CAMP4 Therapeutics Corp (CAMP) 2009 Q3 法說會逐字稿

Welcome to the CalAmp fiscal 2009 third quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded January 13th, 2009. I would now like to turn the conference over to Mr. Lasse Glassen with FRB. Please go ahead.

Thank you, and good afternoon, everybody. Welcome to CalAmp's fiscal 2009 third 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 economic conditions, increased 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 risks that the ultimate cost of resolving a product performance issue with one of the Company's DBS customers may exceed the amount of reserves established for that purpose, the Company's ability to obtain a waiver from its banks under its credit agreement of an event of default arising from a financial covenant violation that arose at the end of December 2008, the length and extent of the US market downturn, stemming from the recent tightening of credit markets that may impact the Company's business and that of its customers, and which may constrain the Company's ability to refinance its bank term loan by the December 31st, 2009 maturity date, and other risks and uncertainties that are described under the heading Risk Factors in the Company's fiscal 2008 annual report on Form 10K as filed with the SEC on May 15th, 2008.

Any projections as to the Company's future financial performance represents management's estimates as of today, January 13th, 2009. 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 thank you for joining us today to discuss CalAmp's fiscal 2009 third quarter results. I'll begin with comments on the financial and operational highlights from this past quarter and then I will 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.

I will wrap up with our revenue and earnings guidance for the fourth quarter of fiscal 2009, along with some concluding remarks. This will be followed by a question-and-answer session.

In looking at our third quarter financial highlights and overview, total revenue for the third quarter was $25.8 million, representing an increase of 11% on a sequential quarter basis, and driven by the resumption of volume shipments to our historically largest direct broadcast Satellite or DBS customer. Despite the strong sequential growth, consolidated third quarter revenue was slightly lower than the revenue guidance range of $26 million to $30 million that we provided last quarter, with the shortfall primarily due to Wireless DataCom demand weakness.

Looking at the bottom line, results of operations included a GAAP loss from continuing operations of $1.8 million or $0.07 per diluted share, which was in line with the guidance that we provided last quarter.

Excluding the amortization of intangible assets and stock-based compensation expense, our adjusted basis or non-GAAP loss from continuing operations was $741,000 or $0.03 per diluted share. This was also in line with our previously provided guidance range.

I refer you to our third quarter earnings press release issued earlier today for a detailed reconciliation of the GAAP basis loss from continuing operations to adjusted basis income or loss from continuing operations.

And looking at our cash flows, during the quarter we generated strong cash flow from operating activities, bringing total operating cash flow to $3.3 million through the first nine months of fiscal 2009. Rick Vitelle will expand on this in his remarks, but suffice it to say I am pleased with our ability to continue generating cash flow from operations under these difficult economic conditions.

I'll next provide updates for our Satellite and Wireless DataCom businesses. Our Satellite business is back on a growth path with third quarter revenue of $7.4 million, more than double the revenue in our second quarter. Shipments to our historically largest customer continue to ramp up, with revenue in the fourth quarter expected to increase sequentially from the third quarter.

And in an important development last week we announced the settlement of our litigation with [Rogers] Corporation that we had initiated in 2007. Rogers paid CalAmp $9 million in cash to settle all outstanding claims.

The settlement materially improves CalAmp's financial strength and we believe it's the best outcome for our shareholders. With this litigation behind us, we can now focus on new challenges and opportunities.

As a further sign of the improving fundamentals of our DBS business, our engineering team is making progress on several new product development initiatives to address opportunities with next generation DBS products. In short, we are now well on the road to recovery and expect our DBS revenue to be materially higher in fiscal 2010, as we continue to ramp up our production lines for existing products and introduce new products.

Now let's move on to an update of our Wireless DataCom business which provides communication systems, products and services for applications in the public safety, Mobile Resource Management or MRM, and industrial monitoring and controls markets.

During the third quarter, the Wireless DataCom business generated revenues of $18.5 million, which is a 22% decrease on a year-over-year basis, and down 8% on a sequential quarter basis. While we did see strong year-over-year growth in our MRM products, the decline in Wireless DataCom revenue is not attributable to any one product line, but is instead indicative of a very sluggish global economy that has resulted in a number of customers delaying purchase decisions for our products.

As an example of the difficult economic conditions that we currently face, last month we announced that we had been awarded a contract byAnsaldo initially valued at $2.5 million, to supply a mobile data communications network for a driverless 1,300-kilometer private railway system in Australia to be operated by a major international mining company. Excuse me.

