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Executives

Rick Gold - President & Chief Executive Officer

Rick Vitelle - Chief Financial Officer

Lasse Glassen - Financial Relations Board

Analysts

Mike Crawford - B. Riley & Co.

Marc Robins - Catalyst Financial Resources

Richard Todaro - Kennedy Capital Management

John Nelson - State of Wisconsin Investment Board

CalAmp Corp. (CAMP) F3Q10 Earnings Call January 7, 2010 4:30 PM ET

Operator

Ladies and gentlemen thank you for standing by. Welcome to the CalAmp’s fiscal 2010 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)

I will now like to turn the conference over to Lasse Glassen with FRB. Please go ahead sir.

Lasse Glassen

Thank you, good afternoon everybody. Welcome to CalAmp’s fiscal 2010 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, 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 and other risks or uncertainties that are described in the company’s Annual Report on Form 10-K 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. Rick.

Rick Gold

Thanks Glassen. Good afternoon and thank you for joining us today to discuss CalAmp’s fiscal 2010 third quarter results. I will begin with comments on the financial and operational highlights from this past quarter and I’ll then provide an update on several of our key business initiatives.

Rick Vitelle will next 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 fourth quarter of fiscal 2010 along with some concluding remarks. This will be followed by a question-and-answer session.

During the third quarter we generated strong top line growth with a 28% sequential revenue increase. This was driven by a sharp ramp of our satellite products business, which delivered significant revenue growth and generated operating profitability.

While revenues from our wireless datacom business were flat on a sequential quarter basis, I believe recent new order bookings and an increase in backlog have laid the foundation for a rebound in this business over the next several quarters. Looking at the bottom line results of operations included a GAAP net loss of $1.3 million or $0.05 per diluted share.

Excluding the impact of changes in the deferred income tax asset valuation allowance, amortization of intangible assets and stock based compensation expenses; our adjusted basis for non-GAAP net income was $0.2 million or $0.01 per diluted share. I refer you to our third quarter earnings press release issued earlier today for a detail reconciliation of the GAAP basis net loss to the adjusted basis or non-GAAP net income.

Moving on to our cash flow statement and balance sheet, this was the fifth quarter in a row in which we generated positive cash flow from operations. Net cash from operations total $0.8 million in the third quarter bring the fiscal year-to-date total to $4.2 million. Also of note is the fact that during the third quarter the company paid in full the outstanding balance of the note payable to a direct broadcast satellite or DBS customer.

I am also pleased with our completion of the recently announced refinancing of our bank debt that occurred after the end of the third quarter. Obtaining the new credit facility with Square 1 Bank was an important milestone as it enhances our financial flexibility and eliminates the uncertainty associated with the maturity of our previous bank loan.

I will next provide updates for our satellite and wireless datacom businesses. Demand for our satellite products grew sharply in the quarter and we made good progress toward reestablishing our leadership position in this market. During the third quarter satellite product revenues increased to $16.8 million up 69% on a sequential basis.

In addition to the strong revenue growth, the satellite business also achieved operating profitability during the third quarter for the first time in nearly three years. While the financial performance of our satellite business improved significantly we are continuing to work through product issues typical with this growth.

Due to the rapid ramp in volume we have experience some operational inefficiency mostly related to material shortages within our supply chain. This is led to higher cost expedite materials and for payroll overtime premium. We continue to work closely with key suppliers and an effort to mitigate these component shortages, but we expect these issues to also impact margins in the fourth quarter as we continue to ramp the volume of our DBS products.

We group our DBS products into three categories based on ASP or average selling price ranges; low ASPs which are $25 or less; medium ASPs which are between $25 and $45; and high ASPs which are $45 or more. During the fiscal 2010 third quarter, low, medium and high ASP products represented 17%, 36% and 47% respectively of our satellite revenue. This compares to low, medium and high ASP products that accounted for 3%, 58% and 39% respectively of DBS sales in the third quarter of last year.

The year-over-year increase in the proportion of revenue generated by sales of low ASP products is attributable to sales of an older generation product in the latest quarter that is deployed by the service provider outside the U.S., while the year-over-year increase in the proportionate revenue generated by sales of high ASP units was driven by sales of the latest generation product used for high-definition video programming.

