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CalAmp Corp. (NASDAQ:CAMP)

F3Q09 Earnings Call

January 13, 2009 4:30 pm ET

Executives

Lasse Glassen – Vice President, Financial Relations Board

Richard B. Gold - President, Chief Executive Officer & Director

Richard Vitelle - Chief Financial Officer, Vice President, Finance & Corporate Secretary

Analysts

Richard Todaro, CFA – Kennedy Capital

[JD Avaltjar – DRT Capital]

[Joy Mugerty – State of Wisconsin Investment]

[Chet Clowski – Private Investor]

Operator

Welcome to the CalAmp fiscal 2009 third quarter conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded January 13th, 2009. I would now like to turn the conference over to Mr. Lasse Glassen with FRB.

Lasse Glassen

Welcome to CalAmp's fiscal 2009 third quarter earnings call. With us today are CalAmp's President and CEO, Rick Gold, and the company’s Chief Financial Officer, Rick Vitelle. Before I turn the call over to management please remember that our prepared remarks and responses to questions may contain forward-looking statements. Words such as may, will, expects, believes, estimates, could 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 made today due to risks and uncertainties including but not limited to fluctuations in market demand for CalAmp's products and services, general and industry economic conditions, increased competition, continued pricing pressure in the DBS market, supplier constraints and manufacturing yields, the timing and market acceptance of new product introductions and approvals, new technologies, the risks that the ultimate cost of resolving a product performance issue with one of the company’s DBS customers may exceed the amount of reserves established for that purpose, the company’s ability to obtain a waiver from its banks under its credit agreement of an event of default arising from financial covenant violation that arose at the end of December, 2008, the length and extent of the U.S. market downturn stemming from the recent tightening of credit markets that may impact the company’s business and that of its customers and which may constrain the company’s ability to refinance its bank term loan by the December 31st, 2009 maturity date and other risks and uncertainties that are described under the heading Risk Factors in the company’s fiscal 2008 annual report on Form 10-K as filed with the SEC on May 15th, 2008.

Any projections as to the company’s future financial performance represent management’s estimates as of today, January 13th, 2009. CalAmp assumes no obligation to update these projections in the future due to changing market conditions or otherwise. With that it’s now my pleasure to turn the call over to CalAmp's President and Chief Executive Officer, Rick Gold.

Richard B. Gold

Thank you for joining us today to discuss CalAmp’s fiscal 2009 third quarter results. I’ll begin with comments on the financial and operational highlights from this past quarter and then I will provide an update on several of our key business initiatives. Rick Vitelle will then discuss additional details about our financial results, balance sheet, working capital management and cash flow.

I will wrap up with our revenue and earnings guidance for the fourth quarter of fiscal 2009 along with some concluding remarks. This will be followed by a question-and-answer session. In looking at our third quarter financial highlights and overview total revenue for the third quarter was $25.8 million representing an increase of 11% on a sequential quarter basis and driven by the resumption of volume shipments to our historically largest direct broadcast satellite or DBS customer.

Despite the strong sequential growth consolidated third quarter revenue was slightly lower than the revenue guidance range of $26 million to $30 million that we provided last quarter with the shortfall primarily due to Wireless DataCom demand weakness. Looking at the bottom line results of operations included a GAAP loss from continuing operations of $1.8 million or $0.07 per diluted share which was in line with the guidance that we provided last quarter.

Excluding the amortization of intangible assets and stock-based compensation our adjusted basis or non-GAAP loss from continuing operations was $741,000 or $0.03 per diluted share. This was also in line with our previously provided guidance range. I refer you to our third quarter earnings press release issued earlier today for a detailed reconciliation of the GAAP basis loss from continuing operations to adjusted basis income or loss from continuing operations.

In looking at our cash flows during the quarter we generated strong cash flow from operating activities bringing total operating cash flow to $3.3 million through the first nine months of fiscal 2009. Rick Vitelle will expand on this in his remarks but suffice it to say I am pleased with our ability to continue generating cash flow from operations under these difficult economic conditions.

