Camp4 Therapeutics Corp Q1 FY2023 Earnings Call

Welcome to CalAmp’s First Quarter 2023 Financial Results Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host of 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 first quarter 2023 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; and Chief Financial Officer, Kurt Binder. Before we begin, I’d like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAmp’s best current judgment, they 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 and 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 thanks to all of you for joining us on the call today. We continue to make progress on converting customers to recurring subscription contracts. Our first quarter software and subscription services revenue grew 13% year-over-year to $39.6 million, representing approximately 61% of the total revenue for the first quarter. This represents the second consecutive quarter our software and subscription services revenue exceeded 60% of total revenue. During the quarter, we converted another 10% of eligible customers, cumulatively representing over one-third of our total base, with the goal of completing the rest of the conversions by the end of the current fiscal year. In the quarter, we secured new customers such as Brigham Young University and Grupo Salinas, the second largest business group in Mexico, among others. And substantive to quarter end, we were selected as the provider to BMW for a new product offering and by Volkswagen Leasing, and we received first orders from them both. I'll touch on BMW further in a few moments. Consolidated revenue in the first quarter continued to be impacted by supply chain constraints, particularly with the COVID-related lockdowns in China that further exacerbated the overall supply situation, especially in the manufacturing and logistics sectors. With the lockdowns now that have lifted, we anticipate gradual improvements in the supply of the affected components. As I just mentioned, we recently received an initial order from BMW related to its GPS-based security by LoJack Solution, which sets unprecedented standards in the industry for monitoring and protecting BMW vehicles. This solution provides peace of mind to owners based on CalAmp's telematics technology, integrated with connected car data from BMW Group's ConnectedDrive Platform, which is accessible via a smartphone app. It also provides a driver tag to detect the presence onboard of an authorized driver and an engine crank inhibitor that can be activated in the case of theft by a network of secure operating centers opened 24/7 across Europe. BMW's decision to select CalAmp as its provider of new Stolen Vehicle Technology Services is a clear testament to our industry leadership and innovation. And these initial orders reflect the sizable opportunity we see ahead for this joint offering in the European market. We announced more strategic partnerships too, with both Bristlecone and Assured Techmatics. Bristlecone is a key systems integrator and leader in AI-powered application transformation services for the connected supply chain. This new partnership integrates real-time data insights from CalAmp supply chain visibility sensors, edge computing devices, and CalAmp Telematics cloud with Bristlecone's proprietary Neo cloud-based platform, thus providing global enterprises with rich end-to-end supply chain visibility and aggregated trend analysis capabilities. Working together, CalAmp and Bristlecone will help enterprises eliminate blind spots across their complex supply chains and enable smarter tracking and data-driven decisions as shipments pass through each phase of their journeys. With these enhanced insights, enterprises can drive logistical efficiencies, prevent cargo theft, and minimize their carbon footprints. Producers, in particular, offering perishable goods, such as food or pharmaceutical purveyors, can monitor environmental conditions and the safe transport of their goods, preventing costly spoilage. Assured Techmatics is a top transport and compliance leader that offers electronic logging device solutions to commercial and public fleet operators. CalAmp will couple its edge computing devices with Assured Techmatics Apollo Electronic Logging Devices, or ELD, to provide a solution that commercial and public fleet operators can use to capture and log critical data necessary for regulatory compliance across North America. Apollo ELD has been approved by the U.S. Federal Motor Carrier Safety Administration for interstate and intrastate commerce across America and by other third-party accredited transport agencies in Canada and Mexico. During the quarter, we were pleased to announce the appointment of Brennen Carson as our new Chief Revenue Officer. Brennen has extensive long-term industry experience in telematics, as well as significant high-level success managing large global SaaS sales organizations. He has previously served as Senior Vice President of Sales at Idelic, a startup company, and as Vice President of Sales, North America at Fleetmatics, which was acquired by Verizon Connect, where he continued to build and lead a sales team of 700 professionals. Brennen will be focused on expanding our software sales team with top professionals and directing them in pursuit of our long-term SaaS revenue growth objectives. In another effort to elevate our leadership and expertise in transportation and logistics, our Board of Directors recently appointed Henry Maier as the new Independent Chairman, effective as of our 2022 Annual Meeting of Stockholders. As many of you know, Henry has spent more than 30 years at FedEx companies and will be of significant value to the company as Chairman of the Board. He will replace Amal Johnson, who has served as a Director since 2013 and most recently served as our Chair. I want to thank Amal for her service and long-standing commitment to CalAmp and the many personal contributions she has made during her tenure. We also recently added Wes Cummins to our Board as an Independent Director. Wes had previously offered an alternative slate of Director nominations for election to the Board. Subsequently, we engaged in a constructive dialogue, resulting in Wes' recent appointment as a Director on our Board, and we look forward to leveraging Wes' expertise to enhance our strategic path forward. In summary, we are encouraged with the progress we continue to make in transitioning our business to a recurring software subscription model for sustainable long-term success. Although challenges remain, I believe we are well-positioned with high levels of backlog remaining and strong demand across our business. We remain focused on our goal to convert the remaining portion of eligible device customers to recurring software contracts by fiscal year end. With that, now, I'd like to turn the call over to Kurt to discuss our financial results in more detail. 