CAMP4 Therapeutics Corp (CAMP) 2005 Q4 法說會逐字稿

Good afternoon. My name is Cassandra, and I will be your conference facilitator today. At this time I would like to welcome everyone to the CalAmp fourth quarter fiscal 2005 earnings call. All lines have been opened. 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 and then the number one on you telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Coalson [ph], you may begin your conference.

Well, thank you Cassandra. Good afternoon everybody. Welcome to CalAmp’s fiscal 2005 fourth quarter and full year earnings call. With us today are CalAmp’s President and CEO, Fred Sturm, and the Company’s Chief Financial Officer, Rick Vitelle. But before I turn the call over to them please remember that management’s prepared remarks this afternoon contain forward-looking statements, which are subject to risks and uncertainties, and management may make some additional forward-looking statements in response to your questions. Therefore, the Company claims the protection, or for the Private Securities Litigation Reform Act of 1995 Safe Harbor Protection for forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today, and this includes but is not limited to risks and uncertainties related to 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, timing and market acceptance of new product introductions and new technologies, the Company’s ability to achieve profitability in its Solutions Division, risks related to the acquisition and integration of Skybility, and the Company’s ability to maintain and/or expand its relationships 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, therefore, encourage all of our listeners to review a more detailed discussion of these forward-looking statements, risks and uncertainties, which is contained in the Company’s filings with the SEC. Any projections, as to the Company’s future financial performance represent management’s estimates as of today, May 5, 2005. 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 now my pleasure to turn the call over to CalAmp’s President and Chief Executive Officer, Fred Sturm.

Thank you, Crocker. Just a housekeeping item, there may be some people having difficulty getting Web access and those that are having that difficulty should turn off their popup blocker, so we’ll get that out of the way.

So, good afternoon everyone, I’m glad that you’re able to be here with us today. I will begin with the highlights of the fourth quarter and full year, provide an overview of the Company’s performance, and give an update on our key strategic programs. Rick Vitelle, will then talk about our gross profit performance, working capital management and cash flow for the fourth quarter and full year, and discuss the future outlook for fiscal 2006 first quarter and full year. After my concluding remarks there will be a brief question and answer session. Now for the financial highlights and overview.

Revenue for the fourth quarter of fiscal 2005 was $67.1 million, up 61% compared to 41.6 million for the fourth quarter of last year. Robust sales of our new products and support of our customer's multi-satellite and digital video recorder offerings continue to support solid, top-line performance. Net income for the fiscal 2005 fourth quarter was $3.2 million, or $0.14 cents per diluted share, compared to net income of 3 million, or $0.18 per diluted share for the fourth quarter of last year. It is important to note that the effective income tax rate was 36.1% in the latest quarter compared to a negative 1.2% in the fourth quarter of last year.

For the fiscal 2005 full year revenue grew by 71% to $220 million, compared to $128.6 million for the prior year. Net income during fiscal 2005 was $8.1 million or $0.36 cents per diluted share versus net income of $5.7 million, or $0.37 cents per diluted share in the comparable period last year. It should be noted that effective tax rate was one-half of 1% in fiscal 2004, due mainly to the reduction in that year of the deferred tax asset valuation allowances. The effective tax rate in fiscal 2005 was 37.5%. We are pleased with the revenue growth reported for both the fourth quarter and the full year periods, which was primarily driven by continued strong demand of our satellite products and our success in introducing more advanced products that have been well received enabling us to build on our leading market share position in that market.

While our Solutions Division had an adverse impact on earnings during fiscal 2005, we are seeing early indications of progress in getting this business back on the path to profitability. We are, therefore, encouraged about the outlook for our Solutions Division in fiscal 2006.

Now for a business update. Our Products Division closed out the year a substantial increase in revenues and profits. These increased sales were driven by the introduction of 2 new products in the fiscal third quarter that support our customers multi-satellite and integrated DVR service offerings. With the wire availability of high definition television sets and the introduction of set top boxes with intergraded DVRs these advanced satellite products normally sell at higher average selling prices than earlier generation DVS outdoor reception equipment, creating an ongoing opportunity for our revenue growth. While the DVS market is highly competitive, we know what it takes to excel in our space. With satellite and cable TV operators fighting for greater market share, our customers need our products, value added features and capabilities to continue attracting new customers and maximizing their average revenue per subscriber. Most industry estimates predict steady incremental growth in the size of the US DVS market. In 2004 alone, analysts estimate that the size of the US DVS market grew by 15%, from 21.6 million subscribers to approximately 24.8 million subscribers. As this US direct broadcast satellite subscriber base continues expanding, we will continue to differentiate ourselves from other suppliers with superior product performance at a competitive price.

