CAMP4 Therapeutics Corp (CAMP) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CalAmp second-quarter fiscal year 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, October 6, 2005.

I would now like to turn the conference over to Ms. Amy Cozamanis with Financial Relations Board. Please go ahead, ma'am.

Thank you, Operator. Good afternoon, everybody. Welcome to CalAmp's fiscal 2006 second-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 their 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 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 statements made today.

And this includes -- it is not limited to risks and uncertainties related to 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; and the timing and market's acceptance of new product introductions and new technologies; the Company's ability to eliminate operating losses and achieve profitability in its solutions division; 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 S-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, October 6, 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.

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

Let's begin with the financial highlights and overview. We are now seeing tangible results from the initiatives we have undertaken to diversify our business and increase our profitability. This is best illustrated by the operating income we generated during the quarter of $6.1 million, an all-time quarterly record for the Company and more than two times the amount of operating income we generated during the same quarter last year.

Over the past 1.5 year, we have also made solid progress in diversifying our business. As a frame of reference, in fiscal 2004, our satellite products accounted for 94% of our total revenue. By comparison, during the first 6 months of fiscal 2006, satellite products represented 77% of our overall revenue. Total revenue for the second quarter of fiscal 2006 was $57.7 million, up more than 13% compared to $50.8 million for the second quarter of last year. On a sequential quarter basis, total revenue increased by approximately $10 million or more than 21% over the prior quarter.

Revenue from our products division comprised a substantial majority of our total revenues at $52.6 million. Products division revenue was up more than 22% from the second quarter last year. This year-over-year products division revenue improvement with the combined result of organic growth and our core direct broadcast or DBS business, the revenue contributions of our Machine-to-Machine product line commonly referred to as M2M that was acquired midway through the first quarter of this fiscal year, and our product supply agreement with EF Johnson, a customer we added as a result of last year's Vytek acquisition.

On a sequential quarter basis, products division revenue increased approximately $11.4 million or 28%. This sequential increase was due to higher demand from our primary DBS customers, both of whom returned to more normal levels of ordering activity in the second quarter after purchasing reduced quantities in the first quarter of this year to adjust their inventory holding levels.

Also contributing to the improved sequential results in the second-quarter revenue were the ramp in shipments of radio modules to EF Johnson and the revenue contributions from the M2M product line for the full quarter compared to the preceding quarter, which included shipments for roughly half that period.

Moving on to the solutions division, revenue for the second quarter fiscal 2006 was $5.1 million compared to $7.8 million for the same period last year. This reduction in revenues from the solutions division is primarily due to our previously stated objective of being more selective in pursuit of business for the solutions division, focusing on higher margin opportunities and foregoing unprofitable, non-strategic solutions division business. To this end, I think we have done a good job during the last several quarters in either eliminating or renegotiating business relationships with customers that were either not strategic to CalAmp or were only marginally profitable.

Although we have not yet returned to profit the solutions division -- and we still have a lot of work ahead of us in order to get the division where we would like it to be financially, we are continuing to make progress towards profitability. On a sequential basis in the second quarter, the solutions division operating loss of $513,000 was reduced by more than $600,000 or 50% compared to the first quarter operating loss of $1.1 million. Furthermore, the solutions division operating loss in the latest quarter was down 75% from the $2.1 million operating loss it incurred in the second quarter of last year.

As we've previously stated, we're targeting the solutions division to achieve operating profitability in the fourth quarter fiscal 2006. In order to achieve this objective, we will need to increase our quarterly revenue to nearly $6 million. We believe that we have the sales organization in place and potential opportunities to achieve this objective.

As a result of the previously mentioned improvements, I am pleased to report that CalAmp's net income for the fiscal 2006 second quarter more than doubled to $3.7 million or $0.16 per share compared to net income of $1.7 million or $0.08 per share for the second quarter of last year.

Now, let's move on to an update on several of our business initiatives. Within the products division, second-quarter sales continue to be driven by DBS products that support our customers' multi-satellite and integrated DVR service offerings. These products help enable the DBS service providers for enhanced offerings, such as high-definition TV, digital video recording capabilities and other popular DBS programming services. These latest generation products also carry higher average selling prices or ASPs, which we believe creates a long-term revenue growth opportunity for CalAmp.

In fact, I'd like to share some ASP trend data that illustrates this point. For internal analytical purposes, we group our DBS products into three categories based on ASPs -- low ASPs, which are $25 or less; medium ASPs, which are between $25 and $50; and high ASPs, which are $50 or more. During the second quarter, low, medium and high ASP products comprised 20%, 58%, and 22% of our DBS sales respectively. This is significantly better than the same period a year ago when low, medium and high ASP products accounted for 42, 52 and 6% of DBS sales respectively.

