CAMP4 Therapeutics Corp (CAMP) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CalAmp fiscal 2008 third quarter conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference call is being recorded today, Tuesday, January 15, 2008.

I would like to turn the conference over to Lasse Glassen, of the Financial Relations Board. Please go ahead, Lasse.

Thank you, Mary. Good afternoon, everybody. Welcome to CalAmp's fiscal 2008 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 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 industry and 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, the Company's ability to efficiently and cost effectively integrate acquired businesses, the Company's ability to amend its bank credit agreement to eliminate the event of default under the credit agreement, the Company's ability to successfully requalify certain products and resume selling these products to one of its key DBS customers, the risks that the ultimate cost of resolving a product performance issue with that DBS customer may exceed the amount of reserves established for that purpose, and other risks and uncertainties better described under the heading, "Risk Factors" in the Company's annual report on Form 10-K filed with the SEC on May 17, 2007, and in the quarterly report on Form 10-Q filed today with the SEC.

Any projections as to the Company's future financial performance represents management's estimates as of today, January 15, 2008. CalAmp assumes no obligation to update these projections in the future due to changing market 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 2008 third quarter results.

I'll begin with comments on the financial and operational highlights from this past quarter and then provide an update on several of our key business initiatives. Rick Vitelle will then discuss additional details about our financial results, balance sheet, working capital management and cash flow followed by our revenue and earnings guidance for the quarter. I will then wrap up with some concluding remarks followed by a question-and-answer session.

Let me begin with our third quarter financial highlights and overview. Total revenue for the third quarter was $32.1 million and was within the revenue guidance range of 32 to $35 million that we provided last quarter.

Similar to the last several quarters the top line results were driven by continued strength of our Wireless DataCom Division, which generated revenues of $23.7 million, a record for this division for a single quarter and accounted for approximately 75% of our consolidated revenue in the period.

As we expected, Satellite Division revenues of $8.4 million were lower on a year-over-year basis due to the lower revenue from a key DBS customer. However, we have made significant progress towards resolving this matter and have begun the progress of rebuilding our competitive position with that customer which we will update you on in a moment.

Results from operations included a GAAP loss from continuing operations of $58.9 million, or $2.49 a share. Included in the GAAP loss from continuing operations is a pre-tax goodwill impairment charge of $65.7 million, or $2.44 per diluted share net of the income tax effect.

It is important to note that this is a non-cash charge and due in large part to our market capitalization being lower than our consolidated net assets. Rick Vitelle will provide more details on the impairment charge in his remarks.

Excluding the impairment charge, amortization of intangible assets and stock-based compensation, we generated an adjusted basis, or non-GAAP income from continuing operations of $67,000, or zero cents per diluted share. I refer you to our third quarter earnings press release issued earlier today for a detailed reconciliation of GAAP basis income or loss from continuing operations to adjusted basis income or loss from continuing operations.

As announced last month, we reached a settlement agreement with a customer with which we had a product performance issue. We believe that this agreement will pave the way to resuming our commercial relationship.

Under the terms of the settlement, we will provide rework and refubishment services on certain returned DBS products currently on hand or returned to us during the next 14 months. We've also agreed to forgive $1 million of outstanding accounts receivable due from this customer on previously shipped products and provide the customer with a $5 million non-interest bearing subordinated note. We'll pay down the note at a rate of $5 per DBS unit purchased by the customer in the future.

The customer also received 1 million shares of CalAmp common stock and 350,000 warrants to purchase additional CalAmp shares at $3.72 per share. In consideration for these items the customer agreed to release CalAmp from certain claims of potential liability and to pay CalAmp approximately $1.3 million, which represents the accounts receivable balance outstanding net of the $1 million in receivables that were forgiven upon finalizing the settlement agreement last month.

We believe that CalAmp's previously established reserves that we accrued earlier in fiscal 2008 will be adequate to cover the total cost of the settlement agreement. And importantly, the agreement is structured in a way that reduces future cash requirements associated with the settlement.

I have some good news with regard to the product qualification which we received early this afternoon for our latest generation products. We received notification of design approval for both new production and rework. We will now work with our customer towards starting the production and rework process.

If our expected internal timeline holds we believe we will likely resume DBS shipments to this customer in our fiscal 2009 first quarter. We expect we will be shipping a mix of both revenue generating new units and refubished units that were returned by the customer for rework under the product warranty. This has been taken into consideration in our forecasted ramp up of revenue with this customer.

