CAMP4 Therapeutics Corporation
Q4 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Welcome to the CalAmp Fourth Quarter and Full-Year Results Earnings Release 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. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Nicole Noutsios, Investor Relations for CalAmp. Nicole, you may begin your conference.

[Nicole Noutsios:]

Thank you, operator. Good afternoon, and welcome to CalAmp's fourth quarter and fiscal year 2018 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 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.

[Michael J. Burdiek:]

Thank you for joining our call today. We achieved several transformative business and operational milestones during fiscal 2018, realizing record revenues and delivering strong bottom line results. Our consolidated revenues for the fourth quarter reached a record level of $94.4 million, up 10% year-over-year. Along with our strong revenue growth, we generated $59 million of free cash flow in fiscal 2018, which is up an exceptional 228% year-over-year. On the business and operational fronts in fiscal 2018, we realigned our global sales organization and armed our team with a comprehensive suite of SaaS solutions. These changes contributed to our successes during the year with several global enterprise customer wins, including the largest SaaS contract award in the company's history. We saw impressive growth with Caterpillar and ramped shipments with one new global heavy equipment customer. There's clear evidence that our investments in our sales organization and go-to-market initiatives are driving successful strategic partnerships and channel activity. Additionally, we continue to rapidly innovate and expand our product portfolio, especially in the connected vehicle marketplace with our next generation LoJack LotSmart advanced dealer inventory management system and LoJack SureDrive sell-through consumer telematics application. Overall, we are realizing the benefits of our investments and have a strong foundation to drive increased recurring revenue and long-term profitable growth. Our Telematics Systems business had a strong quarter with revenues of $78.3 million, up 10% year-over-year. MRM Telematics products revenue was again a strong contributor with growth of 29% year-over-year, driven by broad-based demand across our diversified customer base. During our fourth quarter, we announced our strategic partnership with Trimble, a customer we have worked with for several years. We are continuing to expand our relationship to provide a broad portfolio of telematics devices, the device management systems designed to support a wide array of field service management and asset-monitoring applications. The revenues results from OEM customers was also notable, driven by another strong quarter with our largest customer, Caterpillar. In fiscal 2018, revenues with Caterpillar increased 53% year-over-year to $45.3 million, a new annual record. As we look to fiscal 2019, we expect modest revenue growth from CAT from the strong base, with the longer-term outlook very positive as we expand our partnership to develop next-generation telematics devices to address a larger percentage of the product range. Additionally, shipments with our new global heavy equipment OEM, which commenced in our second quarter, have ramped as planned and contributed approximately $3.4 million to our fiscal 2018 revenues with $1.5 million in Q4 alone. We continue to explore additional opportunities to expand this relationship and land other potential new logos in the heavy equipment market around the globe. We are also focused on fortifying our LoJack brand by offering full solutions with a combination of CalAmp core telematics services and LoJack SVR technology. In March, at the National Auto Dealers Association event, we announced the renaissance of the LoJack brand supported by CalAmp-developed telematics solutions that greatly expand our market footprint and provide dealers across the U.S. with telematics services to help drive bottom-line financial results. Our product offerings now have advanced safety and security features blending CrashBoxx instant crash alerts with other benefits like speed alerts, TripWire arrival notifications and trip history, all delivered via new connected car mobile application developed from the ground-up based on substantial consumer and car dealer research. The buzz that these new applications generated from current and prospective car dealer customers at the NADA event was palpable. And it was abundantly clear that pivoting LoJack towards telematics solutions was not only timely, but also critical. The LotSmart selling service supported by a new dealer inventory management portal, coupled with the opportunity to monetize the LotSmart investment with a consumer sell-through application is exactly what a large percentage of U.S. car dealers are looking for. In order to take advantage of an open market window to advance our LoJack strategy in the U.S., we plan to execute on a more aggressive telematics-driven brand transformation. While we will continue to promote stolen vehicle recovery products and LoJack's unique law enforcement relationships as core brand values, our efforts to build a LoJack recurring revenue franchise built around bundled telematics-enabled services in the U.S. will be our focus. In the near term, this will likely result in some ongoing secular decline in SVR-only product revenue. But in the medium and longer term, we believe that telematics pivot will result in a more sustainable, predictable and profitable