Q3 2022 CalAmp Corp Earnings Call
Welcome to call and third quarter 2022 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 Joel a counterweight managing director of Shelton Group <unk> Investor Relations firm Joel.
You may begin.
Good afternoon, and welcome to <unk> fiscal third quarter 2022 financial results Conference call I'm Joel the Cromwell, its managing director of Shelton Group Cal lamps, Investor Relations firm with US today are <unk>, President and Chief Executive Officer, Jeff Gardner, Chief Financial Officer, Curt vendor and.
<unk> supply chain officer, Nathan Lowe stutter.
Before we begin I'd like to remind you that this call may contain forward looking statements. While these forward looking statements reflect calendar best current judgment, they're subject to risks and uncertainties that could cause actual results to differ materially from those implied by these forward projection. These risk factors are discussed in our periodic SEC filings and in the earnings release.
<unk> 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 that Jeff will begin today's call with a review of the company's operational highlights during which Nathan will discuss briefly the state of the global supply chain, then Kurt will provide a more detailed review of the financial results followed by a question and answer.
Session with that it's my great pleasure to turn the call over to <unk>, President and CEO, Jeff Gardner. Please go ahead.
Thank you Joel and thank you everyone for joining us on the call today.
Revenue for the third quarter of $69 million, reflecting reduced shipments as a result of the ongoing global component shortages that we outlined in our business update press announcement last month.
The supply chain challenges that are plaguing businesses globally.
Have become more pronounced over the past several months.
As a result, our backlog.
Over the past few quarters.
Has remained at record levels, reflecting.
Reflecting the continued strong demand we are seeing for our telematics solutions.
In order to provide our investors more context.
And information regarding talent assessment of the supply chain.
And our mitigation efforts.
I've asked our chief supply chain officer, Nathan lobster to add some.
Additional insights Nathan.
Thank you Jeff as many of you know I joined <unk> in June last year with over 20 years of experience in global supply chain management quality control and manufacturing and project management.
I can tell you that I've never seen such a global disruption in the electronic supply chain like the one we have today.
Like many companies across multiple industries, the global semiconductor shortages continued to impact our ability to gain access to key components and have not shown a marked improvement over the past several quarters.
Although we had previously anticipated some early signs of improvement in the second half of our fiscal year. We were faced with several component delivery get convinced from our suppliers late in the quarter that impacted our ability to ship against order demands.
This was driven by upstream challenges with wafer allocation and delays in deliveries as a result overall material fill rates remain well below our order levels.
Difficult to project.
Inventory levels as many suppliers have limited near term delivery commitment windows of only 1% to three months out.
Additionally over the last couple of quarters, we have seen an increased rate of end of life notices for certain components, which is added to the overall supply challenges.
So Howard County had been addressing the situation.
First my operations team is working several layers deep within our supply chain and its very tactically involved and tailoring our build plans to the material clear to build situation to maximize output for our customers.
Second we are partnering with our engineering and product teams to qualify additional components and where possible to find workarounds or redesign of our product to include components that are more readily available.
We are also aligning our new products with suppliers investment roadmaps to ensure that our products have the law of its expected lifespan and access to critical material supply in the future.
Our joint efforts are focused on creating the most optionality possible in order to source adequate component inventory.
Third we are active in the distribution and broker market for components and have a robust identification and quality verification process in place. However, there are still certain components that cant be found through these channels with new wafer production at foundries and expect it to take a long time to come online our expectation.
<unk> is that we will be working in a constrained material environment well into calendar year 2022, but with the hope that the situation will incrementally improve every quarter we.
We will continue to address and carefully navigate this situation and the best way we can.
Our focus on escalation expediting and reengineering will continue as we work to maximize our material flexibility and output to our customers.
I will now turn the call back over to Jeff, but will be available to answer any questions that you may have during the Q&A.
Great. Thanks for this assessment Nathan we are fortunate to have you and your team helping us navigate through this difficult time.
Now, let me turn to an update on our software and subscription services business.
Revenue in the quarter was $37 million.
Which was up 7% year over year.
But down sequentially.
As expected due to the completion of a major trailer retrofit program with our large package delivery customer last quarter.
Software revenues represented 53% of total consolidated revenue.
The second quarter in which they have exceeded 50%.
We are receiving positive reaction and feedback from our customers.
