Q1 2023 CalAmp Corp Earnings Call
[music].
Welcome to call EMS first quarter 2023 financial results Conference call. As a reminder, this call is being recorded I would now like to introduce your host of today's conference call Joel a prominent.
Managing director of Shelton Group <unk> Investor Relations for Joe You May begin.
Good afternoon, and welcome to Carolina fiscal first quarter 2023 financial results Conference call I'm joined the Cromwell its managing director of Shelton Group Gallium <unk> Investor Relations firm with US today are <unk>, 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 talent 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.
Factors are discussed in our periodic SEC filings and in the earnings release issued today, which are available on our website.
Craig no obligation to revise or update any forward looking statements to reflect future events or circumstances now Jeff will begin today's call with a review of the company's operational highlights and then Kurt will provide a more detailed review of the financial results followed by a question answer session.
With that it's my great pleasure to turn the call over to <unk>, President and CEO , Jeff Gardner Jeff. Please go ahead. Thank.
Thank you Joe and thanks to all of you for joining us on the call today.
We continued to make progress on converting customers to recurring subscription contracts.
Our first quarter software and subscription services revenue grew 13% year over year to $39 $6 million, representing approximately 61% of the total revenue for the first quarter.
This represents the second consecutive quarter, our software and subscription services revenue exceeded 60% of total revenue.
During the quarter, we converted another 10% of eligible customers.
Cumulative representing over one third of our total base with the goal of completing the rest of the conversions by the end of the current fiscal year.
In the quarter, we secured new customers such as Brigham Young University and group assuming is the second largest business group in Mexico among others.
And subsequent to quarter end, we were selected as the provider to BMW for a new product offering and by both wagon leasing.
And we received first orders from them both.
I'll touch on BMW further in a few moments.
Consolidated revenue in the first quarter continued to be impacted by supply chain constraints.
Particularly with the Covid related Lockdowns in China.
Other exacerbated the overall supply situation.
Especially in the manufacturing and logistics sectors.
With the Lockdowns now lifted and.
And transportation to the affected regions resuming.
We anticipate gradual improvement in supply of the affected components.
As I just mentioned.
We recently received an initial order from BMW related to GPS based security by Lojack solution.
Which sets unprecedented standards in the industry for monitoring and.
And protecting BMW vehicles.
This solution provides peace of mind to owners based on cat lamps, telematics technology integrated with connected car data from BMW group's connected drive platform, which is accessible via a smartphone app.
It also provides a driver tag to detect the presence on board of an authorized driver and an edge in crank inhibitor that can be activated in the case of adapt by a network of secure operating centers opened 24 seven across Europe .
BMW decision to select how amp as its provider of news stolen vehicle technology services is a clear testament to our industry leadership and innovation.
And these initial orders reflect the sizeable opportunity we see ahead for this joint offering and the European market.
We announced more strategic partnerships to with both Bristol County, and assured Tech Maddox.
Bristol County was a key systems integrator and leader in AI powered application transformation services for the connected supply chain.
This new partnership integrates real time data insights from Cal lab supply chain visibility sensors edge.
Edge computing devices and.
<unk> telematics cloud.
With Bristol cones proprietary neo cloud based platform.
Thus, providing global enterprises within rich end to end supply chain visibility and aggregated trend analysis capabilities.
Working together.
<unk> and Bristow cone will help enterprises eliminate blind spots across their complex supply chains and.
<unk> enables smarter tracking and data driven decisions as shipments pass through each phase of their journeys.
With these enhanced insights.
Enterprises can drive logistical efficiencies.
Prevented cargo theft.
And minimize their carbon footprints.
Producers in particular offering perishable goods.
Such as food or pharmaceutical purveyors and monitor environmental conditions in the safe transport their goods.
Preventing costly spoilage.
Sure Telematics is a top transport and compliance leader that offers electronic logging device solutions too.
To commercial and public fleet operators.
Cal ample coupled with edge computing devices with the shared tech Maddox Apollo electronic logging devices or E. L. D to provide a solution that commercial and public fleet operators.
I'm used to capture and log critical data necessary for regulatory compliance across North America.
Apollo E. L. D has been approved by the U S. Federal Motor carrier Safety administration for Interstate and intrastate Commerce across America and by other third party accredited transport agencies.
In Canada and Mexico.
During the quarter, we were pleased to announce the appointment of Brennan Carson.
As our new Chief revenue Officer.
Brendan has extensive long term industry experience in telematics as well as significant high level success, managing large global SaaS sales organizations.
He had previously served as senior Vice President of sales at Delek, a startup company.
And as Vice President of sales North America at Fleet, Maddox, which was a cry acquired by Verizon connect where he continued to build and lead a sales team of 700 professionals.
