CAMP4 Therapeutics Corp (CAMP) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CalAmp fiscal 2010 third quarter conference call. (Operator Instructions). I would now like to turn the conference over to Lasse Glassen of FRB. Please go ahead, sir.

Thank you. Good afternoon, everybody. Welcome to CalAmp's fiscal 2010 third quarter earnings call. With us today are CalAmp's President and CEO Rick Gold, and the Chief Financial Officer, Rick Vitelle. Before I turn the call over to management, please remember that our prepared remarks in responses to 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 material 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 market, the timing of customer approvals of new product designs, the length and extent of the global economic downturn that has and may continue to adversely affect the Company's business, and other risks or uncertainties that are described in the Company's annual report on Form 10-K 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?

Thanks, Lasse Good afternoon and thank you for joining us today to discuss CalAmp's 2010 third quarter results. I will begin with comments on the financial and operational highlights from this past quarter, and I'll then provide an update on several of our key business activities. Rick Vitelle will next discuss additional details about our financial results, balance sheet, working capital management, and cash flow. And I will wrap up with revenue and earnings guidance for the fourth quarter of fiscal 2010, along with some concluding remarks. This will be followed by a question-and-answer session.

During the third quarter, we generated strong top-line growth with a 28% sequential revenue increase. This was driven by a sharp ramp of our satellite products business, which delivered significant revenue growth and generated operating profitability. While revenues from our wireless wireless datacom business were flat on a sequential quarter basis, I believe recent new order bookings, and an increase in backlog have laid the foundation for a rebound in this business over the next several quarters. Looking at the bottom line, results of operations included a GAAP net loss of $1.3 million, or $0.05 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 income, was $0.2 million, or $0.01 per diluted share. I refer you to our third 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 income.

Moving on to our cash flow statement and balance sheet, this was the fifth quarter in a row in which we generated positive cash flow from operations. Net cash from operations totaled $0.8 million in the third quarter, bringing the fiscal year-to-date total to $4.2 million. Also of note is the fact that during the third quarter, the Company paid in full the outstanding balance of the note payable to a Direct Broadcast Satellite, or DBS customer. I'm also pleased with our completion of the recently announced refinancing of our bank debt that occurred after the end of the third quarter. Obtaining the new credit facility with Square 1 Bank was an important milestone, as it enhances our financial flexibility and eliminates the uncertainty associated with the maturity of our previous bank loan. I will next provide updates for our satellite and wireless datacom businesses.

Demand for our satellite products grew sharply in the quarter, and we made good progress towards reestablishing our leadership position in this market. During the third quarter, satellite product revenues increased to $16.8 million, up 69% on a sequential basis. In addition to the strong revenue growth, the satellite business also achieved operating profitability during the third quarter for the first time in nearly three years. While the financial performance of our satellite business has improved significantly, we are continuing to work through production issues typical with this growth. Due to the rapid ramp in volume, we have experienced some operational inefficiencies mostly related to material shortages within our supply chain. This has led to higher costs to expedite materials, and for payroll overtime premium. We continue to work closely with key suppliers in an effort to mitigate these component shortages, but we expect these issues to also impact margins in the fourth quarter as we continue to ramp the volume of our DBS products.

We group our DBS products into three categories based on ASP, or average selling price ranges. Low ASPs, which are $25 or less, medium ASPs, which are between $25 and $45, and high ASPs, which are $45 or more. During the fiscal 2010 third quarter, low, medium, and high ASP products represented 17%, 36%, and 47% respectively of our satellite revenue. This compares to low, medium, and high ASP products that accounted for 3%, 58%, and 39% respectively of DBS sales in the third quarter of last year. The year-over-year increase in revenue generated by low ASP products is attributable to sales of an older generation product in the latest quarter, that is deployed by the service provider outside the US.

While the year-over-year increase in the proportion of revenue generated by sales of high ASP units was driven by sales of the latest generation product used for high-definition video programming. We also continue to ship significant quantities of refurbished satellite product 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 80% of the two principal products returned to us for refurbishment under our product warranty program. Based on our current projections we expect to substantially complete reworking these returned products during the first calendar quarter of 2010.

