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spk02: Welcome to CalAMP's second quarter 2023 financial results conference call. My name is Tamia and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Joel Akramovich, Managing Director of Shelton Group, CalAMP's investor relations firm. Joel, you may begin.
spk06: Good afternoon and welcome to CalAMP's fiscal second quarter 2023 financial results conference call. I'm Joel Akramowitz, managing director of Shelton Group, CalAMP's investor relations firm. With us today are CalAMP's president and chief executive officer, Jeff Gardner, CFO Kurt Bender, and also Cindy Zhang, senior vice president of financial planning and analysis. Before we begin, I'd like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAIM'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 regular SEC filings and in the earnings release issued today, which are available on our website. We undertake no obligation to revise or update any forward-looking statements to reflect future events or circumstances. 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.
spk04: Thank you, Joel, and thanks to all of you for joining us on the call today. Our second quarter results exceeded our expectations reflecting approximately 13% sequential growth in consolidated revenue driven primarily by software and subscription services revenue growth that was also up 13% sequentially and 7% year-over-year. Software and subscription services revenue represented 61% of total revenue. This revenue growth resulted from improvements in the supply chain that allowed us to accelerate customer conversions to recurring software contracts, and also to fulfill more orders for our Telematics product customers than the prior quarter. As of today, more than 50% of our eligible customers have converted, including recent transitions by notable customers, Localisa and Trimble, among others. We continue to gain traction in all geographies, with total global subscribers increasing 9% sequentially and 32% year-over-year to 1.3 million at the end of the second quarter. We gained strong traction in the EMEA region from recent conversions, along with new logos, including BMW's Mini and Wabi Santander. Additionally, along with North America SaaS conversions, we also added new subscribers from existing software customers, such as the City of Dallas, which signed the contract extension with us during the quarter. We remain on track to complete most of our eligible customer conversions to subscription contracts by the end of the current fiscal year, as we have stated in the past. Brennan Carson, who was appointed as CRO in June, has been working hard not only to advance these conversions, but also to expand opportunities with existing subscription customers and to secure new logos. Also during the quarter, as we broaden and deepen our overall solutions offerings, we made great strides in the areas of our smart trailer and video-based safety solution offerings. CalAMP's smart trailer technology empowers transportation operators to improve fleet performance, maximize asset utilization, and comply with regulations thereby transforming the way these businesses operate. Together with our video-based safety solution, our transportation and logistics customers can also use video technology to train, assess, monitor, and document asset operation in real time to improve safety, reduce costs, and increase on-time performance. With roughly 90 million commercial fleet vehicles and 35 million heavy trucks in operation around the world today. These two Cal Amp technology initiatives will not only help us expand our opportunities and customer base, but also strengthen our current customer relationships by offering new best-in-class tools to help them gain even more from their telematics investments. We completed a major update of our corporate website and branding, including more expanded information on our telematics solutions such as video webinars and testimonials, product brochures, and other valuable resources for prospects, customers, investors, and the press. Visits to our website have increased 30% since we deployed the upgrade. As you know, Curt's last day will be tomorrow, and thereby, This will be his last earnings call with us. I want to thank him for his support and years of service as our CFO and wish him the best in his new endeavor. In terms of an update on our CFO search, we have been working with a leading executive search firm over the past several weeks. As mentioned in our press release, Cindy Zhang, our current Senior VP of Financial Planning and Analysis, who has been with the company since 2017, will serve as interim CFO effective tomorrow until a successor is named. She and her finance team are fully qualified to maintain the integrity and consistency of our financial operations under my close oversight. With that, I'd like to now turn the call over to Kurt to discuss our financial results in more detail. Kurt?