Brendan will be focused on expanding our software sales team with top professionals.
And directing them in pursuit of our long term SaaS revenue growth objectives.
Our board of Directors recently appointed Henry Maier, So the new independent chairman.
Effective as of our 2022 annual meeting of stockholders.
As many of you know Henry has spent more than 30 years at Fedex companies and will be of significant value to the company as chairman of the board.
He will replace Amal Johnson, who has served as a director since 2013.
And most recently served as our chair.
I want to thank them all for her service.
And long standing commitment to calcium.
And the many personal contributions she has made during her tenure.
We also recently added Wes Cummins to our board as an independent director.
West had previously offered an alternative slate of director nominations for election to the board.
Subsequently, we engaged in a constructive dialogue, resulting in weapons recent appointment as a director to our board, where we look forward to leveraging weapons expertise.
To enhance our strategic path forward.
In summary, we are encouraged with the progress we continue to make in transitioning our business to a recurring software subscription model for sustainable long term success.
Although challenges remain.
I believe we are well positioned with high levels of backlog remaining and strong demand across our business.
We remain focused on our goal to convert the remaining portion.
Of eligible device customers to recurring software contracts by fiscal year end.
With that.
Now I'd like to turn the call over to Kurt to discuss our financial results in more detail Kurt.
Thank you Jeff.
My commentary will include reference to the non-GAAP financial measures of adjusted basis net income adjusted EBITDA and adjusted EBITDA margin.
Full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in the press release announcing our fiscal year 2023 first quarter earnings that was issued this afternoon.
Total revenue in the first quarter was $64 $7 million down 5% from $68 $4 million in the prior quarter and 19% from the $79 $7 million in the same quarter a year ago.
The decline in revenue was mainly attributable to the ongoing supply chain constraints, particularly the COVID-19 related lockdowns in China during the quarter.
As Jeff mentioned with the Lockdowns now being lifted we are beginning to see a resumption of component shipments in those affected regions.
International revenue in the quarter totaled $24 $3 million or 38% of total revenues.
Software and subscription services revenue of $39.6 million up 13% year over year and down 4% from the prior quarter represented approximately 61% of consolidated revenue.
The year over year growth in this business reflects the success, we've achieved converting eligible telematics device customers to recurring subscription contracts.
As of the end of the first quarter, we've converted approximately one third of our total eligible telematics device customers and expect to convert the remaining customers by the end of our fiscal year.
In terms of performance metrics for our software and subscription services business remaining performance obligations in the first quarter was approximately $215 million.
A 7% increase from $200 million in the prior quarter and a 57% increase from $137 million in the same quarter a year ago.
We expect to recognize over 37% or approximately $80 million of this obligation during the rest of our fiscal year.
During the quarter, our subscriber base grew 25% year over year.
And 13% sequentially to 1.2 million.
Telematics products revenue in the first quarter was $25.2 million, which was a 7% decrease sequentially.
And a 44% decrease year over year.
The ongoing supply shortages continued to impact our ability to fully ship against our high levels of backlog.
Within the telematics products reporting segment.
M products revenue totaled $10 $5 million in the first quarter.
Paired to $10 $4 million in the prior quarter and $23 million in the same quarter a year ago.
Our largest customer represented $9.7 million in revenue for the quarter, which was up from $7 $9 million last quarter, but down from $17 $3 million in the same quarter a year ago.
Our backlog with this customer remains high and we were pleased with the sequential increase in shipments in the quarter.
As the supply chain constraints ease over the coming quarters we.
We expect to accelerate fulfillment of the outstanding orders.
Consolidated gross margin in the first quarter was 40% compared to 41% last quarter and 41% in the same quarter a year ago.
Gross margin continues to remain under pressure due to higher product costs and freight charges.
First quarter non-GAAP operating expenses on an absolute dollar basis declined 5% year over year.
Due to lower personnel and incentive compensation expense as our global employee base declines year over year.
non-GAAP operating expenses increased slightly by.
By 3% sequentially due to increases in professional services and personnel cost in the areas of engineering sales and marketing.
Adjusted EBITDA in the first quarter was one point not $9 million.
With an adjusted EBITDA margin of 3% compared to adjusted EBITDA of $5 million.
And a margin of 7% and the.
The prior quarter.
And $8 $4 million or 11% in the same quarter last year.
The decrease in adjusted EBITDA in the first quarter was attributable to the lower revenue.
As previously mentioned higher product cost.
In terms of our overall liquidity position.
The end of the first quarter, we had total cash and cash equivalents of approximately $59 million as compared to $79 million last quarter.
The decline in total cash and cash equivalents.
Is attributable to a reduction in free cash flow from operations due.
Due to the decline in sales volume coupled.
