When CalAmp (NASDAQ:CAMP) announced better-than-expected fiscal second-quarter results last Thursday, it was surprising at first to see shares of the machine-to-machine communications leader fall in response. After all, while CalAmp's headline numbers weren't exactly jaw-dropping -- revenue declined 2.9% year over year to $93.2 million, and adjusted net income dropped by more than half to $4.8 million, or $0.14 per share -- both the top and bottom lines arrived near the high ends of guidance provided three months earlier. And management insisted they were "pleased" with the company's performance, particularly as they build their base of recurring software and subscription-services revenue.
To that end, now's a great time to dig a little deeper for perspective on what's driving CalAmp's business today. Here are three key points management discussed during this quarter's subsequent earnings conference call:
Software and subscription growth is accelerating
As an example of organic progress, Toyota Motor Italy and CalAmp's LoJack Italy subsidiary announced a partnership to protect the entire line of Toyota vehicles sold in Italy with optional LoJack services. [...] Earlier this week, we also announced a strategic partnership with Sprint, a leader in IoT and telecommunication innovation to deliver CalAmp iON Device as a Service subscription services and software applications. This new partnership will expand Sprint's broad range of connected car, fleet and asset management services and create new revenue streams from Sprint enterprise accounts. We are also seeing the benefits of increasing demand for Synovia school bus fleet solutions, as a result of consumer pull through for the award winning, 'Here Comes The Bus' application that tracks bus route activity and real time student ridership. -- CalAmp CEO Michael Burdiek
First, CalAmp's software and subscription revenue soared 65% year over year to just over $31 million, increasing to 33% of total sales in the process (up from 29% three months earlier). It should come as no surprise that CalAmp's previous acquisitions and new partnerships have helped fuel those gains, according to Burdiek above, which should lead to more predictable, higher-margin revenue streams down the road.
Telematics is turning around
Now, turning to our Telematics Systems business, performance in the second quarter was as expected, with revenue down 2% sequentially and 20% year-over-year to $62 million, principally reflecting decreases in MRM Telematics device revenue as well as network and OEM product sales. For these product categories, the sales decrease was isolated to a few of our top customers, mainly our largest OEM customer, Caterpillar, and to a lesser extent the loss of former customer Synovia, which we acquired in April 2019. -- CalAmp CFO Kurt Binder
Make no mistake: CalAmp fully anticipated the decline in its core Telematics Systems business, which effectively dragged down its consolidated revenue and earnings in the process. Also during this quarter's call, however, Burdiek elaborated that Caterpillar is "preparing to ramp [up] deliveries of [CalAmp's] next-generation LTE-based product family."
We believe this product transition will pick up significant momentum in the third quarter, augmented by a significant pickup in order flow related to the 3G to 4G LTE field upgrades scheduled for delivery over the next two quarters. In the second quarter, specifically, overall sales of CalAmp LTE based technology devices increased to approximately 30% of revenue as compared to 15% in the prior year period, reflecting the momentum that's building across our installed base for this critical 3G to 4G upgrade cycle.
On that light earnings guidance
Our third-quarter outlook reflects revenue momentum across our SaaS [software-as-a-service] businesses, combined with an increase in Telematics Systems product sales due to customer LTE transitions. We remain encouraged by the continued progress we are making across our business, while cautiously managing through our ongoing supply chain transitions and tariff mitigation efforts. -- Kurt Binder
More specifically, CalAmp told investors to expect fiscal third-quarter earnings per share of $0.11 to $0.17 -- below the $0.20 per share most analysts were modeling -- which explains the stock's modest post-earnings decline.
Later in the call, Burdiek explained that CalAmp expects roughly half of their MRM telematrics products shipped to the U.S. will be sourced from China (down from 70% to 80% at the start of this year), and that their supply-chain transition should be substantially complete by the end of this fiscal year.
Binder also stated that CalAmp's profitability should ramp up in its fiscal fourth quarter, thanks to a combination of progress in purchase-price accounting and deferred revenue recognition, as well as onboarding processes for recently acquired businesses.
In the end, assuming margins improve as management suggests, I suspect CalAmp stock will respond accordingly as the company returns to sustained, profitable growth.