Volt Information Sciences, Inc.
Q3 2010 Earnings Call Transcript

Published: 1 Nov 2010

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Voltaire’s Q3 2010 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded November 1, 2010. I would now like to hand over the call to Mr. Kenny Green of CCG Investor Relations. Mr. Green, would you like to begin?

[Kenny Green:]

Thank you, operator, and good day to everyone. I would like to welcome all of you to Voltaire’s Q3 2010 results conference call and I’d like to thank Voltaire’s management for hosting this call. With us on the line today are Mr. Ronnie Kenneth, Chairman and CEO, and Mr. Joshua Siegel, CFO. 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 press release also contains this call. If you have not received a copy of the release please view it in the investor relations 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 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 investors’ 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 hand the call over to Mr. Ronnie Kenneth, Voltaire’s Chairman and CEO. Ronnie?

[Ronnie Kenneth:]

Thank you, Kenny. Good day, everyone, and thank you for joining us today for the Q3 2010 earnings conference call. On the call today I will highlight our Q3 2010 results and achievements. I will then turn the call over to Joe Siegel, our CFO, who will discuss the financial results in more detail. After that we will be happy to take your questions. I’m especially pleased with our business performance and strong financial results this quarter. We are now at the inflection point and up until now we have achieved everything we have set out to do. As was our stated goal over the past year, we returned to operating profitability. Looking ahead, we have some very promising growth engines with significant potential to look forward to, and already they are beginning to provide tangible upside to our results. We returned to operating profitability without having to sacrifice our top line growth. We grew revenues 25% over the Q3 of last year. Also, we generated approximately $3.6 million in positive operating cash flows, increasing our net cash position to a healthy $44.7 million. Our business is built on a much stronger foundation than it was only two years ago. Apart from InfiniBand, we now have the growth engines of Ethernet as well as the software offerings supporting our products and providing us with major competitive advantage. I would now like to focus on some of the positive trends we saw in our business during the quarter. In particular throughout this quarter was the traction we are gaining in the market for our software products. While our switching platforms remain central to our offering, Voltaire’s key differentiation and added value is through our software. Q3 was a record quarter for software. It demonstrates we are very much on the right track. It was almost 10% of Voltaire’s business in the quarter. Our application acceleration and unified fabric manager software truly set Voltaire apart from the competition and enabled us to deliver unique value to our customers. (Inaudible) licenses were at the record high and increased substantially over the last quarter, with the majority of sales coming from the energy and financial services verticals, where customers need management for hundreds and even thousands of servers. The environments keep scaling further out, becoming more complex, so they need UFM to remain efficient and competitive. Financial services is where our application acceleration software shines and demonstrates its edge. This business is now expanding beyond the US into Europe and Asia. During the quarter two of our European exchange customers went live with our hardware and software solutions. As we expand our business in this region, we believe that the hedge funds and investment banks will soon follow suit. These represent a significant opportunity for us in the region. During the quarter we began shipping Voltaire’s storage accelerator, or VSA software. We are selling this product to customers who need to improve the performance of applications that require rapid data access, such as Cloud and virtualized data center environments. Lastly, on the software front, our fabric collective accelerator, or FCA, continues to gain momentum. As we announced a few days ago, HP recently completed a series of benchmarks, and FCA delivered between 10% to 30% performance improvement. Just as a point of reference, here is a quote from HP’s technical lead on the benchmarks. “Some of us spend our lives just trying to get 3% to 4% more performance from the applications, and here we’re talking about 10% to 30% improvement using FCA.” So these results for FCA are significant and a very tangible differentiation for our switching platforms, making them attractive for large scale HPC classes. Now to update you on the other parts of our business. We continue to maintain our market share leadership in the InfiniBand switching market, led by the grid direct to modular and edge switches. We enjoyed large HPC wins including CEA, the University of Tokyo, and Los Alamos National Laboratory. We have a strong level of repeat business with key oil and gas accounts and also acquired new customers in the financial space, including two major stock exchanges in Western Europe and the leading online brokerage firm in the US. Our Ethernet business continues to grow as well. We are competing and winning in the markets we anticipated

[Josh Siegel:]

