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Edited Transcript of CAMP earnings conference call or presentation 27-Jun-19 8:30pm GMT

Q1 2020 CalAmp Corp Earnings Call

Oxnard Jun 29, 2019 (Thomson StreetEvents) -- Edited Transcript of CalAmp Corp earnings conference call or presentation Thursday, June 27, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kurtis Joseph Binder

CalAmp Corp. - Executive VP & CFO

* Michael J. Burdiek

CalAmp Corp. - President, CEO & Director

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Conference Call Participants

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* Howard Shepard Smith

First Analysis Securities Corporation, Research Division - MD

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Jonathan Frank Ho

William Blair & Company L.L.C., Research Division - Technology Analyst

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Scott Wallace Searle

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Thomas Michael Walkley

Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst

* Leanne K. Sievers

Shelton Group - President

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Presentation

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Operator [1]

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Welcome to CalAmp's First Quarter 2020 Financial Results Conference Call. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference call, Leanne Sievers of Shelton Group, CalAmp's Investor Relations firm. Leanne, you may begin.

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Leanne K. Sievers, Shelton Group - President [2]

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Good afternoon, and welcome to CalAmp's First Quarter 2020 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group, CalAmp's Investor Relations firm. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek; and Chief Financial Officer, Kurt Binder.

Before we begin, I'd like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAmp's best current judgment, they're subject to risks and uncertainties that could cause actual results to materially differ from those implied by these forward-looking projections. These risk factors are discussed in our periodic SEC filings and the earnings release issued today, which are available on our website. We undertake no obligation to revise or update any forward-looking statement to reflect future events or circumstances.

Michael will begin today's call with a review of the company's financial and operational highlights, then Kurt will provide additional details about the financial results and outlook, followed by a question-and-answer session.

With that, it's my please to turn the call over to CalAmp's President and CEO, Michael Burdiek. Michael, please go ahead.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [3]

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Thank you, Leanne. We are pleased with our first quarter results with consolidated revenue of $89.1 million, which was at the high end of our guidance range. Software and Subscription Services exceeded our expectations with record SaaS revenue of close to $26 million, up 38% year-over-year, driven by strong performance from our 3 recent acquisitions. We also delivered solid profitability as non-GAAP net income was $4.2 million or $0.12 per diluted share, also at the high end of our guidance range.

Collectively, our first quarter results demonstrate further progress on our strategic transformation to a global SaaS solutions provider, which I will elaborate on in a few minutes.

First, I would like to address the progress we made on our supply chain initiatives. During the quarter, Telematics Systems revenue was in line with expectations at $63.6 million, supported by marked improvement in our supply chain performance as we executed on our plan to be more methodical in our diversification efforts in order to meet near-term customer demand. The steps we took to implement new operational processes and tighter synchronization with our key suppliers has resulted in a more stabilized supply chain and shorter lead times. Though we made substantial progress in the latest quarter, we continue to believe it will take 2 more quarters to fully optimize our supply chain structure and realize the full benefits of global diversification with optimum inventory levels and delivery lead times.

I would now like to highlight our recent progress in driving CalAmp's transformation to a global SaaS solutions provider. As I previously mentioned, our Software and Subscription Services first quarter revenue reached a record level at $25.5 million or 29% of consolidated revenue. We saw a particularly strong traction from CalAmp's iOn fleet management applications and LoJack subscription services. Additionally, the integration of our recent acquisitions, which include Tracker in the U.K., Car Track in Mexico and Synovia Solutions in North America, is progressing well. The addition of these businesses aligns with our global SaaS expansion strategy and helped drive international revenue across our entire business to a record 29% of the consolidated total.

Additionally, we are very pleased thus far with the incremental revenue synergies we have identified from these acquisitions, which we believe will further bolster our Software and Subscription Services revenue both domestically and internationally in the coming quarters. With the inclusion of our recent acquisitions, our worldwide subscriber base expanded dramatically and has now reached over 1.2 million subscribers. We expect this substantial subscriber base to drive us towards our recurring revenue target of more than $30 million a quarter exiting this fiscal year and more importantly, advance us towards our long-term target of $200 million in annual subscription revenue.

Similar to last quarter, I would like to take a few minutes to highlight some customer case studies that I believe offer insight into our global strategy to drive CalAmp's software and services transformation.

