CAMP4 Therapeutics Corp (CAMP) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CalAmp Fiscal 2010 Fourth Quarter conference call. (Operator Instructions). This conference is being recorded today, Thursday, May 6, 2010.

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

Thank you. Good afternoon, everybody. Welcome to CalAmp's Fiscal 2010 Fourth Quarter Earnings call. With us today are CalAmp's Chief Executive Officer, Rick Gold, and the Company's Chief Financial Officer, Rick Vitelle.

Before I turn the call over to management, please remember that our prepared remarks and responses to questions may contain forward-looking statements. Words such as "may," "will," "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 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 and uncertainties that are described in the Company's annual report on Form 10-K for fiscal 2010, as filed today 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's now my pleasure to turn the call over to CalAmp's Chief Executive Officer, Rick Gold. Rick?

Thank you, Lasse. Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2010 fourth quarter and full-year results.

I'll begin with comments on our financial and operational highlights and I will 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 our business outlook and guidance, along with some concluding remarks. This will be followed by a question-and-answer session.

We had a strong finish to fiscal 2010 with consolidated fourth quarter revenues of $34.5 million, an increase of 62% from the prior year and 12% sequentially. During the fourth quarter, production volumes of our Satellite products continued to ramp, resulting in a second consecutive quarter of operating profitability in this business segment. In addition, our Wireless DataCom business, which has been impacted by the global economic downturn, stabilized over the course of the fiscal year and generated double-digit percentage growth in revenue in the fourth quarter.

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 amortization of intangible assets and stock-based compensation expense, our adjusted basis or non-GAAP net loss was $0.5 million or $0.02 per diluted share. I refer you to our fourth quarter earnings press release, issued earlier today for a detailed reconciliation of the GAAP basis pretax loss to the adjusted basis or non-GAAP net income or loss.

Looking at our cash flow and balance sheet, in fiscal 2010 we generated cash flow from operations of $2.5 million and reduced our debt from $21.1 million at the beginning of the year to $10.1 million at year end. During the fourth quarter, we announced the refinancing of our maturing bank debt, which was funded by a new credit facility with Square 1 bank and by gross cash proceeds of $9.25 million from the private placement of common stock and subordinated debt. Completing this refinancing was an important milestone, as it enhanced our financial flexibility, improved our liquidity position and eliminated the uncertainty associated with the maturity of our previous bank loan.

I'll next provide updates for our Satellite and Wireless DataCom businesses. During the fourth quarter, Satellite product revenues increased to $18.7 million, up 11% sequentially and 130% on a year-over-year basis. The Satellite business also achieved operating profitability for the second quarter in a row.

That said, gross margin percentages remained below historical levels due to lower revenue run rates resulting in lower overhead absorption, as well as supply chain inefficiencies associated with the rapid ramp in production volume in the second half of fiscal 2010. We have now substantially completed the shipment of refurbished Satellite products under our product warranty program for a key customer.

We continue to work closely with our direct broadcast Satellite or DBS customers on next-generation products that we expect will increase our market share and improve our gross margins over the course of fiscal 2011. In total, we are currently developing four next-generation products, two for each of our DBS customers.

For the product with the largest revenue potential, we are well into the product qualification process with that customer and expect shipments to begin in our second fiscal quarter. We are making good progress on the remaining products and expect two additional products to enter the customer qualification process within the coming weeks. Although the introduction of these important next-generation products has not occurred as rapidly as we had anticipated last year, I am encouraged by the continued progress of our development team.

Now let's move on to an update of our Wireless DataCom business, which provides communications systems, products and services for applications in the utility, public safety, industrial monitoring and controls and mobile resource management, or MRM, markets. After being significantly impacted by the economic downturn, our Wireless DataCom business stabilized in fiscal 2010 and we believe that a recovery is now underway.

During the fourth quarter, the Wireless DataCom business generated revenues of $15.8 million, which was up 14% on a sequential quarter basis 20% year-over-year. This improvement was across the board, with sequential revenue gains in each Wireless DataCom product area.

We also made good progress on key new product and business initiatives. Our entire MRM product line was refreshed, incorporating latest-generation technologies and lower-cost components.

We introduced two core Wireless network products, the Viper-200 and the Phantom II, which are optimized for smart grid infrastructure applications, and we leased 100 kilohertz of nationwide spectrum to offer in conjunction with our Wireless networks products for licensed mission-critical wireless infrastructure applications.

Demand for our MRM products is increasing as we support our expanding base of customers and continue to refresh our product lines and enter new vertical markets. We've successfully leveraged our leadership position in local fleet management and vehicle finance verticals to gain traction in promising emerging applications, including cargo tracking, vehicle insurance and personal security. Fiscal 2011 has started with a strong MRM backlog and an expanding pipeline of opportunities.

