CAMP4 Therapeutics Corporation
Q2 2019 Earnings Call Transcript

Published: 27 Sep 2018

[Operator:]

Welcome to the CalAmp Second 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 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.

[Nicole Noutsios:]

Thank you, operator. Good afternoon and welcome to CalAmp’s second 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. These risk factors are discussed in the periodic SEC filings and the earnings release issued today, which are available on our IR website. We undertake no obligation to revise or update publicly any forward-looking statement 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.

[Michael Burdiek:]

Thank you for joining our call today. We are pleased with our business and financial performance for the second quarter as we experienced accelerating growth in our Software & Subscription Services business, while delivering record consolidated revenue, gross margin expansion and earnings at the upper end of our guidance range. Consolidated revenue for the second quarter once again reached a record of $96 million with gross margin at 41.5%. Revenue growth was driven by our Software & Subscription Services business along with stronger than expected demand from our heavy equipment OEM customers. Strong top-line performance, coupled with the initiatives announced last quarter to realign our global operations and sales organization contributed to earnings leverage with adjusted basis net income of $11 million or $0.31 per share. Additionally, we completed a $230 million convertible debt issuance this quarter, further fortifying our strong balance sheet and enhancing our strategic flexibility as we move into the second half of fiscal 2019 and beyond. Within our Telematics Systems business, we recorded revenue of $77.1 million, driven by exceptional growth in network and OEM product sales. Our revenue for network and OEM products was up 37% year-over-year due to another solid quarter with both our heavy equipment OEM customers. During the second quarter, revenue with Caterpillar increased 43% year-over-year to $15.1 million, which exceeded our expectations. As we discussed in the previous quarter, we expect product demand from Cat to moderate in the second half of fiscal 2019, but we remain excited about the longer term prospects with them. Additionally, revenue with our other global heavy equipment OEM increased 18% year-over-year to $2.2 million in the quarter. Our ability to execute on a land and expand strategy with large global enterprise customers is evident as we continue to capture additional opportunities with strategic logos. During the second quarter, momentum increased within our Software & Subscription Services business with revenues of $18.9 million, up 21% year-over-year. The revenue growth was again driven by continued strength in our LoJack Italia operations, coupled with subscriber additions by our large global freight transport and parcel delivery customer. Revenue from our Software & Subscription Services business was 20% of consolidated revenue for the quarter and we expect our key reference accounts to contribute to incremental growth in recurring revenue through fiscal 2019. Our pipeline is robust with opportunities to expand our SaaS offerings to existing customers as well as to deliver novel over-the-top services to our telematics device installed base. A great case study of market expansion for SaaS applications is becoming evident through our LoJack telematics driven brand transformation. And we are rapidly onboarding a number of large U.S. dealership groups nationwide with our second generation LotSmart and SureDrive applications. A recent example is our success with Salinas Valley Ford, the first ever dealer group on-boarded outside of LoJack’s traditional SVR coverage area. In the second quarter, we also saw the largest increase in LotSmart and SureDrive subscribers since launch. And we expect that we will be approaching $1 million quarterly revenue run rate for domestic LoJack branded telematics services as we exit the fiscal year. We believe that the telematics pivot occurring with LoJack will result in a more sustainable, predictable and profitable business model, while also deploying telematics services that enhance driver safety and help save lives. In the second quarter, we also made considerable progress with product innovations, helping to further expand our addressable market. For example, we recently announced a partnership with Premier Wireless Solutions to provide telematics technology to support a scooter-based mobility-as-a-service for on-demand access to environmentally friendly transportation alternatives in urban areas across the U.S. Similarly, we announced a partnership with Hello Tractor and Aeris to equip John Deere tractors with intelligent telematics devices and wireless connectivity to create an “Uber for tractors” service to support small farmers requiring access to farm equipment and help spur economic growth in Nigeria and other developing regions. On the international front, we remain steadfast in our focus on expansion in existing territories, as well as through efforts to penetrate new geographies. In the second quarter, we recorded international revenues of $25.4 million or 26% of consolidated revenues with solid contributions from European and Latin American regions. Within Europe, our wholly owned LoJack Italia licensee reported strong financial results in the second quarter with revenue growth of 30% year-over-year. LoJack Italia has cultivated impressive enterprise customer relationships, which we believe can be leveraged for ongoing growth, not only in Italy but across Europe as a whole. On the data monetization front, we’re amplifying our efforts to leverage our installed base of millions of connected devices. We’re pursuing our CrashBoxx land and expand program for CalAmp installed base devices, enabling the vast majority of customers to receive automated crash notifications and CrashBoxx portal access for online purchase of accident reconstruction reports. This is just one example of our strategic thrust to expand our addressable market through unique high-margin, over-the-top services as well as through other data monetization activities such as those we plan to launch with TransUnion in the coming months. Before I turn it over to Kurt, I would like to touch on a topic that we mentioned during our first quarter earnings call relating to our evolving supply chain strategy. As we discussed then, early this year, we commenced the supply chain diversification program to transition the manufacturing of our products to various tier 1 global contract manufacturers with facilities outside of China. Our timing around these diversification efforts is proving to be fortuitous given the events unfolding with the recent tariff announcements between the U.S. and China. Although at this time our products are mostly exempt from the recent tariff actions, we’re accelerating our plans in order to minimize the potential impact of any impending tariffs on us or our customers. In summary, we have built on our strong foundation for revenue growth and profitability as we head into the second half of fiscal 2019. We’re very pleased with our financial results as a whole and in particular with our Software & Subscription Services business. These financial achievements coupled with our proven ability to execute against an ambitious strategic roadmap set the stage for steady growth throughout the balance of this year and beyond. With that, I will now turn the call over to Kurt Binder, our Chief Financial Officer for a financial overview and a closer look at our Q2 financial results and Q3 guidance.

