CAMP4 Therapeutics Corporation
Q1 2017 Earnings Call Transcript

Published: 29 Jun 2016

[Operator:]

Thank you for joining us on today’s conference call to Discuss CalAmp’s First Quarter 2017 Financial Results. This call is also broadcast live over the web and can be found on the Investor Relations section of our IR website. With us today are CalAmp’s President and Chief Executive Officer, Michael Burdiek and Chief Financial Officer, Rick Vitelle. Before we begin, let me remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAmp’s that current judgment that are subject to risks and uncertainties that could cause actual results to materially differ from those forward-looking projections. Risk factors that could cause CalAmp’s actual results to materially differ from its projections are discussed in the earnings release which was issued today and is also available on our website and in our fiscal 2016 annual report on Form 10-K that was filed on April 20, 2016 with the SEC. We undertake no obligations to revise or update publicly any forward-looking statements to reflect future events or circumstances. 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 reported a strong first quarter with record results across a number of financial performance metrics. We also made progress on several business initiatives that will set the foundation for long-term revenue growth, margin expansion and earnings leverage. We are very pleased that we are seeing early success with LoJack, which was acquired in March and was a strong contributor on multiple fronts, from revenue growth to operating leverage. Overall it was a solid start to the year with first quarter revenues of $91.1 million, up 39% year-over-year with consolidated non-GAAP gross margin of 43%, non-GAAP earnings per diluted share of $0.30 and adjusted EBITDA margin of 15%. Our first quarter results include revenue of $8.4 million from our satellite business as part of continuing operations. At the time we gave first quarter guidance in April we believe that the satellite business would be accounted for as a discontinued operation beginning in the fiscal 2017 first quarter. However, current accounting guidelines dictate that discontinued operations treatment should not be applied at this time. Nonetheless the outlook for this operating unit is unchanged with the business expected to wind down completely over the next two months. Looking ahead to Q2 we expect to see incremental growth across CalAmp’s core businesses along with continued strong contribution from LoJack. Despite our progress on a number of fronts, we remain cautious in the very near-term as macro conditions in North America have resulted in softer than expected demand from key customer for MRM telematics products. We believe that as certain customers work off their inventory overhang, this part of our business should see solid recovery. In fact we believe that our long-term growth prospects are stronger than ever and we have recently secured a significant customer win that we expect will be a growth contributor in the latter part of this fiscal year. Operationally we are in the process of realigning CalAmp’s Wireless Datacom segment into three new business units and have added dedicated leadership in key areas to drive focus and execution for long-term growth. These new business units are Telematics Systems which includes our MRM and LoJack products businesses, software and subscription services made up of the recurring revenue from our subscription services including recurring revenue of LoJack’s Italian operation and Network and OEM products which includes product sold to customer such as Caterpillar, Positive Train Control products and Networking products sold to utilities and for other industrial applications. I will now touch upon recent accomplishments in each of these businesses. Starting with Telematics Systems we made progress expanding our customer base in the first quarter and we commenced shipping products to one of the largest fleet telematics service providers in North America. Although revenue from this new customer was modest in Q1, we expect them to become an important contributor to telematics systems revenue over the coming quarters as they migrate to 100% outsource model for telematics devices. This customer selected CalAmp as a supplier based upon our product reliability, flexibility, future technology road map as well as our ability to scale with their business. On the product front we made excellent progress on our strategic roadmap, reinforcing our position as a telematics system innovator. In May we officially launched our instant crash notification service or ICN for connected vehicle markets. This new service discriminates different types of crash events and automates damage reporting for insurance, fleet, leasing, vehicle finance and consumer applications. This is the first of CalAmp’s proprietary automated first notification of loss services planned for roll out during the coming quarters. We are also pleased to report that the integration of LoJack is going smoothly and we cannot be more pleased with the financial performance and pipeline of opportunities that this acquisition has brought to CalAmp. While the process of integrating LoJack is not complete, we have made significant and measurable progress on multiple fronts. First and perhaps most importantly we have developed a converged CalAmp LoJack roadmap for products in telematics services targeting the dealer channel. Over the next 6 to 18 months we expect to deliver innovative new offerings ranging from dealer inventory management solutions to consumer sell through applications such as instant crash notification. On the commercial front we have begun realizing revenue synergies with LoJack customers and channels much earlier than anticipated. As one example a LoJack licensee in Latin America purchased CalAmp’s telematics devices for integration into its proprietary telematics service offering. The same customer also began piloting our lender outlook application, which represents the first deployment of the subscription service outside the U.S. and Canada. We are also in dialogue with a number of LoJack’s other international licensees that have expressed an interest in adopting CalAmp telematics devices as part of the regional service offerings. As we look at our software and subscription services business we have been impressed by the performance of LoJack Italy. This captive city area growing in approximately 60% year-over-year and represents a tangible case study of our opportunity to leverage the LoJack dealer channel and brand. LoJack Italy is rapidly innovating and has introduced multiple compelling offerings for auto dealers, insurance companies, leasing and rental companies, as well as consumer stolen vehicle recovery services. It operates on a pure subscription revenue model and we expect solid growth from this business, which is on target to achieve a greater than $15 million per year run rate by the end of our current fiscal year. We are enthused by the prospect of leveraging the LoJack brand and channels to substantially grow our subscription revenues from where they are today. We believe that with the addition of LoJack Italy, incremental revenue streams from new applications launched through LoJack’s global channels and organic growth from CalAmp’s existing SaaS applications, we can achieve our target of $100 million annual run rate for recurring revenues within the next two to three years. Moving on to the Q1 results of our network and OEM products, Caterpillar was a solid contribution this quarter and we expect fairly steady and predictable revenues on its existing telematics program through this year. We are increasingly confident that we will be able to expand on the Caterpillar relationship as it aggressively pursues its global connected machine strategy. The industrial connected machine market is largely unpenetrated, and we believe we are exceptionally well positioned to win a significant share of new opportunities as this market develops. Now turning to capital allocation, we announced today that CalAmp’s Board of Directors has authorized a $25 million 12 month stock repurchase plan. The Board and management believe that our current share price does not reflect CalAmp’s long-term intrinsic value. And this repurchase plan underscores our confidence in our business prospects. We plan to fund these stock purchases through existing cash balances. Overall, we made significant progress in the past few months on a number of financial and business initiatives including the integration of LoJack. Throughout the combined enterprise our employees are energized and excited by our collective vision and are aligned with our prime objective of delivering strong value for our customers and shareholders. With that I will now turn the call over to Rick Vitelle, our Chief Financial Officer for a closer look at our first quarter financial results and Q2 guidance.

