Seeking Alpha

CalAmp Shares Are Down, But Certainly Not Out

|
About: CalAmp Corp. (CAMP)
by: Shareholders Unite
Summary

The company's figures are buffeted by a series of transitory effects, from acquisitions to network transitions, tariffs, closing factories, supply-chain changes and what not.

Under the hood, hidden by these headwinds, the company is increasing its SaaS business which generates higher margins.

We believe that most of these transitory headwinds will gradually lessen going forward and the underlying SaaS growth will start to express itself in the company results.

This will lead to a revaluation of the shares.

CalAmp (NASDAQ:CAMP), the telematics company, has not had a good time last year. Shares have been lingering for some time on one-off issues and purchase accounting, but we will argue that underneath, things are improving.

This isn't a pretty picture:

The shares got quite a bit of a setback with the Q3 2020 earnings mid-December which investors took as disappointing. We'll come to that below.

Looking at things from a longer-term perspective, the progress looks really like stagnating, even moving backwards a little, with the company moving into GAAP losses:

ChartData by YCharts

Growth

Here are the company's main growth drivers (November IR presentation):

The international expansion is mostly done through acquisitions

Acquisitions

Acquisitions have played an important role in the company's strategy, which can be summarized by the IR presentation:

In 2016, the company bought LoJack for $134M, and in 2019, there were the acquisitions of LoJack Mexico ($13M) and Tracker (also $13M) in the UK in February and Synovia in April for $50M in cash. Here is a nice overview from the 10-Q:

SaaS

The Synovia acquisition is of particular interest as it supports the company's efforts to grow its SaaS business, with the long-term aim of getting this to 40% of revenue. From the November IR presentation:

The progress on that has been one of the underrated issues we think. You see that SaaS revenues constituted 21% of revenues in FY2019, but this has already grown to 35%. From the earnings PR:

Software & Subscriptions Services revenue increased 68% year-over-year to a record $33.4 million, or 35% of consolidated revenue, driven by the recent acquisitions combined with strong growth from LoJack® Italy and Supply Chain Integrity (SCI) services.

What's more, there were both new services as well as deals which will provide the SaaS sector with another boost. From the earnings PR:

  • Announced the CalAmp iOn™ Suite of Telematics Services, the first and only suite of telematics services with integrated CrashBoxx™ crash response, driver behavior scoring and iOn Tag asset management. iOn Suite is an all-inclusive SaaS subscription service available through a simple web-based fleet and asset management application.
  • Partnered with Pallet Alliance to incorporate CalAmp's iOn™ Tags, gateways and CalAmp's Telematics Cloud (CTC) with wooden pallets to track shipments and assets that travel across sea, land and air.
  • TRACKER U.K. partnered with London-based Auto Capital to provide commercial van fleet operator customers with automated intelligence using SmartDealer™ lot management and SmartDrive™ connected vehicle applications.
  • TRACKER U.K. also partnered with NG Bailey to deploy SmartFleet™ across its fleet of 240 service vehicles to improve driver behavior and fleet/fuel efficiencies.
  • Amazon (AMZN) Web Services has built one of its mission critical business applications onto our proprietary CTC platform, quite an endorsement of CalAmp's Telematics Cloud strategy.

And from the Q3CC:

LoJack Mexico developed a robust and customized connected vehicle solution built to top the CalAmp technology stack that focuses on security, improve road safety and operational efficiency for MAN Truck & Bus fleet customers and drivers.

We think the nature of these deals suggests they are repeatable elsewhere, so we think that 40% target is really quite realistic and achievable in fairly short order. Indeed, there are quite a few markets and segments to go after. From the November IR presentation:

The reasons are simple. Telematics simply tracks location through networks and a tracker, which is a little connected computer. As networks evolve and computers become smaller, they can generate more useful data and transmit these in real-time where they are collected and analyzed in the cloud to distract useful insights (driver behavior, machine condition, etc.).

This is a long-term trend that isn't done by any means, and the company's basic telematics business is growing at a CAGR of 10% whilst its SaaS business is at a CAGR of 18% a year, or 22% depending on what exactly is included and the period considered. From the November IR presentation:

The 22% CAGR contains services as well, hence the difference. From the 10-Q:

And not only is much of CalAmp's telematics customer base potentially interested in adding SaaS services, but there are also a myriad of new applications and use cases, opening whole new segments.

There are a number of these new use cases at the end of the November IR presentation. Here is just one of these:

But the variation is by no means limited to these three.

So basically the company is already just 500bp away from its SaaS target. Superficially, one could argue that this is bad news as this development has done little for the bottom line so far.

