Q3 2020 Earnings Call
Financial results conference call.
As a reminder, this call is being recorded.
I would now like to introduce your host for todays conference call Joel I came away I'm Shelton group called actually Investor relation for him Gillam you may begin.
Thank you good afternoon, everyone and welcome to calendar fiscal third quarter 2020 financial results Conference call I'm, Joel crumbling managing director of Shelton Group.
Yes, Investor relations firm.
With us today are khalaf, President and Chief Executive Officer, Michael brick and Chief Financial Officer Hurt Center.
Before we begin I'd like to remind you that this call may contain forward looking statement.
While these forward looking statements reflect Carolina. That's current judgment are subject to risks and uncertainties cause actual results could differ materially from those implied by these forward looking projections.
These risk factors are discussed in our periodic FCC filings and in the earnings release issued today, which are available on our website.
Her takes no obligation to revise or update any forward looking statements to reflect future events or circumstances.
Well, Michael will begin today's call with a review of the Companys financial and operational highlights.
The personal provides additional details about the financial results and outlook.
Followed by a question and answer session.
With that it's my great pleasure to turn the call over to Khalaf, President and CEO , Michael Burdick, Michael. Please go ahead.
Thank you Joel.
Third quarter consolidated revenue of $96.6 million exceeded the midpoint of our guidance for the third consecutive quarter and reached a quarterly record.
Software and subscription services revenue also reached a record at $33.4 million.
Which was up 68% year over year and represented 35% of total revenue for the quarter and moving us closer to our long term target 40%.
Our telematics systems business was slightly up sequentially highlighted by the expected rebound in our network and OEM products business with increasing orders from our top enterprise customers as well its significance its sequential growth from our largest customer caterpillar in support of their three g. to L.L.
<unk> product upgrade cycle.
Our solid results this quarter were driven once again by or software and subscription services business. As a result of strong performance from our recent acquisitions and in particular Sonobi a solutions combined with strong growth from Lojack, Italy, and our supply chain integrity services.
In fact, lojack, Italy is revenue was up more than 20% over the prior year period in our emerging Sci business was up more than 40% year over year, albeit from a relatively low base.
We're seeing continued momentum foreign Sonobuoys solutions here comes the bus application asset directly appeals to major school districts across the United States, including recent installations in Minnesota, Florida, North Carolina, New York, Virginia, and Georgia, among others to enhance students saved.
The and bus route optimization.
Here comes the boss now has more than 1.9 million users and we're working on many additional opportunities with more school districts and municipalities across the nation.
Our tracker UK subsidiary is also adding new recurring subscription opportunities with its smart dealer and smart drive applications, including a recent partnership with auto capital in London to manage its aftermarket fleet and provide customers with Nbn connectivity solutions and automated intelligence.
Additionally, trackers smart fleet application saw success with a large fleet customer in G. Bailey, that's adopting our solution to manage and monitor its fleet of 240 service vehicles to improve driver behavior.
Further Calamps Lojack, Mexico subsidiary recently announced to treat a strategic alliance with both Volkswagen groups truck and bus manufacturing Division Man truck and bus Mexico to deliver advanced telematics and video services across its range of truck and bus vehicles sold in Mexico.
Lojack, Mexico developed a robust and customize connected vehicle solution built to top the counting of technology stack that focuses on security improve road safety and operational efficiency Furman truck and bus fleet customers and drivers.
As part of the agreement Man truck and bus will also offer its customers lojack stolen vehicle recovery services on all vehicles.
Which is the only SPR service supported by law enforcement throughout Mexico as a result of our state of the our technology and best in class Security services.
Turning to our telematics systems business revenue for the third quarter was $63.2 million were up 2% sequentially.
As mentioned previously network and OEM products revenue increased during the quarter due to a return to growth from our largest customer caterpillar, which ramped orders for our next generation LP base product family.
We expect this product transition to provide a tailwind for our business across our installed base in the coming quarter and throughout 2020.
Another area that will be important to Carolyn going forward is our supply chain integrity opportunities employing our sci on tags and onboard diagnostic equipment.
We recently entered into an agreement with powered alliance to utilize these powerful tags in combination with our gateways and the Calamp telematics cloud detract wouldnt pallets throughout the logistical roadmap from Dr. dock.
