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

Q4 2019 CalAmp Corp Earnings Call

Oxnard May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of CalAmp Corp earnings conference call or presentation Tuesday, April 30, 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

* Nicole Noutsios

NMN Advisors - Principal

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Conference Call Participants

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* Anthony Joseph Stoss

Craig-Hallum Capital Group LLC, Research Division - Managing Partner & Senior Research Analyst

* Benjamin J. Burud

Goldman Sachs Group Inc., Research Division - Research Analyst

* David William Gearhart

First Analysis Securities Corporation, Research Division - Associate Analyst

* George Charles Notter

Jefferies LLC, Research Division - MD & Equity Research Analyst

* Michael Joshua Nichols

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* 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

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Presentation

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Operator [1]

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Welcome to the CalAmp Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Nicole Noutsios, Investor Relations for CalAmp. Nicole, you may begin your conference.

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Nicole Noutsios, NMN Advisors - Principal [2]

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Thank you, operator. Good afternoon, and welcome to CalAmp's Fourth Quarter Fiscal Year 2019 Financial Results Conference Call. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek; and Chief Financial Officer, Kurt Binder.

Before we begin, let me 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 the actual results to materially differ from those implied by those forward-looking projections. These risk factors are discussed in our periodic SEC filings and in the earnings release issued today, which are available on our website. 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. Kurt Binder will then provide additional details about the company's financial results and outlook. This would be followed by question-and-answer session.

With that, it's now my pleasure to turn the call over to CalAmp's President and CEO, Michael Burdiek.

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

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Thank you, Nicole. We are disappointed that our fourth quarter revenue came in below expectations at $84.4 million, which was below our guidance range. Similar to last quarter, revenue was impacted by ongoing supply chain challenges as well as a decline in domestic MRM Telematics product sales.

However, this was balanced with strong profitability, with adjusted net income of $0.28 per diluted share and at the high-end of our guidance range. Fiscal 2019 was also another year of strong cash flow with operating cash flow of $48 million and free cash flow $36 million.

As we look ahead to fiscal 2020, we remain on track in our transformation to a SaaS solutions provider, driven by recent strong organic growth as well as growth from the 3 acquisitions we recently announced. I will elaborate more on our strategic transformation to a SaaS solutions provider in a few minutes, but first I would like to address the challenges we faced in our most recent quarter.

When we provided our financial outlook last quarter, we discussed concerns around ongoing operational challenges, risks associated with the timing of Chinese New Year as well of a cautious macroeconomic outlook. While we saw some marginal improvement in our fourth quarter supply chain performance, operational challenges remain significant and adversely impacted CalAmp's ability to ship certain products to meet customer demand.

We have taken steps to stabilize and improve supply chain performance with new interim leadership, new operational processes, and tighter synchronization with key suppliers. As we mentioned on the last earnings call, the resolution of supply chain issues will take at least a few quarters and we are focused on resolving these issues as quickly and methodically as possible.

Despite these short-term challenges, our long-term growth drivers and market opportunities remain intact, especially those related to CalAmp's transformation to a SaaS solutions provider.

CalAmp's software and subscription service revenue reached a record level in fiscal 2019 with organic growth of 20% year-over-year. In the fourth quarter software and subscription service revenue reached 23% of consolidated revenue driven by growth in fleet management and LoJack subscription services. In addition to delivering strong organic growth in the latest quarter, we continue to expand our worldwide subscriber base by making 3 strategic acquisitions in the past 3 months.

We acquired TRACKER, based in the U.K., Car Mart, based in Mexico, and Synovia Solutions based in North America. With these acquisitions, we expect our software and subscription service revenue to increase to a run rate of $30 million per quarter in the second half of fiscal 2020, driven by a base of more than 1 million subscribers worldwide.

We also expect that these acquisitions will significantly expand our Telematics subscription services and market reach into the U.K., Mexico, the United States, and other geographies within our targeted verticals.

I would like to highlight some customer case studies that I believe offer insights into our global strategy to drive CalAmp's transformation as a vertical SaaS solutions provider.

The first case study relates to a pilot just getting underway with our large global freight transport SaaS customer to investigate the viability of a solution to detect package drops at their drop box locations across the U.S. This project was spawned by our early success deploying a trailer monitoring solution for this customer for their nearly 100,000 trailers spread all around North America.

Though it is in a very early phase, if successful this drop box parcel detection solution could be deployed as an incremental subscription service for up to 40,000 drop box locations across the United States.

Another case study relates to a Level 2 security service that our second largest heavy equipment OEM plans to deploy for a subset of their machines across North America. Given the customer's desire to go beyond simple layer 1 data encryption for their Telematics solutions, they asked CalAmp for options for an end-to-end Level 2 security solution that they could quickly adopt and deploy.

Up to this point in time, this was a CalAmp Telematics device only customer but the new Level 2 security feature will be deployed as an over-the-top subscription service. It represents a margin expansion opportunity an entree into additional subscription opportunities down the line in this important industrial machine sector.

These are but 2 of several exciting greenfield opportunities gestating in our software and subscription service pipeline and we look forward to sharing additional details in the future, as these and other vertical SaaS opportunities begin to mature.

In addition to our strategic initiatives to grow recurring revenues with vertically focused end-to-end SaaS solutions. We continue to work with select customers to transition certain MRM Telematics products to a subscription model. In this conversion process, CalAmp will focus on adding content value to our install base for services such as instant crash detection and reporting, driver scoring, and security features.