The underlying fundamentals of our satellite products business continue to improve. The DBS business, despite being highly competitive, has high barriers to entry and is characterized by ever increasing product sophistication driven by the two domestic service providers. This approximately $500 million total addressable market is also characterized by demand volatility due to seasonality, product introductions and mix shifts, custom marketing campaigns, and inventory management. To effectively service our DBS customers, we leverage our highly specialized engineering resources for new product developments. and ongoing cost reduction activities and supplement our flexible and scalable supply chain with disciplined working capital management to react to the rapid changes in customer demand. We have successfully reestablished our strong historic relationships with one of our DBS customers, and have recaptured a significant market share for our existing products. We've been working with our other DBS customer with a focus on next generation products, and hope to win a meaningful share of this customer's business over the course of fiscal 2011. In total, we are currently developing four next-generation products, two for each of our DBS customers that should increase our served market and improve our gross margins. We expect to ship qualification units for the first of these new product this quarter, with production ramps beginning over the course of the first half of fiscal 2011 for the various production.

Now let's move on to an update of our wireless datacom business, which provides communication system, production, and services for applications in the mobile resource management or MRM, public safety, utility, and industrial monitoring and controls markets. wireless datacom business generated revenues of $13.9 million in the quarter, which is essentially flat on a sequential quarter basis. Over the past year, our MRM business has been trending upwards, while our public safety and OEM businesses have been declining, and our industrial monitoring and controls business has been holding steady. Our MRM business is being driven by new product introductions, new customer acquisitions and international growth, while our public safety and OEM businesses are heavily dependent on spending in the public safety sector, where state and local government capital budgets have been tight. And our industrial monitoring and controls business, the utility segment has been quite active, while other infrastructure projects seem to be slowly gaining momentum.

While we have seen our overall wireless datacom business stabilize in fiscal 2010, recent new order bookings and an increase in backlog lead me to believe that this business is now poised to recover over the next several quarters. We continue to broaden our customer base and strengthen relationships at existing key accounts. In our MRM business, we recently received an initial order from a Fortune 50 customer for an asset tracking application that pinpoints the location of trailer containers within their distribution network. We also received a significant order from Directed Electronics, which markets vehicle security and remote start systems under brands including Viper, Clifford, and Python. CalAmp is now providing the wireless hardware and services for Directed Electronics new SmartStart family of Apple iPhone-based remote car start products which was launched through Best Buy in October, and was just awarded the prestigious Best of Innovations Honor at the 2010 Consumer Electronics Show.

We are pleased with the traction our wireless solutions are gaining in the utility sector for smart grid infrastructure applications at large utility companies. We have mentioned before that due to the length of proposal cycles, these opportunities are considered to be longer term in nature. That said, we have recently been selected for two smart grid related pilot programs and believe that our portfolio of wireless communication infrastructure solutions is well positioned to serve the needs of this market. Utility sector is an important strategic growth for CalAmp, and we're devoting significant resources to developing business in this segment. And in our wireless OEM and public safety, higher backlog levels entering the fourth quarter, give me optimism that we are finally beginning to build some momentum, albeit off a depressed base.

In summary, I believe our wireless datacom business is headed in the right direction. I'm confident that we're taking the right actions to position this business for long-term sustainable growth. The critical mass we've developed, along with the breadth and strength of our technology platforms gives us an advantage that most other competitors in our 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 third quarter financial details.

Thank you, Rick. I will provide a summary of our gross profit performance, working capital management, and cash flow results for fiscal 2010 third quarter. Consolidated gross profit for the third quarter was $5.9 million, compared to $7.6 million for the same period last year. The consolidated gross margin in the latest quarter was 19.2%, compared to 29.6% in the third 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 downturn reduced tax revenues to city and county governments, leading to cut-backs in public sector capital spending, and tight credit market conditions caused capital spending cut-backs in the private sector. Product mix significantly affects consolidated gross margins, because revenues from wireless datacom products carry higher gross margins than revenues from our satellite products. During the most recent quarter, satellite products accounted for 55% of consolidated revenues, and wireless datacom products represented 45%. This compares to the same quarter last year, in which 29% of revenues were from satellite products, and 71% were from wireless datacom 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 closer look at gross profit performance by reporting segment, wireless datacom gross profit was $4.3 million in the latest quarter, or 30.6% of wireless datacom revenue. This compares to gross profit of $7.4 million, or 40% of the 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, as well as a shift in mix from the higher margin public safety products to lower margin MRM products. We expect gross margins to climb to the high 30% range for our wireless datacom business, as market conditions improve and revenues rebound.