[Rick Vitelle:]

Thanks, Michael. My commentary will include reference to the non-GAAP measures adjusted basis net income, adjusted EBITDA and adjusted EBITDA margin. Our adjusted basis net income excludes intangibles amortization expense, stock based compensation, acquisition and integration expenses and certain other adjustments. Our adjusted EBITDA excludes interest, taxes, depreciation, amortization, stock-based compensation and certain other adjustments. A full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in our first quarter earnings press release that was issued earlier today. Consolidated revenue for the first quarter was $91.1 million, up from $65.4 million in the first quarter of last year. This increase is primarily due to the acquisition of LoJack in the first month of Q1, which contributed revenue of $27.9 million in the quarter. In conjunction with the acquisition of LoJack we are realigning our Wireless Datacom segment into three new business units that Michael mentioned a few minutes ago

[Michael Burdiek:]

Thank you, Rick. In closing we made significant progress over the past year and going forward CalAmp is superbly well positioned as a pure play pioneer in the connected vehicle and broader industrial Internet of Things marketplace. Our global competitive position and the pipeline of growth initiatives has never been stronger positioning us for growth well into the future. With that we would now be happy to open the call up to questions. Operator?

[Operator:]

Thank you, Michael. Ladies and gentlemen we do apologies for the technical difficulties earlier. [Operator Instructions]. Our first question comes from the line of Mike Walkley from Canaccord Genuity. Please proceed with your questions.

[Mike Walkley:]

Great, thank you. And Michael congrats on the new MRM customer. Can you give a little more color just on the inventory you are working through and is it really just the fleet market to your fleet customer base that you see and you are adding maybe $10 million more per quarter in revenue by the second half of the year and maybe walk us through that inventory adjustment?

[Michael Burdiek:]

Boy that was a collection of questions. First of all to clarify on the inventory point, it’s not our inventory that’s really the overhang, it’s our customers’ inventory and over the course of the last few months as we’ve engaged more deeply in terms of our forecasting process with our key customers we’ve been able to get some feedback that in many cases our customers have really over forecast their demand, which is call it some softness in the near-term with some of those key customer accounts. We’ve had the situation happen in the past, in fact two times over the last four years we’ve actually seen fairly significant growth for a certain periods followed by a couple of quarter of weakness. It seems to be the situation that we are working our way through now and as it relates to the soft outlook in MRM it’s almost exclusively focused in the fleet area and almost exclusively a comment related to the U.S. market. Despite the economic challenges in other parts of the world we actually saw an increase sequentially in sales and most regions around the world Latin America being an example. Again this is a commentary on our MRM products business. But overall the business is healthy and as we pointed out in the prepared remarks we think we are in as good position if not a better position than we’ve ever been competitively for a number of reasons. As it relates to the new key customer this is an opportunity we’ve been working on for some time. We have other similar size opportunities in the pipeline, but in this case we believe this customer will be a growth contributor in the second half of the year and into our FY18 and we think they will quickly move into the top five key customer category.

