Camp4 Therapeutics Corp Q2 FY2023 Earnings Call

Welcome to CalAmp's Second Quarter 2023 Financial Results Conference Call. My name is Tamia, and I will be your moderator today. All lines will be muted during the presentation, and there will be a chance for questions at the end. This call is being recorded. I would now like to introduce your host for today's 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 second quarter 2023 financial results conference call. I'm 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; CFO, Kurt Binder; and also Cindy Zhang, Senior Vice President of Financial Planning and Analysis. 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 regular 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. 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. Our second quarter results exceeded our expectations, reflecting approximately 13% sequential growth in consolidated revenue, driven primarily by Software and Subscription Services revenue growth that was also up 13% sequentially and 7% year-over-year. Software and Subscription Services revenue represented 61% of total revenue. This revenue growth resulted from improvements in the supply chain that allowed us to accelerate customer conversions to recurring software contracts and also to fulfill more orders for our Telematics Product customers than the prior quarter. As of today, more than 50% of our eligible customers have converted, including recent transitions by notable customers, Localiza and Trimble, among others. We continue to gain traction in all geographies with total global subscribers increasing 9% sequentially and 32% year-over-year to $1.3 million at the end of the second quarter. We gained strong traction in the EMEA region from recent conversions, along with new logos, including BMW's MINI and Wabi Santander. Additionally, along with North America SaaS conversions, we also added new subscribers from existing software customers such as the City of Dallas, which signed a contract extension with us during the quarter. We remain on track to complete most of our eligible customer conversions to subscription contracts by the end of the current fiscal year, as we have stated in the past. Brennen Carson was appointed as CRO in June and has been working hard not only to advance these conversions, but also to expand opportunities with existing subscription customers and to secure new logos. Also during the quarter, as we broaden and deepen our overall solutions offerings, we made great strides in the areas of our smart trailer and video-based safety solution offerings. CalAmp's smart trailer technology empowers transportation operators to improve fleet performance, maximize asset utilization and comply with regulations, thereby transforming the way these businesses operate. Together with our video-based safety solution, our transportation and logistics customers can also use video technology to train, assess, monitor and document asset operation in real-time to improve safety, reduce cost and increase on-time performance. With roughly 90 million commercial fleet vehicles and 35 million heavy trucks in operation around the world today, these two CalAmp technology initiatives will not only help us expand our opportunities and customer base but also strengthen our current customer relationships by offering new best-in-class tools to help them gain even more from their telematics investments. We completed a major update of our corporate website and branding, including expanded information on our telematics solutions such as video webinars and testimonials, product brochures and other valuable resources for prospects, customers, investors, and the press. Visits to our website have increased 30% since we deployed the upgrade. As you know, Kurt's last day will be tomorrow, and thereby, this will be his last earnings call with us. I want to thank him for his support and years of service as our CFO and wish him the best in his new endeavor. In terms of an update on our CFO search, we have been working with a leading executive search firm over the past several weeks. As mentioned in our press release, Cindy Zhang, our current Senior VP of Financial Planning and Analysis, who has been with the Company since 2017, will serve as interim CFO, effective tomorrow until a successor is named. She and her finance team are fully qualified to maintain the integrity and consistency of our financial operations under my close oversight. With that, I'd like to now turn the call over to Kurt to discuss our financial results in more detail. Kurt?