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 year 2023 first quarter earnings that was issued this afternoon. Total revenue in the first quarter was $64.7 million, down 5% from $68.4 million in the prior quarter, and 19% from the $79.7 million in the same quarter a year ago. The decline in revenue was mainly attributable to the ongoing supply chain constraints, particularly the COVID-related lockdown in China during the quarter. As Jeff mentioned, with the lockdowns now being lifted, we are beginning to see a resumption of component shipments in those affected regions. International revenue in the quarter totaled $24.3 million or 38% of total revenues. Software and subscription services revenue of $39.6 million, up 13% year-over-year and down 4% from the prior quarter, represented approximately 61% of consolidated revenue. The year-over-year growth in this business reflects the success we've achieved converting eligible telematics device customers to recurring subscription contracts. As of the end of the first quarter, we've converted approximately one-third of our total eligible telematics device customers and expect to convert the remaining customers by the end of our fiscal year. In terms of performance metrics for our software and subscription services business, our main performance obligations in the first quarter were approximately $250 million, a 7% increase from $200 million in the prior quarter and a 57% increase from $137 million in the same quarter a year ago. We expect to recognize over 37% or approximately $80 million of this obligation during the rest of our fiscal year. During the quarter, our subscriber base grew 25% year-over-year and 13% sequentially to 1.2 million. Telematics products revenue in the first quarter was $25.2 million, which was a 7% decrease sequentially and a 44% decrease year-over-year. The ongoing supply shortages continued to impact our ability to fully ship against our high levels of backlog. Within the telematics products reporting segment, OEM products revenue totaled $10.5 million in the first quarter compared to $10.4 million in the prior quarter and $20.3 million in the same quarter a year ago. Our largest customer represented $9.7 million of revenue for the quarter, which was up from $7.9 million last quarter, but down from $17.3 million in the same quarter a year ago. Our backlog with this customer remains high and we were pleased with the sequential increase in shipments in the quarter. As the supply chain constraints ease over the coming quarters, we expect to accelerate fulfillment of the outstanding orders. Consolidated gross margin in the first quarter was 40% compared to 41% last quarter and 41% in the same quarter a year ago. Gross margin continues to remain under pressure due to higher product costs and freight charges. First quarter non-GAAP operating expenses on an absolute dollar basis declined 5% year-over-year due to lower personnel and incentive compensation expense as our global employee base declined year-over-year. Non-GAAP operating expenses increased slightly by 3% sequentially due to increases in professional services and personnel costs in the areas of engineering, sales, and marketing. Adjusted EBITDA in the first quarter was $1.9 million with an adjusted EBITDA margin of 3% compared to adjusted EBITDA of $5 million and a margin of 7% in the prior quarter and $8.4 million, or 11% in the same quarter last year. The decrease in adjusted EBITDA in the first quarter was attributable to the lower revenue and, as previously mentioned, higher product costs. In terms of our overall liquidity position, at the end of the first quarter, we had total cash and cash equivalents of approximately $59 million as compared to $79 million last quarter. The decline in total cash and cash equivalents is attributable to a reduction in free cash flow from operations due to the decline in sales volume, coupled with an increase in deferred billings or unbilled receivables as a result of the conversion of approximately one-third of our eligible telematics device customers to multi-year subscription arrangements. The provision of services under multi-year subscription arrangements extends the cash conversion cycle due to upfront cash outlays for devices combined with deferred billing over the subscription period. We are in the process of renewing our revolving line of credit in order to give us added flexibility as it relates to working capital and we expect to finalize the agreement in the coming weeks. Our aggregate outstanding debt is approximately $233 million, including $230 million of the 2% convertible senior notes due August 2025. We expect to maintain a solid financial position and a balance sheet with solid cash for working capital purposes going forward. In reference to our outlook for the second quarter of fiscal 2023, we are maintaining our policy of not providing quarterly guidance. Visibility into product shipments still remains uncertain due to the global component supply shortages. However, we do expect sequential quarterly revenue growth in the second quarter to be in the mid to high single-digit percentage points. With that, I'll turn the call back over to Jeff to provide some final comments before opening the call up for questions. Jeff?

