CAMP4 Therapeutics Corp (CAMP) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the CalAmp Q3 2006 conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, 5 January, 2006. I would now like to turn the conference over to Ms. Amy Cozamanis of the Financial Relations Board. Please go ahead ma'am.

Thank you operator. Good afternoon everybody. Welcome to CalAmp's fiscal 2006 third 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 the 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. 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 in manufacturing yields, the Company's ability to manage cost fluctuations in 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 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 revenue, 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 S3 filed with the SEC on October 20th, 2004.

Any projections as to the Company's future financial performance represent management estimates as of today, January 5, 2006. CalAmp assumes no obligation to update these projections in the future due to changing market conditions or otherwise. With that, it is my pleasure to now turn the call over to CalAmp's President and Chief Executive Officer, Fred Sturm. Go ahead Fred.

Thank you, Amy. Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2006 third quarter results. I will begin my remarks with the financial and operational highlights (technical difficulty) from the third-quarter, including an overview of the Company's performance, and then give you an update on key business initiatives that we're working on.

Rick Vitelle will then provide additional details on our financial results, balance sheet, working capital management, and cash flow for the third quarter, including our current outlook for the fiscal 2006 fourth quarter. I will then wrap up with some concluding remarks, which will be followed by a question-and-answer session. With that, I will begin with our third quarter financial highlights and overview.

Our third quarter results reflect an anticipated seasonably strong revenue performance in our Direct Broadcast Satellite business, and continued progress in improving gross margins in both the Products and Solutions Divisions. The combination of higher revenue and improved margins resulted in attaining operating income of $8.9 million, which is the highest in the Company's history. This represents more than three times the operating income reported in the third quarter of last year.

We're very pleased with the execution of the business during the course of this year and in particular the most recent quarter. Total revenue for the third quarter fiscal 2006 was $64.5 million, a 13% increase over the third quarter of last year. On a sequential quarter basis, total revenue increased by $6.8 million or nearly 12% over the prior quarter.

As has been the case in past quarters, the Products Division continues to comprise a substantial majority of our total revenues. At $59.6 million, the Products Division revenue was up more than 18% from the third quarter of last year. This year-over-year Products Division revenue improvement was a combined result of (technical difficulty) organic growth in our core DBS business, the contributions of our Machine-to-Machine -- or what we refer to as M2M product line -- 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 the Vytek acquisition.

We continue to make progress in diversifying our business to help dampen revenue fluctuations and reduce our reliance on a small number of key customers. As a point of reference in fiscal 2004, our satellite products accounted for 94% of our total revenue. By comparison, for the nine months ended November 30, 2005, satellite products as a percentage of consolidated revenue represented 79%.

Our Solutions Division revenue for the third quarter of fiscal 2006 was $4.9 million compared to $6.6 million for the same period last year. The reduction in revenues from the Solutions Division is primarily due to our previously stated strategy of being more selective in our pursuit of business for the Solutions Division, focusing on higher margin opportunities and foregoing non-strategic and low margin business.

Although we have not yet turned a profit at the Solutions Division and we still have a lot of work ahead of us from an operational and financial perspective, we are continuing to make progress towards profitability. On a sequential basis in the third quarter, the Solutions Division operating loss of $373,000 was reduced by 27% compared to the second quarter operating loss of $513,000.

As these results indicate, we are closing in on our near-term target of achieving operating profitability at the Solutions Division. We believe that the Solutions Division's cost structure is about where it needs to be, and our ability to achieve profitability in this division is now primarily a function of generating new business so that our revenue run rate reaches about $6 million per quarter or higher.

We also believe that we have the infrastructure in place, including the sales force and management team, along with the potential new business opportunities in the pipeline, to achieve operating profitability in this division in the near-term future.

We are also pleased to report that CalAmp's net income for fiscal 2006 third quarter more than tripled to $5.5 million or $0.23 per diluted share. Compared to a net income of $1.8 million or $0.08 per share for the third quarter of last year.

On a sequential basis, third quarter net income increased nearly 50% compared to $3.7 million in the second quarter.

