Volt Information Sciences, Inc.
Q3 2008 Earnings Call Transcript

Published: 29 Oct 2008

[Operator:]

Welcome to the Voltaire's third quarter, 2008 results conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, October 29, 2008. I would like to now hand over the call to Ms. Fiona Darmon of GK Investor Relations. Ms. Darmon, we would like to begin.

[Fiona Darmon:]

Yes, thank you, operator. Good day everybody. I would like to welcome all of you to Voltaire's third quarter 2008 results conference call, and thank Voltaire's management for hosting the call. With us on the line today are Mr. Ronnie Kenneth, Chairman and Chief Executive Officer, and Mr. Joshua Siegel, Chief Financial Officer. Before we begin may I remind our listeners, the present information provided on this call may contain forward-looking statements, and the Safe Harbor statement, I find in today's press release also pertain to this call. In addition, during the call, those non-GAAP financial measures will be discussed. These are used by management to make strategic decision to forecast each result and evaluate the company's current performance. Management believes the presentation of non-GAAP financial measures is useful to investors understanding and assessment of the company's ongoing cooperation with the prospect for the future, excluding conciliation of non-GAAP to GAAP financial measures is included in the third quarter 2008 earnings releases as said earlier. I will now hand over the call to Mr. Ronnie Kenneth, both our Chairman and Chief Executive Officer. Ronnie?

[Ronnie Kenneth:]

Thank you, Fiona. Welcome everyone, and thank you for joining us today to discuss the third quarter results. During the third quarter, we continue to develop the company forwarding new agreements, launching new products, all who are leveraging our three pronged growth strategy. Revenues for the quarter came in at $14.7 million, down 5% from last year. As noted in our preliminary results release, the revenue shortfall mainly followed a slower order intake towards the end of September. Nine months revenues were up 35% over the last year reaching $48.4 million. In terms of gross margin, this quarter we maintained Q2 level of 54.5%, up substantially from the 43.6% last year. On the bottom-line, we showed a net loss of $443,000 driven by the lower revenue, partially offset by the higher gross margin. For the nine months, we presented a net profit of close to $800,000, substantially higher than the loss last year. In terms of cash flow, this quarter we generated a $1.4 million sequential increase from June in our available cash and marketable securities, reaching $58 million at the end of September. We continue to see business progress as we lay the foundation for longer term growth. Over the past few weeks alone, we had a major achievement on the business front with HP and Oracle's announcement on the launch of their new database machine that uses Voltaire InfiniBand. This is a true OEM automatic selling coupe for Voltaire. On the product side, earlier this week we announced the December planned [GA] of our 40 gigabits per second QDR InfiniBand switching platform, and we continue to develop several exciting new products that will be gradually introduced throughout 2009. Now to the quarterly highlights in more detail. We continue to build on our well differentiated vertical market strategy with manufacturing and financial services continuing to be our lead commercial verticals this quarter. Our solutions have driven new product design cycle time, from years down to months for leading automotive manufacturers, and help them save millions by restructuring the data center from legacy to scale our design using cheaper commodity elements. Key wins this quarter included four motors company, Honda and Rolls-Royce. Despite the turmoil in financial services industry, we saw new orders from large investment banks and from exchanges and hedge funds. Although banks are consolidating, we see that they are still buying, inaugurating their infrastructure in order to deliver services faster than the competition which is particularly critical in today's market. The research and education, and government verticals were relatively strong this quarter. Key wins in the research and education vertical included Warsaw University and the University of Florida. In the governmental vertical, we saw key wins from NASA, and the (inaudible) 2008 project at this is a high supercomputing center, the largest high performance computing system in China. We continue to advance our scalable growth to market model and instituted important new revenue generating opportunities with key OEM partners and ISVs. Our main OEM partners, IBM and HP continue to lead in terms of new bookings. In coming weeks, we intend to reach you another exciting product announcement with one of our major OEM partners. We also continue to see substantial value in our ISV and recent partnership. Oracle and other key part of our growth strategy shook up the data warehousing industry last month, when Oracle CEO, Larry Ellison, unveiled the HP Oracle database machine during his keynote speech at the Oracle Open World. The new system which improved the performance of Oracle data warehouse by ten times includes four Voltaire redirected 24 port 20 gigabit per second switches. This is a true OEM automatic selling coupe for Voltaire. Oracle is selling Voltaire hardware as part of the solution; in every system their chips will include Voltaire's switches. The Oracle solution is available immediately and we expect this relationship to have meaningful contribution to Voltaire's revenue in 2009. The HP Oracle database machines architecture is also a showcase of Voltaire's unique ability to deliver unified fabric, providing high performance fibre clustering and storage connectivity, all on a single fabric. The HP Oracle database machine, with its extra data storage servers, is also positioned as a storage platform to compete against EMC and others in other proof point of the value of Voltaire's solution to the storage industry, and in other growth area for Voltaire to include our total available market. We continue to see new opportunities in the virtualization space. In September, Voltaire announced an I/O virtualization solution for VMware, that lowers the equipment and power cost for VMware environment while delivering even software performance. The Voltaire solution virtualizes the network, so only one InfiniBand adapter is needed per port, their host replacing to all of the other cards creating significant cost and energy saving, while boosting performance and providing quick ROI. With regard to the winning of differentiated products, we continue to experience strong sales of the Grid Director switching platform. This quarter we also continue to grow and broaden our product portfolio, announcing the December planned [GA] of our 40 gigabits per second QDR InfiniBand switching platform. Difference of the switches, the Grid Director 36 port switch that not only deliver exceptional performance or high performance scale out system, but also features unique smart design elements to meet the needs of the next generation data centers delivering key benefit such as increased scalability, improved energy efficiency, and expanded management capabilities. We already see how (inaudible) opportunities for these switches for 2009 delivering. As we entered these challenging economic times, our business foundation, compared with our healthy cash balance position us well to take advantage over the opportunities as they arise. We are closely monitoring the market, and are taking measures to lend our expenses to the revenue levels without compromising our growth strategy. We continue to closely monitor the development in each of our vertical markets, and are constantly identifying and developing new markets that can benefit from our solution. In the consolidating financial services sector, we continue to see demand as they are still buying and upgrading their infrastructure in order to deliver services faster than the competition, even more critical in today's market. With regard to our outlook, Q3 started off inline with our forecast, though the turbulent capital markets drove softness in coming orders in September, as it directly affected certain of our end-user clients, even their pre-occupation was the volatile market conditions. As we head into Q4, it is still early days to evaluate if and where there may be an impact on the long-term of crisis. However, it is clear that our end-user customers in all segments continue to be our product, as critical in terms of shortening design or processing time while enabling many of them to deliver services faster than their competition. In summary, we believe that our sound fundamental and significant new developments, just described, as well as our very healthy cash position, these are the necessary tools to navigate these more complex times while enabling us to take advantage of new opportunities to generate long-term growth. With that, I would like to turn over the call over to our CFO, Josh Siegel for his financial review. Josh?

