CalAmp Corp. misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $-0.1. CAMP isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the CalAmp Corp. FY ‘24 Q3 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jikun Kim, Chief Financial Officer.
Jikun Kim: Good afternoon and welcome to CalAmp’s Q3 FY ‘24 financial results earnings call. My name is Jikun Kim. I am the Chief Financial Officer at CalAmp. Also with us today is CalAmp’s Interim President and Chief Executive Officer, Jason Cohenour. During today's call, we will make certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Forward-looking statements are predictions, projections, and other statements about future events that are based on current expectations and assumptions, and as such are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from forward-looking statements in this communication.
Investors should listen to today's call with the understanding that our actual results may be materially different from the plans, intentions, and expectations disclosed in the forward-looking statements that we are about to make. For more information about these risk factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings press release that we issued today as well as the company's filings within the Securities and Exchanges Commission. Investors are cautioned not to put undue reliance on these forward-looking statements. The company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Jason will begin today's call with the review of the company's recent operational highlights, and then I will provide a more detailed review of the financial results, followed by a question-and-answer session.
With that, it is my great pleasure to turn the call over to CalAmp’s Interim President and Chief Executive Officer, Jason Cohenour. Jason, go ahead, please.
Jason Cohenour: Thank you, Jikun, and thanks to all of you for joining us on the call today. In the third quarter, CalAmp continued to see strength in certain areas of the business, while also experiencing demand softness in others. Specifically, our industrial and international connected car segments continued to perform well, whereas soft demand from TSP customers led to lower than expected consolidated revenue. Our view is that continued softness with TSPs is mainly related to the post-COVID supply chain correction and subsequent inventory rebalancing, as well as an intensified competitive environment in the overall telematics solution ecosystem. In response, we have reallocated strategic focus and resources to this segment and believe we are seeing early signs of recovery.
We are optimistic that TSP revenue will stabilize and return to growth from current levels. Another complicating factor with our TSP customers has been a difficult but necessary migration from our legacy PULS device management system to its successor, DMCTC. I am very pleased to report that after 20 months of monumental effort and some pain, that the technical migration of more than 8.5 million devices to DMCTC is now essentially complete. All of our TSP customers can now look forward to fully leveraging the improved functionality and benefits of DMCTC as opposed to migrating devices. Furthermore, as the final strokes of the migration are completed, the CalAmp team can re-vector more of its time and attention to optimizing the customer experience and driving revenue growth.
Overall, the company generated $53.6 million in revenue and $1 million of adjusted EBITDA in the quarter, both of which fell below our expectations at the time we provided directional commentary on October 5th. Adjusted EBITDA was lower than expected as a result of the lower revenue and gross margin. Non-GAAP OpEx was lower sequentially as a result of previous cost reduction initiatives, and this helped to cushion the impact of lower revenue and gross margin. On the product and sales front, the company continued to hone its focus on core market segments to maximize the effectiveness of our investments and resources. As a result, there were several developments in the quarter that we believe represent growth catalysts for the future. One of these developments was the release of an upgraded version of our AI dash cam solution, Vision 2.1. This new model offers the standalone video capabilities of Vision 2.0, but also includes other telematics functionality, such as GPS tracking, without the need for a separate gateway or LMU device.
Vision 2.1 has now been released for our K-12 and commercial fleet applications. As previously mentioned, we had another extraordinarily strong quarter in the industrial segment, particularly with our large OEM customer. We are also seeing some very encouraging market traction with other industrial OEMs who are showing significant interest in the flexibility and computing power of CalAmp's edge software platform, EdgeCore. This edge platform, together with our DMCTC cloud, enables customized edge computing capabilities for proprietary edge apps, which can lead to lower operating costs, improved flexibility, and lower latency compared to traditional device-to-cloud solutions. We have customers integrating this unique edge capability today and are excited to expand our opportunity set with industrial OEMs. Also, our international connected car business continues to execute well, achieving several milestones in the quarter.
First, we were granted Toyota Genuine certification, enabling our solutions to be installed at Toyota's ports, thereby streamlining the sales and customer delivery process and providing an opportunity for geographical expansion. Additionally, Jaguar Land Rover has endorsed our Stolen Vehicle Recovery system as its recommended solution to help mitigate the impact of a growing theft issue in the UK. Increasing theft of JLR's Range Rovers in the UK has led to significant increases in insurance premiums on these targeted models. With JLR's endorsement, select insurance companies are offering lower premiums on vehicles that have our SVR solution installed. We are encouraged by JLR's endorsement of our unique SVR technology and believe that it represents a catalyst for growth in the UK market and beyond.
During the quarter, we also launched an initiative to narrow our strategic focus to market segments where we are particularly well positioned and see opportunities for profitable growth. In addition to concentrating our resources in those market segments with the best opportunity for growth, our narrower focus has also enabled us to take significant cost reduction actions. We estimate that our cost reduction actions will result in approximately $16 million in annualized savings compared to our fiscal Q2 run rate. We anticipate that approximately 75% of the savings will come from operating expenses and capital expenditures, with the balance coming from reductions in cost of goods. While we expect to see some immediate benefit from our cost reduction initiatives, the full impact will be realized throughout fiscal year ‘25.
A technician programming a router in an industrial setting, hinting the company's telecom solutions.
With these reductions, we expect to significantly strengthen the leverage in our operating model and to achieve adjusted EBITDA breakeven at approximately $42 million in quarterly revenue, depending on product mix and gross margins. On December 18, we announced the closing of a $45 million term loan with Lynrock Lake Master Fund LP. This new term loan replaces our previous asset-backed line of credit and enhances our strategic positioning as we engage with new and existing customers, partners, and suppliers. The new capital also provides financial flexibility in support of our strategy and business transformation. Lynrock is a longtime supporter of CalAmp and is an existing holder of a large majority of CalAmp’s 2% convertible senior notes, maturing in August of 2025.
