Q&A
Michael Karas, from MH Capital Partners
Q. Good morning gentlemen. I had a couple of questions. I’d like to start off with a backlog number. I’m not sure if you provided one, and if you can provide a number, how has that changed from the prior year?
A. Total backlog for the company at the end of the calendar year 2002 was just under $6M. [OK] and, compared to the prior year that was a couple million dollars lower than the backlog at the end of the prior year. However I want to point out that the backlog at the end of 2001 included several military orders that were actually scheduled throughout the year of 2002, so, the backlog today actually represents a much shorter cycle time from actual order placement to delivery, than the orders that we had on the books a year ago.
Q. OK. And I’m curious if you’ve had any OEM agreements with non-RV OEM manufacturers for the TracVision product?
A. We’ve had quite a bit of interest. We are talking to vehicle manufacturers. Obviously it’s too early to have agreements in place, but we’re very surprised, we were expecting, you know we’ve said publicly that the initial demand is going to come from the consumer market and the after market, but, at CES we had a lot of vehicle manufacturers come and talk to us. I think there is interest there, and if nothing else it certainly validated our product concept and demand for the product.
Q. And what will the product cost in the after market?
A. The retail price for the antenna, the MSRP is about $2500, and we are bundling it with a 12V DirecTV receiver, which is $495. We’re selling the package initially, for $2,995, [plus installation] plus installation.
Q. OK. Thank you very much.
J. P. Mark, Farmhouse Equity.
Q. Hi Pat and Martin, nice quarter. [Thanks. Thank you.] I wanted to follow up on the question about the A5. One of the things you said, Martin, was that you expected this to be the most successful product ever. I wonder if you could talk about that in terms of revenue, in terms of units, in terms of margin? How do you mean that?
A. Actually, there is another aspect to that as well, I think that this product is going to be successful in terms of what does it do to the company in terms of technology. It really is a fundamental breakthrough in the satellite antenna business, so, if you look at our existing markets, like Marine and RV, I think we have the potential, later on, to go back and apply this type of technology into those markets, you can imagine what that’ll do to our competitive position there, so, ah, and it also opens up military opportunities We’ve had quite a bit of interest, unsolicited interest from the military for this type of antenna for things like Humvees.
But to get back to your question, I think fundamentally, in terms of units and dollars, I think this is going to be our biggest single product ever. Now, I did want to have that cautionary statement in there that I think that this is a very unique product, a brand new market. Nobody’s even heard of this type of technology before, you know, nobody’s out there looking for this technology today, so, as a pioneer in a new market, you have to do your legwork and sell to the early adopters and go through the normal phases that any new technology has to go through. So, while I’m very confident in the product and the prospects, the ramp rate is still going to be a question – how fast is it going to catch on, but, what we’re really excited about – I think the response we got at the announcement was even better than we had hoped for.
Q. Just a follow up to that as well. You also mentioned something about setting up a network to sell to dealers? Can you talk a little bit more about what’s in place right now, and how you expect it to grow, and the third component of that is about competition in this area. Do you see anything coming along in the near term and what do you expect would be the timeframe for seeing a competitor?
A. Well, let me start with the distribution question. What we’ve done is really modeled after what we do in the other channels, where we have a unique set of sales reps in each channel. We don’t try to develop a common sales force to sell a product.
We have already established a nationwide network of sales reps in each territory. Each of these reps is responsible for opening up retail outlets and distributors in their local area, so these are what we call 12V sales reps, people who are selling similar types of products. I don’t mean similar in the sense of satellite antennas but selling high end video equipment or high end car stereo, car alarms, those types of products. So we have that network in place now – all those reps are under contract, and they’re out there actively soliciting new accounts for us in those markets.
The question on competition, we have no idea when we will get a competitor. We are just absolutely thrilled to be first to market. This recurring nightmare of mine is that you get very close to delivering and then somebody beats you to it, so we are very, very happy that we are first to the market, and nobody else has announced a product yet, so …
Q. Are you aware of anyone else that is sort of working on something right now?
A. No I’m not. I’m not aware of any competitor that’s working on an automotive product like this. I know a lot of people have over the years tried to develop products like this, but they failed, either for size reasons, or for price reasons. It’s very difficult to get both those things in a product.
Q. I have a bunch of questions for Pat, but I’ll circle around
A. OK. Great, thank you.
[Q&A 6:08] Pierre Maccagno, Needham.
Q. I have some questions here. A little bit more color on the breakdown of revenues. Is it right to say that for Navigation, the total revenues would be about $6.14 million for the quarter? [Martin: I’ll let Pat take that question.] Defense and legacy?