[Joshua Siegel:]

Thank you, Ronnie, and hello everyone. Before I begin, I'd like to repeat in order to better understand our business, my review relates to our non-GAAP results and excludes the effect of share-based compensation charges and non-cash interest expenses. A full reconciliation between our GAAP and non-GAAP results is available in our earnings release published earlier today. So let me begin. Revenues for the quarter totaled $14.7 million, down 5% from the $15.5 million in the third quarter last year, but within the preliminary results range announced three weeks ago. IBM and HP continued to represent over 10% of revenue customers, joined by Sun this quarter, which also contributed greater than 10% to revenues. Revenues for the nine months totaled $48.4 million, up 35% over the $35.7 million last year. Gross profit for the quarter totaled $8 million, 18% higher than the $6.8 million in Q3 of '07. The gross margin for the quarter totaled 54.5%, significantly higher than the 43.6% in the third quarter last year, and similar to the second quarter this year. Operating expenses totaled $8.7 million in the third quarter, compared to $8.6 million in the second quarter. We do expect some continued growth in expenses for Q4, particularly in R&D, due to several new product development efforts going on today. However as in the past, we continue to keep a tight rate on expenses and are taking steps, both at the human resource level, and discretionary spending to prudently manage expense growth more closely in lieu of the current revenue levels and the macro uncertainties. These measures will give us a tighter control over expense levels as we enter into 2009, granting us increased operating flexibility to execute on our growth strategy. This quarter we generated an operating loss of $692,000, compared to the $532,000 gain for the third quarter of '07. Net loss for the quarter totaled $443,000, compared to the $761,000 income in the third quarter of last year. We continue to show net income for the first nine months, equaling $783,000, compared to a net loss of last year for the same period. Loss per share for the quarter totaled $0.02 compared to $0.04 earnings per diluted share in third quarter of last year. Net cash and cash equivalents combined with our marketable securities, as of the end of September '08 reached $58 million with no outstanding debt. That's a net increase of $1.4 million over the $56.6 million at the end of June in last quarter. In this complex environment, it is important to highlight this figure currently representing just over $2.5 per diluted Volt's share. All-in-all, we have a very healthy balance sheet with a healthy cash position and zero debt, especially important in the current environment. Furthermore, the credit quality of our fixed income investment portfolio remains high, and today we have not charged any losses on our portfolio despite the tough credit environment. Our DSO for the third quarter was approximately 65 days compared to the 73 in the second quarter, as a result of higher sales rate in the first two months of the quarter. Looking ahead, as a result of the complex climate, we have adopted to take a more conservative approach at this time in terms of Q4 guidance, as well as have widened the guidance boundaries. We expect fourth quarter revenues to be in the range of $14 million to $16 million. This revenue guidance will bring annual revenues to be in the range of $62.4 million to $64.4 million, representing an increase of 17% to 21% over fiscal year 2007. We expect our Q4 loss per share on a non-GAAP basis to be in the range of $0.02 to $0.08. Before moving over to question-and-answer session, I would like to mention in the two weeks time, on the 14th of November we will be holding an Investor and Analyst breakfast entitled InfiniBand and HP Oracle Database Machine. What does this means for Voltaire? The event is scheduled to include both, company presentations, and a presentation by an Oracle Executive, as well as a testimonial by a joint Voltaire and Oracle database early adapter. This event will take place at the Omni Berkshire, New York City between 8