We expect to see the ASPs of our DBS products continue to trend higher as these latest generation products gain greater market penetration for both new customers that the DBS service providers must attract to grow their subscriber bases as well as the portion of the approximately 25 million existing DBS subscribers that will upgrade their legacy outdoor equipment in order to take advantage of these new service offerings.

During the quarter, we continued to make progress on the development of key new satellite product offerings that we expect to release later this year and during the first half of fiscal 2007. We are in the final stages of product approval for our Ka/Ku band outdoor reception equipment for DirecTV. We are in the process of building the first production qualification units for verification testing and anticipate that we will receive approval with the next several weeks. This product is in support of DirecTV's launch of expanded high-definition service in anticipation -- and we anticipate that to occur in the fourth calendar quarter of this year. While we expect modest revenue from this product in our current fiscal year, this product is anticipated to have a greater revenue contribution in next fiscal year.

Additionally, a similar effort to address significantly increased bandwidth requirements brought on by HDTV is underway for Echostar. While our efforts here are in the early stages of development, we expect to complete product development by mid-calendar 2006 for deployment in the last half of that year.

In both of the previously mentioned cases, we believe the ASPs generated by these products will be substantially higher than our historical levels. Now, I will address the other key product division programs.

Our Machine-to-Machine product line acquisition is performing as expected with revenues of $3.8 million for the 4.5-month-acquisition-to-date period. And gross margins are above 30%. We now have a concerted effort underway to grow our position in this market area. We are looking for opportunities to provide more of a system value, including higher level products which include a level of software and network interface functions. As we make progress in this area, we will keep you informed.

Also during the quarter, we received a modest order for our MMDS fixed wireless broadband transceivers from an affiliate of Sprint, who is operating Sprint's legacy MMDS wireless broadband system. As you may recall, CalAmp is a sole source supplier of these transceivers during Sprint's initial service rollout several years ago. While we are pleased to see that Sprint is continuing to be active in this area and make any attempt to increase the utilization of their MMDS spectrum, we do not expect this to contribute to a meaningful level of incremental revenue to CalAmp over the next couple of years.

I'm also quite pleased with the result of our supply relationship with EF Johnson, where we are providing RF modules that are incorporated into handheld radios for federal, state and local agencies involved with Homeland Security and public safety. During the second quarter, we shipped more than 18,000 units and are on track to deliver in excess of 50,000 units to EF Johnson for the full year, which will likely produce more than $10 million in revenue for CalAmp this year. Again, it is important to remember that this relationship was originated by a Vytek product development program that has progressed after acquisition into a meaningful part of our products division.

While our DBS customers continue to represent a major portion of our business, I believe that we're making good progress in diversifying CalAmp's product offerings, end markets and customer base. With that, I will now turn the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at the second-quarter financial details and business outlooks.

Thanks, Fred. I'm going to provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2006 second quarter and our financial guidance for the fiscal 2006 third quarter. For the second quarter of fiscal 2006, gross profit in the products division increased by 38% to 11.7 million, up from 8.5 million in the prior year.

Gross margin for the products division improved to 22.3% during the quarter from 19.7% during the second 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 combined with increased shipments of higher margin products to non-DBS customers. Gross profit from the solutions division was $1.7 million or 33.4% of sales compared to $1.8 million or 23.4% of sales last year.

The solutions division's gross margins are benefiting from our concerted effort to improve the division's cost structure and focus on pursuing higher margin business. As previously stated, we expect the solutions division can produce gross margins in the low 40% range over the longer term.

Moving on to the balance sheet, our total inventory was $21.3 million, down from $26.5 million at the end of the first quarter and relatively unchanged from $21.5 million at the end of last fiscal year. A sequential decrease in the latest quarter in inventory is primarily attributable to higher turnover as a result of increased DBS product shipments during the second quarter. Our inventory at the end of the second quarter represents an annualized turnover of about eight times. We expect our inventory turnover to remain in the range of eight to nine turns in the second half of fiscal 2006.

