Actel Corporation, Inc. Q4 2008 Earnings Call

Feb. 3.09 | About: Actel Corp. (ACTL)

Actel Corporation, Inc. (ACTL) Q4 2008 Earnings Call February 3, 2009 5:00 PM ET

Executives

John East - President and Chief Executive Officer

Dirk Sodestrom - Interim Chief Financial Officer

Analysts

Neil Gagnon - Gagnon Securities, LLC

Mike Radcliff - Global Crown Capital

Richard Shannon - Northland Securities

Operator

Welcome to the Actel Corporation's conference call regarding its results for the fourth quarter of 2008. A replay of this call will be available for one week at 1800-642-1687, Conference ID number 80684720. You can also access this call on Thomson CCBN through a link on Actel's website at www.actel.com. This call is being recorded.

To ensure that the question-and-answer session proceeds in an orderly manner, participants will be returned to the queue after one question and one follow-up question.

All forward-looking statements during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in the forward-looking statements. Information concerning factors that could cause actual results to differ materially from those projected in the forward-looking statements are contained in Actel's most recent Forms 10-Q, which is available on Actel's website and will be provided to you free of charge upon request. At this time, all parties have been placed on a listen-only mode. The floor will be opened for questions and comments following the presentation.

It is my pleasure to hand the floor over to your host, Mr. John East, President of Actel.

John East

Thank you, Rachel and thanks for joining us today. Before we do anything else, I would like to say just a few words about Jon Anderson. As you know, Jon passed away three days before Christmas. Besides being a great CFO, Jon was also a great husband, a great father and a great friend. We will figure out a way to get our books closed here at Actel but we will never figure out a way to replace Jon. He was special.

At the time of Jon's death, our controller was Dirk Sodestrom. Dirk has been with Actel for about two years now. In the prior life, he was the CFO of an international staffing company with sales in the neighborhood of $600 million a year. Dirk will be acting in the CFO role while we figure out what we are going to do in the long run. I cannot imagine a worst time for something like this to happen from a business standpoint, but Dirk has done a heck of a job of pulling things together for us.

Dirk, will you please take us to the financials?

Dirk Sodestrom

Thanks, John. Before I talk about the financial details for the fourth quarter, let me tell you how I will provide financial information regarding the first quarter of 2009. We will give guidance on the call today. The guidance will be the Company's targets for the first quarter of 2009 on sales, gross margin, operating spending, other income, tax provision and share account. Next, we expect to provide a financial update in early March. In the absence of a material change, this will be the only financial guidance the Company will give during the quarter. A replay of this call will be made available. Please access the Company's website for the replay information.

Now to the financials, fourth quarter sales were $52.8 million, which was towards the high end of revenue guidance for the quarter. This represented an increase of 2% in comparison with the same quarter one year ago and a decrease of 1% compared with last quarter. For fiscal year 2008, sales were $218.4 million, an increase of 11% compared with 2007. Revenue from flash technology based products was 28% compared with 29% last quarter.

By market segment, 10% of revenue was in communications compared with 9% last quarter. Aerospace and military was 41% compared with 36% in the previous quarter. Industrial was 36%, unchanged from last quarter and consumer was 13% of revenue compared with 19% last quarter.

Market segment numbers are based on our estimate of end uses by our customers. Geographically, 54% of the revenue was in North America compared with 49% last quarter, 25% in Europe compared with 28% in the previous quarter and 21% in Pan-Asia compared with 26% last quarter. By channel, 70% of the revenue was through distribution compared with 72% last quarter, and 30% through OEM compared with 28% in the previous quarter.

Overall, unit shipments increased by 1% compared with last quarter and ASP decreased 1%. Net end customer bookings decreased compared with the previous quarter. Overall, book-to-bill was well below one. Total backlog is lower entering the first quarter of 2009 than it was entering the fourth quarter of 2008. Gross margin in the fourth quarter was 59% compared with 58% in the third quarter.

Now, I will talk about operating spending, net income and earnings per share on a non-GAAP basis. Non-GAAP calculations exclude stock based compensation charges, adjustments to deferred tax valuation allowances, acquisition related charges and other non-recurring items. A reconciliation of non-GAAP to GAAP statement of operations is included in our earnings release which is posted in the press room of the Company's website.

Operating spending for the quarter was $27.9 million or 53% of revenue as compared with $29.5 million or 56% of revenue in the third quarter. The spending does not include $2.3 million of stock based compensation charges during the fourth quarter or $2.4 million of cost associated with the reduction in force that was implemented during the quarter.

R&D spending was $13.5 million or 26% of revenue compared with $15.4 million or 29% of revenue in the third quarter. SG&A was $14.3 million or 27% of revenue compared with $14.1 million or 27% of revenue in the third quarter. Other income was $1.3 million, unchanged from last quarter. This does not include a $0.9 million impairment charge on investments that were taken during the third quarter.

