CAMP4 Therapeutics Corporation (CAMP) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CalAmp fiscal 2012 first quarter results conference call. During today’s presentation all participants will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator instructions) Today’s conference is being recorded today, June 30, 2011. I would now like to turn the conference over to Stacey Fife from SRB. Please go ahead.

Thank you operator. Good afternoon everybody. Welcome to CalAmp’s fiscal 2012 first quarter results conference call. With us today are CalAmp’s President and Chief Executive 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 on April 28, 2011 with the Securities & 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 any forward-looking statements whether as a result of new information, future events or otherwise. With that it’s now my pleasure to turn the call over to CalAmp’s President and CEO Michael Burdiek.

Thank you Stacey. Good afternoon and thank you for joining us today to discuss CalAmp’s fiscal 2012 fiscal first quarter results. I will begin by offering a few comments on the recent announcement regarding the CEO transition along with my thoughts on our business opportunities. And then I’ll provide a review of the financial and operational highlights from this past quarter. Rick Vitelle will then discuss additional details about our financial results, balance sheet, working capital management and cash flow and I will wrap up with our business outlook and guidance along with some concluding remarks. This will be followed by a question and answer session. On June 1st I was named CalAmp’s Chief Executive Officer, succeeding Rick Gold who will continue to serve the company as Vice Chairman of the board of directors. I am honored by this appointment and very much looking forward to my new role as CEO during one of the most exciting times in the company’s history. The wireless technology adoption trends in fleet management, asset tracking, energy management, transportation security and public safety are extraordinarily favorable to CalAmp. We are one of very few companies in the world with the requisite core competencies to address the challenging performance, reliability and environmental requirements of these emerging applications. In my new role I will be focusing my energies on the execution of our strategy to accelerate our rate of growth and to fully capitalize on the exciting market opportunities ahead of us. To that end the leadership team within CalAmp will rely on the following five tenets to lay the foundation for our future growth and profitability. First we will focus our resources on those technologies, products and markets that offer the greatest revenue growth and profit potential and pare back investment in areas with limited…

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 first quarter. Consolidated gross profit for the fiscal 2012 first quarter was $9.4 million or 27.3% gross margin compared to gross profit of $6.1 million or 23.2% 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 $8.6 million in the latest quarter or 39% gross margin. This compares to gross profit of $5.3 million or 33.7% gross margin in the same period last year. Wireless datacom gross margins have improved in recent quarters primarily due to improved absorption of manufacturing overhead costs resulting from higher revenues. Satellite products generated gross profit of $828,000 in the latest quarter or 6.6% gross margin. This compares to gross profit for satellite products of $793,000 or 7.5% gross margin in the first quarter of last year. Approximately $250,000 of costs and expenses were incurred in the first quarter as a result of restructuring the satellite business in conjunction with transitioning to a more variable cost production model. As we complete the transition during our fiscal second quarter we expect additional non-recurring costs to be incurred in the second quarter in an amount that may be moderately higher than the amount incurred in the first quarter. As Michael stated earlier, with the realignment of the cost structure of this business unit we expect to reduce the quarterly breakeven revenue level to below $10 million. Now turning to our tax position, an income tax provision of $9000 was reported in the first quarter representing…

Thank you Rick. Let’s turn to our financial guidance. Based on our latest projections we expect fiscal 2012 second quarter consolidated revenues in the range of $31-35 million with wireless datacom revenues up sequentially and satellite revenues down from the first quarter. We expect fiscal second quarter GAAP basis net income in the range of 1-5 cents per diluted share. The adjusted basis non-GAAP net income for the second quarter is expected to be in the range of 7-11 cents profit per diluted share. Our outlook for the second quarter includes revenue of 3 million generated from the sale of two patents and restructuring charges associated with the winding up of operation of our French subsidiary. As mentioned earlier, we expect to incur additional non-recurring costs and expenses in our fiscal second quarter related to the transition of our satellite operations to a variable cost manufacturing model. Based on our current forecasts we continue to expect year over year revenue growth in fiscal 2012 from both our wireless datacom and satellite businesses. In addition, we expect to be profitable on a GAAP basis in the second half of fiscal 2012 as well as for the full year. Based on our current estimates we expect to end the fiscal year at or near a positive net cash position. In concluding our prepared remarks I’d like to recap some key points drawn from our recent results and latest developments. First at the top line, consolidated revenues in the first quarter were up 31% year over year driven by significant growth from our wireless datacom business. Second, at the bottom line our profitability continues to improve, enabling us to enhance our balance sheet and liquidity position as evidenced by the $2.1 million reduction in our net debt. And finally, our MRM product line continues to generate strong demand, our wireless networks product line is building momentum with a strong pipeline and our satellite business is transitioning to a more variable cost model to increase operational flexibility of this business going forward. Significant challenges remain but I am very pleased to have the opportunity to lead a company with such tremendous potential. That concludes our prepared remarks. Thank you for your attention and at this time I’d like to open up the call to questions. Operator.