Thank you, Jeff. I appreciate your kind words and the time that I had to work with you and the entire CalAmp team. I believe the Company is well positioned to continue its growth and transformation to a leading telematics SaaS-based competitor. With that, let's dive into the second quarter numbers. 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 second quarter earnings that was issued this afternoon. Total revenue in the second quarter was $72.8 million, up approximately 13% from $64.7 million in the prior quarter though down approximately 8% from $79 million in the same quarter a year ago. The sequential increase in revenue was mainly attributable to the availability of product to support the acceleration of customer conversions to recurring subscription contracts as well as the fulfillment of customer demand for our Telematics Products. International revenue in the quarter totaled $26.6 million or 37% of total revenues. Software and Subscription Services revenue was up approximately 13% sequentially and 7% from the prior year quarter to $44.5 million, representing 61% of consolidated revenue. It's instructive to mention that approximately $7.5 million of revenues in the prior year period was associated with 3G to 4G equipment upgrades for a large customer, which did not recur in the current year. Both the sequential and year-over-year growth in our Software and Subscription Services business reflects the progress we're making converting eligible telematics device customers to recurring subscription contracts. As of the end of the second quarter, we've converted just over 50% 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, remaining performance obligations in the second quarter was approximately $210 million, a decline of 2% compared to $215 million in the prior quarter, but up 54% from $136 million in the same quarter a year ago. We expect to recognize over 27% or approximately $57 million of the performance obligations during the remainder of this fiscal year. During the quarter, our subscriber base increased 9% sequentially and 32% year-over-year to 1.3 million. Telematics Products revenue in the second quarter was $28.3 million, which represented a 13% increase sequentially and a 25% decrease year-over-year. Within the Telematics Products reporting segment, OEM products revenue totaled $13.7 million in the second quarter compared to $10.5 million in the prior quarter, and $15.9 million in the same quarter a year ago. Our largest customer represented $12.4 million of revenue for the quarter, which was up from $9.7 million last quarter, but down from $14 million in the same quarter a year ago. Our backlog with this customer remains solid. Consolidated gross margin in the second quarter was 39.8% compared to 39.6% last quarter and 42.2% in the same quarter a year ago. Contributing to the high gross margin in the prior year was an increase in revenue from one of our largest customers associated with the 3G to 4G upgrade cycle. Gross margin continues to be under pressure due to increasing product and logistics costs that have yet to be fully offset by the price increases we've implemented to date. We expect gross margin to improve slightly over the remainder of this fiscal year as a result of increased revenues and, to a lesser extent, favorable product mix. Second quarter non-GAAP operating expenses on an absolute dollar basis increased by 3% sequentially, primarily due to increased compensation costs resulting from changes in the composition of our sales force to drive sales for our telematics subscription services. Second quarter non-GAAP operating expenses on an absolute dollar basis decreased by 5% over the prior year, driven principally by a decrease in general administrative expenses. Our focus remains on reducing G&A expenses in the quarters ahead. Adjusted EBITDA in the second quarter was $4.8 million with an adjusted EBITDA margin of 7% compared to $1.9 million and a margin of 3% in the prior quarter and $8.3 million or 11% in the same quarter last year. The sequential increase in adjusted EBITDA in the second quarter was attributable to higher revenue in the quarter. In terms of our overall liquidity position, at the end of the second quarter, we had total cash and cash equivalents of approximately $48 million as compared to $59 million last quarter. The sequential decline in total cash and cash equivalents is attributable to a reduction in free cash flows due to the payment of the settlement for the Omega legal matter discussed last quarter as well as lower revenue levels resulting from some supply constraints coupled with consistent operating expenses and an increase in deferred billings or unbilled receivables. The deferred billings are a result of the conversion of half of our eligible telematics device customers to multiyear subscription arrangements. The provision of services under multiyear subscription arrangements extends the cash conversion cycle due to upfront cash outlays for devices combined with deferred billing over the subscription period. During the quarter, we executed a new $50 million asset-based revolving line of credit with PNC Bank to give us added flexibility as it relates to working capital. At August 31, there were no borrowings outstanding under this facility and the total borrowing capacity based on eligible accounts receivable and inventory was $34 million. Additionally, we were in compliance with our covenants under this revolving credit facility. We believe that our current cash and cash equivalents, coupled with the availability on our revolving line of credit, provide adequate liquidity to support our transformation and growth over the next 12 months. Our aggregate outstanding debt is approximately $232 million, including $230 million of the 2% convertible senior notes due August 2025. It should be noted that we are always evaluating ways to optimize our capital structure. In reference to our outlook for the third quarter of 2023, the Company is maintaining its policy of not providing quarterly guidance as visibility into product shipments remains difficult to accurately assess. However, we do expect to achieve low- to mid-single-digit percentage sequential revenue growth in the third quarter. With that, I'll turn the call back over to Jeff to provide some final comments before we open the call up for your questions. Jeff?

