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Executives

Joanne Keates - Director of Corporate Communications

Michael Burdiek - President and CEO

Rick Vitelle - VP Finance, CFO and Secretary

Analysts

Mike Crawford - B. Riley & Co.

John Henderson - Inflection Point Investing

Orin Hirschman - AIGH Investment

Marc Robins - Catalyst Research

CalAmp Corp. (CAMP) Q3 2012 Earnings Conference Call December 22, 2011 4:30 PM ET

Operator

Good afternoon. My name is Jessica. And I will be your conference operator today. At this time, I’d like to welcome everyone to the fiscal year 2012 third quarter conference call. (Operator instructions). Thank you. Joanne Keates, Director of Corporate Communications, you may begin your conference.

Joanne Keates

Thank you, Jessica. Good afternoon and welcome to CalAmp’s fiscal 2012 third quarter conference call. With us today are CalAmp’s President and CEO, Michael Burdiek and CFO, 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 on April 28, 2011 with the SEC.

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 any forward-looking statement, whether as a result of new information, future events, or otherwise.

With that, I will now turn the call over to CalAmp’s President and CEO Michael Burdiek.

Michael Burdiek

Thank you, Joanne. Good afternoon and thank you for joining us today to discuss CalAmp’s fiscal 2012 third quarter results. I will begin today’s call with a review of our financial and operational highlights for this past quarter and Rick Vitelle will provide additional details about our financial results. I will then discuss our business outlook and guidance for the fiscal 2012 fourth quarter. We will then open the call to Q&A.

This quarter represents our third consecutive quarter of year-over-year revenue growth and our fourth consecutive quarter of increasing of net income. The fundamental driver for our revenue growth and improving profitability in the third quarter was our wireless datacom business segment.

As has been the case for the last several quarters, our mobile resource management or MRM business continued to experience significant growth, and this was complemented in the latest quarter by solid growth in our wireless networks, rail and energy markets.

Consolidated revenue for this quarter was $32.8 million, up 11% year over year, with wireless datacom revenue increasing by 22% to $25.9 million. GAAP net income of $0.06 and non-GAAP net income of $0.09 were at the high end of our most recent guidance. We generated strong operating cash flow of $2.1 million in the third quarter and $7.5 million through the first nine months of this fiscal year.

Our wireless datacom operations posted record revenue in the third quarter with MRM applications accounting for approximately two-thirds of total wireless datacom revenue and wireless networks applications accounting for one-third. This revenue split in our wireless datacom segment is consistent with recent prior quarters, excluding the patent sale revenue recognized within MRM in the second quarter of this year.

Our MRM growth initiatives continue to drive momentum and we believe that our products are gaining share in a market that is estimated to be growing at approximately 20% a year.

We also believe we are now the number one provider of mobile data devices to the domestic local fleet segment with our industry leading location monitoring unit or LMU product family. In addition, we are gaining traction in Latin America where we have developed tier-one cellular carrier channel partners to market our tracking products for the stolen vehicle recovery application.

As has been the case with channel partners in the U.S., we believe, we are well positioned to establish our products as the standard platforms for our customers internationally, thereby generating predictable and growing revenue streams once integrated into customers end market solutions.

In the emerging insurance segment, we believe our MRM business is competitively positioned with our recently introduced LMU 3000 product. We are currently working with a number of medium and large North American auto insurers to provide the hardware solutions to support their pay-as-you-drive and usage-based insurance initiatives.

There are around 250 million insured vehicles in the United States alone. And while that may take some time before we see significant commercial deployments by key North American auto insurance companies, we believe we are well positioned to provide innovative hardware solutions for these deployments when they occur.

In our Telemetric Systems business within MRM where we provide bundled solutions, including tracking hardware, hosted software applications and cellular data subscriptions, third quarter results were in line with expectations with healthy revenue from our vehicle finance segment and the seasonal ramp in our remote car start application with the onset of winter weather.

We believe that our sale in the second quarter of the two vehicle finance patents had shifted the competitive landscape as we are now seeing resellers and distributors in the buy-here pay-here market align themselves with the high value CalAmp brand. We believe that our brand position along with consolidation in the market bodes well for our revenue growth in this segment over the coming quarters.