Evaluating our new SaaS applications for device management.
Configuration and over the air updating.
The team continues to make progress transitioning them, both contractually and.
And technically.
And we have transitioned several of them from backlog to subscription models.
With total three year T CBS.
Of approximately $30 million.
We are also finalizing terms with a number of other customers.
That we expect to complete in the current quarter.
As these customers recognize the value of having access to the enhanced features and functionality.
Of our device management and CTC platform as.
As well as our value added services and applications.
We expect the transition to pick up momentum.
As these customers transition to a SaaS model they.
They will gain real time access.
All the new feature enhancements that we will continually released in our telematics services portfolio.
They are able to seamlessly leverage the connected intelligence and insights that are available through the CTC services Apis.
In adjacent areas.
Of transportation and logistics cargo and asset tracking intelligence and.
And access to real time sensor information.
From tractors and trailers.
To further help with the advancement and progress of our go to market strategy towards the SaaS model.
We've internally established a transformation office with the express charter of improving cross functional alignment within the organization.
We've also continued to expand our team with highly qualified.
An experienced software sales professionals.
As part of our SaaS sales group.
Well also hiring the best engineering talent.
Augment our product development group.
Taken together.
These efforts have made a critical impact on our SaaS transition initiative.
This past quarter, we exceeded $1 million in core software subscribers.
Which is up from 932000 last year.
As we remain focused on becoming a SaaS telematics leader.
In the transportation and logistics industry.
With that I'll pass the call to Kurt to review the financials.
And then we will open the call to questions.
Right.
Thank you Jeff today My commentary will include reference to the non-GAAP financial measures of adjusted basis net income adjusted EBITDA and adjusted EBITDA margin a full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in the press release announcing our fiscal 2012.
<unk> third quarter earnings that was issued this afternoon.
Total revenue in the third quarter was $68 $8 million, which was down 12% year over year and 13% sequentially.
The decline in revenue is attributable to the ongoing global components supply chain constraints as discussed by Jeff and Nathan.
International revenue totaled $24 2 million or 35% of total revenues for the quarter.
Software and subscription services revenue was up 7% year over year to $36 6 million or 53% of consolidated revenue.
On a sequential basis it declined from 41 $4 million last quarter due to the completion of a large trailer retrofit project.
The year over year growth in our software and subscription services business benefited from the continuing success in transitioning certain existing telematics device customers to recurring software contracts.
In terms of performance metrics.
For our software and subscription services business.
Annual recurring revenue for the trailing 12 months was 85 $5 million up slightly both from $85 $2 million in the third quarter of the prior year and from $85 $1 million last quarter.
As a reminder.
Our our represents revenue from recurring application subscriptions and services, which excludes revenue from the hardware devices in a bundled arrangement with the customer that is recorded at a point in time or upon installation.
Remaining performance obligations in the third quarter were $146 $4 million and as compared to $136 $3 million in the prior quarter.
And $124 $3 million in the prior year quarter.
This metric represents all contracted revenue, including deferred revenue and contracted but unbilled revenue related to bundled contracts with customers.
We continue to see growth in our base of active subscribers and our total number of active subscribers at the end of the third quarter was $1 million.
The growth in our remaining performance obligations and subscribers reflects the increasing success of our program to transition existing customers to recurring subscription contracts as well as new logo generation.
Telematics products revenue in the third quarter was down 28% year over year, and 14% sequentially to $32 $2 million.
Although customer demand remains strong across all regions. The ongoing global supply chain constraints continue to limit our ability to source critical components necessary to meet all demand for telematics devices.
Within the telematics products reporting segment OEM products revenue increased 1% sequentially.
And decreased 16% year over year to $16 $1 million.
Our largest customer represented $14 $4 million in revenue for the quarter, which is up 3% sequentially from $14 million last quarter and down from $16 4 million in the same quarter a year ago due primarily to supply constraints.
Demand remains strong at this customer in support of their three G to forgey upgrade cycle.
Consolidated gross margin from continuing operations in the third quarter was 47% down from 42, 2% last quarter, but was up from 39, 8% in the same quarter a year ago.
The sequential decline in gross margin resulted from higher fixed cost absorption across the lower revenue base in the quarter combined with an increase in component costs across both of our reportable segments.
