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CalAmp Corp. (NASDAQ:CAMP)

F2Q10 Earnings Call

October 8, 2009 4:30 pm ET

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

Marc Robins – The Robins Group

Justin Cable – Global Hunter Securities

Kevin Dede – Jessup & Lamont

Richard Todaro – Kennedy Capital Management

Operator

Welcome to the CalAmp fiscal 2010 second quarter conference call. At this time all parties are in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, October 8, 2009. I will now turn the conference over to your host Mr. Lasse Glassen with the Financial Relations Board.

Lasse Glassen

Welcome to CalAmp’s fiscal 2010 second 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 10K for fiscal 2009 as filed on May 12, 2009 with the Securities & 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 obtained. 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 CEO Rick Gold.

Richard B. Gold

Thank you for joining us today to discuss CalAmp’s fiscal 2010 second quarter results. I will begin with comments on the financial and operational highlights from this past quarter and then I’ll 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. Then, I will wrap up with revenue and earnings guidance for the second half of fiscal 2010 along with some concluding remarks. This will be followed by a question and answer session.

Overall, I continue to be pleased with our ability to grow revenues and generate operating cash flow in spite of the challenging economic environment. During the quarter consolidated revenues increased 4% sequentially to $23.9 million which is within our expected guidance range of $23 to $25 million. The top line was driven by both ramping unit volumes in our satellite products business and a continued rebound of our wireless datacom business.

With two sequential quarters of revenue growth and a solid outlook for the remainder of fiscal 2010, we believe that the recovery of our business is well underway. Looking at the bottom line, results of operations included a GAAP net loss of $4.2 million or $0.17 per diluted share. Excluding the impact of changes in the differed income tax asset valuation allowance, amortization of intangible assets and stock-based compensation expense our adjusted basis or non-GAAP net loss was $2.3 million or $0.09 loss per diluted share.

Included in the second quarter GAAP and adjusted basis net loss is a pre-tax loss of approximately $1 million related to the sale of preferred stock in a privately held company. This non-operating loss on the sale of an investment represents $0.04 per diluted share on a GAAP basis and $0.02 per diluted share on an adjusted basis. Second quarter per share results were also negatively impacted by the sales mix change in which revenue from our lower margin satellite projects came in over our forecast and revenue from our higher margin wireless products came in lower than forecast. I refer you to our second quarter earnings press release issued earlier today for a detailed reconciliation of the GAAP basis net loss to the adjusted basis or non-GAAP net loss.

Moving on to our cash flow statement and balance sheet, we continued to generate positive operating cash flow and reduce our debt. During the second quarter we generated net cash from operating activities of $2.9 million and paid down total debt by $3.6 million. As of the end of the second quarter, the principle balance of our bank debt was down to $14 million and the subordinated note payable to a direct broadcast satellite or DBS customer stood at only $410,000.

I will next provide updates for our satellite and wireless datacom businesses. Our satellite business has entered a period of accelerated growth driven by customer demand. During the second quarter, satellite product revenues increased to $10 million, up 8% on a sequential basis. Looking ahead, we expect satellite revenue to increase sharply in the second half of fiscal 2010. In September, we added a second shift at our main assembly plant in Oxnard, California to increase our production capacity and we are working closely with key suppliers in an effort to achieve a smooth ramp in volume to meet the increased demand.

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 rework commitments to this customer. To date, we have reworked and shipped back approximately 60% of the products returned to us for refurbishment and expect to substantially complete reworking the returns by the February 2010 quarter, one quarter earlier than we had previously projected.

Overall, the underlying fundamentals of our satellite products business continue to improve. Our Next generation satellite product developments for our two principle DBS customers remain on track. We continue to expect initial shipments of these products to begin late in fiscal 2010 with material contributions to revenue beginning in the first quarter of fiscal 2011. Now, let’s move on to an update of our wireless datacom 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 second quarter the wireless datacom business generated revenues of $14 million which is a 2% increase on a sequential quarter basis. We experienced stabilizing or increasing revenues across all of our wireless datacom vertical markets with the exception of our wireless OEM business which was down because of that unit’s dependency on one key customer that has been reducing its inventory levels.

During the first half of this fiscal year, we’ve seen our wireless datacom business begin to recover after a challenging second half in fiscal 2009. Our pipeline of new business opportunities continues to grow and during the second quarter we made significant progress towards developing key channel partners in our targeted markets. In the public safety space, we announced an exclusive agreement with EADS Defense and Security to supply a customized version of our WiMAX based Century 4G wireless IP router for mission critical public safety broadband communication applications.

