SoundThinking, Inc. (SSTI) Q2 2009 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the SST second quarter 2009 earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Chief Executive Officer, Mr. Bing Yeh. Please go ahead.

Thank you all for joining us today for SST's second quarter 2009 conference call. I am Bing Yeh, Chief Executive Officer. 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. During the course of this conference call, we may 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, and 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 events or results may differ materially. Please refer to the company's annual report on Form 10-K for the year ended December 31st, 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 second quarter 2009 financial results are as follows. Net revenue for the second quarter were $58.1 million compared with $50.1 million in the first quarter of 2009 and compared with $83.7 million in the second quarter of 2008. Product revenues for the second quarter of 2009 were $51.8 million compared with $38 million in the first quarter of 2009 and with $71.1 million in the second quarter of 2008. Licensing revenues for the second quarter were $6.3 million, which compared with $11.3 million in the first quarter of 2009 and with $12.6 million in the second quarter of 2008. There were no upfront license fees in the second quarter of 2009 compared with $1.5 million of upfront license fees in the first quarter of 2009 and compared with $850,000 in upfront fees in the second quarter of 2008. Segment revenues for the second quarter of 2009 were $41.7 million of memory product sales and $10.1 million of non-memory product sales, which compares with $29.7 million of memory and $9 million of non-memory in the second [ph] quarter of 2009 and with $60.9 million of memory and $10.2 million of non-memory in the second quarter of 2008. The tables in our press release will give you information regarding the distribution of our revenues by geographic locations and by application. The following discussion is intended to highlight the changes in these areas. Sequentially, revenue from wireless communications increased by 85% while revenue from our digital consumer applications increased by 11%, Internet computing applications increased by 27%, and networking applications increased by 12%. Geographically, our product sales continued to be focused in Asia with China and Taiwan combining to represent 66% of our sales in the second quarter. Our product sales outside of Asia to Europe and North America represented 8% of our sales in the second quarter. Product gross margins in the second quarter were 13.9% compared with 11% in the first quarter of 2009 and with 15.9% in the second quarter of 2008. Memory segment margins in the second quarter of 2009 were 9.1% compared with 2.7% in the first quarter of 2009 and with 16.1% in the second quarter of 2008. Non-memory margins in the second quarter of 2009 were 33.6% compared with 38.1% in the first quarter of 2009 and with 15% in the second quarter of 2008. Total gross margins was 23.3% for the second quarter of 2009. By comparison, total gross margin was 31.1% in the first quarter of 2009 and 28.6% in the second quarter of 2008. Total operating expenses were $21.1 million for the second quarter of 2009. This compares with $21.9 million in the first quarter of 2009 and with $29.9 million in the second quarter of 2008. Research and development expenses for the second quarter were $11.3 million. This compares with $11.4 million in the first quarter of 2009 and with $15.2 million in the second quarter of 2008. Sales and marketing expenses for the second quarter were $5.2 million. This compares with $5 million in the first quarter of 2009 and $6.9 million in the second quarter of 2008. General and administrative expenses for the second quarter were $4.6 million. This compares with $5.2 million in the first quarter of 2009 and with $7.7 million in the second quarter of 2008. Total employee headcount at the end of the second quarter was 576, down from 596 at the end of the first quarter and down from 718 at the end of the second quarter of 2008. Loss from operations for the second quarter of 2009 was $7.5 million, which compares with a loss of $6.3 million in the first quarter of 2009 and with a loss of $5.9 million in the second quarter of 2008. SST is in the process of completing an evaluation of a potential impairment charge during the second quarter related to its investment in Grace Semiconductor Manufacturing Corporation. Therefore, SST's preliminary net loss for the second quarter of 2009, before any such potential impairment charge, if any, was $8.2 million or $0.09 per share, based on approximately 95.8 million diluted shares outstanding. If SST is required to further impair its investment in GSMC, its net loss will increase; however, SST cannot at this time estimate the potential range of any such impairment charge, if any. By comparison, in the first quarter of 2009, the company recorded a net loss of $9.2 million or $0.10 per share, based on approximately 95.7 million diluted shares. For the second quarter of 2008, SST reported net loss of $9.6 million or $0.09 per share based on approximately 101.8 million diluted shares. Now, let's turn to the balance sheet. We completed the second quarter of 2009 with $131.3 million in cash, cash equivalents, short-term investments, and long-term marketable debt securities, up approximately $5.6 million from $125.7 million on March 31st, 2008 [ph]. Changes in cash were the result of a $10.5 million improvement in our working capital, offset by our $8.2 million net operating loss or net loss, which is in turn offset by $2.9 million in non-cash expenses during the quarter. We are anticipating cash, cash equivalents, short-term investments, and long-term marketable debt securities to decrease between $5 million and $10 million in the third quarter because of inventory increases, as well as changes in both AR and AP. Net trade accounts receivable were $31.4 million, up $5 million from $26.4 million in the first quarter of 2009. Day sales outstanding were 49 days, up from 47 days in the prior quarter. Net inventories as of June 30th, 2009 were $33.3 million, down from $42.4 million in the first quarter of 2009 and down from $64.8 million as of June 30th, 2008. This concludes the discussion of our financial results. And I'll now turn the call back to Bing.

