CAMP4 Therapeutics Corp (CAMP) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CalAmp Fourth Quarter 2008 Conference Call. At this time all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder this call is being recorded today, Thursday, May 8, 2008.

I would now like to turn the conference over to Mr. Lasse Glassen from FRB. Please go ahead.

Thank you, operator. Good afternoon, everybody. Welcome to CalAmp's Fiscal 2008 Fourth Quarter Earnings Call. With us today are CalAmp's President and CEO, Rick Gold, 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 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 successfully resume selling certain products to one of its key DBS customers, the risks that the ultimate cost of resolving a product performance issue with that customer may exceed the amount of reserves established for that purpose, and other risks and uncertainties that are described under the heading "Risk Factors" in the Company's annual report on Form 10-K that will be filed next week with the Securities and Exchange Commission.

Any projections as to the Company's future financial performance represents management's estimates as of today, May 8, 2008. CalAmp assumes no obligation to update these projections in the future due to the 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, Rick Gold. Rick?

Thank you, Lasse. Good afternoon and thanks for joining us today to discuss CalAmp's fiscal 2008 fourth quarter and full-year results. I'll begin by offering a few comments on the recent leadership transition at CalAmp along with my thoughts on our business opportunity and then provide a review of the financial and operational highlights from this past quarter. 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 first quarter of fiscal 2009. Then I'll wrap up with some concluding remarks, followed by a question-and-answer session.

So I'm excited as I begin my new role at CalAmp, and I'm impressed by the talent and dedication of our employees. We have a strong, experienced team with a culture of success. We have broad technology platforms with attractive product offerings, and we see growing market opportunities. The foundations are in place for profitable growth at CalAmp. Our management team is energized, excited and working with a sense of urgency to address the challenges that face us and to capitalize on the opportunities that lie ahead.

With this change in CalAmp's leadership, we also have an opportunity to take a fresh look at how we operate. And by empowering all of our employees to make positive changes each and every day, I believe these actions will lead to a significant improvement in our performance.

In looking at our fourth quarter financial highlights and overview, total revenue for the fourth quarter was $29.8 million and was within the revenue guidance range of $29 to $33 million that we provided last quarter. Similar to the last several quarters, the top line results were driven by our Wireless DataCom Division, which generated revenues of $20.5 million, a 14% increase over Wireless DataCom Division revenues in the fourth quarter last year, and accounted for approximately 70% of our consolidated revenue in the period.

Satellite Division revenues of $9.3 million were lower on a year-to-year basis due to lower revenue from a key DBS customer because of last year's product performance issue. However, we've made significant progress towards resolving this matter and have begun the process of rebuilding our competitive position with that customer, which I'll update you on in a moment.

Consistent with the preliminary results we announced last month, results of operations included a GAAP loss from continuing operations of $9.2 million or $0.37 per diluted share. Included in the GAAP loss from continuing operations are pretax charges of $925,000 for a collectibility reserve of a contract receivable, $850,000 associated with the departure of the former CEO, and a goodwill impairment charge of $5.5 million or $0.21 per diluted share, net of the income tax effect.

The goodwill impairment charge is a result of the phase II impairment analysis completed in the fourth quarter and is in addition to the amount recorded during the third quarter. I want to stress that this is a non-cash charge that occurred primarily because our market capitalization was less than the carrying amount of our consolidated net assets. Rick Vitelle will provide more details on the phase II goodwill impairment charge in his remarks.

Excluding the impairment charge, amortization of intangible assets and stock-based compensation, we incurred an adjusted basis or non-GAAP loss from continuing operations of $2.7 million or $0.11 per diluted share. I refer you to our fourth quarter earnings press release issued earlier today for a detailed reconciliation of the GAAP basis loss from continuing operations to adjusted basis loss from continuing operations.

Since I realize that many of you listening today are very interested to know where we stand in terms of resuming our commercial relationship with our historically largest DBS customer, I'd like to provide you with an update on this matter. As we announced previously, in December 2007 we reached a settlement agreement with this customer that addressed the financial and rework aspects of this product performance issue. This was followed by the customer re-qualifying our designs for the latest generation products in January of 2008.

