Q4 2023 CalAmp Corp Earnings Call
Okay.
Welcome to <unk> fourth quarter and fiscal year 'twenty to 'twenty three financial results Conference call. My name is Tia and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star one or your telephone keypad.
As a reminder, this call is being recorded I would now like to introduce your host for today's conference call, Joe <unk>, Managing director of Shelton Group Callouts investors relations firm, Joe you may begin.
Good afternoon, and welcome to Caroline's fourth quarter and fiscal year 2023 financial results Conference call I'm Joel the Cromwell its managing director of Shelton Group <unk> Investor Relations firm with US today, Our Carolina, President and Chief Executive Officer, Jeff Gardner and Chief Financial Officer, Kim before.
Before we begin like to remind you that this call may contain forward looking statements. While these forward looking statements reflect <unk> current judgment they are subject to risks and uncertainties that could cause actual results to differ materially from those implied by these forward looking projections. These risk factors are discussed in our regular SEC filings.
And in the earnings release issued today, which are available on our website. We undertake no obligation to revise or update any forward looking statements to reflect future events or circumstances that Jeff will begin today's call with a review of the company's recent operational highlights and then John will provide a more detailed review of the financial results.
But a question and 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 you Joe and thanks to all of you for joining us on the call today.
This is our first call with our new CFO chicken Kim.
To have him as part of my team I just wanted to welcome him well.
While also thinking Cindy's Yang for serving as acting CFO .
During the transition period.
Fourth quarter revenue was $78 $5 million.
Which was in line with our expectations and revenue for the full year was $295 million flat with the prior year.
Software and subscription services revenue in the quarter grew 4% sequentially and approximately 25% from the prior year to a record 51 $4 million, representing 65% of total revenue.
Full year software and subscription services revenue grew 20% to $185 million and represented 63% of total.
Total revenue in 2023 compared to 52% in the prior year.
Another highlight of the quarter was our adjusted EBITDA performance.
Which increased 44% sequentially.
And 35% year over year.
To $6 $8 million.
Approximately 9% of revenue.
This past year was a challenging one due to several factors, but I believe we have turned the corner.
By the end of our fiscal year 'twenty four.
Macro factors aside.
Our target objective is to return to year over year revenue growth.
We believe that the cost reductions we implemented last year.
Along with continued improvements in the supply chain will by the end of the year see non-GAAP gross margin returned to historical norms.
And allow us to achieve improved EBITDA margin performance as.
As we close out the conversion phase of our business transformation.
And enter the next phase of the process.
I thought it might be constructive.
To provide you with a brief history of why and how.
We decided to transform Callahan.
From a leading data capture and transmission telematics device provider to.
Two one providing software and data insights with sophisticated data analytics and AI capabilities.
Enabling enhanced visibility maintenance safety compliance and efficiency.
These new applications are offered on a recurring subscription basis and become increasingly sticky.
As more and more data is generated and analyzed.
Today with more than $10 million <unk>, Iot telematics hardware devices operational in the field.
And more than one six trillion data points processed annually and our cloud platform. We clearly saw the value of this extensive hardware installed base.
We decided to seize the opportunity to monetize the valuable insights that our hardware generates by providing software applications not only to our existing customers, but new customers as well.
These new applications are offered on a recurring subscription basis and become increasingly sticky as more and more data is generated and analyzed.
Particularly with the industry's focus today on AI analytics.
Autonomous navigational features and electrification.
With these strategic objectives in mind, we began this journey more than two years ago to transform our hardware only business.
So the solutions business similar to our existing K 12, commercial fleet and connected car operations.
Since we started 78% of our hardware only customers have converted to a device management recurring application subscription model deployed on our cloud platform.
Called the CTC.
In addition to the hardware revenue.
This generates a modest monthly recurring fee.
Clearly this conversion process it took some time and effort.
But customers have come to appreciate the value of the new cloud platform.
And its edge computing features, particularly its enhanced capabilities to organize and manage devices accounts and configurations.
With over the air firmware updates.
We have converted a large number of important customers.
