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Executives

Lasse Glassen - Financial Relations Board

Rick Gold - CEO

Rick Vitelle - CFO

Analysts

Mike Crawford - B. Riley & Company

CalAmp Corp. (CAMP) F4Q10 (Qtr End 05/31/10) Earnings Call May 6, 2010 4:30 AM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CalAmp fiscal 2010 fourth quarter conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today Thursday May 06, 2010.

I would now like to turn the conference over to Lasse Glassen with the Financial Relations Board. Please go ahead.

Lasse Glassen

Thank you and good afternoon, everybody. Welcome to CalAmp's fiscal 2010 fourth quarter earnings call. With us today are CalAmp’s Chief Executive Officer, 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 variation 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 on 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 or may continue to adversely affect the company’s business. And other risks and uncertainties that are described in the company’s Annual Report on Form 10-K for fiscal 2010 as filed today with the Securities and Exchange Commission.

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

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

Rick Gold

Thank you, Lasse. Good afternoon and thank you for joining us today to discuss CalAmp’s fiscal 2010 and fourth quarter and full year results. I will begin with comments on our financial and operational highlights and I will then provide an update on several of our key business activities.

Rick Vitelle will next discuss additional details about our financial results, balance sheet, working capital management and cash flow. And I will wrap up with our business outlook and guidance along with some concluding remarks. This will be followed by question-and-answer session.

We had a strong finish to fiscal 2010 with consolidated fourth quarter revenue of $34.5 million an increase of 62% from the prior year and 12% sequentially. During the fourth quarter production volumes of our satellite products continued to ramp resulting in the consecutive quarter of operating profitability in this business segment. In addition our wireless datacom business which has been impacted by the global economic down turn stabilized over the course of the fiscal year and generated double digit percentage growth in revenue in the fourth quarter.

Looking at the bottom line results of operations included a GAAP net loss of $1.3 or $0.5 per diluted share. Excluding the impact of amortization of intangible assets and stock based compensation expense our adjusted basis for non-GAAP net loss with $0.5 million or $0.2 per diluted share. I will refer to our fourth quarter earnings press release issued earlier today for detail reconciliation of the GAAP basis pre-tax laws to the adjusted basis or non-GAAP net income or loss.

Looking at our cash flow and balance sheet in fiscal 2010 we generated cash flow from operations of $2.5 million and reduced our debt $21.1 million at the beginning of the year to $10.1 million at year end. During the fourth quarter we announced the re-financing of our maturing bank debt which was funded by new credit facility with Square 1 bank and by gross cash proceeds of $9.25 million from the private placement of common stock and subordinated debt.

Completing this re-financing was an important milestone as it enhanced our financial flexibility improved our liquidity possession and eliminated uncertainty associated with the maturity of our previous bank loan. I will next provide updates for satellite and wireless datacom businesses. During the fourth quarter satellite product revenues increased to $18.7 million up 11% sequentially and 130% on a year-over-year basis.

The satellite business also achieved operating profitability for the second quarter in a row. That said, gross margin percentages remained below historical levels due to lower revenue run rates, resulting in lower overhead absorptions, as well as supply chain inefficiencies associated with the rapid ramp in production volume in the second half of fiscal 2010.

We’ve now substantially completed the shipment of refurbished satellite products under our product warranty program for our key customer. We continue to work closely with our direct broadcast satellite or DBS customers on next generation products that we expect will increase our market share and improved our gross margins over the course of fiscal 2011.

In total, we are currently developing four next generation products, two for each of our DBS customers. For the product with the largest revenue potential we’re well into the product qualification process with that customer and expect shipments to begin in our second fiscal quarter.

We’re making good progress on the remaining products and expect two additional products to enter the customer qualification process within the coming weeks. Although the introduction of these important next generation products has not occurred as rapidly as we had anticipated last year I am encouraged by the continued progress of our development team.