We have restarted our manufacturing lines to support the forecasted delivery schedule and anticipate that our shipments will resume later this month. That is during our fiscal 2009 first quarter. We have implemented additional quality control measures and continue to work closely with this customer on all the procedural details related to the resumption of shipments.

We anticipate that we'll be shipping a mix of both revenue-generating new units and refurbished units that were returned to us by the customer for rework under the product warranty. This projected mix of new production units and reworked units has been taken into consideration in our forecasted ramp-up of revenue with this customer.

In addition, we're continuing to pursue the lawsuit we filed in May of 2007 against the vendor that supplied the material that we believe caused the product performance issue. While we believe we have a very strong case, it's too early to predict the timing or outcome of this lawsuit.

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 fourth quarter, the Wireless DataCom Division generated revenues of $20.5 million, which is a 14% increase on a year-over-year basis, driven primarily by the contributions of the Aricept Vehicle Tracking business and the SmartLink business, both acquired in the first quarter of fiscal 2008.

On a sequential quarter basis, Wireless DataCom Division revenues were down from $23.7 million in the third quarter, primarily due to lower shipments of radio modules to a large OEM customer resulting from program scheduling. Shipments to this customer are expected to be flat in our fiscal 2009 first quarter and to begin ramping up in the second quarter with future shipments in line with the customer's success in its markets.

Our Mobile Resource Management products are continuing to perform very well in the marketplace. Our MRM revenues were up both year-over-year and on a sequential quarter basis. During the fourth quarter, bookings were up and we added several new key customers, including a leading European fleet tracking service provider. We also added dedicated resources to drive our market penetration in Latin America and will provide additional details on our progress in the near future.

As an aside, today CalAmp generates less than 5% of its consolidated revenues from sources outside the U.S. and Canada. I believe it's reasonable for a company with our scale and breadth to generate 20% or more of its revenues internationally, and we'll be working towards that objective over the next several years.

Aricept revenues in the fourth quarter were down sequentially from the third quarter due primarily to a general weakness in the used car sales market and a one-time license fee that was booked in the third quarter. The macroeconomic conditions that are causing turmoil in the vehicle financing market are posing both new challenges and new opportunities for CalAmp. While many end customers are facing severe downturns in their operations, our asset tracking solutions are becoming even more important to their businesses. Some of our customers who have traditionally focused purely on subprime vehicle financing are now targeting midprime loans and further driving the adoption of our solutions.

Based on these significant external changes in customer behavior and market opportunities, we've made fundamental changes in our go-to-market strategy, so that we can capitalize on these shifts in the marketplace. We've added emphasis on direct sales to major financing companies and initiated telemarketing effort and e-commerce capabilities to target the fragmented used car dealerships market.

In addition, we've initiated private-label service solutions for key partners and have reduced our overall reliance on channel intermediaries. Although we expect softness in our Aricept business in the short term, the long-term prospects look very encouraging. Tracking and monitoring collateral assets just makes good economic sense.

We continue to make product enhancements and have introduced a data rate pooling plan for our customers, launched a new customer interface website and introduced DLMU 1450 hardware unit, with integrated internal GPS and GSM/GPRS antennas that significantly reduces installation expenses. With Aricept we now have a competitive, complete end-to-end tracking solution. We plan to leverage our leadership position in the vehicle financing arena and enter additional vertical markets later in fiscal 2009.

Our public safety mobile business continues to perform well, and we're executing on a previously announced award for a project valued at approximately $2.3 million for the deployment of a new public safety mobile data communications network for the city and county of Denver, Colorado. System acceptance is scheduled for the latter part of this summer, with the deployment activities on a fast track, targeting completion in time for the Democratic National Convention, which is being held in Denver.

In addition, our Dataradio Cipher IP Router/Radio Modem for public safety mobile data applications operating over cellular networks was recently given preliminary approval for use on the Verizon network. The Cipher complements our private mobile data network offerings and enables multi-network system implementation whereby first responders can have the service reliability of mission critical private data networks and can still benefit from the higher data throughputs of cellular networks.

