Camp4 Therapeutics Corp Q3 FY2022 Earnings Call

Welcome to CalAmp’s Third Quarter 2022 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, Joel Achramowicz, Managing Director of Shelton Group, CalAmp’s Investor Relations Firm. Joel, you may begin.

Good afternoon, and welcome to CalAmp’s fiscal third quarter 2022 financial results conference call. I am Joel Achramowicz, Managing Director of Shelton Group, CalAmp’s Investor Relations firm. With us today are CalAmp’s President and Chief Executive Officer, Jeff Gardner; Chief Financial Officer, Kurt Binder; and Chief Supply Chain Officer, Nathan Lowstuter. 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 are subject to risks and uncertainties that could cause actual results to differ materially from those implied by these 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 any forward-looking statements to reflect future events or circumstances. Now Jeff will begin today’s call with a review of the company’s operational highlights, during which Nathan will discuss briefly the state of the global supply chain, then Kurt will provide a more detailed review of the financial results, followed by a question-and-answer session. With that, it’s my great pleasure to turn the call over to CalAmp’s President and CEO, Jeff Gardner. Jeff, please go ahead.

Thank you, Joel, and thank you everyone for joining us on the call today. Revenue for the third quarter of $69 million reflected reduced shipments as a result of the ongoing global component shortages that we outlined in our business update press announcement last month. The supply chain challenges that are plaguing businesses globally have become more pronounced over the past several months. As a result, our backlog over the past two quarters has remained at record levels reflecting the continued strong demand we are seeing for our telematics solutions. In order to provide our investors more context and information regarding CalAmp's assessment of the supply chain and our mitigation efforts, I'd ask our Chief Supply Chain Officer, Nathan Lowstuter to add some additional insights. Nathan?

Thank you, Jeff. As many of you know, I joined CalAmp in June last year with over 20 years of experience in global supply chain management, quality control, and manufacturing and project management. I can tell you that I've never seen such a global disruption in the electronics supply chain like the one we have today. Like many companies across multiple industries, the global semiconductor shortages continue to impact our ability to gain access to key components and have not shown a marked improvement over the past several quarters. And although we had previously anticipated some early signs of improvement in the second half of our fiscal year, we were faced with several component delivery decrements from our suppliers late in the quarter that impacted our ability to ship against order demand. This was driven by upstream challenges, wafer allocation, and delays in deliveries. As a result, overall material fill rates remained well below our order levels. It's been difficult to project inventory levels as many suppliers have limited near-term delivery commitment windows of only one to three months out. Additionally, over the last couple of quarters, we have seen an increased rate of end-of-life notices for certain components, which has added to the overall supply challenges. How has CalAmp been addressing the situation? First, my operations team is working several layers deep within our supply chain and is very tactically involved in tailoring our bill plans of the material, further build situation, and maximizing output for our customers. Second, we are partnering with our engineering and product teams to qualify additional components and, where possible, to find workarounds or redesign our products to include components that are more readily available. We are also aligning our new products with suppliers’ investment roadmaps to ensure that our products have the longest expected lifespan and access to critical material supply in the future. Our joint efforts are focused on creating the most optionality possible in order to source adequate component inventory. Third, we are active in the distribution and broker market for components and have a robust identification and quality verification process in place. However, there are still certain components that can't be found through these channels. With new wafer production at foundries expected to take a long time to come online, our expectation is that we will be working in a constrained material environment well into calendar year 2022, with hope that the situation will incrementally improve every quarter. We will continue to address and carefully navigate the situation in the best way we can. Our focus on escalation, expediting, and reengineering will continue as we work to maximize our material flexibility and output for our customers. I will now turn the call back over to Jeff, who will be available to answer any questions that you may have during the Q&A.

