CAMP4 Therapeutics Corporation
Q1 2016 Earnings Call Transcript
Published:
- Operator:
- Greetings and welcome to the CalAmp Fiscal 2016 First Quarter Earnings Conference Call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation [Operator Instructions]. As a reminder this conference is being recorded. I would now like to turn the conference over to Mr. Lasse Glassen of Addo Communications. Thank you Mr. Glassen. You may now begin.
- Lasse Glassen:
- Thank you operator. Good afternoon and welcome to CalAmp's fiscal 2016 first quarter results conference call. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek and Chief Financial Officer, Rick Vitelle. Before I turn the call over to management please remember that our prepared remarks and responses to questions may contain forward-looking statements. Words such as may, will, expect, intend, plan, believe, seek, could, estimate, judgment, targeting, should, anticipate, goal and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those implied by such forward-looking statements due to a variety of factors including competitive pressures and pricing declines in the company's wireless DataCom and satellite segments, fluctuations in product demand from a key OEM customer and heavy equipment industry and other risks and uncertainties that are described in the company's annual report on Form 10-K for fiscal 2015 as filed on, April 21, 2015, with the Securities and Exchange Commission. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions it can give no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement whether as a result of new information, future events or otherwise. Michael Burdiek will begin today's call with a review of the company's financial and operational highlights. Rick Vitelle will then provide additional details about the company's financial results and Mike will then wrap up with CalAmp's business outlook and guidance for the fiscal 2016 second quarter and full year. 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, Lasse. Our first quarter represented a solid start to our fiscal 2016 with a 21% year-over-year growth in revenue for our wireless DataCom segment and a 37% increase in non-GAAP EPS. We saw continued improvement in consolidated gross margin and operating cash flow was exceptional at $16.3 million. Contributing to these excellent results were record quarterly revenue posted by our Mobile Resource Management or MRM products business as well as a broad based growth in our wireless networks business. Our satellite segment revenue was in line with expectations and added meaningfully to our bottom-line profitability. Overall I am quite pleased with our first quarter results and expect revenue growth and earnings to accelerate as we progress through the balance of the fiscal year. Looking at our first quarter results in more detail, consolidated revenue was $65.4 million with wireless DataCom revenue up 21% year-over-year to $57.8 million, while satellite revenue in the quarter was down 32% year-over-year to $7.6 million. Consolidated gross margin of 36% resulted in the first quarter adjusted EBITDA margin of 16.3% up from 12.9% in the first quarter last year. At the bottom-line we achieved GAAP basis earnings of $0.11 per diluted share in the first quarter with non-GAAP earnings of $0.26 per diluted share which includes the partial quarter impact of interest expense from our recent convertible debt offering. In addition operating cash flow in the first quarter of $16.3 million by far an all-time single quarter record for CalAmp resulting in free cash flow of $15 million. During the quarter we also took advantage of strong market conditions and historically low interest rates and completed a very successful convertible notes offering that raised proceeds of $152 million net of underwriting fees, related transaction cost and the cost of the call spread option. This helped push our cash equivalents and marketable securities balance up to $209 million at quarter end. Our strong liquidity position provides ample flexibility to take advantage of potential future growth opportunities including pursuing strategic M&A. Now we'd like to review our operational highlights for the quarter in more detail. Both businesses in our Wireless DataCom segment performed well with healthy demand from a broad spectrum of customers for our wireless networks products and services along with record quarterly revenues posted by our MRM products business. In our wireless networks business unit revenue from telematics products shipped to our key OEM customer in the heavy equipment industry were in line with our expectations for the quarter. We