SoundThinking, Inc. (SSTI) Q4 2007 Earnings Report, Transcript and Summary

Welcome to the SST fourth quarter and fiscal year 2007 Earnings Call. At this time all participants are in listen-only mood and later we'll conduct a question-and-answer session, instruction will be given at that time. [Operator Instructions] and as reminder, today’s conference is being recorded. I would now like to turn the conference over to your host President and CEO, Mr. Bing Yeh. Please go ahead sir.

Thank you all for joining us today for SST’s fourth quarter and fiscal 2007 conference call. I am Bing Yeh, President and CEO. With me today is a Jim Boyd, Chief Financial Officer. Jim will begin the call today with a financial discussion. Following that, I will discuss the status of the company and the current market conditions. Then we will open up the call for questions and answers. Jim?

Thanks you, Bing. During the course of this conference call, we will make projections and other forward-looking statements regarding flash memory and non-memory market conditions, the company’s future financial performance, the performance of our new products, the company’s ability to bring new products to market, the company’s ability to develop new products, the company's ability to secure manufacturing capacity, inventory levels, ASPs, margins, our tax provision, and expected tax rate and other items as may be appropriate. Please keep in mind that these statements are predictions and that actual results or events may differ. Please refer to the company's annual report on Form 10-K for the year ended December 31st 2006 and other filings made with the SEC for additional information in risk factors, which could cause actual results to differ materially from our current expectations. Now, our fourth quarter and fiscal 2007 financial results. Net revenues for the Net revenues for the fourth quarter were $107.4 million, compared with $107.5 million in the third quarter of 2007 and with $118.2 million in the fourth quarter of 2006. The tables in our press release will give you information regarding the distribution of our revenues by geographic location and by application. The following discussion is intended to highlight the changes in these areas. Sequentially, revenue from wireless communications increased by 13%, while revenue from our digital consumer applications declined by 10%. Internet computing applications declined by 6%, and networking applications declined by 15%. Geographically, our product sales continue to be focused in Asia, both China and Taiwan combining to represent 67% of our sales this quarter. Our product sales outside of Asia to Europe and the United States represented 12% of our sales this quarter. Revenues from technology licensing for the fourth quarter were $11.7 million, up by 21% from $9.7 million in the third quarter of 2007. The increase in licensing revenues in the fourth quarter was largely due to a $1.1 million upfront fee. Technology licensing revenues in the fourth quarter of 2006 were $9.5 million. Product gross margins in the fourth quarter were 23.7% compared with 24.7% in the third quarter of 2007 and with 16.5 % in the fourth quarter of 2006. Total gross margins were 32% for the fourth quarter of 2005. By comparison total gross margin was 31.5% in the third quarter of 2007 and 23.2% in the fourth quarter of 2006. Total operating expenses were $34 million for the fourth quarter of 2007. This compares with $31 million in the third quarter of 2007 and $24 million in the fourth quarter of 2006. Research and development expenses for the fourth quarter were $15.2 million. This compares with $15.4 million in the third quarter of 2007 and $12.8 million in the fourth quarter of 2006. Sales and marketing expenses for the fourth quarter were $7.5 million. This compares with $7.4 million in the third quarter of 2007 and $6.3 million in the fourth quarter of 2006. General and administration expenses for the fourth quarter were $5.6 million. This compares with $6.4 million in the third quarter of 2007 and $4.9 million in the fourth quarter of 2006. Operating expenses were up $10 million in the fourth quarter of 2007 over the fourth quarter of 2006. Of the $10 million, $5.6 million or 56% was for cost associated with our restatements. $2.4 million or 24% of the increase was R&D spending and $1.1 million of that was salary and benefits mainly due to increased headcount related to new product development, and $1.2 million was for patent filings and engineering wafers associated with our new product development. $1.2 million or 12% of the increased spending was sales and marketing. One million dollars of that was salary and benefits, mainly due to increased headcount to support new product introductions. $755, 000 or 8% of the increase was increased general and administration expenses, of which 596, 000 was due to a credit for reduced bad debt accrual in the fourth quarter of 2006. Total headcount at the end of the fourth quarter was 715 employees compared with 704 at the end of the third quarter of 2007. The majority of this increase was in Asia. Other non-recurring charge reflecting the cost associated with our stock option review and restatement were $5.6 million for the fourth quarter of 2007. This compares with $2.3 million in the third quarter of 2007 and zero in the fourth quarter of 2006. Without these non-recurring charges, total operating expenses would have been $28.4 million, $29.2 million, and $24 million for the fourth quarter of 