CAMP4 Therapeutics Corp (CAMP) 2005 Q2 法說會逐字稿

Good afternoon. My name is Sarah and I will be your conference facilitator. At this time I would like to welcome everyone to the CalAmp 2nd quarter fiscal 2005 call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you. Mr. Coalson, you may begin your conference.

Thank you, Sarah. Good afternoon, everyone. Welcome to CalAmp's fiscal year 2005 2nd quarter earnings call. With us today are CalAmp's CEO Fred Sturm, the Company's Chief Financial Officer, Rick Vitelle, and Tracey Trent, who's President of CalAmp's Solutions Division, formally known as Vytek. But before I turn the call over to them, remember that management's prepared remarks do contain forward-looking statements, which are subject to risks and uncertainties. And management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the Safe Harbor contain the Private Securities Litigation Reform Act of 1995 for forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. This includes, but is not limited to, risks and uncertainties related to fluctuations in market demand for CalAmp's products and services, general and economic conditions, competition, development factors and operating costs, continued pricing pressure in the DBS market, supplier constraints in manufacturing yields, the Company's ability to manage the cost volatility of raw materials, such as raw steel, timing and market acceptance of new products introductions and new technologies, the Company's ability to integrate the Vytek acquisition successfully and the Company's ability to maintain and/or expand its relationship with key customers. Examples of forward-looking statements include statements related to CalAmp's anticipated or projected revenues, gross margins, expenditures, and liquidity needs. We encourage all of our listeners today to review a more detailed discussion of these forward-looking statements, risks and uncertainties, which is contained with the Company's filings with the SEC. Any projections as to the company's future financial performance represent management's estimates as of today, October 12th, 2004. CalAmp assumes no obligation to update these projections in the future due to changing market conditions or otherwise. Well, with those formalities out of the way, it's my pleasure now to turn the call over to CalAmps' CEO, Fred Sturm.

Thank you for joining us today. Now I'll provide you with the highlights of the 2nd quarter, an overview of the product divisions performance and an update on the strategic direction of our business. Tracey Trent will then provide an overview of the Solutions Division's performance for the quarter. Rick Vitelle will follow with a review of our working capital management and cash flow during the 2nd quarter. Then at conclusion of my closing remarks, we will open up the call to your questions. Now for the financial highlights. Our total company's 2nd quarter revenues were $50.8 million, which represents 110% increase over the $24.2 million reported for the same period last year. The primary driver for this growth was a resurgence in our satellite product sales that started late in the 2nd quarter of last fiscal year as well as the inclusion of Vytek, which was acquired in April of this year. Net income for the latest quarter was $1.7 million or 8 cents per diluted share, an increase of $1.4 million and 5 cents a share over the same period last year. As we discussed in our last call, the company is now organized into a Products Division and a Solutions Division as a result of the Vytek acquisition. The Products Division includes our historical satellite and wireless access business segments as well as the Vytek wireless access products business. The Solutions Division consists of the Vytex remaining system integration, engineering services and applications software business. In the 2nd quarter, the Products Division had $43 million in revenue while the Solutions Division generated nearly $8 million of revenue. The Products Division contributed $6 million in operating income for the quarter, while the Solutions Division sustained an operating loss of $2.1 million, which includes an intangible asset amortization expense of $435,000. Now for a business update on our Products Division. Our Products Division reported a 78% increase in revenues in the latest quarter compared to last year's 2nd quarter. As a result of the continued growth in the North American direct broadcast satellite subscriber base and our ability to maintain our position in this market.