are quite pleased with our relationship with this customer's progressing and expect revenue to increase in the second quarter and further expand in the second half of the year. Overall we expect that this customer will represent a significant year-over-year growth opportunity for CalAmp in fiscal 2016. Also in our wireless networks business, we saw a solid year-over-year growth for our enterprise fleet management Software-as-a-Service solutions, in total subscription based revenues from our fleet management, automotive aftermarket, vehicle finance and communication services comprised 15.6% consolidated revenue for the first quarter. We continue to benefit from significant SaaS contract wins from large fleet enterprise customers that we announced late in the prior fiscal year. Across all of our market verticals we had approximately 486,000 unique software application subscriptions at the end of the first quarter which is down from approximately 495,000 at the end of the prior quarter due to a decline in vehicle finance SaaS subscribers for similar reasons as described on our last earnings call. However, higher margin fleet SaaS subscribers grew approximately 5% on the sequential quarter basis, driving overall growth in service revenue with higher associated gross margins due to favorable mix. Moving on to our MRM products business, we continue to see strong demand for products used in fleet management and asset tracking application both domestically and with key customers outside the U.S. In fact fleet product revenues reached an all-time record in the first quarter driven by demand from key customers in the U.S. and Europe. In addition there are several emerging industry trends that we believe will benefit CalAmp's MRM products business in future periods, we are continuing to have discussions with large global industry players that are indicating a preference towards an outsourced hardware model with CalAmp regarded as a key hardware supplier. Furthermore we are also seeing existing customers adopt a broader set of CalAmp products including the MDT-7 Android based mobile data terminal along with an expanding portfolio of asset tracking products. With respect to the MDT-7, we continue to be encouraged by market acceptance of this new product category and we remain confident that the MDT-7 will drive meaningful revenue growth over the coming years. During the first quarter, we announced a preferred partnership agreement with Magellan a leading GPS device and content service provider to bundle Magellan's professional grade navigation software with our MDT-7. This partnership provides fleet operators in North America with access to advanced features such as turn by turn navigation, speed limit and speed alert notifications, integrated safety options and trip planning enhancements among others. Importantly customers will also have access to an array of fleet specific value-added cloud services available through aftermarket channels including the CalAmp app store. We believe that the app store along with embedded core applications on the MDT-7 will enable us to layer on these value-added elements resulting in higher margins than our traditional fleet management hardware products. In the auto insurance telematics market first quarter demand for hardware devices increased over the prior quarter and we expect demand will continue to improve throughout this fiscal year. We continue to believe that insurance telematics can be a key growth driver for CalAmp over the longer term particularly as we bring to market value-added services beyond hardware devices. To this end during the first quarter, we completed the acquisitions of Crashboxx an early stage technology company with unique intellectual property focused on insurance telematics application across the entire auto insurance lifecycle from driver risk assessment through claims processing automation. Initial discussions with insurance carriers have been encouraging further validating our concepts for Crashboxx as well as for other technologies on our strategic roadmap. Over the next several quarter we will focus on productizing these technologies as well as on strategic business development activities on a global basis to drive the adoption of the novel telematics based solution. Moving onto our satellite segment, revenue in the first quarter was $7.6 million in line with expectation. We continue to be pleased with the satellite segments operational performance which achieved gross margins of 25.5% in the first quarter and provided solid contribution to our operating cash flow and bottom line results. 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.