The first case study involves a recent fleet management contract win with a mid-Atlantic State Department of Transportation agency. Similar to the contract win announced early last year with the Commonwealth of Pennsylvania, this new customer is launching an initiative to reduce costs and streamline snow-removal operations by leveraging CalAmp's iOn fleet SaaS technology to manage fleet vehicles and snowplow assets, encompassing approximately 12,000 vehicles statewide. This new customer will roll out CalAmp's iOn fleet management service to help its local governments manage their resources and increase fleet accountability, efficiency and asset reliability. The CalAmp iOn solution was viewed by this important new customer as the most innovative and progressive transportation technology that could deliver better citizen service and support statewide road safety initiatives. Vehicle deployments under this new contract will begin late in our current quarter and are expected to continue over the next 12 months. The total contract value for this award is approximately $10 million over an initial 5-year term.

Another case study I would like to highlight is a recent engagement with a global humanitarian aid organization whose mission is to improve the health of people affected by poverty and provide relief aid during natural disasters. This partnership enables safe and reliable cold-chain shipments to pharmaceuticals and other disaster relief supplies. In this application, CalAmp's SCI iOn command supply chain solution will provide real-time package tracking and temperature monitoring of global land and air vaccine and pharmaceutical shipments. This integrated solution helps ensure compliance and proper quality control so products won't become compromised due to exposure under extreme environmental conditions. As a result, more efficient and effective aid can be delivered to patients in disaster areas who would not otherwise have access to critical vaccines or life-sustaining medications. The overall shipment volume of temperature-controlled pharma products is growing at twice the rate of the pharma industry as a whole and shippers are increasingly required to demonstrate compliance with the temperature range specified by the manufacturer. This new partnership addressing humanitarian aid demonstrates CalAmp's continued momentum in the supply chain visibility market while building on our growing SaaS customer base.

In addition to our strategic initiatives to grow recurring revenues with vertically focused end-to-end SaaS solutions, we continue to work with select hardware customers to transition certain MRM Telematics products to a subscription model. In this conversion process, CalAmp is focused on adding content value such as instant crash detection or reporting, driver scoring and security features to our existing installed base. As we mentioned so on our previous calls, we are actively engaged with several of our key customers as part of this device-as-a-service, or DaaS, program, which we plan to officially launch this quarter. As part of the shift from hardware- to a software-based model, the timing and mix of revenue will go through a transitional period until such time that the recurring revenue builds across an increasing number of converted customers and exceeds the prior contribution from upfront hardware sales. This shift is a key part of our overall vision for the company and aligns with our initiative to generate an increasing amount of recurring revenue for greater visibility and predictability across our business.

Now turning to our Telematics Systems business. Revenue was in line with expectations, albeit lower as compared to the same period last year. We are encouraged by increased order flow for LTE-based products and anticipate some demand tailwinds developing from U.S. customers transitioning to LTE products due to the impending 3G network sunset. As an indication of shifting demand, sales of LTE technology-based devices in the first quarter increased to approximately 32% of Telematics Systems revenue as compared to 15% in the prior year period.

Revenue from network and OEM products was in line with expectations in the first quarter, driven by solid customer demand from Caterpillar along with another OEM.

Looking to the future, we see opportunities to expand our global reach in the industrial machine and related equipment rental marketplace not only with additional Telematics device design wins but also for expanding our subscription services.

Before I turn the call over to Kurt, I would like to thank the global CalAmp team for their dedication and efforts this quarter, resulting in strong financial results with markedly improved supply chain performance and solid progress on our recently announced acquisitions. Our first quarter results give us increased confidence in our long-term growth strategy and transformation to a global SaaS solutions provider.

With that, I will now turn the call over to our CFO, Kurt Binder, for a closer look at our fiscal 2020 Q1 financial results and Q2 guidance.

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [4]

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Thank you, Michael. My commentary will include reference to the non-GAAP financial measures of adjusted basis net income, adjusted EBITDA and adjusted EBITDA margin. A full reconciliation of these non-GAAP measures and the closest corresponding GAAP basis measures is included in the press release announcing our first quarter earnings that was issued earlier today.