Our Aercept business continued on its growth path, with particularly strong billings during the fourth quarter. The overall vehicle finance market conditions are improving and we are seeing the benefits of the shift in our sales channel strategy earlier in the year. In addition, fourth quarter revenues benefited from sales to Directed Electronics, where we are providing the wireless hardware and services for their Viper remote car start product that is supported by the Apple iPhone.

Moving on to our Wireless networks business, last month's announcement of more than $15 million in new orders from three key projects has helped push our backlog to an all-time high. Among these new orders is a contract for wireless communications equipment for the rail transportation sector, with delivery scheduled over the course of fiscal years 2011 and 2012.

In the public safety space, we were awarded a contract to expand the existing mobile data communications network for a Canadian provincial government agency. Applications include vehicle tracking, database query, secure inter-vehicle messaging and dispatch. Work on this multi-year contract is underway.

And in the utilities space, we received an order from a large US utility company for a smart grid pilot project. We are pleased with the traction our Wireless solutions are gaining in the utilities sector for smart grid infrastructure applications. This latest award is one of several smart-grid-related projects that we are currently working on and we believe that our portfolio of wireless communication infrastructure solutions is well positioned to serve the needs of this market.

In summary, I believe our Wireless DataCom business is headed in the right direction and that we are taking the right actions to position this business for long-term profitable growth. The critical mass we have developed, along with the breadth and strength of our technology platforms, gives us an advantage that most other competitors in our markets cannot offer.

Before turning it over to Rick Vitelle, I'd like to mention a recent promotion with the CalAmp executive management team. As announced last month, our Board of Directors appointed Michael Burdiek as President, in addition to his duties as the Company's Chief Operating Officer. Michael has assumed increasing levels of responsibility in recent years and this promotion is well deserved and reflects his current leadership role within CalAmp.

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

Consolidated gross profit for the fiscal 2010 fourth quarter was $7.0 million or 20.2% of revenues, compared to gross profit of $13.6 million for the same period last year. Gross profit in the fiscal 2009 fourth quarter included a $9.0 million gain from the settlement of litigation with Rogers Corporation. Excluding the benefit of this litigation settlement, the fiscal 2009 fourth quarter gross profit was $4.6 million or 21.5% of revenue.

The increase in gross profit in the latest quarter, excluding the fiscal 2009 litigation settlement, was due primarily to higher Satellite and Wireless DataCom revenues. Our consolidated revenues in the latest quarter increased by 60% from the fourth quarter of the prior year, yet the consolidated fourth quarter gross margin was about 1.3 points lower, year-over-year. This is because the product mix was significantly different between these two periods.

In the fourth quarter of fiscal 2009, 62% of consolidated revenues were from Wireless DataCom products, which carry substantially higher gross margins than our Satellite products, which accounted for the remaining 38% of revenues in that period. By comparison, in the most recent quarter, Wireless DataCom products represented 46% of consolidated revenue while Satellite products accounted for 54%. 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 $5.1 million in the latest quarter or 32.5% of Wireless DataCom revenue. This compares to gross profit of $4.2 million or 32.1% of revenue in the same period last year.

With Wireless DataCom revenue lower than historical levels due to the global economic downturn, gross margins continue to be impacted by the lower absorption of manufacturing overhead costs, along with 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 products as market conditions improve and revenues rebound.

Gross profit for Satellite products was $1.9 million or 9.9% of Satellite product revenues in the latest quarter. This compares to gross profit for Satellite products of $9.3 million in the same period last year, which included the $9 million gain on the Rogers settlement. Excluding the benefit from the Rogers legal settlement, gross profit for Satellite products was $349,000 or 4.3% of Satellite product revenues in the last-- in the fourth quarter of last year.

While gross profit and gross margin for Satellite products increased significantly on a year-over-year basis, excluding the effect of the legal settlement, they remain lower than historical levels. To accomplish the significant ramp in unit volumes that we had in the second half of fiscal 2010, 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 damped gross margins in both the third and fourth quarters.

However, we expect that our manufacturing efficiencies for Satellite product will improve in fiscal 2011 and, consequently, we believe that our gross margins in the Satellite products business will also improve. We expect further improvement in Satellite margins to the mid teens range, once we are shipping our next-generation products in volume, later in fiscal 2011.

During the fourth quarter of fiscal 2010 we did not recognize an income tax benefit, despite our pretax loss of $1.3 million. In accordance with the applicable tax accounting rules, the income tax benefit associated with the pretax loss generated in the fourth quarter and in fiscal 2010 as a whole, was offset by an increase in the deferred tax asset valuation allowance. Once we return to GAAP basis profitability, we expect to begin reversing the deferred tax asset valuation allowance, which will have the effect of reducing reporting income tax expense.

