CAMP4 Therapeutics Corp (CAMP) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CalAmp fiscal 2006 fourth quarter conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded on Tuesday, May 9th, 2006. I would now like to turn the conference over to Mr. Lasse Glassen with the Financial Relations Board. Please go ahead, sir.

Thank you, operator. Good afternoon, everybody. Welcome to CalAmp's fiscal 2006 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.

Before I turn the call over to management, please remember that the 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, 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 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 its solutions division, the company's ability to efficiently and cost effectively integrate acquired businesses and the company's ability to maintain and/or expand its relationship 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 Fiscal 2006 Form 10-K that will be filed today with the SEC.

Any projections as to the company's future financial performance represent management's estimates as of today, May 9th, 2006. CalAmp assumes no obligation to update these projects in the future due to changing conditions or otherwise.

With that, it's now my pleasure to turn the call over to CalAmp's President and Chief Executive Officer, Fred Sturm. Fred?

Thank you, Lasse. Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2006 fourth quarter and full-year results.

I will begin my remarks with the financial and operational highlights, including an overview of the company's performance, and then provide an update on several key business initiatives, including the agreement to acquire Dataradio that we announced earlier this afternoon. Rick Vitelle, our CFO, will then provide additional details on our financial results, balance sheet, working capital management, cash flow for the quarter and our current outlook for the fiscal 2007 first quarter. I will then wrap up with some concluding remarks that will be followed by a question-and-answer session.

With that, I'll begin with our fourth quarter financial highlights and overview. In general, I was quite pleased with our operating execution during the fourth quarter and the rest of the year. Gross margins improved and the company generated record cash flow from operations during the fourth quarter and full year.

Our revenue for the fourth quarter did, however, reflect the seasonally weak demand in the direct broadcast satellite market, known as DBS. The seasonality of our business was further compounded by product transitions undertaken by our key customers.

While this adversely impacted our top line and we did not attain our original revenue expectations for the quarter, our ongoing focus on cost management resulted in a better-than-expected earnings despite the lower level of revenues. This enabled the company to achieve fully diluted EPS of $0.15 for the fourth quarter, $0.01 better than the prior year's fourth quarter.

For the full fiscal year 2006 our EPS was $0.62, which is an all-time record for the company and an increase of over 72% over the prior year.

Total revenue for the fourth quarter, fiscal 2006, was $47.8 million, a 29% decrease from the fourth quarter of last year. On a sequential basis, total revenue decreased by $16.7 million from the prior quarter.

Looking at the breakdown of revenue, the products division contributed 91% of our revenues for the quarter. At $43.5 million the products division revenue was down 28% from the same period last year. This year-over-year products division revenue reduction was the combined result of the previously mentioned DBS seasonal weakness, product transitions that resulted in lower DBS unit shipments during the fourth quarter and the fact that the prior year's fourth quarter included significant shipments of a new product where we were the sole source supplier during our customer's production introduction phase.

The solutions division revenue for the fourth quarter of fiscal 2006 was $4.2 million compared with $6.3 million for the same period last year. The reduction in revenues from the solutions division is due primarily to our previously stated strategy of being more selective in our pursuit of business and focusing on higher margin opportunities while forgoing non-strategic, low-margin business.

We believe that the solutions division cost structure is where it needs to be and our ability to achieve profitability in this division continues to be a function of generating, new profitable business so that our run rate of revenue reaches about $6 million per quarter or higher. In an effort to improve the top line results of the solutions division, during the fourth quarter we kicked off a marketing campaign which included both print ads and other direct marketing efforts, in addition to recruiting several experienced business development resources.

On a year-over-year basis in the fourth quarter, the solutions division operating loss of $1.2 million was nearly half the operating loss compared to the same quarter last year. On a sequential quarter basis, the operating loss was higher than the third quarter, primarily as a result of increased discretionary expenditures in selling and marketing expenses and legal costs associated with the FIS lawsuit.

Now let's move on to an update of several of our business initiatives. In the products division, fourth quarter sales continued to be driven by DBS products that support our customers' multi-satellite integrated digital video recorder, or DVR, service offerings.

These products help enable the DBS service providers to have enhanced offerings such as HDTV, high-definition television, known as-- excuse me, and digital video recorders, which I mentioned earlier, along with other popular DBS service programs. These highly complex, high-value-added products also carry high average selling prices or ASPs, which provide a long-term revenue growth opportunity for CalAmp.

