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Executives

Lasse Glassen - Financial Relations Board

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

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

Analysts

Wes Cummings - B. Riley & Company

Richard Tidaro - Kennedy Capital

Sam Bergman - Bayberry Asset Management

Mark Robbins - The Robbins Group

CalAmp Corp. (CAMP) F1Q10 Earnings Call July 9, 2009 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CalAmp fiscal 2010 first quarter conference call. (Operator Instructions) I would now like to turn the conference over to Lasse Glassen of the Financial Relations Board. Please go ahead, sir.

Lasse Glassen

Thank you and good afternoon, everybody. Welcome to CalAmp's fiscal 2010 first 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, expect, intend, plan, believe, seek, could, estimate, judgment, targeting, should, anticipate, goal, and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those implied by such forward-looking statements due to a variety of factors, including product demand, competitive pressures and pricing declines in the company’s satellite and wireless markets, the timing of customer approvals of new product designs, the length and extent of the global economic downturn that has and may continue to adversely affect the company’s business, the company’s ability to refinance or extend its bank term loan prior to the December 31, 2009 maturity date, and other risks or uncertainties that are described in the company’s annual report on Form 10-K for the fiscal year 2009 as filed on May 12, 2009 with the Securities and Exchange Commission.

Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The company undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

With that, it’s now my pleasure to turn the call over to CalAmp's President and Chief Executive Officer, Rick Gold. Rick.

Richard B. Gold

Thank you, Lasse. Good afternoon and thank you for joining us today to discuss CalAmp's fiscal 2010 first quarter results. I will begin with comments on the financial and operational highlights from this past quarter. We will then 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 second quarter of fiscal 2010, along with some concluding remarks. This will be followed by a question-and-answer session.

Despite the continued challenging economic conditions, consolidated first quarter revenue of $23 million increased 8% compared to the previous quarter and was within our expected guidance range of $22 million to $24 million. The sequential top line growth was driven primarily by the continued ramp of unit volumes in our satellite products business.

I was also encouraged by the rebound in revenues from our wireless data com business on a sequential quarter basis. There are increasing indications that conditions are beginning to improve in several of the vertical markets we serve and we are cautiously optimistic that our wireless data com business is in the early stages of a recovery.

Looking at the bottom line, results of operations included a GAAP net loss of $4 million, or $0.16 per diluted share, which was within our guidance range of $0.15 to $0.19 loss per diluted share. Excluding the impact of changes in the deferred income tax asset valuation allowance, amortization of intangible assets, and stock-based compensation expense, our adjusted basis or non-GAAP net loss was $2.4 million, or $0.10 loss per diluted share, which was also within our first quarter guidance range of $0.06 to $0.10.

I refer you to our first quarter earnings press release issued earlier today for a detailed reconciliation of the GAAP basis net loss to adjusted basis or non-GAAP net loss.

Looking at our cash flows and balance sheet, we continue to generate positive operating cash flow and pay down our debt. During the quarter, we generated net cash from operating activities of $0.6 million and reduced our debt by $3.1 million. As of the end of the first quarter, our bank term loan balance was $15.7 million and the subordinated note payable to a direct broadcast satellite or DBS customer was $2.2 million. Rick Vitelle will expand on this in his remarks but suffice it to say, I am pleased with the fact that we have generated positive operating cash flow in each of the last three quarters.

I will next provide updates for our satellite and wireless data com businesses. We continue to make steady progress in our satellite business, which generated revenues of $9.2 million in the first quarter, or a 14% sequential improvement compared to the prior quarter. Satellite product revenues have now increased sequentially three quarters in a row. We also continue to ship significant quantities of refurbished products to a key customer that, although not generating revenue, increase our market penetration and decrease our remaining product re-work commitment to this customer. To date we have reworked and shipped back to the customer approximately 40% of the products returned to us for refurbishment.

In addition, our engineering team continues to make good progress on several new development programs involving next generation products for our two principal DBS customers, which we expect to begin shipping late this fiscal year.

Overall, the underlying fundamentals of our DBS business are improving and we expect our satellite product market share to be materially higher in fiscal 2010 compared to fiscal 2009.

