ShotSpotter, Inc.
Q2 2008 Earnings Call Transcript

Published: 30 Jul 2008

[Operator:]

Welcome to the SST second quarter 2008 financial results conference call. (Operator Instructions). I would now like to turn the conference over to your host, Mr. Bing Yeh, President and CEO. Please go ahead.

[Bing Yeh:]

Thank you all for joining us today for SST’s second 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?

[Jim Boyd:]

Thank you, Bing and good afternoon everyone. During the course of this conference call, we will make projections or 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 technologies, the company's ability to secure manufacturing capacity, inventory levels, ASPs, margins, 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 second quarter 2008 financial results are as follows. Net revenues for the second quarter were $83.7 million compared with $81.1 million in the first quarter of 2008 and with $99.3 million in the second quarter of 2007. Product revenues for the second quarter of 2008 were $71.1 million, compared with $69.7 million in the first quarter of 2008 and with $90.3 million in the second 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, revenue from wireless communications decreased by 6%, while revenue from our digital consumer applications increased by 17%. Internet computing applications declined by 3%, and networking applications increased by 4%. Geographically, our product sales continue to be focused in Asia, both China and Taiwan, combining to represent 70% 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 second quarter, were $12.6 million, up 10.5%, from $11.4 million in the first quarter of 2008. Technology licensing revenues, in the second quarter of 2007 were $9.1 million. Up-front fees for the comparable quarters were $850,000, in the second quarter of 2008, compared with $500,000 in the first quarter of this year and zero in the second quarter of last year. Product gross margins in the second quarter were 15.9%, compared with 20.5% in the first quarter of 2008 and with 18.3% in the second quarter of 2007. Product gross margins were down this quarter versus last quarter, mainly due to a change in mix of the sales in our memory business. Total gross margin was 28.6%, for the second quarter of 2008. By comparison, total gross margin was 31.7% in the first quarter of 2008 and 25.8% in the second quarter of 2007, reflecting the improving revenue from licensing, offset by the previously mentioned decline in product margins due to changes in mix. Total operating expenses, were $29.9 million for the second quarter of 2008. This compares with $30.3 million in the first quarter of 2008 and $32.7 million in the second quarter of 2007. Research and development expenses for the second quarter were $15.2 million. This compares with $15.6 million in the first quarter of 2008 and with $13.8 million in the second quarter of 2007. The year-over-year increase was due primarily to added headcount and expenses for engineering wafers related to our new product development. Sales and marketing expenses for the second quarter were $6.9 million. This compares with $7.5 million in the first quarter of 2008 and $7.5 million in the second quarter of 2007. General and administration expenses for the second quarter were $7.7 million. This compares with $7.2 million in the first quarter of 2008, and $7.3 million in the second quarter of 2007. Let me mention here that operating expenses in the second quarter of 2007 included approximately $4 million and expenses related to our stock option investigation, and were highlighted on a separate line in our P&L. Earlier this month, we received word from the SEC that it had terminated its investigation. We also received word from NASDAQ that we had regained compliance with its listing requirements. Total headcount, at the end of the second quarter, was 718, compared with 723 at the end of the first quarter of 2008, and compared with 712 at the end of the second quarter of 2007. As income from operations for the second quarter of 2008, it was a loss of $5.9 million, which compares with a loss of $4.6 million in the first quarter of 2008, and with a loss of $7.1 million in the second quarter of 2007. Net loss for the second quarter of 2008 was $9.6 million, or $0.09 per share, based on approximately 108 million shares. By comparison, we recorded net income of $1.5 million, or $0.01 per diluted share in the first quarter of 2008, based on approximately 104 million diluted shares outstanding. For the second quarter of 2007, we reported a net loss of $7.5 million or a net loss of $0.07 per share on approximately 104 million shares outstanding. The difference in net loss this quarter versus the first quarter 2008, was an $8 million tax refund received in the first quarter of 2008. Now, turning to the balance sheet. We finished the second quarter of 2008 with $148.9 million in cash, cash equivalents, short-term investments, and long-term securities with maturities greater than 12 months, down approximately $13.5 million from $162.5 million on March 31, 2008, and down $13.3 million from $162.2 million on December 31, 2007. During the first half of 2008, common stock repurchases totaling 4.1 million shares at an aggregate cost of approximately $11.9 million accounted for most of this difference. The $148.9 million figure, that I just mentioned, includes $24.8 million in securities, with maturities greater than one year, that are included on our press release balance sheet in the line entitled long-term marketable securities. Net trade accounts receivable were $37.4 million, up $33.2 million from $34.2 million in the first quarter of 2008. Days sales outstanding were 41 days, up from 38 days in the prior quarter. Last quarter, we mentioned that accounts receivable were historically low and we expected it to rise. 90% of our accounts receivable at the end of the quarter were current, and an additional 9% were less than 60 days and aging. Net inventories, as of June 30, 2008, were $64.8 million, up $5.1 million from $59.7 million in the first quarter of 2008, and up $14.7 million from December 31, 2007. At that time, we stated that we felt inventory was too low due to our capacity constraints, and that we expected a rise in inventory of this magnitude. We expect inventory to increase slightly by the end of Q3, 2008. Finally, during the quarter, we repurchased 1.9 million shares of our common stock, at an aggregate cost of $5.8 million, for a blended average cost of $3.09 per share. This makes our total repurchases for the year of 4.1 million shares, at an aggregate cost of $11.9 million for a blended average cost of $2.93 per share. The company has a remaining authorization from its Board of Directors to purchase up to an additional $18.1 million of our common stock. This concludes the discussion of our financial results. I will now turn the call back to Bing.