Great, thanks for this assessment, Nathan. We're fortunate to have you and your team helping us navigate through this difficult time. Now, let me turn to an update on our Software and Subscription Services business. Revenue in the quarter was $37 million, which was up 7% year-over-year, but down sequentially as expected due to the completion of a major trailer retrofit program with our large package delivery customer last quarter. Software revenues represented 53% of total consolidated revenue, the second quarter in which they have exceeded 50%. We are receiving positive reaction and feedback from our customers who are evaluating our new SaaS applications for device management, configuration, and over-the-air updating. The team continues to make progress transitioning them, both contractually and technically. We have transitioned several of them from backlog to subscription models with total three-year TCDs of approximately $30 million. We are also finalizing terms with a number of other customers that we expect to complete in the current quarter. As these customers recognize the value of having access to the enhanced features and functionality of our device management and CTC platform, as well as our value-added services and applications, we expect the transitions to pick up momentum. As these customers transition to a SaaS model, they will gain real-time access to all the new feature enhancements that we will continually release in our telematics services portfolio. They're able to seamlessly leverage the connected intelligence and insights that are available through the CTC services, APIs in adjacent areas of transportation and logistics, cargo and asset tracking intelligence, and access to real-time sensor information from tractors and trailers. To further help with the advancement and progress of our go-to-market strategy towards the SaaS model, we internally established a transformation office with the express charter of improving cross-functional alignment within the organization. We've also continued to expand our team with highly qualified and experienced software sales professionals as part of our SaaS sales group, while also hiring the best engineering talent to augment our product development group. Taken together, these efforts have made a critical impact on our SaaS transition initiative. This past quarter we've exceeded 1 million in core software subscribers, which is up from 932,000 last year, as we remain focused on becoming a SaaS telematics leader in the transportation and logistics industry. With that, I'll pass the call to Kurt to review the financials, and then we will open the call to questions. Kurt?

Thank you, Jeff. Today, 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 with the closest corresponding GAAP basis measures is included in the press release announcing our fiscal 2022 third quarter earnings that was issued this afternoon. Total revenue in the third quarter was $68.8 million, which was down 12% year-over-year and 13% sequentially. The decline in revenue is attributable to the ongoing global component supply chain constraints as discussed by Jeff and Nathan. International revenue totaled $24.2 million or 35% of total revenues for the quarter. Software and Subscription Services revenue was up 7% year-over-year to $36.6 million or 53% of consolidated revenue. But on a sequential basis, it declined from $41.4 million last quarter, due to the completion of a large trailer retrofit project. The year-over-year growth in our Software and Subscription Services business benefited from the continuing success in transitioning certain existing telematics device customers to recurring software contracts. In terms of performance metrics for our Software and Subscription Services business, annual recurring revenue for the trailing 12 months was $85.5 million, up slightly from $85.2 million in the third quarter of the prior year and from $85.1 million last quarter. As a reminder, ARR represents revenue from recurring application subscriptions and services, which excludes revenue from the hardware devices in a bundled arrangement with the customer that is recorded at a point in time or upon installation. Remaining performance obligations in the third quarter were $146.4 million compared to $136.3 million in the prior quarter and $124.3 million in the prior year quarter. This metric represents all contracted revenue, including deferred revenue and contracted but unbilled revenue related to bundled contracts with customers. We continue to see growth in our base of active subscribers and our total number of active subscribers at the end of the third quarter was 1 million. The growth in our remaining performance obligations and subscribers reflects the increasing success of our program to transition existing customers to recurring subscription contracts as well as new logo generation. Telematics Products revenue in the third quarter was down 28% year-over-year and 14% sequentially to $32.2 million. Although customer demand remains strong across all regions, the ongoing global supply chain constraints continue to limit our ability to source critical components necessary to meet all demand for our telematics devices. Within the Telematics Products reporting segment, OEM products revenue increased 1% sequentially and decreased 16% year-over-year to $16.1 million. Our largest customer represented $14.4 million in revenue for the quarter, which is up 3% sequentially from $14 million last quarter and down from $16.4 million in the same quarter a year ago, due primarily to supply constraints. Consolidated gross margin from continuing operations in the third quarter was 40.7%, down from 42.2% last quarter, but was up from 39.8% in the same quarter a year ago. The sequential decline in gross margin resulted from higher fixed cost absorption across the lower revenue base in the quarter, combined with an increase in component costs across both of our reportable segments. Our non-GAAP operating expenses on an absolute dollar basis were consistent sequentially, even with sales and marketing expenses increasing slightly due to our continued investment in expanding our software sales team to support our transition efforts. We will continue to maintain this level of investment in our core business to further our SaaS transformation efforts, given the current customer demand and the record level of backlog we've seen over the past few quarters. Although the supply challenges are impacting revenue in the short term, we believe it is important to remain properly positioned and well-staffed. We believe that today we have the right software solutions roadmap to meet the future demand of our telematics services and solutions. That being said, we will remain prudent in our overall spend and continue to carefully monitor our expenses for any opportunities to make select reductions over time. Adjusted EBITDA in the third quarter was $3 million with an adjusted EBITDA margin of 4%, compared to adjusted EBITDA of $8.3 million and an adjusted EBITDA margin of 11% in the prior quarter. The decline in adjusted EBITDA is attributable to the decrease in sales, coupled with an increase in component costs and freight charges. Similarly, our free cash flow declined in the quarter due mainly to the lower revenue and further compounded by our efforts to transition customers to multi-year contracts, which changes the timing of cash flows as billings occur over the contract period rather than upon device shipment. This situation will be particularly relevant during quarters where larger customers transition to high value recurring subscription contracts. In terms of our overall liquidity position, at the end of the third quarter, we had total cash and cash equivalents of approximately $91 million as compared to $101 million last quarter. Additionally, we have an unused $50 million revolving credit facility. Meanwhile, our aggregate outstanding debt is approximately $237 million, including $230 million of the 2% convertible senior notes due in August 2025. We expect to maintain a strong financial position and balance sheet with significant cash for working capital going forward. In reference to our outlook for the fourth quarter of 2022, we are maintaining our policy of not providing quarterly guidance. Visibility into product shipments in the fourth quarter remains uncertain due to the global component supply shortages, coupled with the timing of Chinese New Year in February. With that, I'll turn the call back over to Jeff to provide some final comments before we open the call up for questions.

