SoundThinking, Inc. (SSTI) Q1 2009 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Silicon Storage Technology First Quarter 2009 Earnings Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and the instructions will be given at that time. (Operator instructions) And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, President and CEO, Mr. Bing Yeh. Please go ahead, sir.

Thank you all for joining us today for SST's first quarter 2009 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 the current market conditions. Then, we'll open up the call for questions and answers. Jim?

Thank you, Bing. First let me begin by apologizing for our tardiness in getting the call started on time. It was due to press release not being released on time. Okay. 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 flows and cash balances, our tax provision and our expected tax rate, and other items as may be 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, 2008, and 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 first quarter 2009 financial results are as follows. Net revenues for the first quarter were $50.1 million compared with $58.4 million in the fourth quarter of 2008 and compared with $81.1 million in the first quarter of 2008. Product revenues for the first quarter of 2009 were $38.8 million compared with $46.3 million in the fourth quarter of 2008 and was $69.7 million in the first quarter of 2008. License revenues for the first quarter were $11.3 million, which compared with $12.1 million in the fourth quarter of 2008 and $11.4 million in the first quarter of 2008. First quarter 2009 licensing revenue included $1.5 million in upfront fees versus no up front fees in the fourth quarter of 2008. Segment revenues for the first quarter of 2009 were $29.7 million of memory product sales and $9 million of non-memory product sales which compares with $37.2 million of memory and $9.1 million of non-memory in the fourth quarter of 2008 and was $61.7 million of memory and $8 million of non-memory in the first quarter of 2008. 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 decreased by 36% while revenue from our digital consumer applications decreased by 12%. Internet computing applications decreased by 21% and networking applications increased by 26%. Geographically our product sales continued to be focused in Asia with China, Taiwan, combining to represent 68% of our sales in the first quarter. Our product sales outside of Asia to Europe and North America represented 13% of our sales in the first quarter. Product gross margins in the first quarter were 11% compared with 9.8% in the fourth quarter of 2008 and with 20.5% in the first quarter of 2008. Total gross margin was 31.1% for the first quarter of 2009. By comparison total gross margin was 28.4% in the fourth quarter of 2008 and 31.7% in the first quarter of 2008. Total operating expenses were $21.9 million for the first quarter of 2009. This compares with $27.4 million in the fourth quarter of 2008 and was $30.3 million in the first quarter of 2008. Fourth quarter 2008 expenses included $2.5 million in restructuring expenses while first quarter of 2009 included approximately $329,000. Research and development expenses for the first quarter were $11.4 million. This compares with $13.9 million in the fourth quarter of 2008 and with $15.6 million in the first quarter of 2008. Sales and marketing expenses for the first quarter were $5 million. This compares with $5.5 million in the fourth quarter of 2008 and with $7.5 million in the first quarter of 2008. General and administrative expenses for the first quarter were $5.2 million; this compares with $5.5 million in the fourth quarter and was $7.2 million in the first quarter of 2008. Total employee headcount at the end of the first quarter was 596, down from 614 at the end of the fourth quarter, and down from 723 at the end of the first quarter of 2008. Loss from operations for the first quarter of 2009 was $6.3 million, which compares with a loss of $10.8 million in the fourth quarter of 2008 and with a loss of $4.6 million in the first quarter of 2008. Net loss for the first quarter of 2009 was $9.2 million or $0.10 per share based approximately on 95.7 million diluted shares outstanding. By comparison, we recorded a net loss of $36.6 million or $0.38 per diluted share in the fourth quarter of 2008 based upon approximately 95.5 million diluted shares outstanding. Net loss in the fourth quarter of 2008 included $21.4 million in impairment charges related to GSMC and ACET. For the first quarter of 2008, we reported a net income of $1.5 million or $0.01 per diluted share on approximately 104 million shares outstanding. Now let us turn to the balance sheet. We completed the first quarter of 2009 with $125.7 million in cash, cash investments, short-term investments and long-term marketable debt securities, down approximately $6 million from $131.7 million on December 31, 2008. Changes in cash were primarily the result of our $9.2 million net loss partially offset by approximately $3 million in non-cash depreciation, amortization and 123 R expenses during the quarter. Net trade accounts receivables were $26.4 million, up $6.3 million from $20.1 million in the fourth quarter of 2008. Days sales outstanding were 47 days up from 32 days in the prior quarter. Net inventories of March 31, 2009 were $42.4 million, down from $54.1 million in the fourth quarter of 2008 and down from $59.7 million as of March 31, 2008. This concludes the discussion of our financial results and I will now turn the call back to Bing.

