Q2 2020 Earnings Call
A reminder, this call is being recorded I.
I would now like to introduce your host for today's conference call. We had fever of Shelton group called <unk> Investor Relations firm well, Yes, you may begin.
Good afternoon, and welcome to calendar fiscal second quarter 2020 financial results Conference call.
And Sievers President of Shelton Group Kellems Investor Relations firm.
With us today were Kellems, President and Chief Executive Officer, Michael Burton and Chief Financial Officer Curb vendor.
Before we begin I'd like to remind you that this call may contain forward looking statements well. These forward looking statements reflect caliber best current judgment, they're subject to risks and uncertainties that could cause actual results could materially differ from those implied by these forward looking projections.
These risk factors are discussed in our periodic 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, Michael will begin today's call with a review the companys financial and operational highlights the Curt will provide additional details about the financial.
Results and outlook followed by a question answer session with that it's my pleasure to turn the call or calendar, President and CEO , Michael Burton Michael. Please go ahead.
Thank you again, we're pleased with our second quarter results as our consolidated revenue of $93 million exceeded the midpoint of our guidance driven by record software and subscription service revenue more than $31 million up 65% year over year.
Our three recent acquisitions performed well during the quarter. We also benefited from supply chain structural improvements.
We also demonstrated improving profitability with non-GAAP earnings per share and EBITDA, both at the high end of our guidance range.
Let me start by highlighting the further progress we've made in our transformation to become a global SaaS solutions provider.
As I mentioned, a moment ago software and subscription service revenue reached another record and now represents 33% of total revenue that's compared to 29% last quarter.
As an example of organic progress toward Toyota Motor, Italy, Accountemps, Lojack, Italy subsidiary announced a partnership to protect the entire line of Toyota vehicles sold in Italy with optional Lojack services.
Now all Toyota models in Italy will help lojack stolen vehicle recovery service offered us an embedded auction to improve security and peace of mind for its customers.
Earlier. This week, we also announced it took a strategic partnership with spread a leader in Aiotv until the communication innovations to deliver Carol apply on devices, a service subscription services and software applications.
This new partnership will expand spreads broad range connected car fleet and asset management services and create new revenue streams from sprint enterprise accounts.
We're also seeing the benefits of increasing demand for Sonobi a school bus fleet solutions as a result of consumer pull through for the award winning here comes the bus application the trucks, all shrewd activity and real time student ridership.
Numerous districts across the United States beginning to recognize the benefits this powerful out before its parents help them better manage their busy schedules well also staying more connected to their children traveling to and from school.
In the second quarter. We also launched the tracker branded smart dealer lot management application to boost auto dealer profitability and enhance customer loyalty along with smart try to deliver connected car services to customers across the United Kingdom.
These solutions integrate with Kellems telematics cloud software as a service platform, which will help accelerate trackers expansion and delivery of connected vehicle services across the UK.
Finally, we also saw strong performance from Lojack, Mexico in the quarter and we expect to rollout telematics service is similar to smart dealer and smart driving Mexico within the coming quarters.
With all of these positive developments our worldwide subscriber base has grown to 1.3 million subscribers, serving as a strong indicator of our continued growth and expansion.
Now turning toward telematics systems business revenue for the second quarter of $62 million was inline with expectations down 2% sequentially and 20% year over year.
During the quarter, our network and OEM revenue was down by $4 million, primarily due to our largest customer caterpillar shifting from end of life products, including Threeg devices, while preparing to ramp deliveries of our next generation LTV based product family.
We believe this product transition will pick up significant momentum in the third quarter augmented by a significant pickup in order flow related to the threeg to Fourg LTV field upgrades scheduled for delivery over the next two quarters.
In the second quarter, specifically overall sales of Keller LP base technology devices.
Increased to approximately 30% of revenue as compared to 15% in the prior year period, reflecting the momentum that's building across our installed base for this critical threeg to Fourg upgrade cycle.
Now I would like to highlight some customer case studies the underscore our ongoing SAS transformation journey a counter.
The first case study involves a major global mail delivery in packaged shipment shipping company adopting the full stack of callout Sci on supply chain visibility services to optimize routing for lease trailers on a real time basis.
The reliability flexibility and dynamic capabilities of Kellems Sci on platform were key to help streamline the routing of thousands of shipments per month based on volume and daily variability in the shipment process.