We also continue to shift significant quantities of refurbish satellite products to a key customer that although not generating revenue increase our market penetration and decrease our remaining product rework commitments to this customer. Today, we have reworked and shift back approximately 80% of the two principal products returned to us for refurbishment under our product R&D program. Based on our current projections, we expect to substantially complete reworking these returned products during the first calendar quarter of 2010.

The underlying fundamentals of our satellite products business continued to improve. The DBS business, despite being highly competitive has high barriers to entry and is characterized by ever increasing product sophistication driven by the two domestic service providers. This approximately $500 million total addressable market is also characterized by demand volatility due to seasonality, product introduction in mixed shifts, customer marketing campaigns in inventory management.

To effectively service our DBS customers, we leverage our highly specialized engineering resources for new product developments and ongoing cost reduction activities and supplement are flexible and scalable supply chain with discipline working capital management to react to their rapid changes in customer demand. We have successfully reestablished our strong historic relationship with one of our DBS customers and have recaptured a significant market share for our existing products.

In addition, we’ve been working closely with our other DBS customer with a focus on next generation products and hope to win a meaningful share of this customer’s business over the course of fiscal 2011. In total, we are currently developing four next generation products: two for each of our DBS customers that will increase our served market and improve our gross margins. We expect to shift qualification units for the first of these new products this quarter, with production ramps beginning over the course of the first half of fiscal 2011 for the various products.

Now lets move on to an update of our wireless datacom business which provides communications systems products and services for applications in the mobile resource management or MRM, public safety, utility and industrial monitoring and controls markets. Wireless datacom business generated revenues of $13.9 million in the quarter which is essentially flat on a sequential quarter basis.

Over the past year our MRM business has been trending upwards or public safety in OEM business have been declining and our industrial monitoring and controls business has been holding study. Our MRM business is being driven by new product introductions, new customer acquisitions and international growth, while our public safety and OEM businesses are heavily dependent on spending in the public safety sector were state and local government capital budgets have been tight.

In our industrial monitoring and controls business the utility segment has been quite active, while other infrastructure projects seem to be slowly gaining momentum. While we have seen our overall wireless datacom business stabilize in fiscal 2010, recent new order bookings and an increase in backlog we made believe that this business is now poised to recover over the next several quarters.

We continue to broad in our customer base and strengthen relationships that existing key accounts. In our MRM business we recently receive an initial order from a Fortune 50 customer for an asset tracking application that pinpoints the location of trailer containers within their distribution network.

We also received significant order from directed electronics, which markets vehicle security and remote start systems under brands including viper, Clifford and python. CalAmp is now providing the wireless hardware and services for directed electronics, new smart start family of apple iPhone based remote car start products that was launch through best buy in October and was just awarded the prestige’s best of innovations honor at the 2010 consumer electronic show.

We are pleased with the traction our wireless solutions are gaining in the utility sector for smart grid infrastructure applications and large utility companies. We have mention before that due to the length of proposal cycles these opportunities are considered to be longer term in nature. That said we have recently been selected for two smart grid related pilot programs and believe that our portfolio of wireless communication infrastructure solutions as well positioned to serve the needs of this market.

Utility sector is an important strategic growth segment for CalAmp and were devoting significant resources to developing business in this segment and in our wireless OEM and public safety businesses, higher backlog levels entering the fourth quarter give me optimism that we are finally beginning to build some momentum albeit off the depressed base.

In summary, I believe our wireless datacom business is headed in the right direction. I’m confident we’re taking the right actions to position its business for long term profitable growth. The critical maths we’ve developed along with the breath and strength of our technology platforms, gives us an advantages that most other competitors 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 third quarter financial details.

Rick Vitelle

Thank you, Rick. I will provide a summary of our gross profit performance, working capital management and cash flow results for the fiscal 2010 third quarter. Consolidated gross profit for the third quarter was $5.19 million compared to $7.6 million for the same period last year.

The consolidated gross margin in the latest quarter was, 19.2% compared to 29.6% in the third 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 downturn reduced tax revenues to city and county governments leading to cutbacks in public sector capital and tight credit market conditions cost capital spending cutbacks in private sector.

