CAMP4 Therapeutics Corp (CAMP) 2013 Q1 法說會逐字稿

Good afternoon. My name is Stephanie, and I will be your conference Operator today. At this time, I would like to welcome everyone to the CalAmp first-quarter conference call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Joanne Keates, Director of Corporate Communications, you may begin your conference.

Thank you, Stephanie. Good afternoon, and welcome to CalAmp's fiscal 2013 first-quarter conference call. With us today are CalAmp's President and Chief Executive Officer, Michael Burdiek, and 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, intellectual property, infringement claims, interruptions or failure of our Internet-based systems used to wirelessly configure and communicate with the tracking and monitoring devices that we sell; and other risks and uncertainties that are described in the Company's annual report on Form 10-K for fiscal 2012, as filed April 26 with the SEC.

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 any forward-looking statement, whether as a result of new information, future events, or otherwise. With that said, it's now my pleasure to turn the call over to CalAmp's President and CEO, Michael Burdiek.

Thank you, Joanne. Good afternoon, and thank you for joining us today to discuss CalAmp's fiscal 2013 first quarter. I will begin today's call with a review of our financial and operational highlights, and Rick Vitelle will provide additional detail about our financial results. I will wrap up with our business outlook and guidance for fiscal 2013 second quarter, along with some concluding remarks. This will be followed by a question-and-answer session.

Our strong financial performance in the first quarter was attributable to continued execution of our business strategy, which resulted in significant growth in revenue and earnings. The Wireless DataCom segment recorded impressive year-over-year revenue growth of 44%, driven by strength in several of our core industry verticals. In our satellite business, we were particularly pleased with the gross margin improvement to 15.8%, and with this segment's solid contribution to our bottom line.

Consolidated revenue for the first quarter was $43.9 million, up 27% compared to the first quarter last year, with Wireless DataCom revenue increasing to $31.6 million and Satellite revenue of $12.2 million. We earned $0.14 on a GAAP basis and $0.18 non-GAAP. Both revenue and EPS results were well above our initial guidance. In the first quarter, we generated operating cash flow of $3.2 million and we ended the quarter with $7.3 million in total cash.

Now I would like to review our operational highlights for the quarter. The Wireless DataCom segment posted record revenue in the first quarter, with continued momentum across multiple market verticals. We experienced strong demand for our MRM products and services, which accounted for nearly 70% of total Wireless DataCom revenue. Wireless network applications accounted for the remaining 30% of Wireless DataCom revenue, with significant contributions from our rail transportation products. In MRM applications, we are gaining market share for our products and solutions, as we continue to exceed market rates of growth.

As in recent quarters, we are experiencing strong customer demand for our core fleet management, trailer tracking, stolen vehicle recovery, and vehicle finance offerings. We continue to focus on increasing our international market penetration, with the Navman Wireless supply agreement further expanding our global footprint. MRM revenue in the first quarter was much higher than we originally projected, primarily due to two large contract wins that have aggressive delivery timelines. The first of these involved initial volume shipments to equip the delivery fleet of a national soft drink company, while the second related to the commencement of shipments to equip the service fleet of a national telecom service provider.

At the end of the first quarter, we had almost $1.5 million MRM devices in service with our customers, that are supported by CalAmp's PULS over the air device provisioning, monitoring, and maintenance system, which is up from $1.3 million at the end of the fourth quarter. First-quarter results for our MRM bundled solutions business were within range of our expectations. Our bundled network offerings for the vehicle finance and remote start markets had approximately 280,000 active subscribers on our network at the end of the first quarter, compared to 265,000 subscribers at the end of the fourth quarter. This subscriber base provides a recurring revenue stream that currently represents about 10% of our Wireless DataCom revenue.

In our wireless networks business, we had steady revenue growth in the first quarter among our broad-based customers in the utility and oil and gas markets, with key contribution from shipment of mission-critical telemetry radios to a global energy company to equip their oilfield operations across the Anadarko Basin. And although our public safety business remained soft during the first quarter, bidding proposal activity is picking up, which suggests that we may be in the early stages of recovery in this market. Within the rail transportation vertical, we experienced a record revenue quarter, with significant shipments on the final phase of the positive training control preproduction contract.

