CAMP4 Therapeutics Corp (CAMP) 2005 Q3 法說會逐字稿

Good afternoon. My name is Christie, and I will be your conference facilitator today. At this time I would like to welcome everyone to the CalAmp third-quarter fiscal 2005 conference call. (OPERATOR INSTRUCTIONS) Thank you. Mr. Coulson (ph), you may begin your conference.

Thank you, Christy. Good afternoon and welcome again to CalAmp's third-quarter fiscal 2005 earnings conference call. And with us today are CalAmp's President and Chief Executive Officer, Fred Sturm, and the Company's Chief Financial Officer, Rick Vitelle.

Before I turn the call over to them, just a moment. Please remember their remarks, their prepared remarks today, contain forward-looking statements, and these are subject to risks and uncertainties. And management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the Private Securities Litigation Reform Act of 1995 as a Safe Harbor protection for forward-looking statements.

These statements are subject to risks and uncertainty that may cause the actual results to differ materially from those discussed today, including, but not limited to the risks and uncertainties related to the following matters -- fluctuations in market demand for CalAmp's products and services; general and industry economic conditions, competition, development factors and operating costs; continued pricing pressure in the DBS market; supplier constraints and manufacturing yields; the Company's ability to manage the cost volatility of raw materials, such as metals and petroleum derivative products; timing and market acceptance of new product 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 relationships with key customers.

Examples of forward-looking statements also include statements related to CalAmp's anticipated or projected revenues, gross margins, expenditures and liquidity needs. We encourage all our listeners to review a more detailed discussion of these forward-looking statements, risks and uncertainties that is contained in the Company's filing with the Securities and Exchange Commission. Any projection as to the Company's future financial performance represent management's estimates as of today, and CalAmp assume no obligation to update these projections in the future due to changing market conditions or otherwise.

With those formalities out of the way, it is my pleasure to turn the call over to CalAmp's President and Chief Executive Officer, Fred Sturm.

Okay. I like to thank everyone for joining us today. I'll begin with the highlights of the third quarter, an overview of the Company's performance, and an update on our business strategic initiatives. Rick Vitelle will then discuss our working capital management and cash flow for the third quarter and provide a future outlook for the fourth quarter. At the end of my final remarks we will have a brief question-and-answer period.

Now for the financial highlights and overview. Third-quarter revenues were $57.1 million, which represents a 29 percent increase from the 44.2 million for the third quarter of last year. The catalyst for this growth was our strong Satellite Products sales that began midway through last fiscal year. Net income for fiscal 2005 third quarter was $1.8 million or 8 cents per diluted share compared to a net income of $3.5 million or 22 cents per diluted share for the third quarter of 2004. The effective net income tax rate was 37.8 percent in the latest quarter compared to only 9.9 percent in the third quarter of last year.

Our Products Division revenue increased 14 percent over the prior quarter, resulting in a revenue of $50.4 million, while our Solutions Division had revenue of $6.6 million. For the third quarter our Products Division achieved $6.2 million in operating income, while the Solutions Division incurred an operating loss of $2.4 million, which includes intangible asset amortization expense of $460,000.

Now for a business update. Our Products Division experienced very strong revenues in the third quarter relative to last year. This performance is being driven by the continued expansion of the US Direct Broadcast Satellite subscriber base and our ability to maintain and increase our market share by periodically introducing new and innovative products that meet and exceed our customers' expectations.

With ongoing competition between satellite and cable TV providers for market share, our customers find that they must continue to integrate new value-added features and capabilities into their service offerings to continue attracting new subscribers. Enabling these value-added features through our products supports our customers' strategy to maximize their average revenue per subscriber. We understand these industry dynamics and consider them opportunities for us to both support our customers and stay one step ahead of our competition by continuously introducing high-performance, high-reliability and cost-effective satellite television reception electronics.

For instance, we recently began volume production of a new product that substantially reduces the cost and complexity of installing digital video reporters or DVRs. Our product enables the transmission of video signals from multiple satellites over a single cable instead of over 2 input cables commonly utilized today.

