This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Welcome to CalAMP's third quarter 2021 financial results conference call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Leanne Seavers, president of Shelton Group, CalAMP's investor relations firm. Leanne, you may begin.
spk08: Good morning and welcome to CalAMP's fiscal third quarter 2021 financial results conference call. I'm Leanne Seavers, president of Shelton Group, CalAMP's investor relations firm. With us today are CalAMP's President and Chief Executive Officer, Jeff Gardner, and Chief Financial Officer, Kurt Bender. Before we begin, I'd like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAMP's best current judgment, they're 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 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. Jeff will begin today's call with a review of the company's financial and operational highlights. Then he will provide additional details about the financial results, followed by a question and answer session. With that, it's my pleasure to turn the call over to Callum's President and CEO, Jeff Gardner. Jeff, please go ahead.
spk03: Thank you, Leigh Ann. Welcome, everyone, and thank you for joining us on this early morning call. Our third quarter results represented another quarter of solid revenue growth combined with strong margin expansion. And as indicated in this morning's release, we recently made the strategic decision to begin winding down our LoJack U.S. operations. And I will speak more about this in a few minutes. First, let me start with the results. Consolidated revenue in the third quarter was $88 million, with adjusted EBITDA margin of 10%. Our SAS revenue grew both sequentially and year-over-year to $34.4 million, or 39% of total revenue. We ended the quarter with a strong balance sheet, including over $91 million in cash, and we generated our fourth consecutive quarter of positive free cash flow. During the quarter, we continued to benefit from the ongoing 3G to 4G upgrade cycle. which fueled our largest customer's record performance in the quarter. Additionally, demand for our fleet management solution remained robust, particularly for our Here Come the Bus and Bus Guardian subscription offerings. And you may have seen our recent press release highlighting a school district in North Carolina that implemented all of our solutions. As the pandemic continues, we've seen more and more K-12 school districts utilize these applications to track their students, buses, and drivers in order to create a safer environment for children and easing parents' concerns. Demand for advanced tracking technologies for critical supply chain asset management has also been increasing recently, especially in light of the global pandemic and the major increase in shipping volumes. I'll comment more about some of our recent successes in this regard in a moment. I couldn't be prouder of our employees' contributions and CalAMP's important technology offerings that together are helping communities all over the world stay increasingly connected and safe. To that end, I'd like to highlight some of the key customer wins during the third quarter and more recently. To begin, we further expanded our relationship with a large global freight transport and package delivery customer by winning an additional 35,000 cargo trailers for telematics tracking. That's in addition to the 100,000 trailers that were already retrofitted. We had been working on this opportunity for almost 18 months, and we're pleased to have won this business over a number of large competing firms. We're also working on a new proof of concept for an exciting smart trailer project that we believe could offer this customer more efficient, cost-effective fleet management and asset tracking features. We are very pleased with the continued progress of this relationship and the potential opportunities for further expansion. Additionally, and as I mentioned earlier, our largest customer, Caterpillar, reached a new quarterly revenue record as we continue to support its ongoing 3G to 4G transition. We also benefited from a similar trend at other large MRM customers, along with some of our smaller TSPs, even though many of our smaller accounts continue to struggle with lower installations due to the pandemic. In our EMEA region, I'm excited to report that our LoJack Italia subsidiary began installing IonTag and vision tracking solutions for shipments across Europe. We also launched a predictive maintenance services program in Italy with PlusService to make public and private transportation vehicle maintenance smarter and easier in order to prevent mechanical breakdown. In the UK, we partnered with Coaster, an exciting emerging digital solutions company to revolutionize the rental car industry with our telematics solutions. And we also partnered with Grove and Dean to protect vehicles across Europe and help reduce insurance premiums. Regarding recent developments on our ION Suite application platform, we recently migrated over 350 customers from our legacy application to our new ION platform, running on CalAMP's telematics cloud. We're also integrating a new AI-based camera solution into the ION platform that TSPs can use in solution development with convenient APIs provided by CalAMP. And we've added some powerful fuel and asset management applications to the suite that raise the bar for our customers managing governmental and private sector vehicles fleet. So there continues to be a lot of great progress being made across our business as CalAMP remains well-positioned to benefit from