CAMP4 Therapeutics Corp (CAMP) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CalAmp fiscal 2010 second quarter conference call. At this time all parties are in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

As a reminder, this conference is being recorded today Thursday, October 8, 2009. I will now turn the conference over to your host, Mr. Lasse Glassen with the Financial Relations Board. Please go ahead, sir.

Thank you and good afternoon, everybody. Welcome to CalAmp's fiscal 2010 second 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 in response to your questions may contain forward-looking statements. Words such as may, will, expect, intend, plan, believe, seek, could, estimate, judgment, targeting, should, anticipate, goal, 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 due to a variety of factors, including product demand; competitive pressures and pricing declines in the Company's satellite and wireless markets; the timing of customer approval and new product designs; the length and extent of the global economic downturn that has and may continue to adversely affect the Company's business; the Company's ability to refinance or extend its bank term loan, prior to the December 31, 2009, maturity date; and other risks and uncertainties that are described in the Company's annual report on Form 10K for fiscal 2009 as filed on May 12, 2009, with the Securities and Exchange Commission.

Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that, it is now my pleasure to turn the call over to CalAmp's President and CEO, Rick Gold. Rick?

Thank you, Lasse. Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2010 second quarter results. I will 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 revenue and earnings guidance for the second half of fiscal 2010, along with some concluding remarks. This will be followed by a question-and-answer session.

Overall, I continue to be pleased with our ability to grow revenues and generate operating cash flow, in spite of the challenging economic environment. During the quarter, consolidated revenues increased 4% sequentially to $23.9 million which is within our expected guidance range of $23 million to $25 million.

The top line was driven by both ramping unit volumes in our satellite products business and a continued rebound of our Wireless DataCom business.

With two sequential quarters of revenue growth and a solid outlook for the remainder of fiscal 2010, we believe that the recovery of our business is well underway. Looking at the bottom line results of operations included a GAAP net loss of $4.2 million or $0.17 per diluted share.

Excluding the impact of changes in the deferred income tax asset valuation allowance, amortization of intangible assets, and stock-based compensation expense, our adjusted basis or non-GAAP net loss was $2.3 million or $0.09 loss per diluted share.

Included in the second quarter GAAP and adjusted basis net loss is a pretax loss of approximately $1 million related to the sale of preferred stock in a privately held company. This non-operating loss on sale of an investment represents $0.04 per diluted share on a GAAP basis and $0.02 per diluted share on an adjusted basis.

Second quarter per-share results were also negatively impacted by the sales mix change in which revenue from our lower margin satellite products came in over our forecast, and revenue from our higher margin wireless products came in lower than forecast. I refer you to our second quarter earnings press release issued earlier today for a detailed reconciliation of the GAAP basis net loss to the adjusted basis or non-GAAP net loss.

Moving onto our cash flow statement and balance sheet, we continued to generate positive operating cash flow and reduce our debt. During the second quarter, we generated net cash from operating activities of $2.9 million and paid down total debt by $3.6 million. As of the end of the second quarter, the principal balance of our bank debt was down to $14 million and a subordinated note payable to a direct broadcast satellite where DBS customers stood at only $410,000.

I will next provide updates for our satellite and Wireless DataCom businesses. Our satellite business has entered a period of accelerated growth, driven by customer demand. During the second quarter, satellite products revenues increased to $10 million, up 8% on a sequential basis.

Looking ahead, we expect satellite revenue to increase sharply in the second half of fiscal 2010. In September, we added a second shift at our main assembly plant in Oxnard, California, to increase our production capacity. And we are working closely with key suppliers in an effort to achieve a smooth ramp in volume to meet the increased demand.

We also continue to ship significant quantities of refurbished products to a key customer that, although not generating revenue, increase our market penetration and decrease our remaining product rework commitments to this customer. To date, we have reworked and shipped back approximately 60% of the products returned to us for refurbishment and expect to substantially complete reworking the returns by the February 2010 quarter, one quarter earlier than we had previously projected.