This is that this is only one example of the types of applications that can benefit from the use of our eye on tax.
The opportunities for intelligent supply chain automation and global commercial accounts, our extensive and I believe this technology could meaningfully contribute to collapse growth in the years ahead.
As part of these efforts, we recently announced the availability of our eye on suite for fleet management, which embodies the latest Cowen Micro service technologies as an integrated safety bundle.
This next generation of talent by on suite includes the latest version of Crashboxx technology as well as additional services for driver, scoring and our innovative eye on tag asset visibility service.
These technologies in combination provide comprehensive real time visibility on fleet vehicles their locations and contents anywhere at any time.
With the eye on Sweet fleet operators can now monitor the safety of drivers and receive instant notification of crash incidents or respond in real time to the potential loss or with the fleet vehicle, where any of its contents, which can all be electronically tag at low cost.
The eye on suite with the eye on tag Microservices uniquely addresses the tools on the truck use case, thereby increasing ROI for columns fleet customers by mitigating lost hours spent searching for lost or stolen tools or other valuable fleet assets.
The eye on suite offers a preview accountemps telematics device microservices roadmap, including our plan to release the eye on tag Micro services, an eye on driver, scoring for install base of telematics device customers later this fiscal year.
These micro services will be available on an all the cart basis or as an aggregated subscription bundle and activated through Calamps telematics cloud services.
Now I would like to highlight a customer case study related to one of many developing connected car telematics services opportunities that we're pursuing in concert with our Lojack International operations.
We recently made an announcement on the strategic alliance with Hurts, Mexico locally represented by a basa Hertz dollar Thrifty Firefly and Carshop franchise operator.
As part of this engagement Hertz, Mexico will leverage Lojack, Mexico stolen vehicle location assist and connected car telematics to reinforce driver safety and bring peace of mind to its rental car customers.
Lojack, Mexico Telematics technology will be installed in select hurts fleets at more than 170 offices throughout Mexico with completion by calendar year end 2020.
We were selected for this opportunity after undergoing a thorough selection process, which highlighted three of Calamp strengths first lojacks brand reputation in Mexico second the power and scalability of our telematics technology and third the solid and consistent operating performance.
And financial strength of Calamp.
It's also instructive to know that we replaced an incumbent who was not able to meet Hertz exascale exacting performance and reliability expectations.
This important new customer will utilize telematics services to support operational efficiency initiatives, including vehicle tracking logistics inventory management and recovery assistance on stranded or stolen vehicles.
Lojack Telematics solution is supported by the full Calamp technology stack and will enable data collection on miles driven speed alerts travel history and vehicle status.
Deployments commenced at the end of our most recent quarter and are expected to ramp to several thousand units by the end of the current fiscal year.
The initial contract value is estimated to be just under $1 million with the opportunity to expand over time.
Now before passing the call onto occurred for his financial review I wanted to point out something that elucidates calamps unique strategic value in the telematics industry.
For a long time, we mentioned the Calamp telematics cloud we're CTC.
This is the platform service underpins all of our proprietary SaaS applications and supports delivery of our current and future micro services.
We built CTC to be extensible powerful reliable and globally scalable.
As we mentioned in a recent social media blog around mobile World Congress Americas, Amazon Web services as Bill one of its mission critical business applications onto our proprietary CPC platform, which is a significant endorsement of our telematics cloud strategy.
We believe this vote of confidence from the World leader and B to B B to C. Internet Commerce is a validation of the exceptional work our technical team has accomplished over the years in building this resilient powerful and flexible telematics application enablement platform.
In closing I am pleased with our consistent performance over the last three quarters, having navigated through significant global trade uncertainties and supply chain transition challenges.
Based on our fourth quarter guidance, we expect continued growth to close out the fiscal year, thus, placing count up in a strong position for further growth in the new year.
We remain focused on serving our global enterprise customers with industry, leading telematics offer solutions as we drive our continued transformation to a global SaaS solutions provider.
With that I will now turn the call over to Curt for a closer look at our fiscal third quarter financial results in fourth quarter guidance. Then we will open the call up to questions.
Thank you Michael My commentary will include references to non-GAAP financial measures on 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 third.
Third quarter earnings that was issued earlier today.
As Michael mentioned, our third quarter consolidated revenue of $96.6 million exceeded the midpoint of our guidance for the third consecutive quarter.