business model. We've recently restructured the LoJack domestic sales organization to support this transition and are investing in digital marketing activities, including the roll out of a dealer point-of-sale platform to create consistency and efficiency in customer engagement and onboarding. Looking at the market more broadly for telematics devices, during fiscal 2019, we expect to see some market angst around the push by the two largest mobile network operators in the U.S. to transition customers away from 3G to LTE technologies. These sort of technology upgrade cycles have historically benefited us by boosting sales volume as older generation networks are decommissioned by the cellular carriers. But in the near term, there could be some degree of customer hesitation as they face next-generation technology choices. In order to be prepared to address this market window and ease the near-term upgrade pain facing many of our U.S.-based fleet and asset tracking customers, we have already released 15 new LTE-based products in fiscal 2018 and expect to continue aggressively releasing products to refresh our entire product portfolio over the course of fiscal 2019. During the fourth quarter, we continue to build on our steady momentum in our Software and Subscription Service business, reporting revenues of $16.1 million. As we broaden our technology portfolio and expand into highly attractive emerging verticals with our suite of SaaS applications, our sales pipeline continues to expand, driving increases in contract backlog and deferred revenue. At the end of the fourth quarter, our deferred revenue was $34.5 million, representing a 28% increase over the prior year. Our growth is attributable to the large SaaS contract awards announced earlier in fiscal 2018, including the contract with a global freight transport customer where we are still in the early stages of deployment and realized only $0.5 million in revenue in the fourth quarter. We have identified additional programs with this customer and continue to expect this contract alone to contribute 10% incremental growth in SaaS recurring revenue in fiscal 2019 and become a key SaaS solution reference account. Our global sales organization is highly incentivized to expand our SaaS customer base with long-term arrangements such as this one. In fact, we recently announced a partnership with CargoSense logistics supply chain management software solutions provider to deliver critical data and analytics on high-value sensitive air cargo for one of the world's largest airlines. The CargoSense platform will ingest pre, post and in-flight data collected from CalAmp's SC1000 and SC1100 telematics devices and iOn smart sensor tags that monitor location, temperature, humidity, barometric pressure, shock, light and vibration. Data from the CalAmp platform provides the airline with granular information to streamline shipment processes and meet mandatory reporting requirements. On the data monetization front, we've started pursuing unique collaboration opportunities to leverage our installed base of millions of connected devices to mine new high-margin revenue streams. For example, we just announced a partnership with TransUnion to help insurance providers recover stolen vehicles equipped with the LoJack Stolen Vehicle Recovery System in cases where SVR units are dormant as a result of the vehicle being resold by the original owner. The partnership brings together the proven capabilities of LoJack with TransUnion's strength in data analytics to empower insurance carriers with loss mitigation tools and bring peace of mind to vehicle owners. This is just one great example of potential opportunities that our extensive installed base in the connected devices affords us, expanding our total addressable market with unique high-margin over-the-top services. Our continued execution on expanding our international presence through our broad network of channel partners and LoJack licensees continues to pay dividends. Our fiscal 2018 international revenues reached a record level of $100.3 million, up 10% year-over-year, representing 27% of our consolidated revenue. We believe that our global enterprise customer focus, along with unique partnerships with LoJack International licensees, positions us well to maintain our momentum in expanding our global footprint. To that end, our wholly-owned LoJack Italian licensee reported strong financial results in the fourth quarter, with revenue growth of 31% year-over-year. LoJack Italia recently announced an agreement to provide real-time vehicle data and crash management capabilities to European fleet management and long-term lease leader ALD Automotive Italia. This makes LoJack Italia the prime supplier of telematics solutions to ALD customers in Italy, with potential future rollouts across Europe. This is but one of many Pan-European enterprise customer opportunities that we are pursuing with telematics-based subscription services from our beachhead in Italy. In summary, we have once again built on our strong foundation for revenue growth and profitability during the fourth quarter of fiscal 2018. We are very pleased with our financial results, especially our ability to generate exceptional free cash flow throughout the year. These financial successes coupled with our ability to execute around several business and operational milestones will enable us to accelerate our growth potential into fiscal 2019. With that, I will now turn the call over to Kurt Binder, our Chief Financial Officer for a closer look at our Q4 financial results and Q1 guidance.