Overall, the underlying fundamentals of our satellite products business continue to improve. Our next-generation satellite product developments for our two principal DBS customers remain on track. We continue to expect initial shipments of these products to begin late in fiscal 2010, with material contributions to revenue beginning in the first quarter of fiscal 2011.

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

During the second quarter, the Wireless DataCom business generated revenues of $14 million which is a 2% increase on a sequential quarter basis. We experienced stabilizing or increasing revenues across all of our Wireless DataCom vertical markets with the exception of our wireless OEM business, which was down because of that unit's dependency on one key customer that has been reducing its inventory levels.

During the first half of this fiscal year, we have seen our Wireless DataCom business begin to recover after a challenging second half in fiscal 2009. Our pipeline of new business opportunities continues to grow and during the second quarter we made significant progress toward developing key channel partners in our targeted markets.

In the public safety space, we announced an exclusive agreement with EA DS Defense and Security to supply a customized version of our WiMAX-based Sentry 4G wireless IP router for mission-critical public safety broadband communication applications. This custom high-power mobile data terminal is being marketed under the EA DS Defense and Security brand name to serve customers in the defense and public safety markets outside the United States and Canada.

Applications for the device include video surveillance and other visual multimedia applications providing security personnel with increased situational awareness through a WiMAX network overlay to existing mission-critical communications networks. We have successfully completed interoperability testing of this product with a major WiMAX infrastructure vendor and have shipped small quantities to the EA DS and supported field trials they will be conducting with an international customer over the next few months.

In our public safety business, we are beginning to see the signs of federal earmarks and stimulus funding flowing to city and county governments. Although this has not yet had a meaningful impact on CalAmp, we are hopeful it will help drive a recovery in the sector of our wireless business in the second half of this fiscal year.

In the utility space, we recently announced a partnership with Elster to incorporate our Sentry 4G wireless IP router with Elster's Energy Access System. Elster is a top-tier utility meter provider and a leader in smart grid utility solutions.

Our combined solution will enable utilities to deploy a single network infrastructure capable of serving the unified communications needs for both their mobile fleet applications as well as fix smart grid applications, including advanced metering, demand response and distribution automation.

We are also currently pursuing opportunities directly with several large utility companies. However, due to the length of the proposal cycle, these opportunities are longer term in nature.

In addition, our Aircept and MRM businesses are also beginning to pick up as the broader economy and credit market slowly improve. During the quarter, we had strong contributions from schoolbus management and service fleet management applications in our MRM business.

For the core Aircept business, our shift in customer focus from selected car dealers to vehicle finance companies is providing us with a more scalable model. We are also gaining momentum with new product introductions that target adjacent market verticals.

In summary, I believe our Wireless DataCom business is in the process of recovering. I am confident we are taking the right actions to position this 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 market markets cannot offer.

With that I will now turn the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at the second quarter financial details.

Thank you, Rick. I will provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2010 second quarter.

Consolidated gross profit for the fiscal 2010 second quarter was $4.8 million, compared to $7.5 million for the same period last year. The consolidated gross margin in the fiscal 2010 second quarter was 20.1% compared to 32.0% in the second quarter of last year.

These decreases in gross profit and gross margin were primarily attributable to lower revenues from our Wireless DataCom products as the global economic crisis caused several of our key customers to delay their purchases. Product mix significantly affects our consolidated gross margins because revenues from Wireless DataCom products carry higher gross margins and revenues from our Satellite products.

During the most recent quarter, Wireless DataCom products accounted for 58% of consolidated revenues and Satellite products represented the remaining 42%. This compares to the same quarter last year in which 86% of revenues were from Wireless DataCom products and 14% from Satellite products.

Our consolidated gross margin percentage is expected to continue to fluctuate in the future, depending on the overall mix of revenues from Satellite and Wireless DataCom products in any given period.

Now, taking a look at gross profit performance by reporting segment, Wireless DataCom gross profit was $4.5 million in the latest quarter or 32.0% of Wireless DataCom revenue. This compares to gross profit of $7.5 million or 37.5% of revenue in the same period last year.

