CAMP4 Therapeutics Corporation
Q3 2016 Earnings Call Transcript

Published: 23 Dec 2015

[Operator:]

Greetings, and welcome to the CalAmp’s Third Quarter 2016 Earnings 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 your host Mr. Lasse Glassen. Thank you, Mr. Glassen, you may now begin.

[Lasse Glassen:]

Thank you, operator. Good afternoon, and welcome to CalAmp's fiscal 2016 third quarter results conference call. 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 forwarding-looking statements reflect CalAmp’s best current judgment, they are subject to risks and uncertainties that could cause actual results to materially differ from these 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 filed with the SEC earlier today and is available on our website and in our most recent Annual Report on Form 10-K and subsequent reports on Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances. Michael Burdiek will begin today's call with a review of the company's financial and operational highlights. Rick Vitelle will then provide additional details on the company's financial results and Michael will then wrap up with CalAmp's business outlook and guidance for the fiscal 2016 fourth quarter. 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. Broad-based customer demand drove excellent third quarter results with consolidated revenue, Wireless DataCom segment revenue, and adjusted EBITDA each at all-time record levels for a single quarter. In addition, third quarter non-GAAP EPS of $0.31 per share exceeded the upper end of our original guidance range with cash flow from operating activities of $9.1 million. During the quarter, we experienced strong growth in shipments of telematics devices to Caterpillar coupled with solid demand for our Mobile Resource Management and wireless network products and services. Our Satellite segment revenue was somewhat better than expected and added meaningfully to our bottom line profitability and operating cash flow. Overall, we are extremely pleased with our third quarter performance and expect momentum to remain strong through the balance of the fiscal year. Looking at our third quarter results in more detail, consolidated revenue was a record $74.7 million with Wireless DataCom revenue up 15% year-over-year to $62.8 million and Satellite revenue up 37% to $11.8 million. Consolidated gross margin increased to 35.6% in the third quarter, up from 35% in the third quarter of last year and adjusted EBITDA margin improved to 17.2%, up from 15.7%. At the bottom line, we achieved GAAP basis earnings of $0.11 per diluted share in the third quarter with non-GAAP earnings of $0.31 per diluted share, up from $0.27 in the immediately preceding quarter. Operating cash flow totaled $37.9 million in the first nine months of fiscal 2016, resulting in free cash flow of $34.4 million. This strong performance increased our total cash and marketable securities to $223 million at quarter end. Now, I would like to review our operational highlights for the quarter in more detail. Our Wireless DataCom segment posted another record setting revenue quarter as we continued to experience strong customer demand for our core products and services. Revenue from telematics products shipped to Caterpillar was sharply higher on both the year-over-year and sequential quarter basis and are expected to remain strong in the fourth quarter and into fiscal 2017. Overall, we are quite pleased with how our business with Caterpillar is progressing. Telematics is a key strategic thrust for Caterpillar, and we continue to look for ways to expand our relationship with this important customer as well as develop additional opportunities in the burgeoning heavy equipment market. Our Wireless DataCom segment growth was broad-based in the third quarter including healthy year-over-year revenue growth for our software-as-a-service solutions. In total, recurring revenue from our fleet management, automotive aftermarket, and communications services was $10.5 million in the third quarter, up from $10 million in the third quarter last year, driven by an 11% year-over-year increase in overall SaaS revenue. Across all of our market verticals, we had approximately 490,000 unique software subscriptions into the third quarter, which is up from 487,000 at the end of the immediately preceding quarter. Moving on to our MRM products business, we continued to see solid demand in fleet management, asset tracking, and insurance telematics applications, both domestically and with key international customers. Customer demand in the US remained strong and we saw healthy pickup in demand from customers across Europe, Latin America, and the Pacific Rim. We are making good progress in building the sales pipeline with new large global enterprise accounts and believe we are well positioned for additional growth in fiscal 2017 and beyond. In the connected vehicle and insurance telematics markets, we are taking concrete