Now let’s move on to an update of our wireless data com business which provides communication systems, products, and services for applications in the mobile resource management, or MRM, public safety, utility, and industrial monitoring and controls markets. During the first quarter, the wireless data com business generated revenues of $13.8 million, which is a 32% decrease on a year-over-year basis. This reduction occurred across all of our wireless data com vertical markets and is primarily attributable to the global economic downturn. That said, we have seen business stabilizing during the first quarter, with wireless data com revenues increasing 4% sequentially after five consecutive quarters of decline. Based on our current forecast, we expect wireless data com revenues to continue to increase throughout the remainder of fiscal 2010.

Contributing to this expected turnaround is strong customer demand for our MRM products and services. As we announced earlier this week, during the months of May and June, orders for the company’s MRM product lines exceeded $7.5 million, the highest ever for a two-month period. These recent orders are from a diverse customer base serving a wide array of MRM markets. Orders for applications in school bus management, service fleet management, vehicle finance, stolen vehicle recovery, and mobile Internet each totaled more than $1 million during this period. We are encouraged to see that our recent product introductions are building momentum as we continued to deliver enhanced value to our customers.

Our [inaudible] business is also trending up with signs that recent strategic initiatives are beginning to bear fruit. To complement our direct sales efforts and cost effectively increase penetration of the fragmented used care dealership market, we have significantly enhanced our indirect distribution channel. During the last several months, we have signed agreements with 29 regional agents that have strong existing relationships with so-called buy here, pay here used car dealers.

During the first quarter, the indirect channel comprised approximately 10% of our overall unit sales and we expect this to more than double in the second fiscal quarter. We are also moving forward with new product introductions targeting stolen vehicle recovery and other verticals.

Moving on to our wireless networks business, we are seeing an up-tick in bid and proposal activity, which is a leading indicator of customer demand. In addition, we recently received some key new orders in the utility and public safety segments of this business.

During the first quarter, we announced the receipt of a contract aware for our data radio Integra wireless radio modems for a large scale deployment of a nationwide smart grid network for the provincial electric authority in Bangkok, Thailand. The initial contract is for 5,000 units that are scheduled to be deployed over the next 18 months.

Also during the quarter, we announced an exclusive agreement with DADS defense and security to supply a customized version of our WiMAX based Sentry 4G wireless IP router for mission critical broadband communication applications. The custom high power mobile data terminal is being marketed under the EADS Defense and Security brand name to serve customers in the defense and public safety markets outside the United States and Canada. Applications for the device include video surveillance and other visual multimedia applications providing security personnel with increased situational awareness through a WiMAX network overlay to existing mission critical communication networks.

We also received a follow-on order valued at approximately $500,000 to expand a private digital data radio network for a large police agency in Western Australia. The wide area network was initially installed in 2007 with CalAmp equipment and deployed in more than 600 police vehicles, providing coverage to an area of more than 9,000 square kilometers.

And finally, we recently helped several of our public safety customer secures federal appropriations funding totaling $1.7 million for first responder mobile communication networks. We expect orders from our customers receiving these funds to contribute to revenues beginning in the second half of this fiscal year.

In summary, I believe our wireless data com business has stabilized and is in the early stages of a turnaround. I am confident we are taking the right actions to position this business for long-term profitable growth. The critical mass we have 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.

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

Richard Vitelle

Thank you, Rick. I’ll provide a summary of our gross profit performance, working capital management, and cash flow results for the fiscal 2010 first quarter. Consolidated gross profit for the fiscal 2010 first quarter was $4.7 million compared to $9.4 million for the same period last year. The consolidated gross margin in the fiscal 2010 first quarter was 20.5% compared to 33.8% in the first quarter of last year. These decreases in gross profit and gross margin were primarily attributable to lower revenues from our wireless data com products as the global economic crisis caused several of our key customers to delay their purchases.

Product mix significantly affects consolidated gross margins because revenues from wireless data com products carry much higher gross margins than revenues from our satellite products. During the most recent quarter, wireless data com products accounted for 60% of consolidated revenues and satellite products represented the remaining 40%. This compares to the same quarter last year in which 73% of revenues were from wireless data com products and 27% from satellite products.