[Mike Walkley:]

Okay, great. That’s helpful. And then just bigger picture Michael on your longer term strategic outlook, any feedback or is it too early just from your LoJack dealership just regarding some of the new products and I am particularly interested in the instant crash notification opportunity through that dealer channel?

[Michael Burdiek:]

I think one thing that’s been surprising to us is the feedback we’ve received from some of the larger dealer group on some of their core enterprise needs. So it’s really not all about the consumer sell through proposition, we believe that a inventory management solution that LoJack had tentatively deployed with certain dealer groups in the U.S. we believe is a great platform that can be enhanced and further improve dealer operations and we think it’s a very, very ripe and near-term opportunity to expand that telematics service business just focused on the dealer enterprise. However the dealers are smart people, they are business people and they’d like to monetize that investment to the maximum extent possible and they have been working with us very, very closely in terms of defining various consumer sell through propositions including instant crash notification services most likely branded under the LoJack brand.

[Mike Walkley:]

Okay, great. That’s helpful. And then just a clarification and I’ll pass it on. Can you give us just for our modeling purposes the breakout between MRM and networking and will we get any kind of historical or just going forward you are going to report the three new divisions?

[Michael Burdiek:]

Well, it’s becoming a bit murky and in fact it’s challenging to break it out cleanly in Q1, which is why we’ve outlined this new business unit structure. Clearly the business was heavily weighted towards the telematics system product sales in Q1. But we did see relatively solid performance in our -- what was formerly known as our wireless networks business with Caterpillar and some of our other OEM opportunities performing pretty much in line with our guidance. And the outlook there from a network products and SaaS applications perspective, I think is pretty positive for the full year.

[Mike Walkley:]

Great, thank you very much.

[Operator:]

And now our next question comes from the line of Mark Drucker from B. Riley & Company. Please proceed.

[Mark Drucker:]

Hi, Michael, thanks for the time. One question is the forward EBITDA that you previously shared for LoJack. It seemed to reflect some lag time with respect to gaining traction with selling connected car systems through the dealer channel. Can you kind of provide some insight as to a time table when you actually anticipate selling the full connected car system suite in the dealer channel?

[Michael Burdiek:]

Sure. I think you started with an EBITDA question and I’d like to touch on that if I could. When we closed the transaction we outlined an adjusted EBITDA profile of LoJack of roughly 10% of revenues. It was actually quite a bit better than that in Q1 and we expect it to be better than that for the balance of the year. And in fact adjusted EBITDA margin for the various LoJack related activities in Q1 was more in line with the consolidated EBITDA margin that we reported roughly 15%. So obviously that helped us outperform related to guidance on the earnings front. As it relates to consumer sell through or other telematics system connected vehicle opportunities in the LoJack channel, we’re actually realizing some of those now vis-à-vis LoJack Italy. And LoJack Italy in many ways is the incubator for many of the concepts which we think are viable in the U.S. new car dealer channel. And as it relates to monetizing opportunities in the U.S. new car dealer channel, I think we'll start to see some commercial activity as we work our way through the fiscal year.

[Mark Drucker:]

Okay, that’s helpful. On the surface level it appears your exposure to Europe is limited although you stated last year that you did well in the UK. Can you kind of touch on your exposure there with respect to currency translation and SmartDriverClub as well?

[Michael Burdiek:]

Well our European exposure if you want to use that term has increased by means of the LoJack acquisition and LoJack Italy is obviously an important enterprise for us. We did roughly prior to the closing of LoJack acquisition about $15 million of business in Europe last fiscal year. Of that probably 60% or so was in the UK. We have a base of operations in the UK roughly six employees there. And we did inherit a corporate administration operation in Ireland by means of the LoJack acquisition. So Europe is an important region for us. And Obviously the UK is an important market for us as well having a base of operations in the UK obviously helps us deal somewhat by UK based cost of hedging the situation there as it relates to the depreciation of the pound versus the dollar. But given the movement there, if you look at it on a percentage terms the pound has moved about 8% over the last few days as compared to where we were three months ago. So that in and of itself isn’t a big risk factor by challenging us from a price competition standpoint. I think the bigger issue short to medium term is in the UK is what’s going to happen to their local economy and given that it’s been an important market for us. Obviously we’re watching that very closely.