the increasing need for tracking, monitoring, and recovering high-value assets around the globe. Now turning to the additional news we released this morning. After extensive consideration of various alternatives over the past several months, we decided to wind down our LoJack US operations. As many of you know, this business historically provided stolen vehicle recovery products operating on radio frequencies allocated by the FCC for domestic automotive dealerships. These products and the related services were provided predominantly as a hardware-based offering that no longer aligns to the company's core focus on a software-based business model. Recognizing the importance of the LoJack brand and in an effort to further promote public safety, we intend to continue supporting law enforcement as we orchestrate the wind-down in a responsible manner and allow sufficient time for our dealer customers to make the transition. The most important reason for this decision is that it allows us to refine our focus on key areas of our telemedic staff business that will drive higher growth rates and more predictable revenue streams. I want to emphasize that we will continue to operate and invest in our international LoJack business, which operates as a subscription-based business model and is also well aligned to our core SaaS strategy. Ultimately, this decision will enable higher growth rates for the consolidated business, as well as generate higher margins and profitability for the company. And although there will be a transition period financially, as we wind down the business, I believe in six to 12 months, the company will be in a better position to grow and further expand our SaaS business. Lastly, I want to take the time to thank the members of our dedicated US Lojac team who have worked very hard over the last four years. And I'd like to personally extend my appreciation for all of their support. To conclude my prepared remarks, the CalAMP team remains focused on offering our telematics software solutions platform to help customers improve their fleet operations supply chain management, and overall operating decisions. We believe our SaaS sales will continue to expand as our customers increasingly value the knowledge and real-time status of their critical mobile assets and personnel. And this is the hallmark of our telematics technology. With continued execution on our strategic initiatives and further refinement of our business, we expect to drive higher quality revenue, to further expand our margins, as well as higher profitability and cash flow for the company. With that, I'll now turn the call over to Kurt for a closer look at our fiscal third quarter financial results, and then we will open the call to questions. Kurt?
spk01: Thank you, Jeff. Today my commentary will include reference to non-GAAP financial measures of 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 fiscal 2021 third quarter earnings that was issued earlier this morning. As Jeff mentioned, we are pleased once again with our solid third quarter results in which revenue increased 5.4% sequentially to $88 million. International revenue was strong in the quarter, totaling $27.2 million, or 31% of consolidated revenue. Going forward, we will begin discussing our international business by region, such as EMEA, LATAM, and APEC, rather than by specific countries, as we continue to execute well on our global expansion initiatives within our core market verticals, including transportation and logistics, industrial heavy equipment and connected car. Software and subscription services revenue grew 2.1% sequentially and 3% year-over-year to $34.4 million and represented approximately 39% of consolidated revenue. Revenue growth for our software and subscription services was driven by an increase in subscribers, particularly in the government, municipalities, and K-12 school bus end markets in the United States, as well as our international recovery services, particularly in the EMEA region. Telematics products revenue grew 8.2% sequentially to $44.1 million from $40.7 million last quarter due to the continued strong demand from the 3G to 4G transition with large customers. The LTE transition is occurring in both our MRM telematics and OEM product categories. MRM telematics products revenue increased 6.1% sequentially to $25 million compared to $23.5 million last quarter. Network and OEM products revenue increased 11.1% sequentially and 9.6% year over year to $19.1 million, primarily due to record revenue from our largest customer, Caterpillar, which increased 19.8% sequentially and 20.5% year over year to $16.4 million. we expect continued solid demand from CAT in the coming quarter, along with other large telematics customers also engaged in this essential 3G to 4G transition. Revenue from our LoJack U.S. business was $9.5 million in the quarter, as compared to $9.1 million in the second quarter, reflecting a sequential increase in product installations, as U.S. auto dealerships remain open this quarter during the pandemic. I will discuss more details about the wind-down of this business in a minute. Consolidated gross margin in the third quarter increased 290 basis points to 39.8% compared to 36.9% last quarter. As you may recall, last quarter's gross margin included a $1.4 million one-time charge to COGS, or approximately 170 basis points of margin, related to the resolution of a product performance matter with a large customer. Third quarter gross margin represents a more normalized margin level for the consolidating business and a marked improvement towards our