During the most recent quarter, Wireless DataCom gross margins were adversely impacted by the lower absorption of manufacturing overhead costs on the lower revenue level. We expect gross margins to decline to the high 30% range for our Wireless DataCom business as market conditions improve and revenues rebound.

Gross profit for Satellite products was $331,000 or 3.3% of Satellite product revenues in the latest quarter, compared to negative gross profit of $81,000 in the second quarter of last year. Gross profit and gross margin for Satellite products remained significantly lower than historic levels, due primarily to the low level of sales that has resulted in lower absorption of manufacturing overhead costs.

As sales volumes continued to increase and manufacturing efficiencies improve, gross margins for our Satellite products are expected to rise to the low teens. We then expect further improvements in gross margins to the mid- to high teens range, once we are shipping our new products in volume next fiscal year.

Now moving onto the balance sheet, our total inventory at the end of the second quarter was $11.7 million, representing annualized inventory turns of approximately seven times. This compares to total inventory of $14.2 million at the end of the immediately preceding quarter, which represented annualized inventory turns of approximately five times.

The improvement in the second quarter was the result of inventory reductions across all of our businesses due to a sharp focus on working capital management.

The accounts receivable balance of $12.2 million at the end of the second quarter represents a 47-day average collection period, compared to receivables of $13.9 million and 55 days at the end of the immediately preceding quarter.

Our primary sources of liquidity are our cash and cash equivalents and the available borrowing capacity on our working capital line of credit. These two sources totaled approximately $5 million at the end of the second quarter, down from $6 million at the end of the first quarter.

Net cash provided by operating activities was $2.9 million in the second quarter, and $3.4 million for the first half of fiscal 2010. Total debt at the end of the second quarter amounted to $14.4 million compared to -- comprised of $14.0 million of bank debt and a non-interest-bearing subordinated note payable to a key DBS customer with a principal balance of $410,000.

During the second quarter, the principal amount of the bank loan was paid down by $1.8 million, and the note payable to the DBS customer was also paid down by $1.8 million. And today, after giving effect to principal payments made subsequent to the end of the second quarter, the total debt balance is $13.6 million -- comprised of $13.4 million on the bank loan and $255,000 on the subordinated note payable. We expect to retire this subordinated note during the fiscal third quarter.

Our bank term loan has a maturity date of December 31, 2009 and, consequently, the entire bank debt balance is classified as a current liability in the consolidated balance sheet at August 31, 2009. We are currently in active discussions with several banks and expect to refinance the term loan prior to the end of calendar 2009 with the proceeds of an asset-based loan, possibly supplemented by proceeds from other funding sources.

With that, I will 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. As I noted earlier, we expect a sharp increase in demand for our Satellite products in the second half of fiscal 2010.

As a result, we expect to see fiscal third-quarter consolidated revenues increase significantly on a sequential quarter basis and be in the range of $29 million to $32 million with a GAAP basis net loss in the range of $0.03 to $0.07 per diluted share. The adjusted basis or non-GAAP results of operations for the third quarter, which exclude changes and the valuation allowance for US deferred tax assets, intangibles amortization expense net of tax, and stock-based compensation expense net of tax are expected to be in the range of a $0.04 net loss per diluted share to break even.

We expect growth to continue in the fiscal 2010 fourth quarter with consolidated revenues in the $34 million to $38 million range and GAAP basis profitability.

In concluding our prepared remarks, I would like to recap some key points drawn from our recent results and latest developments.

We are in the process of establishing a healthy Satellite products business with ramping production in the second half of this fiscal year. And beginning in fiscal 2011, we expect that our new products currently in development will provide further growth opportunities with improved margins.

After a difficult fiscal 2009 second half when we saw our Wireless DataCom customers sharply reducing capital expenditures and inventory levels, our Wireless DataCom business has now stabilized. I am encouraged by the expanding pipeline of new business opportunities as well as the strategic partnerships that we believe will provide a solid foundation for future revenue growth. And we continue to reduce debt and expect to refinance our bank term loan prior to the end of calendar 2009.