[Mark Drucker:]

Okay. And last question from me, are you anticipating any further investments in SmartDriverClub?

[Michael Burdiek:]

Yes we are and we did make an investment by means of debt tranche during our first quarter. It’s denominated in pound. So in that sense it’s interesting and that the investment level there is a little bit low what we thought it would have been given what’s happened with the currency. And based on SmartDriverClub hitting certain commercial milestones we anticipate we’ll make addition debt investments through our FY 2017.

[Mark Drucker:]

Thank you.

[Michael Burdiek:]

You’re welcome.

[Operator:]

And our next question comes from the line of Jonathan Ho from William Blair. Please proceed with your question.

[Jonathan Ho:]

Hey, guys. Can you maybe talk a little bit about the seasonality as we start to model the three new business units and how we should think about that over the course of the year?

[Michael Burdiek:]

Sure. In Telematics Systems we probably inherited a little bit of seasonality as it relates to licensee purchase of LoJack SVR products. Historically the first calendar quarter of the year has been the weakest. And in some cases with the licensees the last calendar quarter of the year has been the strongest. And part of that is just a true up of the licensee’s commitments prior to the expiration of the calendar year. We do expect some seasonality in LoJack Italy. A good chunk of Europe shuts down for the month of August. So we expect a little bit of softness from the licenses in Europe and we expect a little bit of commercial softness with LoJack Italy in the month of August, obviously that impacts our second quarter. But really elsewhere in the company we don’t anticipate that there is a lot of seasonality that you could actually model in that would be any different than recent history.

[Jonathan Ho:]

Got it, that's helpful. And then can you maybe update us on your expectations for the LoJack revenue contribution this year. I just want to get sort of a broad number that can maybe help us understand what that contribution is likely tracking towards?

[Michael Burdiek:]

Well we haven’t broken out LoJack in our guidance obviously. And frankly it’s going to become very challenging for us to break it out LoJack versus CalAmp legacy as we integrate these various functions and these various sales organizations and these various product lines. As an example, we’ve taken all the commercial sales team and all of those products and solutions and merge them into our SaaS business. And it’s going to be very, very difficult for us to breakout on a perspective basis what the actual contribution was from LoJack or LoJack resources going forward. On the Telematics Systems side it’s little bit easier, because those products are sold as LoJack branded products. And it’s very easy for us to track that revenue both retrospectively and prospectively. So I wouldn’t want to necessarily layout for you very, very clear guidance is what we expect from LoJack contribution this year. However I will say this, I don’t expect to see any decline in various business activities whether it’s on the SaaS side whether it’s within LoJack Italy or whether it’s with the sale of LoJack traditional SVR products in United States. I think the business is very sound, very robust. And we’re pleased with the performance thus far.

[Jonathan Ho:]

Great, thank you.

[Operator:]

And our next question comes from the line of Mike Latimore from Northland Capital Markets. Please proceed.

[Mike Latimore:]

Great, thanks a lot. Just think of it as you look at the second half of the year you’re talking about getting to say $100 million kind of run-rate. How you prioritize the drivers to get from say your second quarter guidance like satellite up to that. What will be this out through two to three things to get to sort of $100 million run-rate?

[Michael Burdiek:]

Well obviously ongoing solid performance in the core including some pickup in activity on the MRM product side. We think the LoJack business has been very solid. LoJack Italy as we described in our prepared remarks has been an outperformer we’re very, very enthused by business prospects there. We believe that there is some upside opportunity later on this year with Caterpillar as we become qualified for potentially a new program there. I wouldn’t expect though you wouldn’t want to break in a lot of upside potentially but that business relationship is very sound very solid. So that outlook is very positive. And to get to $100 million a quarter run-rate, we would need to see the MRM products business continue to pick up as it did from Q4 to Q1 this year.

[Mike Latimore:]

Got it. And this margin with telematics customer you said maybe it could actually get to your top five customer, what kind of annual run-rate does the customer -- you need to have to get in that top five category looks like?

[Michael Burdiek:]

To be in the top five you got to be $10 million or more, more or less a year.

[Mike Latimore:]

Okay. And then on the kind of customer over forecasting, I mean I guess one implication there is that there were some weakness in their end market so they over forecast. I guess any sense of what kind of environmental change might occur maybe if at all?

[Michael Burdiek:]

The last time we saw some MRM product weakness we had experienced a slowdown in the U.S. economy, this was about two and half years ago. And obviously we’ve seen a slowdown in the U.S. economy sort of at the end of calendar 2015 and to the early part of 2016. So I think we see that as the primary driver in some of the softness and probably the over inventory position some of our key customers find themselves in.