Fourth quarter sales were benefited by the success of our DVR capable reception equipment, which substantially reduces the cost and complexity of installing DVRs for the direct broadcast satellite customers. We are the primary supplier of this product in one of our key customers, which we believe is a reflection of our ability to successfully execute on our product development strategy.

We are currently working on the development of a new product that would support both KA and KU satellite frequency bands in a single unit. This capability will give one of our DVS customers more available spectrum to offer local programming and HDTV, which requires more band width than traditional broadcast television and is growing in subscriber popularity. Again, our focus is on continued enhancements to our products that enable satellite carriers to compete effectively with cable and develop additional customer revenue streams.

As we indicated in our latest press, release the customer order rate for our satellite products has slowed significantly in our fiscal 2006 first quarter as our key customers began adjusting their inventory holding levels. We believe this is a temporary situation and does not in our judgment represent a fundamental shift in either market share or the DVS industry as a whole. We expect our satellite business to improve in the fiscal 2006 second quarter as our key customers reach their target inventory levels and resume normal ordering patterns.

While our Solutions Division generated a fourth quarter operating loss of $2.1 million, our efforts to improve the cost structure in this division are beginning to gain traction. We expect the Division's operating loss in fiscal 2006 first quarter will be reduced substantially from the fourth quarter and we are targeting operational profitability for the Solutions Division by the fiscal 2006 fourth quarter.

As for directed AP, our enterprise access point we’ve developed over the last 2 years, we recently received United States FCC and UL regulatory approvals and we are seeking CE approvals. Our directed AP product is built around an adaptive digital beam switching technology that utilizes multiple antennas and advanced RF design to improve data, speed, range, and security for wireless networks. Based on our information we believe that it is superior to any other such solutions that available on the market today. We are in discussions with several network infrastructure providers to explore possible alliances involving the access point technology. These parties include Cisco, which recently acquired Airspace with whom we were working to bring this technology to market.

As previously disclosed, we recently signed the following contract with the Los Angeles Police Department to develop a mobile electronic ticketing system for LAPD officers for use in the field. This agreement is an extension of our business relationship with the LAPD that began in our development of the Portable Officer Data Devise System, known as PODDS. This is a hand held computing solution that automates the process of recording traffic stop data and filing field interview reports. Under the new agreement CalAmp will enhance PODDS through the integration of CalAmp’s electronic citations software to automate the time consuming aspects of issuing a traffic ticket. We are pleased to again be working with LAPD and believe that this relationship highlights our ability to leverage advanced wireless technologies and our technical expertise to create solutions that enhance client’s workflow, eliminate paperwork and enable consistent access to critical information.

With respect to our manufacturing agreement with EF Johnson we are production on the RF modules that are incorporated in EF Johnson’s next generation hand held radios for police, fire, and Homeland Security. As you may recall, EF Johnson provides digital, Project 25 compliant, interoperable, wireless communication systems for the Federal, State and local agencies involved with Homeland Security and public safety. Obviously in today’s global environment wireless devices and systems that facilitate seamless communication for rapid response to public safety threats and emergencies are in high demand with local, State, and Federal authorities. These types of products are expected to enable CalAmp to better balance our satellite products and improve our profit margins over time. We are targeting other opportunities of this nature to build on our success.

Another key element of our business strategy is to make acquisitions that bring new capabilities and customers to the Company, and that offer the opportunity to provide our current customers with access to new value added products and services. An example of this is our recent purchase of Skybility, a supplier of cellular transceivers for machine-to-machine communications, for asset tracking, remote monitoring, and other forms of wireless control. The Skybility acquisition brings CalAmp a platform of proven products, an excellent customer base and relationships, and intellectual property that allows customers to take advantage of emerging digital network technology, while reducing the size, cost, and complexity of cellular modules. We believe that Skybility is a very nice fit with our existing RF technology expertise, and accelerates CalAmp’s entry into a product area that offers significant longer term growth potential as machine to machine technology becomes more widely adopted in various vertical markets, including ACA tracking, security, and logistics. We intend to employ our RF design expertise to develop new applications that will enable us to deliver innovative products wrapped around Skybility’s cellular modules. With that I will turn the call over to Rick Vitelle our Chief Financial Officer.

Thanks, Fred. I’m going to provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2005 fourth quarter and full year, and our financial outlook for the fiscal 2006 first quarter and full year.

For fiscal 2005, gross profit in the Products Division increased by over 100% to $35.8 million, up from $17.7 in the prior year. Gross margin for the Products Division improved to 18.4% in fiscal 2005 from 13.7% in fiscal 2004. The higher gross margin in the Products Division is primarily attributable to our ability to mitigate the effects of increased material costs, the improvement in plant utilization and higher gross margin contribution of our new satellite products.

