CAMP4 Therapeutics Corp (CAMP) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CalAmp fiscal 2007 third quarter conference call. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded today Thursday, January 11, 2007. I would now like the turn the conference over to Lasse Glassen with the Financial Relations Board. Please go ahead, sir.

Thank you. Good afternoon, everybody. Welcome to CalAmp's fiscal 2007 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 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, the timing and market acceptance of new product introductions and approvals, new technologies, and the Company's ability to efficiently and cost effectively integrate acquired businesses. We therefore encourage to you read the more detailed discussion 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 best estimates as of today, January 11, 2007. 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. Fred?

Thank you, Lasse.

Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2007 third quarter results. I will begin with the comments on the financial and operational highlights from the third quarter, including an overview of the Company's performance and then I will provide an update on the key business initiatives that we are currently focusing on. Rick Vitelle will give additional details on our financial results, balance sheet, working capital management and cash flow for the third quarter, including our revenue and earnings guidance for fiscal 2007 fourth quarter. I will then wrap up with some concluding remarks followed by a question and answer session.

With that, let me begin with our third quarter financial highlights and overview. Our operating results for the third quarter were within our previous guidance. Total revenues were $61.1 million, GAAP net income was $0.04 per diluted share, and adjusted basis or non-GAAP net income was $0.08 per diluted share. Adjusted basis net income excludes the impact of stock compensation expense and amortization of intangibles. Our third-quarter earnings press release issued today contains a reconciliation of GAAP basis earnings with adjusted basis earnings. On a sequential quarter basis, total revenues increased 5.5% over the prior period, and were driven by growth in our sales of satellite, direct broadcast satellite or DBS customers. DBS revenues in the quarter were $45 million and represented approximately 73% of CalAmp's total revenues in the period.

As we previously announced toward the end of the third quarter, we received product approval from both our key DBS customers, and began shipping next generation equipment in support of the service provider's rollout of high definition television programming, HDTV. This was the culmination of a significant product development effort during the past year. These new units are the most technically complex DBS products that we have produced to date. The latest DirecTV product is a combination KA-KU band unit that is capable of receiving signals from up to five satellites, while the Echostar product is a new three satellite KU-band unit supporting a single-cable digital video recorder, or DVR installation. Although there are other suppliers for these latest generation products, CalAmp is currently the only company supplying these new products to both DirecTV and Echostar which underscores our leadership position in this market. Customer acceptance of these new products was a significant operational milestone and puts our DBS business in an enviable competitive position for the remainder of 2007 and into fiscal 2008.

We expect these new DBS products to contribute significantly to our CalAmp's overall business performance during the next year and beyond. In making the transition from older generation DBS products to next generation DBS units, our third quarter consolidated gross margin of 20.8% was lower on both a year-over-year basis and sequential quarter basis. The reduction in gross margin was primarily the result of higher freight costs and lower margins of final shipments of end of life DBS products. The freight cost for incoming materials was about $2 million higher in the third quarter compared to the same quarter last year. We made a decision to incur higher freight costs to expedite incoming materials as a result of several factors including supply chain disruptions caused by our offshore suppliers, product mix shifts that were attributable to service provider delays in rolling out the new products and demand volatility associated with the new product introductions. We expect the higher level of freight costs to persist through much of the fourth quarter until the pipeline for new DBS products has been filled.

And a non-DBS wireless datacom business lines that comprise the remainder of our products division, we're encouraged with the progress we're making in evolving this portion of our business. Our wireless datacom lines include wireless communication products for applications in public safety, mobile resource management and industrial monitoring and control. In total, our wireless data com businesses generated gross margins of nearly 40% on revenues of $14.4 million in the latest quarter. This includes $8.5 million contributed from the data radio and MRM product line acquisitions made earlier this year, up sequentially from $7.7 million in the second quarter. We remain very optimistic about the long-term growth opportunities for our wireless datacom business and are pleased with the contributions these businesses are having on CalAmp's overall operating performance and customer diversification.