[Kurt Binder:]

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 second quarter earnings that was issued earlier today. As Michael mentioned, we are pleased with our overall financial performance this quarter. Consolidated revenue for the second quarter of fiscal 2019 was $96 million, an increase of 7% year-over-year. Profitability was also strong in Q2 with adjusted EBITDA of $13.7 million or 14% of consolidated revenue, which represents a 12% increase over the prior quarter. Additionally, our recent debt financing transaction, which we publicly announced earlier this quarter, had a meaningful impact on our balance sheet and liquidity position, which I will discuss later in the call. Our Telematics Systems and Software & Subscription Services businesses, both delivered solid financial results for the second quarter. Within our Telematics Systems business, revenue for the second quarter was $77.1 million, up 4% year-over-year. The revenue growth is due to consistent demand for our MRM telematics products and notable revenue growth in the network and OEM products categories. Revenue from MRM telematics products in Q2 was $40.5 million, an increase of 6% year-over-year. The revenue is attributable to solid demand from a well-balanced base of new and existing customers, several of which are transitioning to our newer LTE products. Sales of LoJack SVR products were down due principally to lower SVR product sales to U.S. 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. We are still in the early days in the transformation of the LoJack brand, but there are positive indications that our investment is paying off, given the recent demand in our LoJack, LotSmart and SureDrive telematics applications. Network and OEM products revenue reached a record $20.7 million for the second quarter of fiscal 2019, representing an increase of 37% year-over-year. The increase in revenue is due to remarkable product demand and the timing of certain shipments and engineering services provided to Caterpillar. Caterpillar continues to be our largest customer, representing 16% of our consolidated revenue in the second quarter. Additionally, one other global heavy equipment OEM customer demonstrated strong revenue growth in the second quarter of fiscal 2019, generating revenue of $2.2 million, which represents a 32% sequential increase over the prior quarter. The Software & Subscription Services business experienced notable revenue growth in the second quarter of fiscal 2019. Software & Subscription Services revenue was $18.9 million, up 21% year-over-year. The financial performance for the first half of fiscal 2019 offers clear evidence that our investment in building the foundation for increased recurring revenue is paying dividends. Across all of our SaaS and recurring service platforms, we now have 821,000 unique subscribers, compared to approximately 776,000 in the prior quarter. This increase was driven principally by new subscriptions from our fleet management applications and LoJack Italia applications as well as activations of our LotSmart and SureDrive telematics solutions with large U.S. auto dealerships. LoJack Italy once again produced solid results in the second quarter, generating revenue of $4.9 million, up 30% year-over-year. LoJack Italy as well as [Audio Gap] our network of our international licenses are key drivers of our international growth strategy. Consolidated gross profit for the second quarter was $39.8 million, an increase of 8% year-over-year. Consolidated gross margin was approximately 41.5% in the second quarter, up from 41% in the same period last year. Gross margin was up slightly from the prior year, principally due to favorable product mix. As previously communicated, we are migrating certain customers from the older 3G products to newer LTE technologies. As a result, we may experience near-term fluctuations in our gross margins from new product releases. However, over the long term, we expect that our expanding LTE product portfolio along with higher percentage of SaaS revenue will help to drive gross margin expansion. In OpEx, our GAAP basis R&D, sales and marketing and G&A expenses in the second quarter as percentages of revenue were 8%, 13% and 13% respectively. Our R&D expenses increased year-over-year due to increased engineering headcount to support strategic customer engagement and our overall telematics technology roadmap. For fiscal 2019 as a whole, GAAP basis R&D, sales and marketing and G&A expenses as percentages of revenue are expected to be approximately 8%, 13% and 13% respectively. Turning to our non-GAAP basis OpEx for the full year. R&D, sales and marketing and G&A expense as percentages of revenue are expected to be 7%, 13% and 10% respectively. The GAAP basis net loss in the second quarter was $854,000 or a loss of $0.02 per share compared to net income of $12.2 million or $0.34 per diluted