In addition, we are continuing to pursue a lawsuit that we filed in May 2007 against a vendor that supplied the material we believe caused the field performance issue. While we believe we have a very strong case it is not possible to predict the timing and/or outcome of this lawsuit at this time.

Now let's move on to an update of our Wireless DataCom Division which provides communication systems, products and services for applications in public safety, mobile resource management and industrial monitoring and controls. During the third quarter the Wireless DataCom Division generated record revenues of $23.7 million, which were up 4% on a sequential quarter basis.

Year-over-year, Wireless DataCom revenues were up nearly 70% driven by strong organic growth along with acquisitions of the Aricept Vehicle Tracking business and SmartLink businesses. Both acquisitions were completed in the first quarter of 2008.

We are seeing across the board growth in our Wireless DataCom businesses based on a competitively positioned product servicing growing end markets. Gross margins for the Wireless DataCom Division were 41% in our most recent quarter, higher by approximately 5 percentage points on a sequential quarter basis.

The higher margins during the past quarter were evident in nearly all of our Wireless DataCom product lines and are primarily attributable to recent product introductions of several new higher margin products. (Inaudible) from these new products, licensing and application of our Asian supply chain to the recently acquired businesses are beginning to produce higher margins for our Wireless DataCom business.

We are also moving forward with our strategy to aggressively enforce and capture value from our Wireless DataCom patent portfolio. Last month we entered an agreement with DriveOK, Inc., a provider of GPS enabled vehicle tracking solutions to license two of our patents related to a vehicle location system that enables auto dealers and finance companies to locate and repossess vehicles upon a change in loan status.

Both patents were obtained through our acquisition of Aricept Vehicle Tracking business completed in March 2007. This agreement includes an annual license fee and purchase of related CalAmp manufactured equipment.

In addition, we recently filed suit against three companies that we believe are infringing on the two aforementioned patents. We are in discussions with several other companies and are committed to protecting our intellectual property rights by all appropriate means.

Our Aricept Vehicle Tracking business posted another good quarter of results with revenues of $3.4 million, up from revenues of $3.2 million in the second quarter. We recently launched a new tracking device for this business that provides significant performance enhancements and cost savings.

We expect to realize cost savings of approximately $1 million annually based on this product launch. We believe our complete end-to-end vehicle tracking solution is competitive and will maintain a leadership position in this highly, excuse me, lightly penetrated rapidly growing market.

Our mobile resource management products continuing to exhibit strong momentum in the marketplace. During the past quarters bookings were up and we added several new key customers.

As an example, we were recently notified that we had been selected to proceed with the pilot program providing a major urban school district with pupil tracking and fleet management. We expect to complete this pilot phase and receive a follow-up on award which could be a $3 million plus project later this summer.

Our industrial monitoring controls business had record revenues and gross margins in the latest quarter. Here the cellular based products that we introduced in 2007 are generating strong demand from our customers and contributing to revenue growth.

Our public safety mobile business continues to perform well and was recently notified of an award for a project valued at approximately $2.3 million for the deployment of a new public safety mobile data communications network for a major city in the western U.S. We are also seeing good contributions from SmartLink, acquired last April, which strengthens our competitive position by adding a public safety voice network solution that compliments our public safety data network offering.

During the quarter SmartLink made significant progress on deployments for the Department of Justice in San Francisco and Solano County, California, to provide proprietary inneroperable mobile radio communication platforms and integration services for public safety and critical infrastructure needs.

Overall we are pleased with the progress and performance of the Wireless DataCom Division. Our strategic growth initiative is on track and poised for profitable growth. We expect this division will continue to gain importance to CalAmp's overall operations and will help drive stock price improvement.

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

Thank you, Fred.

I will provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2008 third quarter along with our outlook for the fiscal 2008 fourth quarter.

Consolidated gross profit for the fiscal 2008 third quarter was $10 million, or 31.3% of revenues compared to gross profit of $12 million, or 20.4% of revenues for the same period last year. The $2 million reduction in consolidated gross profit was comprised of a $6.3 million decline in Satellite gross profit on 81% lower revenue and a $4.3 million increase in Wireless DataCom gross profit on 69% higher revenue.

The consolidated gross margin percentage improved from 20.4% to 31.3% due to the shift in product mix from the third quarter of last year when Wireless DataCom represented only 24% of total revenue, to the latest quarter in which Wireless DataCom accounted for 74% of total revenue.