As Michael mentioned, we are pleased with our consolidated revenue performance in the first quarter of fiscal 2020 as well as the continuous progress we are making on our supply chain operations. Additionally, our transformation to a global SaaS solutions provider is progressing well, further complemented by the integration of our 3 recent acquisitions.

Consolidated revenue for the first quarter was $89.1 million, a decrease of 6% year-over-year due to an anticipated decline in Telematics Systems product sales but partially offset by an increase in our Software and Subscription Services revenue. Consolidated revenue was up 6% sequentially due to increased subscription services. This Software and Subscription Services revenue increased 38% over the prior year period to $25.5 million, driven by the contribution from our 3 recent acquisitions and, to a lesser extent, organic initiatives.

Our LoJack subscription services had an exceptional quarter, generating revenue of $10 million in the first quarter, up 80% year-over-year. Our LoJack subscription services represents the LoJack Italy business as well as our recently acquired SaaS businesses, Tracker U.K. and LoJack Mexico. These 3 entities, in aggregate, provide a strong foundation for recurring revenue and are expected to contribute to continued expansion of our Software and Subscription Services business.

Additionally, we made strong progress expanding our global subscriber base in the quarter with 1.2 million unique subscribers as of May 31, 2019, compared to approximately 776,000 for the same period ended last year with 348,000 added with our recent acquisitions. In addition to these new subscribers from our acquisitions, we also added new subscribers from fleet management services, international stolen vehicle recovery and Telematics solutions. We expect to continue to build on this solid subscriber base as we progress throughout the remainder of fiscal 2020.

As previously discussed, we acquired Tracker U.K. in Q4 of fiscal 2019, followed by the acquisitions of LoJack Mexico and Synovia Solutions. We believe these 3 acquisitions accelerate our global SaaS expansion efforts, and on a combined basis, we expect them to be meaningful contributors to our revenue in each quarter of our current fiscal 2020. As I mentioned last quarter, the revenue ramp from the acquired businesses within our Software and Subscription Services business is affected by purchase accounting adjustments, which discounted deferred revenue balance assumed on the opening balance sheet by upwards of 65% as compared to the pre-acquisition balances. The impact of deferred revenue haircut diminishes over the course of the first year or so of ownership with GAAP revenue normalizing to actual billings activity over time.

Now looking to our Telematics Systems business performance in the first quarter. As expected, revenue was down 17% year-over-year to $63.6 million, reflecting a decrease in MRM Telematics and legacy LoJack SVR product sales due to reduced sales volumes in both the United States and internationally. The sales decrease impact was isolated to a few of our top customers, including Synovia Solutions which we acquired in April 2019. Legacy LoJack SVR products, including Telematics sales to LoJack international licensees, were down for the quarter by approximately $4 million or 24% year-over-year as a result of lower sales to U.S. auto dealers and international licensees, including the lost sales revenue through the consolidation of Tracker U.K. and LoJack Mexico. This was partially offset by an increase in CalAmp Telematics solutions sold through these channels as well as growth in our LoJack-related subscription revenue.

Network and OEM products revenue was $16.3 million for the first quarter, representing a slight increase year-over-year and in line with expectations. The product revenue for this category was supported by continued demand from Caterpillar, which increased 11% year-over-year. Caterpillar continues to be our largest customer with $12.2 million of revenue in the first quarter representing 14% of our consolidated revenues.

Consolidated gross margin was approximately 40% in the first quarter and in line with last year. Gross margin performance is expected to improve as we further integrate the recent acquisitions and complete our transition with our suppliers and contract manufacturers while managing the overall closure of our U.S. manufacturing facility. Additionally, as we make progress towards our long-term SaaS revenue targets, we expect to see meaningful progress towards higher gross margin and EBITDA margin targets.

In OpEx, our GAAP basis R&D, sales and marketing and G&A expenses in the first quarter of fiscal 2020 as percentages of revenue were approximately 8%, 16% and 20%, respectively. The significant increase in sales and marketing and G&A expenses as percentages of revenue is due to litigation and nonrecurring legal expenses, compounded by the deferred revenue haircut or purchase accounting adjustments that I mentioned earlier. As the revenue from our acquisitions begins to normalize and we fully integrate these businesses, we expect that our OpEx will decrease as a percentage of consolidated revenue.