Coupled with an increase in deferred billings or unbilled receivables as a result of the conversion of approximately one third of our eligible telematics device customers to multi year subscription arrangements.
The provision of services under multi year subscription arrangements extends the cash conversion cycle due to upfront cash outlays for devices combined with deferred billing over the subscription period.
We are in the process of renewing our revolving line of credit in order to give us added flexibility as it relates to working capital and we expect to finalize the agreement in the coming weeks.
Aggregate outstanding debt is approximately $233 million, including $230 million of the 2% convertible senior notes due August 2025.
We expect to maintain a solid financial position and balance sheet with solid cash for working capital purposes going forward.
In reference to our outlook for the second quarter of fiscal 2023.
We are maintaining our policy of not providing quarterly guidance.
Visibility into product shipments still remains uncertain due to the global component supply shortages.
However, we do expect sequential quarterly revenue growth in the second quarter to be in the mid to high single digit percentage point.
With that I'll turn the call back over to Jeff to provide some final comments before opening the call up for questions Jeff.
Thank you Kurt we are encouraged with our continuing progress as we transition to a leading SaaS telematics software player with the recent lifting.
Bye now.
But.
Pacing, our device customer conversions to recurring contracts and fresh new leadership in our sales organization.
The <unk> team is energized and relentlessly fixed on the operating objectives, we have established for the year.
With that I'd like to open the call to questions operator.
Thank you.
If you'd like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please press star followed by two again to ask a question press Star one.
As a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your questions. We will pause here briefly as questions are registered.
Our first question comes from Mike Walkie with Canaccord.
Great. Thanks for taking my question.
First question for me is just on the sequential growth can you.
Talk about maybe the drivers behind that it sounds like you expect better supply, but would you expect software and services to grow more or it's kind of evenly split that mid to single high single digits. Some of them have both hardware and software and subscription.
Yeah, Mike Thanks for the question.
As you know in our previous earnings announcements and our follow up Q&A sessions, we've mentioned.
Mentioned that we believe the supply chain situation would be improving throughout the year.
We were affected.
In the second in the first quarter by when I close more of a shock in China with the specific lockdowns in terms of cities.
It is significantly.
At the end of the quarter.
The view was that we'd be seeing is improving site supply chain throughout the year and that view has remained unchanged. We don't expect the impact that we saw at the end of the quarter to recur, we've already begun seeing shipments out of China, and the transportation and freight are opening up.
As we see so I mean, that's good news I think overall as we look at the year, we're feeling better and better about that we're working hard with our.
Equipment providers and contract manufacturers and we've done quite a bit in terms of making sure that our bills of material complaint contains products with a good visibility in terms of their supply chain.
So we do see it improving in the back half of the year, that's why Curt.
Given the the range in terms of the sequential growth we expect into Q.
In terms of going forward I think that you'll continue to see improvement on the software revenue side, two things driving that one.
We're continuing to convert our base to a subscription model.
And even more importantly, I know, it's been difficult to track, what's going out in our company through this transformation, but I think the important aspect to this transformation going forward is that all new sales are going to involve a subscription going going forward. So that's going to mean very good things for subscription.
Not only just for the conversion, but going forward for Calvin.
Thanks for that and just as a follow up.
Either you or Curt just is that business mix continues to change over time.
What are sort of like intermediate term gross margin goals for the company as you have software is already over 60%, but you know we're gonna gross margins trend up as you get through this one third to full completion of that targeted base.
Yes.
So Mike this is Kurt just to answer that.
Yeah can you hear me, okay and.
In response to your question, Mike. So as you know our medium to long term goal is the 50% gross margin that's still remains a clear and in line of sight for US. There are some short term pressures that we're experiencing principally coming out of the supply chain. Those things include cost increases around certain.
Components of freight and more recently some tariffs.
We're doing our best to control those costs and actually pass them through when we have the opportunity to do that but sometimes there's a lag between when we are charged to the supply chain and when we can pass them on to the customers, but we're working our way through that process that being said.
Communicated in the past.
Biggest thing driving our R. R.
Our gross margin to that 40, if our 50% target is really revenue mix and so as we were moving or a telematics device customers over to the subscription models. What we're seeing is that initially.
The move is heavily dependent upon getting the devices on our platform and getting the install base acted as that installed base starts to grow that's when the margins start to improve because as you know does it does.
Subs, the subscription subs actually generate incremental revenue for us. So although this quarter, we were down slightly with gross margin and that was driven by the pressure from the supply chain. We do see that we will progressively start moving upward to that 50% target over the next three to five years and it'll be a gradual.
Going from say 40, 41 to 42 43 up to 50 as that installed base becomes more evident and we monetize that installed base.