Our inventories of $21.5 million at the end of the fourth quarter reflect an annual turn's ratio of 9.5 times, which is a significant improvement over the same period last year and which we believe reflects the effectiveness of our inventory management and control process. Our total inventory decreased moderately to $21.5 million from $24.4 million on-hand at the end of our third quarter. This decrease is primarily attributable to the faster turnover of raw materials once we ramped up to volume production and shipment of our 2 new satellite product lines during the third quarter.

Accounts receivable declined slightly to 1.6 million at the end of the fourth quarter from $27 million -- excuse me, to $27 million at the end of the fourth quarter, which represents 36 days outstanding. Operating cash flow for fiscal 2005 was $12.5 million attributable primarily to the net income of $8.1 million for the year.

Capital expenditures during the fourth quarter and for all of fiscal 2006 were approximately -- excuse me, for all of fiscal 2005 were approximately $390,000 and $2.4 million respectively, which represent typical levels of investment given our degree of outsourcing. Our major sources of liquidity are our cash and cash equivalents, which amounted to $31 million at the end of fiscal 2005. Our total debt amounted to $10.6 million at year end.

Now for the financial outlook. Based on our current visibility we expect that fiscal 2006 first quarter revenues will be in the range of $42 to $48 million and that earnings will be in the range of $0.06 to $0.10 cents per diluted share, excluding one-time charges related to the recently completed Skybility acquisition. In addition, we anticipate that second quarter revenues will be up significantly from the first quarter and we are targeting 10 to 15% revenue growth for the full 2006 fiscal year reflecting growth in our core business, as well as the contributions of our recent strategic acquisitions made to diversify our markets and customer base. I’ll now turn the call back over to Fred for some final comments.

Thank you, Rick. We are extremely pleased that our core satellite business ended fiscal 2005 on such a high note and while we were very satisfied with our execution in the Products Division, we do not plat to let up on pursuing our initiatives. To help ensure consistent growth and profitability in our satellite business we will continue to streamline our profit structure, develop and introduce newer higher value added products at competitive prices, and offer superior technical support to our customers. We also believe that our new differentiated products sets, such as the multi-satellite and DVR offerings will help enable us to maintain our market leadership position. We are taking concrete steps to address the Solutions Divisions’ financial performance and deliver on their full potential of the Vytek [ph] acquisition. We believe that we will substantially reduce the Solutions Divisions' operating loss in the first quarter of fiscal 2006 and it is our goal to get this Division profitable by the fourth quarter, fiscal 2006.

Looking ahead, we see numerous opportunities for CalAmp’s products and solutions in vertical markets such as medical devices, content delivery and public safety. Where wireless solutions provide reliable, cost effective alternatives to wire line systems, we believe that we’ve made significant progress during this past year towards our strategic goal of diversifying our business and transforming CalAmp into a provider of comprehensive wireless products and solutions for anytime, anywhere access to critical information, data and media content. Thank you for listening and at this time I’d like to open the call up to questions. Cassandra?

[Operator Instructions] The first question comes from Matt Robison.

Congratulations on a great quarter. Do we attribute that DSO number to linearity during the quarter?

I’m sorry?

That DSO coming down, is that a function of the strength in the early part of the quarter, linearity?

I think it’s a function of the fact that the sales in the fourth quarter were sort of skewed toward the second half of the quarter.

We also have a very good customer base although highly concentrated, Matt, as you well know, and they stick to the agreements that we have in place with respect to terms.

Okay, for the first quarter Skybility as it kind of came late in the first quarter, is it going to register at all do you think? And of that growth shall we just assume something like 10 million from that acquisition in '06?

I mean certainly we're targeting for growth even within the -- it was a roughly $9 million I believe last year in the revenue growth and we would like to see some easily double digit growth in that portion of the business and I would expect that you'll start seeing theirs as a pretty ratable type of business. You know month-to-month if you do sort of your math and you extrapolate from 9 to some level of double digit growth, you would see that happening over a year in a pretty equal basis.

They're going to contribute right away --

Yes.

In terms of profitability?

Yes, excluding one-time charges in particular with IP -- I guess the in process R&D.

And will they be part of the Solutions or the Product Division?

They're part of the Products Division. They're located in Carlsbad currently but do, in fact, report through the Products Division.

But we think there are distinct potential synergies between that portion of our Products Division and the Solutions Division.

Do you want to elaborate on that a little bit?