I’ll next provide updates for our Satellite and Wireless DataCom businesses. Our Satellite business is back on a growth path with third quarter revenue of $7.4 million more than double the revenue in the second quarter. Shipments to historically largest customer continue to ramp up with revenue in the fourth quarter expected to increase sequentially from the third quarter.

And an important development last week we announced the settlement of our litigation with Rogers Corporation that we initiated in 2007. Rogers paid CalAmp $9 million in cash to settle all outstanding claims. This settlement materially improves CalAmp’s financial strength and we believe is the best outcome for our shareholders. With this litigation behind us we can now focus on new challenges and opportunities.

As a further sign of the improving fundamentals of our DBS business our engineering team is making progress on several new product development initiatives to address opportunities with next generation DBS products. In short we are now well on the road to recovery and expect our DBS revenue to be materially higher in fiscal 2010 as we continue to ramp up our production lines for existing products and introduce new products.

Now let’s move on to an update of our Wireless DataCom business which provides communication systems, products and services for applications in the public safety, mobile resource management, or MRM, and industrial monitoring and controls markets. During the third quarter the Wireless DataCom business generated revenues of $18.5 million which is a 22% decrease on a year-over-year basis and down 8% on a sequential quarter basis.

While we did see strong year-over-year growth in our MRM products the decline in Wireless DataCom revenue is not attributable to any one product line but is instead indicative of a very sluggish global economy that has resulted in a number of customers delaying purchase decisions for our products.

As an example of the difficult economic conditions that we currently face last month we announced that we had been awarded a contract by Ansaldo initially valued at $2.5 million to supply a mobile data communications network for a driverless 1,300 kilometer private railway system in Australia to be operated by a major international mining company.

However we were just advised that the mining company has postponed this project because of economic pressures on their business. In light of the weakness in demand last week we took certain actions to reduce the costs and expenses of our Wireless DataCom business and realign its structure.

We reorganized our public safety mobile and industrial monitoring and controls business units into one operating unit by combining R&D groups, merging sales management and consolidating manufacturing operations. As part of this restructuring we have reduced our workforce by 8% which is expected to yield annualized savings of approximately $2.5 million. This will result in a charge of approximately $800,000 in the fourth quarter.

We believe these changes will improve operating efficiencies and profitability of the Wireless DataCom segment while maintaining the ability to achieve our longer term growth objectives once market conditions improve. This new structure should also increase focus on the attractive utility and transportation verticals while preserving our existing public safety and industrial orientation.

Despite the tough economic conditions we face in our Wireless DataCom markets we continue to increase our market reach and have a healthy pipeline of new products and business opportunities. We recently announced an agreement with Mouser Electronics to distribute our UHF and VHF transceiver modules and telemetry radios.

Mouser is our first stocking distributor with global reach and has a sales base of more than 280,000 customers in 170 countries. This agreement builds on our network of regional distributors recently put in place in further expands our sales channels for our transceiver and telemetry modules. As we build a network of strong distribution partners we will look to expand our product offerings through these indirect channels.

We also received two key carrier certifications for recently launched cellular products. Our new CiPHR mobile cellular modem was certified by Bell Mobility a leading Canadian wireless carrier. This certification is expected to help us expand our base of customers in Canada. To that end I’m pleased to report that we recently made initial shipments of CiPHR modems to a governmental agency in Quebec.

In addition our 882-EVDO 3G wireless broadband router was recently certified for use on the Verizon wireless cellular network and is being brought to market under Verizon’s open development program. This certification is an important step in expanding our cellular wireless product portfolio as the 882-EVDO brings 3G speeds to critical applications such as telemetry and SCADA in the industrial monitoring and controls marketplace.

We are now making volume shipments of this product to a customer for use in monitoring the cellular base stations of a tier one wireless carrier. Difficult economic conditions notwithstanding I believe we’re taking the right actions to position our Wireless DataCom business for long term profitable growth.

