Welcome to CalAmp's Third Quarter 2020 Financial Results Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Joel Achramowicz of Shelton Group, CalAmp's Investor Relations firm. Joel, you may begin.

Thank you. Good afternoon, and welcome to CalAmp's fiscal third quarter 2020 financial results conference call. I'm Joel Achramowicz, Managing Director of Shelton Group, CalAmp's Investor Relations firm. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek 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 CalAmp's best current judgment, they're subject to risks and uncertainties that could cause actual results to differ materially from those implied by these forward-looking projections. These risk and factors are discussed in our periodic SEC filings and in the earnings release issued today, which are available on our Web site. We undertake no obligation to revise or update any forward-looking statements to reflect future events or circumstances. Now Michael will begin today's call with a review of the Company's financial and operational highlights. Then Kurt will provide additional details about the financial results and outlook, followed by a question-and-answer session. With that, it's my great pleasure to turn the call over to CalAmp's President and CEO, Michael Burdiek. Michael, please go ahead.

Thank you, Joel. Our first quarter consolidated revenue of $96.6 million exceeded the midpoint of our guidance for the third consecutive quarter and reached a quarterly record. Software and subscription services revenue also reached a record at $33.4 million, which was up 68% year-over-year and represented 35% of total revenue for the quarter and moving us closer to our long term target of 40%. Our Telematic Systems business was slightly up sequentially, highlighted by the expected rebound in our network and OEM products business with increasing orders from our top enterprise customers, as well as significant sequential growth from our largest customer Caterpillar in support of their 3G to LTE product upgrade cycle. Our solid results this quarter were driven once again by our software and subscription services business as a result of strong performance from our recent acquisitions and in particular Synovia Solutions combined with strong growth from LoJack Italy and our Supply Chain Integrity services. In fact, LoJack Italy revenue was up more than 20% over the prior year period and our emerging SCI business was up more than 40% year-over-year, albeit from a relatively low base. We're seeing continued momentum from Synovia Solutions' Here Comes The Bus application as it directly appeals to major school districts across the United States, including recent installations in Minnesota, Florida, North Carolina, New York, Virginia and Georgia among others, to enhance student safety and bus route optimization. Here Comes The Bus now has more than 1.9 million users, and we're working on many additional opportunities with more school districts and municipalities across the nation. Our Tracker UK subsidiary is also adding new recurring subscription opportunities with its SmartDealer and SmartDrive applications, including a recent partnership with Auto Capital in London, to manage its aftermarket fleet and provide customers with in-van connectivity…

Thank you, Michael. My commentary will include reference to non-GAAP financial measures of adjusted basis net income, adjusted EBITDA and adjusted EBITDA margin. A full reconciliation of these non-GAAP measures and the closest corresponding GAAP basis measures is included in the press release announcing our third quarter earnings that was issued earlier today. As Michael mentioned, our third quarter consolidated revenue of $96.6 million exceeded the midpoint of our guidance for the third consecutive quarter, as we continued to gain traction on our transformation to a global SaaS solutions provider. This was up 9% from the prior year period and up 4% sequentially due to another quarter of record revenue in software and subscription services and solid growth in our network and OEM products business. Software and subscription services revenue increased 68% year-over-year to $33.4 million and a record 35% of revenue, driven by increasing contributions from our recent acquisitions in particular Synovia Solutions. We also saw strong growth from LoJack Italy as well as our Supply Chain Integrity services revenue. LoJack subscription services revenue, which includes LoJack Italy, TRACKER UK and LoJack Mexico was $11.5 million in the quarter and up 17% sequentially. Telematics Systems revenue was $63.2 million in the third quarter, up 2% sequentially and down 8% as expected from the prior year period. Network and OEM products revenue increased to $17.4 million in the third quarter from $12.6 million in the prior quarter, driven by a return to growth at our largest customer, Caterpillar. Revenue from Cat increased over 44% sequentially to $13.6 million, compared to $9.4 million in the prior quarter and representing approximately 14% of consolidated revenue. As Michael mentioned, Cat begun ramping orders of our next generation LTE-based product family during the quarter, and we expect these orders to continue in the coming…

Thank you, Kurt. I'd like to reiterate once again that we made great progress this past quarter expanding our software and subscription services revenue, as we continue to transform CalAmp into a leading SaaS service provider. We expect to finish the year with additional growth, and we're excited about our prospects in the New Year. With that, we'd like to open up the call to questions. Operator?

