CAMP4 Therapeutics Corp (CAMP) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to CalAmp Q1 fiscal 2006 conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the presentation, please press the star followed by the zero. As a reminder, this conference is being recorded today, Thursday, July 7, 2005. I would now like to turn the conference over to Amy Cozamanis with the Financial Relations Department. Please go ahead.

Thank you, operator. Good afternoon, everybody. Welcome to CalAmp's fiscal 2006 first quarter earnings call. With us today are CalAmp's President and CEO, Fred Sturm, and the Company's Chief Financial Officer, Rick Vitelle. Before I turn the call over to management, please remember that management's prepared remarks this afternoon contain forward-looking statement 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 Private Securities Litigation Reform Act of 1995 Safe Harbor protection for forward-looking statements.

These statements are subjects to risks and uncertainties that's may cause actual results to differ materially from statements made today. And this includes, but is not limited to, risks and uncertainties related to the fluctuations in the 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 cost fluctuations and raw materials, the timing and market acceptance of new product introductions and new technologies, the Company's ability to eliminate operating losses and achieve profitability in the solutions business 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 are contained in the Company's registration statement on form F-3 filed with the SEC on October 20, 2004. Any projections as to the Company's future financial performance represent management's estimates as of today, July 7, 2005. CalAmp assumes no obligation to update these projections in the future due to changing market conditions or otherwise. With that, it is now my pleasure to turn the call over to CalAmp's President and CEO, Fred Sturm. Go ahead, Fred.

Thank you, Amy. Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2006 first quarter results. I will begin with the highlights from the first quarter, including a overview of the Company's performance, as well as give an update on several of our key programs. Rick Vitelle will then provide additional details on our financial results, balance sheet, working capital management and cash flow for the first quarter and discuss the future outlook for fiscal 2006 second quarter and full year. I will wrap up with some concluding remarks and after that open it up for question and answer session. Let's begin with the financial highlights and overview.

Total revenue for the first quarter of fiscal 2006 was $47.6 million, up nearly 6% compared to $45 million for the first quarter of last year. Similarly to the past several quarters, revenue from our Products Division comprised the majority of our total revenues. At $41.2 million, Products Division revenue was up about 2% from last year, primarily as a result of the Skybility acquisition completed on April 18, 2005 about halfway through our first quarter. As expected, Products Division revenue declined on a sequential basis. As we stated during last quarter's call, we experienced a significant reduction in orders for the direct broadcast satellite, or DBS, products during the first quarter from our two largest customers. Based on information gathered from these customers, we believe that the primary reason for the decline was that both of these customers were adjusting their inventory holding levels after purchasing significant quantities from us during the proceeding several quarters.

This was a temporary condition and we believe it did not result in a significant shift in our market share for the outdoor premise equipment. Thus far during the second fiscal quarter we have seen an improvement in order flow of our DBS products compared to the first quarter. Moving on to the solutions division, revenue for the first fiscal quarter of 2006 was $6.4 million compared to $4.5 million for the same period last year. The growth in revenues was due primarily to the fact that the quarter's results covered the full 13 week period compared to a 7 week period last year as a result of completing the Vytek acquisition in mid April, 2004. While we still have a lot of work ahead of us in order to get the solutions division where we would like it to be from a financial performance standpoint, we are making progress on the path to profitability. On a sequential quarter basis we reduced the Solutions Division operating loss by nearly $1 million or 45% from the preceding quarter.

Your targeting the Solutions Division to achieve operating profitability in the fourth quarter of fiscal 2006. CalAmp's net income for fiscal 2006 first quarter improved by more than 50% to $2 million or $0.09 per diluted share compared to a net income of $1.3 million or $0.07 per diluted share for the first quarter last year. Now let's move on to an update on several of our business initiatives. Starting with the Products Division, similar to last quarter, first quarter sales were driven by products that support our customers multi-satellite and integrated DVR service offerings. Both DIRECTV and EchoStar are competing as aggressively as ever with cable operators to gain market share.

Our latest generation products support high definition TV programming and enhanced digital video recorder services which are key to the DBS service providers' ability to achieve their subscriber growth objectives. In addition, these featureless products carry higher average selling prices creating a sustainable long-term revenue growth opportunity for CalAmp. We play an important role in helping our DBS customers develop and deploy these advanced products and we remain confident in our ability to protect our position as a leading industry supplier. During the quarter we continue to make progress on the development of several new satellite product offerings that we are targeting to release later this year and the first half of fiscal 2007.