Thank you, Kurt. We are encouraged with our continuing progress as we transitioned to a leading SaaS telematics software player. With the recent lifting of some lockdowns in China, a consistent rapid pace in our device customer conversions to recurring contracts, and fresh new leadership in our sales organization, the CalAmp team has been energized and relentlessly focused on the operating objectives we've established for the year. With that, I'd like to open the call to questions. Operator?

Thank you. Our first question comes from Mike Walkley with Canaccord.

Great. Thanks for taking my question. First question for me is just on the sequential growth. Can you talk about maybe the drivers behind that? It sounds like you expect better supply, but would you expect software and services to grow more or evenly split that mid-December high single-digits among both hardware and software and subscription?

Yes, Mike, thank you for your question. As we have previously stated in our earnings announcements and follow-up Q&A sessions, we believe that the supply chain situation will improve throughout the year. In the first quarter, we experienced significant impacts due to lockdowns in China at the end of the quarter. We originally anticipated that the supply chain would improve throughout the year, and that expectation still stands. We do not foresee the issues we faced at the end of the quarter reoccurring. We have started to see shipments from China, and transportation and freight are beginning to open up, which is encouraging. Overall, as we look at the year, we feel increasingly optimistic about this situation. We are collaborating closely with our equipment providers and contract manufacturers, and we have made substantial progress ensuring that our bills of materials include products with good supply chain visibility. Therefore, we anticipate improvement in the latter half of the year, which is why Kurt provided the growth range expected for Q2. Looking ahead, we expect to see ongoing improvement in our software revenue, driven by two factors: our continued transition to a subscription model and the fact that all new sales will now include a subscription moving forward. This will have positive implications for our subscription revenue, both in terms of conversions and future growth for CalAmp.

Thanks for that. And just as a follow-up for either you or Kurt, just as that business mix continues to change over time, what are some intermediate-term gross margin goals for the company as you have software already over 60%, but where do your gross margins trend as you get through this one-third to full completion of that targeted base?

So, Mike, this is Kurt. Just to answer that, so as you know, our medium to long-term goal is the 50% gross margin, that still remains clear and in line of sight for us. There are some short-term pressures that we're experiencing, primarily coming out of the supply chain. Those things include cost increases around certain components, freight, and more recently, some tariffs. We're doing our best to control those costs and pass them through when we have the opportunity, but sometimes there's a lag between when we charge to the supply chain and when we can pass them on to the customers. That being said, as we've communicated in the past, the biggest thing driving our gross margin to that 50% target is really revenue mix. As we move our telematics device customers over to subscription models, what we're seeing is that initially, the move is heavily dependent on getting the devices onto a platform and getting the installed base active. As that install base starts to grow, that's when the margins improve because, as you know, those subscription revenues generate incremental revenue for us. So, although this quarter, we were down slightly with gross margin and that was driven by pressures from the supply chain, we believe we will progressively start moving upward to that 50% target over the next three to five years as that install base becomes more evident and we monetize that install base.