[Kurtis J. Binder:]

Thank you, Michael. It is a pleasure to be here today. My commentary will include reference to the non-GAAP financial measures of adjusted basis net income, adjusted EBITDA and adjusted EBITDA margin. A full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in the press release announcing our fourth quarter and fiscal year earnings that was issued earlier today. Consolidated revenue for the fiscal 2018 fourth quarter was $94.4 million, an increase of 10% year-over-year. For fiscal year 2018 as a whole, consolidated revenue was $365.9 million, an increase of approximately 4% year-over-year. However, excluding last year's revenue of the Satellite business which ceased operations effective August 31, 2016, revenue for the fiscal year was up 9% from $336 million in fiscal 2017. We have a number of profitability and balance sheet metrics that highlight our strong business and financial performance in the year. For instance, free cash flows for fiscal 2018 was $58.6 million, an increase of 228% over the prior year, including a $28.3 million non-operating gain on legal settlement with a former LoJack supplier. Profitability was also strong in fiscal 2018 with adjusted EBITDA of $52.4 million or 14% of consolidated revenue, which represents a 6% increase over the prior year. Our Telematics Systems and Software and Subscription Services businesses delivered solid financial results for both the fourth quarter and fiscal year. Within our Telematics Systems business, revenue for the fourth quarter was $78.3 million, up 10% year-over-year. The growth is due to solid demand and increased sales volume from a well-balanced base of customers, especially our global enterprise accounts, several of which are transitioning to our newer LTE products. Revenue from MRM Telematics products reached a new record in the fourth quarter of $42.4 million, an increase of 29% year-over-year. For fiscal year 2018 as a whole, Telematics Systems revenue was $302.1 million, up 10% year-over-year. Revenue from MRM Telematics products for the year was $155.4 million, up 25% year-over-year and representing 51% of our Telematics Systems revenue. Sales of LoJack SVR products were down year-over-year on a quarter and full-year basis. The decrease is attributable to a decline principally in the fourth quarter of 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 previously mentioned, we are in the midst of a LoJack transition and are seeing LoJack SVR-only product sales continue their long-term secular decline, now beginning to be offset by new telematics-based technology solutions through our domestic dealership channel and to our international licensees. Network and OEM products revenue was $17.5 million for the fourth quarter of fiscal 2018, representing an increase of 8% year-over-year. For the full year, network and OEM products revenue was $66 million, an increase of 16% year-over-year. The increase in this product revenue is due to continued demand from Caterpillar as well as from one other global heavy equipment OEM. Caterpillar continues to be our largest customer with $11.6 million of revenue in the fourth quarter, representing 12% of our consolidated revenue. On a full-year basis, revenue from Caterpillar reached a record $45.3 million, reflecting a 53% increase year-over-year. Additionally, our other global heavy equipment OEM customer demonstrated strong revenue growth in the second half of fiscal 2018, generating revenue of $3.4 million. We remain intent on growing our Software and Subscription Services business with our highly incentivized global sales organization. Software and Subscription Services revenue was $16.1 million in the fourth quarter, up 6% year-over-year. For the fiscal year 2018, Software and Subscription Services revenue was $63.8 million, up approximately 3% year-over-year. We are building a strong foundation for increased recurring revenue and have focused the sales team to drive growth in this specific area of our business. Across all of our SaaS and recurring service platforms, we now have approximately 730,000 unique subscribers compared to approximately 689,000 in the prior quarter. The increase was driven principally by new subscriptions from our fleet management applications and Italian operations. LoJack Italy once again produced exceptional results in the fourth quarter, generating revenue of $4.2 million, up 31% year-over-year. For fiscal 2018, LoJack Italy contributed revenue of $16.1 million, up 22% year-over-year. LoJack Italy, as well as our network of international licensees, are creating strong momentum for our continued success with international revenue growth. For fiscal year 2018 as a whole, our international revenue reached $100.3 million, an increase of approximately 10% year-over-year. Consolidated gross profit for the fourth quarter was $38.4 million, an increase of 7% year-over-year. Consolidated gross margin was approximately 41% in the fourth quarter, down from 42% last year. For fiscal year 2018, consolidated gross profit was $151 million, an increase of 5% year-over-year. Consolidated gross margin was approximately 41% in the full year or just slightly above the prior year. Gross margin was somewhat impacted by an increasing cost of sale in our Software and Subscription Services business as we migrate our SaaS applications from hosted data centers to public cloud service providers. These near-term cost pressures are being partially offset by gross margin expansion from our network and OEM products. In OpEx, our GAAP basis R&D, sales and marketing and G&A expenses in the fourth quarter as a percent of revenue were 7%, 13% and 15%, respectively. Our G&A expenses increased in the quarter due to the additional professional services incurred for certain existing legal matters as well as incremental accounting and auditing services of nearly $1 million to support areas such as the ASC 606 implementation effort and tax planning initiatives. Some of these unusual expenses are expected to carry over into the first quarter of fiscal 2019, as we wind down ASC 606-related initiatives as well as the compliance activities around the new EU GDPR data privacy regulations. For fiscal 2018 as a whole, GAAP basis