Now let's move to an update on several of our business initiatives. Within the Products Division, third quarter sales continue to be driven by DBS products that support our customers' multi-satellite and integrated digital video recorder service offerings, referred to as DVRs. These products help enable our DBS service providers to provide enhanced offerings such as high definition TV, digital video recording and other popular DBS programming services. These latest generation products also carry higher average selling prices, or ASPs.

We believe this creates a long-term revenue growth opportunity for CalAmp. As we have done on recent conference calls, I'd like to take a moment to provide an update on our ASPs of our DBS products. We group our DBS products into three categories based on ASPs -- low ASPs, which are $25 or less, medium ASPs which are $25 to $50, and high ASPs which are $50 or more. During the third quarter, low, medium, and high ASP products comprised 18, 59 and 23% of our DBS sales respectively. This is significantly better than the same period a year ago when the low, medium, and high ASP products accounted for 36, 46, and 18% of DBS sales respectively.

We expect to see the ASPs of our DBS products continue to trend higher as these latest generation products bring market penetration for both new customers that the DBS operators must attract to grow their subscriber base, as well as the portion of the 20 million existing DBS subscribers that may need to update their older outdoor equipment in order to take advantage of these new service offerings.

During the quarter, we continued to make progress on the development of a new key satellite offering that we'll expect to contribute significantly to our financial performance in future periods. Perhaps the most notable is a combination Ka/Ku product for our DIRECTV. To provide a little background, both DIRECTV and Echostar have traditionally broadcast television programming to their subscribers in the Ku frequency band.

With limited to additional Ku frequency band available, DIRECTV made a decision to use their existing satellite capacity in Ka band in order to accommodate new services such as expanded local to local HD television.

For over a year, we have been developing a five satellite outdoor unit that would enable reception of programming broadcasting both Ka band and legacy Ku band. During the third quarter, we received product manufacturing approval for our Ka/Ku band equipment. DirecTV has initiated a soft rollout of its expanded HDTV service on a limited basis in selected markets throughout the country. And we are beginning to ship small quantities of Ka/Ku band at the -- we began shipping small quantities of Ka/Ku band product at the end of the third quarter.

We expect revenue contributions to began to ramp in our fiscal fourth quarter. This product is anticipated have a greater revenue contribution next fiscal year.

Similar efforts are also underway at Echostar to address the significantly increased bandwidth requirements brought on by HDTV. We are currently in the process of developing unique product that will support their strategy and approach to maximizing their network's available bandwidth. These development efforts are still in the early stages and we expect to complete product development by mid-calendar 2006 for deployment in latter half of the year. In both of the previously mentioned cases, we believe the ASP's generated by these products will be much higher than our historical levels.

Moving on to other key Products Division programs, our M2M product line acquisition is performing as expected with revenues of $6.3 million for the 7.5 month acquisition to date period. We have now a concerted effort underway to grow our position in this market both organically and through strategic acquisitions.

By and large, we're exploring opportunities to provide more of the system value, including higher level products which include a level of software and/or network interface functions. As we make progress in this area we will also keep you informed.

And we also continue to be pleased with the results of our supply relationship with EF Johnson, where we are providing RF modules that are incorporated in handheld radios for federal, state, and local agencies involved in homeland security and public safety. For competitive reasons and respecting our customers' wishes, we will no longer disclose the sales volume of these RF module products.

While our DBS business continues to represent a major portion of our overall revenues, we are making solid 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 third quarter financial details and the business outlook.

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 third quarter and year to date period, and our financial guidance for the fiscal 2006 fourth quarter.

For the third quarter of 2006, gross profit in the Products Division increased by 65% to $14.4 million, up from $8.7 million in the prior year. Gross margin for the Products Division improved to 24.2% in the latest quarter from 17.3% in the third 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 for the Solutions Division was $2.0 million or 41.3% of sales, compared to $1.6 million or 23.5% of sales last year. The Solutions Division's gross margins continue to benefit from our ongoing efforts to improve the division's cost structure and our focus on pursuing higher margin business. Over the longer term, we expect the Solutions Division will be able to maintain gross margins in the low 40% range.

Moving on to the balance sheet, our total inventory was $19.8 million, down from $21.3 million at the end of the second quarter, and down from $21.5 million at the end of last fiscal year. The lower inventory level during the latest quarter is attributable primarily to higher inventory turnover as a result of strong DBS product shipments during the third quarter. Our inventory at the end of the third quarter represented an annualized inventory turn of about nine times.