[Mike Latimore:]

Okay, thanks a lot.

[Michael Burdiek:]

You’re welcome.

[Operator:]

And our next question comes from the line of Rajesh Ghai from Macquarie. Please proceed with your question.

[Rajesh Ghai:]

Yes, thanks. So Michael, you talked about some increase in the pickup from Caterpillar. Can you provide some more color on where -- how those programs are ramping with them? Is it the same business that you’ve been kind of being involved in, is that picking up or is this new programs that are ramping? What exactly is that delta that you see between the Q2 number and the Q3 number on the Caterpillar side?

[Michael Burdiek:]

Well we’ve been saying for some time Rajesh that the Caterpillar is an important customer for us. And I think in some ways a bellwether or where the entire heavy equipment market is headed. Caterpillar’s, CEO has been very, very clear and very vocal in their goals to connect all of their vehicles and all of other assets whether they’re rolling off the factory floor or they’re in the field with their customers. And given the program that we’ve been involved with Caterpillar for a number of years, we’ve been front and center as it relates to getting visibility on some of the newer connected machine opportunities that they want to pursue. And we believe that we’re in exceptionally prime position to be able to leverage some of those new programs to drive continued growth with Caterpillar.

[Rajesh Ghai:]

Great. And as far as cost synergies are concerned with the acquisition of LoJack, how much is still left in terms of harnessing cost synergies going forward? How much have you achieved and how much is left in that?

[Michael Burdiek:]

That’s a great question. So in Q1, we obviously had some transaction and integration related expenses that got added back to earnings. And most of those expenses I would say are behind us. And a lot of those things related to the corporate executive team and the wind down of some of the other public company related activities. We also made some progress in integrating various functions of LoJack into like CalAmp functions. And we’ve been able to identify some cost synergies there as well. But also like to point out we found some synergies in reverse LoJack has a very, very large and robust SVR dealer installation crew. And we’ve been able to identify opportunities whereby we can leverage their operational resources and use those as an installation crew for some of our vehicle finance activities and thereby probably finding ways of improving some of our margins on the CalAmp side.

[Rajesh Ghai:]

Okay, thank you.

[Operator:]

Our next question comes from the line of Greg Burns from Sidoti and Company. Please proceed with your question.

[Greg Burns:]

Good afternoon. In terms of the instant crash notification service that you rolled out, how -- outside of incorporating that with the LoJack offering how will you be bringing that to market as a standalone product? And it also sounded like that was the first in the line of like consumer based applications you’re rolling out. Could you just give us maybe a little bit more color on kind of what that roadmap looks like for you this year?

[Michael Burdiek:]

Well instant crash notification is one service which we think is a compelling consumer sell through application, but there are others. And we would anticipate that ICN would be one application in a value added service bundle that would be sold through the dealer network. And again the dealers are interested in leveraging potentially the inventory management solution as a platform to sell through to the consumers. So we’re looking at the entire lifecycle of the telematics platform and how we can leverage it from one phase of a transaction to the next phase of a new vehicle transaction. So there is still a little bit of work to be done as it relates to productization and the marketing activities around that, but I think we have a pretty solid roadmap and we’ll be talking about it more as we work our way through this fiscal year.

[Greg Burns:]

Okay. And in terms of SmartDriverClub, I guess you mentioned Italy was kind like an incubator for what you can potentially do in the U.S. I think SmartDriverClub is kind of that nature too. What kind of success they had commercially with that service so far?

[Michael Burdiek:]

SmartDriverClub just launched their service publically back in April. So it’s pretty early days there. But they had a lot of interesting and I’d like very positive national press and national relating to the UK. So I’d say they were making very, very good progress. And as it relates to the various commercial milestones that were part of our investment agreement, they’ve been hitting those milestones in a very timely manner. We’re very impressed with the team there. And I think they’ve got a very, very advanced consumer value proposition that we think is compelling. The reason we’ve been focused so much on Italy during this call is that Italy obviously is an up and running commercial enterprise. So in many ways offers us more of a real world opportunity to get feedback on various telematics based solutions than SmartDriverClub is in a position to do today. However we’re very excited by SmartDriverClub and we’ll be watching them closely as they rollout their services more broadly in the UK through the new car dealer channel.

[Greg Burns:]

Okay, thank you.

[Michael Burdiek:]

You’re welcome.

[Operator:]

And at this time there are no further questions. This does conclude our question-and-answer session.

[Michael Burdiek:]

Well thank you for joining us today. And we look forward to talking to you at the end of our second quarter.

[Operator:]

Ladies and gentlemen this does conclude our teleconference for today. We thank you for your time and participation. And you may disconnect your lines at this time.