address the challenges we faced in our most recent quarter. When we provided our financial outlook last quarter, we discussed concerns around ongoing operational challenges, risks associated with the timing of Chinese New Year as well as the cautious macroeconomic outlook. While we saw some marginal improvement in our fourth quarter supply chain performance, operational challenges remain significant and adversely impacted CalAmp's ability to shift certain products to meet customer demand. We have taken steps to stabilize and improve supply chain performance with new interim leadership, new operational processes and tighter synchronization with key suppliers. As we mentioned on the last earnings call, the resolution of supply chain issues will take at least a few quarters and we are focused on resolving these issues as quickly and methodically as possible. Despite these short-term challenges, our long-term growth drivers and market opportunities remain intact, especially those related to CalAmp's transformation to a SaaS solutions provider. CalAmp's software and subscription service revenue reached a record level in fiscal 2019 with organic growth of 20% year-over-year. In the fourth quarter, software and subscription service revenue reached 23% of consolidated revenue driven by growth in fleet management and LoJack subscription services. In addition to delivering strong organic growth in the latest quarter, we continue to expand our worldwide subscriber base by making three strategic acquisitions in the past three months. We acquired Tracker based in the UK, Car Mart based in Mexico and Synovia Solutions based in North America. With these acquisitions, we expect our software and subscription service revenue to increase to a run rate of $30 million per quarter in the second half of fiscal 2020 driven by a base of more than 1 million subscribers worldwide. We also expect that these acquisitions will significantly expand our telematics subscription services and market reach into the UK, Mexico, the United States, and other geographies within our targeted verticals. I would like to highlight some customer case studies that I believe offer insights into our global strategy to drive CalAmp's transformation as a vertical SaaS solutions provider. First case study relates to a pilot just getting underway with our large global freight transport SaaS customer to investigate the viability of a solution to detect package drops at their Dropbox locations across the U.S. This project was spawned by our early success deploying a trailer monitoring solution for this customer for their nearly 100 trailers spread all around North America. Though it is in a very early phase, if successful, this Dropbox parceled detection solution could be deployed as an incremental subscription service for up to 40,000 Dropbox locations across the United States. Another case study relates to a level two security service that our second largest heavy equipment OEM plans to deploy for a subset of their machines across North America. Given the customer's desire to go beyond simple layer one data encryption for their telematic solutions, they asked CalAmp for options for an end to end level two security solution that they could quickly adopt and deploy. Up to this point in time, this was a CalAmp Telematics device only customer, but the new level two security feature will be deployed as an over the top subscription service. It represents a margin expansion opportunity and an entrée into additional subscription opportunities down the line in this important industrial machine sector. These are but two several exciting greenfield opportunities just dating at our software and subscription service pipeline and we look forward to sharing additional details in the future as these and other vertical SaaS opportunities begin to mature. In addition to our strategic initiatives to grow recurring revenues with vertically focused end to end SaaS solutions, we continue to work with select customers to transition certain MRM Telematics products to a subscription model. In this conversion process CalAmp will focus on adding content value to our installed base for services such as instant crash detection and reporting, driver's scoring and security features. As we mentioned in our last earnings call, we are engaging with several of our key customers in this transition with the official launch of the program occurring this quarter. Early in this effort, we expect to see some modest negative revenue impact from the transition with recurring revenue building later in the current fiscal year to help offset the near-term loss of upfront hardware revenue. Global expansion and diversification remains an important area of focus for the company, especially as it relates to growth in recurring revenues. In Europe, our wholly-owned LoJack Italian licensee once again reported strong financial results in the latest quarter with revenue growth of 25% year-over-year. The acquisitions of Tracker in the UK and Car Mart in Mexico expand CalAmp's global portfolio for consumer telematics and fleet management solutions and are expected to make a meaningful contribution towards our new long-term software and subscription service annual revenue target of $200 million. Now turning to our Telematics Systems business, we also saw lower demand for MRM products from customers in the United States in the fourth quarter, partially offset by encouraging signs of stronger international demand. Revenue from network and OEM products was a bit stronger than expected once again driven by strong year-over-year growth with Caterpillar along with another OEM. Looking to the future, we see opportunities to expand our global reach in the industrial machine and related equipment rental marketplace, not only with additional Telematics device design wins, but also growth opportunities for subscription services. Before I turn the call over to Kurt, I would like to emphasize that despite our recent challenges, our strong organic recurring revenue growth coupled with our recently announced acquisitions, give us increasing confidence in our long-term profitable growth strategy and transformation to a global SaaS solutions provider. With that I will now turn the call over to Kurt Binder, our Chief Financial Officer, for a closer look at our fiscal 2019 Q4 financial results and fiscal 2020 Q1 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. A full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in