Now, taking a look, closer look at gross profit performance by reporting segment, Satellite Division gross profit was $200,000 in the latest quarter, or 2.6% of revenues compared to gross profit of $6.5 million, or 14.5% of revenues in the third quarter of last year. The decline in Satellite Division gross profit and gross margin were due mainly to the loss of business with a key customer with the resulting lower overhead absorption rates that adversely impacted the gross margin percentage.

Wireless DataCom gross profit was a record $9.8 million in the latest quarter, or 41.4% of revenues. This compares to gross profit of $5.5 million, or 39.3% of revenue in the same period last year. During the third quarter gross profit and gross margin of this division benefited from new, higher margin Wireless DataCom products that were launched earlier this fiscal year.

As Fred mentioned in his remarks, during the third quarter our GAAP basis loss from continuing operations of $58.9 million, or $2.49 per diluted share included a non-cash goodwill impairment charge of $65.7 million.

I'll now give you some background on this impairment charge. As a result of the aforementioned significant decline in DBS revenue during the current year, combined with the substantial decline in the Company's market capitalization, the Company engaged an independent valuation specialist to assist it in conducting an interim goodwill impairment analysis as of November 30, 2007, the end of our fiscal third quarter.

Even though we subsequently entered a settlement agreement with the aforementioned key DBS customer in mid December, and expect to resume our commercial relationship with that customer shortly, this analysis indicated that the Company's goodwill has been impaired. As a result, during the third quarter we recorded a non-cash impairment charge of $65.7 million comprised of impairments in the Satellite and Wireless DataCom Divisions of $43.2 million and $22.5 million respectively.

Despite the fact that Wireless DataCom revenues and gross profit have increased in fiscal 2008 year-over-year, both of our reporting segments were determined to be impaired because in calculating the fair values of the Company's two reporting segments using a discounted cash flow method, a higher cost of capital was employed in this impairment analysis compared to previous analysis as a result of the valuation firm's assessment of risk which took into consideration the Company's decline in market capitalization and overall liquidity constraints at the present time.

Now, moving on to the balance sheet. Our total inventory at the end of the third quarter was $27.7 million representing annualized inventory turns of approximately three times. The third quarter accounts receivable balance was $21.7 million, down from $24.8 million at the end of the second quarter and represents a 60-day average collection period.

Our primary sources of liquidity are our cash and cash equivalents, which amounted to $5 million at the end of the third quarter. Net cash used for operating activities during the third quarter was $2.1 million. Total debt at the end of the quarter amounted to $32.5 million.

As previously disclosed, the net loss reported in the first quarter of this fiscal year caused an event of default as a result of being out of compliance with the financial covenants under our bank credit facility. Consequently, we cannot currently borrow on our working capital revolver until such time as we are able to amend the credit agreement to eliminate the default condition.

Furthermore, because the lenders have the right to call the loan while an event of default exists, $30 million of previously classified long-term debt is now shown as a current liability in our balance sheet.

Reaching a settlement agreement with the DBS customer with which we had a product performance issue, was an important prerequisite to restructuring the bank credit facility. Since finalizing the customer settlement agreement several weeks ago, we have been in active discussions with our lenders to negotiate an amendment to the credit agreement.

These discussions have resulted in good progress and we are evaluating several different alternatives to resolve the matter. But it is also important to note that we are currently projecting to generate positive cash flow from operations over the next several quarters and we believe that the current restriction on borrowing under our bank working capital line of credit will not adversely impact our operations.

Now, let's turn to our financial guidance. Based on our current projections, we believe that fiscal 2008 fourth quarter revenue will be in the range of 29 to $33 million with a loss from continuing operations in the range of $0.06 to $0.10 per diluted share.

The adjusted basis, or non-GAAP loss from continuing operations for the fourth quarter, which excludes amortization of intangible assets and stock-based compensation expense both net of tax, is expected to be $0.01 to $0.05 per diluted share. Included in our fourth quarter estimates are revenue contributions from the Wireless DataCom Division in the range of 20 to $24 million.

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

Thank you, Rick.

Just to recap the key points from our recent results, first although the non-cash impairment charge impacted our GAAP earnings, the recorded revenues were within our guidance range while non-GAAP earnings beat our original expectation.

Second, the Wireless DataCom Division posted another quarter of strong results and is helping to partially offset the temporary disruption in the Satellite Division, and finally, we are now approved on our designs for the key products related to our historically largest Satellite Division customer and expect to resume shipment of the latest generation products to this important customer in early fiscal 2009.

