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CalAmp Corp. (NASDAQ:CAMP)

Q3 2011 Earnings Call

January 4, 2011 4:30 PM ET

Executives

Lasse Glassen – Financial Relations Board

Rick Gold – Chief Executive Officer

Michael Burdiek – President and COO

Rick Vitelle – Chief Financial Officer

Analysts

Ilya Grozovsky – Morgan Joseph

Mike Crawford – B. Riley & Company

John Nelson – State of Wisconsin Investment Board

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CalAmp Fiscal 2011 Third Quarter Conference Call. During today’s presentation, all participants 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, Tuesday, January 4, 2011. At this time, I’d like to turn the conference over to Lasse Glassen with Financial Relations Board. Please go ahead.

Lasse Glassen

Thank you, and good afternoon, everybody. Welcome to CalAmp’s fiscal 2011 third quarter earnings call. With us today are CalAmp’s Chief Executive Officer, Rick Gold, along with the company’s President and Chief Operating Officer, Michael Burdiek; and 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 and uncertainties that are described in the company’s annual report on Form 10-K for fiscal 2010 as filed on May 6, 2010 with the Securities and Exchange Commission.

Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The company undertakes no obligation to update or revise any forward-looking statements whether as 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 2011 third quarter results. I’ll begin with comments on our financial and operational highlights and I’ll then provide an update on our satellite products business. Michael Burdiek will follow with an update on our Wireless DataCom business and Rick Vitelle will discuss additional details about our financial results, balance sheet, working capital management and cash flow. I’ll wrap up with our business outlook and guidance along with our some concluding remarks this will be followed by a question-and-answer session.

Looking at our third quarter results, strong growth in our Wireless DataCom business drove CalAmp to achieve a quarterly operating profit on a consolidated basis for the first time in nearly four years. Wireless DataCom segment revenue grew by 17% on a sequential quarter basis and 52% year-over-year while backlog continues to expand.

Within the Wireless DataCom segment, we continue to experience strong demand for our mobile resource management or MRM products from a broad base of customers. Demand for our wireless networks products is also growing driven by projects in the public safety, rail transportation and utility sectors that made significant revenue contributions in the third quarter.

At the bottom line, the third quarter GAAP basis net loss was $179,000 or $0.01 per diluted share. Excluding the impact of amortization of intangible assets and stock-based compensation expense, our adjusted basis for non-GAAP net income was $365,000 or $0.01 per diluted share. I refer you to our third quarter earnings press release issued today for a detailed reconciliation of the GAAP basis pretax loss to the non-GAAP basis net income.

Looking at our cash flow and balance sheet, during the third quarter of fiscal 2011, cash provided by operating activities was $768,000. Our net debt at the end of the third quarter was $7.4 million, a reduction of $700,000 from the net debt of $8.1 million at the end of the second quarter.

Now let’s take a closer look at our satellite business. As we have discussed in previous calls, over the past year we’ve been working closely with our Direct Broadcast Satellite customers to develop several next-generation products that we believe will increase our served market and improve our gross margins. Unfortunately, the introduction of these new products is not occurring as rapidly as we had expected primarily due to evolving customer requirements.

In addition, demand for the legacy satellite products that we currently supply has been depressed. As a result, we saw lower third quarter satellite revenues of $8.4 million, down from $11.4 million in the second quarter and $16.8 million in the third quarter of last year.

We continue to work with our satellite customers to adapt these new products that are in development to their evolving requirements. Our visibility for the timing of significant revenue from these new products is still limited. That said, we do expect demand for both existing and new satellite products to increase in the first half of fiscal 2012.

In the meantime, we are taking actions that we believe will enhance operational flexibility and improve profitability of the satellite business. We have begun transitioning the satellite business to a more variable cost model with more functions to be performed by our manufacturing partners in Asia. This should allow us to better respond to erupt shifts in demand while also reducing our fixed overhead costs and lowering our breakeven point.

In addition, we’ve started pursuing additional business opportunities with our satellite customers, including lower volume specialty products that command higher gross margins. We expect these changes will have a positive impact on our satellite business profitability in fiscal 2012.