As we mentioned in our last earnings call, we are engaging with several of our key customers in this transition, with the official launch of the program occurring this quarter. Early in this effort, we expect to see some modest negative revenue impact from the transition with recurring revenue building later in the current fiscal year to help offset the near-term loss of upfront hardware revenue.

Global expansion and diversification remains an important area of focus for the company, especially as it relates to grow in recurring revenues. In Europe, our wholly owned LoJack Italian licensee once again reported strong financial results in the latest quarter with revenue growth of 25% year-over-year. The acquisitions of TRACKER in the U.K. and Car Mart in Mexico expand CalAmp's global portfolio for consumer Telematics in fleet management solutions and are expected to make a meaningful contribution towards our new long-term software and subscription service annual revenue target of $200 million.

Now turning to our Telematics systems business, we also saw lower demand for MRM products from customers in the United States in the fourth quarter, partially offset by encouraging signs of stronger international demand. Revenue from network and OEM products was a bit stronger-than-expected, once again driven by strong year-over-year growth with 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 growth opportunities for subscription services.

Before I turn the call over to Kurt, I would like to emphasize that despite our recent challenges, our strong organic recurring revenue growth, coupled with our recently announced acquisitions, give us increasing confidence in our long-term profitable growth strategy and transformation to a global SaaS solutions provider.

With that, I will now turn the call over to Kurt Binder, our Chief Financial Officer, for a closer look at our fiscal 2019 Q4 financial results and fiscal 2020 Q1 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 margin, adjusted EBITDA, and adjusted EBITDA margin. A full reconciliation of these non-GAAP measures with the closest corresponding GAAP basis measures is included in the press releasing announcing our fourth quarter and fiscal year earnings that was issued earlier today.

As Michael mentioned, we are disappointed in our consolidated revenue performance in the fourth quarter and for the full year. But we continue to make improvements in our supply chain operations and our transformation to a global SaaS solutions provider with a strong recurring revenue base is proceeding very well.

Consolidated revenue for the fourth quarter was $84.4 million, a decrease of 11% year-over-year due to lingering supply chain challenges, coupled with a decline in Telematics system product sales. For fiscal year 2019, consolidated revenue was $363.8 million, a decrease of less than 1%. In fiscal 2019, international revenue was $95.3 million, or approximately 26% of consolidated revenue.

Our software and subscription services business performed well for both the fourth quarter and fiscal year, as we remain steadfast in our focus to transform the company into a global SaaS solutions provider. The software and subscription services business generated revenue of $19 million in the fourth quarter and was up 18% compared to the same quarter last year.

The revenue growth was driven by organic initiatives with freight transport subscriber additions and LoJack subscription growth being principal contributors throughout the year. LoJack Italy had another exceptional quarter, generating revenue of $5.2 million in the fourth quarter, up 25% year-over-year. For fiscal 2019, LoJack Italy contributed revenue of $20.7 million, up 29% year-over-year.

LoJack Italy, as well as our recent acquired SaaS businesses, create a strong foundation for recurring revenue and continued success within our software and subscription service business.

We made strong progress expanding our subscriber base in fiscal 2019 with 937,000 unique subscribers compared to approximately 730,000 subscribers for the same period ended last year. The increase in subscribers of 28% year-over-year was driven by new additions in fleet management services, international stolen vehicle recovery, and Telematics solutions, as well as growth in domestic LoJack, LotSmart, and SureDrive activation. We expect to build on this solid subscriber base as we head into fiscal 2020.

Toward the end of February, we acquired TRACKER U.K., which contributed minimal incremental revenues in the fourth quarter. Subsequent to Q4, we also acquired Car Track, or LoJack Mexico, as well as Synovia Solutions. We believe these 3 acquisitions will help accelerate our global SaaS expansion efforts and on a combined basis, we expect them to contribute from approximately $6 million in the first fiscal quarter ramping up to around $11 million in the fourth fiscal quarter of fiscal 2020.

This revenue ramp in affected by purchase accounting adjustments, which discount the deferred revenue balance assumed at the opening balance sheet date by upwards of 65%, as compared to the pre-acquisition balances.

The impact of the deferred revenue haircut diminishes over the course of the first few years of ownership with GAAP revenue normalizing to actual billings activity over time. These acquisitions coupled with organic growth in software subscription services revenue put us on course to reach our newly established long-term annual software and subscription services revenue targets of $200 million and 40% of consolidated revenue, thereby creating a very strong base of predictable recurring revenue for the company.

As we progress towards these long-term objectives, we expect to see meaningful progress towards our 50% gross margin and 20% EBITDA margin targets.

Now looking to our Telematics Systems business performance in the fourth quarter. Revenue was $65.4 million, down 17% year-over-year. The revenue decline was due to lingering supply chain challenges, as well as a decline in MRM Telematics and legacy LoJack SVR product sales.

For fiscal year 2019, as a whole, Telematics Systems revenue was $287.4 million, or a decline of approximately 5% year-over-year. Sales of legacy LoJack SVR products, including Telematics sales to LoJack international licensees, were down for the full year by approximately $23 million, or 27% year-over-year.

