Q3 2023 CalAmp Corp Earnings Call
Our third quarter revenue grew 8% sequentially to $78 $9 million, which exceeded the high end of our expectations.
This higher than expected revenue resulted from additional components, which we secured in the spot market to meet our customer commitments.
This created significant margin pressure in the quarter, but the fulfillment of these orders accomplished several objectives for both <unk> and our customers, including the avoidance of business disruption for customers affected by Verizon's <unk> network shutdown and it allowed the fulfillment of aged.
Order demand for our other customers.
Given the unpredictable nature of component availability and pricing in the spot market as well as the strategic importance of the conversions the team felt it necessary to absorb the margin pressure in order to fulfill these orders.
We view this situation as transitory.
With some continued impact in Q4, but to a much lesser extent.
And then returned to a more normalized level of gross margin and early next fiscal year.
Cindy will discuss the financial impact.
Of this in more detail in a moment.
Turning back to our progress in the quarter. Our sales team has been working very hard to convert customers to recurring contracts. While also setting the framework for securing new customers to drive our future growth.
Our software and subscription services revenue in the third quarter increased 11% sequentially to a record $49 $3 million.
Remaining performance obligations also increased by 20% sequentially to $252 million in the software and subscription subscribers increased 12% sequentially.
The $1 5 million.
Notably, we converted two large customers Michelin and that band to recurring contracts in the quarter.
Along with a number of other customers.
As of quarter end, we have cumulatively converted approximately 75% of eligible customers to recurring contracts and are on track to substantially complete the conversion process for the remaining customers.
At fiscal year end.
Other software highlights during the quarter included a software and subscription services renewal contract with our large parcel shipping customer.
Which is a multi year multi million dollar commitment.
This customer has approximately 130000 trailers outfitted with our edge devices.
And the industry, leading telematics software platform the <unk> telematics cloud.
We also secured for North America, as a major new subscription customer during the quarter.
And we launched our new GPS based vehicle tracking solution developed in collaboration with BMW in Europe .
We expect to see increasing revenue from this partnership in the quarters ahead.
Much of the recent business development success has been due to the focus between our sales and marketing groups to improve our go to market activities.
Led by our CRO and our CMO.
This joint activity has resulted in the implementation of our lead generation program that has enabled expanded opportunities for the company sales team.
This work is setting the foundation for systematically building the sales pipeline and securing new recurring customers.
On the product development side.
Wanted to tell you about an exciting upcoming release that will represent a major milestone for our transportation logistics strategy.
So where we are at least cargo insights for tracking shipments in our <unk> application.
This will be an innovated new user experience that will be simple to use and will make tracking and protecting assets even easier to manage.
As we've shared for a long time.
Our industry, leading <unk> telematics cloud platform aggregates data from our large portfolio of edge devices and sensors installed on tractors and trailers.
Including those from our recent partnership with high end day translate.
We offer a plethora of trailer sensors for tire pressure cargo dark control extreme.
The extreme temperature monitoring tilt shock light and other environmental factors.
The <unk> telematics cloud makes it easy to access data from these many sensors through Apis with 99, 9% uptime in the cloud.
But our new cargo insights application goes a step further it will provide an industry first experience that presents all of this insight data in a single multi sited application.
One that will appeal to all functional departments across the transportation and logistics industry ecosystem.
<unk> cargo inside.
Visibility into the cargo on the trailer the vehicle and the driver.
It adds critical accountability to the customer for protection against insurance claims to maintain compliance with regulations and to keep informed as each trailer are precious cargo proceeds down the highway.
This new release brings our strategy to life for the benefit of our customers before I hand, the call over to Cindy Shang our acting CFO I would like to take this time to thank her for her support during our CFO transition.
Cindy and her team have done an exceptional job and ensured that our financial operations have been maintained with a tremendous level of detail and attention.
At the same time I'd like to welcome our new CFO <unk> Kim.
Who will be starting on January 9th.
He has a long successful track record in.
Executive financial management at various tech companies, including most recently as CFO of momentous.
<unk> listed space infrastructure company.
Prior to momentous he served as CFO at Tech firms form labs EMCORE.
EMCORE America group and Arrow Bryan.
<unk> received an MBA from Columbia business School.
And MFS degree in electrical engineering from UCLA and a BS degree in electrical engineering from the University of California at Berkeley.
He will be joining us in dnb for the Needham growth growth conference on January 10th So those of you planning to attend that event will have a chance to meet him.