Thank you, Kurt. In summary, this is a challenging time for all of us, but the CalAmp team remains resilient and resolute in addressing the current supply chain challenges, while focusing on enhancing our full stack edge-to-cloud software solutions through a SaaS subscription model. Our customers know us as a trusted and reliable partner, and we will remain diligent in solving their business needs through the telematics innovations we have developed and continue to develop. We are excited about our connected intelligence strategy of providing customers with AI-oriented actionable insights across all assets that move from point A to point B. So today, we are more confident than ever that our shift in strategy and our new focus will benefit our customers and ultimately our shareholders. With that, I'd like to open the call up to your questions. Operator?

Your first question is from Mike Walkley with Canaccord. Please go ahead.

I just wanted to ask the team, including Nathan. With the Christmas holidays coming up and then Chinese New Year and what sounds like even more challenging supply chain in the month of November, is supply even tougher into your Q4 than it was in Q3? Or do you think it's more stable? I know you’re not giving guidance, but any color on how things are for Q4 versus Q3 on the supply side?

This is Nathan. We are not providing guidance. But in general, we do not anticipate a quick snapback in the fourth quarter. There may be additional downside risk should the current conditions and allocations not improve. But we are monitoring this very closely and working diligently with our suppliers.

Yes. And Mike, I think just the environment that we're operating in, it's not like we're getting a two or three months heads up anymore. It's a much shorter duration, which has made it particularly troubling for us to make those estimates out in front something like three or four months. But I'm convinced our team is doing everything we can to stay in close connection with our top vendors across all categories of our devices.

And then, maybe an intermediate-term follow-up question. Just on some of the redesigns, qualifying new components, some of those plans, how long do those take to implement? And if successful, how do you see supply improving over a 3 to 12 month period?

Yes, those definitely take more time to initiate within our supply chain. We're working on some of those today. It is probably more like a few months out. So is it going to help us in the fourth quarter? Probably not. But going into next year, the fact that our team has done a thorough analysis of our BOMs for all of our key products — and by the way, we have many fewer SKUs today than we did a year ago, that was very intentional to simplify the business, will put us in a better position to forecast these products going forward. So I feel like while it's not an immediate solution for our problem in the fourth quarter, it is going to result in some better long-term supply chain planning in our company going forward. Nathan, you might want to comment.

Yes. That’s right for sure. And this has been something that we've just started now. This is something that we've been actively working with our product and engineering teams, coupled with our suppliers, making sure that our bills of material reflect their investment roadmaps, and as we look to make sure that we're skating to where the puck is going to be to maximize the allocation possible.

Okay. Last question for me and I'll pass the line. Just it sounds like your backlogs remain at or near record levels. So it appears customers are sticking with you, but any sense your customers are looking for alternate suppliers, just given the tightness in the market and your ability to meet their needs?

No, I mean — this is Jeff, Mike. I think that there's definitely some of that going on out in the marketplace today, but I think without fail, customers are finding out what we know to be broadly true; this is a broad-based supply chain shortage that's affecting a number of different suppliers including us. So to me, my view of it is, there's no easy answers. If there were easy answers, those would have been solved months and months ago when this whole thing started. Nathan, give your perspective, please.