This is the first real time tracking solution for Unpartnered assets deployed by this customer and the initial engagement is expected to generate approximately $1 million of revenue per count Sci on subscription services.
This opportunity was co-opted through a long standing North American wireless network service provider and strategic partnership which was recently expanded to include a reseller arrangement for kind of left Sci on services.
This new resale channel starting to drive a meaningful expansion of Sci related pipeline opportunities globally, which we expect to help drive organic recurring revenue growth over the coming quarters in years.
The second case study I would like to highlight relates to the successful completion of a new proof of concept with our largest freight and transportation SaaS customer as part of their 100000 units Mark Traylor program.
During the second quarter, we initiated pilot testing mccargo sensing solution utilizing stereo Scott the cameras with embedded artificial intelligence algorithms to accurately assess cargo loading in three dimensions within trailer assets.
This automated cargo sensing trial included integration with our newly deployed Apollo solar powered gateways.
That are planned to be retrofitted across a large percentage for the smart trailer fleet of this important freight transport and parcel delivery SaaS customer.
The Apollo Gateway in combination with sensor solutions for accurate cargo sensing tire pressure monitoring and remote door lock and unlock promise to produce significant ROI for this customer as well as across the global freight and transportation market as a whole.
With initial revenue expected from this program to begin next year. The successful completion of this cargo sensing solution in combination with a future proof the pollo sensor gateway sets the stage for meaningful freight and transportation subscription revenue expansion in the coming years.
In summary, we are tracking ahead of expectations in the first half the fiscal year and expect the momentum to continue with an even stronger second half.
We have set the stage for continued growth in or software and subscription service revenue, while fully integrating our recent acquisitions further streamlining and optimizing our supply chain and stabilizing or telematics business.
I'm pleased with our performance as we remain focused on consistent execution and our continued transformation to a global SaaS solutions provider.
With that I will now turn the call over to our CFO tender for a closer look for fiscal 2020 Q2 financial results in Q3 guidance.
Thank you Michael My commentary will include reference to the non-GAAP financial measures on adjusted basis net income.
Adjusted EBITDA and adjusted EBITDA margin a full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in the press release announcing our second quarter earnings that was issued earlier today.
As Michael mentioned, we are pleased with our consolidated revenue and non-GAAP profitability results in the quarter as well as the continuous progress, we're making on our transformation to a global SaaS solutions provider.
Consolidated revenue for the second quarter was $93.2 million up 5% sequentially due to increased software and subscription services revenue and down 3% year over year due to an expected decline in telematics systems product sales.
The software and subscription services revenue increased 65% over the prior year period to $31.2 million driven by increasing contribution from our three recent acquisitions, especially the acquisition of Sunovia as part of our fleet management services.
In the second quarter, our lojack subscription services revenue.
With $9.8 million almost double the revenue from Q2 of last year.
Our lojack subscription services now represents the lojack, Italy business as well as our recently acquired size businesses tracker, UK and Lojack Mexico.
These three entities in aggregate provide a strong foundation for recurring revenue and are expected to contribute to continued expansion of our software and subscription services business.
Additionally, we grew our global supply subscriber base in the quarter to 1.3 million unique subscribers as of August 31, 2019, compared to approximately 821000 for the same period last year.
In addition to new subscribers from our recent acquisitions. We also added new subscribers for fleet management services International stolen vehicle recovery and telematics solutions.
We expect to continue building on our subscriber base as we progressed through the remainder of fiscal 2020 and beyond.
Now turning to our telematics systems business performance in the second quarter was as expected with revenue down 2% sequentially and 20% year over year to $62 million, principally reflecting decreases in MRM telematics device revenue as well as network and OEM product sales.
For these product categories. The sales decrease was isolated to a few of our top customers, mainly our largest OEM customer caterpillar and to a lesser extent the loss of former customer Sunovia, which we acquired in April 2019.
Network and OEM products revenue was $12.6 million for the second quarter, representing a decrease year over year.
The product revenue for this category was attributable to caterpillar, which decreased 38% year over year.
As Michael mentioned caterpillars shifting from end of life products, including Threeg devices, while preparing to ramp deliveries of our next generation LTE based product family.
Caterpillar continues to be our largest customer with $9.3 million of revenue in the second quarter, representing 10% of our consolidated revenue.