However, we were just advised that the mining company has postponed this project because of economic pressures on their business. In light of the weakness in demand, last week we took certain actions to reduce the costs and expenses of our Wireless DataCom business and realign its structure. We reorganized our public safety, mobile and industrial monitoring and controls business units into one operating unit by combining R&D groups, merging sales management, and consolidating manufacturing operations.

As part of this restructuring, we have reduced our workforce by 8%, which is expected to yield annualized savings of approximately $2.5 million. This will result in a charge of approximately $800,000 in the fourth quarter.

We believe these changes will improve operating efficiencies and profitability of the Wireless DataCom segment while maintaining the ability to achieve our longer term growth objectives once market conditions improve. This new structure should also increase focus on the attractive utility and transportation verticals, while preserving our existing public safety and industrial orientation.

Despite the tough economic conditions we face in our Wireless DataCom markets, we continue to increase our market reach and have a healthy pipeline of new products and business opportunities. We recently announced an agreement with Mauser Electronics to distribute our UHF and VHF transceiver modules and telemetry radios. Mauser's our first stocking distributor with global reach and has a sales base of more than 280,000 customers in 170 countries.

This agreement builds on our network of regional distributors recently put in place and further expands our sales channels for our transceiver and telemetry modules . As we built build a network we will look to expand our product offerings through these indirect channels.

We also received two key carrier certifications for recently launched cellular products. Our new Cypher mobile cellular modem was certified by Bell Mobility, a leading Canadian wireless carrier. This certification is expected to help us expand our base of customers in Canada.

To that end, I'm pleased to report that we recently made initial shipments of Cypher modems to a governmental agency in Quebec. In addition, our 882EVDO 3G wireless broadband router was recently certified for use on the Verizon Wireless cellular network and is being brought to market under Verizon's open development program.

This certification is an important step in expanding our cellular wireless product portfolio, as the 882EVDO brings 3G speeds to critical applications such as telemetry and SKATA and the industrial monitoring and controls marketplace. We are now making volume shipments of this product to a customer in use of monitoring base stations of a tier one wireless carrier.

Difficult economic conditions notwithstanding, I believe we're taking the right actions to position our Wireless DataCom business for long-term profitable growth. The critical mass we've developed along with our broad technology platforms and focus on middle market customers gives us a competitive advantage that most other players in our markets cannot offer.

Overall, our margins and cash flow are strong; and we believe we are well-positioned to weather the current economic storm and prosper, once market conditions stabilize.

With that, I'll now turn over the call to Rick Vitelle, our Chief Financial Officer, for a closer look at the third quarter financial

Thank you, Rick. I will provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2009 third quarter. Consolidated gross profit for the fiscal 2009 third quarter was $7.6 million or 29.6% of revenues, compared to gross profit of $10 million or 31.3% of revenues for the same period last year.

The decrease in consolidated gross profit was primarily attributable to lower revenues from our Wireless DataCom products as the slumping global economy delayed purchases by several of our key customers. As we have discussed in the past, product mix significantly affects consolidated gross margins because revenues from Wireless DataCom products carry much higher gross margins than revenue from our Satellite products. During the most recent quarter, Wireless DataCom products accounted for 71% of consolidated revenues and Satellite products represented the remaining 29%.

This compares to the immediately preceding quarter in which 86% of revenues were from Wireless DataCom products and 14% from Satellite products.

As we continue to ramp up our DBS revenue and the percentage of our revenues from Satellite products increases, we expect our consolidated gross margin percentage will decline slightly compared to previous periods, where Wireless DataCom products accounted for a higher percentage of overall revenues.

Now, taking a look at gross profit performance by reporting segment, gross profit for Satellite products was $253,000 or 3.4% of Satellite product revenues in the latest quarter, compared to gross profit of $221,000 or 2.6% of Satellite product revenues in the third quarter of last year.

Despite a slight improvement in the most recent quarter, the gross margin for Satellite products remains significantly lower than historical levels. This is due primarily to the low level of sales that has resulted in lower manufacturing overhead absorption rates which adversely affects the gross margin.

Wireless DataCom gross profit was $7.4 million in the latest quarter or 40% of Wireless DataCom revenue. This compares to gross profit of $9.8 million or 41.4% of revenue in the same period last year. The lower gross profit in the most recent quarter was due primarily to lower Wireless DataCom revenue in the latest period. The slight year-over-year reduction in gross margin percentage was primarily attributable to the lower absorption of fixed costs on the lower revenue level.