As we continued to gain traction on our transformation to a global SaaS solutions provider.
This was up 9% from the prior year period, and up 4% sequentially due to another quarter of record revenue in software and subscription services and solid growth in our network and OEM products business.
Software and subscription services revenue increased 68% year over year to $33.4 million and a record 35% of revenue.
Driven by increasing contributions from our recent acquisitions in particular Sunovia solutions.
We also saw strong growth from Lojack, Italy, as well as our supply chain integrity services revenue.
Lojack subscription services revenue, which includes lojack, Italy tracker, UK and Lojack, Mexico was $11.5 million in the quarter end up 17% sequentially.
Teladoc systems revenue was $63.2 million in the third quarter up 2% sequentially and down 8% as expected from the prior year period.
Network and OEM products revenue increased to $17.4 million in the third quarter from $12.6 million in the prior quarter driven by a return to growth at our largest customer caterpillar.
Revenue from cat increased over 44% sequentially to $13.6 million compared to $9.4 million in the prior quarter and representing approximately 14% of consolidated revenue.
As Michael mentioned Cat began ramping orders of our next generation LTE based product family during the quarter and we expect these orders to continue in the coming quarters in support of their product transition.
Consolidated gross margin was approximately 38% in the third quarter down from the prior quarter and prior year period.
Our gross margin performance was principally impacted by unfavorable product mix with certain customers, coupled with incremental charges for excess and obsolete inventory and unfavorable manufacturing variances as we proceed with the closure of our manufacturing facility in Oxnard, California over the next 90 days.
We expect the impact of these items to diminish over the next few quarters.
In our Opex, our GAAP basis, R&D sales and marketing and Genie expenses in the third quarter fiscal 2020 as percentage of revenue were approximately 8%, 15% and 15% respectively.
In general Opex increased as a percent of revenue due to higher expenses from our recently acquired businesses combined with the deferred revenue haircut or purchase accounting adjustments.
The revenue haircut from our acquisition is normalizing and we expected our opex will begin to decrease as a percentage of consolidated revenue over the next few quarters.
On a non-GAAP basis Opex for the third quarter for R&D sales and marketing and DNA expense as percentages of revenue.
Were 7%, 14% and 12% respectively.
For the full year of fiscal 2020, we expect GAAP basis, R&D sales and marketing engineering expenses as percentages of revenue to be 8%.
16% and 16%, respectively, and we expect non-GAAP R&D sales and marketing engineering expenses as percentage of revenue to be 7%.
15% and 12% respectively.
The GAAP basis net loss in the third quarter was $7.4 million or 22 cents per share compared to a net loss of $7.4 million or 22 cents per share for the previous quarter.
The current year GAAP basis net loss reflects the adjustment for a $2.4 million charge for the early retirement of debt as well as purchase accounting adjustments that I discussed earlier, along with increases in opex due to the acquisitions.
non-GAAP net income for the third quarter was $5 million or 15 cents per diluted share and slightly above the midpoint of guidance as compared to $4.8 million or 14 cents per diluted share and the second fiscal quarter.
Adjusted EBITDA was $10.9 million in the third quarter with an adjusted EBITDA margin of 11% compared to adjusted EBITDA of $10.6 million and adjusted EBITDA margin of 11% last quarter.
I will now provide some additional details on our balance sheet and liquidity position as of our fiscal quarter end.
At the end of the third quarter, we had total cash and marketable securities of $104 million and total outstanding debt of $209 million, which reflects the repurchase of $94.9 million in aggregate principal amount of our 1.6% to 5% convertible.
Senior notes due in May 2020, plus accrued interest.
Of point $7 million.
Additionally, these amounts represent the aggregate carrying value of our convertible unsecured notes, coupled with $15.2 million of amounts due to factors or assignees, which was assumed in the acquisition of Sunovia.
Net cash generated an operating activities was $3.7 million for the third quarter fiscal 2020, which reflects our net loss of $7.4 million adjusted for certain noncash items, such as depreciation amortization and stock based compensation.
As well as changes in working capital.
Our consolidated net accounts receivable balance was $83.5 million at the end of the third quarter, representing an average collection period of 70 days.
The total inventory at the end of the third quarter was $44 million, which was down $5.5 million sequentially and represents an annualized inventory turns of approximately 5.4 times.
