California Amplifier Stays Prepared

Few people watched the fight over the failed $18-billion buyout of Hughes Electronics Corp.’s DirecTV by rival EchoStar Communications Corp.’s Dish Network as closely as Fred Sturm.

Sturm’s California Amplifier Inc. builds the components needed to receive and transmit images from a satellite dish onto a television screen, and 90% of the firm’s $100 million in sales come from the nation’s top two satellite-television providers.

So as workers in one of California Amplifier’s Camarillo buildings were churning out more than 20,000 of the reception components a day for DirecTV and Dish Network, engineers across the street were scrambling to develop components that could work for a new, combined company.

The DirecTV-Dish deal was scratched this fall by the Justice Department and the Federal Communications Commission, precluding a year’s research by California Amplifier.

But Chief Executive Sturm had few regrets. At least his company was ready.

“We knew going down this road that a substantial portion of our engineering would be wasted one way or another,” he said. “If all we got was better customer relations out of it, it was probably worth doing.”

That sort of adaptability has helped keep California Amplifier profitable throughout a two-year technology slump that has battered the bottom lines of many larger companies.

Over its 21-year history, California Amplifier has transformed itself several times as markets shifted.

“They’ve survived major lines of business effectively going to zero and in the meantime have bulked up their core satellite business and made that very profitable,” despite it being a low-margin business, said Rich Valera, an analyst with Needham & Co.

California Amplifier made wise acquisitions and manages its operations efficiently, said Valera, who does not own its stock.

The company jumped into the direct broadcast satellite, or DBS, business in 1999 with the acquisition of Texas-based Gardiner Group, which was already making components for DirecTV and Dish.

Soon afterward, it moved Gardiner’s plant from Texas to Camarillo.

Despite higher labor costs and stricter workplace regulations, the relocation was an easy decision, Sturm said. The manufacturing facility was fashioned within a warehouse the company leases across the street from its headquarters and design operations. That location makes it easier for managers and engineers to keep an eye on costs and make design adjustments quickly, Sturm said.

Plus, as the only maker of the DBS reception components in the United States, California Amplifier enjoys proximity to its two biggest clients. DirecTV is based in El Segundo and EchoStar is based in Littleton, Colo.

“California Amplifier’s proximity makes it easy for us to have their products tested in our labs as opposed to other suppliers,” said DirecTV spokesman Fred Mercer. “Just having them that close improves communication.”

California Amplifier also keeps expenses in line by relying heavily on temporary contract employees for its manufacturing.

Contract employees can number from around 100 to 300, depending on production needs. But overall turnover is fairly low, said spokesman Greg Dare. The company, which also maintains design centers in other parts of the country, employs about 250 people on a regular basis.

California Amplifier started in 1981 making amplifiers and other components for transmitting microwave signals, mostly for satellite video and terrestrial broadband communications, for military and commercial markets. It went public in December 1983 at $10 a share.

The company provided components for the large satellite dishes used by businesses and consumers for television reception in remote areas where cable wasn’t available. That business lost its luster after a few years, prompting California Amplifier to take on more military work.

By 1991, as defense spending eased with the end of the Cold War, the company dropped all military contracting to focus on commercial products. A foray into two-way wireless components propelled a spectacular but short wave of growth in the mid-1990s.

California Amplifier introduced the first transceiver for use in delivering high-speed Internet and cable service over the wireless spectrum. Its fortunes surged as major telephone companies geared up to offer wireless cable, and then two-way voice and data transmission. But the phone companies abandoned those plans in 1996, and California Amplifier’s great times came to an abrupt halt.

As the company grappled with that decline, Chairman and Chief Executive Ira Coron brought in Sturm to take on the CEO role and join him in exploring new avenues for growth. Sturm, who has an MBA from Loyola Marymount University, had been serving as president of the U.S. power systems division of Britain’s Chloride Group.

Sturm helped lead the push into DBS in 1999, which quickly gave California Amplifier another boost.

Consumers had been gravitating toward satellite television rather than cable after satellite providers won regulatory approval to offer local channels.

The company expanded the business early this year with the acquisition of satellite antenna and dish maker Kaul-Tronics Inc., and it now has a 40% share of the North American market for DBS receivers.

Annual revenue has more than doubled from the late 1990s to $117 million in fiscal 2001. It eased to $100.7 million in fiscal 2002, which ended in February.

California Amplifier has reported earnings growth for 11 consecutive quarters in large part because of its intensive focus on keeping costs in line, something that Sturm says is particularly important given the expectations of the consumer electronics industry.

Analysts give the company credit for its cost-efficient ways, and for quickly addressing problems as they arise -- including an accounting scandal involving a misstatement of results last year.

Management had discovered a significant problem with its accounting in March 2001. It notified regulators, worked to restate results that had been overstated for seven quarters, and fired its controller. The company also has settled shareholder lawsuits over the matter, and the Securities and Exchange Commission investigation is complete.

In the latest quarter, California Amplifier had net income from continuing operations of $1.8 million, or 12 cents a share, compared with $465,000, or 3 cents, a year ago. Revenue rose 11% in the fiscal second quarter ended Aug. 31 to $27.5 million.

The results handily beat analysts’ average estimate of 9 cents on revenue of $24 million, according to Thomson First Call.

California Amplifier’s wireless broadband segment also contributed to the earnings growth.

David Kang, an analyst with Roth Capital Partners in Newport Beach, said that segment of the company’s business shows promise because major phone companies are exploring another attempt at providing broadband Internet access with a second-generation product. Kang does not own shares in the company.

Despite California Amplifier’s strong profit record, its shares have lagged because of EchoStar and Hughes’ drawn-out attempt to merge, analysts say.

The shares closed up 12 cents at $5.62 in Nasdaq trading Friday.