At the end of the latest quarter, there were approximately 1.2 million MRM tracking devices in service with our customers that are supported by CalAmp’s PULS cloud-based device provisioning, monitoring and maintenance system. The PULS cloud platform along with our embedded programmable event generator system called PEG continues to drive adoption of our products by customers who find the ease of integration to be a key factor in lowering their overall development and support costs compared to competitors’ products.

Through our bundled hardware and software offerings in the vehicle finance and remote start markets, we had approximately 235,000 active subscriber units on our network at the end of the latest quarter, as compared to 220,000 subscribers at the end of Q2. This growing subscriber base provides an ongoing and complementary recurring revenue stream within our MRM business.

In the energy sector, we continue to experience steady revenue growth from utility and oil and gas customers. We have won several smaller projects recently which we believe will lead to larger deployments over the coming quarters and years. In addition to the domestic growth prospects, we have a growing pipeline of international energy projects through our partners in markets around the world. Over the next few years, we believe that opportunities in the energy management field, including applications in demand management, distribution automation and advanced metering, will deliver steady revenue growth for CalAmp.

Revenue from the rail sector through our positive train control or PTC project reached a high point in our most recent quarter. During the quarter, we announced a $4.7 million addition to our ongoing PTC development project with the prime contractor. Including this contract addition, the project size is now approximately $19 million. Of this amount, we’ve recognized about $10 million of revenue from project inception through the end of the third quarter. We expect to recognize the bulk of the remaining revenue from this development project over the next three quarters.

Longer term, we believe we are well positioned to win future business for PTC production deployments. We continue to view rail as an attractive growth market for CalAmp going well beyond the near term PTC application. We see opportunities for a range of applications with relevance for both our wireless networks and MRM product solutions.

The public safety market segment within our wireless networks business remained weak in the third quarter, though we obtained a recent increase in bid and proposal activity, including opportunities for our next-generation 4G LTE router platform. Despite the challenging near term funding environment, we see good long-term growth prospects of public safety market for CalAmp broadband solutions for converged voice and data applications with the expected deployments of private and public 4G LTE networks.

Moving on to our satellite business, we had somewhat lower revenue in the third quarter compared to the second quarter, though we saw a meaningful sequential quarter gross margin improvement driven by the recently completed transition of the business to a variable cost operating model.

As we announced last week, subsequent to the end of our third quarter, we began shipping a new home video and data networking product to our key satellite customer. We expect this new product will drive improved revenue and profit for the satellite business in our fiscal fourth quarter and into our next fiscal year.

Overall we are pleased with our consolidated revenue and earnings results in the third quarter, and we believe the ongoing execution of our business strategy positions us for solid year-over-year revenue growth and profitability in the coming quarters.

With that, I will now turn the call over to Rick Vitelle, our Chief Financial Officer, for a closer look at our third 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 2012 third quarter.

Consolidated gross profit for the fiscal 2012 third quarter was $10.2 million, or 31% gross margin, compared to gross profit of $7.7 million or 26% 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 revenues, transition of the satellite business to a variable cost operating model, and the shift in the relative revenue contributions of these two business segments in the third quarter of this year versus last year.

Looking more closely at gross profit performance by reporting segment. Wireless datacom gross profit was $9.5 million in the latest quarter, or 36.7% gross margin. This compares with gross profit of $7.5 million, or 35.5% gross margin in the same period last year. The improvements in wireless datacom gross profit and gross margin percentages are due to higher revenues and the associated increase absorption of fixed manufacturing overhead costs.

Our satellite business had a gross profit of $666,000 in the latest quarter or 9.7% gross margin. This compares to satellite gross profit of $190,000 or 2.3% gross margin in the comparable quarter of last year. Primarily because of the transition to a variable cost mode, we have lowered the breakeven point of our satellite business to less than $9 million per quarter.

Now turning to our tax position. An income tax provision of $28,000 was recorded in the third quarter, representing federal alternative minimum taxes. Under the federal AMT rules, we can only sell-through 90% of our taxable income with net operating loss carry-forwards.