We expect a significant pickup in order flow from this customer related to the Threeg to Fourg LTE field upgrade scheduled for delivery over the next two quarters.
Legacy Lojack, SBR products sales, including telematic sales to Lojack International licensees were up slightly by 2% over Q1 of this year, even with the lost revenue through the consolidation of tracker, UK and Lojack, Mexico as previous customers of Cowen.
Consolidated gross margin was approximately 40% in the second quarter slightly up from the prior quarter and down about 110 basis points in comparison to last year.
Gross margin performance is expected to improve as we continue to benefit from the integration of our recent acquisitions.
Complete the transition of our suppliers in contract manufacturers, while also managing the closure of our U.S. manufacturing facility, which is expected to be completed in December .
Additionally, as we make progress towards our long term SaaS revenue targets, we expect to achieve meaningful progress towards our gross margin and EBITDA margin targets.
In Opex, our GAAP basis, R&D sales and marketing and Genie expenses and the second quarter fiscal 2020 as percentages of revenue were approximately 8%, 17% and 14% respectively.
In general Opex increased as a percentage of revenue due to higher expenses from the recently acquired businesses combined with the deferred revenue haircut or purchase accounting adjustments that I mentioned last quarter.
As the revenue from our acquisitions begins to normalize and we fully integrate these businesses, we expect that our Opex will decrease as a percent of consolidated revenue.
On a non-GAAP basis Opex for the second quarter for R&D sales and marketing and DNA expense as percentages of revenue was 8%.
16%.
And 11% respectively.
For the full year of fiscal 2020, we expect GAAP basis, R&D sales and marketing and DNA expenses as percentages of revenue to be 8%, 16% and 16% respectively.
And we expect non-GAAP , R&D sales and marketing and DNA expenses as percentages of revenue to be 7%, 15% and 12% respectively.
The GAAP basis net loss in the second quarter was $7.4 million or 22 cents per share compared to a net loss of $8.7 million or 26 cents per share for the previous quarter.
The GAAP basis net loss reflects the increase in opex due to the recent acquisitions and restructuring charge incurred as we realigned our organizational structure in the quarter.
non-GAAP net income for the second quarter was $4.8 million or 14 cents per diluted share and at the high end of our guidance as compared to $4.2 million or 12 cents per diluted share in the first fiscal quarter.
The sequential increase in non-GAAP net income primarily reflects the increase in revenue combined with improved margin performance.
Adjusted EBITDA was $10.6 million in the second quarter with an adjusted EBITDA margin of 11% compared to adjusted EBITDA of $7.6 million and an adjusted EBITDA margin of 8% last quarter.
This quarter's EBITDA margin performance represents meaningful progress towards our target of 20%.
I will now provide some additional details on our balance sheet and liquidity position as of our fiscal quarter end.
At the end of the second quarter, we had total cash and marketable securities of $201 million and total outstanding debt of $300 million, which represents the aggregate carrying value of our convertible unsecured notes, coupled with $16.9 million I'll amounts due to factors.
Or assignees, which was assumed in the acquisition of Sunovia.
Net cash generated an operating activities was $5.2 million for the second quarter fiscal 2020, which reflects our net loss of $7.4 million adjusted for certain noncash items, such as depreciation amortization and stock based compensation.
And as well as changes in working capital.
Our consolidated net accounts receivable balance was $75.6 million at the end of the second quarter.
Representing an average collection period of 64 days.
While total inventory at the end of the second quarter was $49.5 million, representing annualized inventory turns of approximately 4.5 times.
The increase in inventory is aligned with our efforts to build buffer stock and to improve our overall supply chain performance.
Our cash conversion cycle was 79 days at the end of the second quarter compared to 68 days last quarter.
Additionally, our deferred revenue balance was $61.9 million at quarter end compared to $60.6 million.
At the end of the first fiscal quarter.
For the second quarter, we recorded an income tax benefit of $1.3 million, which is attributable to our pretax loss along with available R&D tax credits, partially offset by other discrete items.
For the same period last year, we recorded an income tax benefit of $497000 for similar reasons as I just cited for the current quarter.
For the remainder of fiscal 2020, we do not expect any material changes to our cash taxes due to our remaining federal net operating losses and other available tax credits.
Now turning to our fiscal 2023rd quarter outlook.
