Welcome to CalAmp's Fourth Quarter and Fiscal Year 2023 Financial Results Conference Call. My name is Tiya and I’ll be your moderator for today’s call. 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 fourth quarter and fiscal year 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; and Chief Financial Officer, Jikun Kim. Before we begin, I'd like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect CalAmp's best current judgment, they're subject to risks and uncertainties that could cause actual results to 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. Jeff will begin today's call with a review of the company's recent operational highlights, and then Jikun will provide a 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. This is our first call with our new CFO, Jikun Kim. It's great to have him as part of my team. I just wanted to welcome him, while also thanking Cindy Zhang for serving as acting CFO during the transition period. Fourth quarter revenue was $78.5 million, which was in line with our expectations, and revenue for the full year was $295 million, flat with the prior year. Software and subscription services revenue in the quarter grew 4% sequentially, and approximately 25% from the prior year to a record $51.4 million, representing 65% of total revenue. Full year software and subscription services revenue grew 20% to $185 million and represented 53% of total revenue in 2023 compared to 52% in the prior year. Another highlight of the quarter was our adjusted EBITDA performance, which increased 44% sequentially and 35% year-over-year to $6.8 million, or approximately 9% of revenue. This past year was a challenging one due to several factors. But I believe we have turned the corner. By the end of our fiscal year '24, macro factors aside, our target objective is to return to year-over-year revenue growth. We believe that the cost reductions we implemented last year, along with continued improvements in the supply chain will by the end of the year see non-GAAP gross margin return to historical norms and allow us to achieve improved EBITDA margin performance. As we close out the conversion phase of our business transformation and enter the next phase of the process, I thought it might be constructive to provide you with a brief history of why and how we decided to transform CalAmp from a leading data capture and transmission telematics device provider to one providing software and data insights with sophisticated data analytics and AI capabilities, enabling enhanced visibility, maintenance, safety, compliance, and efficiency. These new applications are offered on a recurring subscription basis and become increasingly sticky as more and more data is generated and analyzed. Today, with more than 10 million CalAmp IoT Telematics hardware devices operational in the field, and more than 1.6 trillion data points processed annually in our cloud platform, we clearly saw the value of this extensive hardware installed base. We decided to seize the opportunity to monetize the valuable insights that our hardware generates by providing software applications, not only to our existing customers but to new customers as well. These new applications are offered on a recurring subscription basis and become increasingly sticky, as more and more data is generated and analyzed, particularly with the industry's focus today on AI analytics, autonomous navigational features, and electrification. With these strategic objectives in mind, we began this journey more than two years ago, to transform our hardware-only business to a solutions business similar to our existing K12, commercial fleet, and connected car operations. Since we started, 78% of our hardware-only customers have converted to a device management recurring application subscription model deployed on our cloud platform, called DM CTC. In addition to the hardware revenue, this generates a modest monthly recurring fee. Clearly, this conversion process took some time and effort. But customers have come to appreciate the value of the new cloud platform and its edge computing features, particularly its enhanced capabilities to organize and manage devices, accounts, and configurations with over-the-air firmware updates. We have converted a large number of important customers like DCS, Platform Science, GPS Insight, Localiza, Trimble, Micheline, Navman, and many others. In addition, we also made significant R&D investments in our application software stack. And we believe that the turnkey solutions we've developed are offering a competitive advantage, and we anticipate accelerated adoption by our customers as we continue our transformation. Using a baseball analogy to characterize our transitional strategy, I would say that we are in the middle innings of a nine-inning game. During the initial innings over the past two years, we laid the foundation for establishing our vision and strategy, identifying the target customer segments for the conversion, developing the DM CTC platform, and defining the multi-layered software stack that would drive our application solutions business in the years ahead. The multimillion dollar investment we made in this initiative essentially linked our value add as a Software and Systems Company from the edge to the cloud. We also aligned our leadership team to function as a customer solutions based organization and adjusted our cost structure to improve profitability. As we commence this conversion process, our subscriber count increased significantly. However, the modest device management recurring application subscription revenue we received from each new conversion actually put some pressure on blended ARPU on a consolidated basis. Our full stack solution businesses, which I mentioned above, namely K12, Commercial Fleet, and Connected Car, offer high ARPU, high margin applications today, such as 'Here Comes The Bus', fleet management, stolen vehicle recovery, and others. With the hardware conversions complete, we will work to increase revenue across our higher margin subscriber base by upselling them to more advanced software subscription solutions that we have developed while also securing new software customers. We believe this will result in a more predictable, profitable, and higher growth software business on a consolidated basis. Today, as we progress through the middle innings of the game, we have to complete the few remaining eligible hardware conversions, focus on driving value in our full stack solution businesses, and increase the value provided to full stack solution customers with our new applications, such as the AI-enabled Vision 2.0 video platform, smart trailer, and cargo insights. This is where our margins will expand, contributing to increased profitability and cash flow for our investors. In the past year alone, we recognized approximately $80 million in recurring application subscription revenue. And we are determined to increase the higher margin revenue stream significantly in the years ahead. We expect to enter the final innings of the game sometime in our fiscal year '25 or early '26, during which a majority of our revenues will be on long-term recurring subscription contracts, excluding a few of our OEM and TSP customers. Our market strategy will be based on a value-added hardware platform, augmented with our application software and select third-party solutions. Any hardware development we choose to do ourselves will be limited strictly to segments where value and margins are strong and sustainable. I hope this summary helps provide a better understanding of where we've been and where CalAmp is going. I am pleased with our accomplishments both operationally and financially this past year, as we have navigated this stage of the business transition. Our top operating goal in the near term will be to maintain a high level of execution while advancing through the transition to move CalAmp ever closer to a software systems enterprise company. We believe this will be the most direct path to generating strong recurring subscription-based cash flow and increasing shareholder value. Though we are only halfway through the ballgame, we've made great strides transforming our business thus far to a recurring revenue model. As we continue to advance through the rest of the game, I look forward to reporting our progress as we move further up the value chain with our ever-expanding full stack application software portfolio. We believe this will lead us to our end goal of producing consistently profitable revenue growth for years to come. I'd now like to turn the call over to Jikun, who in his first 90 days has already made significant contributions to CalAmp. He will review the fourth quarter and fiscal year results while also providing guidance for the first quarter of fiscal 2024. Jikun?