The effective income tax rate for the fiscal 2012 is expected to be substantially less than statutory tax rates due to the existence of net operating loss carry-forwards for both U.S. federal and state tax purposes.

Now looking at our bottom line, GAAP basis net income in the fiscal third quarter was $1.7 million, or $0.06 per diluted share. Excluding the impact of intangible asset amortization and stock based compensation expense, and including an income tax provision that reflects taxes paid or payable for the period, our adjusted basis or non-GAAP net income in the latest quarter was $2.6 million or $0.09 per diluted share.

For a more detailed reconciliation of the GAAP and non-GAAP financial results, I refer you to our third quarter earnings press release that was issued today and which is available on our website.

Now, moving on to the balance sheet, our total inventory at the end of the most recent quarter was $12.4 million, representing annualized inventory turns of 7 times. At the end of the immediately preceding quarter, inventory was $11.8 million, which also represented annualized inventory turns of 7 times.

During the last two quarters, we built up inventory in response to robust bookings and increased demand for our MRM products and also to support shipments of preproduction radios on our positive train control project. The consolidated accounts receivable balance was $15.8 million at the end of the third quarter. This represents an average collection period of 41 days, which is up slightly from the immediately preceding quarter.

Net cash provided by operating activities was $2.1 million for the three months ended November 30, 2011 and $7.5 million for the nine months then ended.

At the end of the third quarter, cash and cash equivalents totaled $4.4 million, which was essentially unchanged from the end of the preceding quarter. At the end of the latest quarter, our total debt outstanding was $6.5 million, comprised of $3.5 million outstanding under our bank revolver and $3 million outstanding under the bank term loan. In addition, the amount available to borrow on the bank revolver was $5.5 million at the end of the latest quarter.

Our net debt, that is debt minus cash, stood at $2.1 million at the end of the latest quarter and has been reduced by $5.6 million during the nine months year-to-date period.

With that, I’ll now turn the call back over to Michael Burdiek for our guidance and some final comments.

Michael Burdiek

Thank you, Rick. Now let’s turn to our financial guidance. Based on our most recent projections, we expect fiscal 2012 fourth quarter consolidated revenues in the range of $34 million to $38 million. We expect satellite revenues to more than double on a year-over-year basis and wireless datacom revenue to be marginally lower from the third quarter but up year over year.

We anticipate fourth quarter GAAP basis net income per share to be in the range of $0.03 to $0.07. The adjusted basis for non-GAAP net income for the fiscal 2012 fourth quarter is expected to be in the range of $0.06 to $0.10 per diluted share.

Based on our operating cash flow outlook, we expect to be at or near a positive net cash position by the end of this fiscal year. We believe our robust and growing pipeline of opportunities across multiple market segments should drive continued momentum and profitable growth into fiscal 2013.

In concluding our prepared remarks, I’d like to recap some key points drawn from our recent results and the latest developments.

First, our wireless datacom business is experiencing strong revenue growth driven by robust demand in multiple market applications, and we are now experiencing earnings leverage from top line growth. We believe this business is very well positioned for sustained long term profitable growth with competitive products and technologies in attractive markets.

Second, the outlook for our satellite business has improved. With the recent start of shipments of our home video and data networking product to our key satellite customer and the variable cost operating model now in place, we expect improvements in revenue and profitability of this business unit in our fiscal fourth quarter and into our next fiscal year.

And third, our strengthening balance sheet and our improving profitability and operating cash flow provide us with greater financial flexibility to invest in rapid expansion in the markets that we serve.

Overall, we are quite pleased with our operating performance through the first three quarters of this fiscal year. We’ve achieved many of the milestones that we laid out early in the year, and we remain quite optimistic that our wireless datacom growth strategy will produce positive results for our shareholders.

To that end, we will continue to focus our resources on serving those markets and applications that we believe have excellent long term growth prospects with products and services that have sustainable competitive advantages.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mike Crawford with B. Riley & Co. Your line is open.

Mike Crawford - B. Riley & Co.