Thank you, Ronnie, and hello everyone. Before I begin I would like to remind you that 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 $18.1 million, up just over 9% sequentially and up over 25% compared with $14.5 million in Q3 last year. HP and IBM were each 10% customers, or 10% plus customers for the quarter, in addition to a North American reseller. With the growth of our Advantage program, which Ronnie mentioned earlier, we continue to diversify our customer base. Gross profit for the quarter totaled $9.4 million. That’s up 11% compared to the Q2 and up 27% year over year on higher revenues and expanded margins. Gross margin for the quarter increased to 51.9% compared to 51.2% in Q2 and 51.1% in the Q3 last year. The increase in the quarter was due to the product mix including a higher portion of software sales. Operating expenses for the quarter totaled $9.3 million. That’s roughly flat with the previous quarter and up as planned from $8.3 million reported in the Q3 last year. We proved to be very efficient in our operations, allowing us to fully leverage our revenue growth and return to an operating profit for the quarter of $101,000. This is compared to the operating loss of $835,000 last quarter and the $895,000 loss in the Q3 of 2009. We also substantially reduced our net losses to a reported $49,000, or less than a 0.5₵ loss per share, compared to the net loss of $882,000 or $0.04 loss per share in the Q2 of this year, or $949,000 or $0.05 loss per share in the Q3 of 2009. With regard to our balance sheet, we generated a positive $3.6 million in cash flow during the quarter, raising our net cash equivalents, (inaudible) securities and deposits of $44.7 million and we still have zero debt as of September 30th. Our inventory in the quarter increased by $2.3 million to $10.6 million compared with that of last quarter. Given our strong demand and growing pipeline and lead times for components which are long and increasing, we remain comfortable with these inventory levels in order to maintain the high level of service and delivery that our customers expect from us. Our DSOs were 48 days compared to 64 days in the prior quarter, at the lower end of our usual range of 50 to 75 days. Finally, with regard to our guidance, we expect full year revenues to come in at the top end of our guidance range which is as we provided earlier in the year to be between $67 million to $70 million. We expect our gross margin to average around the 52% level for the year. And finally, given our ability to maintain tight control over our expenses while still generating revenue growth, we are able to lower our guidance for full year expenses to between $37 million and $37.5 million for the year. Earlier this year we guided for expenses between $38 million and $39.5 million so we managed to reduce our operating costs by over $1 million while maintaining the revenue growth rate. Finally our increased revenues and lower expense level provided us with the confidence to reiterate our expectations for continued operating profit for the Q3. And with that I would now like to turn the call back over to Ronnie for some closing comments before we move on to the Q&A.

[Ronnie Kenneth:]

Thank you, Josh. In summary, we are pleased with our business performance and strong financial results for the Q3. Specifically, revenue continues to grow nicely and we generated a significant amount of cash in the quarter. Just as importantly we achieved our goal of bringing the business back to operating profitability, something we believe we can sustain going forward. Moreover, we are delighted with the performance of our software sales in the quarter. In parallel we continue to grow and strengthen our foundation for Ethernet business, adding four major distributors and ten more resellers to our roster in the quarter. Ethernet and software are Voltaire’s long-term growth engines, and we are seeing strong traction in the market proving that our strategy is working. Looking ahead, our flight plan is strong, having grown by around 70% in the past three quarters. We expect it to continue to grow quarter to quarter and include a healthy percentage of Ethernet and software deals in the mix. All this makes me increasingly optimistic about our future. And with that, I would like to open the call for questions. 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 Tal Liani of Bank of America/Merrill Lynch. Please go ahead

[Tal Liani:]

Hi, this is (inaudible) for Tal Liani. Ronnie, just a question on seasonality as it relates to your growing exposure to Ethernet and software. How should we think about seasonality going forward given the growth of those two new businesses?

[Ronnie Kenneth:]

I would say we really see strong traction for both software and internet, however moving forward and I think as we have done so far we are not breaking down the percentage of business that is coming from these two growth engines. But I would say that we clearly see a strong growth moving forward.

[Tal Liani:]

Well, I guess the crux of my question is typically the first half is weaker than the second half, or the second half is much stronger than the first half. As we think about Voltaire in the future, should we expect more normalized seasonality as other companies do, or should we think about Voltaire similarly going forward as the first half being weaker than the second half?

[Josh Siegel:]

This is Josh. I think overall when you look at most (inaudible) companies that we kind of fall in that bucket. There always will be some seasonality towards the second half with the Q3 US budget year and also the Q4 enterprise budget year. So I think still in some respects there will be some seasonality with top-heaviness in the second half, but you are right to say that as we get more and more into Ethernet and also into software and across more enterprises and verticals, that the seasonality should soften going forward.