the press release announcing our fourth quarter and fiscal year earnings that was issued earlier today. As Michael mentioned, we are disappointed in our consolidated revenue performance in the fourth quarter and for the full year, but we continue to make improvements in our supply chain operation and our transformation to a global SaaS solutions provider with a strong recurring revenue base is proceeding very well. Consolidated revenue for the fourth quarter was $84.4 million, a decrease of 11% year-over-year due to lingering supply chain challenges coupled with a decline in Telematics Systems product sales. For fiscal year 2019, consolidated revenue was $363.8 million, a decrease of less than 1%. In fiscal 2019, international revenue was $95.3 million, or approximately 26% of consolidated revenue. Our software and subscription services business performed well for both the fourth quarter and fiscal year as we remained steadfast in our focus to transform the company into a global SaaS solutions provider. The software and subscription services business generated revenue of $19 million in the fourth quarter and was up 18% compared to the same quarter last year. The revenue growth was driven by organic initiatives with freight transport subscriber additions and LoJack subscriptions growth being principal contributors throughout the year. LoJack Italy had another exceptional quarter generating revenue of $5.2 million in the fourth quarter, up 25% year-over-year. For fiscal 2019, LoJack Italy contributed revenue of $20.7 million, up 29% year-over-year. LoJack Italy as well as our recent acquired SaaS businesses create a strong foundation for recurring revenue and continued success within our software and subscription services business. We made strong progress expanding our subscriber base in fiscal 2019 with 937,000 unique subscribers compared to approximately 730,000 subscribers for the same period ended last year. The increase in subscribers of 28% year-over-year was driven by new additions in fleet management services, international stolen vehicle recovery and telematics solutions as well as growth in domestic LoJack’s LotSmart and SureDrive activation. We expect to build on this solid subscriber base as we head into fiscal 2020. Towards the end of February, we acquired Tracker UK, which contributed minimal incremental revenues in the fourth quarter. Subsequent to Q4, we also acquired Car Track or LoJack Mexico as well as Synovia Solutions. We believe these three acquisitions will help accelerate our global SaaS expansion efforts and on a combined basis we expect them to contribute from approximately $6 million in the first fiscal quarter, ramping up to around $11 million in the fourth fiscal quarter of fiscal 2020. This revenue ramp is affected by purchase accounting adjustments, which discount the deferred revenue balance assumed at the opening balance sheet date by upwards of 65% as compared to the pre-acquisition balances. The impact of the deferred revenue haircut diminishes over the course of the first few years of ownership with GAAP revenue normalizing to actual billings activity over the – over time. These acquisitions coupled with organic growth in software and subscription services revenue put us on course to reach our newly established long-term annual software and subscription services revenue targets of $200 million and 40% of consolidator revenue, thereby creating a very strong base of predictable recurring revenue for the company. As we progressed towards these long-term objectives, we expect to see meaningful progress towards our 50% gross margin and 20% EBITDA margin targets. Now looking to our Telematics systems business performance in the fourth quarter, revenue was $65.4 million, down 17% year-over-year. The revenue decline was due to lingering supply chain challenges as well as the decline in MRM Telematics and legacy LoJack SVR product sales. For fiscal year 2019, as a whole, telematics systems revenue was $287.4 million or a decline of approximately 5% year-over-year. Sales of legacy LoJack SVR products including Telematics sales to LoJack international licensees, we’re down for the full year by approximately $23 million, or 27% year-over-year. The decrease was about evenly split between a decline in legacy SVR product sales to U.S. auto dealers and sales to international licensees. This decline was partially offset by an increase in CalAmp Telematics solution sold through these channels as well as growth in LoJack related subscription revenues. Network and OEM products revenue was $19 million for the fourth quarter, representing an increase of 9% year-over-year. For the full year, network and OEM products revenue was $75.6 million, an increase of 15% year-over-year. This increase in product revenue was due to continued demand from Caterpillar as well as another global heavy equipment OEM. Caterpillar continues to be our largest customer with $13.8 million of revenue in the fourth quarter, representing 16% of our consolidated revenue. On a full year basis, revenue from Caterpillar reached a record $55.4 million, reflecting a 22% increase year-over-year. Consolidated gross margin was approximately 40% in the fourth quarter, down slightly from 41% last year. Gross margin performance was slightly down primarily due to higher excess and obsolete inventory as we transitioned suppliers and contract manufacturers and manage the closure of our manufacturing facility. For fiscal year 2019, consolidated gross margin was approximately 41% in the full year or roughly the same as in the prior year. In OpEx, our GAAP basis R&D and sales and marketing expenses in the fourth quarter as percentages of revenue were approximately 7% and 14% respectively. Our G&A expenses decreased in the quarter due to the reversal of a significant portion of the loss contingency accrual established for the Omega patent Infringement claim. On April 8, 2019, the Court of Appeals for the Federal Circuit vacated the compensatory and enhanced damages as well as attorneys' fees awarded by the trial court to Omega. The Federal Court also set aside the Jury's Verdict that alleged infringement was willful and remanded the case for a new trial. For fiscal 2019 GAAP basis, R&D, sales and marketing and G&A expenses as percentages of revenue were approximately 8%, 14% and 9% respectively. Additionally, our non-GAAP basis OpEx for fiscal 2019 for R&D, sales and marketing and G&A expenses as a percentage