Even though only a few days after his start date with that I'll now pass the call over to Cindy.
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.
For reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in the press release announcing our fiscal year 2020, Three's third quarter earnings that was issued earlier today.
As Jeff mentioned, we had a strong revenue growth in the quarter, increasing 8% to 78 point to $9 million compared to the prior quarter.
And the up 15% compared to the same recorded a year ago.
Software and subscription services revenue was $49.3 million.
Up 11% sequentially.
And up 35% from the prior year.
Representing 62% of our consolidated revenue.
Both the sequential and a year over year growth in the software and subscription services business.
Reflects the progress we are making converting eligible telematics device customers to recurring subscription contracts.
Which contributed approximately $20 million to revenues in the quarter.
At the end of the third quarter, we have converted approximately 75% of our total eligible telematics device customers.
I anticipate to have substantially converted the remaining customers by the end of our fiscal year.
In terms of our performance metrics for our software and subscription services business.
Remaining performance obligations in the third quarter with approximately $252 million.
Up 20% from the prior quarter.
And the up 72% from the same quarter a year ago.
During the quarter, our subscriber base increased to one 5 million up 12% sequentially and up 44% year over year.
Telematics product revenue in the third quarter was at 29, 1% to $6 million, which represented a 5% increase sequentially and an 8% decline year over year.
Our largest customer represented 13 pointed 2 million.
Revenue for the quarter.
Which was up from 12 4 million last quarter, but down from a $14 4 million in the same quarter a year ago.
Our backlog with this customer remains solid.
Consolidated gross margin in the quarter was 33 point to 7% compared to 39, 8% last quarter and a 44% to 7% in the same quarter a year ago.
As Jeff mentioned earlier, we had aged backlog of demand.
Essential components became available in the spot market, we made the decision to incur additional costs to secure these components to fulfill critical backlog.
Including for those customers.
Irene and upgraded to <unk> G. A handoff of Verizon's <unk> network Sunset.
Some of these costs were passed on to our customers.
The balance putting short term pressure on our gross margin.
This has negatively affected the gross margin in quarter, three by five points to $7 million or approximately 700 basis points.
We anticipate gross margin to improve meaningfully in the fourth quarter, driven by lower level itself a spot buys.
To return to normalized levels early in the next fiscal year.
In the quarter, we continued our efforts to manage operating expenses and achieve operating efficiencies.
As a result third quarter non-GAAP operating expenses.
Decreased by 6% sequentially and decreased by 10% over the prior year.
Adjusted EBITDA in the third quarter was a four point of $7 million compared to $4 $8 million in the prior quarter and a $3 million in the same quarter last year.
Adjusted EBITDA remained flat sequentially, reflecting lower operating expenses offset by gross margin compression.
In terms of our overall liquidity position.
And at the end of the third quarter, we had a total cash and cash equivalents of approximately $45 million as compared to $48 million last quarter.
The sequential decline in total cash and cash equivalents was due to an increase in deferred the billings or unbilled receivables as a result.
As of November 30th 'twenty to 'twenty, two there were no borrowings outstanding under our $50 million revolving line of credit total net of borrowing capacity on this line based on eligible accounts receivable and the inventory. That's in November 30th was 30.
$6 million.
Our aggregate outstanding debt is approximately $232 million.
Including $230 million to the 2% convertible senior notes due August 2025.
In reference to our outlook for the fourth quarter of 2023.
The company is maintaining its policy of not providing detailed quarterly guidance. However, given the significant volume of shipments in the third quarter. The company expects a fourth quarter revenue to be relatively flat sequentially.
Whether that I'm trying to call back over to Jeff to provide some final comments.
Yes.
Thank you Cindy and I am proud of our team for continued progress we have made towards achieving our goal of converting all eligible customers to recurring software contracts by fiscal year end, while continuing to secure additional new logos around the globe to drive our future growth.
With that we'll now open the call to your questions operator.
Certainly.
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Okay.
My first question is from the line of Mike Latimore with Northland Capital market. Please proceed.
Okay.
Great. Thank you.
Congrats on the strong revenue results there.
Question on the guidance for the fourth.
The notion that revenue would be flat sequentially in the fourth quarter and you talked about converting the rest of your software and subscription customers. So going from 75% up to almost 100% to me that would imply some growth at least on the software and subscription side. So should we think about you know software subscription growing sequentially in the rest of the business I don't know how fast.
