ShotSpotter, Inc.
Q4 2008 Earnings Call Transcript

Published: 22 Feb 2009

[Operator:]

Welcome to the Silicon Storage Technology fourth quarter and fiscal 2008 conference call. (Operator Instructions) I would now like to turn the conference over to our host, Bing Yeh, President and CEO.

[Bing Yeh:]

Thank you all for joining us today for SST's fourth quarter and fiscal year 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 the current market conditions. Then, we'll open up the call for questions and answers.

[James Boyd:]

Good afternoon everyone and thank you Bing. During the course of this conference call, we will make projections and 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, ASP's, margins, cash flow and cash balances, our tax position 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 31, 2007 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 fourth quarter and fiscal 2008 financial results are as follows. Net revenues for the fourth quarter were $58.4 million compared with $92.4 million in the third quarter of 2008 and compared with $107.4 million in the fourth quarter of 2007. Product revenues for the fourth quarter of 2008 were $46.3 million compared with $79.8 million in the third quarter of 2008 and with $95.6 million in the fourth quarter of 2007. Segment revenues for the fourth quarter of 2008 were $37.2 million of memory product sales and $9.1 million of non memory product sales, which compares with $68.5 million of memory and $11.3 million of non memory in the third quarter of 2008 and with $86.4 million of memory and $9.3 million of non memory in the fourth 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 45% while revenue from our digital consumer applications decreased by 51%. Internet computing applications decreased by 34% and networking applications decreased by 33%. Geographically, our product sales continue to be focused in Asia with China and Taiwan combining to represent 54% of our sales this quarter. Our product sales outside of Asia to Europe and North America represent 15% of our sales this quarter. Revenue from technology licensing in the fourth quarter were $12.1 million compared with $12.6 million in the third quarter of 2008. Technology licensing revenues in the fourth quarter of 2007 were $11.7 million. Product gross margins in the fourth quarter were 11.8% compared with 23% in the third quarter of 2008 and with 23.7% in the fourth quarter of 2007. Product gross margins were down this quarter primarily due to lower cost of market reserves of $4 million that we took during the quarter to reflect a lowering of ASP's in the Memory business going forward, and $1 million in overhead variance due to lower manufacturing volume during the quarter. Total margin was 30% for the fourth quarter of 2008. By comparison, total gross margin was 33.5% in the third quarter of 2008 and 32% in the fourth quarter of 2007. Total operating expenses were $27.4 million for the fourth quarter of 2008. This compares with $26.9 million in the third quarter of 2008 and with $53 million in the fourth quarter of 2007. Operating expenses during the fourth quarter of 2008 included $2.5 million in restructuring charges compared with the fourth quarter of 2007 which included $1 million in asset impairments, $18 million of good will impairments and $5.6 million in expenses related to our investigation of stock option granting practices and the resulting financial restatements. Research and development expenses for the fourth quarter were $13.9 million. This compares with $14.3 million in the third quarter of 2008 and with $14.7 million in the fourth quarter of 2007. Sales and marketing expenses for the fourth quarter were $5.5 million. This compares with $6.7 million in the third quarter of 2008 and with $7.5 million in the fourth quarter of 2007. General and administrative expenses for the fourth quarter were $5.5 million. This compares with $5.9 million in the third quarter of 2008 and with $6.2 million in the fourth quarter of 207. Total head count at the end of the fourth quarter was 614, down from 713 at the end of the third quarter of 2008 and down from 715 at the end of 2007. Net loss from operations for the fourth quarter of 2008 were $9.9 million with compares income of $4.1 million in the third quarter of 2008 and with a loss of $18.6 million in the fourth quarter of 2007. Net loss for the fourth quarter of 2008 was $29.7 million or $0.31 per share based on approximately 95.5 million diluted shares outstanding. By comparison, we recorded a net income of $4.9 million or $0.05 per share in the third quarter of 2008 based upon approximately 99.7 million diluted shares outstanding. For the fourth quarter of 2007, we reported a net loss of $23.5 million or $0.23 per share on approximately 104.2 million diluted shares outstanding. Net loss during the quarter of 2008 included $2.5 million in restructuring expenses and impairments of $5.6 million and $9.7 million on our investments in Grace Semiconductor Manufacturing Corporation and ACAT respectively for a total of $0.19 per share for these items. Without these three items, we would have had a loss of $0.12 per share for the quarter. Now, let's turn to the balance sheet. We completed the fourth quarter of 2008 with $131.7 million in cash, cash equivalents, short term investments and long term marketable debt securities, down approximately $1.1 million from $132.8 million on September 30, 2008 and down about $30.5 million from $162.2 million on December 31, 2007. Changes in our cash in the fourth quarter included $8.4 million in repurchases of our common stock and an additional $2.6 million for stock repurchased in the third quarter and paid for in the fourth offset primarily by $10.2 million reduction in our inventory balances. For the year, the changes in cash were primarily caused by a $28.9 million repurchase of our common stock. Net trade accounts receivable were $20.1 million, down $27.7 million from $47.8 million in the third quarter of 2008. Day sales outstanding were 32 days, down from 47 days in the prior quarter due to our lower level of sales, and in particular, lower sales in December. Net inventories as of December 31, 2008 were $55.1 million, down from $65.3 million in the third quarter of 2008 and up from $50.2 million as of December 31, 2007. Given the significant and unplanned drop in sales in the fourth quarter, we intend to closely manage inventory levels going forward. During the quarter, we wrote down or impaired our investment in Grace by $5.6 million as Grace completed a new round of financing at a lower cost per preferred share. We also wrote down our investment in ACAT by $9.7 million as ACAT recently accepted an offer to merge with another company. Finally, during the quarter we repurchased 2.8 million shares of our common stock at an aggregate cost of $8.4 million for a blended average cost of $3.05 per share. This brings our total repurchases through the fourth quarter to 9.5 million shares and an aggregate cost of $28.9 million for a blended average cost of $3.04 per share. Now, our fiscal 2008 results are as follows. Net revenues for the year ended December 31, 2008 were $315.5 million compared with $411.7 million for the year ended December 31, 2007. Total gross margin for 2008 was 31.1% compared with 29.2% in 2007. Product gross margins for 2008 were 18.5% compared with 21.7% in 2007. Operating expenses for the year ended December 31, 2008 were $114.4 million compared with $144.5 million in 2007. Net loss for the year ended December 31, 2008 was $32.9 million or a loss of $0.33 per share based on 100 million diluted shares outstanding. This compares with a net loss of $49 million or a loss of $0.49 per diluted share based on 104.1 million diluted shares outstanding for the year ended December 31, 2007. This concludes the discussion of our financial results, and I'll now turn the call back to Bing.

