As a machine-to-machine communications specialist, CalAmp Corp. (NASDAQ:CAMP) is easily one of the most intriguing companies with which investors can play the Internet of Things.
In you're unfamiliar with the term, Internet of Things describes the trend of giving network connectivity to everyday products, thus more deeply embedding connected technology into our lives. The trend is gaining steam: IDC estimates the worldwide Internet of Things install base will grow by a compound annual rate of 17.5% through 2020, at which time it would represent an incredible $7.1 trillion market.
To understand both CalAmp's recent results and how it is seizing this opportunity, investors need to know this Internet of Things company is effectively a tale of two very different businesses.
1. Satellite: Slow and steady(ish)
First is the satellite segment, in which CalAmp sells satellite connectivity hardware that notably includes low-noise block downconvertersm, or LNBs. In short, LNBs are the receiving devices mounted on a satellite dish to collect the radio waves, amplify them, and downconvert them so they can be carried to the indoor satellite receiver through a coaxial cable.
For CalAmp shareholders, the satellite business is today a point of stress. Last quarter, satellite represented about 13.6% of CalAmp's total revenue with sales of $8.6 million. But that was also a huge 37% decrease from the same year-ago period, shocking some investors with the apparent deterioration of this still-material segment.
During CalAmp's latest conference call, however, CEO Michael Burdiek did his best to add perspective on the situation:
[F]or the last few years, we've tried to describe the Satellite businesses as a $40 million a year business -- but not quite that predictable. That $40 million a year is really broken down to $10 million a quarter, plus or minus $2 million. We've been running below $10 million for two sequential quarters, and we've obviously guided to that into Q4. We had an exceptional year in the Satellite business last year. And just as a point of reference last year in Q3, we had more than $13 million of Satellite product revenue. ... We think the run rates we've experienced the last two, three quarters are probably more indicative of the business on a go-forward basis.
In short, though satellite revenue sustained big year-over-year drops in recent quarters, that's not indicative of a failing business, but rather a reflection of its abnormally strong year in 2013. Management also isn't playing down the importance of satellite to CalAmp; Burdiek reiterated multiple times in the call that satellite made a "meaningful contribution to our bottom line profitability and operating cash flow."
2. Wireless datacom: (Potentially) Fast and furious
Next is wireless datacom, the business for which investors seeking Internet of Things exposure are justifiably excited.
In increasing sales 10% year over year to $54.6 million, wireless datacom revenue represented the remaining 86.3% of CalAmp's total last quarter. Within that, CalAmp classifies two subsegments: mobile resource management, or MRM, and wireless networks. As of this writing, CalAmp counts 11 separate industries in which its wireless datacom technology can serve.
For the sake of clarity, I'll look at wireless datacom as a whole and focus on the verticals with the greatest current influence on CalAmp's growth.
First, last quarter CalAmp celebrated the commencement of volume production shipments of its telematics products to Caterpillar (NYSE:CAT), which will enable the heavy-equipment juggernaut's customers to track fleets in painstaking detail down to what equipment is in use, who's using it, when they arrive and leave, and even how they're driving the equipment. Better yet, Burdiek said demand from Caterpillar has not only "exceeded our earlier expectations with revenues in excess of $5 million in the third quarter," but is also expected to ramp into both the fourth quarter and fiscal 2016. As that happens, and assuming other heavy equipment titans follow suit, the construction industry could be a major boon for CalAmp investors.
Next, CalAmp expects strong demand going forward -- though it didn't provide specific financial detail -- in the energy industry based on its current backlog with an unidentified solar power OEM customer. Here, CalAmp's LTE routers can be used to enable smart grid applications such as advanced metering and automated power distribution. Keep an eye out, then, for CalAmp's energy vertical to ramp up in the coming quarters.
Another area to watch is recurring revenue from CalAmp's services -- which add a level of welcome predictability to its results -- including fleet management, automotive vehicle recovery, and vehicle finance applications. In this vertical, CalAmp helps customers track and recover lost or misplaced equipment, prevent defaults on leases and financed vehicles by reminding customers of payment due dates, and even remotely disable a vehicle's starter. As of last quarter, recurring revenue from these services comprised 16% of CalAmp's total sales, up slightly from 15% in the same year-ago quarter.
Last but certainly not least, CalAmp believes the auto insurance telematics market could be an enormous growth driver over the long term. By using CalAmp's unique combination of hardware, software, and services, insurers can track vehicle activity including aggressive driving and speeding -- or, conversely, safe driving -- and adjust premiums to reflect those habits. As it stands, however, usage-based insurance is expected to generate less than 4% of CalAmp's total revenue when all is said and done this fiscal year. As CalAmp continues to gain a foothold in this market, though, that percentage should increase in the coming years.
In the end, I'm impressed by the breadth of both CalAmp's range of products and its customer base. The world should only continue to grow in its affinity for connected devices. And even though CalAmp largely operates behind the scenes, it's firmly positioned as an early leader at the center of multiple markets with huge potential. For patient, long-term investors willing to endure some short-term volatility, this Internet of Things stock could generate huge returns going forward.