Or how should I think those two comments.
Yeah. Thanks, Mike Good good question. So I mean, the way we looked at it if you look at our second half.
Consensus was $152 million the spot buys allowed us to pull in some orders into the third quarter. So that's that's why we're talking about flat sequentially.
Done a lot of the heavy lifting on the conversions. We've just got a couple of our big customers to do in the fourth quarter and then it would be most of our smaller customers. So in terms of the fourth quarter. We said that it would look a lot like the third quarter, but when you look at the.
The comparison to our revenue production in the second half versus consensus it's up quite a bit.
So we're really happy about that I think two things I'd also add on our new contracts for the conversions, we're getting our cash upfront, which is important for long term cash flow.
And that puts us in a better position remember with all of these contracts, we're getting three year minimum commitments from each of our customers. So really pleased at Salesforce, it's been extremely focused on that.
Long term our goal was to.
To build a company here that has much more predictable recurring revenue and I think we're on track for that.
Okay got it.
And then.
On the software subscription EBIT margin.
Can you provide what that was in the quarter I think it will at least in your 10-Q, you can now and then.
What do you view as a normalized EBITDA margin for your software subscription business.
Yeah, I'll I'll start that and maybe Cindy can jump in first of all this is an unusual quarter with the spot buy so looking at our gross margin. This quarter does not give you a good picture of what it is going to look like long term.
Longer term all of our software and subscription businesses. We believe has 50 plus percent gross margin and when you when you combine that with our.
Equipment business, which is shrinking that we believe in the long term, where we're going to move more towards that 50% range Thats, our long term goal. So again.
Cindy talked about some of the expense cuts that we made in the quarter. We continued to improve the efficiency as the business as we move more towards a software company and I think youll see long term the margins grow from historically in the 40% range closer to the 50% range, which still remains a long term call.
Yeah.
Okay. Thank you.
Youre welcome.
Yes.
Thank you Mr Latimore.
The next question is from Scott Searle with Roth Capital. Please proceed.
Okay.
Yeah.
Yeah.
Okay.
Mr. <unk> your line is open.
Our next question is from the line of George Notter with Jefferies. Please proceed.
Hi, guys. Thanks, very much I guess I was just curious about the.
The backlog metrics in the company.
You guys don't explicitly guide tobacco or talked to backlog, but maybe you can kind of give us a sense for what happened I assume it was down sequentially I'm just wondering if.
There is a significant backlog left here or you've worked most of it down kind of where are you with that and then.
Also I was just curious about sort of the impact you are getting from the Verizon <unk> sunset any sense for how much incremental telematics revenue you might have gotten this quarter, just as you're shipping against that opportunity.
With that stepped down in might look like once we kind of get past that sunset. Thanks.
Yeah, Yeah. Thanks, Thanks for the call George our question.
In terms of our backlog.
We're finally able to fulfill some of our backlog. We finally, we are in a position with the spot buys that I mentioned earlier to take some of these older.
Yes.
For our customers and many of those were to support them as we move toward the horizon transition.
I think that as we the ryzen transition being a high point for revenue I don't I don't really feel that way because we've been selling against that.
For the year, there was some incremental demand this quarter, but again I think.
As we as we convert our business convert our existing customers too.
Two four G. It puts our sales force in a better position to sell our software and subscription services revenue. So I don't feel like we had some.
Natural demand driven by the <unk>, we've been filling against that all year.
And.
We're anxious to get our transformation step one was to convert the base.
We're almost there we're going to get there in the fourth quarter, and then I'm really excited as ever about our ability to fulfill against our transportation and logistics and enterprise fleet opportunities, which are more full stack solutions with higher <unk> in 2024 and beyond.
Great. Thank you.
Youre welcome.
Thank you Mr Notter.
Our next question is from Jim or Jerry Revich with Goldman Sachs. Please proceed.
Hi, This is clay Williams on for Jerry.
Just going back to the long term target of 50% gross margin can you kind of help us think about the timing and trajectory to get there as you continue to expand the installed base.
Yeah clay.
To make significant progress next year. When you look at look at the fact that we did 62% <unk> announced this quarter.
And at the same time as we're seeing that growth in software and subscription services, we're seeing very good improvement in our costs. We've been really working hard on our cost structure I believe Cindy talked about 6% down sequentially and 10% down year over year that is a reflection of this company.
Fans, forming into a software company and so I think that.