Great. Thanks.
Last question, then I'll pass it on just for your largest customer snapped back a little bit, but giving you visibility.
With the backlog.
With this customer to get fast maybe too.
Mid teen levels like they were in past years or has anything changed with that as a long term relationship.
Okay.
I mean, we do have very strong backlog with our largest customers.
With our largest customer and in particular.
With the China disruption that I talked about earlier.
Earlier, we had a particular.
Module provider, whose factory was shut down in China that had a pretty significant impact on that.
That supply chain this quarter, which we already as I said, that's already open back up and it was improving.
The strong demand, we do expect those to those that revenue to kick back to more normal levels, there's still quite a bit to do there both in terms of.
<unk> three <unk> to <unk> migration plus the demand for that large customer has been very strong.
Great. Thanks for taking my questions and congrats for the one third conversion data so far.
Thank you.
Yeah.
Our next question comes from George Notter with Jefferies.
Yeah.
Hi, guys. Thanks, a lot I guess I wanted to ask one on the transition.
To subscription models.
Are you getting any pushback from customers.
You're obviously, you're another quarter into the process you know any new perspective, you can share and if a.
Doesn't migrate with you like what is the pushback from them and.
Any metrics you can share in terms of the percentage of customers that are moving along.
Yeah, George first of all thanks for the question.
Our customers are really.
Excited about the technology remember this is not just the change in billing, but we're also offering a new opportunity for them in terms of the software and the software is more robust offers them the ability to better serve their customers to manage their devices more rapidly to do tons of up.
Grades over the air and provides them better security. So they're excited about that the billing arrangement is a little bit new and it takes some getting used to but we've been very successful to date in fact.
Through the first one third we've had no customers decide to move away from us because of this arrangement.
Been pretty clear with our customers. This is the way we do business going forward.
So we're really pleased with that.
In terms of the future.
We control the pace and in terms on this conversion process and as I said in the script, we're anxious that we're going to get all of our customers converted to this model by the end of the fiscal year. So I think it's going well I wish it would be a little bit less disruptive in terms of.
You know how how we're transforming as a company I know that causes some concerns with investors, but I think what gives me comfort.
Comfort and confidence about the future as we are going to be a recurring model business. So at the end of the day Cal.
<unk> is going to be in.
Equity that investors can count on for consistent.
Reliable revenue over time.
And all of our new customers will be signing up for services that involve a subscription.
Got it and then I think you said one third of customers who have migrated or does that also like one third of the installed base. Just in terms of you know units telematics units that are out there or.
You know where are you skewing towards you know larger or smaller customers as you initiate this transition.
Yeah.
Kurt Kurt I'll, let you take that one if you could.
Yes.
Sure Jeff So.
Jordan, We had mentioned I think last quarter that we had defined a population of about somewhere between 60 to 65 telematics device customers, we weren't able to eligible telematics device customers that we were looking to convert over.
Through the first quarter here, we've converted a total of about 22 or 23 of them and it's a pretty good mix I would say there's three.
Three to four that are pretty sizable customers in and then there's a group of medium sized and small sized customers in the mix. So generally a good.
Our mix of customers. There are some larger ones that were targeting problems later throughout the fiscal year, but we feel really good about that 30, 33% a progression here so far on that base of 65, what that represents and I think what excites us. The most is that represent about two.
200000 incremental subscribers that we've tied.
Tied into multi year service contracts. These contracts are typically 36 months with the potential to renew out further and so that subscriber base. We will begin to start monetizing here in the coming weeks and quarters.
So that's really what we're targeting we want to get to that total 60 to 65 customers by the end of this fiscal year, we're making great progress and as we see those subscribers coming onto the platform and we have that ability to monetize them. That's when we start to see some of the real true.
Success from this this model that we're embarking on.
Got it that's great and then the other one I wanted to ask was.
Just looking at the software and subscription services revenue was down sequentially.
You know I know the installation of devices is probably a factor in that but any.
Why would that number be down sequentially at any more insights would be would be great. Thanks, a lot guys.
Okay.
Yeah sure. So I guess I'll handle that one Jeff. So so we have been very focused on what we call converting the base of our eligible telematics device customers. So in those scenarios when you're working with these customers that have moved romley device oriented we do have once we execute those M&A msas.
Scenario, where a large portion of the upfront revenue is associated with the.
The initial performance obligation, which is associated with the device and so that revenue under us GAAP requires us to put put although it's part of a bundled arrangement with that customer it requires us right now to build it into the product revenue not the application subscription why are you why that's happening and that's where.
Our focus is we also have the run off of our vehicle finance business, which you probably know from a couple of years ago was a pretty large portion of our overall subscriber base and was generating a good what I would say.
