Volt Information Sciences, Inc.
Q1 2010 Earnings Call Transcript

Published: 5 May 2010

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Voltaire’s first quarter 2010 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 May 5, 2010. I would now like to hand the call over to Mr. Ken Green of CCG Investor Relations. Mr. Green, would you like to begin?

[Ken Green:]

Thank you operator and good day to everyone. I would like to welcome all of you to Voltaire’s first quarter 2010 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 and Mr. Joshua Siegel, 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 have not received the copy of the release, please view it in the Investor Relations section or news section 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, 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 today’s earnings release. I’ll now handover the call to Mr. Ronnie Kenneth, Voltaire’s Chairman and CEO. Ronnie go ahead please.

[Ronnie Kenneth:]

Thank you, Kenny. Welcome everyone and thank you for joining us today. We’re very pleased with our results for the first quarter of 2010 more than doubling revenues over the last year to $15.6 million. We substantially reduced our operating and net loss and we are remaining on track to reach our financial goal for substantial growth in revenues as well as returning to profitability by Q4 of this year. Joshua will elaborate on the financials in a minute. In terms of other important achievements in the quarter, first we won some major deals for software and 10 Gigabit Ethernet, which are both key to our long-term growth strategy and second, we’re entering Q2 with a sizable pipeline. Now let’s move on the quarter in more detail. Financial services was again our largest vertical this quarter continuing to contribute over a 25% of our revenue. Our wholesale financial customers continues to grow and includes more than 20 investment banks, 11 exchanges and 25 global hedge funds as well as insurance companies and other financial institutions. In this vertical we enjoyed a number of repeat buyers demonstrating the satisfaction with our solution and services as well as new customers providing us with additional organic growth. These customers chose us because our solution consisting of InfiniBand or 10 Gigabit Ethernet (product) combined with our messaging acceleration software and they offer the lowest latency for higher frequency trading in the market. Even shaving off a few microseconds of latency can yield a significant competitive advantage for our financial customer. Government, our next largest vertical contributed over 15% over the business this quarter and grew 100% over Q1 of 2009 with key wins in government agencies from the UK, France, USA, Canada and China. The educational and manufacturing vertical each grew over 20% from Q1 2009 with key wins at a number of leading automotive and aerospace companies. We have been witnessing a steady uptick in growth of this manufacturing vertical over the last five quarters and we believe that we are finally seeing a recovery of this market which previously had been a strong vertical for us. We also won some major deals in the oil and gas sector and are starting to see a ramp up in demand for our unified fabric manager or UFM software in this market. This is because it allows them to improve utilization as well as optimize the performance over the last scale out deployment. In terms of go to market strategy, during the quarter there were some important strategic development with our OEM partners. IBM selected Voltaire’s InfiniBand switches for its smooth SONAS or Scale Out Network Attached Storage offering. In this solution several of the best switches are embedded within each SONAS system that IBM gives to a customer. We are already seeing some good initial business from this key development. Business from HP remained strong and we continued to achieve a steady stream of Oracle (build) to HP. We announced that Turkcell, one of Europe’s largest mobile telecommunications and technology company, they selected Voltaire’s InfiniBand switches as part of the major Oracle database consolidation project that successfully lowered their computing cost. We continue to aggressively expand our adVantage Partner Program and recruit resellers around the globe helping us to grow and diversify our customer base. During the quarter we added some international retailers in several key markets for the resale of both our InfiniBand and Ethernet product line. With regards to product, the first quarter was an exciting quarter for us with a number of new product launches; 20 gigabits per second InfiniBand is still the product of choice for commercial customers but during Q1 we started to see 40 gigabits per second InfiniBand adopted in commercial space by financial services and manufacturing customers. At the end of the quarter we began shipping two new switches platform, the Grid Director 4036E and the Grid Director 4200. The Grid Director 4036E combined 40 gigabits per second InfiniBand and Ethernet in a single compact chassis and provides ultrafast (inaudible) between InfiniBand and Ethernet network. It is important for financial services companies for the high frequency trading and for high performance storage access in markets of oil and gas. In only a short time we have had tremendous response to this product. The Grid Director 4200 is a midsize 40 gigabits per second InfiniBand switch targeted at commercial HPC space to accommodate customers of 150 servers. This product helped us penetrate new automatic and life science accounts beyond the quarter. On the software front, we continued to execute of leveraging our InfiniBand expertise and extending it into Ethernet. Our application acceleration on traffic management software offering has been the key differentiator for Voltaire in the InfiniBand markets and we continue to serve that purpose in the Ethernet market as well. During the quarter we began shipping Voltaire Messaging Accelerator software or VMA for Ethernet. This software enabled the lowest possible latency on 10 gigabit Ethernet making Ethernet fabric a viable option for high frequency trading. While our VMA on InfiniBand software will always deliver the lowest latency, the availability of VMA software on Ethernet means that the customer now has a choice of data center fabrics for high performance messaging application. We also introduced UFM 3.0 for Ethernet software. The industry (expressed) that only Ethernet management software to orchestrate end to end virtual machines connectivity. We took the strategic decision to enable both VMA for Ethernet and UFM 3.0 to also work with (inaudible) Ethernet switching platform in addition to Voltaire products. We believe this move with significantly expand the total available market opportunity for our Ethernet software offering and enable us to penetrate new customer accounts. The software also gives us foot in the door to extend our hardware customer base. We announced a new software solution for InfiniBand called Fabric Collective Accelerator or FCA software. We expect it to be a key differentiator and revenue generator for Voltaire into HPC market. In fact one customer, the national supercomputing center in Sweden experienced a seven-fold performance increase for this application using our solution. We believe that this solution sets us apart from the competition. In terms of our Ethernet platform, these are the key wins this quarter selling Vantage 8500 switches to a well known Ethernet cloud provider. We also enhanced our 10 gigabit Ethernet platform portfolio with the addition of our opartnership with Blade Network Technologies who have got 35 the Vantage 8500 and UFM software (inaudible). In addition, Voltaire’s partnership with other leading (couple) direct switch providers including HP (Poker) which has proven effective for engaging in joint sales opportunities and scaling our Ethernet business. At the (Israel) convention last week we showcased the Vantage 8500 switch as well as third-party (couple) direct switches and adaptors all being managed by our new UFM 3.0 software. The demonstration was good to show how UFM software can orchestrate mutual machine mobility and manage a fully virtualized data center across a multivendor 10 gigabit Ethernet fabric. Demonstration received a lot of (inaudible) at the show and caught the attention of several key media attendants. All in all it was an eventful quarter for Voltaire. We are seeing many positive developments in terms of our R&D product development as well as from a financial and strategic point of view and with that I would now like to turn to our CFO Joshua Siegel for the financial review, Josh?