This 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 have successfully completed interoperability testing of this product with a major WiMAX infrastructure vendor and have shipped small quantities to the EADS in support of field trials they will be conducting with an international customer over the next few months.

In our public safety business we are beginning to see the signs of federal earmarks and stimulus funding flowing to city and county governments. Although this has not yet had a meaningful impact on CalAmp, we are hopeful it will help drive a recovery in this sector of our wireless business in the second half of this fiscal year. In the utilities space we recently announced a partnership with Elster to incorporate our Century 4G wireless IP router with Elster’s EnergyAxis system.

Elster is a top tier utility meter provider and a leader in smart grid utility solutions. Our combined solution will enable utilities to deploy a single network infrastructure capable of serving the unified communications needs for both their mobile fleet applications as well as fixed smart grid applications including advanced metering, demand response and distribution automation. We are also currently pursuing opportunities directly with several large utility companies. However, due to the length of the proposal cycle, these opportunities are longer term in nature.

In addition, our Aircept and MRM businesses are also beginning to pick up as the broader economy and credit markets slowly improve. During the quarter we had strong contributions from school bus management and service fleet management applications in our MRM business. For the core Aircept business our shift in customer focus from selected car dealers to vehicle finance companies is providing us with a more scalable model. We’re also gaining momentum with new product introductions that target adjacent market verticals.

In summary, I believe our wireless datacom business is in the process of recovering. I’m confident we’re taking the right actions to position this 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.

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

RV

I will provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2010 second quarter. Consolidated gross profit for the fiscal 2010 second quarter was $4.8 million compared to $7.5 million for the same period last year. The consolidated gross margin in the fiscal 2010 second quarter was 20.1% compared to 32.0% in the second quarter of last year. These decreases in gross profit and gross margin were primarily attributable to lower revenues from our wireless datacom products as the global economic crisis caused several of our key customers to delay their purchases.

Product mix significantly affects our consolidated gross margins because revenues from wireless datacom products carrier higher gross margins from revenues from our satellite products. During the most recent quarter, wireless datacom products accounted for 58% of consolidated revenues and satellite products represented the remaining 42%. This compares to the same quarter last year in which 86% of revenues were from wireless datacom products and 14% from satellite products.

Our consolidated gross margin percentage is expected to continue to fluctuate in the future depending on the overall mix of revenues from satellite and wireless datacom products in any given period. Now, taking a look at gross profit performance by reporting segment, wireless datacom gross profit was $4.5 million in the latest quarter or 32.0% of wireless datacom revenue. This compares to gross profit of $7.5 million or 37.5% of revenue in the same period last year.

During the most recent quarter wireless datacom gross margins were adversely impacted by the lower absorption of manufacturing overhead costs on the lower revenue level. We expect gross margins to decline to the high 30% range for our wireless datacom business as market conditions improve and revenues rebound.

Gross profit for satellite products was $331,000 or 3.3% of satellite product revenues in the latest quarter compared to negative gross profit of $81,000 in the second quarter of last year. Gross profit and gross margin for satellite products remain significantly lower than historical levels due primarily to the low level of sales that has resulted in lower absorption of manufacturing overhead costs. As sales volumes continue to increase and manufacturing efficiencies improve, gross margins for our satellite products are expected to rise to the low teens. We then expect further improvements in gross margins to the mid to high teens range once we are shipping our new products in volume next fiscal year.

Now, moving on to the balance sheet, our total inventory at the end of the second quarter was $11.7 million representing annualized inventory returns of approximately seven times. This compares to total inventory of $14.2 million at the end of the immediately preceding quarter which represented annualized inventory turns of approximately five times. The improvement in the second quarter was the result of the inventory reductions across all of our businesses due to a sharp focus on working capital management.

The accounts receivable balance of $12.2 million at the end of the second quarter represents a 47 day average collection period compared to receivables of $13.9 million and 55 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 approximately $5 million at the end of the second quarter down from $6 million at the end of the first quarter.

Net cash provided by operating activities was $2.9 million in the second quarter and $3.4 million for the first half of fiscal 2010. Total debt at the end of the second quarter amounted to $14.4 million comprised of $14.0 million of bank debt and a non-interest bearing subordinated note payable to a key DBS customer with a principle balance of $410,000. During the second quarter the principle amount of the bank loan was paid down by $1.8 million and the note payable to the DBS customer was also paid down by $1.8 million.

