Welcome to the CalAmp First Quarter Fiscal Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Nicole Noutsios, Investor Relations for CalAmp. Nicole, you may begin your conference.

Thank you, operator. Good afternoon and welcome to CalAmp's first quarter fiscal year 2019 financial results conference call. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek; and Chief Financial Officer, Kurt Binder. Before we begin, let me remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAmp's best current judgment, they are subject to risks and uncertainties that could cause actual results to materially differ from those implied by these forward-looking projections. The 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 publicly any forward-looking statements to reflect future events or circumstances. Michael Burdiek will begin today's call with a review of the company's financial and operational highlights. Kurt Binder will then provide additional details about the company's financial results and outlook. This will be followed by a question-and-answer session. With that, it's now my pleasure to turn the call over to CalAmp's President and CEO, Michael Burdiek.

Thank you for joining our call today. We had a strong first quarter in fiscal 2019 and we’re pleased with our revenue growth and profitability performance. Consolidated revenue for the first quarter once again reached a record level of $95 million, up 8% over the same period last year. Revenue growth was driven by strong momentum in our software and subscription service business along with steady customer demand for our products within our telematics systems business. Additionally, we continue to fortify our strong balance sheet, as we generated free cash flow of $29 million in the first quarter, an increase of 226% year-over-year. Within our telematics systems business, we recorded revenue of $76.4 million, up 6% over the same period a year ago. MRM telematics products revenue was again highlighted with growth of 24% year-over-year, driven by persistent demand across our diversified customer base. The revenue results from our network and OEM customers were also solid, driven by another strong quarter with our largest customer, Caterpillar. During the first quarter, revenue with Caterpillar increased 11% year-over-year to $11 million. As we previously stated, we expect modest revenue growth with Cat with the longer-term outlook very positive as we expand our partnership to develop next generation telematics devices to address their product range more broadly. Additionally, shipments with another global heavy equipment OEM were a little ahead of expectations and contributed approximately $1.7 million to the first quarter fiscal 2019. We continue to explore additional opportunities to expand our existing OEM relationships and will land other potential new logos in the heavy equipment market around the globe. During the first quarter, momentum increased markedly in our software and subscription services business with revenue of $18.5 million, up 15%, both sequentially and year-over-year. Growth was attributable to continued strength in our LoJack…

Thank you, Michael. It is a pleasure to be here today. My commentary will include references 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 first quarter earnings that was issued earlier today. As Michael mentioned, we had a strong start to the year. Consolidated revenue for the first quarter of fiscal 2019 was $94.9 million, an increase of 8% year-over-year. Additionally, there are a number of balance sheet and liquidity metrics that highlight our strong business and financial performance that I will discuss later in the call. Our telematics systems and software and subscription service businesses both delivered solid financial results for the first quarter. Within our telematics systems business, revenue for the first quarter was $76.4 million, up 6% year-over-year. The revenue growth is due to solid demand and increased sales volume within our MRM Telematics and network and OEM product categories. Revenue from MRM Telematics products reached another new record in the first quarter of $43.9 million, an increase of 24% year-over-year. The revenue performance is attributable to consistent demand from a well-balanced base of customers, especially our global enterprise accounts, several of which are transitioning to our newer LTE products. Sales of LoJack SVR products were down year-over-year, though US SVR product sales were modestly up from the prior quarter. The year-over-year decline is due principally to lower SVR product sales to US auto dealers. This decline was partially offset by an increase in CalAmp telematics products sold to LoJack international licensees as well as new telematics based technology solutions sold through domestic dealership channels. Network and OEM products revenue was $16.1 million for the first quarter…

Thank you, Kurt. We remain intensely focused on expanding our technology leadership and leveraging our scale, channels and partnerships in new and existing markets around the globe. We continue to make steady progress on our growth initiatives and are pleased with our momentum in both our software and subscription service and telematics systems businesses. We remain quite energized by the opportunities that lie ahead for the company. Operator, I will now open up the call to questions.

[Operator Instructions] Your first question comes from the line of Mike Walkley with Canaccord Genuity.