A. I’m sorry Pierre, when you talk about total Navigation, uh [Pierre: I mean the sum of Defense, as well as legacy and Marine products]. Uh, OK. When you look at it that way, yes, the fourth quarter was approximately $6.1 million. The total set of Navigation products, including Defense Navigation, as well as what we refer to as the Legacy navigation, Compasses and OEM sensors.
Q. OK. Then, Communications what percent was land and what percent was Marine?
A. Well if you look at it on a company wide basis, for the year, let me start there, it was about a 50%-50% split between Marine and land for satellite communications. However the profile for the fourth quarter was different. Land was 60% and Marine was 40%. Now that’s for the worldwide.
In the U.S. the percentages are a bit different, the reason being that for the worldwide business, in Europe, most of our business is Marine business at this point. In the U.S. the splits were for the year the Marine was just over 40% of the business for the year, and for the fourth quarter, the Marine was down to about 35% for the quarter.
Q. OK. And within Land, what percent was OEM and what percent was after markets?
A. [Martin:] I don’t have that data handy]. [Pat:] I don’t have that in front of me, Pierre. It’s certainly something I could go research and we could talk later if you like.
Q. The Communication dropped slightly versus last quarter. Any explanation for that? [Pat: For the Satellite Communications? The sequential reduction in revenue?] Yeah.
A. I think as much as anything that’s a reflection of some of the seasonality that’s in that business. We experienced the same thing last year as well. There is a bit of seasonality, but part of it is also in Q3 we had actually just gotten off to our initial shipments of our TracNet products. And so we had a little bit of an extra bump in the third quarter in that business. It’s still growing quite nicely, but we had some backlog that had been built up that we shipped in the third quarter.
Q. OK. And going forward into the first quarter you expect some growth sequentially or …
A. At this point in time, we’re trying to be a bit circumspect about the level of business in the first quarter, but I’d say, we hope and expect it would be about comparable with the fourth quarter, or it could be down a little bit.
[Q&A 09:35]
Q. OK. And what about Depreciation and Cap-Ex for the quarter? Did you mention those?
A. I didn’t. Depreciation was approximately $460,000 for the quarter. Depreciation and Amortization combined for the quarter. And Capital Expenditures were $270,000 for the quarter.
Q. OK. And can you tell us a little bit more about the, uh, you have four new military contracts, one of them was for the British. Could you say a little bit more about the other 3?
A. Well we had recurring business with the U.S. Marine Corps, which is for an amphibious assault vehicle, and they’ve been a long-standing customer, in fact the Marine Corps was our first really big military customer, so we had a couple other orders from the Middle East from the Ministries of Defense of Saudi and OMAN. Both of those were relatively small orders, but they have significant follow on potential.
So, I think what we are seeing in the military business now is continued demand and increases in funding are tending to move programs along a little bit quicker. So, the bad news is we don’t have as much backlog as we did last year, but the good news is we are shipping orders much more quickly. For example, the time from order to shipment on the British order was roughly 60 days, so it’s a very fast turnaround now. So we’ll be shipping that entire order in Q1 of this year, this month in fact.
[11:36] Richard Cabot, Amertech Financial
Q. Congratulations on another good quarter. [Thank you.] I have a couple questions. First, could you give us an update on the Current Sensor status, and what’s happening with ABB?
A. Well, where we are with that is that we have refined the products additionally according to their specifications, and they are in the process of testing and integration. So there is no news to report there. We expect the next announcement to come from ABB, not from us. We’re a supplier to them, so we really have to follow their lead on that. No news to report there.
Q. Was there some news from them that they received an award in Australia?
A. I’m not aware of that.
Q. OK. I thought I had seen something maybe at a website on that, I’m not sure, maybe not directly related on that product. [OK]
Q. The other question I have is what has happened with the Force XXI Digital Battlefield Initiative?
A. Well, what is going on in the military in general is that there is a new program manager, a separate group within the military, within the Army called PM Navigation, and they are now consolidating navigational requirements through that group, and we’ve actually, I’ve been working very closely with them to consolidate requirements. So, a lot of those different programs now, the navigation component is being run through this sort of centralized program. So big opportunities, like the new vehicle for the Army called the Stryker might be facilitated through that program office. And the integration with the Digital Battlefield will happen as a requirement in the Nav system. It won’t be part of Digital Battlefield per se, because that program is actually a software program. So the hardware is being provided by the vehicle platforms directly.