Today, after giving effect to principle payments made subsequent to the end of the second quarter, the total debt balance is $13.6 million comprised of $13.4 million on the bank loan and $255,000 on the subordinated note payable. We expect to retire the subordinated note during the fiscal third quarter. Our bank term loan has a maturity date of December 31, 2009 and consequently the entire bank debt balance is classified as a current liability in the consolidated balance sheet at August 31, 2009. We are currently in active discussions with several banks and expect to refinance the term loan prior to the end of calendar 2009 from the proceeds of an asset based loan possibly supplemented by proceeds from other funding sources.

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. As I noted earlier, we expect a share increase in demand for our satellite products in the second half of fiscal 2010. As a result, we expect to see fiscal third quarter consolidated revenues increase significantly on a sequential quarter basis and be in the range of $29 to $32 million with a GAAP basis net loss in the range of $0.03 to $0.07 per diluted share.

The adjusted basis or non-GAA results of operations for the third quarter which excludes changes in the valuation allowance of US deferred tax assets, intangibles amortization expense net of tax and stock-based compensation expense net of tax are expected to be in the range of a $0.04 net loss per diluted share to breakeven. We expect growth to continue in the fiscal 2010 fourth quarter with consolidated revenues in the $34 to $38 million range and GAAP basis profitability.

In concluding our prepared remarks I’d like to recap some key points derived from our recent results and latest developments. We’re in the process of establishing a healthy satellite products business with ramping production in the second half of this fiscal year and beginning in fiscal 2011 we expect that our new products currently in development will provide further growth opportunities with improved margins.

After a difficult fiscal 2009 second half when we saw our wireless datacom customers sharply reducing capital expenditures and inventory levels, our wireless datacom business has now stabilized. I’m encouraged by the expanding pipeline of new business opportunities as well as the strategic partnerships that we believe will provide a solid foundation for future revenue growth. And, we continue to reduce debt and expect to refinance our bank term loan prior to the end of calendar 2009.

In summary, I believe we’re continuing to make good progress towards our goal of returning CalAmp to sustainable profitability by the end of this fiscal year. 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) Your first question comes from Marc Robins – The Robbins Group.

Marc Robins – The Robins Group

I guess I’m a little awestruck by the projections for the fourth quarter and I guess I’m trying to get my arms around that. Is part of that due to the fact that you’re expecting the cleanup of the warranty work to go away a quarter early and some of that shift from warranty or balance sheet work to income statement work or is all of that increase in sales from the third quarter to the fourth quarter, is all of that essentially due to just a remarkable ramp in satellite and wireless revenues?

Richard B. Gold

It’s the impact of the refurbishment being accelerated to finish at the end of the fourth quarter does not factor in to that because we do expect that during both Q3 and Q4 we will be shipping refurbished products and we’re awfully comparable numbers in each quarter. Actually, slightly higher numbers than we did in the first two quarters of this year so that will not really come in to play until Q1 of next fiscal year.

Marc Robins – The Robins Group

So what you’re really telling me is business is stronger than a garlic milkshake?

Richard B. Gold

I guess I’ve never actually used that analogy but yes and there’s a couple of elements behind that. It is, as we said in the prepared remarks, it is that revenue growth is driven substantially by the increase in the satellite side of the business and it’s really a combination of end user demand, it’s the upgrade cycle that we’ve been talking about as well as simply CalAmp over the period of the last several quarters reestablishing its credibility and its position in the markets. So, even at those levels we will still be meaningfully below historical levels and there’s still room to grow although at this point that far in to the future it’s hard to say what other cycles might be going on.

Anyway, from Q2 to Q3 to Q4 it really is kind of apples-to-apples-to-apples and then in Q4 potentially we have the benefit from the new products at both customers as well as the fact that the loss of potential revenue from the refurbished products goes away. But, who knows what the economy is going to do and what the market is going to do and there’s a lot of other factors that we can’t project at this point.

Marc Robins – The Robins Group

I know this is going to be a tough question and a tougher answer but let’s talk a little bit about the debt renegotiation. You’ve been paying down the debt situation at the bank really very nicely, they’ve got to be fairly pleased. I’m sure that the size of the firm, the improvement in the stock price, your record of paying down debt, the forecast of business, all of those things have got to weigh heavily on the creditors as you’re talking to them. Would you say that negotiations are going along fairly well?

