CalAmp Corp. (NASDAQ:CAMP) Q1 2024 Earnings Call Transcript

CalAmp Corp. (NASDAQ:CAMP) Q1 2024 Earnings Call Transcript July 10, 2023

CalAmp Corp. misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.04.

Operator: Welcome to CalAmp's First Quarter 2024 Financial Results Conference Call. My name is Bethany, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Logan Lucas, Corporate Strategy and Investor Relations Manager at CalAmp. Logan, you may begin.

Logan Lucas: Good afternoon, and welcome to CalAmp's fiscal first quarter 2024 financial results conference call. I'm Logan Lucas, Corporate Strategy and Investor Relations Manager at CalAmp. With us today are CalAmp's President and Chief Executive Officer, Jeff Gardner; and Chief Financial Officer, Jikun Kim. During today's call we will make certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Forward-looking statements are predictions, projections, and other statements about future events that are based on current expectations and assumptions and as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements in this communication.

You should listen to today's call with the understanding that our actual results may be materially different from the plans, intentions, and expectations disclosed in the forward-looking statements we make. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings press release we issued today as well as the company's filings with the Securities and Exchange Commission. Readers are cautioned not to put undue reliance on forward-looking statements and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed on today's call. Now, Jeff will begin today's call with a review of the company's recent operational highlights, and then Jikun will provide a more detailed review of the financial results, followed by a question-and-answer session.

With that, it's my great pleasure to turn the call over to CalAmp's President and CEO, Jeff Gardner. Jeff, please go ahead.

Jeff Gardner: Thank you, Logan. And thanks to all of you joining us on the call today. Over the past few years CalAmp has been executing a strategy to enhance shareholder value as an independent company. In the past weeks we have received unsolicited inbound inquiries. As a result, the Board of Directors has engaged advisors and formed a Special Committee to help us explore all strategic alternatives available to the company. We will not be answering any questions on this topic today. Overall, the CalAmp team is more focused than ever on driving topline revenue with a leaner and more efficient cost structure to increase the profitability of the company. Strategically, we have converted the installed-base to a subscription-model, focused the sales organization on selling full stack solutions, set up a customer success team to drive retention and upselling, and restructured the business to improve cash flow and profitability.

Regarding the first quarter, we saw varying degrees of strength and weakness in demand across the customer base. Specifically, we had a particularly strong quarter with our large industrial customers with the account generating around $16.6 million in revenue. We expect this performance to continue into the future as we are increasingly able to ship against their demand. On the other hand, demand from our telematics service providers, or TSPs, and channel customers demonstrated some softness in the quarter as they adjusted their order volumes in inventory strategies to better align with a more normalized shipping environment. Due to supply improvements, customers no longer need to order far in advance to secure supply. So order volumes were lower as they sell existing inventory.

We expect this to take a few quarters to correct and we will continue to drive additional revenues from other areas of business. Now to dive into our performance in the first quarter of fiscal year 2024. We recognized $70.9 million in revenue. Despite missing the low-end of guidance, the teams’ focus on cost efficiencies produced gross margin growth of 280 basis points and generated over $6 million of adjusted EBITDA. The gross margin expanded due to better revenue mix and decreased PPV costs as the supply chain continues to normalize. Further, the company continued to realize expense efficiencies from the recent cost management initiatives resulting in $5.4 million in operating expense reduction year-over-year. Improvements in gross margin and cost structure culminated in a strong adjusted EBITDA performance, which fell within our guidance range.

Overall, we are pleased with the progress we're making on the expense side of the business and feel that the profitability we achieved despite an unexpected topline shortfall, demonstrates the effectiveness of our cost initiatives. We will maintain an increasingly lean expense structure to continue enhancing the profitability of the company. To help accelerate revenue growth, the sales organization will be dedicating additional bandwidth to new logo generation. Since Q1 marked the completion of the team's efforts to actively convert the installed base of device customers to subscription contracts. In addition, the team gained traction in selling CalAmp's software products, resulting in a modest sequential growth in our recurring application subscription revenue of approximately $100,000.

The sales team closed multiple deals with new enterprise fleet customers, including an opportunity with R&L carriers that added around 18,000 subscribers, following the first quarter. In addition, the team continued to execute on renewals and up-selling opportunities. New products such as our next-generation vision solution will also help us drive new bookings into the second quarter and beyond. This new solution is a standalone dash camera powered by advanced AI software that will help fleets optimize driver behavior and significantly decrease operating and liability related cost. Since the full release, the team has qualified more than 65 different opportunities and the pipeline continues to grow. Sales of this product will have a substantial positive impact on ARPU as we sell to both new logos and the existing customer base Finally to organizationally align behind our growth goals through recurring revenue, we rolled-out new sales compensation programs built and implemented by Brennan Carson, our Chief Revenue Officer.

The new compensation plans rewards sales personnel based on the bookings value of new logo acquisitions and reward customer success personnel according to the net revenue retention targets. This will help to drive our operating model towards the revenue growth, gross margins, and free-cash-flow we are aiming for. Internationally, the consumer, automotive business continues to perform well demonstrating profitable growth in the quarter. The company expects to continue ramping-up revenues from the BMW relationship for the remainder of the year and into fiscal year '25. The relationships with BMW and several other of the world's top automotive brands will drive consolidated and recurring revenue growth well into the future for this segment. Further, the operating models across the various geographies have been aligned under a single leader to maximize cost-efficiency and operating effectiveness.