As the gross margin on SaaS revenue is considerably higher than on the telematics part, the fact that this progress hasn't shown up in the figures is due to other factors (see below under margins).

Q3 results

Revenue growth was actually pretty good. Q3 revenue of $96.6M beat the estimate of $95.1M and rose 9% Y/Y and 4% sequentially. Non-GAAP EPS of $0.15 matched expectations, but were down considerably from last year's quarter ($0.25).

Apart from the ongoing SaaS growth, there are some other favorable developments:

  • Caterpillar (CAT) has been a big customer for CalAmp, but after a considerable dip in revenues from it in Q2, they were back in Q3.
  • Customers are switching from 3G to LTE networks, and there are still some 1.4M CalAmp devices at customers that have to make that transition.
  • LoJack Italy was up 20%+ in Q3 (y/y).
  • SCI, the company's supply-chain integration business, was up 40%+ y/y.

While the SaaS part is doing very well, the Telematics System business, which is still twice as big, grew only 2% sequentially despite the turnaround in revenue from Caterpillar. And it was actually down 8% from last year. From the 10-Q:

The decrease was attributable to reduced sale volume in three product categories including MRM telematics, OEM/network products and legacy LoJack SVR products. The decrease in MRM telematics products sales was primarily due to a reduction in sales volume to a few larger customers. The decrease in OEM/network products was attributable to a reduction in sales to our largest OEM/network products customer which is in the middle of a product line transition and also commencing the rollout of the initial phase of a 3G-to-4G LTE retrofit program. We expect this decline to be temporary and to be offset by demands from our customers as the 3G network sunset becomes more imminent. Legacy LoJack US SVR revenue continues to decline due to a technology transition from proprietary radio frequency technology to GPS-based telematics solutions. We expect this decline to continue but be offset to a degree over time by revenues from our recent acquisitions and future growth in our telematics solutions, such as SureDrive and LotSmart within our Software & Subscription Services segment.

But there might be a growth revival on the way (Q3CC):

Hertz Mexico will leverage LoJack Mexico stolen vehicle location assist and connected car telematics to reinforce driver safety and bring peace of mind to its rental car customers. LoJack Mexico telematics technology will be installed in select Hertz fleet at more than 170 offices throughout Mexico with completion by calendar year-end 2020... It's also instructive to know that we replaced an incumbent who was not able to meet Hertz exacting performance and reliability expectations... The LoJack telematics solution is supported by the full CalAmp technology stack, and will enable data collection on miles driven, speed alerts, travel history and vehicle status.

Again you see adding smarts to the location tracking, which is something we will increasingly see.

Margins

ChartData by YCharts

There were a number of issues that had a negative impact on gross margins:

  • Product mix
  • Purchase accounting from the acquisitions
  • Shift out of China
  • Closing US factory, manufacturing variances

From the Q3CC:

Our gross margin performance was personally impacted by unfavorable product mix with certain customers, coupled with incremental charges for access and obsolete inventory and unfavorable manufacturing variances, as we proceed with the closure of our manufacturing facility in Oxnard, California over the next 90 days. We expect the impact of these items to diminish over the next few quarter.

Purchase accounting also affected revenue, as some part had to shift to deferred revenue, and this will take 16-18 months to gradually work its way back to revenue and involves $4M-$5M. This also affected OpEx. From the Q3CC:

In general, OpEx increased as a percent of revenue due to higher expenses from our recently acquired businesses, combined with a deferred revenue haircut or purchase accounting adjustments.

As these effects of purchase accounting wear off, both gross as well as operating margin should start to recover to their normal levels.

The shift out of China is nearly complete, so that it doesn't really matter whether the 15% tariff continues or not.

Cash

ChartData by YCharts

The company has a history of solid cash flow generation, but this has fallen back really quite a bit in the past 12 months on supply chain issues and acquisitions. Operational cash flow was positive for the quarter, but this came from working capital.

The company has $103.6M in cash and equivalents on the books and $199.3M in debt, $33M of which is current, and it paid $16M in interest so far this year. Dilution really hasn't been a problem:

ChartData by YCharts

Valuation

ChartData by YCharts

Analysts expect EPS to come in this year at $0.55 (ending next month), rising to $0.66 next fiscal year, giving the shares a forward multiple of 13.

Conclusion

While the company is gradually shifting to a higher margin SaaS business, the benefits of this are so far more than compensated by a number of transitional effects (acquisitions, purchase accounting, factory closures, network transitions, etc.), which we expect to gradually become less significant going forward.

That means that the continuation of the shift to SaaS revenue will start to show up in the figures, and the shares are liable to enjoy a revival based on the improvements and moderate valuation.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CAMP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.