Accounts receivable increased more than 30% to $36.2 million at the end of the third quarter from $27 million at the end of last fiscal year. This represents approximately 47 days outstanding. The increase in receivables is primarily due to the fact that payments by key customers were received just after the end of the third quarter, a week later than usual.

Our primary sources of liquidity are our cash and cash equivalents, which amounted to $38.2 million at the end of the third quarter. Operating cash flow for the first nine months of fiscal 2006 was $14.4 million, attributable primarily to net income of $11.1 million, depreciation and amortization expense of $3.3 million and the change in net deferred tax assets of $5.4 million, less $6.5 million for increases in components of operating and working capital.

Partially offsetting the nine month operating cash inflow were cash outflows of $4.9 million for the Machine-to-Machine product line acquisition in the first quarter, $2.2 million for debt repayment and $1.6 million for capital expenditures. In addition to the cash on hand, we also have access to a $14 million working capital line of credit, of which $7.3 million was available for borrowing as of the end of the third quarter. Our total debt at the end of the quarter amounted to $8.4 million, down from $10.6 million of the end of last fiscal year.

Now, turning to our financial guidance. Based on our current projections, which assume a (technical difficulty) [meaningful] contribution in the fourth quarter from the recent launch of our Ka/Ku band product, we expect that fiscal 2006 fourth quarter revenues will be in the range of $50 to $58 million and that earnings will be in the range of $0.13 to $0.18 to per (technical difficulty) [diluted] share.

The anticipated sequential decline in fourth quarter revenues is due primarily to the seasonality of DBS industry [demand] (technical difficulty) and the planned product transition to by one of our DBS customers. We believe the underlying trends in the DBS industry remain very positive, and that this does not represent a fundamental change in either the industry's long-term outlook or in our overall share of the DBS outdoor equipment market.

We expect the increasing availability of HDTV programming and digital video recorder technology will continue to require more advanced satellite TV reception products, which should be key drivers of our DBS business going forward. With that, I will now turn the call back over to Fred for some final comments.

Thank you, Rick. Just to recap the highlights for our third quarter, our revenue was up 13% over last year, with growth coming from our core DBS business as well as diversification efforts in the non-DBS areas. Our DBS product mix continues to shift towards higher ASPs and we began shipment of our new Ka/Ku band product. Overall gross margin improved for the fourth consecutive quarter.

We achieved record operating profits of $8.9 million, substantially surpassing the prior record by 50%. We generated operating cash flow of $5.3 million in the latest quarter, which is also a record. And over the past twelve months, our operating cash flow totals $19 million.

So in summary, we're very pleased with CalAmp's performance and long-term prospects. The fundamentals in our core DBS market remain very positive, and we are making good progress toward our goal of diversifying our business into higher margin product and service areas. On all fronts, our business continues to move in the right direction. Thank you for listening, and at this time, I'd like to open the call up to questions.

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

On the -- the new products that are coming out I guess sometime toward the end of the fourth quarter or maybe early next year, are -- do you expect them to carry margins comparable to what we saw in the third quarter?

Well, there's a couple of questions in there that I'll try to address. One is the margins and the other is on the Product [group]. We've begun shipping the Ka/Ku band product. And I would call it in the -- for the fourth quarter we estimate shipping tens of thousands -- several tens of thousands of those units, which have significantly higher ASPs. The margins on those products, without being specific, are -- we would expect that our overall margins -- to be able to hold our overall margins.

Okay. What about Echostar in their booth here at CES has a mockup of a triple LNB unit. Would -- should we expect that that will be a (technical difficulty) product -- first quarter kind of a product for you guys?

Yes, if they've presented something at CES, I haven't seen it. And we have some NDAs in place, but certainly they are presenting something, I guess you could infer pretty confidently that that's going to be the type of product that they'll be getting.

Is your Ka product -- is it similar [of] form factor or will you be able to potentially interpret the laws of physics a little differently, so you can get a smaller unit? Because that's a -- DirecTV doesn't even have it in their booth, and Echostar has got one in the back that they're kind of making fun of because of its size.