The critical mass we’ve developed along with our broad technology platforms and focus on middle market customers gives us a competitive advantage that most other players in our markets cannot offer. Overall our margins and cash flow are strong and we believe we are well positioned to weather the current economic storm and prosper once market conditions stabilize.

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

Richard Vitelle

I will provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2009 third quarter. Consolidated gross profit for the fiscal 2009 third quarter was $7.6 million or 29.6% of revenues compared to gross profit of $10 million or 31.3% of revenues for the same period last year.

The decrease in consolidated gross profit was primarily attributable to lower revenues from our Wireless DataCom products as the slumping global economy delayed purchases by several of our key customers. As we have discussed in the past product mix significantly affects consolidated gross margins because revenues from Wireless DataCom products carry much higher gross margins than revenue from our Satellite products.

During the most recent Wireless DataCom products accounted for 71% of consolidated revenues and Satellite products represented the remaining 29%. This compares to the immediately preceding quarter in which 86% of revenues were from Wireless DataCom products and 14% from Satellite products.

As we continue to ramp up our DBS revenue and the percentage of our revenues from Satellite products increases we expect our consolidated gross margin percentage will decline slightly compared to previous period where Wireless DataCom products accounted for a higher percentage of overall revenues.

Now taking a look at gross profit performance by reporting segment gross profit for Satellite products was $253,000 or 3.4% of Satellite product revenues in the latest quarter compared to gross profit of $221,000 or 2.6% of Satellite product revenues in the third quarter of last year. Despite a slight improvement in the most recent quarter the gross margin for Satellite products remains significantly lower than historical levels.

This is due primarily to the low level of sales that has resulted in lower manufacturing overhead absorption rates which adversely affects the gross margin. Wireless DataCom gross profit was $7.4 million in the latest quarter or 40% of Wireless DataCom revenue. This compares to gross profit of $9.8 million or 41.4% of revenue in the same period last year. The lower gross profit in the most recent quarter was due primarily to lower Wireless DataCom revenue in the latest period.

The slight year-over-year reduction in gross margin percentage was primarily attributable to the lower absorption of fixed costs on the lower revenue level. Now moving on to the balance sheet our total inventory at the end of the third quarter was $184 million representing annualized inventory turns of approximately 3.4 times. This compares to total inventory of $24 million or annualized inventory turns of about 2.6 times in the prior quarter.

The improvement in the most recent quarter was a result of reductions in inventory across all of our businesses due to an intensified focus on working capital management. The third quarter accounts receivable balance of $15.3 million compared to $16.6 million at the end of the second quarter and represents a 52 day average collection period.

Our primary sources of liquidity are our cash and cash equivalents that amounted to $5.7 million at the end of the third quarter up from $4.7 million at the end of the second quarter. Through the first nine months of fiscal 2009 net cash provided by operating activities was $3.3 million.

Total debt at the end of the third quarter amounted to $29.8 million comprised of $25.2 million of bank debt and a non-interest bearing subordinated promissory note payable to a key DBS customer with a principal balance of $4.5 million. During the third quarter principal amounts of the bank debt was reduced by $750,000 and the note payable to the key DBS customer was reduced by $528,000.

In the first nine months of fiscal 2009 total debt has been reduced by approximately $2.8 million. The company was not in compliance with one of its financial covenants at the end of December, 2008 that requires a minimum level of Wireless DataCom revenues on a rolling three month basis. The company has requested a waiver of this covenant violation and is currently in discussions with the banks but thus far the banks have not waived this noncompliance.

Consequently the company has classified the entire bank term loan balance as a current liability in the consolidated balance sheet at November 30, 2008. This week the company received a cash payment of $9 million from the out of court litigation settlement with Rogers Corporation.

Under the terms of the company’s bank credit agreement as amended the company is obligated to pay 50% of the net cash proceeds of this legal settlement or about $4.1 million to the banks as a reduction of the term loan balance. After giving effect to this principal payment the balance of the term loan is approximately $20.3 million.