Gross profit for satellite products was $1.6 million, or 9.8% of satellite product revenues in the latest quarter, compared to gross profit of $253,000, or 3.4% of satellite product revenues in the third quarter of last year. While gross profit and gross margin for satellite products increased significantly on a year-over-year basis, they remained lower than historical levels. To accomplish the significant ramp in unit volumes in the third quarter, we incurred some higher than normal costs related to worker overtime. And we also experienced some start-stop production inefficiencies due to material shortages that dampened third quarter gross margins. We expect this condition to persist for most or all of the fourth quarter. However, as manufacturing efficiencies improve, gross margins for our satellite products are expected to improve. We then expect further improvements in gross margins to the mid to high teens, once we are shipping our next generation satellite products in volume over the course of the next fiscal year. During the third quarter, we recognized an income tax benefit of $1.4 million as a result of the favorable resolution of an uncertain tax position that had been previously reserved for, pursuant to FASB Interpretation Number 48.

Now, moving on to the balance sheet, our total inventory at the end of the third quarter was $11.6 million, representing annualized inventory turns of approximately 8.5 times. This compared to total inventory of $11.7 million, at the end of the immediately preceding quarter, which represented annualized inventory turns of approximately seven times. This sequential improvement in turns is attributable to our ability to generate higher sales in the third quarter, without increasing inventory levels. The accounts receivable balance of $14.5 million at the end of the third quarter represented a 43-day average collection period, compared to receivables of $12.2 million and 47 days at the end of the immediately preceding quarter. At the end of the third quarter, cash and cash equivalents totaled $4.5 million. Net cash provided by operating activities was approximately $800,000 in the third quarter, and $4.2 million for the first nine months of fiscal 2010.

Total debt at the end of the third quarter amounted to $14 million, comprised of bank debt with the Bank of Montreal and two other banks. During the third quarter, we paid in full the remaining balance of a non interest bearing subordinated note payable to a key DBS customer. Subsequent to the end of the third quarter in December 2009, we announced that the Company had paid in full the $14 million outstanding balance of the bank debt which had a maturity date of December 31, 2009. The funds for this pay off were provided by a drawdown of $7.8 million under a new revolving credit facility with Square 1 Bank of Durham, North Carolina. The Square 1 Bank revolver has a two-year term, and provides for borrowings up to the lesser of $12 million, or 85% of CalAmp's eligible accounts receivable.

Outstanding borrowings bear interest at Square 1's prime rate plus 2%, subject to minimum effective interest rate of 6% per annum or $20,000 per month, whichever is greater. Because of the new bank credit facility is structured such that cash collections on accounts receivable are applied to reduce the revolver balance, this will benefit net interest expense during months that the average outstanding balance under the revolver is more than $4 million. In addition, the Company raised $6.2 million of junior capital from a group of investors comprised of $1.9 million in subordinated debt, and $4 .3 million from the sale of approximately 1.9 million shares of common stock. The subordinated debt bears interest at 12% per annum, and has a three-year term.

The Company also issued a total of 192,500 common stock purchase warrants to the subordinated debt investors at an exercise price of $4.02 per share, which is a 20% premium to the average closing price of the Company's common stock for the 20 consecutive trading days prior to the closing of the refinancing. The refinancing agreements permit a second round subordinated debt issuance of up to $3.1 million on the same terms and conditions as the first subordinated debt round in December. We will be working to fill out this second tranche this month to provide additional flexibility and funding our working capital needs, as we move forward to execute on our plan to achieve profitable growth in our markets. Now with that, I will 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. Looking ahead to the fourth quarter, we expect to see fiscal fourth quarter consolidated revenues increase on both a sequential quarter and year-on-year basis, and be in the range of $32 million to $36 million, with growth expected in both our satellite product and wireless datacom businesses. We expect a GAAP basis net loss in the range of $0.01 to $0.05 per diluted share. The adjusted basis for non-GAAP results of operations for the fourth quarter, which exclude changes in 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 $0.02 net loss to a $0.02 income per diluted share. We expect the growth in our satellite business over the next year will be driven by the launch of several new products that are currently in development. We also expect that our wireless datacom business, which is dependent to a certain degree on spending by governmental entities in the public safety sector, will improve as general economic conditions rebound.

