Volt Information Sciences, Inc.
Q4 2009 Earnings Call Transcript

Published: 8 Feb 2010

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Voltaire’s fourth 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 February 08, 2010. I would now like to hand over the call to Ms. Vivian Chen of CCG Investor Relations. Ms. Chen, would you like to begin?

[Vivian Chen:]

Thank you operator and good day to everybody. I would like to welcome all of you to Voltaire’s fourth quarter 2009 results conference call and thank Voltaire’s management for hosting this call. With us on the line today are Mr. Ronnie Kenneth, Chairman and Chief Executive Officer; Mr. Joshua Siegel, Chief Financial Officer. Before we begin may I 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 have not received the copy of the release, please call CCG Investor Relations at 1-646-797-2868 or view it in the Investor Relations or News section of the company's Web site, 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, forecast future results and 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 fourth quarter 2009 earnings release. I will now handover the call to Mr. Ronnie Kenneth, Voltaire's Chairman and CEO. Ronnie?

[Ronnie Kenneth:]

Thank you, Vivian. Welcome everyone and thank you for joining us today to discuss our fourth quarter and year-end results. 2009 was a year of achievement given the challenges of the global market. Revenues for the year totaled $50.4 million and we met our annual guidance set early in the year. After a challenging Q1 for us and everyone else in the market, we presented three consecutive quarters of sequential growth with fourth quarter revenues reaching $17.4 million, drawing a net income of $295,000 on a non-GAAP basis. We ended 2009 with a strong balance sheet with close to $48 million in net cash and liquid securities. 2009 was about looking inwards and focusing on our core business fundamentals as we build our product portfolio introducing a record number of new hardware and software products throughout the year. We achieved all of this while at the same time cutting expenses and preserving cash. One of the notable highlights of the year was the availability of Voltaire’s first low-latency 10 Gigabit Ethernet switch. This product puts us in a strong position to capitalize on a new and growing opportunity, cloud computing and scale-out virtualized data centers. We are seeing large IT organizations investing first in private cloud computing services and this is exactly where we as Voltaire come into play. As we move into 2010, we are positioned ourselves with a broad and comprehensive product portfolio. On the hardware side it spans 20 Gigabit InfiniBand switches to 40 Gigabit InfiniBand switches in a variety of port counts and, as I just mentioned, a low-latency 10 Gigabit Ethernet switches. For software, we now have unique application acceleration and fabric management software that delivers added performance and efficiency boost on top of our hardware platform. Through continued innovation and focused sales execution we maintain our position as the market leader in InfiniBand switching and this was evident by the November 2009 top 500 list of the world’s most powerful supercomputers. More than half of all InfiniBand deployments on this list use Voltaire switches. Nearly 90% of commercial high-performance computing InfiniBand deployments, such as financial services, automotive, aerospace, and energy also use Voltaire’s scale-out fabric. We are having similar market success in China where Voltaire switches are powering the top three Chinese high-performance computers. In addition, two-thirds of all InfiniBand deployments on the China 100 list use Voltaire switches, far more than any other InfiniBand system vendor. We are seeing a gradually improving macro-environment in the US and early indications of recovery in EMEA with new deals in the