I'd like to take a moment to provide another update on the products mix shift of our DBS products. As you know, in the past we have grouped our DBS products into three categories based on average selling price range -- 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 fiscal fourth quarter 2006 low, medium and high ASP products comprised 9%, 47% and 45%, respectively, of our DBS sales. This is significant-- this is a significant sequential shift considering the fact that the 2006 third quarter low, medium and high ASP products accounted for 17%, 60% and 23%, respectively of our DBS sales. The revenue from the high ASP products as a percent of total DBS products sales essentially doubled compared to the third quarter as we began shipping meaningful quantities of our Ka/Ku band products to DirecTV in support of their expanded HDTV services.

Now let's review several of our other important DBS product initiatives, as well as service offerings, beginning with the combination Ka/Ku band product for DirecTV. As you know, earlier in the fiscal year 2006 DirecTV began utilizing the Ka frequency band to increase its available bandwidth in order to accommodate new services such as expanded local-to-local HDTV. DirecTV implemented the launch of this service in selected areas and during our fourth quarter we shipped approximately 50,000 units to our-- of our integrated five-satellite outdoor product that enables reception of video programming broadcast in both Ka band and legacy Ku band.

Also during our fourth quarter, DirecTV made the decision to redesign the Ka/Ku unit to improve its cost effectiveness and optimize its appearance. We are aggressively working on the development of this second generation Ka/Ku product as we expect to provide qualification samples in the second-- of this second generation product during our second quarter. In the meantime, we expect DirecTV to maintain very low inventory levels of the first generation product, which we have factored into our business outlook for the first quarter.

EchoStar is also addressing the increased bandwidth requirements brought on by HDTV and other services with the transition to a new, three-satellite integrated outdoor unit. We continue to make good progress on our development efforts for this new EchoStar product and we expect to complete this product development project during our fiscal 2007 first quarter, with product qualification and production ramp up expected in the latter half of our fiscal 2007 second quarter.

EchoStar is also taking steps to more economically deploy outdoor equipment. For example, during our past fourth quarter, EchoStar made a significant effort to refurbish outdoor equipment reclaimed from subscribers who had churned away. While such a practice was not economically practical in the past with lower ASP units, in some cases refurbishing some percentage of today's higher-value outdoor equipment may reduce overall cost for EchoStar.

We believe this program impacted our volumes from EchoStar in our fourth quarter 2006 and could also reduce fiscal 2007 volumes. While we would not characterize this as a significant concern for us in the near term, we are continuing to monitor the impact of EchoStar's refurbishment program on our overall business.

Moving on to other key products-- products division programs, our new M2M wireless data module is now in the final stage of interoperability testing and we've recently received PCS Type Certification Review Board approval, known as PTCRB. This is very important since the PTCRB sets the standard that digital modules must meet in North America and is a requirement for operation on GSM networks.

This product will allow current analog users to continue growing their subscriber base and begin the transition to digital GSM networks. For the 10-1/2 month period from the acquisition of our M2M business from Skybility to the end of fiscal 2006, we generated M2M revenues of approximately $7.5 million. However, revenue in the fourth quarter was $1.5 million less than our original expectations as a key M2M customer curtailed orders as it completed its transition from analog to digital transmission technology.

We continue to believe that the M2M sector provides excellent growth opportunities for CalAmp. To this end, we are very pleased to have announced today the acquisition of Dataradio, Inc., a privately held Canadian company that has emerged as a leading supplier of proprietary advanced wireless data systems for public safety and M2M applications. The terms of the transaction include a cash payment of $60.1 million Canadian or approximately $55 million U.S. at the current exchange rate.

We will finance this acquisition using a combination of bank debt and cash on hand. For the trailing 12-month period, Dataradio had revenues of approximately $32 million U.S. with gross margins over 50%.

Although we will be providing more details on Dataradio in a separate conference call following completion of the transaction in the coming weeks, I'd like to quickly give you the highlights of why we're so excited about this opportunity for CalAmp.

First, the combination of Dataradio with our existing M2M and public safety business-- businesses brings CalAmp a critical mass of product development resources and market presence with an extremely diverse customer base. In addition, their systems-level expertise greatly enhances CalAmp's core capabilities. The inclusion of Dataradio with their M2M wireless products in CalAmp's public safety radio modules will result in a business with a combined annual revenue run rate of over $60 million.