Now let’s move onto an update of our wireless datacom business which provides communication systems, products and services for applications and the utility, public safety, industrial monitoring and controls and mobile resource management or MRM markets. After being significantly impacted by the economic downturn, our wireless datacom business stabilized in fiscal 2010 and we believe that our recovery is now underway.

During the fourth quarter, the wireless datacom business generated revenues of $15.8 million which was up 14% on a sequential quarter basis and 20% year-over-year. This improvement with across the Board with sequential revenue gains in each Wireless Datacom product area. We also made good progress on key new product and business initiatives. Our entire MRM product line was refreshed incorporating latest generation technologies and lower cost components.

We introduced two core wireless network products, the Viper-200, and the Phantom II which are optimized for smart grid infrastructure applications. And we leased 100 kilo hertz of nationwide spectrum to offering conjunction with our wireless networks products for licensed mission critical wireless infrastructure applications.

Demand for our MRM products is increasing as we support our expanding base of customers and continue to refresh our product lines and enter new vertical markets. We have successfully leveraged our leadership position and local fleet management and vehicle finance verticals to gain traction in promising, emerging applications including cargo tracking, vehicle insurance and personal security.

Fiscal 2011 has started with a strong MRM backlog and an expanding pipeline of opportunity. Our Aercept business continued on it’s growth path with particularly strong billings during the fourth quarter. The overall vehicle finance market conditions are improving and we are seeing the benefits of the shift in our sales channel strategy earlier in the year. In addition fourth quarter revenue has benefited from sales to directed electronics where we are providing the wireless hardware and services for their Viper remote car start product that is supported by the Apple iPhone.

Moving on to our Wireless Networks business, last months announcement of more than $15 million in new orders from three key projects has helped push our backlog to an all time high. Among these new orders is a contract for Wireless communications equipment for the real transportation sector, with delivery scheduled over the course of fiscal years 2011 and 2012.

In the public safety space, we were awarded a contract to expand the existing mobile data communications network for a Canadian provincial government agency. Applications include vehicle tracking, database query, secured intervehicle messaging and dispatch. Work on this multiyear contract is underway. And in the utility space we received an order from a large US utility company for smart grid pilot project. We are pleased with the attraction our wireless solutions are gaining in the utility sector for smart grid infrastructure applications.

This latest award is one of several smart grid related projects that we are currently working on and we believe that our portfolio of wireless communication infrastructure solutions is well positioned to serve the needs of this market. In summary I believe our wireless DataComp business is headed in the right direction and they were taking the right actions to position this business for long term profitable growth. The critical maps we developed along with breadth and strength of our technology platforms gives us an advantage that most other competitors in our markets can not offer.

Before turning it over to Rick Vitelle, I would like to mention a recent promotion with the CalAmp executive management team. As announced last month, our board of directors appointed Michael Burdiek as President in addition to his duties as the company’s Chief Operating Officer. Michael has assumed increasing levels of responsibility in recent years and this promotion is well deserved and reflects his current leadership role with CalAmp. With that I will now turn the call over to Rick Vitelle, our Chief Financial Officer for closer look at the fourth 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 fourth quarter. Consolidated gross profit for the fiscal 2010 fourth quarter was $7.0 million or 20.2% of revenues compared to gross profit of $13.6 million for the same period last year. Gross profit in the fiscal 2009 fourth quarter included a $9.0 million gain from the settlement of Litigation with Roger’s Corporation.

Excluding benefit of this litigation settlement the fiscal 2009 fourth quarter gross profit was $4.6 million or 21.5% of revenue. The increase in gross profit in the latest quarter excluding the fiscal 2009 litigation settlement was due primarily to a higher satellite and wireless datacom revenues. Our consolidated revenues in the latest quarter increased by 60% from the fourth quarter of the prior year yet the consolidated fourth quarter gross margin was about 1.3 points lower year-over-year. This is because the product mix was significantly different between these two periods.