Q. OK. And on the military modulator contract that you discussed at Needham, could you give us a little color on that?
A. Basically, if you recall our PhotonicFiber modulator, the program is almost identical to that but the application is different. The application is for a in-fiber modulator for a fiber optic gyro, so the application involves increasing the precision of fiber gyros, decreasing the production costs, and decreasing the size, so it’s really like a MEMS type application where it’s a micro-machined fiber with a electro-optic polymer with the chromophores doped into it and inserted in the fiber, and then you can electrically modulate the light in the fiber, which is a requirement in the gyro as well. It’s good – it’s a small contract now, it’s a Phase I contract which is under $100,000 and has a follow on potential funding of about $750,000.
Q. Could that impact new future products coming out of your …
A. Absolutely. The reason that we were interested, and the reason that we wanted to do this program, is that it would impact our fiber gyros directly. So it’s a great way to keep the photonic research funded, so that, as the telecom market re-emerges, we’re having this work funded by the military, which is a good thing long term. Short term it’s a great opportunity for us to improve our gyros, both in terms of cost and performance.
Q. OK. And my last question on the Optical components, you were talking about a 40Gbps modulator, and you were going to wait for the market to reach that. Have you done any more thought about maybe coming out with a 10Gbps modulator?
A. What we’ve done is we’ve really redirected that research towards nearer term markets, and for us right now that’s fiber optic gyros and Current Sensors. So the work – if you look at the R&D work that’s going on, it’s fundamentally identical to what we were doing before, but the application is different, and the speeds are actually much less. I mean for a fiber gyro you need a modulator that’s one MHz or less, so, in an optical telecom application that would be a 1Mbps modulator, not even a gigabit, so, it’s just operating at a different frequency, but the technology is identical.
Q. OK. Thank you very much.
[16:40] Paul Sevetz with Capital Flows.
Q. Thank you. My question is relative to the TracVision product schedule for Q2? [Yes.] Does it include some electronic steering for the antenna, and in the long term, do you see antennas evolving into a hybrid mode where you use both the gyro and electronic steering, or just purely electronic?
A. I think in the long run, electronic steering might be possible, but even our newest products are still using gyros. In the automotive product we are using a MEMs gyro, in our high end product, the G8, we are using our Fiber Optic Gyro, because it’s a big antenna with a very narrow beam, designed to go on big ships that go very far offshore, so the gyros provide instantaneous feedback on the motion of the platform, so, even if you move the beam electronically, I think there will always be an electronic, some type of measurement sensor that measures vehicle motion. This is probably the most economical way to do it.
Q. Gotcha. And by follow up, could you just us a hint as to what it buys you to be able to modulate the gyro fiber loops?
A. Well, it’s a requirement – all fiber gyros that we build, or that anybody builds, have a modulator in it, and the fundamental purpose of a modulator, you know it’s somewhat technical but the reason it’s a requirement is that if you didn’t have a modulator, you would know that there was rotation and you would know how fast it was rotating, but you couldn’t tell whether it was clockwise or counter-clockwise.
Q. OK. I understand. Thank you.
[18:48] Follow up, J. P. Mark, Farmhouse Equity
Q. Hi. Just a couple of quick questions on housekeeping for Pat. If you could give me a little bit more about Gross Margin and whether you think 46% is sustainable. I know you said that fourth quarter, there was a bump in military spending and that helped a lot. I know the trend is obviously up. Does it continue to flatten, or, what do you think?
A. At this point in time, J. P. I think my best estimate would be that, over the course of fiscal year 2003, it will probably be flat to maybe up modestly, over the course of the year. And it could be uneven over the course of the year. The reason for that is just what you mentioned, the military products, they tend to be our highest Gross Margin products, and when we have a strong quarter from a mix stand point, then naturally our Gross Margin tends to be a little bit better than otherwise.
Now, in concert to all of that we continue to work our product cost initiatives across the company, but this really comes down to in the final analysis, much of it comes down to the mix of the business, at least through the mid part of the year until we start to ship more, or significant volumes of the A5, and then naturally we’ve got different dynamics going on at that point, but, looking out over the course of the year I’d say – and I need to clarify here because you asked specifically about the fourth quarter and the 46% for the fourth quarter, is that sustainable, the 46% is probably not, but the Gross Margin that we experienced for the year, which was 44%, that’s what I’m actually referring to when I say that, probably about that number maybe slightly up as we move through the year.
Q. OK. I also wanted to ask specifically about R&D, whether you have any other major programs in mind for the end of year that might increase that number?