Our non-GAAP operating expenses on an absolute dollar basis were consistent sequentially, even with sales and marketing expenses, increasing slightly due to our continued investment in expanding our software sales team to support our transition efforts.
We will continue to maintain this level of investment in our core business to further our SaaS transformation efforts given the current customer demand and the record level of backlog, we've seen over the past few quarters.
Although the supply challenges are impacting revenue in the short term. We believe it is important to remain properly positioned and well staffed.
We believe that today, we have the right software solutions roadmap to meet the future demand of our telematics services and solutions.
That being said, we will remain prudent in our overall spend and continue to carefully monitor our expenses for any opportunities to make select reductions over time.
Adjusted EBITDA in the third quarter was $3 million with an adjusted EBITDA margin of 4%.
<unk> adjusted EBITDA of $8 $3 million.
And an adjusted EBITDA margin of 11% in the prior quarter.
The decline in adjusted EBITDA is attributable to the decrease in sales coupled with an increase in component costs and freight charges. Similarly.
Similarly, our free cash flow declined in the quarter due mainly to the lower revenue and further compounded by our efforts to transition customers to multi year contracts, which changes the timing of cash flows as billings occur over the contract period, rather than upon device shipments.
This situation will be particularly relevant during quarters, where larger customers transition to high value recurring subscription contracts.
In terms of our overall liquidity position at the end of the third quarter, we had total cash and cash equivalents of approximately $91 million as compared to $101 million last quarter. Additionally, we have an unused $50 million revolving credit facility.
Meanwhile, our aggregate outstanding debt is approximately $237 million, including.
$230 million of the 2% convertible senior notes due in August 2025.
We expect to maintain a strong financial position and balance sheet with significant cash for working capital going forward.
In reference to our outlook for the fourth quarter of 2022.
We are maintaining our policy of not providing quarterly guidance.
Visibility into product shipments in the fourth quarter remains uncertain due to the global component supply shortages, coupled with the timing of Chinese new year in February.
With that I'll turn the call back over to Jeff to provide some final comments before we open the call up for questions.
Thank you Kurt.
In summary.
This is a challenging time for all of us.
But the <unk> team remains resilient and resolute and addressing the current supply chain challenges.
Focusing on enhancing our full stack edge to cloud software solutions.
Through a fast subscription model.
Our customers know us.
They trusted and reliable partner.
And we will remain diligent in solving their business needs through the telematics innovations, we have developed and continue to develop.
We are excited about our connected intelligence strategy.
Providing customers with a <unk> oriented actionable insights.
Across all assets that moved from point a to point B.
So today.
We are more confident than ever.
That our shift in strategy and our new focus will benefit our customers and ultimately our shareholders.
With that I'd like to open the call up to your questions operator.
Thank you Sir we will now begin the question and answer session. If you would like to ask a question. Please do so by pressing star one on your phone again. Please press star followed by the number one on your telephone keypad. Please standby all the Q&A roster.
Your first question is from the line of Mike Walkley with Canaccord. Your line is open.
Great. Thanks for taking my question.
Yeah for the team.
Maybe including Nathan.
With the Christmas holidays, coming up and then Chinese new year.
It sounds like even a more maybe challenging supply chain in the month of November.
It's supply even tougher into your Q4 than it was in Q3 or do you think it's more stable I know youre, not giving guidance, but any color on kind of how things are for Q4 versus Q3 on the supply side.
Okay.
Yes, thank you for that question.
This is Nathan.
We are not providing guidance, but in general we do not anticipate a quick snapback.
In the fourth quarter and there may be additional downside risk should the current conditions and allocations not improve.
But we are monitoring this very closely and working diligently with our suppliers.
Yeah, and Mike I think on just the environment that we're operating in it's not like we're getting it two or three months heads up anymore. It's a much shorter duration, which made it.
Made it.
It has made it particularly.
Troubling for us to make those estimates.
Out in front of something like three or four months, but I'm convinced our team is doing everything we can to stay in.
Close connection with our top vendors across all categories of our devices.
Okay, and then maybe an intermediate term follow up question just on some of the redesigned qualifying new components.
Those plans how long do those take to implement and if successful how do you see maybe supply improving over a three to 12 month period.
Yes, those those definitely take more time to.
Initiate within our supply chain, where we.
Working on some of those today.