Insistent revenue, albeit that revenue was that pretty low <unk> and not in terms of.
Gross margin at our target gross margin level. So that is running off while we're working hard to convert this space, which is having somewhat of an offset to and causing that decline.
Year over year that you're you're seeing.
Got it okay. Thanks, very much guys I appreciate it.
Youre welcome.
Our next question comes from Mike Lattimore with Northland capital markets.
Great.
I guess on the vehicle finance topic, and you know how much revenue in the quarter came from that category.
It was.
Well less than than a million dollars, Mike, but that isn't had at one point in time been trending in two and a half to $3 million a quarter, but it has been dropping off pretty quickly here as of late.
Got it Okay, and then if you convert.
The base by year end do you have kind of a range of how much incremental quarterly revenue that would be sort of recurring revenue in our software and subscription category.
We haven't quantified it.
Go ahead, Jeff.
No go ahead, Kurt I'm, sorry go ahead.
So Mike we haven't quantified it in terms of quarterly revenue target.
But what we've done is we've identified of that population of customers that would tell you that 60 to 65 customers that that customer base has historically represented on an annual revenue run rate.
Somewhere around say $65 million to $75 million, maybe as high as $80 million. If you go back in history.
We generally have an idea of how much revenue it relates under the so let's say legacy operating model and we have a sense of what that will ultimately convert to on a go forward basis, but we haven't actually broken it down by quarter.
Okay got it.
It's helpful and then.
We'll say probably.
This is Jim.
Just on that we do we do believe just to give you an idea one I talked about the supply chain recovery and then we do anticipate our percentage of business. That's represent percentage of revenue. That's represented by software in a subscription services to grow throughout the year and were at 61% today.
That should give you some insight into directionally, where we're headed.
Okay, Okay sounds good and just last on.
The sales organization I think last quarter, you talked about a goal of adding 30 salespeople I believe I think thats quota carrying salespeople by year end I guess is that still the targeting or has that changed with your new CRM.
No that that that remains the target and Brennan is often running he's been here for about 30 days now we he was able to start day, one with our.
National sales kickoff, which was great a great success allowed them to meet all of us.
<unk>.
He's already instilled some.
Some new sales leadership and the team.
And he's he's really putting in place his system to manage accountability of the sales process throughout.
Some specific things that I think that you'll see.
There are different or improved at the company as a result of Brendan's leadership is.
To focus that the.
The sales team on new business acquisition. This was a big strength of his at Verizon connect and at <unk> to really focus on new logos and as we complete our conversion our future success in sales is really tied to seeking out new logos in terms of our target customers.
In addition to that he is opening up the mid market, which is going to increase our sales velocity.
And consistency at Cal am so he's doing a lot of lot of new people in sales and sales ops and we're still on track too.
To add those salespeople this year and we're doing it in a way that we're taking down expenses in other areas of G&A to support the sales function, which feels like the right thing to do for the company, it's going to allow us to improve gross margins, while really improving our ability to sell.
Got it got it.
Just back on the sequential decline in software subscriptions can you just sort of dig into that a little bit more you, you've obviously I think a lot of them.
Conversion, you're winning new business.
I guess.
Just maybe clarify a little bit of why that was down sequentially.
Yeah.
Yeah, Kurt could you take that please.
Right. So I think Mike you're just referring to the way we've disclosed in our 10-Q, the software application and services revenue versus the product revenue.
And that decline from last year to this year again, it's it's a it's a combination of things the.
And it's been penetrated by the fact that we are very focused on converting our base of hardware customers over to subscription models, where the.
The predominant portion of that revenue when it happens it gets positioned in the in the product category. The device category not in the recurring application subscription category. So that's the first thing second thing is when you look at the revenue base that existed in two.
2021 first quarter of 2000 fiscal 2022.
There was at least two and a half to $3 million of vehicle finance revenue that that was an area that has come down has been dwindling down.
Those prepaid contracts get service to their term so they had probably two to three year terms and so although we're servicing them they fall off and as they fall off the revenue a portion of that decline. So that's that's a minimum of a couple of million dollars and then the mix of that there are certain contracts that we are in the process of renewing.
That had been on longer term arrangements and were working to either cross sell upsell them, but as they come to the fruition and we are working on renewing them, there's sometimes taper off a bit in the latter part of the contract term. So it's a combination of factors, but we feel really good about the fact that as we are converting.
Our base of customers, a telematics device customers over and we are building that install base and incremental 200000 subscribers.
Subscribers that I mentioned, a little earlier that will start to grow and we will start to monetize it thereby offsetting this decline that youre seeing in the legacy recurring application subscription revenue.
And kind of as.
You described that as a year over year effect because that was also the sequential drivers as well.
