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Executives

Lasse Glassen – VP, Financial Relations Board

Rick Gold – CEO

Michael Burdiek – President and CEO

Rick Vitelle – CFO

Analysts

Mike Crawford – B. Riley & Company

Ilya Grozovsky – Morgan Joseph

Marc Robins – Catalyst Research

CalAmp Corporation (CAMP) F4Q 2011 Earnings Call April 28, 2011 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CalAmp Fiscal 2011 Fourth 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) This conference is being recorded today, Thursday April 28, 2011.

I’ll now turn the conference over to Lasse Glassen of the Financial Relations Board. Please go ahead sir.

Lasse Glassen

Thank you and good afternoon, everybody. Welcome to CalAmp’s fiscal 2011 fourth quarter and full year results conference 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 2011 as filed earlier this afternoon with the Securities and Exchange Commission.

Although the company believes the expectations reflected in such forward-looking statements are based upon 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 2011 fourth quarter and full year 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 some concluding remarks. This will be followed by a question-and-answer session.

Looking at CalAmp’s operational highlights, we returned to profitability on a GAAP basis in the fourth quarter for the first time in four years. Our Wireless DataCom business continued its strong momentum with quarterly revenue increasing 48% year-over-year. This growth was driven by both our Mobile Resource Management and Wireless Networks products.

As Michael will discuss in more detail in a few minutes, we’re seeing strong demand for our Mobile Resource Management or MRM products from local fleet management, vehicle finance, asset tracking, and stolen vehicle recovery vertical. Our Wireless Networks products also showed strong growth with contributions from projects in the public safety, railroad, and energy sectors. We’re making significant investments in R&D to expand and strengthen our footprint in Wireless Data and were encouraged by the traction over new products are getting in the market.

At the bottom line, we generated steady improvement over the course of fiscal 2011 and returned CalAmp to profitability. GAAP basis net income in the fourth quarter was $303,000 or $0.01 per diluted share. Excluding the impact of amortization of intangible assets and stock-based compensation expense, our adjusted basis or non-GAAP net income was $668,000 or $0.02 per diluted share. I refer you to our fourth quarter earnings press release issued today for a detailed reconciliation of the GAAP and non-GAAP basis financial results.

Looking at our cash flow and balance sheet, net cash provided by operating activities during the three and 12 month periods ended February 28th 2011was $51,000 and $857,000 respectively. Our net debt at the end of the fourth quarter was $7.7 million, up slightly compared to the net debt of $7.4 million at the end of the third quarter.

Now let’s take a closer look at the Satellite business. Fourth quarter revenue was softer than expected. During the quarter, we began the initial production ramp of a new product as well as a production ramp of one older product that is experiencing renewed demand. However, these ramps do not begin until late in the quarter. Consequently, we’ve recorded fourth quarter Satellite revenue of only $5.6 million, which was sequentially lower by $2.8 million and was down substantially from $18.7 million in the fourth quarter of fiscal 2010. We expect that volume shipments of these two products should drive significantly higher Satellite revenue during our fiscal 2012 first quarter.

In addition, we’re on track with the plans we discussed last quarter to enhance the operational flexibility and cost structure of our Satellite business. We’re transitioning the Satellite business to a more variable cost model with more functions performed by our manufacturing partners in Asia. This will allow us to reduce our fixed overhead costs and lower our breakeven point while also improving our ability to respond to rapid shifts in demand. We expect to complete this transition during the second quarter of fiscal 2012.

Finally, we are continuing to work on three additional new products that we expect to launch this year and we expect what that both the revenue and profitability of our Satellite business will improve in fiscal 2012 compared to fiscal 2011.

Now, let’s move on to an update of our wireless DataCom business which provides communication systems, products and services to a number of markets including utilities, oil and gas, public safety, railroads, fleet management and asset tracking. Providing comments today is our President and Chief Operating Officer Michael Burdiek. Michael?

Michael Burdiek

Thank you, Rick. Our Wireless DataCom business generated significant momentum during fiscal 2011 with revenue increasing sequentially in each quarter during the year. This culminated in fourth quarter revenue of $23.4 million which represent sequential growth of 10% and an increase of 48% compared to the fourth quarter of last year. For fiscal 2011 full year Wireless DataCom revenues of $78.4 million was up 37% compared to fiscal 2010. The revenue breakdown within our Wireless DataCom segment in the latest quarter was roughly 55% for MRM applications and 45% for Wireless Networks applications. This represents a modest shift from recent quarters where our revenue mix was closer to 60/40 split favoring MRM applications.