Yes, I think we have seen and we've heard good feedback from customers related to our ability to work and support them through their constraints. Certainly we're not able to meet all of the needs on our order book today at the rate that we'd like. But they understand and are reflecting a similar atmosphere that they see across the semiconductor world. So, they may not like it at all times, but they understand it and are working well with us through this.

The important point you made, Michael, is that our backlog is strong and we have experienced very few cancellations, indicating that our customers truly need our products. We are focused on delivering those products as quickly as possible. This period is somewhat unusual because, while it would be great to ship all this product and perform better at the top line, we are also ensuring that we are making significant progress on our migration. Remember, our company's transformation began almost at the same time as the supply chain issues. Therefore, I feel confident that the team is making headway in the transformation.

Your next question is from the line of George Notter with Jefferies, your line is open.

I guess I wanted to ask, any sense for how much revenue was held up in the quarter due to the supply chain constraints?

Hi, George, it's Kurt. It's quite challenging to quantify this. We're not providing any forecasts at this time. Currently, we are aware of our backlog. Historically, our backlog has varied between $35 million and $40 million, and now it's at 2.5 times that amount. The demand is strong, but it's hard to predict when that demand will align with supply. There are fluctuations from week to week and quarter to quarter, so I can't specify the exact amount that has been delayed.

Got it. And then I guess I also wanted to ask about the transition process and what kind of feedback are you getting from customers? I guess I'm talking about the PULS to CT CDM transition. It sounds like you've got a few customers over the goal line here, but what does customer receptivity look like? And are there customers that are not moving forward with you guys? Give us a certain range of outcomes you're seeing and how customers are viewing this? Thanks.

Yes, thanks for the question. We're seeing some pretty positive response from our customers in terms of understanding the new capabilities of our software. That's what gets them the most excited. Keep in mind that they're trying to handle this in the middle of a supply chain situation. The 3G to 4G transition introduces complexities, but I feel good today that one it's been four or five months since we conducted customer visits and had direct dialogue with each of our customers. I believe we're making progress along the way. They understand what the journey is like. We've got some converted today. We've really got to scale that operation, and we're feeling good about our ability to do so in the next few months.

Hey, George. I’d just emphasize, it does take a little time to educate them on the technology and the expanded capabilities that the new platform affords their business. As Jeff mentioned, we have converted a couple of important customers, and we're continuing to invest significant time to help our entire customer base understand how the transition is a win-win for all, but it will take a little time and we're working extremely hard at it.

And then just out of curiosity, what percent do you think of your customer base has made a transition? I assume we're just scratching the surface at this point. Sort of any percentage you can give us?

No, I don't think we should provide a percentage. We have converted some big customers, including one of our top five customers. But it really varies and it's going to be a little bit uneven. We're going to be really focused on this over the next few months though, too. Maybe we'll have some more clarity and be in a position to report percentages then, but now it's a little bit too early.

Your next question is from the line of Mike Latimore with Northland. Your line is open.

Thank you. On the software results in the quarter. Were they in line with your expectations, a little below? Just trying to get a sense of whether the supply chain hindrance had an effect on that?

Yes, we were pleased with the software sales in the quarter. As Kurt mentioned in his remarks, we were coming off a record software quarter with the large sale of equipment that we had with our big package customer. Knowing that, we were really pleased. We saw strength in K-12, connected car, and transportation and logistics. So it was a steady quarter across the board where our sales team really delivered. 53% is a new high for us, I believe, in terms of software revenue as a percent of our total. We expect that to continue to rise as we manage through this conversion.

So should we think about the software business as stable or growing a little bit in the fourth quarter?

Yes. We're not going to quote any forecast and information for Q4. The supply chain constraints we're dealing with right now are pretty broad-based. Our software business is not completely immune from it. We like the way that the conversion of our customers is occurring and the pace at which that's happening, which helps our software business. But at this point in time to give guidance on Q4 regarding that part of our business, we don't think makes sense.

And then just the comment you made about backlog, I think being 2.5x normal. Can you just remind me when you saw the first big step up from normal?

I think when we communicated our fourth quarter of last fiscal year, we had seen a sizable pick-up where in that quarterly filing we quoted something north of $60 million in backlog. From that point in time, it has continued to grow. We're not at record levels today because we have shipped on some of that, but we're at pretty high levels right now. Our historical backlog on the device side ranges anywhere from $30 million to $40 million or maybe $35 million to $45 million and it's up 2.5x that.

Your next question is from the line of Anthony Stoss with Craig Hallum. Your line is open.