Like Dcs platform Science, GPS insight local Lisa Trimble.
Trimble, Michelin Nab man and many others.
In addition, we also made significant R&D investments in.
In our application software stack.
And we believe that turnkey solutions, we've developed our offering as a competitive advantage and we anticipate accelerated adoption by our customers as we continue our transformation.
Using a baseball analogy to characterize our transitional strategy.
I would say that we're in the middle innings of a nine inning game.
During the initial innings over the past two years, we laid the foundation for establishing our vision and strategy.
Identifying the target customer segments for the conversion developing the Dms CTC platform.
And defining the multilayered software stack.
That would drive our application solutions business in the years ahead.
The multimillion dollar investment we made in this initiative essentially linked our value add as a software and systems company from the edge to the cloud. We also aligned our leadership team to function as a customer solutions based organization and adjusted our cost structure to improve.
<unk> profitability as.
As we commenced this conversion process.
Our subscriber count increased significantly.
However, the modest device management recurring application subscription revenue, we received from each new conversion actually put some pressure on blended <unk> on a consolidated basis.
Our full stack solution businesses, which I mentioned above namely.
Namely K 12, commercial fleet and connected car offer high <unk> high margin applications today, such as here comes the bus.
Fleet management stolen vehicle recovery and others.
With the hardware conversion is complete we will work to increase revenue.
Our higher margin subscriber base by up selling them to more advanced software subscription solutions that we have developed while also securing new software customers.
We believe this will result in a more predictable.
Profitability and higher growth software business on a consolidated basis.
Today, as we progress through the middle innings of the game, we have to complete the few.
Painting eligible hardware conversions.
Focus on driving value in our full stack solution businesses.
And increase the value provided to full stack solution customers with our new applications such as AI enabled vision 2.0 video platform smart trailer and cargo insights.
This is where our margins will expand contributing to increased profitability and cash flow for our investors.
In the past year alone, we recognized approximately $80 million and recurring application subscription revenue and we are determined to increase the higher margin revenue stream significantly in the years ahead.
We expect to enter the final innings of the game sometime in our fiscal year 'twenty five or early 'twenty six.
Which the majority of our revenues will be on long term recurring subscription contracts, excluding a few of our OEM and TSP like customers.
Our market strategy will be based on a value added hardware platform augmented with our application software and select third party solutions.
Any hardware development, we choose at that point to do ourselves will be limited strictly to segments, where value and margins are strong and sustainable.
I Hope this summary helps provide a better understanding.
Where we've been and where Cal amp is going.
I am pleased with our accomplishments both operationally and financially this past year.
As we have navigated this stage of the business transition.
Our top operating goal in the near term will be to maintain a high level of execution, while advancing through the transition to move Cal am ever closer to a software systems Enterprise company.
We believe this will be the most direct path to generating strong recurring subscription based cash flow and increasing shareholder value.
Though we are only halfway through the ballgame, we've made great strides transforming our business thus.
Thus far to a recurring revenue model as we continue to advance through the rest of the game.
Look forward to reporting our progress as we move.
Further up the value chain with our ever expanding full stack application software portfolio.
We believe this will lead us to our end goal of producing consistently profitable revenue growth for years to come I would now like to turn the call over to G Khan, who in its first 90 days has already made significant contributions to calcium.
He will review the fourth quarter and fiscal year results, while also providing guidance for the first quarter of fiscal 2020 for chicken.
Jeff I'm glad to be here today, and quite excited to joined Cal M. A global data analytics platform provider.
I'd also like to thank Cindy and the rest of the accounting and finance team for a seamless transition.
Please note that during my commentary today, I will reference non-GAAP financial measures, including adjusted net income.
Adjusted EBITDA and margins a full reconciliation of these non-GAAP measures to corresponding GAAP measures are included in the press release.
Fourth quarter revenues were $78 5 million in line with our expectations. This was flat compared to the prior quarter and up 15% from $68 4 million a year ago.
Full year FY 'twenty, three revenues were $295 million compared to 296 million in the prior year.