I I don't have that in front of me, but I think sequentially, we were fairly flat, but I'd have to go through that and look at it but I was referring to what was stated in our 10-Q.
Okay alright, thank you.
Thanks.
Mhm.
Our next question comes from Scott Serially with Roth capital.
Thanks for taking my questions.
Just a couple of quick clarifications I missed the OEM sales number in the quarter and then if I could on the product gross margin front. How are you seeing seeing things immediately improve or change in the in the current fiscal quarter.
China, starting to open up some supply chain starting to come back will that be up sequentially. What's your best guess at this point in time.
Okay.
Yeah, Kurt would you take those please.
Sure Scott So the first one was the OEM products revenue in the quarter.
So of the $25 2 million of telematics device revenue.
The amount associated with sales to our OEM customers was approximately $10.5 million and then we had indicated back of that $10. Five a portion of that I believe nine seven or so was associated with our largest customer.
And then can you restate your previous question Scott I apologize our gross margins on the on the product front, just just Kurt gross margins on the product front, given supply chain issues and otherwise how that visibility is sort of shaping up now what's it going to be sequentially up how should we be thinking about it in the immediate quarter.
Well.
We're not giving guidance Scott what I would say is that obviously, our gross margins are impacted by our.
Volume and in particular, our revenue growth and so as we indicated in our initial remarks, we do believe that quarter over quarter, there will be an increase or uptick in revenues. So you would naturally assume that there would be some improvement with gross margin I will say also that.
It's been pretty unusual in terms of the pace at which some of these cost increases are coming at us as well as others in our space.
Was compounded more recently round some some tariffs that were being pass through from product coming out of China, obviously, the components and chips have always been a persistent.
Cost increase in freight continues to be a challenge, but we're doing everything possible. We can to absorb those costs and are pass those onto to our customers. When we have that opportunity, but it's been a pretty rapid pace and are there is a little bit of a lag between when we are hit with those costs and when we can actually pass them off or absorb them.
Okay, and if I could on the audio front Jeff.
Yes.
Oh I just I just wanted to add to that.
On the margin side every month, Curt and I get on with the global.
Global supply chain team and talk about our what our P. P V looks like or our price increases look like against our the.
The price increases that we're seeing from our from our vendors and so we're keeping track of that as Curt said, it's a lag, but we're feeling better about the percentage of our total customer.
Does that include PPV as Curt said theres a bit of a lag but were really on top of that from a customer by customer perspective, which will help improve margins throughout the year.
Okay helpful. And then if I could I wanted to clarify on or appeal for the year I think for.
For the current fiscal year last quarter, you talked about there being 90 million on under the floor appeal that would be delivered it in the in fiscal 'twenty. Three there's still 80 million remaining on that plus I think there was about $21 million that was recognized.
<unk> in the quarter is that correct. So it's roughly a little over 100 versus 90 million. So the R. P. O in terms of fiscal 'twenty. Three is continued to increase in the most recent quarter.
Yes, Scott. So we were really pleased with the RPM growth. So we ended last fiscal year.
$200 million to $202 million at.
At the end of this quarter, we were bound for our core business is about 215 $215 million.
When you include what was.
Leftover from the vehicle finance business, maybe $2 16, so that growth I think is very healthy. It does reflect the efforts of us converting over these telematics device customers into a subscription model. It's forward looking so it gives you some of that visibility into what we think we can recognize and we'll have to service.
Over the next one two and three years, we have indicated that 37% or approximately $80 million of that two.
215 will be recognized in the upcoming say 12 months and we do expect that number to continue to grow as we continue our momentum on converting more customers and driving new logos. So pretty pleased with the RP O expansion over the last several months.
And if I could.
You you know Volkswagen how meaningful how big are they what does that do from an <unk> standpoint, how quickly there's a ramp up in kind of blending that against the conversion of the remaining two thirds of the existing MRM customers that are converting how should we be thinking about the <unk>.
Trending over the next couple of quarters.
Yeah, I'll take a shot at that and then Curt if you would tip in because you'll you'll have some more insight I'm sure, but first of all I'd be M. W. That's a very significant opportunity for us it's very early days.
In terms of that relationship we issued our first Po, but that's a pan European opportunity for us.
And of course, BMW has a significant market share in that in that region. So we're very excited it's a very sophisticated application, which means good things in terms of <unk> overall on <unk>, you've got to remember that our transformation has really two steps step one is the conversion of the base.
Which gets you know adds up.
Many many subscriptions to our total subscriber base at a relatively lower our pud to begin with but it sets us up to sell all kinds of things in the future and as we turned our attention to new logos and Upselling our existing base.