R&D, sales & marketing and G&A expenses as percentages of revenue were approximately 7%, 14% and 14% respectively. Regarding our non-GAAP basis OpEx for the full year, R&D, sales & marketing and G&A expenses as percentages of revenue were 7%, 13% and 10% respectively. The GAAP basis net loss in the fourth quarter was $4.8 million or $0.13 per diluted share, compared to a net loss of $4.2 million or $0.12 per diluted share in the same prior-year period. The GAAP basis net income in fiscal year 2018 was $16.6 million or $0.46 per diluted share, compared to a net loss of $7.9 million or $0.22 per diluted share in the same prior-year period. The increase in GAAP basis net income for the full year is attributable to revenue growth, as well as the $28.3 million gain on the favorable settlement with a former LoJack supplier that was recognized during the year. Non-GAAP net income for the fourth quarter was $10.9 million or $0.30 per diluted share, compared to $9.9 million or $0.28 per diluted share in the same prior-year period. For fiscal 2018, non-GAAP net income was $42.2 million or $1.17 per diluted share, compared to $38.6 million or $1.06 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 coupled with operational efficiencies realized during the year. Adjusted EBITDA was $13.1 million in the fourth quarter with an adjusted EBITDA margin of 14%, compared to adjusted EBITDA of $12.8 million and an adjusted EBITDA margin of 15% in the same prior-year period. For fiscal 2018, adjusted EBITDA was $52.4 million with an adjusted EBITDA margin of 14%. In the same prior-year period, adjusted EBITDA was $49.4 million and adjusted EBITDA margin was 14%. I will now provide some additional details to our balance sheet and strong liquidity position as of our fiscal year-end. At the end of the fourth quarter, we had total cash and marketable securities of $156 million and total outstanding debt of $154.3 million, which represents the carrying value of our convertible unsecured notes that we issued in May of 2015. Net cash provided by operating activities increased 159% to $66.9 million for fiscal 2018, which is attributable to our strong cash flows from operations, plus the $28.3 million of net proceeds from the favorable settlement with a LoJack former supplier. In April 2018, we've received approximately $13.3 million of additional net proceeds from this settlement. And the final $5 million of net proceeds is expected to be received in the next few months, thereby further contributing to our strong free cash flows in fiscal 2019. Our consolidated net accounts receivable balance was $71.6 million at the end of the fourth quarter, representing an average collection period of 61 days. While total inventory at the end of the fourth quarter was $36.3 million, representing an annualized inventory turns ratio of approximately 6.1 times. Our cash conversion cycle was 55 days at the end of the latest quarter compared to 60 days in the prior quarter. Additionally, our deferred revenue balance was $34.5 million at the end of our year compared to $26.9 million at the end of the prior year. This is attributable to growth in our contract backlog, largely driven by our global freight transport customer. Looking to fiscal 2019, I want to comment on two items that should be considered. The new revenue accounting rule commonly referred to as ASC 606 and the recent tax law changes. Regarding the accounting rule change, which is effective for us in Q1 of fiscal 2019, it is important to note that the new revenue recognition standard has no fundamental impact on our core business or on our strong free cash flow outlook. Upon adoption, we expect to record a one-time transition adjustment of less than $2 million as an increase to our accumulated deficit. The impact of ASC 606 is primarily related to our Software and Subscription Services business and the requirement to recognize revenue over the expected average contract life of fleet and vehicle finance customers instead of our historic practice of recognizing revenue for each individual non-cancellable contract term. As we are adopting this standard using the modified retrospective transition approach, we will not be restating our prior financial results. The Tax Cuts and Jobs Act enacted on December 22, 2017 resulted in some one-time year-end accounting adjustments. In our fourth quarter of fiscal 2018, we determined a provisional estimate of the impact of the new tax law on our existing deferred tax balances and the one-time transaction tax for our total foreign earnings and profits that we had previously excluded from U.S. income taxes under our global tax structure. We recognized a non-cash charge of $6.6 million for the impact of re-measuring our deferred tax assets and liabilities at the end of fiscal 2018. Additionally, we recorded a one-time transition tax of $2.4 million, which is offset by the utilization of foreign tax credits that were previously subject to a full valuation allowance. Accordingly, for the fiscal year 2018, our GAAP basis effective tax rate was 37%. Our effective tax rate during the year is attributable to over half of the $28.3 million gain from legal settlement being taxable in the U.S., as well as the re-measuring of our deferred income taxes. Moving into fiscal 2019, the impact of the new tax law, including the new taxes on foreign earnings, is not expected to materially impact our cash taxes due to remaining federal net operating losses and other tax credits. Now turning to our Q1 outlook, we expect first quarter consolidated revenue in the range of $91 million to $95 million, which reflects the impact on revenue of between $250,000 to $500,000 due to the new accounting standards adjustments. At the bottom line, we expect first quarter GAAP basis net income to be in the range of $0.26 to $0.32 per diluted share, which includes the contribution of approximately $13.3 million from the receipt of the fourth installment of the legal settlement with LoJack's former supplier. We also expect first quarter non-GAAP net income in the range of $0.26 to $0.32 per diluted share, and adjusted EBITDA in the range of $12 million to $14 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 J. Burdiek:]