In summary, I believe we are continuing to make good progress towards our goal of returning CalAmp to sustainable profitability by the end of this fiscal year.

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

Thank you, gentlemen. We will now begin the question-and-answer session. (Operator Instructions). Marc Robins with the Robins Group.

Actually that's a pretty good quarter, a pretty good showing and then an even better prognosis for the future. So congratulations.

Thank you.

Thank you.

I guess I'm a little awestruck by the projections for the fourth quarter and I guess I'm trying to get my arms around that. Is part of that due to the fact that you're expecting the warranty -- the cleanup of the warranty work to go away a quarter early and some of that shift from warranty or balance sheet work to income statement work?

Is part of that or is all of that increase in sales from the third quarter to the fourth quarter -- is all of that is actually due to just a remarkable ramp in Satellite revenues -- Satellite and Wireless revenues?

So, good question. It's the impact of the refurbishment being accelerated to finish at the end of the fourth quarter does not factor into that. Because we will -- we do expect that during both Q3 and Q4 we will be shipping refurbished products in roughly comparable numbers in each quarter. And actually in slightly higher numbers than we did in the first two quarters of this year.

So there will be some -- that will not really come into play until Q1 of next fiscal year. So it really is --.

So what you are really telling me is business is stronger than a garlic milkshake?

Yes. And I guess I have never actually used that analogy, but the -- yes. And there are a couple of elements behind that.

So it is as we said as we said in the prepared remarks it is -- that revenue growth is driven substantially by the increase in the Satellite side of the business. It's really a combination of end-user demand. It is the upgrade cycle that we've been talking about as well as simply CalAmp over the period of the last several quarters re establishing its credibility and its position in the market.

So even at those levels we will still be meaningfully below historical levels, and there's still room to grow although it's very -- at this point that far into the future -- it is hard to say what other cycles might be going on. But anyway from Q2 to Q3 to Q4, it really is kind of apples to apples to apples. And then in Q4, potentially, we have the benefit from the new products at both customers as well as the fact that the loss of potential revenue from the refurbished products goes away.

But who knows what the economy is going to do and what the market is going to do? And there's a lot of other factors that that's -- we can't project at this point.

Yes. Of course. Let's talk a little bit about the -- I know this is going to be a tough question and a tougher answer, but let's talk a little bit about the debt renegotiation.

You have been paying down the debt situation at the bank really very nicely. They've got to be fairly pleased. I'm sure the size of the firm, the improvement in the stock price, your record of paying down debt, the forecast of business -- all of those things have got to weigh heavily on the creditors as you're talking to them.

Would you say that negotiations are going along fairly well?

Well, our Plan A at this point, Marc, is to put in place a new facility and to retire the existing facility. The existing facility was set up as a term loan, cash flow-based term loan a few years ago in a different environment. And what we really think is the right thing to do at this point for the Company is to transition to an asset base of loan that is non- that's a revolver that's nonamortizing. So that gives us flexibility going forward as the business grows, as the business evolves.

So and we now have a collateral base in receivables and inventory where it is possible to envision a structure including an asset-based facility. So that's really what we're focused on right now. We have good relationships with our current banks and we've worked through a number of really tough challenges with them over the past few years.

But it's time for us to -- like I say our Plan A at this point and we are in active discussions with a number of banks about asset-based facilities and we're getting good interest. And we're hopeful that we can move fairly quickly to close something.

But that -- those credit markets are starting to open up. And there's a number of banks that we're talking to that we seem to be in the sweet spot for the kind of the profile and the size of client they like to have.

Yes. I was going to say given your record and size and all of that kind of thing, they ought to be dating you with flowers. And then lastly and I will get back into the queue, the addition of of a second shift and all that that pertains -- is that going smoothly and a little in the way of transition problems and incremental costs that may affect profitability and so forth? Do you feel comfortable with that?

I think from a structural standpoint and a training standpoint, we had seen some signs that we may need to be doing this several months ago. So we actually brought the core of the second shift staff on to our first shift two to three months ago to get the training, become familiar. And then that group became the core of the second shift when we started that in September.