Product mix significantly affects consolidated gross margins, because wireless datacom products carry higher gross margins than revenues from our satellite products. During the most recent quarter, satellite products accounted for 55% of consolidated revenues and wireless datacom products represent 45%. This compares to the same quarter last year in which 29% of revenues were from satellite products and 71% were from wireless datacom products.

Our consolidated gross margin percentage is expected to continue to fluctuate in the future depending on the overall mix of revenues from satellite in wireless datacom products in the given period. Now taking a closer look at our gross profit performance by reporting segment, wireless datacom gross profit was $4.3 million in the latest quarter, or 30.6% of wireless datacom revenue. This compares to gross profit of $7.4 million or 40% 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 cost on the lower revenue level as well as a shift in mix from the higher margin public safety products to lower margin MRM products. We expect gross margins decline to datacom business as market conditions improve and revenue rebound.

Gross profit for our satellite products was $1.6 million or 9.8% of satellite product revenues in the latest quarter compared to gross profit of $253,000 or 3.4% of satellite product revenues in the third quarter of last year. While our gross profit and gross margin for satellite products increased significantly on a year-over-year basis. They remained lower than historical levels.

We will see significant ramp in unit volumes in the third quarter, we incurred some higher than normal cost related to worker overtime and we also experienced some start stock production inefficiencies due to material storages that dampen third quarter gross margins. We expect this condition to persist for us most or all of the fourth quarter. However, as manufacturing efficiencies improve, gross margins for our satellite products are expected to improve.

We then expect further improvements in gross margins to the mid to high teens, once we are shipping our next generation satellite products in volume over the course of the next fiscal year. During the third quarter, we’ve recognized an income tax benefit of $1.4 million as a result of the favorable resolution of an uncertain tax position that have been previously reserve for pursuant to FASB Interpretation No. 48.

Now, moving onto the balance sheet, our total inventory at the end of the third quarter was $11.6 million representing annualized inventory turns of approximately 8.5 times. This compares to total inventory of $11.7 million at the end of the immediately preceding quarter with represented annualized inventory turns of approximately 7 times. This sequential improvement in turns is attributable to our ability to generate higher sales in the third quarter without increasing our inventory levels.

The accounts receivable balance of $14.5 million at the end of the third quarter represented a 43 day average collection period compared to receivables of $12.2 million and 47 days at the end of the immediately preceding quarter. At the end of the third quarter, cash and cash equivalents totaled $4.5 million. That cash provided by operating activity with approximately $800,000 in the third quarter and $4.2 million for the first nine months of fiscal 2010.

Total debt at the end of the third quarter amounted to $14 million comprised of bank debt with the bank of Montreal and two other banks. During the third quarter we paid in full the remaining balance of a non-interest bearing subordinated note payable to a key DBS customer.

Subsequent to the end of the third quarter in December 2009 we announced that the company had paid in full the $14 million outstanding balance of the bank debt which had a maturity date of December 31, 2009. The funds for this payoff will provide by draw down of $7.8 million under a new revolving credit facility with Square 1 Bank of Durham, North Carolina.

The Square 1 Bank revolvers have a two year term and provides for borrowings up to the lesser of $12 million or 85% of CalAmp’s eligible account receivable. Outstanding borrowings bear interest at Square 1 prime rate plus 2% subject to a minimum effective interest rate of 6% per annum or $20,000 per month whichever is greater, because of the new bank credit facility structured such the cash collections on accounts receivable or apply to reduce the revolver balance.

This will benefit net interest expense during months that the average outstanding balance under the revolver is more than $4 million. In addition the company raised $6.2 million of junior capital from a group of investors comprised of $1.9 million in subordinated debt and $4.3 million from the sale of approximately 1.9 million shares of common stock. The subordinated debts bears interest at 12% per annum and have a three year term.

The company also issued a total of 192,500 common stock purchase warrants to the subordinated debt investors had an exercise crisis of $4.02 per share which is a 20% premium to the average closing price of the company’s common stock for the 20 consecutive trading days prior to the closing of the refinancing.

The refinancing agreements permit a second round subordinated debt issuance of up to $3.1 million on the same terms and conditions as the first subordinated debt around in December. You will be working to fill out this second trances this month to provide additional flexibility and funding our working capital need as we move forward to execute on our plant to achieve profitable growth in our certain markets.

Now with that I will turn the call back over to Rick Gold to our guidance and some final comments.

