Welcome to the CalAmp's First Quarter 2020 Financial Results Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Leanne Sievers of Shelton Group, CalAmp's Investor Relations firm. Leanne, you may begin.

Good afternoon. And welcome to CalAmp's first quarter 2020 financial results conference call. I'm Leanne Sievers, President of Shelton Group, CalAmp's Investor Relations firm. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek; and Chief Financial Officer, Kurt Binder. Before we begin, I'd like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAmp's best current judgment, they're 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 the earnings release issued today, which are available on our website. We undertake no obligation to revise or update any forward-looking statement to reflect future events or circumstances. Michael will begin today's call with a review of the company's financial and operational highlights, then Kurt will provide additional details about the financial results and outlook followed by a question-and-answer session. With that, it's my pleasure to turn the call over to CalAmp's President and CEO, Michael Burdiek. Michael, please go ahead.

Thank you, Leanne. We are pleased with our first quarter results with consolidated revenue of $89.1 million, which was at the high end of our guidance range. Software and subscription services exceeded our expectations with record SaaS revenue of close to $26 million, up 38% year-over-year driven by strong performance from our three recent acquisitions. We also delivered solid profitability as non-GAAP net income was $4.2 million or $0.12 per diluted share, also at the high end of our guidance range. Collectively, our first quarter results demonstrate further progress on our strategic transformation to a global SaaS solutions provider, which I will elaborate on in a few minutes. First, I would like to address the progress we made on our supply chain initiatives. During the quarter, Telematics Systems revenue was in line with expectations at $63.6 million, supported by marked improvement in our supply chain performance as we executed on our plan to be more methodical in our diversification efforts in order to meet near-term customer demand. The steps we took to implement new operational processes and tighter synchronization with our key suppliers has resulted in a more stabilized supply chain and shorter lead times. While we made substantial progress in the latest quarter, we continue to believe it will take two more quarters to fully optimize our supply chain structure and realize the full benefits of global diversification with optimum inventory levels and delivery lead times. I would now like to highlight our recent progress in driving CalAmp's transformation to a global SaaS solutions provider. As I previously mentioned, our software and subscription services first quarter revenue reached a record level at $25.5 million or 29% of consolidated revenue. We saw particularly strong traction from CalAmp's iOn fleet management applications and LoJack subscription services. Additionally, the integration of our…

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 and the closest corresponding GAAP basis measures is included in the press release announcing our first quarter earnings that was issued earlier today. As Michael mentioned, we are pleased with our consolidated revenue performance in the first quarter of fiscal 2020, as well as the continuous progress we are making on our supply chain operations. Additionally, our transformation to a global SaaS solutions provider is progressing well, further complemented by the integration of our three recent acquisitions. Consolidated revenue for the first quarter was $89.1 million, a decrease of 6% year-over-year due to an anticipated decline in Telematics Systems product sales, but partially offset by an increase in our software and subscription services revenue. Consolidated revenue was up 6% sequentially due to increased subscription services. The software and subscription services revenue increased 38% over the prior-year period to $25.5 million, driven by the contribution from our three recent acquisitions and, to a lesser extent, organic initiatives. Our LoJack subscription services had an exceptional quarter, generating revenue of $10 million in the first quarter, up 80% year-over-year. Our LoJack subscription services represents the LoJack Italy business as well as our recently-acquired SaaS businesses, Tracker UK and LoJack Mexico. These three entities in aggregate provide a strong foundation for recurring revenue and are expected to contribute to continued expansion of our software and subscription services business. Additionally, we made strong progress expanding our global subscriber base in the quarter with 1.2 million unique subscribers as of May 31st 2019 compared to approximately 776,000 for the same period ended last year, with 348,000 added with our recent acquisitions. In addition to these…

Thank you, Kurt. Looking forward, we believe the fiscal first quarter represents an inflection point in our business with a positive outlook of increasing revenue and EBITDA growth as we move into the second half of the fiscal year. We made substantial progress this quarter in building a solid base of software and subscription service revenue and believe that we are tracking well towards our long-term target of $200 million of annual recurring revenue. With that, we will now open up the call to questions. Operator?