Richard B. Gold

Well, our plan A at this point Marc is to put in a place a new facility and to retire the existing facility. The existing facility was set up as a term loan, a cash flow based term loan a few years ago in a different environment and what we really think is the right thing to do at this point for the company is to transition to an asset based loan that’s a revolver that’s non-amortizing so that gives us flexibility going forward as the business grows, as the business evolves. We now have a collateral base in receivables and inventory where it’s possible to envision a structure including an asset based facility.

So that’s really what we’re focused on right now. We have good relationships with our current banks and we’ve worked through a number of really tough challenges with them over the past few years but it’s time for us – like I said, our plan A at this point and we’re in active discussions with a number of banks about asset based facilities and we’re getting good interest. We’re hopeful that we can move fairly quickly to close something. But, those credit markets are starting to open up and there are a number of banks that we’re talking to that we seem to be in the sweet spot for the profile and the size of client they like to have.

Marc Robins – The Robins Group

Lastly, and then I’ll get back in to the queue, the addition of a second shift and all that that pertains, is that going smoothly and little in the way of transition problems and incremental cost that may affect profitability and so forth? Do you feel comfortable with that?

Richard B. Gold

I think from a structural standpoint and training standpoint we had seen some signs that we may need to be doing it several months ago so we actually brought the core of the second shift staff on to our first shift two to three months ago to get the training and become familiar. Then, that group became the core of the second shift when we started that in September. By having a second shift frankly, we can have less overtime which we were starting to run and that’s obviously not a good thing from a cost standpoint.

We are going to have challenges. Any time you try to ramp something this fast that has this many components and this many steps and suppliers involved there are going to be challenges. But, those are good problems to have and we’re working through those one at a time, working both with our suppliers and with our customers. I’m confident that we’re going to be able to ramp in to the range that we’ve talked about. That’s not to say there won’t be operational challenges but the demand is there, the products are robust and we’re really now a question of just scaling back to levels not dissimilar to where we were a couple of years ago.

Operator

Your next question comes from Justin Cable – Global Hunter Securities.

Justin Cable – Global Hunter Securities

Just a couple of quick questions for me. I’m curious about the next generation products that are coming in Q1 the next fiscal year. I realize you only provided guidance for the next two quarters but I’m curious to know if you foresee any kind of impact in terms of the sequential trends as you transition to the next generation in terms of revenues?

Richard B. Gold

The first point, we have four products under development. The last time we talked we had three. We have two with each of the two main satellite television broadcasters but those two in each case is they’re really derivatives of a single new platform but there’s two different products for different applications. Of the four, one of those will to some extent cannibalize a product we’re currently producing but the other three represent incremental revenue opportunities for CalAmp.

We expect to have one product for each of the customers in to qualification in Q4 and be shipping in small quantities by the end of Q4. We would expect to be ramping over the course of Q1. These things don’t go from zero to 60 in four seconds so it’s going to take a quarter or two to ramp to any kind of sizeable rate but we do believe there’s a potential there with those new products to meaningfully increase our market penetration beyond the level that we will be at in the second half of the current fiscal year.

Now again, I have to caution this by saying that this is a market that has its ups and downs which is why we wouldn’t really even if we had those products today, we wouldn’t be in a position to hazard a guess for what next year would look like. But again, I can only point to three years ago before we had the misstep and just mention that the overall aggregate opportunity for these products in the US market is as big or as potentially somewhat bigger today than it was at that time.

What we’re seeing right now, obviously on a quarter-to-quarter basis demand is very important but the primary factor for CalAmp in the near term is regaining market share and rebuilding our position in the market and we still think we have a couple of quarters to go in that respect.

Justin Cable – Global Hunter Securities

But in terms of that sort of cannibalization on the first product do you foresee any kind of postponement of orders in anticipation of these new next generation products coming?

Richard B. Gold

No, we don’t because right now the customers – one of the things that we’re seeing throughout certainly the satellite business but also through some of our other businesses is that people really cut their inventories back earlier in the year. So, those customers that have run rate businesses that are seeing a rebound, they don’t have a buffer stock to deal with that so I don’t believe that’s going to have an impact. The other point I should mention is that our new products will have higher standard margins than the products they replace.

We’re doing a lot of things in these new platforms to make the products not only more robust but also to drive cost out of them. So, as I think it was Rick in his remarks mentioned that getting those new products phased in will be important to help drive our margins in that side of the business as well as the revenues.