2000, the third quarter of 2007, and the fourth quarter of 2006 respectively. Finally during the quarter, we impaired goodwill and long lived assets of $19.8 million. Accounting rules require us to review our goodwill, intangibles and long-lived assets annually or when a material event occurs. The decline in our market cap is a potential indicator of goodwill impairment. Thus, we hired a third-party to perform evaluation analysis of our goodwill and intangibles. That analysis, which is still being reviewed resulted in the write-down, and the expenses reported below income from operations. Net loss for the fourth quarter of 2007 was $24.3 million, or $0.23 per share, based upon approximately 104.2 million shares outstanding. By comparison, we recorded a net loss of $16.6 million, or a loss of $0.16 per share in the third quarter of 2007, based approximately on 104.2 million shares outstanding. For the fourth quarter of 2006, we reported a net loss of $39.5 million, or a net loss of $0.38 per share on approximately 103.6 million shares outstanding. Included in these net loss numbers, however, were several items that cloud the picture of how our business actually performed. First, included in the fourth quarter of 2007 numbers were $3 million in impairment charges, $1.7 million in equity adjustments, primarily related to our investment in ACET, $1 million in non-cash stock compensation expenses, and as previously mentioned, $5.6 million in non-recurring charges related to our stock option review. The comparable expenses for the third quarter of 2007 were $19.4 million in impairment charges, $1.9 million in equity adjustments, $1.3 million in non-cash stock compensation expenses and $2.3 million in non-reoccurring charges. And finally, the comparable expenses for the year earlier of fourth quarter 2006 were $40.6 million in impairment charges, $2.1 million in equity adjustments and $1.7 million in non-cash stock compensation expenses and zero for non-reoccurring charges. Now, let's summarize the fiscal 2007 financial results. Revenue for the fiscal year of 2007 were $411.8 million compared with revenues of $452.5 million in fiscal 2006. License revenue in 2007 was $39.8 million, compared with $37.1 million in 2006. Royalty income excluding upfront fees was $34 million, up17% from the $29.1 million figure in 2006. Total gross margins for 2007 were 29.2%, compared with 26.3 % in 2006. Net loss for 2007 was 49.7% for a fully diluted earnings per share loss of $0.48 per share, based on approximately $104.1 million shares outstanding. This compares with a net loss in 2006 of $20.8 million or $0.20 per share diluted share based on 103.4 million shares outstanding. Now turning to balance sheet, we finished the fourth quarter of 2007 with $162.2 million in cash, cash equivalents, and short-term investments, up approximately $2 million from the $160.2 million at the end of September 30th, 2007 and up $22.4 million from the $139.8 million at the beginning of 2007 or December 31st, 2006. Net trade accounts receivable were $56.3 million, down $500,000 from $56.8 million in the third quarter of 2007. Day sales outstanding were 49 days, flat with last quarter. Net inventories as of December 31, 2007 were $50.2 million, up $3.2 million from $47 million in the third quarter of 2007. We believe net inventories will grow slightly in the first quarter because inventories were slightly below what we would like to see them at the end of the year. As a result, of our impairment of goodwill and long-lived assets, goodwill on the balance sheet was reduced $16.9 million. Equipment, furniture and fixtures net as of December 31, 2007 were $16.1 million down $19.5 million from last year, mainly due to a $2.9 million impairment of long-lived assets. Long- term marketable securities as of December 31, 2007 were $36.2 million, down from $45.6 million last year, primarily re-class of securities from long-term to current investments. Other assets as of December 31st 2007 were $63.3 million, down from $84 million last year, mainly due to a $19.6 million impairment of our investment in GSMC. Goodwill, as of the end of 2007 was $12.3 million, down $16.9 million from the end of 2006 due to our impairment of goodwill that was mentioned earlier. Other liabilities, as of the end of 2007, were $69.4 million, up $5.5 million from the end of 2006, mainly due to an adjustment of $4 million due to our adoption of FIN 48. Additional paid-in capital at the end of 2007 was $69.3 million, up $7.8 million from the end of 2006, mainly due to non-cash stock compensation expenses. And finally, our accumulated deficit, as of the end of 2006 was $144.4 million, up $53 million from 2006 due to our net loss for the year of $49.7 million, and a $32.2 million adjustment for the adoption of FIN 48. With the filing of our 2006 annual report on Form 10-K and our quarterly reports on Form 10-Q for the first three quarters of 2007, we have bought ourselves current without SEC reporting obligations, and believe we have addressed NASDAQ's global market listing deficiencies associated with our prior inability to file these reports. We have submitted a plan to NASDAQ Listing Qualifications Panel addressing our remaining listing deficiencies, including deficiencies related to our inability to hold an annual shareholders meeting in 2007, and the panel has stayed their delisting decision at this time. This concludes the discussion of our financial results. I'll now like to turn the call back to Bing.