At the end of the first quarter, we had $3 million of shipments remaining on our $19 million PTC development contract, which we expect to complete in our fiscal 2013 second quarter. In addition, last month we announced that we had received our first commercial production follow-on orders for the PTC program. These initial orders, totaling $5 million, are to supply interoperable PTC radios to two Class I North American railroads. These initial orders should help facilitate a smooth transition from the product design and preproduction phases to full-scale production. In addition to these PTC radios, we expect to extend our full suite of mobile asset management solutions to the rail market and further grow our revenue opportunities in this important market segment.

Moving on to our Satellite segment, we experienced solid performance in the first quarter, with revenue of $12.2 million and a gross margin of 15.8%. The improved gross margin profile is due to the transition to a variable cost model that we completed last year, and to the introduction of two new products in recent quarters. Though some degree of quarter-to-quarter revenue volatility can be expected in our Satellite segment, given its high concentration of sales with a single customer, we expect the volatility could be somewhat dampened due to the expansion of our product portfolio in this market. We anticipate that our satellite business will continue to generate double-digit gross margins and be a positive contributor to bottom-line results this year.

Late in our first quarter, we announced the acquisition of the hardware business of Navman Wireless, a global provider of fleet management solutions. In conjunction with this asset purchase, we entered into a supply agreement, pursuant to which Navman agreed to purchase a minimum of $25 million of products from CalAmp over a five-year period. We also gained a 14-person R&D team and design center in Auckland, New Zealand. This acquisition, our first in five years, reflects our new renewed financial strength and the momentum that we are experiencing in our MRM business. The assets acquired including -- include technology for mobile display terminals, or MDTs, that will complement and expand our existing MRM product portfolio and allow us to market enhanced platform solutions for fleet management -- thereby expanding our served market.

The Navman supply agreement, which was finalized just prior to quarter-end, accounted for first-quarter revenue of approximately $500,000. Across all businesses, we expect that our focused R&D investments will continue to drive new and innovative products to market at an accelerating pace over the coming quarters, preserving our technology and product leadership position in mobile resource management and industrial machine-to-machine applications. We are making incremental investments in software resources, as well as utilizing our recently acquired design center in New Zealand, to give us increased capacity to bring innovative products to market and fuel the future growth of our Wireless DataCom segment.

The high-value CalAmp brand and our state-of-the-art product portfolio position us well to serve larger enterprise customers intent on rolling out new, secure, turnkey solutions that enhance their business processes and improve the efficiency of their operations. We are now seeing larger opportunities as we continue to nurture channel partnerships with global reach and develop differentiated solutions tailored to diverse enterprise applications.

We will continue to focus our resources on those markets and applications that we believe have excellent long-term growth prospects, addressing them with products and services that we believe have sustainable competitive advantages. The results of the latest quarter are a clear expression of the transformation that CalAmp has undergone over the past several years, to once again be a growing and profitable enterprise with a strong sales pipeline and solid momentum. With that, I will now turn the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at our first-quarter financial details.

Thank you, Michael. I will provide a summary of our gross profit performance, income tax position, working capital management, and cash flow results for the fiscal 2013 first quarter. Consolidated gross profit for the fiscal 2013 first quarter was $13.7 million -- an increase of $4.3 million over the same quarter last year, predominantly as a result of higher revenue. Consolidated gross margin increased nearly four points, to 31.2%, in the latest quarter, from 27.3% in the first quarter of last year, primarily as a result of the significant improvement in the gross margins of our Satellite business.