Our cash conversion cycle time was 76 days at the end in the third quarter compared to 79 days last quarter.
Additionally, our deferred revenue balance was $64 million at quarter end compared to $61.9 million last quarter.
For the third quarter, we recorded an income tax benefit of $2.6 million, which is attributable to our pre tax loss along with available R&D tax credits, partially offset by other discrete items.
For the same period last year, we recorded an income tax benefit of $778000 for similar reasons that I just cited for the current quarter.
For the remainder of fiscal 2020, we do not expect any material changes to our cash taxes due to our remaining federal net operating losses and other available tax credits.
Now turning to our fiscal 2024th quarter outlook.
We expect the fourth quarter consolidated revenue to increase to a range of $95 million to $100 million representing year over year growth of 16% at the midpoint.
Our fourth quarter outlook reflects continued momentum across our SaaS business and expect to Tailwinds from the Threeg to LTE upgrade cycle.
At the bottom line, we expect fourth quarter GAAP basis net loss to be in the range of 19 cents to 13 cents.
Per share and non-GAAP net income in the range of 10 cents to 16 cents per dilutive share.
We also expect fourth quarter adjusted EBITDA to be in the range of between $8.5 million to $13.5 million.
With that I'll turn the call back over to Michael to provide some final comments before we open the call up for your questions.
Thank you Kurt I'd like to reiterate once again that we made great progress this past quarter, expanding our software and subscription services revenue as we continue to transform calamp into a leading SaaS service provider.
We expect to finished the year with additional growth and we're excited about our prospects in the new year with that we'd like to open up the call to questions operator.
As a reminder to ask your question you will need to press star one on your telephone.
So we enjoy your question pressing to balance our Heskey. Please stand by al will be compiled it gave us.
Your first question comes from Mike Walkley of Canaccord Genuity. Your line is open.
Alright, thank you.
Oh.
A question for me just just on the telematics systems business.
Especially on the MRM piece, Michael there's been some soft trends and new truck build and trailer builds Keith can you talk about kind of what you're seeing from your end customers in that business. How you talked about from Threeg to LTE, but can you talk about kind of trends in that business and in overall, just how we should think about the run rate for telematics systems going forward given.
Some bundling going on and you bought couple of your end customers. Thank you sure sure. Thanks for the question Mike.
So as we as we explained in the prepared remarks, our telematics systems business was up sequentially and I think it's important to point out that we were addressing a number of significant headwinds as we worked our way into Q3, specifically around our supply chain transitions and the tariffs that went in.
To affect September one, which were applied to to a significant portion of our products imported to customers in the United States from our manufacturing base in China.
But despite those headwinds we did see incremental growth in revenue our bookings activity. During Q3 was probably a little bit better than expected given the tariff headwinds that we faced and we saw nice recovery with caterpillar in the quarter related to two there are various LTV great initiatives.
And new product builds.
So all in all I would say it was a good quarter.
As it relates to some of the macro factors that you described I'm not sure we saw any significant.
Deterioration in end markets as it relates to some of those factors and I would say overall, we're very encouraged going into Q4, given our improved revenue outlook.
Hey, thanks.
Follow up for me.
Some of the things you talked about in the headwind in mix.
How should we think about just gross margins within that business trend, where do they kind of dipped to in Q3, and maybe staying Q4 and how should they recover over time.
Sure well talk about it qualitatively and Kirk can get into more details.
But as Curt explained in the prepared remarks, and when we had some significant expenses actually unexpected expenses as it relates to some of the activities related to our U.S. manufacturing.
Facility wind down.
Facility has been in business and producing product for Calamp for almost two generations and as we wound that down obviously, we're cleaning up a lot of past sins and addressing things on a very proactive way as we move some of that activity to our tier one manufacturing partners in other parts of the world.
So we expect that Q3 was probably the bottom in terms of gross margin and we would expect to see things improve.
Incrementally over the course of the next few quarters and get us back to were more or less where we were a couple of quarters ago, and especially considering the fact that as the deferred revenue haircut headwind sort of dissipate as it relates to some of the purchase accounting around the acquisitions that should also provide.
Somewhat of an impetus for continued margin expansion as we work our way into the next fiscal year as it relates to the mix factor, we launched two new LTC products in Q3, and they ramped much more strongly than we had anticipated with a couple of key customers. Each of those products were launched it I would say.