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

Question for me, just on the Telematics Systems business, especially on the MRM piece, Michael, there has been some soft trends and new truck builds and trailer builds. Can you talk about kind of what you're seeing from your end customers in that business? I know you've talked about from 3G to LTE. But can you talked about kind of trends in that business and overall, just how we should think about the run rate for telematics systems going forward, given, some bundling going on and you've bought a couple your end customers? Thank you.

So as we explained in the prepared remarks, our Telmatics Systems business was up sequentially. And I think it's important to point out that we were addressing a number of significant headwinds as we worked our way into Q3, specifically around our supply chain transitions and the tariffs that went into effect September 1st, which were applied to a significant portion of our products imported to customers in the United States from our manufacturing base in China. But despite those headwinds, we did see incremental growth in revenue. Our bookings activity during Q3 was probably a little bit better than expected, given the tariff headwinds that we faced. And we saw a nice recovery with Caterpillar in the quarter related to their various LTE upgrade initiatives and new product sales. So all-in-all, I would say it was a good quarter and as it relates to some of the macro factors that you described. I'm not sure we saw any significant deterioration in the end markets as it relates to some of those factors. And I would say overall, we're very encouraged going into Q4 given our impression revenue outlook.

And follow up for me. Some of the things you talked about the headwinds and mix. How should we think about these gross margins within that business trend? Where do they kind of dip to in Q3 and maybe staying Q4? And how should they recover overtime?

I'll talk about it qualitatively and Kurt can get into more details. But as Kurt explained in the prepared remarks, we had some significant expenses, actually unexpected expenses as it relates to some of the activities related to our U.S. manufacturing facility wind down. That facility has been in business and producing product for CalAmp for almost two generations. And as we wind that down obviously we're cleaning up a lot of pass-ins and addressing things on a very proactive way as we move some of that activity to our Tier 1 manufacturing partners in other parts of the world. So we expect that Q3 was probably the bottom in terms of gross margin, and we would expect to see things improve incrementally over the course of the next few quarters and get us back to where more or less where we were a couple of quarters ago; and especially, considered the fact that as the deferred revenue haircut headwind sort of dissipates as it relates to some of the purchase accounting around the acquisitions that should also provide somewhat of an impetus for continued margin expansion as we work our way into the next fiscal year. As it relates to the mix factor, we launched two new LTE products in Q3. And they ramped much more strongly than we had anticipated with a couple of key customers. Each of those products were launched it I would say, not optimized cost profile, and launched with new partners and other parts of the world. And so, we really haven't had an opportunity yet to really optimize those products. And that will be an effort that will be underway over the course of the next couple of quarters, which should also help even if the current mix of demand stays roughly the same going into Q4 in the first part of next fiscal year.

Last question to me and I'll pass it on. You've talked about some good momentum with Synovia and the overall SaaS business. How is pipeline in that business? Any seasonality we should think about into year-end and just overall outlook for growth and that business going forward? Thank you.

Sure. I would expect that there will be a little bit of seasonality as it relates to some of those LoJack international operations. We're coming off in an exceptional quarter and LoJack Italy. We expect Q4 to be a little bit softer. LoJack Mexico was also quite strong in Q3. We've got some new programs ramping, but we wouldn't expect to see the same sort of growth that we saw in Q4 carrying into -- I am sorry, in Q3 carrying into Q4, but overall the pipeline of opportunities is terrific on really all fronts, across our software and subscription service portfolio.

I would add that Mike also is in the network and OEM products category, we saw a nice rebound with Cat in the third quarter. And as we look into the fourth quarter and they move more rapidly through the 3G to 4G transition, the bookings seem very strong there. And we're really pleased with the way that is progressing as well.

Your next question comes from Jonathan Ho of William Blair. Your line is open.

I just wanted to start out with your comments around China, and just given that the there's a recent trade deal out there you. Is there any way you could maybe quantify or help us understand what potential impact there could be on your business, if we do see a resolution here?

As I mentioned, we were impacted by tariffs in Q3. And about somewhere between 40% and 50% of our MRM products shipped to customers in the United States were affected by tariffs. As we talked about on earlier conference calls, we've had an initiative underway for some period of time to try to transition away from that supplier concentration in China to other partners around the world and that transition program is well underway and on track. So we, even if there isn't a relaxation of the current tariff rates on our products that are imported from China and in the United States, we expect that the percentage of affected products is going to drop off pretty considerably in Q4 and be almost de minimis in Q1 of next fiscal year. The so called phase one trade agreement, which we have few details on, supposedly would reduce the tariffs that went into effect on September 1 to rate lower than the 15%, but we don't have any specific details on that. If those tariffs are reduced, obviously, it's a plus for us. But our trajectory in terms of transitioning away from suppliers in China to other parts of the world is going to continue under any circumstance.