I believe that you'll see the <unk> the company continue to drive up over time and I'd say the <unk>. Some of these initial convergence is lower than Youll see on new logos. When you. When you think about the difference between going to the base and going to a new customer so on the <unk> front, we're very.
<unk> focused on that.
We still feel good about converting all of these lower <unk> customers to a subscription model to begin with because that's step one and sets our sales team up to do more in the future.
Okay I heard you might very helpful in out there.
Yeah, and I just wanted to just touch a little bit about on on BMW. So it's got I don't know I'm sure. Many people are aware, but BMW is a fantastic story of what we'd characterize as land and expand and shows how we can penetrate large Oems to drive incremental type service arrangements with them we've been doing bids.
With BMW for a number of years out of our Italian office and be able to ever who came to us with this what.
What I would call advanced telematics.
Vehicle recovery solution that they want to embed within.
Most if not all of their vehicles that they shipped in the Pan European area. So that ended up itself shows you that we have the ability to expand on the account and what typically comes with expanding within accounts is what our <unk> expansion and incremental service opportunities. So on BMW itself, we do see that as a.
Fantastic example of what we can do to expand our view on the broader question of where our peers will trend in the next say year or so there will be downward pressure, primarily because we're converting our base of telematics device customers and moving them into multi year service contracts, which in and of itself creates stickiness, but in the near term as we saw.
To build on that installed base and we deliver just access to our platform and some of the services. We have on our platform we might see some downward pressure on our <unk>, but in the long run that will be a very favorable thing for us.
Gotcha, and lastly, if I could Kurt from a modeling perspective, it looks like non-GAAP Opex was flattish.
Should we be expecting that to trend over the next couple of quarters. Thanks.
Yeah. Thanks, Ed on the Opex, obviously that is certainly an area of focus for us.
It's become.
A key area that we're concentrating on here in the near term, especially as we really target two things that we need to navigate through one converting the base of our customers and moving them into multi year service contracts and to navigating through some of these supply chain challenges. So we are absolutely focused on opex.
As we pace the conversion of our customers that we navigate through the supply chain challenges.
In particular, Jeff and I will be working with the other departments and functional groups to ensure that we're keeping our expenses in check and are rationalizing those as we see appropriate based upon how things are unfolding through the transformation.
Great. Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question is with Jody <unk> with Goldman Sachs.
Yes, hi, good afternoon can you talk about your expectations for gross margins this coming quarter given the revenue outlook that you mentioned I know, it's tough to put a fine point on it but.
Any high level comments about the sequential progression would be helpful. Thanks.
Yeah.
So Jerry as I mentioned before we are.
Giving guidance forward looking guidance.
I do believe given that there is an expectation that we will have revenue growth and that the supply chain challenges will ease up a bit going into.
The second quarter that there will be some.
Hum some improvement in gross margin, but in terms of quantifying it and right now we're not in a position to do that given that we're not giving guidance.
Okay.
Maybe asked differently. So you folks laid out a 50% gross margin targets.
40% today, just what's the path to get there.
How much of that is reduced.
Reduced supply chain friction and improved price cost the other moving pieces can you can you just bridge for us.
How do we get from 40% to 50%.
Sure sure Jerry I'll take that and.
The biggest part of that is as we move to more and more of our revenue coming from software and subscription services in general the margins on that are in the low to mid fifties compared to our product margins. So that that dynamic of moving more of our revenue to our software and subscription will be in <unk>.
<unk> driver and then Youre right in the in the short run we'd been affected by the supply chain situations and over time as Chris said during his comments.
Our PPV or increases to our customers have lagged.
Those.
Increases that we're seeing but 100% all I'll assure you that we are passing on these additional costs to our customers. We've been successful with that we're doing that in a way that's I'm respectful of our customer relationships and we're working with them on that but over time, we're getting caught up there in that lag.
Should that lag should diminish over time as we see fewer challenges in the supply chain.
Okay.
So the reason for my question as you know we are working towards the conversion and gross margins have gone from 41% to 40%. So I'm just trying to understand what's the path from 40% to 50%.
The extent, we could put maybe a finer point on price cost improvements expected in another moving moving pieces.
That'd be helpful.
Yes, Okay got it.
Yeah.
Yeah.
I can lay out Jeff do you want me to some some of our thoughts in that so.
Sure Jerry its a multifaceted.
<unk> response in the sense that as we move our convert our basic customers over and as we mentioned.
We've converted about one third of the total population of somewhere between 60 and 65 customers.
They will come over with a multiyear subscription arrangement and those multi year subscription arrangements. We are charging for active subscribers as those active subscribers come on base. They are actually going to be monetize over a period of a minimum of three maybe as high as five years and that will.