The decrease was about evenly split between a decline in legacy SVR product sales to U.S. auto dealers and sales to international licensees. This decline was partially offset by an increase in CalAmp's Telematics Solutions sold through these channels, as well as growth in LoJack related subscription revenues.

Network and OEM products revenue was $19 million for the fourth quarter, representing an increase of 9% year-over-year. For the full year, network and OEM products revenue was $75.6 million, an increase of 15% year-over-year. This increase in product revenue was due to continued demand from Caterpillar, as well as another global heavy equipment OEM. Caterpillar continues to be our largest customer with $13.8 million in revenue in the fourth quarter, representing 16% of our consolidated revenue.

On a full year basis, revenue from Caterpillar reached a record $55.4 million, reflecting a 22% increase year-over-year. Consolidated gross margin was approximately 40% in the fourth quarter, down slightly from 41% last year. Gross margin performance was slightly down, primarily due to higher excess and obsolete inventory as we transition suppliers and contract manufacturers and manage the closure of our manufacturing facility.

For fiscal year 2019, consolidated gross margin was approximately 41% in the full year or roughly the same as in the prior year. In OpEx, our GAAP basis R&D and sales and marketing expenses in the fourth quarter as percentages of revenue were approximately 7% and 14% respectively.

Our G&A expenses decreased in the quarter due to the reversal of a significant portion of the loss contingency accrual established for the Omega Patent infringement claim. On April 8, 2019, the Court of Appeals for the Federal Circuit vacated the compensatory and enhanced damages, as well as attorney's fees awarded by the trial court to Omega.

The federal court also set aside the jury's verdict that our alleged infringement was willful and remanded the case for a new trial. For fiscal 2019, GAAP basis, R&D, sales and marketing, and G&A expenses as percentages of revenue were approximately 8%, 14%, and 9% respectively. Additionally, our non-GAAP basis OpEx for fiscal 2019 for R&D, sales and marketing, and G&A expenses as percentages of revenue were 7%, 13%, and 10% respectively.

Over the past few quarters, we have been executing on our plan to integrate the global sales organization and further outsource manufacturing functions in order to drive operational efficiency, increase supplier geographic diversity, and reduce operating expenses.

Accordingly, we recorded a restructuring charge of $8 million during fiscal 2019 related to our plan. As we look to fiscal 2020, we remain intent on optimizing our fixed cost structure without sacrificing investment in our growth initiatives.

The GAAP basis net income for the fourth quarter was $11.3 million, or $0.33 per diluted share compared to a net loss of $4.8 million, or $0.13 per share in the same prior year period. The improvement in the GAAP basis net income for the fourth quarter is a result of the reversal of the loss contingency accrual on the Omega Patent infringement matter that I mentioned earlier.

The GAAP basis net interest income in fiscal year 2019 was $18.4 million, or $0.52 per diluted share, compared to net income of $16.8 million, or $0.46 per diluted share in the same prior year period. The increase in GAAP basis net income for the full year is attributable to the reversal of the loss contingency accrual on the Omega matter, offset by the reduced gain realized in fiscal 2019 on the favorable settlement with a former LoJack supplier.

Non-GAAP net interest income for the fourth quarter was $9.4 million, or $0.28 per diluted share, compared to $10.9 million, or $0.37 per diluted share in the same prior year period. For fiscal 2019, non-GAAP net interest income was $39.8 million, or $1.13 per diluted share, compared to $42.2 million, or $1.17 per diluted share in the same prior year period. The decrease in non-GAAP net interest income is due to a decrease in gross profit attributable to the slight revenue decline experienced during the year.

Adjusted EBITDA was $10.9 million in the fourth quarter with an adjusted EBITDA margin of 13%, compared to adjusted EBITDA of $13.1 million and an adjusted EBITDA margin of 14% in the same prior year period. For fiscal 2019, adjusted EBITDA was $48.2 million with and adjusted EBITDA margin of 13%. And the same prior year period, adjusted EBITDA was $52.4 million and adjusted EBITDA margin was 14%.

I will now provide some additional details on our balance sheet and liquidity position as of our fiscal year-end. At the end of fourth quarter, we had total cash and marketable securities of $274 million and total outstanding debt of $276 million, which represent the aggregate carrying value of our convertible unsecured notes that we issued in May 2015 and July 2018.

Net cash provided by operating activities was $47.7 million for fiscal 2019, which is attributable to our strong cash flows from operations, plus the $18.3 million of net proceeds from the favorable settlement with a former LoJack supplier. The final payment related to the settlement was received in February of 2019, thereby completing all outstanding items for this matter.

During the fourth quarter, we acquired TRACKER U.K. effective February 25 for a net purchase price of $13 million. TRACKER U.K., along with the 2 other businesses just acquired, were purchased using cash on hand. Additionally, we used approximately $10 Million to repurchase outstanding common stock under the $20 million share repurchase program authorized by our Board of Directors in December of 2018.

During the fiscal year, we had used $49 million to purchase approximately 2.5 million shares of our common stock. At the end of the year, we had approximately $10 million remaining under the existing share repurchase authorization. Our consolidated net accounts receivable balance was $78.1 million at the end of the fourth quarter, representing an average collection period of 71 days. While the total inventory at the end of the fourth quarter was $32 million, representing annualized inventory turns of 6.4 times.