Thank you. First, I would like to ask about this new home video and data networking product. So one, is this – since this is something you designed in conjunction with your main DBS customer, is this something that could lead toward higher gross margins in your satellite segment? That’s a part A. And then part B would be, whether this particular product is to be sold up by other boxes inside of a home as opposed to your traditional business in that segment, which has been on a roof top (ph).

Michael Burdiek

Sure. Well, let me start with part A of the question. We expect that the product we announced last week will be somewhat higher margin than our traditional legacy product. Hopefully that answers part A.

In terms of part B, we’ve talked throughout this year about the fact that we had three products in development in the qualification process. Obviously the first of those three came through the queue last week and we began volume shipments of that product. There is a – sometimes term here big brother to that product, that’s a similar application, that’s in the queue currently. And we hope to get that qualified and hopefully begin shipments perhaps late this quarter and perhaps into Q1 of next fiscal year.

And followed behind that is a product that’s essentially a refresh of the legacy product we’ve been shipping for nearly five years. So hopefully that gives us an opportunity to lower the overall cost of the platform and potentially see somewhat higher margins for that product. Once it becomes qualified, it replaces the legacy product we’ve been shipping most recently.

Mike Crawford - B. Riley & Co.

Okay, thanks. And just to clarify, three months ago, when you said you had restructured this business to be cash generative above $9 million a quarter, was that with these products in mind? Or is this an additive to the expected profitability on that part of the business?

Michael Burdiek

Well, it was part of our outlook at that period of time. But let me correct part of your question if I could. You said, cash flow generating north of $9 million. Two quarters ago, I believe, we said that we expected the business to be breakeven at $10 million or less. We’ve updated that last quarter and said, we thought it was more like $9 million or less. We basically reaffirmed that outlook today.

The business is actually cash flow accretive at numbers well below $9 million through the overall – the overhead cost absorption that’s really built into the business.

Mike Crawford - B. Riley & Co.

On the public safety front, so this is a market that has just been in dormancy for the better part of the past few years as customers despite desiring products have not been able to afford them. You said you are seeing the uptick related to 4G LTE products in particular. But is there also any change in your customers’ ability to buy these products, or what do you see?

Michael Burdiek

Well, we see definitely an improvement in the pipeline based on some 4G project opportunities. Some of those projects are supported by federal grant funds. So that in some cases counters the local tax flow issues that states and municipalities are facing, in terms of just trying to manage their budgets.

So there is a little bit of a tail wind coming from the federal government there. So that is actually increasing our opportunities, because most of those grant funds are related to 4G LTE deployments in support of converged public safety communication applications. We think it will be some time -- before their projects awarded, we think it will be sometime before the network buildouts begin. But we’re getting some decent looks and it’s some fairly large opportunities relative to what we’ve seen in the recent past.

Mike Crawford - B. Riley & Co.

And then last question regarding the wireless networking and MRM businesses, is a part, I guess, A on the positive train control win might some of those projects start to move to production volumes where you might hope to sell some of your hardware? And well, we’ll just take those, is the first part of that.

Michael Burdiek

Sure. We wouldn’t expect to see any volume production until the development project is complete. And RFPs of the development project won’t be completed till probably some time in our fiscal second quarter next year. So we would think that the earliest we would see revenue associated with production activities coming in Q3 or Q4 next year.

But our outlook for opportunities there hasn’t changed. We expect to compete for that business. Once the design phase of this project is complete, we won’t be the only supplier into the market. But we hope to be one of the – one, or two, or three strong competitors out there competing for that business.

Mike Crawford - B. Riley & Co.

And then last question relates to insurance pay-as-you drive, so that’s something else and I think the major revenue opportunities for you are more like a year off. But what has been the development in the past few months since (indiscernible) about this business?

Michael Burdiek

One development over the last year, Mike, is that we’ve actually been able to seed a number of pilot opportunities with our LMU 3000 platform. We introduced that about three months ago. We’ve ramped the pilot level or prototype level production of that platform. So we now have that in a number of different pilot projects and trials. So that’s one development that’s occurred.

