SoundThinking, Inc. (SSTI) Q3 2008 Earnings Report, Transcript and Summary

Welcome to the Silicon Storage Technology third quarter 2008 earning results conference call. Our participants at this time are in a listen-only mode. Later we will conduct a question-and-answer session and we’ll give instructions at that time. (Operator instructions) As a reminder, the conference is being recorded. And we will turn the call over to our host, President and CEO, Mr. Bing Yeh. Please go ahead, sir.

Thank you all for joining us today for SST’s third quarter 2008 conference call. I am Bing Yeh, President and CEO. With me today is 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 current market conditions. Then, we will open up the call for questions and answers. Jim?

Thank you, Bing. During the course of this conference call, we will make projections or other forward-looking statements regarding the flash memory and non-memory market conditions; the general economic climate; the Company's future financial performance, the performance of our new products, the market’s acceptance of those new products; the Company's ability to bring new products to market, the Company's ability to develop new technologies, the Company's ability to secure manufacturing capacity, inventory levels, ASPs, margins, cash flow and cash balances; our tax provision and expected tax rate, and other items as maybe appropriate. Please keep in mind that these statements are predictions and that actual events or results may differ materially. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2007 and any other filings made with the SEC for additional information and risk factors which could cause actual results to differ materially from our current expectations. Now, our third quarter 2008 financial results are as follows. Net revenue for the third quarter were $92.4 million compared with $83.7 million in the second quarter of 2008 and with $107.5 million in the third quarter of 2007. Product revenues for the third quarter of 2008 were $79.8 million, compared with $71.1 million in the second quarter of 2008 and with $97.8 million in the third quarter of 2007. Segment revenues for the third quarter of 2008 were $68.5 million of memory products sales and $11.3 million of non-memory sales, which compares with $60.9 million of memory and $10.2 million of non-memory in the second quarter of 2008, and with $87.2 million of memory and $10.6 million of non-memory in third quarter of 2007. 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, revenues from wireless communications increased by 29%, while revenue from our digital consumer applications increased by 5%. Internet computing applications increased by 7%, and networking applications decreased by 7%. Geographically, our product sales continue to be focused in Asia with China and Taiwan combining to represent 66% of our sales this quarter. Our product sales outside of Asia to Europe and the United States represents 11% of our sales this quarter. Revenues from technology licensing for the third quarter were $12.6 million comparable to the second quarter of 2008. Technology license revenues in the third quarter of 2007 were $9.7 million. We did not record any up-front fees in the third quarter of 2008, which is compared with $850,000 in up-front fees in the second quarter of this year, and $400,000 in the third quarter of last year. Product gross margins in the third quarter were 23%, compared with 15.9% in the second quarter of 2008 and with 24.7% in the third quarter of 2007. Product margins were higher than expected this quarter due to purchase price variance adjustments, some release of inventory reserves and a one-time only sale of previously expensed material. Total gross margin was 33.5% for the third quarter of 2008. By comparison, total gross margin was 28.6% in the second quarter of 2008 and 31.5% in the third quarter of 2007. Total operating expenses were $26.9 million for the third quarter of 2008. This compares with $29.9 million in the second quarter of 2008 and with $31.5 million in the third quarter of 2007. Operating expenses were lower during the quarter due to reduced salary and benefits, lower engineering wafers and $800,000 reduction in accrued liabilities for expenses related to our investigation of stock option practices and the resulting financial restatements. Research and development expenses for the third quarter were $14.3 million. This compares with $15.2 million in the second quarter of 2008 and with $14.7 million in the third quarter of 2007. The reductions from Q2 to Q3 were due to lower salary and benefits, reduced stock based compensation and lower expenses related to wafers mask and evaluation parts. Sales and marketing expenses for the third quarter were $6.7 million. This compares with $6.9 million in the second quarter of 2008 and $7.4 million in the third quarter of 2007. General and administration expenses for the third quarter were $5.9 million. This compares with $7.7 million in the second quarter of 2008, and $7.1 million in the third quarter of 2007. G&A expenses were lower this quarter versus last due to lower salary and benefits, reduced stock based compensation and the reduction in accrued liabilities mentioned earlier. Total headcount at the end of the third quarter, was 713, down from 718 at the end of the second quarter of 2008, and down from 715 at the end of 2007. Thus income from operations for the third quarter of 2008 was $4.1 million, which compares to a loss of $5.9 million in the second quarter of 2008 and a gain of $2.4 million in the third quarter of 2007. Net income for the third quarter of 2008 was $4.9 million or $0.05 per share, based on approximately 99.7 million fully diluted shares outstanding. By comparison, we recorded a net loss of $9.6 million or $0.0 9 per share in the second quarter of 2008, based on approximately 101.8 million diluted shares outstanding. For the third quarter of 2007, we reported a net loss of $16.6 million or a net loss of $0.16 per share on approximately 104.2 million diluted shares outstanding. Now, the balance sheet. We completed the third quarter of 2008 with $132.8 million in cash, cash equivalents, short-term investments, and long-term marketable securities, down approximately $16.1 million from $148.9 million on June 30, 2008, and down $27.4 million from the $160.2 million on September 30, 2007. Changes in our cash included $6 million in cash payments for stocks repurchases, $16 million in increased working capital requirements, offset by non-cash items such as depreciation and amortization, 123R expenses and our positive earnings. Net trade accounts receivable were $47.8 million, up $10.4 million from $37.4 million in the second quarter of 2008. Days sales outstanding were 47 days, up from 41 days in the prior quarter due to higher sales. 96% of our receivables are current or less than 30 days past due. Net inventories, as of September 30, 2008 were $65.3 million, up slightly compared with inventory of $64.8 in the second quarter of 2008, but up $15.1 million from the $50.2 million as December 31, 2007. At the end of 2007, we had stated that we felt inventory was too low due to our capacity constraints, and we would be increasing inventory. We will be closely monitoring inventory levels against projected sales in the future. Finally, during the quarter, we repurchased 2.7 million shares of our common stock, at an aggregate cost of $8.6 million for a blended average cost of $3.19 per share. This brings our total repurchases through the third quarter to $6.8 million at an aggregate cost of $20.5 million for a blended average cost of $3.03 per share. This concludes the discussion of our financial results, and I will now turn the call back to Bing.