long-term gross margin target. Adjusted EBITDA in the third quarter was $8.8 million with an adjusted EBITDA margin of 10% compared to adjusted EBITDA of $5.4 million and an adjusted EBITDA margin of 6.5% in the prior quarter. The increase in adjusted EBITDA was primarily due to increased revenue and the absence of one-time charges that we took in the prior quarter coupled with improved operating leverage. Our non-GAAP operating expense as a percentage of revenue was approximately 36% in the third quarter, and we expect to manage our operating expense in line with consolidated revenue growth as we continue to navigate through this uncertain period. Now let me discuss the wind-down of our LOJAC U.S. operations and provide more details as to the financial implications of today's decision. In the third quarter, we took an $18 million one-time non-cash charge for the write-down of goodwill, intangibles, and other long-lived assets. As part of the wind-down, we expect the secular decline in revenues from the legacy LoJack US SVR product sales to accelerate over the next three to six months. To offset the impact of declining revenues, we will execute various cost reduction measures in order to achieve expected cost savings in the range of $12 to $15 million annually beginning in fiscal year 2022. We believe these actions will help to further align our cost structure to a SAS-based business model that should result in operating expenses declining, leading to solid improvement in our consolidated operating margin over time. These savings will be achieved incrementally over the coming quarters as we orchestrate the wind down in a responsible manner as part of our commitment to public safety. Longer term, we expect the overhead necessary to maintain our beacon technology that operates on radio frequencies allocated by the FCC will be de minimis as the volume of tracking activity declines over time. In the fourth quarter, we are anticipating a $1.5 to $2 million non-recurring cash charge for severance and related personnel costs. Now turning to our current liquidity position. At the end of the third quarter, we had total cash and cash equivalents of approximately $91.7 million after paying down $20 million on our revolving credit facility. That compares to $107.1 million last quarter. Our aggregate outstanding debt is approximately $241 million, including $230 million of the 2% convertible senior notes due in August 2025. It is notable that we achieved another quarter of positive free cash flows in the amount of $6.7 million. representing a solid increase over the prior quarter. CalAIM continues to maintain a strong financial position and balance sheet with significant cash for working capital going forward. In reference to our outlook for the fourth quarter, we are maintaining our policy of not providing quarterly guidance due to the ongoing uncertainties related to the pandemic. Though we remain very pleased with the resiliency of our business, and the sequential growth we have achieved during this time, we expect there could be continued pressures on the global supply chain as changing demand dynamics pose challenges for both our customers and suppliers. As many companies have been recently reporting, there have been broader supply imbalances across the semiconductor space due to the pandemic that have resulted in rapid adjustments in available supply. This situation could be further compounded by the seasonal nature of our fourth quarter, which includes the Chinese New Year. Overall, we are very pleased with the effectiveness and improvements we have made across our supply chain that have enabled us to support our recent growth. But we recognize that there are a number of global market dynamics that we are closely monitoring. With that, I'll turn the call back over to Jeff to provide some final comments before we open the call up for questions.
spk03: Thank you, Kurt. I'm very pleased with our performance in the third quarter as the CalAMP team continues to execute on our strategic initiatives across the organization. I'm very pleased with the continued success we've achieved in our SaaS business to improve the growth and quality of revenue, which is contributing to increased profitability in our overall business. Today's action to wind down our LoJack US operations takes us one step closer to our longer-term goal of becoming the global leader in tracking, monitoring, and recovery of critical mobile assets. Although ongoing challenges remain across the globe and the supply chain due to the pandemic, we remain cautiously optimistic and focused on executing our strategic initiatives and expanding our SaaS offerings to drive increasing value to our customers, and shareholders. With that, let's take questions.
spk07: At this time, we would like to take any questions you may have for us today. To ask a question, please press star 1 on your telephone keypad. Our first question is from Scott Zero with Rock Capital. Your line is open.
spk04: Hey, good morning. Thanks for taking my questions. Nice quarter, guys. I hope you, your family, and your teams are safe during this time period. Hey, just to clarify, so on the low-jack exit, is that going to be a discontinued operation going forward? And I want to make sure I heard correctly. In terms of the SVR sales in the U.S. market, that's going to accelerate in the next couple of quarters? And then do you expect by the end of the 6- to 12-month time period you're at zero in terms of contribution on the product front from SVR in the U.S.? Or is there some long tail that's kind of associated with that?