share in the same prior year period. The GAAP basis net loss for the second quarter of this year is attributable to a $2 million loss on early extinguishment of debt realized in July when we completed the debt financing transaction. The net income during the second quarter of fiscal 2018 is due to the $15 million gain on the favorable settlement with a formal LoJack supplier that was recognized in that period. Non-GAAP net income for the second quarter was $11 million or $0.31 per diluted share compared to $9.6 million or $0.27 per diluted share in the same prior year period. The increase in non-GAAP net income is due to an increase in gross profit attributable to revenue growth and favorable product mix. Adjusted EBITDA was $13.7 million in the second quarter with an adjusted EBITDA margin of 14% compared to adjusted EBITDA of $12.3 million and an adjusted EBITDA margin of 14% in the same prior year period. The increase in adjusted EBITDA is personally a result of increased gross margin in Q2, as I mentioned earlier. I will now provide some additional details on our balance sheet and strong liquidity position as of our quarter-end. At the end of the second quarter, we had total cash and marketable securities of $305 million and total outstanding debt of $269 million, which represents the aggregate carrying value of our convertible, unsecured notes due in May 2020 and August 2025. During the quarter, we issued $230 million of convertible senior unsecured notes. We used approximately $21 million to purchase capped call instruments in order to reduce potential future dilution from the conversion of our debt, and another $54 million of the proceeds to repurchase outstanding convertible notes due in May 2020. Additionally, we used approximately $15 million to repurchase outstanding common stock. In the first half of the year, we have used $28.6 million to purchase approximately 1.3 million shares of common stock at an average share price of $22.76 as part of our share repurchase program initially authorized by our Board of Directors in early May. At the end of the second quarter, we had approximately $10.4 million remaining under the existing share repurchase authorization. Our consolidated net accounts receivable balance was $71 million at the end of the second quarter, representing an average collection period of 59 days, while total inventory at the end of the quarter was $31.2 million, representing annual inventory turns of approximately 7.1 times. Our cash conversion cycle time was 32 days at the end of the latest quarter, compared to 40 days in the prior quarter. Additionally, our deferred revenue balance was $46.5 million at quarter end compared to $34.5 million at the end of fiscal 2018, which is attributable to continued growth in our contract backlog as well as the adoption of the new revenue recognition standard, commonly referred to as ASC 606. In Q2, we recorded an income tax benefit of $497,000 on a net pre tax loss of $821,000, due to the loss on extinguishment of debt. For the first half of fiscal 2019, our GAAP basis effective tax rate was approximately 13%, which is lower than the statutory U.S. federal income tax rate due principally to a portion of our taxable income being earned in jurisdictions subject to lower tax rates coupled with our R&D tax credits and other benefits. Moving through fiscal 2019, we expect our full-year GAAP basis effective tax rate to approximate 14%, and we do not anticipate our cash basis taxes to fluctuate materially due to our remaining federal net operating losses and other income tax credits. In the first quarter of fiscal 2019, we discussed our plan to integrate the global sales function and further outsource manufacturing functions. Our plan was formulated in part to increase flexibility and greater geographic diversity in our supply chain. These efforts are proving to be quite timely, given the current trade tensions between the U.S. and China. Although we cannot state with complete certainty, we do not anticipate that any of the recently announced tariffs, nor our supply chain diversification efforts will have a material business or financial impact on us at this time. Now, turning to our Q3 outlook. We expect third quarter consolidated revenue in the range of $94 million to $99 million. At the bottom-line, we expect third quarter GAAP basis net income to be in the range of $0.07 to $0.13 per diluted share, which includes the expected contribution of approximately $2.5 million from the receipt of a portion of the remaining installment of the legal settlement with LoJack’s former supplier. We also expect third quarter non-GAAP net income in the range of $0.29 to $0.35 per diluted share, and adjusted EBITDA in the range of $12 million to $16 million. With that, I’ll turn the call back over to Michael to provide some final comments before we open the call up for questions.