Great. Thanks. Last question and I'll pass it on. Just for your largest customer, snap back a little bit but to give you visibility within the backlog, will this customer get past maybe to mid-teen levels like they were in past years, or has anything changed with that long-term relationship?

No, I mean, we do have very strong backlog with our largest customer and in particular, with the China disruption that I talked about earlier. We had a particular module provider whose factory was shut down in China that had a pretty significant impact on that supply chain this quarter, but that's already opened back up and is improving. With strong demand, we do expect that revenue to kick back to more normal levels. There's still quite a bit to do there both in terms of 3G to 4G migration, plus the demand for that large customer has been very strong.

Great. Thanks for taking my questions and congrats for hitting the one-third conversion base so far.

Thank you.

Our next question comes from George Notter with Jefferies.

Hi, guys, thanks a lot. I guess I wanted to ask one on the transition to subscription models. Are you getting any pushback from customers? Obviously, you're another quarter into the process, any new perspectives you can share? And if a customer doesn't migrate with you, what is the pushback from them? Any metrics you can share in terms of the percentage of customers that are moving along?

Yes, George, first of all, thanks for the question. Our customers are really excited about the technology. Remember, this is not just a change in billing, but we're offering a new opportunity for them in terms of the software. The software is more robust, offers them the ability to better serve their customers, manage their devices more rapidly, to do tons of upgrades over the air, and provides them better security. So, they are excited about that. The billing arrangement is a little bit new and it takes some getting used to, but we've been very successful today. In fact, through the first one-third, we've had no customers decide to move away from us because of this arrangement. We've been pretty clear with our customers that this is the way we do business going forward and so we're really pleased with that. In terms of the future, we control the pace and terms on this conversion process, and as I said, in the script, we're eager that we will convert all of our customers to this model by the end of the fiscal year. So, I think it's going well. I wish it would be a little bit less disruptive in terms of how we're transforming as a company, I know that causes some concerns with investors, but I think what gives me comfort and confidence about the future is we are going to be a recurring model business. So at the end of the day, CalAmp is going to be an equity that investors can count on for consistent, reliable revenue over time, and all of our new customers will be signing up for services involving a subscription.

Got it. You mentioned that about one-third of customers have migrated. Is that one-third of the entire installed base in terms of telematics units, or are you seeing a trend towards larger or smaller customers as you begin this transition?

Sure, we previously mentioned that we had identified a group of 60 to 65 eligible telematics device customers for conversion. In the first quarter, we successfully converted about 22 or 23 of these customers, which includes a good mix. There are three to four significant customers, alongside a group of medium-sized and smaller ones. Overall, the mix looks promising. We are also targeting some larger customers later in the fiscal year, and we are pleased with the progress of around 30% to 33% conversion from our initial pool of 65. This translates to approximately 200,000 new subscribers who will enter into multi-year service contracts, typically lasting 36 months with options for renewal. We will start monetizing this subscriber base in the upcoming weeks and quarters. Our goal is to reach the total of 60 to 65 customers by the end of this fiscal year, and we are on track. As these subscribers begin to join the platform, that’s when we expect to see significant success from this new model we are implementing.

Got it. That's great. And then the other one I wanted to ask was just looking at the software and subscription services revenue was down sequentially. I know the installation of devices is probably a factor in that. But why would that number be down sequentially? Any more insights would be great. Thanks a lot, guys.

Yes, I'll take that one, Jeff. We have been concentrating on converting our eligible telematics device customers. In these cases, when we work with customers who have mainly been focused on devices, we have scenarios where, after executing those M&A agreements, a significant part of the upfront revenue comes from the initial performance obligation linked to the device. Under GAAP, this revenue must be recorded as product revenue instead of application subscription revenue, even though it is part of a bundled arrangement with the customer. While this is our current focus, we are also facing the impact of our vehicle finance business, which, as you may recall, was a substantial part of our subscriber base a couple of years ago. This business generated steady revenue, but the ARPU was low and did not meet our target gross margin levels. As that business winds down, it is offsetting our efforts to convert this customer base, which is contributing to the year-over-year decline you are observing.