Justin Cable – Global Hunter Securities

Where do you see margins going in the next 12 to 18 months if these products do start becoming very meaningful?

Richard B. Gold

Well, we said earlier on the call we expect over the next couple of quarters to be in the low teens but that’s with the existing product mix. We think those new products can take us to the mid to high teens as they phase in and our objective for this business is 20%. We’ve been there before. It’s been challenging and this is obviously a very – it’s a consumer electronics business with tough competitors but that’s our target for this business, 40% is our target for the wireless data business but in terms of the modeling we’re doing and the guidance we gave here we’re pointing to the high teens and high 30s respectively.

Justin Cable – Global Hunter Securities

Speaking of the wireless data business, you’re saying that you’ve started to see signs that its stabilizing obviously, we’re in a period of customer sort of winding down some of their inventories so that had some impact, what do you think is sort of the new normal revenue run rate? And, maybe a step back, why do you think things are stabilizing now?

Richard B. Gold

We participate in several different vertical markets there so I can’t give you a one size fits all answer to that. In some of the areas we focus, we’re making some slight strategic shifts so let me kind of parse it and then build up the answer. We have some run rate businesses within that, our Aircept business in many respects is a run rate business, our MRM hardware business is in many respects a run rate business, some of our public safety business with respect to add ons, some of our smaller volume industrial monitoring and controls business is a run rate business and that business fell off dramatically in the economic down turn and that business has come back.

I don’t expect that business however to grow dramatically. Where we’re going to see the opportunities for future growth are in some of the bigger projects that we’re going after that CalAmp has historically not gone after or the predecessor companies that we acquired had not historically gone after just because of the scope of those. One some of those we’ve alluded to both in the public safety area and in the utility area and some of those we’re bidding directly and in some of those we’re teamed with prime contractors and we’re teamed with some of the major prime contractors in both of those markets on several of those bids.

That’s a longer term process so it’s hard to really say when we’ll see that impact. It’s not something that’s going to drive much of anything in Q3. Even if we were to get some of those awards, they take time to spool up and really contribute to revenue. But, I think the opportunities for future growth is really around those areas as well as some of the newer adjacent verticals that we’re driving in our tracking business, stolen vehicle recovery for example that have substantial growth opportunities.

I think the flip side of that is our OEM business which has been declining really over the last couple of years is not something we can – there’s real serious limits to how much we can affect that business from our end. So, it’s important to us but it’s not something we can count on as we look forward so we want to make sure that we serve that business but again, it’s not something we have great visibility in to. We have better visibility in to other elements of the business.

I think overall this business is one that has the potential to be substantially larger than it is and with a margin profile that is better than it is. Our OEM business and our MRM hardware business are the lowest margin pieces of that business and the public safety business and utility systems business are for the highest margins just because of the nature of the value that we provide. So, we’re really trying to be proactive in driving the business in that direction.

Justin Cable – Global Hunter Securities

But in terms of a revenue run rate, when we look at the current quarter of about $14 million but an operating loss of about $1.3 million, is that sort of the base line business or does that also include some of this impact from customers winding down some inventories, what’s the new normal here?

Richard B. Gold

I think it’s in the range. I think we still have some customers winding down some inventory, particularly OEM customers. If they were to return to the levels that they were nine months ago, that could be an extra million or two a quarter there. That business in the aggregate was a $20 million a little over a year ago and the opportunities are certainly there to get it back to that level. The breakeven, kind of the way the business is structured now is somewhere around $17 million. So, we’re pretty confident that the irons we have in the fire in terms of outstanding bids have the potential to get that business well above breakeven and back to historical levels or above. That said, our visibility on timing of many of those projects is poor just because of the nature of what they are.

Justin Cable – Global Hunter Securities

Then the last two questions here for me, in terms of inventories, your own inventories, how much more inventory do you plan to wind down? Obviously, that’s been a key provider of cash flow. Then, in terms of overall production capacity, you mentioned adding a second shift but do you feel like you have enough capacity for the next 12 to 18 months or will you start to have to look at some cap ex projects to increase capacity?

Richard B. Gold

On the inventory we expect our dollar denominated inventories are going to be relatively flat this quarter. We’re going to be growing inventory on the satellite side of the business and still working down inventory on the wireless side of the business and squeezing some more efficiencies out there. I do think we can improve our turns incrementally over the next two quarters but dollar inventories are going to need to increase after this quarter.