[Tal Liani:]

Great. Secondly in terms of the InfiniBand business, could you provide a little bit more color in terms of the growth in the quarter as well as the growth expectations going forward?

[Ronnie Kenneth:]

So I would say that demand for the InifiBand products remains very strong for us. The pipeline is growing as we just indicated, and we clearly maintain our market leadership in respect to our standard switches. So all in all I think it’s a healthy business for us and anticipate that will remain on the same pace moving forward.

[Tal Liani:]

Got it. And lastly, one on gross margins. I believe, Josh, you said that you’re anticipating 52% gross margins for the Q4. Could you help reconcile that comment versus your growing exposure again to your Ethernet and software businesses, which typically command a higher gross margin?

[Josh Siegel:]

Yeah. First just to make it clear I said that we would have for the year approximately 52% although we are relatively close to that now for the first nine months. I think at this point that’s the guidance that I’ve been giving all the way along from the beginning of the year. Given the fact that our product mix still is volatile and jumps around at this point I prefer not to change that guidance and leave it where it’s been all year. Where we are getting more traction on the software/Ethernet which is definitely in our higher-margin product mix, at the same time there’s also pricing pressures on the InfiniBand business. So overall we are increasing our gross margins, we did that from Q2 to Q3 by almost 1%, and we anticipate keeping our gross margins strong and growing them through next year.

[Tal Liani:]

Thank you.

[Operator:]

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

[Daniel Meron:]

Hey, Ronnie and Josh. Congrats on the strong numbers here, good work. First question

[Ronnie Kenneth:]

So obviously we are not providing here a forward-looking statement into 2011. I believe we will provide you with guidance for 2011 when we do the Q4 earnings call. However, what I would say with respect to Ethernet and software, first of all, is that we believe we have a full portfolio of products for both Ethernet and software that can enable us to really capitalize on the opportunity ahead of us. And I think it’s a matter of sales execution, and we take all the necessary steps needed in terms of channels and channel expansion to move forward and grow the business there. So I’m very optimistic about it and I think we are heading in the right direction as has been evident by the growing slice that we have.

[Daniel Meron:]

Okay, great. And then my second question is relating, I think you touched upon this earlier but if you could provide us with a little more detail on where you think we are with adoption of InfiniBand or high-end Ethernet in the commercial segment. Do you think we’re really at the inception point when it comes to commercial deployments versus HPC, which is obviously an early adopter of these technologies? Where do you think we are? What are the milestones we should continue to look at as we look for the adoption of your solutions in the commercial verticals? Thanks.

[Ronnie Kenneth:]

Right. So first of all it’s doing quite well in the commercial verticals that are quite large, like oil and gas and manufacturing and financial services. I think that you see Voltaire with clear leadership over there by far. And the reason is I think it’s based on the reliability of our hardware platform as well as the specific software packages that we have for the different verticals. So that’s a general statement. Now specifically, if you look historically you’ll see that the largest vertical for Voltaire when we started a couple of years ago was in government and higher education. Today, financial services, which is a pure commercial vertical, is the largest for us and we continue to grow as we move forward. Just recently, as I said before, we won two major exchanges in the UK and we expect now that to grow very fast as banks and hedge funds are connecting to these electronic exchanges. And that represents a nice expansion beyond what we see today in the US. So clearly we see that our strategy with reliability and software packages are playing extremely well in the commercial verticals, and especially financial services as we grow beyond the US.

[Daniel Meron:]

Okay. Thank you, Ronnie. And then the last one for me. We’ve seen a lot of changes in the landscape of data centers with a bunch of acquisitions. How does that impact Voltaire as you look at competitive dynamics or at partnerships going forward from here?

[Ronnie Kenneth:]

I think that when we look at what’s happening right now in the competitive landscape, it represents an opportunity for us. We believe that our scale out technology, the switches and the fabric management software are continuing to serve extremely well as a key differentiator for us in the marketplace. So right now all the dynamics that are going on in the market, we view that as an opportunity for ourselves.

[Daniel Meron:]

Okay, very good. Thank you.

[Operator:]

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

[Glenn Hanus:]

Good morning, guys, and congrats on your results. On the competitive front, maybe you could drill down a little bit further and talk about whether you’re seeing anything. Brocade had their VCS announcement, Juniper’s Stratus project; and then on the InfiniBand side MelonAux, QLogic and work in there maybe Oracle, any thoughts about Oracle’s investment in MelonAux?