And Jonathan just to add there, when we started the September month, we did institute a path through a program with our customers. And I'm pleased to say that that was well received, I think, with all of the guidance and feedback we had given to our customers over the past year on this program, they were anticipating it. And so we had actually good success and accomplishment in that pass-through.

And then just as a quick follow-up, you've mentioned an opportunity with AWS. Can you maybe quantify that or give us a little bit of a sense of what you'll be doing in conjunction with AWS and maybe what types of opportunities that could open up? Thank you.

What we had talked anecdotally and somewhat anonymously, about an opportunity to work with a public cloud service provider on providing a tracking solution for high value servers and being moved from one data center to another. I think we've explained who that customer is. We have to be pretty careful about how public we are as it relates to the details around that engagement. But needless to say, it's an exciting opportunity. We're talking about the world leader not only in cloud services, but increasingly in transportation and logistics. And then as many people know, that's a key area focus for us and an investment area, and hopefully a great opportunity for growth well into the future.

Your next question comes from Anthony Stoss of Craig-Hallum. Your line is open.

I wanted to drill down a little bit more on the gross margin. And Kurt, maybe you can of the 200 basis points gross margin being lower, how much of that was from product mix versus inventory? And also, if you can just give us a glimpse of what you expect the gross margin might be in February quarter? And then I had two follow-ups.

Well, let me start off and say, first off, we were extremely pleased with the gross margin around our software and subscription business. And as you know, as that business becomes a larger portion of our revenue, it will start to trump our margin profile within the Telematic Services division. But just to touch on your comment. So we noted in the earlier remarks that there was really three areas that impacted margin. First off, we did have a product mix change over where a number of our customers started to move into higher volume but lower margin products in the quarter, and we incurred some start up costs associated with those new products. So I would characterize that as probably one-third of the overall margin impact. The next third was around manufacturing variances and the last year was around, E&O cost. As Michael pointed out, we were started in the Oxnard facility back in 2004. So we've been there for quite a long time, and we set a goal for ourselves of executing that facility by the end of this calendar year. We will be close to achieving that goal. But as you can imagine, as we've moved out a ton of that inventory and we've either sold it through or we're moving to other assembly facilities, there's added costs that have risen and those were somewhat of a surprise in terms of the magnitude. We expect that to dissipate over the next say, 60 to 90 days, once that facility completely is shut down, but we want to be mindful of that going into Q4. So in Q4, we do expect that some of the manufacturing facility costs will continue. We do think that will mix up into Q4 and in Q1, which will result in us overall ticking up slightly from where we ended the third quarter here at 38%.

Tony, I'd add one of the things this is a very, very minor factor, but it is a it is a factor and that is Kurt mentioned earlier that we had instituted a tariff pass-through program for those products and those customers of affected by the tariffs that went into effect on September 1. So, our objective was not to turn that into a profit center to be fair and transparent with our customers and pass those through at close to zero margin. So there was a very minor effect there, but not as substantial as these other factors that Curtis described.

And then, Michael, if you wouldn't mind and not looking for guidance like gross margin, but do you think you can get back above the 40% level and either May or August quarters? I know, you said several quarters, I'm curious. And do you expect Caterpillar to be sequentially, clearly, they were one of the negative impacts on gross margins. Do you expect them to be up sequentially in February quarter?

As it relates to the gross margin guidance, we want to be pretty careful. We do expect gross margins to pick up from where we were in Q3. I don't think it's unreasonable to expect that by the midpoint of next year, we would be back to sort of where we were in recent history. And then as relates to Cat, I think the outlook is good for Q4. And I would say, more or less in line could be a little bit higher, could be a little bit lower, but it should be solid. And consistent with where we were more or less in Q3 with somewhat of an improved margin profile, given some of the cost reduction activities we have around some of these newly launched LTE products.

If I could sneak just one more, you mentioned your Hertz Mexico engagement to amount about $1 million. Is that primarily product revenue or is there some recurring revenue attached to that?

No, that's a bundled subscription arrangement.

Your next question comes from David Gearhart of First Analysis. Your line is open.

I wanted to start with a couple housekeeping questions. Can you give us the subscriber count for fiscal Q3? And then also, can you give us the acquired revenue in the quarter?

Well, the second question is going to be hard to answer, the first one is easier. Our subscriber count was right at 1.3 million in Q3. And in our prior quarter, I think we've talked about roughly 1.3 million subscribers as well, but that was around figure. We were up sequentially right around 35,000 subscribers. And I think it's worth pointing out, it was spread almost across every single subscription category and so that's a very encouraging, obviously, forward looking opportunity for us in terms of revenue growth. As it relates to acquire revenue, it was certainly up sequentially. But I think it's worth pointing out that it's going to be increasingly difficult for us to be able to discriminate the sources of revenue from recent acquisitions in the pre-existing subscription revenue streams that we had before we acquired Synovia, Tracker and LoJack Mexico.