Particularly we have a software product called TelAlert for urgent messaging, which is one of the leading softwares for that marketplace and recently we just received an award from HP relative to their suite of products when opened where our product is sold to their customer base and the TelAlert product may have some application in the remote sensing and tracking marketplaces and we're exploring those opportunities now.

And on your directed AP product is the business model one of selling products or are you looking at just licensing for that?

We're still pursuing the product approach for that. Certainly one of the issues that we face with that product is the potential for margin stacking in the distribution channel and we're trying to address that issue currently. As I mentioned earlier in the last conference call, Cisco purchased Airspace. Cisco is still evaluating our product although they've made no decisions one way or another at this point so we're not solely hanging our hat on being able to get Cisco to be our customer. We're actively pursuing other alternative engagements, which were sort of on the simmer prior to the Cisco acquisition.

Okay, and is that part of the Products or Solutions Division?

That actually reports in separately but is in the, from an organizational standpoint, reports in separately to me at our operation but it is in the Products reporting unit from a P&L standpoint.

Okay, and is that product -- do you have your own ASIX [ph] for that product or are you using Merchant Silicon?

We're using actually -- that product uses FPGAs.

All right --

But we haven't -- by the way, Matt, we haven't discounted out completely trying to sell the technology or license the technology although with the impending changes in 802.11 a lot of companies are hesitant to make a decision one way or another depending on which way the 802.11 end goes.

It would seem like there are a lot of avenues for opportunity there. The sequential, the seasonality or whatever you want to attribute that to, your sequential decrease in the current quarter, I guess if you could elaborate on that a little bit and if -- was this inventory situation because your customers couldn't move the older products perhaps as quickly as they wanted to or --?

Well, obviously we're in close contact with our customers and we believe that they've achieved the requirements or they will soon achieve their requirements in terms of their inventory objectives and there are a couple of reasons that they're obviously addressing their inventories. One is just the physical space for products, which leads to issues with respect to warehouses and do they need another warehouse and there is also the working capital management side of how much money do you have invested in products for distribution. And as you can imagine, some of our customers are looking at their inventory turns and implementing aggressive policy changes with respect to how much inventory they're willing to keep on hand so you have some of that. You have some of the effect of them potentially not meeting their own internal forecasts with respect to -- before they've taken forecasted product but not actually had to pull through on certain products that they had anticipated so at some point they have to adjust that. Otherwise, obviously their inventory levels go up so there's a combination of factors that have attributed to the first quarter estimate for the slowdown but certainly we're close to the customer and we believe that this is a very short-term issue. And, as you know, as conservative as we are this is about as far out as we've ever gone on a limb with respect to giving guidance to saying that we believe the next quarter will be significantly up and giving full-year guidance.

No, that's not lost on me. Now you didn't blame anything on the weather, Fred? I mean it's pretty clear that a late winter in the East coast and all the rain in California slowed things down a little bit on deployment. Are you getting that message from the -- ?

No, our customers I think are better suited to talk about why they think their subscriber rates are what they are but we have these weather effects year-in and year-out but I think we're largely impacted by changes in management philosophy with respect to working capital more than we were affected by weather.

Now one more question and I'll let somebody else ask a few. The announcements by Direct TV talked about service in the fall with the KA Band spectrum, at least for part of the country. What shall we anticipate for the production time frame for you guys?

Well, certainly we're in a prototyping phase. We're not in pre-production yet and that does take several months but we would expect to be supporting them in their rollouts. Typically in these rollouts it starts off fairly small making sure that the rollout is -- there are no bugs in it somehow. So I would expect to see in terms of any meaningful, assuming we meet our expectation of being an approved source and competing competitively on price, that any meaningful shipments would be in our fourth quarter, either late third but fourth quarter in terms of meaningful volumes.

Okay so you would -- if they're going to launch service in the fall then that would probably not be large enough to really move the needle from your perspective?

That's correct.

Okay, thanks.

Dave Kang [ph].

Just a couple of questions -- last conference call you talked about this new product that was ramping up but at that time you were sole source but you also mentioned that you anticipated another vendor. What is the latest status on that?

My understanding is there is another qualified supplier but the extent of their deliveries to this point. Also my understanding is that we're the primary supplier on that product.

And do you know what the mix will be between primary and secondary at this point?

In terms of the long term we've been the leading supplier. We've not given that specific information out for competitive reasons but we have been the leading supplier with fairly relatively few suppliers at that customer so we'd expect to maintain our position there as long as we do our jobs correctly.

Got it and then you also talked about KU and KA integrative product. When can we expect that product? Is it this quarter or next couple of quarters?

I think we'll be looking at fall time period in terms of any revenues at all with the meaningful revenues either late in our third quarter or fourth quarter.