- Rick Vitelle:
- Thanks, Michael. I will provide a summary of our gross profit performance, income tax position, working capital management and cash flow results for the fiscal 2016 first quarter. Consolidated revenue for the fiscal 2016 first quarter was $65.4 million, an increase of 10.9% compared to the first quarter last year. Consolidated gross profit for the first quarter was $23.5 million, an increase of $3.3 million or 16.4% over the same quarter last year. The gross profit increase is the result of higher revenue in the Wireless DataCom segment. Consolidated gross margin was 36.0% in the latest quarter compared to 34.3% in the first quarter last year. Looking more closely at gross profit performance by reporting segment, Wireless DataCom gross profit was $21.6 million in the first quarter with a gross margin of 37.3%. Year-over-year Wireless DataCom's first quarter gross profit was up $4.3 million, while gross margin increased by 110 basis points. Our satellite business had a gross profit of $1.9 million in the first quarter with a gross margin of 25.5%. This compares to gross profit of $2.9 million and a gross margin of 26.1% in the first quarter of last year. GAAP basis net income for the fiscal 2016 first quarter was $4.1 million or $0.11 per diluted share compared to $2.7 million or $0.07 per diluted share in the first quarter of fiscal 2015. Although the company's GAAP basis effective tax rate of 36.7% in the latest quarter approximates the combined U.S. federal and state statutory tax rate, the company's pretax income is still largely sheltered from taxation by NOL and research and development tax credit carry forwards and is expected to remain so for the next several years. Our non-GAAP net income for the fiscal 2016 first quarter was $9.5 million or $0.26 per diluted share compared to $6.9 million or $0.19 per diluted share for the same quarter last year. Non-GAAP earnings excludes the impact of intangible asset amortization, stock-based compensation expense and non-cash interest expense from accretion of debt discount and includes an income tax provision for cash taxes paid or payable for the period. Adjusted EBITDA which is also a non-GAAP measure was $10.7 million in the fiscal 2016 first quarter with an adjusted EBITDA margin of 16.3%. This compares to adjusted EBITDA of $7.6 million and an adjusted EBITDA margin of 12.9% for the same quarter last year. Adjusted EBITDA excludes the impact of investment income, interest expense, income tax expense, depreciation expense, intangible asset amortization and stock-based compensation expense. For a reconciliation of the GAAP and non-GAAP financial results, please see our fiscal 2016 first quarter earnings press release that was issued today which is available on our website. Now, moving on to our liquidity position and balance sheet in the first quarter of fiscal 2016, net cash provided by operating activities was $16.3 million. As Michael noted earlier this was an all-time quarterly record for CalAmp. In addition during the first quarter the company completed a private offering of [1 5/8%] convertible senior notes in the principal amount of $172.5 million along with simultaneous bond hedge and work transactions which collectively generated net cash proceeds of $152 million. The convertible notes have a conversion price of $27.59 per share of CalAmp common stock, but by entering into the bond hedge and warrant transactions, that comprised the call spread option the effective conversion price from the company’s perspective was increased to $39.42 per share. We have provided a detailed disclosure of the accounting treatment for the convertible notes and the associated call spread option instruments in our first quarter 10-Q which was filed earlier this afternoon. Primarily as a result of the net cash inflow from the convertible notes financing, our total cash and marketable securities jumped to $209 million as of May 31, 2015. CalAmp’s consolidated accounts receivable balance was $45.1 million at the end of the first quarter, down $2.8 million from the previous quarter. This represents an average collection period of 56 days compared to the receivables collection period of 54 days at the end of the preceding quarter. Our total inventory at the end of the first quarter was $16.0 million, a decrease of $2.6 million compared to the previous quarter representing annualized inventory turns of approximately 10 times. For the fiscal 2016 first quarter our GAAP basis effective tax rate was 36.7% compared to 40.4% in the first quarter of fiscal 2015. For the full year in fiscal 2016 we expect that our GAAP basis effective tax rate will be approximately 35% and our non-GAAP tax rate will be about 1.5%. With that, I will now turn the call back over to Michael for our guidance and some final comments.