Thank you, Jim. Our first quarter revenues dipped to the lowest levels since 1999 due to the unprecedented drop in demand since last September. Purchase orders from customers progressively increased as we moved through each month during the first quarter. We also received more term business than we had initially projected. We were encouraged by the better than expected revenues given the current challenging economic environment. However, ASP pressures, particularly in commodity and memory, continued to impact gross margin performance and are likely to persist for several quarters. This pressure is the result of both weak end market and manufacturing overcapacity in our industry. While it's likely that the demand would begin to recover this year, we b believe that much of the improvement in the first quarter was a function of inventory replenishment, rather than an improvement in the end user demand. I inventory throughout the supply chain is lower than it has been in quite some time and companies are taking steps to ensure that they can respond to stronger demand when it occurs. However, fab capacity is so plentiful that the pricing environment continues to deteriorate and we believe that it may not strengthen even as end demand returns until fab utilization comes back to a healthier level. Therefore, our focus continues to be on executing our strategy of diversification and advancement of our technology road map while reducing our inventory and tightly controlling our expenditures. We're making good progress in each of these areas. In fact, our expenses came in at the low-end of our expectations for the quarter and our inventories were reduced by $12 million. We're actively working towards the goal of returning the company to profitability and are managing our assets conservatively through this period. Looking at our application segment, for the first quarter, it is evident that the market demand is substantially lower than historical levels, and consumer related market segments suffered the most in this downturn. After more than a 45% sequential decline in the fourth quarter, unit shipments to the digital consumer segment suffered another 13% decline in the first quarter. Most digital consumer sub segment were down substantially. The bright spots where we saw sequential unit growth are DVD players, portable media players and set-top boxes. Shipments to the Internet computing segment began to stabilize and were down only 2% sequentially following the 29% sequential decline of prior quarter. Most sub segments were down substantially except for PC monitors, printers, notebook and desktop PCs, which showed healthy recovery. The wireless communication segment suffered most with 25% sequential decline following 49% decline of the prior quarter. The only sub segment that showed robust recovery is mobile phones. The networking segment is the only segment, the only market segment that showed a positive sequential growth in the first quarter. Following the 36% decline of the fourth quarter, networking grew 32% sequentially, with increased shipments to DSL broadband access and WiFi networking devices. Looking at our memory business, it is not surprising that under the current weak demand environment, our memory business suffered severe margin declines in both the fourth quarter of 2008 at the first quarter of 2009. Our memory product gross margin was in the single digits and we do not expect to see material improvement until the economical climate improves. Given theses challenging market conditions, continued innovation in our products and advancement in our technology are particularly important. Therefore we are pleased to report that we have begun to ramp up production of our 120 nanometer technology products at both (inaudible) which are the foundries that will produce most of our products in 2009. Six products have been released to production with four more under verification and qualification. These products include 16 megabits, 32 megabits, and 64 megabits parallel and serial family of products. Also for the 12-inch line at Powerchip, we already have the first product in production and expect to release to two more products to production during the second quarter. We believe this 12 inch line will provide a broader cost structure to compete in the broader commodity market. And finally we are very pleased to announce that we won an Innovation of the Year award from EDM Magazine for our 26 Series SQI family of serial interface flash memory devices. The award recognized our product performance advantages to the user side and low-power consumption. This marked the second consecutive Innovation of the Year award for SST and our fourth consecutive nomination as a finalist. Turning to our licensing business, our first quarter total licensing revenue declined 6% sequentially, while the royalty portion declined approximately 20% sequentially. It is important to understand that licensing revenue are deposited one quarter in arrears, so that the royalty portion of our first-quarter licensing revenue will advance the business of our licensing base in the fourth quarter of 2008. Therefore, we expect our second quarter royalty revenue to reflect the broad downturn of the semiconductor industry that occurred in the first quarter. At this time, we expect the royalty portion to decline more than 30%. Nevertheless, our licensing business remains a tremendous asset to our financial model and our continued investment in our core memory product and the technology roadmap has to ensure that we will thrive as demand returns to more normal levels. Turning to our non-memory business, as I mentioned earlier, revenues in this area came in ahead of our expectations albeit from a smaller base. When we initiated the diversification strategy to expand into the non-memory business four years ago, our opportunity was to develop and market products with higher ASP, high gross margin and a non-commodity nature. Although it has taken a longer time to establish this new business, our goal remains unchanged. In fact, we have made good progress in this area. In the first quarter, the non-memory business contributed 22% of p product r revenue but contributed more than 50% off product gross profit. It NAND drive, our embedded flash solid state drive product family, we continue to be pleased by the design in activities and customer interest, particularly for applications such as IP set-top boxes, mobile Internet devices, and industrial applications. During the first quarter, we expanded this product line by the initiation of an eight-gigabyte NAND drive product for consumer applications. Our non-memory business also suffered from the downturn of the macro economic environment. Nevertheless, unit shipments of NAND drive grew 14% sequentially and as we further diversified our customer base, we expect to see a steadier run rate, and improved manufacturing efficiency. We were pleased to report that the NAND drive was also a finalist in the EDM Innovation of the Year award, among an impressive list of products from other EDM manufacturers. Our RF power amplifier and front-end module products targeting the embedded WiFi are also being received well in the marketplace. This family of products was introduced a year ago and was already being designed in and is beginning to ramp into embedded system applications such as gaming consoles and cellular phones. While volumes are still low, we expect to see a fairly steady growth rate for this product in the quarters to come. In conclusion, though the macro environment is challenging, SST is fundamentally a stable financial sound business with a strong balance sheet and a management that is committed to repositioning the company for returning to profitability and renewed growth. We continue to operate our business in a fiscally conservative way while investing in strategically important technology and product advancements that will strengthen our position as the global economy begins to recover. While the pricing environment may continue to be weak, as a result of softening demand and overcapacity, we continue to focus on expense control and manufacturing improvements such as our 12-inch line that we have (inaudible) to offset margin pressure and allow us to enhance shareholder value. In terms of our guidance for the second quarter, we expect our blended ASP to decrease 4% to 5% from that of the first quarter. As such, we expect our second quarter revenues to be between $50 million and $56 million. Gross margin is expected to be between 25% and 28%, subject to the risk of changing market conditions. Total operating expenses are expected to be between $22 million and $24 million, including stock option expense. Net loss per share on a GAAP basis for the second quarter of 2009 is expected to be between a loss of $0.12 and a loss of $0.08. This concludes our prepared comments, we're now happy to answer your questions.