Got it. Regarding your current quarter's guidance, shall we expect Solutions to be flat at around $6 million or -- ?

Certainly our focus on that business is improving gross margins so in doing that you might price out of a few customers but we don't think that having reduced revenues or flat revenues is acceptable. I think we're targeting fairly similar objectives for that business as we are for the Company as a whole.

Just a couple of our numbers questions for you, Rick. First on Sarbanes, how much was that during the quarter if any?

During the year as a whole --

We can give a whole year number probably.

Sure.

Between the compliance costs and the incremental audit related costs that we think are attributable to all the additional procedures that the auditors have to carry out, it's in the vicinity of $700,000 to $800,000 for the year as a whole.

Got it and shall we expect kind of comparable amounts this next fiscal year or I mean fiscal '06?

I wouldn't expect it to be more than that. I'm hoping that it won't be as much but it's just hard to tell at this point.

It should be noted, Dave, that for our compliance testing the Vytek acquisition was actually excluded and Rick can get into the details of how that's allowed but it is but they will be included this year and so there will be some additional work in terms of integrating the financial systems early this year. So we're obviously concerned about the costs but the accuracy at least at this point in time is much more important.

Got it and lastly regarding FAS123 [ph] about expensing stock options, some of the June fiscal year companies are already giving guidance in I guess the December quarter or December fiscal year companies will get hit January or so. Since your fiscal is February are you already getting hit or are you another away from it? Can you explain that situation a little bit more?

Getting hit -- ?

When would we anticipate -- ?

Adopting -- ?

Yes.

No decision has been made. I think we have to adopt in the first quarter of our fiscal 2007.

Oh, 2007. Okay. All right, so you still have another year then?

Yes.

Okay, that was it. Thank you very much.

[Operator Instructions] You have a follow-up question from Matt Robison.

Hey, Rick, are you expecting a 37.5% tax rate for '06 as well?

In that vicinity, yes, Matt.

Okay, thanks.

J.D. Aberchar [ph].

Good quarter. The usual questions I ask on ASPs for the Satellite products, can you sort of give me your range right now from sort of the low end to the high end?

Generally speaking the low end in terms of products is around $15 that we would sell our product for and the high end is in the $80-$90 range and the mix can change substantially month-to-month on that but that's generally the range.

Okay, and the new KA product when it comes out, would that be about the high end of the range?

Potentially, yes. That product will have a couple of configurations that may allow it to be substantially above that.

Okay and are you still selling a fair number of the low end sort of just your basic plain vanilla products?

We don't like to think of them as plain vanilla, J.D. It's highly competitive high technology but to answer your question, we do sell a fairly surprising volume of the -- I'll call it technology -- that was developed 5 years ago.

Okay, I guess what I'm driving at is there a potential for blended ASP to go up and can you talk about sort of what the trend has been over the last fiscal year?

Yes, I think there is certainly the opportunity. That's really what we're striving to do is increase the value added for the products and so over time the products that were developed 5 years ago will just be phased out because in order to offer the HDTV and support the HDTV and support the multi-satellite launches that are going on, that those products just won't support a long-term business model, that those will have to go away and higher value added products will fill their place.

And shipping subject here on the Air Space side, did you have much revenue from them prior to they're being acquired by -- ?

We had no revenue from them. The product has just now gotten the SEC approval, as I mentioned, and the Underwriter's Laboratory approval. We're waiting for CE marketing approval in May and hopefully we'll develop our first revenue customer for that in the summer time period.

That's fine. Okay, great. Thank you very much.

[Operator Instructions]

Okay, Cassandra, are there any calls there?

We have one more question. One second please. The next question comes from Larry Litton [ph].

Thank you. I was just wondering in terms of the guidance, the low end of about 10% revenue growth for the year, excluding acquisition that would be about 5% growth, which seems quite conservative. What would be the variables that would lead to only 5% growth in the core business?

Well, I would think that just a general slowdown in the economy or consumer demand for our satellite business. As you're aware, a significant amount of our revenue comes from the satellite product side of the business and so there is always some vulnerability to factors outside of our control. We have a leading market share so if something does happen in the marketplace it generally affects us more than our competitors.

Okay and from a modeling standpoint, if we get the Solutions business to a breakeven or a slight profit in the fourth quarter, what would that suggest in terms of the gross profit margin?

In terms of the Solutions Division we're targeting 40% gross margins.

Okay, thanks a lot.

We have no further questions at this time.

Okay, well thank you, Cassandra, and thank you everybody for listening. We'll talk to you I guess in July on the next conference call. Thank you very much.

This concludes CalAmp's fourth quarter fiscal 2005 earnings call. You may now disconnect.

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