We are -- now that's not to say -- and by having a second shift, frankly, we could have less overtime which we were starting to run and that is obviously not a good thing from a cost standpoint.

We are going to have challenges. Anytime you try to ramp something this fast that has this many components and this many steps and suppliers involved, there are going to be challenges. But those are good challenges. Those are good problems to have. And we are working through those one at a time, working both with our suppliers and with our customers.

So I'm confident we're going to be able to ramp into the range that we've talked about. That is not to say there won't be with operational challenges, but the demand is there, the products are robust and we are really -- it is really now a question of just scaling back to levels that were not dissimilar to where we were a couple of years ago.

Very, very good. Thank you.

Justin Cable with Global Hunter Securities.

Just a couple of quick questions for me. Curious about the next-generation products that are coming in Q1, the next fiscal year.

I realize you've only provided guidance for the next two quarters, but curious to know if you foresee any kind of impact in terms of the sequential trend as you transition to the next generation? In terms of revenues?

So, the first point -- we have four products under development. The last time we talked we had three. We have two with each of the two main Satellite television broadcasters and but those two in each case is they are really derivatives of a single new platform, but there are two different products for different applications.

Of the four, one of those will to some extent cannibalize a product we are currently producing. But the other three represent incremental revenue opportunities for CalAmp.

We expect to have one product for each of the customers into qualification in Q4 and be shipping in small quantities by the end of Q4. We would expect to be ramping over the course of Q1. These things don't go from 0 to 60 in four seconds.

So it is going to take a quarter or two to ramp to any kind of sizable rate. But we do believe that there's potential there with those new products to meaningfully increase our market penetration beyond the level that we will be at in the second half of the current fiscal year.

Now again, I have to caution us by saying that this is a market that has its ups and downs and which is why we wouldn't really -- even if we had those products today or we wouldn't be in a position to hazard a guess for what next year would look like. But again, I can only just point to the three years ago before we had the misstep and just mention that the overall aggregate opportunity for these products in the US market is as big or potentially somewhat bigger today than it was at that time.

So what we're really doing, what we're seeing right now obviously, on a quarter-to-quarter basis, demand is very important. But we're -- it's --the primary factor for CalAmp in the near term is regaining market share and rebuilding our position in the market. And we still think we have a couple of quarters to go in that respect.

Right but in terms of that sort of cannibalization on the first product, I mean, do you foresee any kind of postponement of orders in anticipation of these new next-generation products coming and that (multiple speakers)

No. Yes. I understand that. No we don't, because right now the customers -- one of the things that we're seeing throughout certainly the Satellite business, but also some of our other businesses is that people really cut their inventories back earlier in the year. So those customers that have run rate businesses that are seeing a rebound, they don't have a buffer stock to deal with that. So I don't believe that that is going to have an impact.

The other point I should mention is that our newer products will have higher standard margins than the products they replaced. They were doing a lot of things in these new platforms to make the products not only more robust, but also to drive cost out of them.

And so as we mentioned I think it was Rick, in his remarks, mentioned that getting those new products phased in will be important to help drive our margins on that side of the business as well as the revenues.

Where do you see margins going in the next 12, 18 months if these products do start becoming very meaningful.

Well, we said earlier on the call we expect over the next couple of quarters to be in the low teens. But that's with the existing product mix. We think those new products can take us to the mid to high teens as they phase in.

And our objective for this business is 20%. We've been there before. It's been challenging and this is obviously a very -- it's a consumer electronics business with tough competitors. But that's our target for this business. 40% is our target for the Wireless Data business, but in terms of the modeling we are doing and the guidance that we gave here, we are pointing to the high teens and the high 30s respectively.

And speaking of the wireless state of business, you are saying that you've started to see the signs that it is stabilizing. Obviously you were in a period of customers sort of winding down some of their inventories so that had some impact. What do you think is sort of the new normal revenue run rate? And maybe a step back as to why you think things are stabilizing now.

Okay so there's -- we participate in several different vertical markets there so I can't give you a one size fits all answer to that. And we are also making -- in some of the areas that we focus, we are making some slight strategic shifts.