[Joshua Siegel:]

Thank you Ronnie and hello everyone. Before I begin I would like to remind you, in order to better understand our business, our views related 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 $15.6 million representing a 102% year-over-year growth compared to the first quarter of last year and down 10% due to seasonality compared to the fourth quarter of last year. (In terms of) 10% from customers for the quarter, we’ve included HP, IBM, SGI and (inaudible) for a combined total of roughly 60% in quarter’s revenue with dozens of other channels rounding up (inaudible). Gross profit for the quarter totalled $8.2 million; that’s up 87% over that of the first quarter of 2009 and down slightly by 5% compared to last quarter. Gross margins for the quarter totalled 52.6% compared to 50% in the last quarter and 56% in the first quarter of last year. Our gross margin continues to be sensitive to our product mix while on a year-over-year basis our margins were affected by the increase in (portion) of 40 gigabit solution. On a sequential basis, we have been able to improve margins with a favorable (inaudible) 20 gigabit solution coupled with improved cost for our 40 gigabit products in the first quarter compared to the fourth quarter. Operating expenses for the quarter totaled $8.9 million compared to the $8.4 million reported in the first quarter of last year mostly due to the (inaudible) increase due to R&D and in the end we recorded a net loss of $866,000 for the quarter compared with a net loss of$5.5 million on a year-over-year basis and a net profit of $295,000 in prior quarter. We ended the quarter in net cash equivalent marketable securities and deposits of $44.7 million filled with zero debt. Our cash position remained strong and more than adequate for all our working capital needs. Net cash and equivalent at the end of December 2009 was $47.5 million. Cash used in operating (inaudible) was $1.6 million in part due to the increase in inventory. The inventory increase was primarily noted to a drastic growing demand for our products and to ensure that in the coming quarters we will completely be able to deliver products to our customers in a timely manner. Our DSO was 66 days compared to 51 days in the fourth quarter and 85 days in the first quarter of last year. Turning now to the guidance for 2010, as announced in the press release earlier today, we increased our annual revenue guidance (inaudible) by $1 million and now expect 2010 revenues to be in the range of $67 million to $70 million reflecting a growth rate of between 33% and 39% over 2009 revenues with the second half as usual being seasonally stronger than the first. We continue to anticipate the annual growth margins to be between 51% and 53% similar to 2009 with some fluctuations on a quarterly basis driven by the change in product type. We reiterate our non-GAAP operating expense forecast to increase by up to 15% over last year to be between $38 million and $39.5 million for the year. The increase will be primarily in R&D and sales and marketing in order to capitalize our current and future market opportunities that we are currently seeing. As Ronnie mentioned earlier, we continue to target non-GAAP operating profit by the fourth quarter. In summary, 2010 had started well and we are on track to meeting our financial goals. We believe that as we progress through 2010 we will improve our operating leverage (inaudible) long-term financial model, which if you (inaudible) is targeting a quarterly operating profit in the mid teens by the end of 2011. And with that I would now like to turn the call back to Ronnie for some closing comments before we move on to Q&A.