steps to advance our strategic vision. Earlier in the year, our acquisition of Crashboxx helped to position CalAmp at the forefront of telematics technologies for streamlining insurance claims processing through the automation of crash detection notification and vehicle damage estimation. Last month, we announced a strategic seed capital investment in Smart Driver Club Limited, a new technology and insurance startup founded by an experienced team of telematics industry experts with an exciting vision. Smart Driver Club was created to provide extensive connected car services and innovated insurance offerings by leveraging aftermarket telematics solutions through new and used auto dealerships in the United Kingdom. More recently, we made public our all-cash offer dated November 10, 2015, to acquire LoJack Corporation, a provider of vehicle theft recovery systems and advanced fleet management solutions, for $5.50 per share in a transaction valued at approximately $113 million. For nearly two years, we have tried to engage with LoJack in discussions regarding a combination of our two companies. In the past 14 months, we have made three all-cash offers to LoJack, each of which would have provided a median and certain value for LoJack shareholders at a significant premium. As demonstrated by our recent offer, we continue to believe that the benefits of the business combination are significant for the stakeholders of each company. Given our strong belief in the opportunity for potential combination of CalAmp and LoJack offers and having been unsuccessful in moving forward privately, we determined that the most constructive path forward is a direct appeal for LoJack shareholders about the merits of our compelling offer. We believe the combination of LoJack’s world renowned brand and strong auto dealership distribution channel, coupled with CalAmp’s leading portfolio of wireless connectivity devices, software, services, and applications would create a market leader that is well-positioned to drive the broad adoption of vehicle telematics technologies and applications worldwide. CalAmp’s Board of Directors unanimously support this offer and believes with the close cooperation and focus of our respective teams that we can expeditiously complete due diligence and execute a definitive agreement. After our most recent offer, LoJack announced that they are evaluating strategic alternatives and we look forward to their serious consideration of our offer. We are committed to completing this transaction. We also continue to invest organically in unique technologies that can give CalAmp sustainable sources of competitive advantage. Our R&D investments are focused on high-growth markets to maintain technology leadership, and we are also protecting our innovations through patents whenever possible. As an example, we were recently awarded three patents that capture incremental innovations that streamline the successful deployment and adoption of machine to machine or M2M solutions. These new patents increased our awarded patent count to 37 with a record number awarded this year and are the latest in the long string of technology innovations that CalAmp has developed over the years. Overall, we are pleased with our recent progress in advancing our strategic initiatives in the connected vehicle space. We will continue to invest in the technologies, channels, and strategic partnerships that we believe will position CalAmp to play a foundational role in the evolution of the overall M2M marketplace. Moving on to our Satellite segment, revenue in the third quarter was $11.8 million, somewhat better than our expectations. We continue to be pleased with the satellite segment's operational performance which achieved gross margins of 26.7% in the third quarter and provided healthy contributions to operating cash flow and our 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 third 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 third quarter. Consolidated revenue for the fiscal 2016 third quarter was $74.7 million, an increase of 18.1% compared to the third quarter last year. Consolidated gross profit for the third quarter was $26.6 million, an increase of $4.5 million or 20.2% over the same quarter last year. The gross profit increase is the result of higher revenue in both the Wireless DataCom and the Satellite reporting segments. Consolidated gross margin was 35.6% in the latest quarter compared to 35.0% in the third quarter last year. Looking more closely at gross profit performance by reporting segment, Wireless DataCom gross profit was $23.4 million in the quarter, that’s a gross margin of 37.3%. Year-over-year, Wireless DataCom’s third quarter gross profit was up $3.3 million while gross margin increased by 50 basis points. Our Satellite business had a gross profit of $3.2 million in the third quarter with a gross margin of 26.7%. This compares to gross profit of $2.0 million and a gross margin