The DBS service providers continue to take subscribers away from cable TV and are focused on layering additional services and functionality onto their services in order to continue to attract new customers and increase the average revenue per subscriber. CalAmp continues to be a performance and technology leader for the electronics that are the heart of the outdoor reception equipment used by the major DBS service providers in North America. We have been successful in continuing to meet the needs of our customers and are often relied upon to develop and launch next generation equipment. Late in the 2nd quarter we obtained approval on two new satellite products, which we anticipate will begin shipping in volume quantities towards the end of our fiscal 3rd quarter. The first DBS product substantially reduces the cost and complexity of installing digital video recorders commonly known as DVR's. Our product facilities transmission of video signals over a single coaxial cable and represents a significant technology advancement over the two input cables prevalent today for installations involving DVR's. Other supports ATV reception which is becoming increasingly popular with subscribers and an important added product offering by our customers. We have also added -- excuse me, we have also had success in recent quarters in managing our costs resulted in improvement in our overall gross margins. This improvement has been achieved in an environment of on-going competitive pricing pressure. Our investments in technology and focus on manufacturing excellence underpins our success in this segment of our business. The 2nd quarter represented the first full quarter of reported results of our newly-formed Solutions Division, which generated revenues of nearly $8 million, but incurred an operating loss at this revenue level. Despite this, we made progress during the quarter in executing on our strategic business model of providing a complete end-to-end tond solution, most notably with our recently-announced manufacturing agreement with E.F. Johnson. However, it is clear that we need to make certain adjustments to improve this division's overall performance. To that end, we recently strengthened our sales and marketing organization and have made efficiency improvements in our overhead structure. We will closely monitor our progress towards achieving profitable results for the Solutions Division as soon as possible, but without adversely impacting our ability to execute on our strategic model. Now I'll turn the call over to Tracey Trent, who will provide some more backgrounds on the Solutions Division.

Thanks, Fred. So overall, while the Solutions Divisions' revenues for the 2nd quarter probably weren't as strong as we had hoped, I'd say we're still very optimistic about the potential to capitalize on the strength of the Products Division up here and figure out a way to get greater leverage in the shared customer base. Overall, I think the value of proposition has been very well received at a customer level. Clearly, E.F. Johnson, as Fred highlighted, is a great early example, and we're starting to see early indicators that there are other similar opportunities, some of which we think we could realize before the fiscal year is out. We're determined to execute on the joint strategic model to provide this end-to-end solution where we take customers all the way from the initial design phase through prototyping and out into full-scale production. During the quarter there were a number of real positive steps, we think that, that we made towards realizing this vision. Clearly, the E.F. Johnson thing, great opportunity where we did the initial design. We've now entered into this manufacturing agreement to produce a range of new high-spec RF modules that will be incorporated into the E.F. Johnson product line for next-generation hand-held radios, catering to the police, fire, and homeland security applications. The new module actually allows E.F. Johnson to comply with the project 25 standards for inner operability wireless communications systems for the federal, state and local government agencies, and clearly puts them on a path to take advantage of homeland security and public safety funding. The production agreement builds on the early design that was done by the Vytek team and then followed on with the systems from CalAmp here in Oxnard to build this next generation set of RF modules. I think the thing I'd like to highlight that is probably of equal importance is the recognition that there are similar opportunities to this one for E.F. Johnson, but in other industry segments, such as healthcare and industrial controls, and we'll talk a little bit about that further on. During the quarter we also announced support for Intel's new IXP-425 network processor.

A lot of acronyms in this section. But overall, we're hopeful that this partnership will yield similar results to those that we saw when we had worked with the earlier Intel X-scale products, such as the PXA 250, 255 and 270, an area where we probably did something on the order of 10 to 15 designs over the past 18 months. Thus far around this relationship, we started some work on a reference design, imported our THEROS drivers over to support the 425 to offer this up as a platform for customers that are looking at wireless access point products. Last, we made an announcement around a new reference platform. Was a product that was originally developed as part of a design engagement with a major beverage provider. It enables wireless and graphics capabilities to be incorporated into kiosks, vending machines and other types of intelligent point of sale terminals. The part here that is pretty exciting is this week at the NAMA conference, the automated merchandising conference, will actually be a first time that we expose this product out into the public. We'll be doing it in partnership with the customer that we did the design work for. So we're real excited to see what kind of response we get when we get that in front of some customers. As Fred highlighted, despite, you know, these successes, the overall revenue achievement was less than the planned levels and I think we became I guess very familiar that we needed to make some changes to get this division on its track for profitability. And really comes down to two things. During the last couple of quarters we've got two specific segments of the business, our embedded product development business and our public sector business, where the revenue progress has just been slower than expected, for probably different reasons in each, but clearly, we need to boost that up. I think the other thing that became clear is that with the unified operating model, the Solutions Division was carrying much more overhead than was probably needed given the way that we're gonna operate the company, and so there was an opportunity there for cost reduction.

