Q3 2024 CalAmp Corp Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the Cal Lab Corp. FY 'twenty for Q3 earnings call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question. During this session. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, you couldn't Kim Chief.
Kim Chief: Financial Officer.
Kim Chief: Good afternoon, and welcome to Cal M Q3, FY 'twenty for financial results earnings call.
Gee: My name is Gee content I am the Chief financial Officer at Cal lamp.
Speaker Change: Also with US today is <unk> interim President and Chief Executive Officer, Jason Cohen our.
Jason Cohen: During today's call, we will make certain forward looking statements within the meaning of section 27, a of the Securities Act of 1933 and <unk>.
Jason Cohen: Section 21 E of the Exchange Act of $19 34.
Jason Cohen: Forward looking statements are predictions projections and other statements about future events.
Jason Cohen: That are based on current expectations and assumptions and.
Jason Cohen: And as such are subject to risks and uncertainties.
Jason Cohen: Many factors could cause actual future events to differ materially from forward looking statements in this communication.
Jason Cohen: Investors should listen to today's call with the understanding that our actual results may be materially different from the plans intentions and expectations disclosed in our forward looking statements that we are about to make.
Jason Cohen: For more information about these risk factors that may cause actual results to differ materially from forward looking statements. Please refer to the earnings press release that we issued today as well as the company's filings within the Securities and Exchange Commission.
Jason Cohen: Investors are cautioned not to put undue reliance on these forward looking statements.
Jason Cohen: The company, specifically disclaims any obligation.
Jason Cohen: Update the forward looking statements that may be discussed during this call.
Jason Cohen: Jason will begin today's call with a review of the company's recent operational highlights.
Jason Cohen: And then I will provide a more detailed review of the financial results.
Jason Cohen: Followed by a question and answer session.
Jason Cohen: With that it is my great pleasure to turn the call over to Kal lamps, interim President and Chief Executive Officer adjacent cone hour.
Kal Lamps: Jason go ahead please.
Kal Lamps: Thank you Jay.
Kal Lamps: And thanks to all of you for joining us on the call today.
Kal Lamps: In the third quarter <unk> continued to see strength in certain areas of the business, while also experiencing demand softness and others.
Specifically, our industrial and international connected car segments continued to perform well.
Kal Lamps: Whereas soft demand from TSP customers led to lower than expected consolidated revenue.
Kal Lamps: Our view is that continued softness with tsp's is mainly related to the post COVID-19 supply chain correction.
Kal Lamps: Subsequent inventory rebalancing as well as an intensified competitive environment and the overall telematics solution ecosystem.
In response, we have reallocated strategic focus and resources to this segment and believe we are seeing early signs of recovery.
Kal Lamps: We are optimistic that TSP revenue will stabilize and return to growth from current levels.
Kal Lamps: Another complicating factor with our TSP customers has been a difficult but necessary migration from our legacy pulse device management system to its successor Dms GTC.
Kal Lamps: I am very pleased to report that after 20 months of monumental effort and some pain.
Kal Lamps: Technical migration of more than $8 5 million devices to DMC T. C is now essentially complete.
Kal Lamps: All of our TSP customers can now look forward to fully leveraging the improved functionality and benefits of Dms GTC.
Kal Lamps: As opposed to migrating devices.
Kal Lamps: Furthermore, at the final strokes of the migration are completed.
Kal Lamps: Our team can react or more of its time and attention to optimizing the customer experience and driving revenue growth.
Kal Lamps: Overall, the company generated $53 $6 million in revenue.
Kal Lamps: And $1 million of adjusted EBITDA in the quarter, both of which fell below our expectations at the time, we provide a directional commentary on October 5th.
Kal Lamps: Adjusted EBITDA was lower than expected as a result that the lower revenue and gross margin.
Kal Lamps: non-GAAP Opex was lower sequentially as a result of previous cost reduction initiatives and that's helped to cushion the impact of lower revenue and gross margin.
Kal Lamps: On the product and sales front. The company continues to hone its focus on core market segments to maximize the effectiveness of our investments and resources.
Kal Lamps: As a result, there are several developments in the quarter that we believe represent growth catalysts for the future.
Kal Lamps: One of these developments was the release of an upgraded version of our AI Dash Cam solution Division.
Kal Lamps: <unk> <unk> one.
Kal Lamps: This new model offers the Standalone video capabilities of vision two dot O.
Kal Lamps: But also includes other telematics functionality, such as GPS tracking without the need for a separate gateway or <unk> device.
Kal Lamps: Vision two dot one has now been released for our K 12, and commercial fleet applications.