We view DVR cable reception equipment to be a significant opportunity. DVR adoption rates are poised to rapidly increase in 2005 and beyond as many subscribers are expected to request DVR units for their household to accommodate their viewing needs. Our product, which represents a development effort of over 2.5 years was introduced ahead of our competitors'. While our Satellite Products customers generally do not buy a given product from a single supplier for a prolonged period of time, we view our current lead-supplier status as an indication of the success of our product development efforts.

Also we are developing another new product for one of our DBS customers that supports both Ku and Ka satellite frequency bands in a single unit. This is significant because it gives our customer more available spectrum to offer high-quality HDTV, which requires more bandwidth than traditional broadcast television and is becoming increasingly popular with subscribers as an important value-added product offering.

By continuing to streamline our overhead cost structure and continuous improvement efforts on our product costs, we expect to sustain our performance levels in this business segment through at least the end of the fiscal year. We also believe that we're well positioned to defend our position as a leader in developing and supplying Next Generation outdoor reception equipment used by the major service providers in the US.

For the Solutions Division we're continuing to work to bring our operations and cost structure in line to achieve our near-term objective of breaking even and to ultimately profitable performance. While this has not happened as quickly as expected, we are aggressively taking concrete steps to ensure this division's success going forward.

Most notably, we recently appointed Steve L'Heureux as the President of this division. Steve is an experienced technology business executive with a strong sales and marketing background. He also has a proven track record of successfully improving revenue and profits for under-performing technology organizations. Steve's proven operational leadership and business development expertise will be instrumental in expanding the Solutions Division's revenue base. Under Steve's leadership we expect to deliver on our vision of providing complete and end-to-end content delivery connectivity solutions. We will closely monitor our efforts and effectiveness in bringing the Solutions Division to profitability as quickly as feasible while making necessary adjustments or refinements to our execution plan along the way.

Additionally, we recently announced the signing of a production agreement with Airespace to strengthen the reliability and performance of enterprise class 802.11 wireless networks. Under the agreement Airespace and CalAmp will jointly develop and implement product initiatives that leverage Airespace's market leading Wireless LAN system and CalAmp's RASTER technology. RASTER is an adaptive digital beam-forming or switching technology that utilizes multiple antennas and advanced RF design to improve the data speed, range and security for wireless networks.

We are currently undergoing customer and applicable regulatory agency testing of our enterprise access point. We have an initial order for 1000 units which may be shippable in the first calendar quarter of 2005, depending on the timing of agency approval and final customer acceptance of the initial 100 units already provided. We will keep you apprised on the progress in this area as key developments occur.

With that I will turn the call over to Rick Vitelle, Chief Financial Officer.

Thank you, Fred. I am going to provide a summary of our working capital management and cash flow results for the third quarter and our financial performance outlook for the fourth fiscal quarter.

Our inventories of $24.4 million at the end of the third quarter reflects an annual turns ratio of 7.5 times, which we believe represents solid performance in view of the length of our supply chain. Our total inventory decreased moderately to 24 million from the 25.2 million on hand at the end of the second quarter. This decrease is primarily attributable to the faster turnover of raw materials once we ramped up to volume production of our 2 new satellite product lines during the third quarter. We have also begun investigating other initiatives that could improve the efficiency of our purchasing practices and inventory management capabilities, including consignment inventory arrangements, changes in FOB point and additional outsourced content.

Accounts Receivable grew by $2.9 million during the latest quarter to 28.6 million, which represents 41 days outstanding. We believe this is quite respectable for our industry.

Operating cash flow in the third quarter was 2.4 million, attributable primarily to net income of 1.8 million during the quarter. We also had a very strong working capital position of nearly $50 million at the end of the latest quarter. Capital expenditures during the third quarter were approximately $725,000, which represents a fairly typical level of investment, given our degree of outsourcing. Total cash flow for the latest quarter was 1.3 million. And during the nine-month year-to-date period, total cash inflow was 3.6 million. Our major sources of liquidity continue to be our cash and cash equivalents, which amounted to $26.5 million at November 30, 2004, and a $10 million working capital line of credit with our bank.

Now for the financial outlook for the fourth quarter. Based on our current visibility, we estimate fiscal 2005 fourth-quarter revenues in the range of 62 to $68 million and earnings in the range of 11 to 15 cents per diluted share. Included in this earnings estimate are charges of approximately $460,000 for amortization of intangible assets.