(Operator instructions) And our first question is from the line of Richard Shannon with Northland Securities. Please go ahead.

Good afternoon guys. How are you?

Good. Thank you, Richard.

Good. A couple of questions, I guess I will start on the guidance for the quarter. Bing, I think I caught your comments regarding the licensing revenues, royalties being down 30%, and I think you made some comments about your up front royalties in the first quarter, does your guidance imply any sort of up front coming in the second quarter or should we see that number coming down about 30% or so?

No. There is more than 30% decline for royalty portion, and the up front fee portion is hard to predict depending on the timing of the agreement executed. So there is no upfront in the forecast.

Okay. All right, fair enough. And then the second question on product revenues, you mentioned your products you made in 120 nanometer and also ramping up the 300-millimeter versions of that, how much revenues have you implied from those 120 nanometer memory products in the second quarter?

At this time, still small.

Still small?

They will begin to ramp. Yes.

Okay. I would love to get, Bing, your comments about what you're seeing from Spansion as they have progressed through some of the bankruptcy proceedings in the past quarter, what you're seeing in terms of them being aggressive in terms of pricing and / or capacity out there in the market?

Well, at present Spansion is supporting the high intensity portion of the memory, medium to high density, and because they continue to operate and the pricing has been very aggressive as you induced. Low pricing has been there now for several quarters because previously they were motivated to catch the inventory, and that pressure continued to be the. So at this time they had to walk away from opportunities while we continue to encourage the potential customers to design our products. And they're not actually taking business. We just do the design win – do the design-ins.

Okay. And referring to Spansion again, you made some comments about your forward-looking thoughts on ASP pressures and mentioned that you think those pressures could persist for several quarters, was that – is that broad-based out there, or is that primarily due to expansion?

Well, there are also pressure from the low-density area from our competitors like (inaudible) and they have plenty of capacity at this time.

Okay. One of the things that is interesting from your first quarter was that networking did quite well, up 26%. And I apologize, I was kind of ping ponging back and forth to reading your press release and hearing some of the comments. I was kind of curious what happened there, what applications are driving that and is that something that came late in the quarter?