On a non-GAAP basis, our OpEx for the first quarter for R&D, sales and marketing and G&A expense as percentages of revenue was 7%, 16% and 13%, respectively. For the full year of fiscal 2020, we expect GAAP basis R&D, sales and marketing and G&A expenses as percentages of revenue to be 7%, 16% and 16%, respectively. And we expect non-GAAP R&D sales and marketing and G&A expenses as percentages of revenue to be 7%, 15% and 12%, respectively.

The GAAP basis net loss in the first quarter was $8.7 million or $0.26 per share compared to a net income of $8.5 million or $0.23 per diluted share in the same prior year period. The GAAP basis net loss comparison is attributable to an increase in OpEx due to litigation and nonrecurring legal expenses in the first quarter of fiscal 2020, coupled with the $13.3 million gain that was realized in the first quarter of fiscal 2019 on a favorable settlement with a former LoJack supplier.

Non-GAAP net income for the first quarter was $4.2 million or $0.12 per diluted share, at the high end of the guidance range and compared to $10.5 million or $0.29 per diluted share in the same prior year period. The decrease in non-GAAP net income primarily reflects the impact of deferred revenue purchase accounting adjustments from the recent acquisitions and incremental depreciation expense associated with the acquisitions and more specifically, the Synovia bundled hardware solutions.

Adjusted EBITDA was $7.6 million in the first quarter with an adjusted EBITDA margin of 8% compared to adjusted EBITDA of $12.2 million and an adjusted EBITDA margin of 13% in the same prior year period. We expect overall profitability to improve with adjusted EBITDA margin in the midteens as the effect of purchase accounting adjustments diminishes in the second half of the fiscal year. As we make progress towards our long-term revenue objectives on our SaaS business, we expect to see meaningful progress towards our EBITDA margin target of 20%.

I will now provide some additional details on our balance sheet and liquidity position as of our fiscal quarter end. At the end of the first quarter, we had total cash and marketable securities of $200 million and total outstanding debt of $298 million, which represents the aggregate carrying value of our convertible unsecured notes coupled with $18.8 million of amounts due to factors which was assumed in the acquisition of Synovia. Prior to the acquisition, Synovia sold the rights to future revenue under certain subscription contracts on a nonrecourse basis for credit-approved accounts. The amount entitled due to factors was recorded by us as of the opening balance sheet for this acquisition.

Net cash used in operating activities was $5.7 million for the first quarter of fiscal 2020, which is attributable to our net loss of $8.7 million for the quarter coupled with an overall net cash outflow for working capital requirements. During the first quarter, we acquired LoJack Mexico and Synovia Solutions, both of which were purchased using cash on hand.

Our consolidated net accounts receivable balance was $73.6 million at the end of the first quarter, representing an average collection period of 65 days. While total inventory at the end of the first quarter was $41.9 million, representing an annualized inventory turns of approximately 5.1x. The increase in inventory is aligned with our efforts to build buffer stock and to improve our overall supply chain performance.

Our cash conversion cycle was 69 days at the end of the latest quarter compared to 57 days at fiscal year-end. Additionally, our deferred revenue balance was $60.6 million at quarter end compared to $51.4 million at the end of the 2019 fiscal year, which is attributable to the recent acquisitions.

For the first quarter, we recorded an income tax benefit of $2.3 million, which is attributable to a decline in pretax income along with available R&D and foreign tax credits, but partially offset by a onetime tax charge related to foreign tax restructuring. For the same period last year, we recorded an income tax provision of $1.8 million, representing 17% of our reported GAAP basis pretax net income. Throughout fiscal 2020, we do not expect any material changes to our cash taxes due to our remaining federal net operating losses and other available tax credits.

Now turning to our fiscal 2020 second quarter outlook. We expect second quarter consolidated revenue to increase to a range of between $89.5 million to $94.5 million. At the bottom line, we expect the second quarter GAAP basis net loss to be in the range of $0.27 to $0.21 per share. And non-GAAP net income to be in the range of $0.08 to $0.14 per diluted share, reflecting an incremental $1.6 million of depreciation expense, principally associated with the recent acquisitions. We also expect second quarter adjusted EBITDA to be in the range of $7.5 million to $11.5 million.