Software and subscription services segment revenues in the fourth quarter was a record $51 4 million up 4% quarter over quarter and up 25% year over year.
The increase in our <unk> segment revenues reflect the continued transition of our telematic product segment customers to our device management, <unk> telematics cloud or <unk> CTC.
Subscription business model and into our <unk> segment.
Full year, <unk> revenues increased 20% to 185 million or 63% of total revenues compared to $154 million was 52% of total revenues in the prior year.
So NASA space remaining performance obligations in the fourth quarter was approximately $234 million down 7% quarter over quarter from 252 million and up 17% year over year from 200 million.
During the quarter, our subscriber base increased 9% quarter over quarter to $1 6 million and increased 51% year over year.
Telematic products revenue in the fourth quarter were $27 1 million down 8% quarter over quarter from $29 6 million and flat year over year.
We continued to convert these telematic product customers to a dms CTC subscription arrangement.
We ended the year with $29 million in telematic products backlog.
For the full year, and 23 telematic products revenue declined 22% to $110 million from $142 million.
The decrease revenues reflect the ongoing supply shortages that have limited our ability to ship against firm backlog.
Combined with the transition of a large portion of our customers to our Dms CTC subscription model and hence moved into a SNF segment revenues.
Within the telematic product segment, our largest OEM customer revenues increased 17% to $15 million quarter over quarter from $13 million and increased 90, 95% year over year from $8 million.
On a full year basis, our largest OEM customer accounted for 15 1 million of revenues.
Which was down from 54 million in the prior year.
While we recovered in the second half of the year supply constraints had negatively impacted our ability to fulfill demand for this customer in FY2023.
As we moved into 'twenty four supply has improved and demand from this customer remains strong.
Our annual recurring software application subscription revenue declined from 94 million to 80 million.
Driven primarily by the discontinuation of our auto leasing business and foreign exchange headwinds and our connected car business.
This was somewhat offset by new customer logos and DM CTC subscription revenues attributable to customers being converted from <unk> products to DSS segment.
Excluding the discontinued auto leasing business the recurring software applications subscription revenues were flat quarter over quarter.
In FY 'twenty four our plan is to focus and drive these recurring revenues with new applications like the vision two point solution that just discussed.
Beginning in Q1, FY 'twenty four we will pivot our focus to the recurring applications subscription revenues.
Consolidated gross margin in the fourth quarter improved 160 basis points sequentially to 35, 3%, but was down from 41% in the prior year.
As expected, we had lower levels of spot buys in the fourth quarter, which resulted in a net reduction of PPV of two 1 million compared to $5 7 million in the prior quarter.
These PPV related improvements to gross margin were offset by unfavorable product mix shifts.
Interest rate impacts associated with capital lease deals.
And the customary year end inventory adjustments.
Full year FY 'twenty, three gross margin was 37% compared to 41% in the prior year.
We anticipate continued improvements in our gross margins in 2024.
Fourth quarter operating expenses, excluding restructuring charges, and intangible asset amortization decreased 2% quarter over quarter and 10% year over year.
Full year operating expenses, excluding restructuring charges and intangible asset amortization declined 5%.
In late January we announced a restructuring to address our cost structure and to realign their operations to be more consistent with the data analytics and insight driven recurring revenue business model.
We expect these actions to result in an annualized cash savings of approximately $10 million to $12 million.
Savings will be realized across our cost of goods sold operating expenditures and capital expenditures.
We will begin to see the benefits of these actions in the first quarter and full impact of benefits being realized in the second quarter and beyond.
Adjusted EBITDA in the fourth quarter increased 44% quarter over quarter to $6 8 million or approximately 9% of revenue from $4 7 million or 6% of revenues.
Year over year, we saw a 35% increase from $5 million or 7% of revenue.
Compared to the prior quarter adjusted EBITDA benefited from slightly lower operating expenses, excluding restructuring charges combined with improved gross margins.
Slide 23, adjusted EBITDA was $18 1 million or 6% of revenue compared to $24 7 million or 8% of revenue in the prior year.