Now, moving on to the balance sheet, our total inventory at the end of the third quarter was $19.4 million, representing annualized inventory turns of approximately 3.4 times. This compares to total inventory of $24 million, or annualized inventory turns of about 2.6 times in the prior quarter.

The improvement in the most recent quarter was a result of reductions in inventory across all of our businesses, due to an intensified focus on working capital management. The third quarter accounts receivable balance of $15.3 million compared to $16.6 million at the end of the second quarter, and represents a 52-day average collection period.

Our primary sources of liquidity are our cash and cash equivalents that amounted to $5.7 million at the end of the third quarter, up from $4.7 million at the end of the second quarter. Through the first nine months of fiscal 2009, net cash provided by operating activities was $3.3 million, total debt at the end of the third quarter amounted to $29.8 million, comprised of $25.2 million of bank debt and a non-interest bearing subordinated promissory note payable to a key DBS customer with a principal balance of $4.5 million.

During the third quarter, principal amounts of the bank debt was reduced by $750,000, and the note payable to the key DBS customer was reduced by $528,000.

In the first nine months of fiscal 2009, total debt has the first nine months of fiscal 2009, total debt has been reduced by approximately $2.8 million. The Company was not in compliance with one of its financial covenants at the end of December 2008 that requires a minimum level of Wireless DataCom revenues on a rolling three-month basis.

The Company has requested a waiver of this covenant violation and is currently in discussions with the banks, but thus far the banks have not waived this noncompliance. Consequently, the Company has classified the entire bank term loan balance as a current liability in the consolidated balance sheet at November 30, 2008.

This week, the Company received a cash payment of $9 million from the out of court litigation settlement with Rogers Corporation. Under the terms of the Company's bank credit agreement as amended, the Company is obligated to pay 50% of the net cash proceeds of this legal settlement or about $4.1 million to the banks as a reduction of the term loan balance.

After giving effect to this principal payment, the balance of the term loan is approximately $20.3 million. The Company continues to seek a waiver of the covenant violation and expects that it will ultimately refinance the bank debt from the proceeds of an asset-based loan at or before the December 31, 2009 maturity date.

With that, I'll now turn the call back over to Rick Gold for our guidance and some final comments.

Thank you, Rick. Now let's turn to our financial guidance. Our fourth quarter guidance is reflective of the tough macroeconomic environment that continues to impact purchase decisions by key customers. We anticipate a flat to slightly down top line compared to the third quarter, with an increase in sales of Satellite products offset by weakness in the Wireless DataCom revenue.

Based on our current estimates, we believe that fiscal 2009 fourth quarter revenue will be in the range of $22 million to $26 million, with a GAAP net income driven by the proceeds from the aforementioned legal settlement in the range of $0.06 to $0.10 per diluted share.

The adjusted basis or non-GAAP results of operations for the fourth quarter, which exclude amortization of intangible assets and stock-based compensation expense, both net of tax, are expected to be net income in the range of $0.10 to $0.14 per diluted share. The GAAP and non-GAAP expected results for the fourth quarter include per share income net of tax of approximately $0.20, attributable to the $9 million legal settlement and the workforce reduction charge of $800,000.

Early in fiscal 2009, you may recall that we provided longer term guidance for our business. These projections included that in the second half of fiscal 2010, we targeted a consolidated quarterly revenue run rate of approximately $40 million, with a Wireless DataCom quarterly revenue run rate greater than $25 million, and Wireless DataCom gross margins above 40%, along with a profitable Satellite business, resulting in consolidated gross margins of approximately 30%.

In light of the current economic conditions, we're reducing our projected second half fiscal 2010 Wireless DataCom quarterly revenue run rate from $25 million to $20 million, and our consolidated revenue run rate from $40 million to approximately $35 million. We project gross margins of 40% for Wireless DataCom products and 28% on a consolidated basis, due to the mix shift.

The operating margin adjusted to exclude stock-based compensation expense and intangible asset amortization expense is now targeted to be 6%, and we expect to continue generating positive operating cash flow.