Not optimized cost profile launch with new new partners in other parts of the world and so we really haven't had an opportunity yet to really cost optimize those products and that will be an effort that will be under way over the course of the next couple of quarters, which should also help.
Even if the current mix of demand stays roughly the same going into Q2 for in the first part of next fiscal year.
Okay. That's helpful. On last question for me I'll pass on you talked about some good momentum with Sanofi and the overall.
SaaS business.
How how's the pipeline in that business has any seasonality, we should think about into year end and just just overall the outlook for growth and that business going forward. Thank you sure.
I would expect that there will be it a little bit of seasonality as it relates to some of the lojack International operations, we're coming off in an exceptional quarter and Lojack, Italy, we expect Q4 to be a little bit softer.
Lojack, Mexico is also quite strong in Q3, we've got some new programs ramping but we wouldn't expect to see the same sort of growth that we saw in Q4 carrying into starting Q3 carrying into Q4, but overall the pipeline of opportunities is terrific on really all fronts.
Across our software and subscription service portfolio.
I would add there Mike also has in the network and OEM products category, we saw a nice.
Rebound win with cat in the third quarter and as we look into the fourth quarter and they move more rapidly to the threeg to fourg transition the booking seem very strong there and we're really pleased with the way that is progressing as well.
Okay. Thank you.
Thank you.
Your next question comes from Jonathan.
William Blair.
Hi, Good afternoon, I guess I wanted to start out with your comments around China and just given that the there's a recent trade deal out there.
Is there any way you could maybe quantify or help us understand what potential impact there could be on your business.
If we if we do see a resolution here.
Well Hello, Jonathan Thanks for the question.
As I mentioned, we were impacted by tariffs in Q3.
And about somewhere between 40, and 50% of our MRM products shipped to customers in United States were affected by tariffs as as we've talked about on earlier conference calls we've had an initiative underway for some period of time to try to transition away from that supplier concentration in China to us.
Other partners around the world than not and transition program is well underway and on track. So we even if there isn't a relaxation of the current tariff rates on our products that are imported from China and in the United States. We expect that the the percentage of affected products is going to drop.
Off pretty considerably in Q4 and be almost diminimus in Q1 of next fiscal year.
The so called Phase one trade agreement, which we have few details on.
Supposedly supposedly would reduce the tariffs that went into effect on September one two or rate lower than the 15%, but we don't have any specific details on that if those tariffs are reduced obviously, it's a plus for us.
But our trajectory in terms of transitioning away from suppliers in China to other parts of the world is going to continue under any circumstance.
And John and just add there when we started the September month, we did Institute a.
Pass through a program with our customers and I'm pleased to say that that was well received I think with all of the guidance and feedback we'd given to our customers over the past year on this program. They were anticipating it and so we had some fares will actually good success and accomplished in that pass through.
Got it and then just as a quick follow up you mentioned and opportunity with eight of U.S. can you, maybe quantify that or give us a little bit of a sense of what you'll be doing in conjunction with they do have a WMS and maybe what types of opportunities that could open up thank you.
Sure.
What we had talked anecdotally somewhat anonymously.
About an opportunity to work with the public cloud service provider on providing a tracking solution for for high valued servers being moved from one data center to another I think we've explained to prove that customer is.
We have to be pretty careful about how public we are as it relates to the details around that engagement.
But needless to say, it's an exciting opportunity we're talking about the world's leader not only in cloud services, but increasingly in transportation and logistics and then as many people know thats a key area of focus for us in an investment area and hopefully a great opportunity for growth well into the future.
Your next question comes from Anthony Stoss.
Caitlin.
Hi, guys I wanted to drill down a little bit more on the gross margin and Curt maybe again.
200 basis points.
Gross margin being lower how much of that was from product mix versus inventory and also if you can just give us a glimpse of what you expect the gross margin might be in February quarter.
Then I had two follow ups.
Sure I will let me start up and say first off we were extremely pleased with the gross margin around our software and subscription business and as you know as that business becomes a larger portion of our revenue it will start to Trump our margin profile within telematics services.
Division, but I just to touch on your comments. So we noted in the early remarks that there was really three areas that impacted margin first off we didnt have a product mix change ever where a number of our customers started to move or into higher volume, but lower margin products in the quarter and we incurred some startup.