We are completing the development of an indoor multi-switch that will improve distribution signals in multi set top box applications. We currently anticipate production of this multi switch during the latter part of fiscal 2006 third quarter with volumes ramping up in the fourth quarter. We are also developing a new product for EchoStar that allows for the reception of three satellites and a distribution in home using the same frequency stacking technology that we used in last November's introduction. We expect to begin shipping this new product to EchoStar in the first quarter of next fiscal year. We are also making steady progress in our development efforts for a product for DIRECTV, which will support both Ka and Ku satellite frequency bands in a single unit.

In April of this year DIRECTV launched Spaceway F1, the first of two new Ka-band satellites scheduled for 2006 launch that will provide additional bandwidth and allow DIRECTV to expand digital and high definition programming for its customers. For the Ka/Ku product we have begun the intended tooling process and are in the final stages of the electronics product development. Once development is complete, we will undergo approval testing with an expected production start date in the third quarter of this fiscal year. During this quarter we also saw first contributions from our Skybility business, acquired about three months ago. Skybility is a supplier of cellular transceivers from machine to machine wireless communications with a specific emphasis on applications for asset tracking, remote equipment monitoring and other forms of wireless control.

Skybility was included in our consolidated results for the last six weeks of the first quarter and during this period Skybility generated $1.2 million in revenue and produced gross margins of approximately 30%. While we see this as a great fit with our existing wireless technology expertise, it also gives CalAmp access to new customers and new markets with significant long-term growth potential and provides us the opportunity to leverage CalAmp's high volume manufacturing capability and design and development expertise with Skybility's intellectual property and strong customer relationships. We are currently in discussions with several of Skybility's customers to produce complete units thereby expanding our involvement beyond the radial modules that Skybility supplies today.

Going forward, we will continue our strategy of making selective acquisitions similar to Skybility that provide CalAmp with new capabilities and customers along with the opportunity to offer our customers access to new value-added products and services. As previously announced, we have a manufacturing agreement with a leading supplier of public safety communications equipment where we are supplying RF modules that are incorporated into handheld radios for federal, state and local agencies involved with homeland security and public safety. We have now shipped in excess of 15,000 units under this agreement. As the various homeland security and public safety agencies nationwide began upgrading their communications equipment, we this relationship as having the potential to result in volumes from 30 to 50,000 units annually. This is an excellent example of a successful transition of a Solutions Division customer into a high volume Products Division customer.

Before turning it over to Rick, I would like to make a few comments on the progress we are making in getting the Solutions Division on track. Steve L'Heureux and his management team have done a commendable job of getting their arms around the business and making the necessary changes that we believe will put Solutions Division in a position to succeed and be a valuable contributor to CalAmp. Under Steve's leadership we've organized and re-focused the Solutions Division into three lines of business -- Software applications, design and development, and professional consulting. We have also made excellent progress in either eliminating or renegotiating business relationships with customers that were either not strategic to CalAmp or were only marginally profitable. Obviously, this impacted the division's top-line and has helped to significantly reduce operating losses. We are on the right track to achieve our goal of getting this division to operating profitability in the fourth quarter of this year. 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, our working capital management and cash flow results for our fiscal 2006 first quarter and our financial outlook for our fiscal 2006 second quarter and full year . For the first quarter of fiscal 2006 gross profit in the Products Division increased by 21% to 8.8 million, up from 7.3 million in the prior year. Gross margin for the Products Division improved to 21.4% during the latest quarter from 17.9% during the first quarter of last year. The higher gross margin in the Products Division is primarily attributable to a change in the mix of products favoring higher margin equipment sold to our key DBS customers. Gross profit from the Solutions Division increased to 1.9 million representing a gross margin of 29.4% from gross profit of 1.0 million or 23.0 gross margin last year.

The Solutions Division's results are clearly benefiting from our concerted effort to improve this division's cost structure and focus on pursuing higher margin business. Longer term, we expect the Solutions Division can generate gross margins in the low 40% range. Moving on to the balance sheet, our total inventory increased to 26.5 million from 21.5 million at the end of our fourth quarter. This increase is primarily attributable to the acquisition of Skybility in the first quarter along with slower inventory turnover as a result of lower DBS product shipments during the first quarter. Our inventory at the end of the first quarter represents an annualized turnover of about five times. We expect our inventory turnover to improve over the next several quarters as sales volumes increase on our satellite products.

Accounts receivable declined more than 10% to 24.1million at the end of the first quarter from 27 million at the end of the fourth quarter. This represents 42 days outstanding. Our major sources of liquidity are our cash and cash equivalent, which amounted to 29.2 million at the end of the first quarter. Operating cash flow for the first quarter was 4.1 million attributable primarily to the net income of 2.0 million for the quarter and depreciation and amortization of $1.1 million. Offsetting the first quarter operating cash inflow were cash outflows of $4.9 million for the Skybility acquisition and about $1 million for debt repayments and capital expenditures in the aggregate. In addition to the cash on hand, we also have access to a $10 million working capital line of credit, of which 3 million was outstanding at the end of the first quarter.