[Bing Yeh:]

The unprecedented softened demand of semiconductor products during the fourth quarter resulting from the deepening global financial crisis has caused a significant decline in our revenues. This persistent difficult economic environment necessitated that we accelerate our planned changes to our business and focus in late 2008. We took important steps to reduce our inventory, streamline our organizational structure and cut our expenses by focusing our efforts on our most strategic initiatives with a goal of returning the company to a profitable entity. Despite the current dismal market conditions, we do not have a single doubt in our mind that the industry is bound to recover and it is crucial that we plan well now for the next upturn. Our objective is to continue to execute our strategy of diversification and advancement of our technology roadmap through collaborative efforts with our partners while reducing our R&D spending. We are very proud to report that despite the difficult conditions, our cash used in operations for 2008 was nearly breakeven. With reduced head count and organizational changes, we believe now we can counter our expenses while continuing to develop our new products and new technologies and position SST for growth as the economy recovers. Turning to current market conditions, we have experienced a record deterioration in our booking activities since last September and we reached a very low level during October as our customers held back their purchase orders in response to the sudden slow down in demand. Booking activities remained weak through December. In early January, there has been some improvement but bookings remain at low levels. Our customers continue to report a lack of visibility and we believe that there is still inventory in the channel that will need to be digested before bookings will actually reflect demand. Our own inventory declined by approximately $10 million from the end of the third quarter as we have been very careful in monitoring customer requirements and have adjusted wafer stock accordingly. We expect to reduce our inventory level further in the first quarter. Looking at our application segments for the fourth quarter, the sharp decline in demand is evident. The digital segment suffered the most with revenues decreasing more than 50% from the third quarter as consumer related products have been especially hard hit. All digital consumer segments were down substantially. The only bright spots were digital camera which is flat with the third quarter and high definition, Blue Ray players which had growth. Wireless communications segment also suffered with the relative decrease approximately 45% from the prior quarter. The only wireless communications segment that showed some growth is the GPS. Moving on to internet computing and networking segment both decreased approximately 35%. Revenues in all segments within these two categories were down except the industrial application segments. Included are instrumental, medical and security systems. Now I would like to give you an update on non memory product status. During the past two quarters we have successfully brought up our 120 nanometer technology at both Grace and the power chip which are the foundries that we have produced most of our products in 2009. Five products have been released into production. Four more are under verification and qualification. These products include 60 megabyte, 32 megabyte and 64 megabyte parallel and serial family of products. Further, for the [inaudible] power chip we released the first product for production. A second product is under qualification and a third product is being verified and assembled to customers. We believe this design will provide us with a proper cost structure to compete in the broader commodity market. Now, turning to our licensing business. Our licensing business continued to be solid in the fourth quarter. However, it is important to understand licensing revenues are recorded one quarter in arrears so the royalty portion of our licensing revenue in Q1 is expected to reflect the severe downturn that occurred in the fourth quarter. However, this weakness may be somewhat offset by the off line fees to be recognized in the first quarter. Our licensing business remains a tremendous asset to our financial model and our continued investment in our core products and technologies are met, helps to ensure that it will rise as demand returns to more normal levels. For the fourth quarter, the overall decline in product revenue coupled with a strong performance in licensing revenue resulted in total gross margin of 30%. However we expect another decrease in our product revenue in the first quarter, coupled with especially the stable licensing revenue in Q1 will result in an increase in our total gross margin due to the favorable revenue mix. Turning to our non memory business, as most of our investors know, we have also been investing strategically in non memory products including NAND modules and RF modules. In the fourth