Looking more closely at gross profit performance by reporting segment, Wireless DataCom gross profit was $11.7 million in the first quarter, or 37.1% gross margin. This compares with gross profit of $8.6 million, or 39.0% gross margin, in the same quarter last year. Wireless DataCom gross profit increased on higher revenue, while the gross margin percentage declined, mainly because last year's first quarter included approximately $500,000 of nonrecurring license revenue for which there was no corresponding costs. Our Satellite business had a gross profit of $1.9 million in the first quarter, or 15.8% gross margin. This compares to gross profit of $828,000 in the first quarter last year. These significant improvements in gross profit and gross margin are attributable to the conversion of this business to a variable cost operating model, as well as the broadening of the product space.

Now let's take a look at CalAmp's income tax situation -- in the latest quarter, we recorded income tax expense of only $9,000, which represents minimum state income taxes. No federal income tax expense was recorded in the first quarter, due to the existence of net operating loss carryforwards. At the end of fiscal 2012, we had NOL carryforwards of approximately $70 million for US federal income taxes and $87 million for state income taxes, which we expect will shelter substantially all of our taxable income for at least the next few years. Consequently, we expect that our actual cash payments for income taxes over this time period will be quite small, and will average perhaps 1% to 2% of our taxable income.

The tax benefits of the NOLs, along with tax credit carryforwards and book tax temporary differences, comprise our total deferred tax asset balance, which amounted to $51 million at the end of fiscal 2012. A deferred tax asset valuation allowance was established in prior years, during periods when we were not able to demonstrate that the Company could generate sufficient future taxable income to utilize all these tax benefits. The valuation allowance had a balance of $39 million at the end of fiscal 2012. As a result of CalAmp's return to profitability, the valuation allowance is being reduced as we generate taxable income and utilize NOLs in the current fiscal year.

In addition, at the end of this fiscal year, we expect to make a substantial reduction in the deferred tax asset valuation allowance, in order to recognize, for financial reporting purposes, the tax benefits associated with most of the remaining NOLs and tax credits that we expect to utilize in future years. Once we get closer to the end of this fiscal year, we will provide an estimate of how much we believe this fourth-quarter income tax benefit will be. Beginning next fiscal year, we expect our effective income tax rate will revert to a more typical level of around 40%, based on full federal and state statutory tax rates, even though our actual income tax payments are expected to remain very low for the next few years because of the NOLs.

Next, looking at bottom-line results, GAAP basis net income in the first quarter was $4.2 million, or $0.14 per diluted share. Our non-GAAP net income in the first quarter was $5.3 million, or $0.18 per diluted share. Non-GAAP earnings excludes the impact of intangible assets, amortization, and stock-based compensation expense, and includes an income tax provision that reflects taxes paid or payable for the period. For a reconciliation of the GAAP and non-GAAP financial results, please see our first-quarter earnings press release that was issued today, which is available on our website.

Now, moving on to the balance sheet, our total inventory at the end of the first quarter was $14.6 million, representing annualized inventory turns of eight times. At the end of the immediately preceding quarter, inventory was $10.1 million, which represented annualized inventory turns of 10 times. The reduction in inventory turns is primarily due to an inventory ramp-up in the first quarter in our MRM business, in response to increasing demand. The consolidated accounts receivable balance was $14.4 million at the end of the first quarter. This represents an average collection period of 38 days, which is consistent with our receivables collection rates of the past few quarters.

As of May 31, 2012, cash and cash equivalents totaled $7.3 million -- an increase of $1.7 million from the end of the preceding quarter. Net cash provided by operating activities was $3.2 million for the first quarter. In addition to cash generated by operations, our primary source of liquidity is the $12 million credit facility with Square 1 Bank. At the end of the first quarter, we had $2.8 million outstanding under a bank term loan, and the unused borrowing capacity on the revolver portion of the credit facility was at full availability of $9.2 million. The bank term loan is repayable at the rate of $100,000 per month.

Our total outstanding debt at the end of the first quarter was $5.9 million, comprised of the $2.8 million bank term loan and the $3.1 million carrying value of the non-interest-bearing note payable that was issued as part of the purchase consideration for the Navman Wireless asset purchase. The Navman note payable, which has a face amount of $4 million, is payable in the form of sales price rebates, as sales are made to Navman under the five-year $25 million supply agreement. Excluding the Navman note payable, we ended the first quarter with a net cash balance of $4.5 million. With that, I will now turn the call back over to Michael for our guidance and some final comments.

