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spk02: Welcome to CalAMP's first quarter 2023 financial results conference call. As a reminder, this call is being recorded. I would now like to introduce your host of today's conference call, Joel Akramowitz, managing director of Shelton Group, CalAMP's investor relations firm. Joel, you may begin.
spk05: Good afternoon, and welcome to CalAMP's fiscal first quarter 2023 financial results conference call. I'm Joel Akramowitz, managing director of Shelton Group, CalAMS Investor Relations Firm. With us today are CalAMS President and Chief Executive Officer Jeff Gardner and Chief Financial Officer Kurt Binder. Before we begin, I'd like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAMS' 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 issue 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. Now, Jeff will begin today's call with a review of the company's operational highlights, and then Kurt will provide a more detailed review of the financial results, followed by a question-and-answer session. With that, it's my great pleasure to turn the call over to Calendars President and CEO, Jeff Gardner. Jeff, please go ahead.
spk11: Thank you, Joel, and thanks to all of you for joining us on the call today. We continue to make progress on converting customers to recurring subscription contracts. Our first quarter software and subscription services revenue grew 13% year-over-year to $39.6 million, representing approximately 61% of the total revenue for the first quarter. This represents the second consecutive quarter our software and subscription services revenue exceeded 60% of total revenue. During the quarter, we converted another 10% of eligible customers, cumulatively representing over one-third of our total base with the goal of completing the rest of the conversions by the end of the current fiscal year. In the quarter, we secured new customers such as Brigham Young University and Grupo Salinas, the second largest business group in Mexico, among others. And substantive to quarter end, we were selected as the provider to BMW for a new product offering and by Volkswagen Leasing, and we received first orders from them both. I'll touch on BMW further in a few moments. Consolidated revenue in the first quarter continued to be impacted by supply chain constraints, particularly with the COVID-related lockdowns in China that further exacerbated the overall supply situation, especially in the manufacturing and logistics sectors. With the lockdowns now lifted and transportation to the affected regions resuming, we anticipate gradual improvements in supply of the affected components. As I just mentioned, we recently received an initial order from BMW related to its GPS-based Security by LoJack solution, which sets unprecedented standards in the industry for monitoring and protecting BMW vehicles. This solution provides peace of mind to owners based on CatLamp's telematics technology integrated with connected car data from BMW Group's Connected Drive platform, which is accessible via a smartphone app. It also provides a driver tag to detect the presence on board of an authorized driver and an engine crank inhibitor that can be activated in the case of theft by a network of secure operating centers open 24-7 across Europe. BMW's decision to select CalAmp as its provider of new stolen vehicle technology services is a clear testament to our industry leadership and innovation. And these initial orders reflect a sizable opportunity we see ahead for this joint offering in the European market. We announced more strategic partnerships, too, with both Bristol Cone and Assured Techmatics. Bristocon is a key systems integrator and leader in AI-powered application transformation services for the connected supply chain. This new partnership integrates real-time data insights from CalAMP's supply chain visibility sensors, edge computing devices, and CalAMP telematics cloud with Bristocon's proprietary Neo cloud-based platform. thus providing global enterprises with enriched end-to-end supply chain visibility and aggregated trend analysis capabilities. Working together, CalAMP and Bristol Cone will help enterprises eliminate blind spots across their complex supply chains and enable smarter tracking and data-driven decisions as shipments pass through each phase of their journeys. With these enhanced insights, enterprises can drive logistical efficiencies, prevent cargo theft, and minimize their carbon footprints. Producers, in particular, offering perishable goods such as food or pharmaceutical purveyors can monitor environmental conditions and the safe transport of their goods, preventing costly spoils. Assured Techmatics is a top transport and compliance leader that offers electronic logging device solutions to commercial and public fleet operators. CalAMP will couple its edge computing devices with Assured Techmatics Apollo electronic logging devices, or ELD, to provide a solution that commercial and public fleet operators can use to capture and log critical data necessary for regulatory compliance across North America. Apollo ELD has been approved by the U.S. Federal Motor Carrier Safety Administration for interstate and interstate commerce across America and by other third-party accredited transport agencies in Canada and Mexico. During the quarter, we were pleased to announce the appointment of Brennan Carson, as our new Chief Revenue Officer. Brennan has extensive long-term industry experience in telematics, as well as significant high-level success managing large global SaaS sales organizations. He had previously served as Senior Vice President of Sales at IDELIC, a startup company, and as Vice President of Sales North America at Fleetmatics, which was acquired by Verizon Connect, where he continued to build and lead a sales team of 700 professionals. Brennan will be focused on expanding our software sales team with top professionals and directing them in pursuit of our long-term SaaS revenue growth objectives. In another effort to elevate our leadership and expertise in transportation and logistics, our board of directors recently appointed Henry Mayer to the new independent chairman effective as of our 2022 annual meeting of stockholders. As many of you know, Henry has spent more than 30 years at FedEx companies and will be of significant value to the company as chairman of the board. He will replace Amal Johnson, who has served as a director since 2013 and most recently served as our chair. I want to thank Amal for her service and longstanding commitment to CalAMP and the many personal contributions she has made during her tenure. We also recently added Wes Cummins to our board as an independent director. Wes had previously offered an alternative slate of director nominations for election to the board. Subsequently, we engaged in a constructive dialogue resulting in Wes's recent appointment as a director to our board, where we look forward to leveraging Wes's expertise to enhance our strategic path forward. In summary, we are encouraged with the progress we continue to make in transitioning our business to a recurring software subscription model for sustainable long-term success. Although challenges remain, I believe we are well positioned with high levels of backlog remaining and strong demand across our business. We remain focused on our goal to convert the remaining portion of eligible device customers to recurring software contracts by fiscal year end. With that, now I'd like to turn the call over to Kurt to discuss our financial results in more detail. Kurt?
