Welcome to CalAmp's Third Quarter 2021 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, President of Shelton Group, CalAmp's Investor Relations firm. Leanne, you may begin.

Good morning, and welcome to CalAmp's fiscal third quarter 2021 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, Jeff Gardner; 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 are subject to risks and uncertainties that could cause actual results to differ materially 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 any forward-looking statements to reflect future events or circumstances. Jeff 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, followed by a question-and-answer session. With that, it's my pleasure to turn the call over to CalAmp's President and CEO, Jeff Gardner. Jeff, please go ahead.

Thank you, Leanne. Welcome everyone, and thank you for joining us on this early morning call. Our third quarter results represented another quarter of solid revenue growth combined with strong margin expansion. And as indicated in this morning's release, we recently made the strategic decision to begin winding down our LoJack U.S. operations. And I will speak more about this in a few minutes. First, let me start with the results. Consolidated revenue in the third quarter was $88 million, with adjusted EBITDA margin of 10%. Our SaaS revenue grew both sequentially and year-over-year to $34.4 million, or 39% of total revenue. We ended the quarter with a strong balance sheet, including over $91 million in cash, and we generated our fourth consecutive quarter of positive free cash flow. During the quarter, we continued to benefit from the ongoing 3G-to-4G upgrade cycle, which fueled our largest customer's record performance in the quarter. Additionally, demand for our fleet management solution remains robust, particularly for our Here Comes The Bus and Bus Guardian subscription offerings. And you may have seen our recent press release, highlighting a school district in North Carolina that implemented all of our solutions. As the pandemic continues, we've seen more and more K-12 school districts utilize these applications to track their students, buses and drivers, in order to create a safer environment for children and easing parent's concerns. Demand for our advanced tracking technologies for critical supply chain asset management has also been increasing recently, especially in light of the global pandemic and the major increase in shipping volumes. I'll comment more about some of our recent successes in this regard in a moment. I couldn't be proud of our employees' contributions and CalAmp's important technology offerings that are together are helping communities all over the world stay…

Thank you, Jeff. Today, my commentary will include reference to 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 fiscal 2021 third quarter earnings that was issued earlier this morning. As Jeff mentioned, we are pleased once again with our solid third quarter results, in which, revenue increased 5.4% sequentially to $88 million. International revenue was strong in the quarter totaling $27.2 million or 31% of consolidated revenue. Going forward, we will begin discussing our International business by region, such as EMEA, LatAm and APAC, rather than by specific countries, as we continue to execute well on our global expansion initiatives within our core market verticals, including transportation and logistics, industrial heavy equipment and connected car. Software and Subscription Services revenue grew 2.1% sequentially and 3% year-over-year to $34.4 million, and represented approximately 39% of consolidated revenue. Revenue growth for our Software and Subscription Services was driven by an increase in subscribers, particularly in the government municipalities and K-12 school bus end markets in United States, as well as our international recovery services, particularly in the EMEA region. Telematics products revenue grew 8.2% sequentially to $44.1 million from $40.7 million last quarter due to the continued strong demand from the 3G-to-4G transition with large customers. The LTE transition is occurring in both our MRM Telematics and OEM product categories. The MRM Telematics Products revenue increased 6.1% sequentially to $25 million compared to $23.5 million last quarter. Network and OEM products revenue increased 11.1% sequentially and 9.6% year-over-year to $19.1 million, primarily due to record revenue from our largest customer, Caterpillar, which increased 19.8% sequentially and 20.5% year-over-year to $16.4 million. We expect continued…

Thank you, Kurt. I'm very pleased with our performance in the third quarter, as the CalAmp team continues to execute on our strategic initiatives across the organization. I'm very pleased with the continued success we've achieved in our SaaS business to improve the growth and quality of revenue, which is contributing to increased profitability in our overall business. Today's action to wind down our LoJack U.S. operations takes us one step closer to our longer-term goal of becoming the global leader in tracking, monitoring and recovery of critical mobile assets. Although, ongoing challenges remain across the globe and the supply chain due to the pandemic, we remain cautiously optimistic and focused on executing our strategic initiatives and expanding our SaaS offerings to drive increasing value to our customers and shareholders. With that, let's take questions.

At this time, we would like to take any questions you may have for us today. [Operator Instructions] Our first question is from Scott Searle with ROTH Capital. Your line is open.