[Ronnie Kenneth:]

Right. On the Ethernet front and specifically relative to Brocade and Juniper, I believe they both have a strategy and vision into the data center. We don’t, where we specifically compete today in the scale out environments, we don’t see them that often in this segment of the market. In respect to QLogic and MelonAux, as I said based on the numbers that we have in front of us, we believe that we continue to be the market leader for the extent of switches in the InfiniBand market. Our business continues to grow there so I believe that this is basically leading to a conclusion that our winning ratio on the InfiniBand front remains as high as it used to be and will continue and that will fuel the growth of our InfiniBand business moving forward. In respect to your question, Glenn, on Oracle, I believe their move was to solidify their relationship with MelonAux as a silicon provider, and we are a systems company so I don’t see that move specifically impacting our ability to sell InfiniBand systems in the marketplace.

[Glenn Hanus:]

And any thoughts around IBM’s acquisition of BNT? I think you had some relationship there with BNT. Just kind of whatever thoughts you can share there regarding your recent relationship and how that should evolve.

[Ronnie Kenneth:]

Sure, Glenn. We have been partners with BNT, so when providing a scale out where we have given Ethernet solutions to customers, we have been utilizing their top of the rack switch as well as their modular switches and that’s interconnect managed by our Voltaire USM fabric management software, and this way providing customers with a complete solution. Now that BNT’s becoming part of IBM I don’t see any reason whatsoever why this partnership cannot in fact grow as we are more kind of a tight-knit couple, not just with BNT but also with IBM’s sales force on that. So that’s why we view this as an opportunity for ourselves, and also keep in mind that IBM is already carrying our modular switch in their price list, so the integration has really become easier. And bottom line, we view this as a positive for Voltaire.

[Glenn Hanus:]

On the reseller front, you mentioned a few developments there. Can you just talk about how you feel, how far along you’ve come, what work’s left to be done that’s a key aspect for your Ethernet rollout? And you mentioned it’s a sales execution challenge. You feel strong on the product front. Talk more about your development there, the reseller channel, and how far you’ve come and what you think the major things are you need to execute on here over the next couple quarters.

[Ronnie Kenneth:]

Right. So thanks, Glenn, for the question. Obviously our Ethernet represents an opportunity for us to expand the channels as with InfiniBand traditionally

[Glenn Hanus:]

And maybe lastly you mentioned lower operating costs. How have you been achieving that? I know R&D leverage is a key aspect for your operating model going forward, so maybe just talk about where you’ve trimmed on the OPEX side and how we should think about that going forward.

[Josh Siegel:]

Yeah thanks, Glenn, this is Josh. So in fact while we’ve trimmed we’ve trimmed it on a leverage basis. We continue to increase on a nominal dollar amount on R&D and on sales and marketing as compared to last year. So we really are continuing to invest more money into those areas as they’re critical to keeping new products out there, and also on the sales and marketing to be able to staff and bring to market our new products. But as you can see we were able to really leverage the model over the course of the last three quarters by about 5%, and particularly in R&D we’ve gone down from 29% in the Q1 to under 26% in the Q3. One of the things I can point out in terms of how we’ve been able to do that, particularly on the R&D side, is one of the things we’ve been talking about for a year as we continue to bring software into the mix, our software and R&D has always been developed from the get go to be portable, both for InfiniBand and for Ethernet. So we’ve really been able to get synergy out of that product development on the R&D side and we’re starting to feel that now. With regard to sales and marketing, that’s a matter of just being able to create efficiencies in the system. And we’re looking at every avenue to do that, and as the company grows its revenue we’re able to take advantage more and more of lower cost structures. So our message is that this quarter we hit operating profit as we targeted for this year, and as we look forward we expect to be able to continue to leverage the bottom line off of the revenue growth.

[Glenn Hanus:]

Thank you.

[Ronnie Kenneth:]

You’re welcome, Glenn.

[Operator:]

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

[Ronnie Kenneth:]

Thank you everyone for joining us today and for your ongoing support and interest in the company. We will be presenting at the Marymount Conference in New York in two weeks’ time, Tuesday, November 16th, as well as holding an investor luncheon around that time. If you would like to meet us, please contact our IR team. We look forward to hosting you again on our next call. Have a good day.

[Operator:]

Thank you. This concludes Voltaire’s Q3 2010 results conference call. Thank you for your participation. You may go ahead and disconnect. Copyright policy