Thank you, Kurt. In closing, I would like to highlight a few important takeaways as we look ahead into fiscal 2019 and beyond. Number one, our core Telematics device business is on solid footing with technology transition tailwinds expected later in the year. Two, our Software and Subscription Service business is expected to see solid growth as we fully deploy our newer large program wins. Three, we are aggressively executing on the LoJack telematics transformation as a fundamental thrust in the renaissance of the brand. And last but not least, we are now tapping in to a substantially expanded addressable market by leveraging unique partnerships to monetize the millions of units in our installed base. I am pleased with our progress and the future does indeed look bright. I would now like to open the call up to questions.

[Operator:]

Thank you. Your first question comes from Mike Walkley with Canaccord Genuity. Your line is open.

[T. Michael Walkley:]

Great. Thank you and congratulations on a strong close to the fiscal year.

[Michael J. Burdiek:]

Thank you.

[T. Michael Walkley:]

With your -- just building on the SaaS pipeline, can you talk about how the overall pipeline is looking for AssetOutlook, GovOutlook and FleetOutlook? And also just with this large global freight transport customer, can you talk about the rollout there, how it's progressing and when this customer might let you share the name to benefit from a large customer reference win?

[Michael J. Burdiek:]

Well, I wish I could answer the last part of that question. I really don't know when and if they'll allow us to announce their name, but they are a very important customer. And as we alluded to in our prepared remarks, we're starting to see incremental opportunities with that customer, not only to address the initial application with our AssetOutlook software suite, but also with extensions on that, including Supply Chain Integrity technology and other platform services as they extend the initial service out to not only their proprietary fleet, but also fleet components that they may lease or leverage from other partners. So we're very, very excited about that. And I would say, as it relates to the overall SaaS pipeline, that's probably the biggest element in the pipeline. It's just extending our relationship with that customer in a more holistic fashion. I would say, as it relates to those individual fleet and asset tracking applications, you mentioned AssetOutlook, GovOutlook and FleetOutlook, most of our emphasis these days is on enhancing the capabilities of AssetOutlook to be more comprehensive and include features that were only formerly part of GovOutlook or FleetOutlook. So, going forward, I would say, most of our new opportunities and certainly most of them in our pipeline, as it relates to asset and fleet management opportunities, are centered around AssetOutlook and its capabilities.

[T. Michael Walkley:]

Great. Thanks. And then just as we think about the longer-term model, you shared on the call how some of the duplicative costs going on with the SaaS public cloud move are being offset by some stronger margins on the hardware side. Any color on just quantifying what the duplicative costs are? And then when they're done, where they might be a rerating of either company gross margins or adjusted EBITDA margins?