Congratulations on a strong start to the fiscal year, especially with the ramp in the software and subscription revenue.

Thank you.

My question is just building on the record SaaS revenue, can you just update us on kind of the rollout with that large fleet customer and how the overall pipeline looks for, as outlook, for wins for this year. Thanks.

Yeah. The large freight transport customer is ramping nicely and in fact about 60% or so of the incremental subscribers that we reported were related to that contract. So we're very, very pleased with how that's rolling out and we believe that there are a lot of other opportunities that can be cultivated with that customer as we prove our success here on this initial program. But overall, I would say we're very happy with how our pipeline is developing, not only with existing accounts, but with new opportunities, including some newer opportunities related to converting existing hardware customers to more platform service opportunities and that's sort of a new development here and we're very happy to see some progress there as it's been an initiative on our strategic roadmap for some period of time.

And then just on the telematics systems business, can you just walk us through maybe on the guidance provided, how you're seeing the different areas of that business, both on a sequential and year-over-year basis.

Yes. Well, obviously, we're very bullish on the MRM telematics device business. We had solid growth in Q1. We expect that business to continue on a nice pace here in Q2. Network and OEM products is very strong. Cat had a solid quarter. The outlook in Q2 is better than Q1. We have a second OEM customer there that's obviously ramped nicely and we have new opportunities in that pipeline. We're still in transition as it relates to SVR -- Legacy SVR product sales in existing channels and converting them both to subscription services as well as some of our newer telematics products with licensees. And as we tried to describe in our prepared remarks, we're happy that we're making progress there, but that's a long term initiative. So overall, I think the outlook is pretty good.

Last question for me and I’ll pass it on. Just kind of building on the LoJack strategy, can you just update us on how your transition towards the telematics brand is going and any early feedback from dealers on the offerings? Thank you.

As we talked about on our last earnings call, we made a big announcement at the NADA show back in March and it was basically a rollout of a new brand as well as version 2.0 of LotSmart and SureDrive. And coupled with that rollout is what we call the LoJack Beyond initiative, which includes the capability of creating a hybrid solution around legacy SVR capabilities and the law enforcement relationships there coupled with the telematics capabilities where it looks like one integrated solution. And the reception on that initiative with dealers has been very positive, especially as it relates to the modernized capabilities around the LotSmart application as well as the dealer lot management portal. We've also had some very positive response as it relates to our point-of-sale initiatives and providing digital collateral to salespeople at the dealerships as well as the personnel in the F&I Office and we're going to continue to make some additional developments there around the integration of that point-of-sale application into some of the digital signing platforms that are used pretty regularly as part of the paperwork process, when customers come in and buy new cars. So very, very positive response around all of our digital activities there. And just as it relates to numbers, last quarter, we talked about roughly 13 active dealers either selling or onboarding LotSmart with the sell through of SureDrive. That number has more than doubled. We have about 15 of those dealers being very active in terms of the sellthrough of SureDrive and we've on boarded a significant number of new dealers who are either going to leverage the capabilities of LotSmart and/or focus on SureDrive as the sell through application either coupled with LotSmart or as an independent sellthrough product.

One last housekeeping from me actually. Kurt, just on the GAAP to non-GAAP net income guidance. Did you say the last 5 million legal settlement was or was not included in the walk through from GAAP to non-GAAP net income?

Yeah. Mike, so for the second quarter, we do factor in the $5 million of final installment from that legal settlement. We haven't received it yet, but we're assuming that we will receive it in the second quarter. So actually it's treated like we've treated all the previous installments.

Yeah. I just wanted to make sure I heard that correctly.

Your next question comes from the line of Jonathan Ho with William Blair.

Just wanted to, I guess, step back to some of your commentary around the gross margin. How should we be thinking about that trend over the balance of the year, just given the product mix shift?