Thank you sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator instructions) Our first question comes from the line of Mike Crawford with B. Riley & Co. Please go ahead.

Thank you. First, I’m pleased to hear that free cash flow projections that you expect to be at or near positive net cash flow. You’re in - that implies you’re in 10% free cash yield and that’s a couple million better than our model. So I’m pleased to see that. Regarding your positive train control business, is your revenue in the train sector right now just from that one subcontract? Or are there other contracts? What does the pipeline look like there?

Well, as we mentioned in the prepared remarks and on prior calls, we have a subcontract for development of products to service the rail industry. We’re not able to go into details of exactly what the application is related to that project. But in terms of current business activities, that is our main revenue generation source from the rail industry although we do have some legacy business activities with railroads through our wireless networks business.

Okay. So if I could just paraphrase, are you saying that the products that you’re developing may be used for more than one deployment?

That’s possible, yes.

Okay. Thanks. On the MRM side did you give a total number of assets tracked?

We updated the number of units on our network to approximately 210,000. That’s compared to 185,000 at the end of last quarter.

Right. That’s the number that used to bounce around a little bit. But it seems to be on a pretty clear upward trajectory. Is that something you expect to continue or could that you know, bounce around from this level do you think?

Well, there is a pretty big jump from the last quarter. There wasn’t as large of a jump from the quarter before that to Q4. But we expect to continue growth in that business and we expect that subscriber numbers are actually going to increase faster than revenues. Remember we have seen a pretty good pop over the last couple of quarters related to the remote start activity, which has been a great contributor layered on top of our vehicle finance activities.

Okay. Great. Thanks Mike. And then maybe this is more for Rick, I’m not sure. But you did say that the Q2 revenues will include or you expect to include 3 million from sale of two patents. You also mentioned some restructuring charges but you did not quantify those. So can you quantify the restructuring charges you expect on the quarter?

Yes Mike. This is Rick. We do expect to take a charge of in the range of $1.1-1.3 million for the shut down of our French subsidiary, of which about 2/3 would be a non-cash charge. And also as we mentioned earlier we expect to incur non-recurring charges in the second quarter associated with the transition of our satellite business to a more variable cost production model. And we estimate those second quarter charges will be moderately higher than the approximate $250,000 that we incurred in the first quarter.

Okay. Thanks. And then Rick, you also mentioned that you expected your tax rate to be below statutory but I believe the cash tax rate that CalAmp expects to pay is something closer to an AMT, is that not correct?

We do expect that it’s going to be substantially less than the statutory rates, somewhere in the range of 1-1/2 to 2-1/2% for the year.

Great. Thank you very much.

You’re welcome.

Thank you. Our next question comes from the line of Aaron Martin with AIGH Investment Partners. Please go ahead.

Hi guys. Just a quick question on the guidance - is there going to be any special charge offsetting the patents sale or is there going to be no charge related to that?

The patents had a zero carrying value on our books. So substantially all those proceeds will be reflected on the bottom line.

Great. And then in terms of the non-recurring charge for the satellite business, that’s cash or non-cash non-recurring?

Those are essentially all cash.

Mostly cash.

Cash, okay. Got it. And for this past quarter on the wireless segment, how much of that was equipment sales or one-time sales versus recurring revenue?

Let me give you an approximate percentage of recurring revenue within our MRM segment. Revenue there is - actually I’ll give it as a percentage to our overall wireless datacom revenue. I think approximately 10% of revenues are recurring.

All right. About 2.2. Okay. And I would hope as we’re getting more units connected that would go up as a percentage?

It would trend upwards as subscriber units are activated. But at the same time the rest of our wireless datacom business is growing. So I don’t expect that to really change too much in character.

Okay. And then just jump a little bit - in terms of you’re saying you’re getting the satellite business to have a breakeven around 10, that would be hopefully get there by Q3?

I’m sorry, what was the question?

I mean in terms of getting the satellite business to the point where it’s more valuable and breakeven is about 10 million in revenue, you would hope to have that by Q3?

Well, we’re not giving…

I’m trying to guess in terms of we’re having some more charges next quarter and then hopefully that would be the end of the restructuring.

We expect to complete the transition of the satellite business to a variable cost model by the end of our Q2. So we have also guided our revenue down in Q2. We expect it to increase quarter to quarter through the balance of fiscal year. And obviously we have also stated that we expect satellite revenues to be up for the full year as compared to the previous fiscal year.

Satellite revenues and satellite profits - you’d have to do a lot of making up at the end of the year.

That’s correct.

Okay. Great. Thanks.

Thank you. Our next question comes from the line of John Nelson with State of Wisconsin Investment Board. Please go ahead

Hey Rick and Mike, I want to compliment you and your team on the good progress that you’ve made in terms of getting the company to profitability and continuing to improve the balance sheet. My first question is related to any change in the competitive arena for either satellite or wireless over the last you know, three to six months?