Going forward, our consolidated gross margin percentage can be expected to fluctuate depending on the mix of revenues from satellite and wireless data com products.

Now, taking a closer look at gross profit performance by reporting segment, wireless data com gross profit was $4.3 million in the latest quarter, or 31.1% of wireless data com revenue. This compares to gross profit of $8.7 million, or 42.9% of revenue in the same period last year. The wireless data com gross margin percentage in the first quarter of last year was benefited 4.5 points by the inclusion of a $1.5 million sale of patents, for which there was no associated -- for which there are no associated costs. During the most recent quarter, wireless data com gross margins were impacted 1.6 points by the restructuring related expenses and were also adversely impacted by the lower absorption of manufacturing overhead costs on the lower revenue level. The total impact of restructuring related charges in the first quarter was approximately $400,000, of which $225,000 was included in cost of sales.

We expect gross margins to climb to the high 30% range for our wireless data com business as market conditions improve and revenues rebound.

Gross profit for satellite products was $427,000, or 4.6% of satellite product revenues in the latest quarter, compared to gross profit of $733,000, or 9.6% of revenues in the first quarter of last year. The gross margin for satellite products remains significantly lower than historical levels due primarily to the low level of sales that has resulted in lower absorption of manufacturing overhead costs.

Now moving on to the balance sheet, our total inventory at the end of the first quarter was $14.2 million, representing annualized inventory turns of approximately five times. This compares to total inventory of $15.1 million at the end of the immediately preceding quarter, which represented annualized inventory turns of approximately four times.

The improvement in the first quarter was a result of inventory reductions across all of our businesses due to a relentless focus on working capital management. The accounts receivable balance of $13.9 million at the end of the first quarter represents a 55-day average collection period, compared to receivables of $13.7 million and 58 days at the end of the immediately preceding quarter.

Our primary sources of liquidity are our cash and cash equivalents and the available borrowing capacity on our working capital line of credit. These two sources totaled $6 million at the end of the first quarter, down from $8.6 million at the end of the fourth quarter. Net cash provided by operating activities was $0.6 million in the first quarter. Total debt at the end of the first quarter amounted to $17.9 million, comprised of $15.7 million of bank debt and a non-interest bearing subordinated not payable to a key DBS customer with a principal balance of $2.2 million. During the first quarter, the principal amount of the bank loan was paid down by $1.8 million and the note payable to the DBS customer was paid down by $1.3 million. And today, after giving effect to principal payments made subsequent to the end of the first quarter, the total debt balance is $15.1 million comprised of $14.1 million on the bank loan and $1 million on the subordinated note.

The bank loan has a maturity date of December 31, 2009 and consequently the entire term loan balance is classified as a current liability in the consolidated balance sheet at May 31, 2009. After giving effect to the next quarterly term loan principal payment, the balance on that loan is projected to be within the company’s estimated borrowing capacity against receivables and inventories.

Based on this, we believe that we will be able to refinance the bank term loan prior to the end of calendar 2009 from the proceeds of an asset based loan possibly supplemented by proceeds from another funding source.

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

Richard B. Gold

Thank you, Rick. Now let’s turn to our financial guidance. As noted earlier, I am pleased the new orders in our MRM business and bid and proposal activity in our wireless networks business have picked up significantly in recent months. Based on our current forecast, we believe fiscal 2010 second quarter consolidated revenues will be in the range of $23 million to $25 million with a GAAP basis net loss in the range of $0.06 to $0.10 per diluted share. The adjusted basis non-GAAP results of operations for the second quarter, which exclude changes in the deferred income tax asset valuation allowance, amortization of intangible assets, and stock-based compensation expense are expected to be a net loss of $0.02 to $0.06 per diluted share.

As I stated earlier, there are increasing indications that our business is in the early stages of a recovery. We now expect that CalAmp will be profitable on a GAAP basis in the second half of this fiscal year with quarterly revenues in the range of $26 million to $32 million.

In concluding our prepared remarks, I’d like to recap some key points drawn from our recent results and latest developments. Our satellite business is in the midst of recovery with ramping production lines over the last several quarters. Longer term, we expect that our new products currently in development will become significant growth opportunities.

