CAMP4 Therapeutics Corp (CAMP) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CalAmp fiscal 2007 second quarter 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, October 12, 2006. I would now like to turn the conference over to Mr. Lasse Glassen of the Financial Relations Board. Please go ahead sir.

Thank you, operator. Good afternoon, everybody. Welcome to CalAmp's fiscal 2007 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 our prepared remarks and responses to questions may contain forward-looking statements. Words such as may, will, expects, believes, estimates, could, and variations of these words and similar expressions, are intended to identify forward-looking statements. Actual results could differ materially from those implied by such forward-looking statements made today due to risks and uncertainties, including, but not limited to, fluctuations in market demand for CalAmp's products and services, general and industry economic conditions, competition, continued pricing pressure in the DBS market, supplier constraints and manufacturing yields, timing and market acceptance of new product introductions and approval, new technologies, and the Company's ability to efficiently and cost-effectively integrate acquired businesses. We therefore encourage you to read more detailed discussions of these risks and uncertainties that are described under the heading "Risk Factors" in the Company's annual report on Form 10-K, filed with the SEC on May 10, 2006, and in the Form 10-Q filed with the SEC today. Any projections as to the Company's future financial performance represent management's estimates as of today, October 12, 2006. 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 Chief Executive Officer, Fred Sturm.

Thank you, Lasse. Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2007 second-quarter results. I will begin my remarks with financial and operational highlights from the second quarter, including an overview of the Company's performance, and then give an update on the key business initiatives that we are focusing on. Rick Vitelle will then provide additional details on our financial results, balance sheet, working capital management and cash flow for the second quarter, including our outlook for the fiscal 2007 third 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 our second-quarter financial highlights and overview.

Our second-quarter performance was within our expectations for both revenue and earnings at $57.9 million and $0.05 per diluted share. The $57.9 million revenue represented an increase of $11.6 million on a sequential quarter basis. The recent acquisitions contributed to revenues of approximately $8 million during the second quarter, and our DBS business improved, with shipments of $39 million up $5 million on a sequential quarter basis.

As we previously communicated, we are in the latter stages of a product transition by both of our key DBS customers. As part of this transition process, we sold end-of-life DBS products at lower margins during the second quarter, and we expect to conclude shipments of these particular products during the third quarter.

More importantly, the contributions from our recent acquisitions of Dataradio and Mobile Resource Management product line helped generate sequential and year-over-year improvement in our consolidated gross margins.

Having completed these acquisitions at the end of May, the latest past quarter marked the first full quarter of contributions from the acquired operations. Once combined with our existing wireless connectivity business, these businesses generated revenues of approximately $16 million for the quarter, with gross margins just over 40%. We continue to be optimistic about the long-term growth opportunities for our wireless connectivity business, and we are already seeing positive impact that the business has had on CalAmp's gross margins end customer diversification.

Our solutions division revenue for the second quarter of fiscal 2007 was $2.6 million, compared to $5.1 million for the same period last year. During the quarter we completed the phaseout of nonstrategic solutions division activities. Additionally, we completed the transfer of our design engineering services operation from the solutions division to the products division in order to focus the solutions division solely on its core software business, consisting of the industry-leading TelAlert urgent messaging software application, as well as the CalAmp media management software.

Our focus on the solutions division core software business is the driving force behind the significant increase in gross margin, 53% versus the previous year's second-quarter gross margin of 33%. We expect going forward that gross margins for the solutions division will be in line with comparable software product lines.

During the second quarter we achieved important milestones for both of the solution division software product lines. In August, we launched the next-generation TelAlert product, TelAlert 6e, for large enterprises, which extends our industry-leading TelAlert, which already has 4500 installed sites in 58 countries, by dramatically improving the flexibility, configurability and scalability of the solution. TelAlert 6e users are now able to fully integrate their IT network urgent messaging software applications across their entire global IT infrastructure.