Our cash conversion cycle time 57 days at the end of the latest quarter compared to 55 days at the end of last year. Additionally, our deferred revenue balance was $51.4 million at year-end compared to $34.5 million at the end of the prior year, which is attributable to the impact of adopting the revenue recognition standards of [AFD 606] coupled with growth in our contract backlog, especially as we deployed units for our global transport customer.

For fiscal year 2019, we recorded an income tax benefit of $1.3 million, which is attributable to R&D tax credits and a decrease in our valuation allowance applied against certain foreign deferred tax assets. For the same prior year period, we recorded an income tax provision of $10.7 million, representing 37% of our reported GAAP basis pretax net income.

This provision was attributable to the remeasuring of our deferred income taxes and a onetime transition tax as a result of the new tax law enacted in December of 2017.

Moving into 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 fiscal 2020 Q1 outlook. We expect first quarter consolidated revenue in the range of $84.5 million to $89.5 million. We are still in the process of integrating the 3 acquisitions into our business and for Q1 have assumed minimal revenue contribution beyond the contribution from the discounted deferred revenue balance for the upcoming quarter.

At the bottom line, we expect first quarter GAAP basis net loss to be in the range of $0.31 to $0.37 per share. We also expect first quarter non-GAAP net income in the range of $0.06 to $0.12 per diluted share, and adjusted EBITDA in the range of $6.5 million to $9.5 million. For fiscal 2020 as a whole, we expect software and subscription services revenue to increase to approximately $120 million and represent more than 30% of consolidated revenue.

We expect Telematics Systems revenue to decline between $25 million and $30 million due primarily to product revenue loss and consolidation with the acquisition of 3 former customers, as well the transmission of certain MRM product lines to a subscription-based revenue recognition model. Also included in this outlook is the ongoing secular decline in legacy product revenue. Additionally, we expect our adjusted EBITDA in fiscal 2020 to be greater than the adjusted EBITDA recorded in fiscal 2019.

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. While we are disappointed in this latest quarter's results, we are making progress in addressing our short-term challenges and hope to have these issues behind this over the next few quarters. We are entering the new fiscal year with increased optimism that CalAmp's transformation as a global SaaS solutions provider will drive value creation through a solid base of recurring revenues and accelerated growth in higher-margin innovative Telematics subscription services.

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 comes from Mike Walkley with Canaccord Genuity.

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

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Michael, with several of the recent acquisitions, you're certainly accelerating the transformation to higher mix of recurring revenue. Can you just helps us maybe walk through the 3 acquisitions and the hardware sales that are coming out of your hardware sales to this customer, I mean to these different customers as all 3 of the acquisitions were hardware customers for CalAmp.

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

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Correct. Hello, Mike. Yes, each of the acquired entities, TRACKER, LoJack Mexico, and Synovia were all good customers. Synovia was a particularly good customer for MRM products. And as a consequence of making the acquisitions, obviously, we lose the product revenue in consolidation. But of course, as we continue to use our own products as part of the bundled solutions, we get to retain the margin associated with those bundling activities.

So going forward, obviously a little bit of a short-term impact but obviously a good trade-off in terms of our ability to drive increased levels of recurring revenue.

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

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I was just trying to see with the $25 million to $30 million decline how much of it was just a change of accounting for bundled versus overall just decline due to other macro and other weaknesses you talked about on the call.

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

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Yes, I can kind of give you some directional feedback on that. As it relates to sort of how that $25 million to $30 million decreased, Telematics System revenue outlook is sort of parsed out. About approximately a third is anticipated to be eliminated in the consolidation of the 3 entities.

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

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Okay. Great. That's helpful. And just on the overall for the Synovia, can you walk us through just how their bus application ties together with maybe CrashBox and LoJack, and are there any longer-term synergies just from the applications of the platforms that you're acquiring?

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

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Yes. Well, good questions. So as we announced when we described the acquisition in some level of detail, Synovia is obviously a very, very important player in school bus fleet management marketplace. And in fact, I think they are probably number 1 if not close to being the number 1 position in that marketplace in terms of share.

And they did something really interesting and innovative when they developed this Here Comes the Bus app for the parents that are part of the school districts where they provide their fleet management services. And it might seem very simplistic at the surface. It's an app that allows parents and anybody that's part of that school district system and has access rights to be able to track the school buses.

But it's actually a complex analysis of where the school bus is relative to where it's supposed to be given a published schedule. So there's a lot of analytics work that's done in the background actually to feed that consumer app to allow people to really know where those buses are. We see an opportunity to take some of our technology and integrate it into the Here Comes the Bus application by allowing parents to not only know where the bus is, but potentially know that the child has actually been able to get on the bus, leveraging some of the LoJack supply chain integrity technology that we acquired with LoJack about 3 years ago.

We have these so-called asset tags that we plan to introduce as a bus pass alternative as part of the overall Synovia solution, so we can continue to have interesting sources of competitive advantages as it relates to our opportunity to provide fleet management services in that important K-12 marketplace.

Now as it relates to additional potential LoJack synergies, it's interesting that Synovia chose to not brand the Here Comes the Bus app when they introduced it a few years ago. So essentially, the Here Comes the Bus app is a blank canvas as it relates to branding opportunities and the parents who use the Here Comes the Bus app, and there's roughly 300,000 a day who do, obviously are very interested and concerned about child safety and security.