pipeline. This combined with the refresh cycle that’s happening in the data center keeps me bullish about Voltaire’s prospects for 2010 and our longer-term growth. Now let’s move on to the quarter in more detail. Financial services was our largest vertical this year contributing over 20% of our business; orders here increased 33% since last quarter and 44% year over year. Voltaire’s InfiniBand and now 10 Gigabit Ethernet fabrics combined with our unique Messaging Acceleration software delivered ultra-low latency that’s needed for high-frequency trading. Our solution helps financial institutions, including banks, exchanges, and hedge funds execute trades faster, creating significant competitive advantage and a tangible ROI. The government vertical, our other major vertical, contributed over 20% of our business this year, growing 85% year over year with key government wins in CEA in France, Lockheed Martin, and NASA Ames. We also announced our recent installation of the Centre for High Performance Computing in Cape Town, South Africa powering the fastest computer in the African continent. The education and manufacturing verticals, each continued to drive more than 10% of our business in 2009 as well. Our go-to market partnerships also enabled us to efficiently scale our business and global reach. A milestone achieved during the quarter was that both HP and IBM price listed our new Vantage 8500 low latency 10 Gigabit Ethernet switch as part of their data center portfolio resulting in initial sales in the quarter. IBM, in fact, announced its availability on the same day we GI [ph] the product underscoring the great need for this product in their networking portfolio. HP and IBM, as well as other OEM partners also began shipping our new Grid Director 4700 40 Gigabit per second InfiniBand Director switch serving as a major contributor to the growth this quarter. In the Asia Pacific and Japan region, Fujitsu drove sales of the Grid Director 4700 switches, and in Europe it will also continue as a strong channel for our switches, and selling as well as our Unified Fabric Manager, or USM, software. Our adVantage Partner Program continues to grow and provide additional revenue for the company as well as diversify our customer base worldwide. Since launching the program in April, we have added 22 strategic channel partners to the program. With regard to products, the fourth quarter was largely about ordering [ph] for our Grid Director 4700 40 Gigabit per second InfiniBand Director switches. 40 Gigabit per second represented nearly 75% of the InfiniBand ports shipped during the quarter as compared 20 Gigabit per second. We had record booking for our management and application acceleration software during the quarter booking more than $1 million in software orders. Two weeks ago, we announced a new switching platform, the Grid Director 4036E, which delivers 40 Gigabit per second InfiniBand and Ethernet in a compact 1U chassis. We have had tremendous interest in this product from financial services customers. This is because it provides the industry’s highest performance InfiniBand-to-Ethernet breaching capabilities, which is a new way to further reduce latency in high frequency trading. The small form factor makes it ideal for co-located training networks and we believe this attribute will increase our target addressable market within financial services by a factor of two to three. We expect to begin shipping the 4036E at the end of Q1, and we have already begun taking orders. On the storage front, we are involved in several development initiatives, both internally and with our OEM partners, to boost storage performance. We expect to announce at least one of these major initiatives in the coming weeks. With that, I would now like to turn to our CFO, Josh Siegel for the financial review, and I will then conclude with few words on our positioning for 2010. Josh?