[Michael Burdiek:]

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 growth initiatives that we believe will drive future growth margin expansion and earnings leverage. We are pleased with our momentum, especially around recurring revenue growth and the progress we have made advancing our strategic initiatives. Operator, I will now open the call up to questions.

[Operator:]

Thank you, Michael. [Operator Instructions] Your first question comes from the line of Mike Walkley from Canaccord Genuity. Mike, your line is now open.

[Mike Walkley:]

Thank you very much and congratulations on the strong results. Can you just walk us through the up sequential, better than expected for the Software & Subscription revenue, especially with LoJack Italy seasonally week during the quarter? Can you kind of walk us through what drove up the sequential growth and how we should think about maybe growth for the back half of the year? I assume, LoJack Italy should be seasonally stronger in the back half and your large customer rollout, maybe you can update us there and how that might continue to drive growth of that business? Thank you.

[Michael Burdiek:]

Sure. Well, thank you, Mike. You are correct, LoJack Italy was down a bit on a seasonal basis in the most recent quarter, but probably a little bit better than we had expected. So, that was one factor that drove our results little bit better than we would have expected when we gave guidance. But also, our freight transport and parcel delivery customer has been driving subscriber additions at a pretty aggressive pace, and a little bit ahead of our expectations. And that’s flowing through in the form of recurring revenue. And as we look through the balance of the year, we would expect some pick-up in LoJack Italy, as you pointed out, and also continued recurring revenue growth, mostly driven by our global freight transport customer but also from other sources including the one we noted in the call around activity on subscription side with LoJack, LotSmart and SureDrive subscriptions.

[Mike Walkley:]

Great. Thank you. You had strong subscriber numbers during the quarter. Just maybe as you walk through the guidance, kind of the puts and takes. Sounds like Software & Subscription should grow sequentially. Caterpillar came in really strong, you’ve been hinting on a softer back half of the year. So, does that mean, maybe MRM, which has historically been stronger in the second half of the year that growth maybe offset what’s happening at Caterpillar or maybe just short of putting words in your mouth, maybe you can help how we should think about the puts and takes sequentially on the different business lines.

[Michael Burdiek:]

Well, I love when questions are asked and answered at the same time. We have been suggesting, the Caterpillar in the second half of the year will not be as strong as it was in the first half of the year. And as Kurt pointed out and I hinted out a little bit in the prepared remarks, Cat was a lot stronger than we had expected in Q2. So, we expect Cat to moderate a bit in the second half of the year. So, that provides a little bit of a headwind. And we would expect MRM to see growth through the balance of the year as well as the growth in recurring revenue, which we just talked about.

[Mike Walkley:]

Great, thanks. Last question for me, and I’ll pass on the line. Just update us maybe on the cadence of LTE products, particularly MRM. What does that do for ASPs and margins as that becomes greater in the mix? And when do you see it may be getting up to the half of your mix in terms of the revenue contribution? Thank you.

[Michael Burdiek:]

Great question. So, in terms of LTE shipments and LTE revenue contribution, Q2 was by far the strongest quarter we’ve ever seen. And in fact, the unit LTE volumes in Q2 were about one-third of total LTE shipments from time zero up to today. So, we’re definitely seeing a pickup in terms of LTE shipments as part of the overall telematics device shipment activities. ASPs, we would expect to be a little bit higher than the average within our MRM portfolio. But, LTE product pricing is not materially higher in terms of being a contributor to top-line growth. And in terms of margin contribution, I would say, they’re quickly normalizing to what is generally represented in our overall MRM telematics device portfolio.