Okay. Thanks very much, guys. I appreciate it.

You're welcome.

Our next question comes from Mike Latimore with Northland Capital Markets.

Great. Yes, just I guess around the vehicle finance, how much revenue in the quarter came from that category?

It was well less than a $1 million, Mike, that business had at one point in time, been trending in $2.5 million to $3 million a quarter, but it has been dropping off pretty quickly here as of late.

Got it. And then if you convert the base by year end, do you have a range of how much incremental quarterly revenue that would be, sort of, recurring revenue in the software and subscription category?

We haven't quantified it. Go ahead, Jeff.

No, go ahead, Kurt. I'm sorry. Go ahead.

So, Mike, we haven't quantified it in terms of the quarterly revenue target, but what we've done is we've identified that of that population of customers, let's say that 60 to 65 customers, that that customer base has historically represented an annual revenue run rate of somewhere around $65 million to $75 million, maybe as high as $80 million if you go back in history. So, we generally have an idea of how much revenue it relates under the, let's say, legacy operating model and we have a sense of what that will ultimately convert to on a go-forward basis, but we haven't actually broken it down by quarter.

Okay, I understand. That's helpful.

I just want to mention that we believe the supply chain recovery will positively impact our business, and we expect the percentage of revenue from software and subscription services to increase over the year. Currently, we are at 61%, which should provide some insight into our future direction.

Good. Okay. Last fall in the sales organization, I think last quarter, you mentioned a goal of adding about 30 quota-carrying salespeople by the end of the year. Is that still the target, or has it changed with your new CRM?

No, that remains the target and Brennen is off and running; he's been here for about 30 days now. He was able to start on day one with our national sales kickoff, which was a great success and allowed him to meet the team. He has already introduced some new sales leadership within the team and is putting in place his system to manage accountability of the sales process. Some specific improvements you will see at the company as a result of Brennen's leadership include a focus on new business acquisition by the sales team. This was a significant strength of his at Verizon Connect and Idelic, emphasizing new logos. As we complete our transition, our future success in sales is closely linked to pursuing new logos among our target customers. Additionally, he's opening up the mid-market, which will enhance our sales velocity and consistency at CalAmp. He’s making many changes, bringing in new people for sales and sales operations. We are still on track to add those salespeople this year, and we are managing this by reducing expenses in other areas of general and administrative costs to support the sales function, which seems to be the right strategy for the company; it will allow us to improve margins while enhancing our selling capabilities.

Got it. Can you elaborate on the sequential decline in software and subscriptions? You’ve added many new clients and completed several conversions. Could you clarify why there was a decrease from the previous period?

Yes, Kurt, could you take that, please?

I believe you are referring to how we've reported our software application and services revenue compared to product revenue and the decline from last year to this year. This drop results from multiple factors. We are focused on converting our eligible telematics device customers. In these situations, when we engage with customers who primarily rely on devices, we see that once we finalize those agreements, a significant portion of the upfront revenue is linked to the initial performance obligation associated with the device. According to GAAP, we must classify this revenue under product revenue rather than application subscriptions, even though it is part of a bundled arrangement. While we concentrate on this shift, we are also dealing with the decline of our vehicle finance business, which used to form a significant part of our subscriber base and generated consistent revenue, though at low ARPUs, which didn't meet our target gross margin. This transition is contributing to the year-over-year decline you are observing while we work to convert our customer base.

Okay. And Kurt you described that as a year-over-year effect, but that was also in a sequential drivers as well?

I don't have that in front of me, but I think sequentially, we were fairly flat. But I'd have to go through that and look at it. But I was referring to what was stated in our 10-Q.

Okay, all right. Thank you.

Thanks.

Our next question comes from Scott Searle with ROTH Capital.

Thanks for taking my questions. Just a couple of quick clarifications. I missed the OEM sales number in the quarter. And then if I could on the product gross margin front, how are you seeing things immediately improve or change in the current fiscal quarter? China is starting to open up, some supply chain starting to come back, will that be up sequentially? What's your best guess at this point in time?