While MRM drove most to be the Wireless DataCom segment growth in fiscal 2011 the recent revenue growth within Wireless Networks is encouraging. Similar to recent quarters customer demand for our MRM products continues to be very strong. Revenue from our core local fleet management vertical is increasing at a healthy pace driven by new customer win and the business growth for existing customer base.

Fourth quarter MRM revenue was also benefited by new orders from a South American customer in the Stolen Vehicle Recovery vertical. In addition, momentum is building for asset tracking application and we’re seeing activity in a number of other new and emerging applications. In MRM services, our subscriber base for bundled solutions in vehicle finance and remote start application continues to expand with approximately 185,000 active units on the network at the end of the fourth quarter up from 163,000 at the end of the third quarter.

We continue to invest in new technologies to broaden our MRM offering. We are launching new products at an ever increasing phase to meet demand from emerging applications to take advantage of cost reduction opportunities. Last month we announced the availability of new MRM products for trailer tracking and for enterprise fleet workforce management.

Our new trailer tracking product line is designed specifically for tracking mobile assets such as trailers, and other toll-able equipment and features extendable life battery as well as superior GPS and cellular performance. These devices can operate for extended periods without recharging, replacing battery and could give owners a mobile drop and leave assets, peace of mind.

We also introduced two new MRM devices in the enterprise fleet and workforce management phase. Designed to enable a vehicle to function as a mobile WiFi hotspot, these devices have high speed, high data rate capability and provide real time Internet connectivity, streaming video of field event and other mobile data applications. In addition we recently refreshed our entire low and mid-tier tracking product line in order to further improve the product performance and to reduce production cost. We believe our MRM products are competitively priced and we have the feature set capitalized on vertical markets that represent significant growth opportunities for CalAmp.

Moving on to our Wireless Networks business, momentum is continuing to build and we experienced solid growth in the fourth quarter. We made good progress on an important rail industry development project that we were awarded in the first quarter of fiscal 2011. While we anticipate completing this project in the second half of fiscal 2012, there are significant follow-on opportunities in this vertical and we believe it can be an important contributor to CalAmp growth over the next several years.

In the public safety space, an order for a mobile data network for police, fire, and EMS agencies in the City of Plano, Texas contributed to fourth quarter results. Our work on this project is scheduled to be completed during fiscal 2012. In addition, our public safety backlog continues to improve. Just this month, we were awarded a $1.7 million project to upgrade the mobile data communications network used by public safety personnel in the municipal region of Holton, Ontario, Canada.

CalAmp designed and installed Holton’s original network in 1999 and subsequently upgraded the network in 2004. The latest upgraded project called for the deployment of our latest generation, Paragon base station and Gemini mobile modems operating in the 700 megahertz licensed band and we’ll triple the data rate of the existing network. In addition to network equipment, the project award included system engineering, implementation and technical support following deployment, we expect complete discovery late this fiscal year.

And finally, the utility sector is an important strategic growth area our Wireless Network product and services.

During fiscal 2011, we started to work on 35 pilot projects for utility companies throughout the United States while our wireless communication products are providing data connectivity for smart grid infrastructure solutions.

Specific applications include distribution automation, demand response and advanced metering infrastructure. 10 of these projects generated greater than $100,000 each in revenue in fiscal 2011, and we expect both number and scale of these projects to grow in fiscal 2012.

Our go to market strategy has been to target utility customers both directly and through regional and global Tier 1 partners. As an example, (inaudible) recently completed compatibility testing and certified CalAmp wide-area data networks as interoperable with their grid stream smart grid solution.

CalAmp products that were certified include the Vanguard 3G for use for cellular networks, the Viper for private RF networks in licensed bands and the Phantom II for unlicensed networks. Overall, we have a bullish outlook for our Wireless DataCom business in fiscal 2012 and beyond. As revenue trends upward, we expect to see further improvements in gross margin and profitability.

With that I will now turn the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at fourth 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 fourth quarter. Consolidated gross profit for the fiscal 2011 fourth quarter was $8.4 million or 28.9% gross margin compared to gross profit of $7.0 million or 20.2% gross margin for the same period last year. The increases in consolidated gross profit and gross margin percentage in the latest quarter were primarily due to higher Wireless DataCom revenue.