of 23.4% in the third quarter of last year. GAAP basis net income for the fiscal 2016 third quarter was $3.9 million or $0.11 per diluted share, which is essentially flat compared to the third quarter of fiscal 2015. Although the company's GAAP basis effective tax rate of 38.3% 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 net operating loss and research and development tax credit carryforwards. Our non-GAAP net income for the fiscal 2016 third quarter was $11.4 million or $0.31 per diluted share, compared to $9.2 million, or $0.25 per diluted share for the same quarter last year. Non-GAAP earnings excludes the impact of intangible asset amortization, stock-based compensation expense, non-cash interest from amortization of debt discount, the non-operational equity in net loss of affiliate and acquisition related expenses in periods when incurred and includes income tax expense for cash taxes paid or payable for the period. Adjusted EBITDA which is also a non-GAAP measure was $12.8 million in the third quarter of fiscal 2016 with an adjusted EBITDA margin of 17.2%. This compares to adjusted EBITDA of $10.0 million and an adjusted EBITDA margin of 15.7% 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 third-quarter earnings press release that was issued today, which is available on our website. Now moving on to our liquidity position and balance sheet. As of November 30, 2015, the company had total cash and marketable securities of $223 million and total outstanding debt of $138 million, which represents the carrying value of our 1.625% convertible unsecured notes that we issued in May 2015. Net cash provided by operating activities was $9.1 million during the third quarter and $37.9 million for the first nine months of fiscal 2016. We also have $15 million bank working capital line of credit that is fully available for borrowing. Our consolidated accounts receivable balance was $44.9 million at the end of the third quarter, compared to $45.8 million at the end of the immediately preceding quarter. This represents an average collection period of 51 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 third quarter was $18.1 million, representing annualized inventory turns of approximately 11 times, up from inventory turns of approximately 8 times in the preceding quarter. Total inventory decreased by $4.5 million compared to the previous quarter due to the ramp up in shipments made during the third quarter. Primarily as a result of the increased inventory turns, our cash conversion cycle improved from 29 days at the end of the preceding quarter to 23 days at the end of the latest quarter. For the fiscal 2016 third-quarter, our GAAP basis effective tax rate was 38.3% compared to 37.4% in the third quarter of fiscal 2015. For the nine month year-to-date periods, our GAAP basis effective tax rate was 37.4% both this year and last year. As a result of the recent congressional action to extend and make permanent the federal R&D tax credit program, our GAAP basis effective income tax rate for fiscal 2016 as a whole is expected to be approximately 35% due to R&D tax credits in the estimated amount of $600,000 that will be realizable in the fourth quarter. Our non-GAAP tax rate in the fourth quarter is expected to be about 1.5%. With that, I will 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 fiscal fourth quarter. Looking at our fiscal 2016 fourth quarter, we expect to achieve consolidated revenue in the range of $73 million to $78 million. We expect Satellite segment revenue to be down slightly on a sequential quarter basis with Wireless Datacom revenue up sequentially in the fourth quarter and solidly higher on a year-over-year basis. At the bottom line, we expect fourth quarter GAAP basis net income in the range of $0.09 to $0.13 per share and non-GAAP net income in the range of $0.28-$0.32 per diluted share. We anticipate the continued operational execution and investments in key strategic initiatives will help drive profitable growth into fiscal 2017 and beyond. In closing, I'd like to recap some key points. First, I'm quite pleased with our performance in the third quarter and fiscal 2016 to-date. Our strong results reflect continued operating momentum across all of our businesses. Second, investment and strategic initiatives, including our opportunity from the heavy equipment sector, connected vehicle technologies and geographic expansion activities are growth catalysts. Third, our strong liquidity position gives CalAmp the flexibility and financial wherewithal to take advantage of growth opportunities including the recent investment in Smart Driver Club and our proposed acquisition of LoJack. And finally, our ever-increasing scale, impressive roster of global enterprise customers, growing IP portfolio and emerging strategic opportunities position us well to sustain our momentum into fiscal 2017 and beyond. 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:]