The company continues to seek a waiver of the covenant violation and expects that it will ultimately refinance the bank debt from the proceeds of an asset based loan at or before the December 31, 2009 maturity date. With that I’ll now turn the call back over to Rick Gold for our guidance and some final comments.

Richard B. Gold

Now let’s turn to our financial guidance. Our fourth quarter guidance is reflective of the tough macro economic environment that continues to impact purchase decisions by key customers. We anticipate a flat to slightly down top line compared to the third quarter with an increase in sales of Satellite products offset by weakness in the Wireless DataCom revenue.

Based on our current estimates we believe that fiscal 2009 fourth quarter revenue will be in the range of $22 million to $26 million with a GAAP net income driven by the proceeds from the aforementioned legal settlement in the range of $0.06 to $0.10 per diluted share.

The adjusted basis or non-GAAP results of operations for the fourth quarter which exclude amortization of intangible assets and stock-based compensation expense both net of tax are expected to be net income in the range of $0.10 to $0.14 per diluted share.

The GAAP and non-GAAP expected results for the fourth quarter include per share income net of tax of approximately $0.20 attributable to the $9 million legal settlement and the workforce reduction charge of $800,000. Early in fiscal 2009 you may recall that we provided longer term guidance for our business.

These projections included that in the second half of fiscal 2010 we targeted a consolidated quarterly revenue run rate of approximately $40 million with a Wireless DataCom quarterly revenue run rate greater than $25 million and Wireless DataCom gross margins above 40% along with a profitable Satellite business resulting in consolidated gross margins of approximately 30%.

In light of the current economic conditions we’re reducing our projected second half fiscal 2010 Wireless DataCom quarterly revenue run rate from $25 million to $20 million and our consolidated revenue run rate from $40 million to approximately $35 million. We project gross margins of 40% for Wireless DataCom products and 28% on a consolidated basis due to the mix shift.

The operating margin adjusted to exclude stock-based compensation expense and intangible asset amortization expense is now targeted to be 6% and we expect to continue generating positive operating cash flow. In concluding our prepared remarks I’d like to recap some key points drawn from our recent results and latest developments.

Our Satellite business in the midst of recovery with ramping production lines and significant growth opportunities. While the sluggish economy is impacting the growth of our Wireless DataCom product sales we believe the realignment outlined today should partially mitigate the effects of the slow economy on our results going forward and increase our focus on the most attractive vertical markets.

With the receipt of the $9 million settlement proceeds we have fortified our balance sheet. Moving forward we expect to continue to generate positive cash flow from operations and further enhance our liquidity position as we convert long standing DBS inventory into cash. The legal settlement enables us to reduce our bank term loan balance by approximately $4 million to $20.3 million.

As previous discussed we expect to refinance the bank debt during calendar 2009 from the proceeds of an asset based loan. I believe we’re making good progress overall on our plan to return CalAmp to sustainable profitability albeit in a challenging environment. That concludes our prepared remarks. Thank you for your attention and at this time I’d like to open the call up to questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Richard Todaro, CFA – Kennedy Capital.

Richard Todaro, CFA – Kennedy Capital

I think we have pretty good visibility in what’s going on in DBS and in direct TV, but could you guys give us a little bit more color on Wireless? In your guidance you guys are guiding Wireless down sequentially and I just don’t know the amount and why and if that’s going to bottom or stabilize. You gave some guidance in the back half of the year but how can we have any comfort in that, what gives you comfort that that doesn’t continue to climb?

Richard B. Gold

There’s a couple questions in there. Let me take the current question first and then I’ll transition to the forward-looking piece of that. In the current quarter on a sequential basis in Wireless we had softness in all of the segments, the public safety segment, we had softness in mobile resource management, we had softness in industrial monitoring and controls, for reasons I think that are all generally connected with the economy but in different ways.

The public safety as an example, there were a couple new police data systems that we had been selected on. One of them was actually a follow on where we’re sole source and those projects they slipped in time. We expect them to happen, all the indications are that they will happen but municipal funding is clearly under some pressure.