Looking closer at gross profit performance by reporting segment, Wireless DataCom gross profit was $8.9 million in the latest quarter or 37.9% gross margin. This compares to gross profit of $5.1 million or 32.5% gross margin in the same period last year. As Wireless DataCom revenue has continued to rebound in the recent quarters, gross margins have increased primarily due to improved absorption of manufacturing overhead costs. We expect Wireless DataCom gross margins will further improve given continued growth in revenue.

Satellite products had negative gross profit of $493,000 in the latest quarter. This compares to positive gross profit for Satellite products of $1.9 million or 9.9% gross margin in the fourth quarter of last year. The negative gross profit in the latest quarter is primarily due to the low level of sales that has resulted in lower manufacturing overhead absorption rates. As Rick Gold discussed a few minutes ago, we expect the profitability of our Satellite business will improve in fiscal 2012 as the result of increasing revenue and the transition to be more variable cost production model.

Now turning to our income tax position, an income tax benefit of $172,000 was recorded in the fourth quarter as the result of a carry back of net operating losses of our French subsidiary. Excluding this item no income tax provision or benefit was recorded in fiscal 2011 and no tax provision or benefit is expected to be recorded in fiscal 2011 due to the existence of the net operating loss carry forwards for U.S. federal and state tax purposes.

Now, moving on to the balance sheet. Our total inventory at the end of the fourth quarter was $9.9 million, representing annualized inventory returns of approximately eight times. This compares to be immediately preceding quarter, where total inventory at $9.8 million at quarter end, represented annualized inventory returns of approximately nine times.

The accounts receivable balance was $16.8 million at the end of the fourth quarter, representing an average collection period of 51 days. This compares to an account receivable balance of $13.0 million at the end of the immediately preceding quarter or an average collection period of 41 days. The increase in the average collection period in the fourth quarter is not attributable to any underlying deterioration in the receivables collection experience. Rather, results from the fact that a significant portion of fourth quarter of sales were made in the latter part of the quarter, which has the effectives skewing the collection period upwards as a result of the formula used to calculate this metrics.

Net cash provided by operating activities was $51,000 during the fourth quarter or fiscal 2011 as a whole, cash provided by operating activities was $857,000. At the end of the fourth quarter, cash, cash equivalents totaled $4.2 million and total debt outstanding was $11.9 million. In addition to our cash and cash equivalent balance our main source of liquidity is our revolving credit facility with Square 1 Bank, which provides for borrowing up the lesser of $12 million or 85% of eligible accounts receivable.

The unused amount available to borrow on the bank revolver was $3.8 million at the end of the fourth quarter. Our total debt balance of$ 11.9 million is comprised of $7.49 million outstanding under this revolving bank credit facility and $4.46 million of subordinated debt. This subordinated notes payable which were issued in the fourth quarter of fiscal 2010 have an aggregate principal case amount of $5 million, for financial reporting purposes the principal announced is reduced by a debt discount consisting of the unamortized fair value of the warrant that were issued along with support needed notes. At the end of the latest quarter, this unamortized debt discount was $540,000.

And finally, a word of explanation regarding the S-8 registration statement that we filed with the SEC today. Two years ago at CalAmp’s 2009 Annual Meeting the stockholders approved the addition of 3 million shares two to the company’s 2004 incentive stock plans. None of these shares have been issued yet, however. The S-8 is a routine filing that will allow these shares to be issued to employees and directors in the future pursuant to the provisions of the 2004 stock plan and consistent with FAS practice.

With that I will now turn the call back over the 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 latest projections, we expect fiscal 2012 first quarter consolidated revenue in the range of $31 million to $34 million. Satellite revenue is expected to increase significantly on a sequential quarter basis. Wireless DataCom revenue is expected to increase significantly on a year-over-year basis, but be down slightly on a sequential quarter basis.

We expect fiscal first quarter GAAP basis per share result in the range of $0.01 loss to $0.02 income per diluted share. The adjusted basis, non-GAAP per share results for the first quarter were expected to be in the range of breakeven to $0.03 income per diluted share. Based on our current fiscal 2012 forecast, we expect fiscal 2012 revenue and operating results to trend higher compared to fiscal 2011 with growth in both our Satellite and Wireless DataCom businesses.

In concluding our prepared remarks, I’d like to recap some key points drawn from our recent result and latest developments. First at the bottom line, we generated steady improvement over the course of fiscal 2011 and return CalAmp to profitability on a GAAP basis in the fourth quarter.