[Operator:]

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). The first question is from Tom Curlin of RBC. Please go ahead.

[Tom Curlin:]

Good morning. Can you just talk about, what specifically you are seeing in terms of slowing orders, maybe segment? I assume financial is part of the issue, but I've also heard some talk in the industry about oil and gas. Do you think both of those segments are a little more uncertain now than before or is it primarily financial?

[Ronnie Kenneth:]

I would say that it is primarily financial, Tom, even though I have to say that overall we are seeing increase in our pipe. We clearly see the demand out there continues to be held before us, and in fact with respect to oil and gas, we have won some major projects with two oil and gas companies, that obviously I cannot disclose the names now. But hopefully at the next call, I will be able to.

[Tom Curlin:]

Okay. Then, on the QDR front, you mentioned your announced platform for availability in December. Is that a fixed port offering or a chasy-based offering? What's the sequence of events?

[Ronnie Kenneth:]

We are starting off with a six port switch of 36 ports, Tom.

[Tom Curlin:]

Okay. Then, I guess the chasy-based product would be later in calendar '09?

[Ronnie Kenneth:]

Well, we're working on several exciting products for '09. I'm afraid I cannot detail any specifics of that yet.

[Tom Curlin:]

All right. Then how would you describe the pipeline specifically for cluster database with the high-end stocks? How that relates to Oracle? How is that looking?

[Ronnie Kenneth:]

As far as we are concerned looking at demand for our specific products in that, and that's the visibility we have for our products. Clearly, this pipeline is growing quite rapidly.

[Tom Curlin:]

Okay. Thanks very much.

[Ronnie Kenneth:]

Thank you, Tom.

[Operator:]

The next question is from Mark Moskowitz of JPMorgan. Please go ahead.

[Mark Moskowitz:]

Yes, good day. Thank you. Ronnie, a quick question here on the order (inaudible). In terms of 3Q deferrals, how should we think about those as related to the fourth quarter? Are they anticipated to be recaptured? Is that part of your guidance? Or if there is any sort of recapture of those deferrals would that be incremental to your guidance?

[Ronnie Kenneth:]

First of all, one of these orders is in and we expect the other one to come in by quarter-end. As I said in the previous earning call, we did expect or did experience some orders going through a longer sale cycle, and eventually this is what happened. However if I look forward, as I said in my answer to Tom, clearly, we see increased buy to our products moving forward.

[Mark Moskowitz:]

Okay. If I could as far as a follow-up on the elongating sales cycles, can you talk in the pricing? How has the pricing dynamics changed or not changed in recent weeks because of the pressure on the sales cycles? Are you seeing the pricing pressures yet?

[Ronnie Kenneth:]

As I said, I think what we experience is longer sale cycle. I can't say that there was any impact on the pricing; I think the pricing remains stable.