[Michael J. Burdiek:]

I think as it relates to timing, you'll see incremental, and perhaps even modest incremental improvement as we work our way through the year with us bearing the brunt of some of those duplicate costs more towards the beginning of the year as opposed to the latter part of the year.

[T. Michael Walkley:]

Okay. Great. But to be done by year-end you think, and then just see a steady increase in gross margin is the way to think about it?

[Michael J. Burdiek:]

Well, I doubt it we'll be completely done, and we will continue to carry some modicum of proprietary infrastructure to support some legacy services. But over time, those things will start to dissipate and become essentially immaterial as it relates to overall effect on the financials.

[T. Michael Walkley:]

Okay. Great. Last question for me and I'll pass on. Just on the comment on the move to LTE creating some near-term pause, as your mix shifts more to these LTE products, does it create an ASP uplift at all that may help overall revenue growth and is the margins on these newer products better than the products you might be replacing? Thank you.

[Michael J. Burdiek:]

Great question. First of all, I'd like to kind of point out that the word to be used probably isn't pause. But when we've seen these technology transitions and carrier initiatives to transition off of legacy, older-generation infrastructure with their subscribers, it caused us a great deal of market angst. And our job is to make sure we ease that angst as much as possible. And the reason why we're focused so much on LTE product developments, we're trying to be ahead of that curve so that there isn't, quote, a pause in the market. But we don't want to be overly optimistic as it relates to customers move towards those newer technology platforms. But I'd say, in general, for us, again using the past as the indicator, there generally has been some modest uplift as it relates to ASPs, but not necessarily a big uplift in terms of product margin.

[T. Michael Walkley:]

Okay. Thanks for taking my questions.

[Michael J. Burdiek:]

Thank you.

[Operator:]

Your next question comes from Howard Smith with the First Analysis. Your line is open.

[Howard S. Smith:]

Yes, thank you. I was glad hear the margin question, that was on my list. So I wanted to talk – you talked international about the strength, particularly you called out Italy. I was wondering if you could discuss some of the other areas of success or pockets of weakness internationally outside of that. And then a broad – I'll ask them both and you can answer both. A broader question on LoJack, talking about the kind of transformation of your strategy there. And I wanted to know, you had thought at one point you could, maybe at the end of this year, something kind of stabilize that base, and it sounds like you have somewhat with the offset and I'm curious, is that kind of how you were thinking about it, but the core – what I'll call core LoJack would continue to decline or has there been some change that's kind of accelerating the transition here, and how that business has gone over the last year?

[Michael J. Burdiek:]

Sure. Well, thanks, Howard. Thanks for stacking them up for me here. As it relates to the international market landscape, I wouldn't say that anywhere it was weak. So, certainly, no air pockets anywhere. I would say Europe wasn't as much, up as much as Latin America was in FY 2018. But I would say we're very, very bullish on our international opportunities and we think we have a great sales organization now and certainly scale in these international markets to kind of support that ongoing momentum. As it relates to LoJack, well, there's no real fundamental change in our outlook. We just want to make sure it's clear that no one should expect a big upturn in LoJack channel-related revenues here in the near term. But we are quite focused on pursuing and in fact, enhancing our overall transformation strategy, and it's really important that we have our sales organization aligned with that strategy and to a certain extent, resist the temptation of pursuing short-term product revenue for the benefit of a long-term recurring revenue stream and overall higher revenues per subscriber than would have been the case in the past. And I think as it relates to sort of the inflection point, I think we're working our way through it now. And we're very encouraged with the reception we've received from the newest generation of LoJack applications and the dealer lot management portal which we introduced and previewed at NADA back in March. So, we believe on the right track. We think we have the sales organization aligned with the strategy and structured for success, and the incentives are in place for us to see all of that through.

[Howard S. Smith:]

All right. Thank you.

[Michael J. Burdiek:]

Thank you.

[Operator:]

Your next question comes from Mike Crawford with B. Riley. Your line is open.

[Mike Crawford:]

Thank you. Shouldn't the declining stolen vehicle recovery mix be improving gross margins? And I guess ancillary to that, what is your potential journey toward your longer-term 50% gross margin target?