Thank you, Jim. 2008 represents for us a new beginning on many fronts. Having completed our stock option review and become current on all SEC filings, we are able to close a difficult chapter in SST's history and focus our attention on executing an aggressive strategy for growth that we began more than three years ago. With the recognition that our core memory business would continue to experience ASP pressure that would limit it's revenue growth potential, we began in late 2004, investing in product and technologies that would yield ASPs that's were substantially higher than current business. While our memory business continues to be healthy, we believe that a strategy of diversification would allow for better growth opportunities for our company and more return for our shareholders. Our investment has been focused on both internally developed products that have innovative features as well as companies offering technology and products that enhance our competitive positioning. 2007 was a key year in the execution of that strategy, as we began to introduce and bring to market the first product in a series of both non-memory and non-commodity memory products resulting from our investments. The first product introduced in late 2006 and brought to market in 2007 was the NANDrive. A high performance embedded flash solid state drive. NANDrive contains an integrated ATA controller and NAND flash die in a multi-chip package and it is used as a base computing block of storage for variety of applications such as GPS devices, mobile internet devices, camcorders and portable media players. It is also ideal for many industrial applications such as POS terminals, industrial PCs, medical and instrumental devices. It is currently available in multiple densities up to 4 gigabyte, with high density 8 gigabyte, 15 gigabyte, and 32 gigabyte in development. To date, we have more than 20 design wins for this part of our family and we expect to see its revenue gradually ramp up in 2008. Our second important family, which was announced as technology in March of 2007 and began to offer engineering samples in July with only one memory. This is a truly revolutionary memory subsystem that blends key benefits of NOR, NAND, and RAM in a unified architecture, which offer very high density execute-in-place XIP code storage and it satisfies the growing data storage needs of embedded applications. All-in-OneMemory enables our customers to support the rapid increasing demand for multimedia rich functions, in next generation mobile, consumer electronics and opens up segments of the cell phone market in which we previously have not participated. Our first commercial sample of this product are expected to be available in June and the first product in this revenue is expected to be released to full production in the third quarter. Also being received positively in the market is our FlashMate technology, jointly developed with Insyde software. This technology combines SSTs expertise in NAND flash controllers, and memory subsystem design, with Insyde software's expertise in PC BIOS system software and power management to create a complete application subsystem. FlashMate enables hybrid-drive functionality and uniquely lets user instant access hard-disk drive data, transferring files and run applications even while the CPU is off. With more than 100 million notebooks sold each year, the potential for this product is enormous given that the ASP is likely to be significantly higher than all current business. We expect to tape out the FlashMate design in the second quarter and to have the first series of products available in the second half of 2008. Our fourth new product family announced last April is the MelodyWing wireless audio solution. This product offers uncompressed, wire-equivalent sound quality for use in both home theater surround sound and multi-room radio broadcasting applications, and allow significantly enhances sound quality to any other wireless audio products on the market. At our recent consumer electronic show in Las Vegas, our MelodyWing wireless speaker solution with various configurations was demonstrated by us and by four of our potential customers and was well received. We are very excited about the potential for all of these products as well as the potential for variety of additional non-memory and non-commodity memory products that we expect to introduce over the coming years Our strategy is to continue working closely with our customers to design and deliver semiconductor platforms that address system level concerns. Our NANDdrive, MelodyWing and All-in-OneMemory product as well as our innovative FlashMate technology are gaining good traction in the market. As the design cycle with major accounts for all of these products is at least twelve months, we expect to see revenue from NANDrive and MelodyWing in the second half of 2008, with FlashMate and All-in-OneMemory beginning to contribute revenue in 2009. We will continue to introduce new value-added products throughout the course of 2008. In the meantime our core memory business remained robust. For the past three years an increasing number of electronics products have been designed around microprocessors and microcontrollers. Virtually all these product incorporates some low density NOR flash memory for code storage. In some cases the code size for each product is also increasing as consumer demand more features and functionality. Further, as a definition, although low density continues to expand into 16, 32 and 64 megabits densities. The addressable market for our product grows steadily. This creates an opportunity for SST and gives strong evidence that our core business will benefit from a growing market. We are continually driving towards this increasing densities