Our total debt at the end of the quarter amounted to 9.8 million, which is down from 10.6 million at fiscal year-end. Now for the financial outlook. Based on our current projections we expect that fiscal 2006 second quarter revenues will be in the range of 52 to $60 million and that earnings will be in the range of $0.10 to $0.14 per diluted share. In addition we continue to target 10 - 15% revenue growth for the full 2006 fiscal year reflecting growth in our DBS business as well as the contributions of our recent strategic acquisitions made to diversify our markets and customer base. With that I'll turn the call back over to Fred for some final comments.

Thank you, Rick. In summary, this past quarter proceeded as expected and there were very few surprises. While orders from our DBS customers were down compared to recent past periods, this was anticipated and I'm quite pleased that the volume has picked up in the first half of the second fiscal quarter. I am also encouraged that the near term prospects of our new satellite products for both DIRECTV and EchoStar. The real results from the Skybility acquisition suggest that this business has the ability to be a solidly profitable with excellent long-term growth opportunities and potential to build on CalAmp's core competencies and expand our customer base. And finally, the efforts we have undertaken to turn the Solutions Division around are starting to payoff with tangible results. All and all, I think we are off to a nice start in fiscal 2006. Thank you for listening and at this time I would like to open the call up to questions.

Thank you, sir.

Operator?

Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question please press star followed by the one on your telephone keypad. If you would like to decline from the polling process, you may press the star followed by the two. You will hear a three tone prompt acknowledging your selection. Any questions will be polled in the order they are received. If you're using speaker equipment, please lift the handset before pressing the numbers. Our first question comes from Matthew Robison with Ferris Baker Watts. Please go ahead.

Congratulations on the quarter and particularly the margin performance at Solutions Division and the gross margins. Can you comment on the sustainability of that margin level? You have said something in terms of Solutions Division gained a 40% and I would like to understand better how that happens.

Yes, there are several avenues that, you know, we're taking to improve the gross margins. The DBS business, as you know, is a fairly competitive business and we're targeting to get that business over 20%. It is a bulk of the overall volume. However, as you know, we are also trying to increase the revenue in other parts of the operation. The public safety business that I mentioned earlier with the unit volumes improving will have a very positive impact on the overall margins. It is a business that has margins in the same range as Skybility. Skybility has margins in the 30 plus range that we're still looking, as you mentioned, to increase the revenue side of the Solutions Division in quarters going forward, but also to improve the profitability from a gross margin standpoint. I think, collectively, we're targeting to improve the gross margins, but that happens on a sequential basis. It's difficult to forecast because of product mix within the DBS business and that being a major portion of our business currently. But as you can see, we are executing on our plan to diversify the business and improve the overall gross margins.

You know, love to hear you tell us what your ASPs are, but since that seems like a stretch given past disclosure.

Again, we're trying to communicate more. And be more sure we're friendly, obviously, and so I'm going to try to give you some information to deal with that, give you some examples and frame something for you in terms of where our revenue came from. And this is on the DBS side which is the bulk of our business currently. Last year's fiscal Q1, and we've framed this, Matt, in terms of what we call low ASPs, is below $25. Middle ASPs are 25 to 50 and high ASP products are $50 and more. Give you an example. In Q1 of last year, 48% of our revenue came from what we call low ASP products, less than $25. In the most current quarter 27% came from that category. And the mid ASPs that went from 38% to 46. And on the high ASPs it went from 14 to 27. That will give you a range of what we're trying to -- we are making some progress on trying to have higher value-added products. It appears to be successful so far and certainly we have some additional products, as I mentioned earlier, that should add to that.

That is very helpful and it sounds like with these new products you discussed that are in the works, that the trend certainly should continue. Is that the -- the primary driver in the implied growth in the back half of the year or should we also expect that there is a major seasonal rebound?

Well, certainly we are looking for seasonal rebound. Our third quarter is a particularly good quarter for us. But clearly that we are counting on new product introductions to -- moving into that fourth quarter to have an impact.

Now, is the -- your inventory turns were about as low as they have been in the recent past, anyway. Is there any obsolescence there or should we expect to see that recover in the near future?

If there was we would have recorded it.

Okay.

But it's difficult, as you're aware. We have gone to -- very close to almost a variable manufacturing model using -- but using offshore supply. And once those containers are on the way it is very difficult to stop the ships. We are optimistic that we will be able to get the inventories in line in this coming quarter and even a better performance out of our inventory turns in the following quarter.