Now let’s move onto an update of our Wireless DataCom business, which provides communications systems, products and services for applications in the energy, public safety, rail transportation, industrial monitoring and controls and MRM markets. Providing comments today is our President and COO, Michael Burdiek. Michael?

Michael Burdiek

Thank you, Rick. During the third quarter, the Wireless DataCom business recorded revenues of $21.2 million, an increase of 17% on a sequential quarter basis and up 52% year-over-year. For the nine months ended November 30th, Wireless DataCom revenues are up 32% compared to the same period last year.

Our Wireless DataCom segment has now generated operating profits for two consecutive quarters. Growth in the latest quarter was driven by both our MRM and wireless networks product line, with an increasing backlog and solid operating profit, the overall financial picture of our Wireless DataCom segment has essentially recovered to pre-recession levels and we believe we are well positioned for continued profitable growth.

The revenue breakdown within our Wireless DataCom segment in the latest quarter was roughly 60% for MRM applications and 40% for wireless network applications, essentially unchanged from the third quarter of last fiscal year. As a point of reference, the revenue breakdown in the third quarter two years ago was reversed with a 60-40 split favoring wireless network applications.

Similar to recent prior quarters, customer demand for our MRM product continues to be very strong. Third quarter MRM product revenue reached an all time high, driven by the strength of our local fleet management vertical and penetration into emerging applications, such as cargo tracking and auto insurance.

In addition, backlog for our MRM product line increased during the third quarter. We also recently received an important order from a fleet management services provider for tracking devices that are scheduled to be deployed over the course of calendar 2011 for a global soft-drink bottling company. We expect this project will involve over 10,000 vehicles and once completed would represent the largest single deployment to date of our MRM fleet tracking products.

In MRM solutions, our Aercept subscriber base for tracking and monitoring services continues to expand with approximately 163,000 active units on the network at the end of the third quarter. This business also posted a record revenue quarter, benefiting from a strong product portfolio and improving fundamentals in the vehicle finance market.

We also generated increased sales in the third quarter to an automotive electronics OEM for our remote car start application, where we are providing wireless hardware, air time and backend services.

This product is supported by apps on the Apple iPhone and BlackBerry smartphone and is available throughout North America from leading retailers, including Best Buy. Remote car start is a highly seasonable product used mostly in colder climates, so our sales of this particular product are expected to taper off in our fiscal fourth quarter.

Moving on to our wireless networks product line, momentum is building and we generated growth during the third quarter with revenue contribution from several previously announced projects. We made initial delivery of advanced wireless modems to the U.S. National Oceanic and Atmospheric Administration that will be used to gather relay information, weather information critical to aviation and transportation safety from sensors throughout the U.S. We expect to complete delivery of these modems in our fourth fiscal quarter.

Also in wireless networks we continue to make good progress on an important rail transportation development project that we announced in the first quarter. Though we anticipate completing this project in the second half of fiscal 2012, there are significant follow-on opportunities in the rail transportation market and we believe CalAmp can capture additional business in this vertical over the next several years.

In the public safety space, we began shipments on an order for a mobile data network for the police, fire and EMS agencies of the City of Plano, Texas. Our work on this project is scheduled to be completed during fiscal 2012.

Overall, our public safety backlog has been improving and we have a healthy sales pipeline, including some key opportunities we are pursuing jointly with alliance partners. As a case in point, today Harris Corporation announced that it was selected by the State of Oregon as the radio system service provider for the state-wide Oregon Wireless Interoperability Network. This communications infrastructure will improve voice and data interoperability among state, local and federal agencies throughout the state.

CalAmp, with our data radio base and mobile radios is a member of the project implementation team for the wireless data portion of this multi-phase project area. As the project has just been awarded, scope and timing details are still being worked out. Nonetheless, this is a significant project and we expect it will generate revenue in the multiple millions of dollars for CalAmp over the next two years.

And finally, we continue to view the utility and energy sector as an important strategic growth area for our wireless network product and services. Thus far in fiscal 2011, we have started work on more than 30 pilot projects at utility companies throughout the U.S. where we are demonstrating the performance of our equipment for Smart Grid infrastructure solution.