So we think it's a fabulous opportunity to introduce the LoJack brand into that safe and secure sort of ecosystem, and offer opportunities for parents as they monitor the journey of their children from kindergarten students all the way up through high school students and when they become key drivers. And be able to have LoJack be a fundamental part of that journey from a branding perspective.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [8]

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Great. That's very helpful. Last question from me and I'll pass it on maybe for Kurt or both of you. Just on some of the supply issues, how much longer do you think they're going to impact your business and what was maybe the impact to sales in the fourth quarter? Thank you.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [9]

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I'll take part of that and Kurt can add color as he chooses. But we said in the prepared remarks that we expect it to take a few quarters to be completely resolved. We did make a little bit of progress in Q4. We expect to continue to make progress in Q1 but it did have a material impact on our results in Q4.

And as we talked about when we announce our Q3 results, we estimated that roughly 50% of our issues that we face as related to our revenue guidance was related to supply chain related matters, and about 50% was related to specific customer demand issues. And I would say what we talked about last quarter is roughly the situation that we face this quarter.

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [10]

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The only thing I would add, Mike, there is that as we communicated last quarter, we left the third quarter with the highest backlog level that we've had probably ever in our history. This quarter, it was not as bad. We did make improvement there but unfortunately, it was at an unacceptable level. And so we are still working through the process, aligning ourselves better with our contract manufacturers, and ensuring we have complete visibility in that supply chain so that these backlog levels come down significantly over the next few quarters.

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Operator [11]

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Your next question comes from Mike Latimore.

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Unidentified Analyst, [12]

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This is [Powan] on for Mike Latimore. My question is related...

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [13]

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Hello.

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Unidentified Analyst, [14]

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Hello. Do you hear me?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [15]

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Yes.

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Unidentified Analyst, [16]

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This is [Powan] for Latimore. I have 2 questions. What did LotSmart and SureDrive contribute to this quarter?

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

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LotSmart and SureDrive revenue was approximately $500,000 to $600,000 and as relates to subscribers, I believe in combination, it was right around 25,000 with actually a little bit more than 25,000. I believe LotSmart ticked over 20,000 for the first time and SureDrive, I think, was hovering around 5,000 to 6,000 subscribers at the end of Q4.

Both of those numbers are up considerably year-over-year and up a respectable amount actually on a sequential basis. So we're making great progress there and we're very encouraged by the traction we're gaining in the dealer channel. It's taken some time to get there. And I think the Trophy Group announcement that we made just about a week ago I think is a great expression of the traction we're making with dealers and how they see Telematics playing a critical role not only in terms of managing their operations but also giving them the opportunity to sell through products to consumers and help boost their bottom lines.

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Unidentified Analyst, [18]

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And where could that run rate go this year?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [19]

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I don't think we're in a position to be able to break that out separately but obviously, we're encouraged by the traction we're gaining. And really, it's a similar situation as it relates to Telematics opportunities for all of our LoJack entities, both domestic and international. In Italy, TRACKER U.K., as well as LoJack Mexico.

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Operator [20]

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Your next question comes from Jerry Revich.

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [21]

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This is Ben Burud on for Jerry. I was just hoping to discuss the Telematics business and the outlook for fiscal 2020. Can you kind of give us an idea what is embedded in the outlook for the MRM business and LoJack SVR? Obviously, you guys discussed in the release the $25 million to $30 million decline and what's driving that. But can you just give us an idea of what the more organic growth outlook is specifically for MRM and LoJack SVR?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [22]

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Well, as it relates to the MRM outlook, obviously, we expect it to be impacted by the loss of revenue and consolidation specifically associated with Synovia, but also the other licensees as well because they were MRM Telematics device customers as well as LoJack SVR device customers. So obviously, that's an impact.

We also expect to transition some of our MRM product lines to subscription only and in fact, we just launched the first program this week. And as it relates to sort of a percentage breakdown of what's related to revenue lost in consolidation, I estimated around 1/3 of the $25 million to $30 million.

I would estimate about another third associated with the transition of our MRM products, or some of them, to a subscription-only model. And then the balance is related to a number of different elements, including some last time, essentially end-of-life notices that we made for some our really old legacy private radio products, including PTC radios, and public safety communication systems. And then also some expectation that we'll continue to see some level of secular decline in SVR sales, discrete SVR product sales to the remaining licensees, as well as through the dealer channel in the U.S.

As it relates to the offsets, obviously, we expect to see some recurring revenue growth associated with the device as a service transition for that one MRM or those MRM product categories. We also expect to see pretty noticeable growth, organic growth, through our various LoJack related Telematics initiatives for transportation and logistics around the LoJack SCI supply chain product line and solutions, as well as the Telematics services that we're selling through dealers and in partnership with companies like Pioneer, a relationship we announced back sometime in in our fiscal 2019.

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [23]

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But adjusting for all those one-off items, I guess I'm trying to get at -- what I'm trying to get at is what is the foundational organic outlook for MRM. I think we get where LoJack SVR is going. The Cat story is very positive and I think well understood. But all those items you just listed out, if you just adjust them out, what's the underlying organic outlook for MRM look like?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [24]

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That's really a good question and it's very difficult to answer. But as we enter the new fiscal year, we're trying to be prudent and cautious in our outlook. So I think at this point in time, we are not expecting significant organic growth in demand for MRM Telematics products in FY '20.