Cost associated with those.
New product so I would characterize that is probably one third of the overall.
Our Gen impact.
The next third was around manufacturing variances in the last part was around.
No cost.
As Michael pointed out we were started in the Oxnard facility back in 2004. So we've been there for quite a long time and we set a goal for ourselves of exiting that facility by the end of this calendar year, Walt will be close to achieving that goal, but as you can imagine as we've moved out a ton of that inventory and we.
Either sold it through our where on moving into other assembly facilities.
There is added costs that have risen in those.
Were somewhat of a surprise in terms of the magnitude we expect that to dissipate over the next say 60 to 90 days once that facilities completely shut down.
We want to be mindful that going into Q4. So in Q4, we do expect that some of the manufacturing facility costs will continue we do think that will mix up.
Into Q4 in into Q1, which will result in us overall ticking up slightly from where we ended the third quarter here at 38%.
Tony I'd add one other thing this is a very very minor.
Factor, but it is that it is a factor and not as Curt mentioned earlier that we had instituted a tariff pass through program.
For those products in those customers affected by the tariffs that went into effect on September one. So our objective was not to turn that into a profit center to be be fair and transparent with our customers and pass those through.
At close to zero margin. So so there was a very minor effect, there, but not not a substantial as these other factors that Kirk just described.
Got it and then.
Michael if you wouldn't mind and I'm not looking for guidance on gross margin, but do you think you can get back about 40% level and either.
May or August quarters, I know, you've said several quarters I'm curious and do you expect caterpillar be up sequentially. Clearly there were one of the negative impact on gross margins you expect them to be up sequentially every quarter.
Sure as it relates to to the gross margin guidance, one or be pretty careful we we do expect gross margins to tick up from where we were in Q3 I don't think its unreasonable to expect that by the midpoint of next year, we would be back to sort of where we were in recent history.
Three.
And then as it relates to Cat I think the outlook is good for Q4.
And I would say more or less in line.
Maybe a little bit higher could be a little bit lower but more but but it should be solid.
And consistent with where we were more or less in Q3 was somewhat of an improved margin profile given some of the cost reduction activities. We have around some of these newly launched LTC products.
If I could sneak in just one more.
You mentioned your hurts, Mexico engagement could amount to about a million dollars is that primarily product revenue or is there. Some recurring revenue attached to that no. That's a bundled subscription arrangement.
Got it thanks, a lot you are welcome.
Your next question comes from David Gearhart first analysis.
Hi, Good afternoon. Thank you for taking my questions I wanted to start with a couple of housekeeping questions can you give us the subscriber counts for fiscal Q3, and then also can you give us the acquired revenue in the quarter.
Well. The second question is can be hard to answer the first one's easier.
Our subscriber count was right at 1.3 million in Q3.
And in our prior quarter I think we talked about roughly 1.3 million subscribers as well, but that was around that figure we were up sequentially right around 35000 subscribers and I think it's worth pointing out it was spread almost across every single subscription category.
And so that's that's a very encouraging obviously forward looking opportunity for us in terms of revenue growth.
And then.
Go ahead sorry.
As it relates to acquired revenue it was certainly up sequentially.
But I think it's worth pointing out that it's going to be increasingly difficult for us to be able to discriminate you know the sources of revenue from recent acquisitions and though the preexisting subscription revenue streams that we had before we acquired Sunovia tracker and Lojack Mexico.
Yes, I would just add that we mentioned two in the previous quarters that the range we had.
For the quarters was 7 million to 13 million I believe.
We're as I mentioned last quarter were at and slightly above the high end of that range right now and we would expect that that rate to continue into into the fourth quarter, especially as the purchase accounting adjustments are starting to dissipate.
And just given that comment with fiscal Q4 and on the software subscription you're at the high end of that some to 13 million range you have seasonality coming into play for fiscal Q4 Lojack, Italy.
Is it fair to consider at roughly flat from fiscal Q3, I know you're not guiding specific to that level of Swiss specificity, but I just wanted to double check that.
I think thats, a reasonable outlook given given the seasonality factors could have ground in.
Okay, and then lastly from me on the device as a service program wondering if you could provide us some color on the take rates and plans and the next coming quarters.
Term for expanding that's other product lines.