It's hard to get to give you specific guidance as to when we get to 50%, but we definitely think we will make significant progress we're well set up for that to make progress towards that goal in fiscal year 'twenty four which begins in March of 2023.
No. Thank you and a quick follow up on the on subscriber growth.
As you mentioned, we are going towards that.
Alright coming to the end of the conversions here at the end of the year, how should we think about subscriber growth.
Longer in 'twenty, three annual and longer term. Thank you.
Yeah, Yeah. So yeah, it's been a banner year for subscriber growth and a lot of that had to do with our conversion to a subscription model getting our customers on our device management platform. That's been really good I think what what our investors have to look forward to is maybe slightly slower growth in 2024.
In terms of absolute subscriber growth, but much higher growth in terms of our pool as we as we add more hot full stack solution customers Enterprise fleet transportation and logistics, but I am excited about is when I talk to my sales leader.
Carson Who's brought in a lot of.
Domain expertise in terms of transportation logistics and enterprise fleet.
Why we're doing these conversions were building a really excellent pipeline for future growth and those are at much higher ARPA. So again, I think youll see slightly slower growth in terms of absolute subscribers, but at much higher ARPA.
Yes, Jeremy this is Randy I, just wanted to add that you know.
The in the SaaS calibration deals right multiple deals actually all three are based and we have a minimum guarantees with the customers. So we would as Jeff mentioned that we would still expect that good growth internally in terms of the number of subscribers in the next two years next several years right within the current.
And we hope there'll be more to come in the future. So we have a bit of confidence on the number of subscriber growth yes.
Thank you Tom.
Yeah.
Thanks for the color I'll pass it on.
Great. Thank you.
Thank you Mr. William once again to ask a question press Star one.
The next question is from Scott Searle with Roth Capital. Please proceed.
Hey, good afternoon, Thanks for taking my questions and I apologize for my earlier technical difficulties.
Yeah, a couple of quick clarifications I am not sure if I heard an OEM mix number I heard a caterpillar number but I was wondering if there was a total OEM number that you provided and then also within the software and subscription services Big number. This quarter you did sign some other extensions on some existing customer contracts I'm wondering if there are any larger onetime <unk>.
<unk> fits in there if you could break that out then I had a couple of follow ups on the gross margin front.
Yes.
So maybe Jeff I will answer the OEM question I'm sure you can handle the rest so.
Scott the OEM.
You know in the past like in the past couple of years, we had multiple customers their cat one.
One of the Academy that is one of the biggest one.
We actually successfully converted some of the core OEM customers.
<unk> SaaS business already in the past a lengthier, so that leading customer or almost you know the major customer in this OEM a category is caterpillar. So the caterpillar revenue is honest seasons. There. There are representative of the total OEM business revenue, so specifically for quarter.
For me the total OEM revenue was about 13 $5 million with a cat and the second $1 million to $2 million there.
And as we mentioned the demand with this customer remains solid and we do hope we can continue to grow the business when our supplies.
Continuous to support and then yes. Thanks City, that's great answer and on the software side. We did have some big conversions, we had a very successful quarter.
Getting Michelin in Nab man two of our top.
Top six customers converted so that helped a lot. We also in addition to the large parcel delivery company that we mentioned multiyear multimillion dollar contract. We also signed another extension for Commonwealth of Pennsylvania.
Another large enterprise fleet customer that delivers million multibillion dollar revenue each year, so I mean.
Youre seeing some very good things with respect to Brendan Carson, our Chief revenue Officer has been here for about six months. He ceded his sales leadership with.
An extensive amount of domain knowledge and I E.
You can see our pipeline growing each and every quarter. So yeah. It was a great quarter with good numbers, but I mean, we want to keep putting up those kind of numbers going forward, Scott and that's really what this transformation is all about.
Hey, Jeff just to clarify in terms of that $49 million or they're one time sort.
Software sales in there or any sort of large component. That's one time that we should not expect to be recurring as we go into future quarters.
I don't I don't believe so I mean, it's it's.
Pretty much our normal mix. So yeah, I don't think theres any large one time in there that would be unusual that we need to call out. So that you can model going forward.
Okay very helpful and lastly, if I could on the gross margin front I want to make sure to clarify a couple of numbers I thought it was $5 7 million.
In terms of negative cost related to the product front. So a 700 basis points overall from a gross margin standpoint, just wondering.