I think there’s a number of projects that we’re looking at in the pipeline where the ultimate funding or a big piece of the funding is from the Federal government. I think those are looking very solid but obviously anything where the primary source of funding is from local tax revenues is, there is some pressure on those.

I think from a competitive standpoint what we’re seeing in that market, we’re not seeing significant shifts, we’re not seeing customers going away but we are seeing some projects getting delayed or scaled down.

In the mobile resource management area a couple quarters ago we had some substantial sequential increases there that were driven by fuel prices and earlier in the year we had had some, in our Aercept vehicle finance sub-vertical we’d had some sequential drops due to what was happening in the used car market and particularly the sub-prime used car market but that was in large part compensated by the fact that as fuel prices went up the fleet operators were accelerating the pace of introduction of tracking modules for fleet tracking.

Again that pace has slowed down as fuel prices have softened. We continue to see a lot of activity there but not at the accelerated pace we had. Since that enterprise IT spending again I think throughout the economy we’re seeing pressure there. Then finally in the industrial monitoring and controls market there’s a mix of verticals there. We mentioned the one project with the driverless railroad.

There’s some of the enterprise related spending there I think is soft but utilities and transportation are looking very solid there. Those are two segments that are doing pretty well. So it’s a mix across the different verticals.

I think the thing that we talked about for the last couple of quarters strategically is really expanding our business internationally and moving more of our products into some of these indirect channels to really build the base there so that we can target our direct sales activities on larger projects and key accounts.

We’re starting to see the impact of that. Our pipeline of larger projects is actually larger today than it was three months ago and six months ago. That’s what gives us some confidence looking forward but I would have to caveat that with given the markets we play in we’re certainly exposed to what’s happening in the economy.

Richard Todaro, CFA – Kennedy Capital

It was going fast there, can you just repeat what you think the run rate on the Wireless part of the business would be in the back half of the year?

Richard B. Gold

We had expected the Wireless business to be $25 million a quarter and the satellite to be $15 million and we’ve modified that down to $20 million for the Wireless and still at $15 million for Satellite. Just for reference by the way we were at $20 million in Wireless the first two quarters of this fiscal year.

We’ve been down sequentially two quarters but like I said the pipeline looks pretty good. I think the issue that we’re really focused on right now is the timing to get some of these big jobs through and actually into the deployment phase.

Richard Todaro, CFA – Kennedy Capital

I apologize, without knowing that business, I just can’t add a lot of value there, so I’m asking for some guidance here. When you guide on that part of the business is there a backlog of visibility that contracts, what some sort of comfort levels can we have that it doesn’t all of a sudden just off the cliff or we don’t get hit with an inventory issue or some issue in that part?

Richard B. Gold

We don’t actually publish our backlog because there’s a lot of apples and oranges there, different pieces of that business, different projects have different levels of firm order commitments. In general the public safety jobs that is a backlog business but the mobile resource management and the industrial monitoring and controls business we typically get blanket orders and then we get releases against the orders. So it’s not what I would call a true backlog business.

We do have blanket orders and in the public safety piece of the business we have very good visibility on that one to two quarters out. Beyond that it gets less. I think for the quarter we have, with the exception of the turns business that we get, in other words, there is a component, some of our smaller orders where we get orders in a month for delivery in a month.

In general in that side of the business and one of the things we mentioned on the inventory you’ll notice there was a substantial drop across the board, we’re taking steps in all of our businesses to make sure that we’re not leaning forward too far. One of the things that we’ve done from a product standpoint in several of our businesses is really move to common platforms so that we don’t have to build finished goods of specific products.

We can hold the inventory at a sub-assembly stage or the platform stage and then in fairly short order convert that to a specific product for a specific customer where the firmware may be custom but not the basic hardware platform.

Richard Todaro, CFA – Kennedy Capital

Along those lines you historically had to carry more inventory with DBS customer or with EchoStar. Will you have to start building inventory as it relates to those sales going out or do you think you can actually keep inventory flat for the rest of the year? How do you feel?