Let me start with satellite. There has been no change in the competitive environment for satellite during that period of time nor do we foresee any change in the competitive picture in the satellite business for at least the next quarter. That may change as we introduce new products towards the end of the year, it might be a slightly different competitive environment, but not dramatically so. In our wireless datacom business I think we would expect that the competitive environment will stay roughly what it’s been for the last three to six months. However, as we enter into new applications for our MRM products business we may expect to see a slightly different competitive environment partly because there are new and developing applications in some cases with a dearth of competitors.

Okay. Great. Second question is let me challenge you for I think the benefit of our shareholders. The closing comment said that you described the tremendous future potential of the company. Can you give us a little more flavor for the kinds of things that need to happen for this tremendous future potential to occur?

Well, I think some of the things are happening right before our eyes. I mean obviously our MRM business has done very, very well over the last couple of quarters as compared to the prior year. We expect to continue sort of the growth rates we’ve been on in the MRM business for some period of time. And we’re presented with new opportunities, new, large and developing opportunities domestically as well as internationally for that business. So we’re quite bullish there. In the wireless network segment we’re in some very, very attractive markets. And in many ways we have barely penetrated them from a revenue standpoint. And so we see tremendous upside in the utility sector. We see a great deal of opportunity in a related energy sector, namely oil and gas. We have talked a fair amount about the rail marketplace and that being a good growth opportunity for the company. So we have no shortage of opportunities and the markets we’re playing in are large and growing. And so that’s really the basis for us making those comments.

Do you think you have enough capital on the balance sheet to successfully or fully pursue these opportunities?

Well, we obviously generated strong operating cash flow in Q1. We’re projecting pretty strong operating cash flow through the balance of the year as noted in the net cash comment in the prepared remarks. We don’t see any short-term to medium-term constraints that really require us to look at our capital structure.

Okay. Good. Thanks very much.

Thank you. (Operator instructions) Our next question comes from the line of Ilya Grozovsky with Morgan Joseph. Please go ahead.

Yes. Hi guys. Thanks. So I just wanted to kind of go over the numbers first Rick and I apologize because I’m on a cell phone so it might have cut out a little bit. The guidance for Q2 was 31-35 and that’s inclusive of $3 million from a patent sale?

That’s correct.

Okay. Thank you. And then Mike, if you could just kind of I mean you’ve been in charge now for about a month. If you could sort of just take us through philosophically what you have seen that you intend to change and do differently and kind of what has already been done and implemented and what you think still needs to get done differently, thank you.

As you know, these are works in progress. Rick Gold and I and the entire management team here have worked together for quite a long period of time and we have been through some difficult times and we’re starting to see some very positive conditions for corporate growth going forward. And Rick Gold and I worked very collaboratively over the last few years. We think a lot alike. We tend to come to the same conclusions when presented with a set of facts. So from a decision making standpoint not a lot is going to change. However, I think it’s important to understand where CalAmp sits today and where we’ve been and where we’re going. Over the last few years our operating mode has been one one might term sort of a turnaround operating mode. And we’re clearly moving into a growth mode and so I think in terms of corporate attitude the tenor of prepared remarks, future press releases and as articulated in the five tenets at the start of the prepared remarks, we’re clearly thinking in terms of growth with the turnaround situation behind us.

Okay. Thanks.

Thank you. Our next question comes from the line of Marc Robins with Catalyst Research. Please go ahead.

Thank you. Congratulations on a much better quarter.

Thank you Marc.

Talk to us a little bit about the TV situation. The seasonality of that business is usually right after the Super Bowl period and I guess I need to be told again why there is kind of a backing up of the business here a bit.

Well, let’s sort of dissect our Q1 for just a minute. You know, Q1 was sort of an interesting phenomenon. We had a legacy product that represented a little more than half of revenues. And we had a new product that we ramped towards the end of our Q4 through Q1 and actually started ramping down towards the end of Q1.

Ramping down towards the end of Q1.

Ramping down towards the end of Q1. So that was a bit of an aberration and really the fundamental behind the very, very lumpy revenue Q4 to Q1 and expectations for our Q2.

And that’s because all new products come in Q2 or is half of that legacy comes back?

No. The legacy is going to maintain a fairly consistent run rate for the balance of this fiscal year.

All right. And let’s see now - you have some debt on the balance sheet, fixed debt. And I guess that has to be refinanced or paid off or something. When is that due?

In about 18 months.

18 months - okay. So that’s not really a problem at all.

Yes, the fixed debt, I assume you’re referring to the subordinated notes.

Yes.

And then our bank revolver matures in about six months but we are in discussions with banks and will have a new facility in place before the current one expires.

Right. Okay. Very good. Thank you.

Thank you.

Thank you. I show no further questions in the queue at this time. I’d like to turn the conference back to management for closing remarks.

Thank you again for joining our fiscal Q1 earnings call. We look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, this concludes the CalAmp fiscal 2012 first quarter results conference call. Thank you for your participation. You may now disconnect.