Volt Information Sciences, Inc.
Q3 2009 Earnings Call Transcript

Published: 28 Oct 2009

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Voltaire’s Third Quarter 2009 Results Conference Call. All participants are at 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 28, 2009. I would now like to hand over the call to Mr. Crocker Coulson of CCGK Investor Relations. Mr. Coulson would you like to begin?

[Crocker Coulson:]

Thank you so much operator and good day and welcome to everyone on the call. I’d like to welcome all of you to Voltaire’s third quarter 2009 results conference call and we would like to thank Voltaire’s management for hosting this call. With us on the line today are Mr. Ronnie Kenneth, the company’s Chairman and Chief Executive Officer and also Mr. Joshua Siegel, the company’s Chief Financial Officer. Before we begin, I’d like to remind our listeners that certain information provided on this call may contain forward-looking statements and the Safe Harbor statement outlined in today's earnings release also pertains to this call. If you’ve not received the copy of the release, please call CCGK Investor Relations at 646-797-2868 or view it on the Investor Relations or News Sections of the company's website at www.voltaire.com. In addition, during this call certain non-GAAP financial measures will be discussed. These are used by the management to make strategic decisions, to forecast future results and to evaluate the company's current performance. Management believes that the presentation of non-GAAP financial measures is useful to investor's understanding and assessment of the company's ongoing core operations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in the third quarter 2009 earnings release. With all these formalities out of the way, I’d now like to hand this call over to Mr. Ronnie Kenneth, Voltaire's Chairman and CEO.

[Ronnie Kenneth:]

Thank you, Crocker. Welcome everyone and thank you for joining us today to discuss our third quarter results. This has been a good quarter for Voltaire in terms of financial performance and business execution serving as a second consecutive quarter of positive momentum this year. Revenues for the quarter totaled $14.5 million, up 35% from last quarter with gross margins at 51% supported by strong software sales. Net loss for the quarter narrowed substantially to $0.9 million, down from $2.3 million last quarter. We retained our strong balance sheet with cash and cash equivalents stable totaling $50.4 million and zero debt. In terms of the revenue and order make-up Q3 marked the first full quarter that we had our 40 Gigabit per second InfiniBand director switches in the market and available for purchase generating strong demand and gaining market share. These switches using combination with Intel Nehalem based servers fulfill the demanding performance requirements of large scale-out architecture. These include as many large government and HPC deals previously delayed which are now back on schedule with more of these deals excepted in the future. We are now entering the fourth quarter with a healthy backlog and large pipeline of deals confirming the continued positive momentum in the business. We expect Q4 to bring continued sales of our 40 Gigabit per second director switches, incremental software business and continued growth in the Asia Pacific region. This grants us the confidence to reiterate our annual revenue guidance of around $50 million. We remain committed to our three thronged approach of delivering vertically oriented solution, our go-to-market strategy through premier several OEM partners and leading differentiated product. We believe this service key foundation for long-term growth. Now, to the quarter in further detail. Looking at our vertical market, the government vertical had the largest impact on bookings for the quarter with over a third of total orders. We won many large government projects across the all geographies. These included seven figure deals for broad project in both Europe and the US. The majority of these deals specify the use of Nehalem based servers and 40 Gigabit per second director switches. Financial services was again strong this quarter delivering more than 20% of our total order. Previously dominated by US based account, we increased momentum this quarter in Europe and Asia with key wins at some well known banks and exchanges. Voltaire solutions make market data and automated trading application run faster creating a measurable and valuable competitive advantage for (Inaudible) that deploy the solution. In many cases our Voltaire Messaging Accelerator or VMA software is a trigger that enable us to deliver faster performance than the competition in this vertical and win the business. Once again we experienced steady demand in the energy vertical with some large repeat orders from major oil and gas accounts. Our partnership with Oracle is driving business across many industries with multiple wins in the telecommunication vertical. We announced that the wireless carriers of China Mobile and Turkcell are using Voltaire switches as the scale-out fabric for their Oracle Real Application Cluster environments. Oracle selections of Voltaire and interconnect fabric for Version one of the database machine created a numerous exposure for Voltaire helping us increasing the penetration into mainstream Oracle environments. We have accumulated more than 40 new Oracle customers this year and expect the Oracle RAC to be a continued growth area for the company in the coming quarters. Our robust OEM and reseller channel serves as an important extension of our sales organization and continues to create a majority of our business. HP began selling our Unified Fabric Manager or UFM software as part of its scale-out infrastructure portfolio. This is an important milestone for Voltaire with HP becoming one of the first global system vendors to carry our management software in addition to our switching hardware. Our UFM software optimizes performance and management for high performance scale-out data centers. As announced last week IBM became the first of our OEM partners to carry our new Vantage 8500 low latency 10 Gigabit Ethernet Layer 2 core switch in addition to our 20 and 40 Gigabit InfiniBand platform. We are very pleased with the growing demand in the Far East as Fujitsu, our new OEM partner in Asia Pacific and Japan region has been quick to adopt and drive sales of Grid Director 4700 QDR InfiniBand switches. We also announced in collaboration with Dawning another system vendor in Asia Pacific Region on an SSI-Compliant internal blade switch for new solutions to be available in 2010. Voltaire now offers the industry’s first SSI-Compliant 40 Gigabit blade switch giving us a first mover advantage within the blade sector, the fastest growing sector of server market potentially expanding our opportunity in the blade sector market. Our adVantage Partner Program that we launched in April continues to grow and provide additional revenue for the company and diversifying our customer base. We have added 60 new partners since its inception and have one key new business as a result. Now, to the third component of our strategy, developing innovative product. We are currently witnessing the accelerated ramp of our Grid Director 4036 QDR InfiniBand switch shipping over 400 units since the launch in December 2008 and believe we are steadily increasing our market share in this market. During this first four quarter of manufacturing we also shipped over 20 systems of our Grid Director 4700 QDR InfiniBand director switch adding to a total of 20,000 QDR switch port shipped during the third quarter. Our management and application acceleration software allows us to offer differentiated solutions to our customers for their scale-out compute environment. Our UFM software became generally available at the end of Q2 and we are seeing a nice adoption rate by our commercial financial services and HPC customers. Several (Inaudible) for providing high speed electronic trading platform that purchase these license for our VMA software to help it execute even faster into the global market. Looking ahead we expect to see substantial increase in software pipeline for Q4 and 2010. With regard to our 10 Gigabit Ethernet product, this month we began shipping the first switch in our new Ethernet portfolio the Vantage 8500, it is a low latency Layer 2 core 10 Gigabit switch for scale-out data center. These switches provide customers who are designing scale-out virtualized data centers and cloud environment with networking solution that deliver efficiencies, scalability and performance at significantly reduced cost. These switches will also grant our OEM partners the competitive tools to effectively compete with Cisco creating even greater opportunities for Voltaire with the OEM. As we mentioned just a moment ago, IBM is already including Voltaire Vantage 8500 in its 1350 portfolio and we expect to announce additional strategic OEM partnerships for our Ethernet product in the weeks to come. In other words, we are planting the seeds now for the Ethernet product to be a growth engine for the Voltaire in 2010 and beyond. I would now like to turn to our CFO, Josh Siegel for the financial review and will then conclude with few words on the fourth quarter and beyond, Josh.