Thank you, Jim. We were pleased that the third quarter came in at the high end of our revenue guidance, and substantially above our earnings per share projections, due to several favorable non-recurring adjustments and the reduced operating expenses. Our whole memory business showed healthy seasonality with part of revenue growing 12% from the prior quarter. We also achieved record unit shipments in the car infotainment, server, table modem, mobile phone and their Bluetooth applications. Further, our licensing revenues remained consistent with our strong Q2 results. This continued strong licensing revenue also positively impacted our total gross margin line. As we look to the remainder of the year, we are definitely seeing the impact of the weakening global economy on our business, as the majority of our products target consumer end market in form or another. In fact, we saw a steep decline in our weekly new portions [ph], beginning in early September and continuing through mid-October. We have also seen increased cancellations and push outs of the existing backlog by our customers’. Although, in the next several quarters, we expect that the demand for non-memory product will be weak and product gross margin will decline as a result of tough competition under such weak demand. Therefore, we have reduced our expectations for the fourth quarter significantly. In the mean time, we have also taken measures to evaluate our business and scale back accordingly. It includes reducing wafer stock, cutting back our spending level and adjusting our headcount. Turning to our gross margins. We expect out total gross margin in the fourth quarter will remain strong, as licensing will make up higher portion of our revenues, offsetting a significant expected decline in memory product gross margins in Q4. As we move into 2009, we expect our licensing revenue to be stable but memory product gross margin will likely continue to decline. Turning to inventory, we are closely monitoring our level against projected sales and as I mentioned we have reduced wafer stock accordingly. Our inventory may go up slightly in Q4, the result of product mix [ph], that had already begun but we would expect to see our inventory decrease in Q1. So, where do we go from here? Even in this challenging environment, we have several bright spots in our business I want to highlight for you today. First, our core business of low-density flash memory showed through [ph] our licensing program is a solid business. It has been in existence for nearly 20 years and is richly branded. With SuperFlash technology accepted as a premier solution for a diverse range of applications, our customer relationship are deep and longstanding. And our unique virtual IBM business model allows us to produce high volume of product cost effectively. Further, as a fab-based Company, we are able to scale our operations according to demand. Our process technology, circuit design, product history and operations expertise has enabled us to ensure height of product quality, despite the very high volume and the variety of products we are shipping. It is the strength of this business and the success of our product and technology development that has allowed us – allowed our business to generate solid returns. And several years ago recognizing that ASP pressure would continue to constrain our revenue growth, we began investing in our memory, non-commodity memory and non-memory products. We began to introduce several new high ASP products last year with the expectation that the designing cycle would be long. The first product we announced was an end drive, our high-performance, fully integrated, embedded flash solid-state drive, and I’m pleased to report that we are seeing promising initial production revenue from this product. In fact, in the third quarter, revenues for the main drive were up again significantly from the prior quarter with a shipment of almost 400,000 units into applications such as IP Set Top Boxes, mobile Internet devices and industrial applications. We do expect the ramp up of this product to be lumpy, as initially entered [ph] a dispute and then digest before reaching a steadier run rate. And further, only a few customers’ have begun