It is probably more like a few months out. So it's is it going to help us in the fourth quarter, probably not but going into next year. The fact that our team has done.
Analysis of our bombs for all of our key products and by the way by the way we have many fewer skus today than we did a year ago that was very intentional to simplify the business it'll put us in a better position to forecast these products going forward. So.
I feel like while it's not an immediate.
Solution for our problem in the fourth quarter. It is going to result in some better long term supply chain planning and our company go forward Nathan you might want to comment.
Right for sure.
And this isn't something that we're just starting now this is something that we've been actively working with.
Our product and engineering teams, coupled with our suppliers, making sure that our bills of material reflect their investment roadmaps.
And as we look to make sure that.
We are skating to where the puck is going to be to maximize the allocation on a possible.
Great.
Last question from me now ill pass the line just it sounds like your backlogs remain at or near record levels. So it appears here customers are sticking with you, but any sense of your customers are looking for dual supplier new suppliers, just given the tightness in the market and your ability to meet their needs.
Yes, I mean, this is Jeff Mike I think that there's definitely.
Some of that going on out in the marketplace today, but I think without.
Fail customers are finding out what we know to be broadly true that this is a broad based.
Supply chain shortage, it's affecting a number of different suppliers, including us. So to me My my view of it there's no easy answers. If there were easy answers those would've been solved months and months ago. When this whole thing started.
Nathan give your perspective please.
Yeah I think.
We have seen.
Heard good feedback from customers related to our ability to work and support them through their constraints.
Certainly we're not able to.
I mean, all of the needs on our order book today at the rate that we'd like.
But.
They understand and are reflecting a similar atmosphere that they see across the semiconductor world. So.
They may not like it at all the times, but they understand it and are working well with us through this.
The key thing that I called that you mentioned is that the backlog remains strong and we've seen very few cancellations, which is another indication that customers really need our products and we're focused on getting to them getting those products to them as quickly as possible.
When I look at this period, it's kind of an odd time, where yes, it would be great to ship all of this product and.
Perform much better on the topline level, but at the same time, what we're we're taking making sure of is that we're making substantial progress on our migration remember this transformation at <unk>.
Our company started.
Almost coincident with the supply chain issues. So we've been working both and I feel really good that the team is making progress on the transformation.
Okay. That's good to hear thanks.
For taking my questions. Good luck with the supply chain and happy holidays to everybody on the call.
Same to you Michael.
Your next question is from the line of George Notter with Jefferies. Your line is open.
Hi, guys. Thanks, very much I guess I wanted to ask any sense for how much revenue was held up in the quarter due to the supply chain constraints.
Hi, George its Kurt I know, it's very difficult to quantify.
We are.
We don't really and of course, we're not giving any forecast here right now so I think at this stage, it's difficult to say we know what the backlog is when we look at our historical backlog, we've ranged anywhere from say $35 million to $40 million and right. Now we're two five times that so the demand is strong but in terms of when that demand.
<unk>.
Can be materialized or align with supply it's difficult to predict so theres a lot of movement.
From week to week from quarter to quarter, and so I can't sit here and quantify the exact amount that.
That got pushed out.
Got it and then.
I guess I also wanted to ask about.
The transition process and what kind of feedback are you getting from customers I guess I'm talking about the pulse too.
CTC DM transition.
It sounds like you've got a few customers over the goal line here, but what is customer receptivity look like and are there customers that are not.
Moving forward with you guys.
Give us the sort of range of outcomes youre seeing and how customers are viewing this thanks.
Yeah.
Thanks for the question, we're seeing some pretty positive response.
Our customers in terms of understanding the new capabilities of our software that's what gets the most excited.
Keep in mind that Theyre trying to handle this in the middle of the supply chain situation.
<unk>. So there are always some complexity there.
But I feel good today that one.
It's been four or five months since we went out on these.
Customer visits all the all the executives here and had a direct dialogue with each of our customers and I feel like we're making progress.
Along the way they understand what the journey is like we've got some converted today, we've really got to scale that operation and we're feeling good about our ability to do so in the next few months.
And Jason I'd, just emphasize it does take a little time to educate them on the technology and the expanded capabilities that the new platform affords their business.
As Jeff mentioned, we have converted a couple of customers here that are really important customers and we're continuing to invest significant time to help our entire customer base understand how the transition is a win win win for all.