[Josh Siegel:]

Thank you Ronnie and hello everyone. Before I begin I’d just like to remind in order to better understand our business our review relates to our non-GAAP results. A full reconciliation between our GAAP and non-GAAP results is available in our earnings release published earlier today. Revenues for the quarter totaled $14.5 million, up 35% in the second quarter and only slightly down from the $14.7 million year-over-year. During the quarter, we saw strong a increase in orders for 40 Gigabit switches, as well as answer increase in both UFM and VMA software and (Inaudible) revenue. In terms of over 10% customers for the quarter in addition to both HP and IBM, we also added Fujitsu, SGI and another reseller from the Asian Pac region, each contributing over 10% reflecting an increasingly diversified customer base. Growth profit for the quarter totaled $7.4 million, up 30% from the second quarters’ $5.7 million and down slightly compared to the gross profit in Q3 last year of $8 million. As expected the increased sales of the 40 Gigabit solutions placed some downward pressure on our [blended] gross margin which totaled 51% compared to 53% last quarter and 54.5% Q3 last year. I’ll talk in a minute a bit more about the gross margin and our outlook. Total operating expenses totaled $8.3 million slightly higher than the $8 million in the second quarter, but only 57% of revenues compared to 74% in Q2 benefiting from the leverage in our operating model. We did have a marked increase in our sales and marketing expenses from $2.6 million to $3.2 million that reflects specific go-to-market item related to our product relations through the channels during the last quarter. Debt amounts for the quarter narrowed substantially from Q2 totaling $900,000 compared to $2.3 million loss last quarter and the $400,000 net loss in Q3 last year. We continued to prudently manage our cash flow with net cash equivalents, marketable securities and deposits at the end of September at $50.4 million compared to $50.6 million at the end of June. Our DSO was stable at 47 days compared to 45 days last quarter. In addition to a strong pipeline, our healthy order intake enables us to enter the fourth quarter with a strong backlog. We are reiterating our forecast for annual ’09 revenues to be around $50 million and [part of the] fourth quarter revenues to be around 17 million. With regards to gross margin we anticipated the product mix may still create some short-term pressure on our gross margin. As mentioned last quarter, we are ramping our 40 Gigabit portfolio which could reach over 50% of our business in Q4. As these products currently bear a lower margin given that they are not yet benefiting fully from the economy to scale on cost reduction, we expect Q4 gross margins to be flat to down from Q3 dependent on the actual [mix], although we still remain on track to meet our annual gross margin guidance throughout. We expect gross margins to return to the mid-50s in 2010 as margin on the 40 Gigabit products expand following the economies up scale, the addition of the higher margin Ethernet products to our mix and the ramp of our software and services revenues. On the expense side, while Q4 operating expenses are expected to increase specifically in R&D due to [certain] development cycles, we continue to guide towards our annual OpEx at flat or below the [OS] level with OpEx for the year expected to be around $34 million excluding the one-time bad debt provision for this quarter. With that I’d now like to turn it back to Ronnie for some closing comments.

