Every hardware company seems to envy software companies. Software companies seem easier to start. Can make changes to their products freely. And of course trade at premium valuations. And so we often hear hardware and semis companies talk about how they are adding software to their products. This is not easy to do, especially for established companies, and history is littered with examples of just how hard it can be. .
Take the example of Cal Amp (ticker: CAMP). CalAmp started life as a maker of electronics modules. Along the way, they started making GPS modules with two-way radios that could be attached to trucks and industrial equipment. Like many electronics makers, CalAmp built up distribution partners to enter new markets and reach end-customers. CalAmp left sales to these partners, and those partners quickly realized that customers wanted software, basically maps showing the locations of the assets they were tracking. These partners built those simple software interfaces, marked up CalAmp modules and then charged customers monthly for use of the software. Over time, these partners extracted far more value than CalAmp with its one time sale of electronics. After a few years, recognizing their mistake, CalAmp tried to get into the software business. First they tried to build the software platform themselves, but they lacked sufficient software talent. So next, they acquired LoJack, an automobile tracking service well known for its TV commercials in the 90’s and 00’s. For a variety of reasons, this effort failed too. And while this was going on, CalAmp’s partners found alternative electronics suppliers, suppliers who were not competing with them directly. Then a few years before the pandemic, CalAmp made some mistakes with its production operations and lead times for their products went from weeks to months, which distracted the company from its software ambitions. In the early 2010’s CalAmp was, for a brief moment, a stock market darling, an investible company in the IoT space, and the company was valued at over $3 billion. (The Street loves its Bubbles). Today, its market cap is $64 million, while one-time partner Samsara is valued at $14 billion. To pour salt on that wound, they acquired LoJack for $130 million, double the comapny’s current value. Today, CalAmp has managed finally to build a software business, which generated about two thirds of their of their $300 million in revenue last year, but this is not reflected in the company’s stock.
Why was this so hard? Many of their partners seemed to have a much easier time of building software, what did CalAmp get wrong?
The simplest answer is that they did not have the right management team. CalAmp got a new executive team in 2020, but prior to that the company lacked anyone at the C-Level or Board Members with any software experience. The current CEO used to be CEO of Brink’s home security, which was one of the best run alarm companies around, with a very enduring recurring revenue base. Their current Chief Revenue Officer comes from a software background as do many other members of the executive team. Prior management teams had their strengths, but they lacked the background needed to make the transition.
Another big problem the company faced was the expense involved. CalAmp has been public for a long time, and building a software capability is expensive. Constrained by an investor base that did not understand the dynamics of software, the company struggled to justify the expense to the Street. Getting this message to the Street is not impossible, but it requires a lot of heavy Investor Relations work, and our sense is that those past teams lost a lot of credibility with the LoJack acquisition.
In addition, as we hinted above, CalAmp faced immense friction from their distribution partners. CalAmp was essentially trying to compete with them, which is never a good look. The company might have been able to pull it off, but during this period Chinese competitors emerged on the scene. Vendors like Quectel offered similar products at materially lower prices, which meant all those partners had ready alternatives for what were now undifferentiated products. Probably the most critical factor was that the company from its inception was organized to build hardware. Designing software and maintaining the service that comes with it require a markedly different frame of mind, which can take years to build.
In our next piece, we will generalize this to explore strategies that other hardware companies can employ to make this transition.
CalAmp may yet be able to turn things around, but it has been a painful journey.