The acquisition is also a large step forward towards our goal of reducing CalAmp's current market segment and customer concentration. At the same time, the acquisition of Dataradio is expected to increase CalAmp's overall gross margin and long-term growth potential.

Additionally, with the exception of the one-time non-cash write-off of IP R&D, the transaction is expected to be immediately accretive. We've spent a great deal of time and energy on our M&A activities over the last year and Dataradio was one of the few target companies that satisfied all of our acquisition criteria while having an immediate and meaningful positive impact on our financial results in addition to providing long-term growth opportunity.

With that, I'll now turn the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at the fourth quarter financial details and business outlook.

Thank you, Fred. I'm going to provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2006 fourth quarter and our financial guidance for the fiscal 2007 first quarter. For the fourth quarter fiscal 2006, gross profit in the products division decreased by 5.7% to $10.6 million, down from $11.3 million in the fourth quarter of the prior year.

Despite the lower gross profit, gross margin for the products division improved to 24.4% in the quarter from 18.5% in the fourth quarter of last year. The higher gross margin in the products division is primarily attributable to a change in the product mix 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 $1.6 million or 37% of sales compared to $1.2 million or 19% of sales last year. Compared to last year, the solutions division's gross margin benefited from our efforts to improve this division's cost structure and on the focus on pursuing higher-margin business.

Moving on to the balance sheet, our total inventory was $18.3 million at the end of the fourth quarter, down from $19.8 million at the end of the third quarter and down from $21.5 million at the end of fiscal 2005. Our inventory at the end of the fourth quarter represents an annualized turnover of about 9 times.

Accounts receivable of $28.6 million represents approximately 50 days outstanding. This represents a decrease of $7.6 million from the prior quarter end. The accounts receivable balance at the end of the prior quarter was unusually high, 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 $45.8 million at the end of the fourth quarter. Operating cash flow for the full fiscal year of 2006 was very strong at $22.4 million, attributable primarily to the net income of $14.6 million, depreciation and amortization of $4.4 million and utilization of net deferred tax assets of $6.2 million, less $4.3 million for increases in components of operating working capital.

Partially offsetting the full-year operating cash inflow were cash outflows of $4.9 million for the M2M product line acquisition from Skybility, $2.9 million for debt repayment and $2.3 million for capital expenditures. Our total debt at the end of the fourth quarter amounted to $7.7 million, down from $10.6 million at the end of the prior fiscal year.

Now turning to our financial guidance, based on our current forecast, we expect that fiscal 2007 first quarter revenues will be in the range of $44 million to $48 million and that GAAP earnings will be in the range of $0.08 to $0.13 per diluted share. Beginning in the first quarter, we will begin accounting for stock option expense under the provisions of FAS-123R. Accordingly, included in our GAAP EPS guidance is stock compensation expense of approximately $500,000 before income taxes or $0.01 per share-- per diluted share.

Now I'd like to emphasize that the guidance that I've just provided you for the first quarter of fiscal 2007 excludes any effect of the pending Dataradio transaction.

With that, I'll now turn the call back over to Fred for some final comments.

Thank you, Rick. Just to recap the highlights for our fourth quarter and full year, we achieved $217 million in annual revenue. Our overall gross margin in the fourth quarter remained stable, despite the revenue decline and reflects the excellent operating execution during the last several quarters. We achieved record operating cash flow of $8 million for the fourth quarter, which was a 50% increase over the prior record, which was the prior quarter.

During the past 12 months, our operating cash flow was $22.4 million, also a company record. Our fourth quarter EPS of $0.15 beat the analyst consensus and helped us achieve a record full-year EPS of $0.62 a share and, of course, today we announced the signing of a definitive agreement to acquire Dataradio, which I believe will have a very positive near-term and long-term impact on CalAmp's future growth and profitability.

Thank you for your attention and at this time I'd like to open up the call to take questions. Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Matt Robison from Ferris, Baker Watts. Please go ahead with your question, sir.

Hi. My first question is, what was the concentration between your two primary customers?

EchoStar -- you mean in terms of revenue?

Yes.

EchoStar accounted for, I think, 55% of revenue. Excuse me just a moment. And DirecTV about 15%.

Okay and what was the low, medium, high percentage for the fourth quarter of last year? I'll let you-- I'll let you come back to me with that one.

I've got it.

Okay.