Thank you, Jeff. I'm glad to be here today and quite excited to join CalAmp, a global data analytics platform provider. I'd also like to thank Cindy and the rest of the accounting and finance team for a seamless transition. Please note that during my commentary today, I will reference non-GAAP financial measures including adjusted net income, adjusted EBITDA and margins. A full reconciliation of these non-GAAP measures to corresponding GAAP measures is included in the press release. Fourth quarter revenues were $78.5 million, in line with our expectations. This was flat compared to the prior quarter and up 15% from $68.4 million a year ago. Full year FY '23 revenues were $295 million compared to $296 million in the prior year. Software and subscription services segment revenues in the fourth quarter were a record $51.4 million, up 4% quarter over quarter and up 25% year over year. The increase in our S&SS segment revenues reflects the continued transition of Telematic product segment customers to our device management CalAmp Telematics cloud or DM CTC subscription business model and into our S&SS segment. Full year S&SS revenues increased 20% to $185 million, or 63% of total revenues compared to $154 million, or 52% of total revenues in the prior year. S&SS based remaining performance obligations in the fourth quarter were approximately $234 million down 7% quarter over quarter from $252 million and up 17% year over year from $200 million. During the quarter, our subscriber base increased 9% quarter over quarter to $1.6 million and increased 51% year-over-year. Telematic products revenue in the fourth quarter was $27.1 million, down 8% quarter over quarter from $29.6 million and flat year over year. We continue to convert these telematic product customers to a DMCTC subscription arrangement. We ended the year with $29 million in telematic products backlog. For the full year in '23, telematic products revenues declined 22% to $110 million from $142 million. The decreased revenues reflect the ongoing supply shortages that have limited our ability to ship against firm backlog, combined with the transition of a large portion of our customers to a DMCTC subscription model, hence moving into our S&SS segment revenues. Within the telematic product segment, our largest OEM customer revenues increased 17% to 15 million quarter over quarter from 13 million and increased 95% year over year from $8 million. On a full-year basis, our largest OEM customer accounted for $51 million of revenues, which was down from $54 million in the prior year. While we recovered in the second half of the year, supply constraints have negatively impacted our ability to fulfill demand for this customer in FY '23. As we moved into '24, supply has improved and demand from this customer remains strong. Our annual recurring software application subscription revenue declined from $94 million to $80 million, driven primarily by the discontinuation of our auto leasing business and foreign exchange headwinds in our connected car business. This is somewhat offset by new customer logos and DMCTC subscription revenues attributable to customers being converted from telematics products to the S&SS segment. Excluding the discontinued auto leasing business, the recurring software application subscription revenues were flat quarter over quarter. In FY '24, our plan is to focus and drive these recurring revenues with new applications like the Vision 2.0 solution that I just discussed. Beginning in Q1 FY '24, we will pivot our focus to the recurring application subscription revenues. Consolidated gross margin in the fourth quarter improved 160 basis points sequentially to 35.3% but was down from 41% in the prior year. As expected, we had lower levels of spot buys in the fourth quarter, which resulted in a net reduction of purchase price variance of $1 million, compared to $5.7 million in the prior quarter. These purchase price variance related improvements to gross margin were offset by unfavorable product mix shifts, interest rate impacts associated with capital lease deals, and the customary year-end inventory adjustments. Full year FY '23 gross margin was 37% compared to 41% in the prior year. We anticipate continued improvements in gross margins in 2024. Fourth quarter operating expenses, excluding restructuring charges and intangible asset amortization decreased 2% quarter-over-quarter and 10% year over year. For the full year, operating expenses excluding restructuring charges and intangible asset amortization declined 5%. In late January, we announced a restructuring to address our cost structure and to realign our operations to be more consistent with the data analytics and insight driven recurring revenue business model. We expect these actions to result in an annualized cash savings of approximately $10 to $12 million. These savings will be realized across cost of goods sold, operating expenditures, and capital expenditures. We will begin to see the benefits of these actions in the first quarter, with the full impact of benefits being realized in the second quarter and beyond. Adjusted EBITDA in the fourth quarter increased 44% quarter over quarter to $6.8 million, or approximately 9% of revenue from $4.7 million or 6% of revenues. Year over year, we saw a 35% increase from $5 million or 7% of revenue. Compared to the prior quarter, adjusted EBITDA benefited from slightly lower operating expenses, excluding restructuring charges, combined with improved gross margins. FY 23 adjusted EBITDA was $18.1 million or 6% of revenue compared to $24.7 million or 8% of revenue in the prior year. At the end of the fourth quarter, we had total cash and cash equivalents of approximately $42 million as compared to $45 million in the prior quarter and had no outstanding borrowings under our $50 million asset-backed line. Total net borrowing capacity on this line at the end of the year was $34 million, meaning our aggregate outstanding debt is approximately $232 million, including $230 million of the 2% convertible senior notes due on August 1, 2025. Our guidance for the first quarter of FY '24 is as follows: We expect revenues in the first quarter to range between $72 million to $78 million, with adjusted EBITDA expected to be between $5 million to $9 million.