I'm also pleased with contributions from SmartLink, which strengthens our competitive position by giving CalAmp a public safety voice network solution that complements our public safety data network offering. We'll look to capitalize on the market trend requiring inoperability across different technology standards and networks. During the fourth quarter, SmartLink made significant progress on deployments for the Department of Justice in San Francisco as well as Solano County, California to provide interoperable mobile radio communications infrastructure for public safety and first responder needs.

We're continuing to make good progress with our strategy to aggressively enforce and capture value from our Wireless DataCom patent portfolio. During or shortly after the fourth quarter, we entered into license agreements with Skywatch GPS and Procon, each of which provide GPS-enabled vehicle tracking solutions. These agreements come on the heels of a license agreement announced in the previous quarter with DriveOK, Incorporated and now gives us three licensing partners for our vehicle location and recovery process technology. We're committed to protecting our intellectual property rights by all appropriate means and capturing the value of our technology innovations.

Overall, we're pleased with the progress and performance of our Wireless DataCom Division. Our strategic growth initiative is on track and poised for profitable growth. That said we still expect significant integration activities to occur over the next several quarters for the six acquisitions we completed in the past two years before we can fully shift our focus from integration to exploitation of new opportunities.

In the meantime, during fiscal 2009, we plan to invest in four key organic growth initiatives that will lay the foundation for growth in future years. The first is strengthening our sales engine and distribution channels, including expanding our Wireless DataCom products to high-growth international markets. Second is penetrating adjacent vertical markets and applications. Third, moving up the value chain to offer more services and integrated solutions. And fourth, exploiting the technical and operational synergies between our lines of business to provide more comprehensive product offerings to our customers.

The critical mass we developed in Wireless DataCom along with our broad technology platforms gives us a competitive advantage that most other players in our markets cannot offer. We expect this business will continue to gain in importance to CalAmp's overall operations and will help to drive shareholder value.

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

Thank you, Rick. I will provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2008 fourth quarter along with our outlook for the fiscal 2009 first quarter.

Consolidated gross profit for the fiscal 2008 fourth quarter was $7.5 million or 25.3% of revenues compared to gross profit of $10.6 million or 19.4% of revenues for the same period last year. The reduction in consolidated fourth quarter gross profit was attributable entirely to the Satellite Division, which had 75% lower revenue.

Wireless DataCom Division gross profit was essentially unchanged on 14% higher revenue. The fourth quarter gross margin percentage, on a consolidated basis, improved from 19.4% last year to 25.3% this year due to an overall shift in product mix. In the fourth quarter of last year, the Wireless DataCom Division, which operates at higher gross margin levels than the Satellite business, represented only 33% of total revenue, while in the latest quarter, Wireless DataCom accounted for nearly 70% of total revenue.

Now, taking a look at gross profit performance by reporting segment, Satellite Division gross profit was $722,000 in the latest quarter, or 7.8% of revenues, compared to gross profit of $3.8 million or 10.4% of revenues in the fourth quarter of last year. The decline in Satellite Division gross profit and gross margin were due mainly to the significant reduction of business with a key customer during fiscal 2008 with the resulting lower manufacturing overhead absorption rates that adversely impacted the gross margin percentage.

Wireless DataCom Division gross profit was $6.8 million in the latest quarter, or 33.2% of revenue. This compares to gross profit of $6.8 million or 37.9% of revenue in the same period last year. The year-over-year change in gross margin percentage for this division was affected by changes in product mix and by the acquisition in the fiscal 2008 first quarter of Aricept, which is currently operating at a lower gross margin percentage than our other Wireless DataCom businesses. We expect a gross margin percentage for Aricept to be higher in fiscal 2009.

On a sequential quarter basis, Wireless DataCom gross margin was lower by approximately 8 percentage points. This decline is attributable to several factors, including fixed costs that were under absorbed by the lower revenue level, integration costs, warranty provisions and provisions for excess and slow-moving inventory. We expect the gross-margin percentage for the Wireless DataCom Division to be higher next quarter.

As Rick Gold noted earlier, our fourth quarter GAAP basis loss from continuing operations of $9.2 million or $0.37 per diluted share included a non-cash goodwill impairment charge of $5.5 million, a charge of $850,000 associated with the departure of the Company's former CEO and a collectibility reserve of approximately $925,000 for a contract receivable.