I'd just add that as we mentioned to in the previous quarters at the range we had for the quarter was 7 million to 13 million, I believe. As I mentioned in the last quarter, we're at and slightly above the high end of that range right now, and we would expect that rate to continue into the fourth quarter, especially as the purchase accounting adjustments are starting to dissipate.

And just given that comment with fiscal Q4 and on the software subscription, you're at the high end of that 7 million to 13 million range. You have seasonality coming into play for fiscal Q4, LoJack Italy. Is it fair to consider it roughly flat from fiscal Q3? I know you're not guiding to that level of specificity, but I just wanted to double check that?

I think that's a reasonable outlet given the seasonality factors could have ground in.

And then lastly for me on the devices of service program, wondering, if you could provide us some color on the take rates and plans in the next coming quarters near term for expanding into other product lines? As we should think -- and how we should think about just the telematics systems revenue offset from that dynamic or program?

Given that we really only have one full quarter under our belt and only one full quarter domestically under our belt, we're just now rolling that program out internationally. So it's really, really premature to give you statistics on take rates much too early. As it relates to expanding that to other products, obviously, we're looking at all of our options and opportunities there. But right now, there's no imminent plan to start to apply that sort of a program to additional skews in our portfolio. As it relates to impact on our Telematics Systems revenue, I would say the biggest impact that we've seen this year is around obviously the elimination of revenue and consolidation of some of our former key customers. And obviously the soft quarter we had in Q2 with Caterpillar and hopefully that's all behind us. And I think going forward, considering the devices of service program, and other factors, I think that, the outlook is reasonably positive in terms of some level of growth, but not substantial, given some other factors and play. We do believe that the bulk of the 3G to LTE upgrade cycle was still in front of us. And as we've talked about on prior calls, there is a substantial number of telematics devices and service that are 3G in nature. In the most recent quarter, I think we talked about around 1 million units. It turns out that that estimate is a little bit low, because not factored into that into that population are all of the legacy CDMA devices that are also in service, which are nearly 400,000. So there's an addressable upgrade opportunity there of something in the neighborhood of 1.4 million CalAmp units that are still in service with customers in the United States. So at some point in time, hopefully that's going to become a pretty significant tailwind for us, but the timing of that is really uncertain.

Your next question comes from George Notter of Jefferies. Your line is open.

I guess I wanted to go back to the purchase accounting impact on deferred revenue and how to rebuild going forward. Can you just walk us through the mechanics of that? I guess, are those one year contracts that his customers come back and renew, post to post the deal then they start flowing through for you guys? I guess I'm trying to understand, when the impact is kind of done, and then how much incremental revenue you would pick up as that process plays out? And then separately, I want to ask you about your NOLs and tax credits, I understand that some of the NOLs run off in 2021. Is that correct? And then what is the normalized tax rate look like once those NOLs are consumed? Thanks.

So, first we'll start off with the purchase accounting. So, the way that the purchase accounting works is that. When we acquired the businesses, we had to take a haircut at that point in time, that was recorded on the opening balance sheet as an offset to the already recorded deferred revenue to essentially eliminate their gross margin or margin that was earned, let's say prior to our acquisition date. That that total adjustments, then gets basically amortized over a period of time, which equates to the remaining weighted average use away from the contracts that came over at the date of acquisition. So most of those might have a period of say anywhere from about 16 to 18 months, but it varies between the three acquisitions. So we haven't given any specific guidance on the exact numbers because each acquisition is different. What I can tell you is that looking at the three businesses, and in particular, the larger one of the largest revenue contribution on Synovia Solution. That purchase accounting adjustment will dissipate and be essentially gone by the first quarter of this upcoming new fiscal year, fiscal 2021. The others two, it might burn off over a little bit longer period of time, but generally we should be at a very nominal rate going into the first the second quarter of next fiscal year. Those businesses as I mentioned before, when we bought Synovia, it was somewhere in the range of $28 million $29 million annual run rate. The two other acquisitions were anywhere from $11 million to $13 million. And we indicated that the growth rate on those four would be for snow via the mid-teens. And for the other two, we thought mid to high single digits. So that should give you some visibility. We again haven't announced the exact adjustment but we expect them to dissipate to be gone over the first two quarters of 2021.