[Operator Instructions]. Your first question is from Mike Walkley from Canaccord Genuity. Your line is now open.

Great. Thank you. Michael, you mentioned you're seeing some revenue synergies from the Tracker, Car Track and Synovia acquisitions. Can you just discuss how integration is going so far and maybe give us more color on what you're mentioning on some potential revenue synergies?

Sure. Thank you. Well, the integration is going very well. We tried to express that in our prepared remarks. And as relates to revenue synergies, we see a number of opportunities to really combine sales and marketing activities in different market verticals to really drive recurring revenue short to medium term. And I think one of the greatest opportunities is in the state municipal government market here in the United States. And with the acquisition of Synovia, we have real scale now as it relates to market coverage across the United States and even into Canada to a certain extent. So, I would say that's one of the biggest areas of focus for us. And we look forward to continuing to drive contract win similar to the one we described for this Department of TransportationAgency in our prepared remarks.

Great, thank you. And just to follow-up on that, on the MRM business, you mentioned some large customers weak, one being Synovia which obviously is part of your company now, but are you seeing any share losses at customers or can you just maybe discuss demand trends for the MRM business?

Yes. We were concerned about share loss as it relates to some of our supply chain challenges over the last couple of quarters. I think, this latest quarter, we felt pretty good about our ability to retain existing customers and potentially even claw back to a certain extent some share losses, especially in the Latin American markets. So, I would say, we feel pretty good that we're almost back to where we were prior to some of the issues that we faced in Q3 and Q4. On the demand side, I think we see encouraging signs that a large percentage of our customer population here in the United States is starting to take seriously the 3G sunset issue, and we're feeling good that that could produce some tailwinds for us over the coming quarters, especially over the next two years, as that sunset becomes very imminent at the end of 2021.

Okay, thanks. Last question for me and I'll pass it on. Just given the start to the year on the guidance, can you just help us think about adjusted EBITDA for the year? Do you still think it's similar to last year and slightly higher? And if so, with the purchase accounting, how should we think maybe about the slope of the adjusted EBITDA ramp throughout the rest the fiscal year? Thank you.

Yes. Well, given our guidance of roughly $92 million at midpoint on revenue for Q2 and approximately $9.5 million of adjusted EBITDA at the midpoint in Q2, that suggests that there's pretty strong marginal profitability in the operating model – $3 million of incremental revenue producing an incremental $2 million of adjusted EBITDA. So, we would expect that as revenue grows through the year, especially in the software and services category that we would see that express in terms of earnings leverage working through the year. And as Kurt pointed out, we expect to get back into the mid-teens neighborhood as it relates to EBITDA margin as we work our way into the second half of the year and especially as we exit the year.

Great. Thank you.

Your next question is from Jonathan Ho from William Blair. Your line is now open.

Hi. Good afternoon and congrats on the strong results. I just wanted to start out with the 3G to 4G transition. Can you talk a little bit about whether there may be a content or pricing uplift opportunity as customers start to contemplate that and maybe roll out upgrades to their systems? Clearly, there should be more capability with the enlarged bandwidth as well.

Sure. Well, just to kind of quantify the scope of that opportunity, as of last Friday, there were 1.3 million 3G CalAmp units in service with customers in the United States, all of which are either going to go dark or going to have to be replaced and upgraded over the course of the next two years or so. Some of those 3G units are a part of our subscription population, but even setting those aside, that's more than a million unit addressable market opportunity as it relates to upgrades. And assuming that half or so of those would get replaced in normal course, that's about a $50 million addressable market opportunity in terms of tailwinds around MRM Telematics device sales over the course of the coming eight quarters or so. We believe that gives us a good deal of tailwind to sort of offset some of the headwinds we'll face from a revenue recognition standpoint as we transition certain of our products to a subscription-only model through our device as a service program. So, we think the LTE upgrade tailwind is a very positive thing for us and gives us some breathing room from a revenue growth perspective as we transition to more of this device as a service model for certain of our products with certain customers.