Accounts receivable declined more than 5% to $25.6 million at the end of the second quarter from $27 million at the end of the fourth quarter of last year. This represents approximately 38 days outstanding. Our primary sources of liquidity are our cash and cash equivalents, which amounted to $33.1 million at the end of the second quarter. Operating cash flow for the first half of fiscal 2006 was $9.1 million attributable primarily to net income of $5.7 million, depreciation and amortization expense of $2.3 million, and net deferred tax assets of $2.2 million. Primarily offsetting the first-half operating cash inflow were -- pardon me -- partially offsetting the first-half operating cash inflow were cash outflows of 4.9 million for the Machine-to-Machine product line acquisition, $1.5 million for debt repayments, and $1.1 million for capital expenditures. In addition to the cash on hand, we also have access to a $10 million working capital line of credit, of which $3.3 million was available for borrowing as of the end of the second quarter. Our total debt at the end of the quarter amounted to $9.1 million, down from $10.6 million at the end of last fiscal year.

Now turning to our financial guidance, based on our current projections which assume a third-fiscal quarter launch of our Ka/Ku-band product, we expect that fiscal 2006 third-quarter revenues will be in the range of 60 to $68 million, and the earnings will be in the range of $0.17 to $0.21 per diluted share. We also expect revenue for the full year of fiscal 2006 will grow approximately 10% over last year.

I will now turn the call back over to Fred for some final comments.

Thank you, Rick. In summary, I am quite pleased with the second-quarter results. We generated significant revenue growth on both a sequential and year-over-year basis. We achieved a record level of quarterly operating income. Compared to last year, we doubled our earnings per share and surpassed our EPS guidance range for the quarter. ASPs on our core DBS products continue to trend in the right direction and drive our growth in revenue and profitability. We made progress in diversifying and expanding our customer base and end markets as evidenced by the results of our M2M products and radio modules. And finally, we made substantial progress in improving the performance of the solutions division and positioning it to achieve profitability.

With the first half of fiscal 2006 behind us, I am excited about our prospects and the rest of the year and beyond. Thank you for listening. At this time, I would like to open the call to questions. Operator?

(OPERATOR INSTRUCTIONS). Matt Robison, Ferris, Baker Watts.

Congratulations. I have got a couple concerns, which you might already have gone over, so I apologize if I make you repeat yourself.

First of all, on the gross margin drivers, should we assume that that was all EF J and M2M that was driving that on the product side?

Well, I think it is a compilation of several things, Matt. It is the improvement of margins at the solutions division. It is certainly the increase in revenue and the diversified customer base with EF Johnson and the other customers in our M2M product line. But also, we have made some progress on the DBS side of the business as well. So it's really a full effort by the entire Company.

Your solutions division gross profit was up 63% year over -- well, yes, it's about 63% from what it was early last year, which is pretty remarkable. In particular, your margins are up a lot on the product side of the solution division. Is that the alarm software products?

Yes, that would be on the TelAlert side of our business.

How are you going to -- now your selling expenses were down. How do you put that decrease in selling expenses with the need to raise revenue in solutions division?

On the solutions division, we have essentially I guess restructured that whole organization. And so while they have been down sequentially, I think what you will find is in this next quarter, they're actually going to be up. We made a full transition in our sales organization over the last quarter.

Can you talk about anything that you are doing that gives you confidence in getting the slope of the revenue change going the other direction?

Well, I certainly trust the effort that Steve L'Heureux is now doing and the team is doing down in Del Mar. We go through a pipeline and a backlog review, and they seem to have credible opportunities. We have cleaned up the pipeline in terms of what we thought the revenue opportunities were. As I've stated before, we have cleaned up our backlog in terms of customers that were low profitability customers.

But there's a number of areas. As you know, that business has got three segments to it. It has the software side, which is the TelAlert. It has a professional consulting side on the IT infrastructure as well as the design and development for RF products. And each of those organizations have identified opportunities that support getting back to a profitability in the fourth quarter.

My sense is that you've kind of pruned the business to the customers that could provide economic value. And now, you are focusing on those applications. Is that -- and you're going to (multiple speakers)?

On those applications and other applications that are similar -- other customers that have similar requirements. And that's why the sales organization is so important.

Now the Sprint order, did you recognize revenue from that application in the quarter?

I do not believe so at this point. I do not know specifically, but I think the order came in fairly late. So I would be surprised if there was any meaningful revenue.

We don't need to expect that that is going to be very meaningful either, I guess.

No.

It was nice to see them putting that service back on their website though for a change. Now, you also discussed the EF J ramp up. Can you repeat yourself on that a little bit?

Yes, I believe we have shipped over 18,000 units in the most recent quarter. So we believe we are on track for a full year $10 million in revenue at 50,000 units.

At 50,000 units for the year?

Yes.

