CalAmp Posts Better Earnings, But Weak Guidance Has Investors Scared

Source: CalAmp.

Connectivity specialist CalAmp came into Tuesday afternoon's fiscal third-quarter report with some positive momentum, as its previous earnings release had suggested the company might finally be resolvingits recent episode of stagnant revenue and earnings growth. Yet when the company released its latest figures, nervous investors looked beyond the initially favorable numbers from the previous quarter and instead focused on troubling guidance for the rest of its fiscal year. Let's take a closer look at CalAmp's quarterly results and what's up next for the company as it looks to get back on track for faster growth.

Source: CalAmp.

CalAmp tops estimates, but sales remain sluggishCalAmp's third-quarter report was mixed, by most accounts. Overall sales of $63.2 million were just slightly lower than investors had expected, and also down a fraction of a percent from last year's third quarter. Similarly, on a generally accepted accounting principles basis, net income fell about 5% to $4 million, declining $0.01 per share from a year agoto $0.11 per share. Yet CalAmp's adjusted earnings rose about $1 million to a solid $9.2 million, or $0.25 per share, topping the consensus by $0.02 per share.

As seen recently from CalAmp, the company's overall results masked two completely different performances by its major divisions. The growing wireless datacom segment continues to see solid growth, with a 10% revenue gain that now represents more than 86% of CalAmp's total business. By contrast, the satellite division's sales fell37% from last year to just $8.6 million. Investors have known for a while that the satellite business did not have much growth potential, but the speed of the deterioration in that business has likely come as a shock even to the most prepared of shareholders.

Source: CalAmp.

CalAmp CEO Michael Burdiek nevertheless trumpeted the healthiest parts of its business. In particular, Burdiek noted that "specialized telematics device shipments to a key [original equipment manufacturer] customer in the heavy equipment industry boosted our third quarter results, and we continue to believe that this customer will be a significant growth catalyst for CalAmp." This remark likely referred to Caterpillar , with which CalAmp has cultivated a close relationship as it tries to help the heavy-equipment giant incorporate more interconnectivity solutions into its machinery to give end-user customers the data they need to work more efficiently.

What's ahead for CalAmp?The most concerning part of CalAmp's quarterly release came in its business outlook. Burdiek said the company expects to post fiscal fourth-quarter sales of about $66 million to $70 million, which is well below the $71 million that investors wanted. Still, that revenue range wouldrepresent 10% to 17% growth from last year's fourth quarter. As satellite-related sales fade toward single-digit percentages, CalAmp's future will rest squarely on the success of its wireless datacom business. The earnings per share guidance for $0.26 to $0.30 for the quarter is in line with what investors expect, but alone could not reassure shareholders. The stock dropped more than 4% in after-hours trading within the first hour after the announcement, giving up some of its hard-fought gains from recent months.

Longer term, one thing to note is that CalAmp is benefiting from tax losses accumulated earlier in its history. As a result, even though the company has a pre-tax profit,its income is largely sheltered from taxation due to carried-forward net operating losses. When CalAmp uses up all of those losses, the company could see a dramatic drop in after-tax profits.

CalAmp still needs to work hard to restart its growth engines and take full advantage of the huge opportunity presented by the Internet of Things movement. To return to its former status as a high-flying growth stock, CalAmp will have to tap into favorable trends in connectivity technology and build up competitive advantages against much larger players in the space.

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