spk06: Thank you, Jeff. Today, my commentary will include reference to the 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 year 2023 first quarter earnings that was issued this afternoon. Total revenue in the first quarter was $64.7 million, down 5% from last $68.4 million in the prior quarter and 19% from the $79.7 million in the same quarter a year ago. The decline in revenue was mainly attributable to the ongoing supply chain constraints, particularly the COVID-related lockdowns in China during the quarter. As Jeff mentioned, with the lockdowns now being lifted, we are beginning to see a resumption of component shipments in those affected regions. International revenue in the quarter totaled $24.3 million, or 38% of total revenues. Software and subscription services revenue of $39.6 million, up 13% year-over-year and down 4% from the prior quarter, represented approximately 61% of consolidated revenue. The year over year growth in this business reflects the success we've achieved converting eligible telematics device customers to recurring subscription contracts. As of the end of the first quarter, we've converted approximately one-third of our total eligible telematics device customers and expect to convert the remaining customers by the end of our fiscal year. In terms of performance metrics for our software and subscription services business, Remaining performance obligations in the first quarter was approximately $215 million, a 7% increase from $200 million in the prior quarter, and a 57% increase from $137 million in the same quarter a year ago. We expect to recognize over 37% or approximately $80 million of this obligation during the rest of our fiscal year. During the quarter, our subscriber base grew 25% year-over-year and 13% sequentially to $1.2 million. Telematics products revenue in the first quarter was $25.2 million, which was a 7% decrease sequentially and a 44% decrease year-over-year. the ongoing supply shortages continue to impact our ability to fully ship against our high levels of backlog. Within the telematics products reporting segment, OEM products revenue totaled $10.5 million in the first quarter compared to $10.4 million in the prior quarter and $20.3 million in the same quarter a year ago. Our largest customer represented $9.7 million of revenue for the quarter, which was up from $7.9 million last quarter, but down from $17.3 million in the same quarter a year ago. Our backlog with this customer remains high, and we were pleased with the sequential increase in shipments in the quarter. As the supply chain constraints ease over the coming quarters, we expect to accelerate fulfillment of the outstanding orders. Consolidated gross margin in the first quarter was 40%, compared to 41% last quarter and 41% in the same quarter a year ago. Gross margin continues to remain under pressure due to higher product costs and freight charges. First quarter non-GAAP operating expenses on an absolute dollar basis declined 5% year-over-year due to lower personnel and incentive compensation expense as our global employee base declined year-over-year. Non-GAAP operating expenses increased slightly by 3% sequentially due to increases in professional services and personnel costs in the areas of engineering, sales, and marketing. Adjusted EBITDA in the first quarter was $1.9 million, with an adjusted EBITDA margin of 3%, compared to adjusted EBITDA of $5 million and a margin of 7% in the prior quarter, and $8.4 million, or 11%, in the same quarter last year. The decrease in adjusted EBITDA in the first quarter was attributable to the lower revenue and as previously mentioned, higher product costs. In terms of our overall liquidity position, at the end of the first quarter, we had total cash and cash equivalent of approximately $59 million as compared to $79 million last quarter. The decline in total cash and cash equivalent is attributable to a reduction in free cash flow from operations due to the decline in sales volume coupled with an increase in deferred billing or unbilled receivables as a result of the conversion of approximately one-third of our eligible telematics device customers to multi-year subscription arrangements. The provision of services under multi-year subscription arrangements extends the cash conversion cycle due to upfront cash outlays for devices combined with deferred billing over the subscription period. We are in the process of renewing our revolving line of credit in order to give us added flexibility as it relates to working capital, and we expect to finalize the agreement in the coming weeks. Our aggregate outstanding debt is approximately $233 million, including $230 million of the 2% convertible senior notes due August 2025. We expect to maintain a solid financial position and a balance sheet with solid cash for working capital purposes going forward. In reference to our outlook for the second quarter of fiscal 2023, we are maintaining our policy of not providing quarterly guidance. Visibility into product shipments still remains uncertain due to the global component supply shortages. However, we do expect sequential quarterly revenue growth in the second quarter to be in the mid- to high single-digit percentage points. With that, I'll turn the call back over to Jeff to provide some final comments before opening the call up for questions. Jeff?