[Ronnie Kenneth:]

Thank you Josh. The bottom line is we are successfully executing against our goal; our InfiniBand switching business is strong. We continue to maintain our market share leadership position in InfiniBand switches. We have taken our Infiniband expertise and expanded it into Ethernet, developing unique hardware and software offerings that set us ahead of the competition in sales out performance, scalability, manageability and costs. We have expanded our 10 Gigabit Ethernet switch portfolio to now offer an end-to-end solution that well positions Voltaire to capitalize on the data center virtualization and cloud computing opportunities. Our software plan is also on track. We had began shifting focus on Infiniband and Ethernet that delivers unsurpassed performance and manageability to the network. The execution with our software products, and important link for our differentiation in improved margins. With all of these measures that we are building the Company for the long-term growth in 2010 and beyond. With that I would like to open the call for questions. Operator?

[Operator:]

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

[Woo Jin Ho:]

Hi, this is Woo Jin Ho for Tal Liani. Unfortunately Tal is out of the country this week. First question is regards to the March quarter results. Ronnie, how much of the strong results were related to the overall environment versus catch up spending because of the economic downturn in 2009?

[Ronnie Kenneth:]

It’s Ronnie here, thanks for the question. Its really I would say a combination of our leadership in the market, the introduction of new products, the unique value proposition we bring to the table combined with some macro aspects. So I think as we saw and its really difficult for me to be able to differentiate but overall specifically for Voltaire and for where we sit, we see a stronger demand for our product and as being in fact reflected on the growing and healthy signs that we moving forward, specifically on Infiniband, I think that in Q1 we also increased our market share. So the fundamentals for the Company are very good, that combined with probably some tailwinds from the macro environment in general as we suggested that could probably result in a strong quarterly results.

[Woo Jin Ho:]

All right, in terms of the partnership, it seems as if your OEM relationships are progressing well. Can you just talk a little bit about the partnership pipeline and how you expect that to progress through the course of 2010?

[Ronnie Kenneth:]

So overall, with this new product including Ethernet we have as we indicate that HP and IBM are carrying our products as well as others. So as the year progressing and truly be more business coming our direction from these major partnerships. In addition we are also focused on having the OEM partners also carrying our software products and I think this is also exciting and heading completely in the right direction. So they will be able to not only to sell our products, the hardware platforms but also be able to tail our software in some cases also integrated into their environment which is obviously good for us.

[Woo Jin Ho:]

Great and then one last one from me. In terms of the gross margin guidance, you’re keeping the full year gross margin guidance at just 153, you’ve already done 52.5 in the first quarter. The second half is typically better and then you’re getting more software in your diet. Why are you keeping the gross margin guidance where it is, are you just being conservative?