Hey, good morning. Thanks for taking my questions. Nice quarter, guys. I hope you, your family and your teams are safe during this time period.

Thanks, Scott.

Just to clarify, so, in -- on the LoJack exit, is that going to be a discontinued operation, going forward? And I want to make sure I heard it correctly, in terms of the SVR sales in the U.S. market, that's going to accelerate in the next couple of quarters? And then, do you expect by the end of the six-month to 12-month time period you are at zero, in terms of contribution on the product front from SVR in the U.S.? Or is there some long tail that's kind of associated with that?

Thanks, Scott. I appreciate the question. Yes, this is Kurt. So, first off, let me say that, in terms of the discontinued operations treatment, unfortunately until you effectively shut the business down, the accounting guidance doesn't allow for you to show the business as discontinued operations. However, if you remember, a couple of quarters ago, we made a decision to actually put the LoJack U.S. SVR business as a separate reporting segment. And therefore, if you look in our financial statements, you'll see it actually broken out as a reporting segment. That's important, because we wanted to make sure we were providing some form of comparative information so that you can see management execute on the wind down. We have indicated that over the next, say, six months or so, we're going to be executing on this wind down plan. So, until that wind down period is complete, we won't have discontinued ops treatment. So hopefully, that makes sense to you. In terms of the tail, I'll just answer that question. We believe that there will be some incidental longer-term cost that we will have to cover for this business. We understand that the LoJack brand is very important and the technology is very important. And so, we believe it's critical for us to continue to support our law enforcement partners to allow them to do their job effectively utilizing our technology. But we think, that cost of maintaining that say, tower infrastructure will become de minimis over time as the device activity tails off. So we do expect some tail, but it will be a de minimis cost, and we think we can manage it. On your last point regarding the Software and Subscription Services revenue. Our whole goal in this effort is really to ensure that we're focused on driving our key, more profitable growth initiatives, because we want to have high quality and more predictable revenue streams. And so, we believe that realigned focus around our software and subscription businesses at our key telematics solutions will allow us to drive better growth, in terms of the timeline that we expect will materialize, say, over the next six months to 12 months.

Yes. And Kurt, If I could, just on the LoJack U.S. business, as all of our investors know, that business has been in a secular decline, and it's been putting pressure on our revenue and our EBITDA margins, and we were trying very hard this year to make the conversion to telematics a SaaS offering. But at the end of the day, as Kurt said, we were really focused on doing something that was quick and seamless, and believe that in the long run this will be accretive to both our top-line growth and margins. The International business which we're going to continue to be in is very different, it's multi-channels. So in addition to dealers, we have rental companies, we have financial companies and OEMs as well. And as many of you know, that's all SaaS model. So, I think it's a good decision in the long run for the Company, as we focus on those verticals that we think have the best growth and profitability potential.

And maybe, Jeff, just to follow-up quickly on the accretion to the gross margins. Could you quantify that a little bit what the gross margin differential is, maybe between the U.S. LoJack and other MRM products? And then also curious in terms of CAT, huge quarter, the sustainability on that front, or any color you could provide in terms of where that's going either geographically or some of the end markets? And lastly, just the SaaS mix of the business, you've got Italy in there, you've got Synovia. I'm kind of wondering how those components breakout? It seems like there's a lot of activity that you've got going on in the asset tracking front, kind of, how big is that right now? Thanks so much.

Yes.

You want me to take the first one on the [indiscernible].

Sure, yes.

So Scott, on the gross margin, one thing that we want to make sure we focus on is, this is more about improving our overall EBITDA performance. We believe that if we can execute on our plan and drive the cost savings that we've qualified in our pre-recorded quarter remarks, that our EBITDA performance will improve and this decision will be either neutral or overall accretive to our margin profile. So, in the interim, there will be -- some work we'll need to do, as we proceed down this wind down plan. But again, we believe this is the right decision to allow us to focus on revenue growth and over time, EBITDA margin improvement. You want to touch on CAT?

Yes, sure. I mean, Caterpillar has been an important part of our business for a long time. We're very focused on that customer. I consider that a very strategic relationship. They -- the outlook in the near-term is very strong for Caterpillar. So, we expect to continue aggressive rollout of their 3G-to-4G conversion. So, we're feeling pretty good about that business, working very hard all the time to improve our quality and performance with that company and maintaining a good relationship and very proud of that. In terms of the other things that I'd say, in terms of margins, just contrasting the U.S. business to International on the LoJack connected car space, you know, our margins are well over 50% in Italy. Italy, we're coming off one of the best quarters we've ever had. So, very different business mix, as I said high channel, which makes it very attractive to us. When you asked about our business overall, we had very good traction in transportation and logistics and fleet management this quarter, driven really by -- our K-12 business was very, very strong. As I talked about on the call, we did renew or sign additional business with a large transportation logistics company, and then the international markets continue to perform very well.