But it will take a little time.
And we're working extremely hard at it.
Got it and then just out of curiosity what percentage do you think of your customer base has made the transition I assume we're just scratching the surface at this point or any percentage you can give us.
No I don't think we I think we should stay away from a percentage we have converted some big customers.
One of our one of our top five customers, but it really varies and it's going to be a little bit uneven.
We're gonna be really focused on this over the next few months, though too.
Maybe we'll have some more clarity and be in a position to report percentages, then but now it's a little bit too early.
Okay, great. Thank you guys.
Your next question is from the line of Mike Latimore with Northland. Your line is open.
Yes. Thank you.
On the software results in the quarter were they.
In line with your expectations little below just trying to get a sense of whether the supply chain had much of an effect the effect on that.
Yeah, we were real pleased with the supply chain sales and in the quarter as Kurt.
<unk> mentioned in his remarks, we're coming off a record software quarter with the large.
Sale of equipment that we had with our big packaged.
Customer and knowing that we were really pleased we saw strength in K 12 connected car.
In transportation and logistics so it was.
Steady quarter across the board, where our sales team really delivered and 53% as a new high for US I believe in terms of software revenue as a percent of our total.
And we expect that to continue to go up as we manage through this conversion.
Alright, alright.
So should we think about the software business as <unk>.
Stable or growing a little bit in the fourth quarter.
Hi.
Yeah, we're not going to quote any any forecasted information for Q Q4.
The supply chain constraints that we're dealing with right now are pretty broad based.
Our software business is not completely immune from it and we like the way that the conversion of our customers is occurring and the pace in which that's occurring which actually helps our software business, but at this point in time to kind of give guidance on Q4 regarding that part of our business. We don't think it makes sense. So.
Got it okay.
Great and then just the comment you made about backlog I think being two five times normal.
Can you just remind me when he saw the first big step up from normal.
I think when we communicated our fourth quarter of last fiscal year.
We had seen a pretty sizable pickup we're actually in the Q I believe RMC.
Orderly fun annual filing we quoted I think something north of $60 million in backlog.
From that point in time, it has continued to grow.
So we are we're not at record levels today, because we have shipped on some of that but we're at pretty high levels right now and our historical backlog. When you look this is on the on the device side has ranged anywhere I think from 30% to $40 million, maybe it's $35 million to $45 million.
It's up 200 times that.
Okay.
Thank you.
Thank you. Your next question is from the line of Anthony Stoss with Craig Hallum. Your line is open.
Hey, Jeff.
Can you comment how many components within your products do you rely on a single source of supply for them.
There's very few that we rely on a single source Nathan you can give him some.
Perspective on that but it's not.
Significant I mean, we're using all of the major players in the industry for radio module GPS et cetera.
There's no real wildcards in that basket so.
Our well diversified.
But we are working with the best industry players so.
To that extent you know as you think about upstream levels.
May have multiple approved vendors for Ya.
The type of component, but when you get into the upstream wafer level.
Talking about really the same players across the board. So it depends on what at what level you were talking about.
But at the wafer level Theres very few global players and they're the ones that production capacity and output is really dictating the pace of the industry.
Okay, maybe I'm confused I'm, just trying to get more clarity on I think in the prepared remarks, you talked about discontinuation of products from your suppliers.
I'm wondering if that's what's led to the redesign has it's going to take some time to actually get products to customers.
I understand your question. So if you think about the broad base of products products that we have in our portfolio.
And the general World Electronics, there's a product lifecycle for.
Components and there's some reach maturity there is a natural end of life phase.
As.
The industry is working to maximize output.
We have seen an acceleration of that product lifecycle phase two includes some.
Advanced notices of end of life components, which we are working to.
Qualify redesigns or alternatives.
Alternatives to.
<unk> enable us to continue to to source, but the fact that we have.
A portfolio of products.
Can within certain.
Ranges mix-and-match for customers to serve their needs.
Okay, yeah. Thanks.
It's a lesson.
Thanks Nathan.
Lessons learned in this stuff that's always to take a long view of your all your bombs across the industry and I think you'll not only see Cal amp, but others in the space that some of the CLA.
L notifications come out to do as much as we can in front of any kind of crisis and believe me. We've never seen anything like this is to make sure that we've got a list of bombs that are.