spk01: Thank you, Jeff. I appreciate your kind words and the time that I had to work with you and the entire CalAIM team. I believe the company is well positioned to continue its growth and transformation to a leading telematics SaaS-based competitor. With that, let's dive into the second quarter numbers. 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 gap basis measures is included in the press release announcing our fiscal year 2023 second quarter earnings that was issued this afternoon. Total revenue in the second quarter was $72.8 million, up approximately 13% from $64.7 million in the prior quarter, though down approximately 8% from $79 million in the same quarter a year ago. The sequential increase in revenue was mainly attributable to the availability of product to support the acceleration of customer conversions to recurring subscription contracts, as well as the fulfillment of customer demand for our Telematics products. International revenue in the quarter totaled $26.6 million, or 37% of total revenues. Software and subscription services revenue was up approximately 13% sequentially and 7% from the prior year quarter to $44.5 million, representing 61% of consolidated revenue. It's instructive to mention that approximately $7.5 million of revenues in the prior year period was associated with 3G to 4G equipment upgrades for a large customer, which did not occur in the current year. Both the sequential and year-over-year growth in our software and subscription services business reflects the progress we're making converting eligible Telematics device customers to recurring subscription contracts. As of the end of the second quarter, we've converted just over 50% 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 second quarter was approximately $210 million, a decline of 2% compared to $215 million in the prior quarter, but up 54% from $136 million in the same quarter a year ago. We expect to recognize over 27% or approximately $57 million of the performance obligations during the remainder of this fiscal year. During the quarter, our subscriber base increased 9% sequentially and 32% year-over-year to $1.3 million. Telematics products revenue in the second quarter was $28.3 million, which represented a 13% increase sequentially and a 25% decrease year-over-year. Within the Telematics products reporting segment, OEM products revenue totaled $13.7 million in the second quarter, compared to $10.5 million in the prior quarter and $15.9 million in the same quarter a year ago. Our largest customer represented $12.4 million of revenue for the quarter, which was up from $9.7 million last quarter, but down from $14 million in the same quarter a year ago. Our backlog with this customer remains solid. Consolidated gross margin in the second quarter was 39.8% compared to 39.6% last quarter and 42.2% in the same quarter a year ago. Contributing to the high gross margin in the prior year was an increase in revenue from one of our largest customers associated with the 3G to 4G upgrade cycle. Gross margin continues to be under pressure due to increasing product and logistics costs that have yet to be fully offset by the price increases we've implemented to date. We expect gross margin to improve slightly over the remainder of this fiscal year as a result of increased revenues and, to a lesser extent, favorable product mix. Second quarter non-GAAP operating expenses on an absolute dollar basis increased by 3% sequentially, primarily due to increased compensation costs resulting from changes in the composition of our sales force to drive sales for our telematic subscription services. Second quarter non-GAAP operating expenses on an absolute dollar basis decreased by 5% over the prior year, driven principally by a decrease in general administrative expenses. Our focus remains on reducing G&A expenses in the quarters ahead. Adjusted EBITDA in the second quarter was $4.8 million with an adjusted EBITDA margin of 7% compared to $1.9 million and a margin of 3% in the prior quarter and $8.3 million or 11% in the same quarter last year. The sequential increase in adjusted EBITDA in the second quarter was attributable to higher revenue in the quarter. In terms of our overall liquidity position, at the end of the second quarter, we had total cash and cash equivalents of approximately $48 million as compared to $59 million last quarter. The sequential decline in total cash and cash equivalents is attributable to a reduction in free cash flows due to the payment of the settlement for the omega legal matter discussed last quarter, as well as lower revenue levels resulting from some supply constraints, coupled with consistent operating expenses and an increase in deferred billings or unbilled receivables. The deferred billings are a result of the conversion of one-half 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. During the quarter, we executed a new $50 million asset-based revolving line of credit with PNC Bank to give us added flexibility as it relates to working capital. At August 31st, there were no borrowings outstanding under this facility, and the total borrowing capacity based on eligible accounts receivable and inventory was $34 million. Additionally, we were in compliance with our covenants under this revolving credit facility. We believe that our current cash and cash flow equivalents, coupled with the availability on our revolving line of credit, provide adequate liquidity to support our transformation and growth of the next 12 months. Our aggregate outstanding debt is approximately $232 million, including $230 million of the 2% convertible senior notes due August 2025. It should be noted that we are always evaluating ways to optimize our capital structure. In reference to our outlook for the third quarter of 2023, the company is maintaining its policy of not providing quarterly guidance as visibility into product shipments remains difficult to accurately assess. However, we do expect to achieve low to mid single-digit percentage sequential revenue growth in the third quarter. With that, I'll turn the call back over to Jeff to provide some final comments before we open the call up for your questions. Jeff?
spk04: Thank you, Kurt. In summary, the CalAMP team achieved a solid quarter with revenue growing sequentially from an increasing rate of SaaS conversions fueled by incremental device inventory and resulting in a major increase and total global subscribers. With that, we will now open the call to your questions. Operator?