and smaller geometries to prove the advantages of our SuperFlash technology. This allows us to maximize the market for our products, while offering the most competitive pricing in the low density market. Today, the sweet spot for low density NOR is between a few megabits, up to 60 megabyte of memory requirement. We address the market very effectively with the most feature rich, cost-effective products on the market. This allowed us to support a very broad range of applications. Four applications requiring smaller memory, we also embedded SuperFlash technology, through licensing agreements. During the fourth quarter, we continue to focus on higher margin business where our business will steer, constrained by wafer capacity. As such, our ASP increased to 4% sequentially. There is a move o factor our product mix, our blended selling price decreased 1% during the fourth quarter. Our product gross margin was 23.7% in the fourth quarter. Though, we look ahead to the coming quarters, we do not expect margins to stay at this level. First, we expect to see a sufficient decline in Q1 of our higher margin business as a result of the seasonal, which means an uncertainty in the US and world economies. Further our decision to focus on high-margin business opportunities as a result of our capacity shortage, a statutory result at the loss of market share, at some of a high-volume commodity customers and certainly our revenue over the next couple of quarters. But the good news is that we are sitting at a very low inventory level when the industry is expected to enter a down cycle. We plan to measure our inventory conservatively over the coming quarters. To update you on manufacturing capacity, as you know we have been working with several foundries to bring up additional capacity at 180 and the 250 nanometer. As we entered 2008, we expect the normal strong seasonality in Q1 to bring our capacity back inline with demand. At this time, we have started 120 nanometer pilot production at both Grace and PowerChip by gradually converting our product from 180 nanometer to 120 nanometer. We expect our unit output from Grace to increase by the fourth quarter of 2008 in time with the holiday period. Now turning to our licensing business, our fourth quarter licensing revenue increased sequentially, mainly due to the recognition of upfront fees from two licensees, and more than 10% increase in royalty. Our licensing income fluctuate from quarter-to-quarter depending on the timing of technology milestones, our license is achieved or technology deliveries are made by us. From time-to-time, seasonality also contributed to a such fluctuation. However, on a year-to-year basis, the upward trend is more pronounced, especially the royalty portion of our licensing revenue. At this time all of our license that technology notes ,except for the 25 micron, are showing strong year-to-year growth in royalty revenue. We believe, our licensing business is very strong. To-date, our licensees have cumulatively shift nearly 6 million units of products. It is important for all the shareholders to understand that The licensing business is an integrated part of our non-memory business. Our license fees maybe a technology license in decision based on the reliability data produced by our volume NOR non-memory component's business for each technology generation. Our engineers also need to continue developing new generation non-memory technology in order to provide our licensee base a dependable long-term technology road map. We expect our licensing revenue continuing to grow as long as long as we continue to work closely with these licensees to provide technical support in both process technology and the Flash IP designs, while we continue to advance our technology to our own non-component business. And finally, we are very pleased to announce today that our Board of Directors have authorized to-purchase of up to $30 million of SSTs common stocks from time to time, and any time commencing February 11th, 2008. We believe that a repurchase program is an attractive use of our cash and we are confident that SST and both invest in the growth initiatives; a key to our future success and enhance the value of our company by repurchasing common stock at this time. In closing, I would like extend my gratitude and appreciation to all of our employees, whose handwork and dedication allowed SST to achieve the many important goals in 2007. As we move into 2008, we are very excited about the strong foundation we have built. We continue to be encouraged by favorable technology trend that are driving the need for flash memory in an increasing number and variety of devices. As well as driving the demand for the high performance, low power and small package advantages of our SuperFlash technology. Further, we are excited to see the fruition of several years of investments and development in our non-memory and non-commodity memory products. We believe that they will have a significant and positive impact on our business for years to come. Now turning to our guidance, as we mentioned, we expect similar strong seasonality in the first quarter of 2008, as we saw in the first quarter of 2007. This is a result of both customary reduced demand, following the holiday season period, as well as the some expected consequence due to our inability to support our higher volume commodity customers during the second half of 2007 All blended ASP in the first quarter is expect to decrease at 6% to 7% from that of the fourth quarter. As such, we expect our first quarter revenue to be between $83 million and $93 million. Accordingly we are expecting loss per share in the first quarter of between $0.03 and a $0.10. This concludes our prepared comments. We are now happy to answer your questions.