During fiscal 2011 to date, five of these pilot projects have each generated revenues in excess of $100,000 and we expect the first of these projects to begin full deployment in early fiscal 2012. We continue to believe that our portfolio wireless communications infrastructure solution is well-positioned to serve the needs of this high growth market and it will become a significant contributor to our growth in fiscal 2012 and beyond. In short, we have a bullish outlook for our Wireless DataCom business.

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

Rick Vitelle

Thank you, Michael. I will provide a summary of our gross profit performance, income tax position, working capital management and cash flow results for the fiscal 2011 third quarter. Consolidated gross profit for the fiscal 2011 third quarter were $7.7 million or 26.1% gross margin, compared to gross profit of $5.9 million or 19.2% gross margin for the same period last year. The increase in consolidated gross profit and gross margin percentage in the latest quarter was primarily due to Wireless DataCom revenues.

Looking closer at gross profit performance by reporting segment, Wireless DataCom gross profit was $7.5 million in the latest quarter for 35.4% gross margin. This compares to gross profit of $4.3 million or 30.6% gross margin in the same period last year.

As Wireless DataCom revenue has rebounded in recent quarters, gross margins have improved primarily due to improved absorption of manufacturing overhead costs. However, the Wireless DataCom gross margin improvement has been relatively modest, since most of the revenue growth has come from MRM products, which tend to carry lower gross margins than our wireless networks products.

As Michael noted a few minutes ago, during the third quarter MRM products comprised approximately 60% of Wireless DataCom segment revenues with wireless networks products accounting for the remainder. Nonetheless, we expect Wireless DataCom gross margins to further improve as revenues continue to grow.

Gross profit for satellite products was $191,000 or 2.3% gross margin in the latest quarter. This compares to gross profit for satellite products of $1.6 million or 9.8% gross margin in the third quarter of last year.

The gross margin of our satellite business in the latest quarter remains below longer term historical levels, primarily due to the lower absorption of manufacturing overhead costs resulting from lower sales volumes.

Now turning to our income tax position, during the third quarter we did not recognize an income tax benefit despite our pretax loss of $179,000, which is consistent with the accounting treatment in our recent prior periods.

In accordance with the applicable tax accounting rules, the income tax benefit associated with the pretax loss generated in the third quarter 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 or eliminating reported income tax expense.

In the third quarter of last year, we recognized an income tax benefit of $1.4 million as a result of the favorable resolution of an uncertain tax position that had been previously reserved for in accordance with the applicable accounting rules.

Now moving onto the balance sheet, our total inventory at the end of the third quarter was $9.8 million representing annualized inventory turns of approximately nine times. This compares to the immediately preceding quarter where total inventory of $12 million represented annualized inventory turns of approximately seven times.

The accounts receivable balance was $13.0 million at the end of the third quarter, compared to $13.7 million at the end of the immediately preceding quarter. The average collection period was 41 days at the end of both of these quarters.

Net cash provided by operating activities was $768,000 during the latest quarter. Through the first nine months of fiscal 2011, net cash provided by operating activities was $806,000.

At the end of the third quarter, cash and cash equivalents totaled $4.3 million and total debt outstanding was $11.7 million. In addition to our cash and cash equivalents balance, our main source of liquidity is our revolving credit facility with Square 1 Bank, which provides for borrowings up to the lesser of $12 million or 85% of eligible accounts receivable. The unused borrowing capacity on the bank revolver was $2 million at the end of the third quarter.

Our total debt balance of $11.7 million at the end of the third quarter is comprised of $7.3 million outstanding under this revolving bank credit facility and $4.4 million of subordinated debt. The subordinated notes payable, which were issued about one year ago, have an aggregate principal face amount of $5 million.

For financial reporting purposes, the principal amount is reduced by a debt discount consisting of the unamortized fair value of the warrants that were issued along with the subordinated notes. At the end of the latest quarter this unamortized debt discount was approximately $600,000.

With that, I’ll 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, based on our most recent projections we expect fiscal 2011 fourth quarter consolidated revenues will be in the range of $28 to $32 million with wireless revenue increasing sequentially and satellite revenue slightly down from the third quarter.