Overall, we've addressed these concerns by increasing the staffing of the sales team. Pleased to announce that we're fully staffed on that side. We've actually increased that team by eight people. We've also centralized the sales organizations that will now be reporting directly to me, and we've refocused that team on some new customer segments and end markets where we really believe that we've got the greatest prospects for revenue and growth. There are segments where we've seen some success in the past and we believe it offers not attractive margins for the future. We've mentioned that we've taken cost reductions by restructuring the division. The actions we took were moved approximately $3.5 million from the annualized cost structure, so a significant change there. It should highlight that this is beyond the cost savings that were contemplated by the merger plan. So clearly, it should help on the profitability track. I would also like to highlight that we were able to do that without dramatically interfering on the engineering side. Almost all of the cuts came out of overhead or support functions and allowed us to maintain the engineering base we have. So, overall we think the new operating structure will not significantly impact our ability to work on this end-to-end vision, and bringing through some of the product -- or production opportunities. I guess now I'd like to shift the focus in terms of really what's on the horizon for us in the upcoming months. Clearly, the focus is on how to now grow the top line. And that effort really comes down to four pretty straight-forward things. First on that list is to build the backlog for the embedded product development team, and the path we're taking here is to focus on existing clients and customers where we've previously done work. And so if I highlight some of those, we anticipate in the upcoming weeks that we'll actually announce a follow-on engagement with one of our healthcare clients.

I mentioned this one because once again, I think it's a similar model to what we saw with E.F. Johnson, where it's a design of a new RF module, and one where the customer ideally would like to see this company produce it. A second one, as many of you heard about, our work in the in-flight entertainment space. We've recently been awarded new projects from that customers, that are starting in development right now, but more importantly we would anticipate announcing in the next two weeks that we will look at a more formal teaming relationship with that customer that would kind of expand the work that we're doing. Not only helping them with the hardware development, such as what we've done in the past, but also focusing on the content delivery systems that would support their systems as well as looking at in-flight wireless delivery technologies. We're also focused on some follow-on work with some customers we've worked with earlier in the year, specifically some things in the kiosk and the industrial control space. I mentioned that we've added some additional sales resources. Two of those are specific to the embedded product development team, and we're excited. These people are actually located on the East Coast and will be directed into some segments where we've traditionally seen a lot of success, but have not been able to focus so much in the Eastern U.S. These would be things like media, healthcare or medical applications, industrial controls and other types of wireless enablement projects, and clearly, we're hopeful that this new vending and kiosk platform will allow us to get some traction and we're gonna continue to build on the relationships that have worked for us with people like Atheros Communications and Intel, but we're now expanding it into some new segments and other technologies, such as 802.15.4 and the partnership we announce we did Ember Networks. The second area of focus is really in the public sector business, and I think this is an area that, you know, just continues to be lumpy, given government contracting cycles.

Fortunately, the company was just recently awarded a contract. Came through the partners' GSA schedule. It's for a D.O.D. client and it's a facility security solution, one of the D.O.D. facilities. We'll be deploying that here in the 3rd quarter. We're very focused on finalizing the base contract for the Los Angeles police department. And you know, with that you've heard that we're focused on an add-on for that customer and we're hopeful that we'll negotiate that during the quarter and be able to start delivering. One of the things that we've clearly seen as an opportunity is that in the public sector there's a lot of opportunity to go out and do the integration of commercial off the shelf projects similar to the one for this D.O.D. customer. We see much shorter delivery cycles on those, and so we would hope to be much more competitive in that space. We also have some partnerships that we've made some investments in. We're hopeful that we'll start to see some return on those. These are some of the areas where we've teamed with larger federal systems integrators, and the other one is on the last conference call we announced our relationship with Nextel, which continues to progress. It's actually taken some interesting directions in that we will look at the continued rollout of the Wants & Warrants application, but we've also talked to Nextel about extending this into some other industry segments and applications. Two additional areas with the messaging software product, Telalert.

We're looking to expand that into new industry segments. We also took some steps during the 2nd quarter to look at moving some of the development offshore to reduce our R&D costs and we'll look at furthering those things as we progress later in the year. The last thing that I want to highlight is for quite a while I think you guys have heard about the Wrapster technology and specifically the first product that's announced there is the Directed Access Point. We are very much in the final phases of closing out an agreement with the launch customer. We would hope to announce that here in the upcoming month. Probably more importantly, we believe the product is finalized. It will be deployed out into beta settings prior to the end of the year, and we're hopeful that we'll be in production probably in Q1 of next year on this. Really, the opportunity here is there's a lot of interest around mimo technology and how that could help Wi-Fi solutions and we believe the Wrapster technology and the directed AP represents a precursor to the mimo standards and so we're very excited to work with our partner here at Atheros Communications to get greater traction in this segment of the market. With that, I'll go ahead and turn things over to Rick.