Looking further ahead, we believe that we now have the essential elements in place to grow CalAmp's revenues back to an annual run rate, exceeding $200 million over the next 18 to 24 months, balanced between our satellite and wireless datacom businesses. It bears noting that, given the inherent lumpy nature of demand in both of our business segments, this expected growth will likely not occur in a smooth and linear pattern. In concluding our prepared remarks, I'd like to recap some key points drawn from our recent results and latest developments. First, we successfully completed the refinancing of our maturing bank debt. This refinancing is an important milestone for CalAmp as it enhances our financial flexibility and eliminates the uncertainty associated with the maturity of the previous bank debt. Second, we continue to generate operating cash flow with a sharp focus on working capital management. Third, we continue to grow our top line revenue even in this challenging economic environment.

We returned our satellite products business to operating profitability during the quarter, based on a significant ramp in production volumes. As we launch our next generation DBS products in fiscal 2011, we expect to gain additional share in this market. Fourth, our wireless datacom business has stabilized and is beginning to show signs that a recovery is underway. I'm encouraged by recent new orders and higher backlog levels, along with an expanding pipeline of new opportunities. And I expect our wireless datacom business will be back on a growth trajectory starting with this current fourth quarter. And finally, despite the challenging economic conditions of the past year, we've continued to invest significantly in R&D to bring differentiated and innovative technology offerings to the market. Our R&D spending is expected to exceed $11 million in the current fiscal year, representing approximately 10% of our revenues. In summary, I believe we're continuing to make good progress towards our goal of returning CalAmp to sustainable profitability. That concludes our prepared remarks. Thank you for your attention, and at this time I would like to open the call up to questions. Operator?

Thank you, sir. (Operator Instructions). And your first question comes from the line of Mike Crawford with B. Riley & Company. Please go ahead.

Thank you. A few quick questions. First, can you give give an update on the two Smart Grid pilot programs you have an opportunity to participate in?

We're not at liberty to talk too much about those. I will just give you a little bit of color. We're -- our focus is on the infrastructure component of the communications network. These are domestic investor-owned utility opportunities. And there -- and it's both to enable some new initiatives that the utility has put in place, the kinds of things that are traditionally being called smart grid today, as well as to upgrade the existing communications infrastructure that's already in the distribution and transmission network. The tricky thing with any of these projects is to predict the time frame, but our expectation is that this pilot program will last through the first half, and into the second half of the fiscal year, in both cases. And then sometime later this fiscal year, will be a determination about full deployment.

Okay. Thank you. A couple of things regarding the DBS segment. So, one, you've had a nice uptick in business, and the second line -- production line in place with some in material shortages, so you got high turns. But how -- what level of inventory do you you need to cover kind of current and expected business level in that segment?

I actually think we still have some room to squeeze efficiencies in both sides of our business. The issue that we've had -- in our satellite business we worked -- we worked as you know through subcontract manufacturers that do most of the sub assembly manufacturing. And most of the issues that we had with components, were components that they actually buy from component manufacturers that were on allocation. or that had some lead time challenges. When we don't take most of those sub assemblies onto our books, until we receive the complete sub-assembly. And so, one of the issues we had right now, is that we actually have some inefficiencies, from an inventory standpoint because in a few of those cases, we had to bring in certain assemblies minus certain components, add those here. And so we're actually sitting on more work in process right now, than we would like to in an ideal, smooth production environment.

So I think our inventory mix is going to change, as that business evolves. But we're also, I think everyone on the call knows, we're still working through, both in terms of the refurbished product, as well as on there's still some clean up work dealing with inventory, that had been in the pipeline for quite some time since the music stopped three years ago. So we're -- we've still got another quarter or two to work through some of that, which I think will improve our efficiencies. I'm hopeful that by Q1, some of these issues with shortages and overtime will largely be behind us. But as both Rick and I mentioned, we expect that to persist through Q4.