TelAlert 6e has been enthusiastically received in the marketplace and we are very encouraged by the interest shown by our customers.

Regarding our CalAmp Media Manager software application, designed to enable owners of premium entertainment content to securely distribute video content to end users, we recently delivered our latest version, 3.0, to one of our key customers, Comcast Interactive Media, which is being integrated into a new yet-to-be-released video-on-demand service. We are working with Comcast Interactive Media and other existing customers, including ClickStar and Starz [Rongo], to upgrade the Media Manager technology to be fully compatible with Microsoft's new powerful Vista operating system, which Microsoft is scheduled to release early next year. We look forward to enabling our new secure media download applications in the future for customers and partners.

Now let's move on to an update of several of our business initiatives. As has been the case in prior periods, second-quarter product division sales continue to be driven by DBS shipments. These products support multi-satellite reception and enable the DBS service providers to offer HDTV and DVRs, along with other popular DBS programming services.

During the second quarter we made further progress on our next-generation DBS product development efforts. We anticipate receiving product approvals from both of our key DBS customers during the third quarter, with initial shipments of these products expected in the latter part of next month. We expect these higher-ASP products to contribute meaningful revenues during calendar 2007.

It is important to note that the expansion of HDTV programming services continues to be a major area of focus for both of our DBS customers. In addition to its slate of -- slate of national HD channels, Echostar has indicated that it intends to offer local HD programming in 29 local markets by the end of this calendar year.

Earlier this week, DirecTV announced that it expects to offer local HD broadcast network channels in 67 markets by the end of the year, representing nearly three-quarters of the nation's TV households. DirecTV has said that its local HD programming will broadcast in the Ka band, which will require new and existing customers to receive local HD [program service] -- they'll be required to purchase or upgrade their outdoor equipment in order to receive the next generation of products. This is an area where CalAmp is currently in the approval process and expects to be a qualified supplier. These next-generation products also carry higher average selling prices, which provide a long-term revenue growth opportunity for CalAmp.

I'd like to take a moment to provide an update on the product mix shift of our DBS products.

As you know, in the past we have grouped the DBS, LNB and antenna products into three categories based on ASP ranges -- low ASPs, which are $25 or less; medium ASP's, which are between 25 and $50; and high ASPs, which are $50 or more. During the fiscal 2007 second quarter, low, medium and high ASP products represented 12%, 73% and 15%, respectively, of our DBS sales.

On a sequential quarter basis, this compares to low, medium and high ASP products that accounted for 15%, 67% and 18%, respectively, of our DBS sales in fiscal 2007 first quarter. As expected, the revenue from high-ASP products as a percent of total DBS product sales declined slightly compared to the first quarter, as both DirecTV and Echostar were in the process of transitioning their higher-complexity outdoor equipment to more cost-effective next-generation products in support of their expanded HDTV and integrated DVR services.

While DBS continues to comprise the majority of our business, we are making progress on our slated market segment diversification initiative. Looking at the breakdown of revenue for the quarter, non-DBS products accounted for 33% of total revenue in the latest quarter, compared to 22% of total revenue in the second quarter of last year.

I will now provide an update on our Dataradio and MRM product line acquisitions.

For the second quarter of fiscal 2007, these businesses generated about $8 million in revenue with net bookings of approximately $10.5 million. In July, Dataradio won a contract to provide mobile data communications to New York's Onondaga County for fire, police and EMS personnel, valued at $3.8 million. We started initial delivery of the system in September and expect deliveries to continue through fiscal 2007 and into fiscal 2008.

I am pleased with the progress of our integration activities of the most recent acquisitions. With respect to the MRM product line acquired from TechnoCom, the integration process has been completed. This business is now utilizing CalAmp's logistics, procurement and sales resources.