Our solutions division revenue for the third quarter fiscal 2007 was $1.6 million compared to $4.9 million for the same period last year. This decline in solutions division revenue reflects the phase-out of nonstrategic activities and the transfer of our design engineering services operation to the products division earlier this year. The solutions division remains focused on its core software businesses, consisting of the leading TelAlert 6E urgent messaging software application and the CalAmp media manager software. TelAlert 6E, which was launched late last summer, significantly improves flexibility and scalability, allowing users to fully integrate the IT network urgent messaging. During the third quarter, we closed sales of TelAlert 6E with several large customers including two national cellular service providers, one global bank, a leading aerospace company and a large retail company. We are encouraged by the significant interest TelAlert 6E is generating for both our large install base and new customers looking to add this functionality to their worldwide IT networks.

Now let's move on to an update on our principal ongoing business initiatives. As has been the case in prior periods, third quarter product division sales are dominated by DBS products that support our customer's multi-satellite integrated digital video recorder service offerings. These products help enable DBS service providers to provide enhanced offerings such as high definition TV, also known as HDTV and DVRs, digital video recorders, along with their other popular programming services. These products also carry higher average selling prices or ASPs, which provide a long-term revenue opportunity for carbon. I would like to provide update on the shifting product mix of our DBS products in the latest quarter.

We group our products into three categories based on ASP ranges. Low ASPs, which are $25 or less, medium ASPs, which are between 25 and $50, and high ASPs, which are $50 ir more. During the fiscal 2007 third quarter, low, medium, and high ASP products represented 8%, 71%, and 21% respectively of our DBS sales. On a sequential quarter basis this compares to a low, medium and high ASP products that accounted for 12, 73 and 15% respectively in the fiscal 2007 second quarter. Revenue from high ASP products as a percent of total DBS product sales increased compared to our prior quarter as both DirecTV and Echostar continued their rollout of expanding HDTV programming. We expect to see the ASPs of our products continue to trend higher as our latest generation products for both DirecTV and Echostar gain market share or excuse me market penetration for both new customers with the DBS operators must attract to grow their subscriber base, as well as the portion of the 20-plus million existing DBS subscribers that are expected to upgrade their older outdoor equipment in order to take full advantage of the expanding HDTV service offerings.

DirecTV and Echostar are clearly making substantial financial commitments to expand their HDTV program offerings. DirecTV, for example, currently provides local HDTV channels that are available to approximately two-thirds of the nation's television households, and plans to increase local HD availability throughout calendar 2007. In addition, Echostar, which has the largest lineup of national HD channels, recently launched a new promotion offering new customers a free set top box that has both DVR and HDTV capability. CalAmp has played an important role in helping our DBS customers develop outdoor reception equipment that will enable these services and we remain committed to protecting our position as the leading supplier in the industry.

We're also very pleased with the results of our wireless datacom business lines. In addition to the solid third quarter financial performance, we also added to our backlog with several recent new business awards. In December, Data Radio won a contract to provide mobile data communications to Michigan's Genesee County 911 consortium, and replaced its existing global data public safety network for first responders. This contract is valued at at $1.3 million, and will provide mobile data to 28 Police Departments and 22 Fire departments within Genesee County. We recently started work on this project with system acceptance scheduled for late 2007. As an example of the strength of our products from Mobile Resource Management or MRM applications, we were recently selected to provide key components for GE Security's new NavLogic's fleet tracking service that is rolling out to medium and large-sized businesses with fleets and vehicles. GE Security is a wholly-owned subsidiary of General Electric Company, and our products will help GE Security Service meet a wide range of applications, including GPS-based vehicle tracking, advanced input/output control, and integration with the vehicle's on-board equipment.