Thank you, Kurt. In summary, the CalAmp team achieved a solid quarter with revenue growing sequentially and an increasing rate of SaaS conversions fueled by incremental device inventory and resulting in a major increase in total global subscribers. With that, we will now open the call to your questions. Operator?

We will now begin the question-and-answer session. Our first question comes from Mike Walkey with Canaccord. Please proceed.

Great. Well, Kurt, best wishes. It's great to work with you all these years. Best wishes as you get your new opportunity, and Jeff, congratulations on the conversion looking strong across that 50% mark. Can you update us on just the supply chain improvements that helped in the quarter? And how does supply look to support the conversions in future quarters?

Yes. We were pleased. We saw some modest improvement, Mike, in the quarter that helped us in terms of, one, driving better revenue, as you saw and assisting us with the conversions, which was equally important. We're able to grow Software and Subscription Services as well. We're not totally out of the woods yet, but I do see progressive improvement throughout the back half of the year, and we're still working very hard on that in terms of doing everything we can. We've made a few redesigns in terms of our products that make us clearer in terms of future-looking BOM improvement and we are looking to see, as I said, steady improvement in the back half of the year.

Okay. Good. Any update? I know you had a record backlog over $60 million not too long ago. Is that coming down now as you're working through that backlog? Or is it still kind of similar levels?

Yes. Mike, it's still pretty high, but it has come down a little bit. So we're still pretty pleased at the robust nature of the demand. Obviously, we're hoping that that continues in the second half of the year. And as we ship on that backlog, we have a constant inflow of orders. So, we're pleased with the progress we've made with the supply chain, as Jeff had mentioned, and the backlog has come down a little bit, but still pretty robust.

Great. Last question for me, and I'll pass the line. Kurt, I know you indicated your gross margins would slightly improve over the next couple of quarters. But now that your transition is going well, you're over halfway through it. Once the costs improve on the hardware side and the price increases go through, any thoughts just longer term where gross margins can trend from current levels?

So yes, as Mike we've discussed in the past, I mean, the great thing about this business model is that as we expand on that installed base, and that installed base becomes monetizable, that increased revenue base helps us with expanding our gross margins. So, we're super excited about proceeding this fiscal year through the conversions, getting close to 70% of all of our customers over to the subscription model, that will be a major accomplishment. Once that's done and things stabilize in the supply chain, and that installed base starts to monetize, it will have a pretty meaningful impact on our gross margin. As we've indicated before, our medium- to long-term financial model suggests that we target 50% gross margin. So that's still our goal across the entire enterprise.

Thank you. The next question comes from Jerry Revich with Goldman Sachs. Your line is open.

This is Adam Bubes on for Jerry Revich today. Thanks for taking my question. You talked about expectations to achieve low- to mid-single-digit sequential revenue growth in the third quarter. Can you just help us parse that out between the two segments?

I believe we will keep seeing growth driven by our Software and Subscription Services revenue, which has consistently performed well. We expect to see more conversions. Our conversion numbers for the quarter indicate that we are slightly ahead of our expectations. Therefore, I anticipate continuing at this pace. Given that we have completed a lot of deals with our major clients, we will be focused on driving additional conversions in the third quarter. As we engage with our customer base, which is quite exciting, our sales team will shift more towards acquiring new clients, which will contribute to our overall growth. Specifically, all of our new sales efforts will concentrate on Software and Subscription Services.

Great. And then in telematics, what was EBITDA margin in this quarter? And what does the path to profitability look like from here?

In the 10-Q we filed this afternoon, we detailed EBITDA margin by reportable segment for your reference. To address your question, our focus has been on transitioning telematics customers to a subscription model as part of our Software and Subscription Services business. The gross margin and EBITDA margin will move to that reporting segment. Currently, the EBITDA margin for the Telematics Products segment is negative. However, as we complete the conversion and concentrate on customers within our OEM segment, we believe this segment can eventually become profitable or EBITDA positive. It will take some time, likely the rest of this year, to stabilize.