With that, I'll turn the call back over to Michael to provide some final comments before we open the call up for questions.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [5]

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Thank you, Kurt. Looking forward, we believe the fiscal first quarter represents an inflection point in our business with a positive outlook of increasing revenue and EBITDA growth as we move into the second half of the fiscal year. We made substantial progress this quarter in building a solid base of Software and Subscription Service revenue, and believe that we are tracking well towards our long-term target of $200 million of annual recurring revenue.

With that, we will now open up the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Mike Walkley from Canaccord Genuity.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [2]

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Michael, you mentioned you're seeing some revenue synergies from the Tracker, Car Track and Synovia acquisitions. Can you just discuss how integration is going so far? And maybe give us some more color on what you were mentioning on some potential revenue synergies?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [3]

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Sure. Thank you. Well, the integration is going very well. We tried to express that on our prepared remarks. And as it relates to revenue synergies, we see a number of opportunities to really combine sales and marketing activities in different market verticals to really drive recurring revenue short to medium term. And I think one of the greatest opportunities is in the state and municipal government market here in the United States. And with the acquisition of Synovia, we have real scale now as it relates to market coverage across the United States and even into Canada to a certain extent. So, I would say that's one of the biggest areas of focus for us. And we look forward to continuing to drive contract wins similar to the one we described for this department of transportation agency in our prepared remarks.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [4]

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Great. And just to follow up on that, on the MRM business, you mentioned some large customers, one being Synovia, which obviously is a part of your company now. But are you seeing any share losses at customers or can you maybe just discuss demand trends for the MRM business?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [5]

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Yes. We were concerned about share loss as it relates to some of our supply chain challenges over the last couple of quarters. I think this latest quarter, we felt pretty good about our ability to retain existing customers and potentially even claw back to a certain extent some share losses, especially in the Latin American markets. So, I would say, we feel pretty good that we're almost back to where we were prior to some of the issues that we faced in Q3 and Q4. On the demand side, I think we see encouraging signs that a large percentage of our customer population here in the United States is starting to take seriously the 3G sunset issue, and we are feeling good that that could produce some tailwinds for us over the coming quarters, especially over the next 2 years as that sunset becomes very imminent at the end of 2021.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [6]

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Great. Last question for me, and I'll pass it on. Just given the start to the year and the guidance, can you just help us think about adjusted EBITDA for this year? Do you still think it's similar to last year and slightly higher? And if so, with the purchase accounting, how should we think maybe about the slope of adjusted EBITDA ramp throughout the rest of the fiscal year?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [7]

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Yes. Well, given our guidance of roughly $92 million at midpoint on revenue for Q2 and approximately $9.5 million of adjusted EBITDA at the midpoint in Q2, that suggests that there's pretty strong marginal profitability in the operating model, $3 million of incremental revenue producing and incremental $2 million of adjusted EBITDA. So, we would expect that as revenue grows through the year, especially in the software and services category, that we would see that expressed in terms of earnings leverage working through the year. And as Kurt pointed out, we expect to get back into the mid-teens neighborhood as it relates to EBITDA margin as we work our way into the second half of the year and especially, as we exit the year.

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Operator [8]

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Your next question is from Jonathan Ho from William Blair.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [9]

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Congrats on the strong results. I just wanted to start out with the 3G to 4G transition. Can you talk a little bit about whether there may be a content or pricing uplift opportunity as customers start to contemplate that and maybe roll out upgrades to their systems? I mean clearly, there should be more capability with the enlarged bandwidth as well.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [10]

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Sure. Well, just to kind of quantify the scope of that opportunity, as of last Friday, there were 1.3 million 3G units -- CalAmp units in service with customers in the United States, all of which are either going to go dark or going to have to be replaced and upgraded over the course of the next 2 years or so. Some of those 3G units are a part of our subscription population, but even setting those aside, that's more than 1-million unit addressable market opportunity as it relates to upgrades. And assuming that half or so of those would get replaced in normal course, that's about a $50 million addressable market opportunity in terms of tailwinds around MRM Telematics device sales over the course of the coming 8 quarters or so. Now we believe that gives us a good deal of tailwind to sort of offset some of the headwinds we'll face from a revenue recognition standpoint as we transition certain of our products to a subscription-only model through our device-as-a-service program. So, we think the LTE upgrade tailwind is a very positive thing for us and it gives us some breathing room from a revenue growth perspective as we transition to more of this device-as-a-service model for certain of our products with certain customers.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [11]

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Got it. And then just in terms of my follow-up, when we think about sort of the supply chain issues that you've resolved and sort of what's left to do, is there much of a gross margin impact? Or can you give us a little bit of financial quantification in terms of the improvement that you see over the next couple of quarters when you get back to normal?

