SoundThinking, Inc. (SSTI) Q3 2009 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the SST Third Quarter Earnings Results Conference Call. At this time, all lines are in a listen-only mode. Later we’ll conduct a question-and-answer session and the instructions will be given at that time. [Operator Instructions]. As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Chief Executive Officer, Mr. Bing Yeh. Please go ahead.

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

Thank you, Bing, and good afternoon, everyone. 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 lay-offs, ASPs, margins, cash flow and cash balances, 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 the 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 expectations. Now our third quarter 2009 financial results are as follows. Net revenues for the third quarter were $71.3 million, compared with $58.1 million in the second quarter of 2009, and compared with $92.4 million in the third quarter of 2008. Product revenues for the third quarter of 2009 were $61.8 million, compared with $51.8 million in the second quarter of 2008, and with $79.8 million in the third quarter of 2008. Licensing revenues for the third quarter were $9.5 million, compared with $6.3 million in the second quarter of 2009 and with $12.6 million in the third quarter of 2008. Revenues for the quarter included 350,000 in upfront fees, which compared with zero in the second of 2009, and with zero in the third quarter of 2008. Excluding the upfront fees, royalties were up approximately $2.8 million in the third quarter over the second, reflecting a general improvement in the industry. Segment revenues for the third quarter of 2009 were $50 million of memory product sales and $11.7 million of non-memory product sales, which compares with $41.7 million of memory and $10.1 million of non-memory in the second quarter of 2009 and with $68.5 million of memory, and $11.3 million of non-memory in the third 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 increased by 4%, while revenue from our digital consuming applications increased by 22%. Internet computing applications increased by 38%, and networking applications increased by 35%. The largest increase in sales came from products selling into Bluetooth, GPS, digital camera, disk drives, monitors and Voice-over-IP applications. Geographically, our product sales continued to be focused in Asia with China and Taiwan combining to represent 64% of our sales in the quarter. Our product sales outside of Asia to Europe and North America represented 8% of our sales in the third quarter. Product gross margins in the third quarter of 2009 were 21%, compared with 13.9% in the second of 2009 and with 23% in the third quarter of 2008. Memory segment margins in the third quarter of 2009 were 16.6%, compared with 9.1% in the second of 2009 and with 20.6% in the third quarter of 2008. Prices stabilized during the quarter nearly across the board, but product mix also contributed to these improvements. Non-memory margins in the third quarter of 2009 were 40%, compared with 33.6% in the second quarter of 2009 and with 37.9% in the third quarter of 2008. The improvements in non-memory margins mainly came from product mix during the quarter. Total gross margin was 31.5% for the third quarter of 2009. By comparison total gross margin was 23.3% in the second quarter of 2009, and 33.9% in the second quarter of 2008. A sequential improvement was due to increases in both sales and gross margins in our product business and sales in our licensing business. Total operating expenses were $21 million for the third quarter of 2009. This compares with $21.1 million in the second of 2009 and with $26.9 million in the third quarter of 2008. Research and development expenses for the third quarter were $10.6 million. This compares with $11.3 million in the second quarter of 2009 and with $14.3 million in the third quarter of 2008. Sales and marketing expenses for the third quarter were $5.1 million. This compares with $5.2 million in the second quarter of 2009 and with $6.7 million in the third quarter of 2008. General and administrative expenses for the third quarter were $5.3 million. This compares with $4.6 million in the second of 2009 and with $5.9 million in the third quarter of 2008. G&A expenses for the quarter included approximately $860,000 in estimated payments for the settlement of our derivative lawsuits. Total employee headcount at the end of the third quarter was 576, flat with the end of the second quarter of 2009 and down from 713 at the end of the third quarter of 2008. Income from operations for the third quarter of 2009 was $1.5 million, which compares with a loss from operations of $7.5 million in the second of 2009 and with income from operations of $4.1 million in the third quarter of 2008. Other income in the third quarter of 2009 was $3.4 million, up $3.2 million from the second quarter of 2009. The sequential increase was mainly due to $1.4 million in dividends from our related party investments that we received in the third quarter of every year and a $1.1 million gain on sales of investments. Approximately $300,000 of this gain came from the sale of some of our public company equity positions. The $800,000 remaining balance came from a gain on the sale of our shares in ACET in the third quarter of 2009 in exchange for stock in ADL, which will be taking over the operations of ACET. With the change in ownership, we will no longer incur an expense for our portion of ACET's losses, which were $122,000 in the third quarter of 2009, $254,000 in the second of 2009, and a $1.9 million in the third quarter 2008. We do not anticipate recording this type of charge related to our ownership in ADL. Net income for the third quarter of 2009 was $3.1 million or $0.03 per share, based upon approximately 95.9 million diluted shares. By comparison, the company recorded a net loss of $6.4 million or $0.07 per share, based on approximately 95.8 million shares in the second quarter of 2009. For the third quarter of 2008, SST reported net income of $4.9 million, or $0.05 per share based on approximately 99.9 million diluted shares. We completed the third quarter of 2009 with $143.8 million in cash, cash equivalents, short-term investments and long-term marketable debt securities, up approximately $8.5 million from $135.3 million on June 30, 2009. Net trade accounts receivable were $35.9 million, up $4.5 million from $31.4 million in the second quarter of 2009. Day sales outstanding were 46 days down from 49 days in the prior quarter. Net inventories as of September 30, 2009 were $30.6 million, down from $33.3 million in the second quarter of 2009, and down from $65.3 million as of September 30, 2008. We plan to grow our inventory in the fourth quarter in support of customer requirements. This concludes the discussion of our financial results, and I'll now the call back to Bing.