spk11: Thank you, Kurt. We are encouraged with our continuing progress as we transition to a leading SaaS telematics software player. With the recent lifting of some lockdowns in China, a consistent rapid pace in our device customer conversions to recurring contracts and fresh new leadership in our sales organization, the CalAMP team is energized and relentlessly fixed on the operating objectives we've established for the year. With that, I'd like to open the call to questions. Operator?
spk02: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your questions. We will pause here briefly as questions are registered.
spk03: Our first question comes from Mike Walkie with Canaccord.
spk08: Great. Thanks for taking my question. First question for me is just on the sequential growth. Can you talk about maybe the drivers behind that? It sounds like you expect better supply, but would you expect software and services to grow more or kind of evenly split that mid to single digits among both hardware and software and subscription?
spk11: Yeah, Mike, thanks for the question. As you know, in our previous earnings announcements in our follow-up, Q&A sessions, we've mentioned that we believe the supply chain situation would be improving throughout the year. We were affected in the first quarter by what I'd call as more of a shock in China with the specific lockdowns in terms of cities that affected us significantly at the end of the quarter. Our original view was that we'd be seeing us improving supply chain throughout the year. And that view has remained unchanged. We don't expect the impact that we saw at the end of the quarter to recur. We've already begun seeing shipments out of China and the transportation and freight are opening up as we see. So, I mean, that's good news. I think overall, if we look at the year, we're feeling better and better about that. We're working hard with our equipment providers and contract manufacturers. And we've done quite a bit in terms of making sure that our bills and material contain products with a good visibility in terms of their supply chain. So we do see it improving in the back half of the year. That's why Kurt was giving the range in terms of the sequential growth we expect in 2Q. In terms of going forward, I think that you'll continue to see improvement on the software revenue side. Two things driving that. One, we're continuing to convert our base to a subscription model. And even more importantly, I know it's been difficult to track what's going on in our company through this transformation, but I think the important aspect of this transformation going forward is that all new sales are going to involve a subscription going forward. So that's going to mean very good things for subscription revenue, not only just for the conversion, but going forward for CalAmp.
spk08: Thanks for that. And just as a follow-up, Frieder, you or Kurt, just as that business mix continues to change over time, what are some intermediate term gross margin goals for the company as you have Software is already over 60%, but where do gross margins trend as you get through this one-third to full completion of that targeted base?
spk06: So, Mike, just to answer that. Yeah, can you hear me, Mike? Okay. Yeah, in response to your question, Mike, so, you know, our medium to long-term goal is the 50% gross margin. That still remains clear and in line of sight for us. There are some short-term pressures that we're experiencing, principally coming out of the supply chain. Those things include cost increases around certain components, freight, and more recently, some tariffs. We're doing our best to control those costs and actually pass them through when we have the opportunity to do that. But sometimes there's a lag between when we are charged to the supply chain and when we can pass them on to the customer's but we're working our way through that process. That being said, as we've communicated in the past, the biggest thing to driving our gross margin to that 50% target is really revenue mix. And so as we were moving our Telematics device customers over to the subscription models, what we're seeing is that initially the move is heavily dependent upon getting the devices on the platform getting the install base active as that install base starts to grow that's when the margins start to improve because as you know those subs the subscription subs actually generate incremental revenue for us so although this quarter we were down slightly with gross margin and that was driven by the pressure from the supply chain we do that see that we will progressively start moving upward to that 50 target over the next three to five years. And it will be a gradual going from, say, 40, 41 to 42, 43, up to 50 as that install base becomes more evident and we monetize that install base.
spk08: Great. Thanks. Last question to me. I'll pass it on just for your largest customer. Snap back a little bit, but give your visibility within the backlog. Will this customer get fast maybe to mid-teen levels like they were past years or has anything changed with that long-term relationship?