Great, thanks guys. Happy holidays.

Yes, you too.

Thank you, Scott. Take care.

Your next question is from Mike Latimore with Northland Capital. Your line is open.

Great, thanks. Yes, congratulations on the quarter there. On the SaaS business, it grew some sequentially despite the backlog fill from last quarter, I guess, is there any seasonality in this business or should this continue to kind of grow sequentially?

Yes. Mike, there is a little bit of seasonality with the business, in particular, as you probably know, our business in EMEA region, particularly the UK and Italy, tends to slow a bit in the -- in our fourth quarter, because the fourth quarter encompasses the Christmas holiday. So, there is a little bit of ebb and flow that's driven in the fourth quarter. Overall, I mean, we were very pleased. I mean, I can give you a couple of highlights. One is, in terms of our subscriber growth, we had seen -- we have seen sequential and year-over-year subscriber growth. One of the items where we've talked to you about in the past, that we are watching and managing very closely is our vehicle finance business. As we mentioned to you in the past, that business was running historically at about 400,000 subscribers and that came down pretty quickly here, we've dropped about 8% to 15% over the last couple of quarters. So as an offset, even -- with that taken out, our sequential growth in subscribers was about 3% year-over-year about 9%, and so we would expect that trend to continue. But we do have a little seasonality that we will be addressing around our Q4.

Got it. And then, it looks like your EBITDA margins on your SaaS business are almost -- were almost 26% in the quarter. That's -- that continues to grow a little bit. I mean, what's driving the growth in EBITDA margin there? And, how sustainable is that? Or would you expect to invest some more in sales and marketing overtime or R&D?

Yes. So first of all, I always say to the team, gross margin matters. And so, as that business continues to grow and our gross margin continues to expand, obviously that margin will roll down to our EBITDA margin. But in addition to expanding on our gross margin with the revenue growth, we had been watching carefully our OpEx, and not just in terms of trying to keep it in check around COVID-19, and not just to bring it down, but more so to reallocate to make sure that we're spending in the right places. And the area of focus for us right now is, driving down G&A. But of course, investing in things like sales and marketing as well as R&D. In connection with the wind [ph] down of LoJack, our objective is to really take a close look at our OpEx and ensure that it's optimized around the SaaS-based business model. And I think that, that will overall help us continue to expand on our EBITDA margin, especially in our Software and Subscription Services business.

And one thing I would add there Kurt is, like -- as we continue to refine our strategy and get focused on a smaller number of verticals, I think that really helps us in terms of also focusing on our investments, R&D. I talked about in the script, some of the things that we're doing with iOn Suite, which is our platform for the future. And so, I think, it puts us in a better position longer-term to continue to invest in our software, to avail ourselves to those higher margins.

Great. And just on the opportunity in the -- I guess, U.S. municipal and education markets. Do you have a sense of what percent penetrated those markets are for your applications at this point?

Well, we can speak more directly around, say, the K-12 and municipality space, a lot more focused on K-12. When we acquired the Synovia business over a year ago and we were looking at the market potential, one of the reasons why Synovia was so attractive is because they did have a real strong market penetration. We estimated at that time, based upon the data that we had, it was somewhere in the, say, 25% to 30%, and that there were a couple of key players in that space. So, that's what we estimated back then, and we think that over the last year we've actually gained additional momentum and we've been taking share.

Okay, great. Thanks a lot.

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

Yes. Hi, good morning, everyone. And Jeff, congratulations on reaching a decision on LoJack. I'm wondering if we can talk about the range of growth that you're seeing in the subscription portfolio? So Kurt, you had mentioned, overall, excluding vehicle finance the growth was 9% year-over-year. Can we just step through and maybe rank order the platforms that are driving growth? And what's slower on the growth curve?