Thank you, Jim. This has been an encouraging and productive quarter for SST. When we reviewed our results for you in July, we told you that we were taking a fresh look at our business and were focusing our resources on areas that would yield to the most impact overtime. These efforts include the targeted approach to product development that emphasizes non-commodity products with differentiated featured. New programs to enhance our licensing business and they continue to focus on cost control and the conservative management of our assets. We are pleased to report that strong execution of these objectives, coupled with an improved demand environment, resulted in the solid financial performance in the third quarter, and several key achievements in our product development and licensing efforts that will help to drive our growth in quarters to come. To begin, the end market demand recovery that we began to see in the second quarter continued through the third quarter, resulting in more than 30% sequential increase in unit shipments and healthy growth across all four of our applications segments. Equally encouraging, we begin to see a stabilizing pricing environment, and the rate of price declined for likely product has slowed dramatically from earlier in the year. Further, the competitive environment is more rational, than we have seen it in several quarters. Although, our blended ASP decreased by 7% in the third quarter, it was more a function of changes in our product mix, particularly the increase in sales of serial flash and RF power amplifier products that carry a lower ASP. Sequential ASP decline for the serial memory products was less than 4%, compared with 11% to 6% declined in each of the prior three quarters. We expect that the stability in the pricing environment will continue through the fourth quarter, even though no more seasonality in NOR flash coupled with some potential digestion or inventory in the chain now is expected to result in lower demand industry wide. Turning to our memory business, we continue to place strong focus on the development of innovative and highly differentiated products. That explains our addressable market. As such, we expect soon to announce a new family of high-speed [copied] serial flash memory with our proprietary (inaudible) in-place feature. This new product family builds upon in the success of our announced, SQI flash products that won an Innovation of the Year Award from EDN Magazine earlier this year. This product is significant, because over the past several years, electronic device manufacturers have been transitioning from the use of (inaudible) flash to the use of serial flash for certain applications in order to take advantage of the significant costs savings of using serial flash. However, serial flash has historically not offered the performance level required for use in applications that requires very high-speed memory access, such as mobile handsets, Bluetooth headsets, GPS devices and others. The breakthrough of our high-speed, SQI serial flash is that a nice traditional serial flash memory. This family marries the performance of parallel flash memory with the low cost of serial flash memory. In addition, it offers this performance at extremely low power consumption, a critical factor in the design of next generation portable devices. We are also pleased to report that our 120 nanometer products continue to ramp at [Grace] in the next year. We plan to aggressively ramp up these products to reach 50% revenue contribution to our memory business in the next few quarters. In the meantime, our development engineers are working hard with our foundry partners to develop a 90 nanometer and 70 nanometer technologies, aiming to develop innovative and cost comparative products to support our target application segments in the years to come. In fact, we have recently taped out a 70 nanometer product we hope to a 12-inch [line] partner. Another strong focus of our memory business has been the expansion of our presence in under represented geographies and the strategic accounts. This includes the aggressive expansion of our sales and distribution channels, particularly in Europe and in North America to include, both direct sales and indirect distribution arrangements. We believe that through enhanced distribution, we can achieve greater penetration of our existing market, as well as new applications for our products. Turning to our licensing business. In accordance with the general improvement of semiconductor industry in the second quarter, our licensing royalty revenue which has recorded one quarter in [arrears] grew by more than 40% in the third quarter. We expect to see continued growth in our royalty revenue in the fourth quarter, as it reflects the industry's strong sequential growth in the quarter earlier. We believe that this area of our business is a tremendous asset and we have made it a priority to expand our licensing base to new accounts in wafer foundries, IDMs and design houses. Therefore, we are very pleased that we reported on the new licensing agreements we have signed over the course of the past few quarters. We will begin to contribute upfront fees in the fourth quarter, as we are achieving milestones to fulfill the deliverables for these new agreements. Now turning to our non-memory business; we are very pleased with the continued progress that we are making with our RF power amplifiers and main consultants in modules. In total, our non-memory business constituted 19% of revenue, but 36% of gross profit in the third quarter. Our RF power amplifiers and the front-end module products targeted to be embedded in to WiFi market showed a strong sequential growth in Q3, following very strong growth in the prior quarter. In Q3, we shipped more than 20 million units up from 14.6 million units in Q2. Also we announced the availability of our newest RF power amplifier that doubled the output power of our WiFi power amplifier with less current consumption and high linearity. This new device can help increase the broadcast range of wireless AP routers to better support broadband applications, such as streaming video and other multi-media rich content. Our RF power amplifier products are winning designs with several major chipset manufacturers for use in smartphones applications. We expect a ramp-up of this chipset in the smartphone market will drive the unit volume shipments of our power amplifier products in 2010. Further, these design wins open up other opportunities for our non-memory and NANDrive products. In terms of our main controller in the modules, we continue to see steady growth in our customer base, with now more than 80 customers for this product. Further, our engineering teams are designing new controllers with new interfaces to expand our addressable market into such applications as mobile internet devices, automotive, industrial equipment, camcorders and IP set-top boxes among others. This is an emerging business for SST, and our growth portfolio of design wins indicates that we are in front of our positive revenue cycle for this product family. In closing, we believe that we are making excellent strides in our business to leverage our many strengths and to [border] the reach of our products and our distribution. We are focusing on our engineering resources on innovative non-commodity products that target high-volume high-growth market. So that has never been accessible to us before. These efforts are yielding tremendous designing activities in the robust portfolio design wins that we are beginning to ramp over the next 12 to 18 months. As we look to the fourth quarter, we expect to see the normal seasonality in our business resulting in slightly decreased product revenues. However, licensing revenue is expected to increase as a result of both stronger royalty revenue and upfront fees from our new licensees. Therefore, we expect our fourth quarter revenue to be between $67 million and $72 million. We expect plenty of ASP to decrease 2 to 4% from that of the third quarter. Gross margin is expected to be between 30 and 32%, subject to the risk of changing market conditions. Total operating expenses are expected to be between $21 million and $23 million, including stock option expense. Net income per share on a GAAP basis for the fourth quarter 2009 is expected to be between zero and $0.03. This concludes our prepared comments. We are now happy to answer your questions.