Kal Lamps: As previously mentioned, we had another extraordinarily strong quarter in the industrial segment, particularly with our large OEM customer.
We are also seeing some very encouraging market traction with other industrial Oems, who are showing significant interest in the flexibility and computing power of <unk> edge software platform edge core.
Kal Lamps: This edge platform together with our DM CTC cloud enables customized edge computing capabilities for a proprietary edge apps, which can lead to lower operating costs improve flexibility and lower latency compared to traditional device to cloud solutions.
Kal Lamps: We have customers integrating this unique edge capability today and are excited to expand our opportunity set with industrial Oems.
Kal Lamps: Also our international connected car business continues to execute well achieving several milestones in the quarter.
Kal Lamps: First we were granted Toyota genuine certification, enabling our solutions to be installed at Toyota supports thereby streamlining the sales and customer delivery process and providing an opportunity for geographical expansion.
Kal Lamps: Additionally, Jaguar land Rover has endorsed our stolen vehicle recovery system as its recommended solution to help mitigate the impact of our growing theft issue in the U K.
Kal Lamps: Increasing SaaS the <unk> range Rovers in the UK has led to significant increases in insurance premiums on these targeted models.
Kal Lamps: But <unk> endorsement select insurance companies are offering lower premiums on vehicles that have our SBR solution installed.
Kal Lamps: We are encouraged by <unk> endorsement of our unique SBR technology and believe that it represents a catalyst for growth in the UK market and beyond.
Kal Lamps: During the quarter. We also launched an initiative to narrow our strategic focus to market segments, where we are particularly well positioned and see opportunities for profitable growth.
Kal Lamps: In addition to concentrating our resources in those market segments with the best opportunity for growth are.
Kal Lamps: Our narrower focus has also enabled us to take significant cost reduction actions.
Kal Lamps: We estimate that our cost reduction actions will result in approximately $16 million in annualized savings compared to our fiscal Q2 run rate.
Kal Lamps: We anticipate that approximately 75% of the savings will come from operating expenses and capital expenditures with the balance coming from reductions in cost of goods.
Speaker Change: Well, we expect to see some immediate benefit from our cost reduction initiatives. The full impact will be realized throughout fiscal year 'twenty five.
Speaker Change: With these reductions we expect to significantly strengthen the leverage in our operating model and to achieve adjusted EBITDA breakeven at approximately $42 million in quarterly revenue, depending on product mix and gross margins.
Speaker Change: On December 18th.
Speaker Change: We announced the closing of a $45 million term loan with Lin Rock Lake Master Fund LP.
Speaker Change: This new term loan replaces our previous asset backed line of credit and enhances our strategic positioning as we engage with new and existing customers partners and suppliers.
Speaker Change: The new capital also provides financial flexibility in support of our strategy and business transformation.
Speaker Change: Lynn rock is a longtime supporter of <unk>.
Speaker Change: And as an existing holder of a large majority of <unk>, 2% convertible senior notes maturing in August of 2025.
Speaker Change: In connection with the execution of the term loan agreement <unk> lab is amending the notes to add a security interest.
Speaker Change: And finally I am very excited that we recently announced the appointment of veteran technology leader, Chris Adams as <unk> next President and CEO effective January <unk> two.
Speaker Change: 2024.
Speaker Change: Chris is an accomplished technology leader, who will bring a wealth of knowledge and experience to <unk>.
He possesses a unique combination of technical depth operational skills and general management experience from a broad range of technology companies. Most recently as general manager of the automotive sensing division at on semi.
Speaker Change: We have high confidence in <unk> ability to lead the company through its transformation into greater value for customers and investors.
Speaker Change: As for me I will continue to serve as <unk> interim CEO until Chris arrives.
Speaker Change: Following his arrival I will work with him and the team to ensure a smooth handover of leadership responsibilities.
Speaker Change: Following the handover I plan to resume my role as independent director for <unk> lab.
Speaker Change: It has been a true pleasure to serve as <unk> interim CEO and I can report without hesitation that the cat lab team is talented and passionate and they believe in the opportunity before us and.
In addition to having a great team.
Speaker Change: The company also has other tremendous assets, including excellent products and solutions.
Speaker Change: Our blue chip customer base, and a large and growing market opportunity.
Speaker Change: I look forward to supporting <unk> next chapter of profitable growth and market leadership.
Speaker Change: With that I'll turn the call over to John to discuss our third quarter financial results in more detail.
John.
John: Thank you Jason and thank you for stepping up during this transition it hasnt been a pleasure to work with you.