We expect the third quarter consolidated revenue to increase to a range of between $92 million and $98 million.
Our third quarter outlook reflects revenue momentum across our SaaS businesses combined with an increase in telematics systems product sales due to customer LT transitions.
We remain encouraged by the continued progress, we're making across our business, while cautiously managing through our ongoing supply chain transitions and tariff mitigation efforts.
At the bottom line, we expect the third quarter GAAP basis net loss to be in the range of 23 cents to 17 cents per share.
And non-GAAP net income in the range of 11 cents to 17 cents per diluted share.
We also expect third quarter adjusted EBITDA to be in the range of between $9.5 million and $13.5 million.
With that I'll turn the call back over to Mike will provide some final comments before we open the call up for questions.
Thank you Kurt I would like to reiterate the progress made this past quarter, expanding our software and subscription revenue and opportunities further streamlining our supply chain and optimizing our cost structure I'm very pleased with the progress we continue to make and look forward to discussing additional updates and opportunities in the coming quarters.
With that I would now like to open the call up the questions operator.
At this time, if you will let you asked a question simply press star studded number one on your telephone keypad.
Well pause for just a moment to compiled it kinda roster again to ask the question simply press Star then a number one on your telephone keypad.
Your first question is from Mike Walkie from Canaccord Genuity. Your line is still open.
Hi, Yes. This is actually anthea for Mike Congrats on the solid her.
In terms of the either.
Hi, good third quarter.
Given the full year targets I think it implies.
Significant ramp up in Q4 was there anything can help us kind of break down the drivers of that whether it's the caterpillar ramp where maybe some of the opex synergies continuing to flow through on any color there would be helpful. Thank you.
You're welcome.
Well, it's a little all of the above we expect continued progress as it relates to the purchase price accounting and deferred revenue hair cut unwind that being a big factor as it relates to our expected ramp in EBITDA EBITDA margin through the balance of the year.
We do expect based upon us completing our various supply chain transitions through our third quarter that by the fourth quarter.
Given that most of that will be settled out we will see some some cost to sales as well as opex benefits from that and also some of our recent consolidation efforts around consolidating sales and customer onboarding processes from the recent acquisitions should also play out.
Very strongly later in the year, all of which would contribute to two improved gross margin performance as well as EBITDA margin, reaching somewhere in the mid teens as we exit the year.
Got it great and then on can you sprint partnership.
Thank you mentioned in the past the das products generally require.
More services support on the on.
The structure of the agreement I'm just wondering how this partnership was specifically structured in terms of support and yes, we expect other operator iOS platform partnerships like this as part of a broader strategy to accelerate the that's program.
Yes, great question. So the sprint partnership is a reseller arrangement.
Targeting sprint enterprise accounts.
In spread was really keen to adopt an onboard our devices. The service program because they see it as a a way to lower friction.
For customer adoption and upgrade to Fourg LTE devices as they consider the wind down of their Threeg services. So it helps them transition some of their legacy threeg customers to Fourg network connectivity.
Through a relatively low upfront capital expenditure model, which we can facilitate through our das partnership also sprint was keen to to become a reseller of our supply chain integrity solutions, which we now call Sci on.
And we do have another partnership and in fact, the case study that we highlighted on on the in the prepared remarks is with another North American Telecom service provider, who is also a reseller both solutions targeting specific verticals. So we see carrier partnerships, both domestically and outside the United.
States is being ready channels.
To take some of these the software and service solutions into specific verticals in certain regions around the world. We see it is real real nice growth opportunity in channel play.
Which we really didn't exercise and the path.
Great. Thank you.
You're welcome.
Your next question is from George Notter from credit card.
Jefferies. Your line is now open.
That's because I just wanted to get back to a the supply chain transition.
If I go back to last quarter, you guys said there were a couple of more quarters left so this fiscal year.
Turning now how much of the supply is in.
China versus elsewhere, just any more detail you could give us would be great.
Sure.
Well.
In the current quarter, our outlook is that roughly roughly half.
Of the MRM products that we will shipped to customers in the United States will still be sourced in China, we expect that to drop off dramatically in the fourth quarter and if we go back to the beginning of the fiscal year was probably something in the neighborhood of 70% to 80%. So we've made significant progress in terms of transitioning.