Finally last month E F Johnson announced they had been awarded a significant order from the Department of Justice -- or Department of Defense, excuse me, to provide Project 25-compliant portable radios and accessories. Over the past few years, CalAmp has been a high volume supplier of RF modules to E F Johnson that are Incorporated into the portable radios. We expect the large DOD order they received to help grow our business with EFJ during the coming fiscal year, and we're pleased to have the opportunity to expand our relationship with EFJ.

With that I will turn the call over to Rick Vitelle, Chief Financial Officer for a closer look at our detailed financial results and business outlook.

Thank you, Fred. I am going to provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2007 third quarter, and our financial guidance for the fiscal 2007 fourth quarter. For the third quarter of fiscal 2007, overall gross profit was $12.7 million, or 20.8% of revenues compared to $16.5 million, or 25.5% of revenues for the same period last year. Gross profit in the Products division was $12 million, down from $14.4 million in the third quarter of the prior year. Gross margin for the Products division in the latest quarter was 20.1% compared to 24.2% in the third quarter of last year.

As Fred mentioned, gross profit and gross margins in the third quarter were adversely affected by heavier than normal freight costs, incurred in response to supply chain disruptions and demand volatility in order to meet our customer's requirements. In total, freight costs for incoming material was approximately $2 million higher in the third quarter compared to the same quarter last year, and affected our consolidated gross margin by over 3 percentage points in the period. Also contributing to lower margins in the latest quarter were final shipments of end of life DBS products. While all of the end of life product inventory has been sold, we expect the higher freight costs to persist into the fourth quarter of fiscal 2007 until the supply chain for the new DBS products has been adequately filled. During the latest quarter, the aggregate gross margin generated by our non-DBS wireless datacom businesses that comprised the remainder of the division held steady at nearly 40%.

Moving onto the balance sheet, our total inventory was $20.8 million, down slightly from $21.9 million at the end of the fiscal 2007 second quarter. During the third quarter, our annualized inventory turnover was about 9 times. Accounts receivable of $30.3 million at the end of the third quarter represents approximately 51 days outstanding. Our accounts receivable balance was lower by $8.5 million on a sequential quarter basis due to the timing of large cash receipts from a key customer. Our primary sources of liquidity are our cash and cash equivalents, which amounted to $30.3 million at the end of the third quarter. Operating cash flow for the first nine months of fiscal 2007 was $11.7 million. During the third quarter, we paid down our bank debt by $3.7 million, and our total debt at the end of the quarter amounted to $34.3 million.

Now turning to our financial guidance, based on our current expectations, we believe that fiscal 2007 fourth quarter revenues will be in the range of 54 to $60 million, and that GAAP earnings will be in the range of $0.03 to $0.07 per diluted share. Non-GAAP adjusted earnings for the fourth quarter, which excludes amortization of intangible assets and stock-based compensation expense, each net of tax, is expected to be $0.07 to $0.11 per diluted share. With that I will now turn it over to Fred for some final comments.

Thank you, Rick. Just to recap the highlights from the third quarter, operationally our results were in line with expectations for both revenue and earnings. In addition, operating cash flow of $11.7 million in the quarter was very strong. We received product approval from both Echostar and DirecTV on the next generation DBS products, which had been in the development stages for the last several quarters. These high value, high SP products will contribute meaningfully to the revenues in the fourth quarter and beyond. Finally we continue to aggressively execute on our wireless datacom growth strategy in order to diversify our customer base and improve our long term financial performance.

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

Thank you sir. [OPERATOR INSTRUCTIONS]. Our first question comes from Murray Arenson with Ferris Baker. Please go ahead.

Thank you. Good afternoon, guys. A couple questions for you. One is, I appreciate you breaking out the impact of the freight. I just wanted to make sure I was understanding what you were baking in for the fourth quarter. You see the impact being of the same order of magnitude in the fourth quarter as in the third, or does that start to dissipate so it is kind of a partial impact this quarter?