Thank you. (Operator Instructions) Our first question will come from the line of Alexander Paris of Barrington Research. Please go ahead.

Good afternoon, Jim. I think there is a chance to go quickly through all these charges and one-time write-offs and so forth, but adjusting for all of those, do you have rough idea about what the operating earning-per-share would have been excluding all of the one-time and non-cash items and so forth?

Yeah, I do. Unfortunately if I give out that kind of information, I get into the land of pro-forma or non-GAAP numbers, and then I get -- yeah, so I tried to give all the number that you could calculate it yourself.

Okay.

If you want, I can review them with you.

Okay. I'll get back to you on that. Just to review, we talked a lot about all these new products. It sounds like from some of the core products that the NANDrive will start shipping in the second half of '08, FlashMate and All-in-One not until 2009, and the MelodyWing, I don't think you said when you expect that to start?

No, no. For NANDrive and our MelodyWing, we expect the revenue contribution in the second half.

Okay.

Actually our NANDrive, we already get some small revenue base. It going through a very gradual ramp, because of the nature of this product, and also the folks of our market segment, and our MelodyWing, we expect to get our revenue contribution in the second half, more like in the later part of this year. And then the All-in-OneMemory, and the FlashMate, since we are planning to have a commercial sample available in the second half, so we expect the revenue should be starting in 2009.

So you had, you said, 20 wins in the NANDrive, so you don't have any wins yet in the FlashMate or the All-in-One, is that correct?

For FlashMate, we just announced that technology last year, and the product is not even taped off yet, and we will need to announce the technologies in order to walk with our several OEM customers to do some joint development. That was the reason we announced the technology first, then follow by the -- then we solicit the input from those potential customers in order for us finalize the specification, so we can taped off in the second quarter this year, and we expect a commercial sample to be available in the third quarter. So, as a result of that, and also the long time to get design in, we expect the revenue contribution should be in 2009.

Okay, just one another question on the ASP: the selling price. Your standard, your traditional low density, did you say is -- was that ASP up 4% in the fourth quarter sequentially, did you say?

Yes, but that was including some product mix. In other words, they are different type of densities, but if we remove that product mix, then actually it's about 1% reduced compared with the third quarter of last year.

So putting all your products together, you did have your ASP; you did have a increase sequentially?

Yeah.

Okay. What about unit growth? For a long time you were getting strong unit growth in the low-density area, but declining revenue -- is the unit growth still rising?

No, unit had no growth during the fourth quarter. As we said previously that we had capacity constraint.

Okay.

And as a result of that, we are focusing in some area that is more profitable, and we also focus on certain products that will also have a high density to become more wafers. So an allocation of those situations we basically walked away from many high-volume, commodity business.

Okay.

And because of that, that is going to impact our -- coming back to those accounts this year when our capacity becomes more available.