I think in terms of the number of pilot applications we are involved in has increased somewhat. But we still view that as a very interesting market segment. We think it will develop slowly, but we think it will develop steadily over the next year and potentially be pretty robust in the year after that.

Operator

Your next question comes from the line of John Henderson with Inflection Point Investing. Your line is open.

John Henderson - Inflection Point Investing

Okay. In regards to PTC program, in the last earnings call, you stated that – we see some pretty significant opportunities to participate in production part of that. I mean, do you see any contract now coming down the line as production, part of the PTC rollout any time soon?

Michael Burdiek

Well, we are involved in some budgetary quoting at this point in time. I wouldn’t say that announcements or M&A and again, we wouldn’t expect to see any real revenue from production activities until probably Q3 of next year. Simply because of the development project carrying on at least through the end of our Q2 of next year.

John Henderson - Inflection Point Investing

And then in regard to the California Metrolink and the Chicago Transit Link, which is hoping to be up and running by the end of 2012, can you provide us with any estimate of how much equipment they would need to order to complete the production phase and installment next year?

Michael Burdiek

I wouldn’t be able to give you exact figures in terms of the number of radios that are necessarily the revenue associated with those projects. We don’t expect the metro lines, or the metro rails to be anywhere near the size of opportunities that we see, with the cargo rails, the tier-1 and some cases, regional rail operating companies. We believe in terms of market size, they represent the bulk of the market.

We believe that the commuter lines will probably represent an early adopter community. So we are certainly interested in competing for that business but we think the bulk of the business will come from the major real operating companies.

John Henderson - Inflection Point Investing

I see. Okay. Last one –I guess, essentially since CAMP has played such a pivotal role in the PTC design and the preproduction phase, would it be reasonable to expect that the rail roads are likely to be one of the primary suppliers? I mean, in other words, what your competition --- and besides the price point, is there anything that would incentivize the railroads to go with another vendor other than CalAmp?

Michael Burdiek

We would hope not. Certainly our position. I mean, certainly our position as a key player in the development project probably gives us a first mover advantage in the market. But again, for a number of reasons there will be more multiple suppliers of radios into this opportunity.

John Henderson - Inflection Point Investing

Well, we think that it probably is interesting to tier-1 EMS companies or very traditional network and infrastructure into the real market. But we are not sure exactly who the key competitors will be at this stage.

Michael Burdiek

But I think they would the usual suspects.

John Henderson - Inflection Point Investing

And then I actually had a question from Rick if I may. In terms of the valuation allowance of $40.2 million. I mean with the earnings, now the earnings leverage kicking into the model. Can you provide some color on what the tax rates would look like and whether or not you plan to modify the valuable allowance?

Rick Vitelle

I think some point in the future we will have to modify the valuation allowance substantially. Currently we’re modifying the valuation allowance incrementally to offset the current taxable income. The primary test for a company in our situation is that we have to have pre-taxes online or an aggregate basis for the most recent period.

So we get to that point, we will be probably reducing our valuable allowance by a substantial amount.

John Henderson - Inflection Point Investing

So on an aggregate basis for the previous three years – do you think?

Rick Vitelle

For the current and prior two year period. For the most recent three year period.

Operator

(Operator Instructions). Your next question comes from the line of Orin Hirschman with AIGH Investment. Your line is open.

Orin Hirschman - AIGH Investment

Just to follow up on the last set of questions. It sounds like at this moment in time, there isn’t – I don’t know, it could be just because spec really isn’t truly finished and ironed out. But it doesn't sound like there is a competitor at this moment on the radio side. Is that a fair statement?

Michael Burdiek

Well, there is no competition purely on the radio side because the design isn’t released – is the design phase of the project isn’t yet complete.

Orin Hirschman - AIGH Investment

So my question just related to preproduction units. I assume during the preproduction phase, whether that’s a six month phase or three months phase and you’re going to a little – I don’t know if the volumes are meaningful at that point. But just ask you for some color on that.

Michael Burdiek

Well, the volumes aren’t anywhere near the volumes we would expect as part of the production contract, simply because these are relatively small quantities, they price somewhat higher, then we would expect to be selling radios. And so we are talking quantities in the 100 for preproduction radio deployments. We would expect production volumes to be in the 1000s.