quarter the non memory products contributed 19% of product revenue and 34% of product gross profit. The NAND drive are high performance, full integrated embedded flash solid state drive continues to penetrate the market. During 2008 we were pleased to extend this family of products with four new additions; 5 megabyte, 1 gigabyte, 2 gigabyte and 4 gigabyte products capable of operating at industrial temperature ranges making them comparable to storage options in harsher environments including medical equipment, factory automation and in cabin automotive electronics. I'm very pleased to report that our customer base for the NAND drive module continues to grow. This diversification will eventually drive our revenue for this product and we will provide more revenue stability as the volume of unit shipment ramp. As we have said, we expect initial ramp of this product to be lumpy as initial inventory is built for a few large customers and then digress before reaching a steady run rate. Further, only a small number of customers have begun to ramp up their production. During the fourth quarter our unit volume decreased from a strong third quarter performance of this product, but we substantially increased the number of customers. With early success coming from applications such as IP, Mobile Internet Devices, and Industrial applications, we believe that initial response to this product is a strong early indication of its position in the market. Turning to our AF Modules, our identifying in module products targeting the Wifi market is also showing a positive market reception. Through our advanced technology development, developed by SSTI communications, this device features a highly efficient low power, small footprint design to support the high capacity AF2.11 standard. We shipped nearly 40 million units in 2008 with strong growth expected in 2009. Finally, before we close, we get asked from time to time about our equity investment portfolio and so I would like to spend a minute to briefly discuss this portfolio in an effort to help you understand the strategic nature of our investments. To start, all of our investments fall into the categories of either capacity, new technology and product distribution and applications. On the capacity side, the investment in Grace, PTI, and KYE. Grace as you know represents a majority of our wafers capacity and its current value on our book is far less than is actually of strategic value to us. PTI and KYE are our primary back end partners. These strong relationships have been instrumental in our unit volume ramp since 1999. On the technology and product side, our investments are more like a long term R&D partnerships that allow us to incorporate innovative technology into our product portfolio that would be far more difficult or costly to develop on our own. By investing, we accelerate our road map and also shift our own head count and keep operating expenses lower. This category includes inside software boosting our use for Flash Memory in PC applications and a link on solar based modules in memory sub system applications. The category also includes [Optos] and ACET who are advanced packaging partners for all [Optos] products, a very powerful portable applications. Finally, in terms of product distribution and applications, we invest in PTC. This has been a very positive relationship as PTC has essential contacts and strong presence in Taiwan and China to allow us to more effectively penetrate the Asian market. Also, our investment helps us to extend our main controller into industrial applications. We review these investments on an ongoing basis with an eye toward our financial and strategic return on investment and believe that they are an essential part of our strategic plan. From time to time we will divest our investment when we determine that the strategic value for positive investment has diminished. In conclusion, more than ever the memory environment is challenging. SST is fundamentally a stable, financially sound business with a strong balance and strong competitive position. We believe that we have taken positive steps to align our expenses with the current earning level while continuing to invest in technologies that will drive our business in the coming years. Incremental progress in our new business in our components NAND modules, we present exciting opportunities as the economical climate improves. In terms of our guidance for the first quarter, we expect our blended ASP to decrease 3% to 4% from that of the fourth quarter. As such, we expect our first quarter revenues to be between $39 million and $45 million. Gross margin is expected to be between 38% and 40% subject to a risk and changing market conditions. Total operating expenses are expected to be between $23 million and $25 million including stock option expenses. Net loss per share on a GAAP basis for the first quarter of 2009 is expected to be between a loss of $0.12 and a loss of $0.06. This concludes our prepared comments. We are now happy to answer your questions.

