CAMP4 Therapeutics Corp (CAMP) 2013 Q2 法說會逐字稿

Greetings, and welcome to the CalAmp second-quarter fiscal 2013 results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Lasse Glassen with Addo Communications. Thank you, Mr. Glassen. You may begin.

Thank you, Operator. Good afternoon and welcome to CalAmp's fiscal 2013 second-quarter conference call. With us today are CalAmp's President and Chief Executive Officer, Michael Burdick; 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 on the Company's Satellite and Wireless markets; the timing of customer approvals of Wireless product designs; intellectual property infringement claims; interruption or failure of our Internet-based systems used to wirelessly configure and communicate with the tracking and monitoring devices that we sell; the effects of the proposed automatic Federal budget cuts if the scheduled sequester were to take place early in 2013; 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, 2012, 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 assurances that 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, it's now my pleasure to turn the call over to CalAmp's President and CEO, Michael Burdiek.

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

We continue to experience operating momentum with strong performance once again driven by our Wireless Datacom segment, where revenue grew 34% year-over-year. This record-setting Wireless Datacom revenue was due to growing demand for our Mobile Resource Management, or MRM, products and services; significant contributions from our rail initiative; as well as improving fundamentals in public safety. In addition, we continue to be pleased with the performance of our Satellite segment and its contribution to the bottom line.

Consolidated revenue for the second quarter was $44 million, up 30% compared to the second quarter last year, with Wireless Datacom revenue increasing to $34.2 million, and Satellite revenue of $9.8 million. At the bottom line we earned $0.12 per diluted share on a GAAP basis, and $0.17 on a non-GAAP basis. Both revenue and EPS results were at the high end of our guidance range for the quarter. Cash flow provided by operating activities was $4 million, and we ended the quarter with a cash balance of $10.2 million.

Now I would like to review our operational highlights for the quarter. The Wireless Datacom segment posted record revenue in the second quarter, with continued momentum across multiple market verticals. MRM products and services accounted for two-thirds of total Wireless Datacom revenue, with wireless network applications accounting for the remaining third. Similar to what we've seen in recent quarters, we are continuing to experience strong customer demand for our MRM products in fleet management, asset tracking, stolen vehicle recovery, and vehicle finance verticals.

In addition, we are gaining traction from international expansion initiatives in our MRM business. During the quarter, we received type approval for a range of our MRM devices by the Independent Communications Authority of South Africa. And we began product shipments to key South African customers towards the end of the second quarter. South African regional expansion came on the heels of the Navman supply agreement announced earlier in fiscal 2013, which generated approximately $2 million of revenue in the second quarter, almost all outside of North America.

We're also seeing steady growth in Latin America, as we support key partners such as Mobistar and the rollout of new MRM services across South America. And this past summer, our Dutch partner, Cicada Mobile Solutions relied on CalAmp's products to provide the efficient and safe transportation of VIPs between venues during the Olympic Games, and to facilitate logistics management and security initiatives.

At the end of the second quarter, we had 1.7 million MRM devices and service with our customers that are supported by CalAmp's PULS cloud-based device management platform, which is up from 1.5 million at the end of the first quarter. Our bundled network offerings for the vehicle finance and remote start markets had 293,000 active subscribers on our network at the end of the second quarter, up from 280,000 subscribers at the end of the first quarter. This subscriber base provides an ongoing return -- recurring revenue stream.

In our wireless networks business, we generated revenue growth in the second quarter across each of our key market verticals. We believe our public safety business has reached an inflection point as we've seen a solid sequential quarterly increase in revenue, coupled with some recent customer wins and the strengthening opportunity pipeline.

During the second quarter, we added to our public safety backlog with the contract to deploy a mobile data network for the Police Department of Anchorage, Alaska. This project calls for CalAmp's latest-generation IP mobile data system, and includes base stations and dual-band mobile modems enabling dispatch, automatic vehicle location, facial photographs, thumbprint image upload and download, as well as other applications.