Low, 28%; medium, 47%; high, 24%.

Okay. And of that $60 million, it looks, if I just-- if I just add things up as you described them and put the $1.5 million back in the Skybility legacy business, I get to $32 million, or rather $42 million. Now that other $18 million, I guess, would be coming from public safety. What constitutes that now?

I guess, Matt, you're going to have to help us with your--

Well, you've got $10 million for Skybility, right? If I annualize it and then add $1.5 million back in that would have been there if you didn't have the product transition issues--

It would have been $9, yes.

Well, maybe I annualized it wrong. Okay. Then you have $32 million for Dataradio, right?

Okay. Oh, you're trying-- Okay, now I understand the $60 million you're looking at.

Yes.

Yes, we have-- included in that are several components. We have some design and-- what we're including in that is some design and development revenues. We have--

Okay, so part of that's solutions division, then?

It has part of the solutions division in it.

Okay.

Not a great deal, but it does include part of the solutions division. It includes our legacy machine-to-machine business that-- from the MMDS and other-- When we made the original Vytek acquisition there was a component of machine-to-machine that was transferred to the products division, which was-- part of that spawned the module business for the public safety.

Okay. That was like-- if I remember-- if memory services, that was like $1.5 million, $2 million a quarter.

At the-- at the time of acquisition, yes.

Okay. Now you've had-- now since we've heard what EFJ reported-- at one time we thought that that was a $10 million run rate business. What's going to happen with that in the near term, given their delivery issues?

Well, I really can't comment on their delivery issues other than they alluded to a supplier, which was us, that had a supplier issue, which we had, which we've resolved.

Okay.

And so we're in the-- we're shipping product to them on an ongoing basis. That was all restarted some time ago.

Okay, so that-- and so that-- they mentioned, I think, in reading the transcript it sounded like there was, maybe a quarter or two before they got back up to full speed. At least they talked about their margins-- margins in that context. So in terms of your revenue guidance, do you expect that to be--?

Our revenue guidance, Matt, includes what we plan on shipping to our customers based on the information that we have.

Okay. Okay. I'll come back and ask a couple followups later. Thanks.

Okay.

Our next question comes from Troy Peery from Oppenheimer & Company. Please go ahead with your question.

Hello. Congratulations on the results and also on the acquisition.

Thank you.

Can you hear me okay?

Yes, thank you.

I'm trying to understand, looking forward, how you might expect Dataradio to impact any new customer or new revenue acquisition. Is there any low-hanging fruit you might see as far as cross-selling opportunities from this with the existing customers?

Certainly. On the public safety side of their business they've not historically provided the opportunity for their customers to use the cellular infrastructure, using data cards, which is an area that we, obviously, have some expertise in. We have several customers, obviously, in that-- using radio cards on an analog system and we also announced an analog-to-digital version of that so they have a migration path forward to the digital system. That's clearly one area where we see a benefit of bringing our product technology that we currently have into their market presence.

And in terms of timing, sales cycle, how might this new product line impact that, how does it compare to the-- to some of the legacy sales cycles or next gen product cycles?

When you say legacy you're talking about which legacy products? On the-- on the satellite side?

Yes. Yes, exactly. Just in terms of how long its taken to close deals in the past versus is there any delta?

Well, I think there is a significant delta on one side. Again, their public safety side of the business has got a much longer sales cycle. It's a little more complex sale in that you're generally selling to either the end customer being a municipality or government agency and sometimes through selling through systems integrators. So that portion of their business is much more driven by a long sales cycle and concentrated on having a robust pipeline.

The other side of the business, which addresses the private wireless networks, has probably a little bit longer sales cycle than what we're accustomed to, but, again, they've had a long-standing presence in that marketplace and the great thing is, is once you have your private wireless network up and running the customers, essentially, have to come back to you. So there's a great established installed base of products.

It looks like that acquisition will help gross margins more or less immediately, I'm assuming, and those margins were already strong. I'm wondering if you could quantify, maybe, how much of that was because of product mix issues in the quarter and how much do you think might be really sustainable going forward on the margin line?

Okay. In terms of the margins, they've got very-- and have had very, very good margins, over 50%. And while we haven't dialed a lot of synergy -- which is a word I hate to use -- into this, we are anticipating being able to improve the material acquisition cost of their product line using our leverage from the satellite side of our business. So we see a potential to even improve the margins that they currently have.