Good question, Murray. We expect it to dissipate during the fourth quarter, so it will ratably go down, and so it won't be this as large of impact, but it will be a reasonable impact on our results.

Okay. And you talked -- you mentioned a few different things in your remarks. You talked about Dish putting out a free DVR promotion, and you went through some of the MRM deals. Can you talk about what's baked in, if anything, for the fourth quarter and just give us an overall sense of how you see timing on that starting with the HD, and then those additional deals, like the E F Johnson deal, and how those will roll in through the year?

I guess there is a few questions in there.

Sorry.

That's okay. In terms of the new products, we're essentially trying to produce those new products as quickly as we can, and obviously trying to do two things with that. We're trying to fill our customer's requirements, which are fairly significant, but also try to fill that pipeline. We're concentrating on the current -- the newest generation of products and getting those in the pipeline. In terms of the wireless datacom, there is no significant new business in that fourth quarter that's expected. I think the Genesee will be later in the coming calendar year.

Coming fiscal year.

Excuse me, fiscal and calendar year.

And in terms of --

Actually we're -- [technical issues].

In terms of new product introductions and impact in fourth quarter we're not planning on new product introductions impacting our fourth quarter at this point.

Okay. And lastly, on the solutions side of the business, you talk a little bit of some new developments on TelAlert, that business was down again here sequentially. Can you just give us set expectations heading into next quarter on that piece in particular?

We would expect that piece of business would be up slightly on a sequential basis, the TelAlert portion, but there may be continued reductions in other nonstrategic portions of that business, so as you can see through the numbers, it is not a significant portion of our overall business. We have what we believe to be a very solid remaining portion, which is the CHAMs, the media management software business, which is a fairly small piece annually. It is about a $2 million annual product line. The TelAlert is roughly a $6 million annualized product line, so they won't have -- even if they double their business, it wouldn't have a significant impact on our overall business, but we're really proud of the progress we have made on the TelAlert 6E, and attracting fairly significant customers from a national and international scale.

Okay. Great. Thank you.

Thank you.

Next question comes from Lawrence Harris with Oppenheimer & Co. Please go ahead.

Yes, thank you. I was wondering did you indicate what the split was within DBS between DirecTV, Echostar and other?

I didn't, but I think we can.

Larry, in our 10-Q in our notes we do disclose that in the latest quarter our largest customer which is Echostar accounted for about 53.5% of our revenue, and -- consolidated revenue, and DirecTV accounted for about 17%.

Understood. Thank you. I notice in one of the trade press publications that John Malone was talking about the potential development of a common platform for HD that might be shared by DirecTV and Echostar, and I was wondering what your thoughts were on that and whether that could have an impact on the products that you offer.

I guess there has been a lot of speculation even on the combination, potential combination of the companies. I think Charlie Ergan, the CEO of Echostar, was quoted as saying given the movement in terms of outdoor equipment, there is just a lot of incompatibility at this point between the two companies from a hardware standpoint.

Yes.

So I don't have much more information than that that I can provide, but other than what's already publicly available that's being stated by the Chief Executives of the companies.

I understand. All right. Thank you.

Thank you, Larry.

Our next question comes from John Bucher with BMO Capital Markets. Please go ahead.

Thank you. John Bucher with BMO. Can you say, the supply chain issue that is the cause of the freight increase, can you say is that component availability or can you talk about specifically what the supply chain is causing the problem?

On the supply chain there is a couple things in the supply chain, all of which have already worked themselves through. But, the supply chain, we had some component availability issues, without being specific in terms of what those components are. Those are resolved, but we also had issued related to the fact that we expected a certain timing on approval of the next generation of products which were delayed during the quarter, so as we had to go back and provide other products to support ongoing subscriber acquisitions, we hadn't -- we didn't have on order necessarily the products to support unforecasted requirements, and so we were making demands on our suppliers that they hadn't planned on, so there was a combination of capacity issues at suppliers that affected certain components as well as just the ability to have the capacity to get that kind of product through on a short notice.