I don’t believe we’re going to need to add any facilities. We actually consolidated our two principle manufacturing facilities in our wireless networks business earlier this year. We actually just finished that consolidation this most recent quarter and got some – there’s obviously a certain amount of disruption associated with that but as the dust settles we have expanded production capacity in the aggregate and we have enhanced flexibility there compared to what we had before. We’ve also begun to move some assembly manufacturing in to the supply chain we manage for the other parts of our business. So, I believe we have quite a bit of scalability there.

That would be true for our MRM business as well, I don’t think we’re limited there. The satellite business, it really depends on the mix there. Again, we are at a level that is materially below what we were at a couple of years ago so from an aggregate standpoint we definitely have the capacity. It really depends on the product mix at any given point in time so what we’ve been doing there is we haven’t had to spend substantial capital but we’ve been reconfiguring our lines. Taking equipment from legacy product lines that are downsizing and moving those to support some of the lines that are ramping. So, I don’t expect other than the tooling associated with new products that we’ll need either on the facilities side or test and assembly side will need meaningful cap ex.

Operator

Your next question comes from Kevin Dede – Jessup & Lamont.

Kevin Dede – Jessup & Lamont

I didn’t quite understand why you expect satellite demand to increase so strongly in the second half?

Richard B. Gold

There’s three factors that are coming in, the first is if you look at overall US demand for satellite and you look at just the public filings of the two principle satellite providers, their business has shown an uptick and our principle customer showed an increase in net subs in the June quarter which is the first quarter in I believe it was five quarters that they’d actually had an increase in the net subs.

The other big factor there is the HD upgrade cycle, that’s really in full swing right now. That applies to both new subscribers which helps push up the ASPs but there’s a big push by the service providers to get their existing subs who are not getting HD service to sign up for HD service as a way for them to drive their ARPU. That drives demand for our products because most of the legacy products that are on rooftops of existing subs are not capable of the latest generation of HD and HD local and DVR kind of capability.

That’s the second piece of it and the third piece of it is just that CalAmp is back in the game with our customers. We’ve been on the sideline for a while due to the product problem we had and then once we got requalified we were taking the ramp a step at a time just to make sure there were no miss steps and that part of the cycle is behind us now. We’re seeing the full force of the demand in the market.

Kevin Dede – Jessup & Lamont

You made it pretty clear that new products in that segment don’t really come in until the next fiscal year. I’m just wondering what you think the margin implications might be?

Richard B. Gold

Well again, we had said we expect the margins to get up in the high teens as those phase in. They’re going to be phasing in over the course of next year.

Kevin Dede – Jessup & Lamont

Even though you’re sort of starting from scratch with the new ones?

Richard B. Gold

Yes, because by the end of the year we expect those new products will represent a substantial percentage of what we’re shipping, more than 50% by the end of next fiscal year.

Kevin Dede – Jessup & Lamont

Can you give us a little background on how sales cycles have changed through the course of the current calendar year just in light of sort of the change in the overall economic environment what’s sort of been the impact on your wireless data business?

Richard B. Gold

Again, I kind of have to break that down in to the individual pieces of that business. The public safety business is still quite soft in terms of actual revenues. That business obviously depends on municipal and other governmental tax dollars. That business was hit hard and the stimulus dollars, the federal dollars, just the fact that there is pent up demand now for a lot of that equipment and it can’t wait forever. We are seeing in the last three months a pretty substantial increase in the bid and proposal activity there. We’ve also gotten indications that a couple of our customers are pretty close to actually having some of those earmark and stimulus dollars show up.

But, it’s safe to say that the flood gates have not yet opened in that business but we’re pretty optimistic that within six months or so that’s going to happen. It’s going to happen gradually over that period. There is some bigger projects there, a couple of substantial projects in that area that went on hold for a while and are now back on the front burner of the respective agencies and we’re engaged in those but those would be fiscal 2011 kinds of activity. I think that’s kind of my take on what’s happening in that area.

In the utilities segment, that didn’t fall off as fast or as far, it was not affected as much but what we’re seeing there is there are a number of big smart grid projects that are being developed right now that are being bid, that are being bid, that are being engineered. That’s definitely something that is up from a year ago. It’s not so much economy related but we see a number of those. The timing is less certain on those, these are big entities and they move at their own pace. But, I think that business has held up.