[Michael J. Burdiek:]

Great question. As it relates to margins, I would say the outlook on the LoJack front isn't markedly different than what it was in the past. I mean, the SVR products were quite high margin as it relates to some of the other products in our portfolio. And given that this LotSmart and SureDrive, SureDrive in particular, is essentially a channel sale, sort of resell model, we can't expect to see 75%, 80% gross margins on that type of transaction. But we do think that LotSmart in combination with the sell-through product SureDrive should be somewhat at least modestly accretive to the gross margin outlook as it relates to what we might have been able to see in the past with LoJack legacy SVR product sales. As relates to the journey to $100 million, we're on the path and I would say we're happy with where we are and we're certainly passing through some critical milestones as it relates to that journey. And I talked earlier about the opportunities we see with our global freight transport customer. And we believe that other opportunities in the pipeline can support our journey to $100 million of subscription revenue. And as it relates to 50% gross margin aspirational target on a consolidated basis, it's fundamentally dependent on the pursuit of or the journey towards $100 million of Software and Subscription Service revenue, because that's going to be the fundamental driver that allows us to see the degree of margin accretion to 50% from where we are here today.

[Mike Crawford:]

Okay. Thank you. Then, you've grown business with these large global brands, as you mentioned, Caterpillar, Trimble, Verizon, what about on the insurance front which could have the potential at one point down the road to be – maybe even your largest vertical, bigger than fleet per se? For instance, what's going on with the Smart Driver Club where you still have a 49% minority interest? How are they doing, and what else is going on in the insurance side?

[Michael J. Burdiek:]

Well, we made an announcement just a few weeks ago as it relates to a unique relationship with TransUnion. And the group we're working with, the TransUnion, is essentially their insurance practice. So, the initiative that we talked about in that press release was directly related to an insurance opportunity, although not in the form of a usage-based or telematics-based insurance program. But we believe that TransUnion could be a fantastic partner for us to monetize not only our installed base, but to allow us to tap in more directly into telematics-based programs with insurance carriers in the U.S. As it relates to Smart Driver Club, I would say we're very pleased with their progress. They've been having particular success in the UK through the aggregator channel in onboarding telematics-based insurance policies and the performance of their book, i.e., the KPIs associated with loss ratios and profit per policy, premium per policy, all the KPIs are outstanding. And so, we're encouraging them in every way possible to continue their current pursuits and to do whatever they need to do to make sure that they're doing what they can do given their budget constraints, to continue to pursue their existing strategy onwards towards, I would say, building a very, very profitable insurance franchise. So, we're very encouraged there. And meanwhile, we've been able to successfully onboard some of the driver behavior technology that they've developed. It's become part of our – we're terming our safety suite, giving us the ability to integrate that into SureDrive and some of our fleet applications, so that we can provide real-time and post-trip feedback on driver behavior in order to help drivers improve their driving ability and obviously reduce risk and potentially save lives.

[Mike Crawford:]

Okay. Thank you very much.

[Michael J. Burdiek:]

Welcome.

[Operator:]

Your next question comes from Mike Latimore with Northland Capital. Your line is open.

[Unknown Speaker:]

Hi. This is Rishi Vallikandi (46

[Michael J. Burdiek:]

Excellent question. So, at the end of the fiscal year, we had 13 dealers that were active with a combination of LotSmart and SureDrive sell-through activities. And as relates to outlook, I would expect that number to increase pretty dramatically as we work our way through this fiscal year. And just as an indication of that, we actually doubled the number of dealers who were active with LotSmart and SureDrive just from the end of Q3 to the end of Q4.

[Unknown Speaker:]

Okay, great. And regarding the Caterpillar, so are you in most of the Caterpillar SKUs now or are there more to come?

[Michael J. Burdiek:]

Great question. We're in well under 50% of the current SKUs or machines that are being produced at their factories around the world. And I alluded to new programs that should enable us to increase our penetration rate, and attach to a greater percentage of their product portfolio as we complete those programs that are going to be active through most of this fiscal year.

[Unknown Speaker:]

Great. That's helpful, Mike. Thank you.

[Michael J. Burdiek:]

You're welcome. Thank you.

[Operator:]

We have no further questions at this time. I turn the call back to Michael.

[Michael J. Burdiek:]

All right. Well, thank you for joining our call today and we look forward to speaking with you at the end of our first quarter.

[Operator:]

This concludes today's conference call. You may now disconnect.