Thank you, Rick. Now let's turn to our financial guidance. Based on our most recent projections, we expect fiscal 2013 second-quarter consolidated revenues in the range of $41 million to $45 million. We anticipate that our Wireless DataCom second-quarter revenue will be up significantly year over year, and up moderately on a sequential basis. And we expect Satellite second-quarter revenue will be up year over year, but down somewhat sequentially. At the bottom line, we expect second-quarter GAAP-basis net income in the range of $0.09 to $0.13 per diluted share, and non-GAAP net income in the range of $0.13 to $0.17 per diluted share.

And in closing, I would like to recap some key points drawn from our recent results and latest developments. First, the Wireless DataCom segment posted impressive revenue growth of 44%, driven by strength across several of our core verticals, with particular momentum in MRM and significant contribution from our rail transportation initiative. Second, in the Satellite business segment, we were pleased with the revenue results and especially the gross margin improvement, which provided a solid contribution to the bottom line. Going forward, we expect this business segment will continue to generate double-digit gross margins and be a positive contributor to bottom-line results.

Third, we are increasing our R&D investments, particularly in software development, to give us increased capacity to deliver innovative products to market and fuel the future growth of our Wireless DataCom segment. And fourth, in the first quarter we generated operating cash flow of $3.2 million, and ended the quarter with $7.3 million in total cash. Our strengthening balance sheet has formed a solid foundation for further execution of our strategic growth initiative in core markets, as well as in new and emerging applications. We are now realizing the benefits of our focused strategy on key market verticals that offer attractive long-term growth prospects.

Our momentum is building and our competitive position is strengthening, as we broaden our product portfolio and pursue opportunities for integrated hardware and software solutions for ever-larger global enterprise customers. We expect that our continued effective execution to meet growing market demand for state-of-the-art, machine-to-machine connectivity will drive profitable growth through fiscal 2013 and beyond. That concludes our prepared remarks. Thank you for your attention. At this time, I would like to open the call up to questions. Operator?

(Operator Instructions) Mike Crawford.

First, Michael, I would like to talk about how you view -- what portion of your business, how you view the returning nature of your business. You have these 280,000 Aercept subscribers that comprise about 10% of Wireless DataCom revenue, but I believe also much of your business is repeat business from repeat customers. Can you comment on that, please?

Sure. The true recurring revenue percentage is roughly 10% of Wireless DataCom revenue, as you point out. But the reality is, is that a good deal of our MRM products business is, in effect, recurring revenue. Once we are designed in to a fleet service provider's application, generally speaking, those customers tend to stick with a single supplier for those specific types of applications. There are fairly high switching costs once a hardware device has been integrated into the cloud-based computing platforms and the fleet service applications. So, the business tends to be very sticky. So, a large percentage of our MRM revenue is, in effect, recurring business with existing customers.

Okay, thank you. And then, on the rail opportunity, so you have $3 million remaining on the high-margin development contract. And then, what might be a relatively smooth transition to production. But what sort of margin drop-off should we look at, at least initially, as you improve costing and manufacturing of this equipment?

Well, we do expect that early production business to be at somewhat lower margin than we have experienced with the recent preproduction radio shipments. But we do expect that we will still be in the range of our Wireless DataCom gross margin profile, which is roughly 30% to 50%; it's probably towards the lower end of that range, at least initially. Over time, hopefully we will have the opportunity to reduce costs and find additional efficiencies to help improve the gross margin profile. But also, we hope to be able to augment our current radio offerings into the rail market with other products and services that will, over time, accrete overall margins for the rail sector.

Okay, thank you. And then, what percent of the business in, say, the past year has been attributed to public safety versus where you think that could be going forward? And what in particular are the signs of activity pickup that you are seeing in that market, that used to be a much more significant portion of your business?