- Michael Burdiek:
- Thank you, Rick. Now let’s turn to our outlook including our financial guidance for the second quarter and full year. Looking at our fiscal 2016 second quarter, we expect to achieve consolidated revenue in the range of $66 million to $70 million. We anticipate wireless DataCom revenue in the second quarter will be up on a sequential quarter basis due to broad based demand in core markets and increased shipments to our OEM customer in the heavy equipment industry. Second quarter Satellite segment revenue is expected to be relatively flat on a sequential quarter basis. At the bottom line, we expect second quarter GAAP basis net income in the range of $0.07 to $0.11 per diluted share and non-GAAP net income in the range of $0.24 to $0.28 per diluted share. For the full year fiscal 2016, we continue to expect consolidated revenues to gain momentum as the year progresses with the full year revenue outlook in the range of $280 million to $290 million driven by continued growth in our wireless DataCom segment and a much stronger second half for our Satellite segment. In closing, I’d like to recap some key points. First, we’re off to an excellent start in fiscal 2016. Our strong performance reflects the continued growth within our core markets and operating momentum in our MRM products business as well as software-as-a-service businesses. Second, investments and strategic initiatives including our opportunities in the heavy equipment sector evolving initiatives in the insurance telematics market and geographic expansion activities are expected to be growth catalyst for CalAmp throughout fiscal 2016 and beyond. Third, our strong liquidity position, which was further enhanced in the first quarter with the successful convertible debt offering, gives CalAmp tremendous flexibility and the financial wherewithal to take advantage of both organic and inorganic growth opportunities. And finally, we firmly believe our unique portfolio of hardware, software and service solutions supported by established channel partnerships with global reach gives us the leverage to win a disproportionate share of opportunities and drive broader adoption of emerging applications in the M2M market. We are working to take CalAmp to new heights by continuing to focus on short-term execution while strategically positioning the Company to benefit over the longer term from emerging M2M trends. That concludes our prepared remarks. Thank you for your attention. And at this time, I’d like to open up the call to questions. Operator?
- Operator:
- Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question is from Howard Smith of First Analysis. Please go ahead.
- Howard Smith:
- Yes, good afternoon, and congratulations on a strong start for the year. I wanted to talk a little bit about the visibility you're seeing in two specific areas, the first in the satellite. I know there's a product transition going on at your major customer there. You have a couple more months of dialogue or discussion or visibility. And maybe you could just give us an update on how much confidence you have, in terms of the ramp throughout the year? We'll start with that.
- Michael Burdiek:
- Well, I would say that our visibility on the Satellite transition is increasing and I think at this point in time, it appears that the transition won’t be as dramatic as one point in time or at least our view of it is one point in time. We think the transition will be more of a phased in process with our legacy product shipments continuing for some extent of period of time. Overall, that’s generally a positive for really two fundamental reasons; one, our legacy products carry somewhat higher margins and we anticipate will be realized with some of the newer products early in that lifecycle; and two, based on the exhaustion of inventory for the legacy products, we think there is potentially some catch up in the second half of the year in order to keep the flow of products moving as our customer continues to bring online new customers.
- Howard Smith:
- Okay, sounds like an incremental positive. And then the other region I wanted to dig in on was Latin America, South America. That's been a little choppy for you quarter to quarter and just uneven order patterns as you ramp up in that area. Do you feel now your customer base and the patterns are more predictable for you?
- Michael Burdiek:
- Well, certainly, Latin America has been weak for us for the last couple of quarters. I am pleased to say in our first quarter even though our international product revenues on a consolidated basis were down as a percentage of revenue. In our MRM products business we actually saw growth in product shipments in virtually every region in the world including Latin America. Canada being a key exception. So I think that for us is a positive indicator and it's also interesting in that our product shipments to international customers particularly in Latin America has sort of undergone somewhat of a change in character shifting more from sort of lower-end stolen vehicle recovery types of products more towards low to mid ranged fleet types of products. So I think that’s again a fairly positive indicator for us.
- Operator:
- The next question is from Mike Latimore of Northland Capital. Please go ahead.
- Mike Latimore:
- Great quarter and outlook there. Just following up on the usage-based insurance market, it sounds like you're seeing growth throughout the year. Is that tied to the current core customers you have? Or are new customers being layered in here?
- Michael Burdiek:
- I think our expectation is we'll see growth with our existing programs and obviously the growth would be greater if we can bring some additional customers online and we're involved in a couple of different pilot projects and some of our key activities there. But the growth we saw in Q1 versus Q4 was with the existing core customers that we've been shifting to for some period of time. And we expect again some progress there as we work our way through the year.
- Mike Latimore:
- Are the new prospects interested in the acquisition you guys made? Or is that not part of that proposal?
- Michael Burdiek:
- I think it's changed the character of the conversation and I think for the positive perhaps significantly more positive in that certainly our roadmaps suggest we're going be able to do a lot more than just deliver our hardware device and report driver behavior information from that device. We've been involved in many interesting discussions and actually a number of different live trials involving our device and the Crashboxx technology on board. And I would say that the feedback we've received thus far and the market dynamics that are in play today are very, very receptive to that type of value added technology.