Good afternoon and thank you, Tracey. I'm gonna cover some working capital and cash flow highlights for the 2nd quarter as well as our outlook for the 3rd quarter. Inventories of $25.6 million at the end of the latest quarter represent an annual turnover rate of six times, which we consider to be in the acceptable range of performance, given the length of our supply chain. Although our total inventory increased by approximately $1.8 million during the latest quarter, we reduced our finished goods inventory level by over $2.6 million during this period. The net increase of $1.8 million in inventory is primarily attributable to a build-up of raw materials in advance of volume production of the two new satellite products. Accounts receivable increased $4.7 million during the quarter to $25.6 million, which represents about 40 days outstanding, which we regard as very good. Operating cash flow in the 2nd quarter was $2.0 million, attributable primarily to net income of $1.7 million during the quarter. Capital expenditures during the latest quarter were approximately $550,000, which represents a typical level of quarterly investment, given our degree of outsourcing to contract manufacturers. Total cash in flow for the 2nd quarter was about $1.6 million. Now for the financial outlook. Based on our current visibility, we estimate our 3rd quarter revenue in the range of $50 to $58 million and diluted earning per share in the range of 7 to 12 cents. Included in the EPS estimate are pretax charges of $461,000 for amortization of intangible assets and approximately $350,000 for expenses related to overhead rationalization in the Solutions Division just after the end of the 2nd quarter. I will now turn it back over to Fred for some concluding remarks.

Thank you, Rick. As we shared with you, CalAmp's base business fundamentals remain intact and we have a clear plan in place to improve the performance of our Solutions Division and realize the synergies of the combination of the Vytek and the CalAmp business. The company's primary strategic plan has two tactical areas of focus. One, maintaining our market position in our core satellite business by developing and introducing new products to current customers and two, leveraging our broad our range of RF and imbedded software expertise to provide current and new customers with solutions to capture revenue streams from early market identification and product development through manufacturing and life cycle management. Over the 2nd half of the fiscal year we plan to continue development of new evaluated products in our satellite division -- or excuse me, our products division, grow our top line in the solutions business and make progress towards achievement of profitable performance and position the business to become a true end-to-end solutions provider in those market segments where we can bring critical value-added expertise to customers, thereby achieving our goals of enhanced revenue and product growth as well as customer and end market diverse fiction. With that, I'd like to open the call up to questions. Operator Sarah?

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Matt Robison with Ferris, Baker, Watts.

Hi, good afternoon. And congratulations on the margin progress for the Products Division. Sorry to see the Solutions Division isn't performing better. Can you comment a little bit about why -- a little more specifically -- why the Solutions Division appears to be down year-over-year and sequentially versus the pro forma from the May quarter? Also, maybe it's related, I don't know, but the deferred revenue was up about 600K sequentially. Maybe you could comment on that. Also, you said you increased sales staff in Solutions Division by eight. I'm itching to know -- that's eight over how many before? And if you could talk a little bit about your A, B, C, and D customers in the mix there.

Boy, Matt, how many questions is that?

I don't know, it's four or five. If you want them one at a time, I can do that too.

I think in Tracey's comments, it really reflected the two parts of the organization that we saw. Business is, you know, substantially lower levels than we would have anticipated on a historical basis. It's the imbedded product side of the business as well as the public safety side, and those are the two areas getting obviously our focus from a sales organization standpoint. I can't comment -- I'll let Rick -- I'll defer the deferred income to Rick. And I'll just turn this over to Tracey real quick to go over what the head count was and is.

Yeah, I'm not sure exactly what the number is, Matt, but you know, rough numbers is probably, you know, 20, and you've got 8 as in addition to that. I mean in rough numbers. It's probably plus or minus 2 there. So you know, significant increase and you know, it's predominantly on building out the embedded team. So we doubled the number of people that we've got on the street there. Put a couple more in the messaging side and we put probably, I think it was three net new out in the enterprise team on the East Coast. And maybe just to comment further on what Fred had said, or on the revenue side, is you know in the embedded products area we had a number of customers where we did some initial, what we would call phase zero assessments or design efforts, but for one reason or another, like the medical customer, you know, slowed taking that into the full design phase, and we're now going to see that in the 3rd quarter. So the revenue was less there. On the public safety side, it just continues to be waiting in the government contracting process to get some of these proposals released. So we've, you know, got some areas where we've been given verbal awards, but the contracts still in negotiations and LAPD is probably the best indicator there. We've been waiting for that change order for probably better than five months now.