Hey Jeff, can you comment on how many components within your products do you rely on a single source of supply from?

There's very few that we rely on a single supply source. Nathan, you can give him some perspective on that, but it's not significant.

Yes. I mean, we're using all the major players in the industry for radio modules, GPS, etc. There's no real wildcards in that basket. So, we are well-diversified but we are working with the best industry players. So, to that extent, if you think about upstream levels, we may have multiple approved vendors for your particular component. But when you get to the upstream wafer level, you're talking about really the same players across the board. It depends on at what level you're talking about. But at the wafer level, there are very few global players and they're the ones whose production capacity and output are really dictating the industry's pace.

Maybe I'm confused. I'm just trying to get more clarity on the pick in the prepared remarks you talked about discontinuation of products from your suppliers. I am wondering if that's what's led to the redesign as it’s going to take some time to actually get products to customers?

I understand your question. If you think about the broad base of products that we have in our portfolio, there is a product life cycle for components and some reach maturity; there is a natural end-of-life phase. As the industry is working to maximize output, we have seen an acceleration of that product life cycle phase to include some advanced notices of end-of-life components, which we are working to qualify, redesign, or find alternatives to continue sourcing. The fact that we have a portfolio of products allows us within certain ranges to mix and match for customers to serve their needs.

Yes. Thanks, Nathan. Lessons learned in this situation are to take a long view of all your BOMs across the industry. I think you'll see not only CalAmp but others in the space experiencing some of these end-of-life notifications. We strive to do as much as we can in front of any type of crisis. And believe me, we have never seen anything like this to ensure we have a list of BOMs that have a long life ahead of them to not put us in a difficult situation. That's just one aspect of the supply chain situation that we're in, but I believe the team is navigating it quite well.

Your next question is from the line of Scott Searle with ROTH Capital, your line is open.

Good afternoon. Thanks for taking my questions and happy holidays, guys. Real quickly. Kurt, I'm not sure if I heard it, but gross margins actually seem like they were okay overall, but I'm wondering if you could quantify any sort of the gross margin impact as it relates to component pricing, freight issues, or otherwise? And also Jeff, from an end-of-life for 3G timeline, is there any reprieve on that front at this point in time? Are you starting to hear that things would get pushed out a little bit longer in terms of your customers for their upgrade cycles?

Yes, Scott. So on the gross margin, we are generally pleased with the overall consolidated gross margin, recognizing that in the second quarter we had exceeded 42%. So sequentially, it was down slightly. In the short-term, it's difficult to project our margin because there are some uncertain conditions in the supply chain that we're dealing with. As discussed in some of our remarks, there's an increasing cost of components out there that we're working through. I know our maintenance team is all over it. But generally we're making progress toward our long-term model target of gross margin around 50%. That's also supported by a continued increase in our overall percentage of Software and Subscription Services revenue. As long as we continue executing to drive the percentage of our Software and Subscription Services revenue higher and higher, we are approaching a 60% target. I think our margins will improve, but in the near term, there are some uncertainties we'll work through over the next few quarters.

Yes. And regarding the 3G conversion, AT&T's 3G conversion is still scheduled for the end of February. While we continue to talk to AT&T, as I'm sure they're having similar discussions with other players in the field due to the supply chain crisis, no one is really as far along on the 3G conversion as they’d like to be. To date — and remember when discussing AT&T 3G, we're focused on North America. The rest of the world has a different set of standards and end-of-life timelines. In the case of the other major carrier in the U.S., we have more time for that, which I think will be helpful as we can give us some time to navigate the supply chain challenges we're facing today. However, as far as I know, the latest I've heard is that February 28th remains unchanged, and there's no indication of a reprieve from that date.

They understand the situation in the industry, but thus far they've held firm with their date.

And Jeff, maybe I will do a follow-up on that. What's the latest number or your estimate in terms of installed 3G devices out there from CalAmp that need to be upgraded in the timeline? And maybe Nathan for you — and just, I think you got asked it, I'm not sure if I missed the answer, but in terms of the requalification process, as you start to bring in other components and/or other modules into your products, how long is that cycle to go through a recertification process with the carriers?

Well, it does depend a bit on what type of changes and what level of the BOM we're discussing. If there are simple components, then there may not be much time required at all; it could be a fairly straightforward validation and test process. However, for the higher level components, it can take between 3 and 9 months, depending on the type of qualification due to testing, validation, and recertification.