Hello, Jonathan. I'll address that qualitatively and I’ll let Kurt talk a little bit about it quantitatively. We do expect to see some gross margin improvement, as we work our way through the year. And those improvements will come sort of in three streams. One, we've expedited the release of a number of LTE products over the last quarter or so and those expedited activities are sort of put on the back burner, cost optimization activities, which has resulted in product launches probably a little bit below normalized run rate, as it relates to gross margin profile. Secondly, we've got ongoing pressures on the SaaS side, as it relates to transitioning legacy platforms from on-premise infrastructure to the cloud. We've talked about that on previous calls. And then we also have a fairly significant initiative underway to transition away from domestic internal manufacturing resources to a fully outsourced model, so that's burdening our operational overhead a little bit and probably resulting in certain amount of pressure around product gross margins. But, as I say, qualitatively, we would expect to see some improvement as we work our way through the year.

Yeah, Jonathan. So as Michael pointed out, I mean, there are a number of initiatives in the works here. Obviously, we expect to see our gross margin improve. In order to give you some quantitative feedback, I'd suggest that it’s going to tick up slightly somewhere in the range of say 50 to 100 basis points over the next several quarters.

Got it. And then I think you guys talked about moving out CrashBoxx over the entire base. Can you maybe give us a sense of what you have baked into either guidance or sort of your expectations for the year in terms of contribution from CrashBoxx and maybe how you're going to monetize this product.

Sure. Well, as it relates to Q2 guidance, virtually, nothing is baked in. But, our objective would be to see roughly 200,000 to 300,000 devices enabled with CrashBoxx services by the end of the year. Again, that's an objective. It's not necessarily certain that we’ll be able to achieve that. We would expect a large percentage of our installed base and new product customers to on board with CrashBoxx enabled. If you assume annual crash rates of say 6% to 10% for those vehicles which have that CrashBoxx capability on board, and you assume that a fraction of those, let’s say, 20% to 40% would choose to buy a report as a consequence of having a reported accident the numbers can start to add up pretty quickly. I would not want to venture to forecast anything in Q2, but we're optimistic that by the end of the fiscal year, we could be at an annual run rate of something north of $1 million from that CrashBoxx land and expand initiative. And by the way, annual run rate of $1 million, not on a quarterly basis, but obviously once you build in that installed base, it can ramp fairly quickly.

Your next question comes from the line of David Gearhart with First Analysis.

Thank you for taking my questions. Most of what I wanted to ask has already been asked. So I kind of want to go back just to some of your ongoing smaller initiatives we haven't heard an update on in a while, whether that’s PTC or things going on like, excuse me, besides PTC, like the solar OEM customer, just a general update there since you haven’t mentioned in a while.

Sure. Well, you’re certainly talking about some legacy revenue streams. PTC has been winding down over the last several quarters. In Q1, we saw roughly $0.5 million of business. So it was a very small contributor to our network and OEM products revenue. In the prior quarter, it was around 1 million. We expect it to trail off as we work our way through the year. So it's becoming a very immaterial contributor to revenue. As it relates to the solar OEM, we actually have not seen any revenue related to those products for a couple of quarters. So that's essentially at zero run rate currently. And then there's one other legacy revenue stream around satellite data communication services and that declined actually from about 4.5 million in FY17 to about 2.5 million in FY18 and in Q1, it was around $250,000. So it’s almost trailed off to 0 as well. So if you look at those legacy revenue streams, they've been actually creating a bit of a headwind as it relates to our growth metrics, but now there's such minimal level that I would say they're no longer a headwind and they’re pretty much behind us.

Your next question comes from the line of Josh Nichols with B. Riley FBR.

Thanks for taking my questions. Just wanted to ask, some great progress it looks like on the company's second heavy equipment manufacturer. Can you help frame that a little bit for how that might pan out as we think about things going through the remainder of the fiscal year?

Certainly. Well, in the last couple of calls, we've talked about that customer being roughly a $5 million to $6 million annual run rate customer. Clearly, $1.7 million in the latest quarter is a little bit above that. So I'd say we would like to reset expectations there a little bit and it's probably more in the range of $6 million to $8 million a year on existing programs. We continue to work with that customer on new initiatives and we believe that there's probably some long term upside in that relationship. So we're happy there. We also alluded to other OEM opportunities in our pipeline and I would say we've been making some notable progress as it relates to engagement with some of these other heavy equipment OEMs and we're optimistic that in the medium to long term, the population there will be more than just the two that we ship to currently.