[Josh Siegel:]

Thanks Eugene, its Josh. We’re – our products is very on the eventually debt margin that we have and at this point that we could during the year for me to go ahead and say that we are (inaudible) for the entire year but I generally can say that based on this chart that we have in the first quarter potential upside on the gross margin.

[Woo Jin Ho:]

Great, thank you.

[Operator:]

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

[Daniel Meron:]

Thank you. Congrats on the solid execution again guys. Can you provide us with the breakdown of Ethernet progression this quarter and also how should we think about half of the year, I may have missed it earlier?

[Ronnie Kenneth:]

So we are not – Daniel thanks for participating here, its Ronnie. We are not breaking down Ethernet revenue versus Infiniband. I can say as I previously indicated on the call that we had very significant win this quarter with a leading cloud provider. So overall I can tell you that our plan for Ethernet products revenue is on track.

[Daniel Meron:]

Okay. So you still think that this going to be at least 10% of 2010 revenue at this point?

[Josh Siegel:]

I think in previous call we’ve said its going to be significant and I think that hits percentage, the 10% it maybe a good reference but I believe it at that.

[Daniel Meron:]

Okay and then the targets or the adoption rate so far, I mean what kind of feedback are you getting on these Ethernet cards at this point in time?

[Ronnie Kenneth:]

It’s nothing but encouraging as I said we are on track with our progression plan for the Company [ph] from the feedback and our ability to differentiate our solution. Remember our Ethernet operating including not only the hardware platform but also the software for application acceleration as well for project and virtualization management, all aimed to scale out environment in the next generation data center and we see a very strong consistent feedback from customers about our unique offerings which is obviously very encouraging and I would also say that the feedback we get from media and others is also very encouraging. So all in all, as I said I think all indicators are pointing at the fact that execution is on plan and we are very pleased with the results so far and direction we see ahead of us.

[Daniel Meron:]

Great. And then on then on the software side, if you can just, can you provide us with still a little bit more clarity on what’s the mix there and how should we think about it when it comes to the margins side?

[Ronnie Kenneth:]

Well first of all, I think it’s the importance to highlight that the philosophy of Voltaire has been always and will continue to be valid as we move into the Ethernet world. To be able to provide customers for choice on the hardware platform and provide people with Infiniband platform where they need the highest performance and lowest latency and 10 Gigabit Ethernet platform for people who are satisfied with 10 Gigabit Ethernet and then on top of it provide the additional value in the project management and application acceleration and the same software applies with both for the Infiniband and the Ethernet platform, but that’s the strategy of the Company, we invested heavily on that and I think its working extremely well for us in terms of improving our margins and creating differentiation for us. I believe that moving forward this will also be further enhanced as I believe that the networking technology in general is heading to a more and more value on the software side and that has been compared a process from day one. And what we have discussed earlier today is the availability of our Ethernet software not only for our products, but also extending, for example, the UFM software to manage other switches from third parties such as HP and others and as well as providing our application acceleration throughout these other switches, which means that we basically increasing our available market and increasing our opportunity moving forward. And again all of this is clearly heading in the right direction for us.

[Daniel Meron:]

Okay, great. And then just moving on the cash flow slide, Josh, can you give us a sense on how we should think about the cash flow for the balance of year? Are you guys are investing in the growth side right now? When do you think that you will see those returns coming when it comes to the cash flow?

[Josh Siegel:]

As this has been in the last couple of years, our cash flow has been very close to P&L and I think that’s going to be case going forward. We talked about profitability, our operating profit, already by the fourth quarter. So that’s basically why the cash may lag behind or be – and advancing by a quarter or so, it should be pretty close to the P&L.

[Operator:]

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

[Glenn Hanus:]

Good morning, guys. Maybe you could sort of summarize, I mean, obviously a good results and lots of positive factors. Could you maybe rank of how you are kind of seeing the growth drivers through the year? In the past you have talked about software and should IBM, Fujitsu the opportunity in China. Could you maybe take another crack at where you are seeing the most growth potential and what’s driving particularly into the second half?