spk01: Thanks, Scott. I appreciate the question. Yeah, this is Kurt. So first off, let me say that in terms of the discontinued operations treatment, unfortunately, until you effectively shut the business down, the accounting guidance doesn't allow for you to show the business as discontinued operations. However, if you remember, a couple quarters ago, we made a decision to actually put the LoJack U.S. SVR business as a separate reporting segment. And therefore, if you look in our financial statements, you'll see it actually broken out as that reporting segment. That's important because we wanted to make sure we were providing some form of comparative information so that you can see management execute on the wind down. We have indicated that over the next, say, six months or so, we're going to be executing on this wind-down plan. So until that wind-down period is complete, we won't have discontinued ops treatment. So hopefully that makes sense to you. In terms of the tail, I'll just answer that question. We believe that there will be some incidental longer-term costs that we will have to cover for this business. We understand that, you know, The LoJack brand is very important, and the technology is very important. And so we believe it's critical for us to continue to support our law enforcement partners to allow them to do their job effectively utilizing our technology. But we think that that cost of maintaining that, say, tower infrastructure will become de minimis over time as the as the device activity tails off. So we do expect some tail, but it will be a de minimis cost, and we think we can manage it. On your last point regarding the software and subscription services revenue, our whole goal in this effort is really to ensure that we're focused on driving our key more profitable growth initiatives because we want to have high-quality revenue and more predictable revenue streams. And so we believe that realigned focus around our software and subscription businesses and our key telematics solutions will allow us to drive better growth in terms of the timeline that we expect will materialize, say, over the next six to 12 months.
spk03: Yeah, and Kurt, if I could, just on the LoJack US business, as all of our investors know, that business has been in secular decline recently. And it's been putting pressure on our revenue and our EBITDA margins. And we were trying very hard this year to make the conversion to telematics, the SAS offering. But at the end of the day, as Kurt said, we were really focused on doing something that was quick and seamless. And I believe that in the long run, this would be accretive to both our top-line growth and margins. The international business, which we're going to continue to be in, is very different. It's multi-channel. So in addition to dealers, we have rental companies, we have financial companies, and OEMs as well. And as many of you know, that's all a SaaS model. So I think it's a good decision in the long run for the company as we focus on those verticals that we think have the best growth and profitability potential.
spk04: And maybe, Jeff, just to follow quickly on the accretion to the gross margins, could you quantify that a little bit, what the gross margin differential is, maybe between the U.S. LoJack and other MRM products? And then also, I'm curious in terms of CAT, huge quarter. the sustainability on that front or any color you could provide in terms of where that's going, either geographically or some of the end markets. And lastly, just the SaaS mix of the business. You've got Italy in there. You've got Synovia. I'm kind of wondering how those components break out. It seems like there's a lot of activity that you've got going on in the asset tracking front. Kind of how big is that right now? Thanks so much.
spk01: You want me to take the first one? Sure. So, Scott, on the gross margin, one thing to we want to make sure we focus on is this is more about improving our overall EBITDA performance. We believe that if we can execute on our plan and drive the cost savings that we've qualified in our recorded remarks, that our EBITDA performance will improve and this decision will be either neutral or overall accretive to our margin profile. So, in the interim, there will be some work we'll need to do as we proceed down this wind-down plan. But again, we believe this is the right decision to allow us to focus on revenue growth and, over time, EBITDA margin improvement. You want to touch on Caterpillar? Yeah, sure.
spk03: I mean, Caterpillar has been an important part of our business for a long time. We're very focused on that customer. I consider that a very strategic relationship. The outlook in the near term is very strong for Caterpillar, so we expect to continue aggressive rollout of their 3G to 4G conversion. So we're feeling pretty good about that business, working very hard all the time to improve our quality and performance with that company and maintaining a good relationship and very proud of that. In terms of the other things that I'd say in terms of margins, just contrasting the U.S. business to international on the LoJack connected car space, our margins are well over 50%. In Italy, we're coming off one of the best quarters we've ever had. So very different business mix. As I said, multi-channel, which makes it very attractive to us. When you ask about our business overall, we had very good traction in transportation and logistics and fleet management this quarter, driven really by our K-12 business was very, very strong. As I talked about on the call, we did renew or sign additional business with a large transportation logistics company, and then the international markets continue to perform very well.
spk04: Great. Thanks, guys. Happy holidays. Yeah, you too, Scott. Take care.