[You do have to comply] with the laws of the physics unfortunately. And getting five satellite signals on a dish does require a larger dish than the traditional three satellite system. I'm not obviously at the CES today, but I guess I am a little surprised that DirecTV doesn't have theirs out.

Maybe they did and we just couldn't find it, but --

You couldn't find it, okay. But it is a little larger.

We did see it in the Echostar booth though.

You saw the --

DirecTV one. Anyway, I don't want to gross too much on that. Is yours -- (multiple speakers)

For DirecTV, all the products are essentially the same physical outline. There might be minor differences, but essentially all of them are -- all the suppliers have the same physical dimensions.

It looks like the product cycle this year is like a little bit out of phase (technical difficulty) of last year. You had a tremendous -- much better-than-expected fourth quarter last year, and then you had a tough May quarter with some inventory overhang and weather-related issues and product cycle stuff. Should we kind of anticipate a little bit of a rebound after your fourth quarter guidance?

We would expect to go back into the normal trend of the business, which is the fourth quarter is down from -- typically down from the third quarter and starts moving back upwards the first, second, and reaching the high mark in the third quarter. So we would anticipate -- we don't have anything at this time to indicate to us that anything is going to be different than that.

So maybe some sort of sequential improvement in the May quarter. Now, DSO -- Rick, you gave a partial explanation that the payments came in late. I guess that is the total explanation. But the backdrop for the payments, [was it just] a backlogged quarter? Or did the customers stretch payments?

A certain customer has been granted extended payment terms -- nothing too out of the ordinary. I think that was a contributing factor, but overall, we don't foresee any collection issue per se.

Can you help us with the arithmetic a little bit and give some quarterly numbers for operating cash flow, depreciation, amortization, and CapEx?

Yes. One moment. CapEx, obviously, you would be able to derive these by looking at our quarterly Qs. But CapEx was $350,000 approximately in Q1 of this year, 700,000 in Q2, 500,000 in Q3, for a total of about 1,550,000. Depreciation and amortization, including the write-off of IPR&D earlier in the fiscal year was, by quarter, 1,350,000 in Q1, 1,260,000 Q2, and just about 1 million on the nose in Q3. Now for the -- (multiple speakers)

I was hoping to get depreciation broken out separately from amortization.

Yes, by quarter, about $610,000 in Q1, 710,000 in Q2, 600,000 in Q3. Just depreciation, excluding amortization of intangibles.

(technical difficulty) [So] your tax rate percentage continues at the level of 3Q for the foreseeable future?

For the foreseeable future, until we further expand our international operations and open up more tax planning opportunities.

Fred, did you say the Machine-to-Machine was 7.5 million year-to-date? Or did I -- is that the wrong statistic?

Bear with me. No, it's 6.3 and it was 7.5 months.

Okay. That makes more sense. Okay, I will let somebody else ask questions.

Karen Payne, Pacific Edge Investment Management.

Thanks. I just wanted to go over some numbers that you went over quickly about the percentage sales by type of DBS products (multiple speakers). You went through that pretty quickly.

A lot of numbers.

Yes. Can you just give us those percentages for the low, middle, and high ASP?

Why don't I do this -- I will give them both. I will give you both last year's and this year's again. The numbers themselves are categorized in less than $25 as the low, 25 to 50 medium, and above 50 is high. And during our third quarter, the products comprised of -- essentially going from low, medium to high, 18%, 59%, and 23% compared to 36, 46, and 18.

36 --

So essentially, our -- the take away there is our low ASP percentage dropped 18 percentage points.

Right. Okay. Great. That is all I needed.

(OPERATOR INSTRUCTIONS). Management, there do not appear to be any further questions at this time. Please continue with any closing comments.

Yes, in conclusion, thank you for joining us today, first of all. And we look forward to seeing possibly some of you at the upcoming investor conferences that we'll be participating in, including the Needham conference next week and the Brean Murray conference in late January. Again, thank you for joining us today and have good today. Bye bye.

Ladies and gentlemen, this concludes the CalAmp Q3 2006 conference call. If you would like to listen to a replay of today's conference in its entirety, you may dial 800-405-2236 or 303-590-3000 using access code 1104-9646. (Repeats numbers.) You may now disconnect. Thank you for using AT&T teleconferencing and have a very pleasant day.