We expect that our GAAP basis per share results will be in the range of a net loss of $0.03 to net income of $0.01 per diluted share. The adjusted basis per share results for the fourth quarter, which exclude intangibles, amortization expense and stock-based compensation expense, are expected to be in the range of $0.01 net loss to $0.03 net income per diluted share.

Looking further ahead to the first half of fiscal 2012, based on our current backlog and pipeline of opportunities, we anticipate that our satellite shipments will begin to rebound and we expect continued strength in our Wireless DataCom segment.

In concluding our prepared remarks, I’d like to recap some key points drawn from our recent results and latest developments. First, Wireless DataCom segment revenues increased sharply in the third quarter with continued strong demand for our MRM product line and momentum building for our wireless networks product line. Wireless DataCom backlog continues to expand and we believe we are well positioned in several high growth markets.

Second, while our Wireless DataCom business has been robust, demand for our satellite products has been soft. However, our satellite customers are actively working with CalAmp to launch new products that address their future requirements and we are making structural changes that we believe will improve the future financial performance and operational flexibility of our satellite business.

And third, CalAmp achieved operating profitability on a consolidated basis for the first time in nearly four years. Overall gross margins are improving and we remain diligent in controlling operating expenses, with topline growth we expect further improvements in the bottom line.

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

Question-and Answer Session

Operator

Thank you, sir. (Operator instructions) And our first question comes from the line of Ilya Grozovsky with Morgan Joseph. Please go ahead.

Ilya Grozovsky – Morgan Joseph

Hi, guys. Thanks.

Rick Gold

Hey, Ilya.

Ilya Grozovsky – Morgan Joseph

I had two questions. Can you guys talk a little bit about the opportunity in the utility, energy sector and kind of elaborate on that?

Michael Burdiek

Hello, Ilya. It’s Michael Burdiek. Well, as we stated, we have a number of pilot projects underway in the utility sector. I would say, the majority of those opportunities are focused primarily on distribution automation application and not so much on AMI sorts of applications and we see a number of those opportunities beginning to mature. And as we suggested in the remarks, we feel very confident that beginning in early part of fiscal 2012 we’ll be moving from pilot phase into potential full deployment on one or more of those projects.

Rick Gold

I guess I would just add that for -- there is a mix here of size and scale of projects, there’s a mix in some, we’re dealing directly with the end customer utility and some we’re dealing with a prime contractor or a system integrator.

One of the things about distribution automation is, unlike a lot of what you read and hear about in the AMI area, a number of these are add-on projects that are done and can be done in (inaudible) sized bits where a small section of the grid is being instrumented and there are -- there’s a radio network that’s going into connect those various monitoring and control points back to a central infrastructure.

So we’re dealing primarily with domestic projects here although we’re starting to get involved in the first international projects. And again, they range in scale from some relatively small incremental projects to some significant system-wide greenfield network implementations.

Ilya Grozovsky – Morgan Joseph

So and how would we think about the size of the opportunity, if you were to look at, on the high side of, a system-wide deployment with a utility, I mean, what is that look like from a dollars perspective?

Michael Burdiek

Well, let’s just use a sort of a medium-sized investor owned utility as an example and let’s use for sake of argument, a greenfield opportunity, as Rick suggested just a couple of moments ago. A mid-size to larger-sized investor owned utility deploying communications devices across its network for a distribution automation application could be looking at 500 to lower thousands of endpoints. And those kinds of opportunities would range probably in the low seven figures up to potentially eight-figure types of opportunity for CalAmp.

Ilya Grozovsky – Morgan Joseph

Okay. Thanks. And then also, can you guys just touch a little bit on your product development efforts in the satellite segment? You guys mentioned that in the press release and just elaborate on that a little bit?

Rick Gold

Sure. So we are -- just to kind of back up a step. We obviously had a major issue back in 2007. We focused on that for the better part of three years really, both to solve the problem and to resolve it and get re-qualified and get back in the game. And we effectively missed the generation of product at both of the customers.

And what we’re doing right now, now that we’re back re-qualified, we’re back into production with our legacy products, is we’re working with both of those customers to launch products that effectively are the next generation beyond the one that we missed and leapfrogging. And so what we build is, as you all know, the outdoor customer premises equipment or the LNB or the dish, depending on what you want to call it.