of revenue were 7%, 13% and 10% respectively. Over the past few quarters, we have been executing on our plan to integrate the global sales organization and further outsource manufacturing functions in order to drive operational efficiency, increased supplier geographic diversity, and reduce operating expenses. Accordingly, we recorded a restructuring charge of $8 million during fiscal 2019 related to our plan. As we look to fiscal 2020, we remain intent on optimizing our fixed cost structure without sacrificing investment in our growth initiatives. The GAAP basis net income for the fourth quarter was $11.3 million, or $0.33 per diluted share compared to a net loss of $4.8 million, or $0.13 per share in the same prior year period. The improvement in the GAAP basis net income for the fourth quarter is a result of the reversal of the loss contingency accrual on the Omega patent infringement matters that I mentioned earlier. The GAAP basis net income in fiscal year 2019 was $18.4 million, or $0.52 per diluted share, compared to net income of $15.6 million, or $0.46 per diluted share in the same prior year period. The increase in GAAP basis net income for the full year is attributable to the reversal of the loss contingency accrual on the Omega matter offset by the reduced gain realized in fiscal 2019 on the favorable settlement with a former LoJack supplier. Non-GAAP net income for the fourth quarter was $9.4 million, or $0.28 per diluted share compared to $10.9 million, or $0.30, per diluted share in the same prior year period. For fiscal 2019, non-GAAP net income was $39.8 million or $1.13 cents per share compared to $42.2 million, or $1.17, per diluted share in the same prior year period. The decrease in non-GAAP net income is due to a decrease in gross profit attributable to the slight revenue decline experienced during the year. Adjusted EBITDA was $10.9 million in the fourth quarter with an adjusted EBITDA margin of 13% compared to adjusted EBITDA of $13.1 million and an adjusted EBITDA margin of 14% in the same prior year period. For fiscal 2019, adjusted EBITDA was $48.2 million with an adjusted EBITDA margin of 13% and the same prior year period adjusted EBITDA was $52.4 million and adjusted EBITDA margin was 14%. I will now provide some additional details on our balance sheet and liquidity position as of our fiscal year end. At the end of the fourth quarter, we had total cash and marketable securities of $274 million and total outstanding debt of $276 million, which represents the aggregate carrying value of our convertible unsecured notes that we issued in May 2015 and July 2018. Net cash provided by operating activities was $47.7 million for fiscal 2019, which is attributable to our strong cash flows from operations plus the $18.3 million of net proceeds from the favorable settlement with a former LoJack supplier. The final payment related to the settlement was received in February of 2019, thereby completing all outstanding items for this matter. During the fourth quarter, we acquired Tracker UK effective February 25th for a net purchase price of $13 million. Tracker UK along with the two other businesses just acquired were purchased using cash on hand. Additionally, we used approximately $10 million to repurchase outstanding common stock under the $20 million share repurchase program authorized by our board of directors in December of 2018. During the fiscal year, we have used $49 million to purchase approximately 2.5 million shares of our common stock. At the end of the year, we had approximately $10 million remain under the existing share repurchase authorization. Our consolidated net accounts receivable balance was $78.1 million at the end of the fourth quarter, representing an average collection period of 71 days while the total inventory at the end of the fourth quarter was $32 million, representing annualized inventory turns of 6.4 times. Our cash conversion cycle time was 57 days at the end of the latest quarter compared to 55 days at the end of last year. Additionally, our deferred revenue balance was $51.4 million at year end compared to $34.5 million at the end of the prior year, which is attributable to the impact of adopting the revenue recognition standards of ASC 606 coupled with growth and our contract backlog, especially as we deployed units for our global transport customer. For fiscal year 2019, we recorded an income tax benefit of $1.3 million, which is attributable to R&D tax credits and a decrease in our valuation allowance applied against certain foreign deferred tax assets. For the same prior year period, we recorded an income tax provision of $10.7 million representing 37% of our reported GAAP basis pre tax net income. This provision was attributable to re-measuring of our deferred income taxes and a one-time transition tax as a result of the new tax law enacted in December of 2017. Moving into fiscal 2020, we do not expect any material changes to our cash taxes due to remain federal net operating losses and other available tax credits. Now turning to fiscal 2020 Q1 outlook. We expect first quarter consolidated revenue in the range of $84.5 million to $89.5 million. We are still in the process of integrating the three acquisitions into our business and for Q1 have assumed minimal revenue contribution beyond the contribution from the discount and deferred revenue balance for the upcoming quarter. At the bottom line, we expect first quarter GAAP basis net loss to be in the range of $0.31 to $0.37 per share. We also expect first quarter non-GAAP net income in the range of $0.06 to $0.12 per diluted share and adjusted EBITDA in the range of $6.5 million to $9.5 million. For fiscal 2020 as a whole, we expect software and subscription services revenue to increase to approximately $120 million and represent more than 30% of consolidated revenue. We expect telematics systems revenue to decline between $25 million and $30 million due primarily to product revenue loss and consolidation with the acquisition of three former customers as well as the transition of certain MRM product line to a subscription based revenue recognition model. Also included in this outlook is the ongoing secular decline in legacy product revenue. Additionally, we expect our adjusted EBITDA in fiscal 2020 to be greater than the adjusted EBITDA recorded in fiscal 2019. With that, I'll turn the call back over to Michael to provide some final comments before we open the call up for questions.