[Joshua Siegel:]

I think one thing I would add there Mark, this is Josh. As you can see, we have been able to retain our gross margin, sequentially flat compared to Q2, even with the lower revenue base. So, I think that's a strong indicator that they were still able to hold our pricing reasonably strong.

[Mark Moskowitz:]

Josh speaking of gross margins, I know it's kind of early here in terms of the broader macro pressures, but have you seen any sort of flexibility or increased flexibility from some of your suppliers? Maybe give you guys some cash discounts on some of your components you're buying that could actually help value gross margins as you go forward?

[Joshua Siegel:]

We're definitely seeing some of that. I won't say from who but, generally I've received email from vendors that are willing to opt for that.

[Mark Moskowitz:]

Okay. Thank you.

[Operator:]

The next question is from Tal Liani of Merrill Lynch. Please go ahead.

[Stanley Kovler:]

Thank you, this is actually Stan Kovler for Tal. Difficult question, Josh maybe you can go over what the currency impact was from the dollar writing into the shekel, how that impacts your R&D? Then going forward, whether or not you have any hedges in place as it effects the other income rate or other line item?

[Joshua Siegel:]

Yes, sure. Well, we've had a hedging program in place now for several quarters. So, we're becoming less and less sensitive to the movement and the volatility of the shekel, whether it goes up or whether it goes down. But clearly, the reason of strengthening of the dollar will have a positive effect on our expense level, not dollar for dollar since we are hedged at different levels during the course of the last nine months. I think as we look into 2009, we're significantly less hedged in the longer term, and the dollar says strong and that will give us a positive boost on the expense level.

[Stanley Kovler:]

Got it. So for Q4, we shouldn't think about the margin benefit that you are getting on OpEx, entirely as a function of the movement in the dollar?

[Joshua Siegel:]

No.

[Stanley Kovler:]

Okay.

[Joshua Siegel:]

We prudently manage the expenses on unhedged basis. So there will be some effect but not dollar for dollar.

[Stanley Kovler:]

Got it. My next question is more about competitions; one of your competitors recently announced some new products. I was just wondering if you are seeing a rise in competition? Whether, the run rates from new deals are coming down in anyway yet or any changes in the environment? Maybe, also you can touch on how Cisco is doing in the market, and while you are seeing more of Cisco with respect to InfiniBand deals?

[Joshua Siegel:]

We see less of Cisco, obviously, in the InfiniBand market. I think that most of the competition today is actually coming from the macro environment. I think we have well-differentiated products, we have strong traction with several OEMs, and we see this traction continue. So I wouldn't say that there is any new phenomena in the competitive landscape.

[Stanley Kovler:]

Okay. Just lastly, a question on the guidance. So, when we look at the push outs for Q4 and the guidance that you're assuming, it seems like Q3 and Q4 are pretty flattish? Do you feel like you are building up enough of a pipeline to maybe start showing some sequential growth, off of these similar levels as we go into 2009? Do you feel maybe that there is enough pipeline from your existing products, and maybe the new products, there is going to be enough interest to start boosting revenues into first half of '09?

[Ronnie Kenneth:]

It's Ronnie here. We clearly see growing pipeline, and I think that given the macro environment, it's only prudent by management to be very cautious when it comes to guidance.

[Stanley Kovler:]

Okay. Thank you.

[Operator:]

The next question is from Irit Jakoby of SIG. Please go ahead.

[Irit Jakoby:]

Hi, thank you. With respect to the vertical strategy, you mentioned that again in the beginning of this call. So, as you think about financial services, I know that has been so far the fastest growing vertical. But given the recent turbulence in the market, are you still giving financial services the same emphasis or are you maybe now giving more emphasis to other verticals?

[Ronnie Kenneth:]

No, I think we continue and give focus to financial services, simply because we see the demand out there. In fact, we have clients who are telling us that even if they will be laying off people, they in fact will be more dependent on our (inaudible) that we are enabling. So we clearly see their need for our solution, and we clearly see this being translated into demand to our product. So I see no reason right now to defocus from this segment. However, we are seeing more opportunities, and clearly, the latest are coming from the HP or from database machine is one of them that in fact will help us further penetrate across vertical with that solution.

[Irit Jakoby:]

Then as you look at your pipeline first financial, how it developed over the last month or month and a half, what do you see? Are there any opportunities that were in the pipeline that has kind of fallen off given everything that's happened? Do things just lengthen? May be you can give a little more color on what's actually happening.