Okay. One major growth in that area has been the WiFi applications because of our – due to partner RF partnering of PA products, the power amplifier products. We have designed quite a few design applications in embedded WiFi areas. So that drives some of the growth. And we also have good progress in NOR flash design-ins in those areas, particularly the gaming console applications.

Okay. And maybe last question for me, financially oriented, maybe for Jim, you mentioned your of OpEx guidance for the quarter 22, 24, you at 22 the last quarter, is this kind of – is kind of showing us what the new level of OpEx can be over the next several quarters or can you go into more – can I get your thoughts on where you are kind of taking headcount and those kinds of costs?

Well I think we have structured the company at that level of sales and we're watching the economy and our revenue. You know if we have to we will take it lower but I think we are targeting this level right now. So I think you should think that 22 is a good achievable number.

Okay. Good enough. I will jump on the line. Thank you.

(Operator instructions) And our next question is from the line of Lawrence Fisher [ph] with CFC [ph]. Please go ahead.

Hi, good afternoon gentlemen. Richard actually asked some of the questions I wanted to touch on, especially related to Spansion, possibly having a large effect on bringing down ASPs for the quarter. You have answered most of my questions related to that, but do you have any sort of gauge for how much the decrease in ASP is due to Spansion and their bankruptcy versus oversupply from some of your competitors?

It is a broad-based, it is not from the medium to high density area, and also the low-density area also started on severe decline over the past two quarters, and mainly because of the weak demand as well as the overcapacity.

Okay. And as far as you come in slightly ahead in revenue for this quarter, you had written in your release that you were slightly ahead month by month for what your prediction was for the month; just trying to get a feel for how we are looking going forward? Do you – would you say that the rate of surprise month by month has been increasing, or is it you're getting slightly more ahead of your revenue expectations on a per month, or you are just kind of flat there as far as (inaudible) per month?

The progressive increase by month that was a first quarter phenomena. And at this time, I think it is more stabilized. I think the first quarter has a strong recovery from the tremendous cutback or the (inaudible) during the fourth quarter, and because of that, our customers began to replenish their inventory, and of course progressive increases during the first quarter.

All right, thank you. And just one thing on OpEx and excuse me if you touched it, I did miss the beginning of the call, last quarter, last quarter you said you expected your expenditures this quarter to be 23 to 25, you came in slightly under 22, could you just touch on briefly how you ended up to be under even the bottom range of what you have predicted like in what areas was OpEx lower?

It mainly was lower in mass charges during the quarter and we expect those to carry over into Q2.

Okay. So that is why your Q2 expectation is probably a million lower than you had expected for Q1 originally?

Yes, that's correct. Yes. It was quite a few projects go to the tape out to incur the mass (inaudible) push out in a few weeks, so are going to occur in the second quarter.

All right, thank you very much guys, and congratulations on beating your revenues for the first quarter.

Thank you.

We have a question from the line of Richard Wong who is an individual investor. Please go ahead with your question.

Spansion, just one more question on Spansion, in the press release, they said they were reducing their presence in the wireless market or maybe even getting out of it, would that affect your wireless revenue or profit?

That basically will not impact our operations. Basically the so-called wireless business are mainly referred to the high density NOR supporting the face of our market and we are not in that market at this moment.

Just one more question on your NAND drive, early on, maybe last year, you mentioned that toward maybe second half of this year, there might be many new products put out by the manufacturers, is that still in your projection?

You mean our customer base using our product?

Right.

Yes, we have been working with several hundred opportunities but not all of them are high volume, most of them actually are very low volume at this moment, and those are industrial, medical business, non-consumer high volume type of qualifications. And our objective is to have to design in most of those applications for growth down the road. So this market is going to be – so we get into the commodity business and you are going to be competing with many other suppliers, so we chose to force in that area, except there is a few high-volume account we are working with to serve additional volume but in the long run we believe good business can be made in a much broader base in the industrial, medical, instrumentation type of applications which we can drive a higher margin and also have a stable business.

And now, I will turn the meeting back over to Mr. Yeh for any closing remarks.

Okay. 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 a meeting. We thank you for your continued interest in SST.

Thank you. And ladies and gentlemen, this conference call will be made available for replay starting today at 3:30 PM specific time. The replay of the conference runs for one week till the date of May 5 at midnight Pacific. You may access the AT&T teleconference replay system by dialing 1-800-475-6701. Please enter the replay access code 996784. International participants may dial 320-365-3844. Those numbers again 1-800-475-6701; international participants dial 320-365-3844, the replay access code 996 784. That concludes our conference call.