I will now turn the call back over to Fred for some concluding remarks.

Thank you, Rick. Our core satellite business is operating well, and we anticipate continued growth in this division through at least the end of this fiscal year. While we are pleased with our Product Division's results, we also realize that the satellite television industry is cyclical and very competitive, and that we will continue to need to execute well to ensure continued success. At the same time we're taking actions to improve our Solutions Division's performance and attain the long-term benefits from the combination of our companies. We continue to believe that executing on our strategy of leveraging the technical strengths of our 2 divisions, we will be able to offer our customers a complete end-to-end solution of design through manufacture that will provide them improved time to market and other competitive advantages.

With that I would like to open up the call to questions. Christy, if you are there?

(OPERATOR INSTRUCTIONS) Matt Robison.

First question -- why was gross margin for Products Division down sequentially?

There is 2 factors related to that. The major factor has to do with a combination of effects; it's our incoming materials, procurement costs, principally freight. We had a new product introduction which we alluded to or actually spoke about in earlier remarks. We had to airfreight a number of components from the Far East to support that product rollout. In addition to that, from a freight standpoint we suffered through 2 extensions in the procurement cycle relative to shipping from overseas. 1 is a requirement by the US Customs that products be in port a week prior to shipment coming out of the Far East. That was 1. In addition to that there was a backup in the L.A. port, which was about another week to week and a half. So in order to maintain our customer relationships and our market position we elected to airfreight selected products in support of that.

In addition to that, the remainder portion of that is related to some pricing changes on certain products in advance of cost reductions that are expected to occur in the following quarters.

So you had a little bit of forward pricing?

Yes. I don't like to say it, but --

Okay. Well, I said it for you.

It's a bad term.

Do you expect that the second-quarter gross margin level is something that you could achieve?

Yes. We would like to get back to over 20 percent.

Now, last call you talked about severance for the restructuring you planned at that time on the order of 350,000. And obviously you didn't break it out separately. Was that the kind of number that you did or is that going forward?

Yes, that's correct. We had a pretty good estimate at the time. And they will be actually similar types of numbers in this current quarter, obviously related to other previously announced changes in management.

Now, for the third quarter, did some of that come out of R&D, because I noticed R&D was up sequentially by a significant amount?

In the third quarter there is a small amount related to R&D, but it is not a significant portion.

Is the R&D a function of prototyping expenses? Or is that level kind of something we should expect going forward, the 2.3 million?

No; I think that that's, I think, a fairly acceptable level in terms of what we see going forward.

Now, given that you have kind of had to take a real close look at the Solutions Division and you are working through issues there, should we anticipate that there will be some write-down of intangibles here by the end of the year? Or is that --?

This is Rick. I think it would be premature to anticipate that. We were required to test for impairment our goodwill associated with each of our operating units on an annual basis. And in the case of this goodwill that arose from the acquisition of Vytek last April, we have selected an annual impairment test date of April 30th. So we will basically have to wait until after that time to know.

And fundamentally, the reason that we made the acquisition is sound. The markets that they participate are still growing. You know, we believe that currently it's an execution issue.

Now, the prepaids were up. What was the reason for that, Rick?

Relative to the end of the fiscal year?

No, sequentially.

Sequentially?

I will let you come back to me on that. On the (multiple speakers)

I know that included in that prepaid number is approximately $1 million of property held for sale associated with our Wisconsin operations, but I think it was there last quarter too.

I don't want to get into too much minutia here. Let me ask you this, Fred. Is the Products Division revenue -- is the new products cycle -- did that contribute 10 percent yet, or is that more in the current quarter?

New products, yes, contributed at least 10 percent in the latest quarter.

In the November quarter?

Yes.

And should we attribute them for most of the sequential growth you anticipate?

The significant portion, yes.

Great job driving the revenue number and keeping the inventory down.

We let it get up a little ahead of ourselves.

Yes, but it's going the right direction here.

(OPERATOR INSTRUCTIONS) Ed Bede (ph), private investor.

I've got a 2-part question. On the last conference call, unless I'm thinking of a different company, you announced that -- well, you said that you were getting close to doing a deal with the L.A. Police Department. And the second part of my question is I thought that you were getting close to doing a deal with 1 of the airlines in regards to a couple of your products. Is any of that going to be forthcoming in the near-term?