Thank you, Jikun. Before opening the call for Q&A, I'd like to thank all of our employees for their incredible work this past year. The CalAmp team has worked hard to position the company for growth and profitability going forward. We believe we've turned the corner on the business transition we set out to implement and are thus well positioned today to seize the opportunities that lie ahead. With years of experience in the telematics industry, we've developed a reputation for delivering high-quality products that lead to optimal asset operation and control. And now, with this recent business transformation, we're using that experience to deliver software solutions to our customers that solve real, mission-critical issues, while providing invaluable and actionable AI analytical tools and insights. With that, we will now open the call to your questions, operator.

The first question comes from George Notter with Jefferies. Please proceed.

Hi, guys, thanks so much. I guess, can you give us the recurring application subscription number? I know typically, you guys break it out in the queues in case, but do you have that number offhand?

For the fourth quarter, it was $19.4 million, plus the rental revenues of $8.6 million.

Got it. Great. Later this afternoon. Okay, great. So that $19.4 million number was about flat sequentially in the February quarter. I guess, obviously, it's a recurring revenue line item. We've seen that line item kind of decline for a few quarters. I just want to make sure I understand the narrative there. Is that really have more to do with the discontinuance of the auto finance piece, or is that fully out of the numbers now? And we should be seeing some lift there? Like, what's your perspective on the trajectory of those numbers?

Yes, it is definitely impacted by two things: the auto finance business discontinuance, as well as some foreign exchange pressure in our automotive business, George. But, I mean, it's also affected by the fact that over the last year, we focused most of our resources on converting our base to DMCTC. What we're excited about in fiscal year '24, with that largely behind us, is our sales team is 100% focused on driving recurring revenue businesses in K12, fleet, TNL, and automotive. So I think what investors have been looking at and anxious for us to really complete that churn of the conversion of the base and really focus on what's going to drive value going forward, which is those full stack recurring revenue businesses.