Okay, thank you very much.

Thank you.

Thank you, and next will go to the line of Eric Singer, Riley Investment Management. Please go ahead.

Hi guys, can I get a break-out of your memory, non-memory revenue on the product side?

Non-memory revenue is still very small. Those non-memory revenue stream was coming from the some FlashMate will commence with the product as well as the Power Amplifier individual components from our data communication group. Actually, though, there is one more item, which is Smart Card ICs, which also have small revenue contribution. So, roughly it is about 10% of our product revenue. That is right.

And how that will break out on the gross margins for that versus your memory business?

Those are higher than our memory business.

Okay. I was just wondering for this quarter?

I don't have that numbers versus by memory and non-memory.

In the September quarter, the non-memory business was around 21%, so it is couple of hundred basis points below memory. Should that trend continue this quarter?

I don’t even see that right in front of me, but I believe it's a about the same range, I would say compared with last quarter.

Eric, I can't find that but unfortunately we didn't have it. We have not prepared the stuff.

We could do of with that one, that’s okay.

Okay.

Is there any way you guys can quantify how much revenue you walked away from in this quarter due to the capacity constrained environment, and how that is going to impact Q1 if you did have access to capacity on some of the high volume memory products?

It's difficult too…

Do you think I would have known those numbers.

In the tens-of-million dollar range.

In the tens of million per quarter, or…

Per quarter. Also there is only two quarters we had that problem.

All right. So we can’t have the [lost fees]?

So we lost this, speaking through memory, we lost about between $20 million to $40 million of revenue opportunities due to the shortage.

Okay. And what type of margin would that revenue have come in, would it have come in slightly below what we had seen you guys do on the memory side in the last two quarters?

No. No, those are not good margin, not high quality revenue.

All right.

It's a good strategy that we decided to walk away from those business.

Okay. On your licensing business, embedded in your guidance for Q1, is there any way you could sort of guide sequentially on the licensing business, if you accept the one-time upfront payments?

We expect that royalty will continue to grow, and this is overall, probably going to be less than what we get in a fourth quarter, simply because the upfront fee is not going to be recurring in the first quarter.

Right. Then as we tape out, Jim maybe you can help me, I'm just going through my notes from what you said, there was $1.1 million in upfront, so if I back that out, it looks like royalty was 10.6, am I looking at that correctly?

Yeah.

Okay. So are you saying, you think there will be growth after 10.6 in Q1?

I think you just think of it as about flat.

Is about flat? Okay, great. And on a year-over-year basis in entire '08 over '07, what type of growth would you expect on the royalty front?

We expect more than 10% increase.

Okay. All right, great. On OpEx, guys, how should we be looking at OpEx, are you taping out a lot of products this quarter, and is that what accounts for the sequential increase in operating expenses in light of the down revenue?

Basically, we are going to have lot of product tape out. Essentially, this new product is on a more advanced technology, and mask cost is quite high. In the past we were working at a film 1A, 0.25 micron, but now all the new technology we are working with, either 120 nanometer or in the 90 nanometer range. So the mask cost is substantially high.

Right, so as you keep out keep out these products, should we expect in the back half of the year, operating expenses to go back down?

The trend seemed to me is going to go down, based on our current plan.

I'm sorry. Can you say that again, Bing?

Based on our current plan for this year, the following year will go down, and it will be because of the heavy investment of some mask cost in the beginning of the year.

Right, and are these mask costs going to be with you guys through the June quarter as well?

Yes, I think so.

Okay, and you historically had indicated that you expected to drive 30% of your revenue in fiscal '08 from these non-memory products, and it looks like based on the guidance you are giving FlashMate and some of the NANDrive in '09. It looks like that’s probably not a number that we should be relying on. Is that correct?

Yeah, we will say that on a quarter basis and not a yearly basis. There is no way we can we can reshuffle 2008. So, this is, we expect, that in previous -- we were thinking about by end of the year we probably can reach 30%. Coming from the non-memory business, but it is a big uncertainty due to the design cycle already involved. Although we have a taken a lot of customers, interesting in evaluating our technology and even to some actual work to designing but we have no assurance that those design wins, designs confined to a design win. So, at this point, we cannot give a concrete determination when that goal can be achieved. But I would say if not in the late fourth quarter this year, it is going to be happening in next year. Sometime you can’t give the coming because of these new products. Particularly due to the higher ASP nature of this type of products.