The integration of Dataradio is proceeding in line with our expectations. We are in the process of implementing a new financial and MRP software package at Dataradio's Montreal facility, with an expected go-live date early next fiscal year. We have also met with early success in negotiating material cost reduction. In total, we believe that we can realize up to $1 million in annual cost savings by taking advantage of CalAmp's leverage and supply chain management capability. We will begin to realize these cost savings as existing Dataradio inventory turns over. In addition, we have expanded the Dataradio product roadmap, which will allow us to increase our addressable market.

Our experience and expertise in wireless communications, high-volume manufacturing capabilities, strong customer relationships and critical mass in a very fragmented marketplace provide a unique opportunity for CalAmp. We believe in our ability to compete effectively in this market, with a goal to have our wireless connectivity business organically grow to more than $100 million in revenues within three years. Additionally, we are targeting gross margins of 40% plus; operating margins of at least 12%.

We expect that our long-term revenue and [gross profit growth] prospects in these markets will further enhance our shareholder value.

With that I will now turn the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at second-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 2007 second quarter, and our financial guidance for the fiscal 2007 third quarter.

For the second quarter of fiscal 2007, overall gross profit was $14 million, or 24.2% of revenues, compared to $13.4 million, or 23.3% of revenues for the same period last year.

Gross profit in the products division increased by 7.8% to $12.6 million, up from $11.7 million in the second quarter of the prior year. In addition to higher gross profit dollars, gross margin for the products division improved to 22.8% in the latest quarter, from 22.3% in the second quarter of last year.

In the latest quarter, Dataradio and the MRM product line generated an aggregate gross margin of 50%.

Moving on to the balance sheet, our total inventory was $21.9 million at the end of the latest quarter, down significantly from $30.6 million at the end of the first quarter of fiscal 2007, due primarily to shipments of first-generation Ka/Ku band units to DirecTV, which are in the process of being phased out as we prepare for approval of the next-generation products.

Our inventory at the end of the second quarter represents annualized turns of about eight times, based on [cost] sales in the latest quarter. Accounts receivable of $38.8 million at the end of the second quarter represents approximately 52 days outstanding. Our accounts receivable balance increased $10.4 million from the prior quarter-end. The accounts receivable balance at the end of the latest quarter was unusually high, primarily due to a change in vendor payment frequency by a key customer from weekly to monthly. This resulted in a large payment received from this customer just after the end of the second quarter.

Our primary sources of liquidity are our cash and cash equivalents, which amounted to $25.5 million at the end of the second quarter. In addition, we have $2.9 million in restricted cash that is securing two standby letters of credit, which will become unrestricted in the near future once we renew these letters of credit under our new line of credit with Bank Montreal.

During the quarter, we made a cash payment of $5.4 million associated with accrued incentives paid to Dataradio employees shortly after CalAmp acquired that company. As previously disclosed, the negotiated terms of this acquisition included that this amount of cash be left in the Company and recorded as -- and be recorded as an expense in Dataradio's preacquisition income statement, and as an accrued liability in Dataradio's closing date balance sheet. Excluding this payment of accrued incentives, CalAmp's operating cash flow for the first half of fiscal 2007 was approximately $5.4 million.

Our total debt at the end of the quarter amounted to $38 million, which is unchanged from the prior quarter-end. Principal repayments on the $35 million bank term loan are scheduled to begin in March of 2007.

Now turning to our financial guidance for the fiscal 2007 third quarter, we expect that third-quarter revenues will be in the range of 59 to $64 million, and that GAAP basis earnings will be in the range of $0.04 to $0.08 per diluted share. Included in our GAAP EPS estimate is stock option expense of approximately $725,000, amortization expense related to the recent acquisitions of $928,000, and net interest expense of $345,000. All three of these amounts are prior to income tax effects.