Certain product lines to other manufacturing partners outside of China.
And we've reduced our exposure to tariff factors pretty significantly.
We got roughly one more quarter to play out before all of our supply chain transitions and various tariff mitigation initiatives or more or less complete.
Got it I think the endgame it to Peyton roughly 30% of the sourcing in China is that so the case.
That is correct.
And most of that sourcing.
For completed products would be to international customers outside the U.S.
And our current supply chain primary supply chain partner in China will continue to manufacture certain sub assemblies and components and supply. Those two are other tier one contract manufacturing partners outside of China.
Okay, and then just on sprint deal.
Obviously the T mobile merger is is pending but.
I assume that relationship survives post a T mobile sprint deal close.
I would anticipate it would or would be no reason for it not too.
Especially given the enterprise focus that this is is really the promise.
Up our of our relationship with expense, probably got a little bit more of a enterprise focused than perhaps T. Mobile has had historically.
Okay very good thanks very much.
You're welcome.
Your next question from Mike Latimore from Northland Capital. Your line is open.
Great. Thanks, Yes.
Great results in fastidious looks like it's doing well.
In terms of the SaaS business.
Should we think about that sort of growing sequentially over the next couple of quarters or reserves and seasonality that shows up here and there.
There is a certain amount of seasonality, especially with our lojack international.
Operations very very typical seasonality. It's played out this year just like it has in new over the last couple of years. So we would expect to see you know us pull through the seasonal period or seasonal I would say call. It downturn piece the business is actually up on a year over year basis, but we would generally.
The the tailwind start to emerge in the September October timeframe and.
I think things are playing out pretty much as they have been you know in the past. So I would expect it to will probably be a little more organic.
Kick in Q4 late in Q3 and in Q4 than we would probably see at the beginning of our third quarter.
And the.
Thank you originally talked about I think 120 million a SaaS revenue. This year is that still your thinking or maybe tracking ahead of that an hour theres no reason for us to deviate from that that earlier guidance.
Yes.
It seems like you have a number of drivers of your SaaS business I guess.
Is there one or two that are.
At the top unless share or is it fairly diversified.
Well, it's fairly diversified I think it depends on which timeframe you want to focus on I think short to medium term.
We see great opportunities to continue to grow our lojack International operations.
And continue to build upon the momentum that we've experienced in sonobi experienced prior to the acquisition in both the school bus market as well as the municipal government space I think medium to long term there is a tremendous pipeline of opportunities related to the transportation logistics space and.
So I think all of them can play in parallel but shorter term I think it's more on the Lojack International and fleet management front in longer term, we think thats a tremendous secular tailwind for us.
In a really interesting roadmap and pipeline of opportunities around transportation logistics opportunities.
Great. Thank you.
Welcome.
Your next question is from Jonathan Hall from William Blair. Your line is now.
Thank you very much this is John one more for Jonathan Thanks for taking my questions.
Okay.
I would like to ask weather, which you can you give your sales capacity and sales channel capacity.
For so many subscription.
As opposed to and extend to which you're preparing your sales force in the channel so subscription more subscription and devices a service relative to the prior focus on not more hardware oriented sales.
That's an excellent question, where we've done we've been working diligently on building, our what we call our vertical SaaS sales organization, we've actually brought in some some new leadership and resources to really focus on those vertical opportunities, but in parallel we have also been building up our channel and our channel initiatives to support various software.
Subscription service opportunities not just domestically, but outside the United States.
Our channel has been pretty solid on the telematics device front for the last couple of years now we're in the process of enhancing that channel and obviously, bringing on new partnerships like spread to really become very very solid sort of points of leverage for us as we grow our software and subscription service offerings, both domestically and outside that.
Yes.
Okay, great good here.
Could you just give some general discussion on any.
The competitive environment any changes there in either though telematics services business.
I really don't think that there's anything notable that I can identify that would be a change in the competitive environment I would say in the transportation logistics space in many ways. Its bereft of competition, we think we're in a unique position.
Especially given our global scale to engage with with the various enterprise.
Classic customers that we would be targeting and so I think there. It's a it's a very much a greenfield opportunity.
And outside of that I don't think there's really any any detectable change in the overall competitive environment.
Great. Thank you one last question if I can squeeze it in the your target for your long term target for.
200 million an annual subscription revenue.