Yeah we see that turnover a factor ramping back up to where it has been tracking for the last couple of years by the end of this year.

Rick, while you're there, can you give us the actual -- you combined CapEx with some of the other -- what was the actual CapEx?

Capital expenditures were $373,000 in the latest quarter and the debt reduction was $730,000.

Now, Fred, on that -- the solution division segment that you talked about, is there a mix shift between those three segments that you think will drive their margins or is it just an absorption of better contracts?

I think it is -- principally it is better pricing, better contracts, better execution and better cost structure. We still have some work to do there but they have done a great job addressing the business issues that are currently at hand. As you know, every day you have new issues that are confront you and I am real confident in the team we have down there.

Do you have anymore deals like this public safety deal? It seems like that was about a, if I remember right, it seems like about six months ago when that was announced. Is that about the right gestation for that to -- ?

It is probably almost nine months ago.

Really? Okay, time flies.

We're working on a few of them but they are too early at this point to announce. But clearly, not only from the Solution side we actually are working on something with the medical community where a number of equipment suppliers have to compete against companies like GE and Phillips, which essentially have their own wireless, proprietary wireless technologies to communicate with their equipment. We are working with some companies along the lines of providing a wireless communication device for a consortium of companies. That's in its very early stages. You know, that would be great if it happens. We certainly have the capability to do the design work. We are doing it for one of those companies. But in terms of getting the types of volumes I talked about it would take a consortium agreeing to a technology platform that would be our technology platform and then they would all buy our technology platform to compete effectively against the GEs and the Phillips.

Is that directed AP fit into that at all or is it -- ?

Not currently.

Anything on that front?

I guess what I can say -- the best I could say is that Cisco has showed a lack of interest. But the good news is that, as you may be aware, Airspace had several customers that were quite large that were also Cisco competitors. And it is our understanding that they have elected not to stay with the Cisco platform and that they have gone to other wireless switch providers. We're obviously working along those lines with those wireless switch providers.

Okay. I guess stay tuned. Thanks a lot.

Okay.

And our next question comes from J.D. Abouchar with Pacific Edge Investment Management. Please go ahead.

The first question was just a housekeeping, the tax rate looked a little bit high. Can you help me out on that?

Yes, J.D. The 40.5% in the latest quarter, it essentially represents the full combined federal state statutory rate. And what's limiting our ability to do anything about that in the near-term future is the fact that our business is almost all domestic now and we don't have substantial international operations where most of the tax planning opportunities would exist. But we are definitely mindful of that and exploring ways in which we can get that rate down, but I don't expect any significant rate relief in the near-term future. It could trend down modestly over the next several quarters, but nothing substantial in the near-term future.

Okay. On the first two topics on the public radio you said you'd shipped 15,000 units to date. Are we sort of at that 30 - 50,000 year run rate or should we see some more growth in that in the coming quarter now that you are ramping up?

I would expect this coming quarter we'll actually improve our rate. The 15,000 is since inception, I think we have done 10,000 in this fiscal year. But certainly our customers are doing well with that product. Actually there are several products, there's about four products we provide and we are looking forward to some growth in our second quarter and anticipating as they are successful we will be able to continue to grow.

And I know it is a little early because the Ka-band LNB won't launch until Q3. Do you have any sense that that's going to be sort of a niche product or is that going to be something that perhaps your custs will be a little bit more aggressive with?

Maybe I can repeat the question. You are coming in a little cloudy. I guess the question, J.D., if I heard it correctly, is the product launch for the third quarter LNB, I assume you're talking about the Ka/Ku, and is that a niche product or is that going to be a widespread product or what's sort of the volume implications? What I can tell you, at least at this point, is initially, obviously, there will be a channel fill. There will be some cities that's will likely be retrofitted. We would expect to have competition. It is a much more expensive product than our customer currently provides. I would think that initially it would be fairly -- not niche, but lower volumes than we would typically expect and moving towards probably maybe 30 to 50% of the volumes at 12 months to 18 months from now.

Great. Okay, thank you, guys.

Ladies and gentlemen, if there are any additional questions, please press star followed by the one on your telephone keypad. If you are using speaker equipment, please lift the handset before pressing the numbers. One moment please for the next question. At this time we have no further questions. I would like to turn the conference back to management for any concluding comments. Please go ahead.

Thank you again for joining us today. We've had a good start to the year and we look forward to a good fiscal 2006. Thank you.

And, ladies and gentlemen, this does conclude CalAmp's Q1 fiscal 2006 conference. If you would like to listen to a replay of today's conference, you may dial 1-800-405-2236 or 303-590-3000 using pass code 11034129 pound. Thank you again for your participation in today's conference and you may now disconnect.