[Josh Siegel:]

Thank you Ronnie and good morning everyone. Before I begin, as we said earlier, in order to better understand our business, my 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 $17.4 million growing 20% from the third quarter and a 32% increase year over year. During the quarter, we saw the continued increase in orders for our 40 Gigabit switches which contributed to over 50% revenues as well as an increase in both UFM and VMA software and support revenues. Revenues for the year totaled $50.4 million comfortably within the guidance range we introduced in February 2009. In April, we intend to publish our Annual Report on the 20-F and would like to share with you today several key statistics. This year our Grid Director and edge switches combined contributed to over 71% of total revenues, compared to roughly 76% in 2008. Our new 40 Gigabit switches alone contributed to over 30% of revenues, the majority in the second half of the year. This year, we also saw a strong increase in professional service revenue which grew by 70% over last year contributing to roughly 11% of revenues in the year compared to 6% in 2008. Finally, revenues from our rapidly-growing software solutions reached over $1 million for the year. In terms of 10% customers for year, HP, IBM and SGI continued to be our large customers. Now back to the quarter. Gross profit for the quarter totaled $8.7 million up 17% from the third quarter’s $7.4 million and up 18% from the $7.3 million gross profit in Q4 last year. Gross profit for the year totaled $26.2 million compared to $32.7 million in 2008. Gross margin for the quarter was 50% compared to 51.1% last quarter and 55.6% in Q4 last year. As mentioned during the year, the increase in sales of the 40 Gigabit solutions continued to place downward pressure on our blended gross margin, partially offset by the increase in software and support revenues. Gross margin for the year still totaled 52% compared to 53.1% in 2008 for the year. Operating expenses for the quarter totaled $8.4 million similar to the 8.3% last quarter and reduced from the $9.1 million in the fourth quarter last year. I want to point out that operating expenses for the quarter dropped to 48% of revenues compared to 57% in Q3 and 59% in Q4 last year, showing how we successfully leveraged our operating model of the top line. Throughout 2009, we adopted a prudent cost preserving process enabling us to maintain annual operating expenses at $34.4 million similar to the 2008 level and in line with our guidance provided. Furthermore, once you net out the one-time charge of $1.7 million recorded in the first quarter due to the SGI bankruptcy, we actually reduced our operating expense level by $1.7 million compared with 2008. These prudent measures enabled us to record a net income of $295,000 for the fourth quarter as compared to a $900,000 net loss last quarter and a $1.7 million net loss in Q4 last year. We ended the year with net cash equivalents, marketable securities and deposits of $47.5 million and zero debt compared to the $50.4 million at September 30. Cash used in operating activities during the quarter was $1 million primarily due to gradual increase in inventory in order to address the growing anticipated demand for our products as well as $1.7 million cash used in investing in capital equipments. Our DSOs were slightly up at 51 days compared to 47 days in Q3. Turning now to the guidance for 2010; we forecast 2010 annual revenues to increase by between 31% and 37% to be in the range of $66 million to $69 million with the second half as usual being seasonally stronger than the first. We anticipate annual gross margin to remain between 51% to 53% range similar to 2009. Gross margins in the second half of the year are expected to be higher than the first half of the year. This will be driven by the change in product revenue mix resulting from increasing higher margin software and Ethernet switch sales in the second half. Our focused effort on growing software sales and the adoption rate of Ethernet products may provide additional upside to this margin guidance. Non-GAAP operating expenses are to be between $38.0 million to $39.5 million in 2010, roughly a 15% year-over-year increase. This increase will be primarily due to increased investment in R&D and sales in marketing activities to support our rapid growth with dual technologies. Finally, we target sustainable non-GAAP operating profit by the fourth quarter. In summary, after a difficult first half in 2009, we are now back on track and see 2010 as a year in which we will return to approach our long-term financial model targeting an operating profit at the mid-teen level, something we aim to achieve in 2011. With that I would now like to turn it back to Ronnie for some closing comments. Ronnie?

[Ronnie Kenneth:]

Thank you, Josh. In summary, I am pleased to note that what began as a challenging year for Voltaire and in fact everyone has ended on a high note; and as Josh indicated, we believe that we are well positioned for increased growth into 2010 and beyond. Voltaire is in the right place at the right time, and I say this for several reasons. First, the principle used in high-performance computing of scale-out, low latency and application acceleration is becoming the foundation for next generation virtualized data centers and the rapidly expanding cloud computing opportunity. This is our heritage and where Voltaire excels. Second, we are on the forefront of a widespread infrastructure refresh in the data center. This is happening now and is something that only comes along about once every 10 years. Third, we are entering the year with an end-to-end portfolio of switching products and first-in-kind application acceleration and management software that strongly differentiates Voltaire from the competition. And lastly, with our new Ethernet offering, Voltaire is the only company in the market with a compelling solution to help the server OEMs compete against Cisco UCS. It’s these reasons that keep me excited about the opportunity ahead for Voltaire in 2010 and beyond. With that, I would like to open the call for question. Operator?

[Operator:]

Thank you. (Operator instructions). The first question is from Tal Liani of Bank of Merrill Lynch of America. Please go head.

[Eugene Howe -- Bank of America/Merrill Lynch:]

It is Eugene Howe [ph] for Tal from Bank of America/Merrill Lynch. Ronnie just a bigger picture question, could you just talk a little bit about the visibility into 2010? Can you discuss some of the macro puts and takes in building your 2010 guidance?

[Ronnie Kenneth:]

Yes obviously, I think that we believe like I think most of the companies out there in our space that this market and especially the data center market segment are getting back to a normal spending pattern, I would say, and with the new technology that has been matured really ready for a refresh to be able to build more efficient data centers or cloud compute environment. So we believe that this will really be a key to our growth as we move forward.

[Eugene Howe -- Bank of America/Merrill Lynch:]

Okay got it. In terms of the Ethernet, could you provide the Ethernet product of revenue number in the quarter? And what do you expect basis [ph] for Ethernet as a percentage of revenue for 2010?