Thank you, Kurt. While we were disappointed in this latest quarter's results, we are making progress in addressing our short-term challenges and hope to have these issues behind us over the next few quarters. We are entering the new fiscal year with increased optimism that CalAmp’s transformation as a global SaaS solutions provider will drive value creation through a solid base of recurring revenues and accelerated growth in higher margin, innovative telematics subscription services. With that, we will now open up the call to questions. Operator?

Thank you. [Operator Instructions] Your first question comes from Mike Walkley with Canaccord Genuity. Your line is open.

Great, thank you. Michael with several of the recent acquisitions you’re certainly accelerating the transformation to a higher mix of recurring revenue. Can you just help us maybe walk through the three acquisitions and the hardware sales – that are coming out of your hardware sales to this customer – I mean to these different customers as all three of the acquisitions were hardware customers for CalAmp?

Correct. Hello, Mike. Yes, each of the acquired entities Tracker, LoJack Mexico and Synovia world were all good customers. Synovia was a particularly good customer for our MRM products. And as a consequence of making the acquisitions, obviously, we lose the product revenue in consolidation, but of course as we continue to use our own products as part of the bundled solutions, we get to retain the margin associated with those bundling activities. So going forward, obviously, a little bit of a short-term impact, but obviously a good trade off in terms of our ability to drive increased levels of recurring revenue.

Okay, thanks. Yeah, I am just trying to see what the $25 million to $30 million decline. How much of it was just the change of accounting for bundled versus overall just decline due to other macro and other weaknesses you talked about on the call?

Yeah, I could kind of give you some directional feedback on that. As it relates to sort of how that $25 million to $30 million decreased telematics system revenue outlook is sort of parsed out about approximately a third is anticipated to be eliminated in the consolidation of the three entities.

Okay, great. That's helpful. And just on the overall – for the Synovia, can you walk us through just how their bus application ties together with maybe CrashBoxx and LoJack? And are there any longer term synergies just from the applications of the platforms that you're acquiring?

Yes, well, good questions. So as we announced when we described the acquisition in some level of detail, Synovia is obviously a very, very important player in the school bus fleet management marketplace. And in fact I think they are probably number one if not a close to being number one position in that marketplace in terms of share. And they did something really interesting and innovative when they developed this. Here comes the bus app for the parents that are part of the school districts where they provide their fleet management services. And it might seem very simplistic at the surface that it's an app that allows parents and anybody that's part of that school district system and has access rights to be able to track the school buses, but it's actually a complex analysis of where the school bus is relative to where it's supposed to be given a published schedule. So there's a lot of analytics work that's done in the background actually to feed that consumer app to allow people to really know where those buses are. We see an opportunity to take some of our technology and integrated into that here comes the bus application by allowing parents to not only know where the bus is, but to potentially know that the child has actually been able to get on the bus leveraging some of the LoJack supply chain integrity technology that we acquired with LoJack about three years ago. We have the so called asset tags that we plan to introduce as a bus pass alternative as part of the overall Synovia Solution that – so we can continue to have interesting sources of competitive advantage as it relates to our opportunity to provide fleet management services in that important K-12 market place. Now as it relates to additional potential LoJack synergies, it's interesting that Synovia chose to not brand that Here Comes The Bus app when they introduced it a few years ago. So, essentially, the Here Comes The Bus app is a blank canvas as it relates to branding opportunities and the parents who use The Here Comes The Bus App and there's roughly 300,000 a day who do, obviously are very interested and concerned about child safety and security. So, we think it's a fabulous opportunity to introduce the LoJack brand into that safe and secure sort of ecosystem and offer opportunities for parents as they monitor the journey of their children from kindergarten students all the way up through high school students and when they become teen drivers and be able to have LoJack the fundamental part of that journey from a branding perspective.

Right. Thanks that's very helpful. And last question for me and I'll pass it on maybe for Kurt or both of you, just on some of the supply issues, how much long you think they're going to impact your business and what was maybe the impact to sales in the fourth quarter? Thank you.

Yes. Well, I'll take part of that and Kurt can add color as he chooses. But, we said on the in the prepared remarks that we expected to take a few quarters to be completely resolved. We did make a little bit of progress in Q4. We expect to continue to make progress in Q1, but it did have a material impact on our results in Q4. And as we talked about when we announced our Q3 results, we estimated that roughly 50% of our issues that we face is related to our revenue guidance was related to supply chain, related matters and about 50% was related to specific customer demand issues. And I would say what we talked about last quarter is roughly the situation that we face this quarter.