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [25]

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And then just on the acquisitions, can you give us an idea how bidding intensity was for the multitude of deals you did in the last few months? Were there multiple bidders looking at these assets? Can you just give us an idea for that? And then going forward, are you -- what is your appetite for M&A going forward? And how is the pipeline shaping up?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [26]

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Really, really good question. As it relates to TRACKER and LoJack Mexico, we were obviously in a very unique position as it relates to our relationship with those entities. And therefore, I would say there wasn't as good of a -- or another viable alternative, I would say, that could've sort of stole those away from us as it relates to our opportunity to integrate those acquisitions.

We had great insights into the businesses. We understood them better than anybody else. And the unique nature of our license agreements made it a little bit difficult to run what one might term a normal M&A process. So I would say that the competition, if you want to view it that way, was relatively minimal as it relates to those 2 assets.

Synovia, a different story. This was a very, very solid business, well-known company in the school bus fleet management marketplace. They had run a process a few years ago and decided they couldn't get the valuation they expected. They ran another process more recently. We were not the only participant in that process.

But given our unique insights into their business and what the shareholders felt were the strategic synergies associated with dealing a deal with CalAmp versus potential others, including private equity firms, they thought that a deal with CalAmp was a much better alternative than those they might consider from other bidders. And we didn't necessarily have to outbid others in order to get the asset.

We think all of them were great values and we expect to be able to do a lot with each and every one of them. And I think it's important to remind everybody that pre-acquisition, these businesses on a combined basis were doing about $54 million, $55 million a year revenue and growing.

So you consider the roughly $75 million we paid in total consideration for the 3 businesses. We think we got a great deal and we're certainly not going to sit on our hands as it relates to managing these businesses, and integrating them, and trying to find the various avenues of strategic synergy that we expect to be able to find.

And then the follow-up question I think you had was relative to what is our ongoing M&A appetite and what's the pipeline look like. I would say we're very much focused at this stage of integrating the 3 acquisitions. There's a lot of work to do there. And so for the time being, I wouldn't say we're particularly active or necessarily trying to build a very robust pipeline of M&A opportunities.

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Operator [27]

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Your next question comes from Scott Searle.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [28]

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Just a couple things. Wanted to follow-up. I'm not sure if I missed it but did you give an outlook in terms of the OEM business both for the first quarter and for the year what you're kind of expecting from a growth standpoint? And as well, now with the 3 acquisitions, what the fully loaded OpEx -- non-GAAP OpEx structure is going to look like when we get a full quarter contribution from those 3 businesses?

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

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Good questions. We did not break out separately the network and OEM products outlook and I think we're a little reluctant to do that. I will give you a little bit of color in terms of what's sort of implied in the outlook. And that is we do not expect this year, that would be FY '20, to be as good of a year with Caterpillar as what we saw last year. Last year was an exceptional year. Cat has obviously been very, very cautious with their guidance and I think it's prudent for us to be cautious as well as it relates to our engagement with them and what we would expect to see in terms of our outlook for this fiscal year.

We do expect the second OEM that's been growing in terms of revenue contribution to continue to grow. That's a great relationship. We alluded to a subscription opportunity in our prepared remarks around security services that we plan to layer onto the products that we currently sell to that other OEM. And we expect to see some other heavy equipment OEM related activity in FY '20, although we don't think it's going to be very material for the results in the coming fiscal year.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [30]

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Just to clarify, though, is that -- so when you say not as good as last year, certainly you're talking in terms of growth or are you -- in terms of absolute dollars as it relates to (inaudible)?

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

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That reference was in terms of absolute dollars.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [32]

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And in terms of the fully loaded OpEx structure with the 3 acquisitions?

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

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Good question. I'll let Kurt take that one.

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [34]

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Yes, Scott. So as you know, we're still in the process of integrating these 3 businesses and in so doing, kind of evaluating their overall operating expense. I can tell you right now that all 3 businesses had very robust spending in sales and marketing and G&A area.

If you look at where we are, on a non-GAAP OpEx standpoint, we're estimating that non-GAAP fully loaded will be somewhere in the range of, say, 41% to 43% for Q2 and then probably starting to normalize throughout the year.

Something you have to keep in mind. When I say 41% to 42%, we have this purchase accounting anomaly that will play out over the next year to potentially year and a half. Under purchase accounting, we are required to haircut the deferred revenue balance that we acquired as part of the opening balance sheet and that haircut is essentially eliminating the profit margin that the previous owned business consistently earned during its period of ownership. We won't get that benefit.

So when I say 41% to 42%, obviously, it's on a haircutted revenue number. So over the year, year and a half, that number will drop significantly. So that's what we're looking at right now.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [35]

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And just to follow-up on that point, Kurt, from a SaaS standpoint, I thought you referenced earlier in the call about $6 million in contribution from the acquisitions in the first fiscal quarter, ramping up to closer to $11 million in the back half of the year. Is that correct?

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [36]

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That's correct. So that's a haircutted revenue number and you can see that over the year, the haircut starts to dissipate.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [37]

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Got you. Oh sorry, go ahead, Mike.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [38]

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I was going to say, we didn't break this out specifically but in the prepared remarks, Kurt did talk about our full year adjusted EBITDA outlook being at or better than FY '19. In FY '19, that was around $48 million and we guided at the midpoint, Q1, at around $8 million. You can see that there are significant sort of marginal profitability dynamics associated with this deferred revenue haircut and the phenomenon associated with that starting to accrete to revenue over the course of the fiscal year.