As we should think it and how we should think about just the telematics systems revenue.
The offset from that dynamic or program.
Sure.
Well you know given that we really only have one full quarter under our belt and only one for one full quarter domestically under our belt. We're just now rolling that program out internationally.
So it's really really premature to give you statistics on take rates much too early.
As it relates to expanding that two other products.
Obviously, we're looking at all of our options and opportunities there, but right now there is no imminent plan.
To start to apply that sort of a program to two additional skews in our portfolio as it relates to impact on our telematics systems revenue I would say the biggest impact that we've seen this year is around obviously the elimination of revenue and consolidation of some of our four.
Our key customers and obviously the soft quarter, we had in Q2 with caterpillar hopefully thats, all behind us and I.
I think going forward, considering the device as a service program and other factors I think that.
The outlook is reasonably positive in terms of of of some level of growth, but not not substantial.
Even some other factors in play we do believe that the bulk of the.
Rejji to OEP PE upgrade cycle is still in front of us and as we've talked about on prior calls there. There is a substantial number of Cowen telematics devices and services that are three g. and nature.
In the most recent quarter I think we talked about around 1 million units. It turns out that estimate is a little bit low because not factored into that into that population or all of the legacy CDN made devices that are also in service, which were nearly 400000, so there's an addressable upgrade opportunity there.
Of something in the neighborhood of 1.4 million Calamp units that are still in service with customers in the United States.
So at some point in time, hopefully thats going to become a pretty significant tailwind for us, but the timing of that is really uncertain.
Okay. Thanks, a lot for that color.
You're welcome.
Your next question comes from George Snyder of Jefferies. Your line.
Hi, Thanks, very much I guess I wanted to go back to the purchase accounting impact.
Deferred revenue and how that rebuilds going forward can you just walk us through the mechanics of that I guess.
Are those one year contracts that as customers come back and renew post the close the deal then they start flowing through for you guys I guess I'm trying to understand when the impact is kind of done and then how much incremental revenue you would you would pick up as that process plays out and then separately I wanted to ask about your.
No wells and tax credits I understand that some of the other wells run off in 2021 is that correct and then what does the normalized tax rate look like once once those animals are consumed. Thanks.
Right. Okay. So first to start off of that purchase accounting. So the weighted the purchase accounting works is that when we acquired the businesses, we had to take a hair cut at that point in time.
That was recorded on opening balance sheet as an offset to the already recorded deferred revenue to essentially eliminates.
The gross margin our margin that was.
Earn must say prior to our acquisition date that total adjustment.
Then gets basically amortized over a period of time, which equates to the remaining weighted average useful life of the contracts that came over at the date of acquisition. So most of those may have a period of say anywhere from 16 to 18 months.
But it but it varied between the three acquisition. So we haven't given any specific guidance on the exact numbers because each acquisition is different when I can tell you is that looking at the three businesses and in particular the larger one in the largest revenue contribution one snowy a solution that purchase accounting adjustment will.
Dissipating be essentially gone by the first quarter of this upcoming new fiscal year in fiscal 2021, the others to it might earn off over a little bit longer period of time, but generally we should be at a very nominal rate going into the.
First to second quarter of next fiscal year.
Those businesses I mentioned before when we were we bought snow via it was somewhere in the range of 20 829 million dollar annual run rate on the two other acquisitions, where anywhere from $11 million to $13 million and we indicated that the growth rate on those for would be for snow via the mid teens.
For the other two we thought.
Mid to high single digit so that should give you some visibility we again, having announced the exact adjustment, but we expect them to dissipate and be gone over the first two quarters in fiscal 2021, George I would add one other thing and that is obviously not only was there.
Impact as it relates to reported revenue obviously, there is there's a dilution to gross margin related to the reduction in revenue and then that flows through all the way too to adjusted EBITDA and based on our assessment in our fourth quarter guidance as it relates to adjusted EBITDA.
We the purchase accounting adjustments older Pro form all of the required adjustments and GAAP accounting.
More or less mast off somewhere between four and $5 million of true a true adjusted EBITDA, which which obviously we can't report. So that gives you some idea of what the bottom line impact would have been had we been able to bring the financials through with all the various accounting adjustments that were in place on the opening balance sheet.
And then to the second part of your question George Yes, we do have an oil wells. We've also instituted a number of tax planning strategies, which essentially.