In concluding our prepared remarks, I would like to recap some key points drawn from our recent results and latest developments. Our Satellite business is in the midst of recovery with ramping production lines and significant growth opportunities. While the sluggish economy is impacting the growth of our Wireless DataCom product sales, we believe the realignment outlined today should partially mitigate the effects of the slow economy on our results going forward and increase our focus on the most attractive vertical markets. And with the receipt of the $9 million settlement proceeds, we have fortified our balance sheet.

Moving forward, we expect to continue to generate positive cash flow from operations and further enhance our liquidity position as we convert long-standing DBS inventory into cash. The legal settlement enables us to reduce our bank term-loan balance by approximately $4 million to $20.3 million. As previously discussed, we expect to refinance the back debt during calendar 2009 from the proceeds of an asset-based loan.

I believe we're making good progress overall on our plan to return CalAmp to sustainable profitability, albeit in a challenging environment.

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 begin the question-and-answer session. (Operator Instructions). One moment, please, for your first question. Our first question comes from the line of Richard Todaro with Kennedy Capital. Please go ahead.

Hi, guys. I think we have pretty good visibility in what's going on in DBS and in DirectTV, but could you guys talk about -- give us a little bit more color on wireless? In your guidance you guys are guiding wireless down sequentially, and I just don't know the amount and why and if that thing -- if that's going to bottom or stabilize.

You gave some guidance in the back half of the year, but how can we have any comfort in that? What gives you comfort that that doesn't continue to decline?

Okay. There's a couple questions in there. Let me take sort of the current question first, and then I'll transition to the forward-looking piece of that.

We had, in the current quarter on a sequential basis in wireless, we were -- we had softness in all of the segments. The Public Safety segment, we had softness in Mobile Resource Management, we had softness in Industrial Monitoring and Controlsfor reasons I think that are all generally connected with the economy, but in different ways.

The Public Safety is an example, there were a couple new police data systems that we had been selected on. One of them was actually a follow-on where we're sole source, and those projects, they slipped in time.

We expect them to happen, all the indications are that they will happen, but municipal funding is clearly under some pressure. I think there's a number of projects that we're looking at in the pipeline where the ultimate funding or a big piece of the funding is from the federal government.

I think those are looking very solid, but obviously, anything where the primary source of funding is from local tax revenues, there's some pressure on those. But I think from a competitive standpoint, what we're seeing in that market, we're not seeing significant shifts. We're not seeing customers going away but we are seeing some projects getting delayed or scaled down.

In the Mobile Resource Management area, we had a couple quarters ago, we had some substantial sequential increases there that were driven by fuel prices. And we, earlier in the year, we had had some -- in our Aercept vehicle finance subvertical, we'd had some sequential drops due to what was happening in the used car market and particularly the subprime used car market.

But that was in large part compensated by the fact that as fuel prices went up, the fleet operators were accelerating the pace of introduction of tracking modules for fleet tracking. And again, that pace has slowed down, as fuel prices have softened. We continue to see a lot of activity there, but not at the accelerated pace we had and since that's enterprise IT spending, again, I think throughout the economy we're seeing pressure there.

And then finally, in the industrial monitoring and controls market, there's a mix of verticals there. We mentioned the one project with the driverless railroad. There's some of the enterprise-related spending there, I think, is soft, but utilities and transportation are looking very solid there. Those are two segments that are doing pretty well. So it's a mix across the different verticals.

I think the thing that we've talked about for the last couple quarters strategically is moving -- is really expanding our business internationally and moving more of our products into some of these indirect channels to really build a base there so that we can target our direct sales activities on larger projects and key accounts.

And we're starting to see the impact of that. We're starting -- our pipeline of larger projects is actually larger today than it was three months ago and six months ago. That's what gives us some confidence looking forward, but I would have to caveat that with, given the markets we play in, we're certainly exposed to what's happening in the economy.

So one -- could you just -- it was going fast there. Can you just repeat what you think the run rate on the wireless part of the business would be, kind of in the back half of the year?

Yes. We're looking -- we had expected the wireless business to be $25 million a quarter and the Satellite to be $15 million. And we've modified that down to $20 million for the wireless and still at $15 million for Satellite.

Okay. And --

And just for reference, by the way, we were at $20 million in wireless the first two quarters of this fiscal year. So we've been down sequentially two quarters. But like I said, the pipeline looks pretty good. I think the issue that we're really focused on right now is the timing to get some of these big jobs through and actually into the deployment phase.