- Mike Latimore:
- Got it. And then the solar segment you guys are in, did you see the solar business being -- growing this year, let's say, in FY16?
- Michael Burdiek:
- We had a good year last year with that particular customer, it was down a little bit in Q1 but up substantially year-over-year because we had a pretty light quarter on Q1 of FY'16. I think our outlook is that we'll have somewhat of a better year this year than last year and last year was by far our best year ever with that customer.
- Operator:
- The next question is from Sid Sinha of Canaccord Genuity. Please go ahead.
- Sid Sinha:
- Thanks for taking my questions, and congratulations on the nice quarter. I guess starting off with the wireless networks, and given the expected slowdown at the heavy equipment customer in the quarter, you've said that the Q2 should see improved sales. And how should we think about the sales level? Is it a modest improvement over Q1? Or could it potentially go back to Q4 levels, and I guess, Q4 FY15 levels?
- Michael Burdiek:
- I don’t think our outlook is in line with where we were in Q4. I would say probably more the former than our expectation for the latter in Q2. We do expect to be up somewhat in Q2 and strengthen considerably as we move our way through the balance of the fiscal year.
- Sid Sinha:
- And then just outside of this heavy equipment customer, if we look at the wireless networks business for Q2 and the rest of the year, given your guidance, how should we think about the different verticals? And is there any better visibility for PTC after the unfortunate railway accident? And what about public safety in the energy markets?
- Michael Burdiek:
- Sure that was a full question for sure. Actually our outlook for the full year is based upon really solid growth in all of the core vertical applications. And as it relates to some of the specific ones you mentioned like PTC we had a pretty good year last year in PTC radio shipments. We would be quite pleased to see that level of activity again this year although I think based on the quoting activity and the pipeline of opportunities we may see a little bit of improvement in PTC this year. I am also pleased to say we saw for the first time in I think almost seven years an increase in product shipments into the public safety market in Q1. There hasn’t been a lot of activity on the product side there for some period of time and I think the first net infrastructure is beginning to be built out and that’s starting to create some demand for our fusion high end band 14 router product. And we had some solid shipment in Q1 and I think the pipeline is solid for the balance of the year. On the energy front we had a good year last year. We would expect that base of business to grow modestly this year and as we pointed out earlier in the Q&A here we expect our solar customer to ramp up somewhat from where we were in FY'15. So I think the energy segment overall for FY'16 looks to be pretty solid. So our guidance, our full year guidance is based upon really core for growth almost all across the board with the exception of our satellite segment obviously.
- Sid Sinha:
- Okay, great, thanks for the great color. And then following the recent significant convertible debt raise, could you remind us, Michael, what your acquisition philosophy is, in terms of the financial and strategic goals? And then how is this M&A pipeline, in terms of potential candidates and timelines, I guess?
- Michael Burdiek:
- Sure, well, there are four key acquisition criteria, number one, margin accretion that being gross margin accretion; two, non-GAAP earnings accretion; three, vertical market alignment and/or channel leverage; and four, relative ease of integration. So those are the key acquisition criteria and they're not easily satisfied obviously collectively. I think our philosophy continues to be to try to adhere to those principles and I would say as we've increased our international revenues we've had some increased visibility on potential acquisition opportunities given our more global view today as opposed to where we've been in the past, but outside of that I don't think anything has necessarily changed in terms of our pursuit of strategic M&A opportunity.
- Sid Sinha:
- Okay, thanks. And just a bookkeeping question. Can you share what the split between the MRM and the wireless networks business was? Or wireless…?
- Michael Burdiek:
- Yes, it was approximately 60% MRM products versus 40% wireless networks products and services in Q1.
- Operator:
- Thank you, the next question is from Jonathan Ho of William Blair. Please go ahead.