So if you were going to sort of extrapolate, for us to get to that $48 million number, we need to be driving an adjusted EBITDA margin by the end of the year at least around the mid-teens.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [39]

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But Mike, you jumped ahead of me and you cut off my punch line questions here. That's where I was leading. So just to follow-up on that, so you said $120 million in SaaS revenue for the year, which implies the exit rate is well north of $30 million. And to your point on the EBITDA as well, greater than last year. You get into the third quarter, certainly back half the fourth quarter, you're at an EBITDA level that is greater than anything that you saw in fiscal 2019. Is that correct?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [40]

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That is correct.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [41]

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So one last follow-up then. On that front, Mike, what gives you the confidence -- now, certainly, look, the SaaS businesses are building and growing. So you're getting visibility on that front. But what gives you the confidence in the rest of the business that you maintain that sort of trajectory to hit those numbers.

And also on the $200 million SaaS target, was there a timeline associated with that? Thanks so much.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [42]

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Well, I mean clearly, as recurring revenue, software and subscription revenue becomes a large percentage of the consolidated mix, which it does do and has done recently, and will do more so in Q1 with the integration of the acquisitions, there's much more predictability and much more visibility as it relates to us being able to give a full year outlook, which we've done for the first time in a very, very long time, obviously a little bit earlier in our prepared remarks.

So I think we have a fair amount of confidence but we're also cautious in terms of our outlook as it relates to our ability to continue to grow our software and subscription lines of business on an organic basis, while also integrating these recently acquired entities and not go off the rails on any of -- either of those 2 fronts. As it relates to our product revenue, obviously, it's been somewhat volatile recently and we're trying to be prudent and cautious as it relates to providing an outlook there.

But I would say that I think it's our sense that as it relates to the short-term challenges we face, both around demand as well as on the supply chain side, we're cautiously optimistic. I would use that word cautiously optimistic that the worst is behind us.

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Operator [43]

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Your next question comes from David Gearhart.

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David William Gearhart, First Analysis Securities Corporation, Research Division - Associate Analyst [44]

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I wanted to kind of go back to the Telematics line and the guidance for the year. No one has asked about ELD and the second ELD mandate is in December of this year. Just wondering what you have baked into guidance for the second stage of the mandate.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [45]

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Thank you for the question, David. We do not have much if anything specifically earmarked in our outlook as it relates to that second wave of ELD regulations. It may be a positive tailwind but we're really discounting that at this stage.

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David William Gearhart, First Analysis Securities Corporation, Research Division - Associate Analyst [46]

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Then lastly from me, I wanted to ask what feedback has been from your existing Telematics Solutions providers from your recent acquisitions? I know you get the question quite a bit about channel conflict, competing with your customers. I think you've given us a sense before of how you answer that question to the analyst community.

But what's been the feedback and what are you telling your customers about potential channel issues?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [47]

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That's really a good question. On the LoJack side, really no concern because those were specific types of businesses operating in specific verticals around SVR, as well as some other enterprise related fleet applications for rental cars, insurance companies, and long-term leasing companies. So it was a fairly isolated sort of market landscape. So really not a lot of concern around those acquisitions. I would say on the Synovia side that school bus market is pretty unique and over the years, there's been a fair amount of shake out as it relates to viable players there and there's really only 2 or 3.

And of the other players, really none of them were ever in any meaningful way or at any meaningful level, Telematics device customers. So really no concern there either. But if there was a situation where someone was concerned about our efforts to continue to increase software and subscription service revenue as a larger percentage of our consolidated mix, obviously, it's something that we would pay attention to.

But it wouldn't divert us away from our ultimate objective, that is to become ever increasingly more of a software and subscription service business. And we think that we can serve multiple clients both from an end-to-end perspective, but also give ourselves the opportunity to add additional value-added services with some of our hardware only clients, and allow them to share in the value and the technology and the investments we're able to make around software and subscription service technology development.

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David William Gearhart, First Analysis Securities Corporation, Research Division - Associate Analyst [48]

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If I could sneak in one more. You had mentioned some demand issues on the MRM side. Just wondering, did that have anything to do with the 4G ebbs and flows, puts and takes of getting the hardware out? Some customers maybe ordering a bit ahead, concerned about supplies or stuff like that. Just wondering if I can get some color on that.

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

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That's a really good question. We do know that a customer that was a large contributor to revenue in the early part of fiscal 2019 was really trying to get ahead of the 4G sunset issue and probably had loaded up a fair amount on inventory. And the business tailed off somewhat from that very strong first part of the year later on in the year. So maybe there was an impact there but that's only 1 customer that we could point to that really made an overt effort to try to build up inventory.

We did have a situation, however in Q3 and into Q4, where we had a channel partner that took advantage of a last time buy and loaded up on 3G products that we had essentially end-of-lifed, and contributed a significant amount of Q3 revenue, which did not repeat in Q4. So it was almost an inverse effect there.

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Operator [50]

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Your next question comes from George Notter.

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George Charles Notter, Jefferies LLC, Research Division - MD & Equity Research Analyst [51]

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I guess I just wanted to ask about the supply chain issues. Obviously, it's been part of the narrative here for a couple quarters here. But I'm just curious if you can give us any more sense for kind of where you're at in terms of the transition and how you're seeing that affecting topline going forward.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [52]

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Sure. Well, as we talked about back in Q3, in fact, earlier in fiscal 2019, we had an initiative under way to diversify our supply chain and move some production out of China to other regions around the world. As our business has grown and expanded around the world, it just seemed to make sense for us to consider doing that and really avoid specific regional risk by having a concentrated supply chain in China.