Yes, Scott. So, the first one was the OEM products revenue in the quarter. So, of the $25.2 million of telematics device revenue, the amount associated with sales to our OEM customers was approximately $10.5 million. And then we had indicated that of that $10.5 million, a portion of that, I believe, $9.7 million or so, was associated with our largest customer. And then can you restate your previous question, Scott? I apologize.

Gross margins on the product front, just, Kurt gross margins on the product front given supply chain issues and otherwise, how that visibility is sort of shaping up now. Is it going to be sequentially up? How should we think about it in the immediate quarter?

Well, we're not giving guidance, Scott, but what I would say is that obviously, our gross margins are impacted by our volume and in particular, our revenue growth. And so as we indicated in our initial remarks, we do believe that quarter-over-quarter, there will be an increase or uptick in revenue. So, you would naturally assume that there will be some improvement with gross margin. I will say also that it's been pretty unusual in terms of the pace at which some of these cost increases are coming at us as well as others in our space. It was compounded more recently around some tariffs that were being passed through from product coming out of China. Obviously, the components and chips have always been a persistent cost increase, and freight continues to be a challenge, but we're doing everything possible we can to absorb those costs and/or pass those on to our customers when we have that opportunity. But it's been pretty rapid pace and there's a little bit of a lag between when we are hit with those costs and when we can actually pass them off or absorb them.

Okay, and if I could on the RPO from. Yes?

I just wanted to add to that on the margin side. Every month, Kurt and I meet with the global supply chain team to discuss our price variance and the price increases we're experiencing from our vendors. We're monitoring this closely. As Kurt mentioned, there's a delay, but we're feeling more optimistic about the percentage of our total customer purchase orders that reflect price variance. There's still some lag, but we're closely managing it on a customer-by-customer basis, which will help enhance margins throughout the year.

Okay, helpful. And if I could, I wanted to clarify an RPO for the year. I think for the current fiscal year, last quarter, you talked about there being $90 million under the full RPO that would be delivered in fiscal 2023. There's still $80 million remaining on that, plus I think there was about $21 million that was recognized in the quarter, is that correct? So, it's roughly a little over $100 million versus $90 million, so the RPO, in terms of fiscal 2023, has continued to increase in the most recent quarter?

Yes, Scott. We were very pleased with the RPO growth. At the end of last fiscal year, it was around $200 million to $202 million. By the end of this quarter, our core business reached about $215 million, and including the vehicle finance business, it might be around $216 million. This growth is quite healthy and reflects our efforts in transitioning telematics device customers to a subscription model. It provides forward-looking visibility into what we expect to recognize and service over the next few years. We indicated that 37%, or about $80 million of that $215 million, will be recognized in the upcoming 12 months. We anticipate that number will continue to grow as we maintain our momentum in converting more customers and acquiring new logos. Overall, we are quite pleased with the expansion of RPO in recent months.

And if I could, how significant are BMW and Volkswagen? What impact does that have on ARPU? How quickly does it increase? Considering the conversion of the remaining two-thirds of existing MRM customers that are converting, how should we think about ARPUs trending over the next few quarters?

I'll address that and then Kurt can add his insights. First, the opportunity with BMW is significant for us. It's still early in our relationship, but we have issued our first purchase order. This represents a pan-European opportunity, and BMW holds a substantial market share in that area, which excites us. The application is quite sophisticated, which bodes well for average revenue per user. It's important to note that our transformation involves two key steps. The first step is converting our current customer base, which will initially lead to a lower average revenue per user but positions us for future sales opportunities. The second step focuses on acquiring new customers and upselling to our existing ones, and I believe we will see the average revenue per user increase over time. Initially, the average revenue for these conversions may be lower than that of new customers, highlighting the difference between converting existing users and attracting new ones. We're dedicated to improving our average revenue per user and are optimistic about transitioning these lower revenue customers to a subscription model, as this is our first step and will empower our sales team for future growth. Kurt, you may have more to add.