[Operator Instructions] Our first question comes from Howard Smith with First Analysis. Please state your question.

[Howard Smith:]

Couple of questions, first, just on the international business, you were up surprisingly sequentially last quarter in South America and Brazil. I'm curious if that continued or if the macro caught up to you and just maybe what you’re seeing overall around the globe by region?

[Michael Burdiek:]

Well, thank you Howard, nice to speak with you. Actually, we did make continued progress in Q3 as compared to Q2. It may be surprising to you, not necessarily so much for us that we’re continued momentum in regions all around the world. And in fact, similar to what we stated last quarter, we saw growth at least as it results to MRM product sales, we saw growth in every single region outside the US including some of the regions that you mentioned in Latin America, so we're very pleased to see ongoing process on the international front.

[Howard Smith:]

That's very encouraging. My other question has to do with Smart Driver Club, an intriguing combination of offerings there, may be. Do you look at that as somewhat a test environment where you can do things, and then particularly if you get LoJack, maybe do it in a larger scale over here or how do you look at kind of trialing some of that? And what stage are you at, is that actually rolled out yet, maybe we can get an update on that deployment schedule?

[Michael Burdiek:]

Sure. Well, Smart Driver Club obviously is an independent company. We provided some seed capital for the business launch. And we do believe that they have an interesting strategic vision. It's very, very consistent with ours, and it's basically offering a range of different types of consumer and commercial based offerings through the new car and in some cases as part of their business plan the used car dealer channel in UK, and they're looking at offering a range of different types of services and consumer benefits including things like value my car, locate my car, service and maintenance programs, coupons, and affinity programs with the dealer networks themselves, all to the benefit obviously of the consumer through these value-added services, but also to the benefit of the dealer in maintaining a connection with that customer and relationship with that customer after the new or used car sale. Down the line, Smart Driver Club intends to offer insurance services through that same channel relying on telematics obviously as the key component of their underwriting activities . And indeed we do see the opportunity to bring those types of products and services through the new and used car dealer channels in the United States, and we think LoJack’s position and their relationships with those dealers and those dealer networks could be extremely valuable. If indeed these types of services gain traction in the UK and are piloted and mature there, we think that's a great opportunity to bring back that concept into the US market.

[Howard Smith:]

Great, thank you, and congratulations on another solid quarter.

[Operator:]

Our next question comes from Mike Crawford with B. Riley & Co. Please state your question.

[Mike Crawford:]

Back to Smart Driver Club, it looks like you made $2.2 million investment in affiliate. Is that what the C capital was that you provided for them?

[Rick Vitelle:]

That's correct.

[Mike Crawford:]

And so what percent do you own and what further commitments do you expect might be forthcoming?

[Michael Burdiek:]

Well, our seed capital investment is – it brings us an equity stake of under 50%, and we do have some financing commitments that would be triggered based on them achieving certain commercial and operational milestones, but our current outline contractual commitments based on those meeting milestones are considerably less than $10 million.

[Mike Crawford:]

I'm sorry Michael, less than $10 million all in to –

[Michael Burdiek:]

Incremental to our current $2.1 million or $2.2 million investment.

[Mike Crawford:]

And is that something that you anticipate might come like over the course of a known timeframe?

[Michael Burdiek:]

Well, if they achieve their operational milestones per business plan, we would expect a bulk of that to sort of roll through in terms of balance sheet items through really most of our fiscal 2017, perhaps little bit rolling into fiscal 2018.

[Mike Crawford:]

Okay, great thank you, and then I'll just ask one other question. So on the heavy equipment vertical, we know Cat’s volumes are down a little bit year-over-year as that market is soft, although they still ship lots of vehicles that you can put your radars on. What about progress in doing more on the telematics front with them and also progress on hardware and/or applications front with others in the vertical?