So we embarked on that process and we're making progress. And then of course, the tariff threat came along and we tried to accelerate that process. And that really complicated matters and probably is the root cause of most of the issues we've faced over the last 2 quarters, in Q3 and in Q4.

What we talked about last quarter was trying to slow that transition process and stabilize our supply chain backdrop. And I think we made pretty good progress and continue to make progress as it relates to that stabilization. And as the tariff threat seems to diminish more by the day, we think that it's probably practical for us to consider sustaining a certain level of production in China.

So in a certain sense, we're trying to re-establish what were in the past very reliable supply chain partnerships, while also kind of slowing the pace and being a little more methodical as it relates to some of the other geographic diversity activities we had around our overall supply chain strategy.

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Operator [53]

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The next question comes from Josh Nichols.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [54]

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I did want to ask with the TRACKER acquisition, the company moving more into the Latin America market, obviously a bit different from a competitive perspective. Could you tell me how you think CalAmp fits in there, competitive dynamics in the region, ARPU, things like that, and how that compares and contrasts to the U.S.?

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

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Really broad question. We've been making progress as it relates to international expansion for a number of years. Last year, we were almost $100 million -- $96 million I believe -- yes, 26% consolidated revenues. So we've been quite active in Latin America and obviously in Europe as well.

And these acquisitions, TRACKER in the U.K. as well as LoJack Mexico, give us an opportunity to really build a platform where we can continue to expand that reach into those regions, not just through hardware sales but also through the provision of various Telematics related services. And so LoJack Mexico, TRACKER in the U.K. represent more established beachheads for us as it relates our ability to continue to expand and add additional value around subscription services and recurring revenue streams.

In the U.K., we view that as a little bit different than our expansion into LoJack Mexico and that is it gives us sort of a bookend and a better pan-European perspective as a complement to a very successful operating entity and operational strategy with LoJack Italy. So we're very active in terms of trying to align TRACKER's activities in the U.K. with those of LoJack Italy and we're making excellent progress. We think that that's going to play out quite well for us to give us that broader pan-European footprint and really give us the scale to be able to provide a range of different software and subscription services to clients all across Europe.

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Operator [56]

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And the last question comes from Anthony Stoss.

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Anthony Joseph Stoss, Craig-Hallum Capital Group LLC, Research Division - Managing Partner & Senior Research Analyst [57]

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Michael, if you wouldn't mind expanding again on the supply chain issues. I'm just curious if you think you're losing any share as a result of it. And also, this contract manufacturer, how much of it can you influence the speed in which they complete the transition or be at the mercy of them.

And then Kurt, could you help us out a little bit more on what you expect gross margin to be for the May quarter, also OpEx. And then lastly, once the transition is done, on the supply chain side, where do you think gross margins might be at the end of fiscal 2020?

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [58]

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Good questions, Tony. As it relates to the share loss concern, there probably have been situations where we've lost some business to what some might term competitors because of our extended lead times. We have had 2 quarters of really excessive past due backlog and lead times that have extended well past historical norms. And in some cases, we have customers who simply can't wait and if we can't deliver the product, they have no choice but to look elsewhere.

I'm not sure it's been a dramatic impact in terms of our overall consolidated revenues, but it is a factor. It's a huge concern and it really is an additional motivator for us to try to get the supply chain situation stabilized and get the lead times back to the levels that they had been historically.

Our customers had come to rely on us for virtual just-in-time delivery and we really want to get as close to that as we possibly can. As it relates to the supply chain challenges and the ongoing transitions, I would say it's up to us and our partners to make that work and be effective.

And so we've really tried to double down on engaging with our supply chain partners so that we have better visibility on their activities and they have better visibility on what our demand is so that we can continue to try to make progress and get things back to where they were before, without having any compromise on any front, especially around quality.

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Kurtis Joseph Binder, CalAmp Corp. - Executive VP & CFO [59]

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To address your question on gross margin, and some of those conversations sort of parallels what we discussed a bit earlier I think with Scott on EBITDA and EBITDA expansion that occurs over the next 4 quarters.

But just to give you additional color, we kind of ended the year, all-in, just between 40% to 41% gross margin. We think that in Q1, that will drop off a bit, probably in the 38% to 39% range mainly because of the haircutting that will occur as a result of the deferred revenue that I mentioned before.

But we think that the margins over the base of the year will expand, especially towards the second half of the year. So somewhere at or north of potentially 43% to 44%. That kind of mirrors the trajectory that we would expect to see with adjusted EBITDA because you start to get that earnings leverage again sort of toward the second half of the year as the deferred revenue haircut burns off quicker. So that hopefully gives you some color on your question regarding what our margin expectations are.

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Operator [60]

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At this time, there are no further questions. This concludes the question-and-answer session. I'll turn the call back to Michael for any closing remarks.

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Michael J. Burdiek, CalAmp Corp. - President, CEO & Director [61]

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Thank you. Thanks for joining our call today and we'll look forward to speaking with you at the end of our first quarter.

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Operator [62]

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This concludes today's conference call. You may now disconnect.