Within our rail transportation vertical, during the second quarter we completed the final phase of our Positive Train Control Development project and have now begun initial deliveries for commercial orders to support the nationwide PTC deployment. These initial production orders, totaling $5 million, are to supply interoperable PTC radios to two Class I North American railroads. In addition, we've recently received several smaller orders for delivery of radios during our current fiscal year.

Also on rail, we were recently awarded $2.2 million subcontract by Ansaldo, a global integrator, to provide a mobile data communications system for Rio Tinto's driverless train project that is being deployed to haul iron ore from a remote location across its 1500-kilometer private railway system in Western Australia.

Overall, we are pleased with both the strategic direction and growth trends of our wireless networks business. Our focus on machine-to-machine solutions targeting large multinational enterprise applications, leveraging CalAmp's unique portfolio of hardware, software, and service content, is gaining customer traction and positions us well for long-term growth. Shorter-term, we expect the budding recovery in our public safety business, as well as further growth within core verticals, to continue to benefit our bottom-line results in the coming quarters.

Moving on to our Satellite segment, we are very pleased with the second-quarter financial performance, with revenue of $9.8 million and a gross margin of 17.4%. Subsequent to the end of the second quarter, we announced initial volume shipments of a new triple satellite, low noise converter receiver for Echostar, our primary satellite customer. This next-generation product provides a simplified product architecture and delivers significant cost savings over prior products. We expect that our Satellite business will continue to generate gross margins in the mid-teens and contribute meaningfully to our profitability over the coming quarters.

Across all of our businesses, we continue to focus our R&D resources on markets and applications with the most compelling growth prospects. We expect to continue to drive new and innovative product introductions to market at an accelerated pace. Our ever-growing state-of-the-art product portfolio positions us well to serve larger enterprise customers intent on rolling out new, secure M2M solutions that enhance their business processes and improve their operational efficiency.

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

Consolidated gross profit for the fiscal 2013 second quarter was $14.1 million, an increase of $2.3 million over the same quarter last year, predominantly as a result of higher revenue. Consolidated gross margin was 32.1% in the latest quarter, compared to 35.0% in the second quarter of last year, which included a $3 million patent sale for which there was no associated cost of revenue. Excluding the effect of last year's patent sale, the consolidated gross margin percentage in the latest quarter was up 3.4 points year-over-year, due primarily to substantial improvement in Satellite margins.

Looking more closely at gross profit performance by reporting segment, Wireless Datacom gross profit was $12.4 million in the second quarter, or 36.4% gross margin. Excluding the effects of last year's $3 million patent sale, year-over-year Wireless Datacom gross profit was up by $4 million, and gross margin percentage was essentially flat. Our Satellite business had a gross profit of $1.7 million in the second quarter, or 17.4% gross margin. This compares to gross profit of $445,000, or 5.4% gross margin in the second quarter last year. These significant improvements in Satellite 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 base.

Next, looking at bottom-line results, GAAP basis net income in the second quarter was $3.6 million, or $0.12 per diluted share. Our non-GAAP net income in the second quarter was $4.9 million, or $0.17 per diluted share. Non-GAAP earnings excludes the impact of intangible asset 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 second-quarter earnings press release that was issued today, which is available on our website.

In the latest quarter, we recorded income tax expense of only $17,000, which represents minimum state taxes. No Federal income tax expense was recorded in the second quarter, due to the existence of net operating loss carryforwards. These NOLs are expected to shelter substantially all of our taxable income for 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. We currently have a valuation allowance that offsets these future NOL tax benefits. As a result of CalAmp's return to profitability starting last fiscal year, this valuation allowance is being reduced as we generate taxable income and utilize NOLs.

In addition, at the end of the current fiscal year, we expect to recognize an income tax benefit of roughly $20 million for GAAP basis financial reporting purposes that represents the tax savings associated with the remaining NOLs that we expect to utilize in future years. Beginning next fiscal year, we expect our GAAP basis effective income tax rate will revert to a more typical level of around 40%, based on full Federal and state statutory tax rates.