Yes. In terms of our customer base, it's a little complicated because we have customers with AT&T and large customers that have tended to move very quickly on 3G. My concern longer term regarding this February timeframe is the smaller customers out there that either didn’t have the capital funds available to transition or are lagging behind on this 4G conversion. It's difficult, right, because we have probably an equal number of customers on the horizon that have a different shutdown date entirely. What matters to us is that we stay very close with our customers. Our sales team and executives are actively communicating with the CEOs of their companies to understand their situations and how we can help as a reliable partner to avert any crises by February 28th.

Okay. And lastly, if I could, Jeff, Samsara has gotten a lot of attention in the past week or so. I was wondering if you could address it competitively in terms of what you're seeing from the competitive landscape, where they fit into the overall equation and how you see them in head-to-head competition or otherwise? Thanks.

Yes. Samsara is a great company and in many ways, it's a good thing they get recognized with a $12 billion valuation. However, I don't think there are many similarities between a company like CalAmp and them. You heard Kurt talk about ARR and our RPO statistics. We’re an incumbent legacy company making the conversion, which is always easier to do as a unicorn. Nonetheless, when you look at CalAmp’s business, it's not unlike what you see at Samsara. We're solving complex problems for customers today, providing insights and competing with them in many cases head-to-head, and doing quite well. I'm taking nothing away from the incredible marketing machine built by those two founders; I’m proud of what they've created, and it has made us all better thanks to the competition. But don't lose sight of the fact that there are companies like CalAmp that have a substantial software business addressing complex problems for significant brands in the industry, and to have such a large valuation discrepancy makes little sense to me.

Your next question is from Jerry Revich with Goldman Sachs. You can go ahead.

Hi, this is Adam on for Jerry Revich today. I was wondering, given increased component costs, how extensive the magnitude of price increases was put in across your customer base during the quarter? And did you see any elevated levels of churn as a result?

Yes, I'll start and let Nathan jump in. We announced last quarter that we did an extensive price increase across the base to accommodate some of those increases we saw. Speaking as the CEO, we received very little pushback. Of course, we had inquiries from customers, but most of them were more focused on solving issues related to obtaining equipment in time for 4G, and not much pushback on the prices.

Yes, it is true that we've seen more rapid price increases across the board over the last couple of quarters on the material side as well as in logistics. Early in the year, we perhaps didn't adjust quickly enough in how we passed those costs on, but we've learned to partner with customers to manage those broker buys as necessary and have the discussions to address price inflation. It remains an ongoing discussion topic.

Yes, our initial increase in the first quarter was around 3% to 4% across all of our customers. Since then, prices have continued to rise, and currently what we're doing is being more specific; as customers request or demand products and we process allocations, if there are incremental cost increases, we work with them directly to accept those increases before we proceed with their orders. This approach allows us to tailor our pricing strategy based on customer needs despite the ongoing volatility in the market. However, as circumstances continue to change in the supply chain, we will reassess our approach quarterly.

That's clear. And then margins in telematics have been choppier recently as a result of supply chain impact. Can we revisit how you think about normalized margins in this segment once component shortages start to ease?

Well, again, our outlook on gross margin heavily depends on our ability to accomplish two key things. First, we use the term 'convert the base,' which is essentially taking our existing customers and migrating them into a subscription model. We have been working diligently on this, and I believe we've made significant progress over the last few quarters. The second critical aspect is driving new logos and ensuring those new customers are integrated with full-stack solutions where we know we can generate gross margins exceeding 50% in specific market verticals like K-12 and government municipalities. We're generating that type of margin profile. For us, it's more about the concentration of revenue coming from Software and Subscription Services contracts versus the device business. In alignment with this strategy, we reiterate our medium to long-term target of achieving gross margins within a 50% range, considering we will have a device component in the overall bundled arrangements. Depending on the service, the margin profile could increase from that 50% target upwards to 60-65%, again depending on the solution. We want to reaffirm that our target right now is a 50% gross margin based on the increased revenue from Software and Subscription Services.

Because I don't see additional questions at this time, I'll now hand the conference over to Mr. Jeff Gardner for closing remarks.

Thank you, Paula. Thank you for joining us on the call today and for your continued interest in CalAmp. One final note, Kurt and I will be participating in the Needham's Growth Conference on January 11th. If you'd like to request a meeting, please contact your Needham representative or our IR firm Shelton Group. We will be releasing our fourth quarter and full year operating results in April of next year. Until that time, all of us at CalAmp wish you a happy holiday season. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect. Happy holidays.