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [12]

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Yes, Jonathan. So as we look at this supply chain transition, in all honesty, we kind of assume that we will potentially have some uplift in our margin. The reason is that we're taking a more sophisticated approach in looking at these Tier 1 suppliers and ensuring that we are getting the best pricing that's possible. But you'll see a combination of things happening over the next couple of quarters. The biggest thing which is going to impact us is the burn-off of this deferred revenue haircut that will happen throughout the year, which we think will also help. So, net-net, as you look through the base of the year, we do see some of the -- some improvement in our overall gross margin. I think we communicated that to you last quarter that we thought margins would tip up over 41% to 42% thereabouts as we exit the year.

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Operator [13]

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Your next question is from Howard Smith from First Analysis.

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Howard Shepard Smith, First Analysis Securities Corporation, Research Division - MD [14]

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First question has to do with free cash flow generation capability. A lot of moving parts with the factoring and inventory, et cetera. But as you think about longer term on a more normalized basis, how should we think about now the business model in terms of cash flow generation relative to whatever metric? I think you used to do it to adjusted non-GAAP net income. But whatever the correct metric is, at a high level, how should we be thinking about it?

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [15]

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Yes. So I think first we should address this first quarter. I think this first quarter was a bit of an anomaly for a couple of reasons: one, when we acquired 2 of the businesses, in particular Synovia and you noted the factoring of the receivables as well as Tracker U.K., upon initial purchase, we did have an obligation to kind of shore up their working capital, which was a cash outflow. Additionally, we took some steps, as you saw, in improving our overall buffer stock of inventory. We wanted to make sure that we were trying to optimize our supply chain and making sure that we had sufficient product to meet demand. And in doing that, we also reduced our AP days, which also resulted in an outflow. So we look at Q1 as a bit of an anomaly. Where we see things progressing to more of kind of a historical perspective is in Q2 to Q3 -- Q2 to Q4, excuse me. So I don't know that we expect anything to change substantially from this historical cash flow generation that we've experienced. If you factor out a lot of these onetime items that we've had in the past, if you remember, with the LoJack supplier some of the things that were out of the ordinary. So we're quite pleased with the way the cash flow is progressing, and we would think that we'd be back to the historical levels past into Q2 to Q4.

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Howard Shepard Smith, First Analysis Securities Corporation, Research Division - MD [16]

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Great. And then in terms of the subscription -- SaaS -- software and subscription line, you mentioned you had obviously very strong growth helped by the acquisitions. You've mentioned also organic growth. I don't know if you can exactly break it out given all the puts and takes of the business, but can you talk about what the organic growth rate for the subscription businesses are looking like, either precisely or in general terms?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [17]

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Yes. So we're not prepared to break out the number specifically. But in general, as we've talked about in the last couple of calls, our global freight transport customer, which had driven a pretty significant uptick both in subscribers and subscription revenue last year, that reached a plateau as we made the initial deployment and completed that project. So, we expect that to sort of maintain its existing run rate level until the second half of this fiscal year as that program expands, not only in terms of increased number of assets, but potentially into new applications. And to give you somewhat of a leading indicator as it relates to organic activities, our net subscriber adds in Q1 -- our organic net subscriber adds in Q1 were approximately 25,000 and that includes the effects -- the negative effects of about 7,000 subscribers declining in our vehicle finance business, which is obviously considerably lower ARPU than some of these other more attractive categories like fleet and asset tracking. So I think the subscriber growth trends are positive and an indicator of ongoing subscriber growth and revenue growth on an organic basis as we work our way through this year.

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Operator [18]

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Your next question is from Scott Searle from Roth Capital.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [19]

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Just quick housekeeping, I think I missed it, but did you give a figure for the network OEM sales? And also on the services and SaaS front, did you break out the M&A contribution versus what the organic growth was in the quarter? Then I had a follow-up on the hardware front.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [20]

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We did not break out specifically the network and OEM products number as part of Telematics Systems. We did talk explicitly about Caterpillar. And Caterpillar being up on a year-over-year basis but slightly down from the prior quarter and in line with expectations. And then on the software and subscription side, no, we did not break out specifically what the contribution from M&A was as it relates to the overall software and subscription revenue growth. But I would say that the acquisition-related revenue contribution was a bit better than what we had expected and what we had guided to on our last earnings call.