[Ronnie Kenneth:]

Sure, Irit. I think the way we look at it is that, clearly as I said, the demand is glowing, this is reflected in the growing pipe. However, when I look at an opportunity, given the macro environment that they are operating in, I would have touched a higher risk to our ability to close the deal at a certain day. So the same cycle is becoming longer, but in terms of the demand, it's growing.

[Irit Jakoby:]

Okay. Switching to your guidance for the Q4, I think the midpoints of your earnings guidance implies growing operating percentage, significantly Q4 over Q3. I mean, how should we think of that? Do you plan headcount increases as we plan to maintain expenses that is in level given the macro slowdown? What is the best way to think of your expense structure going forward?

[Joshua Siegel:]

Sure Irit, this is Josh. In fact as I said earlier, we do anticipate that we'll have increased expenses into Q4. Also due to the fact that we have taken steps and took a stand on expenses related to human resources and discretionary spending, as well as looking at taking a higher thresholds who rely on certain projects that we are doing in-house. We did that in order to make sure that we can curtail any growth expenses, so that we're well positioned in 2009 to grow expenses where we need to, in order to continue to take advantage of the growth opportunities. So in Q4, we will have increased expenses, the majority of those increased expenses will be related to very specific R&D product deliveries that are anticipated in this quarter, and as well as into the middle of next year that are cycling through R&D today. But overall, we've taken a significant reduction in the planned growth expenses that we anticipated. So, there will be some continued growth but it's going to be at a much lower rate than what we have seen.

[Irit Jakoby:]

Okay. Thank you. That's it from me, and good luck.

[Ronnie Kenneth:]

Thank you, Irit.

[Operator:]

The next question is from Doug Reid of Thomas Weisel Partners. Please go ahead.

[Nahol Choksy:]

Hi, this is Nahol Choksy for Doug Reid, few questions. Regarding the one plus million fields that were pushed out in 3Q '08. Can you confirm that those deals will ship in revenue in 4Q '08?

[Joshua Siegel:]

Hi Doug, this is Josh. As already said before, one of those orders are in already and we anticipate the second one coming in. As they come in, we will ship according to their requirement.

[Nahol Choksy:]

Okay. Then with respect to excluding the macro economic risk, what could drive upside or downside to the current set of guidance?

[Joshua Siegel:]

Doug, in terms of the upside, clearly, we're looking at the macro environment around us closely and need to see where the dust settles there. That obviously, can provide some significant upside if it had to settle. I think the other upside component will be, as we look at the different verticals that we are going through, and specifically the partnership that we've announced recently on the Oracle products, which are growing and helps us diversify into several verticals, including retail and Telco. So, I would view that as the additional upside. In terms of downside, we believe we analyze the risks overtime, we are comfortable. We've provided our guidance for Q4 in anticipation of what's going on today in the environment. Barring any surprises, I think we have taken a prudent approach to the guidance.

[Nahol Choksy:]

Very good to hear.

[Ronnie Kenneth:]

Just to elaborate on that, it's Ronnie here. I think that our customers out there need our solutions to differentiate themselves and compete in the macro environment in their respective markets. So I think in general terms, the upside or downside from the guidance, I think is dependent on our ability of the closure rate of the pipeline that we see.

[Nahol Choksy:]

Thank you. Last question, trying to gauge how incremental the database machine can be visible to your growth opportunity, in CY '09. By the growing pipeline that you see, would you expect that to be still growing without the HP Oracle or is that a very, very big components here?

[Ronnie Kenneth:]

Absolutely, absolutely. I think that if I look at the government of high education next year, I think a lot of all these customers have been awaiting for the Intel CPU known as the Nehalem, that is scheduled to be release, I believe in Q1 now. So this will have a positive impact on our business, I think moving forward.

[Nahol Choksy:]

Okay. Thank you very much.

[Ronnie Kenneth:]

Thank you, Doug.

[Operator:]

(Operator Instructions). There are no further questions at this time. Mr. Kenneth, would you like to make a concluding statement?

[Ronnie Kenneth:]

Yes. Thank you everyone for joining us today, and for your ongoing support for the company. We look forward to hosting you again on our next call. Have a good day.

[Operator:]

Thank you. This concludes the Voltaire's third quarter 2008 results conference call. Thank you for your participation, you may go ahead and disconnect.