I think the mobile resource management business, that was probably hit the hardest of all by the economy. It has come back albeit at a somewhat lower level than it was a year ago but it came back significantly this quarter for us. It’s not clear where that business is going on kind of some of the mainstream applications, particularly the vehicle finance one that we serve but there are new applications opening up. So, I think for us the growth is likely to come more from some of these new applications than from than from the [inaudible]. So, if I split those end markets that’s how I would answer that question.

Operator

Your next question comes from Richard Todaro – Kennedy Capital Management.

Richard Todaro – Kennedy Capital Management

Can you guys talk about how much total dollar warranty work did you ship this quarter roughly?

Richard Vitelle

Dollars in terms of equivalent revenue?

Richard Todaro – Kennedy Capital Management

Yes, just ballpark.

Richard Vitelle

Ballpark is about $3 million.

Richard Todaro – Kennedy Capital Management

Help me, I thought you guys had been shipping about that number a quarter so how were you able to pull the warranty work forward a quarter? I just assumed business was going well and you shipped more warranty this quarter and that’s how it happened but am I missing something?

Richard Vitelle

No, you’re not missing anything, I didn’t give kind of the next level of detail which is we expect our rate of shipment of warranty product to also accelerate this quarter and next. So, I expect that we’ll be shipping slightly in excess of $4 million of equivalent warranty product this quarter and next that will also be the case. So, instead of three quarters time $3 million it will be more like two quarters times four point something.

Richard Todaro – Kennedy Capital Management

So business has really picked up in that area in order to feel that way?

Richard Vitelle

Yes.

Richard Todaro – Kennedy Capital Management

Then, I think you kind of talked about the slow ramp in that it doesn’t go zero to 60 on the new products but I’m not sure really how to gage a slow ramp. Is this an incremental $250,000 a quarter for a while in revenues and then it moves or how do I think about that?

Richard B. Gold

Again, it’s very product specific and customer specific but my expectation Rich would be that within two quarters we would be up to whatever the equilibrium run rate would be on those. It depends on a whole lot of other factors but it’s not going to all happen within one quarter but if it takes longer than two quarters it’s not because we couldn’t do it or the customer couldn’t assimilate it, it’s just because the demand might not be there. But, from an operational standpoint and from a customer integration standpoint we’re talking somewhere between one and two quarters.

Richard Todaro – Kennedy Capital Management

Just to gage the magnitude of kind of how business is picking up here, when you originally were kind of giving guidance for the back half of the year, did you originally think you could do as much as $4 million a quarter in warranty work or is this a business has gotten better we can pull more of that forward?

Richard B. Gold

Well, we certainly had the capacity to do it but we were frankly in no rush to do it because there was a cash cost to us for doing that and we really have been working very closely with our customer there to balance how fast we work down the RMA pile with new product so that we really both keep their demand satisfied but keep our factory well balanced and as efficiently running as you can at those relatively low levels. So, it’s really now with the demand increase for the revenue product as long as we have the capacity then the customer would like to get that and we frankly would like to get it out of here so that’s really what’s driving that.

Richard Todaro – Kennedy Capital Management

Then can you clarify, you guys left yourself open again on alternative funding sources as it relates to this credit line and that dangling statement always kinds of catches investors off guard so I’m just curious about how you’re thinking about that?

Richard B. Gold

I’ll give you the same answer I gave you last time Rich, it really is because you don’t know until you know but it’s not meant to signal that we plan to jump out and do anything highly dilutive. I’ll give you that same answer at $2 plus a share as I gave you at $1 a share. We have highly aligned interests here so we believe it’s going to be financing but there are tradeoffs between different structures there and it might not be a single facility.

Richard Todaro – Kennedy Capital Management

Could you just talk about how when I’m looking at the guidance you’re thinking mix will play out? Maybe just in the fourth quarter when you’re talking in that range, what percentage of that might be satellite? How do I think about it?

Richard B. Gold

I think you should think about it that the vast majority of the increase will be on the satellite side. We believe that the wireless business has the potential to grow on a sequential quarter basis within that period but our visibility there is not nearly as clear as it is on the satellite side.

Operator

Management I show no further questions at this time.

Richard Vitelle

Thanks again for joining us today. We look forward to speaking to you again next quarter.

Operator

Ladies and gentlemen this concludes the CalAmp fiscal 2010 second quarter conference call. Once again we’d like to thank you for your participation and you may now disconnect.

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Source: CalAmp Corp. F2Q10 (Qtr End 08/31/09) Earnings Call Transcript
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