In the fourth quarter of fiscal 2009, 62% of consolidated revenue from wireless datacom products which carry substantially higher gross margins in our satellite products which accounted for the remaining of 38% of revenues in that period. Slight comparison in the most recent quarter wireless datacom products represented 46% of consolidated revenue while satellite products accounted for 54%. 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 data com products in any given period.

Now taking a closer look at gross profit performance by reporting segment wireless data com gross profit was $5.1 million in the latest quarter or 32.5% of wireless data com revenue. This compares to gross profit of $4.2 million or 32.1% of revenue in the same period last year.

Wireless datacom revenue lower than historical levels due to the global economic downturn, gross margins continue to be impacted by the lower absorption of manufacturing overhead cost along with the shifting mix from the higher margin public safety products to lower margins MRM products.

We expect gross margins to climb to the high 30% range for our wireless datacom products as market conditions improve and revenues rebound. Gross profit for satellite products was $1.9 million or $9.9% of satellite product revenue in the latest quarter. This compares to gross profit for satellite products of $9.3 million in the same period last year which included the $9 million gain on the Roger’s settlement.

Excluding the benefit from Roger's legal settlements gross profit for satellite products was $349,000 or 4.3% of satellite products revenues in the first quarter of last year. While gross profit and gross margin for satellite products increased significantly on year-over-year basis excluding the effect of legal settlement, they remain lower than historical levels. We have accomplished these significant ramp in unit volumes that we had in the second half of fiscal 2010, we incurred some higher than normal cost related to worker overtime and we also experienced some start-stop product inefficiencies due to material shortages that dampened gross margins in both the third and fourth quarters.

However, we expect that our manufacturing efficiencies for satellite product will improve in fiscal 2011 and consequently we believe that our gross margins in the satellite products business will also improve. We expect further improvement in satellite margins to the mid-teens range once we are shipping our next generation products in volume later in fiscal 2011. During the fourth quarter of fiscal 2010 we did not recognized an income tax benefit despite our pretax loss of $1.3 million.

In accordance with the applicable tax accounting rules, the income tax benefit associated with the pretax loss generated in the fourth quarter and in fiscal 2010 as a whole was offset by an increase in the deferred tax asset valuation allowance. Once we return to GAAP basis profitability we expect to begin reversing the deferred tax asset valuation allowance which will have the effect of reducing recorded income tax expenses.

It should also be noted that the $1.4 million income tax benefit that we did report in an earlier quarter of fiscal 2010 was attributable to the resolution of an uncertain income tax position relating to a prior year and consequently this income tax benefit was not offset by an increase in the valuation allowance.

Now moving on to the balance sheet, our total inventory at the end of the fourth quarter was $10.6 million, representing annual inventory returns of approximately 10 times. This compares to total inventory of $11.6 million at the end of the immediately preceding quarter, which represented annualized inventory turns of approximately eight and a half times.

This sequential improvement in turns is attributable to inventory reductions primarily related to satellite products coupled with our ability to generate higher sales in the fourth quarter. The accounts receivable balance of $16.5 million at the end of the fourth quarter represents a 43-day average collection period, compared to receivables of $14.5 million at the end of the immediately preceding quarter.

Net cash provided by operating activities was $2.5 million for fiscal 2010. At the end of the fourth quarter cash and cash equivalents totaled $3.0 million and totaled that outstanding was $10.1 million. In addition to our cash and cash equivalents balance our main source of liquidity is our revolving credit balance with Square 1 Bank which provides for borrowers up to the lesser of $12 million or 85% of eligible accounts receivable.

Our total debt balance of $10.1 million at the end of fiscal 2010 is comprised of $5.9 million drawn under this revolving bank credit facility and subordinated debt with a carrying value of $4.2 million. The subordinated debt which was issued in the fiscal 2010 fourth quarter has a principal face amount of $5 million and is reduced by a debt discount of approximately $800,000 which represents the unamortized fair value of the warrants that were issued along with the subordinated notes.