The tax accounting rules that apply in this situation will cause our GAAP basis earnings results to be incomparable year-over-year, because we expect to recognize a large tax benefit this year, which means that next year we would begin reporting income tax expense at full statutory rates; even though, on a tax return basis, our income will still be largely sheltered from taxation by these NOL carryforwards.

Our non-GAAP earnings method recognizes the NOL benefits as they are utilized in our tax returns. And for this reason, our non-GAAP earnings will not be affected by the year-over-year comparability issues. So we encourage our investors to pay particular attention to these non-GAAP results going forward.

Now moving on to the balance sheet, our total inventory at the end of the second quarter was $13 million, representing annualized inventory turns of 9 times. At the end of the immediately preceding quarter, inventory was $14.6 million, which represented annualized inventory turns of 8 times. The consolidated accounts receivable balance was $19.6 million at the end of the second quarter. This represents an average collection period of 39 days, which is consistent with our receivables collection rates of the past several quarters.

As of August 31, 2012, cash and cash equivalents totaled $10.2 million, an increase of $2.9 million from the end of the first quarter. Net cash provided by operating activities was $4 million for the second quarter. In addition to cash generated by operations, our primary source of liquidity is the credit facility with Square 1 Bank. The unused borrowing capacity on the revolver portion of the credit facility was at full availability of $9.5 million at the end of the second quarter.

Our total outstanding debt at the end of the second quarter was $5.7 million, comprised of a $2.5 million bank term loan and the $3.2 million carrying value of the non-interest-bearing note payable issued in May 2012 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 second quarter with a net cash balance of $7.7 million, versus a net debt position of $4.0 million in the year-ago period.

And with that, I'll 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 latest projections, we expect fiscal 2013 third-quarter consolidated revenue in the range of $41 million to $45 million. We anticipate Wireless Datacom revenue in the third quarter will be significantly higher year-over-year, and up slightly on a sequential quarter basis. Satellite revenue in the third quarter is expected to be up year-over-year, but lower on a sequential quarter basis due to normal demand fluctuations. At the bottom line, we expect third-quarter GAAP basis net income in the range of $0.10 to $0.14 per diluted share, and non-GAAP net income in the range of $0.14 to $0.18 per diluted share.

Looking further ahead into our fourth quarter, we expect continued strength within our Wireless Datacom segment, and a strong rebound in Satellite revenues from the third quarter, with consolidated fourth-quarter revenues projected to be in the range of $43 million to $49 million.

And in closing, I'd like to recap some key points, drawn from our results and latest developments. First, our Wireless Datacom segment once again posted impressive revenue growth, with a 34% increase driven by strength across all of our core verticals, with particular momentum in MRM and significant contribution from our rail transportation initiative.

Second, our unique hardware, software and service portfolio, supported by established channel partnerships with global reach has given us the leverage and scale to pursue ever-larger opportunities.

And third, we are operating from a position of financial strength. During the second quarter, we generated operating cash flow of $4 million and ended the quarter with $10.2 million in cash. Our strengthening balance sheet has improved our financial flexibility, providing a solid foundation to execute on our strategic growth initiatives in core markets, as well as in new and emerging applications.

Our competitive position is strengthening as we broaden our product portfolio and pursue opportunities for integrated hardware and software solutions for larger global enterprise customers. We have established a solid foundation for growth and expect that our continued effective execution to meet growing market demand will drive profitable growth through fiscal 2013 and beyond.

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 Instructions). Mike Crawford, B. Riley & Company.

Thank you. A couple questions about the quarter, maybe a couple going forward. First, you said you also received some new PTC production orders. Can you talk about what those were for at all?

Those were some smaller orders, follow on orders to the $5 million orders for the two Class I railroads we had announced earlier this year.

So primarily radios?

All radios.

All radios. Okay. Thank you. And then -- regarding the tax situation, so we already have in our model the $20 million benefit in Q4 and the 40% GAAP tax rate next year. And then Rick talked about a 1% to 2% estimated cash tax payment for several years going forward. Just -- we've been using 2.5%. I think it was 1% in your pro forma calculation this quarter. Is it best, do you think, to use 1.5% going forward, so we're all on the same page with pro forma estimates? Or how should we be looking at cash taxes?