Orin Hirschman - AIGH Investment

Could those preproduction volumes total add low unit 2 a quarter for a period of time –

Michael Burdiek

They have certainly added that, more than approximately $2.5 million in our Q3.

Orin Hirschman - AIGH Investment

So just on the radio side itself?

Michael Burdiek

Almost all on the radio side, yes.

Orin Hirschman - AIGH Investment

Is there any reason why that shouldn't continue for the next couple of quarters until we get to production?

Michael Burdiek

Well, actually we expected to be down this year, because of the various staging for the preproduction radios and their testing regimens. So we’ve shipped basically stage 1 of the preproduction radio, the quantities. They are going through a phase of test and acceptance right now. So there is a bit of a law in the preproduction activities. Due to timing of those ratio deliveries and testing processors, we’re actually going to somewhat lower revenue this quarter. But we expect that to ramp up pretty significantly in Q1 and potentially spilling over into Q2, next year.

Orin Hirschman - AIGH Investment

Just a follow up as well, it’s tied to that – just in terms of the overall guidance for the wireless side to be down slightly from Q3. Could you just review again besides this contributor that you just mentioned on the railway deals? What else is in there, if there is anything?

Michael Burdiek

Mostly related to what I just described.

Orin Hirschman - AIGH Investment

If you would describe the overall – I mean, you’ve described it on the call pretty definitively. But if you had to pick just one or two other opportunities besides rail and besides insurance, that are currently ramping and then have a very good potential in the next 6 to 12 months. But you have public safety, what would those two or three verticals be?

Michael Burdiek

Well, they’re actually a number, that’s why we used the word multiple a couple of times in the call script. We see continued strength in MRM specifically the fleet segment. It’s been very strong. There just seems to be a lot of momentum there. So we expect continued growth in that area.

Of course, insurance is an emerging application for us, it will start to add to revenues next year. We expect it to be again a pretty robust in the year after. We see steady and increasing opportunities in the energy sector particularly internationally, which is interesting. And of course, rail has been a good growth engine for us over the last several quarters. And last and not least, we’re seeing some – fortunately some strength in our satellite business which just complements everything else I just described.

Orin Hirschman - AIGH Investment

One last question on the wireless side. So you mentioned now just international, utility related, for example, any breaks yet on the long, long, long story of domestic utilities?

Michael Burdiek

Not really. It’s more of the same, I would say, though we’ve seen larger opportunities enter the pipeline. But as we’ve talked about for many quarters, these things tend to take a while to just gestate. Even though the opportunities are coming in and they are larger than some we’ve seen in the recent past, it will take a whole to consummate.

Orin Hirschman - AIGH Investment

Would you say that overall in that business that you would guess you will see growth year over year and it’s coming for the full year?

Michael Burdiek

We expect two, yes.

Orin Hirschman - AIGH Investment

Okay. Congratulations on continuing to hit your milestones since we signed on a few quarters ago this year, and I hope you continue

Michael Burdiek

We appreciate that. Thank you.

Operator

Your next question comes from the line of Marc Robins with Catalyst Research. Your line is open.

Marc Robins - Catalyst Research

I’m going to add on to the last questioner’s question about anything breaking through on the utility side. And I guess my follow-up would be, do you see maybe, Michael, you are losing some business to the other competitors, or is it decisions just not being made?

Michael Burdiek

Well, I think there are two factors. I think one is decisions are simply not being made, or if they’re being made, they’re being made very tentatively. So, in some cases, it’s hard to discern when something has gone from an opportunity to a pilot to larger pilot to a full deployment. There just tends to be steady increase in engagement with the utility, one you seem to have been designed in so to speak.

In certain circumstances we’ve seen utilities pull back from some of their initiatives. So they may have cancelled some of the projects they originally anticipated they would roll out, perhaps because they were little more ambitious from a capital expenditure standpoint and they were willing to buy it off. So we see delays and slower rollouts than we would have hoped for.