spk11: No, I mean we do have very strong backlog with our largest customers with our largest customer and in particular it with the China disruption that I talked about earlier we had a particular module provider whose factory was shut down in China that had a pretty significant impact on that supply chain this quarter, which we already, as I said, that's already opened back up and it's improving. With the strong demand, we do expect that revenue to kick back to more normal levels. There's still quite a bit to do there, both in terms of 3G to 4G migration, plus the demand for that large customer has been very strong.
spk08: Great. Thanks for taking my questions and congrats for hitting the one-third conversion base so far.
spk04: Thank you.
spk03: Our next question comes from George Nodder with Jefferies.
spk02: Hi, guys.
spk07: Thanks a lot. I guess I wanted to ask one on the transition. to subscription models. Are you getting any pushback from customers? You're obviously another quarter into the process. Any new perspectives you can share? And if a customer doesn't migrate with you, what is the pushback from them? And any metrics you can share in terms of the percentage of customers that are moving along?
spk11: Yeah, George, first of all, thanks for the question. Our customers are really... excited about the technology. Remember, this is not just a change in billing, but we're offering a new opportunity for them in terms of the software. And the software is more robust, offers them the ability to better serve their customers, to manage their devices more rapidly, to do tons of upgrades over the air, and provides them better security. So they're excited about that. The billing arrangement is a little bit new, and it takes some getting used to. But we've been very successful today. In fact, through the first one-third we've had no customers decide to move away from us because of this arrangement. We've been pretty clear with our customers this is the way we do business going forward. And so we're really pleased with that. In terms of the future, we control the pace and terms on this conversion process. And as I said in the script, we're anxious that we're going to get all of our customers converted to this model by the end of the fiscal year. So I think it's going well. I wish it would be a little bit less disruptive in terms of how we're transforming as a company. I know that causes some concerns with investors. But I think what gives me comfort and confidence about the future is we are going to be a recurring model business. So at the end of the day, CalAMP is going to be an equity that investors can count on for consistent, reliable revenue over time. And all of our new customers will be signing up for services that involve a subscription.
spk07: Got it. And then I think you said one-third of customers have migrated. Is that also like one-third of the installed base just in terms of units, telematics units that are out there? Or are you skewing towards larger or smaller customers as you initiate this transition?
spk11: Yeah. Kurt, I'll let you take that one if you could.
spk06: Sure, Jeff. Jordan, we had mentioned, I think, last quarter that we had defined a population of about somewhere between 60 to 65 telematics device customers, eligible telematics device customers that we were looking to convert over. Through the first quarter here, we've converted a total of about 22 or 23 of them, and it's a pretty good mix. I would say there's three to four that are pretty sizable customers, and then there's a group of medium-sized and small-sized customers in the mix. So generally a good mix of customers. There are some larger ones that we're targeting probably later throughout the fiscal year, but we feel really good about that 33% progression here so far on that base of 65. What that represents, and I think what excites us the most, is that represents about 200,000 incremental subscribers that we've tied into multi-year service contracts. These contracts are typically 36 months with the potential to renew out further. And so that subscriber base, we will begin to start monetizing here in the coming weeks and quarters. So that's really what we're targeting. We want to get to that total 60-65 customers by the end of this fiscal year. We're making great progress. And as we see those subscribers coming on to the platform and we have that ability to monetize them, that's when we start to see some of the real true success from this model that we're embarking on.
spk07: Got it. That's great. And then the other one I wanted to ask was just looking at the software and subscription services revenue is down sequentially. I know the installation of devices is probably a factor in that, but any Why would that number be down sequentially? Any more insights would be great. Thanks a lot, guys.
spk06: Yeah, George, so I guess I'll handle that one, Jeff. So we have been very focused on what we call converting the base of our eligible Telmax device customers. So in those scenarios, when you're working with these customers that have a predominantly device-oriented, we do have, once we execute those MSAs, where a large portion of the upfront revenue is associated with the initial performance obligation, which is associated with the device. And so that revenue under GAAP requires us to put, although it's part of a bundled arrangement with that customer, it requires us right now to build it into the product revenue, not the application subscription. While that's happening, and that's where our focus is, We also have the runoff of our vehicle finance business, which you probably know from a couple years ago, was a pretty large portion of our overall subscriber base and was generating a good, what I would say, consistent revenue, albeit that revenue was at pretty low ARPUs and not in terms of gross margin at our target gross margin level. So that is running off while we're working hard to convert this base which is having somewhat an offset to and causing that decline year over year that you're seeing.
spk07: Okay. Thanks very much, guys. I appreciate it.