That the only thing I would add, Mike, there is that as we communicated last quarter, we left the third quarter with the highest backlog level that we have had probably ever had in our history. This quarter was not as bad. We did make improvement there, but unfortunately, it was at an unacceptable level. And so we are still working through the process, aligning ourselves better with our contract manufacturers and ensuring we have complete visibility in that supply chain. So that these backlog levels come down significantly over the next few quarters.

Okay, thank you very much.

Thank you.

Your next question comes from Mike Latimore [Northland Capital Markets]. Your line is open.

Hi, guys. This is Ton [ph] on for Mike Latimore.

Hello.

My question is related – hello. Do you hear me?

Yes.

This is Ton on for Latimore. I have two questions. Like what did LotSmart and SureDrive contribute to this quarter?

LotSmart and SureDrive drive revenue was approximately $500,000 to $600,000. And as it relates to subscribers, I believe in combination, it was right around 25,000 with actually a little bit more than 25,000, I believe LotSmart ticked over 20,000 for the first time and SureDrive, I think was hovering around 5,000 to 6,000 subscribers at the end of Q4. Both of those numbers were up considerably year-over-year and up a respectable amount actually on a sequential basis. So we're making great progress there and we're very encouraged by the traction we're gaining in the dealer channel, taking some time to get there. And I think the Trophy Group announcement that we made just about a week ago, I think is a great expression of the traction we're making with dealers and how they see Telematics playing a critical role not only in terms of managing our operations, but also giving them the opportunity to sell through products to consumers and help boost their bottom lines.

Okay, got it. And where could that run rate go this year?

We – I don't think we're in a position to be able to break that out separately, but obviously we're encouraged by the traction we're gaining. And really it's a similar situation as it relates to Telematics opportunities for all of our LoJack entities, both domestic and international in Italy, Tracker UK, as well as LoJack Mexico.

Okay, that's all for me. Thank you.

You're welcome.

Your next question comes from Jerry Revich [Goldman Sachs].Your line is open.

Hi, everyone. This is Ben Burud on for Jerry.

Hello.

Hi, I was just hoping to discuss the Telematics business and the outlook for fiscal 2020. Can you kind of give us an idea of what is embedded in the outlook for the MRM business and the LoJack SVR? You obviously – you guys discussed in the release the $25 million to $30 million decline and what's driving that? But can you just give us an idea of what the more organic growth outlook is specifically for MRM and LoJack SVR?

Well, as it relates to the MRM outlook obviously, we expect it to be impacted by the loss of revenue consolidation specifically associated with Synovia but also the other licensees as well because they were MRM Telematics device customers as well as LoJack SVR device customers. So, obviously, that's an impact. We also expect to transition some of our MRM product lines to subscription only and in fact we just launched the first program this week. And as it relates to sort of a percentage breakdown of – what's related to revenue lost in consolidation, I estimated around a third of the $25 million to $30 million. I would estimate about another third associated with the transition of our MRM products or some of them to a subscription only model. And then the balance is related to a number of different elements including, some blast time essentially end of life notices that we made for some of our really old legacy private radio products including PTC radios, the public safety communication systems. And also some expectation, we'll continue to see some level of secular decline in SVR sales, discreet SVR products sales to the remaining licensees as well as through the dealer channel in the U.S. As relates it to the offsets, obviously, we expect to see some recurring revenue growth associated with the device as a service transition for that one MRM or those MRM product categories and we also expect to see pretty noticeable growth, organic growth through our various LoJack related Telematics initiatives for transportation logistics around the LoJack SCI [ph] supply chain product line and solutions as well as the Telematics services that we're selling through dealers and in partnership with companies like Pioneer, relationship we announced back some time in our fiscal 2019.

Got it, but adjusting for all those one-off items, I guess I'm trying to get at – what I'm trying to get at is, what is the foundational organic outlook for MRM? I think we get where LoJack SVR is going on the CAT story is very positive and I think well understood. But if all those items you just list out, if you just adjust them out, what's the underlying organic outlook for MRM look like?

That's really a good question, and it's very difficult to answer. But as we enter the new fiscal year, we're trying to be prudent and cautious in our outlook. So, I think at this point in time, we are not expecting significant organic growth in demand for MRM Telematics products in FY 2020.

Got it. And then just on the acquisitions, can you give us an idea, how bidding intensity was for the multitude of deals you did in the last few months were there multiple bidders looking at these assets? Can you just give us an idea for that? And then going forward, are you – what is your appetite for M&A going forward? And how is the pipeline shaping up?