Our wireless data com business is trending up, with improving customer demand in several of our targeted vertical markets. New product introductions and recent cost reduction initiatives have us well-positioned to resume profitable growth in our wireless data com business. And we continue to reduce debt and expect to refinance our term loan prior to the end of calendar 2009.

I believe we are continuing to make good progress towards our goal of returning CalAmp to sustainable profitability beginning in the second half of this fiscal year.

That concludes our prepared remarks. Thank you for your attention and at this time, I would like to open the call up to questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Wes [Cummings] with B. Riley. Please go ahead.

Wes Cummings - B. Riley & Company

A quick question related to your DBS customers you’re doing the rework for, I think I heard you on the call say that you are about 40% complete on reworking the amount of units they returned to you?

Richard B. Gold

That’s correct.

Wes Cummings - B. Riley & Company

When do you anticipate completing the rework and does that have an impact on your income statement as far as demand, you know, I guess true demand from this customer, or are we already seeing I guess the true demand from this customer in the income statement and they are just taking the reworks and that wouldn’t have any impact on your new business with them once you complete that?

Richard B. Gold

Okay, let me take that in a couple of pieces. As to the first question, the timeframe for completing that, the current schedule we are working to has us completing that during the first quarter of next fiscal year. So roughly four quarters to go from the end of the quarter we’re just reporting here. That could move plus or minus a quarter just depending on how we balance that schedule working with the customer.

In terms of the second piece of the question, it’s roughly at the current rate that it’s been for the last couple of quarters and that we project for the next couple of quarters, it’s about $3 million a quarter of equivalent revenue that we are not booking because we are shipping non-revenue product. We’ve reserved the cost of those repairs as part of what we did, gosh, almost two years ago now, at the time that that issue came up. So from a P&L standpoint, the cost of that, there’s a cash impact to that but the P&L impact is nil as we work through that. But there is a -- essentially I guess you could look at it as an opportunity cost of the revenue that’s on the order of $3 million a quarter, which we are fulfilling real customer demand but we are not seeing that flow through our financials.

Wes Cummings - B. Riley & Company

Okay. That’s the only question I had. Thank you.

Operator

Thank you. Our next question comes from the line of Richard [Tidaro] with [Kennedy] Capital. Please go ahead.

Richard Tidaro - Kennedy Capital

Thanks. So let’s just flesh that out -- so the $3 million a quarter drag that you are really shipping but you are not showing in revenues today, in your guidance because you are still going to be shipping stuff under warranty, the $26 million to $30 million in sales doesn’t include what your real revenue run-rate kind of is with DBS, right?

Richard B. Gold

That’s correct. And it was 26 to 32.

Richard Tidaro - Kennedy Capital

Twenty-six to 32 -- so just as the warranty work, if status quo in the back of the year after the warranty work, it would be more like a 29 to 35 run-rate -- is that correct, kind of conceptually?

Richard B. Gold

That is conceptually correct. Obviously there’s no guarantees with any of this but --

Richard Tidaro - Kennedy Capital

Yeah, and obviously wireless could move and all the rest of that. And then just so I understand, so you start to ship those products that aren’t under warrant to DBS direct and then do you actually get the benefit in your overhead costs so that your margins will start to show an increase in the wireless business, if you were status quo today, if everything else changed?

Richard B. Gold

That is correct.

Richard Tidaro - Kennedy Capital

Okay. Let’s talk about the new products going to the satellite customers -- how do you think those are progressing? You had mentioned you felt good about them but can you give us anything else or --

Richard B. Gold

Well, we had -- I think the first time we mentioned those was a couple of quarters ago when we indicated that our target was to begin shipping those for revenue in small quantities in the fourth quarter of the current fiscal year. That’s still our timetable, so we are proceeding apace with those developments.

Richard Tidaro - Kennedy Capital

Okay, and then do you guys have anymore patents to sell or have we flushed that out? Is there anything left there?

Richard B. Gold

I think it’s safe to say, Rich, that we’ve picked most of the low-hanging fruit there. There are some non-strategic assets we still have on our books and as I’m sure you can assume we do on a regular basis we review those to look at what is the best disposition for those going forward. So I would not say that we are -- that we will ever be done with that process.