And then I did want to ask, you mentioned about an initiative to move manufacturing outside the US. Any details you could provide as far as how long that may take from the timing front or costs associated with that.

Yes. Well, our objective is by this time next year that 100% percent of our manufacturing activity will be outsourced. We've engaged with two primary tier 1 EMF companies that give us a modicum of geographic diversity and global scale. One being located in Asia, another being located in Latin America with the opportunity to provide flexible manufacturing services in the US when and if we need them for specific customer requirements. Again that will take the better part of a year to transition and during a period of time, we’ll have some overlap as it relates to manufacturing overhead, which will put some pressure on margins, but as Kurt pointed out, despite that, we expect to see some product margin accretion during that transition period.

And then last question for me and then I’ll pass the torch. Any updates you can provide on the company's work with TransUnion. Clearly, doing some more work with – or on the services and analytics front, auto insurance companies and insurers, is this a sizable opportunity for the company? And your thoughts on also doing some work potentially like the usage based insurance market as well.

Well, I think that was all about insurance. The relationship with Trans Union is very, very good. We're getting very, very close to launching our initial engagement with TransUnion and we believe that that program will be positive for both parties, but we see a longer term opportunity to leverage TransUnion and its relationships with insurance carriers in US specifically on additional data monetization activities. And really a key area of focus there is on the claims side and we think our CrashBoxx land and expand strategy plays neatly into that relationship and monetization opportunities here in the US. And we're working with other companies outside the US on potential data monetization opportunities, again mostly centered around crash and claims. But we will provide details as those relationships develop down the line.

Your next question comes from the line of Mike Latimore with Capital Markets.

Yeah. On the software and subscription business, sounds like good trajectory there. Should we assume that that kind of grows sequentially throughout the year or is there some seasonality periods in there?

There is a little bit of seasonality with LoJack Italy, typically the second, our fiscal second quarter, which captures the month of August, tends to be a little bit weaker than other periods during the year. So we would not expect to see necessarily sequential growth in LoJack Italy going into Q2 and in fact could be a bit a -- little bit lower in Q2 than Q1, however the outlook for the full year is very positive there. And as it relates to our freight transport customer and the rollout of additional subscriptions, we expect that to progress at a fairly monotonic rate through the year.

Okay. Excellent. And then what kind of gross margin are you getting on your software and subscription business now.

Approximately 50% on a blended basis and obviously there are puts and takes there. LoJack Italy is a little above that, fleet is solidly above that, vehicle finances is well below that. So taken on a blended basis, right around 50%.

And then just last one, on the – you mentioned LTE a few times. I guess what percent of the mix or hardware mix is LTE nowadays. Sounds like there is some good demand there.

Great question. In Q1, again this is a percentage of MRM telematics revenue, was around 25% of revenue. LTE products are a little bit higher ASP than the average. So, unit volumes were actually below 25%. We expect that to tick up pretty markedly as we work our way through the year.

[Operator Instructions] Your next question comes from the line of Anthony Stoss with Craig-Hallum.

Kurt, you rattled off quite a few adjustments or addbacks in the quarter. I'm curious in your 11 million to 15 million adjusted EBITDA guide, can you lift off or let us know what you're assuming on the adjusted – adjustment or addback side to get to that 11 million to 15 million?

Sure. Well Anthony, most of those adjustments are fairly consistent with what we shared in the past. There's nothing that I would suggest to you that is anything unusual than what we've done over the last couple of quarters. The adjustments that you see in our press release come from the customary stuff like investment income, interest expense, amortization, stock-based compensation and then there's some litigation items. This quarter, in particular, we had the adjustment for the gain on the legal settlement. And as I mentioned in the earlier comment, one of the previous question for Q2 guidance, we expect the adjustment to be similar, but installment payment is about $5 million. And then the restructuring charge we had in this quarter and we don't expect any material, similar type charges in the future.

At this time, there are no further questions. This concludes the question-and-answer session. I will turn the call back over to Michael, CEO.

Thank you so much. We look forward to speaking with you at the end of our second quarter.