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

Thank you, Rick. Just to recap the highlights from the second quarter, operationally our results were solid and we achieved our expected range for both revenues and earnings. Our overall gross margin for the quarter increased to 24.2% on the strength of the margins of our recently acquired businesses. We made steady progress in our development efforts for the next generation of satellite products for our key DBS customers. Approval from both those customers is expected in the near term. And we made good progress in integrating the Dataradio and MRM product line acquisitions as significant pieces of our wireless connectivity group. We formulated our strategies and we have begun to execute on our objectives what we believe will be a very valuable component of CalAmp's overall business.

That concludes our prepared remarks. Thank you for your attention. And at this time I'd like to open up the call to questions. Operator?

(OPERATOR INSTRUCTIONS). Troy Peery, Oppenheimer & Co.

Let's focus on your 10% customers. I kind of had to be in and out. The revenue from 10% customers, is there any granularity I missed? Can you give us what exact percentage that was from those two combined?

Our two major customers, which are our two DBS customers, represented about 75% of second-quarter revenue.

I see. And I wonder, was there -- so there wasn't really any other satellite sales (multiple speakers)

I'm sorry; let me correct that. About 63%. They'd be --

That would be Echostar and DirecTV.

That's right. And was there a little bit of satellite sales outside of the big two?

Yes.

That gets us to 75%?

It's around 67%

On Dataradio specifically, it does seem like that acquisition is kind of coming along according to plan. You have provided some granularity, especially with the optics on that recent deal. I wonder what kind of split you're seeing between the public safety side and M2M in Dataradio.

It's typically -- historically on average it's been about 50-50. That changes quarter to quarter because of the type of business that the public safety is in terms of being contract-oriented. And it's somewhat lumpy. So, in any given quarter that shift might shift by 10 percentage points or 20 percentage points back and forth. But on an aggregate basis over an annual period, we would expect it to be roughly 50-50.

Okay. And then, Skybility and TechnoCom -- can you give us a little bit of a view on how those are coming along, what you're seeing there, margins on the sales that you're closing and so on?

I'll try to give you an aggregate picture, and I think I may have alluded to that in the remarks -- is that we're seeing on an aggregate basis -- and we're trying to look at these businesses in the aggregate because we're in the process of integrating them -- on an aggregate basis, the margins for those businesses are in the mid to high 30s. For the -- we refer to M2M and MRM. And those businesses currently are -- it's been particularly the TechnoCom is performing very much to expectations.

Okay, great. So, it seems like now with the full quarter in there, that the ramp that must have hit was in line with the original expectations that you guys had, but it was so hard for us on the outside to really get a sense of with just like one week's worth of results (multiple speakers)

We were a little under our expectation for the quarter. But I think, in general, with all the numbers, we were okay with all the numbers. We didn't miss the revenue slightly.

But gross margins were what you expected?

Overall the operating performance was about what we expected.

The last thing I'll ask, maybe, before I step out of the queue -- this Comcast thing is interesting. We've heard about it in the past. I was wondering if you could give us a refresher on the background there, and then kind of connect those dots back to what's happening now at Comcast on interactive media.

I'm not sure how much information I can give you related to that, because it is a product in development on their end. But at CalAmp, the Media Manager has been a product at CalAmp that was developed actually during the Vytek period, and was subsequently -- it was developed under a joint development program for another customer, and it was subsequently commercialized as part of the original agreement, which allowed us to do that.

And so we've actually gone out to a number of companies, as you can see, ClickStar and Starz Rongo, as well as some others which we can't mention, and have marketed that product line, and that software application fairly successfully during the last year. And we're in the process of evaluating other features that we can add to it on the client side potentially that will make it a little more valuable. So I can't say a lot, because in a lot of cases our customers, obviously, have -- we have confidentiality agreements. But hopefully that gives you some background as to how we originated it, and it's really been commercialized over the last year.

Before I do step out, I think that the amortization was a little bit higher than we were expecting. Is that -- first of all what might have driven that delta above what might have been 800,000-plus expectation previously? Where should we forecast that going forward? Is that a $1 million a quarter kind of level going forward beyond the guidance you've given for Q3?