[Ronnie Kenneth:]

So I think we gave some color on that earlier and we believe that we will see in the second half the year a bigger ramp compared with first half of the year. And I also believe that in the previous calls we indicated that we believe that revenue generated from our Ethernet product line will represent at least 10% of our revenue this year.

[Eugene Howe -- Bank of America/Merrill Lynch:]

Okay, great. Thank you.

[Operator:]

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

[Mark Moskowitz -- JP Morgan:]

Yes, thank you. Good day Ronnie and Josh. I want to start -- my first question regarding the puts and takes to macros, I just want to get a little bit of understanding around your discussion on clouds computing. It seems like it is still a lot more hype out there than reality. I think it is part of encouragements folks [ph] they will talk about. And in terms of the tools, the management tools, the automation tools, they don’t always seem to be agreed upon for cloud computing for more of a critical mass adoption. So I am wondering if you can talk a little more about what you really think is going to drive your 30% revenue growth for 2010 outside of cloud computing.

[Ronnie Kenneth:]

Sure. Let me start with 2010 and drivers for growth. So we indicated earlier that financial services has been the largest segment for us in 2009, and we see this is really moving forward into 2010 as well, as more and more people are getting into the low latency rate, and clearly we have a leadership there and well differentiated in that market segment. So I think financial services is another way for us to increase our revenue as we move forward. We also discussed the storage opportunities. We can’t right now provide more details but some interesting development internally as well as with partners will also provide additional growth opportunities for us in 2010. Now in respect to clouds, I think we need to differentiate between public clouds and private clouds, and private clouds is really people deploying scale-out computing environment in a virtualized manner, and for that you don’t need to have all the billing infrastructure and so on that you may need in public cloud environment. So what we do see in enterprises is in fact really a substantial shift towards new way of doing things. And the fact that people are looking into using the latest Intel microprocessors is also opening up the question of what is a more efficient way to build our data centers? And again at that point the clear answer is let’s scale-out the infrastructure and do this in a virtualized environment and we provide the solution to do. So that’s actually happening and it is happening in fact for us in InfiniBand, and I believe it will open up much bigger opportunity for us as we move into the year with our Ethernet offering. Did that answer the question Mark?

[Mark Moskowitz -- JP Morgan:]

Yes, thanks for the clarification, I appreciate that. I wondered if you can talk a little more about the Nehalem refresh taking place in sever market. Folks that we do talk down the field seem to suggest that there is a richer constant fail [ph] with these servers that folks are sitting [ph] on would sell a lot more attached storage in that attached networking type environment. Are you guys seeing a better flow through for your business in terms of you’re being able to sell a richer margin profile into these early-stage adopters in the Nehalem blade servers.

[Ronnie Kenneth:]

Absolutely, and I think you also in your question mentioned the storage attach which also represent an opportunity for us because you would need these storage servers to be connected with very high bandwidth. So that also represents a significant opportunity for us. So overall this refresh into the Nehalem is clearly a great opportunity for us.

[Mark Moskowitz -- JP Morgan:]

Just lastly, Josh, can you talk a little more about the gross margin profile? I know in the past we’ve been kind of more or less under the impression that you’ll get back in the mid 50s in terms of gross margin. Do you think that’s still achievable over the next 12 to 18 months?

[Josh Siegel:]

Yes, thanks Mark for the question. Absolutely, we are very confident that we will be able to return to the mid 50s. We think the time frame for that would be in the back half of this year. And again, it is really -- our gross margin you kind of being following us for several years is a result of our product mix and the verticals that we play in. And over the years, if you look at ‘09, while we had some downward trend on the gross margin, if you look at it on an annual basis compared to ‘08, it was fairly flat. And I think as we look into 2010, on an annual basis, it may remain fairly flat but we see a nice upward trend towards second half as, one, the Ethernet switch has come into play and be a bigger part of our mix -- Ronnie talked about it being 10% of our annual sales -- and with more of it coming in the second half and the first half and we see the margins on the Ethernet switches are being very attractive for Voltaire. And the second piece of the puzzle is the software, and as we saw in the back half of ‘09 software picking up, we see that trend continuing going into 2010, and in addition to the software drives, additional support revenue which also enhances the gross margin. So again, I think we will be the reverse of where we were in ‘09 and we will trend upwards as we go into ‘10.