Rick Gold

Thank you, Rick. Now let’s turn to our financial guidance. Looking ahead to the fourth quarter, we expect to see fiscal fourth quarter consolidated revenues increase on both a sequential quarter and year-over-year basis and being the range of $32 million to $36 million with growth expected in both our satellite products and wireless datacom businesses.

We expect a GAAP basis net loss in the range of $0.01 to $0.05 per diluted share. The adjusted basis or non-GAAP results of operations for the fourth quarter, which excludes changes in the valuation allowance for U.S. 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 $0.02 net loss to a $0.02 income per diluted share.

We expect that growth in our satellite business over the next year will be driven by the launch of several new products that are currently in development. We also expect that our wireless datacom business, which is dependent to a certain degree on spending by governmental entities in the public safety sector, will improve as general economic conditions rebound.

Looking further ahead, we believe that we now have the essential elements in place to grow CalAmp’s revenues back to an annual run rate exceeding $200 million over the next 18 to 24 months, balanced between our satellite and wireless datacom businesses. It bears noting that given the inherent lumpy nature of demand in both of our business segments. This expected growth will likely not occur in a smooth and linear pattern.

In concluding our prepared remarks, I’d like to recap some key points drawn from our recent results and latest developments. First, we successfully completed the refinancing of our maturing bank debt. This refinancing is an important milestone for CalAmp as it enhances our financial flexibility and elements the uncertainty associated with the maturity of the previous bank debt.

Second, we continue to generate operating cash flow with the short focus on working capital management. Third, we continue to grow our top line revenue even in this challenging economic environment. We’ve returned our satellite products business to operating profitability during the quarter based on a significant ramp in product volumes. As we launch our next generation DBS products in fiscal 2011, we expect to gain additional share in this market.

Fourth, our wireless datacom business has stabilized and it’s beginning to show signs those recoveries underway. I’m encouraged by recent new orders and higher backlog levels along with an expanding pipeline of new opportunities and I expect our wireless datacom business will be back on a growth trajectory starting with this current fourth quarter.

Finally, despite the challenging economic conditions over the past year, we’ve continued to invest significantly in R&D to bring differentiated and innovative technology offerings to the market. Our R&D spending is expected to exceed $11 million in the current fiscal year, representing approximately 10% of our revenues. In summary, I believe we’re continuing to make good progress towards our goal of returning CalAmp to sustainable profitability.

That concludes our prepared remarks. Thank you for you attention and at this time, I’d like to open the call up to questions, operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Crawford - B. Riley & Co.

Mike Crawford - B. Riley & Co.

A few quick questions first can you give anymore information on the two Smart Grid power programs? Do you have an opportunity to participate in?

Rick Gold

We’re not liberty to talk too much about those I will just give you just a little bit of color. Our focus is on the infrastructure component of the communications network. These are domestic investor owned utility opportunities it’s both to enable some new initiatives that the utility is put in place; the kinds of things that are traditionally being called Smart Grid today as well as to upgrade the communication’s infrastructure that’s already in the distribution and transmission network.

The tricky thing with any of these projects is to predict the timeframe, but our expectation is that this pilot program will last through the first half and into the second half of the fiscal year. In both cases, and then later this fiscal year will be a determination about full deployment.

Mike Crawford - B. Riley & Co.

A couple of things regarding the DBS segment so one, you’ve had a nice up tick in business any of that second production line in place with some material shortages, so you’ve got high turns, but what level of inventory do you think you need to cover kind of current and expected business level on that segment?

Rick Gold

I actually think we still have some room to squeeze efficiencies in both sides of our business. That the issue that we’ve had, in our satellite business we work as you know through sub contract manufactures at do most of the subassembly manufacturing and most of the issues that we had with components were component that they actually buy from component manufactures that were on allocation or that had some lead time challenges.

When we don’t actually take most of those subassemblies on to our books until we receive that the complete subassembly and so one of the issues we have right now is that we actually have some inefficiencies from inventory standpoint because in few of those cases we had to bring in certain assemblies, minus certain components add those here and so we were actually sitting on more working process right now then we would like to in an ideal smooth production environments.