Is that is that from existing businesses.
Organic.
Target or do you anticipate adding additional small acquisitions, Illinois.
Well.
Yeah.
It's a target is sort of stands on its own and it's not predicated us on us necessarily.
Continuing to do larger acquisitions.
I think acquisitions tend to be part of any companies growth story, but those targets weren't set specifically around assumptions for incremental M&A.
Got it okay. Thank you very much appreciate.
You're welcome.
Your next question is from Scottsdale from Roth Capital Your line is though.
Hi, good afternoon. Thanks for taking my question nice quarter, guys, Hey, Mike, maybe just a little bit more color on the software and services side of equation to big step function up I think you gave the to break out for lojack, but just kind of wondering what sonobi it looked like in the quarter.
And.
If there any one time events or revenue events in there how we should think about normalized that going forward or is just a base level will be working off and that had a couple of follow ups.
Sure.
Well I think it's important to point out or remind everybody that.
But a lot a lot of the step up was driven by having a full quarter of sunovia as part of our consolidated results, whereas in the first quarter, we really only had a half a quarter or so.
In addition to that obviously is the continued deferred revenue hair cut unwind or normalization.
And so so those were two key factors in terms of the the incremental growth from Q1 to Q2 would also point out we did have organic growth.
Despite the seasonality that we experienced in our Lojack international operations, and so I'd say things are more or less playing out according to plan and the outlined we talked about earlier in the year as relates to the contribution the incremental contribution of the acquisitions to our software and subscription service revenue for.
For our current fiscal year.
Great Thanks, and on the OEM sales front.
Caterpillar certainly down sequentially sounds like they're burning through.
Threeg before moving to LT products.
How good is your visibility on that front how quickly does it come back are we going to see caterpillar up kind of in the range that they had been prior to this quarter that 12 to 15 plus million range.
A quarter to out how long is going to take back to get to those.
Those types of levels.
Well as it relates to visibility or visibility actually that the second half of the years very very good.
We came into the current quarter with substantial backlog position that suggests that Q3 could be in line more or less with where we were in Q1.
From a revenue perspective, so we see we anticipate a pretty significant rebound in the cat business in Q3.
And there really two key factors there one you identified sort of the wind down of the take rates for Threeg.
Legacy products, there was a little bit of a delay in the ramp of our next generation products, which cover a larger.
Print across the cat product lines, and then we expect to see in Q3 in Q4 cats start to initiate its field upgrade program converting existing threeg devices to fourg devices in the field. So so all of those take things taken together give us pretty pretty good confidence.
There were going to see a significant rebound in the cat business in Q3 carrying into Q4 Gotcha, and then just to delve into little bit more into telematics systems business, removing network OEM side of the equation. It seems like the lojack number has been stabilizing and the non lojack business now is starting to go.
Into growth mode, So kind of extrapolating that out into the second half of this year. It looks like we're finally going to be in a year over year growth mode is that what you're seeing what do you think is this sustainable growth now that we've got the lojack business stabilize and the rest of the MRM business starting to grow.
Well I wouldn't want to specify what exact growth rate that we anticipate but I think you put your finger on the key factor and that is we do expect to see year over year growth beginning in Q3, and probably very strong year over year growth in Q4 based upon our increases.
Ability around the cat business and and obviously some some good momentum on the MRM front as you pointed out and continued growth in our software and subscription service revenues, which are more or less tracking. According to the plan that we talked about earlier in the year.
Hey, Mike just to wrap up with one final question then looking at the guidance of 92 to 98 million where are you finished up in the August quarter and kind of the qualitative comments you providing about network OEM bouncing back the rest of the telematics systems business looking healthy software services wouldn't healthy why what's the what has to happen what are you concerned about the revenues could add.
Actually be down sequentially as opposed to flat to up if you could kind of just take us quickly through where where you think those triggers are thank you.
Sure well for us to be in the lower end of the range we would.
Well put it this way we've tried to accommodate all factors into our guidance range. The risks around supply chain transitions, which we still have underway and we'll have through through our third quarter.
Tariff mitigation activities and potential hesitation on customers part around the tariff impacts.
So that would sort of be pushes into the lower end of the range accommodating those risk factors, but on the on the other side of the larger.
Again, we have very very good visibility on the cat business in Q3 and into Q4.