spk07: Your next question is from Mike Lattimore with Northland Capital. Your line is open.
spk04: Good. Thanks, yeah. Congratulations on the quarter there. On the SaaS business, you know, it grew some sequentially despite the backlog fill from last quarter. I guess, is there any seasonality in this business, or should this continue to kind of, you know, grow sequentially?
spk01: Yeah, like there is a little bit of seasonality with the business. In particular, you probably know, you know, our business in the media region, particularly the U.K. and Italy, tends to slow a bit in our fourth quarter. because the fourth quarter encompasses the Christmas holiday. So there is a little bit of an ebb and flow that's driven in the fourth quarter. Overall, I mean, we were very pleased. I mean, I can give you a couple highlights. One is in terms of our subscriber growth, we have seen sequential and year-over-year subscriber growth. One of the items where we've talked to you about in the past that we are watching and managing very closely is our vehicle finance business. As we mentioned to you in the past, that business was running historically at about 400,000 subscribers, and that came down pretty quickly here. We dropped about 8% to 15% over the last couple quarters. So as an offset, even with that taken out, our sequential growth in subscribers was about 3%. 3% year over year, about 9%. And so we would expect that trend to continue. But we do have a little seasonality that we will be addressing around our Q4.
spk04: Got it. And then it looks like your EBITDA margins on your SaaS business are almost, we're almost 26% in the quarter. You know, that continues to grow a little bit. I mean, what's driving the growth in EBITDA margins there? And, you know, how sustainable is that? Or would you expect to invest some more in sales and marketing over time or R&D?
spk01: Yeah, so first of all, I always say to the team, gross margin matters. And so as that business continues to grow and our gross margin continues to expand, obviously that margin will roll down to our EBITDA margin. But in addition to expanding on our gross margin revenue growth, We have been watching carefully our OPEX, and not just in terms of trying to keep it in check around COVID-19, and not just to bring it down, but more so to reallocate to make sure that we're spending in the right places. And the area of focus for us right now is driving down C&A, but, of course, investing in things like sales and marketing as well as R&D. In connection with the wind-down of OJAC, Our objective is to really take a close look at our OpEx and ensure that it's optimized around a SaaS-based business model. And I think that that will overall help us continue to expand on our EBITDA margin, especially in our software and subscription services business.
spk03: And one thing I'd add there, Curtis, is we continue to refine our strategy and get focused on a smaller number of verticals. I think that really helps us in terms of also focusing our investment in R&D. I talked about in the script some of the things that we're doing with the Ion Suite, which is our platform for the future. And so I think it puts us in a better position longer term to continue to invest in our software to avail ourselves to those higher margins.
spk04: Great. And just on the opportunity in the, I guess, U.S. municipal and education markets, Do you have a sense of what percent penetrated those markets are for your applications at this point?
spk01: Well, we can speak more directly around, say, the K-12 and municipality space. More focused on K-12, when we acquired the Synovia business, over a year ago, and we were looking at the market potential. One of the reasons why Synovial was so attractive is because they did have a real strong market penetration. We estimated at that time, based upon the data that we had, it was somewhere in the, say, 25% to 30%. and that there were a couple key players in that space. So that's what we estimated back then, and we think that over the last year we've actually gained additional momentum and we've been taking share. Okay. Great. Thanks a lot. Thank you. Thanks, Mike.
spk07: Your next question is from Jay Levish with Goldman Sachs. Your line is open.
spk05: Yes, hi. Good morning, everyone. And Jeff, congratulations on reaching the decision on LoJack. Thanks. I'm wondering if we could talk about the range of growth that you're seeing in the subscription portfolio. So, Kurt, you had mentioned overall excluding vehicle finance, the growth was 9% year over year. Can we just step through and maybe rank order the platforms that are driving growth and what's slower on the growth curve?
spk01: Yeah, sure, Jerry. So looking at year-over-year subscriber growth, when you asked for us to rank order it, first and foremost, Italy and the EMEA region was by far the highest subscriber growth. That grew year-over-year about 14%. Second, I have to say that here in the U.S. in our fleet management solutions, space that actually grew, the subscriber base grew about 6% year over year. And then LATAM was probably the third place. So outside of that, we did, as I mentioned, automotive was down. We dropped to about 345,000 subscribers. from the peak of about 404,000 subscribers. And so we're trying to manage that accordingly, but that will be a bit of a headwind over time. And we'll make sure that we give you adequate information so you can kind of understand how that portfolio of subscribers is trending.