[Mike Walkley:]

Great. Thanks and congrats on the strong quarter.

[Michael Burdiek:]

Thank you.

[Operator:]

Thank you, Mike. Your next question comes from the line of Jonathan Ho from William Blair. Jonathan, your line is now open.

[Jonathan Ho:]

Hi. Congratulations on the strong results. Just wanted to work through maybe a little bit more detail around the sourcing transition. Can you talk about how we should think about the gross margin trends as we kind of work through that process, and maybe what inning we’re in, in terms of that transition?

[Michael Burdiek:]

Very, very good question. We talked last quarter about some manufacturing overhead expense that would be duplicative, as we work through the supply chain transition. That was a factor, certainly in Q2. And we did see pretty notable gross margin expansion in Q2. So, we don’t expect it to be a tremendous burden for us as we work our way through the completion of this transition to the tier 1 contract manufacturers with substantial geographic diversity. As it relates to what inning we’re in, in that transition, I would say, third or fourth inning. And, it’s roughly a one-year program. We are going to start accelerating certain aspects of that. So, I would expect that somewhere between 6 and 8 months from now, that process will be complete.

[Jonathan Ho:]

Got it. And then, as you start to look at the over-the-top opportunity, what does the successful outcome look like, near, medium term? Are there any guideposts that you can point us to, either in terms of maybe number of subscribers coming from these opportunities or partnerships? Anything you can maybe point us to in terms of how to measure that success and what that success would look like for you would be helpful.

[Michael Burdiek:]

Ultimately, it’s in the form of profitability and gross margin accretion. And at this point in time, it’s not material in that regard. But, we will start to develop some metrics that I think would be useful for investors to track over time as these activities become more pronounced in terms of revenue contribution.

[Jonathan Ho:]

Thank you.

[Michael Burdiek:]

You’re welcome.

[Operator:]

Thank you, Jonathan. Your next question comes from the line of Scott Searle from Roth Capital. Scott, your line is now open.

[Scott Searle:]

Hey, good afternoon. Thanks for taking my question. Nice quarter. Hey, Mike, in terms of the upside in the current quarter, it seems like a lot of that came from Caterpillar to push you towards a higher end of the range. I’m wondering if there was a particular area where things were a little bit weaker to offset some of that because I imagine going into the quarter, you weren’t thinking about doing $15 million with Caterpillar. So, wondering if there was one area that was particularly weak. And then, in terms of the gross margin mix, the favorable mix. Is most of that related to MRM versus LoJack hardware? And maybe give us some idea of where you think LoJack hardware is going or where that would start to bottom out? And then, I had a couple of follow-ups.

[Michael Burdiek:]

Okay. Yes, Cat was stronger than expected. You used the term weakness. I don’t think any area was particularly weak. MRM telematics device shipments as it relates to revenue was down a little bit from Q2. But we had a couple of customers -- I’m sorry, from Q1. We had a couple of customers in Q1 that were really trying to build up LTE inventory that sort of dropped off the map in Q2 and were somewhat dormant. And those two customers Q1 to Q2 represented downshift about $6 million sequentially in revenue. And by the way, both of those customers are key customers of ours, typically in the top 10 list. And we’re the sole source supplier to both. So, we would expect those to rebound through the balance of the year. So, if we wanted to attribute the sequential decline in MRM to anything, it would be those two customers almost exclusively. In terms of gross margin impact in Q2, we saw marginal improvement in the telematics device area. We also saw improvements mostly due to the shift towards activations with our global freight transport customer sort of driving up Software & Subscription gross margins. And to address the LoJack question, it’s interesting in that about a year ago, we talked about what would be a key indicator of inflection as it relates to the LoJack business and channel activities. And I talked then about flat being the inflection point. And I think we’re basically there. For every dollar we’ve seen a decline in pure legacy LoJack SVR hardware shipments we’ve been able to backfill those with increases in subscription revenue, whether it’s from LoJack Italy or from our supply chain integrity activities, and also telematics device sales to LoJack licensees. So, as it relates to LoJack branded solutions and sales into LoJack channels, I think we sort of hit bottom, if you want to use that reference. And I think as it relates to our opportunities to increase subscription revenue in those channels, obviously the outlook is brightening somewhat, as we talked about in our prepared remarks.