Right. Okay, let me just ask you two other quick things, then I will let somebody else jump in. Bing, maybe you can give us some perspective on what's going on macro. Your guidance is down in the sequentially-down period. There are reports out on GPS guys to the handset guys -- that business is really turning down here. Have things deteriorated from your vantage point over the last couple of weeks? Can you give us some perspective on what are you seeing?

We see some softness, but our longer-term projection was not that bad from our customers. Probably that we cannot depend on. What we can see is that near-term, we are going to see some softness. And we also see our competitors also have inventory image in NOR. That certainly going to impact the NOR business for near-term. But as we said, good news for us is that we are sitting at a very low inventory level.

Right. Okay, but are things deteriorating as the month of January went on, or as things have been pretty stable the last couple of weeks?

Well, I know, this is just information [counsel] sent to me the forecast from our sales force is changing. Month-to-month is not -- I don’t see that weekly data you are asking for.

Okay.

I think it's the monthly changes from our sales-force forecast.

Great. Thanks a lot.

Thank you.

Thank you. And our next question will come from the line of Richard Shannon of Northland Securities.

Hi, guys. I'm at the airport, so I might be a little loud, so I apologize. I just got a probably one or maybe two quick questions for you. In response to one of the earlier questions about licensing revenue, I think the previous caller was wondering about the going run rate of royalty revenues in the first quarter and beyond, and I think you mentioned a number of 10.6. I just want to confirm that you expect that to be relatively flattish into the first quarter, is that right?

Yes.

Okay. Is there an expectation that investors should have with that number, that's the kind of number we should expect to see going forward after the first quarter as well?

That number is going fluctuate. Remember the first-quarter number more reflects the fourth quarter number by our licensee base. So even though the first quarter for all of the business generally are slow, but the way we recognize our revenue is really for one quarter earlier of those licensee income after we receive the report from our licensee base.

Okay.

That will include the upfront fee. So they are very hard to predict, and they could make fairly significant differences. They were $1.2 million last quarter. They can make a difference in the quarter.

All right. But even the 10.6 seems to be substantially higher than what we've seen in the past, and if that's the rate that can continue and even grow that would certainly be a nice thing to see. So I'm just trying to confirm that that's kind of a new level that we should see from what you can grow year-over-year?

No. Richard, as I said, that number in fact reflects the fourth quarter income from our licensee base. There is seasonality involved. So, after that we expect the licensing revenue, I mean larger revenues should go down a little bit because of seasonality. But if you take a year-over-year basis, we believe that our licensing revenue should continue to grow.

Okay. A second quick question on non-memory revenues and gross margins. I know in the filings you put out over the last few quarters, the non-memory revenue gross margin has actually been a little bit lower than historically, and even below the product gross margins. I'm curious as to what's the cause of that, and as your newer products that you talked in your opening thought whether that should drive gross margins on these non-memory products higher?

The historical non-memory product is associated with different type of products than what we are going to introduce down the road. Those non-memory products, including the power-amplifier products, which I believe we continue to have a good gross margin, and also some fresh microcontroller products, which also have good margin, but there is one segment which is very weak that is smartcard ICs. As you know, the overall smartcard IC business is in the whole worldwide market, and that's because of lot of competition in that area. And ironically, that was caused by our technology, the success of licensing business. We have been able to enable quite a few surprises. By using our technology, their costs can be substantially reduced, and then, cause the smartcard IC business to go down because of the depressed ASP. However, our strategy going forward is to design more higher-valued product based on the smartcard IC technology we have. So we hope with our new product introduction in the future we will have a good return in that area.

Okay. Last question for me, in the past, when you haven't been under stock option, you've historically come to investors twice a year to talk about your yearly revenue and earnings goals. I know you haven't talked them out today, but are you going to do that again at some point in the near future like you've done in the past, in June or in November?