It certainly did -- as it was at one time a more significant part of our business. And in our fiscal Q1, it was very minimal. The things we are seeing now are increased demand for legacy private radio systems, which is a little bit of a surprise to us. But more importantly, we are seeing a fair amount of early demand for D-block-related LTE router platforms. And so, there is a good deal of quoting activity underway for those types of products.

Okay. Thank you very much.

Marc Robins.

Very good quarter. It's wonderful after three, four years to see such a successful run of operations. Just a great job, everybody. Thank you.

Thank you, Marc.

Tell me a little bit about the Satellite business. Are we seeing any kind of new R&D work going on in that area? And I don't mean to be an ingrate; I'm just wondering if new developments are still underway.

Well, we always have product development activities underway for the business. And as you know and we talked about on the last couple of earnings calls, we have released a couple of new products that have been shipping in volume. Right now --

And seem to have some pretty good success, I might add.

Indeed. And the current focus is on, really, two different product development initiatives. One is a product refresh initiative that would allow us to introduce a lower-cost product as a replacement for our mainstream or mainstay legacy product that we been shipping in volume for almost five years. And then, we also have another development underway, which we hope to get into qualification sometime later this year, that will help expand the served market slightly by giving us better geographic coverage. That is essentially a brand-new product.

Okay, and then -- thank you. And then, changing perspective here, let's talk about the railroad arena. Something that you kind of piqued my interest, you said other products and services. You want to expand on that at all? I know you are trying to do more commercial-oriented kind of products, other than those that might be mandated by the government. I was wondering if you wanted to say a little more about what those might be and what the services might be.

Well, we still believe that there is a good opportunity for us to sell our range of MRM products into the rail marketplace, either directly or through our existing set of fleet management service provider partner. We have a nice tap into that market now, through our PTC engagement. And so, we believe longer-term that is a good opportunity for us. But also, we believe that there will be other developing opportunities around the PTC initiative itself, as that ecosystem begins to develop. And so, we are hopeful that we can do a lot more than just provide radios; potentially providing software and other engineering types of services as that PTC ecosystem evolves.

And this would still be in the lines of MRM kind of classification?

Not necessarily. Could be PTC focused.

Okay. Interesting. With the two orders that you currently have received, which are now added up to something over the $5 million number, has that spurred other interest from other railroad operators for equipment?

I wouldn't say those orders have spurred activity. I think each of the rail operators are operating somewhat independently, in terms of their respective PTC rollout plans. But we are involved in a good deal of quoting activity now, and we hope that we can book some additional orders over the coming quarters that would result in added revenue for this fiscal year.

Okay. And then, I will get back in the queue, but I have one more quick one -- are we still looking at, what is it, December of 2015 for this whole positive train control system to be employed?

To the best of our knowledge, that deadline has not yet changed.

Okay. Thanks. And as I said, I will get back in the queue.

(Operator Instructions) Gene Weber.

My congratulations again. Great quarter. Love to see those pre-announcements; they are not happening enough with my other companies. I have -- my one question just relates to the -- to what you mentioned about the MRM business. You said it was particularly strong, because you had two large wins with aggressive timelines. And then, you mentioned the verticals. Could you mention a little bit more about those applications? And why they were -- why the timelines were aggressive?

Well, both of those opportunities have actually been brewing in our pipeline for almost a year. And is so often the case, when a customer decides they are finally going to order product, they want it right away. And we happened to have two of those hit at the same time. So, we had a fair amount of visibility on the opportunity, but the timing was uncertain, given the length of time it took for those respective customers to make their ultimate decisions as to how they were going to deploy the product.

And did you satisfy those orders just this quarter? Or does it -- do they have a couple quarters to run?

Well, both opportunities will probably spill over into Q2. The soft drink fleet application, most of that business was in Q1. The telecom service provider opportunity, that is going to be more of a steady state opportunity, probably over this fiscal year. But it was somewhat front-end loaded in Q1.

Okay. And could you take a second to say what the applications were? Were these fleet, tracking, telematics? Or just, what was -- what are they trying to do with your equipment? I guess that is the easiest way of asking it.