[Mark Moskowitz -- JP Morgan:]

Thank you.

[Operator:]

The next question is from Daniel Meron of RBC Capital Markets. Please go ahead.

[Daniel Meron -- RBC Capital Markets:]

Hi, guys, congrats for the ongoing execution here. Can you walk us through the competitive landscape now that end markets are heating up and I think that other players are seeing the opportunity, was there any change here or do you see any competitors moving into this space?

[Ronnie Kenneth:]

You’re talking about the scale-out cloud environment?

[Daniel Meron -- RBC Capital Markets:]

I am talking for – specifically within Ethernet, now that the interest and demand is there, do you see other competitors that may opt for OEM partnerships like you guys have right now?

[Ronnie Kenneth:]

Right. So I believe that we have a unique offering there from a switch perspective. This is a very high-port count switch, non-blocking low latency, so that by itself a very large Layer 2 switch. So by itself an Ethernet switch today is very unique in the market and the way this was built specifically to optimize for this kind of scale-out virtualized environment. And then on top of it we have the Unified Fabric Management software, the UFM, that is providing basically a fabric management tool and not a typical device management tool that you find today by most of the vendors; and it enables you not only to monitor and manage the fabric but also to provision the fabric element on the fly in a virtualized manner, in a very high abstract level. So we believe that the combination of the switch and the software are the best provision today in the market for scale-out environment. Right now, as we indicated earlier, we believe that we equip our server partners with a solution that enables them to outsmart Cisco in this kind of environment.

[Daniel Meron -- RBC Capital Markets:]

Okay. Do you have any stats or other data points that can help us figure out what win ratios when new product comes to the market, either in the Ethernet side which is I guess early right now but just from the feedback that you get from new customers, and also in the InfiniBand space how can – if you can evaluate this quantitatively in one way or the other.

[Ronnie Kenneth:]

Absolutely. I think there are some, already, references out there that we published in respect to our performance versus the competition. We will be rolling out more information on a regular basis. So stay tuned.

[Daniel Meron -- RBC Capital Markets:]

Okay. That’s great. And then you did about some I think $1 million of software this quarter, right Josh?

[Josh Siegel:]

Yes.

[Daniel Meron -- RBC Capital Markets:]

What’s the target there? I think before – and you mentioned 10% of the target, is this is 2010 target or is it 2011 target?

[Josh Siegel:]

I think we are targeting to do 5% to 10% of software in ’10 and certainly -- and then going forward be in double digits.

[Daniel Meron -- RBC Capital Markets:]

Okay. As we think about 2011 for the double-digit figure what kind of growth rate should we assume to get there? I mean, do we need to get to -- sustain the same level of growth to get there or should we expect some acceleration; how do we get to that figure?

[Josh Siegel:]

I think we are not talking about 2011 yet in guidance on 2011, but I think what’s happening is that we are just going to see especially as we move into ’10 more and more attach rate on our management software and our application acceleration middleware, particularly as we are successful in the financial verticals and the other enterprise verticals. So I think -- I don’t know if I can give a specific growth rate for ’11, but would say to keep it steady based on ’10 and going into ’11 at the same rate.

[Daniel Meron -- RBC Capital Markets:]

Okay. And then what kind of seasonality should we expect especially in the first quarter; it is typically the weakest one, there is usually a drop off in revenue. We’ve seen it over the last several years. I realize that there is not going to be the same kind of drop obviously because of improved macro-environment like last year. But what kind of rate should we expect either in the first quarter versus the fourth quarter or on a year-over-year basis. Can you just give us a little bit of a sense here?

[Josh Siegel:]

Daniel, I think we don’t want to really give guidance towards the first half of the year, and I think what I would do is I would look back over the last couple of years under normal economic conditions and get a sense of where you see H2 versus H1.

[Daniel Meron -- RBC Capital Markets:]

Okay. That’s great. Thanks so much. I appreciate it. Good luck.

[Josh Siegel:]

Thanks, Daniel.

[Ronnie Kenneth:]

Thank you.