Second, Wireless DataCom segment revenue increased sequentially in each quarter of fiscal 2011 and has been growing ahead of our expectations. Full year Wireless DataCom revenue was up 37% compared to the prior year. We continued to generate strong demand for MRM product line, while momentum is building for a Wireless Networks product line. Our overall Wireless DataCom pipeline is very robust heading into fiscal 2012 and we believe we are well position in several high growth markets.

Third, while demand for our Satellite products has been softy, we received customer approval of one new product late in the fourth quarter and we continue to actively work on additional products. In the meantime, we are making changes in the cost structure that we believe will improve the financial performance and operational flexibility of our Satellite business going forward.

And finally, we expect revenue in fiscal 2012 to trend higher compared to fiscal 2011 with growth in both our Satellite and Wireless DataCom businesses and we expect to be profitable on a GAAP basis – for the year as a whole.

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. (Operator Instructions)And our first question comes from the line of Mike Crawford with B. Riley & Company. Please go ahead.

Mike Crawford – B. Riley & Company

Thank you. Yesterday on its conference call PCTEL disclosed that it’s been supplying (inaudible) antennas for positive training control project with MetroLink and I am wondering how that project is going in, what else you have in the hopper regarding that PTC?

Rick Gold

Hello, Mike. First of all that would be news to us, to the best of my knowledge and I believe I would – no, we did not purchase any antennas for that specific application. We do business with PCTEL in a number of different verticals, we have a very good relationship with them.

Michael Burdiek

But on the broader question, on the rail, our initiative in the rail industry, Mike, we are as we mentioned on the last quarter we are not at liberty to disclose any of the details of that were, we are a subcontractor to a prime contractor on that contract. The end customers are multiple Class 1 railroads, but unfortunately we are not liberty to comment on the specifics, and I will say that are contract currently is a development contract, it’s not a production contract.

Mike Crawford – B. Riley & Company

Okay. Thank you. And then Rick regarding the Satellite business, the new design that’s started to ramp at the end of the quarter, is that what’s your 31% customer from FY11?

Rick Gold

Yes, that product is for our historically largest customer, just a comment on that, in Q1 that product will represent incremental revenue for us, longer term we expect that product to transition to the other product we’ve had in development for this customer and which we expect to complete later in the year. Back to what I think is going to be your follow-up question there, the other two products we referenced last quarter were for the other major DBS service provider and those two products have actually gone to the backburner. As they move through development there were changes in the customers’ expected product mix and demand that may – those less attractive for both the customer and for CalAmp.

So, they are on a hold for now and at the same time two development programs that we’ve been incubating for our historically largest customer had moved to the fast track. Those products are newer architecture; they have significantly higher software content than our typical Satellite products, and in fact they share some attributes of some of our wireless products. And in the current quarter we have delivered several hundred units of those for evaluation and we expect to be ramping production in the second half of the fiscal year. So we’ve got a lot going on the development side managing these product launches and transitions is going to be the key.

We do expect there’s certain amount of revenue volatility. The first quarter is going to be very robust showing the pipeline with that new product. We expect the second quarter to be softer, but then we expect the back-half to be stronger as those other two products I just alluded to come in.

Mike Crawford – B. Riley & Company

Okay. Thanks, Rick. And then, if you looked at CalAmp’s last two years combined and you look at the total gross margin on Satellite, over that two year period that is half of the gross margin you got just in this one quarter on the Wireless DataCom business. To me clearly the Wireless DataCom business is driving the vast majority of the value here today although with recovery that Satellite business could be worth something.

But, just CalAmp where too somehow divest the Satellite business, what problems would that create in terms of overhead absorption, are there any hurdles in that regard that would lessen that impact given potential leases coming up, or what can you say regarding that whole connection between the few businesses?

Rick Vitelle

So certainly, your observation about where our profit growth and revenue growth are being driven is certainly on point. That said, the Satellite business is quite intermingled with our wireless business, the manufacturing, the operation, many of the engineering resources are shared resources. And so, we – as I think, we’ve communicated over the last few calls, we are looking at that Satellite business going forward last as the foundation of the company, but rather as a product line that we treat incrementally.

And so one of the reasons that we are restructuring the way we operate that business is not only to drive the breakeven point down, which it will, it’s going to take it from 15 million down to 10 million, but it will also allow to run that business much more incremental business than as core business.