[Bing Yeh:]

Thank you, Jim. The softening of the market that we began to see in the first quarter continued through the second quarter, particularly in the cell phone market in China. However, our focus on retaining market share, and positive result in our licensing area, enabled us to record revenues and EPS at high end of our guidance range. In our core business, which includes non-memory products and the license revenue from our SuperFlash technology, demand for our product and our licensee's product is growing. Our non-memory unit shipment increased from Q1 by 12%. As a segment, Internet Computing unit shipments were down by 7%, mainly caused by the precipitous drop in hard disk drive applications. Other applications in the Internet Computing segment, including notebook PC, desktop PC, printer and monitor shipments were strong. Digital consumer unit shipments, increased 24%, strongly rebounding from the first quarter, driven by the recovery in portable media players, digital camera, module, video game and the DVD-RW drive shipments. Networking unit shipments increased by 20%, mainly due to the strong growth of our [PA] product in the wireless LAN applications. In the wireless communication segment, unit shipments increased by 17%, driven by strong shipments in Bluetooth, smartphone and the smart card IC shipments, offset by the continued weakness in the GPS and low cost phone applications. ASP also trended down in the second quarter, and is expected to continue to decline over the next several quarters. This is the result of both increasing competitive dynamics in the overall NOR flash market, as well as our force on regaining our market share, as we ramp up new capacity at Powerchip. Turning to gross margin. During the second quarter, we benefited from strong licensing revenue and that positively impacted our total gross margin line. Over the next several quarters, we expect that non-memory product gross margin will continue to decline as a result of the weak demand environment. Falling prices of high-density NAND, that puts pressure on low-density NAND prices in the top competition in low-density NAND. This decline in product gross margin and the increase of product revenue contribution to the total revenue mix are expected to result in lower total gross margins in the coming quarters. We are very pleased that to report that we made great progress in the quarter, revving up our 120-nanometer production of Powerchip’s eight-inch line. We also continue to run engineering NANDs on the 12-inch line at a Powerchip that began 120-nanometer pilot production at Grace during the second quarter. As a result, we expect to be able to meet the seasonal butte in the second half of 2008. Further by gradually converting our product from 180-nanometer to 120-nanometer, we expect our units output from both Powerchip and Grace to increase by the fourth quarter of this year. Our product development in our core memory business continued strongly in Q2, with announcement of a new 20 series Serial Quad I/O family of 4-bit multiplexed to I/O serial interface flash memory devices and new addition to our flash family of 8-bit microcontroller. The 26 family of Serial Quad I/O has the Low Pin Count and enhances serial interface architecture, making the family an ideal code to storage solution for applications such as ultra low-cost handsets, Bluetooth handsets, optical disk drives, and GPS devices, whereas small form factor, low power consumption and high data rate are a must. Also our new FlashFlex Microcontroller device, is the industry's first 8051-based MCU to feature two system management buses, each supporting up to 400 Kilobits per second data throughput, in a tiny 6 millimeter x 6 millimeter QFN package. It also supports operating voltages from 2.7 Volts to 5.5 Volt for implementation in applications with a variety of power supply requirements, including HDMI, HDTVs, Audio/Video receivers, home appliance, industrial instruments, notebook PCs, DVD players, Blu-ray players, RF modules and security applications such as fingerprint identification. Finally, turning to the licensing of our SuperFlash technology, we had a strong quarter in Q2, as both royalty and up-front fees increased strongly