So let me kind of parse it and then build up the answer. We have some run rate businesses within that. Our Aircept business in many respects is a run rate business. Our MRM hardware business is in many respects a run rate business. Some of our public safety business with respect to add-ons, some of our smaller volume industrial monitoring controls business, is a run rate business. And that business fell off dramatically in the economic downturn. And that business has come back.

I don't expect that this business, however, to grow dramatically. Where we are going to see the opportunities for future growth are in some of the bigger projects that we are going after that CalAmp has historically not gone after or that the predecessor companies that we acquired had historically not gone after just because of the scope of those.

And on some of those we've alluded to both the public safety area and the utility area. In some of those we're bidding directly and some of those we're teamed with prime contractors and we are teamed with some of the major prime contractors in both of those markets on several of those bids.

That is a longer-term process so it is hard to really say when we will see that impact. It is not something that is going to drive much of anything in Q3. Even if we were to get some of those awards they take time to spool up and really contribute to revenue.

But I think that's the opportunities for future growth thank you are really around those areas, as well as some of the newer adjacent verticals that we're driving in our tracking business -- stolen vehicle recovery, for example -- that have substantial growth opportunities.

I think the flip side of that is our OEM business which has been declining really over the last couple of years is not something we can -- there's real serious limits to how much we can affect that business from our end. And so it is important to us. But it's not something we can count on as we look forward.

So we want to make sure we serve that business, but again it's not something we have great visibility into. We have better visibility into other elements of the business.

So I think, overall, this business is one that has the potential to be substantially larger than it is and with a margin profile that is better than it is. Our OEM business and our MRM hardware business are for the lowest margin pieces of that business and the public safety systems business and utility systems business are part of the highest margin just because of the nature of the value that we provide.

And so we are really trying to be proactive in driving the business in that direction.

But in terms of revenue run rate, you know when we look at the current quarter of about $14 million but an operating loss of about $1.3 million is that sort of the baseline business? Or does that also include some of this impact from customers winding down some inventory that -- i.e., what is the new normal here?

I think it's in the range. I think we still have customers winding out some inventory, particularly OEM customers. If they were to return to the levels that they were nine months ago that could be an extra $1 million to $2 million a quarter there.

You know, that business in the aggregate was at $20 million a little over a year ago. The opportunities are certainly there to get it back to that level and get it to break even kind of the way the business is structured now is sometimes somewhere around $17 million.

So we are pretty confident that the irons we have in the fire in terms of outstanding bids have the potential to get that business well above break even and back to historical levels or above. That said, our visibility on timing of many of those projects is poor just because of the nature of what they are.

Right. And then the last two questions here for me. In terms of inventories, your own inventories, how much more inventory do you plan to wind down? Obviously, that's been the key provider of cash flow.

And then, in terms of overall production capacity, you mentioned adding a second shift. But do you feel like you have enough capacity for the next 12 to 18 months? Or will you start to have to look at some CapEx projects to increase capacity?

So on the inventory we expect our inventory, dollar-denominated inventories are going to be relatively flat this quarter. We are going to be growing inventory on the Satellite side of the business and still working down inventory on the Wireless side of the business and squeeze in some more efficiencies out there.

I do think we can improve our turns incrementally over the next few quarters, but dollar inventories are going to need to increase after this quarter. And then the other question was --? (multiple speakers) Capacity.

So I don't believe we are going to need to add any facilities. I mean we actually consolidated our two principal manufacturing facilities in our Wireless networks business earlier this year. Actually just finished that consolidation this most recent quarter and got some -- there was obviously a certain amount of disruption associated with that, but as the dust settles we have expanded production capacity in the aggregate. And we have enhanced flexibility there compared to what we had before.

We've also begun to move some of that subassembly manufacturing into the supply chain we used for the other parts of our business. So I believe we have quite a bit of scalability there. That would be true for our MRM business as well. I don't think we are limited there.