So I think our inventory mix is going to change as that business evolves but we’re also I think everyone on the call knows we’re still working through both in terms of the refurbish product as well as even on the that the new product are still some clean up work doing with inventory that had been in the pipeline for quite sometimes since the music start three years ago.

So, we’re still got another quarter due to work through some of that which I think will improve our efficiencies, I am hopeful that by Q1 some of these issues with shortages and overtime will largely behind us, but Rick and I mention we expect that the persist through Q4.

Mike Crawford - B. Riley & Co.

Final question if you get this increased share at the second major DBS customer with the new HD products, I guess its two parts. a) What percent share of that companies business do you think you could that reach and what you then also need to move closer to 24 hour assembly in Oxnard? Thanks.

Rick Gold

Let me answer those in reverse order. I don’t see us going beyond two shifts. I don’t think we need to that and as a matter of fact some it what were doing here we’re doing just because we had to ramp very quickly and it was quicker for us to do it here, but actually some of that production over the next few quarters is going to be move back offshore and that’s one other things that will gradually help our margins over the next few quarters.

We’re actually doing more of that total function manufacturing operations and functions here today, then we would like to in a steady state or more steady state kind of environment. As to the first question, I think it’s difficult to put a hard number around that Mike, but we wouldn’t be doing and so we didn’t think we can get to a double digit market share bright. The nature of those products and that we’ve been the No. 2 supplier, we’ve been the No. 3 supplier, we’ve been the No. 4 supplier and I think our expectations at this point are measured.

One of the products we’re doing in that particular version have some features that we hope to be the first to market with that particular version and hopefully we’ll be able to leverage that to accelerate the ramp there. I’d say it’s too early to tell, where the market share might shake out.

Operator

Your next question comes from Marc Robins - Catalyst Financial Resources.

Marc Robins - Catalyst Financial Resources

Just a couple of little cleanup items, when you were charring about the amount of warranty repair work that you did in a quarter. What was that number again?

Rick Gold

You mean the equivalent revenue?

Marc Robins - Catalyst Financial Resources

Yes.

Rick Gold

I don’t think we actually said that. It was about $4 million.

Marc Robins - Catalyst Financial Resources

So it was the number that you folks guessed back in the prior quarter?

Rick Gold

Yes.

Marc Robins - Catalyst Financial Resources

Then one thing that you said, at this time around versus the last conference call, you said that essentially the warranty repair, I’m going to call it revenue with approach around it. It would go essentially with go away or to exist end of the first calendar quarter. I’m going to put it use my terms and it sounds to me like maybe a little of that is flopping into March. Is that a correct characterization and what’s going on?

Rick Gold

That is a highly correct characterization and what’s going on.

Marc Robins - Catalyst Financial Resources

So essentially, there’s a little bit left over from a fourth fiscal quarter end of the first calendar quarter? Any comments about that or just trying to catch up with what you’re have…?

Rick Gold

We’re hamsters on a treadmill right now.

Marc Robins - Catalyst Financial Resources

Let’s chat a little bit about R&D. Do you want to say anything more characterize, anything more about what you’re doing in your DBS? What you doing in R&D there? You want to describe it a little more?

Rick Gold

In the DBS business, that the nature of the R&D work we do is fundamentally different than in the wireless datacom business. In the wireless datacom business, we’re building new platform products based on the aggregation of a whole lot of inputs from a whole lot of different customers and we’re making some marketing, but we’re making marketing determinations on where we think the market is going and what the rate products will be intersect the needs of that market when the products come to market.

That’s not the way works in the DBS business, we have two customers they have very specific requirements. We work handing glove with them to respond to their requirements and to flush them out depending on whether we’re getting onboard earlier, or we’re coming in after the fact, but it’s very specific product developments, where we know there’s a market for that specific product with that specific customer.

It is a matter of fact, the customer doesn’t even, they have to make a significant investment of engineering and quality resources to support us during that process and to get us qualifies. So, it’s not just us making a decision to work on it, it’s them making a decision to work with us on it and invite us into that process.

So, we are working on four products, I can’t go into any of the specifics about any of those products to other than to just repeat what I said last time, which is that we expect that three of those four will open up potential new incremental, they will expand our served market and open up additional revenue. Potential one of those four will effectively cannibalize and ultimately replace the product that we currently have. Albeit with it something that is hopefully higher margin because of the cost reductions we’ve incorporated.