It should also be noted that the $1.4 million income tax benefit that we did report in an earlier quarter of fiscal 2010 was attributable to the resolution of an uncertain income tax position relating to a prior year and, consequently, this income tax benefit was not offset by an increase in the valuation allowance.

Now moving on to the balance sheet, our total inventory at the end of the fourth quarter was $10.6 million, representing annual inventory turns of approximately 10 times. This compares to total inventory of $11.6 million at the end of immediately preceding quarter, which represented annualized inventory turns of approximately 8.5 times. This sequential improvement in turns is attributable to inventory reductions primarily related to Satellite products, coupled with our ability to generate higher sales in the fourth quarter.

The accounts receivable balance of $16.5 million at the end of the fourth quarter represents a 43-day average collection period compared to receivables of $14.5 million at the end of the immediately preceding quarter.

Net cash provided by operating activities was $2.5 million for fiscal 2010. At the end of the fourth quarter, cash and cash equivalents totaled $3.0 million and total debt outstanding was $10.1 million. In addition to our cash and cash equivalents balance, our main source of liquidity is our revolving credit balance with Square 1 bank, which provides for borrowings up to the lesser of $12 million or 85% of eligible accounts receivable.

Our total debt balance of $10.1 million at the end of fiscal 2010 is comprised of $5.9 million drawn under this revolving bank credit balance and subordinated debt with a carrying value of $4.2 million. The subordinated debt, which was issued in the fiscal 2010 fourth quarter, has a principal face amount of $5 million and is reduced by a debt discount of approximately $800,000, which represents the unamortized fair value of the warrants that were issued along with the subordinated notes.

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

Thank you, Rick. Now let's turn to our financial guidance. Looking ahead, we expect fiscal 2011 consolidated full-year revenues to increase in the range of 10% to 20% over fiscal 2010 due to growth in both our Satellite and Wireless DataCom businesses. Our Satellite business is expected to benefit from the launch of the new products that should increase our served market and improve our gross profit margin and a recent uptick in orders for Wireless DataCom products, along with an expanding pipeline of new opportunities, has set the stage for growth to continue in fiscal 2011.

In addition, we expect that our consolidated gross margin for fiscal 2011 as a whole will be in the range of 23% to 27% of revenue and we expect fiscal 2011 total operating expenses will remain flat compared to fiscal 2010.

Looking further ahead, we believe that we can reach an annual revenue run rate greater than $200 million within the next two years, more or less balanced between our Satellite and Wireless DataCom businesses.

Our revenues can fluctuate significantly from one quarter to the next due to seasonality, product transitions, customers' inventory management practices and the non-linearity of revenues associated with large development or system contracts. Due to a combination of these factors, we expect that fiscal 2011 first quarter consolidated revenues, although higher on a year-over-year basis, will decrease on a sequential quarter basis and be in the range of $24 million to $27 million, with lower sales expected, primarily in our Satellite products business.

We expect a fiscal 2011 first quarter GAAP basis net loss in the range of $0.08 to $0.12 per diluted share. The adjusted basis non-GAAP operating results for the first quarter, which exclude intangibles amortization expense and stock-based compensation expense, and includes an income tax benefit computed without giving effect to an increase in the deferred income tax valuation allowance, is expected to be in the range of a $0.03 to $0.07 loss per diluted share.

In concluding our prepared remarks, I'd like to recap some key points drawn from our recent results and latest developments. First, our liquidity position improved significantly over the course of fiscal 2010. We successfully completed the refinancing of our maturing bank debt in a challenging environment and reduced our total debt balance by more than half during the year.

Second, we reestablished our competitive position with our Satellite products and returned this business to operating profitability during the second half of fiscal 2010 with a significant ramp in production volumes. As we launch our next generation DBS products in fiscal 2011, we expect to further improve profitability and gain additional share in this market.

And finally, a recovery of our Wireless DataCom business is underway and we expect growth in fiscal 2011. I am encouraged by recent new orders and higher backlog levels, as we start the new year. We are competitively positioned in several emerging markets for wireless applications and we have a healthy pipeline of new opportunities.

In summary, I believe we're making 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'd like to open the call up to questions. Operator?

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

Thank you. Good afternoon.

Hi, Mike.

Hi, so, first, okay you have a record backlog and did you give a backlog number?

We don't publish our backlog number. That's something we track internally and it's primarily on the Wireless DataCom side. Typically in the Satellite business we get releases-- we work from forecasts and get releases very close in.

Okay. You also talked about an expanded pipeline of new opportunities, so is there any way you can quantify that, Rick?