But our products are part of a complete system. In other words, they have to interact with set-top boxes, they have to interface with the antenna reflectors, they need to line up with the customers’ marketing and deployment plan. And what we have been seeing, frankly, for the last couple of quarters is that although we have products that have -- where we have effectively completed the development of those products, the total system development is not complete and there are still some moving pieces. And we are responding with our customers to those moving pieces.

What’s frustrating to us and I realize is also frustrating for the shareholders is that since we’re not -- this is not a situation where we will be cannibalizing our own product, this is a situation where we will be getting back and effectively regaining some market share and building our served market. Those delays have a significant impact on CalAmp’s ability to grow our revenue.

So what we are doing is working diligently with our customers. To the best of our understanding, we are engaged with both our customers on every major next-generation outdoor CPE initiative they are working in this space. And we have to do our part to help push these over the finish line. But as I indicated in the remarks, because of these other moving pieces, most of which we do not control, there is a limit to our visibility there.

So we’re focusing there and in parallel, we are taking some steps to make sure that we get the full benefit from a financial standpoint as we do begin to ramp revenue.

Ilya Grozovsky – Morgan Joseph

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Mike Crawford with B. Riley & Company. Please go ahead.

Mike Crawford – B. Riley & Company

Thanks. Just continuing on that track, Rick, of the two major North American satellite customers, have you started shipping a product yet for the second major customer, the one that you hadn’t been shipping to in the last couple years?

Rick Gold

No, we have not. That product -- where we stand on that, Mike, is we are -- there are changes required to the set-top box. We have working units but those -- there is a process whereby the configuration and the connectivity with the set-top boxes for a variety of set-top boxes needs to be addressed. There are some firmware and software changes involved in that. We’re deep into that process right now.

Mike Crawford – B. Riley & Company

Okay. Thank you. And then, regarding your effort to outsource more of the production here to lower your fixed cost, what steps are you taking exactly?

Rick Gold

So we have -- over the last many years, we have been moving an increasing percentage of the content, in particular, the touch labor-intensive content to our Asian manufacturing partners and we are moving some additional steps there. We will still be fulfilling out of Oxnard here. CalAmp is still responsible for the complete oversight there. And obviously the quality and performance, the final test assurance, et cetera of all those products.

But there are a number of touch labor steps that we have been doing here for historical reasons but where it really just makes sense to move those offshore. I should point out, by the way, that our two primary competitors in that space do -- their manufacturing facilities and our manufacturing facilities, even though we are based in the United States, Japan and Taiwan, respectively, we are all within a few miles of each other in southern China.

Mike Crawford – B. Riley & Company

Okay. Thank you. And then on the MRM side of your business, which -- as you mentioned, it does comprise 60% of your Wireless DataCom business overall. So with other aspects growing, like the school bus tracking, container tracking, remote car start, even some stuff I don’t think you talked about today, like personal and pet tracking -- as some of these opportunities start to grow, do you expect any of these to surpass local fleet management or will that continue to be the biggest piece of that business?

Michael Burdiek

Mike, as has been talked about in previous calls, there is a clear, very clear ROI associated with the fleet management application and we would expect that to remain a very core part of the MRM products business. Last year, the school bus tracking application, in particular, was very strong for us. We think there’s a general trend there that should favor us going into fiscal 2012. And, in some ways it’s hard to predict what the next great application will be and where there will be a clear ROI developing which will drive additional demand for our types of products.

One thing that gives us a competitive advantage in the marketplace is our ability to respond with somewhat customized devices for very specific types of tracking applications. We think we have a great ability to respond as these new opportunities develop.

Rick Gold

I guess, I would add to that, that we -- there’s been a lot of focus in this market about what’s the next big thing from a consumer standpoint. And we’ve learned -- we’ve seen over the last couple of years that the applications that really take hold are the ones where there’s a demonstrable ROI, as Michael was saying. And once you have that demonstrable ROI, then, whether it’s a small enterprise, a large enterprise, frankly, whether capital is tight or loose, they can still find a way to make that happen.