Marc Robins - Catalyst Research

But do you feel very good that you’re not just losing the business to someone else?

Michael Burdiek

Not in the areas where we are focused, or have been focused over the last couple of years.

Marc Robins - Catalyst Research

Michael, discuss with me a little bit more about how you described earlier in your prepared remarks the pre-eminent position you have, or you hold in the wireless business. Tell me again how you phrase that and how you perceive that position?

Michael Burdiek

I might start using that phrase pre-eminent. I like that.

Marc Robins - Catalyst Research

That’s copyright me now.

Michael Burdiek

I will call and ask permission.

Marc Robins - Catalyst Research

That’s okay.

Michael Burdiek

Obviously in all the markets we serve, we have competitors. But we think our strategy, our focus and in particular our focus on technologies and product capability is to give us a sustainable competitive advantage, really has allowed to become a leader in many of the market applications we serve, in particular the MRM applications.

We just have a team of people there who can execute, who understand the applications, who come up with very innovative approaches to solving problems. And the really designing state-of-the-art product platforms, very tailored to the applications and they are all supported by state-of-the-art back-end cloud-based computing platforms which really allow us to look like a modern supplier in this industry whereas others may be little more behind the time.

Marc Robins - Catalyst Research

And then moving on to the next section of my question. You mentioned that you are now supporting, I think I heard the number 135,000 versus 120,000 in the previous quarter of – I am going to say radio signals that you are monitoring on an ongoing basis. A, are my numbers right? And B, if I remember correctly, does that kind of indicate – should that indicate to me a bit of a slowing of this trend?

Michael Burdiek

First, to answer the question about the numbers, no, the numbers are not quite right. Last quarter, we had 220,000 units –

Marc Robins - Catalyst Research

135,000.

Michael Burdiek

Today it’s 225,000.

Marc Robins - Catalyst Research

Okay. Thank you for helping me with that number. But my question is still kind of – my real question still stands and that is, are we seeing a slowing of this monitoring business? Or what we’re really seeing a shift more of this business towards you producing more radios and there is a real market there, and not quite so much on the monitoring side.

Michael Burdiek

Actually if you go back two quarters ago, we had 210,000 subscribers. The end of last quarter, we had 220,000. The end of this latest quarter, we had 235,000. So we’ve actually seen a greater subscriber increases between Q2 and Q3 than we did from Q1 to Q2. So that doesn’t suggest we’re seeing a slowing in terms of subscriber uptick, just the opposite in fact.

Marc Robins - Catalyst Research

No, you are right. Okay, good. Thank you. All right. Now you said something in your address – earlier address about the fourth quarter wireless business being a little bit below the third quarter. Is that a seasonal factor or is that a timing actor? Help me understand that just a little bit.

Michael Burdiek

The main reason that we are expecting wireless revenue to be down marginally from Q3 is solely because of the phasing on of the PTC project.

Marc Robins - Catalyst Research

The phasing on of the PTC project?

Michael Burdiek

Yes. As I mentioned earlier, we just passed through the first stage of preproduction activities on that project. And so we captured a good chunk of revenue for that activity in Q3 because of the testing and acceptance process associated with those initial deliveries under the preproduction phase of the contract. We’re going to see a little bit of a downturn in revenue, and we expect it to ramp pretty significantly going into Q1.

Marc Robins - Catalyst Research

Yeah, that was my follow on that we’d see kind of a -- the bulge in the snake would kind of work its way through the snake then. Okay.

Michael Burdiek

Precisely and we’ve seen some volatility on this project quarter to quarter. It’s not unprecedented for revenue to be down from one quarter to the next but often times it’s been offset in the subsequent quarter by a particularly large ramp.

Marc Robins - Catalyst Research

Okay. Even more importantly, are you beginning to see any inroads with your work on the rail in the PTC arena? In the railroad, the regular major operating railroad side of the business, is that beginning to bear any fruit whatsoever? Are you still -- is it part scrabble effort?

Michael Burdiek

Well, our key focus right now from a business development standpoint, it is pursuing PTC related business opportunities with the major rail operators. But as part of that obviously, we have the opportunity to introduce the complete portfolio of CalAmp capabilities, including products that we may sell into other market segments from our wireless networks business, or even some of our MRM solutions.

