Howard Smith – Analyst, First Analysis Securities
And on Caterpillar, or your heavy equipment OEM, if it’s going to be more than $10 million in the second half, so you have raised your expectations there. Does that alter the run rate and the annual expectation, or is it just a matter of the pace of the ramp in the second half?
Michael Burdiek: That’s a great question. And I am not sure we can answer that question with a great deal of certainty. We definitely see the program coming on stronger than we anticipated. And I think qualitatively, it’s our belief that going into next year the program is probably going to be a little bit bigger than we initially expected. So obviously it has to play out here over the next couple of quarters and we have to see where we settle in, in terms of the typical quarterly run rate. And we are nowhere close to being at that state yet obviously.
Operator: Thank you. The next question is from Mike Crawford of B. Riley.
Mike Crawford – Analyst, B. Riley
Michael, just to extend that on Caterpillar, your expectations now for a unit attach rate, is that something where you think one of your cellular or satellite routers will be attached to maybe two-thirds of all new pieces of heavy equipment from Caterpillar or is it too hard to say?
Michael Burdiek: It’s a little bit difficult to say at this point, but I think our expectation is that the attach rates are going to be pretty high right out of the gate. We have talked historically about roughly 150,000 units a year addressable market. It’s our view that we can get closer to very, very high rates of penetration vis-à-vis that addressable market earlier than we originally expected.
Mike Crawford – Analyst, B. Riley
Regarding some of the international MRM business, the fleet tracking asset management, who would be some of your top customers, maybe Sascar? Would that be one of the top ones?
Michael Burdiek: Well, as we have talked about in the past, our strategy has been to try to penetrate some of these larger developed international markets by first attacking some of the larger players in each of those regions. Obviously Sascar is a big player in Brazil. So they have been obviously a key focus area for us from an account development standpoint. We have talked about Masternaut in the UK and Europe. Obviously we have made some progress there. And in Q2, we made some excellent progress with one of the larger players in South Africa.
Mike Crawford – Analyst, B. Riley
And then, with your – for the fleet management product, your new tablets, is this something where you are going to be able to offer your own Software-as-a-Service on this platform? Or are you expecting other people to be developing apps that are then sold through your store? How is that going to play out?
Michael Burdiek: Actually, both. Initially, we would expect to be bringing in or bringing through our Appstore some third-party content providers. But we think that there is opportunities for us to also essentially license SaaS applications through our Appstore that would run and operate on the MDT tablet platform.
Mike Crawford – Analyst, B. Riley
And last question just relates to your new architecture overall. I think you have taken maybe some of the best parts of COLT and some of the best parts of Wireless Matrix and now is that all blending into one common platform now?
Michael Burdiek: More or less, yes. And we talked about a couple of Platform-as-a-Service opportunities getting off the ground in Q2. Both of those opportunities we’re going to be operating on what we term the new CalAmp Connect platform. So for those newer greenfield opportunities, we will be launching them on the new integrated platform.
Operator: Thank you. The next question is from Tim Quillen of Stephens.
Tim Quillen – Analyst, Stephens
Michael, on the previous earnings call three months ago, when discussing the earnings outlook for the year, you had suggested from a conservative to an optimistic view would range from something like 20% to 30% year-over-year growth and I think that the guidance now is 15% to 22% and obviously that bracket is up where analyst estimates already were. So that was good, but what is the change that you have seen to go from that 20% to 30% level down to a 15% to 22% level?
Michael Burdiek: Well, obviously our visibility has increased as we worked our way through the year. We don’t see the satellite business getting back to that sort of $10 million a quarter run rate. It’s going to be hovering between $8 million and $9 million likely this quarter and next as well, probably closer to $8 million than $9 million. So that’s obviously been a very, very solid profit contributor at a time margin profile was realized over the last couple of quarters. So there has been no upside opportunity appear on the scene from satellite’s perspective.
And obviously there’s still a little bit of uncertainty as to exactly how strong Cat will be in the second half of the year, although it’s going to be stronger than we earlier projected in the first couple of quarters this year. And there’s still some potential upside but I think, for us, as we sit here today, I think where we centered guidance for the full year is an appropriate sort of setting of expectations.
Tim Quillen – Analyst, Stephens
And on Caterpillar, I think last quarter, when you were talking about a $10 million type contribution, you suggested that two-thirds or roughly two-thirds would come in 4Q and one-third in 3Q. Is your third quarter outlook the same right now, but there is some upside to the fourth quarter outlook? Is that the right way to think about it?
Michael Burdiek: I know on the last call we talked about Q3 being approximately 30% to 40% of our full year outlook and the last quarter being the balance of that, 60% to 70%.