So we’re interested. We’re excited about the remote car start application. There are some other more consumer-focused applications such as auto insurance, where we’ve got some pretty exciting early activity going on, but those are much harder to handicap. But to your original question, the auto insurance application could certainly be bigger than fleet management if it took off but that’s a much more speculative thing. And it’s not going to happen in the next 12 months.

Mike Crawford – B. Riley & Company

Okay. Thanks. And then on the networking side, so what is it that would make a customer, depend on you how you’re going into a potential deployment, choose a CalAmp point-to-point or a point-to-multi-point solution versus, say, a GE?

Michael Burdiek

That’s an excellent question. We’re quite proud of our technology and we believe we still have technical advantages versus the competition whether it’s GE or someone else, in the narrow band licensed radio marketplace. The other advantage we have versus a GE, as an example, is that we are not a one-trick pony. We have a range of products, whether they are cellular-based router platforms or whether they are narrow-band radio platforms or they’re wide-band spread spectrum platforms, we have a number of different products that can fit into any number of different utility application. And I think that’s what really is a key CalAmp advantage in the utility marketplace.

Rick Gold

Obviously, we’re not going to beat them on distribution and brand awareness. But, as Mike was saying, from a technology and product portfolio standpoint, we stack up very well. And I think the other thing that’s worth noting there and this is true -- there is a similar analogy and the public safety area, where Motorola is the 800-pound gorilla -- that there are just a lot of big players in that arena who are competitors of our competitor at the prime contractor level. And so we are a much more natural partner for them.

But that’s ultimately not why we win the business, that’s kind of why they wouldn’t obviously go there. And the Oregon system is an excellent example of that, where we partnered with Harris, who is one of the leaders on the voice side of the system business, put together a combined voice plus data package, competed with the world, really and were able to win.

Mike Crawford – B. Riley & Company

Okay. Thanks. And then, Rick, if you could just clarify -- if I could just help us gauge the opportunity again on the grid side. So you’re in over two-dozen pilot projects, five have been over $100,000 of revenue to date and you expect some of these to move to production volumes in the next coming months. And is there an average size for a full -- for what would be a full -- a distribution automation rollout for one of these things? I understand these are different scales so that might be hard to…

Rick Gold

Unfortunately, Mike, it’s still early days for us to really say what an average is. These range from six to seven to very low eight figures in terms of the ultimate opportunity. That said, they are not necessarily all going to be contracted out at once. A lot of these things are going to be done in stages or piecewise, whether it’s from a regional standpoint or a functional standpoint. But we expect that we will be getting seven-figure orders in fiscal 2012.

And, just to reference, we have done -- in Thailand, of all places, was our first major system deployment for Smart Grid and that was a low to mid seven-figure contract. So we do have some experience with jobs of that size. And again, the exciting thing to us is that there really isn’t a serious, a significant utility in the U.S. that isn’t going to do something like this over the next few years.

Michael Burdiek

Mike, I would also add -- you mentioned two dozen-plus opportunities in terms of pilot activity. That was our reference point with the Q2 conference call. As we mentioned earlier today, we’ve actually increased the number of pilot opportunities in our pipeline to where we are looking at something more like 30 today. So the opportunity range continues to increase and as we mentioned before, we are very bullish on that market today.

Mike Crawford – B. Riley & Company

Okay. Thank you. And then I guess, the last question relates to seasonality. So I guess the satellite side, that’s a little more hard to say what’s going to happen, that’s going to depend on your customers’ ability and need. But on the Wireless side, would you expect a seasonal dip in February or do you expect that continue to grow sequentially? Thank you.

Michael Burdiek

You know, it’s interesting. As the MRM business and the wireless networks businesses continue to grow, it’s very difficult to reference empirical data to determine whether or not there’s seasonality in the business. Over the last couple of years, there has been a seasonal bump in the school bus application for our MRM products, for natural reasons.

Rick Gold

In summer.

Michael Burdiek

In summer, it’s warm. School bus fleets are generally idle in the summer months and upgrades are -- it’s sort of a natural period of time to make upgrades for those sorts of fleet applications. Just to be quite honest, we have a hard time determining with the information we have today that there’s a real seasonal aspect for our business, on either side, the MRM side or on the wireless network side.