The $1 million a quarter going forward sounds reasonable. I'm not sure, but with regard to the first part of your question, I believe a contributing factor for why that may have been a little higher than expectations was the fact that we had in the first quarter no amortization expense recorded for those two entities, because we only had them in the quarter for one week. And we're not far enough -- we were at that time not far enough along in the determination of the preliminary purchase price allocations for those two acquisitions. So, I think there was a bit of a catch-up adjustment in Q2.

Just to be clear, that's -- that 928 is just for the recent acquisitions we had previously other amortization expense. The combination of those is closer to 1.2 million going forward.

So then rolling it all up, you're comfortable with levels consistent with the Q2 levels on a go-forward basis.

Yes.

Murray Arenson, Ferris, Baker Watts.

A couple different questions for you. First, the M2M and Dataradio margins, I think, you said for the quarter were about 50%. And if I have you right, you're forecasting kind of 40% plus. That's a good performance so far and a pretty broad range. Can you talk about what the levers are and how much (multiple speakers)

I think there might be some confusion just a little, and I'm sure it's because we haven't communicated it as well as we could have. On the -- the combination of Dataradio and the TechnoCom is the 50%. So, we wanted to get you some clarity on that. But the combination of all of our wireless connectivity businesses, which would include the M2M and MRM, and other product realization (multiple speakers) and our other public safety and other wireless businesses -- the combination of all of those is just over 40%.

So, I had mentioned earlier that we had some in the mid to high 30s, which brings, obviously, the average down. Just so there's some clarity, the 50% margin would roughly relate to $8 million worth of business, and the 40% margin relates to $16 million worth of revenue, which includes that 8.

That helps. So, that shouldn't be -- we shouldn't be seeing wild fluctuations?

No; I would hope not.

On the inventory side of things, can you tell us a little bit about what that's looking like in engineering this transition, if there's any obsolete inventory risk, or how the timing of that (multiple speakers)

We clearly made a huge amount of progress in the quarter clearing out the inventory that was in our possession. As you well know, because of the pipeline that we have out of the Far East, we also had some supplier liability that we were concerned about. That supplier liability was being [shipped] in our third quarter, and so we would not expect any material inventory exposure at this point. Based on our knowledge at this point, we don't expect any material inventory exposure.

Can you talk to us a little bit about that qualification process, and how comfortable you are with the timing of that? What's involved in that?

As you are aware from other companies you cover, engineering programs typically take longer when you're developing next-generation products, and the qualifications at customers generally takes longer than anybody anticipates. And I think that's been the case here, not only on the outdoor equipment side, but there's been other issues on the indoor equipment as well.

But I think my understanding [is] that most of the issues are behind us. We're very comfortable that we are at the end stages of approval. There's always -- there's never any guarantee until it happens. So, we can't guarantee that we're going to get approval. But we have every indication. Our testing, our recent testing was very positive. But the testing is not complete. It's fairly extensive testing, as you're aware. All this product has to operate outdoors, whether it be in Tucson, Arizona or Alaska somewhere. And so -- and it's much more complex in today's environment providing HDTV signals as well as for Echostar providing the stack technology to allow the single cable DVRs.

So, given the product complexity, the number of satellites we're trying to reach, in terms of bringing the signals indoors and distributing them indoors without having -- without degrading the signal, it's a very complex process. We're at the very end stages, and we're optimistic that we'll begin those shipments of the products late in the November timeframe.

And then I had a couple questions on the media manager side. I wondered, first, if you can talk about maybe business model a little bit; how that scales up for you; what metrics we should be looking at if we're looking at some of your customers or the other players in the space. And then, maybe offer up some comments on whether Apple's changed the (indiscernible) if you're seeing changes in the environment as a result of their new initiative, and what they're planning in terms of the in-home link to TV and that sort of thing.