Really, really good question. As it relates to Tracker and LoJack Mexico, we were obviously in a very unique position as it relates to our relationship with those entities. And therefore, I would say there wasn't as good of a mile or another viable alternative. I would say that was – that could have sort of stole those away from us as it relates to our opportunity to integrate those acquisitions. I mean we had great insights into the businesses. We understood it better than anybody else. And the unique nature of our license agreements made it a little bit difficult to run what one might term a normal M&A process. So, I would say that the competition, if you want to view it that way was relatively minimal as relates to those two assets. Synovia different story, this was a very, very solid business well-known company in the school bus fleet management marketplace. They had run a process a few years ago, decided that they couldn't get the valuation they expected. They ran another process more recently. We were not the only participant in that process, but given our unique insights into their business and what the shareholders felt were the strategic synergies associated with doing a deal with CalAmp versus potential others including private equity firms, they thought that a deal with CalAmp was a much better alternative than those they might consider from other bidders. And we didn't necessarily have to outbid others in order to get the asset. We think all of them were great values, and we expect to be able to do a lot with each and every one of them. And I think it's important to remind everybody that pre-acquisition these businesses on a combined basis were doing about $54 million – $55 million a year revenue and growing. So, you consider the roughly $75 million we paid in total consideration for the three businesses, we think we got a great deal and we're certainly not going to sit on our hands as it relates to managing these businesses and integrating them and trying to find the various avenues of strategic synergy that we expect to be able to find. And then the follow-up question, I think you had was relative to what is our ongoing M&A appetite and what's the pipeline look like? I would say we're very much focused at this stage of integrating three acquisitions. There's a lot of work to do there and so for the time being, I wouldn't say we're particularly active or necessarily trying to build a very robust pipeline of M&A opportunity.

Got it. Thank you very much.

You're welcome.

Your next question comes from Scott Searle [Roth Capital]. Your line is open.

Hi, good afternoon. Thanks for taking my question. Hey guys, just a couple of things wanted to follow-up, I'm not sure if I missed it, but did you give an outlook in terms of the OEM business both for the first quarter and for the year, what you're kind of expecting from a growth standpoint? And as well now with the three acquisitions what the fully loaded OpEx – non-GAAP OpEx structure is going to look like, when we get a full quarter contribution from those three businesses?

Good questions. We did not break out separately, the network and OEM products outlook and I think we're a little reluctant to do that. I will give you a little bit of color in terms of what's sort of implied in the outlook. And that is we do not expect this year that would be FY2020 to be as good of a year with Caterpillar as what we saw last year. Last year was an exceptional year. Cat has obviously been very, very cautious with their guidance and I think it's prudent for us to be cautious as well as relates to our engagement with them and what we would expect to see in terms of our outlook for this fiscal year. We do expect the second OEM that's been growing in terms of revenue contribution to continue to grow. That's a great relationship. We alluded to a subscription opportunity in our prepared remarks around security services that we plan to layer on to the products that we currently sell to that other OEM. And we expect to see some other heavy equipment OEM related activity in FY2020 although we don't think it's going to be very material for the results in the coming fiscal year.

Got it. Hey, Mike just to clarify though is that – so when you say not as good as last year, certainly you're talking in terms of growth or you talk in terms of absolute dollars as it relates to capital?

I would – that reference was in terms of absolute dollars.

Okay. And in terms of the fully loaded OpEx structure with the three acquisitions?

Good question. I'll let Kurt take that one.

Yes, Scott, as you know we're still in the process of integrating these three businesses and so doing kind of evaluating the overall operating expense. And I can tell you right now that all three businesses had very robust spending in sales and marketing in the G&A area. If you look at where we are on a non-GAAP OpEx standpoint, we're estimating that non-GAAP fully loaded will be somewhere in the range of say 41% to 43% for Q2 and then probably starting to normalize throughout the year. Something you have to keep in mind when I say 41% to 42%, we have this on a purchase accounting anomaly that is will play out over the next year to potentially year and a half, under purchase accounting we are required to haircut the deferred revenue balance that we acquired as part of the opening balance sheet. And that haircut is essentially eliminating the profit margin that the previous owned business – essentially earned – period of ownership, we don't get that benefit. So when I say 41% to 42%, obviously it's on a haircuted revenue number. So, over the year, year and a half that number will drop significantly. So that’s what we’re looking at right now.

Okay. And just to follow-up on that point Kurt from a from a SaaS standpoint, I thought you referenced earlier in the call about $6 million in contribution from the acquisitions in the first fiscal quarter ramping up to closer to $11 million in the back half of the year. Is that correct?

That's correct. So that's a haircutted revenue number. And you can see that over the year, the haircut starts to dissipate.

Got you. Sorry, go ahead Mike.

I was going to say, we didn't break this out specifically, but that in the prepared remarks, Kurt did talk about. So our full year adjusted EBITDA outlook being at or better than FY2019. In FY2019 that was around $48 million and we guided at the midpoint Q1 at around $8 million. You can see that there are significant sort of marginal profitability dynamics associated with this deferred revenue haircut and the phenomenon associated with that starting to creep to revenue over the course of the fiscal year. So, if you were going to sort of extrapolate for us to get to that $48 million number, we need to be driving an adjusted EBITDA margin, by the end of the year at least around the mid teens.