Thank you. Our next question comes from Mike Latimore with Northland Capital Markets. Please proceed.

Great. So I just wanted to be clear on the conversions. So I heard that you had finished the conversion by, I think, year-end, and I also heard maybe you get to 70% converted. Can you just clarify which one's accurate?

Yes. Yes, just I think there's a little confusion. We think that ultimately, our Software and Subscription Services as a percent of revenue will increase to 70%, Mike. But we think that by the end of the year, we believe we'll get to 100% of our base converted to a subscription model.

Got it. And then for those conversions through year-end, what kind of ARR does that represent or what revenue level would that represent in terms of software and subscription?

Yes. As you know, we reported that we're about 50% through our customer base today. We're not providing guidance on the annual recurring revenue for the remaining customers. We have a mix, including some large customers. Our strategy has been that during these conversions, we not only move our customers to a subscription model but typically secure a three-year commitment on volumes. We expect to keep executing that. The only change we've made is to accelerate cash realization by adjusting our terms upfront. Starting last quarter and continuing into the next two quarters, the arrangement fee will differ slightly from the first half of the year as we focus on obtaining more cash upfront, which we believe will strengthen the balance sheet and improve our cash position.

Would that also change rev rec? Or is it really just on the cash side?

No, it has no impact on rev rec whatsoever.

Okay. And then kind of once you're through this conversion, as you look into next year, would you expect most of the growth to come from new logos or from kind of current customers expanding?

We hired Brennen Carson and the expanded sales team this year to concentrate on these areas. Our primary emphasis is on our existing customers through the customer success program. However, the significant shift for us moving forward, after the base is converted, is a distinct focus on collaborating with our marketing team to acquire new customers. This will be the most notable change in CalAmp over the next six months, particularly emphasizing new customer acquisition in the key sectors of transportation logistics, both in the U.S. and in regions like EMEA and LatAm, as well as enterprise fleet in those areas.

Thank you. The next question comes from Scott Searle with ROTH Capital. Please proceed.

Kurt, I want to wish you the best a lot going forward. It's always been a pleasure working with you. Just quickly, to dive in on the supply constraint side, it sounds like things are getting better on that front. I'm wondering if you were still constrained in the quarter in terms of what you ended up leaving on the table. And as you're looking out to that mid-single-digit sequential growth what do you actually have visibility to in terms of what you can service? Is that what you already have in terms of visibility or parts be able to service that?

Yes. No, that's a complicated question. But absolutely, we could have done more in terms of revenue with a stronger supply chain. Having said that, we did see a significant increase in units shipped. So, as I mentioned in my remarks, it did get better. We expect to see that progress even more in the third quarter. We're finally back to a point where customers can order and receive goods on certain of our solutions in the same quarter, which is a nice feeling. That's been some time since we've been able to do that. I think we will progress steadily over the rest of the year. Now when we think about CalAmp, we're a little bit different than most out there because of the sophistication of our solutions, and we have pretty high-end devices. Our supply chain is a little bit different than some of the more generic device players out there. But nonetheless, it's good. We do see better visibility, especially in the third quarter. We're trying to really get ahead and work with everybody in the supply chain all the way to the semiconductor players, even though their relationships are more with our contract manufacturers, our team, including me, have been in direct contact with everybody across the chain and working very, very hard to improve the situation and improve the visibility. But it does feel good. It feels good to have the ability to meet our customers' demand to fulfill some of our backlog in the quarter.

And Scott, we look at the historical run rate, especially within the Telematics Products. And with our backlog at an all-time high, I don't think it would be unusual to have expected that at least the Telematics Product segment could have done maybe 20% more than where it was for this particular quarter. That's just going off of what we've done historically when you look at the quarterly run rate from the last two fiscal years.