We have already begun to see significant benefit to this new organizational structure and expect this trend to continue. The modest growth in our recurring application subscription line which occurred despite declines in overall revenue and Software and Subscription Services revenue demonstrates the value and strength of the recurring software revenue we are focused on growing. We look forward to accelerating execution in this area of the business which is positioned to grow as we execute on a robust pipeline of opportunities. These deals with direct fleet customers will continue to drive-up ARPU as the mix of recurring revenue shifts away from the low ARPU device management solutions purchased by converted telematics service providers and channel customers and towards high ARPU cloud API and application solutions purchased directly by fleet.

Finally, we will continue to work with our TSP and channel customers to return to normalized order volume over the coming quarters. With that, I will turn the call over to Jikun to discuss our first quarter financial results in more detail. Jikun?

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Jikun Kim: Thank you, Jeff. My commentary will include reference to non-GAAP financial measures. A full reconciliation of these non-GAAP measures with the corresponding GAAP measures included in the Q1 FY '21 earnings release. Total revenue in the first quarter were $70.9 million. Revenues grew 10% year-over-year but we realized a 10% sequential decline from $78.5 million last quarter. The sequential decline in revenue was driven by telematic devices and rental income revenue. As Jeff mentioned in his remarks, our TSP and channel customers are working through their excess inventories, as well as our K-12 business is seeing a temporary slowdown in hardware installations. We expect this inventory corrections to take a few quarters to work through.

Excluding the effect of the auto leasing, recurring application subscription revenue was $19.2 million, a $100,000 sequential increase. Net subscribers increased 6% sequentially to 1.69 million subscribers. S&SS RPO and hardware backlog ended the quarter at $217 million and $20 million, respectively. RPO declined $17 million and hardware backlog declined $9 million sequentially. RPO decline was driven by customer contract modifications, and hardware backlog decline was driven by TSP and channel customers working through their inventory correction. Consolidated gross margin in the first quarter was 38% compared to 35% last quarter. Gross margin continues to recover from the Q3 FY '23 later driven by a better mix of offerings, as well as significant reductions in purchase price variance.

First quarter GAAP operating expenses, excluding restructuring charges, increased $100,000 sequentially driven by increased R&D and sales and marketing activities, offset by lower G&A. The sequential OpEx increase was driven by annual incentive and commission resets for FY '24, along with recruiting activities related to our CEO and CTO transitions. GAAP operating expenses declined $5.4 million year-over-year. The cost reductions that we implemented in late '23, and early '24 are starting to take impact not only in their OpEx, but our cost of goods sold and capital expenditures. Q1 FY '24 adjusted EBITDA was $6 million or 9% of revenue, compared to $6.8 million in the prior quarter. Year-over-year, adjusted EBITDA increased by $4.1 million.

At the end of Q1 FY '24, we had total cash and cash equivalents of approximately $35 million, as compared to $42 million last quarter. The decline in cash was driven by working capital paydowns and CapEx in the quarter. Excluding working capital paydowns, cash generated from operations would have resulted in a positive $4.1 million cash flow, a $3.5 million improvement from the prior quarter. At the end of the quarter, we have $35.6 million in undrawn asset back line availability. As customary, this availability is subject to various covenant tests. The $230 million 2% convertible senior notes are due on August 1, 2025. Our objective is to generate a high-quality, strong EBITDA run rate by the end of the fiscal year to provide financing options to resolve this continuing overhang on our shares.

As demonstrated over the past few quarters, EBITDA quality and quantity continues to improve over time. Our future EBITDA run rate increases will be driven by several factors and initiatives. First, the normalization of telematic device revenues in the second half of FY '24. Our TSP and channel customer inventory corrections should be behind us. Recurring revenue growth driven by new solutions like Vision 2.0, our Video Dash Camera, which will drive significant ARPU growth, upsell opportunities across our installed with K-12 customers and new subscribers in our commercial fleet market segment. Fleet continued improvements in gross margins trending back towards our historical 40% levels. And lastly, aggressive cost reductions implemented in '23 and '24 across our cost of goods sold, operating expenditures and capital expenditures.

In addition, we will have to continue our vigilance to cash flows and cash generation over the next 25 months. Executing on these EBITDA run rate improvements could provide the following financing options. Organic positive cash flows gives the opportunity to pay off a portion of the convertible loan as it matures. 2% coupon is very valuable financing during these times of high interest rates. Refinancing a portion of the convert with term loan structure, which will come with higher interest rates and expenses. Refinancing a portion of the convertible loan and pushing out the maturity which will come with higher interest rates and the conversion prices as well as other financing options. There is no single solution that will address the convertible note, who will take a combination of these and other solutions to resolve over time.

As for Q2 FY '24 guidance, we expect revenue to range between $67 million and $73 million, with adjusted EBITDA expected between $5 million and $9 million. With that, I will turn the call back over to Jeff for some final thoughts and comments.

Jeff Gardner: Thank you, Jikun. I am proud of our team for the continued progress we have made in driving these transformational efforts. I am confident in our ability to execute on growing both revenues and profitability into the future, both of which will ultimately manifest in value creation for our shareholders. With that, we will now open the call to your questions. As a reminder, we will not be answering questions on our Board's decision to explore all strategic alternatives for the company. Operator?

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