We are cautiously optimistic that the momentum will continue for MRM telematics device demand. Despite some of those risk factors and so that would push us more towards the upper end of the range, if those risk dissipate or don't aren't realized and things kind of continue on the track that they were in Q2.
Great. Thank you.
You're welcome.
Your next question is from Howard Smith from first analysis. Your line is now open.
Good afternoon. Thank you for taking my questions first question I just wanted to follow up on a comment you made your prepared remarks regarding the Sci on.
New customer an opportunity I think you said 1 million of revenue initially with that.
What is that like a run rate it gets to a what period of time, maybe the revenue recognition on that and then what might that be overtime, because it's a what's what's the expansion potential there.
Excellent question. So so the 1 million is that the current engagement and it would probably be spread over roughly 24 to 36 months, but this is almost a pilot level engagement at this point so.
Assuming that we are successful with this initial deployment. This this program could expand pretty dramatically.
Perhaps not to the scale that we have with another freight and transport customer, but it could be quite large.
Kevin given the footprint of this business and the scale of this business.
From a from a mail delivery and and package delivery perspective, so it's exciting because it's an initial engagement that particular customer has not it.
Employed a lot of automation.
In its in its transport network and so we think we're we're in prime position to be able to provide some additional automation and visibility into a service offerings to improve prove the experiences of the customers.
With that particular opportunity.
Great and kind of a numbers questions here on the inventory you talked about the reasons for the increase with kind of managing the inventory levels as do supply chain adjustment would you expect this is the new normal in terms of inventory turns or is this once you get everything adjusted you can start to tamp that down.
And get a little more efficiency there.
Yes, I think at this point, we wanted to make sure that we were comfortable as we headed into the third and fourth quarter to have adequate buffer stock.
To carries through any of the challenges that might come up with the transition to our new contract manufacturers. We've also been focused on ensuring that we had adequate inventory to cover for any of the tariff risks that might come through so we would expect this level of inventory would top out and then start to come down we are laser focused on managing our working capital.
And we think that if we're able to do that over the next couple of quarters, then our cash balance will be stable income up actually as we head into the first quarter of next fiscal year.
Great. Thank you.
Sure.
Your next question is from Anthony Stoss from Craig Hallum Kierland itself.
Hi, Congrats on great execution in a tough environment guys.
Just want to kind of.
Two part question related gross margins Michael incurred.
As you've gone through the rest of the supply chain transitions lets say future question now where do you think your gross margins could be and then as a follow up the sprint and other potential carrier supply agreements on pricing looks like it will that have any impacted your gross margin.
Great questions.
We would expect to see continued progress on gross margin expansion.
More pronounced in Q4 than likely in Q3, given some of the the issues, we talked about earlier around supply chain transitions and some probably nonrecurring costs associated with that.
But we would expect to exit the year, probably in the 41% to 42% gross margin range.
And then as our software and subscription service revenue continues to grow.
And become a larger part of our overall mix, we would expect to continue to make progress.
Towards our 50% consolidated gross margin target, which is a long term target obviously.
But we think once most of these transitions are behind us and these deferred revenue.
Purchase accounting adjustments of normalized that we would see nice nice margin expansion Q4 and into next fiscal year.
As it relates to pricing I.
I think that these new channel arrangements.
Our not necessarily in any way dilutive.
To to gross margin in fact should be accretive given the software and subscription service nature of those arrangements in those resale agreements and that's a key area of focus for us as we talked about a little bit earlier in terms of building out channels that can take those solutions to market.
And then just as a follow up to Scott's question outside of Caterpillar you expect your telematics now to grow sequentially over the next several quarters kind of the worst well.
Well I think that.
We're a little more cautious probably going into Q3, given the supply chain transition in tariff related risks.
But we feel pretty good.
That the business has stabilized and is in its on a modest growth track again, and we think that the the industries need to transition to LTV and upgrade existing threeg devices that are deployed in the field will continue to be a pretty solid tailwind for us as we enter into the new fiscal year.
Yeah.
Hi, good job guys. Thank you.
Thank you Tony.
There are no question at this time Mr., Michael Burdick, Gimme continue with your closing remark.
Well, thank you for joining us today, and we look forward your twoq to your continued interest and support.
Operator, you may disconnect.
This concludes today's conference call. Thank everyone for participating you may now disconnect.