Richard B. Gold

We expect our inventory to decline sequentially for at least two more quarters and we expect the turns to grow substantially. Just for reference our inventory turns two or three years ago when we were rocking and rolling in the Satellite business we were in the eight or so annualized turn.

We still have a ways to go to get our turns up to where they have been before and that’s just simply a reflection of the fact that we had a lot of material in the pipeline when production was halted year before last. We’re now flushing through that inventory. We’re not by any stretch of the imagination done with that process.

We are starting to buy new material for certain items, certain components, certain products in the Satellite area but we still have several million dollars of net inventory to work down there. Of all the forward-looking statements we just made I think the one that we can have the most confidence in is the positive operating cash flow just given the state of our inventory and the steps we’re taking there.

Richard Todaro, CFA – Kennedy Capital

I’m not trying to hog the call but I have a couple more questions. You guided to I think like a 6% margin towards the back of the year, does that include the expense reductions, the $2.5 million in annual cost savings to get to that 6%?

Richard B. Gold

Correct.

Richard Todaro, CFA – Kennedy Capital

What all has to happen for those savings to be achieved?

Richard B. Gold

We took those actions this month so that’s already built in.

Richard Todaro, CFA – Kennedy Capital

Is it simply just workforce?

Richard B. Gold

We are consolidating some manufacturing operations as part of that. That process was actually already under way at a somewhat lower level but that’s going to happen over this quarter and next quarter. But we expect the bulk of that to happen like I say in the next four months.

Richard Todaro, CFA – Kennedy Capital

If you could just do one simple math for us, you’re at $29 million, you’ve got $9 million in, that’s $20 million then you had $5 million in cash, that’s get you to $15 million net, $5 million is to Echo Star so that’s net $10 million. Is that the way to think about the debt as we stand today? Would that math work? You had $29 million, you got $9 million in, that gets you to $20 million.

Richard B. Gold

Right, although we’re not applying all that $9 million immediately.

Richard Todaro, CFA – Kennedy Capital

I’m doing a net.

Richard B. Gold

For the debt. But yes, if we were to, that would get us to $20 million and the rest of that supplier, we’ve indicated previously we expect that to be paid down and off over the next few quarters. We classified that as current liability as of the end of the August quarter so indicating we expected by the end of Q2 of fiscal 2010 we expect that to be paid off.

Richard Todaro, CFA – Kennedy Capital

So based on the numbers that you guys are looking at and the guidance you’re giving, your net debt 12 months from today, would you have a rough ballpark where that could fall out based on your guys’ numbers, because I have numbers, I just want to make sure that they’re in the ballpark.

Richard B. Gold

We haven’t given guidance on that, Rich, but we do expect and we have a payment scheduled with the banks where we will be paying an additional, just a little more than $4 million in principle payments against that note through September 30th.

If we were not to make any additional payments against the note above what’s currently called for, what we will be making out of the litigation proceeds which will bring it down to roughly $20 million and then the roughly $4 million of scheduled principle payments, even if we were not to do any additional ones, that would be down to approximately $16 million.

Now in that calculation that assumes that the $5 million that’s not going to debt reduction out of the settlement just goes to cash and stays there. One of the things that we are in discussions with the bank right now is the possibility of taking a portion of that and using it to accelerate the reduction of principle.

But we had $5.7 million in cash at the end of last quarter. We expect to have positive operating cash flow this quarter and through the calendar year. That should give you the numbers you need.

Richard Todaro, CFA – Kennedy Capital

My last question then, great job on everything you guys are doing, is on the DBS we know you’re ramping from zero there, but in the other part of the Satellite business anything going on unique there?

Richard B. Gold

No, we’re really focused on the US domestic satellite market, although I alluded to a couple new product initiatives that we’re working on there. Those are with and for the current providers in that market. But, we do see in that market that there is some interesting opportunities coming up that are not what I would call necessarily all mainstream opportunities.