[Ronnie Kenneth:]

Thank you, Josh. In summary this has been a strong quarter for Voltaire in terms of order momentum and growing pipeline. We are witnessing strong demand for our QDR director switches, gaining the lion share of the orders this quarter in addition to increasing interest and order taking for our differentiated software offering. Looking ahead, we believe that 2010 will be about further leveraging these growth drivers. The improving economic environment and ramping up of our 10 Gigabit Ethernet product will enable us to continue the gross momentum through 2010 and beyond. In terms of upcoming events where Voltaire will be presenting, on November 10th I will be presenting at the Merriman Curhan Ford's 6th Annual Investor Summit at the Sofitel Hotel in New York. In January we will be attending the Needham’s 12 Annual Growth Stock Conference at the New York Palace Hotel in New York. We look forward to seeing you there. With that, I would like to open the call for question. Operator?

[Operator:]

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

[Tom Elrich:]

Hi Ronnie and Josh, this is Tom Elrich for Daniel. Congrats on a great quarter here. I have a few questions. The first one regards to your new Ethernet product and the strategy. Could you provide us with a bit of color on how our Ethernet shipments are going along and your relationship with IBM and specifically do you expect to recognize some revenues and how should we think about the trajectory into 2010? Thanks.

[Ronnie Kenneth:]

Thanks Tom for participating and asking the question. In respect to our Vantage 8500 product as I said we now really planting the seeds for this platform to be a growth engine for us in 2010 and beyond. So, if you are kind of asking for more color, I would say that definitely be a significant business we’ll start ramping in 2010 and not before. As now we are really building the channels as we said IBM is carrying the Vantage 8500 as part of the 1350 portfolio and we expect more OEMs to join-in the not too distant future.

[Tom Elrich:]

And another question regarding [Apac] seems like the Fujitsu relationship is going I think ahead of plan. Do you expect them to continue and be 10% customer or a significant customer?

[Ronnie Kenneth:]

Well Tom I cannot give you any kind of forward-looking statement on that, but I can definitely confirm that the relationship with Fujitsu are strong and we expect them to be significant revenue generator for us. As we move forward overall, as I said in the call, we’d see a nice ramp of business overall in Asia Pacific, not only in Japan but also China has been very good and we believe this will continue moving forward.

[Tom Elrich:]

Maybe a final one on my end before I hop to the queue. Could you give us a sense on your current software mix and also what is the long-term goal if you can share some details here with us on the long-term software mix you are targeting?

[Ronnie Kenneth:]

So, first of all the software element in our strategy is key, for two reasons; A, it helps us to differentiate our offering against the competition, our Unified Fabric Management software, the UFM, the VMA Accelerator, all and other products all enabling customers to run applications much faster in a more efficient way and creating a significant value for them in the same time that they are differentiating Voltaire offering. So, all in all it’s really a key initiative for Voltaire, we are dedicating resources to sell software in the field and anticipate moving forward without specifying a time here, our objective is for software to be probably double digit as part of our revenue mix.

[Tom Elrich:]

Great that’s clear and helpful. Thanks a lot and good luck going forward.

[Ronnie Kenneth:]

Thank you.