Yes, I wanted to briefly discuss BMW. It's a remarkable example of our strategy to expand within large OEMs and establish additional service arrangements. We have been working with BMW for several years from our office in Italy. They approached us with an advanced telematics vehicle recovery solution that they aim to integrate into most, if not all, of their vehicles shipped across Europe. This indicates our capability to grow within accounts, which typically leads to increased average revenue per user and new service opportunities. BMW exemplifies how we can enhance ARPU. Regarding the broader outlook on our ARPU trends over the next year, we expect some downward pressure due to our transition of telematics device customers to multi-year service contracts, which foster customer loyalty. However, in the short term, as we expand our installed base and provide access to our platform and its services, we might experience some decline in ARPU. Nevertheless, this transition will ultimately be beneficial for us in the long run.

Got you. And lastly if I could, Kurt, from a modeling perspective, looks like non-GAAP OpEx was flattish. How should we be expecting that to trend over the next couple of quarters? Thanks.

Yes, thanks. On the OpEx, obviously, that is certainly an area of focus for us. It's become a key area that we're concentrating on here in the near term, especially as we really target two things that we need to navigate through; one, converting the base of our customers and moving them into multi-year service contracts; and two, navigating through some of these supply chain challenges. So, we are absolutely focused on OpEx. As we pace the conversion of our customers and we navigate through the supply chain challenges, Jeff and I will be working with the other departments and functional groups to ensure that we're keeping our expenses in check and rationalizing those as we see appropriate based upon how things are unfolding through the transformations.

Great. Thank you.

Our next question comes from Jerry Revich with Goldman Sachs.

Yes. Hi, good afternoon. Can you talk about your expectations for gross margins this coming quarter given the revenue outlook that you mentioned? I know it's tough to put a fine point on it, but any high level comments about the sequential progression would be helpful. Thanks.

So, Jerry, as we mentioned before, we aren't providing forward-looking guidance. I believe that there is an expectation for revenue growth and that supply chain challenges will improve somewhat as we move into the second quarter, which should lead to some enhancement in gross margin. However, we are not in a position to quantify that right now since we are not giving guidance.

Okay, maybe asked differently, so you folks laid out 50% gross margin targets, we're at 40% today. Just what's the path to get there? How much of that is reduced supply chain friction and improved price costs, other moving pieces? Can you just bridge for us how we get from 40% to 50%?

Sure. Sure, Jerry, I'll take that. And the biggest part of that is as we move to more and more of our revenue coming from software and subscription services, in general, the margins on that are in the low to mid 50s compared to our product margins. So, that dynamic of moving more of our revenue to software subscription will be an important driver. And then you're right, in the short run, we've been affected by the supply chain situations and over time, as Kurt said during his comments, our PPV, or increases to our customers have lagged those increases that we're seeing. But 100%, I'll assure you that we are passing on these additional costs to our customers. We've been successful with that. We're doing that in a way that's respectful of our customer relationships and we're working with them on that. But over time, we're getting caught up there in that lag. That lag should diminish over time as we see fewer challenges in the supply chain.

Okay. So, the reason for the question is we're working towards the conversion and gross margins have gone from 41% to 40%. So, I'm just trying to understand what's the path from 40% to 50% to the extent we can put maybe a finer point on price/cost improvement, expected and other moving pieces? I think that'd be helpful.

Yes, Jerry, let me address that.

Go ahead.

I could summarize our thoughts on that.

Sure.