spk02: Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here briefly as questions are registered. The first question comes from Mike Walke with Canaccord. Please proceed.
spk03: Great. Well, Kirk, best wishes. It's great to work with you all these years. Best wishes at your new opportunity. And Jeff, congratulations on the conversion looking strong across that 50% mark. Can you update us on just the supply chain improvements that helped in the quarter and how does supply look to support the conversions in future quarters?
spk04: Yeah, we were pleased. We saw some modest improvement, Mike, in the quarter that helped us in terms of, one, driving better revenue, as you saw, and assisting us with the conversions, which was equally important. We're able to grow software and subscription services as well. We're not totally out of the woods yet, but I do see progressive improvement throughout the back half of the year. We're still working very hard on that in terms of doing everything we can. We've made a few redesigns in terms of our products that give us better clarity in terms of future looking BOM improvement and we are looking to see, as I said, steady improvement in the back half of the year.
spk03: Okay, great. Any update? I know you had a record backlog over 60 million not too long ago. Is that coming down now as you're working through that backlog, or is it still at kind of similar levels?
spk01: Yeah, Mike, it's still pretty high, but it has come down a little bit. So we're still pretty pleased at the robust nature of the demand obviously we're hoping that that continues in the second half of the year and as we ship on that backlog we have constant inflow of orders uh so we're pleased with the progress we made with the supply chain as jeff had mentioned and uh this the the backlog has come down a little bit but still pretty robust great last question for me and i'll pass the line you know kurt i know you indicated your gross margins would
spk03: slightly improve over the next couple of quarters. But now that your transition is going well, you're over halfway through it. Once the costs improve on the hardware side and the price increases go through, any thoughts just longer term where gross margins can trend from current levels? Thank you.
spk01: Sure. Yeah, like we've discussed in the past, I mean, the great thing about this business model is that as we expand on that installed base and that installed base becomes monetizable, that increased revenue base helps us with expanding our gross margin. So we're super excited about proceeding this fiscal year through the conversions, getting close to 70% of all of our customers over to the subscription model. That will be a major accomplishment. Once that's done and things stabilize in the supply chain, and that install base starts to monetize, it will have a pretty meaningful impact on our gross margin. As we've indicated before, our medium to long-term financial model suggests that we target 50% gross margin, so that's still our goal across the entire enterprise. Great.
spk03: Thank you very much.
spk06: You're welcome.
spk10: Thank you. The next question comes from
spk02: Jerry Revich with Goldman Sachs. Your line is open.
spk05: Hi, this is Adam Bubis on for Jerry Revich today. Thanks for taking my question. You talked about expectations to achieve low to mid-single digit sequential revenue growth in the third quarter. Can you just help us parse that out between the two segments?
spk04: Well, I think, Adam, we'll continue to see growth led by our software and subscription services revenue growth. That's been performing well all along. We expect to do more conversions. If you've looked at our conversion numbers for the quarter, we're actually a little ahead of where I thought we would be, and so I think we'll continue at that pace. When we look at the fact that we've gotten a lot of our big customers over the finish line there, we're going to be very specific in terms of driving additional conversions in the third quarter. And again, as we get through the customer base, which to me is really exciting, our sales force is going to continue to turn more towards new logos, which will help us grow across the base. And in particular, all of our new sales will be focused on software and subscription services.
spk05: Great. And then in telematics, what was EBITDA margin in this quarter and you know, what does the path to profitability look like from here?
spk01: Right. So, Adam, in the 10Q that we filed this afternoon, we did lay out for you EBITDA margin by reportable segment. So you can reference that in that filed document. But to answer your question, we – It's a bit of a journey here. Obviously, the first part of the journey we've been focused on is moving those Telematics customers over to a subscription model. As they evolve or move over to the software and subscription services business, the gross margin and EBITDA margin associated with that roll over to that reportable segment. So right now, the EBITDA margin is actually negative for the Telematics products reporting segment. Over time, as we finalize the conversion, and we focus on essentially the customers within our OEM segment. We believe that that reportable segment can be profitable or EBITDA positive, but it's going to take a little bit of time, and it certainly will take probably the balance of this year to even that all out.
spk05: Great. Thank you very much.
spk02: Thank you. Our next question comes from Mike Lattimore with Northland Capital Markets. Please proceed.