A. Well we’ve got a lot of ongoing R&D. I think that in terms of absolute dollars, we might actually trend down this year. Certainly as a percentage of sales it will be down dramatically, but not because we are curtailing our R&D efforts, but it is because, with the A5 going into production, we’ll be reducing some outside expenses that we’ve been incurring, and with the Photonics effort focused on Defense products, some of that’s going to be funded externally, rather than internally, so I think what you should expect is declining R&D as a % of sales and probably in absolute terms as well.
Q. So the level $1.9 million or so in the fourth quarter, you think it’s going to decline even more than that, is that right? Or do you think it’s the total spending for the year, $8.9 million or there abouts that’s going to be down?
A. I think it might be better to think in terms of the $1.9M that we showed in the fourth quarter, as being approximately where it will stay through the course of the year. On a full year basis, the number for 2003 should be lower than 2002 on a full year basis. But we are at about the quarterly level now of R&D that we would like to sustain for the near term anyway.
Q. Ok. I also wanted to ask a little bit more about Accounts Receivable, I know you mentioned about military orders driving that. And you also mentioned that DSOs in the first quarter should be down. Is that a trend you think you can sustain through the end of the year, through ‘03? [Pat: To bring DSO down?] Yeah, or is it being driven by the military?
A. We should be able to. The military tends to be the wildcard in a lot of these things, not only in terms of the timing of order flows and deliveries, but also it tends to drive our DSO number, but we do intend to drive DSO down somewhat. I wouldn’t say a great deal, but potentially 10% or so.
The DSO calculation that we do by the way is very straightforward and very simple. We just take the total Accounts Receivable measured at the end of the quarter, we divide that by revenue for the quarter, and then multiply it by 90 days, so we do no factoring or taking into consideration, you know, taking out the skew or anything like that. It’s just a straight, simple calculation of DSO.
[Martin:] So what that means is that, even if the military pays within 30 days, which the U.S. military does, you can ship a large order in December, and that increases your DSO. It’s just the way the calculation works.
Q. OK. One other quick question here, I was wondering a little bit about the Marine market in ’03, and whether you think that there is going to be something that might improve that? I know it’s economic, it’s economy driven, but do you have a feel for whether that might be up this year?
A. I think it is going to be up this year. We’re introducing a bunch of new products, the G8, we’ve got a new F55 product that we launched in Miami as well, which is a high end product for off shore use, TracNet is continuing to gain momentum, we are continuing to gain market share, so we expect our sales to be up fairly substantially in the Marine market this year, and that’s just based on what we see today.
We’re not counting on the Marine market recovering for that to happen. It’s just sort of steady state, based on what we see today. Now, if you know that the Marine market, - a lot of it’s luxury items driven by high end purchases, which is impacted by things like the Stock Market, which isn’t helping, but that’s pretty much been the case throughout 2002 as well, so we’re just counting on the market being no worse than it is today, and then we see growth from new products and gaining market share.
Q. OK. One last question. This is the last one. About the A5, I think you mentioned something about how it would be adapted for Internet connection use as well, and I wonder if you can explain that a little bit more, and what the strategy is for that?
A. The strategy for the product launch is something that we worked very hard on, and I think if you saw the amount of media attention we got on the A5 for spending virtually no money – we obviously haven’t done any advertising yet, but we’ve got a lot of attention, The reason, I think we did that we got a very simple, very focused message – satellite TV for cars We didn’t want to dilute the message by talking about all the other things the product could do, the Internet and those types of things. So it was a conscious decision to focus the product benefit on one simple thing, satellite TV for cars, and all of our sales people, all the marketing people, the P/R, I/R, - everyone was given the same message, and I think it’s been very effective.
Now, in reality, the product has built in the same capabilities as our other products. It has a port where you can plug in a TracNet, you can do broadband Internet with it. We will be launching a 12V version of Tracnet later on this year, once the product has been established. And that will give us a chance to come out with something new again, which will be TracNet for cars, which will be the Mobile Broadband Internet product, so it was really more of a marketing decision than a technology decision. The product has the capability right now.
Q. So what would you have to do? You’d have to sign up with an Internet connection …
A. Yeah, today you’d have to buy our TracNet product. The other reason is, the existing TracNet product is a server based product. It’s really kind of big, so it doesn’t run on 12V today, so it isn’t architected to run in cars, but the antenna has a 12V receiver for DirecTV built in. It’s designed, uh, but it has a port built into it to talk to our existing TracNet so …
Q. It would be an easy upgrade then, is that what you are saying?
A. Exactly.
Q. Great. Thank you very much. [You’re welcome] |