[Operator:]

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

[Mark Moskowitz:]

Two questions; firstly can you talk a little more Ronnie or Josh just about the complexion of the government customer base, how much are you able to identify the interim by stimulus activity, are you seeing those stimulus dollars? And if so any change there in the margin structure with those type of deals versus non-stimulus driven? (Inaudible)

[Ronnie Kenneth:]

Sorry Mark, what was the second part of your question is driven by which factor on the government?

[Mark Moskowitz:]

Stimulus dollars, while the global stimulus activity out there was seen a really penetrator or a helper augmenting the government spending vertical first, just want to get a sense on in terms of how much of the government dollars that [you have] seemed are driven by the stimulus activity? Anyway you can kind of extrapolate or break that down or identify it. And then within that where you are seeing if you are able to identify the stimulus dollars helping out some of your customers. Are those type of business deals, are they that company average in terms of gross margin are they better or worse?

[Ronnie Kenneth:]

Mark, Ronnie here. SO its really difficult for us to kind of track where the source of the dollars are coming from especially as we see that as a combination of the stimulus package and the demand to increase performance with the combination of the Nehalem based servers and the 40 Gigabit per second switches from Voltaire and as we indicated in previous calls, the government sector by and large was on the fence waiting for these two technologies to mature and right now we see the catch-up of that. So, we cannot really differentiate or single out one reason why that the business really came back. I think it’s a combination, that’s the best I can say.

[Mark Moskowitz:]

And then the other question is to the new versus existing customers. Can you give us any sense in terms of the overall composition of revenues that come from new customers versus the customers that have been working with Voltaire from the past couple of years? Just trying to get a sense in terms of your contribution in growth from new customers?

[Ronnie Kenneth:]

Its Ronnie here Mark. As we said I think oil and gas, telecommunication together with solution for Oracle, all our new segments for us that we thought of penetrating not too long ago and the ramp up is nice. We have customers in the financial services that are placing orders with us that have not been on the customer list before. So I would say that probably very close to half of the business in Q3 was from new customers.

[Operator:]

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

[Tal Liani:]

I have a question, first of all can you quantify your expectations for the next year contribution of Ethernet. Do you have any financial target in mind, what kind of percentage of revenue should we expect? Second; you recently signed on a deal with IBM. What does it mean in terms of first expectations timing, how long did it take them to train their employees and then how does it work in their portfolio, is there any segmentation where they offer your switches to certain types of customers and maybe Juniper switches to different type of customers. I want to understand the differences? And the third question, is about HP. You signed on an agreement to sell the software through HP, what does it mean? Can HP fill your software with their own switch, I mean how does it work if you take high-end management software with a lower end switch? Thank you.

[Ronnie Kenneth:]

Thanks Tal for the question. In regard to the Ethernet proportion and the revenue mix next year, again I won’t give you any forward-looking statement here, but I can tell you that we expect the Ethernet to ramp up through the year next year, totaling probably at the end more than 10% of our overall revenue for next year. So, clearly we expect it to be significant there. Now in terms of IBM carrying the product, I can’t talk on behalf of IBM and how fast it takes them to carry the product to the market and so on, but I would say that we anticipate a typical ramp up with this product, compared to other products that we are providing IBM or any other company for that matter. So, all I can say that we expect like for us a common ramp up of the revenue for the product moving forward. In respect to also the differentiation versus others, we build our Ethernet switches for scale-out environments where people want to scale-out their virtualized data centers with hundreds and thousands on serves and want to do this in a very efficient way from a performance standpoint, from utilization standpoint and of course from a price standpoint. So we feel our switching offering bottom-up to meet the requirements of these customers. And as a result can differentiate our offering versus the competition there. So, I believe that the OEMs that are carrying the product and will be carrying the product will use Voltaire and recommend Voltaire in this kind of environment of the scale-out computing. In respect to the software, the UFM software that HP now price listed is a management software to really manage the scale-out environment as a whole as a fabric and is only meant to work with Voltaire switches and is integrated to the rest of the HP software stack and management software in that respect. So we are not replacing any other management software stack, we are integrating our software with our switches into the HP environment to enable customers to have a more robust solution for scale-out.

[Tal Liani:]

From your ends I understand it could only work with your own switches, so does it mean that because HP has not announced yet as far as I remember on agreement to sell your Ethernet switches. So does it mean that for now this will only be used for the InfiniBand market or does it mean that you are still working to get the switches approved within HP? How can they sell the software if they don’t sell the switches?

[Ronnie Kenneth:]

So the software is transparent and it doesn’t (inaudible), if it runs on our InfiniBand switch or our Ethernet switch. The code is exactly the same code. Right now, HP only carrying our InfiniBand product, which means, the UFM software is an option that HP salesperson can sell along with our switches and the rest of the elements that they’re selling to the customer. If and when HP is carrying our Ethernet product they could then use the UFM software, the exact UFM software that they have price listed now to work with the Ethernet switches.