spk11: You're welcome.
spk02: Our next question comes from Mike Lattermore with Northland Capital Markets.
spk09: Great. Yeah, just on the vehicle finance topic, how much revenue in the quarter came from that category?
spk06: It was well less than a million dollars, Mike, but that business had at one point in time been trending in $2.5 to $3 million a quarter, but it has been dropping off pretty quickly here as of late.
spk09: Got it. And then if you convert... the base by year end, did you have kind of a range of how much incremental quarterly revenue that would be, sort of recurring revenue in the software and subscription category?
spk06: We haven't quantified it. Go ahead, Jeff.
spk11: No, go ahead, Kurt. I'm sorry. Go ahead.
spk06: So, Mike, we haven't quantified it in terms of the quarterly revenue target. But what we've done is we've identified of that population of customers, let's say that 60 to 65 customers, that that customer base is historically represented on an annual revenue run rate somewhere around, say, 65 to 75 million, maybe as high as 80 million if you go back in history. So we generally have an idea of how much revenue it relates under the, let's say, legacy operating model and we have a sense of what that will ultimately convert to on a go-for basis. But we haven't actually broken it down by quarter.
spk09: Okay, that's helpful.
spk11: I will say, Mike, just on that, we do believe, just to give you an idea, one, I talked about the supply chain recovery, and then we do anticipate our percentage of business percentage of revenue that's represented by software and subscription services to grow throughout the year. And we're at 61% today. So that should give you some insight into directionally where we're headed.
spk09: Okay. That sounds good. And just last on the sales organization, I think last quarter you talked about a goal of adding, I think, 30 salespeople. I think that's quota-carrying salespeople by year-end, I guess. Is that still the target or does that change with your new Sierra?
spk11: No, that remains the target. And Brennan is off and running. He's been here for about 30 days now. He was able to start day one with our national sales kickoff, which was a great success, allowed him to meet all of his team. He's already instilled some new sales leadership in the team. And he's really putting in place his system to manage accountability of the sales process throughout. Some specific things that I think that you'll see that are different or improved at the company as a result of Brendan's leadership is to focus the sales team on new business acquisition. This was a big strength of his at Verizon Connect and at Idelec to really focus on new logos. And as we complete our conversion, Our future success in sales is really tied to seeking out new logos in terms of our target customers. In addition to that, he's opening up the mid-market, which is going to increase our sales velocity and consistency at CalAMP. So he's doing a lot of new people in sales and sales ops, and we're still on track to to add those salespeople this year, and we're doing it in a way that we're taking down expenses in other areas of G&A to support the sales function, which feels like the right thing to do for the company. It's going to allow us to improve margins while really improving our ability to sell.
spk09: Got it. Back on the sequential... decline in software and subscription. Can you just sort of dig into that a little bit more? You've obviously added a lot of conversions. You're winning new business. I guess just maybe clarify a little bit why that was down sequentially. Yeah. Kurt, could you take that, please?
spk06: Right. So I think, Mike, you're just referring to the way we've disclosed in our 10Q that the software application and services revenue versus the product revenue. And that declined from last year to this year. Again, it's a combination of things. And it's being perpetuated by the fact that we are very focused on converting our base of hardware customers over to these subscription models where the predominant portion of that revenue, when it happens, gets positioned in the product category, the device category, not in the recurring application subscription category. So that's the first thing. The second thing is when you look at the revenue base that existed in 2021, first quarter of fiscal 2022, there was at least $2.5 to $3 million of vehicle finance revenue that was in there that has come down has been dwindling down as those prepaid contracts get serviced to their term. So they had probably two, three-year terms, and so although we're servicing them, they fall off, and as they fall off, the revenue portion of that declines. So that's at a minimum a couple million dollars. And then in the mix of that, there are certain contracts that we are in the process of renewing that have been on longer-term arrangements, and we're working to either cross-sell or up-sell them but as they come to their fruition and we are working on renewing them, they sometimes taper off a bit in the latter part of the contract term. So it's a combination of factors, but we feel really good about the fact that as we are converting our base of customers, our telemetry device customers over, and we are building that install base, an incremental 200,000 subscribers that I mentioned a little bit earlier, that will start to grow and we will start to monetize it, thereby offsetting this decline that you're seeing in the legacy recurring application subscription revenue.
spk09: Okay. And, Chris, you described that as a year-over-year effect, but that was also the sequential drivers as well?
spk06: I don't have that in front of me, but I think sequentially we were fairly flat, but I'd have to go through that and look at it. But I was referring to what was stated in our 10-Q. Okay.
spk09: All right.