- Jonathan Ho:
- Hi guys. Congrats on the strong quarter. Just wanted to start out, you referenced in your prepared remarks that you're starting to see a bit more of a shift from some of the larger customers towards an outsourced hardware model. Can you talk a little bit about maybe what's changed there? And what sort of opportunity this would open up for you guys?
- Michael Burdiek:
- Thanks Jonathan. Well, as you know, I mean, we've been a dominant supplier of fleet products to application service providers in North America for some period of time, we have significant market share, but even through our market share is quite high in the U.S. and in North America more broadly and as we look at the largest application service providers in that region in the North American region, roughly 8 out of 10 of the top service providers are our customers, that leads two large ones that we have left to tackle. I think in terms of some of the holdouts we're starting to see some opportunity to potentially penetrate those key North American accounts and likewise in various regions around the world where some of the larger application service providers up to this point in time have relied mostly on their own internal developments for their product solutions, we're starting to see some openings to potentially transition some of those customers over to our core product portfolio.
- Jonathan Ho:
- Got it. And then just in terms of the competitive landscape, can you talk about whether you're seeing any increased competition? Whether there's any -- there's been more traction with some of the Asian competitors that have been referenced in the past? And whether that's meaningful at all, relative to the first-quarter results?
- Michael Burdiek:
- I don't think the potential Asian treat has been detectable in the market at least in terms of our go-to-market strategies and if anything I would say our competitive position and strengthening as opposed to weakening or being somewhat stable. I am really-really comfortable with where we're at. I am very-very comfortable with the momentum we're seeing in terms of converting some of these customers we talked about a moment ago over to our product portfolio all around the world.
- Jonathan Ho:
- Got it, and one last one for me. You guys talked a little bit about the MDT-7, and what that can add to some of the potential transactions, and some of the customers that are adopting it. Can you maybe give us a sense of how much that would uplift a typical deal? Or what that could mean, if you're able to, I guess, more fully penetrate the base with the additional hardware up-sell?
- Michael Burdiek:
- Well in the past we've talked about the MDT product in terms of revenue impact being potentially minimal. We reached a run rate of a few million dollars a year on that product that we would see that as a success where we would see the lift is on the margin side. The ASPs we've been able to realize for those products are both accretive in terms of pricing but very much accretive in terms of margin impact.
- Operator:
- [Operator Instructions] The next question is from Mike Crawford of B. Riley. Please go ahead.
- Mike Crawford:
- Thank you. Could you please talk about what kind of activity you're seeing with your B2B App store? And what your thoughts are, and how that's progressing?
- Michael Burdiek:
- Well in terms of revenue activity not much but it has been an interesting sort of incubator for some interesting content providers [and] Crashboxx is a great example of that. Crashboxx had been developing Android based versions of some of their applications to be monetized through our app store and obviously that's when we got to know those guys better and certainly that ended up resulting in us acquiring their technology. We see other kind of emerging players with special types of applications mostly targeted towards fleets but not fairly exclusively targeted fleet where we're getting some interesting insights into where the market is headed for some fleet applications, so that's very, very valuable market information is a great leading indicator for us. But it also is providing a portal for us to be able to bring some of our own applications to the android platform such as fleet outlook which is our core enterprise fleet application, which we acquired through wireless metrics, but also some of the driver scoring and driver feedback applications that Crashboxx was developing, we’re starting to mature those and hopefully we’re in a position to bring those to market early part of next year.
- Mike Crawford:
- Okay, thank you, Michael. And then in the heavy equipment vertical, it sounds like you and your primary customer continue to be happy with each other, and we know you've been working to penetrate others in the market, as well. How's that progressing?
- Michael Burdiek:
- It's progressing very well and as it relates to our key customer, I am pleased to say that we were recently -- we recently were awarded the highest supplier designation by that customer in recognition through our top tier quality systems and processes which is great and I think that’s a great endorsement of our capabilities and hopefully will help secure a solid long-term relationship with that customer. But outside of that account we’re seeing a lot of activity including some piling activities of our products with some of the other larger players around the world and it's actually -- the engagements are actually extending beyond I would -- what we would term just the heavy equipment component of some of those companies offerings including some of the heavy duty truck OEMs and the engagement and the piling activities are in some cases involving more than just a hardware device which is also exciting for us.