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

Rick Gold

Thank you, Rick. Now let’s turn to our financial guidance. Looking ahead we expect fiscal 2011 consolidated full year revenues to increase in the range of 10% to 20% over fiscal 2010 due to growth in both our satellite and wireless DataComp businesses. Our satellite business is expected to benefit from the launch of the new products that should increase our served market and improve our gross profit margin.

And the recent up-tick in orders for wireless Datacom products along with an expanding pipeline of new opportunities have set the stage for growth that continue in fiscal 2011.

In addition we expect that our consolidated gross margin for 2011 as a whole will be in the range of 23% to 27% of revenue. And we expect fiscal 2011 total operating expenses will remain flat compared to fiscal 2010. Looking further ahead we believe that we can reach an annual revenue run rate greater than $200 million within the next two year more or less balanced between our satellite and wireless datacom businesses.

Our revenues can fluctuate significantly from one quarter to the next due to seasonality, product transitions, customers inventory management practices and the non-linearity of revenues associated with large development or system contracts. Due to a combination of these factors we expect the fiscal 2011 first quarter consolidated revenues although higher on a year-over-year basis will decrease on a sequential quarter basis and be in the range of $24 to $27 million with lower sales expected primarily in our satellite products business.

We expect a fiscal 2011 first quarter GAAP basis net loss in the range of $0.8 to $0.12 per diluted share. The adjusted basis non-GAAP operating results for the quarter which exclude intangibles amortization expense and stock base compensation expense and include an income tax benefit computed without giving effect to an increase in the differed income tax valuation allowance is expected to be in the range of $0.03 to $0.07 loss per diluted share.

In concluding our prepared remarks I will like to re-cap some key points drawn from our recent results and latest developments. First our liquidity position improved significantly over the course of fiscal 2010. We successfully completed the re-financing of our maturing bank debt in a challenging environment and reduced our total debt balance by more than half during the year.

Second we reestablished our competitive position with our satellite products and returned this business to operating profitability during the second half of fiscal 2010 with a significant ramp in production volumes. As we launch our next generation DBS products in fiscal 2011 we expect to further improve profitability and gain additional share in this market. And finally a recovery of our wireless datacom business is underway and we expect growth in fiscal 2011.

I am encouraged by recent new orders and higher backlog levels as we started the New Year. We are competitively positioned in several emerging markets for wireless applications and we have a healthy pipeline of new opportunities.

In summary, I believe we’re making good progress towards goal turning CalAmp to sustainable profitability. That concludes our prepared remarks, thank you for your attention and at this time I would like to open the call up to questions, operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operators Instructions) And our first question comes from the line of Mike Crawford with B. Riley & Company, please go ahead.

Mike Crawford - B. Riley & Company

So first okay you have a record backlog and did you give a backlog number?

Rick Gold

We don’t publish our backlog number, that’s something we track internally and it’s primarily on the wireless datacom site, typically in the satellite business, we get releases, we work from forecast and get releases very close in.

Mike Crawford - B. Riley & Company

Okay, you also talked about in expanded pipeline and new opportunities so is there anyway you can quantify that Rick?

Rick Gold

Well, I think to put it in perspective the backlog is in an all-time high, looking forward to next year, Mike, we expect the revenue to be slit fairly evenly between the wireless and the satellite obviously, there’s pluses and minuses. That we could see there but and again the trajectory to the $50 million balance between the two that we see by the back end of fiscal 2012, we believe is supported by those indicators and in particular the two, or the three contracts that we’d announced that I mentioned. Those the bulk of those revenues are going to be recognized over that two year period, relatively middle at the very fine front end, but as we get into the latter part of 2011 and then into the earlier part of 2012 we’ll start to see some contribution from those, and potentially from others that we have in the pipeline or even follow on’s from those.

Mike Crawford - B. Riley & Company

Okay, two more questions if you don’t mind. So one, on smart grids you said you have multiple projects, multiple opportunities. So what is the goal the market strategy there? Are you being pulled in, who pulls you in, how do you get those deals?