[Ronnie Kenneth:]

Well, I think that as I indicated before, Glenn, I think we are participating it from here. We clearly see a continuous growth in terms of demand for our product, hardware and software in financial services. We see manufacturing coming back from a low and becoming substantial for us both the traditional verticals that we enjoyed growth and including at this time manufacturing and government and education are coming back clearly on the InfiniBand side. And from the low-end of these markets, also representing a very strong opportunity for our Ethernet product. In terms of software, clearly, we think our expectations also moving forward on the pipe that’s also another clear and growth engine that is materializing, IBM as a partner. SONAS is clearly another growth driver. And we continue and see China or I would say China and Asia Pacific in general providing us with a hefty growth and contribution for the business. Our OEM, Fujitsu is playing well as well as some very nice big installations, specifically in China. Ethernet is also contributing to a growth of our pipeline and that combines with the software for Ethernet. And the trend we see toward cloud, all are contributing to a healthy pipe moving forward.

[Glenn Hanus:]

And could you maybe touch on the R&D roadmap here for the balance of the year?

[Ronnie Kenneth:]

I am not sure exactly what you indicate there. When the right time comes, we will announce. I am sure some new exciting products also on the hardware side as well on the software side, but clearly stay tuned there and we will have some exciting news as we move forward. And – but the color on the R&D expenses I think has been disclosed by Josh.

[Glenn Hanus:]

Okay, thank you.

[Operator:]

(Operator Instructions). The next question is from Rajesh Ghai of Thinkequity. Please go ahead. Sir, do you have a question?

[Rajesh Ghai:]

Yes, and sorry, I was on mute. Thanks for taking the question. You talked about strong demand trends in the national services and some other verticals. Just wanted to understand what’s best (inaudible) cases are the people looking at to use your products? And do the strengths seem to be helping InfiniBand more than Ethernet? And does that mean that InfiniBand adoption rate appears to be broadening?

[Ronnie Kenneth:]

Clearly in financial services and specifically in high-frequency trading, people look for low latency. Our combination of hardware and software product are guaranteeing people to get the lowest latency available. So I would say that combined with the reliability and improvement of our product in a critical mission environment is a key driver for people to adopt these kind of technologies, but we clearly see a nice uptick of our InfiniBand product in the SSI. And they are in fact other people in the financial services, market segments, where still would do high-frequency trading, but 10-gigabit Ethernet combines our application acceleration software would be good enough and that represents additional market opportunity for us. So it’s both on InfiniBand and Ethernet.

[Rajesh Ghai:]

Okay, great. And if you look at the full year right now, what are your stands at this point of time? Do you see more growth coming from InfiniBand or you kind of see Ethernet also growing at the same rate as InfiniBand for you?

[Ronnie Kenneth:]

Since we have started selling our Ethernet products about a couple of months, then I would maybe expect Ethernet ramping to be more aggressive. But in absolute numbers, probably InfiniBand will supersede. But remember though that Ethernet is representing a bigger total available market. So over time, this would be a great opportunity for us to pursue and I think we are positioned extremely well to capitalize on that.

[Rajesh Ghai:]

Okay. And last question for me. Could you provide us with a little bit more color on your partnership with BLADE Network, considering that they are also another company that does 10-gig Ethernet switches, and I am wondering what the rationale is for that.

[Ronnie Kenneth:]

Yes. So when we are going after a large-scale virtualized data centers or cloud environment, there are situation where people want to deploy a technology where our core switches and UFM is the foundation of that solution. And then they would like to add in that case what’s known as top-of-the-rack switches in specific technology. And in these cases, our switches and fabric management software works well with third-party switches and managing them as part of the software. And that is exactly the nature of our partnership with people such as BLADE Network or HP.

[Rajesh Ghai:]

Thank you.

[Ronnie Kenneth:]

Thank you.

[Operator:]

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

[Ronnie Kenneth:]

Well, thanks everyone for joining just today and for ongoing support and interest in our company. In the coming weeks, we will be presenting at the Oppenheimer Conference in Tel Aviv, the JPMorgan Tech Conference in Boston, the Bank of America Merrill Lynch Small and Mid Cap Conference in New York, as well as the RBC Tech Conference in New York. We will also be meeting with the investors in our traditional road show on both the west and east coast and we do look forward to meeting you on the road and at the conferences. We will look forward to hosting you again in our next call and have a good day.

[Operator:]

Thank you. This concludes Voltaire’s first quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect. Copyright policy