And I apologize, I just without knowing that business, I just can't add a lot of value there, so I'm asking for some guidance here. Are you -- when you guide in that part of the business, is there a backlog of visibility? Is it the contracts? What sort of comfort level can we have that it doesn't all of a sudden just fall off the cliff or we don't get hit with an inventory issue or some issue in that part?

So we don't actually publish our backlog because there's a lot of apples and oranges there, different pieces of that business, different projects have different levels of firm order commitments. In general, the Public Safety jobs, that is a backlog business.

But the Mobile Resource Management and the industrial monitoring and controls business, we typically get blanket orders and then we get releases against the orders. So it's not what I would call a true backlog business. But we do have, like I say, we have blanket orders.

And in the Public Safety piece of the business we have very good visibility on that, one to two quarters out. Beyond that, it gets less.

So I think for the quarter, we have -- with the exception of the turns business that we get, in other words, there is a component, some of our smaller orders, where we get business in -- we get orders in a month for delivery in a month.

But in general, in that side of the business -- and one of the things we mentioned on the inventory, you'll notice there was a substantial drop across the board. We're taking steps in all of our businesses to make sure that we're not leaning forward too far.

One of the things that we've done from a product standpoint in several of our businesses is really moved to common platforms, so that we don't have to build finished goods of specific products. We can hold the inventory at a sub assembly stage or the platform stage, and then in fairly short order, convert that to specific product for a specific customer, where the firmware may be custom, but not the basic hardware platform.

Along those lines, I mean, you historically had to carry more inventory with DBS customer or with EchoStar. Will you have to start building inventory as it relates to those sales going out, or do you think you can actually keep inventory flat for the rest of the year? How do you --?

We expect our inventory to decline sequentially for at least two more quarters. And we expect the turns to grow substantially. So just for reference, our inventory turns two, three years ago when we were in -- when we were rocking and rolling in the Satellite business, we were in the eight or so annualized turns.

So we still have a ways to go to get our turns up to where they have been before. And that's just simply a reflection of the fact that we had a lot of material in the pipeline when the -- when production was halted last year or year before last. So we're now flushing through that inventory.

We're not by any stretch of the imagination done with that process. We are starting to buy new material for certain items, certain components, certain products in the Satellite area, but we still have several million dollars of net inventory to work down there.

So that's -- of all the forward-looking statements we just made, I think the one that we can have the most confidence in is the positive operating cash flow, just given the state of our inventory and the steps we're taking there.

I'm not trying to hog the call, but I have a couple more questions.

So you guided to, I think like, a 6% margin towards the back half of the year. Does that include the expense reductions, the $2.5 million in annual cost savings, to get to that 6%?

Correct.

And what all has to happen for that -- those to be achieved?

Those -- .

Savings -- .

We took those actions this month. So that's already built in.

Is it simply just workforce?

It's workforce and there's some -- I understand what you're driving at. Okay. No, we did consolidate some manufacturing operations or we are consolidating some manufacturing operations as part of that.

That process was actually already under way at a somewhat lower level, but that's going to happen over this quarter and next quarter. But we expect the bulk of that to happen, like I say, in the next four months.

So if you could just do one simple math for us, so you're at $29 million. You got $9 million in. That's $20 million. Then you had $5 million in cash. That gets you to $15 million net. $5 million is to direct TV, or I mean EchoStar, so that's net $10 million.

Is that the way to think about the debt as we stand today? Did that math work?

So -- .

You had $29 million, you got $9 million in, that gets you to $20 million.

Right. Although we're not applying all that $9 million immediately.

I'm doing it on a net.

But yes, if we were to, that would get us to $20 million, and the rest of that supplier know we expect -- we've indicated previously we expect that to be paid down and off over the next few quarters.

I mean, we classified that as current liability as of the end of the August quarter. So indicating we expect by the end of next August quarter, Q2, yes, this August, by the end of Q2 of fiscal 2010, we expect that to be paid off.

So based on the numbers that you guys are looking at and the guidance you're giving, your net debt 12 months from today, would you have a rough ballpark where that could fall out, based on your guys' numbers? Because I have some numbers, I just want to make sure that they're in the ballpark.

We haven't given guidance on that, Rich, but we do expect -- and we have a payment scheduled with the banks where we will be paying an additional -- just a little more than $4 million in principal payments against that note through September 30th.

So if we were not to make any additional payments against the note above what's currently called for, what we will be making out of the litigation proceeds, which will bring it down to roughly $20 million, and then the roughly $4 million of scheduled principal payments, even if we were not to do any additional ones, that would be down to approximately $16 million.