And finally, we believe that there is substantial potential for products and markets synergy going forward between the two businesses. The products that I alluded to today that start to look more Wireless like is a baby step in that direction, but we are going to manage the Satellite business for cash in the near-term. We’re looking to the Wireless business to drive our growth, but we do expect the Satellite business once we get through this transition to be a meaningful contributor to profit for the company and ultimately for value and we also believe that as we look forward that ultimately those two businesses are going to converge in multiple dimensions. So, long answer to a short question.

Mike Crawford – B. Riley & Company

Okay. Thank you and then last question relates to gross margin. So I’m happy to see the revenue guidance above our model for first quarter and I think that’s likely to flow through for the year. You already had the highest gross margin reaching quite a long time in this quarter just completed. But, given the expected ramp in Satellite, you know, that’s probably going to bring the overall gross margin down for the year, but if you had to give your best guess at this point, you’re saying that you’re going to become out in the 27%, 28% range for the year of fiscal 2012 on gross margin or –

Rick Vitelle

So let me talk to that, Mike. To the – your first point on revenue, our three analysts that are out there range their estimates for the year range from $133 million to $142 million for fiscal 2012. We’re actually comfortable with numbers at the lower end of that range. As I mentioned, we do expect a robust quarter from a Satellite standpoint in Q1, but we do expect some softness in Q2 there. Wireless, there’s a seasonal dip in Q1, but we expect the year to be onward and upward from there, but at this point, we don’t want to lean too far forward on the revenue standpoint.

On the gross margin standpoint, the estimates that are out there range from 26% to 28.2%. We’re actually comfortable with the high end of that range and maybe even if that higher depending on mix and depending on the success of some of the initiatives I mentioned earlier. You know kind of last piece of that puzzle on operating expenses, we are making some significant investments on the product development front both in R&D as well as support. So we expect the OpEx to grow this year, but we expect it to grow at a percentage that’s less than our revenue growth.

Mike Crawford – B. Riley & Company

Okay, thank you.

Operator

Thank you. And our next question comes from the line of Ilya Grozovsky with Morgan Joseph. Please go ahead.

Ilya Grozovsky – Morgan Joseph

Great, thanks, guys. Cam we talk a little bit about the Wireless DataCom, so obviously we are – you’re kind of made some comments about 2012. You’re coming off of a 2011 where grew that top line there about in the high 30% range. What kind of percentage growth do you think that business could see in 2012?

Rick Vitelle

Well, as Rick, mentioned earlier in the remarks earlier, we expect our business to grow, satellites grow this year as well. Rick just sort of back envelope and overall sort of annual revenue growth for the company as a whole and – we haven’t given specific percentages out, pretty obvious in the prepared remarks. We expect solid growth in the business with coming year. And we said in some of our presentation materials and in investor presentation listed online that we expect our Wireless Networks market to grow roughly 10%, our MRM market to grow greater than that, and we would expect to be operating within those ranges.

Ilya Grozovsky – Morgan Joseph

And you feel that, I mean just at the back of the envelop on that 133 number for the year, but that’s – I mean I just want to understand how you feel, you’re going to get there and what kind of expectations do you for Satellite for the year as well?

Michael Burdiek

Let me first talk about wireless and I’ll let Rick pick it up with Satellite. The reason we have such confidence in Wireless coming into the new years that our pipeline is very robust in all market segments both in (inaudible) products, applications, and within our Wireless Networks vertical. Our backlog is very solid. So we entered the year on a much better position. We entered last year and obviously you’ve just seen last year’s results. So we have a great deal of confidence. We’re going to be able to continue our momentum in Wireless DataCom. I think we feel that confident about that as we have for anything entering into –

Ilya Grozovsky – Morgan Joseph

Sorry to interrupt you, so then I’m sort of having a tough time reconciling that with why Q1 guidance for that business would be down sequentially.

Michael Burdiek

Well, Rick briefly mentioned seasonality. If you look at our MRM business in particular, there are numbers seasonal influences in every quarter of the year expect for Q1. In Q2, typically we experience a ramp in school bus installations and our school bus tracking vertical. In Q3, we have over the last two years seen a seasonal bump in terms of remote start application activity. And in Q4, in our vehicle finance business, which is part of our MRM Solutions Group, we see a general uptick in terms of vehicle finance activity related tax season and tax refund effects.