Rick Gold

So, there’s multiple ways there. The first is, and just to make sure everybody understands here, our focus is on backhaul solutions for smart grids. We are working at the core of those networks, not typically out at the edge, although we do help facilitate some of the communications as going to and from the edge.

So, we have in some cases been pulled in by the utilities themselves. We have a couple of projects going on now that are like that. And that’s typically what happens with some of these larger distribution automation projects where the utility has multiple contractors working on multiple phases of that.

That said there are some projects where there is a single prime contractor. The project we are executing right now in Thailand for instance we are a subcontractor on that one to a prime contractor that’s doing multiple pieces of that system including our backhaul piece.

And then finally and I think this is something we will see particularly as we get into 2012, we have some expanded partnerships on the smart metering side, providing some of the wireless connectivity solutions there. We have already talked about Elster publicly but that’s an area, where we think there is some opportunity from the meter manufacture themselves but that’s further out in time. So, long answer to a short question.

Mike Crawford - B. Riley & Company

Okay. Thanks and final question relates to DBS. So I believe you have been designing some products for DirecTV to whom you haven’t shipped in the past year but working on some kind of next generation HDTV capable type of receivers. So, have any of those projects been launched or its just basically one quarter push out?

Rick Gold

So the short answer is no. We are still before projects we talked about we have been working on for the better part of year now. Two of those are for each of the US service providers and we are working on all four of those right actively.

Operator

Ladies and gentlemen, (Operator Instructions) And our first question comes from the line of [George Pulice, Private Investor]. Please go ahead.

Unidentified Analyst

Yes, gentlemen I have a question concerning your press release, it says that you are going to grow your 2011 revenues by 10 to 20% but then within the same paragraph here giving some form of guidance of $200 million over the next two years which means that there is going to be quite the jump between 2011 and 2012. Can you give us a little bit more detail?

Rick Gold

Sure. So, the $200 million, it’s a $50 million per quarter run rate number that this was the same guidance we gave a quarter ago that by the second half of fiscal 2012 we expect that some time in that period between now and then we can be to that run rate. And its really, its on both sides of the business in the satellite side which is more volatile on a quarter to quarter basis but we believe we been at numbers higher than that in the past and we believe that with the launch of the new products that we just referred to that we will have the where with all and the market opportunity and the product portfolio to be in that kind of range and similarly on the wireless side, it’s equation of product portfolio and market access as well and on the MRM side and the wireless network side based design wins that we see on the MRM side as well as been proposal and backlog activity that we just alluded to on the wireless network side we believe the opportunity is there as well and I will also indicate that we have been at that level before on the wireless network side. Although albeit with there is somewhat different mix of focus from the vertical market standpoint.

Unidentified Analyst

And then just follow on, in your guidance you are giving a range 23% to 27% in your gross margin lines, have you given any indications as in terms of your gross profit or operating margin lines?

Rick Gold

Well, we've given the revenue, we've given the gross margin and we have indicated that we expect the overall OpEx for the year to be flat. And that kind of points you to what you need for the operating profit analysis. I will mention by the way on the OpEx side we will be and some of our shares and marketing activity, some of the customers support, some of the new products we will be growing some of our expenditures.

But we have achieved some significant savings and our OpEx from structural standpoint over the last year in particular, we were doing manufacturing and customer fulfillment out of six facilities a year ago and that is now down to two just our Oxnard, California and Waseca, Minnesota facility and the other four, where we are still doing engineering, sales and marketing, we have been able to move out of those larger, more expensive facilities into smaller less expensive more focused facility.

So essentially we were able to use the savings on the structural side to continue the development and the focus on the business side but overall we expect our OpEx to be flat.

Operator

Thank you and at this time I will like to turn the call back over to management for any closing comments.

Rick Gold

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

Operator

Thank you ladies and gentlemen. This concludes the CalAmp fiscal 2010 fourth quarter conference call. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or 1-800-406-7325 and followed by pass code of 4291490. AT&T would like to thank you for your participation you may now disconnect.

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