I think that outlook is still reasonable as a percentage of revenue in the second half from Caterpillar.
Tim Quillen – Analyst, Stephens
So same percentages, but a bigger revenue number, perhaps?
Michael Burdiek: Precisely.
Tim Quillen – Analyst, Stephens
And then in terms of other heavy equipment customers, I know the sales cycles would be relatively long. But what can you tell us about the pipeline of other similar contracts, especially now that you are starting to ship Caterpillar and potential customers can see exactly what you are working on?
Michael Burdiek: Sure. Well, I am not sure any of the other opportunities would be similar to Caterpillar, given Caterpillar’s size. But we certainly have a healthy pipeline of opportunities including some developing opportunities in some heavy equipment sub niches. And in fact, one of our Platform-as-a-Service opportunity is related to one of those construction equipment sub niches.
Tim Quillen – Analyst, Stephens
And I wasn’t quite sure I understood, and I think the way you put it was maybe some onboarding issues that you have had in insurance telematics or usage-based insurance? Or what have been the hiccups that you have seen in there?
Michael Burdiek: Well, I mean these programs are obviously relying on a great deal of brand new cutting edge technology. And this technology is being targeted at, in many cases, consumers. In fact, in most cases for our existing programs, consumers. The RAC may be being a little bit of an exception to that. And these products are being distributed to consumers and often times they are self installed and they are often times installed in a random set of vehicles which the insurance carrier has some visibility on but the exact vehicle make and model are often times unknowns.
And so just aligning the business processes and doing a better job of vetting out the exact vehicle types that these devices are going to be installed into really business process and customer onboarding challenges. And we think in general those onboarding processes are maturing very, very rapidly and so we are optimistic that things will begin to pick up again here in the second half of the year.
Tim Quillen – Analyst, Stephens
And there is no — in that on-boarding process, has there been anything to suggest that you have lost traction within your specific channel relationships? In other words, has there been any switches to competitors during this onboarding process or just a matter of ramping?
Michael Burdiek: No. We are confident that the customer opportunity is still very much real.
Tim Quillen – Analyst, Stephens
And then, just lastly. Could you discuss how you plan to ramp up Masternaut? And what that opportunity might look like as you go a year or two down the road? Thank you.
Michael Burdiek: Well, we have been working with Masternaut for the better part of two years. And so during that timeframe, we have been generally on a ramp. What’s interesting about Masternaut’s business, it’s evolving a little bit. Earlier on the relationship was essentially an exclusive fleet focused relationship. But Masternaut’s dabbled in the UBI market a little bit in Continental Europe and we have been supporting them on some of their pilot programs. So the nature of that relationship is evolving a little bit because of the different sort of sub vertical applications they are looking to address with their range of software solutions.
Operator: Thank you. The next question is from Jonathan Ho of William Blair.
Jonathan Ho – Analyst, William Blair
Just wanted to start out with the new platform initiatives that you guys talked about and maybe where you see the turnkey initiatives getting traction, maybe some of the customer reaction that you are seeing out of that platform and what this incrementally could mean as an opportunity for the company?
Michael Burdiek: Well, from an opportunity perspective, it’s going to be long lived. The types of opportunities we are getting involved in are generally greenfield in nature, although we believe large over the lifecycle. We mentioned one of the applications being a construction equipment sub niche. Another application is an automotive aftermarket opportunity. But we are beginning to talk to some very large tier 1 global IT service companies who view the M2M or IOT market as highly attractive from a secular standpoint. And obviously as a partner, we can bring a lot of tools to their toolkit and provide a lot of the connectivity solutions on a turnkey basis as they look to rollout various solutions to large enterprise customers around the world.
And so we are building those types of channel relationships and technology partnerships which we think will be growth drivers into the future. But really what’s going to drive the business for us over the next several quarters is obviously the core applications, both product and service, as well as the opportunities developing with Caterpillar and other opportunities in the heavy equipment market.
Jonathan Ho – Analyst, William Blair
And then just regarding the subscriber growth that you saw quarter over quarter, can you just maybe talk a little bit about where that subscriber growth is coming from? Are there any sort of specific verticals, or is it sort of the same historical verticals that you have seen in the past?
Michael Burdiek: Historical — most of the quarter-over-quarter subscriber growth was in the vehicle finance area.
Jonathan Ho – Analyst, William Blair
And then, just in terms of the Masternaut opportunity, I know you said earlier that you have been working on this for over two years. But what does the incremental opportunity that you referenced this quarter add? Or how large of an opportunity could this be in terms of the relationship?
Michael Burdiek: I don’t think it’s a deflection point. I think it’s just an emphasis on how important the Masternaut relationship is and how prominent Masternaut is in the UK and across Europe as a major fleet service provider.
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