At the end of the fourth quarter, we had total cash and cash equivalents of approximately $42 million as compared to $45 million in the prior quarter.
And had no outstanding borrowings under our $50 million asset backed line.
Total net borrowing capacity under this line at the end of the year was $34 million or aggregate outstanding debt is approximately $232 million, including $230 million of the 2% convertible senior notes due on August one 2025, our guidance for the first quarter.
Of FY 'twenty four are as follows we expect revenues in the first quarter to range between 72 to 78 million with adjusted EBITDA expected to be between five and $9 million.
With that I'll turn the call back over to Jeff for some final thoughts Jeff.
Thank you Qi con before opening the call for Q&A I'd like to thank all of our people for their incredible work this past year.
<unk> team has worked hard to position the company for growth and profitability going forward.
We believe we've turned the corner on the business transition, we set out to implement and are thus well positioned today to seize the opportunities that lie ahead with years of experience in the telematics industry.
We've developed a reputation for delivering high quality products that lead to optimal asset operation and control and now with this recent business transformation, we're using that experience to deliver software solutions to our customers that solve real mission critical issues.
While providing invaluable and actionable AI analytical tools and insights with that we will now open the call to your questions operator.
Yes.
Thank you.
We'll now begin the Q&A session.
If you would like to ask a question. Please press star followed by one for you you touched on key pad.
If for any reason you would like to remove that question. Please press star followed by <unk>.
To ask a question press star one.
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We will pause briefly to allow questions to generate in Q.
The first question comes from the line of George Notter with Jefferies. Please proceed.
Hi, guys. Thanks, so much thanks, a bunch I guess.
Can you give us the recurring application subscription number I know typically you guys break it out in the Qs and Ks, but do you have that number offhand.
For the fourth quarter.
Sure so $19 four plus.
The rental revenues of $8 six.
Got it okay.
Great.
Your.
Later this afternoon.
Okay.
Great so that $19 $4 million number was about flat sequentially in the February quarter.
I guess.
It's a recurring revenue line item.
We've seen that line item kind of.
Declined for a few quarters now I just want to make sure I understand the narrative there or is that is that really have more to do with the discontinuance of the auto finance piece or is that fully out of the numbers now and we should be seeing some lift there are like you know whats your perspective on the trajectory of those numbers.
Yeah. It was definitely impacted by two things the auto finance business discontinuance as well as some foreign exchange pressure in our automotive business, George but I mean, it's also affected by the fact that over the last year, we focused most of our resources on converting our base to <unk>.
CTC, what we're excited about in fiscal year 'twenty four with that largely behind us as our sales team is 100% focused on driving recurring revenue businesses and K 12 fleet P&L and automotive so I think what investors have been looking at and anxious.
For us to really complete that turn.
The conversion of the base and really focus on what's going to drive value going forward, which is those full stack recurring revenue businesses.
Got it okay.
You mentioned the transition to <unk> TTC I think I saw on the press release, 78% number.
And I think the base was 65 customers in total you were trying to convert so it sounds like the progress there is diminishing this past quarter I think a quarter ago, you were at 75% two quarters ago. I think you were at 50 so.
Is it fair to say the other 22% of the customers are just going to stand Pat in and not make that transition or how do you look at it.
No no I think what's more.
Accurate there is that we have two larger large large customers who have.
More complicated contractual issues that we want to make sure we get right for our customer and for us.
But both these customers have a large embedded base and do large volume with us. So we still expect to complete those in the near term.
We were hopeful to get those done in the quarter, but we're making good progress and we're working with our customers. So it's a seamless integration for them as well, but no we're still on track.
Yeah.
Got it okay, okay great.
Then the last one I know you guys were talking about implementing some pricing increases.
To reflect.
Higher supply chain costs.
Any success in implementing those this past quarter was that part of the telematics number that we're looking at or.
What can you tell us there.
Yes, we had some.
PPV or purchase price variance.
Revenue items that we charge to customers in the quarter.
You saw sequentially or impact from pricing changes or because we reduced the number of slot buys really improved so part of that was the fact that we were able to build more of this PPE to our customers.