But, Mike, you jumped ahead of me and you cut off my punch line questions, so that's why I did so? So just to follow-up on that though right. So you said $120 million in SaaS revenue for the year right, which implies the exit rate is well north of $30 million. And to your point on the EBITDA as well greater than last year, you get into the third quarter certainly by the fourth quarter you're at an EBITDA level that is greater than anything that you saw in fiscal 2019. Is that correct?

That is correct.

So one last follow up, on that front Mike, what gives you the confidence, now certainly look the SaaS businesses are building and growing, all right, you’re getting visibility on that front, what gives you the confidence in the rest of the business that you maintain that sort of trajectory to hit those numbers? And also on the $200 million SaaS target was there a timeline associated with that? Thanks so much.

Hey, great. Well, I mean, clearly as recurring revenue, software and subscription revenue becomes a larger percentage of the consolidated mix, which it does do and has done recently and will do more so in Q1 with the integration of the acquisitions, there's much more predictability and much more visibility as it relates to us being able to give a full year outlook, which we've done for the first time in a very, very long time, obviously a little bit earlier in our prepared remarks. So I think we have a fair amount of confidence, but we're also cautious in terms of our outlook as it relates to our ability to continue to grow our software and subscription lines of business on an organic basis, while also integrating these recently acquired entities and not go off the rails on any of either of those two fronts. As relates to our product revenue, obviously, it's been somewhat volatile recently and we're trying to be prudent and cautious as it relates to providing an outlook there. But, I would say that I think it's our sense that as it relates to the short-term challenges we face both around demand as well as on the supply chain side, we're cautiously optimistic. I would use that word cautiously optimistic that the worst is behind us.

Thank you.

You're welcome.

Your next question comes from David Gearhart [First Analysis Securities Corporation]. Your line is open.

Hi, good afternoon. Thanks for taking my questions. I wanted to kind of go back to the Telematics line and the guidance for the year. No one's asked about ELD and the second ELD mandate is in December of this year. Just wondering what you have baked into guidance for the second stage of the mandate?

Thank you for the question David. We do not have much if anything specifically earmarked in our outlook as it relates to that second wave of ELD regulations. It may be a positive tailwind, but we're really discounting that at this stage.

And lastly for me, I wanted to ask what the feedback has been from your existing Telematics solutions providers from your recent acquisitions. I know you get the question quite a bit about channel conflict competing with your customers. I think you've given us a sense before of how you answer that question to the analyst community, but what's been the feedback and what are you telling your customers about potential channel issues?

It’s really a good question. On the LoJack side, really no concern, because those were specific types of businesses operating in specific verticals around SVR as well as some other enterprise related fleet applications for rental cars, insurance companies and long-term leasing companies. So, it's fairly isolated sort of market landscape, so really not a lot of concern around those acquisitions. I would say on the Synovia side that school bus market is pretty unique. And over the years, there's been a fair amount of shakeout as it relates to viable players there and there's really only two or three and of the other players really none of them were ever, any meaningful way or at any meaningful level. CalAmp Telematics device customers. So, really no concern there either. But if there was a situation where someone was concerned about our efforts to continue to increase Software & Subscription Service revenue as a larger percentage of our consolidated mix, obviously, it's something that we would pay attention to, but it wouldn't divert us away from our ultimate objective that is to become ever increasingly more of a Software & Subscription Services business and we think that we can serve multiple clients both from an end to end perspective but also give ourselves the opportunity to add additional value added services with some of our hardware only clients and allow them to share in the value and the technology and the investments we're able to make around Software & Subscription Service Technology Development.

Okay. If I can sneak in one more. You had mentioned some demand issues on the MRM side. Just wondering, did that have anything to do with the 4G ebbs and flows puts and takes getting the hardware out. Some customers may be ordering a bit ahead concerned about supplies or stuff like that. I just wondered if I get some color on that?

Yes, that's a really good question. We do know that that a customer that was a large contributor to revenue in the early part of fiscal 2019, was really trying to get ahead of the 4G sunset issue and probably had loaded up a fair amount on inventory. And then the business tailed off somewhat from that very strong first part of the year later on in the year. So maybe there was an impact there, but that's only one customer that we could really point to that really made it an overt effort to try to build up inventory. We did have a situation however in Q3 and into Q4 where we had a channel partner that took advantage of a last time buy and loaded up on 3G products that we had essentially in delight and contributed a significant amount of Q3 revenue which did not repeat in Q4. So it's almost an inverse effect there.

Okay. Thanks for the color.

You're welcome.

Your next question comes from George Notter [Jefferies]. Your line is open.

Thanks very much. I just wanted to ask about the supply chain issues. Obviously, it's been part of the narrative here for a couple of quarters now but I'm just curious if you can give us any more sense for kind of where you are at in terms of the transition? And how are you seeing that affecting top line going forward?