[Operator:]

(Operator Instructions) Your first question comes from Richard Shannon – Northland Securities.

[Richard Shannon:]

What's your model for getting to an operating profitability? What kind of revenue levels and what's the implied OpEx that you need to get there? Any way you can describe that would be great.

[James Boyd:]

I think the guidance that we gave on OpEx expense for this quarter is in line with our expectations. We did, in our restructuring press release say that we have reduced our expected payroll related expenses to decline by $13 million and that puts us in line with this guidance this quarter. And depending on how the second half does in terms of sales and of course mix of products both between licensing and the product mix itself, we think we can exit the year at a break even level.

[Richard Shannon:]

Just to help me understand, what's the absolute magnitude of operating expenses that you're hoping to get down to from which you can get to at least operating break even then?

[James Boyd:]

Our guidance is at $23 million to $25 million and we expect maybe we can do a little better than that, but that's the level we're restructured to at this point.

[Richard Shannon:]

So the amount of revenues per quarter, I guess depending on the amount of licensing which I would expect to be in general the range we're at right now, it sounds like you're going to have to get to a level quite a bit above the $39 million to $45 million, so I'm kind of curious as to where you see that panning out to get to that operating break even.

[James Boyd:]

I think you can work through your own expectations in terms of margins that we've had. We're saying our gross margins are $39 million to $40 million. Of course that's with our higher mix of license revenue, but product margins have been in the range of 20% and we're all trying to target that second half.

[Richard Shannon:]

It sounds like revenue growth is kind of coming from some of the new products. You've mentioned the NAND drive prominently, but also some of these newer products, to what extent do you expect the growth from the first quarter levels to come from each of those two general categories to achieve that break even level?

[Bing Yeh:]

Based on our current plan, we should expect, if the market recovers, a slow recovery in the second half will help to start a ramp up on those new products, particularly the higher ASP product, that's a main driver which will help us to reach more gross profit than in the past. To exit in 2009 with break even we require certain assumptions that the second half is doing better than the first half.

[Richard Shannon:]

One last question on the competition on your base memory business. It sounds like one of your larger customer expansion is having some questions about what they're going to be doing going forward. I'm wondering if you're seeing any changes in the competitive environment either more difficult pricing and they're trying to liquidate inventory or backing away from the market at all.

[Bing Yeh:]

That certainly is the case. Even though there are a lot of customers starting to approach us for competitive quote so the problem that we saw there is the low price set, making it very, very difficult to make money in that business. But I expect this is going to be short term. In the long run the street will start to change.

[Operator:]

Your next question comes from Lawrence Fisher – CFC.