Okay. So it is really just sort of a catch-up and once you reach that and do get caught up, you don't expect any further problem?

That's correct. It is not a long-term issue.

And then I have another question for you on the data module market. Two of the markets there that look very attractive, and you reported progress in the public safety area, both the public safety and the industrial communications markets look like they're very attractive markets. I am wondering if you can just talk a little bit about what kind of visibility you get into each. You're just sort of a subcontractor it would appear to other vendors in that area. Are you guys contacted as they start to get respond to RFPs, or just how far out and if you can just qualitatively talk about the each of the markets and the changes that you've seen in specifically those two markets since last quarter's call.

That's a pretty big question. Let me try to address the public safety first, although to a large degree, it applies to the industrial monitoring controls. We work generally direct with our customers, so from a selling process standpoint the public safety market place can be a six-month process or a three-year process, and we would work directly with municipalities or government agencies to identify requirements to help them plan their system, help them determine what kind of quotation is required, almost I think every system that I am aware of is competitively bid from a government agency standpoint, so there are all kinds of avenues to get what bids are coming from government agencies, so we get those as well.

We manage that pipeline. We try to develop an interest. We try to manage that interest. We try to help with a quotation process in developing the request for proposals as our competitors do. And so it is a fairly long cycle, and the funding is extremely important as you're aware in the public safety side, and so as you look at that business, you get a lot of visibility, but a lot of visibility has the possibility of it taking a long time as well, so it has both good news and bad news associated with it. We've been very successful on the data side of that public safety business, particularly with our data radio business, who has been a supplier in that market for 25 years, and so we don't see significant changes in the short-term in that business. We do see shifts in that business, longer term as the TV stations give up some of their channels for use in the 700 megahertz range and FCC is currently taking and asking for comments relative to how to best use that bandwidth. They're also doing some farming or changing of allocation to a certain spectrum which is going to create some opportunity.

We're really excited about the longer-term prospects on the public safety side, as well as the industrial monitoring controls. The difference on the industrial monitoring and controls is usually there is a high return on investment impetus on the industrial monitoring controls, so the pipeline doesn't take quite as long. Once somebody sees the return on investment, they want to get it installed as quickly as possible. The same process applies. We typically use direct sales, although we do, on occasion work with third parties significant integrators, the ones you would expect to see in those marketplaces. We do support those as well, and we work with the professional engineering profession to do the design work, to do the layout, and then do the bid and proposal.

The significant difference between those two markets while I think the opportunities are about the same, is that there tends to be a speedier process in terms of achieving return on investment that our kinds of products offer. Does that answer your question, John?

That's a great description. Thank you very much. Appreciate it.

[OPERATOR INSTRUCTIONS]. Our next question comes from Debra Fiakas with Crystal Equity Research. Please go ahead.

Thank you. Most of my questions have been answered, but I would also follow up on the previous question regarding the E F Johnson relationship. They had a big win, appears like for Department of Defense Project 25 business. Will you have to go back out and compete with other suppliers or do you feel like your position in getting subcontracting work with E F Johnson is fairly secure?

We have obviously NDAs in place with EFJ. I guess the -- I am trying to give you information that is publicly available. The delivery on those products is going to occur essentially during the next fiscal year, and we believe that our relationship there will allow us to take full advantage of that.

Excellent. Thank you.

Thank you. At this time, we have no further questions in queue. I would like the turn the conference back to Management for any concluding comments. Please go ahead.

I would like to say thank you again for joining us today, and I look forward to our next conference call. Thank you.

Ladies and gentlemen, that does conclude the CalAmp fiscal 2007 third quarter conference call. If you would like to listen to a replay of today's call, you may dial 1-800-405-2236 or 303-590-3000 and use pass code 11078829-pound to access the conference. Thank you again for your participation today. You may now disconnect.