Thank you, Jim. After hitting bottom during the month of January our product shipments rebounded the momentum continued into the second quarter. The inventory replenishment coupled with modest improvement in demand accounted for better-than-expected product revenue in the second quarter. However, our licensing revenue declined significantly in the second quarter as expected, reflecting the decline in our licensee's business in the first quarter. We expect our licensing revenue to rebound in the third quarter, following the same recovery pattern as our product revenue in the second quarter. Market conditions remain challenging in the memory space as there continues to be uncertainty over the macroeconomic environment, resulting in poor visibility and continued pricing pressure. We continue to experience ASP declines, particularly in commodity memory. Although the rate of decline is improving, this drop in ASPs is a result of both weak end market demand and manufacturing overcapacity in our industry. While it is likely that the memory improves modestly for the rest of this year, capacity is so plenty for – that the pricing environment continues to be challenging. And we believe that it may strengthen even as end demand returns, until fab utilization comes back to a healthier level. Given these difficult conditions, we are taking a fresh look at every aspect of our business and are focusing our resources on areas of our business that will yield the most impact over time, creating additional opportunity without additional R&D expense in the near term. These efforts include a targeted approach to product development that emphasizes non-commodity with differentiated features, new programs to enhance our licensing business, and continue to focus on cost control as well as inventory and cash management. By leveraging our core competencies and improving the efficiency of our efforts, we believe that we can move closer to our goal of returning the company to profitability. Looking at our application segments, the continued momentum in inventory replenishment from Q1 and some improvement in demand have resulted in a 44% sequential increase in unit shipments in the second quarter. We saw almost across-the-board improvement in application segments. However, due to the severe decline during prior two quarters, total unit shipments are still 20% below the second quarter of 2008 and are 30% below that of 2007 even with this strong snapback. We do not expect this rate of growth will sustain in the third quarter. Unit shipments to the digital consumer segment increased 18% sequentially with set-top box, digital TV, portable media player and the high-definition optical drive applications showing substantial recovery. Unit shipment to the Internet computing segment increased nearly 35% sequentially and showed substantial recovery in hard disk drive, PC monitor, and notebook applications. We also saw substantial growth in point-of-sale in the solid-state disk applications. Unit shipments to the wireless communications segment increased 73% sequentially, triggered by the strong recovery in Bluetooth and the GPS applications, and the continued sequential growth in ultra low-cost phone shipments. Unit shipments to the networking segment increased 45% sequentially, mainly driven by the RF power amplifier shipments to the Wi-Fi module applications whereas the shipments to the router and other networking equipment applications suffered a more than 20% sequential decline. Looking at our memory business, although our memory business is mature and have more successfully weathered the economic conditions than many of our competitors, we believe that future improvement in our cost base, our customer base, our product roadmap, and cost structure will allow us to emerge from this recession in a stronger position. As such, we were very pleased to announce in June that Bertrand Cambou has joined SST to head up all aspects of the operations of our memory business. While he was only been with us a short time, his energy and fresh viewpoint have generated a new excitement in our efforts to revive our memory business. Over the past few weeks, we have evaluated the current market environment and the competitive landscape in order to streamline our product platforms and to effectively deploy our employee – our engineering resources. We have also assessed the geographic areas and strategic accounts in which we maybe under-represented and we believe there are opportunities for a greater presence. We are in the process of formulating a focused effort in order to penetrate these opportunities with existing products in the coming quarters. By successfully expanding our presence, we will have a more balanced customer base with additional strategic accounts in Japan, North America, and Europe. In terms of our roadmap, we are putting special emphasis on our memory products offering – product offerings with differentiated features that take advantages of the benefits of super flash technology such as high reliability, fast read/write performance with very low power requirements, and the serial flash with XIP function. For the near term, we are focused on the product transition to 120-nanometer node and the 300-millimeter capacity for cost improvements. Over the past several quarters, we have been working to ramp our 120-nanometer technology products at Grace and the MAC Chip [ph]. These products including 16 Megabit, 32 Megabit, and 64 Megabit parallel and serial memory family of products offer significant performance, power efficiency, and footprint advantages over previous generations. To date, nine products have been released at (inaudible) with five more (inaudible). The production ramp of this 120 nanometer product is limited by the current market demand. We expect the situation to continue to improve over the next few quarters. For the