Marc Robins - Catalyst Financial Resources

Predominantly, though HDTV?

Rick Gold

Of the four new products we’re doing, every single one them is targeted strictly at full featured HD next generation applications, that’s correct.

Marc Robins - Catalyst Financial Resources

Let’s talk a little bit about the refinancing situation, and Rick, I’m not trying to get into the Monday quarterback situation. It sounds to me like it was a little bit, as an outsider, it sounds to me like it was a little bit dramatic. I know you were in the penalty box, because you have weren’t making money and that always means two or three black marks against whatever you’re trying to negotiate. Do you want to say anything about how arduous the negotiation were and tell us a little bit about what was going on?

Rick Vitelle

Sure I would be glad to give you some color on that, so I mentioned on the last call they was quite possible that the structure, the refinancing may ultimately have multiple elements to it. When we talk to a number of banks during this process and we look to the number of other potential sources and we spend a lot of time about it and we are very happy with the ultimate outcome. It became pretty clear earlier on that to get a kind of one size its all single bullet or silver bullet solution to this was not going to optimize the result for the company or it shareholders…

Marc Robins - Catalyst Financial Resources

Even with bank of Montreal who had gone through the valley of death with you.

Rick Vitelle

Well, to go back the issue is that if you try to get one instrument that captures that the total amount of the refinancing, you don’t have the flexibility and you don’t really optimize the cost of capital and let me just step back to your comment about bank Montreal, remember that the security we have there for that financing we had there was a team loan and we were making was a cash flow base term loan with substantial quarterly principle payments and it really wasn’t the right structure for business that entering a growth cycle.

So that in the reality is that the profile with CalAmp today was in the fit for that for those institutions and so the right thing that’s not to say that we didn’t explore possibilities for restructuring that facility, but it became clear that the they were much better options available and we talk to number of banks they were larger financing available they were smaller financing we were ultimately decided to work with Square 1 for several reasons.

First of all it structure is revolver it offers is maximum flexibility it’s a very clean structure it doesn’t have a lot of fine print and secure fees that when you factor it all in make it lot worse than the headline number its very clean and we have the ability overtime and they understand our business.

I think it’s going to be a very, very good partnership. With that said, with that good of a banking facility we weren’t going to be able to get something with those attractive returns that would fill the entire amount that we were looking to raise. So that let us to explore multiple trenches and then of course when you get into multiple layers of the structure, there’s additional complexity, they gets introduce.

We tried to keep it clean and again find that mix where we get a balance sheet coming out of this. That gives us the strength and the flexibility that we need to go forward, but at a minimum across the capital and dilution to the existing shareholder. Those were all the things we are trying to juggle and we went through a number of different scenarios through that process, but at the end of the day this was very clearly something that look like to best outcome for the company.

Marc Robins - Catalyst Financial Resources

It just as an outsider, I’m not getting information. It just looks like as good as you appear from a stock analyst standpoint. You’d entered into the land of banking hell.

Rick Gold

Let me just clarify that. So again if you look at the asset based loan, you look at the terms, you look at the structure, you look at mechanics, that’s a very, very good facility for us. If you look at the equity, I could see and some one could say, while that’s pricey or pricey year, but again it really comes back.

If you step back and look at it from a total package standpoint and we tried to do all of this and we had proposals by the way to do all of this as a more traditional higher yield that financing and that would have ended up having a much higher cost.

So having that combination really, we believe it gives us the structure that we need and a cost that’s going to be reasonable going forward and then we’ll take it. We’ll watch that and we’ll watch the markets. We do have the option after the first year to prepay the sub debt, that something will look at based on our capital needs, based on alternative sources when the time comes.

Marc Robins - Catalyst Financial Resources

Well, nothing set in stone until it changes, you guys are doing such a great job rebounding from, where you were for crying loud.

Rick Gold

The other point I will say there, remember that banks look at the companies different than analyst and then really they are interested in the upside leverage, but only to the extended of that means we are going to need borrow more money. So, then it really becomes to what are the assets that can be used as security their and that, so that’s really what led us to the multiple trenches.

Operator

Your next question comes from Richard Todaro - Kennedy Capital Management

Richard Todaro - Kennedy Capital Management

Let me ask more question on the warranty work. In your Q4 expectations how much warranty work do you think you going to do?