The other thing I would point out, and I think I might have mentioned on the last call but we filed five new patent applications last year so there is an ongoing pipeline there as we look forward to building our IP portfolio and some of those will be strategic to our core business and some will -- some of those will be ones we look to monetize elsewhere.

So there are opportunities on that side. I would not preclude it but there’s nothing that’s going to happen next week.

Richard Tidaro - Kennedy Capital

Well, the reason why I ask that is you had a number of questions on -- you guys mentioned about refinancing the debt that you had the other sources, so I think that that dangling statement kind of left questions. Could you guys flush that out a little bit for us?

Richard B. Gold

Well, there are -- we’re still relatively early in the process. We have some discussions underway and it was not intended to signal any one particular direction but we will obviously -- we continue to look to our balance sheet to mine for assets and your question about patents was on point. But I don’t expect another $1.5 million for a single patent like we had a year ago there.

But we also have other potential assets there as well as just different financing alternatives. So it was really not intended to signal any one thing in particular, Rich, but until we are done, we want to make sure that we leave the options open.

Richard Tidaro - Kennedy Capital

I know that we’ve talked that your debt cost is relatively cheap right now at LIBOR plus whatever it is -- it’s like sub five or something, so I understand there’s no urgency but a lot of companies in this situation make a statement like that and the next thing you know, they are doing some private placement or something crazy and I just want to make sure that we’ve eliminated all kind of dilutive options as part of this -- as part of that statement, or no?

Richard B. Gold

Well, I wouldn’t say that we’ve eliminated anything but I would say, Rich, that our first preference here is to -- we believe that at the level that that line will be at the end of the year, we have -- excuse me, the term loan will be at the end of the year that we have sufficient collateral value in our inventory and receivables to carry that forward in large part, if not total, as an asset-based loan. So that’s clearly our first preference and at the current stock price, we have no interest in doing anything dilutive.

Richard Tidaro - Kennedy Capital

Okay, yeah. Okay, good. And then the -- along the lines of the inventory side, you guys have been making some improvements there. Is there anything left to be flushed out from a cash flow standpoint on reducing inventory or --

Richard B. Gold

There is. We have -- we are still dealing with the legacy of what happened a couple of years ago in our satellite business. We are also in the midst -- the reorganization, restructuring we talked about in our wireless networks business last quarter -- we’ve consolidated the manufacturing operations there and are using that as a catalyst to drive some increased efficiencies there. So there is definitely some room to improve there, both on a turns basis and on a dollar basis, and we have some aggressive internal targets that people have signed up for.

Richard Tidaro - Kennedy Capital

Okay, and this is my last question, just kind of stepping through the numbers sequentially here -- so the -- I guess this is going to be multi-part -- of the $9 million in wireless today plus the 3 kind of gets you at a 12-ish run-rate on DBS. Without new products, do you think that that number moves without the new products?

Richard B. Gold

I think at DBS at that level, yes, it does still move. There’s still upside because, just for one thing, seasonality, we’re not in the peak season. The peak season is actually in our third fiscal quarter, so all other things being equal, there’s upside just from that. And -- but I believe that the next kind of quantum step after that, it will come with new products and I should mention we have three different new product initiatives going on there, all of which are targeted for the end of our fiscal fourth quarter.

Richard Tidaro - Kennedy Capital

In the three new product initiatives, I mean, I know it’s early and you don’t -- you may not know but how do you think that those actually start? You talked about the fourth quarter, you start shipping them but how does a new product initiative usually roll out through a customer like that? What’s the demand take-up and how can that change your revenue profile?

Richard B. Gold

So that’s a good question -- there’s a multi-month qualification process which happens before the initial revenue shipments, so at that point, from a -- both an engineering standpoint and manufacturing standpoint and a quality standpoint, we would be blessed and good to go. So it would be within one quarter after that that we would expect to have meaningful revenue contribution.

Richard Tidaro - Kennedy Capital

So they roll out a new product, then they have to kind of fill the channel? Is that how it would be with the new product? And then they start selling that new product? How does the ramp-up of new products from a demand standpoint start to happen?