spk09: Great. Thank you. I just want to be clear on the conversions. So I heard that you would finish the conversions by, I think, year-end, and I also heard maybe you'd get to 70% conversion. Can you just clarify which one's accurate?
spk04: Yeah. Yeah, just I think there's a little confusion. We think that ultimately our software and subscription services as a percent of revenue will increase to 70%. Mike, but we think that by the end of the year we believe we'll get to 100 percent of our base converted to a subscription model. Okay, okay.
spk09: And then for those conversions through year end, you know, what kind of ARR does that represent or, you know, what revenue level would that represent in terms of software and subscription?
spk04: Yeah, as you know, we reported that we're about 50% through our customer base today. We're not providing guidance in terms of what the ARR for the remaining customers are. Obviously, we've got a couple of – it's a little bit of a mix. We've got some big customers out there. And, again, our strategy has been when we do these conversions, not only do we convert our customers to a subscription model, but generally we get a three-year commitment on volume. So we expect to continue to execute on that. The only change that we've made, and it's relative to our desire to realize cash faster, is to change our terms on the front end. So starting last quarter and into the next two quarters, you'll see our arrangements be slightly different than it was in the first six months of the year, or first four months of the year, as we focus on getting more cash up front, which I think will benefit the balance sheet and put it as a better position from a cash perspective.
spk09: Would that also change RevRec or is it really just on the cash side? No, it has no impact on RevRec whatsoever. Okay. And then kind of once you're through this conversion, as you look into next year, would you expect most of the growth to come from new logos or from kind of current customers expanding?
spk04: Yeah, well, the whole reason we hired Brennan Carson and the rest of the sales team, which has been upgraded substantially this year, is to focus on those areas. One, we've got a major focus on our existing customers who are customer success program. But the big change for us going forward after the base is converted is a clear focus on and working with our marketing team on new logos. And I think that will be the biggest difference. When you look at CalAMP year over year and in the next six months, is that new logo focus, specifically in the key areas of transportation logistics, not only in the U.S., but in EMEA and LATAM, and in enterprise fleet in those same geographies.
spk09: Thanks a lot.
spk04: You're welcome.
spk02: Thank you. The next question comes from Scott Searle with Roth Capital. Please proceed.
spk08: Good afternoon. Thanks for taking the questions. Kurt, I want to wish you the best of luck going forward. It's always been a pleasure working with you. Hey, just quickly, to dive in on the supply constraint side, it sounds like things are getting better on that front. I'm wondering if you were still constrained in the quarter in terms of what you ended up leaving on the table. And as you're looking out to that mid-single-digit sequential growth, what do you actually have visibility to in terms of what you can service? Is that what you already have in terms of visibility or parts, you know, be able to service that?
spk04: Yeah, well, that's a complicated question. But absolutely, we could have done more in terms of revenue with a stronger supply chain. Having said that, we did see a significant increase in unit ship. So as I mentioned in my remarks, it did get better. We expect to see that progress even more in the third quarter. We're finally back to a point where customers can order and receive goods on certain of our solutions in the same quarter, which is a nice feeling. That's been some time since we've been able to do that. And I think we'll progress steadily over the rest of the year. Now, when we think about CalAmp, we're a little bit different than most out there because of the sophistication of our solutions. And we have pretty high-end devices, and so our supply chain is a little bit different than, say, some of the more generic device players out there. But nonetheless, it's good. We do see better visibility, especially in the third quarter. We're trying to really get ahead and work with everybody in the supply chain, all the way to the semiconductor players, even though their relationships are more with our contract manufacturers. Our team, including me, have been in direct contact with everybody across the chain and are working very, very hard to improve the situation, and improve the visibility. But it does feel good. It feels good to have the ability to meet our customer's demand to fulfill some of our backlog in the quarter.
spk01: And Scott, one thing that we look at is the historical run rate, especially within the telematics products. And with our backlog at an all-time high, I don't think it would be unusual to have expected that At least the telematics product segment could have done maybe 20% more than where it was for this particular quarter. That's just going off of what we've done historically when you look at the quarterly run rate from the last two fiscal years.
spk08: Great. And, Kurt, maybe to follow up on that point, though, given the push to more of a recurring revenue stream, the expectation was that MRM would continue to come down on the telematics side. Right. But it seems like we're running above, I think, those longer term levels that you thought it would get down to 10 million or so a quarter. So is there a new higher sustained level of telematics product once you strip out the OEM business that you expect the company to be running at going forward?