First of all, there's been a number of companies that are looking at ways to get media down into the house and sell it but have it on a secure basis. We've talked to a number of companies, both start-ups and large companies. So, there's a wide range of opportunities. Those companies are all still to a large degree trying to figure out their business models. And the ones that have figured out their business models we're, obviously, doing some work with.

The typical engagement for that type of -- for our type of product there is a license sale from anywhere from $500,000 to $1 million for the license, and then some work to integrate other applications that they may want to link into it, which may be either 50% of the licensing value, up to 100% of the licensing value. So, the typical engagement is in the $1 million range.

And so -- there are more -- they're longer sales in terms of the sales cycle. We're dealing with companies -- some companies that have no money that are talking about getting money, and some companies that -- like Comcast -- that have a lot of money. So, the sale process is much longer, and the -- however, the margins, obviously, in the software business we would expect to see in the 70% range or better on that type of sale; less, obviously, on the service side of it. Does that help you?

That does help. Does the effort to link some of these download services within the household to the TV, does that play into your solution or change the dynamics or opportunities for you guys?

Anytime you're trying to download media into the house that is copyright-protected, that's an opportunity for our management software.

John Bucher, BMO Capital Markets.

Just a question on the mix, and then tying that into your comment on growth in wireless connectivity. The non-DBS products grew to 33%, up from 22% last year. And you've indicated that the goal is for wireless connectivity to be $100 million in annual revenue in three years. Is there a point as you look out where you would -- we should start to expect a substantial shift looking in the next couple of quarters, and non-DBS-related revenue as a percentage of the total revenue moving? And how much of that is a factor in your outlook for next quarter? I suspect not much of one, but just curious on that.

Sure. I'll address next quarter first. Next quarter is actually -- I would have believed a shift if you did the math -- a shift downwards percentage-wise potentially. Because there's a pick-up in our expectation on the satellite side because the third quarter is a larger -- historically larger quarter. That will shift -- that will go back in the next quarter, likely, as we move into the fourth quarter, which is historically the lowest period of the salvation.

And so I think over -- to answer your first question, we'll see a gradual shift over time that might be a little soft-toothed; it goes up, it goes down; it goes up, it goes down, depending on what that -- what the satellite cycle is, their seasonal cycle. So, it will be a little solitude, but we would expect to see it on a gradual basis.

Debra Fiakas, Crystal Equity Research.

Since it sounds like your last two acquisitions have gone fairly well in terms of integrating into the overall operation, are you considering doing additional acquisitions? And if so, could you maybe elaborate on what the characteristics or profile might be?

Obviously, if we were -- if we were doing something, we wouldn't comment. But let me talk about generally. Generally, we're always looking at potential opportunities? Because as you know -- may very well be aware, you have to turn over 100 rocks to find a couple frogs to kiss, and then see which one turns into a prince.

So, at this point, we are continuing to talk to companies. We are focused in terms of our efforts. Our focus is on the wireless connectivity side. And in particular, the M2M, MRM side of the business, as well as public safety. Areas -- those have been stated areas of interest for the Company. But in terms of -- do we have -- are we progressed on anything? Even if we were we couldn't say anything. But, clearly, we see having to add through acquisition in the future as well as the organic growth to make sure we continue to diversify the business.

And just to be sure, we're looking at things -- opportunities are accretive in nature. In particular, if it's a small acquisition, maybe a product like an acquisition that's strategic or something, that's small, very small, that might be of interest to us if it wasn't accretive immediately. But clearly, we're looking at immediately accretive opportunities, which limits by its very nature the number of companies we can look at.

(OPERATOR INSTRUCTIONS). Management, there are no further questions. I'll turn it back to you for any closing comments you may have.

I would just like to thank everybody for joining us with their questions; they're very good and insightful. I look forward to talking to you after the third-quarter results are in. Thank you very much.

Ladies and gentlemen, that will conclude the CalAmp fiscal 2007 second quarter conference call. We thank you again for your participation, and at this time you may disconnect.