[Michael Burdiek:]

Sure. Obviously, we had a very good quarter with Caterpillar, actually better than expected in Q3. In fact, we expected some of what happened in Q3 to actually happen in Q4. But generally speaking, you know, the Cat business in the second half of the year is pretty much in line with what our expectations were earlier in the year. It’s interesting because Cat is obviously a key customer, but in many ways, we look at Caterpillar as a market in and of itself, and we’re exploring a number of different opportunities with Caterpillar and we are confident that if we continue to execute on our current program and given our strengths across the board as it relates to Telematics products and services, we think we are well positioned to take advantage of new incremental opportunities with Caterpillar beyond our current program. As it relates to opportunities outside of Caterpillar, as we mentioned on prior calls, we are engaged in a number of different piloting activities. Those piloting activities continue to progress. But in most cases, their engagements with global enterprise customers, not unlike Caterpillar and these relationships and these opportunities take a fair amount of time to gestate. But we think we are supremely well positioned to engage long-term, not only with Caterpillar, but with other major players in the heavy equipment market.

[Mike Crawford:]

Okay. Thank you very much.

[Michael Burdiek:]

Thank you.

[Operator:]

Thank you. Our next question comes from Mike Walkley with Canaccord Genuity. Please state your question.

[Mike Walkley:]

Great. Thank you very much. Happy holiday to everybody on the call. Question for me was just on the PTC business, I think it was having some better trends this year than last year. Maybe you can update us on how that business trended in the quarter, and maybe the outlook for the remainder of the year?

[Michael Burdiek:]

Well, PTC has been solid for us this year. It was good last year as well. And in Q3, I think it was just under $2 million of revenue. And through three quarters, pretty much at the same level it was for the full year last year. So obviously, it’s been very good and the outlook for Q4 is actually quite positive as well.

[Mike Walkley:]

Great, thanks. And then in the UBI business, can you update us on some of the opportunities and trends in that business? I know you talked in the past about some good business in UK and then the US market starting to pick up with some opportunities?

[Michael Burdiek:]

Yes, it’s interesting because the Europe has been very good, and in fact, we had a nice quarter. It was up sequentially from Q2 as it relates to product sales. And really the majority of the business as it relates to device sales for insurance telematics was outside the US in Q3, a major chunk of that being in Europe, including the UK with the RAC. We also had a bit of business develop for us in the Asia-Pacific region. But obviously, it’s an area that we are focused on and it’s also quite interesting that since we announced the acquisition of Crashboxx earlier this fiscal year, it’s really changed the nature of the conversation. I think the view of CalAmp in the insurance marketplace globally and we find ourselves having conversations with not only our existing clients, but also new clients and new major insurance players who have global footprints, who are very, very interested and how that technology can really revolutionize the whole claims processing facet of auto insurance – the auto insurance experience for consumers. And obviously the technology needs the platform to write upon to be fully effective and so in some ways, it’s creating more opportunities for our device business because in a sense, it – the devices are future proof, because they have been or they are being integrated with the Crashboxx technology. So one sort of opportunities on the claim side seems to be feeling us new opportunities as it relates to device opportunities and vice-versa.

[Mike Walkley:]

Great, thanks. And just on Michael, with the LoJack proposed acquisition, obviously great channel to sell more of these type products. As you look at Crashboxx and uses base insurance, just that opportunity, I know you've talked in the past in baseball terms, but where do you think that opportunity stands today? And how should we think about CalAmp's market opportunity over the next two to three years relative to your revenue base today?

[Michael Burdiek:]

Well, I haven’t talked about baseball in a while and the season is over. Well, trying to frame it in baseball vernacular, I think we’re still in the early innings and in some ways the game really hasn’t progressed much from where we were earlier in this year at least as it relates device opportunities. But I think we are playing the game in a completely different fashion now than we were a year ago and we certainly have more to bring to the party and we certainly have a stronger team to feel as it relates to engaging with insurance players, with novel offering. In fact, quite revolutionary offerings. If you contemplate what can be done with driver scoring applications with the type of devices that we have that are integrated with crash detection and claims automation processing technology, it’s really quite revolutionary. And obviously, we are working diligently to bring that technology to market and obviously that technology is going to be looking for channel to market once it’s to a commercial state.