Great. Kurt, following up on that point, with the shift towards more recurring revenue, the expectation was that MRM would decrease in the telematics segment. However, it appears we are currently operating above the longer-term levels you anticipated, around $10 million per quarter. Is there a new higher sustained level for Telematics Products, excluding the OEM business, that you expect the Company to maintain going forward?

No. I believe, as we've stated before, our goal is to transition all MRM telematics device customers to multiyear subscription agreements. This approach makes sense given the ongoing support services we offer and the way customers are utilizing our devices and services. I am confident that we will eventually shift all of these customers, which will account for 70% of our total revenue, as Jeff mentioned. However, this transition will take place throughout the year. Furthermore, there remains strong demand from existing customers within the Telematics Product category that contributes to our backlog. Therefore, the decline will occur, but it will be gradual and unfold over an extended period.

Great. And lastly, if I could, on the Software and Subscription Services front, was a big sequential uptick in the quarter. Are there any one-time events that are kind of mixed in there to calibrate us on that front? And also on that $1.3 million subscription figure that you have now, is it possible to give us an idea in the quarter of the incremental net adds, how many of those were from conversions versus non-conversions?

Yes, I'll address the first part. Kurt will respond to the second part about subscriber growth. There weren't really any one-time items. We benefited from acquiring new clients by selling full stack solutions as well as experiencing a significant increase in our conversion rates, moving from the 30s to 50% in the quarter. So those were the two key points. No major one-time events to note.

Sure. Yes, Scott. So I would say it was split probably maybe like 80-20, where we have 80% coming from conversion and 20% from new logos.

The next question comes from George Notter with Jefferies. I think that we benefited both from new logos selling full stack solutions to our customers as well as a pretty healthy success in terms of moving up our conversions. I think we're moving from something in the 30s to 50% in the quarter. So those were two things. No big one-time events there. Sure. Yes, Scott. So I would say it was split probably maybe like 80-20, where we have 80% coming from conversion and 20% from new logos.

This is Blake Mielke standing in for George Notter. First, I wanted to wish you good luck, Kurt, moving forward. Based on what you've mentioned, it seems that the remaining 50% of telematics customers to be converted are primarily larger customers. Should we anticipate that the total opportunity left with these customers will exceed 50%? I also have a follow-up question.

I think there may have been a misunderstanding, but we have a few large customers involved, as well as a number of smaller ones that we can consolidate quickly. As mentioned earlier, we successfully brought on board Localiza and Trimble, which are two of our larger clients. Our current situation is a mix of both large and smaller customers. While we have a couple of significant accounts, we also have that group of smaller clients I referred to. What's essential is that we have streamlined our process for working with customers. They are experiencing significant advantages in switching to the subscription model because the software they are using has greatly enhanced their capabilities. Our sales and technical teams are now quite experienced at facilitating these transitions.

Okay. And then in terms of price increases, when should we expect those to fully work into the model? And is there any evaluation for additional rounds of price increases at this point?

We have consistently utilized what we call purchase price variance to mitigate costs, particularly when we need to make spot purchases to access high-demand products. This approach has allowed us to transfer those costs to our customers. However, the purchase price variance does lag slightly behind some of the price increases we experience. As we move through the year, we plan to continue using this tool. We will also look for opportunities to implement strategic price increases to alleviate some of the inflationary pressures and other cost increases in our bills of materials.

There are currently no questions waiting in the queue at this time. So, I'll pass it back to the management team for any closing remarks. Excuse me.

Thank you for joining us. Please go ahead.

Apologies. It seems they removed their question; you may proceed with the closing remarks.

No worries. Thank you for joining us on the call today and for your continued interest in CalAmp. As we look into the second half of our fiscal year, we remain focused on further expanding our SaaS transition program and securing new global customer logos to drive a higher level of future recurring revenue. We look forward to sharing our progress with you during our third quarter 2023 earnings call in December. Operator, you may now disconnect the call. Thank you.

This concludes the CalAmp Q2 Fiscal Year 2023 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.