Now, in that calculation, that assumes that the $5 million that's not going to debt reduction out of this settlement just goes to cash and stays there. One of the things that we are in discussions with the bank right now is the possibility of taking a portion of that and using it to accelerate the reduction of principal.

But we had $5.7 million in cash at the end of last quarter. We expect to have positive operating cash flow this quarter and through the calendar year. So -- but that should give you the numbers you need to -- .

Okay. And my last question, then, and great job on everything you guys are doing, is -- on the DBS we know you're kind of ramping from zero there, but in the other part of the Satellite business, anything going on unique there?

No, we're really focused on the US domestic satellite market, although there are a couple -- I alluded to a couple new product initiatives that we're working on there. Those are with and for the current providers in that market.

But we do see in that market that there is some interesting opportunities coming up that are not what I would call necessarily all mainstream opportunities. As that business matures, there will be a potential for some nichier products that could be somewhat interesting in addition to the mainstream products. So I think I'll just leave it at that for now.

Okay. Thanks a lot.

Thank you.

Thank you. Our next question comes from the line of J.D. Aboucher with GRT Capital. Please go ahead.

Hi, guys. So if I look at OpEx this quarter, excluding intangible amortization, was about $8.6 million, $8.7 million. With these expense reductions, what are you targeting on a quarterly basis, your OpEx to be?

Well, just on an apples-to-apples basis, we expect that to be down $600,000 to $700,000.

So roughly $8 million?

About $8.3 million.

Okay. So I'm struggling with the positive cash flow. Are you assuming basically converting inventory into cash? Because I'm not getting there on an operations basis with your 29% gross margin.

Right. We did not guide to positive adjusted basis earnings, but it's -- we still, on the inventory, we expect our inventory and our target inventory turns, as I alluded to earlier, is up in the range of $8 million and we're currently sitting at $3.4 million.

So we have a ways to go there to convert some of that long-standing inventory into cash.

Okay. And so on a looking-out basis, what are you targeting on a top line revenue per quarter basis to get to operating breakeven?

Well, in the second half, where we guided to $35 million, that would put us comfortably above the breakeven level. In that, the $15 million of Satellite quarterly revenue gets that business by itself to breakeven.

The exact breakeven between the $26 million we were at this quarter and the $35 million really depends on the mix and the details. But at 35% we expect -- I'm sorry, at $35 million, we expect that we would be at a 6% operating margin on an adjusted basis.

Okay and you're comfortable with that? Because I mean that's almost 50% growth in a pretty crappy economy.

Well -- .

I'm not trying to pin you down on a forecast.

I understand. The reason we dropped it was because we just didn't see the $25 million. We had visibility, we thought, to $25 million a couple quarters ago when we were sitting at $20 million.

I will say on the Satellite business to get to $15 million from the $7.9 million, help me out, Rick, that we were at this quarter.

Yes. That should be less of a stretch, considering where you're coming from.

Less of a stretch because if you look at it from a market share standpoint, or if we look at it from a unit standpoint, or we look at it just compared to where we a couple years ago, we believe that we have, just based on the forecasts we've had and our insight into that business -- again, that business is like any other business today, exposed to the macro economy. But we believe we have the wherewithal and the history and the confidence to do that.

But the wireless business, it really does -- again, we have been there just two quarters ago, but it really depends on getting some of these bigger projects that are in the pipeline, getting those back on track.

And I think one of the things we saw was throughout our customer base, and this was really kind of an October/November phenomenon, a lot of things just sat. A lot of people were really decided that the appropriate thing to do, given all the turmoil there, was to just step back, revalidate.

And so we're starting to see some of those projects that were sitting in October start to move. I think there is a question in our mind as to how much of this is a timing effect and how much is -- continues to deteriorate.

So we're fundamentally assuming that we can get back. Again, we -- the other thing I should point out is two quarters ago we did very little international business. We're substantially expanding some of our activities internationally.

So I think we could get to a $20 million quarterly run rate in wireless even with the domestic business off 10%, if we made that up internationally. But it's -- I will say this is contingent on the economy not continuing to deteriorate.

And your crystal ball is -- excuse me, as good or better than mine on that. But from where we sit today, we believe that's a reasonable target.

Okay. Thank you.

Thank you. Our next question comes from the line of Joy Mukherjee with State of Wisconsin Investment. Please go ahead.