Marc Robins - Catalyst Research

Right. As we have talked in the past, I mean, if the railroads ever figured out what business they were really ever in, and could track engines, and track cars and track freight like the trucking business, I mean, that would be wonderful for them and terrific for you. And I know that, that’s where we would like to see CalAmp go eventually. I was just wondering if we’d made any headway, so I guess not quite.

Michael Burdiek

Not in any substantive way but obviously that’s part of our strategy in the real marketplace.

Marc Robins - Catalyst Research

Okay. That’s great. Now last question and I really apologize to you letting me go on. Help me better understand what the satellite business is doing with the whole home video data network. I am sorry, I only have a physics, chemistry degree. I can’t do this computer stuff any more. I worked out of 360, so what can I say?

Michael Burdiek

So what’s that product all about?

Marc Robins - Catalyst Research

Yeah, what is it about and why should I be excited? And then following on, does this device give you – probably not – but does it give you any better inkling as to what this major customer is trying to do going in the future with its capability, satellite and wireless capabilities?

Michael Burdiek

Well, let me answer the first question as best as I can. So current key customer in this market is really the only service provider that doesn’t offer a whole home video networking solution. And so this platform gives them the ability to introduce that into the market.

Marc Robins - Catalyst Research

So it’s just up to the competition.

Michael Burdiek

Essentially, yes. From a CalAmp standpoint, this is an incremental product opportunity because it’s complementary to what we’ve traditionally done through the design and manufacture of outdoor of receiver equipment. So this is a complementary product. And in no way cannibalizes any of the business activities we have underway with that customer.

In terms of where is the market going, I’ll try to answer from that point of view. I think that the satellite service providers see an opportunity or perhaps even a need to offer a complete bundle of services. TV, phone, streaming video, and the easiest way to be able to deliver those bundle services is through a broadband connection to the home. And we believe that our customer was probably looking at opportunities to be able expand their offering to provide a broadband solution into the home, whether it’s through a partnership with someone who provides a wired service, or through a buildout of a network or through a partnership that would allow them to offer those services through a broadband wireless connection.

Obviously, we are in the wireless business, and we are in the wireless data business and if the market ends up going in that direction whereby the service providers offer broadband service is through wireless connection to the home, hopefully that presents an incremental business opportunity for CalAmp.

Marc Robins - Catalyst Research

And I am going to step back for a second. Again, I appreciate the audience indulgence. The competitor’s product, was that two separate pieces of equipment made by two different manufacturers? What I mean is somebody made the horn amplifier on the roof and then somebody made the other device inside the high definition video and data stuff, because – and this is the reason why I asked that, I was – I always believed that you were one of the very, very few wireless folks that could do both sat – or all three satellite coaxial and RF. And that’s tricky business.

Michael Burdiek

I would agree with that last comment. In terms of how companies deliver content to the home, outside of outdoor receiver devices, the satellite service providers themselves today can and offer any broadband connection to the home, other than through one of the cable providers, or one of the –

Marc Robins - Catalyst Research

I am sorry Michael. What I am saying is that you have these devices that you are now manufacturing to deliver that has both satellite capability and some really whole home def, whole home ability, okay, which is not satellite stuff, it’s RF and whatever else. And I am wondering you might – this is a complete package that you are producing for your customer. The other customers, the competitor products that seem to have this already, it must have been parceled out, it’s not supplier, supply in the whole package.

Michael Burdiek

No, there are multiple competitors serving each of the major broadcast TV service providers in the U.S. The competitor to our main customer actually has integrated, the whole home video networking capability into the outdoor receiver equipment. So it’s an integrated device. However, that integrated device sells for somewhat higher ASPs than let’s say, a device that doesn’t include this whole home video capability integrated in with the outdoor receiver.

Operator

No further questions at this time. I’ll turn the call back over to Michael Burdiek for closing remarks.

Michael Burdiek

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

Operator

This concludes today’s conference call. You may now disconnect.

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