California Amplifier: Sleeper in the Wireless Arena?
By Matt Paolucci

According to International Data Corporation, more than 111 million people subscribed to wireless services in 1998, producing almost $40 billion in revenues. By 2003, there will be nearly 186 million subscribers, generating revenues of almost $69 billion. As the demand for satellite and broadband services increases, California Amplifier Inc. (CAMP) plans to be one of the players at the forefront.

California Amplifier, Inc. designs, manufactures and markets a broad line of amplifiers, downconverters, antennas and integrated products. These products are used in the reception, conversion and amplification of microwave signals used in conjunction with the reception of video, audio and data transmitted from satellites or wireless terrestrial sites and antennas used in global positioning systems.

CAMP also designs, manufactures and markets two-way voice and data transceivers used for wireless communications between fixed locations.

The Company operates in three business segments: Satellite Products, Wireless Products, and Antenna Products.

The birth of wireless cable started back in the 1970s, with what was called MDS (Multipoint Distribution System). In 1974, realizing the commercial potential for a local broadband distribution service, the Federal Communications Commission (FCC) introduced the MDS license for business data services. Just four channels were allocated at the time. The MDS frequency was originally designated as a common carrier service (for public use).

However, in 1975, HBO (Home Box Office) began distribution using this frequency band, thus, MDS quickly evolved into a means of distributing pay TV programming. But with the onset of the cable TV boom, the future of MDS appeared doubtful. Subscribers who were paying $20-$30 for one channel on MDS could now receive 12- 24 channels with coaxial cable for the same price.

In 1979, the MDS industry petitioned for additional bandwidth for commercial TV distribution. After a long delay, the FCC reallocated 8 additional channels in 1983, creating MMDS (Multichannel Multipoint Distribution System).

Over time, as the need for more competition, not government regulation, between the wired-cable and wireless cable industries became evident, the government slowly began allocating more bandwidth (more channels, programming) for the wireless industry in order to compete with its wired-cable constituents.

But, it wasn't until 1995 when real progress was made.

In June, the FCC declared its plans for a series of auctions of MMDS spectrum rights. This was an attempt to promote competition in the video marketplace and enhance the MMDS industry's ability to compete with hardwire cable. After 181 rounds of bidding, the auctions ended March 1996, issuing 493 licenses for $216 million.

Subsequently, The Telecommunications Act of 1996 was passed by Congress and signed into law. The Act opened the local and long- distance telephone businesses and deregulated the broadcast and cable TV markets. Several provisions were favorable to wireless cable, including: wireless cable operators were excluded from common carrier regulation, cross- ownership of a wireless cable system by a cable operator was now permitted, zoning restrictions on wireless cable antennae were loosened, and wireless cable systems were not required to provide public access channels.

It's easy to see why the wireless cable industry has grown so quickly. With wireless, a company can achieve positive cash flow and profitability faster. It is less expensive and more cost- efficient to install antennae and downconverters than it is to bury cable, maintain cable, and replace coax with fiber.

The investment in wireless is in subscriber equipment, not network, thus making the investment proportional to the number of subscribers. Also, these costs are only incurred when an installation is made, and when one has a paying customer.

This holds true for urban as well as suburban and rural installations.

Transitioning from analog to digital in wireless cable is also easier, because the existing equipment can usually be used in a digital environment.

Today, MMDS has become a competitive force in multichannel TV industries throughout the world, with over 200 systems operating in the United States serving approximately 1.5 million subscribers and another 5 million subscribers receiving wireless cable in over 90 countries.

The MMDS arena is where CAMP plans to dominate. It is the premier supplier of outdoor customer premises equipment to the wireless cable industry. And CAMP is leading the charge in developing MMDS systems worldwide.

CAMP is just turning the corner towards profitability. For the nine months ended November 27, 1999, CAMP's revenues totaled $57.9 million, up from $27.1 million. Net income totaled $2.8 million, or 12 cents per share, versus a loss of $1.5 million, or 2 cents per share. Results reflect increased Satellite product sales due to the acquisition of products from Gardiner Communications.

The company is scheduled to release fourth quarter and year-end earnings on April 6. Analyst estimates are for 12 cents versus a 1 cent per share profit in the year ago period. In its last two quarters, the company has trounced estimates by 123 percent and 171 percent, respectively.

CEO Fred Sturm said he remains comfortable with analysts' revenue estimates of $26.2 million in the fourth quarter, up from $10.1 million a year earlier, but he acknowledged that making the goal depends on receipt of certain supplies in the final days.

CAMP shares have already had quite a run, surging more than 50 percent since the beginning of the year. But the run probably isn't over. Shares trade for a lofty 117 times earnings, assuming they match estimates for the forth quarter.

But, if you consider the high growth industry in which CAMP operates, and that it is ranked #1 by Zack's Investment Research out of 60 companies in the Electrical Components category, maybe it's worth the high valuation. The two analysts covering CAMP have Strong Buy ratings.