Richard B. Gold

These are all being phased in and out on an ongoing basis, so it’s not -- at this point it’s not a particular service that a product is supporting. They are being phased in -- I think -- let me think about this. I think all three of these are -- work in conjunction with existing set-top boxes, so from an architectural standpoint and a marketing standpoint, it doesn’t require a substantial change. In those cases, there is a time lag with the customer. But in these cases, it’s really a question of they are replacing an older generation of product and they have economic and performance advantages, and so it’s really a question of just the supply chain management more than any fundamental marketing initiative.

Richard Tidaro - Kennedy Capital

That’s what I’m asking because in prior years, it was HDTV or more satellites or something like that and so let’s say you get on this new product, how do you know what your market share or how do you feel how your market share would play out so that -- I guess I’m trying to understand how this actually does work out for you guys over the next few years. It’s hard to kind of --

Richard B. Gold

Yeah, I think we are shipping three products in volume now. My expectation is that any of these new ones would be comparable to or potentially greater than any of the ones we have right now, and they would layer on on top. But it really depends on how many different suppliers there are or how broadly they are rolled out, and so at this point it’s difficult to predict exactly what that ramp would look like but at a very high level, they would be comparable to or potentially greater than the products we’re shipping today.

Richard Tidaro - Kennedy Capital

And the ASP, would you expect to be the same or higher?

Richard B. Gold

They would be higher.

Richard Tidaro - Kennedy Capital

And this is the final question -- so the current total dish run-rate of satellite business sold times your market share in normal -- for some reason I thought that there was a possibility that you could get to $25 million a quarter just off of the satellite business alone, where you are at today in revenues. Is that still a viable number that’s a possibility if you won market share in these three new products?

Richard B. Gold

That is a viable number that’s a possibility. I mean, this is -- that’s not a prediction but there’s certainly the demand there and we’ve been at those numbers before and the market -- you know, the overall market size has not changed substantially from that time.

Richard Tidaro - Kennedy Capital

I’m sorry, one more -- so then the wireless -- the data com business has dropped from 20 to 13 and is starting to pick up. Of the drop, do you have any way to say well, this is a demand fall-off versus an inventory adjustment for our ability to get that part of the business from 13 back to 18 or 20, what all has to happen for that to kind of happen?

Richard B. Gold

I would say of the drop from 20 to 13, there was probably a couple of that that was inventory adjustment. Of that seven delta, I’d say maybe -- and I’m just pulling numbers out of the air here, which is a dangerous thing to do on a conference call but I think intuitively about $2 million of that was inventory adjustment and about $5 million was demand fall-off.

Richard Tidaro - Kennedy Capital

All right, well, thanks. Great work, guys.

Richard B. Gold

Thank you, Rich. Sorry for all the obnoxious sounds.

Operator

(Operator Instructions) Your next question comes from the line of Sam [Bergman] with Bayberry Asset Management.

Sam Bergman - Bayberry Asset Management

Good afternoon, Rick. A couple of questions -- one, can you quantify the pipeline of new opportunities this quarter versus last quarter?

Richard B. Gold

We don’t actually disclose either our backlog number or our pipeline number. Those are things we track very religiously internally but as quantitative metrics, they leave something to be desired because there’s apples and oranges in there.

But what I can tell you is that our backlog at the end of June was higher than it’s been in the last year and that our pipeline of new business opportunities -- when I say backlog, I mean booked backlog of orders that released, and when I say pipeline I mean pipeline of opportunities that are in our bid and proposal process that our sales force is chasing. That is the largest it’s been in the last year, and they are up in a meaningful way but I don’t want to put specific numbers around that because as I said, there’s apples and oranges inside there.

Sam Bergman - Bayberry Asset Management

In the wireless radio modems, the ones that were sold to Thailand, what type of activity have you had in terms of quotations on that product line?

Richard B. Gold

In terms of -- you said quotations?

Sam Bergman - Bayberry Asset Management

Right, or proposals.

Richard B. Gold

So that’s actually probably our hottest product area right now, is in the utilities sector. There’s a lot of, as I’m sure you see just from following the trade press, there’s a lot of activity right now in terms of smart grid networks in various stages of development and it’s interesting -- that’s a business we’ve actually participated in for a number of years and a few years ago, it was a very sleep business with some longstanding customer relationships and our business was instrumenting power systems where there were transmission and distribution networks that were far from the reach of any other existing communication networks, and so the customers were setting up a private radio network to be able to access that information and provide the controls.