Well, we're really kind of splitting hairs here. But I am comfortable at 1.5%. Whether it's 1% or whether it's 2%, we'll be in the ballpark.

Okay. And then, Michael, you talked about at the end scale to pursue ever-larger opportunities. So are some of these larger opportunities working through your pipeline now, and close to fruition? Or any of those potentially incremental to expected guidance? Or are you just expect to win your fair share of these?

Sure. Let's first talk about the scale issue. For us, scale really involves two dimensions. One is on the hardware side, and one is on the software or cloud platform side. As we talked about, we now -- at least at the end of the second quarter -- had 1.7 million units of M2M products and service with our customers. That's pretty substantial scale on the hardware side. We've also invested a good deal of resource and R&D funds in cloud services and application support. And we believe we have a state-of-the-art platform that can go well beyond the 293,000 subscribers that currently reside on that platform, from a recurring revenue standpoint. So we think we have the hardware and the software platforms in place to really go much larger than those numbers of 1.7 million devices and 293,000 subscribers suggest.

In terms of opportunities in the pipeline, I would say they're at all stages in the pipeline. We have some that are near-term opportunities and some that are just entering the pipeline that generally involve very large enterprise customers, generally with a global footprint. In terms of their ability to impact the potential numbers for Q3, or affecting the guidance range we gave for Q4, it's unlikely that they will be needle-movers in that timeframe. But we expect them to be contributors, sometime over the next year.

Okay Great. Thank you. And then, last question, your outlook -- which is above our model -- also implies 10% sequential growth in your February quarter, from November. And part of that is due to a rebound in Satellite. But is there anything else in particular on the Wireless Datacom side generating that growth, other than what we have -- just more of the same of what we've seen?

Obviously, our visibility six months out is not as good as it is three months out, which obviously supports the wider revenue range we gave for Q4. Our expectation is that Satellite will be a larger contributor incrementally to revenue from Q3 to Q4 than will Wireless Datacom revenue growth, but we do expect growth in both areas.

Great, thank you very much.

Mike Walkley, Canaccord Genuity.

Good afternoon, Michael and Rick. This is actually Matt Ramsay on for Mike today. I appreciate you guys taking my questions. So just a couple --first of all, it was interesting to me that you chose to give revenue color around your fiscal Q4. And you talked, just in the previous question there, about a little less visibility in February quarter than November, which is logical. I just wonder I guess why you guys chose to give the additional quarter of color, and what -- what particular visibility led you to make that decision?

Hello Matt, and welcome. We feel reasonably comfortable, given the visibility -- kind of extended visibility we have on the Satellite business as compared to the visibility we have on the Wireless business. We are seeing some signs that there will be a pretty strong rebound there. And we feel comfortable kind of leaning forward a little bit in terms of revenue guidance into Q4.

Okay. And you talked a little bit about, on the call, just improving gross margin trends in the Satellite business. It looks like, in our model, that gross margin is up like four quarters a row. And your verbal commentary talked about kind of mid-teens sustainable gross margin in that business. And I think the last quarter's commentary was at least double-digits. Could you talk about maybe the reasons why your expectations now for that kind of gross margin going forward might be higher than they were, say, a quarter ago?

I think the primary reason we feel more comfortable sort of stepping up our margin guidance for Satellite is the fact that we recently introduced our new lower cost triple product, which we discussed in the comments. That product is lower cost. It's also somewhat lower ASP. But the margins there are a little bit higher than we've experienced with some of our legacy products and some of the challenges we've had in managing down the cost structure in those legacy product designs.

Great. I guess one more particular question, and then I have a more longer-scoped one. Michael, could you give a little bit of an update, maybe in further detail than you did in your prepared remarks, about how the Navman kind of integration is going? And you gave the stat on the call, about $2 million in sales in the quarter from that, up versus kind of the $500,000, which was a partial quarter, last quarter. Is that a stable run rate we should look at, as kind of the $2 million run rate for sales there? And could you give any color around the growth margin profile of sales into Navman?