Now the comparisons versus what was talked about in the spring and late last year is -- there's a couple -- is a couple million kind of a figure of magnitude for what went over to product division from Vytek?

In terms of the historical, off of last year, I don't remember the specific number, but it's several million.

Okay.

And Rick --

Yes, Matt. To your question on the quarter-over-quarter -- or sequential quarter fluctuation in deferred revenue in the increase of about $600,000, a lot of that difference relates to the purchase accounting process and specifically, a fair value adjustment that we had to -- in effect to at the time of the acquisition, that essentially reduced the deferred revenue that was on Vytek's books and that fair value adjustment is getting amortized away over some number of months and consequently was not as great as at the end of 2nd quarter as it was May 31, the end of our 1st quarter. So it's really a combination, but I don't believe that fundamentally there was a significant increase in deferred revenue on a sequential quarter basis when you just look at the business of the Solutions Division.

And so also, a customer mix question.

Can you repeat that question?

well, the A, B, C, D customers that you talked about in your Q, can we -- I believe last quarter customer A was like 31% and B and C amounted to 26.5 or something like that combined. How is that looking in the August quarter?

I think the Q, as a matter of fact, is out and should be out for you momentarily.

Yeah, that was filed about 45 minutes ago.

Okay, I'll let somebody else have the floor then.

Okay.

Your next question comes from Dave Kang with Roth Capital.

Thank you, good afternoon. Couple of questions. First what was the impact of steel price, and regarding your two new DBS products, do they have higher ASP's and higher margins versus the current DBS product?

Okay. One second here. Let me just complete writing your question. On the impact of steel price, the steel prices have -- well, they've inched up. They pretty much stabilized. In addition to steel prices, I mean, a number of other materials -- base materials, including oil derivatives, you know, plastics and other products that are actually made from oil as it's -- from a processed oil -- we're seeing a little increase on all of those fronts, so it's not just steel. The steel is essentially abated in terms of its increasing rate, but you know, we're watching that closely. It hasn't had a significant impact in this quarter. Hopefully it will all go the other way, but, you know, you can never count on that. And a lot of that is still -- steel price increases, experiences related to the demand by the Chinese for you know, steel, oil, other things to grow their economy. With respect to the ASP's on these new products, yes, they have higher APP's than our traditional products, and so, you know, we expect our ASP's to go up, however in terms of revenue, some of these products in a sense cannibalize other products we had previously sold. There's only so many new subscribers and upgrades, so we have to be careful about anticipating what the volume improvement's gonna be, because it will really be whatever the ASP increase is short-term.

Okay. Regarding your guidance for this quarter, you said there's going to be $350,000 or related to rationalization of a solution division expenses. Was this included in the fiscal 2nd quarter results as well and how long do you expect to incur this going forward?

It's a charge related to cost related to position eliminations, and we actually undertook that late in the September timeframe. And therefore, it's not in the second -- it's not in the 2nd quarter results and the full effect of that won't be felt -- only about a third of the effect of the savings will get felt as a result of that in the 3rd quarter. The full effect will be recognized obviously in the 4th quarter.

All right. Just a couple more. Can I get depreciation and amortization and what is the current number of head count? Thank you.

Okay. The head count's roughly -- just probably 625 to 630. I mean that, changes every day, but it's in that range. I think we gave you the capital expenditure.

Right. Dave, for the 2nd quarter the depreciation was about 655,000 and the amortization expense on intangible assets is 461,000.

And so it included -- I think this is the first time we've provided in the press release there's also a cash flow statement, abbreviated cash flow statement that's included in there as well, Dave.

Thank you.

Once again, in order to ask a question, please press star, then the number 1 on your telephone keypad. At this time there are no further questions.

Well, if there's no further questions, I'd like to thank everybody for joining us on the 2nd quarter conference call and look forward to speaking with you on our 3rd quarter conference call. Thank you very much.