Rick Vitelle

This is an equivalent dollar, we are talking about.

Rick Gold

Yes, it will be about, for these are really rough numbers at this point, but it something likes $3 million in Q4, with probably sloping already in Q1.

Richard Todaro - Kennedy Capital Management

Can you just help us understand how the million moves if you are shipping kind of equivalent products are you just doing that are you discussion are is there reason?

Rick Gold

Its really question that we’ve got finite capacity and between us and the customer. We work out what the priorities are and so we had some priorities on some other things that they were looking to accelerate and part of the, we push on a balloon here and it kind of talked out on the other side then we had to have some of that slop over to Q1.

Richard Todaro - Kennedy Capital Management

Just to be clear so let say that we go and we’re looking a clean quarter where there is a million dollars, but this additional $3 million comes in revenues that’s you are not really getting any gross margin on today. You should get full gross margin on these new $3 million in revenues that’s you are shipping, am I making myself clear on that?

Rick Gold

All other things being equal that’s correct.

Richard Todaro - Kennedy Capital Management

So, Q1 we should see an additional somewhat like $3 million bump just from warranty work loan right?

Rick Gold

All other things being equal…

Rick Vitelle

Well is an opportunity there for us to do that again we have to as I every time I talk about this I just have the reinforced that means that there is demand for that product and we need to go and win that business to get that and that demand, it goes up, it goes down, it shifts from one product to another all those things are in play as part of that, but all other things being equal, then you’re absolutely correct.

I’ve mentioned it a couple times, there’s a second order effect here, we’re just having all that rework product going through the factory is: it’s confusing, it’s inefficient and I will be so happy when we’re done with that.

Richard Todaro - Kennedy Capital Management

You talked about some overtime and some part shortages, instead that we’re affecting gross margins, when we’re starting to look at Q1 and we’re starting to look at a more clear quarter for this business. Do you think you can work out most of those part shortages and the issues and start to see some gross margin improvement in the Q1, and if so what are nicely done and kind of…?

Rick Gold

Look, we’re not going to grow 69% sequentially very often and that was really to think and even within the quarter it was very back loaded as a result of this. Q4 is going to be smoother and our December revenues were up substantially from our September revenues just because this quarter is shaping up to be not the hockey stick the last quarter was. So I think that, we will see some gradual improvement there. We had just to put some more specific on.

We had almost $1 a share just of overtime premium expenses in the last quarter just a premium component of the overtime. It was meaningful, you will have some of that in Q4, and I would expect that to be largely worked out of the system by Q1. That said, there’s a limit to how forward we’re going to go with margins until we get the new products owing in and that’s going too really over the course of the year that impact comes. So to get up to the high teens we need new products, we’re not going to do that with that we’ve got.

Richard Todaro - Kennedy Capital Management

I was surprised you guys want to help and called out that $200 million in revenue from the rate that throughout today. Can you us a view today how the $200 million would break out between satellite and wireless, if…?

Rick Gold

We use the word balance in the press release I believe was the word and that doesn’t that certainly mean 50/50, but it’s certainly within 60/40 and I couldn’t even really tell you which way. I think in the near term, the satellite business last quarter obviously had a substantial increase and past the wireless business. It’s going to continue to be higher revenue than the wireless business in Q4. We’ve expect both of them to grow, but I expect that satellite to continue to be better.

Both of those business is can bounce around and we do analysis or our analyst do analysis, but the reality is that some of these other factors will coming to play overtime that we have very little control over in terms were the lumps are, but that said, I think over the next year or so, I would expect the satellite business to be ahead of the wireless business, but then in expect about a year from now, I will be disappointed if the wireless business isn’t accelerating with some of these new bigger project opportunities that were incubating and chasing today.

When they start to contribute that the magnitude of some of those is very significant potentially. So my guess is, the two years from now our wireless revenues will have surpassed our satellite revenues, but I think the reason that we highlighted the $200 million is our high watermark historically was about $220 million and the vast majority of that was satellite. We expect to surpass that prior high watermark, but I think by the time we get there. It’s going to be a fairly balanced mix, but longer term higher growth opportunities ultimately on the wireless side.