John: My commentary will include reference to non-GAAP financial measures.
John: A full reconciliation of these non-GAAP measures with the corresponding GAAP measure is included in the earnings release.
John: Total revenues in the third quarter were $53 6 million revenues declined 32% year over year, and 13% sequentially from $61 7 million last quarter.
John: Much of the year over year and quarter over quarter revenue decline was driven by lower sales to our TSP customers.
John: Partially offset by strong performance in our industrial and connected car market segments.
John: As Jason mentioned in his remarks, the revenue decline was driven by our TSP customers continuing to rebalance their inventories while also navigating competitive pressures there.
End markets.
John: As we move into Q4, we are seeing early indications from our TSP customers.
John: But the business is stabilizing and orders have improved.
John: Recurring application subscription revenue in the quarter were $17 8 million, a 900 K sequential decline.
John: While the total connected car market segment revenues were steady quarter over quarter. The decline in recurring revenue was driven by our connected car U K operations.
John: It's a large insurance carrier exited the U K market in the quarter.
John: These declines were partially offset by recurring revenue growth in our K 12 segment.
John: Consolidated gross margin in the third quarter was 33%.
John: Compared to 36% in the prior quarter.
John: The sequential gross margin decline was driven by unfavorable product mix.
John: Lower volumes and higher than normal excess and obsolescence accruals and warranty expenses.
John: <unk> was largely driven by a set of skus from our cargo tracking product line and higher warranty expenses were the result of quality issues with one of our product Skus, which has since been resolved.
John: Third quarter GAAP operating expenses were $101 million.
John: Excluding goodwill impairment restructuring charges expenses related to Jeff gardeners, passing and other nonrecurring expenses third quarter operating expenses would have declined $2 5 million sequentially to approximately $23 million.
John: The result in Q3, FY 'twenty four adjusted EBITDA was $1 million or 2% of revenues.
John: Please see the press release for further details over nonrecurring adjustments.
John: At the end of Q3, FY 'twenty four we had total cash and cash equivalents.
John: Of approximately $38 2 million as compared to $38 6 million last quarter.
John: Cash flow from operations was a positive $1 8 million in the quarter.
John: Pre cash flow in the quarter was a negative 500 K.
John: Towards the end of Q3, FY 'twenty four we implemented a significant cost reduction initiatives targeting $16 million in annualized cash savings relative.
John: Relative to Q2, FY 'twenty for run rates.
These savings should be fully realized by the end of FY 'twenty five.
John: Approximately 25% of the reductions will come from cost of goods as new lower cost and higher performance products replace aging products over time.
John: The balance of the reductions will come from operating expenses and capital expenditures.
John: With these reductions are adjusted EBITDA breakeven should be reduced to approximately $42 million in quarterly revenues, depending on business mix and realized gross margin.
John: In the quarter.
We also assess the carrying value of goodwill on our balance sheet.
John: Driven by significant revenue declines in our TSP market segment, the fair value of some of the goodwill of the segment was determined to be less than the carrying value and we recognized a $74 million goodwill impairment.
John: Subsequent to the quarter end, we announced the closing of our strategic financing agreement with Lin long Lake the.
John: The financing, we will provide additional liquidity and operating flexibility as.
John: As we implement our restructuring efforts.
John: Cal M to growth profitability and cash flow generation.
John: As a note term loan has no financial covenants.
John: With this strategic financing significantly lowered cost structure.
John: Incremental revenues will create enhanced profitability and cash flows positioning.
John: Positioning the company to execute our launch plan to address the $230 million convertible loan coming due on August one 2025.
John: And the $45 million term loan coming due December 15 2027.
John: From a business outlook standpoint.
John: In Q4, we expect revenues from our industrial market segment to decrease from its recent multi quarter highs to a more normalized level.
John: We expect this revenue reduction and industrial to be partially offset by a recovery from our TSP customers.
John: Overall, we expect consolidated revenues to be down slightly and for the adjusted EBITDA to be stable relative to Q3, FY 'twenty four levels.
With that I'll turn the call back to Jason for some final comments Jason.
Jason Cohen: Thank you <unk> and.
Jason Cohen: In conclusion, I would like to thank everyone for their continued support of talent we.
Jason Cohen: We have an unwavering belief in the value our technology services and employees bring to the market.
And our team remains dedicated to capitalizing on that value and navigating the opportunities ahead.
Jason Cohen: This concludes our prepared remarks, we will now open the call to your questions operator.
Speaker Change: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: One moment for questions.
Speaker Change: Okay.