from the first quarter. All of our licensing and technology notes expect for the 0.5 micron continue to show year-to-year growth in royalty revenue. As we look to Q3, we expect flat to a modest decrease in licensing revenues. We are very pleased with the performance of the licensing business and expect it to grow over time, driven by our continued investment into technology advancement, in the memory portion of our business. Our licensing business is totally integrated with our core memory business. Investment into memory products development ensures that our licensees have the newest generation non-memory technology to provide a dependable long-term technology roadmap, and the essential reliability data produced by our volume NOR memory components business, for each new technology generation. In total, our core business continues to perform profitably, even in this current difficult environment. We believe it is a very good business, but that its growth potential is limited over time. For that reason, we are excited by the development in our non-memory business, which we expect will drive our growth as we ramp up those products. Turning to our non-memory business, of particular interest in Q2 was our progress with NANDrive, our solid state storage solution. As we expected in the last quarter, revenues from NANDrive increased appreciably in Q2 to slightly more than $0.5 million. Although it is be a small amount of revenue compared with the rest of our business, it is the significant increase from the prior quarter, and is an indication of the success that the product is having in the marketplace. The applications we are shipping into currently are industrial PCs, PC terminals, POS terminals, mobile Internet devices, network security devices, and IP set-top boxes. NANDrive also has exciting opportunities in HDTV, Blu-ray players, camcorders and car infotainment devices. In effect, we are currently working on literally hundreds of hidden opportunities, spanning a variety of consumer, industrial, instrumentation, and the medical application For the third quarter, we expect revenues from NANDrive to more than double from the second quarter. We expect significant quarter-to-quarter fluctuations, as our revenues are initially concentrated with a couple of major accounts. However, we believe that the NANDrive product line represent good potential for us. We are also making good progress with our other new non-memory product offerings. MelodyWing is proceeding through lengthy design cycle, at major television manufacturers. We are also working with after-market opportunities to take advantage of opportunities for home theater applications and customer design and installation market. All-in-OneMemory is progressing well through the development phase. We have completed all of the technical aspects of manufacturing, and are working through the final marketing and support consideration. We will hope in Q3 to release our first product into production and hope to have small volume initial shipment in Q4. Judging from our experience with NANDrive, we expect All-in-OneMemory to have a similar long design cycle with potential customers. However, we believe the long-term potential of All-in-OneMemory is high. In conclusion, the second quarter was a solid and productive quarter for us. Despite a difficult economic environment, our core business performed well, and we have made important strides in our new non-memory business. As we enter the seasonally stronger second half of the year, we expect our revenue to grow sequentially, somewhat offset by softness in the macroeconomic environment. Our blended ASP in the third quarter is expected to decrease 1% to 2% from that of the second quarter. As such, we expect our third quarter revenue to be between $87 million and $95 million. Gross margin is expected to be between 26% and 28%, subject to the risks of changing market conditions. Total operating expenses are expected to be between $30 million and $32 million, including stock option expense. Net loss per share on a GAAP basis for the third quarter of 2008 is expected to be between a loss of $0.05 and a loss of $0.10. This concludes our prepared comments. We are now happy to answer your questions.