Initially, classic, mid-duty to heavy-duty fleet management applications. In both cases, longer-term, there could be some opportunities to augment the initial installation with additional asset-tracking capabilities, but that is probably sometime down the line.

Okay. And you were the -- if you will, the prime contractor here. This wasn't through a customer of yours that this was sold -- or was it?

No. In the soft drink fleet case, it was through one of our traditional fleet service providers. So, they were our channel partner there. For the national telecom service provider, that was somewhat of a direct engagement, where they were basically selecting hardware independent of the software application solution provider.

Got it, got it. That is very helpful. Well, good. Keep those up. I assume that -- you had mentioned that telecom is going to continue to run. And in your pipeline, do you have other types of opportunities like this that could pop up and surprise you every once in a while?

Well, if they are surprises, probably not. But we do have other large opportunities in our pipeline, which we hope to realize at some point in time. And I wouldn't doubt that they would have the same sort of dynamics associated with them, whereby they would request that we expedite deliveries and front-end load the opportunities.

Okay. And just last question -- can you give us any sense as to what type of quantities we are talking about here? How many vehicles you are talking about, or the range of vehicles that might be involved?

I actually don't know the exact quantity, but I think in both cases, it has been in excess of 10,000.

The full implementation will be in excess of 10,000 vehicles?

Yes.

Wow, that is great. Okay. Well, congratulations again. Keep it up.

Thank you.

Marc Robins.

In the MRM arena, who might be some of your competitors that would supply equipment like that being used on the soft drink distributor or the wireless phone repair operation?

Well, there are a number of small hardware providers that focus on fleet. And then, we have one mainstream competitor that really goes cross-MRM verticals, Enfora, which was acquired by Novatel.

But mostly, it's smaller folks. And then, this one larger one. Is that correct?

Domestically, that is generally the case, yes.

Okay. All right. Then that helps describe that. Oh, rats. Oh -- foreign sales -- with all the hubbub in the news, I was just wondering if there had been any sign of softness or change in the Company's perspective on how foreign sales are being affected? Or viewed, rather?

Nothing discernible. I mean, not --

Okay.

We have had relatively little exposure in Europe. And of course, most people are concerned about Europe.

Right.

So, in that sense, we are somewhat immune to what is going on there.

Okay. And then, lastly -- and please don't think of me as ungrateful -- but the Company's cash position is much improved, the balance sheet is much improved, you are $170 million some-odd, running on $170 million some-odd of a run rate, if you will. And this question was posed when we were at dinner six months ago, maybe, so it's a good question to ask. Has the Board thought seriously about a dividend policy? And I know that there are probably those listening on the phone call thinking -- what kind of crackpot question is this?

But in my observations, there really seems to be a change in what kind of companies are getting attraction right now and getting traction in the market. And being a long-time observer of CalAmp and shareholder, maybe it might be well-considered to return something to the shareholders, rather than the gains and not gains, if you will, that we have experienced over the last -- well, since 1993, when we started following it as a research and owned it in the early or the late '80s as a portfolio manager.

A question and comment all in one. We are hardly to the point from a cash perspective to consider anything like a cash distribution policy.

I will grant you that.

We would love to be in a position where we would consider something like that. We are not there yet. I mean, our first priority is to continue to invest in our growth initiatives. We think that there is a lot of gas left in the tank, in terms of opportunities we can exploit in the markets we currently serve. So, that is our first priority for use of cash.

Okay. Anything -- any other comments in that regard? Are they all -- are they -- not so much -- not as much anymore organically than things that have to be done outside? Or --

Well, it's any or all of the above. Our objective, our fiduciary responsibility is to produce positive return for our shareholders. And we have probably done a good job of that over the last year, as is reflected in the current share price. So long as we continue to execute, hopefully, the kinds of returns we produce for shareholders will be ones that continue to improve over time.

Okay. I will let it stand for now. Thanks, Michael.

(Operator Instructions) There are no further questions at this time.

Thank you again for joining us today. We look forward to speaking with you at the end of our second quarter.

Thank you. This concludes today's conference call. You may now disconnect.