On our side-- on the satellite side of the business, the margins have improved consistently during the year. Our most recent estimate reflects a slight dampening of those margins as we have made some concessions to get our customers to take inventory from us that has been-- that's in the pipeline on some of these products that are going to be replaced by the next generation products. So as an inducement, we will see a slight margin reduction on the satellite side of the business in our first quarter that may dribble into our second quarter.

But-- but we're really looking at the Dataradio acquisition as one step in a long-term margin improvement program for the business.

Sure. Sure. Okay. I think that'll do it for me. Congratulations again.

Thank you.

Our next question comes from Patrick Forkin from Tejas Securities Group. Please go ahead with your question.

How are you all doing? This is actually [Anderson Price] for Pat.

Okay.

And just to follow up on that last question, as far as the sustainability of gross margin, you talked about you expected a little bit of dampening. Could you kind of quantify that over the next two quarters?

Well, in terms of precise numbers I don't think we want to provide those other than to say that if you sort of go through the math on quarter-to-quarter the revenue's going to be roughly the same. We're probably looking at a 10% reduction overall.

Okay.

At the gross margin line.

Okay. Thank you. And then last question, is the transition to the more complex DBS equipment that you've talked about going as anticipated or is it slower or quicker?

I would say it's probably not gone as fast as everybody would have hoped. It probably has gone as fast as you think it might go, upon reflection in hindsight. There's certainly a lot of challenges whenever you introduce a new program. But we're excited about the opportunity to work on the second generation of this product. So-- and that's what we're doing.

Okay, great. Appreciate that.

You bet.

Thanks, guys.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is a followup question from Matt Robison from Ferris, Baker Watts. Please go ahead, sir.

This is actually Mark Donahue for Matt. Matt had to step out real quick, but first off, just congrats on the huge cash quarter. That looks real good. I think you guys said 8 operating cash flow this quarter?

Yes.

That looks great. On top of that, just one housekeeping thing. Headcount for the quarter and, actually, last quarter, if you have it, too?

About 370.

370? What about the quarter before?

425.

And I guess, maybe that marries into my next question--

Excuse me-- hold on.

Your R&D and selling came down. Is that part of that?

Excuse me. It's 470 at the end of the fourth quarter and about 525, just about 100 off on both.

So 525?

525 versus call it 475.

Okay. 525 and 475. 475. So you've come down significantly from the August quarter, too. Was 633 the number you had then?

No, that appears to be our-- the end of our first fiscal quarter, May '05.

May '05. Okay. So you're somewhere-- what did you have in August?

About 520.

520? Okay. All right. That helps.

And I guess into that, sequentially you guys did a lot better in expenses.

And some of that has to do with reductions due to compensation related to our revenue.

Okay.

The result is, if the revenue goes up--

Is that most of it or half of it?

I don't know the exact proportion but there's a significant amount of incentive compensation as part of that.

And then R&D, was that just sort of a slow in projects because of the revenue level or--?

There's some incentive compensation in there, as well.

Oh, there is? Okay. Okay. Okay. Going forward do you expect it to sort of just-- sort of keep that same pace with the revenue guidance?

It might trickle up a little because a few things are happening in terms of investments in some of these business initiatives, particularly on the R&D side, but as we've done in the past, we manage our costs pretty closely and we have a lot of-- a lot of goal-setting that goes on and you could see just in the last-- last period. When we don't meet our goals, this compensation isn't there for us.

Right. Right. All right. I think the only other question I have, I think you said you were going to finance this acquisition with debt and cash?

Yes.

Do you have any idea how that might break down or are you guys still kind of working through that?

Well, we think the new debt will be in the vicinity of about $33 million U.S.

Okay.

And the cash will be the-- obviously, the remainder.

Got it.

When he says new debt, that would be on top of the-- I think we have $7 million of debt-- or $7 million to $8 million.

That's right. Okay.

Yes.

Good. Good. That's all I have right now.

Okay.

So I appreciate taking my questions.

Very good.

Thanks.

Thank you. Management, at this time we have no further questions. Please continue with any further remarks that you would like to make.

Okay. Well, thanks for joining us today and we look forward to speaking with you again upon completion of the Dataradio acquisition in the next several weeks. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the CalAmp fiscal 2006 fourth quarter conference call. We thank you for your participation. You may now disconnect and thank you for using ACT Teleconferencing.