spk01: No, I mean, I think as we've communicated in the past, our objective is to move telematics 100% of those MRM telematics device customers over to multi-year subscription arrangements. It only makes sense considering the post-sale support services that we tend to provide to those customers and really with the business use of what they're doing with our devices and our services. So I think ultimately we will get all of those customers moved over. That then will represent 70% of our consolidated revenue, as Jeff mentioned. But I think that it's still going to happen over the course of this year, and there's still, with the existing customers that are within the telematics product category, healthy demand that's sitting in that backlog. So it'll come down, but it'll come down gradually over an extended period of time.
spk08: Great. And lastly, if I could, on the software and subscription services front, with a big sequential uptake in the quarter, are there any one-time events that are kind of mixed in there to kind of calibrate us on that front? And also on that 1.3 million subscription figure that you have now, is it possible to give us an idea in the quarter, the incremental net ads, how many of those were from conversions versus non-conversions?
spk04: Yeah, I'll take the first part as Kurt will answer the second part regarding the subscriber growth. In respect to, there weren't really any one-time items. I think that we benefited both from new logos selling full-stack solutions to our customers as well as a pretty healthy success in terms of moving up our conversions. I think we're moving from something in the 30s to 50% in the quarter. So those were two things. No big one-time events there.
spk08: Oh, and just the subscriber net addition mix in the quarter?
spk01: Sure. Yes, Scott, so I would say it was split probably maybe like 80-20 where we have 80% coming from conversions, 20% from new logos.
spk08: Okay, great. Hey, thanks so much.
spk01: Sure.
spk02: Thank you. As a reminder to all participants, if you would like to ask a question, please press star 1 on your telephone keypad The next question comes from George Nodder with Jefferies. Please proceed.
spk07: Hi, this is Blake Milkey. I'm for George Nodder. First, I just wanted to congratulate or rather wish you good luck, Kurt, moving forward. You know, from what you're saying, it sounds like the remaining 50% of Telematics customers to be converted tilts towards larger customers. So should we expect the total opportunity remaining with these customers be larger than 50%? And then I have a follow-up.
spk04: Well, I think maybe you misheard me a little bit, but there's a couple large customers in there, but there's also the tail of our smaller customers that we'll kind of bring over in one fell swoop. So we brought over, as we said in our script this quarter, we brought over Local Lisa and Trimble, which are two of our larger customers. So it's a little bit of mix in terms of what we have in front of us. There are a couple large ones, but we also have that tell that I mentioned earlier.
spk07: Okay, great. Which tend to be smaller.
spk04: But the important thing is we've really got this down to a science now, both in terms of how we work with our customers. They're seeing tremendous benefit to switching to the subscription model because of the software that they utilized. is giving their much improved capability. Our sales and technical teams are now that it's old hat to drive these conversions.
spk07: Okay. And then in terms of price increases, when should we expect those to fully work into the model? And is there any evaluation for additional rounds of price increases at this point?
spk04: Well, we've steadily used something we term internally PPV or purchase price variance to offset, especially when we go out and do spot buys to opportunistically access some products that are in high demand. We've done that steadily, and we've been able to pass those costs on to our customers. Now, the PPV does lag a little bit behind some of the price increases that we see, so I think throughout the rest of the year, you'll see us both continue to use PPV as a tool. And that is, as we see inflation and other costs increase in our bonds, look to opportunities to strategically use price increases to help offset some of that pressure. Great.
spk07: Thank you.
spk00: You're welcome.
spk10: Thank you.
spk02: There are currently no questions waiting in the queue at this time, so we'll pass it back to the management team for any closing remarks.
spk04: excuse me great well thank you for joining us okay you're teasing us okay go ahead please apologies it seems they've removed their question you may proceed with the closing remarks uh no worries uh thank you for joining us on the call today and for your continued interest in cal amp as we look into the second half of our fiscal year we remain focused on further expanding our SaaS transition program, and securing new global customer logos to drive a higher level of future recurring revenue. We look forward to sharing our progress with you during our third quarter 2023 earnings call in December. Operator, you may now disconnect the call. Thank you.
spk10: This concludes the CalAMP Q2 fiscal year 2023 earnings conference call. Thank you for your participation.
spk02: You may now disconnect your line.
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