When CalAmp (CAMP +0.00%) released fiscal first-quarter 2020 results last Thursday after the market closed, investors couldn't have been more pleased. Shares soared more than 12% on Friday as the market absorbed the report, which highlighted adjusted profits near the high end of guidance on a narrower-than-expected revenue decline. For that, the machine-to-machine communications company credited the relative outperformance of its software-as-a-service (SaaS) solutions, and largely appeased concerns over the effect of broader telematics industry headwinds.
To better understand what drove CalAmp as it kicked off the new fiscal year, and what we should be watching in the coming quarters, let's take a closer look at five key points management discussed during its subsequent conference call with analysts.
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1. There's still opportunity for supply chain improvement
Telematics Systems revenue was in line with expectations at $63.6 million, supported by marked improvement in our supply chain performance as we executed on our plan to be more methodical in our diversification efforts in order to meet near-term customer demand. The steps we took to implement new operational processes and tighter synchronization with our key suppliers has resulted in a more stabilized supply chain and shorter lead times. While we made substantial progress in the latest quarter, we continue to believe it will take two more quarters to fully optimize our supply chain structure and realize the full benefits of global diversification with optimum inventory levels and delivery lead times.
-- CalAmp CEO Michael Burdiek
Recall in early May, CalAmp stock plunged following the company's mixed fiscal fourth-quarter 2019 results, which fell short due to both telematics headwinds and what management described as "lingering supply chain challenges" as it moved away from Chinese manufacturers to offset the impact of tariffs. While investors are rightly excited the company made significant improvement on the latter front, it's equally encouraging that CalAmp expects its supply chain optimization efforts to yield further fruit over the next couple of quarters.
2. On (deceptively) light telematics demand
Looking to our Telematics Systems business performance in the first quarter, as expected, revenue was down 17% year over year to $63.6 million, reflecting a decrease in MRM Telematics and legacy LoJack SVR product sales due to reduced sales volume in both the United States and internationally. The sales decrease impact was isolated to a few of our top customers including Synovia Solutions, which we acquired in April 2019. Legacy LoJack SVR products, including Telematics sales to LoJack international licensees, were down for the quarter by approximately $4 million, or 24%, year over year as a result of lower sales to U.S. auto dealers and international licensees, including the lost sales revenue through the consolidation of Tracker UK and LoJack Mexico. This was partially offset by an increase in CalAmp Telematics Solutions sold through these channels, as well as growth in our LoJack-related subscription revenue.
-- CalAmp CFO Kurt Binder
In short, CalAmp's telematics decline wasn't as severe as it first seemed, particularly given the consolidation of Tracker UK and LoJack Mexico, as well as sales lost to CalAmp's decision to acquire top customer Synovia Solutions for $50 million earlier this year. As CalAmp laps these strategic moves, and as the underlying strength of its subscription services and core telematics businesses becomes more clear, I suspect the market will take note and the stock will continue to respond positively.
3. On CalAmp's budding SaaS business
[O]ur software and subscription services' first-quarter revenue reached a record level at $25.5 million or 29% of consolidated revenue. We saw particularly strong traction from CalAmp's iOn fleet management applications and LoJack subscription services. Additionally, the integration of our recent acquisitions, which include Tracker in the U.K., Car Track in Mexico, and Synovia Solutions in North America, is progressing well. The addition of these businesses aligns with our global SaaS expansion strategy and helped drive international revenue across our entire business to a record 29% of the consolidated total.
-- Burdiek
To be clear, Burdiek was forthright in noting that recent acquisitions played a key role to bolster CalAmp's recurring SaaS subscriber base and revenue streams. In fact, of CalAmp's more than 1.2 million subscribers at the end of the quarter -- up from 776,000 a year earlier -- 348,000 came from those acquisitions, with around 76,000 arriving via organic growth initiatives. Assuming CalAmp can efficiently complete the integrations of those new businesses, however, they should be instrumental in helping the company reach its longer-term goal for $200 million in annual subscription revenue.
4. On demand from heavy equipment OEMs
Revenue from network and OEM products was in line with expectations in the first quarter driven by solid customer demand from Caterpillar along with another OEM. Looking to the future, we see opportunities to expand our global reach in the industrial machine and related equipment rental marketplace not only with additional telematics device design wins but also for expanding our subscription services.
-- Burdiek
A few weeks after CalAmp's underwhelming quarterly report in May, Goldman Sachs analyst Jerry Revich downgraded the stock in part due to concerns of the effect of a cyclical slowdown in the truck and construction end markets on CalAmp's telematics business. According to Burdiek during last week's call, however, CalAmp not only continues to enjoy "solid customer demand" from its heavy-equipment customers -- including Caterpillar, its single-largest client, from which quarterly revenue climbed 11% to $16.3 million -- but also believes it can seize opportunities for incremental growth in this vertical.
5. One potential tailwind for MRM telematics
We were concerned about share loss as it relates to some of our supply chain challenges over the last couple of quarters. I think this latest quarter we felt pretty good about our ability to retain existing customers and potentially even claw back to a certain extent some share losses, especially in the Latin American markets. So I would say, we feel pretty good that we're almost back to where we were prior to some of the issues that we faced in Q3 and Q4. On the demand side, I think we see encouraging signs that a large percentage of our customer population here in the United States is starting to take seriously the 3G sunset issue. And we're feeling good that that could produce some tailwinds for us, over the coming quarters especially over the next two years, as that sunset becomes very imminent at the end of 2021.
-- Burdiek
This insight came in response to an analyst question about mobile resource management (MRM) telematics demand, and market-share losses from customers outside of the Synovia acquisition. Of course, Burdiek mused that CalAmp was indeed worried about losing customers given its supply chain delays in recent months. But investors should be happy those losses didn't materialize.
Further, as 3G technology goes by the wayside in the coming years in favor of 4G and 5G solutions, CalAmp is presented with a significant potential catalyst that could drive incremental demand for CalAmp's products over the next several years. For investors who buy even after CalAmp's recent pop, and coupled with its ongoing shift toward recurring SaaS revenue, I think those catalysts could translate to enormous, market-beating gains from here.