Speaker Change: Our first question comes from Adam <unk> with <unk>.
Adam: Goldman Sachs you May proceed.
Adam: Hi, This is Adam <unk> on for Jerry today, Thanks for taking my question.
As a starting point can you just put a finer point on what youre seeing in the TSP market.
Adam: Driving your confidence that that we could see a recovery here soon and then.
Adam: Stepping back more broadly how are you thinking about timing around.
Returned to revenue growth for the overall business.
Speaker Change: Thank you.
Speaker Change: Thanks, Adam this is Jason so.
Jason Cohen: I'll be abstract somewhat on the on the signals, we're seeing from Tsp's.
Jason Cohen: But basically we're we are seeing order volume come up a bit our internal forecast is up.
Jason Cohen: We're getting more favorable anecdotal commentary from our from our Tsp's.
Jason Cohen: So all of that leads us to believe that.
Jason Cohen: A recovery is underway.
Jason Cohen: Being realistic I think that recovery is going to be slow.
Jason Cohen: It's going to take us a while to get back up to historical levels, but.
Jason Cohen: Like I said, we're optimistic and our current view is in Q4, we will see a recovery relative to Q3.
Speaker Change: With respect to forward guidance beyond the commentary provided here on an overall consolidated revenue I think we're going to be cautious on that at this point in time, Adam but.
Speaker Change: I'd say on balance we're we're optimistic the big negative moving piece for US has been in the past few quarters, Tsp's and we're seeing signs of recovery.
Speaker Change: As <unk> indicated in our prepared remarks, we're going to see kind of a return to normal for industrial so that's going to that's going to work through the consolidated results.
Speaker Change: But overall, we're optimistic and we've got we've got some we believe growth catalysts in the business that will play out over time.
Speaker Change: Thanks for that and then nice to see the closing of the $45 million term loan can you just update us on how youre thinking about other strategic options to address the 2025 convertible note.
Speaker Change: Yes, So I think we've discussed this in the past Adam.
Speaker Change: So operationally, obviously, we're going to have to do better right grow the business increase profitability and generate more cash. We believe these things will generate opportunities and flexibility options for us to be able to one potentially refinance a portion of the all of the debts coming due.
Speaker Change: <unk> at a lower cost as well as push out some of it as well as pay off some of that at maturity.
Speaker Change: So fundamentally the strategy really hasnt changed.
Speaker Change: Okay got it and then.
Speaker Change: Just lastly from me.
Speaker Change: You folks have been focused on some new applications and solutions just wondering how the growth trajectory of some of those.
Speaker Change: Higher <unk>.
Speaker Change: Solutions have been and how you think about.
Speaker Change: Revenue subscriber trends over the next several quarters as you work to grow those.
Speaker Change: Our applications and solutions.
Speaker Change: Sure. Adam This is Jason I'll talk to really vision to doubt one has been kind of our most recent important launch in terms of an <unk> driver.
That product has been now fully integrated with both our K 12 apps.
And our <unk> app for our commercial fleet.
Speaker Change: We're in market with it.
Speaker Change: We've got a handful of customer wins and installation. So we're kind of stepping into it now.
<unk>, there and and in particular around K 12, and the other dynamic around K 12 is.
Speaker Change: They are back and they are back to business now after their normal seasonal quiet period as school as school opens and of course through the holidays.
Speaker Change: So were optimistic there and other growth catalysts.
Speaker Change: 0.2.
Speaker Change: The app are connected car.
Speaker Change: Connected car has I think a few good things happening we've organically opened in Spain about 18 months ago.
Speaker Change: That business has now achieved breakeven and it's continuing to grow and based on the success. There we're evaluating other geographical expansion opportunities with connected car mainly in Europe.
Speaker Change: And in addition to that we've got some nice.
Speaker Change: Milestones customer milestones in that part of the business with both Toyota.
Speaker Change: And Jen and Jaguar land Rover that we believe can Ken.
Speaker Change: Ken can help us drive more growth.
Speaker Change: In that in that area of the business.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: A reminder to ask a question. Please press star one one on your telephone one moment for questions.
Speaker Change: And im not showing any further questions I would like to turn the call back over to Jason <unk> for any closing remarks.
Jason Cohen: Thank you Josh and thank you to everybody for joining us on the call today and for your continued interest in Cowen. We look forward to speaking with you again during our fourth quarter and fiscal year 2024 earnings call.
Jason Cohen: Josh you can now disconnect the call.
Josh: Thank you. Thank you for your participation you may now disconnect.
Josh: Okay.
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