JD Abouchar, Pacific Edge Investment.

Fred, congratulations on a great quarter. I had a couple questions for you. First, on the satellite, if we look at the medium and the high price brackets in the current offering, is there much -- what's driving that? Is it PVR functionality, HDTV functionality, or that it's the single wire application at Dish that really separates them out?

It's a combination of each of those because the HDTV and multi-satellite in particular with Dish Network or Echostar, they use essentially the band translating technology in those applications as well as in maybe single satellite -- not just single satellite but in dual satellite. So where they might have three feeds or two feeds, they will use that band translating technology. So it is a combination effect of multi-satellite as well as DVRs.

So right now, it really doesn't matter to you if it's an HD box going out with your dish or a PVR box going with your dish?

Correct.

Now the new Ka/Ku combination, well, obviously that bumps us up into the higher ASP range.

Correct.

Now is that one physically a lot different? Or is it roughly about the same size as the current one, so just a lot more electronic technology involved?

It is physically larger, and it has anywhere from three to five feeds on it. So it has to have -- the antenna has to be capable of supporting the reception of up to five satellite signals.

Does that make it (multiple speakers) I'm just trying to visualize if shipping, a lot of these other expenses are getting in. Is it a lot bigger than the current dishes or just marginally bigger?

It is reasonably bigger.

Bigger than a breadbox. You did not mention the WiFi access points. Can you give us an update there?

Yes, I can. I think when I last talked about it, there was one customer that expressed interest. Just to refresh everybody, we developed an excellent technology for beamforming. We are working with aerospace on a development contract. We thought aerospace would be successful; we were right. Apparently, Cisco thought we were right too, purchased Airspace. And as a result of that purchase, Cisco elected to go in a different direction. Cisco and Airspace had the bulk of the market share in the wireless networking arena.

So we went to the other potential customers. And while they find the technology useful and it works, it's just not something that they are prepared at this point in time to dedicate resources to because of their own situations in competing in that marketplace.

So at this point, we are essentially putting that development -- the product is developed. Essentially, we are ready to produce it if we get a customer that is able to support it on the software side of their equipment. So we've got a couple roads ahead on that, either we continue to pursue the several customers that we have pursued or sell the technology. And we are evaluating those options.

WiMax is a big buzz these days. Obviously, you guys are key in wireless R&D. Is that something we should see opportunity show up in solutions or more in products? Is there anything going on there?

I think I said in the past on WiMax, we are certainly aware of it and keeping track of it. We have not seen any opportunities yet for us. Clearly, WiMax is a much more attractive technology for international applications. And so, the bottom line for us is, we are not in it today; we are keeping track of it. But we haven't seen any significant activities in that arena to date.

Just a final housekeeping thing, what was total depreciation, amortization and CapEx for the quarter?

For the quarter?

Yes.

Well, CapEx was about $700,000. Total depreciation and amortization was about $1,260,000.

Terrific. Thank you very much.

Does that include IPR&D write-off?

It was 27,000.

(OPERATOR INSTRUCTIONS).

Okay. Is there any other questions, Operator?

Matt Robison, Ferris, Baker Watts.

Fred, your revenue -- since your revenue ranged down I guess a little bit. You were at one point saying you ranged it up to 15%. Now, you're talking 10%. What has changed in terms of your revenue? Obviously, you are clearly generating great gross profit dollar progress here. But what is the primary thing that has changed and made you come down in your range a little bit?

And I have to ask, given the hubbub about it, this little one-sided PR from somebody that claims to have filed a suit. If you could provide some input on that as well.

I will respond to both of those, Matt. In terms of what has changed, obviously there's been some delay as far as our plans with regard to the rollout of the Ka/Ku-band product. So there's a fairly reasonable effect of that, and so that's the most significant change. There are minor changes, but that's the most significant change.

And as it relates to I guess this announcement, I've got a couple comments. First, I am not going to comment on the lawsuit itself. CalAmp was notified via Yahoo! yesterday that a small firm had filed suit against us, a subsidiary. This firm has been a very small supplier to our solutions division TelAlert program. We are obviously disappointed to see that they choose to use the media as a means to make inflammatory and defamatory statements and basically untrue statements. We believe that the suit was brought obviously without merit and is likely a response to a suit that we filed more than a week ago. We had elected to fight our differences of opinion in the court, as opposed to the court of public opinion. And so, saying that I think says enough.

Fair enough. And so for Ka/Ku, is it your sense that there's probably a period of evolution of what this outdoor equipment's form factor is going to be before it really gets to be an aggressive ramp?