[Scott Searle:]

And maybe just to clarify, I thought you said some of the dealer channel relationships resulted in 1 million of subscription revenue from some of the newer services. Just to clarify that, and if you could give us a target, looking out maybe 4 to 6 quarters what you think that would be? And then, also on the market front from a high level, there’s a lot going on within the industry. I’m just kind of curious as to what you’re seeing impacting thoughts as it relates to FirstNet or where [CBRS] [ph] fits into the portfolio. Thanks and nice quarter.

[Michael Burdiek:]

Thank you. So, the $1 million reference was what we think we will be approaching on a quarterly revenue run rate, as it relates to LotSmart and SureDrive subscription revenue as we exit this fiscal year. So, we’re not there yet. But the pace is definitely picking up. So, obviously, you keep an eye on that as it relates to progress being made. Around FirstNet and opportunities there, certainly, we think there will be. We believe we’re well-positioned, both in terms of having a portfolio of telematics devices that could be repurposed for FirstNet related communications applications, and of course, on the LoJack side, we have a relationship with law enforcement. So, I think there maybe some interesting opportunities for us to develop some converged solutions whereby router products that we may design and deploy for public safety communication applications could become potentially gateways in some ways for assistance as it relates to stolen vehicle recovery and instant crash response. And as it relates to the CBSR [ph] question, probably not prepared to go there. So, I’m not sure I’m the most technically confident to address this.

[Operator:]

Your next question comes from the line of David Gearhart from First Analysis. David, your line is now open.

[David Gearhart:]

I just had a quick one. Last quarter, you talked about some of the gross margin headwinds from working on some cost optimization programs for LTE hardware, and also migrating the telematics cloud to a public cloud. Just wondering, if you can give us an update on the status of that and your expectations of when it will be complete. I think, you said end of your -- last [ph] time, I just wanted to double check to see if we’re still on path for that.

[Michael Burdiek:]

Yes. I would say, more or less we’re on track. And, I think I gave a relatively good outline of the roadmap for the supply chain transition. So, obviously, it’s a very active period of time for us from an operational standpoint, seeing through the transition of all of our on-premise platforms to the cloud, and obviously moving all of our contract manufacturing activities to these tier 1 suppliers to give ourselves the geographic diversification that we’re looking for.

[David Gearhart:]

Okay. That’s it for me. Thank you so much.

[Michael Burdiek:]

Thank you.

[Operator:]

Thank you, David. Your next question comes from the line of Josh Nichols from B. Riley FBR. Josh, your line is now open.

[Josh Nichols:]

Yes. Hi. Thanks for taking the question. I was going to say, I mean, good to see the second heavy equipment manufacturer ramping pretty quickly as well. And, could you provide any details for us, what the size of this opportunity could be over the next 12 to 18 months as you kind of frame that given what we’ve seen with Cat happen over the last year or so?

[Michael Burdiek:]

Well, thank you, Josh. The second heavy equipment OEM’s been an evolving story. When we initially tried to size that opportunity, we talked about that customer being roughly a $5 million a year customer. And then after a couple of quarters of activity and good progress, we sort of upped that opportunity to be sized between $5 million and $6 million a year. And then, on the most recent quarter, I think we talked about it being more along the lines of $6 million to $8 million a year. Here we are again having kind of exceeded that as it relates to at least this last quarter’s performance. So, I believe the outlook as it relates to current programs is probably in the $2 million to $2.5 million a quarter run-rate sort of level. But, we continue to talk to them and other customers about additional programs and opportunities. And that’s why we alluded to the terms, land and expand with some of these strategic accounts. Because the more we become embedded and successful on existing programs, the more opportunities seems to develop around future pipeline activities. So, we’re really optimistic about that relationship. We certainly proven ourselves with them. And now, it’s turned into material contribution to our financial results.

[Josh Nichols:]

And then, the Company is attacking the opportunities that you guys have [Audio Gap] to grow SaaS revenue from a lot of different fronts here. And good to see the growth coming in at 21% for the quarter. Is there like a general longer term target that you have that you think the SaaS revenue growth could achieve over like next like 12 to 18 months, say?