As that business matures there will be the potential for some nicher products that could be somewhat interesting in addition to the mainstream products. I think I’ll just leave it at that for now.

Operator

Our next question comes from [JD Avaltjar – DRT Capital].

[JD Avaltjar – DRT Capital]

If I look at op ex this quarter excluding in tangible amortization it was about $8.6 to $8.7 million. With these expense reductions what are you targeting on a quarterly basis your op ex to be?

Richard B. Gold

Well, just on an apples-to-apples basis we expect that to be down $600,000 to $700,000.

[JD Avaltjar – DRT Capital]

So roughly $8 million.

Richard Vitelle

About $8.3 million.

[JD Avaltjar – DRT Capital]

I’m struggling with the positive cash flow. Are you assuming basically converting inventory in to cash because I’m not getting there on an operations basis with 29% gross margin.

Richard Vitelle

We did not guide to positive adjusted basis earnings. But, we expect our inventory and our target inventory turns as I alluded to earlier is up in the range of 8 and we’re currently sitting at 3.4. So, we have a ways to go there to convert some of that long standing inventory in to cash.

[JD Avaltjar – DRT Capital]

So on a looking out basis, what are you targeting on a top line revenue per quarter basis to get to operating breakeven?

Richard B. Gold

Well, in the second half where we guided to $35 million, that would put us comfortably above the breakeven level. In that the $15 million of satellite quarterly revenue gets that business by itself to breakeven. The exact breakeven between the $26 we were at this quarter and the $35 really depends on the mix and the details. But, at $35 million we expect that we would be at a 6% operating margin on an adjusted basis.

[JD Avaltjar – DRT Capital]

And you’re comfortable with that because that is almost 50% growth in a pretty crappy economy? I’m not trying to pin you down with a forecast.

Richard B. Gold

I understand and that’s the reason we dropped it because we just didn’t see the $25 million. we had visibility we thought to $25 million a couple of quarters ago when we were sitting at $20. I will say on the satellite business, to get to $15 from the 7.9 that we were at this quarter is less of a stretch because if you look at it from a market share standpoint or if we look at it from a unit standpoint or if we look at it just compared to where we were a couple of years ago, we believe that we have just based on the forecast that we’ve had and our insight in to that business – again, that business I like any other business today, exposed to the macro economy but we believe we have the wherewithal and the history and the confidence to do that.

The wireless business, it really does again, we have been there just two quarters ago but it really depends on getting some of these bigger projects that are in the pipeline, getting those back on track. I think one of the things we saw was throughout our customer base, and this was really kind of an October/November phenomenon, a lot of things just sat. A lot of people really decided that the appropriate thing to do given all the turmoil there was to just step back and revalidate.

We’re starting to see some of those projects that were sitting in October start to move. I think there is a question in our mind as to how much of this is a timing effect and how much continues to deteriorate. We’re fundamentally assuming that we can get back. The other thing I should point out is two quarters ago we did very little international business, we’re substantially expanding some of our activities internationally. I think we could get to a $20 million quarterly run rate in wireless even with the domestic business off 10% if we made that up internationally.

I will say this is contingent on the economy not continuing to deteriorate and your crystal ball is good or better than mine on that. But, from where we sit today, we believe that is a reasonable target.

Operator

Our next question comes from [Joy Mugerty – State of Wisconsin Investment].

[Joy Mugerty – State of Wisconsin Investment]

As your satellite business ramps up, where can gross margins go to for that business?

Richard B. Gold

A good question. I think the issue we’re struggling with right now is absorption of fixed costs and our product margins are really not much different than they were a couple of years ago. ASPs continued to decline but so do our costs as we squeeze more costs out of products. I think in the kind of medium term timeframe that we were looking at in the third and fourth quarters of 2010 we’re looking at margins that are in the mid teens.