[Operator:]

The next question is a follow-up question from Daniel Meron of RBC Capital Markets. Please go ahead.

[Daniel Meron:]

Congrats on the great execution. I missed the first part and I just wanted to get a little bit of a read on the first of all on the competitive landscape you guys discussed that if there is any change here that you’re seeing you have been in the Sambian market and as you enter into the Ethernet market. What’s the feedback more importantly that you’re getting on your competitive stand versus the products out there? Thank you.

[Ronnie Kenneth:]

Thanks Daniel if I understand your question correctly you are asking what is the feedback what are we witnessing in the market in respect to the position of the Ethernet switch is that’s the question Dan, is that the question Daniel.

[Daniel Meron:]

Yes exactly you got it right, that’s what I was talking about.

[Ronnie Kenneth:]

Okay. So I think what we witness in the market place is that we have build a solution based under Ethernet switch along with our software. The [US] management software the application accelerator such as VMA, basically providing the customer with an interconnect that is optimized for scale out computing and in large environment 100s and 1000s of servers the competition cannot provide a solution in terms that is comparable to this in terms of performance, efficiency, energy consumption and of course the price. So, overall I think the experience we have in the market is that we have a very unique platform that so far is unmatched by anybody else, and I am talking again about the combination of our switch the management software, the USM and the application acceleration software.

[Daniel Meron:]

Thank Ronnie and then the next question you mentioned the seven those deals what are the prospects of additional ones in the pipeline you don’t have necessarily to give the time line on that, but just are there more deals like that or were they one off? And then what’s the revenue commission cycle that we should expect from these deals, and for if so just in general not just in the same event deals that you announced? Thank you.

[Josh Siegel:]

With regards to the second part of the question your recognition for the Ethernet product so as Ronnie mentioned earlier we see the pipe building as the OEM channels are bringing these product in to their channel and then certifying them we see really this being a revenue generator from a recognition currently that we are doing ‘010 and ramping up during the course of ‘010. I think the first part of your question was related to singular transactions of Ethernet shipping this quarter, was that you question?

[Daniel Meron:]

You mentioned couple of seven digit deal of InfiniBand side, if [memory serves], if you can just elaborate that in prospect of getting additional ones or were they kind of one off?

[Josh Siegel:]

We were successful in Q3, we had a strong quarter with government which had some of those larger transaction that Ronnie referred to. And we see actually a long list of several seven digit transactions in our pipeline going forward in to ‘010, and as we said in our earlier remarks that’s giving us the confidence with the pipeline and our backlog as we look into the fourth quarter and growing in ‘010.

[Ronnie Kenneth:]

Well lets put it this way, I just add to what some color to what Josh just said I think that we are seeing in the pipe some large deals and in terms of number of deals and size of deals clearly a phenomena that wasn’t there couple of quarters ago, se we see this market really coming back and we are very pleased with the pipe that is developing.

[Daniel Meron:]

And last one for me before I leave the floor. As we continue the InfiniBand markets, I know it’s still a niche market what kind of growth should we expect as we look into 2010 here or on long term basis thanks?

[Ronnie Kenneth:]

You know the reports out there by research firms etcetera are I think right now outdated, so I wouldn’t refer you to any independent research at this point and would actually share with you the numbers as the new fresh numbers as soon as they come out and we do expect them to come out in the next couple of months. Overall, we clearly see the market picking up the combination of 40 Gigabit per second with the Nehalem servers is a great combination and people want to build powerful environments with that. So we see that as a kind of a growth engine for us as we move forward. We see financial services clearly picking up. The government as I said before and now even getting in to storages, storage is becoming faster and faster and we have seen more kind of flash base or solid say devices base storage popping up more and more and require a big part, so all of these that we indicated as growth engines in the past, I think are intact and will fuel the growth of the industry and Voltaire I believe in 2010 and beyond.

[Daniel Meron:]

Great thank you. Good luck Ronnie and Josh.

[Operator:]

(Operator Instructions). Yes.

[Crocker Coulson:]

If there are no further questions, I think we’ll make some concluding remark.

[Operator:]

Sure, go ahead Mr. Kenneth.

[Ronnie Kenneth:]

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.

[Crocker Coulson:]

Thank you operator.

[Operator:]

Thank you and this concludes Voltaire’s third quarter 2009 results conference call. Thank you for your participation you may go ahead and disconnect.