Okay, thanks. And then final question is, if you get this increased share at the second major DBS customer, with the new HD product, I guess it's two parts. A, what percent share of that company's business do you think you could could reach? And would you then also need to move closer to 24-hour assembly in Oxnard? Thanks.

Let me answer those in reverse order. I don't see us going beyond two shifts. I don't think we need to do that. And as a matter of fact, some of what we're doing here, we're doing because we had to ramp very quickly, and it was quicker for us to do it here. But actually some of that production over the next few quarters is going to be moved back offshore, and that's one of the things that we'll gradually that will gradually help our margins.

We're actually doing more of the total function manufacturing operations and functions here today, than we -- than we would like to in a steady state, or more steady state kind of environment. As to the first question, I think it's difficult to put a hard number around that, Mike. But we wouldn't be doing this if we didn't think we could get to a double digit market share. But the nature of those products and that, we've been at times, we've been the number two supplier, we've been the number three supplier, we've been the number four supplier. And I think our expectations at this point are measured. But one of the products we're doing, that particular version, has some features that we hope to be the first to market with that particular version. And hopefully we'll be able to leverage that to accelerate the ramp there. But it's, I'd say it's too early to tell where the market share might shake out.

Thank you.

Thank you. And our next question comes from the line of Marc Robins with Catalyst Financial Resources. Please go ahead.

Hey, thank you very much. Guys, great quarter. It really is coming along, since we first started looking at you folks. Fantastic.

Thank you.

Just a couple of little cleanup items. When you were chatting about the amount of warranty repair work that you did in the quarter, what was that number again?

We didn't actually put -- you mean the equivalent revenue dollar number?

Yes.

I don't think we actually said. That it was about $4 million.

So it was the number that you folks guessed.

Yes.

Back in the prior quarter. Okay.

Yes.

And then one thing that you said this time around versus the last conference call, you said would it have -- that the -- essentially the warranty repair -- I'm going to call it revenue with quotes around it, it would it go -- essentially go away or cease to exist come the end of the first calendar quarter. Now, I'm going to use my terms, and -- it sounds to me like maybe a little of that is slopping into March. Is that a correct characterization of what's going on?

That is a highly correct characterization of what's going on.

Okay. So essentially there's a little bit left over, a little bit left over from the fourth fiscal quarter into the first calendar quarter. Any other -- any comments about that, or -- just trying to catch up with what you have?

We're hamsters on a treadmill right now.

Okay, that's probably a good thing. Let's chat a little bit about R&D. Do you want to say anything more, characterize anything more about what you are doing, and the -- your DBS -- what you're doing in R&D there? You want to describe it a little more?

Well, in the DBS business, it's the nature of the R&D work we do is fundamentally different than in the wireless datacom business. In the wireless datacom business, we're building new platform products based on the aggregation of a whole lot of inputs from a whole lot of different customers, and we're making some marketing --

You're kind of all over the place.

But we're making marketing determinations where we think the market is going, and what the right product will be to intersect the needs of that market when the products come to market. That's not way it works in the DBS business. We have two customers, they have very specific requirements. We work hand-in-glove with them to respond to their requirements and to flesh them out, depending on whether we're getting on board early or we're coming in after the fact. It's very specific product developments where we know there's a market for that specific product with that specific customer. As a matter of fact, the customer doesn't even -- they have to make a significant investment of engineering and quality resources to support us during that process, and to get us qualified.

So it's not just us making a decision to work on it. It's them making a decision to work with us on it, it's them making a decision to work with us on it, and invite us into that process. We are working on four products. So I can't go into any of the specifics about any of those products, other than to just repeat what I said last time, which is that we expect that three of those four will open up potential new incremental -- they will expand our served market, and open up additional revenue potential. One of those four will effectively cannibalize and ultimately replace a product that we currently have. Albeit with it something that is hopefully higher margin, because of the cost reductions we've incorporated.

Predominantly, though, HDTV?

Of the four new products we're doing, every single one of them is targeted strictly at full-featured HD next-generation applications, that's correct.