[Mike Walkley:]

Great, thanks. Just two more questions for me and I'll pass it on. Just one, the more housekeeping questions for my model, one, can you give us the breakout mix within MRM for that division? And then also, just the FAS recurring revenue seemed a little lighter than I expected this quarter. Is that mainly due to the remote car start business being a little light with the warmer weather this winter?

[Michael Burdiek:]

First question, as it relates to breakdown between MRM and wireless networks within the wireless datacom segment, it was approximately 57% MRM products and 43% wireless networks products and services. As it relates to your second question, yes, some of the – I guess, you might call it lack of progress in terms of recurring revenue growth in Q3 was related to a sequential decline in bundled hardware revenue, mostly related to the remote car start application. The season kicked off as typical in the summer quarter where there was an inventory build. But obviously as you know, the winter has yet to really embrace the United States and most of North America yet this year and so, there hasn’t been quite a stimulus for remote car start products, and obviously the related subscription application take up as we have seen in prior years. We’re hopeful that the harsh winter finds its way into North American starts to generate some incremental demand there, but that’s – it’s been relatively soft thus far in the season. And obviously we have an ongoing decline in churn and our satellite data services, which is another kind of headwind as it relates to recurring revenue growth. But our fleet business is on solid ground and in fact, I think our fleet subscribers were up something around 17% versus Q3 last year. And also we have seen a bit of an inflection point as it relates to SaaS revenue in the vehicle finance market. It was flat for a number of quarters and we are actually seeing a little bit of uptick in the last couple of quarters. But obviously the latest quarter experienced some effects from decline in bundled hardware, mostly related to remote car start applications.

[Mike Walkley:]

Thank you very much.

[Michael Burdiek:]

Thank you.

[Operator:]

Thank you. Our next question comes from Jonathan Ho with William Blair. Please state your question.

[Jonathan Ho:]

Good afternoon, and congrats on the strong quarter.

[Michael Burdiek:]

Thanks, Jonathan.

[Jonathan Ho:]

Just wanted to start out in terms of the satellite business, what sort of drove the outperformance relative to your expectations? And I know you guys said that, it would be a little bit softer in the fourth quarter, but can you give us a little bit more color in terms of where we are in terms of the next-generation transition, and maybe what that impact was on the quarter?

[Michael Burdiek:]

Sure. Q3 was a little bit better than we expected. But I think the second half outlook is generally in line with what we projected back in the very beginning of this fiscal year. So for the full year, I think we are generally in line with what we expected, how we would expect it to play out. Looking in for the next fiscal year, we believe that the new products will launch, but they will ship in parallel our shipping combination with some of our legacy products. So we don’t expect to see quite the margin hit that once upon a time we would have expected as it relates to a product line transition with our key customer there. So in the beginning of next fiscal year, we expect some marginal decline in gross margin profile for the business, but not precipitously and through – as we run through the next fiscal year, we will probably see margins hover in the low-20% range as opposed to sort of a mid-20s we have experienced over the last few quarters.

[Jonathan Ho:]

Got it, that's helpful. And then as you look at sort of the strength in free cash flow, can you guys talk a little bit about what maybe drove the stronger cash conversion cycle, and where we should think about medium-term targets in terms of what free cash flow and operating cash flow should look like?

[Michael Burdiek:]

Well, on a sequential quarter basis, the cash conversion cycle was down to 23 days, primarily due to the increased inventory turns. I think that year-to-date, our operating cash flow and free cash flow is pretty indicative of what we expect over the near to mid-term future. We could see cash conversion days trending even a bit lower, but low-20 days range, I think is a good target for us.

[Jonathan Ho:]

Got it. And one last one for me. Just in terms of the international investments that you guys are making, can you just maybe refresh us in terms of where those investments are going, and where you see sort of the biggest opportunities, particularly around distribution channel expansion internationally?