And the other part was that because of the supply chain has improved a great deal of our allocations have improved our lead times have.
Shortened we're able to.
Paying less in terms of additional spot.
Spot buys in the market. So again that leads to us having a little bit more pricing flexibility, but also reducing the added cost and pressure on gross margin.
Got it okay, alright, I'll hand, it over thanks a lot.
Sure. Thanks, Josh.
Thank you.
The next question comes from Manhattan.
Scott.
<unk> capital partners. Please proceed.
Yeah.
Hey, good afternoon, Thanks for taking my questions nice job on the quarter guys.
To quickly dive in on a couple of clarifications from an opex and restructuring standpoint.
I wanted to clarify in terms of the current quarter, how much of the restructuring that got announced was implemented in this quarter I think the non-GAAP opex was around $25 million. It sounds like there is another $8 million to $10 million to come out annually. So by the end of this fiscal year, we're expecting another two plus million to be coming out on a quarterly basis and then on the gross.
Margin front, just wanted to clarify a couple of things.
You talk about normalization as we get to the end of this fiscal year I Wonder if you could could recap that for us by segment in terms of product and software and subscription services, what that should look like and what's the long term target for gross margins on the software and subscription services, particularly now as you're pursuing higher end.
Patients higher dollar and value added.
Just overall better blend to terex.
Sure.
Yes, So let me make sure we got your question. So first question was on the impact of cost reductions on the opex going into the future second was on gross margins.
We think normalized gross margins look like.
With long term gross margin would be is that did I get that right.
Correct Yep Okay.
Opex cost.
Cost reductions were implemented very late in Q4.
And they continue to be implemented in Q1, So you will not see the full impact of those reductions until really in Q2.
But you are correct it's roughly.
$8 million to $10 million, a year and so we will see some of that in Q1 and most of the balance in starting in Q2, and we should be fully fully costed down at that point in time in terms of gross margins.
If you look at 2021 and 'twenty, two I think youll see that blended gross margins roughly 41% to 40, 40% to 41%.
That is where we're trending back towards however, long term wise when we have our recurring software and application revenues higher.
A portion of the overall business.
We are looking for a 50% blended gross margin from a long term basis.
The below that a product line, where you talked about <unk> versus hardware, we really don't break that out in any lower at that level.
Okay, and maybe if I could follow up now that youre going through the forced conversion process and you're largely done do you still have a couple of laggards.
What is going to be the organic growth rate that you guys are targeting in terms of.
Alright.
<unk> devices, how should we be thinking about or it sounds like that's bottoming out and the overall target revenue growth number for <unk>.
Yeah. So overall long term goal on <unk>, but we really let's say it differently.
Got for recurring revenue growth is 10%.
So what you guys have been looking for.
Is that clear recurring revenue growth, which is driven by more of our sales of our full stack solution.
We won't get there all the way this year, but we'll definitely make progress that you saw in my remarks, we're going to return to revenue growth and see significant I mean, we really did some significant restructuring.
To align the company better with.
Our long term goal of being a software and subscriptions provider, which is going to mean better margins in the long run we really expect that software business to be much more in the 50% range. Our first step with the DM CTC conversion those are relatively lower our pools. They are definitely helpful.
And everything that we ship going forward has a recurring component.
But I think what Youll see in 2024 is a greater percentage of our units.
We will go out on the.
Full stack solution higher our higher gross margin.
Area.
Great. Thanks, so much ill get back in the queue.
Yeah. Thanks, Scott.
Thank you.
The next question comes from the line, Mike Latimore with Northland Capital markets. Please proceed.
Great. Thanks, guys nice quarter there.
On the software and subscription business is it fair to assume that should.
Continue to grow sequentially throughout the year.
Okay.
Yes, absolutely that's the goal I mean, we have a good pipeline.
Okay tore we've always had a good pipeline I'd say that in terms of our focus on our cat lamp app in our P&L product, we've got very good pipelines going into the year.
In the automotive business you may remember.
Last year, we signed a long term deal with BMW, that's actually being implemented so we've got a good.