spk02: Our next question comes from Scott Searly with Roth Capital.
spk10: Thanks for taking my questions. Just a couple of quick clarifications. I missed the OEM sales number in the quarter. And then if I could, on the product gross margin front, How do you think seeing things immediately improve or change in the current fiscal quarter? You know, with China starting to open up, some supply chains starting to come back, will that be up sequentially? What's your best guess at this point in time?
spk11: Yeah, Kurt, would you take those, please?
spk06: Sure, Scott. So the first one was the OEM products revenue in the quarter. So of the $25.2 million of telematics device revenue, the amount associated with sales to our OEM customers was approximately $10.5 million. And then we had indicated that of that $10.5, a portion of that, I believe $9.7 or so, was associated with our largest customers. And then can you restate your previous question, Scott? I apologize.
spk10: Gross margins on the product front. Just, Kurt, gross margins on the product front given supply chain issues and otherwise, how that visibility is sort of shaping up now. Is it going to be sequentially up? How should we be thinking about it in the immediate quarter?
spk06: Well, we're not giving guidance, Scott, but what I would say is that obviously our gross margins are impacted by our volume and in particular our revenue growth. And so as we indicated in our initial remarks, we do believe that quarter over quarter there will be an increase or uptick in revenue. So you would naturally assume that there would be some improvement with gross margin. I will say also that it's been pretty unusual in terms of the pace at which some of these cost increases are coming at us as well as others in our space. It was compounded more recently around some tariffs that were being passed through from product coming out of China. Obviously, the components and chips have always been a persistent cost increase, and freight continues to be a challenge. But we're doing everything possible we can to absorb those costs and pass those on to our customers when we have that opportunity. But it's been pretty rapid-paced. And there is a little bit of a lag between when we are hit with those costs and when we can actually pass them off or absorb them.
spk10: Okay. And if I could, on the RPO front... Oh, yes.
spk11: Oh, I just wanted to add to that. On the margin side, every month, Kurt and I get on with the global supply chain team and talk about what our PPV looks like or our price increases look like against our the price increases that we're seeing from our vendors. So we're keeping track of that. As Kurt said, it's a lag, but we're feeling better about the percentage of our total customer POs that include PPV. As Kurt said, there's a bit of a lag, but we're really on top of that from a customer-by-customer perspective, which will help improve margins throughout the year.
spk10: Okay, helpful. And if I could, I wanted to clarify an RPO for the year. I think for the current fiscal year, last quarter you talked about there being $90 million under the full RPO that would be delivered in fiscal 23. There's still $80 million remaining on that, plus I think there was about $21 million that was recognized in the quarter. Is that correct? So it's roughly a little over $100 versus $90 million. So the RPO in terms of fiscal 23 has continued to increase in the most recent quarter?
spk06: Yes, Scott. So we were really pleased with the RPO growth. So we ended last fiscal year at about $200 to $202 million. At the end of this quarter, we were about, for our core business, about $215, $215 million, when you include what was left over for the vehicle finance business, maybe $216. So that growth, I think, is very healthy. It does reflect the efforts of us converting over, these Telematics device customers into a subscription model. It's forward-looking, so it gives you some of that visibility into what we think we could recognize and will have to service over the next one, two, and three years. We have indicated that 37% or approximately 80 million of that 215 will be recognized in the upcoming, say, 12 months. And we do expect that number to continue to grow as we continue our momentum on converting more customers and driving new logos. pretty pleased with the RPO expansion over the last several months.
spk10: And if I could, BMW, Volkswagen, how meaningful, how big are they? What does that do from an ARPU standpoint? How quickly does it ramp up? And kind of blending that against the conversion of the remaining two-thirds of the existing MRM customers that are converting, how should we be thinking about the ARPUs trending over the next couple of quarters?
spk11: Yeah, I'll take a shot at that and then, Kurt, if you would tip in because you'll have some more insight, I'm sure. But first of all, on BMW, that's a very significant opportunity for us. It's very early days in terms of that relationship. We issued our first PO, but that's a pan-European opportunity for us. And of course, BMW has a significant market share in that region. So we're very excited. It's a very sophisticated application, which means good things in terms of ARPU. Overall on ARPU, you've got to remember that our transformation has really two steps. Step one is the conversion of the base, which adds up many, many subscriptions to our total subscriber base at a relatively lower ARPU to begin with, but it sets us up to sell all kinds of things in the future. As we turn our attention to new logos and upselling our existing base, I believe that you'll see the ARPU at the company continue to drive up over time. I'd say the ARPU on some of these initial conversions is lower than you'll see on new logos when you think about the difference between going to the base and going to a new customer. On the ARPU front, we're very keenly focused on that. We still feel good about converting all these lower ARPU customers to a subscription model to begin with because that's step one and sets our sales team up to do more in the future.