[Michael Burdiek:]

Sure. Well, obviously, we have a direct investment, it's more driver club, but we've also been investing in sales and marketing resources, key regions around the world, we have a team in Brazil, we have a team in the UK, we have obviously an organization based in New Zealand and actually we made most of those investments two or three years ago and obviously we’re reaping the rewards from those investments today. But as the business continues to grow, obviously, we’ll have to fortify those resources as necessary.

[Jonathan Ho:]

Great, thank you.

[Michael Burdiek:]

Thank you.

[Operator:]

The next question comes from Mike Latimore with Northland Capital Markets. Please state your question.

[Mike Latimore:]

Great. Thanks a lot. Great color there guys.

[Michael Burdiek:]

Thank you.

[Mike Latimore:]

Just on the Smart Driver’s Club and really, you executed on that, what would be the mix of say hardware versus software and services in some of those types of scenarios or sales once everything is kind of fully integrated let’s say?

[Michael Burdiek:]

Well, let's use I think Smart Driver Club as an example of what's possible. The concept there is to rule these services out. Essentially as a recurring service to a subscriber, much like OnStar has offered through GM today. So not unlike that, perhaps different price points, maybe different profitability profiles, but Smart Driver Club also is contemplating the rollout of insurance services, insurance services based upon the ability to mine telematics data and there, those policies would be offered much like policies that are offered here in the United States.

[Mike Latimore:]

Okay, got it. And then on Caterpillar, do you use the sort of the second half of this year as kind of a good run rate to think about or are we still not at sort of full deployment there?

[Michael Burdiek:]

I think it's fairly indicative and that’s consistent with what we talked about for some period of time. There may be a little bit of a peak in demand here as sort of things get in balance as it relates to in demand and inventory and supply chain capacity. But we’ve talked about a steady-state run rate of roughly $7 million a quarter plus or minus and obviously we were in that neighborhood in Q3. So as we look forward into next fiscal year, I don't think that's an unreasonable outlook.

[Mike Latimore:]

You talked about maybe some other different new opportunities at Caterpillar, would that be incremental to that $7 million?

[Michael Burdiek:]

Yeah. I was meant to suggest something incremental, or opportunities incremental to our current program.

[Mike Latimore:]

Is there any natural sort of seasonality with the Caterpillar business like really one quarter should be higher than others?

[Michael Burdiek:]

Much too early to tell.

[Mike Latimore:]

Okay. And then how did the solar customer do in the quarter?

[Michael Burdiek:]

Well, I think right around $3 million in revenue and it's actually been quite consistent for the last several quarters. I think the outlook for Q4 is generally in line with what we experienced in Q3.

[Mike Latimore:]

Okay, got it. And then you’ve given some longer-term guidance in the past about the non-GAAP tax rate, I guess any updated view on what the non-GAAP tax rate should be versus ‘17?

[Rick Vitelle:]

Over what timeframe?

[Mike Latimore:]

Fiscal ‘17?

[Rick Vitelle:]

17, okay. I don't envision any significance change in the next fiscal year. I think we’re still looking at somewhere below 2% cash taxes.

[Mike Latimore:]

Okay, great. Thanks a lot.

[Michael Burdiek:]

Thank you, Mike.

[Operator:]

Your next question comes from Greg Burns with Sidoti and Company. Please state your question.

[Greg Burns:]

Good afternoon. So on the vehicle telematics space and what you are attempting to accomplish there, when you look at the competitive dynamics of that market, competing against supported solutions like OnStar or like a aftermarket solution like Hum that I've just heard Verizon advertising a lot lately, how do you differentiate from these other kind of solutions, is it like you said a price point issue or is there other ways that you can differentiate and kind of separate yourself out from a crowded kind of consumer services space?