I'll now give you some background on the fourth quarter goodwill impairment charge. As a result of a significant decrease in business during fiscal 2008 with the aforementioned key DBS customer due to a product performance issue and the associated substantial decline in the Company's market capitalization, we conducted an interim goodwill impairment analysis as of November 30, 2007. This resulted in recording an estimated non-cash goodwill impairment charge of $65.7 million during our fiscal third quarter.

Accounting standards require that a second phase of the impairment test be performed if certain conditions are met, and this second test was completed during the fourth quarter. This phase II analysis determined that there was an additional impairment of goodwill of $5.5 million, which was recorded in fourth quarter. This $5.5 million is comprised of impairments of Satellite and Wireless DataCom goodwill of $1.2 million and $4.3 million respectively.

Now, moving on to the balance sheet, our total inventory at the end of the fourth quarter was $25.1 million, representing annualized inventory turns of approximately three times. The fourth quarter accounts receivable balance of $20 million was down from $21.7 million at the end of the third quarter and represents a 55-day average collection period.

Our primary sources of liquidity are our cash and cash equivalents, which amounted to $6.6 million at the end of the fourth quarter, up from $5 million at the end of the third quarter. Net cash provided by operating activities in the fourth quarter was $2.6 million. Total debt at the end of the fourth quarter amounted to $32.5 million, comprised of $27.5 million of bank debt and a $5 million note payable to a key DBS customer. During the fourth quarter, the bank debt was reduced by $4.5 million.

As previously disclosed, during the fiscal fourth quarter, the Company announced the amendment of its bank credit agreement. Under the terms of the amended credit agreement, the lenders agreed to waive the financial covenant violations that existed for the first three quarters of fiscal 2008.

In addition, the financial covenants contained in the original credit agreement, consisting of a fixed-charge coverage ratio, a leverage ratio and a minimum net worth requirement were eliminated and were replaced with new covenants that required minimum levels of consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA, and Wireless DataCom Division revenues. The amendment also makes available new borrowings of up to $1 million under the working capital revolver.

The credit agreement, as amended, has a maturity date of June 30, 2009, with financial incentives to repay all borrowings by December 31, 2008. Further details of the terms and conditions of this credit agreement amendment are provided in the Company's Form 8-K that was filed with the Securities and Exchange Commission on March 3, 2008.

Now, let's turn to our financial guidance. Our first quarter guidance is somewhat cautious due in part to continued uncertainties surrounding the U.S. economy, which could impact purchase decisions by key customers. Based on our current estimates, we believe that fiscal 2009 first quarter revenue will be in the range of $29 to $32 million, with a net loss in the range of $0.05 to $0.08 per diluted share on a GAAP basis. The adjusted basis or non-GAAP results of operations for the first quarter, which exclude amortization of intangible assets and stock-based compensation expense, both net of tax, are expected to be in the range of breakeven to a loss of $0.03 per diluted share.

With that, I will now turn the call back over to Rick Gold for some final comments.

Thank you, Rick. Just to recap the key points from our recent results, the fourth quarter revenues and earnings were consistent with the preliminary results announced last month. The Wireless DataCom Division posted a solid quarter. Our strategic growth initiatives here are taking hold, and we now have the critical mass for profitable growth that should significantly enhance shareholder value. And with approval of redesigned DBS products for our historically largest customer, we're now poised to resume shipments, and once again become a key participant in the DBS HDTV upgrade cycle.

I'm very pleased to have the opportunity to lead the day-to-day operations of a company with such tremendous potential. We have a lot of work ahead of us, but I'm confident that the CalAmp team is up to the task of returning the Company to profitability.

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

Thank you. Ladies and gentlemen, at this time we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Murray Arenson from Ferris, Baker Watts. Please go ahead.

Thanks. Good afternoon, guys.

Good afternoon.

Hi, Murray.

A couple of questions for you, first on the growth side of things and then on the expense side just to kind of take your pulse and clarify here. As far as resuming shipments by the end of the month, I'd just like to get a confidence level from you. Are there any additional hurdles at all that we're looking at or is this essentially a done deal at this point?