Sure. Well, as we talked about back in Q3, in fact, earlier in fiscal 2019 we had had an initiative underway to diversify our supply chain and move some production out of China to other regions around the world. As our businesses has grown and expanded around the world it just seemed to make sense for us to consider doing that. And really avoid specific regional risks by having a concentrated supply chain in China. So, we embarked on that process and we're making progress. And then of course the tariff rate came along and we tried to accelerate that process and that really complicated matters and probably is the root cause of most of the issues we faced over the last two quarters in Q3 and Q4. What we talked about last quarter was trying to slow that transition process and stabilize our supply chain backdrop. And I think we made pretty good progress and continue to make progress related to that stabilization. And as the tariff rates seems to diminish more by the day we think that it's probably practical for us to consider sustaining a certain level of production in China. So, in a certain sense we're trying to reestablish what we're in the past very reliable supply chain partnerships, while also kind of slowing the pace and being a little more methodical as relates to some of the other geographic diversity activities we had around our overall supply chain strategy.

Your next question comes from Josh Nichols [B. Riley FBR]. Your line is open.

Yes. Hi, thanks for taking my question. I did want to ask what the Tracker acquisition, the company moving more into the Latin America market. Obviously a bit different from a competitive perspective. Could you tell me how you think CalAmp fits in their competitive dynamics in the region ARPU and things like that and how that compares in contrast to the U.S?

Sure, really broad question. Well, we've been making progress as it relates to international expansion for a number of years. I mean last year we were almost $100 million, $96 million, I believe it was…

26%...

Yes, 26% consolidated revenue. So we've been quite active in Latin America and obviously in Europe as well. And these acquisitions Tracker in the UK as well as LoJack Mexico give us an opportunity to really build a platform where we can continue to expand that reach into those regions not just through hardware sales, but also through the provision of various Telematics related services. And so, LoJack Mexico, Tracker in the UK represents more established beachheads for us as it relates to our ability to continue to expand and add additional value around subscription services and recurring revenue streams. In the UK, obviously we view that as a little bit different than our expansion into LoJack Mexico and that is that gives us sort of a bookend and a better pan-European perspective as a complement to a very successful operating entity and operational strategy with LoJack Italy. So we're very active in terms of trying to align Tracker’s activities in the UK with those of LoJack Italy and we're making excellent progress and we think that's going to play out quite well for us, to give us that broader pan-European footprint and really give us the scale to be able to provide a range of different software and subscription Services to clients all across Europe.

And the last question comes from Anthony Stoss [Craig-Hallum Capital Group]. Your line is open.

Hey guys. Mike, if you would mind expanding again on the supply chain issues, so I'm just curious if you think you're losing any share as a result of it. And also this contract manufacturer, how much of it can you influence the speed in which they complete the transition or at the mercy of them? And then Kurt, could you help us a little bit more on what you expect gross margins to be for the May quarter also OpEx? And then lastly, once the transition is done on the supply chain side, where do you think gross margins might be at the end of fiscal 2020?

Good questions Tony. As relates to the share loss concern there probably have been situations, where we've lost some business to what some might term competitors. Because of our extended lead times and we have had two quarters of really excessive past to backlog and lead times that have had extended well past historical norms, and in some cases, we have customers who simply can't wait. And if we can't deliver the product they have no choice, but to look elsewhere. I'm not sure it's been a dramatic impact in terms of our overall consolidated revenues, but it is a factor it's a huge concern. And it really is an additional motivator for us to try to get the supply chain situation stabilized and get lead times back to the levels that they had been historically. Our customers have come to rely on us for virtual just in time delivery. And we really want to get as close to that as we possibly can. As relates to the supply chain challenges and the ongoing transitions, I would say, it's up to us and our partners to make that work and be effective. And so, we've really tried to double down on engaging with our supply chain partners, so that we have better visibility on their activities and they have better visibility on what our demand is. So that we can continue to try to make progress and get things back to where they were before without having any compromise on any front especially around quality.

And just to address your question on gross margin, and some of that conversations or parallels what we discussed a bit earlier I think with Scott on EBITDA and EBITDA expansion that occurs over the next four quarters. But I just give you additional color and we kind of ended the year all-in just between 40% to 41% gross margin. We think that in Q1 that will drop off a bit probably in the 38% to 39% range mainly because of the haircutting that will occur as a result of the deferred revenue that I mentioned before, but we think that the margins over the base of the year will expand especially towards the second half of the year to somewhere at or north of potentially 43% to 44%. That kind of mirrors the trajectory that we would expect to see with adjusted EBITDA because you start to get that earnings leverage again sort of towards the second half of the year as the deferred revenue haircut burns off quicker. So that hopefully gives you some color on…

Well, thank you. Thanks for joining our call today and we'll look forward to speaking with you at the end of our first quarter.

This concludes today's conference call. You may now disconnect.