spk05: Okay. Appreciate it. And then in terms of, you know, the testing and pilots you're running with the major shipping company, that you spoke about, Jeff. Can you talk about what the timeline looks like for their investment decision? Do you have a rough sense of key milestones or signposts that we should be thinking about in terms of how that's going?
spk03: Yeah, and I think, Jerry, we're very excited on what's going on. Just in general, transportation and logistics in general is growing very quickly. In particular, as it relates to smart trailer, we're looking at something near-term, and I'd say in the 6- to 12-month time frame there, really adding features to what we already do today, things like cargo sensing, temperature control, door lock and unlock, those kind of features that are really important to our end users. So I think that's pretty near-term. The team is very focused on that space, and, again, looking forward to continued growth there.
spk05: And sorry, in terms of the evaluation of the pilot programs that you spoke about, is there a specific date in mind or is it tough to tell?
spk03: It's hard to tell. It's pretty early days for that. So we'll keep everybody updated. And I think more importantly that The point that we want to convey is that we'll continue to invest in our capabilities around transportation and logistics.
spk01: And the only thing I'd add there is, as Jeff pointed out in his earlier remarks, we did add additional close to 30,000, 35,000 subscribers to our existing relationship with them under our current trailer program. So that relationship is very good, and it's trending in the right direction. And as you know, Jerry, when you're working with these large global enterprises, these pilot programs are much about a collaborative effort to identify the type of solution that they want holistically, and so it takes a bit of time. So I think that six- to 12-month timeframe that Jeff mentioned seems reasonable.
spk05: Terrific. I appreciate the discussion. Thanks. Thank you. Thanks, Jerry.
spk07: Your next question is from George Notter with Jefferies. Your line is open.
spk02: Hi, guys. Thanks very much. I guess I wanted to maybe ask a couple questions about the SDR exit, and then maybe just to start, did you guys have any opportunity to sell those assets or sell the business to any other entity? Was that something that you guys considered? And then also on the cost structure, you mentioned $12 million to $15 million in costs coming out of the business over the next – I think it was a handful of quarters. But just to be clear, is that just the cost structure of the SCR business, or are you talking about cutting costs on other areas of the company as well? Thanks.
spk03: Yeah, I'll take the first part and let Kurt speak to the $12 million to $15 million cost number that he mentioned. Yeah, George, we considered all alternatives, including a potential sale, and we worked with a reputable financial advisor Our primary objective was to do something that was swift and seamless, would not be – we wanted to stay away from a lot of complexity. So at the end of the day, this wind-down absolutely was our best option. But we did explore all those opportunities.
spk01: And, George, to the cost question, so let me just try to clarify. So Bestway is to – describe it in a holistic perspective. So that business is printing at, say, maybe a $30 to $35 million revenue run rate on an annual basis. Of the entire cost structure that supports that revenue base, about 60% to 62% of that cost structure costs represent what I call indirect and direct variable costs, which means it will go away as the revenue declines. The remaining portion, let's say 35% to 38%, represent indirect and direct fixed costs. And we believe that if we can pull the $12 to $15 million out of that fixed cost structure, then this decision to wind down this business will be EBITDA margin neutral or accretive. So that's kind of how we qualified the $12 to $15 million target number for expense savings.
spk02: Got it. Okay. That's helpful. Thanks very much. Thank you.
spk07: Again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Mike Walkley with Gannicor Genuity. Your line is open.
spk06: Great. I hope everybody has a happy holiday on the call and stays healthy. Just a follow-up question on the LOJEC. For the unwinding of the U.S. trajectory, just on the revenue, just wanted to clarify, do you think there will be any late buying as customers maybe stock up on this, or should we just have a pretty steady decline to zero over the next, call it, two to three quarters?
spk01: Yeah, Mike, how are you doing? Yeah, so good question. And as you can imagine, this is a, you know, it's a little uncertain. We are having conversations right now kind of contemporaneously with this public notice with our customers, so we'll know more here. But our overall feeling is that this business has been running COVID-adjusted at about $9 to $9.5 million. We know that our focus is on the next, say, three to six months in winding down those customers. Of the revenue base, about 50% is with the larger dealers. And we want to make sure that we provide those larger dealers with kind of a seamless exit and or a replacement associated with this solution with the SVR products. We expect that the revenue to decline in the first quarter after these notices probably somewhere between 40% and 50%, and then followed by a continuous wind down over the base of the next two to three quarters down to zero. So the secular decline that we've been experiencing, we do believe that will accelerate and it'll really kind of wind down over three to six months or so.