to ramp up their production. In addition, we will enter this season near-term impact from the involvement. As a result, we expect our mainstream revenue to be down in the fourth quarter of 2008 when compared to the seasonality high third quarter. However, the initial success of this product is a strong early indication of its potential in the market. In fact, main drive continues to corner award for its innovative design. During the third quarter, it was selected by Design News magazine as the winner of the 2008 Golden Mousetrap Award in electronics. We are very pleased by its success in the editorial community, and we believe that success is being reflected in the markets reception of main products. Another area of that is beginning to see healthy success is our GaAs Power Amplifier in front-end module products targeting the Wi-Fi market through advanced technology development, developed by SST Communications. This device feature a highly efficient, low power, small-footprint design that supports the AL2.11g wireless standard. We expect to record nearly $10 million in revenue from this product in 2008 with a strong growth potential in 2009. In addition to our memory products, our investment continues to be – continue into innovative solutions that further the road map of our core memory business. During the third quarter, we announced a true development in our serial flash products. The first announcement was a new addition to our 1.8 port 25WF SPI series of flash memory family. The 4Mbit small-form-factor device is ideal for battery-powered space and height constrained mobile applications where performance, reliability, and low-power consumption are crucial to product success in the high-volume portable electronics market. Also is part of our corporate collaboration with Freescale Semiconductor. We announced that our SST25WF10, SPI Serial Flash device is featured in Freescale’s line of Platform in Package solutions designed for 802.15.4 and ZigBee protocols enabling Freescale’s basic Platform in Package solution to deliver a battery life measured in decades. In conclusion, though a difficult macro economic environment is expected to be a strong headwind of our results in the near term, we believe that the breadth and uncavity [ph] of our core business coupled with incremental progress in our new business in IF components and the main module will exciting opportunity as the economical climate improves. In the mean time, we are actively taking steps to reduce our operating expenses with the goal of returning our Company to profitability. And hence our guidance for the fourth quarter, we expect our blended ASP to decrease 1% to 3% from that of the third quarter. As such, we expect our fourth quarter revenues to be between $63 million and $69 million. Gross margin is expected to be between 31% and 34%, subject to the risk of changing market conditions. Total operating expenses are expected to be between $28 million and $29 million, including stock option expenses. Net loss per share on a GAAP basis for the third quarter of 2008 – for the fourth quarter of 2008 is expected to between a loss of $0.07 and a loss of $0.12. This concludes our prepared comments. We are now happy to answer your questions.

Operator?

Yes, sir, you are ready for questions?

Yes, we are.

(Operator instructions) And there are no questions at this time, please continue.

I would just like to check and make sure that the – can we check and make sure that the participants have an operating – are operating correctly and have the ability to ask questions?

(Operator instructions) Yes, the lines are coming in.

Okay. I just had a technical experience with that problem over the years.

Sure, sure, yes. There are two lines queuing up.

Okay.

(Operator instructions) Yes, they are both back in queue.

If there are no questions – okay, thank you for participating in this conference call. As always, feel free to contact Leslie Green in Investor Relations, Jim Boyd or myself directly, if you would like to arrange a call or meeting. We thank you for your continued interest in SST.

Thank you, ladies and gentlemen. That does conclude your conference for today. Thanks for your participation and you may now disconnect.