[Michael Burdiek:]

Well, our near-term objective, which we’ve talked about publicly, is getting to and beyond 25% of consolidated revenue. So, near to medium term, that’s our target. We’ve also talked about a $100 million a year of recurring revenue as part of our consolidated mix. We’re obviously making progress against that objective. And over time, I’m sure we’ll reset those objectives. But, I would say, we’re quite pleased with the progress we’ve made, certainly over the last couple of quarters.

[Josh Nichols:]

That’s all for me. I’ll hop back in the queue. Thank you.

[Michael Burdiek:]

Thank you.

[Operator:]

Thank you, Josh. Your next question comes from the line of Mike Latimore from Northland. Mike, your line is now open.

[Unidentified Analyst:]

Hi. Thanks for taking the question. This is Pavan [ph] on for Mike Latimore. Can you walk us through the…

[Michael Burdiek:]

Hello.

[Unidentified Analyst:]

Hello. Do you hear me?

[Michael Burdiek:]

I can. Yes, we can.

[Unidentified Analyst:]

Yes. Thanks for taking my question. This is Pavan for Mike Latimore. Can you walk us through conversion opportunity of existing hardware customers into platform service opportunities? And also any -- could you give us any sense of the mix of clients who use both the products and services?

[Michael Burdiek:]

Well, good questions. So, we are making progress transitioning some of our pure hardware customers to something that looks more like a mix of hardware and subscription services. And, a key focus area for us on some of these over-the-top activities, namely CrashBoxx and some other things that we’re developing as part of our strategic roadmap. What’s interesting about the 2 or 3 long-term telematics device customers who are contemplating moving over to a more bundled arrangement around hardware and our telematics cloud service, is a key catalyst for them to make that consideration really relates to some of these micro services that either A, we offer currently or on our roadmap. And in one case, crash and CrashBoxx and accident reconstruction was really a critical catalyst for them to consider abandoning some of their backend software work, and actually some of the work they’ve done on developing some of their own crash algorithms and considering moving into a bundled arrangement where they would bundle hardware, connectivity and our telematics cloud service including crash micro-services on a purely subscription basis. And then, we have one additional customer, again a longstanding hardware client that’s been growing at a pretty rapid pace. And that rapid growth has really challenged them from a cash flow standpoint, given that they got to outlay all of this cash to buy hardware from us from a CapEx perspective, while they also have to support all their other software development activities and sales activities from a go-to-market standpoint. And they’ve really gotten to the point where they think an OpEx model makes a whole lot more sense for them than this CapEx model, which causes them to be cash flow constrained oftentimes as they go through the various growth spurs. And again, there, one of the key catalysts for them to consider doing this with CalAmp was the fact that we’ve got a micro-service on our roadmap around integrating certain of our supply chain integrity capabilities into our LMU and TTU product portfolio and support that through a CTC-enabled micro-service. And so, there we think we’re going to be able to launch some interesting new capabilities with that client, again, giving them some cash flow flexibility by not having to outlay so much cash on the front end of deployments, in purchasing hardware from us.

[Unidentified Analyst:]

And I have another question, which is relating to the synergies by streamlining global operations and sales organization, which you spoke in last quarter. Can you quantify the impact and the trajectory for that synergies? And also, could you give us a sense of the impact it could have on operating margins, once the synergies are operating at a full rate?

[Michael Burdiek:]

Oh, boy. What we talked about the timeline around our transition to cloud, moving away from on-premise infrastructure, we’ve talked about moving to, tier 1 contract manufacturers with global, regional manufacturing facilities outside of China. So, we’re going to be bearing the burden of those overhead expenses for some period of time. And I would expect that as we make progress on the cloud transition and on the manufacturing shift that we will start to see marginal improvements in gross margin and naturally operating margin. But, we think even with that burden through our various activities on rationalizing certain other functions in the Company, and also being focused on margin accretion in terms of cost inputs on our devices and other costs inputs on our software and subscription revenue delivery systems that we can see progress on gross margins, even with those other burdens in our cost of sales.

[Operator:]

Thank you, Mike. At this time, there are no further questions. This concludes the question-and-answer session. Now, I’ll hand the call back to Michael. Thank you.

[Michael Burdiek:]

Well, thank you for joining us today. And we’ll look forward to speaking with you at the end of our third quarter.

[Operator:]

Thank you. And that concludes today’s conference. Thank you all for participating. You may now disconnect.