Yes. Sure, Jerry. So, looking at year-over-year subscriber growth, when -- you asked first to rank order it. First and foremost, Italy and the EMEA region was by far highest subscriber growth, that grew year-over-year about 14%. Second, I have to say, that here in the U.S. in our fleet management solutions space that actually grew, the subscriber base grew about 6% year-over-year. And then, LatAm was probably the third place. So outside of that we did, as I mentioned, automotive was down, we dropped to about 345,000 subscribers from the peak of about 404,000 subscribers. And so, we're trying to manage that accordingly. But that will be a bit of a headwind over time, and we'll make sure that we give you adequate information so you can kind of understand how that portfolio of subscribers is trending.

Okay, I appreciate it. And then in terms of the testing that you -- and pilots you're running with the major shipping company that you spoke about, Jeff. Can you talk about what the timeline looks like for their investment decision? Do you have a rough sense of key milestones or signpost that we should be thinking about, in terms of how that's going?

Yes. And I think, Jerry, we're very excited on what's going on just in general transportation and logistics. In general, is growing very quickly, in particular, as it relates to smart trailer. We're looking at something near-term, and I'd say, in the six month to 12 month timeframe they are, really adding features to what we already do today, things like cargo sensing, temperature control, door lock and unlock, those kind of features that are really important to our end user. So, I think that's pretty near-term. The team is very focused on that space and looking forward to a continued growth there.

And sorry, in terms of the evaluation of the pilot programs that you spoke about, is there a specific date in mind or it is a tough to tell?

Yes. It's hard to tell, it's pretty early days for that. So, we'll keep everybody updated. And I think more importantly that the point that we want to convey is that we're continuing to invest in our capabilities around transportation logistics.

And the only thing I'd add there is, as Jeff pointed out in his earlier remarks, I mean, we did add additional close to 30,000 subscribers to 35,000 subscribers to our existing relationship with them under our current trailer program. So that relationship is very good and it's trending in the right direction. And as you know, Jerry, when you're working with these large global enterprises, these pilot programs are much about a collaborative effort to identify the type of solution that they want holistically, and so, it takes a bit of time. So, I think that six month to 12 month timeframe that Jeff mentioned seems reasonable.

Terrific, I appreciate the discussion. Thanks.

Your next question is from George Notter with Jefferies. Your line is open.

Hi, guys. Thanks very much. I guess, I wanted to maybe ask a couple of questions about the SVR exit. And then, maybe just to start, did you guys have any opportunity to sell those assets or sell the business to any other entity? Was that something that you guys considered? And then, also on the cost structure, you mentioned $12 million to $15 million in costs coming out of the business over the next -- I think, it was a handful of quarters, but just to be clear, is that just the cost structure of the SVR business or are you talking about cutting costs on other areas of the Company as well? Thanks.

Yes. I'll take the first part and let Kurt speak to the $12 million to $15 million cost number that he mentioned. Yes, George, we considered all alternatives including a potential sale, and we worked with a reputable financial adviser. Our primary objective was to do something that was swift and seamless, would not be -- we didn't -- we wanted to stay away from a lot of complexity. So at the end of the day, this wind down absolutely was our best option. But we did explore all those opportunities.

And George, to the cost question. So, let me just trying to clarify. So, best way is to describe it in a holistic perspective. So that business is trending, let's say, maybe at $30 million to $35 million revenue run rate on an annual basis. Of the entire cost structure that supports that revenue base, about 60% to 62% of that cost represents what I would call as indirect and direct variable costs, which means, it will go away as the revenue declines. The remaining portion, let's say, 35% to 38% represent indirect and direct fixed cost. And we believe that if we can pull the $12 million to $15 million out of that fixed cost structure, then this decision to wind down this business will be EBITDA margin neutral or accretive. So, that's kind of how we qualified the $12 million to $15 million target number for expense savings.

Got it. Okay, that's helpful. Thanks very much.

Thank you.

[Operator Instructions] Our next question is from Mike Walkley with Canaccord Genuity. Your line is open.

Great. I hope everybody has a happy holiday on the call and stay healthy. Just a follow-up question on the LoJack. For the unwinding of the U.S. trajectory, just on the revenue. Just wanted to clarify, do you think there'll be any late buying as customers may be stock up on this? Or should we just have a pretty steady decline to zero over the next, call it, two to three quarters.