next-generation technology, we have been working on the 70-nanometer technology node on a 12-inch fab at one of our manufacturing partners and licensees. Our goal for the 70-nanometer node is to sample the first product in early 2011 and to extend to the memory density offerings up to 256 Megabit. Turning to our licensing business. As we have been describing for sometime, the royalty component of our licensing business reflects the business of our licensee base one quarter in arrears. Therefore, as expected, our Q2 licensing revenue were down more than 44% sequentially with the royalty portion down 36% from the prior quarter as a result of softer demand in the first quarter for our licensee's products. As the semiconductor industry improved in Q2, we expect that our Q3 royalty revenues will also improve from the prior quarter. We believe that our licensing business represents considerable opportunity for us and we are placing enhanced emphasis in several areas that we believe will foster its growth. First, we continue to focus on growing our licensee base and are targeting many new accounts including wafer foundries, IDMs, and the design houses to promote the use of super flash technology. We are also working with current licensees to extend to more and advanced technology nodes, which will drive more value from our licensing activity. Further, we are expending our offering in design services to help our licensees speed up the tighter market for their new products. These design services include both the flash IP blocks and full-chip design. We are also supporting our licensees with the marketing programs designed to assist them in their own outreach to customers. During the third quarter, we expect to launch a dedicated, embedded super flash website to promote our licensing business and assist our licensee base in their product design. We also kept our – we also had our first super flash user forum on May 11 at the 2009 Nonvolatile Memory Workshop in Monterey, California to promote super flash technology for embedded applications. The seminar was well attended and interest in future similar events is strong. We are very excited about these programs and we believe they will help driving additional licensing revenues down the road. Turning to our non-memory business. We continue to make progress in this area, which is especially gratifying given the difficult of penetrating new market and customers in an environment when customers are scaling back their development and production. In fact, all non-memory business contributed 20% of product revenue, but contributed nearly 50% of product gross profit in the second quarter. Our RF power amplifier products targeting embedded Wi-Fi market had a very strong sequential growth. Unit shipments more than doubled to reach 40.6 million units in Q2, driven by videogame and printer applications. We are currently driving the design wins in the smartphone applications and expect to see product ramp for this application in a few quarters. While the revenue base is still quite small, ASPs for this product remain stable and interest continues to grow. More importantly, the design activities with chipset partners in power amplifier products also open up opportunities for our non-memory and the NANDrive products. We are also continuing to experience good traction for our NANDrive, our NAND consultant in the module products. The number of customers for our NANDrive product line have been growing steadily every quarter for the past 10 quarters. Our revenues remain small as the design cycle for the products that incorporate the NANDrive is quite low. Also, several of our design wins are in the car infotainment space. That is likely to be weak until the broader economy recovers. Nevertheless, our growing portfolio of design wins that have not yet ramped to volume production indicates that we are in front of a positive revenue cycle for this product family. We continue to experience customer enthusiasm for the NANDrive, particularly in iTP SET, set-top boxes, mobile Internet devices, and industrial applications. In the next few quarters, we expect to expand our product offering to increase our addressable market into applications with host interface rather than PATA, as well as industrial temperature applications. These products will cause a broad range of capacities from 0.5 Gigabyte to 32 Gigabyte. So in closing, given the near-term challenges in the global economy, we are taking this opportunity to improve our business by leveraging our existing core competencies and just focusing our resources on high-impact areas that yield the strongest return. We will continue to expand into new markets with high-value products that target high-volume applications. We will also expand our core business through the expansion of our customer base into an enhanced technology licensing program. We see ourselves as a supplier of basic computing blocks for new products in the electronics industry and we are committed to developing solutions for customers that facilitate innovation. In terms of our guidance for the third quarter, we expect our blended ASP to decrease 5% to 7% from that of the second quarter. As such, we expect our third quarter revenues to be between $61 million and $68 million. Gross margin is expected to be between 25% and 29%, subject to risks or changing market conditions. Total operating expenses are expected to be between $22 million and $24 million including stock option expenses. Net loss per share on a GAAP basis for the third quarter of 2009 is expected to be between a loss of $0.03 and a loss of $0.07. This concludes our prepared comments. We are now happy to answer your questions.

(Operator instructions) And no one is queuing up for questions. Please continue.

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.

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