To a lesser extent on our Wireless Networks business, there is a seasonal influence in that. Those types of products are generally purchased as part of capital budget. And as you know, capital budget tend to get blowing out at the end of the budget year and there tends to be new budget coming into play start of the New Year. Our Q4 spans those two phenomenons, so there is a smaller seasonal effect in play in Q4, but I think you shouldn’t be too much our guidance that wireless will be down slightly from Q4 to Q1. Our business – our core business is very strong and we have a great deal of confidence in Wireless DataCom as we enter into the year.

Rick Gold

Yeah, I will characterize that comment regarding Q1 as more or less how strong the bump was regarding Q4 than, it is not out of the question that Q1 could be very, very close to Q4, but as we look today and just based on kind of recent trends that would be our expectation, on the Satellite side, Ilya that is much more about product transitions and the even flow of the new products and getting those out there than any other macro phenomena.

Ilya Grozovsky – Morgan Joseph

Okay, and so with basically we’re sitting here today two-thirds of way into your Q1, and with the guidance for the wireless piece being flat, sorry, being down sequentially, is your 31 million to 34 million, and you just did 29 million so is that increase even to the low-end essentially a function of all of the Satellite and increase in Satellite for the quarter?

Rick Vitelle

Yeah, that is correct.

Ilya Grozovsky – Morgan Joseph

Okay, great.

Rick Vitelle

Thank you very much.

Rick Gold

And the reason if you look at the earnings guidance for the quarter which is kind of flattish compared to the last quarter on the up revenues is because of that potential mix shift there.

Ilya Grozovsky – Morgan Joseph

Right, got. Thanks a lot.

Operator

Thank you (Operator Instructions) And the next question comes from the line of Marc Robins with Catalyst Research. Please go ahead.

Marc Robins – Catalyst Research

Hi, thank you and congratulations on the profit, it’s nice to see.

Rick Gold

Yeah. Thank you.

Marc Robins – Catalyst Research

Talk to me a little bit about the differed revenue, it was up $700,000 on a base of 5 million, can you give a little explanation as to how that came about?

Rick Vitelle

Well, the first thing, this is Rick Vitelle, Marc. The first thing that’s important to note is that substantially all of that deferred revenue balance relates to the air-step portion of our MRM business where we’re selling tracking devices into the vehicle finance market and also into the remote car market. The increase of roughly $700,000 in the fourth quarter was really a function of the strong shipments of tracking units during the fourth quarter.

Marc Robins – Catalyst Research

And so that’s why you get paid upfront and then you have amortized the revenue over the period of time?

Rick Vitelle

Right, the...

Marc Robins – Catalyst Research

Okay.

Rick Vitelle

The tracking hardware gets amortized over the 12 months.

Marc Robins – Catalyst Research

Okay. Now I understand that, okay. What roughly is the NOL now?

Rick Vitelle

$75 million is the U.S. federal NOL.

Marc Robins – Catalyst Research

That’s close enough. So it’s a whole bunch. And the soda truck opportunity that was mentioned in the last call, I guess it was supposed to be your offsetting 10,000 soda delivery trucks, did that get started in the quarter or is that beginning to get ramped and the third quarter was it underway on the fourth or is that going to really get underway in the first?

Michael Burdiek

It began in Q4 and will continue through at least this calendar year possibly through our fiscal year.

Marc Robins – Catalyst Research

So, that’s another layer of business that we can just kind of depend up on for 2012?

Michael Burdiek

Yes. But, I think it’s important to keep in mind that we announced that it’s a single largest opportunity we’ve ever booked for MRM. But, in the overall scheme and mix of opportunities that make up MRM revenue, I wouldn’t overweight that too much.

Marc Robins – Catalyst Research

Well, that makes an interesting question, is the kind of device that you would be using with those vehicles, will that be significantly less costly or valuable device than what be used in the vehicle tracking, vehicle, faster the vehicle insurance market.

Michael Burdiek

It wouldn’t be the lowest tier product, but it would be more in the category of mid-tier products.

Marc Robins – Catalyst Research

Okay, okay.

Rick Gold

Hey, Marc, back to Michael’s earlier point, the...

Marc Robins – Catalyst Research

Yes, sir.

Rick Gold

A lot of our customers in that business are run rate customers. So, while we don’t necessarily – its rear that we get a huge order for a single contract. In that business, what we typically do is we quality our customers and then they buy products on a monthly basis as needed.

Marc Robins – Catalyst Research

Okay.