[Operator:]

(Operator Instructions) Our first question comes from Richard Shannon with Northland Securities. Your line is open.

[Richard Shannon:]

Hi, guys. How are you?

[Jim Boyd:]

Pretty good. Thank you.

[Richard Shannon:]

Good, Bing, I want to follow-up on one of your statements in your opening script regarding gross margins. I just want to make sure I caught the exact statement and maybe a couple of quick follow-ups on that. You were you talking about gross margins over the next couple of quarters, next few quarters declining, I want to make sure I understood whether that includes or does not include the effective licensing and whether that includes the effective transition towards 120 nanometer manufacturing?

[Bing Yeh:]

Okay. We are talking about the total gross margin. Because we expect our memory portion of business, the margin of that is going to decline because of the current market environment, and also, which is not really going to grow. So, it is not having a bigger contribution to the total revenue mix. So, as a result, we expect our total gross margin to decline.

[Richard Shannon:]

Okay. And did you mention that within your revenue guidance for the third quarter that you're expecting licensing to come down modestly? Is that what I heard?

[Bing Yeh:]

Yes.

[Richard Shannon:]

Okay.

[Bing Yeh:]

In flat to moderate decline because it is very difficult to predict that. Our licensees don't give us projection. So, it’s very hard to look into that.

[Richard Shannon:]

Sure. And as I look at what’s you commented about last quarter, and I believe I asked the question on your conference call, you mentioned you thought licensing would be flat perhaps down and obviously you had a very good quarter and even if you back out the upfront fees, your royalties were up quite nicely. Does the environment suggest that you could have a similar difference from your opinion right now that you did last quarter?

[Bing Yeh:]

As I said, it is very difficult to make that, I know we don't have visibility. That's the main issue. Because our licensees normally does not give us a projection and also, last quarter I commented on that, based on the judgment that our royalty revenue typically is out one quarter and after that our customer ship their product. So, the product should be in the first quarter, then we should expect the second quarter. Normally first quarter in January a down season for almost all major semiconductor suppliers, that's why we projecting our second quarter license revenue, was going to go down. But since actually our licensees, they have a much stronger revenue shipment to some particular accounts. That contributed the increase in our licensing increase.

[Richard Shannon:]

Okay, and maybe just a couple of quick questions on your new non-memory products. You talked about the NANDrive product, quite extensively over the past couple of quarters, which is great to hear. And I think you mentioned you expect the sales to double here in the third quarter. At what point should we expect to see a level of volume production into a significant material number of customers? I presume we're really seeing a sampling in pre-production volumes at this point, right?

[Bing Yeh:]

Yes, but at this time, we also have a couple of constitutes higher volumes, so that constitutes the current growth. Now I would say the overall growth we had to wait until our broad base customer begin to ramp up. And that is going to be sometime hopefully next year, or probably more this like to be later part of next year.

[Richard Shannon:]

Okay. And in terms of the competitive environment with your NANDrive, where are you seeing the competition coming from? I would love to hear what you think your advantages are relative to those other offerings?

[Bing Yeh:]

Well, our competition comes from a few memory card manufacturers. And I believe our competitive edge is that we have been working with OEMs, throughout all corporate life and we have a very strong sales force working with all type of OEMs. And also, we have a very good quality system that I believe all our retail-oriented in our store card manufacturers are probably don't have that kind of capability, compared with us. We are business supporting OEMs, that require very stringent quality conditions.

[Richard Shannon:]

Okay, great. Thank you very much.

[Bing Yeh:]

Thank you.

[Operator:]

And our next question comes from Alexander Paris with Barrington Research. Please go ahead, sir.