[Lawrence Fisher:]

I'd like to ask a little bit about the investments that you had. I noticed that Grace was wrote down again and I'm not sure of the numbers off the top of my head, I believe the original investment was somewhere around $83 million. Maybe it had been written down to half that. At one point you owned about 10% of Grace. Where do you stand right now with that, and do you see Grace still having SSTI as its largest customer and what do you see happening at Grace going forward?

[Bing Yeh:]

Grace is going through a new round of financing and they are already placed to get new funding. At this point, because of the current market environment, the new funding certainly is much substantially reduced the price compared with the price level between our investment many years ago. So as such, we basically have suffered a reduction in our credit dilution. Fortunately, they are somewhat building in the dilution protection agreement previously. So essentially, we are roughly at about 4% to 5% range after this valuation.

[Lawrence Fisher:]

And what is that Grace investment today? I think it was originally $3 million. Is that somewhere in the 30's?

[James Boyd:]

It was at $83,150,000. That was the original investment. It's now currently carried at $17.6 million.

[Lawrence Fisher:]

And the investment of ATC that was written down, were they acquired now by another private company? I'm not sure what actually happened to them, and was that cash you received? Do you now own shares in the company that was they acquired?

[Bing Yeh:]

We continue in our investment and roll over to this new company, new acquired company. It's important to ATC that the technologies that we have developed together with them. We have been shipping product based on the patented technology developed at ATC for probably more than 10 important customers in the early small volume stage. But altogether we've shipped over 5 million units of our small packaged products. The issue with a small company is that it takes time for our customers to qualify this product and it has taken longer than we originally planned, and unfortunately with the current market environment the company continues capital in order to continue operations, so we make a decision that we agree with the company for them to be acquired by an entity so we can continue to produce our products. I can assure you that those products are far more important than the current evaluation of the company. So we take unfortunately a set back at this point. However, we believe that the technologies that we have developed there have a very important impact to our revenue down the road.

[Lawrence Fisher:]

Going forward now, last quarter you had about $58 million revenue, $12 million of which was license, so there's about $46 million in product revenue. Looking forward to Q1 you say that revenue will be $39 million to $45 million. Backing out license fees, now I'm not sure what those will be going forward. Obviously you said they reduce due to the fact that they're one quarter in arrears, even say they're $6 million to $8 million, whatever they are, we're now looking at obviously a much lower product revenue, somewhere in the 30's perhaps. Can you break down at least at a rough level where that revenue is coming from? Percentage wise, how much of it is perhaps 16 megabytes and under Legacy products how much is NAND drive and so forth and have you seen those percentages changing going forward?

[Bing Yeh:]

At this stage, due to the current environment the memory business is always the toughest. I see many companies, they are memory suppliers, they are already declined substantially. Our Flash Memory is no exception. So basically the memory portion has declined more than the other business so essentially the non memory portion which includes the NAND modules, that's less decline than the memory products. Further to that, the gross product contribution also comes from the non memory portion and I believe that's the strength for while, until the markets have recovered. When the market recovers, then I believe the memory portion is going to grow faster than the rest of the product groups.

[Lawrence Fisher:]

Was that $12 million license fee that you booked in Q4, how much of that was upfront fees and how much was royalty?

[James Boyd:]

It was all royalty.

[Lawrence Fisher:]

I assume then that you'll see those numbers turning downward at least through Q1 as they're booked in retrospect.

[Bing Yeh:]

The royalty portion is expected to go down because of overall market. Product revenue goes down, so does our license as part of our revenue which will translate to our royalty income.

[Operator:]

Your next question comes from Richard Shannon – Northland Securities.

[Richard Shannon:]

In terms of cash flow for the first quarter, I think you mentioned you're expecting inventories to come down. I'm kind of curious where you're expecting total cash or operating cash flow to be in the first quarter generally speaking.

[James Boyd:]

I think we'll see low single digit reductions in cash.

[Operator:]

We have no further questions in queue.

[Bing Yeh:]

Thank you for participating in this conference call. As always, feel free to contact Jim Boyd or me directly if you would like to arrange a call or meeting. We thank you for your continued interest in SST.