Richard Todaro - Kennedy Capital Management

Then my final question, can you guys talk about the size of kind of the smart grid projects that are out there that you’re bidding on. What kind of potential was there…?

Rick Gold

Some of the projects that we are chasing right now have the potential to be far and away the largest project we’ve ever done as a company. There are multiple projects we’re chasing that are eight figure projects. Now, I have to again just remind everybody, these are competitive and very frequently what my expectation is. They’re going to come out and be solicited as a very large totally full system integrated mammoth project, but then the implementation is going to come in stages.

Not all stages may ultimately be funded, but that said the scope of these projects even our piece of them, is significant and some of these projects are that the total project is in excess of a billion dollars and so our piece while its, the number of pretty significant to us we are doing a piece of piece.

So these going to be significant, but what’s attractive about them to CalAmp is that most of these require of breadth of product capabilities and we some of the once we’re looking at now require spread spectrum, unlicensed plus narrow band, high throughput license plus cellular, plus some of them are mobile have some of them are fixed as well as mobile and the ability to seamlessly interoperate and there are a lot of companies out there with kind of magic bullet solution targeted at one piece of that puzzle, but CalAmp is one of very few companies that can come in and actually tackle a broader range…

Richard Todaro - Kennedy Capital Management

What soon as we could hear about some of these projects that you want them or you did…?

Rick Gold

I think its realistically the second half of this calendar year, because typically the pilots, most of these things start with the pilot, most the pilots are not publicized. We will talk about them as soon as we are allowed to talk about them.

Operator

Your final question comes from John Nelson - State of Wisconsin Investment Board.

John Nelson - State of Wisconsin Investment Board

My question is have there been any significant changes in the competitive landscape for either satellite or wireless datacom products in the last six to 12 months?

Rick Gold

Satellite the short answer is no, the competitive space there is essentially what it was actually its kind of exactly what it was three, four years ago there been one or two companies have left the space there are no new entrance and the positioning has not changed dramatically within that. So that’s actually pretty simple question to answer.

In the wireless base, it’s very hoped; there are a lot of things happening there. Frankly, whatever we’re doing and have been doing over the last couple of years is try to really make sure we understand where the opportunities for CalAmp and I’ll just use public safety as an example, where we one of the strongest players on the data side of that business.

We’ve done some things overtime on the voice side, where we were one of many people and really didn’t have a highly differentiated offering and we’ve decided that they rather than try to build a strong footprint on the voice side. We were much better off partnering with the people, who have voice offerings, but don’t have data offerings and go to market in that way, so that’s just an example. So we’re not directly affected by some of the things that were happening on that side, but we’re indirectly affected.

So the partnering and teaming with people who are either prime contractors are doing complimentary, larger companies that are doing complimentary products and taking the lead or other company they are size or even smaller, they can think and bring things to market, that’s going to be a big piece of what we do going forward especially in the wireless networks side of things.

So there’s a light in the mobile resource management, there’s a lot, the product lifecycles there are roughly a year and so, we’ve seen a lot of smaller competitors come and go there. I expect that to be a fairly dynamic competitive situation for the next couple of years in that side.

John Nelson - State of Wisconsin Investment Board

Can you identify who you’ve partnered with on the voice side?

Rick Gold

No, although there are a couple of albeit, if you look at the list of key players on the voice side, number is Motorola, who is also number one on the data side. So they’re not a logical partner candidate. Although there are a couple of smaller things where we have partnered with them, but those are really more niche opportunities, but then if you look at kind of the two, three and four players, they do not have data offerings. So we are working at the proposal level really with everybody in the top, I’m looking to Garo for some headline, everybody in the top five with the exception of Motorola.

Operator

Thank you. At this time, I’m showing no additional questions in my queue. At this time, I’d like to turn the conference back over to management for any closing remarks.

Rick Gold

Thanks again for joining us today. We look forward to speaking with you next quarter. Happy New Year.

Operator

Ladies and gentlemen, this does concludes the CalAmp fiscal 2010 third quarter conference call. This conference will be available to replay. If you’d like to listen to the replay, you may dial at 303-590-3030 or 1-800-406-7325 with the access code of 4197971#. We thank you for your participation. At this time, you may now disconnect.

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Source: CalAmp Corp. F3Q10 (Qtr End 11/30/09) Earnings Call Transcript
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