Many good things on the momentum side for our full stack businesses and then keep in mind that for our TSP customers, who are hugely important to us and we're very focused on making sure our customer service.
To them is excellent.
Been rolling out D&C, DTC, so well lower our pool everything that we're selling to are.
Yes P customers also have recurring revenue component so all of those things.
Growing recurring revenue over the long run.
Yes.
And for the customers that you converted to DMC Tc early on I would say.
This time last year first half of last calendar year.
It has been the.
Upsell pattern there so far I know that hasnt been a big emphasis Jeff any color on just upsell to those early customers.
I mean, I think that one our customers are realizing the value of DM CTC.
It's early days on the Big technology advantage with DM CTC is the edge computing capability. So it's early days on that but I think a lot of opportunity position R. R.
Our TSP customers.
To compete better against their competitive.
Landscape and position us well to.
To sell additional features so more of that and I think the way I think about next year is.
More on these full stack recurring revenue businesses driving more of the top topline.
Yeah.
Okay great.
Great. Thanks very much.
Yeah, and then one other thing that I would like to mention there.
In Q3, we spent a lot of time building out a customer success organization that is focused on taking care of our existing customers. So lowering churn selling additional features to our existing customers, but most importantly as.
We are getting a lot of questions about topline revenue.
That does free up our <unk>.
I experienced salesforce in P&L fleet automotive K 12 to focus exclusively on.
On new logos.
Okay.
Yeah.
Got it.
Thanks.
Yeah.
Thank you.
The next question comes from the line of Gary repeat.
Eldon sacks. Please proceed.
Hi, This is Adam <unk> on for Jerry today. Thanks for taking my question wondering if you could help us think about the path and timing around.
Positive inflection in free cash flow during your transition here.
Yeah. So.
You can see from the cash flow.
<unk> implement a project that we implemented late in Q4 that should start contributing.
As well as the.
Enhance or improving gross margins those were both impact.
From a free cash flow standpoint, I think we still have a bit of ways to go from a working capital standpoint, but if you take it up before working capital adjustments I think you will see that we should be able to do much better in the second half of the year.
Great. Thanks, and then I think.
Revenue outlook for <unk>.
The quarter implies down around four 5% sequentially. Just wondering if you can parse that out between the two segments.
Yes, we didn't we're not going to unpack the guidance at that level.
Additional questions I might be able to provide any additional clarity, but we're not going to go below the aggregate level.
Alright, thank you.
Mhm.
Yeah.
Thank you.
The next question comes from the line of Martin <unk> with Oppenheimer. Please proceed.
Hi, good afternoon, Thanks for taking my question.
One question on the cost saving plans.
Is there any way for you to give us more details.
<unk> is the most savings coming from across Cogs, Opex and Capex and also where do we see more concentrated headcount reduction. Thank you.
Yes, I think that what we tried to do and <unk> will add some more color across the <unk>.
Various aspects of the income statement, but we definitely focused on reducing expenses in our legacy.
Hardware business.
Yes, so we spoke about roughly $8 million to $10 million of annual cash flow reduction.
And spans across cost of goods sold Opex and Capex I would say roughly about 20% is in cost of goods sold in Capex and 80% is in the Opex.
In terms of head counts.
It was pretty widely spread across sales and marketing G&A as well as a small amount in R&D.
Got it thanks for the efficient details.
Sure.
Okay.
Thank you.
Again to ask a question please press star one.
There are no additional questions at this time.
I will now hand, it back to Geoffrey Gardner for any closing remarks.
I want to thank you all again for joining us today on the call and for your continued support of <unk> as a final note we.
We will be participating in the Oppenheimer emerging growth conference on May 11.
Which is a virtual conference Jakarta, and I will be speaking answering questions. So please schedule a meeting with US if you plan to attend we look forward to updating you on our progress during our first quarter of 2024 earnings call, which we expect to be in June operator, you may now disconnect the call.
Thank you guys.
Thank you.
That concludes today's conference call.
You may now disconnect your line.
Yes.