Okay. Let's talk a little bit about the refinancing situation and, Rick, I'm not trying to get into the Monday quarterback situation. It sounds to me like it was a little bit, as an outsider, it sounds to me like it was a little bit traumatic. I know you were in the penalty box because you weren't making money, and that always means two or three black marks against whatever you're trying to negotiate. Do you want to say anything about how arduous the new negotiations were, and tell us a little bit about what was going on?

Sure, I'd be glad to give you some color on that. So we -- and I mentioned on the last call that it was quite possible that the structure of the refinancing may ultimately have multiple elements to it. When we -- we talked to a number of banks during this process, and we looked at a number of other potential sources. And we spent a lot of time about it, and we were very happy with the ultimate outcome. It became pretty clear early on, that to get a kind of one size fits all single bullet, or silver bullet solution to this was not going to optimize the result for the Company or its shareholders.

Even with Bank of Montreal, who had gone through the valley of death with you?

Well, to go back -- the issue is -- that if you try to get one instrument that captures the total amount of the refinancing, you don't have the flexibility, and you don't really optimize the cost of capital. And let me just step back to your comment about the Bank of Montreal. Remember, the instrument -- the security we had there, or the financing we had there, was a term loan.

Right.

And we were making -- it was a cash flow based term loan with substantial quarterly principal payments. And it really wasn't the right structure for business that's entering a growth cycle. And so that -- and the reality is that CalAmp, the profile of CalAmp today wasn't a fit for that -- for those institutions. And so the right thing -- that's not to say that we didn't explore possibilities for restructuring that facility -- but it became clear that there were much better options available, and we talked to a number of banks. There were larger financings available, there were smaller financings. We ultimately at the sided to work with Square 1 for several reasons. But first of all, it's structured as a revolver, it offers maximum flexibility. It's a very clean structure. It doesn't have a lot of fine print and obscure fees, that when you factor it all in, make it look a lot worse than the head line number. It's very clean. And we have the ability, over time to grow with that facility. And so, they understand our business. And I think it's going to be a very, very good partnership.

But, that said, with that good of a banking facility, we weren't going to be able to get something with those attractive terms, that would fill the entire amount that we were looking to raise. So that led to us explore multiple tranches. And then, of course, when you get into multiple layers of the structure, there's additional complexity that gets introduced. We tried to keep it clean. And again, find that mix where we get a balance sheet coming out of this that gives us the strength and the flexibility that we need to go forward. But at a minimum cost of capital and dilution to the existing shareholders. But those were all the things we were trying to juggle. And we went through a number of different scenarios through that process. But at the end of the day, this was very clearly something that looked like the best outcome for the Company.

Well just as an outsider, and not getting information, it just looked like as good as you appear from a stock analyst standpoint, you had entered into the land of banking hell.

I think that's -- let me just clarify that. So again, if you look at the asset based loan, you look at the terms, you look at the structure, you look at the mechanics, that's a very, very good facility. If you look at the sub debt or the equity, I would see how someone could say, wow, that's pricey, or pricier. But again, it really comes back to -- if you step back and look at it from a total package standpoint, and had we tried to do all of this -- and we had proposals, by the way to do all of this -- as a more traditional higher yield debt financing. And that would have ended up having a much higher -- a much higher cost. So having that combination, really we believe gives us the structure that we need, and a cost that is going to be reasonable going forward. And then we'll take it -- we'll watch that, and we'll watch the markets. We do have the option, after the first year to prepay the sub debt. That's something we'll look at, based on our capital needs, based on alternative sources, when the time comes.

Well, nothing is set in stone until it changes. You guys are doing such a great job rebounding from where you were, for crying out loud.

Well, by the way, the other point I will say there, remember that banks look at companies different than analysts do.

Oh, absolutely.

The banks really, they're interested in the up side leverage, but only to the extent that it means we're going to need to borrow more money.

No, that's exactly right, yes, that is exactly right.

So then it really becomes to what are the assets that can be used as security there, and that kind of -- so that's really what led us to the multiple tranches.

Okay, thank you. I will get back in the queue.

Thank you. And our next question comes from the line of Richard Todaro with Kennedy Capital Management. Please go ahead.

Hi, guys.

Hey, Rick.

The -- let me ask a couple more questions on the warranty work. In your Q4 expectations, how much warranty work do you think you are going to do?