Yes, Mike. How are you doing? Yes, so, good question. And, as you can imagine this is a -- it's a little uncertain. We are having conversations right now, kind of, contemporaneously with this public notice with our customers, so we'll know more here. But our overall feeling is that this business has been running COVID-adjusted, at about $9 million to $9.5 million. We know that our focus is on the next, say, three months to six months in winding down those customers. Of the revenue base, about 50% is with the larger dealers. And we want to make sure that we provide those larger dealers with the kind of a seamless exit and/or replacement associated with this solution, with the SVR products. We expect that the revenue to decline in the first quarter after these notices, probably somewhere between 40% and 50%, and then followed by a continuous wind down over the base in the next two to three quarters down to zero. So the secular decline that we've been experiencing, we do believe that will accelerate and really kind of wind down over three months to six months or so.

Great, thanks. And then, may a follow-up for Jeff on that when you're talking with these -- all the dealer partners across the U.S., or do you think there is any chance to convert some of these to a subscription model, like you've done with Italy and other regions that have that type model?

Yes, we do hope there is some opportunities there, and that's why we're trying to be very responsive to our transition with this announcement today. We have good relationships with some of these large dealers who do business all around the world, and we're really looking for an opportunity to continue to part with them on a SaaS business model.

Great. And then a follow-up question for you there, just on this very strong Caterpillar results. Do you have any sense of how far you are into the 3G-to-4G upgrade? And what might be more of a steady state of the business once that 3G-to-4G is done? Is it -- does that tail continue for another year or six months? Just trying to get an idea of how that model Caterpillar will grow, call it a two to three-year period?

Yes. Thanks, Mike. I think, well, first off, I just need to say that the relationship with CAT is an exceptional one, and we are working with them, not just on, say, the heavy equipment, where we've been over the past several years, but expanding that relationship into other product categories within their portfolio, and that's been going well. In terms of the momentum around 3G-to-4G, I mean, the great thing about CAT is, CAT is one of our largest customers and our most sophisticated customers, and they are rolling out the 3G-to-4G transition globally. So, we are seeing them with products being sold into regions outside of the U.S., places like APAC and the LatAm regions. We expect that momentum to continue at least for the next year or so, and then, our goal is really to continue to penetrate their portfolio to grow from there as well. That was a big part of our strategy. About a year ago when we started to sell a lower priced higher volume-oriented product to them, Telematics product to them, I guess, about a year, September or so, and that product line has been growing very well. So, I think, in terms of the 3G-to-4G momentum, we'll continue to stay for the next year or so, and then we will expand into other areas of their portfolio. I do want to use that as an opportunity to highlight what we're also experiencing with other customers. Again, our larger customers are making this move pretty rapidly. But for the smaller-to-medium sized customers, the pace has been a bit delayed. And we expect that to start to pick up here in the next two quarters. And then from there, it will be focused on here domestically. But then, we are seeing some trends internationally. If you look at our International growth, as I pointed out in the prerecorded remarks, our international business grew to 31% of our revenue. A big part of that was growth in LatAm, and most of that expansion in LatAm was around 4G. So, although the mandate is here in the U.S. in the next year driven by the sunset date. We are seeing the growth potential globally, and a lot of companies moving in that direction outside of the U.S.

Great, thanks. That's helpful. And just last question from me, just on this logistics customer, additional win, congrats on expanding within that important customer. Can you just remind us when you sell the hardware, is that bundled and runs through higher services revenue over time, or is that kind of one-time in nature with this customer? And can you talk maybe a little bit about the competitive environment that helped you win the deal versus what sounds like a pretty, pretty busy one?

Yes. No, it's definitely a bundled product with the SaaS component. This is a strategic relationship that we're providing visibility across the entire fleet there. So, I think, we're well suited. I think, one of the things we bring to their market, when we're competing in situations like that is our engineering prowess, our product, leadership that really gives a lot of comfort. We've got a very highly scaled platform out there that offers great visibility to our customers. And as you heard me talk about my remarks, really looking to make continued investment in the smarter trailer initiative.

Great. Best wishes for the New Year. And thanks for taking my questions.

Yes. Same to you. Thanks.

Thanks, Mike. Happy holidays.

Thanks.

And there are no further questions at this time. I turn the call back to Jeff Gardner for closing remarks.

Okay. Well, thank you for joining us today, and your combined continued interest in CalAmp. On a final note, Kurt and I will be attending the -- a virtual conference with Needham -- Needham Growth Conference on Thursday, January 14. If you'd like to request a meeting there, please contact Needham or The Shelton Group. And we look forward to talking to our investors throughout the day today. And have a safe and happy holiday season, everyone. Thank you.

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