Rick Gold

So, we have – but we have a significant diversity of customers and applications and markets and increasingly geographies in that business that allows us even though individual customers it is more difficult for us to predict. This is a business where actually the statics are starting to become relatively meaningful.

Marc Robins – Catalyst Research

Okay. Okay.

Rick Gold

So if we don’t – again, we don’t have a huge backlog at any point in time typically in that business, but once a customer has integrated a CalAmp product into their offering, that’s what they’re going to use. So we have a reasonably high degree of confidence that next month it’s going to look pretty close to last month with some ups and down and puts and takes related to some specific opportunities or seasonality or outliers.

Marc Robins – Catalyst Research

I guess and the question is as we’re beginning to see some improvements, some real improvement in the sale of newer vehicles versus used vehicles, does that mean anything to be outlook of that business?

Rick Gold

Not really.

Marc Robins – Catalyst Research

Not really. Okay. Okay. Let’s go back to something on the Satellite and gentlemen before me understood and I was just totally lost. You said and I apologize – you said that there were two products, your largest customer you are going to ship a new product and you were starting up an old product and you had two products for the lesser of the two customers and then go through that explanation again if you don’t mind. I did get lost.

Rick Gold

So let me just kind of cut to the chase Mark. So we have – we’ve launched one product, which is now in volume production that was (inaudible) historically largest customers.

Marc Robins – Catalyst Research

And that is the old product or the new product?

Rick Gold

It’s a new product, that’s a new product.

Marc Robins – Catalyst Research

Okay.

Rick Gold

When I say launch Marc, it’s a new product. We restarted manufacturing on a legacy product that had gone on- that was in hibernation, but it came back. But that was not a new development. So, we have the products, first new product in five years, actually that was qualified and launched and is now going production or historically largest customer.

We have three other products today in development and understand that this is always a fluid situation as I discussed last quarter, because of the continuing evolution of some of the opportunities, but we have three other products in development today. Those all happened to be for that same customer. We had two products a quarter ago in development for the other large system operator. Those products are on hold, and they were replaced by two products for the other customers. So it’s – and realistically, three at one time is or four at one time is about our available ban. So...

Marc Robins – Catalyst Research

All right. Let me state what I think I heard you said. For the lesser of your two major customers, Satellite customers, you have two new products that were under development. They were put on hold and they have been replaced with the development of two newer designed products for that lesser customer.

Rick Gold

No. Two products for our largest customer.

Marc Robins – Catalyst Research

Okay. So, right now you are not really developing any...

Rick Gold

By the way, we never used the word lesser with any of our customer...

Marc Robins – Catalyst Research

All right. There is the big customer and the kale customer. All right. However, you want to – the larger customer the less large customer, okay? So the larger customer now has two products and the product that was otherwise under development so it has three products essentially under development.

Rick Gold

That’s correct.

Marc Robins – Catalyst Research

Well, we got through that one. All right. And then talk to me a little bit about one last question; I promise to get off. Talk to me a little bit about going to this more variable manufacturing process on the Satellite side. What’s you’re really doing is trying to get fixed costs, dry fixed costs way down, be more responsive to whatever the demand situation might be and essentially if possible question mark drive up the gross margin if you could without having so much of a negative if the volume is very low?

Rick Gold

Correct.

Marc Robins – Catalyst Research

Okay. Would we ever be able to see gross margin in excess of 20%?

Rick Vitelle

Not with the traditional product mix we’ve had. If the product mix evolves in the direction reflected by those two new developments I talked about, that would not be out of the question.

Marc Robins – Catalyst Research

Okay. Thanks.

Rick Vitelle

But Mark, to be clear, in the near term the real driving force behind the variable cost margin I talked about, it less about savings in direct costs although there are savings in direct costs, it’s much more on the indirect side. And as you pointed out to take that fixed cost out of there so we can treat this as a product line and really manage it for cash on an incremental basis rather than as foundation business.

Rick Vitelle

Which is what historically was 5, 6, 7 years ago?

Marc Robins – Catalyst Research

Absolutely. Okay. Thanks very much. I’ll get back to the queue.

Rick Gold

Okay, thank you.

Operator

Thank you. (Operator Instructions) I’m showing no further questions at this time. I’ll now turn the call back over to management for any closing remarks you may have.

Rick Gold

All right, 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 would like to listen to a replay of today’s conference call, please dial 1-800-406-7325 and enter the access code 4430187. I would like to thank all of you for your participation today. You may now disconnect.

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