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [21]

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Let me correct. I just -- because I think in my original remarks, I did indicate network and OEM products was about $16.3 million, and that was representing a slight increase year-over-year. But...

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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Okay. Perfect. And just to follow up then on the Telematics Systems front. A lot of moving parts in terms of transition to the DaaS model, which is starting to ramp up this quarter, acquisition of some customers. Could you take us through your thinking in terms of the impact, both in the second quarter, what kind of the impact that's going to have on the Telematics Systems business and also for the year? Because it seems like there's some good things that are going on there now as you're getting through some supply chain issues, being able to recapture some of those customers, and then you combine that with some of the 3G sunsetting opportunities and just natural organic growth within the industry that it seems like there's a better outlook overall for hardware. But could you kind of pull that into the backdrop of some of these, I won't call them cannibalization, but that's really kind of obscuring what that core Telematics Systems growth looks like when you net out DaaS and you net out Synovia sales and LoJack sales, et cetera?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [23]

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Yes. So if you annualize Telematics Systems revenue from Q1, you're a little bit below the outlook we gave as guidance on our last earnings call, which was approximately $257 million to $262 million. The annualized number from Q1 would be $254 million. So we do expect some modest growth in Telematics Systems as we work our way through the year because we feel pretty comfortable with the guidance we gave on our last earnings call as it relates to the full year outlook there, and we would expect that to be somewhat of a linear progression, Q2, Q3 and into Q4.

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Operator [24]

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Your next question is from Jerry Revich from Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [25]

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I'm wondering if you can talk about for the businesses that were acquired, what's their organic growth trajectory. So obviously, the accounting is noisy with deferred revenue on a like-for-like organic basis, what the growth profile of the businesses is in this first quarter on the like-for-like basis?

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [26]

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Yes, Jerry. So to respond to your initial question, I think the best way to answer it is, we were pretty conservative in our forecasted growth rates. Looking at the businesses prior to acquisition, you had Synovia that was growing in the midteens range on a billings basis prior to acquisition, whereas the 2 other businesses, Tracker U.K. and Mexico, were flat to slightly up, maybe 2% to 3%. And in general, I think the best way to kind of characterize it is, we looked and said, well, based upon all of the noise in the purchase accounting, what would be an acceptable but conservative growth rate from a billings perspective? And our assumption was somewhere in the range of 5% to 7%. So we wanted to be just fairly conservative as we get to understand these businesses, figure out where the revenue synergies are before we went ahead and started to apply some of the more aggressive growth rates.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [27]

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And so you had modeled 5% to 7%, but it's tracking double digits. So is that what the comments imply?

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [28]

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No, no. I'm just saying we, on a billings basis, forecasted at a 5% to 7% rate. The historical growth rate was probably double that, but we didn't take that into consideration. We won't do that until we know and understand fully all of the revenue synergies that are available to us.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [29]

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I would add this color. And that is having almost the full quarter of experience with these 3 businesses, we're very encouraged with our performance thus far.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [30]

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And how would you characterize the M&A pipeline at this point? Any other opportunities that have a similar profile and similar fit with your business that look like Synovia specifically?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [31]

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Well, I would say that we're very much in integration mode now and very focused on trying to extract maximum value out of these investments we've made. So I wouldn't suggest that we are active in terms of trying to build an M&A pipeline. And I think once we've digested these acquisitions, they start to be fully realized, both in terms of potential and also in terms of revenue recognition impact. I think we have some options to start to consider some inorganic initiatives. But right now, we're very, very focused on making sure that we get the integration right and that we pursue the revenue synergies as appropriate given these new growth platforms.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [32]

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And Michael, you mentioned, for the legacy subscription business, sort of, the subscriber count was up 25,000 sequentially. What's the outlook for adds from here for the base business? Is that how we should be thinking about the baseline subscriber growth?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [33]