We still are in the process with L.A. -- let me answer both of those. This is Fred. We still are in the process on the LAPD of going through the long cycle of getting all the different departments' approvals. I still believe we'll be getting that shortly.

I don't think we ever said we were going to get an order from an airline. We are working with somebody that supplies the airlines. And we are currently working with that customer. As you may be aware, getting approval to use company's names in press releases is difficult, and you have to go through a number of processes, particularly legal review. And hopefully we will be able to announce something, but at this point we can't guarantee that we will announce something, principally due to confidentiality requirements by the customer (multiple speakers) the customer is.

Matt Robison, Ferris, Baker Watts.

(technical difficulty) prototype production approval cycle for the Ka/Ku-band type product?

You were cut off at the beginning of your question. Can you start (multiple speakers)

Where are you in terms of the prototype or production approval cycle for the Ka/Ku-band product?

Let me see how I can describe it. We're in the process of developing our own prototypes. We have gone through a couple of critical design reviews with the customer. And we are at the point of putting our prototypes together to make sure that they integrate and do the things that -- have the performance necessary to meet our customers' expectations. And so we have not provided any qualification samples to date. We are still in the prototyping phase.

This is obviously a much different spectrum, Ka being millimeter wave spectrum. Do you anticipate a different batch of competitors for this type of product?

So far that's not the indications we have from the marketplace.

Does it involve a different set of vendors from a procurement perspective?

No. Matt, it's not that far. I think it's between roughly 18 and 21 GHz. It's not that far off of (multiple speakers) band is at the low end of Ka.

Okay, it's low. Because I know some of that spectrum that they had for space way (ph) was up in the higher 20s. And I guess that's my only question for now.

Christie, do we have other questions?

Kevin Dede, Merriman.

Hey, Fred. Congrats. Could you give us some more details on the Airespace deal? Is it exclusive? When might you see revenues? How is that whole thing going to work?

It's not necessarily an -- we don't have an exclusive arrangement with them. It's for a particular development of a particular type of products. The revenue -- I think I mentioned on the call it really depends on market acceptance. But we do have an order for 1000 pieces. We have shipped an initial 100 pieces that is undergoing their testing. We also have testing in -- I believe there's 3 areas that have to be -- UL, FCC, and there is I think at least 1 other Wi-Fi-related testing agency. And so it's undergoing those test currently. And so the combination of the input back from those 4 testing organizations will give us some clarity in the next quarter whether it's going to be in this quarter or the following quarter. But certainly we are optimistic that that will lead to the ability to ship 1000 units. And based on the market acceptance of those 1000 units, I think that will set forth what the revenue projections will be for that product.

Okay. But they don't have an exclusive claim on your technology?

No. We actually are in the process of getting several patents related to the RASTER technology and the implementation thereof.

Is there an opportunity, do you think, in taking that development and translating it to other frequencies and applications?

Yes, it certainly has that possibility, although this 1 is the nearest in the short-term. And it's really designed around 802.11. You can apply the same types of technology to other frequencies, but at this point our focus is on 802.11a, b and g.

I'm just wondering if you saw something that you might bring to the WiMAX opportunity.

We're reviewing the WiMAX opportunity. We think that maybe Europe is a little ahead actually, potentially. And then there's 802.11n, which in 1 case -- I guess there's at least 2 competing thoughts in terms of which way to go on that. In 1 case our product really supports that. If it goes the other way, our product doesn't support it. So we are trying to keep abreast of the different changes and the different applications in the industry. But right now we are really focused on getting this product out and into the marketplace. There's a lot of people out there talking about the next generation when they are not even shipping anything today. We are trying to ship something today.

Matt Robison, Ferris, Baker Watts.

Fred, on the guidance, would it be reasonable for us to anticipate the Solutions Division at a level approximately as it has been in the November quarter?

That would be a safe assumption.

At this time there are no further questions. Mr. Coulson, are there any closing remarks?

This is Fred; I'll speak for Mark. I think we've had a good conference call. I look forward to speaking with you on the conclusion of our fiscal year. Thank you very much.

This concludes today's conference call. You may now disconnect.