We have not decided whether we want to continue to provide that. Because of our poor quality of our projecting the past, we have decided we want to reevaluate our strategy in terms of providing the long-term guidance.

Okay, it's fair enough.

Especially when we start to ramp-up quite a few new products, and it is extremely difficult to predict the outcome of those new products.

Okay, fair enough. Thanks a lot, guys.

Thank you.

(Operator Instructions) Now we'll go to the line of Bryant Riley of Riley Investment Management.

Hi, guys. Just one comment. I'm glad to see you guys announced a buyback, and that's a great use of cash. I guess, Bing, I just want to emphasize; my sense is that you are in an investment period on your new products, and so given the seasonality, downtick, you'll lose a little bit of money. In the last quarter also you made like $8 million or $9 million in EBITDA, and the way that we've looked at it and we've been pretty clear, you're not paying a lot of money for the enterprise here. And my sense is, in this environment, you're going to get an opportunity to buy back a lot of stock, and if you are confident about the business in six or nine months and going forward, I would just urge you and your Board to buy aggressively at an enterprise value close to zero. So hopefully, the focus of the company will be doing that and realizing that the best use of cash is your own stock. We've entrusted the company with a lot of cash, you guys have lot of cash, you have equity investments, and I think that would be the best way to get it back to shareholders. So just want to emphasize that to you and curious if you any comments.

Bryant, appreciate your input, and I certainly agree with a lot of your viewpoint. And at this time, the Board approved a $30 million of buyback, and that also take into consideration of the uncertainty of the economy this year. If it turns out the economy is not as bad as we thought, I think we may do more of purchase. Of course, we also need to take into consideration of the cash required when we start to ramp up the new products. So they are some of the factors we need to consider. In any case, I appreciate your inputs.

Yeah. My sense is if the economy is better, your stock price won't be here. So there is an opportunity kind of view you've got to take, but I appreciate it. Thanks, Bing. That's all I have.

Thank you.

Anything further, Mr. Riley?

No.

Thank you. And next we'll go to Sal Kamalodine of B. Riley & Company.

Most of my questions have been answered. Just wondering if you can comment on the competitive dynamics you are seeing in the industry currently.

Are you talking about the NOR business?

Yeah, the NOR business.

Yeah. The NOR business continue to be very competitive. Essentially the demand for NOR, low-density NOR, as well as high-density NOR, actually is still there. It's very strong demand. The units continue to grow overall industry-wide. So to stay in this business, I believe requires a lot of technology advances as well as superiority in the technology itself. And I believe we have the right technology. And by working in a couple of new foundries to order smaller geometry and even go to 12-inch wafers, we have put us in a very competitive position. Overall, I have confidence that we can be an eventual survival in this NOR business. I believe in next few years you are going to see a shakeout of companies that cannot survive in this competitive environment.

And as you look out over that time horizon, where do you think your focus will be in terms of densities? When you define lower densities and wanting to stick around the stick around the lower densities, where does that end up as you look at couple of years out and where are the bigger players like Spansion and Samsung, where are they going to be if you look out a couple of years in terms of densities? Is there a risk that they may come down into your part of the spectrum?

We will continue to focus on the low-density portion. Today, we already have the product at a 64-megabit level. And when we continue to shrink our geometry, we may go up to 128 and mostly to 256-megabits. Above that, I think the market is not going to be attractive. And the main reason in my belief has always been that for those high density memories, NAND would be a much better alternative in terms of costs. And by using NAND to get up with some sort of consulting that we also offer, we can create a product that essentially can replace a high density NOR. In fact, that was one of our strategies in driving the NAND module type of products. So, overall, we would stay in the low density, and then expecting the high-density portion going to shrink. And for us, since we can develop product like all-in-one memory as well as the other future product that can address the need of a high density code storage market, we believe we can have a great and a bright future in this business.

Okay, thanks.

Thank you.

Thank you. And there are no further questions in queue. I'll turn it back to our host for closing comments.

Thank you for participating in this conference call. As always, feel free to contact Leslie Green, Investor Relations, Jim Boyd or me directly if you would like to arrange a call or meeting. We thank you for your continued interest in SST.

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