This is equivalent dollars, we're talking about?

Yes, roughly.

It will be about -- and these are really rough numbers at this point, but something like $3 million in Q4, with probably a $1 million slopping over to Q1.

Can you just help us understand how the $1 million moves, if you're shipping kind of equivalent products? Are you just doing that to your discretion, or is there a reason?

It's really a question of we've got finite capacity, and between us and the customer, we work out what the priorities are. And so we had some priorities on some other things that they were looking to accelerate, and part of the -- we were pushing on a balloon here, and it kind of popped out on the other side, then we had to have some of that slop over to Q1.

And just to be clear, so let's say that we go, and we're looking at clean quarter where there's $1 million dollars worth of this, but this additional $3 million comes in, in revenues that you're not really getting any gross margin on today. You should get full gross margin on the new $3 million in revenues that you're shipping? Am I making myself clear on that?

All other things being equal, that's correct.

Okay, so Q1, we should see an additional somewhat like $3 million bump just from warranty work alone, right?

All other things being equal, that's correct. Well, there's an opportunity there for us to do that. The again, we have to -- as I've -- every time I've talked about this, I just have to reinforce that that means that there is demand for that product, and we need to go and win that business to get that. And that demand, it goes up, it goes down, it shifts from one product to another product, and so that's -- all those things are in play as part of that. But all other things being equal, then you're absolutely correct, it would be -- and there's also -- I've mention this a couple times, there's a second order effect here, where just having all that reworked product going through the factory is -- it's confusing, it's inefficient. And I will be so happy when we're done with that.

Then just so I understand, so when we -- you talked about some overtime and some part shortages, stuff that we're effecting gross margins, when we're starting to look at Q1, and we're starting to look at a more clean quarter for this business. Do you think you can work out most of those part shortages and the issues, and start to see some gross margin improvement in Q 1, and if so, what all needs to be done?

I think -- look, we're not going to grow 69% sequentially very often. And that was really the thing. And even within the quarter, it was very back loaded, as a result of this. Q4 is more -- is going to be smoother. And our December revenues were up substantially from our September revenues, just because this quarter is shaping up to be a -- not the hockey stick that last quarter was. But -- so I think that we will see some gradual improvement there. We had, just to put more specifics on it, we had almost $0.01 a share just of overtime premium expenses in the last quarter, just the premium component of the overtime. And so it was meaningful. We'll have some of that in Q 4. I would expect that to be largely worked out of the system by Q1.

That said, there's a limit to how far we're going to go with margins until we get the new products flowing in. And that's going to be over the -- really, over the course of a year, that that impact comes in. So to get up to the high teens, we need new products. We're not going to do that with what we've got.

And can you -- I was surprised you guys went ahead and called out the $200 million in revenue from the rate that you are at today. Can you give us a view today how the 200 would break out between satellite and wireless?

We use the word "balance" in the press release, I believe was the word. And that doesn't necessarily mean 50/50. But it's certainly within 60/40, and I couldn't even really tell you which way. I think in the near term, the satellite business last quarter obviously had a substantial increase and passed the wireless business. It's going to continue to be higher revenue than the wireless business in Q4. We expect both of them to grow, but I expect satellite to continue to be better. Both those businesses can bounce around. And I don't -- we do analysis, analysts do analysis, but the reality is that some of these other factors can -- will come into play over time, that we have very little control over in terms of where the lumps are.

But that said, I think over the next year or, so I would expect the satellite business to be ahead of the wireless business. But then I expect about a year from now, I will be disappointed if the wireless business isn't accelerating with some of these new bigger project opportunities that we're incubating and chasing today. When they start to contribute, the magnitude of some of those is very significant, potentially. And so my guess is that two years from now, our wireless revenues will have surpassed our satellite revenues. But I think the reason that we -- that we highlighted the $200 million, is our high watermark historically was about 220. And the vast majority of that was satellite. We expect to get -- we expect to surpass that prior high watermark. But I think by the time we get there it's going to be a fairly balanced mix. But longer term, higher growth opportunities ultimately on the wireless side.

Okay, and then my final question, can you guys talk about the size of kind of the smart grid projects that are out there, that you're bidding on? What kind of potential is there? Is there needle movers within there?