Well, I think certainly there's going to be -- the whole push by DirecTV is they have their own launch. They have plans for launching the service in different markets, starting out for a fairly focused set of markets to begin with. I think they are going to take a look at what their reaction is to their service offering and their pricing and their promotional efforts. And I think once that is out in the marketplace, everybody will step back after a couple months and reevaluate how hard they've pushed going forward with the service offering. Everybody makes adjustments, and I'm sure they will make a few adjustments.

Well, congratulations again for moving your business model towards the higher margin revenue model.

Michael Cheng, Primarius Capital.

Fred, nice quarter. Thanks a lot. My question is a little bit on the Ka/Ku dish. Could you just maybe quantify how much you had thought you might be able to get in third and fourth quarter of this year? I guess that is --

Well, I think you can get pretty close to quantifying it on your own if we've come from potentially a 15% revenue growth down to 10.

So it would account for (multiple speakers) almost entire 5% delta?

Yes, a substantial portion.

Then, if I'm looking forward to next year, fiscal '07 or whatever, what is your sense on -- should that be a bigger contributor next year? What are you anticipating there versus kind of the PVR-type HD?

Well, the expectation is it's going to be a reasonable size. As these -- typically these product rollouts go and I would like to point you out to our last fourth quarter last year, where Eco is rolling out their band translating product. We had a fairly significant push in the fourth quarter, filled the distribution channel and then it sort of fell down a little. And so what I would expect to happen is for the first 3 or 4 months, we will be essentially filling the distribution channel, supporting the initial launch of the services for the new customers, and then there will be a period where there might be some adjustments either up or down with respect to how hard to continue to market the product offering once the pipeline is filled.

So typically, what we see is a fairly reasonable early-on inventory build for the distribution channel, a little slacking and then coming back. So there might be a little dip next year in one quarter as a result of that type of scenario. But I think overall throughout next year, it should begin to have a reasonable impact on the revenue side of our business.

Can you make any comments on relative profitability on those products?

I think we have stated in the past that we believe the profitability of the products generally speaking follow a pattern of -- in the short-term, they are generally a little more profitable. But as the volumes go up and the competitive nature of the industry takes hold, the margins essentially become the same type of margin percents that we seen on our legacy products. So after about a 6 to 12 month period of time, they tend to normalize into the historical rates.

Sounds good. Keep it up.

Simon Wong (ph), Pandion Capital.

Congratulations on a great quarter. I am not up to speed on the most recent developments of the Company. Can you just describe briefly what is the significance of the Ka/Ku-band product, and what is the market opportunity for you over the next year?

Okay. In terms of the significance, historically, the revenue opportunity per subscriber we will call it, as we described in some of the percentages during the conference call, has been in the let's call it the $30 range; that has been changing. As we described, I think almost 80% of the business is out now more than $25. So the value of that product in its full configuration is currently in excess of $100. So to give you exact -- that's the kind of revenue multiple in terms of per subscriber that as the service gets rolled out, those are the kinds of changes that we would see.

DirecTV has roughly 14 million installed subscribers, some of which are going to want to convert to the new service offering that will require this type of equipment. So there's a customer base installed that is an opportunity for conversion. Plus, they are obviously going to market for new customers and new subscribers of service.

So over time -- it won't be immediate -- but over time, the customer base as HDTV equipment becomes less expensive, over time, we believe the entire product line will migrate towards the HDTV-compatible equipment.

So basically from a subscriber's point of view, in order to receive HDTV and ultimately the multiple screens of HDTV, you will need to have a Ka/Ku-band antenna?

Well, let me just clarify that for you. You can get HDTV from DirecTV now that has a limited number of channels, and it doesn't have the full local-to-local programmings. The intention by DirecTV is to provide a significant number of markets -- I believe almost entire number of markets HDTV programming, given local-to-local programs.

So basically, the Ka/Ku-band product would allow its traditional bandwidth to accommodate more channels?

Yes, more HDTV channels. Correct. So essentially, it allows five satellites to transmit and be received by a subscriber's home.

Thank you. At this time, I would like to turn the call back to management for additional remarks.

Okay, well, there's just a few. I'd like to thank everybody for joining us today. Operator, that is the conclusion of the conference call.

Thank you. Ladies and gentlemen, this concludes the CalAmp second-quarter fiscal year 2006 conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or internationally at 303-590-3000 with access number 11039903. Once again, if you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 with access number 11039903 followed by the pound sign. Again, thank you so much for your participation today. You may now disconnect.