[Operator:]

The next question is from Glenn Hanus of Needham. Please go ahead.

[Glenn Hanus -- Needham & Company:]

Good morning. Could you guys maybe -- if you just go back to the growth driver question again, you’ve talked about a number of things, switches and software, IDM, OEM, InfiniBand [ph] blade switch, Fujitsu, the China opportunity, financial services, storage, could you maybe take a cracker kind of ranking what should be the top three or four things we should really hone in on as what the key drivers on the top line this year.

[Ronnie Kenneth:]

I think that the immediate growth drivers obviously the success we see today in financial services. We have a very mature offering there that is very well differentiated. I think we have built a reputation in this market segment. So I think the straightforward growth should come from that vertical clearly. We also see software as a growth engine. Part of our software is also sold independently to a lot of financial services companies to really cut the latencies, so there is an opportunity there, and then on top of it, the management software. So after financial services, I will say the software opportunity. In terms of the channel we added Fujitsu. So I think that’s also clearly a growth engine for us in APAC, in Japan specifically. Obviously, Ethernet that we are seeing the (inaudible) for that and will clearly see revenue coming in the first half, but I think in the second half of the year Ethernet will definitely serve as a very significant revenue engine for us. Is that answering the question, Glenn?

[Glenn Hanus -- Needham & Company:]

Yes, good. Maybe to follow-up, you could talk a little bit more – any more detail or color you can provide on what you are seeing in the field and how you are really enabling HP and IBM to compete against some of Cisco’s latest offerings.

[Ronnie Kenneth:]

I have to be very careful, and I don’t want to talk on behalf of HP and IBM, of course. But we see in the marketplace in general that Cisco entering with UCS into the server domain is making server companies by and large to look for effective ways to compete with Cisco and provide a complete scale-out solution, and in that respect we are being invited for our cues and bids in a way that we did not experience in the past. So that by itself, I think, is a very positive change.

[Glenn Hanus -- Needham & Company:]

Okay. How about you’re ramping up R&D a little bit, can you give us some color there on the R&D roadmap for this year?

[Ronnie Kenneth:]

In terms of what we are working on?

[Glenn Hanus -- Needham & Company:]

Yes, what might we expect to see later this year?

[Ronnie Kenneth:]

Yes, I think that we will see some interesting things on the storage side for sure. I think the storage landscape is changing. The introducing of solid-state disk is forcing people to use wider pipes and I think we will be in a position to really play a role there. Also in respect to Clouds and storage, I think people are doing more and more file manipulation versus block manipulation, so this is about scaling out; and again another clear opportunity for us. So clearly we will see more on the storage side. And as we move forward, I think we will see Voltaire bringing in more innovation in terms of ability to scale IT environment as well as boosting application performance and effectively manage the fabric. So I think you will see more innovation along the line that we are engaged today to really further enhance our competitiveness as the leader in providing scale-out solution for virtualized datacenters.

[Glenn Hanus -- Needham & Company:]

Maybe lastly, you mentioned adding 22 partners last year. Should we see some of the smaller partners grow as a percentage of business or will it continue to be pretty concentrated among your largest OEM partners, where are you with your partner build out?

[Ronnie Kenneth:]

I think that as we are clearly shifting gear on the Ethernet front, we will add more channels and people specialized in integrating solution for scale-out datacenters. So you should expect the number of partners being added to our program continue to grow.

[Glenn Hanus -- Needham & Company:]

Okay, thank you.

[Ronnie Kenneth:]

Thanks, Glenn.

[Operator:]

(Operator instructions) There are no further questions at this time. Mr. Kenneth, would you like to make your completing statement?

[Ronnie Kenneth:]

Yes, thanks. As I mentioned, 2010 looks to be an exciting year for Voltaire, and I look forward to updating you on an ongoing basis as we continue to grow and build the company. We intend to attend various conferences throughout the year as well as hold ongoing meetings and investor events. Please keep yourself updated on our Web site and through the investor relations screen. Thank you again everyone for joining us today, and for your ongoing support and interest in our company. We look forward to hosting you again in our next call. Have a great day.

[Operator:]

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