By incremental revenue that will help us improve our gross margins in parallel with that we are doing everything possible to optimize our cost structure to ensure that some of these challenges we're experiencing and the incremental costs that are coming through the supply chain are addressed by that I mean, we're doing things like trying to ensure that we have.
A very tight base of devices that we are going to use as part of the subscription arrangements. We are trying to improve the overall design and proficiency of the devices. We are trying to work within our supply chain costs down various components and the overall build of the of the devices and also monetize in.
Parallel with that the subscription arrangement. So it's a it's a multifaceted approach to improving margins, we've been trying to target the margin improvement around the overall mix of revenue being more concentrated to software and subscription services. This quarter, we were at about 60%, 61%, which we think is.
A healthy level for where we are in the transformation. We do think that that can increase potentially as high as 70% over the course of the next few years and so as that concentration increases and the install base grows and we monetize that installed base, while trying to optimize the supply chain around the device and <unk>.
Livery of that service, we believe the margins can gradually tick up to that 50% range, but that's going to take a couple of years, probably three to five years.
Okay I appreciate the discussion thanks.
Thank you Jerry.
Our next question comes from Orin Hirschman with <unk> investment partners.
Hi, and thank you for taking my question just I know, it's been asked a little bit in different variations before in the call. But you know there were a lot of different variables that caused the sequential slight sequential decline in the recurring lawn.
You mentioned in the call.
That that you feel that there will be quarter over quarter growth as we go through the year.
Does that mean that the pain points.
Have have have either completely going away that pinpoints, meaning things that.
Causing a decline in that line that pressuring the one in the other direction has.
Trained off mostly at this point, what should give us confidence that things can grow sequentially in that.
So every quarter or in that line of business.
Yeah, well, one as I talked about as we as we get more of these conversions done our sales teams are able to focus more on new business. That's that's a big part of it but.
The convergence of the base.
Especially for these initial customers was required some amount of effort and I think we.
We every day, we get better and better at that and that will allow us to spend more time on.
New logos and selling upselling to our base.
So that will be helpful. In addition.
We're going to continue to make progress on.
Converting the base going forward and in terms of the percentages. The same time as I said in my script that all.
All new customers.
Will they are purchases will involve a subscription so we feel good about that over time certainly in.
In our business at device enabled solution business.
We're not.
The supply chain just doesn't impact the product side. It also impacts.
The software side, because we've got to get those devices and that absolutely was an impact this quarter as some of the finished goods inventory were stranded in some of those.
Locations in China that we mentioned early that were on lockdown, so that will get better as well we've already seen the China situation is immense.
Immensely so.
All of those will help the sequential growth.
There's just one more question on the no no you went through some of the items that put pressure in the other direction.
The beauty of the recurring revenue is typically the sequential growth assuming that theres not much attrition in your case, you actually have a good line of visibility in terms of additions, particularly on the new contracts how they're designed.
Yes, there's some underlying Rev.
Revenue metric, we can look at let's say for the last few quarters, where it's been rising rapidly on the recurring where some of those what I would say.
End of life items.
If you strip the mouth that you could see the underlying growth on the recurring itself.
Yeah, Kurt would you take that please.
Yeah. So when we have been working to disclose really two key metrics that we think provide forward looking.
Insight to where we're going in and the first one is the growth in the RPE OS or remaining performance obligations. So that growth from 200 to 215 $260 million, we believe as is.
Actually very good we also think that the increase in subscribers also gives you greater visibility now I know that there's.
This this thought process are well within that our P. O. There's an element of the device and that is true we sell device enabled solutions. So in every customer bundled arrangement there will be a device element, there's no getting around that but what we are doing in these multiyear service contracts and what is being observed in these that the.
P. O is the fact that we are working with our.
Their customers to have multi year volume commits as to adding incremental subscribers and to a path to monetize and there's incremental subscribers. So as parts of a legacy business are winding down and are becoming less of a distraction for us. We have some short term trends that we are addressing but as you can see the forward looking.
<unk> metrics and the forward looking trends look very healthy given that we have been able to bring new subscribers on converting new customers and it is showing up in two real places on the RPM growth and on the subscriber base.
Okay. Thanks very much.
Youre welcome.
There are no further questions. So I'll pass the call back over to management team for any final remarks.
Sure. Thank you Jason.
Thank you all for joining us today on the call and for your continued interest in calcium we do plan on attending Oppenheimer's, 25th annual technology Internet and Communications Conference on August 10th Please contact your op and higher Oppenheimer sales contact or Shelton group, if you'd like to.
Schedule, a meeting with Kurt and I will look forward to speaking with you again during our second quarter earnings call in late September .
Operator, you may disconnect the call.
That concludes the call amps first quarter 2023 financial results Conference call. Thank you for your participation you may now disconnect your lines.
Yeah.