Well, nothing's a done deal until it's done, but I do not believe there are any significant hurdles remaining. There are a number of procedural things that have to happen, but the ball is rolling and we are building product.

Okay.

And we have the -- back in January we got the requalification from the customer, so we are on track and optimistic.

Okay. And can you help us at all by trying to characterize, to the extent you can, the mix of reworked products and new products and/or the ramp you see happening through the year?

So, I'm not going to answer that quantitatively, Murray, but I'll answer it qualitatively, both because we don't know the exact numbers and because that's just not something we're prepared to disclose. But I will say that there's going to be a balance between new product and reworked product. That's part of the understanding, the agreement. It's in everybody's interests to operate that way. And that doesn't mean it's going to be 50-50, but it's going to be a balance, and we're going to strive to manage that throughout the year, as is the customer.

And that's for cash reasons. We don't want to have a spike of reworked product at the beginning or the end of that process, so it's in everybody's interest to keep the line balanced and as efficient as possible.

As far as the ramp, it's not going to be a step function but we're starting at a relatively low level, and we're in discussions now about the kind of increases and ramp we can expect during the course of the year. And that will play out, but we're -- since we're starting at a relatively low level and getting back up and since we have a line that we already know is capable of much higher volumes, I don't believe we're going to be supply limited once we get a little ways out of the gate there.

Okay. And looking at the Wireless side of the business a little bit, can you talk about your visibility or your view, taking a look at the full year on what you can expect there if the economy is cooperating or, on the other hand, if it's not?

So we're not prepared to give guidance, again, quantitative guidance for the year. I'll make a couple points there. I think -- the first is all the markets that we're playing in are fundamentally growth markets. We believe that over time -- and I'll get back to that in a second -- that we have the ability, through some of the initiatives I talked about earlier, to grow our revenues at a rate that's materially higher than the market growth rates. That said, some of those initiatives have a gestation period associated with them that's measured in quarters. It's not months, it's not years but it is quarters.

And we're -- I also talked just a couple minutes ago that the integration phase -- from the standpoint of the organizational integration, the financial integration, some of the internal processes, etc., we're very well along with that. But from that integration to the operational synergies to the product and channel synergies and then ultimately to the strategic synergies takes some time. So we're -- we've got a couple issues that I touched on there with the OEM customer, with Aricept, that I think will kind of balance out in the very near term. But I believe over the course of the year, and then certainly into next year, we expect the Wireless Data business to be on a very healthy growth trajectory.

Okay. You talked a little bit about the patents and settlements and monetization on the patent side. Are there any particular -- is there a flow we need to be aware of in terms of settlement payments that you've received or accrued for anything like that?

No. That's -- some of them had upfront; some of it's over time; some of them also had purchase of product going forward as part of that. So I think the short answer is no. Those will generally flow through the business.

Okay. And then just a couple expense questions. One is as kind of a one-off, I saw the recognition of the $850,000 in this quarter. Is there any further charges we should look for related to the management change or is that all captured in this quarter?

There's going to be a small one next quarter. It was originally $1 million, and it's about $150,000, or $170,000 of that is actually deferred into Q1.

Okay. And then I notice the selling expense line was up this quarter, and I know you talked about that being a focus of growth for the Company, specifically internationally. Is that what we're looking at? And is this kind of a run rate number or how should we deal with something like that?

Yes. Actually, the big piece of that jump that you see, Murray, was the $925,000 collectibility reserve.

Oh, okay.

That appeared in that line item. So the -- we will be seeing some growth going forward in that line, but I also believe we're going to be getting some efficiencies in our engineering organizations and our operations through some of the integration work that's already happened there that will allow us to make those kinds of investments in sales and marketing.

Okay. All right. Thanks very much.

Thank you. (OPERATOR INSTRUCTIONS) And I'm showing that we have no further questions at this time. Please continue with any closing remarks.

I don't have any prepared closing remarks. But I, again, would thank everyone for their attention and thanks again for joining us today. I look forward to speaking with you again in July.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.