Have a long life ahead of them and don't put us in a difficult situation.
That's just one aspect of the supply chain.
<unk> that were in but I think the team is navigating it quite well.
Okay. Thanks, Joe.
Sure.
Your next question is from the line of Scott Searle with Roth Capital. Your line is open.
Good afternoon, Thanks for taking my questions and happy holidays guys.
The.
Real quickly I'm not sure if I heard it but gross margins actually seemed like they were okay. Overall, but I'm wondering if you could quantify any sort of the gross margin impact as it related to component pricing trade issues or otherwise.
And also Jeff from our end of life for three G. Timeline is there is there any reprieve on that front at this point in time are you starting to hear that things would get pushed out give you a little bit longer in terms of your customers for their upgrade cycles.
Sure.
Yes, Scott so on the on the.
On the gross margin generally.
We are pleased with the overall consolidated gross margin.
Recognizing that in the second quarter.
It exceeded 42% so sequentially it was down slightly.
In the short term, it's difficult to project our margin because there are some uncertain conditions in the supply chain that we're dealing with in <unk>.
As we've talked about in some of our remarks Theres an increase in cost of components out there that we're working through and I know Nathan's team is all over it but generally.
We're making progress you know that our long term model targets gross margin around 50%.
But that's also.
Supported by the continued increase in our overall percentage of software and subscription services revenue. So as long as we keep executing to drive the percentage of our software and subscription services revenue higher and higher to hit that well.
Now probably more closer to 60% target I don't think our margins will improve but in the near term there are some others uncertainties that we're dealing with and we'll be working through those over the next I think few quarters.
Yeah and on the question on the <unk> conversion AT&T.
<unk> conversion is still scheduled for the end of February.
While we continue to talk to AT&T as I'm sure they're getting.
Similar discussions from other players in the field.
Cause of supply chain crisis.
No one is really as far along on the <unk> conversion is they'd like to.
But to date and.
And remember when we talk about AT&T three G. We're talking about North America, the rest of the world that's a whole different.
Set of standards and an end of life.
And then in the case of.
The other big carrier in the U S. We've got more time for that which I think will be helpful. As we can cause us some time to work out from.
Some of these supply chain challenges that we're seeing today, but as far as I know.
Latest I've heard Nathan.
February 28, there is no one is giving us any reason to be believed that there's going to be a reprieve from that date.
They understand the situation in the industry, but thus far these held firm with their D. Yeah Gotcha. Thank you, Okay, and Jeff maybe a follow up on that what's the latest number your estimate in terms of.
Stalled three J devices out there from kind of lamp that need to be upgraded in the timeline and maybe Nathan for you and just.
I think I'd ask that I'm not sure if I missed the answer but in terms of the re qualification process.
You start to bring in other components or other modules into your products.
How long is that cycle to go through.
A recertification process with the carriers.
Sure.
Well it does depend a bit on what the type of changes and at what level of the bomb were talking about components. So if they're simple.
Components, then there may not be much time required at all.
It may just be a fairly simple validation and test process, but.
For the higher level components that can take them.
You know between three and nine months, depending on the type of qualification to do the testing validation and recertification.
Yeah, and as it relates to when you look across our customer base. So it's a little bit of a complicated.
Because we have customers with AT&T, we have large customers that have tended to move very quickly as it relates to three G. What I'm more concerned about longer term and in this February timeframe is some of the smaller customers out there that either because they didnt have the capital.
Capital funds available at the time are a bit behind on this.
<unk> conversion so.
And then it's difficult right because we are we haven't probably an equal number of customers on horizon that has a different.
Shutdown date entirely but I mean, what's important to us is that we stay very close with our customers and I know ourselves team and somebody exact here I'm talking with Ceos of their companies understanding what it is exactly what's in front of them.
And how we can help them how can we get resourceful as a partner to help them avert any kind of crisis on February 28.
Okay, and lastly, if I could Jeff Samsara has gotten a lot of attention in the past week or so I was wondering if you could address it competitively in terms of what you're seeing from the competitive landscape, where they kind of fit into the overall equation and kind of how you see them in head to head or otherwise. Thanks.
Yeah, I mean, some Sarah is a great company and I'm in a lot of ways I think its great thing that they get recognized.
As such with a 12 billion dollar valuation, but I do think when you look at a company like Cal Amp. There are very many similarities you heard Kurt talk about a R. R.