[Michael Burdiek:]

Well, I think there is two dimensions of differentiation, one is technology. I hate to sound like I'm boasting, but I think it's pretty clear we’re one of the market leaders, if not the market leader in the world as it relates to the sale of aftermarket telematics devices for mobile applications and obviously across a range of different types of mobile assets, anything from passenger vehicles all the way through obviously construction equipment. So we’re on the cutting edge as it relates to embedding interesting core technology to enable a range of different telematics applications inside a device and the whole device management ecosystem that goes around that. So I think that's one critical area of differentiation and we think a sustainable source of competitive advantage. And on the other side of that equation, so obviously the application suite and our ability to pull different types of information for a very, very broad range of vehicles, addressing multiple types of end market applications whether consumer facing or enterprise facing and also our ability to integrate that telematics suite at the platform level into third-party applications and ERP systems. And I don't believe the OEMs have that sort of world view, those are solutions that are obviously very proprietary, highly dependent upon their own specific OEM platforms and oftentimes closed system is not allowing others to be able to access critical information in support of this very, very broad range of different types of end market applications.

[Greg Burns:]

Okay, thank you. And I think maybe last quarter you had mentioned, you have eight of the top 10 fleet service providers outsourcing your hardware, the other two seems to be progressing towards potentially outsourcing. Have you made any progress on that front?

[Michael Burdiek:]

We’re progressing well.

[Greg Burns:]

Okay, all right, fair enough. Thanks.

[Michael Burdiek:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Marc Estigarribia with Chardan Capital Markets. Please state your question.

[Marc Estigarribia:]

Thank you. Congratulations on the quarter. If you can just looking at back on the Analyst Day presentation, the MRM and wireless markets, the SAM is expected to grow at 15% and 13% for MRM and wireless respectively for 2017, any chances that CalAmp is securing share gains in the growing SAM or do we expect to grow in line with the overall segment CAGR?

[Michael Burdiek:]

Very, very good question, Mark. Well, last year, our combined wireless datacom segment growth rate was right in line with market rates of growth, which is about 14%. If you took the midpoint of guidance, and assuming that we’re down modestly in the satellite business in Q4, it would imply that our wireless datacom segment would be growing faster than the overall market. And I don't think that there is any reason for us to have a different outlook than obviously focused on growing our wireless datacom segment at or greater than market rates of growth short term, mid-term and longer term.

[Marc Estigarribia:]

Great, thank you. And with regards to I guess the fast and growing end markets, revenue drivers in the next coming two, three years?

[Michael Burdiek:]

Well, we think there are multiple revenue drivers, but obviously given the market rates of growth, obviously that would be, the biggest growth driver as it relates to revenue is core market growth. But obviously we’re making investments in all sorts of interesting new areas, the heavy equipment market is one, interesting and innovative strategies like Smart Driver Club, obviously any strategic M&A that would broaden our channel reach and give us additional leverage and I think new initiatives similar to what we announced with Toyota earlier this year where we offer platform as a service and integrate with third-party applications on a bundle basis. So we think all of those key potential growth drivers that allow us to do better than the overall market rate of growth.

[Marc Estigarribia:]

Great. And just one last one I guess on the back of the first questions, on the first question with regard to the overall wireless datacom business, growing at a nice clip of 22% over the last three quarters on a year-over-year basis, is the 20% plus sustainable, should we expect it to gradually taper down, what is the outlook on that please? Thank you.

[Michael Burdiek:]

Well, again, implicit in our fourth quarter guidance, which obviously brings us to a full year number, we would be somewhere under 20% for wireless datacom segment growth for this fiscal year. Last year was 14% and next year, obviously we haven't gotten to the point where we’re giving guidance, but I think we’re focused obviously on growing that segment at or greater than the market rates of growth.

[Marc Estigarribia:]

Great, thank you very much.

[Michael Burdiek:]

Thank you.

[Operator:]

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

[Lasse Glassen:]

Thank you for your support and for joining us today. We look forward to speaking with you again when we report our fiscal 2016 fourth quarter results in the spring. Happy holidays.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.