[Operator Instructions]. Our first question will come from the line of William Myers with Miller Asset Management. Please go ahead.

In terms of growth, your networking segment has done better than your wireless communications segment. I'd just be curious as to if you could explain that a little bit, and as also if that trend you would be thinking, it would continue into 2010.

The segments growth is mainly because the growth - actually, we have a strong growth in the Bluetooth and GPS. But that was offset by the decrease of shipment to the cell phone market. So as a result of that, it shows a small increase. Moving forward we believe that it would recover some from mobile phones shipments. So, as a result we will gain more increase in the coming quarters.

The other question I would have the specifics would be is; you said you were going to expect to increase inventories. Do you have any - even approximate number you would put on what you might think would be necessary?

We are going to ramp a little bit, not a lot, in terms of wafer side. In order to meet in case there is a surge in demand. So, in case that demand doesn't exist and then essentially our inventories are now going to grow more than 10%. So, it's under our control.

[Operator Instructions]. And gentlemen allowing a few moments for anyone to queue up, we have no questions in queue.

Thank you for participating in this conference call. We will be presenting at the Needham Growth Stock Conference in January and look forward to seeing many of you there. As always, feel free to call Leslie Green in 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.

Again, ladies and gentlemen, that does conclude our conference for today. As you heard earlier it was recorded and it will be available for replay starting at 3:30 pm Pacific today through November 3, 2009. You may dial in to the replay system at 1800-475-6701 and enter the access code 119429. International participants may dial area code 320-365-3844 and enter the same access code number. Those numbers again 1800-475-6701, International is 320-365-3844 with the access code 119429. I'd like to thank you for using AT&T executive teleconference. You may now disconnect.