But the Satellite business, it really depends on the mix there. Again we are at a level that's materially below what we were at a couple of years ago. So from an aggregate standpoint we definitely have the capacity. It really depends on the product mix at any given point in time.

So what we have been doing there we haven't had to spend substantial capital, but we have been reconfiguring our lines as taking equipment from legacy product lines that are downsizing and moving those to support some of the lines that are ramping. So I don't expect other than the tooling that is associated with new products that we will need -- either on the facility side or a test and assembly side will need meaningful CapEx.

Great. Thank you.

Kevin Dede with Jessup and Lamont.

I didn't quite understand why you expect Satellite demand to increase so strongly in the second half.

There's really -- there are three factors that are coming in. The first is if you look at overall US demand for satellite and you look at just the public filings of the two principal satellite providers, their business has shown an uptick. And our principal customers showed an increase in net subs in the June quarter, which is the first quarter, and I believe it was five quarters that they had actually had an increase in the net subs.

The other big factor there is the HD upgrade cycle. That's really in full swing right now that applies to both new subscribers which helps push up the ASPs, but there is a big push by the service providers to get their existing subs, who are not getting HD service to sign up for HD service as a way for them to drive their ARPU.

So that really encour -- that drives demand for our products. Because most of the legacy products that are on rooftops of existing subs are not capable of the latest generation of HD and HD local and DVR kind of capability. So that is the second piece of it.

And the third piece of it is just that CalAmp is back in the game with our customers. And we have been -- we've been on the sideline for a while due to the product problem we had had. And then once we got requalified, we were taking the ramp a step at a time just to make sure there were no missteps. And that part of the cycle is behind us now and we are seeing the full force of the demand in the market.

Now you made it pretty clear that the new products in that segment don't really come in until the next fiscal year. I'm just wondering what you think the margin implications might be?

Well we -- again we had said we expect the margins to get up to the high teens as those phase in. They are going to be phasing in over the course of next year.

Even though you are sort of starting from scratch with the new ones?

Yes. Because we will -- but by the end of the year, we expect that those new products will represent a substantial percentage of what we're shipping.

Okay.

But more than 50% by the end of next fiscal year.

Can you give us a little background on how sale cycles have changed the course of the current calendar year? Just in light of sort of the change in the overall economic environment? What's been the impact on your wireless data business?

So again I have to kind of break that down into the individual pieces of that business. The public safety business is still quite soft in terms of actual revenues. That business, obviously, depends on municipal and other governmental tax dollars. That business was hit hard and the stimulus dollars, the federal dollars, just the fact that there is pent up demand now for a lot of that equipment and it can't wait forever, we are seeing a pretty --. In the last three months we have seen a pretty substantial increase in the bid and proposal activity there.

We have also gotten indications that a couple of our customers are pretty close to actually having some of those earmark and stimulus dollars show up. But it's safe to say that the floodgates have not yet opened in that business. But we are pretty optimistic that within six months or so that is going to happen.

And it is not going to -- it's going to happen gradually over that period. There are some bigger projects there. A couple (technical difficulty) projects in that area that went on hold for a while and are now back on the front burner of the respective agencies. And we are engaged in those. But those would be fiscal 2011 kinds of activity. So I think that is kind of my take on what is happening in that area.

In the Utility segment, that didn't fall off as fast or as far. It was not affected as much, but what we're seeing there is there's a number of big smart grid projects that are on the -- that are being developed right now, that are being bid, that are being engineered. That is definitely something that is up from a year ago. That's not so much economic, economy-related, but we see a number of those. The timing is less certain on those.

These are big entities and they move at their own pace, but I think that business has held up. I think the mobile research management business, that was probably hit the hardest of all by the economy.

It has come back, albeit at a somewhat lower level than it was a year ago. But it came back significantly this quarter for us. It is not clear where that business is going on kind of some of the mainstream applications, particularly the vehicle finance one that we serve, but there are new applications opening up. So I think for us the growth is likely to come more from some of these new applications than from the --.

So if I split those end markets that is how I would answer that question.

Yes. Thanks a lot for the color, Rick.