Got it. And then, just in terms of my follow-up, when we think about sort of the supply chain issues that you've resolved and sort of what's left to do, is there much of a gross margin impact or can you give us a little bit of financial quantification in terms of the improvement that you see over the next couple of quarters when you get back to normal?

Yeah, Jonathan. So, as we look at this supply chain transition, honestly, we kind of assume that we will potentially have some uplift in our margin. The reason is that we're taking a more sophisticated approach in looking at these tier 1 suppliers and ensuring that we are getting the best pricing that's possible. But you'll see a combination of things happening over the next couple of quarters. The biggest thing which is going to impact us is the burn off of this deferred revenue haircut that will happen throughout the year, which we think will also help. So, net-net, as you look through the base of the year, we do see some improvement in our overall gross margin. I think we communicated that too the last quarter that we thought margins would tip up over 41% to 42% thereabouts as we exit the year.

Great. Thank you.

Thank you.

Your next question is from Howard Smith from First Analysis. Your line is now open.

Good afternoon. Thank you for taking my questions. First question has to do with free cash flow generation capability. A lot of moving parts with the factoring and inventory, et cetera. But as you think about longer term, on a more normalized basis, how should we think about now the business model in terms of cash flow generation relative to whatever metric I think you used to do it to adjusted non-GAAP net income? But whatever the correct metrics is, at a high level, how should we be thinking about it?

Yes. So, I think first we should address this first quarter. I think this first quarter was a bit of an anomaly, caused for a couple of reasons. One, when we acquired two of the businesses, in particular Synovia and you noted the factoring of the receivables as well as Tracker UK, upon initial purchase, we did have an obligation to kind of shore up their working capital, which was a cash outflow. Additionally, we took some steps, as you saw, in improving our overall buffer stock of inventory. We wanted to make sure that we were trying to optimize our supply chain and make sure that we had sufficient product to meet demand. And in doing that, we also reduced our AP days, which also resulted in an outflow. So, we look at Q1 as a bit of an anomaly. Where we see things progressing to more of a kind of historical perspective is in Q2 to Q4, excuse me. So, I don't know that we expect anything to change substantially from the historical cash flow generation that we've experienced if you factor out a lot of these one-time items that we've had in the past, if you remember with the LoJack supplier some of the things that were out of the ordinary. So, we're quite pleased with the way the cash flow is progressing and we would think that we'd be back to the historical levels past in the Q2 to Q4.

Great. And then, in terms of the subscription SaaS and software and subscription line, you mentioned – obviously, very strong growth helped by the acquisitions you mentioned, also organic growth. I don't know if you can exactly break it out given all the puts and takes in the business, but can you talk about what the organic growth rate for the subscription businesses are looking like either precisely or in general terms?

Yes. So, we're not prepared to break out the numbers specifically. But, in general, as we talked about in the last couple of calls, our global freight transport customer which had driven a pretty significant uptake both in subscribers and subscription revenue last year, that reached a plateau as we made the initial deployment and completed that project. So, we expect that to sort of maintain its existing run rate level until the second half of this fiscal year as that program expands not only in terms of an increased number of assets, but potentially into new applications. And to give you somewhat of a leading indicator as it relates to organic activities, our net subscriber adds in Q1 – our organic net subscriber adds in Q1 were approximately 25,000, and that includes the negative effects of about 7,000 subscribers declining in our vehicle finance business which is obviously considerably lower ARPU than some of these other more attractive categories like fleet and asset tracking. So, I think the subscriber growth trends are positive and an indicator of ongoing subscriber growth and revenue growth on an organic basis as we work our way through this year.

Helpful color. Thank you very much.

You're welcome.

Your next question is from Scott Searle from ROTH Capital. Your line is now open.

Hey, good afternoon. Thanks for taking my questions. Hey, just quick housekeeping, I think I missed it, but did you give a figure for the network OEM sales? And also on the services and SaaS front, did you break out the M&A contribution versus the organic growth within the quarter? And then I had a follow-up on the hardware front.