- Mike Crawford:
- Okay, thank you, and then final question is more financial related. Given the recent successful convertible offering, combined with the hedge and swap transactions, and also the continued utilization of your NOLs. Can you just go walk us forward several years, as to how non -- cash tax expense as a percent of pro forma income might walk up? It's 1.5% this year. I think it probably starts to increase a couple percent a year for several years? Or maybe you could provide some more color there, please?
- Rick Vitelle:
- We don’t expect the convertible notes and the call spread option instruments to have any appreciable effect on the non-cash tax rate for the near to mid-term future we still expect the cash tax rate to be roughly 1.5% and 2% of our taxable income. What’s happening for tax purposes is we have the cost of the bond hedge that -- and that growth cost of approximately $31 million is deductible on the tax return as original issued discount interest which essentially mirrors what’s happening for financial reporting purposes as we’re recognizing as interest expense in addition to the [1 and 5/8%] coupon interest and the amortization of the transaction cost that were allocated to the debt. On top of that we’re also recognizing for cash reporting interest expense as we amortize the note discount of 33, almost $34 million. So there is really not any significant impact on the cash tax rate per se. As we indicated during our Analyst Day presentation, we expect our cash tax rate will start moving that hold the next several years as we began recognizing more of our taxable income outside the United States where we currently don’t have tax.
- Operator:
- The next question is from Greg Burns of Sidoti & Company. Please go ahead.
- Greg Burns:
- How much remains outstanding on the Navman note payable? And do you expect any change in buying behavior from that customer, once the discount goes away?
- Michael Burdiek:
- So I think the amount outstanding if there is any is nil on the note and as it relates to the potential commercial activities with that customer going forward, I think there shouldn’t be any perceptible change in the relationship and now that we’re some two and a half years, almost three years into commercial engagement with that customer obviously we’re tied together tighter than ever and over the past two to three years that customer's transitioned away from some of internally developed legacy products to our broader portfolio. And in fact I think that’s put them in a stronger competitive position frankly given our product portfolio in general is probably brought to market at a lower cost and they think they were able to do on their own internally. So, we’re quite pleased with the relationship. We think it’s solid and secure and in fact growing as we work our way through this year and the coming years.
- Greg Burns:
- And just had a question about the recent rise in DSOs, not necessarily quarter-over-quarter, but more structurally from a little over a year ago. It seems like we're at this higher plateau than where you are historically. Can you just run through what the major drivers have been of that?
- Michael Burdiek:
- Sure, there is fundamentally three contributing factors. Number one, it’s the consolidated mix shift. Historically our Satellite customer has paid a very relatively short number of days after invoice as compared to the broader average for our wireless DataCom segment so that’s a key factor obviously. Satellite is a much smaller percentage of revenue today than it was a year ago. Another factor is obviously our expanding international footprint. Generally speaking, international customers pay slower than we would traditionally see from a U.S. base customer. But that is not a big factor but it is a bit of a factor. And thirdly, in the last couple of quarters, our key customer our key heavy equipment OEM customer has well [attuned] to our average customer base has fairly liberal payment terms. And so, those three factors combined I think are the key reasons you’ve seen the DSOs expand marginally. I would say this, the credit worthiness of our customer base overall has actually increased over the last few years and I think our [well past due] balance was at a record low at one point during this past quarter. So overall, even though the DSOs have expanded somewhat due to the factors I mentioned earlier the credit worthiness of the customers and our bad debt expense has actually gone down during that period in time.
- Operator:
- Thank you. I would now like to turn the conference back over to management for any additional remarks.
- Michael Burdiek:
- Well, thank you for your support and for joining us on today’s call. We’ll look forward to speaking with you again when we’ll report our fiscal 2016 second quarter results in the fall. Thanks again.
- Operator:
- Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
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