And -- but that has morphed in the last couple of years into much more sophisticated systems where it’s not just a few points but it’s many, many points over a network and we have a mix of not just the private network but cellular and now with the new sentry platform we have the WiMAX, broadband unlicensed as well as licensed capability, so it’s a very active area for bids and proposals right now and it’s one that I think over the next year will probably be our most significant growth area.

Sam Bergman - Bayberry Asset Management

In terms of the backlog or business this quarter, was there any cancellations of any projects?

Richard B. Gold

No.

Sam Bergman - Bayberry Asset Management

And in the satellite business, in the DBS business, the new products that you are going to release in the fourth quarter, somewhere around the fourth quarter, what kind of competition do you have that’s close to that -- the technology that you are developing, if any.

Richard B. Gold

Well, we have longstanding competition in that market. We’re actually the only American company that’s still in that business. We have competitors in Japan and Taiwan. And all of the source, at least our sub-assemblies, in China. But there’s a relatively small number of players in that business and we have, as we’ve mentioned on a couple of the calls before, our engineering team has worked very closely with our customers over the years and that’s more than anything else our differentiation in that business is our ability to sit side-by-side with the engineering teams on the development and the architectural definition of the new products.

Sam Bergman - Bayberry Asset Management

Are there plans for the reworked products? I know you said it’s probably going to be four quarters out before it’s out of the system. Is there any chance that you could get that out quicker and save a quarter’s worth of revenue, or that’s not a possibility?

Richard B. Gold

Well, we play that by ear, and that’s a good question and we are going to see how that plays out. You know, the faster we pull it in, the more revenue we’re foregoing in the near-term. So it’s a balancing act there and we are working closely with the customer to make sure that we’re satisfying their needs first and foremost in that process, so obviously it’s to all of our benefit to get that flushed through as quickly as possible, so we’re certainly motivated to do it but we also want to keep the production lines balanced and steady and running at peak efficiency.

Sam Bergman - Bayberry Asset Management

Are they happy with the reworked product?

Richard B. Gold

Yes.

Sam Bergman - Bayberry Asset Management

And the only other question in regard to investor relations, what’s your plan for the rest of the year?

Richard B. Gold

From the standpoint of -- what, you mean like conference participation, for instance?

Sam Bergman - Bayberry Asset Management

Correct.

Richard B. Gold

We have a couple of conferences scheduled -- one in August and one in November, I believe, but we’ll be posting those on the website.

Sam Bergman - Bayberry Asset Management

One last question I forgot, regarding the estimates for quarterly revenues -- pretty wide range, $26 million to $32 million. What would make that at the top range of the numbers? Would that be mostly extra wireless business or more DBS business?

Richard B. Gold

It could be either of those, Sam, and again, that’s two and three quarters out, respectively, so plus or minus 10%. I know it looks wide to you but it kind of looks narrow to us, so --

Sam Bergman - Bayberry Asset Management

Thank you very much.

Richard B. Gold

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Mark Robbins with the Robbins Group.

Mark Robbins - The Robbins Group

Thank you. Forgive me, I’m still getting accustomed to the company so I’m very new at this -- help me understand the philosophy of selling patents and what you are looking for when you sell something like that. That to me is kind of an unusual thought.

Richard B. Gold

Well, it’s not a core piece of our business.

Mark Robbins - The Robbins Group

This is something that’s been developed in-house and then you decide that it just doesn’t fit, so you pitch it?

Richard B. Gold

Yeah, those maybe weren’t exactly the words I would use --

Mark Robbins - The Robbins Group

Excuse me, a little cavalier.

Richard B. Gold

But the -- you know, we’ve had a number of things over the years where we have developed some interesting intellectual property but it hasn’t found its way into our mainstream product business and we found in the last couple of years a couple of situations where we were able to identify other enterprises for whom that technology was potentially strategic and it was really from our standpoint, it was something that was on the shelf and in those cases, we did get a license back to use the technology, so we did not forgo it in perpetuity but in terms of actually putting it in the mainstream of our business and deriving value directly from it, that wasn’t something we were planning to do. So it was very opportunistic.