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Well, we have not given any -- in fact, we've never given any subscriber growth outlook or forecast. But I think in the freight and transportation marketplace and in the municipal government space, I think we're encouraged by the pipeline of opportunities there, and we would expect that most of the subscriber growth going forward would come in those 2 market vertical categories.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [34]

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And lastly, in MRM Telematics, it's tough to tell with your customers obviously becoming part of the platform. If you were to strip out those intercompany sales, what would the like-for-like organic sales performance for MRM this quarter, stripping out Synovia and any other adjustments?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [35]

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Well, I think that would be wading somewhat into uncharted territory. And frankly, it's really hard to tell. And I don't think we're really -- we would be very comfortable in trying to answer that question very specifically.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [36]

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Okay. I'm -- the point is, I think MRM, the performance -- the underlying performance was better than what it shows because of the acquisition of the customer. And I'm just trying to get a rough understanding of how much better it would've been without what's essentially a change in accounting.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [37]

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Well, I think that's an accurate statement. And to be clear, it was better than we expected even with the loss of revenue and consolidation effect.

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [38]

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Yes. I mean the Synovia, specifically, they were a very important MRM Telematics customer of ours. And they -- so moving them onboard here and consolidating that revenue does have an impact on that product line, yes.

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Operator [39]

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(Operator Instructions) We have a question from Michael Latimore from Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [40]

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I'd just like to ask a couple of questions on the SaaS business. Roughly, what is the kind of gross margin, EBITDA margin profile now that you've got these acquisitions in the mix here?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [41]

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On a consolidated basis or which product line are you referring to?

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [42]

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Software and Subscription Services.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [43]

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Oh, Software and Subscription...

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [44]

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The overall software-as-a-Service business, subscription SaaS business.

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [45]

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Yes. I think probably the way to look at it is -- and as we've communicated in the past, Mike, is that the Software and Subscription Services, from a historical perspective, has been at/or just slightly north of 50%. When you add in the new acquisitions, those actually would have been exclusive of the purchase agreement accretive to that. I think on a blended basis, they were definitely north of 50%, probably mid-50s once you pull out all of the purchase accounting adjustments. So we would expect that they would be longer term, after say 12 months or so, once we get past this phase, that they would be overall accretive to our gross margin percentage for the SaaS business.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [46]

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All right. And EBITDA margins, I can't remember what you -- I think you said it's been maybe 10% or so in the past. Is that right or -- on SaaS?

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [47]

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No, no. These again also are accretive to our overall EBITDA margin. I think if you look at us, the organic business, we probably say we're in the low to midteens. These businesses should drive us to the midteens to even high teens, so they would definitely be accretive to our overall EBITDA margin.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [48]

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Great. And then in terms of the device-as-a-service strategy here, that largely relates to your MRM category? Or does it also affect the network and OEM at some point?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [49]

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No, that's isolated to our MRM category and even isolated within our MRM portfolio to just a couple of product lines.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [50]

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Okay. Got it. And then the guidance for, I think you've guided to the software subscription business being sort of over $30 million on a quarterly basis exiting the year. What does that imply from an organic and then acquisition growth? Are you assuming this kind of 5% to 7% growth on the acquisitions and then some organic growth beyond that?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [51]

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I think the simple answer is yes. We talked a little bit early on this call about our expectation that we would see growth, both organically and in billings growth with each of the acquired businesses, including Tracker, which was flattish in the year prior to the acquisition. We are encouraged with the outlook for Tracker and especially as it relates to the first quarter performance. So I think we've got a modicum of momentum on both the inorganic front as well as the organic front.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [52]

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And just lastly, at the midpoint of second quarter, as you're growing a couple of million, should we assume that's largely on the sort of the SaaS category or some hardware?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [53]

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We would expect some modest growth in Telematics Systems and probably a little more growth on Software and Subscription Services.

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Operator [54]

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There are no questions at this time. Mr. Michael Burdiek, you may continue with your closing remarks.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [55]

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Well, thank you, everyone, for joining us today. Before we conclude the call, I'd like to mention the upcoming investor events we will be attending, including the Jefferies Industrial Conference on August 6 in the New York and the Canaccord Growth Conference on August 7 in Boston. If you'd like to arrange a meeting with us at either of these events, please contact your sales representative or the Shelton Group. We look forward to providing further updates on our next earnings call in late September. Operator, you may disconnect the call.

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Operator [56]

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This concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.