Got it. Okay. You mentioned the transition to DM-CTC. I think I saw in the press release 78% number. And I think the base was 65 customers in total you're trying to convert, so it sounds like the progress there is diminishing this past quarter. I think a quarter ago, you were at 75%, two quarters ago, I think you were at 50%. So is it fair to say the other 22% of the customers are just going to stand pat and not make that transition? Or how do you look at it?

No, no, I think what's more accurate there is that we have two large customers who have more complicated contractual issues that we want to make sure we get right for our customer and for us, but both these customers have a large embedded base and do large volume with us. So we still expect to complete those in the near term. We were hopeful to get those done in the quarter, but we're making good progress. And we're working with our customers, so it's a seamless integration for them as well. But no, we're still on track.

Okay, great. And then the last one, I know you guys were talking about implementing some pricing increases to reflect higher supply chain costs. Any success in implementing those this past quarter? Was that part of the telematics number that we're looking at? Or? What can you tell us there?

Yes, we had some purchase price variance revenue items that we charged to customers in the quarter. If you saw sequentially, our impact from pricing changes, or because we reduced the number of spot buys really improved. So part of that was the fact that we were able to build more of this PPB to our customers and the other part was that because the supply chain has improved a great deal, our allocations have improved, our lead times have shortened, we're able to pay less in terms of additional spot buys in the market. So again, that leads to us having a little bit more pricing flexibility, but also reducing the added cost and pressure on gross margin.

Got it. Okay. All right. I'll hand it over. Thanks a lot.

Thank you. The next question comes from the line of Scott Searle with Roth Capital Partners, please proceed.

Good afternoon. Thanks for taking my questions. Nice job on the quarter, guys. Maybe to quickly dive in on a couple of clarifications from an OpEx and restructuring standpoint, I want to clarify in terms of the current quarter, how much of the restructuring they got announced was implemented this quarter? I think the non-GAAP OpEx was around $25 million. It sounds like there's another $8 million to $10 million to come out annually. So by the end of this fiscal year, we're expecting another $2 million plus to be coming out on a quarterly basis. And then on the gross margin front, just want to clarify a couple of things. You talked about normalization as we get to the end of this fiscal year. I wonder if you could recap that for us by segment, in terms of product on software and subscription services, what that should look like. And what's the long-term target for gross margins on the software and subscription services, particularly now, as you're pursuing higher-end application higher dollar and value added, just overall better blended mix?

Yes. So let me make sure we got your questions. First question was on the impact of cost reductions on OpEx going into the future? Second was on gross margins, what we think normalized gross margins look like and what the long-term gross margin would be. Is that, did I get that right?

Correct. Yes. Okay, OpEx, the cost reductions were implemented very late in Q4. And they continue to be implemented in Q1. So you will not see the full impact of those reductions until really Q2. But you are correct, it's roughly $8 million to $10 million a year. And so we will see some of that in Q1, and most of the balance starting in Q2, and we should be fully costed down at that point in time. In terms of gross margins, if you look at 2021 and '22, I think you'll see that blended gross margins were roughly 40% to 41%. That is where we're trending back towards. However, long term wise, when we have our recurring software and application revenues up higher as a portion of the overall business, we are looking for a 50% blended gross margin from a long-term basis. The below that product line and where you talk about, that's FNF versus hardware. We really don't break that out any lower at that level.

Okay. And maybe if I could follow up now that you're going through the force conversion process, and you're largely done, you still have a couple of laggards. What is going to be the organic growth rate that you guys are targeting in terms of connected devices? How should we be thinking about ARPU? It sounds like that's bottoming out. And the overall target revenue growth number for S&SS.

Yes, so overall long-term goal on S&SS, we really, let's say it differently, Scott, for recurring revenue growth is 10%. So what you guys have been looking for, is that clear, recurring revenue growth, which is driven by more of our sales of our full stack solutions. We won't get there all the way this year, but we'll definitely make progress. So as you saw in my remarks, we're going to return to revenue growth and see significant improvement. We really did some significant restructuring, to align the company better with our long-term goal of being a software and subscriptions provider, which is going to mean better margins in the long run. We really expect that software business to be much more in the 50% range. Our first step with the DM-CTC conversion, those are relatively lower ARPUs. They're definitely helpful. And everything that we ship going forward has a recurring component. But I think what you'll see in 2024 is a greater percentage of our units go out on the full stack solution higher gross margin area.