So they -- some of the projects that we are chasing right now have the potential to be far and away the largest projects we've ever done as a Company. There are multiple projects we're chasing that are eight-figure projects. Now, I have to again just remind everybody these are competitive, and very frequently what my expectation is, a lot of these, they're going to come out and be solicited as very large totally full system integrated mammoth project. But then the implementation is going to come in stages, and not all stages may ultimately be funded. But that said, the scope of these projects, even our piece of them, is significant. And some of these projects are -- the total project is in excess of $1 billion dollars. And so our piece, while the numbers are pretty significant to us, we're doing a piece of a piece.

And so these can be significant, but what's attractive about them to CalAmp is that most of these require a breadth of product capabilities. Some of the ones we're looking at now require spread spectrum, unlicensed plus narrow band, high throughput licensed, plus cellular, plus the ability to enter -- plus some of them are mobile. Some of them are fixed, as well as mobile. And the ability to seamlessly interoperate. And there are a lot of companies out there with kind of magic bullet solutions targeted at one piece of that puzzle, but CalAmp is one of very few companies that can come in and actually tackle a broader range.

What's the soonest we could hear about some of these project that you want them or you didn't -- that you win them or you didn't?

I think it's realistically the second half of this calendar year, because typically the pilots don't -- most of these things start with a pilot. Most of the pilots are not publicized. We will -- we will talk about them as soon as we're allowed to talk about them.

Good stuff. Keep up the good work. We appreciate it.

Thanks, Rich.

Thank you. (Operator Instructions). Your next question comes from the line of John Nelson with State of Wisconsin Investment Board. Please go ahead.

Hi, guys. Good job to you and your team on the quarter, and the long-term progress. Congrats. My question is, have there been any significant changes in the competitive landscape for either satellite or wireless datacom product in the last six to twelve months?

Satellite, the short answer is no. The competitive space there is essentially what it was -- actually, it's kind of exactly what it was three, four years ago. There have been one or two companies have left the space. There are no new entrants, and the positioning has not changed dramatically within that. So that's actually pretty simple question to answer. And in the wireless space, it's very fluid. There's a lot of things happening there. Frankly, a lot of what we're doing, and have been doing over the last couple years is try to really make sure we understand where the opportunities for CalAmp are. And I will just use public safety as an example, where we're one of the strongest players on the data side of that business. We had -- we've done some things over time on the voice side where we were one of many people, and really didn't after highly differentiated offering. And we've decided that rather than try to build a strong footprint on the voice side, we were much better off partnering with the people who have voice offerings, but don't have data offerings, and go to market that way.

So that's just an example, and so we're not directly affected by some of the things that are happening on that side, but we're indirectly affected. So the partnering and teaming with people who are either prime contractors or doing complementary -- larger companies that are doing complimentary products, and taking the lead. Or other companies our size or even smaller that can bring things to market, that's going to be a big piece of what we do going forward, especially in the wireless networks side of things. So there's a lot in the mobile resource management. There's a lot -- the product life cycles there are roughly a year, and so we've seen a lot of smaller competitors come and go there. I expect that to be a fairly dynamic competitive situation for the next couple of years in that side.

Can you identify who you have partnered with on the voice side?

No, although there are a couple of obvious -- if you look at the list of key players on the voice side, number one is, Motorola, who is also number one on the data side. So they're not a logical partner candidate. Although there are a couple of smaller things where we have partnered with them, but those are more niche opportunities. But then if you look at that time two, three, and four players there, they do not have data offerings. And so we are working at the proposal level with -- really with everybody in the top -- I'm looking to Garo for some head nodding -- everybody in the top five with the exception of Motorola.

Okay. Thank you.

Thank you. And at this time, I'm showing no additional questions in my queue. I would like to turn the conference back over to management for any closing remarks.

All right, well thanks again for joining us today. We look forward to speaking with you next quarter. Happy New Year.

Ladies and gentlemen, this does conclude the CalAmp fiscal 2010 third quarter conference call. This conference will be available for replay. If you would like to listen to the replay, you may dial it at 303-5900-3030, or 1-800-406-7325, with the access code of 4197971 pound. We thank you for your participation, and at this time, you may now disconnect.