But that said, you know, wireless technology, we’re -- it becomes more and more clear to me as I spend more time in the bowels of the company here that we have some very unique capability in our ability to design and develop and come up with some novel ways of implementing wireless communications and many of those, we will find ways to use in our business but there’s some that we may not.

So that’s something we keep our eyes on the lookout for but it’s not a core part of our business.

Mark Robbins - The Robbins Group

Okay. And I guess I didn’t understand the accounting when you discussed the DBS -- so you’ve been taking $3 million a quarter, I guess, of revenues or you’ve reserved for this some time ago and then you’ve been doing $3 million of work a quarter. And that revenue and costs and contribution, that does not hit the income statement at all currently but you are running it through your factory. And I would not think that that does have a benefit to your overhead, the rest of your operations overhead, or does -- it does or does not?

Richard Vitelle

There’s probably more than one question wrapped up in there --

Mark Robbins - The Robbins Group

Oh, there’s a lot of them.

Richard Vitelle

Let me see if I can address that. Well first of all, the $3 million revenue figure that Rick Gold cited, that is indeed the sales value of this refurbished product --

Mark Robbins - The Robbins Group

Correct.

Richard Vitelle

Those are not -- that is not the level of rework costs that we are incurring and charging against the reserve.

Mark Robbins - The Robbins Group

Understood.

Richard Vitelle

-- each quarter. It’s substantially less -- how much less, I don’t have those figures in front of me but suffice it to say, it’s quite a bit less.

A lot of that rework cost, rework activity is occurring in China and so it doesn’t really absorb overhead costs here in our main facility in [inaudible] or for that matter, anywhere else of our U.S. facilities.

Mark Robbins - The Robbins Group

Okay, so it really doesn’t have a -- it’s not included in the income statement and it really doesn’t have a benefit as to your operations. It’s just there.

Richard Vitelle

Well, I think that -- yeah, that’s true. The point was that we made in our comments is that it represents a share of the market that we currently have that’s not reflected in our revenue number and as we continue to work down this quantity of returned product, it’s reducing our commitment, our remaining rework commitment to this customer.

Mark Robbins - The Robbins Group

With you. Okay, and once that goes away, it really means that you don’t have additional business to be had. It doesn’t mean that you have an additional capacity to use. It just means that there’s nothing -- it’s phantom, essentially.

Richard B. Gold

No, it actually does mean there’s additional business to be had because we are satisfying a meaningful fraction of our customers’ demand today with product that we are not getting paid for, so I think that was to the question, I believe it might have been Rich Tidaro that asked earlier about all other things being equal, when we get through that rework, is there a potential pop in revenue that’s available there, and the answer to that is yes, all other things being equal, there would be a $3 million incremental quarterly revenue pop and associated margin pop that --

Mark Robbins - The Robbins Group

Okay, so there’s more of this business to be had once the rework that goes away, there’s a fulfillment -- there’s more business to be had and to be completed and that could replace this phantom stuff that’s there.

Richard B. Gold

Exactly.

Mark Robbins - The Robbins Group

Okay, now I get it.

Richard B. Gold

Provide we can retain all or substantially all of that product flow.

Mark Robbins - The Robbins Group

Right, and provided you haven’t irritated the customer to the point where they’d go someplace else.

Richard B. Gold

Always a given, yes.

Mark Robbins - The Robbins Group

Always a give -- okay, all right. I’ll get back in the queue. Thank you.

Operator

Thank you. And management, there are no further questions. I’ll turn the call back over to you for any closing comments you might have.

Richard B. Gold

Your comment about getting back into the queue, did that mean, Mark, that you had another question, or did I misunderstand that? Okay. All right, well, then thanks again for joining us today. We look forward to speaking with you, with everyone on the call again next quarter.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or toll free number, 1-800-406-7325 and enter the access code of 4110355 followed by the pound sign. We thank you again for your participation and at this time, you may disconnect.

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Source: CalAmp F1Q10 (Qtr End 5/31/09) Earnings Call Transcript
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