Well, I think to put it in perspective, the backlog is at an all-time high. Looking forward to next year, Mike, we expect the revenue to be split fairly evenly between the Wireless and the Satellite. Obviously, there's pluses and minuses that we could see there, but-- and, again, the trajectory to the $50 million balance between the two that we see by the back end of fiscal 2012, we believe is supported by those indicators.

And, in particular, the two or the three contracts that I-- that we had announced, that I mentioned, the bulk of those revenues are going to be recognized over that two-year period, relatively little at the very front end. But as we get into the latter part of 2011, and then into the earlier part of 2012, we'll start to see some contribution from those and, potentially, from others that we have in the pipeline, or even follow-ons from those.

Okay. Two more questions, if you don't mind. So one, on the smart grid you said you have multiple projects, multiple opportunities. So what is the go-to-market strategy there? Are you being pulled in? Who pulls you in? Do you-- how do you get those deals?

So, there's multiple ways there. The first is, and just to make sure everybody understands here, our focus is on backhaul solution for smart grid. So we're working at the core of those networks, not, typically, out at the edge, although we do help facilitate some of the communications that's going to and from the edge.

So, we have, in some cases, been pulled in by the utilities themselves. We have a couple of projects going on now that are like that and that's typically what happens with some of these larger-distribution automation projects where the utility has multiple contractors working on multiple phases of that.

That said, there are some projects where there is a single prime contractor. The project we're executing right now in Thailand, for instance, we're a subcontractor on that one to a prime contractor that's doing multiple pieces of that system, including our back-haul piece.

And then finally, and I think this is something we'll see, particularly as we get into 2012, we have some expanded partnerships on the smart metering side, providing some of the wireless connectivity solutions there. We've already talked about Elster publicly, but that's an area where we think there's some opportunity from the meter manufacturers themselves. But that's farther out in time. So long answer to a short question.

Okay, thanks. And then the final question relates to DBS. So I believe you've been designing some products for DirecTV where-- to whom you haven't shipped in the past year, but been working on some kind of next-generation HDTV-capable type of receivers. So, have any of those projects been lost or it's just basically a one quarter push-out?

So the short answer is no. We're still-- the four projects we talked about, we've been working on for the better part of the year now, two of those are for each of the US service providers and we're working on all four of those right now actively.

Okay, great. Thank you.

Thank you.

(Operator Instructions). And our next question comes from the line of [George Pulis], private investor. Please go ahead.

Yes, gentlemen. I have a question concerning your press release. It says that you're going to grow your 2011 revenues by 10% to 20% but then, within the same paragraph, you're giving some form of guidance of $200 million over the next two years, which means that there's going to be quite the jump between 2011 and 2012. Can you give us a little bit more detail?

Sure. The $200 million, it's a $50 million per quarter run-rate number. This is the same guidance we gave a quarter ago that by the second half of fiscal 2012 we expect that some time in that period, between now and then, we can be to that run rate.

And it's really-- it's on both sides of the business. In the Satellite side, which is more volatile on a quarter-to-quarter basis, but we believe-- we've been at numbers higher than that in the past and we believe that with the launch of the new products that we just referred to that we will have the wherewithal and the market opportunity and the product portfolio to be in that kind of range.

And similarly, on the Wireless side it's a question of product portfolio and market access, as well. And on the MRM side and the Wireless networks side, based on design wins that we see on the MRM side, as well as bid and proposal and backlog activity that we just alluded to on the Wireless networks side, we believe the opportunity is there, as well.

And I would also indicate that we have been at that level before on the Wireless networks side, although-- albeit with a somewhat different mix of focus from a vertical market standpoint.

And then just a follow-on, in your guidance, you're giving a range of 23% to 27% on your gross margin lines. Have you given any indication in terms of your gross profit or operating margin lines?

Well, we've given the revenue, we've given the gross margin and then we've indicated that we expect the overall OpEx for the year to be flat. And so that can kind of point you to what you need for the operating profit analysis.

I will mention, by the way, on the OpEx side, we will be, in some of our sales and marketing activity, some of the customer support, some of the new products, we will be growing some of our expenditures, but we've achieved some significant savings in our OpEx from a structural standpoint over the last year.

In particular, we've-- we were doing manufacturing and customer fulfillment out of six facilities a year ago and that's now down to two, just our Oxnard, California, and Waseca, Minnesota, facility and the other four, where we're still doing engineering, sales and marketing, we've been able to move out of those larger, more expensive facilities, into smaller, less expensive, more focused facilities. So, essentially, we're able to use the savings on the structural side to continue the development and the focus on the business side. But overall, we expect our OpEx to be flat.

Thank you. And at this time I would like to turn the call back over to management for any closing comments.

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

Thank you. Ladies and gentlemen, this concludes the CalAmp fiscal 2010 Fourth Quarter conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 followed by a passcode of 4291490. ACT would like to thank you for your participation. You may now disconnect.