Clarify that number and then the recovery it sounds like you are recovering in the immediate quarter could you give us some idea as to the magnitude of that recovery and you talk about normalizing and I think in.
In the most.
Last two to four quarters normalized I think has been more in the 28 to maybe 30% plus range on the product front is that where we're going to in the first half of fiscal 'twenty four.
Yeah, Yeah, I mean, what was unique about the third quarter, we had an unprecedented level of spot buy opportunities.
How should investors think about that I'll tell you, how we think about it as the supply chain continues to improve the first sign of that is the spot buy opportunities right. So these are customers who.
Didn't use their full allocation who sold their product to these brokers and made it available in smart market. So I think long term, what we see and into the first quarter as we look at our.
Forecast that our allocations are improving we're seeing our vendors really step up in terms of providing extra capacity.
Both we've got one one of our contract manufacturers expanding their production into Vietnam, bringing on new capacity and we've got Texas instruments building some capacity in the U S, which is also going to allow us to source more in the normal market is not with the spot buy opportunities so that means.
Good things in terms of margin.
In terms of the fourth quarter I think the recovery, we said, we're going to see a significant or meaningful recovery in the fourth quarter that means on two fronts. Because when you talk about the spot buy there is there is two parts of it one is how much do we pass onto our customers and what are the spot buy opportunities. So we believe our spot buy.
Activity will be much less even as as much as half as much as the first quarter and we'll be able to pass on more to our customers as we've kind of work through this we were under an extraordinary amount of pressure in the in the third quarter because of the impending transition. So now that that's going to be.
Falling away, we're in a much better position to work with our customers on this to find the best way to bring on this additional volume what I'm really pleased about and I think we earned a tremendous amount of goodwill for our key customers some of which had orders that were sold at six or nine months outstanding to.
<unk> product to them in advance of the January one Verizon shutdown.
Yeah.
Hey, Jeff quickly if I could follow up on that front. It looks like you added about 50000 customers sequentially.
Which is a pretty big number part of that is the ongoing <unk> to <unk> migration.
I want to say that the existing base that we needed to be converted over was somewhere in the ballpark of 200000 or so is that correct and so then kind of using straight line math.
Rounding a little bit that non <unk>.
<unk> upgraded customers are somewhere in the 50 to 75000, plus kind of net additions in the quarter is that the way to think about the non.
End of life <unk> contribution.
But we think we think the customers that we've delivered I'm sure. That's a complicated question but.
We believe that.
I believe the numbers were something like 80 to 100000.
Product that we delivered to serve our customers who needed to do the <unk> transition or in other words, they needed to get that product before the Verizon cutover. So the balance would be more traditional.
And we are our shipments increased.
About 25% in the quarter.
And so most of it most of that was not this <unk> I mean, some of it was the incremental part, but still had very strong shipments across the board to our customers as a supply chain improved now would improve because of the spot market. This quarter, but we expect that improvement to continue into <unk>.
The fourth quarter and fiscal year 'twenty four.
Okay, great. Thanks, so much I wanted to add.
I just want to add a little more color.
We made the decision to do spot buys in quota for me actually.
The majority of these bothered by expenses, which will support our telematic.
Telematics product business, but as you can see from the 10-Q, we filed our absolutely yes Calumet.
That business got it.
The other on gross margin. So when we report our number of subscribers. It was it is actually more related to tell our SaaS business. We think the SaaS business actually in terms of the subscriber growth.
Steve Let's talk about the 80, 20 rule, where 80% of the subscriber growth is driven by the SaaS calculation, 20% is driven by new logos and renewals et cetera.
So the point is.
The three D G that impact actually was more towards our telematics products, but in our subscriber business. It is actually a more active support to the new customers. We just converted.
Great. Thank you.
Youre welcome.
Thank you Mr. Sara.
Yeah.
Once again to ask a question press star one.
Okay.
Yeah.
There are no additional questions waiting at this time I would like to turn the call over to Jeff Gardner for any further remarks.
Well, thank you and thank you for joining us on the call today.
And for your continued interest in <unk>.
So I mentioned earlier, we will be attending the Needham growth conference again in January in New York, but this time in person so that'll be nice.
So please feel free to schedule a meeting with US if you are planning to attend.
Look forward to sharing our progress with you during our fourth quarter of 2003 2023 earnings call.
In April of next year, we hope you all have a wonderful holiday season and appreciate your time today operator, you may now disconnect the call.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
Okay.