Good afternoon. Your Satellite business ramps up, where can gross margins go to for that business?

Good question. I think the issue we're struggling with right now is absorption of fixed cost. And our product margins are really not much different than they were a couple of years ago. ASPs continue to decline, but so do our costs. As we squeezed more costs out of product.

So I think in the kind of medium term time frame that we were looking at in the third and fourth quarters of 2010, we're looking at margins that are in the mid-teens. We expect that we're not going to get up into the mid-20s there, because we just haven't been there.

If you look historically, we've been in the mid-teens and when we've been kind of in the mid-high teens, we've done very well and when we've got closer to the low teens, we've -- it's been tougher. So I think if we can get in the mid-teens there, we have an operational cost structure that will allow us to get nice leverage from that and have healthy operating margins.

Sounds good. And then on the wireless side, where does the breakeven go after this, the cost cutting?

It's pretty close to where we were last quarter. If you look at last quarter, in the Wireless business, we -- on a -- in the press release we had a $293,000 operating loss for that segment, including the intangible asset amortization. And the bulk of the costs that we're taking out of that $600,000, plus per quarter are in the Wireless Data segment.

So at the -- roughly -- assuming the margins of 40% we got last quarter are sustainable, which we believe they are, we've really been bouncing around that for a longtime, would say that 18% -- 17% to 18% is the breakeven with these cost adjustments.

Now, I remember -- I think you were bidding on some like solar type contracts. Is that still something that's happening, or is the economy no longer allowing for that?

Yes, we actually have, I believe it's three different solar energy projects that we have either been awarded or have bids in for the wireless communications infrastructure, the control and monitoring infrastructure for them. And they're all continuing to move. One of them we do expect to begin deliveries in the next few months.

But one of the things we're seeing there, again, is that a lot of those projects are dependent on both governmental subsidies, as well as access to the credit markets. And so we believe that that's a vertical that's going to do very well.

I think that's also one, though, where a lot of people are just over the last couple months, they've stepped back, they looked, oil at $40, and some of the solar energy credits were -- went on hold. I know in the state of California, some of them did. In the federal government, they're actually looking to increase those, but there was some timing issues.

So I think that's a market we're very bullish on in the one- to two-year period. I think over the next couple quarters, it would be a question mark.

Sure. And then as far as converting the debt to the asset-backed line, is there a certain level of debt where you can do that?

Yes is the answer to that, and we had actually gone through the exercise a couple months ago, before we had the legal -- the litigation settlement, and looked at our forecast, mapped out the principal reduction schedule for the current term loan and looked at our asset-based loan capacity, and convinced ourselves then that with the extension of the term that we got to the end of calendar 2009, that we would be able to get there.

And that at the time that we did that, that the asset-based loan, the size of the asset-based loan that we would be able to support was somewhere in the $15 million, $16 million range. And that analysis pretty much holds true today. What's different today is we've made a -- with a $9 million litigation settlement, we made an immediate reduction in the principal on the term loan, and potentially could be doing a little more.

Okay.

So I think, again, depends on -- there's a lot of moving parts in that. But that is still our plan and we believe that that $9 million of litigation settlement gives us a lot more flexibility in getting there.

Okay. Thank you.

Thank you. (Operator Instructions). One moment, please.

By the way, I just want to clarify one comment I made before. I may have implied that we had already paid the $4 million to reduce the principal. We will be doing that just in the next few days.

Right, right, it's about $4.1 million and we'll many be doing that shortly.

And we did yesterday receive the $9 million in cash, so just wanted to clarify that as well.

(Operator Instructions). Our next question comes from the line of [Chet Galauki], Private Investor. Please go ahead.

Are you folks concerned about having the stock delisted?

No, not really. There's -- we're obviously concerned about maintaining and keeping the maximum liquidity for our shareholders. If you're referring to the fact that the share price is currently below $1, that NASDAQ rule was suspended several months ago and is currently suspended until April.

I would not be surprised at all to see it suspend -- to see that suspension continue, given the state of the economy and the markets. I don't believe the NASDAQ thinks it's in either their interest or their Company's interest to do that.

So, obviously over time the challenge is on us to execute to the operating plan that we've talked about, and I believe if we do that, that will be a non-issue, irrespective of any NASDAQ rules. But obviously, it's something we watch and something we track.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Well, thanks again for joining us today, and we look forward to speaking with you again next quarter.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you so much for your participation. You may now disconnect.