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?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Murray Arenson with Ferris, Baker Watts. Please go ahead.

Thanks. Good afternoon, guys.

Hi, Murray.

Couple questions. One just to clarify, the requalification, that's good news. Does that apply to all products or certain products and what is that as a percentage of total products going forward?

It applies to two of three rework oriented products at this point that have been submitted but the third product is not a product that's considered a new production product in terms of potential revenue. So in terms of there's really no loss of potential revenue at this point by not having the approval on the third product.

Okay. And everything can move forward on those two products without waiting for requalification and finalization on the third?

That's correct, yes.

Okay.

And you talked about having a mix of new product and refurbished product. Can you give us any sense of what you expect that mix to look like in the early quarters?

We're not prepared to publicly disclose that.

Okay.

The DataCom business, taking a look at the guidance a little bit, looks like DataCom you're expecting next quarter to be kind of flat, maybe a little bit down. Can you give us some color on why that's the case?

And then also maybe talk a little bit about margins which were strong this quarter. Is that a sustainable number for you or it looks like it might come down a little bit from there?

Okay. Let me address the first question. Yes, the revenue guidance is essentially if you take the middle of it is slightly down from the previous quarter but that is primarily due to our OEM business, which will be down substantially quarter-to-quarter in terms of our expectation, and it is partially offset by improvement to other places but not fully.

And in terms of margins, we believe we've stated publicly in the past that we're targeting over 40% gross margins as being our long-term target for that business and we're expecting to stay at or around that 40% level in the long-term.

Okay.

And then if I can ask you a little bit about this goodwill impairment. What I'm most curious about, I guess, is on the DataCom side of the business, I understand there was a DCF methodology employed and you've had to change up the cost of capital.

What I'm trying to figure out is how much of a real world exercise this was and how much of an accounting exercise this was. I don't know what you can or want to disclose in terms of the assumptions made in that DCF model but can you help us characterize that and figure that out?

Well, I guess, the accountants would probably argue that they are in the real world, but there's been a lot consternation internally on that and I'm going to turn this hot potato over to Rick.

Oh, okay, Murray.

I think it is really more of a creature of the accounting requirements. As we indicated in our comments, there's been, in the past year, no downturn in our Wireless DataCom business to the contrary, it's up considerably year-over-year.

But it is a fact that these goodwill impairment analyses at the end of the day must find some way to reconcile to the overall value of the enterprise as reflected in its market capitalization, and in so doing, it unfortunately caused the impairment charge spillover effect and caused us to have to take an impairment charge on the Wireless DataCom side as well as the Satellite side.

Okay.

But if you take a look at the methods that you guys had to employ to arrive at these figures, the cost of capital assumptions that were made, are those cost of capital assumptions that you would only make today and are highly unlikely to be made three to six months from now or are those reasonable cost of capital assumptions looking at the business going forward?

Well, we think that the cost of capital assumptions that were employed in this impairment analysis were on the very high side and reflects our current risk profile. It included a small company risk premium of nearly 4% because our market cap is in the bottom 10% of all public companies and, but that cost of capital, that discount rate, was up several percent or more relative to the last such analysis conducted nearly a year ago.

So Murray, I think that to summarize it, the Wireless DataCom business was affected by essentially the current profile of the Company which changed substantially given its market cap and given the lack of access and constraints on cash to invest in the wireless business in the near-term and we would expect that the discount rate in the future, as we work through the agreement with our biggest customer since our returning product and start shipping new product to come back down, but it's not like you recapture anything.

Right. I understand.

Okay, And you're just going to do another impairment analysis using a lower rate which should give you some cushion.

Okay.

There's no recapture potential.

I understand.

Last question for you. The situation with the lenders, you just received certification on requalifying on two products. Do you need all three before you button everything up with the lenders? Once you do it all, can you give us any sense of what you think the time frame is?

No. The requalification of that third product that Fred referred to is not, in our judgment, a prerequisite to finalizing an amendment with the lenders on this credit facility. We're striving to get that completed within the next two to three weeks.

Okay. That's great. Thanks very much.

Thank you, Murray.

Thank you. [OPERATOR INSTRUCTIONS]. Gentlemen, I'm showing that there are no further questions. I'll turn it back to you.

Okay. Well thank you, and thank you, everybody, for joining us today. Goodbye.

Thank you. Ladies and gentlemen, that will conclude today's teleconference.

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