spk06: Great, thanks. And then I may follow up for Jeff on that. When you're talking with these, you know, all the dealer partners across the U.S., do you think there's any chance to convert some of these to a subscription model like you've done with Italy and other regions that have that type model?
spk03: Yeah, we do hope there's some opportunities there, and that's why we're trying to be very responsive to our transition with this announcement today. We have good relationships with some of these large dealers who do business all around the world, and we're really looking for an opportunity to continue to part with them on a fast business model.
spk06: Great. And then a follow-up question for either, just on this very strong Caterpillar results, do you have any sense of how far you are into the 3G to 4G upgrade and what might be more of a steady state of the business once that 3G to 4G is done? Does that tail continue for another year or six months, just trying to get an idea of how to model Caterpillar over a, call it a two- to three-year period?
spk01: Yeah, thanks, Mike. I think, well, first off, I just need to say that the relationship with CAD is an exceptional one, and we are working with them not just on, say, the heavy equipment where we've been over the past several years, but expanding that relationship into other product categories within their portfolio, and that's been going well. In terms of the momentum around 3G to 4G, The great thing about CAT is CAT is one of our largest customers and our most sophisticated customers, and they are rolling out the 3G to 4G transition globally. So we are seeing them with products being sold into regions outside of the U.S., places like APIC and the LATAM regions. We expect that momentum to continue at least for the next year or so. And then our goal is really to continue to penetrate their portfolio to grow from there as well. That was a big part of our strategy about a year ago when we started to sell a lower priced, higher volume oriented product to them, Telmax product to them, I guess about a year, September or so. And that product line has been growing very well. So I think in terms of the 3G to 4G momentum, will continue, say, for the next year or so. Then we will expand into other areas of their portfolio. I do want to use that as an opportunity to highlight what we're also experiencing with other customers. Again, our larger customers are making this move pretty rapidly. But for the smaller to medium-sized customers, the pace has been a bit delayed. And we expect that to start to pick up here in the next two quarters. And then from there, it will be focused on here domestically, But then we are seeing some trends internationally. If you look at our international growth, as I pointed out in the prerecorded remarks, our international business grew to 31% of our revenue. A big part of that was growth in LATAM, and most of that expansion in LATAM was around 4G. So although the mandate is here in the U.S. in the next year, driven by the sunset dates, we are seeing the growth potential globally and a lot of companies moving that direction outside of the U.S.
spk06: Great. Thanks. That's helpful. And this last question for me, just on this logistics customer additional win, congrats on expanding within that important customer. Can you just remind us, When you sell the hardware, is that bundled and runs through higher services revenue over time, or is that kind of one-time in nature with this customer? And can you talk maybe a little bit about the competitive environment that helped you win the deal versus what sounds like a pretty busy one?
spk03: Yeah, no, it's definitely a bundled product with the SaaS component. This is a strategic relationship that – we're providing visibility across the entire fleet there. So I think we're well-suited. I think one of the things we bring to market when we're competing in situations like that is our engineering prowess, our product leadership that really gives a lot of comfort. We've got a very highly scaled platform out there that offers great visibility to our customers. And as you heard me talk about in my remarks, really looking to make continued investment in the Smarter Trailer initiative.
spk06: Great. Best wishes for the new year, and thanks for taking my questions.
spk01: Yeah, same to you. Thanks, Mike. Happy holidays.
spk06: Thanks.
spk07: There are no further questions this time. I turn the call back to Jeff Gardner for closing remarks.
spk03: Okay. Well, thank you for joining us today. and your combined continued interest in CalAMP. On a final note, Kurt and I will be attending a virtual conference with Needham Growth Conference on Thursday, January 14th. If you'd like to request a meeting there, please contact Needham or the Shelton Group. And we look forward to talking to our investors throughout the day today. And have a safe and happy holiday season to everyone. Thank you.
spk07: This concludes today's conference. You may now disconnect.
Disclaimer