R. R. P O statistics I mean, we're an incumbent legacy company, that's making the conversion it's always easier to do so as a unicorn, but nonetheless.
When you look at <unk> business, it's not unlike what you see at some Sarah we're solving complex problems for customers today, providing insights and competing them competing with them in many cases had to add and doing quite well. So I mean, I'm, taking nothing away from the incredible marketing machine.
Gene that those two founders have built.
What they've built they've made us all better because of it but don't lose sight of the fact that there's some companies out here one of which is Cal app that has a very significant software business. Today. It is solving very complex problems at scale for some of the biggest brands in the industry and have a valuation.
The discrepancy that large makes absolutely no sense to me.
Great. Thank you happy holidays guys.
Yep same deal.
Once again to all participants if you have a question. Please press star one now against its star one on your telephone keypad.
Your next question is from the line of Jerry Revich with Goldman Sachs. Your line is open.
Hi, This is Adam on for Jerry Revich today.
I was wondering given increased component costs, how extensive the magnitude of price increases that you put in across your customer base during the quarter and did you see any elevated level of churn as a result.
Okay.
Yes.
Yes, I'll start and let Nathan jump in.
We announced last quarter that we did a pretty extensive across the base price increase to accommodate some of those increases that we saw.
And speaking as the CEO, we received very little feedback of course, we had questions from consumers, but most of our customers who are more in the mindset of how can we solve the problem getting us equipment in time that will be fine for <unk> and not a lot of pushback on the prices.
Yes, it is true that we've seen.
More rapid price increases across the board over the last couple of quarters on the materials side as well as logistics.
And I think early on in the year.
Sure.
Maybe lagged a little bit in terms of how we pass that on but we've gotten better at learning how to partner with customers to participate in those broker buys.
You did and to pass through some of the price inflation that we're seeing.
And it's still an ongoing discussion topic.
Yes. The approach we took back in say our first quarter was we applied a broad based I think 3% to 4% increase across all of our customers.
<unk> prices have continued to increase from there and now what we're doing is we're becoming a little bit more specific in that as customers request or demand product and we perform allocations in the event that there are incremental cost increases that need to be passed on we work with them directly to have them.
Except those cost increases before we move to process their their orders so.
Rather than take a broad based it's more customer specific however, as things continue to evolve and the supply chain will be reevaluating our approach.
To quarter.
Okay. That's clear and then margins in telematics have been choppy recently as a result of supply chain impact could we just revisit how you think about normalized margins in this segment once component shortages start to ease.
Well again our outlook on.
Gross margin is heavily dependent on our ability to to accomplish two real things one we use the term convert the base, which is essentially taking our existing customers and moving them into a subscription model that is what we've been working on diligently and we've made I think some really good progress here over the last quarters few court.
The second thing is really our ability to to drive new logos and have those new logos b and full stack solutions, where we know we can generate gross margins north of 50% in select market verticals like for instance, K through 12, the government municipalities, we're already generating that type of margin.
Profile, so for us it's more around the concentration of revenue coming out from <unk>.
Software and subscription service arrangements versus the device business.
So we'll reiterate again our.
Medium to long term target is to have gross margins in that.
50% range given that in all of our scenarios with customers, we will have a device element.
In the overall bundled arrangement and depending on the magnitude of the service of a solution that we provide the margin profile could increase from that 50% target upwards to 60% to 65% again, depending on the solution, but we want to just reiterate that our target right. Now is it's a 50% gross margin.
Based upon our mix up and overall revenue to software and subscription services.
Okay. Thank you very much.
Once again, if you have a question. Please press star one now again star one on your telephone keypad.
Speakers I don't see additional questions at this time.
I'll now hand, the conference over back to Mr. Jeff Gardner for.
Hi, Mike.
Thank you Paul.
Thank you for joining us on the call today and for your continued interest in Cal M.
One final note.
And I will be participating in the needham's growth conference on January 11th.
Who'd like to request the meeting.
Contact your Needham representative or our IR firm Shelton group.
We will be releasing our fourth quarter and full year operating results in April of next year until that time.
All of Us at Cal Amp wish you a happy holiday season. Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for joining you may now disconnect happy holidays.
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Okay.
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Okay.
Henry.
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Yes.
Okay.
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