We’re not going to get up in to the mid 20s there because we just haven’t been there. If you look historically we’ve been in the mid teens and when we’ve been in kind of the mid high teens we’ve done very well and when we’ve got closer to the mid teens it’s been tougher. I think if we can get in the mid teens there we have an operational cost structure that will allow us to get nice leverage from that and have healthy operating margins.

[Joy Mugerty – State of Wisconsin Investment]

Then on the wireless side, where does the breakeven go after the cost cutting?

Richard B. Gold

It’s pretty close to where we were last quarter. If you look at last quarter in the wireless business in the press release we had a $293,000 operating loss for that segment including the intangible asset amortization and the bulk of the cost that we’re taking out of that $600,000 plus per quarter are in the wireless data segment. So, assuming the margins of 40% that we got last quarter are sustainable which we believe they are, we’ve really been bouncing around that for a long time that would say that 17% to 18% is the breakeven with these costs adjustments.

[Joy Mugerty – State of Wisconsin Investment]

I remember I think you were bidding on some solar type of contracts, is that still something that’s happening or is the economy no longer allowing for that?

Richard B. Gold

We actually have, I believe it is three different, solar energy projects that we have either been awarded or have bids in for the wireless communications infrastructure, the control and monitoring infrastructure for them. They’re all continuing to move. One of them we do expect to begin deliveries in the next few months. But, one of the things we’re seeing there again, is that a lot of those projects are dependent on both governmental subsidies as well as access to the credit markets.

So, we believe that’s a vertical that’s going to do very well. I think also that’s one where a lot of people are just over the last couple of months they’ve stepped back and looked at oil at $40 and some of the solar energy credits went on hold. I know in the state of California some of them did, in the federal government they’re actually looking to increase those but there were some timing issues. I think that’s a market we’re very bullish on in the one to two year period. I think over the next couple of quarters it would be a question mark.

[Joy Mugerty – State of Wisconsin Investment]

Then as far as converting the debt [inaudible] line, is there a certain level of debt where you can do that?

Richard B. Gold

Yes, is the answer to that. We had actually gone through the exercise a couple of months ago before we had the legal litigation settlement and looked at our forecast, mapped out the principal reduction schedule for the current term loan and looked at our asset based loan capacity and convinced ourselves then that with the extension of the term that we got to the end of calendar 2009 that we would be able to get there.

But, at the time we did that the size of the asset base loan that we would be able to support was somewhere in the $15 to $16 million range. That analysis pretty much holds true today. What’s different today is with a $9 million litigation settlement we’ve made an immediate reduction in the principal on the term loan and potentially could be doing a little more. So, I think again, it depends, there are a lot of moving parts in that but that is still our plan and we believe that $9 million of litigation settlement gives us a lot more flexibility in getting there.

By the way, I just want to clarify one comment I made before. I may have implied that we had already paid the $4 million to reduce the principal. We will be doing that just in the next few days.

Richard Vitelle

Right, it’s about $4.1 million and we’ll be doing that shortly.

Richard B. Gold

And we did yesterday receive the $9 million in cash. I just wanted to clarify that as well.

Operator

Our next question comes from the line of [Chet Clowski – Private Investor].

[Chet Clowski – Private Investor]

Are you folks concerned about having the stock delisted?

Richard B. Gold

No, not really. We’re obviously concerned about maintaining and keeping the maximum liquidity for our shareholders. If you’re referring to the fact that the share price is currently below $1, that NASDAQ rule was suspended several months ago and is currently suspended until April. I would not be surprised at all to see that suspension continue given the state of the economy and the markets.

I don’t believe that NASDAQ thinks it’s in either their interest or their company’s interest to do that. Obviously over time the challenge is on us to execute to the operating plan that we’ve talked about and I believe if we do that, that will be a non-issue irrespective of any NASDAQ rules. But, obviously it’s something we watch and something we track.

Operator

There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Richard B. Gold

Thanks again for joining us today and we look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you so much for your participation. You may now disconnect.

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Source: CalAmp Corp. F3Q09 (Qtr End 11/30/2008) Earnings Call Transcript
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