In connection with the execution of the term loan agreement, CalAmp is amending the notes to add a security interest. And finally, I'm very excited that we very recently announced the appointment of veteran technology leader Chris Adams as CalAmp's next President and CEO, effective January 22nd, 2024. Chris is an accomplished technology leader, will bring a wealth of knowledge and experience to CalAmp. He possesses a unique combination of technical depth, operational skills, and general management experience from a broad range of technology companies, most recently, as General Manager of the Automotive Sensing Division at onsemi. We have high confidence in Chris's ability to lead the company through its transformation and to greater value for customers and investors.
As for me, I will continue to serve as CalAmp’s Interim CEO until Chris arrives. Following his arrival, I will work with him and the team to ensure a smooth handover of leadership responsibilities. Following the handover, I plan to resume my role as Independent Director for CalAmp. It has been a true pleasure to serve as CalAmp's Interim CEO and I can report without hesitation that the CalAmp team is talented and passionate and they believe in the opportunity before us. In addition to having a great team, the company also has other tremendous assets, including excellent products and solutions, a blue chip customer base, and a large and growing market opportunity. I look forward to supporting CalAmp's next chapter of profitable growth and market leadership.
With that, I'll turn the call over to Jikun to discuss our third quarter financial results in more detail. Jikun?
Jikun Kim: Thank you, Jason, and thank you for stepping up during this transition. It has been a pleasure to work with you. My commentary will include reference to non-GAAP financial measures. A full reconciliation of these non-GAAP measures with the corresponding GAAP measure is included in the earnings release. Total revenues in the third quarter were $53.6 million. Revenues declined 32% year-over-year and 13% sequentially from $61.7 million last quarter. Much of the year-over-year and quarter-over-quarter revenue decline was driven by lower sales to our TSP customers, partially offset by strong performance in our industrial and connected car market segments. As Jason mentioned in his remarks, the revenue decline was driven by our TSP customers continuing to rebalance their inventories, while also navigating competitive pressures in their end markets.
As we move into Q4, we are seeing early indications from our TSP customers that the business is stabilizing and orders have improved. Recurring application subscription revenue in the quarter were $17.8 million, a $900,000 sequential decline. While the total connected car market segment revenues were steady quarter over quarter, the decline in recurring revenue was driven by our connected car UK operations as a large insurance carrier exited the UK market in the quarter. These declines were partially offset by recurring revenue growth in our K-12 segment. Consolidated gross margin in the third quarter was 33%, compared to 36% in the prior quarter. The sequential gross margin decline was driven by unfavorable product mix, lower volumes, and higher-than-normal excess and obsolescence accruals and warranty expenses.
E&O was largely driven by a set of SKUs from our cargo tracking product line and higher warranty expenses were the result of quality issues with one of our product SKUs, which has since been resolved. Third quarter GAAP operating expenses were $101 million. Excluding goodwill impairment, restructuring charges, expenses related to Jeff Gardner's passing, and other non-recurring expenses, third quarter operating expenses would have declined $2.5 million sequentially to approximately $23 million. The resulting Q3 FY ‘24 adjusted EBITDA was $1 million or 2% of revenues. Please see the press release for further details of our non-recurring adjustments. At the end of Q3 FY ‘24, we had total cash and cash equivalents of approximately $38.2 million as compared to $38.6 million last quarter.
Cash flow from operations was a positive $1.8 million in the quarter. Free cash flow in the quarter was a negative $500,000. Towards the end of Q3 FY ‘24, we implemented a significant cost reduction initiative, targeting $16 million in annualized cash savings relative to Q2 FY ‘24 run rates. These savings should be fully realized by the end of FY ‘25. Approximately 25% of the reductions will come from cost of goods as new, lower cost and higher performance products replace aging products over time. The balance of the reductions will come from operating expenses and capital expenditures. With these reductions, our adjusted EBITDA breakeven should be reduced to approximately $42 million in quarterly revenues, depending on business mix and realized gross margins.
In the quarter, we also assessed the carrying value of goodwill on our balance sheet. Driven by significant revenue declines in our TSP market segment, the fair value of some of the goodwill segment was determined to be less than the carrying value, and we recognized a $74 million goodwill impairment. Subsequent to the quarter end, we announced the closing of a strategic financing agreement with Lynrock Lake. The financing will provide additional liquidity and operating flexibility as we implement our restructuring efforts and return CalAmp to growth, profitability, and cash flow generation. As a note, term loan has no financial covenants. With this strategic financing and significantly lower cost structure, incremental revenues will create enhanced profitability and cash flows, positioning the company to execute on its plan to address the $230 million convertible loan coming due on August 1, 2025, and the $45 million term loan coming due December 15, 2027.
From a business outlook standpoint, in Q4, we expect revenues from our industrial market segment to decrease from its recent multi-quarter highs to a more normalized level. We expect this revenue reduction in industrial to be partially offset by a recovery from our TSP customers. Overall, we expect the consolidated revenues to be down slightly and for the adjusted EBITDA to be stable relative to Q3 FY ‘24 levels. With that, I'll turn the call back to Jason for some final comments. Jason?
Jason Cohenour: Thank you, Jikun. In conclusion, I would like to thank everyone for their continued support of CalAmp. We have an unwavering belief in the value our technology services and employees bring to the market, and our team remains dedicated to capitalizing on that value and navigating the opportunities ahead. This concludes our prepared remarks. We will now open the call to your questions. Operator?