Sure. Let's start with how well it's going. We are very pleased with how it's going, both in terms of the revenue contribution; also in terms of just our success in integrating the development team with our other MRM development programs. It's gone exceedingly well. We couldn't be more pleased. And that comment really carries over to the revenue contribution. In terms of future quarters, I wouldn't expect $2 million every quarter; but, certainly, in the $1.5 million to $2 million range would be a reasonable expectation.

Okay, thank you very much. I appreciate that color. The last question for me, and then I'll pass the line, is -- just now that I guess looking forward into kind of fiscal '14 and maybe even longer-term than that, do you have, Michael, any broader commentary about what you expect, say, the year-over-year CAGR growth to be, or the potential TAM growth to be in your Wireless Datacom business? And how should we think about the long-term resiliency or stability of your Satellite revenue on kind of the next-few-year basis? Obviously, is not particular quarters, and not looking for guidance here, just some directional market commentary.

My. A few years of guidance.

No, no.

I'm afraid we're not prepared to do that. Our outlook for Satellite is basically stable. The outlook there is probably better today than it's been for a couple years. And we think the last few quarters' run rate, $10 million plus or minus, is probably a reasonable expectation for that business going into the new fiscal year.

In terms of growth rates as it applies to Wireless Datacom, we've talked many times -- and, certainly, it's in our investor presentation -- that the market for wireless network applications, we believe, is growing roughly 10% per year. Whereas wireless -- MRM applications or Mobile Resource Management applications, are growing probably closer to 20% per year.

We have done better than that over the last couple of quarters in both areas. Our expectation is those market rates of growth will sustain ongoing revenue and profit growth in our Wireless Datacom segment. So in terms of future outlook, I would use those numbers and market size growth rates as guidance.

All right, guys. Thank you very much for taking my questions, and congrats on a solid quarter.

(Operator Instructions). Marc Robins, Catalyst Research.

Thank you. Just a question regarding auto insurance. There was no mention made of that in your formal comments. You want to bring us up to date on anything in particular?

Hello, Marc. No, we didn't mention it in our prepared remarks because we were using up too many words. But insurance is still a very key focus for us. We do believe that that represents a great growth opportunity for our MRM product segment. In terms of opportunities in the pipeline, it's been fairly stable. And there are a number of good opportunities that are actually moving through the pipeline.

So in terms of maybe adding color, or modifying color from past conference calls, I would say things are moving forward at perhaps a pace a little bit faster than we expected. And we could see some meaningful contribution -- when I say meaningful, it's measurable contribution in terms of product shipments in that segment -- sometime in the next fiscal year.

That's good to hear. Okay. Very good. And then, secondly, I noticed that your corporate expenses seemingly dropped rather dramatically. Did I miss any formal comments there? Or is there something to add in that area?

Rick can add more detail, but our OpEx actually stepped up from Q1 to Q2. A big contributor to that step-up was the integration of the Navman operation in to our operating numbers.

I must've been looking at year-over-year and did not pay as much attention --

You're talking about the just corporate expense in the operating income by segment section?

Yes. Yes, sir.

Okay. We had some nonrecurring stock compensation expenses that fell into Q1. And to a lesser extent, that fell over into part of the second quarter. But that's really the main reason why we have the reduction, the sequential quarter reduction.

Okay, very good. And then, I think everything else I had was pretty much -- is interest by the Class 1 railroads in PTC, is that broadening at all? Or is it still the couple major players?

Obviously, we have orders from a couple of major players. And in terms of pipeline opportunities, we are starting to see some additional interest from other large rail operating companies.

Is that in PTC alone? Or is that in possibly car inventory, and in tracking, and so forth and so on? Is it the normal area that we've focused on in the last two, three, four years? Or have we begun to broaden out a little bit?

In terms of qualified opportunities in our pipeline, things we monitor or measure and track, it's primarily PTC radio opportunities.

But that still good. Okay. Very good. I liked the quarter. I thought it was excellent. Good going, guys.

Thank you.

Thank you.

Gentlemen, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

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

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.