spk06: And Kurt, you might have anything to add there. Yeah, I just wanted to touch a little bit on BMW. I'm not sure if Many people are aware, but BMW is a fantastic story of what we characterize as land and expand and shows how we can penetrate large OEMs to drive incremental-type service arrangements with them. We've been doing business with BMW for a number of years out of our Italian office, and BMW came to us with this, what I would call, an advanced telematics vehicle recovery solution that they want to embed within OEMs. most if not all of their vehicles that they ship in the pan-European area. So that in and of itself shows you that we have the ability to expand on an account. And what typically comes with expanding within accounts is what ARPU expansion and incremental service opportunities. So on BMW itself, we do see that as a fantastic example of what we can do to expand ARPU. On the broader question of where our ARPUs will trend in the next, say, year or so, there will be downward pressure primarily because we're converting our base of Telematics device customers and moving them into multi-year service contracts, which in and of itself creates stickiness. But in the near term, as we start to build on that installed base and we deliver just access to our platform and some of the services we have on our platform, we might see some downward pressure on ARPU. But in the long run, that will be a very favorable thing for us.
spk10: Gotcha. And lastly, if I could, Kurt, from a modeling perspective, It looks like non-GAAP OPEX was flattish. How should we be expecting that to trend over the next couple of quarters? Thanks.
spk06: Yeah, thanks. On the OPEX, obviously that is certainly an area of focus for us. It's become a key area that we're concentrating on here in the near term, especially as we really target two things that we need to navigate through. One, converting the base of our customers and moving them into multi-year service contracts. And two, navigating through some of these supply chain challenges. So we are absolutely focused on OPEX. As we pace the conversion of our customers and we navigate through the supply chain challenges, in particular Jeff and I will be working with the other departments and functional groups to ensure that we're keeping our expenses in check. and rationalizing those as we see appropriate based upon how things are unfolding through the transformations.
spk03: Great. Thank you.
spk02: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question is with Jerry Rebich with Goldman Sachs.
spk01: Yes, hi, good afternoon. Can you talk about your expectations for gross margins this coming quarter, given the revenue outlook that you mentioned? I know it's tough to put a fine point on it, but any high-level comments about the sequential progression would be helpful. Thanks.
spk06: So, Jerry, as I mentioned before, we aren't giving guidance, forward-looking guidance. I do believe, given that there's an expectation that we will have revenue growth and that the supply chain challenges will ease up a bit going into the second quarter, that there will be some improvement in gross margin, but in terms of quantifying it, right now we're not in a position to do that given that we're not giving guidance.
spk01: Okay. Maybe I ask differently. So, you know, you folks laid out 50% gross margin targets. We're at 40% today. What's the path to get there? How much of that is reduced supply chain friction, improved price costs, other moving pieces? Can you just bridge for us how we get from 40% to 50%?
spk11: Sure, Jerry. I'll take that. The biggest part of that is as we move to more and more of our revenue coming from software and subscription services. In general, the margins on that are in the low to mid 50s compared to our product margins. So that dynamic of moving more of our revenue to software and subscription will be an important driver. And then you're right. In the short run, we've been affected by the supply chain situations. And over time, as Kurt said during his comments, our PBV or increases to our customers have lagged. increases that we're seeing, but 100% I'll assure you that we are passing on these additional costs to our customers. We've been successful with that. We're doing that in a way that's respectful of our customer relationships and we're working with them on that, but over time we're getting caught up there and that lag should diminish over time as we see fewer challenges in the supply chain.
spk01: Okay, you know, so the reason for the question is, you know, we're working towards the conversion and, you know, gross margins have gone from 41% to 40%. So I'm just trying to understand what's the path from 40% to 50% to the extent we can put, you know, maybe a finer point on price-cost improvement expected and other moving pieces. I think that would be helpful.