Rick Gold

The one exception would be remote car start, which, as we mentioned in the script, is highly seasonal and we are just coming out of the peak season there. So, overall, we expect Q4 in Wireless to be up, despite the fact that that one application, remote car start, is going to be down but that’s just because of the -- frankly, the diversity of applications and markets that we serve.

Mike Crawford – B. Riley & Company

Thank you.

Operator

Thank you. (Operator Instructions) And our next question is from the line of John Nelson, State of Wisconsin Investment Board. Please go ahead.

John Nelson – State of Wisconsin Investment Board

Hi. Congrats on the non-GAAP profitability for the quarter to you and your team.

Rick Gold

Thank you.

John Nelson – State of Wisconsin Investment Board

My question relates to if you can -- if you feel comfortable talking to any long-term financial goals, such as gross margin, operating margin, ROE, anything that might be helpful for us in assessing long-term potential of the company.

Michael Burdiek

Sure. So we have stated previously that our target gross margin for our Wireless products is 40% and our target gross margin for our satellite products is the high teens, with a consolidated margin target of 30%, which obviously depends to some extent on the mix there but those targets all remain operative. And I think if you look at recent quarters from a consolidated basis and from a wireless basis, you can see us making progress towards those targets. And I think it’s safe to say we are within shooting distance.

On the satellite side, we are obviously well below the breakeven level and we have some work to do there. But if -- assuming we get back to the breakeven level, which, as we said before, was around $15 million in that business, with some of the steps we talked about today, that that’s going to come down somewhat. But that’s what’s going to -- it’s really just volume that we need there to drive that back.

From an operating margin standpoint, we haven’t put out specific targets there. It’s a function of getting some top-line growth as well to absorb the OpEx. We don’t expect a lot of OpEx growth from an absolute dollar standpoint over the next year. We expect some because there is some incremental component of that, but we don’t -- on the real fixed cost infrastructure side of that, we do not expect a lot of growth. And then, if you look at the top line from a revenue standpoint, it’s premature for us right now to guide to revenue next year.

We have indicated that we expect both the Wireless business and the satellite business to have the potential to get up into north of $20 million at quarterly run rate. We obviously have made pretty good progress there on the Wireless side and those markets are growing. Not only are we gaining share, but those markets on the Wireless side are growing 10% to 20%.

Obviously, on the satellite side, we still have some recovery to do and that’s going to depend on launching products in collaboration with our customers.

John Nelson – State of Wisconsin Investment Board

Okay. For both Wireless and satellite, in the last 12 months has there been any significant new competition coming in and, vice versa, has there been any significant loss of competition in either area?

Rick Gold

So in the satellite area, the competitive landscape is unchanged from a year ago, which was unchanged from the year before that. That’s a very simple answer. The Wireless business is a much trickier answer because we participate in a number of different market segments, technologies and there’s both direct and indirect competitors in that business and it’s a much more fluid situation.

I think we can say, in the public safety market, if you look back a couple of years ago, there were five, six, seven players on the data side there, the licensed private data networks and right now, it’s really CalAmp and Motorola. There are a couple other players that have just fallen by the wayside. There’s been attrition in that area.

But in the other areas, it’s like any kind of robust technology market. There’s new entrants and there’s changes and it’s more about the technology changes than it is about the players, per se.

John Nelson – State of Wisconsin Investment Board

Okay. And then one final question -- you have $2 million left on the revolver, of borrowing capacity on the revolver. Is that adequate for the growth that you see coming in first half of fiscal ‘012?

Rick Gold

The short answer is yeah. We expect the company over the next year to be positive operating cash flow. That doesn’t necessarily mean every single quarter is going to be, depending on the ups and downs of the business but as we look at the various metrics, working capital metrics and model it out, we expect that we will actually be reducing our net debt over the next year. So the short answer is yeah. We expect that to be sufficient.

John Nelson – State of Wisconsin Investment Board

Good. Okay. Thanks very much.

Rick Gold

Thank you.

Operator

Thank you. And gentlemen, I’m showing no further questions at this time. Please continue with any closing remarks.

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, if you’d like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030, using the access code of 439-4709 followed by the pound key. This does conclude the CalAmp fiscal 2011 third quarter conference call. Thank you for your participation. You may now disconnect.

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