(Operator Instructions). Richard Todaro with Kennedy Capital.

Can you guys talk about how much total dollar warranty work did you ship this quarter, roughly?

Dollar in terms of equivalent revenue for (multiple speakers).

Yes, just ballpark.

Ballpark is about $3 million.

Help me -- I thought you guys had been shipping about that number a quarter. So how were you able to pull the warranty work forward a quarter? I just assumed business was going well and you shipped more warranty this quarter and that is how it happened. But am I missing something?

No, you are not missing anything. I didn't give kind of the next level of detail which is that we expect to ship -- we expect our rate of shipment of warranty product to also accelerate this quarter and next.

So I expect that we will be shipping slightly in excess of $4 million of equivalent warranty product this quarter. And next will be -- that will also be the case. So instead of three quarters times 3 million it will be more like 2 quarters times 4 point something.

So business has really picked up in that area.

Yes.

In order to feel that way. Okay and then I think you kind of talked about the slow ramp and that it doesn't go 0 to 60 on the new products, but I'm not sure really how to gauge a slow ramp. So I'm not -- I mean is this an incremental $250,000 a quarter for a while and revenues and that moves? Or how do I think about that?

Again it's very product-specific and customer-specific, but my expectation would be that within two quarters would be up to whatever the equilibrium run rate would be on those. You know, it depends on a whole lot of other factors, but it's not going to all happen within one quarter.

But if it takes longer than two quarters it is not because we couldn't do it or the customer couldn't assimilate it. It's just because the demand might not be there. But from the current operational standpoint and from a customer integration standpoint, we are talking somewhere between one and two quarters.

And just to gauge the magnitude of how business is picking up here, when you were originally giving guidance for the back half of the year did you originally think you could do as much as $4 million a quarter in warranty work? Or is this as business has gotten better we think we can pull more of that forward?

Well, we certainly had the capacity to do it, but we didn't want to -- we were frankly in no rush to do it because there's a cash cost to us in doing that. And we really have been working very closely with our customer there to balance how fast we work down the RMA pile with new product so that we really, both, keep their demand satisfied but didn't keep our factory well-balanced and as efficiently running as you can get those relatively low levels.

And so it's really now with the demand increase for the revenue product as long as we have the capacity, then the customer would like to get that. And we frankly like to get it out of here. So that is really what is driving that.

And then can you clarify? You guys left yourself open again on alternative funding sources as it relates to this credit line and that dangling statement always catches investors off guard. So I am just curious how you are thinking about that?

I will give you the same answer I gave you the last time whereas it really is because you don't know until you know, but it's not meant to signal that we plan to do -- to jump out and do anything highly dilutive. And I will give you that same answer at $2 plus a share that I gave you at $1 a share.

Okay and then --

But we are -- you know, we have highly aligned interests here. So we believe it is going to be a debt financing and but there are trade-offs between different structures there. And it might not be a single facility and so --.

All right. I trust you guys. That's a good deal. Could you just talk about how when I'm looking at the guidance, how you're thinking mix will play out? Maybe just in the fourth quarter when you are talking in that range. What percentage of that might be Satellite? How do I think about it?

I think you should think about it that the vast majority of the increase will be on the Satellite side. We believe that the Wireless business has the potential to grow on a sequential quarter basis within that period, but our visibility there is not nearly as clear as it is on the Satellite side.

I think we've covered inventory enough. I think that's it. Great job, guys. If you guys execute on the guidance, your fourth quarter account is going to be ridiculous. 37 versus 21 last year. It is like 70% growth showing to the street.

So it's a great job. Just hit the guidance and we will be off to the races. Appreciate it.

That's our goal too.

Marc Robins with the Robins Group.

Todaro took all the glory. He asked the question I wanted. So thank you.

Okay.

(Operator Instructions). I show no further questions at this time.

All right. Well, thanks again for joining us today. We look forward to speaking with you again next quarter.

Thank you. Ladies and gentlemen, this concludes the CalAmp fiscal 2010 second quarter conference call. Once again, we would like to thank you for your participation. You may now disconnect.