spk06: Yes. Jared, let me... I can lay out, Jeff, if you want me to, some of our thoughts on that. Sure. Jared, it's a multifaceted response in the sense that as we move or convert our basic customers over, and as we mentioned, we've converted about one-third of the total population, somewhere between 60 and 65 customers. They will come over with a multi-year subscription arrangement. In those multi-year subscription arrangements, We are charging for active subscribers. As those active subscribers come on base, they are actually going to be monetized over a period of a minimum of three, maybe as high as five years. And that will provide incremental revenue that will help us improve our gross margins. In parallel with that, we are doing everything possible to optimize our cost structure to ensure that some of these challenges we're experiencing and the incremental costs that are coming through the supply chain are addressed. By that I mean we're doing things like trying to ensure that we have a very tight base of devices that we are going to use as part of these subscription arrangements. We are trying to improve the overall design and proficiency of the devices. We are trying to work within our supply chain to cost down various components and the overall build of the devices and also monetize in parallel with that the subscription arrangements. It's a multifaceted approach to improving margins. We've been trying to target the margin improvement around the overall mix of revenue being more concentrated to software and subscription services. This quarter we were at about 60%, 61%, which we think is a healthy level for where we are in the transformation. We do think that that can increase potentially as high as 70% over the course of the next few years. And so as that concentration increases, and the install base grows, and we monetize that install base while trying to optimize the supply chain around the device and delivery of that service, we believe the margins can gradually tick up to that 50% range. But that's going to take a couple years, probably three to five years.
spk03: I appreciate the discussion. Thanks. Thank you, Jerry.
spk02: Our next question comes from Oren Hershman with AIGH Investment Partners.
spk04: Thank you for taking my question. I know it's been asked a little bit in different variations before on the call, but there were a lot of different variables that caused a slight sequential decline in the recurring line. You mentioned in the call that you feel that there will be quarter over quarter growth as we go through the year. Does that mean that the pain points have either completely gone away, pain points meaning things that are causing a decline in that line, pressuring the line in the other direction, have drained off mostly at this point? What should give us confidence that things can grow sequentially in that business every quarter or in that line of business?
spk11: Yeah, well, one, as I talked about, as we get more of these conversions done, our sales teams are able to focus more on new business. That's a big part of it. The conversion to base, especially for these initial customers, required some amount of effort, and I think every day we get better and better at that, and that will allow us to spend more time on on new logos and upselling to our base. So that will be helpful. In addition, we're going to continue to make progress on converting the base going forward in terms of the percentages, the same time as I said in my script that all new customers, their purchases will involve a subscription. So we feel good about that over time. Certainly, in our business, a device-enabled solution business, the supply chain just doesn't impact the product side. It also impacts the software side because we've got to get those devices, and that absolutely was an impact this quarter as some of the finished goods inventory were stranded in some of those locations in China. that we mentioned earlier, that we're on lockdown. So that will get better as well. We've already seen the China situation ease immensely. So all of those will help the sequential growth.
spk04: Just one more question on that note. You went through some of the items that put pressure in the other direction. The beauty of the recurring revenue is typically the sequential growth, assuming that there's not much attrition. And in your case, you actually have a good line of visibility in terms of additions, particularly on the new contracts, how they're designed. So I guess is there some underlying revenue metric that we can look at, you know, let's say for the last few quarters where it's been rising rapidly and recurring, where some of those, what I would say, you know, end-of-life items, if you strip them out, that you could see the underlying growth on the recurring itself?
spk11: Yeah, Kurt, would you take that, please?
spk06: Yeah, so when we've been working to disclose really two key metrics that we think provide forward-looking insight to where we're going, and the first one is the growth in the RPOs, the remaining performance obligations. So that growth from 202, 215, 260 million, we believe is actually very good. We also think that the increase in subscribers also gives you greater visibility. Now, I know that there's this thought process of, well, within that RPO, there's an element of the device, and that is true. We sell device-enabled solutions. So in every customer bundled arrangement, there will be a device element. There's no getting around that. But what we are doing in these multi-year service contracts and what is being observed in these the RPO is the fact that we are working with our customers to have multi-year volume commits as to adding incremental subscribers and to a path to monetizing those incremental subscribers. So as parts of our legacy business are winding down and are becoming less of a distraction for us, we have some short-term trends that we are addressing. But as you can see, the forward-looking metrics and the forward-looking trends to us look very healthy given that we have been able to bring new subscribers on, convert new customers, and it is showing up in two real places on the RPO growth and on the subscriber base.
spk03: Okay, thanks very much. You're welcome.
spk02: There are no further questions, so I'll pass the call back over to Nancy for any final remarks.
spk11: Sure. Thank you, Jason. Thank you all for joining us today on the call. and for your continued interest in CalAMP. We do plan on attending Oppenheimer's 25th Annual Technology Internet and Communications Conference on August 10th. Please contact your Oppenheimer sales contact or Shelton group if you'd like to schedule a meeting with Curt and I. We'll look forward to speaking with you again during our second quarter earnings call in late September. Operator, you may disconnect the call.
spk02: That concludes the CalAMPS first quarter 2023 financial results conference call. Thank you for your participation. You may now disconnect your lines.
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