Great. Okay, thanks so much. I'll get back in the queue.

Thank you. The next question comes from Michael Latimore, with Northland Capital Markets. Please proceed.

Great. Yes. Thanks. Yes. Nice quarter there. On the software and subscription business, is it fair to assume that should continue to grow sequentially throughout the year?

Yes, absolutely. That's the goal. We have a strong pipeline in Mankato, and we have consistently maintained a good pipeline. In terms of our focus on our CalAmp app and our TNL product, we have solid pipelines going into the year. In the automotive sector, you may recall that we signed a long-term agreement with BMW last year, which is currently being implemented. We are seeing a lot of positive momentum in our full stack businesses. Additionally, for our TSP customers, who are very important to us, we are dedicated to providing excellent customer service. We have been rolling out DMCTC. While we are experiencing lower ARPU, every product we sell to our TSP customers includes a recurring revenue component. All these factors contribute to our long-term growth in recurring revenue.

And for the customers that you converted to DMCTC early on, say, this time last year, first half of last calendar year, how has been the upsell pattern there? So far? I know that hasn't been a big emphasis yet, but any color on upsell to those early customers?

I mean, I think that our customers are realizing the value of DMCTC. It's early days on, you know, the big technology advantage with DMCTC is the edge computing capability. So it's early days on that, but I think a lot of opportunity to position our TSP customers to compete better against their competitive landscape and position us well, to sell additional features. So more of that. And I think the way I think about next year is more focused on these full stack recurring revenue businesses driving more top line.

Yes, and then one other thing that I'd like to mention there. In Q3, we spent a lot of time building out a customer success organization that is focused on taking care of our existing customers, so lowering churn, selling additional features to our existing customers. But most importantly, as we are getting a lot of questions about top line revenue, what that does is free up our experienced sales force and TNL, fleet, automotive, K12 to focus exclusively on new logos.

Thank you. The next question comes from Delano with Goldman Sachs, please proceed.

Hi, this is Adam Beavis. On for Jerry today. Thanks for taking my question. Wondering if you could help us think about the path and timing around a positive inflection in free cash flow during your transition here.

Yes, so I think you can see from the cash flow, you know, reduction implemented project that we implemented late in Q4, that should start contributing, as well as the enhance or improving gross margins should both impact. From a free cash flow standpoint, I think we still have a bit of ways to go from a working capital clearance standpoint. But if you take it up before working capital adjustments, I think you'll see that we should be able to do much better in the second half of the year.

Great, thanks. And then I think the revenue outlook for the quarter implies down around 4.5% sequentially. Just wondering if you can parse that out between the two segments.

Yes, we didn't. We're not going to unpack the guidance at that level. If you have additional questions, I might be able to provide additional clarity, but we're not going to go below the aggregate level.

All right, thank you.

Thank you. The next question comes from the line of Martin Yang with Oppenheimer. Please proceed.

Hi Good afternoon, and thanks for taking my question. One question on the cost-saving plans. Is there any way for you to give us more details on where is the most savings coming from across stocks, OpEx, and CapEx? And also, where do we see more concentrated headcount reduction? Thank you.

Yeah, I think that what we tried to do, and Jikun will add some more color across the various aspects of the income statement. But we definitely focused on reducing expenses in our legacy hardware business.

Yes, so we spoke about roughly $8 million to $10 million of annual cash flow reduction in spends across cost of goods sold, OpEx, and CapEx. I would say roughly about 20% is in cost of goods sold and CapEx and 80% is in OpEx. In terms of headcount, it was pretty widely spread across sales and marketing G&A, as well as a small amount in R&D.

Got it? Thanks for the additional details.

There are no additional questions at this time. I will now hand it back to Jeff Gardner for any closing remarks.

I want to thank you all again for joining us today on the call and for your continued support of CalAmp. As a final note, we will be participating in Oppenheimer's emerging growth conference on May 11, which is a virtual conference G con and I will be speaking answering questions. So please schedule a meeting with us if you plan to attend. We look forward to updating you on our progress during our first quarter of 2024 earnings call, which we expect to be in June. Operator, you may now disconnect the call. Thank you guys.

Thank you. That concludes today's conference call. Thank you. You may now disconnect your line.