Ensure that our cash basis tax rate will remain relatively low out in two beyond fiscal 2002, and a 23, obviously, it's heavily contingent upon whether we are a tax pain.
Entity and that will dictate the speed at which those burn off but currently our cash basis tax rate is forecasted or in the range of somewhere between 3.5% to 5.5%.
And we look like and it looks like that will be consistent through the.
The remainder of this fiscal year, we did have a slight uptick in Q2 in Q3, mainly because when we purchased Mexico.
Mexico does have.
Cash tax obligations and the performance around the Mexico acquisition has been a bit better than we had anticipated at least from tax pain standpoint, and so that's favorable thing, but given our I know wells and our glide path around that as well as other tax planning strategies, we don't anticipate any major changes in our overall cash.
This is tax rate into fiscal 21 and 22.
Thank you.
You're welcome.
Again to ask your question. Please press star one on your telephone keypad again, Thats starlin on your telephone keypad.
Your next question comes from Scott Keville off Roth Capital Hill actual hey, good afternoon. Thanks for taking my questions couple of quick cleanup here I'm not sure if I heard a sunovia number in the quarter I was wondering if you could provide some color on that and then given that we're we're getting through a majority of the impact.
On the purchase accounting.
Before.
Tracker, Mexico and Sunovia the normalized run rate now that we should expect from a from a growth standpoint within the services business and what the mid mid to low teens kind of on a blended basis now as we're going forward.
Well first it's got to your first question for Sanofi, we haven't actually.
Quoted the revenue contributions by acquisition again, what we had indicated is the combined three acquisitions were.
Attributing at or slightly above the 13 million dollar range for the past two quarters. We were extremely pleased with that based upon as I mentioned before the annual run rate of say 20, 829% novia.
10 million to 12 million 30 million for each of the other two you can kind of guesstimate what the relative allocation is by acquisition. So I'll, let you let you figure that out.
Your other question on terms of ongoing service I think commence as run rate as revenue growth in general yes.
I think our expectation is that the mid teens seems to be reasonable based on what we're experiencing right now and the overall contribution that these acquisitions are providing is is giving us additional visibility on on what that growth rate should be.
Oh, I'm, sorry, I would add I would add Scott did that but that growth rate I would say is is a medium to long term expectation given the enterprise nature of some of these these SaaS platforms.
Sonobi being a good example, it won't necessarily come and linear fashion.
But but we're pretty optimistic that we can sustain the recent growth we've experienced with sunovia and some of these other south rep SaaS revenue stream.
Got you and then just to revisit the gross margin questions from earlier it sounds like once we get through some of the manufacturing and other issues that you are experiencing new product introductions, particularly on the LTE front.
By the Middle of next year, we're back to normalized gross margins in the 39 percentage kind of range like is that what we should be thinking about and also as part of those assumptions what have you factored in from a from a tower stent whenever you said, 15% kicked in on September 1st but is that part of those assumptions when you're talking about getting back to normalized gross margins. Thanks.
We didnt.
Say 39.
I mean last quarter, we were we were just over 40.
So I would think that that say.
Medium term expectations for so called normal.
Gross margins and then hopefully expansion from there is some of the deferred revenue haircut dynamics burn off and we continue to see growth in our software and subscription service business broadly.
Which obviously has has better than 40% gross margins.
The tariff reference you made a 15% was not the pass through rate for the most park for the customers who bought products from us that were imported from China, those customers, who direct imported might have had to pay 15% on the purchase price, but because of the we pay a tear based upon the import.
Cost.
That's the effective rate that we passed through to our customers and so obviously the 15% applied to cost is not 15%.
Pass through to customers was quite a bit less than not.
So therefore, the headwind wouldn't be as significant as that 15% headline might lead you to expect.
As I mentioned earlier, we expected the tariff impact will will start to dissipate even if the current rates stay into effect as we continue to transition more and more manufacturing activity away from our legacy suppliers in China.
Great. Thank you.
Welcome.
Again to ask the question Press Star one on your telephone keypad.
There's no further questions at this time I would now like the Transicold over back to Michael.
Well, thank you for joining our call today happy holidays, everyone and we look forward to speaking with you after our fourth quarter year end.
This concludes today's conference call. Thank you for participating you may now disconnect.