We did not break out specifically the network and OEM products number as part of Telematics Systems. We did talk explicitly about Caterpillar and Caterpillar being up on a year-over-year basis slightly down from the prior quarter and in line with expectations. And then, on the software and subscription side, no, we did not break out specifically what the contribution from M&A was as it relates to the overall software and subscription revenue growth. But I would say that the acquisition-related revenue contribution was a bit better than what we had expected and what we had guided to on our last earnings call.

Scott, let me correct just one because I think in my original remarks I did indicate network and OEM product was about $16.3 million, and that was representing a slight increase year-over-year. But…

Okay, perfect. Hey, and just to follow-up then on the Telematics Systems front, a lot of moving parts in terms of transition to the DaaS model, which is starting to ramp up this quarter, acquisition of some customers, could you take us through your thinking in terms of the impact both in the second quarter, kind of the impact that's going to have on the Telematics Systems business and also for the year? Because it seems like there's some good things that are going on there now as you're getting through some supply chain issues, being able to recapture some of those customers, and then you combine that with some of the 3G sunsetting opportunities and just natural organic growth within the industry that it seems like there's a better outlook overall for hardware, but could you kind of fold that into the backdrop of some of these, I don't call them cannibalization, but that's really kind of obscuring what that core Telematics Systems growth looks like when you net out DaaS and you net out Synovia sales and LoJack sales, et cetera? Thanks.

Yes. So, if you annualize Telematics Systems revenue from Q1, you're a little bit below the outlook we gave as guidance on our last earnings call, which was approximately $257 million to $262 million. The annualized number from Q1 would be $254 million. So, we do expect some modest growth in Telematics Systems as we work our way through the year because we feel pretty comfortable with the guidance we gave on our last earnings call as relates to the full-year outlook there. And we would expect that to be somewhat of a linear progression, Q2, Q3 and into Q4.

Great, thank you.

You're welcome.

Your next question is from Jerry Revich from Goldman Sachs. Your line is now open.

Hi. Good afternoon. I'm wondering if you could talk about, for the businesses that were acquired, what's their organic growth trajectory? So, obviously, the accounting is noisy with deferred revenue. On a like-for-like organic basis, what's the growth profile of the businesses in this first quarter on a like-for-like basis?

Yeah, Jerry. So, to respond to your initial question, I think the best way to answer it is we were pretty conservative in our forecasted growth rates. Looking at the businesses prior to acquisition, you had Synovia that was growing in the mid-teens range on a billings basis prior to acquisition whereas the two other businesses, Tracker UK and Mexico, were flat to slightly up, maybe 2% to 3%. In general, I think the best way to kind of characterize it is we looked and said, well, based upon all of the noise in the purchase accounting, what would be an acceptable, but conservative growth rate from a billings perspective. And our assumption was somewhere in the range of 5% to 7%. So, we wanted to be just fairly conservative as we get to understand these businesses, figure out where the revenue synergies are before we went ahead and started to apply some of the more aggressive growth rates.

And so, you have modeled 5% to 7%, but it's tracking double digits, is that what the comments imply?

No, no. I'm just saying, we, on a billings basis, forecasted at a 5% to 7% rate. The historical growth rate was probably double that, but we didn't take that into consideration. We won't do that until we know and understand fully all of the revenue synergies that are available to us.

I would add this color. And that is, having almost a full quarter of experience with these three businesses, we're very encouraged with their performance thus far.

And how would you characterize the M&A pipeline at this point? Any other opportunities that have a similar profile and similar fit with your business that looked like Synovia specifically?

Well, I would say that we're very much in integration mode now and very focused on trying to extract maximum value out of these investments we've made. So, I wouldn't suggest that we are active in terms of trying to build an M&A pipeline. And I think once we've digested these acquisitions, they start to be fully realized both in terms of potential and also in terms of revenue recognition impact. I think we have some options to start to consider some inorganic initiatives. But, right now, we're very, very focused on making sure we get the integration right and that we pursue the revenue synergies as appropriate given these new growth platforms.

And, Michael, you mentioned, for the legacy subscription business, the subscriber count was up 25,000 sequentially. What's the outlook for ads from here for the base business? Is that how we should be thinking about the baseline subscriber growth?