Jerry it's a multifaceted response in the sense that as we move or convert our base of customers over and as we mentioned, we've converted about one-third of the total population, somewhere between 60 and 65 customers. They will come over with multi-year subscription arrangements. In those multi-year subscription arrangements, we are charging for active subscribers. As those active subscribers come on base, they are actually going to be monetized over a period of a minimum of three or five years. And that will provide incremental revenue that will help us improve our gross margins. In parallel with that, we are doing everything possible to optimize our cost structure to ensure that some of these challenges we're experiencing and the incremental costs that are coming through the supply chain are addressed. By that, I mean, we're doing things like trying to ensure that we have a very tight base of devices that we are going to use as part of these subscription arrangements. We are trying to improve the overall design and proficiency of the devices. We are trying to work with our supply chain to cost down various components and the overall build of the devices. And also monetize in parallel with that the subscription arrangement. So, it's a multifaceted approach to improving margins. We've been trying to target the margin improvement around the overall mix of revenue being more concentrated to software and subscription services. This quarter, we were at about 60%, 61%, which we think is a healthy level for where we are in the transformation. We do think that can increase potentially as high as 70% over the course of the next few years. And so as that concentration increases and the install base grows and we monetize that install base while trying to optimize the supply chain around the device and delivery of that service, we believe the margins can gradually tick up to that 50% range. But that's going to take a couple of years, probably three to five years.

I appreciate the discussion. Thanks.

Thank you, Jerry.

Our next question comes from Orin Hirschman with AIGH Investment Partners.

Thank you for taking my question. I know it's been asked in various ways earlier in the call. There were many factors that led to the slight decline in the recurring revenue. When you stated that you anticipate quarter-over-quarter growth as the year progresses, does that imply that the issues causing the decline have mostly resolved? What gives us confidence that this business line can achieve sequential growth each quarter?

As I mentioned, as we complete more conversions, our sales teams can concentrate more on acquiring new business, which is a significant part of our strategy. The process of converting our existing customer base has required effort, particularly for our initial clients, but we are improving daily. This improvement will enable us to dedicate more time to attracting new clients and upselling to our existing customers, which will be beneficial. We will continue to make progress on these conversions moving forward. Also, all new customers will be required to adopt a subscription model for their purchases, which we believe is a positive development over time. In our device-enabled solution business, the supply chain affects not just the product side but also the software side, as we need to secure those devices. This quarter, we experienced some impact due to finished goods inventory being stranded in lockdown areas in China. However, we have already seen significant improvement in the situation there. All these factors will contribute to sequential growth.

There's just one more question on that note. You went through some of the items that put pressure in the other direction. The beauty of the recurring revenue is typically the sequential growth assuming that there's not much attrition, and in your case, you actually have a good line of visibility in terms of additions, particularly on the new contracts, how they're designed. So, I guess is there some underlying revenue metric that we can look at, let's say, for the last few quarters, where it's been rising rapidly and recurring where some of those, what I would say, end of life items, if you strip them out that you could see the underlying growth on the recurring itself?

Yes, Kurt, would you take that, please?

Yes, so we've been working to disclose really two key metrics that we think provide a forward-looking insight into where we're going, and the first one is the growth in the RPOs, the remaining performance obligations. So, that growth, from $202 million to $215 million to $216 million, we believe is actually very good. We also think that the increase in subscribers gives you greater visibility. Now, I know that there's this thought process of, well, within that RPO, there's an element of the device, and that is true; we sell device-enabled solution. So, in every bundled arrangement with those customers, there will be a device element, there's no getting around that. But what we are doing in these multi-year service contracts and what is being observed in the RPO is the fact that we are working with our customers to have multi-year volume commits as to adding incremental subscribers and to a path to monetizing those incremental subscribers. So, as parts of the legacy business are winding down and becoming less of a distraction for us, we have some short-term trends that we are addressing. But as you can see, the forward-looking metrics and forward-looking trends to us look very healthy, given that we have been able to bring new subscribers on, convert new customers, and it is showing up in real places on the RPO growth and on the subscriber base.

Okay. Thanks very much.

You're welcome.

There are no further questions. So, I'll pass the call back over to the management team for any final remarks.

Sure. Thank you, Jason. Thank you all for joining us today on the call and for your continued interest in CalAmp. We do plan on attending Oppenheimer's 25th Annual Technology Internet and Communications Conference on August 10th. Please contact your Oppenheimer sales contact or Shelton Group if you'd like to schedule a meeting with Kurt and I. We'll look forward to speaking with you again during our second quarter earnings call in late September. Operator, you may disconnect the call.

That concludes CalAmp's first quarter 2023 financial results conference call. Thank you for your participation. You may now disconnect your lines.