[Alexander Paris:]

Hi. Just looking at volume and price trends, in the second quarter, overall, did have you unit growth for your products? You mentioned some had a good increase in unit growth.

[Bing Yeh:]

Pretty much growth in almost a lot of segments, except a few of them are tough, for instance, I mentioned hard disk shipment has specific drop and also the low cost handset business also dropped significantly. But the rest of the segment almost across the board increased I should say they bound in from the first quarter unit shipments.

[Alexander Paris:]

And just looking at, I know some of your older prices I got products, you've had a lot of price discounting, I imagine just overall discounting has continued. Just for example, looking at NANDrive, the price that you're getting now, is that lower than you were expecting when you first introduced the product some time ago, where is that?

[Bing Yeh:]

Yes, the NAND, because the NAND price continue to go down. Fortunately, since we are in the OEM business, so that price volatility is not as severe as a retail-oriented storage kind of market. So, we were able to hold the price longer than those in our retail products.

[Alexander Paris:]

Can you give us a rough idea what the average selling price is in that family of products?

[Bing Yeh:]

At this time, we are setting roughly say $10 per device.

[Alexander Paris:]

Okay, and that’s about what you expected when you first introduced it a year ago?

[Bing Yeh:]

Yes.

[Alexander Paris:]

Okay. And just generally, in terms of your new products, you've got three or four of them going, and you say you're talking to hundreds of opportunities. Can you give us an idea, the number of OEMs that you actually have a contract with, where you've got a win with them, where they're going to be in a specific product or still just in the sampling stage?

[Bing Yeh:]

You see, I’d say quite a lot of design wins. But most of those design wins are with our smaller volume customers. The real high volume one, currently, we have about just a few of them, a handful of them, and in various stage of ramping up, and probably one to two of them are ramping up more faster than others. So, that has been contributing to our recent growth.

[Alexander Paris:]

So, the high volume ones, what type of products are they in?

[Bing Yeh:]

These are either in industrial PC or in the consumer product like a set-top box.

[Alexander Paris:]

Okay. And it still looks like, I thought is your new product volume, it's really 2009, and is it that they’re start ramping up, and is it still more toward the late second half of 2009 rather than the first half?

[Bing Yeh:]

Well, we expect to see the volume continue to grow, but over the next few quarters, it may fluctuate up and down. And here, the broad base of customers begin to ramp up. And I expect that to be more like a second or later part of 2009 than the first half of 2009.

[Alexander Paris:]

Okay. Can you, just a couple of words about FlashFlex, your new microcontroller, what are they, the novel features in it relative to competitors?

[Bing Yeh:]

Well, that is, basically, we have two parts, and easiest and also of a higher performance than our competitors. But overall, the microcontroller market is not large. So, you should not expect that to generate a significant amount of revenue. The higher revenue drivers should be coming from either our core business with the non-memory, or the newer product which is NANDrive, as well as other NAND module, as well as Wireless IF module products.

[Alexander Paris:]

And just with that, the FlashFlex microprocessor, what kind of prices is that?

[Bing Yeh:]

That’s around $1 a piece range.

[Alexander Paris:]

$1?

[Bing Yeh:]

Yes. It is significantly higher than our NOR business, NOR ASP. However, the volume is not that high.

[Alexander Paris:]

What’s the price, really low end NOR flash business?

[Bing Yeh:]

Very low end?

[Alexander Paris:]

Yes.

[Bing Yeh:]

That could be $0.20.

[Alexander Paris:]

Okay. Is it showing any signs of stabilizing?

[Bing Yeh:]

Well, I believe to certain point, you got to stop dropping, because the margin is almost doesn't exist for every manufacturers. So, I believe you're going to bottom at certain point.

[Alexander Paris:]

Would you say, just putting all of your products together, the average selling price, now and really what it has to get to before you start showing some really good profits?

[Bing Yeh:]

Well, our core memory business has been profitable. It currently is around $0.50 ASP.