George I would add one other thing and that is obviously not only was there an impact as it relates to reported revenue obviously there's a dilution of gross margin related to the reduction of revenue and then that flows through all the way to adjusted EBITDA. And based on our assessment in our fourth quarter guidance, as relates to adjusted EBITDA, we the purchase accounting adjustments, all the perform all of the required adjustments in GAAP accounting, have more or less massed off, somewhere between $4 million and $5 million dollars and true a true adjusted EBITDA, which, which obviously we can't report. So that gives you some idea of what the bottom line impact would have been had we been able to bring the financials through, with all the various accounting adjustments that were in place on the opening balance sheet.

And then to the second part of your question, George, yes, we do have NOLs. We've also instituted a new number of tax planning strategies, which essentially ensure that our cash basis tax rate will remain relatively low out into beyond fiscal '22 and '23. Obviously, heavily contingent upon whether we are a tax planning entity and that'll dictate the speed at which those burn off. But currently, our cash basis tax rate is forecasted or in the range of somewhere between 3.5% to 5.5%. And we look like and it looks like that'll be consistent through the remainder of this fiscal year. We did have a slight uptick in Q2 and Q3, mainly because when we purchased Mexico, Mexico does have cash tax obligations and the performance around the Mexico acquisition has been a bit better than we had anticipated, at least from a tax standpoint. And so that's a favorable thing. But given our no wells and our glide path around that, as well as other tax planning strategies, we don't anticipate any major changes in our overall cash basis tax rates in the fiscal '21 and '22.

[Operator Instructions] Your next question comes from Scott Searle from ROTH Capital. Your line is open.

Thanks for taking my questions. Couple of quick cleanup here, I'm not sure if I heard Synovia number in the quarter. I was wondering, if you could provide some color on that? And then given that we're getting through a majority of the impacts on the purchase counting for Tracker, Mexico and Synovia. The normalized run rate now that we should expect from a from a growth standpoint within the services business and what the mid to low-teens kind of on a blended basis now as we're going forward?

Well, first, Scott on your first question first Synovia. We haven't actually quoted the revenue contributions by acquisition. Again, what we indicated is the combined 3 acquisitions. We're trimming at or slightly above the $13 million range for the past 2 quarters. We were extremely pleased with that. Based upon, as I mentioned before, the annual run rate of say 28%, 29%, Synovia, 10 million, 12 million and 13 million for each of the other two, you can kind of guesstimate what the relative allocation is by acquisition. So I'll let you figure that out. Your other question in terms of ongoing service, I think mean SaaS run rate.

SaaS revenue growth in general, yes.

Yes, I think our expectation is that the-mid teens seems to be reasonable based on what we're experiencing right now. And the overall contribution that these acquisitions are providing is giving us additional visibility on what that growth rate should be.

I would add, Scott. The fact that that growth rate I would say is a medium to long-term expectation given the enterprise nature of some of these SaaS platforms, Synovia being a good example. It won't necessarily come in a linear fashion. But we're pretty optimistic that we can sustain the recent growth we experienced with Synovia and some of these other SaaS route, SaaS revenue stream.

And then just to revisit the gross margin questions from earlier. It sounds like once we get through some of the manufacturing and other issues that you're experiencing new product introductions on the LTE front. By the middle of next year, we're back to normalized gross margins in the 39 percentage kind of range like is that what we should be thinking about? And also as part of those assumptions, what have you factored in from our tariff standpoint? And he said, 15% kicked in on September 1st, but is that part of those assumptions when you're talking about getting back to normalize gross margins?

We didn't say 39. I mean, last quarter, we were just over 40. So I would think that's a medium-term expectation for so called normal. Gross margins and then hopefully expansion from there, some of the deferred revenue haircut dynamics burn off. And we continue to see growth in our software subscription service business broadly, which obviously has better than 40% gross margins. The tariff reference you've made, a 15% was not the pass-through rate for the most part for the customers who bought products from us that were imported from China. Those customers who direct imported might have had to pay 15% on the purchase price. But because of the, we pay a tariff based upon the import cost, that's the effective rate that we pass through to our customers. And so obviously, the 15% applied cost is not 15% pass-through to customers, it was quite a bit less than that. So therefore, the headwind wouldn't be as significant as that 15% headline might lead you to expect. As I mentioned earlier, we expected that the tariff impact will start to dissipate even if the current rates stay into effect as we continue to transition more manufacturing activity away from our legacy suppliers in China.

[Operator Instructions] There's no further question at this time. I would now like to turn the call over back to Michael.

Well, thank you for joining our call today. Happy Holidays everyone and we look forward to speaking with you after our fourth quarter year-end.

This concludes today's conference call. Thank you for participating. You may now disconnect.