Yeah. Well, we have not given any – in fact, we've never given any subscriber growth outlook or forecast. But I think in the freight and transportation marketplace and in the municipal government space, I think we're encouraged by the pipeline of opportunities there. And we would expect that most of the subscriber growth going forward would come in those two market vertical categories.

And lastly, in MRM Telematics, it's tough to tell with your customers obviously becoming part of the platform. If you were to strip out those intercompany sales, what would the like-for-like, the organic sales performance for MRM this quarter, stripping out Synovia and any other adjustments?

Well, I think that would be wading somewhat into uncharted territory. And, frankly, it's really hard to tell. And I don't think we're really – we would be very comfortable in trying to answer that question very specifically.

Okay. The point is, I think MRM, the performance – the underlying performance was better than what it shows because of the acquisition of the customer. And I'm just trying to get a rough understanding of how much better it would have been without what's essentially a change in accounting.

Well, I think that's an accurate statement. And to be clear, it was better than we expected even with the loss of revenue and consolidation effect.

Yeah. Synovia specifically, they were a very important MRM Telematics customer of ours and they – so, moving them on board here and consolidating that revenue [ph] does have an impact on that product line. Yes.

Okay. All right, thank you.

Thank you.

[Operator Instructions]. We have a question from Mike Latimore from Northland Capital Markets. Your line is now open.

Thanks. I guess just a couple of questions on the SaaS business. Roughly, what is the kind of gross margin, EBITDA margin profile, now that you've got these acquisitions in the mix here?

On a consolidated basis or which product line are you referring to?

The overall software as a service business – subscription SaaS business.

Yeah. I think probably the way to look at it is – and as we've communicated in the past, Mike – is that the software and subscription services from a historical perspective has been at or just slightly north of 50%. When you add in the new acquisitions, those actually would have been exclusive of the purchase agreement accretive to that. I think on a blended basis, they are definitely north of 50%, probably mid-50s once you pull out all of the purchase accounting adjustments. So, we would expect that they would be longer term after, say, 12 months or so, once we get past this phase that they would be overall accretive to our gross margin percentage for the SaaS business.

Right, right. And then, EBITDA margins, I think you said it's been maybe 10% or so in the past, is that right or – on SaaS business?

No, no. These again also are accretive to our overall EBITDA margin. I think if you look at us, the organic business, we'd probably say we're in the low to mid-teens. These businesses should drive us to the mid-teens to even high-teens, so they would definitely be accretive to our overall EBITDA margin.

Great. And then, in terms of the device as a service strategy here, that largely relates to your MRM category or does it also affect the network and OEM at some point?

No, that's isolated to our MRM category; and even isolated within our MRM portfolio to just a couple of product lines.

Got it. And then, the guidance for – I think you've guided to the software subscription business being sort of over $30 million on a quarterly basis exiting the year. What does that imply from a kind of organic and then acquisition growth? Are you assuming this kind of 5% to 7% growth on the acquisitions and then some organic growth beyond it?

I think the simple answer is yes. We talked a little bit earlier on this call about our expectation that we would see growth both organically and billings growth with each of the acquired businesses including Tracker which was flattish in the year prior to the acquisition. And we're encouraged with the outlook for Tracker and especially as it relates to the first quarter performance. So, I think we've got a modicum of momentum on both the inorganic front as well as the organic front.

And just last, I guess the midpoint of second quarter, as you're growing a couple of million, should we assume that's largely on the sort of the SaaS category or some hardware?

We would expect some modest growth in Telematics Systems and probably a little more growth on software and subscription services.

Okay, thank you.

You're welcome.

There is no question at this time. Mr. Michael Burdiek, you may continue with your closing remarks.

Well, thank you everyone for joining us today. Before we conclude the call, I'd like to mention the upcoming investor events we will be attending including the Jefferies Industrial Conference on August 6th in New York and the Canaccord Growth Conference on August 7th in Boston. If you'd like to arrange a meeting with us at either of these events, please contact your sales representative or the Shelton Group. We look forward to providing further updates on our next earnings call in late September. Operator, you may disconnect the call.

This concludes today's conference call. Thank you everyone for participating. You may now disconnect.