[Jim Boyd:]

55. Its profitable, but we are investing in our new businesses and so we don't have an operating profit. But it's mainly because our R&D expenses are higher then, we do have positive gross margin on most of our business.

[Alexander Paris:]

Well, just one other question. Your tax rate, what’s kind of a good, if you're going to be profitable, what kind of tax rate would you be assuming next year? What would be normal for you, given your geographic mix?

[Jim Boyd:]

I haven't been here long enough to experience all quarters, but I’d say it would be in the mid-20s.

[Alexander Paris:]

Okay, good. That's helpful. Alright.

[Jim Boyd:]

Right now, I think of it in terms of we’re about, because we hit certain minimums in our international entity, that we're about 1.5 million a quarter hitting those minimums, given the negative business. Going forward, mid-20s, probably, because a good portion of our sales happens through that international entity.

[Alexander Paris:]

All right, okay. Thank you very much.

[Operator:]

Thank you. (Operator Instructions) And we do have a question from Sal Kamalodine with B. Riley. Please go ahead.

[Sal Kamalodine:]

I wanted to ask about the FlashMate product, which I believe it has been launched at this point. Can you give us a sense for what the traction has been with that product?

[Bing Yeh:]

No, it’s not launched yet. –It’s still in the designing cycle. And we did have an FPGA product to show potential customers, but it’s still in the design.

[Sal Kamalodine:]

And what has been the response you've had from the customers, who had seen the FPGA?

[Bing Yeh:]

The customers certainly are very interested. But this is a very complicated product. So, it probably take longer than we originally anticipated to complete the design. So, at this point, we are still doing the design. And also, through the discussion with customers, we also get inputs. So, we are also trying to incorporate those inputs and those inputs tend to get this even more complicated. So, we had to make decisions at certain point to complete our design.

[Sal Kamalodine:]

And is that a part that is compatible only with a hybrid disk drive instead of a notebook? Or is it something that can run on a solid state drive as well?

[Bing Yeh:]

No. It’s not intended for standalone solid state drive. It’s intended to working with either notebook or desktop PCs, to perform certain functions.

[Sal Kamalodine:]

Okay. But the storage, the main storage medium, is it going to have to be hard drive, or a hybrid-drive that has both NAND and hard-drive?

[Bing Yeh:]

Our FlashMate is the flash portion of the hybrid-drive.

[Sal Kamalodine:]

Got it.

[Bing Yeh:]

So, you have to work together with hard-disk drives. But instead of, you may had another hard disc drive product that in coveted name had become stand-alone hybrid-drive. But in our solution, our FlashMate, we work with a stand-alone hard disk drives.

[Sal Kamalodine:]

Okay, understood. And so from the customers that you're talking to, presumably I guess it would be the large HDD suppliers, do you feel like there is a sustainable demand opportunity there, given that most of what we're hearing in the industry that it’s going to go probably straight from HDDs straight to solid state drives? How long is there going to be an opportunity for hybrid-drives and laptops and desktops?

[Bing Yeh:]

Well, our customer is not HDD manufacturer. Our customers are many the notebook computer manufacturers or the desktop PC manufacturers.

[Sal Kamalodine:]

Okay.

[Bing Yeh:]

And further, I believe that the hard-disk drive cost is going to always cheaper than the solid state solution, in terms of the cost, per megabyte. And therefore, I believe this hybrid-drive and pure solid state drive is going to co-exist, even with the traditional hard disk drive, is going to co-exist for long time.

[Richard Shannon:]

Okay. Thanks for the clarification.

[Bing Yeh:]

Thank you.

[Operator:]

Thank you. And there are no further questions in queue. Please continue.

[Bing Yeh:]

Okay. Thank you for participating in this conference call. We will present in at the B. Riley Conference in San Francisco in August and we look forward to seeing many of you there. As always, feel free to contact Leslie Green, the 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.

[Operator:]

And thank you, ladies and gentlemen. This conference will be available for replay starting today, at 3