Non GAAP net income was $3.3 million compared with $1.9 million last quarter. Diluted share count was 25.9 million. This all resulted in earnings per share on a non-GAAP basis of $0.13 compared with $0.07 last quarter. Not included in these numbers was the $0.7 million charge associated with the acquisition of Pigeon Point Systems and a $2 million fourth quarter charge for the reduction in force. Non GAAP net income also does not include a non cash charge of $13.3 million to increase the Company's valuation allowance associated with its deferred income tax assets. The increase in the valuation allowance results from uncertainties surrounding the nature and timing of the taxable income required to realize certain tax credits and net operating loss carry forwards.

Cash, cash equivalents and investments were $146.6 million at the end of the quarter, an increase of $1.9 million from the end of the previous quarter.

Accounts receivable decreased sequentially by $18 million to $11.6 million. DSO decreased by 31 days to 20 days. Net inventory increased sequentially by $4.4 million. Net days of inventory increased by 27 days to 256 when compared with the third quarter. Capital expenditures were $2.7 million during the quarter and we recorded $3.4 million of depreciation. Headcount decreased sequentially by 64 or 10% to 550 as the result of cost reduction initiatives taken during the fourth quarter. These initial actions were taken in response to immediate economic issues that were affecting the Company.

Later in the call, John East will be discussing additional cost reductions steps that the Company will be taking in response to its changing corporate philosophy.

Now I will give the financial outlook for the first quarter of 2009. Taking into consideration all of the information currently known by us, we are projecting revenue to be down 10% to 15% sequentially. Gross margin is expected to be approximately 59% to 60%. Operating spending is anticipated to come in at about $29 million which does not include a non-cash charge for equity compensation of $1.6 million. This operating expense outlook takes into consideration seasonal increases in payroll taxes, timing issues associated with research and development work and higher legal expenses.

As John East will discuss later in the cal, we expect to see downward trends in operating expenses during the remainder of 2009 and into 2010. Other income will be around $2 million. The tax rate for the quarter is expected to be approximately 30%. Fully diluted share count is expected to be 26.3 million shares.

This guidance for operational expenses does not include the ongoing amortization of intangibles and deferred compensation for the Pigeon Point Systems acquisition of approximately $570,000. The guidance also does not include any restructuring charges that maybe incurred during the first quarter of 2009 in connection with the cost reduction measures.

Thanks and now I would like to turn the call back to John.

John East

Thanks Dirk. First, let us talk about Q4. As Dirk told you, our sales were up 2% from a year ago and down 1% from the prior quarter. Now that the dust has settled on the year, we know that we once again gained market share in a programmable space. 2008 was the second consecutive year in which we gained share and the fact that we gained share on each and every one of our competitors, my sense is that we will be able to do it again in 2009 although there will be a lot water that we will have to flow over the dam before we feel secure about that.

Now, let us move on to Q1. As Dirk told you, the book-to-bill was well below one and we consumed back log. The net new order bookings so far this quarter have been what I would call mediocre. They are definitely not robust, but they are not a disaster either. My guess is the bookings to this quarter will be better than last quarter. However as we have already said, our back log is down from last quarter so on balance, we are going to call Q1 revenue at somewhere between down 10% and down 15%. To make that number, we will need turns in the neighborhood of 30% which is a reasonable range for us.

Normally, right now I would begin the discussion of our products and product strategies but I am not going to do that. Instead, I want to give you a sense of what steps we are taking in the face of the economic environment that we are all facing and then I want to tell you about our new philosophy. Specifically, I want to tell you about how we are going to run this business more profitably.

First, let us take a step back and review a little of our history. Historically, we were based exclusively on any of these products. In those days, we typically run in the neighborhood of 45 points of OpEx but eventually we began to see cracks in the plaster. With the exception of satellite products, it was getting harder and harder to win designs with any of these products. In general, customers want a reprogrammable solution and we did not have it.

Now, it is not unusual to have to reinvent yourself. It will happen to most companies sooner or later. My problem was that I have seen too many companies bet the form on a single new approach only to find out there was not there to fan out and the consequences for that are dire. I thought that we needed a multifaceted approach so we actually increased our rate of investment in order to find a new raison d’exister, the reason to exist in French. That caused our operating expenses to rise to around the 60% level.

During 1998 through 2002 timeframe, we worked on four different approaches to reinventing ourselves. We worked on low cost SRAM FPGAs on bridge FPGAs, [Veracore] embeddable FPGAs and flash but by the time that dust had settled and the market had spoken which shows flash FPGAs and we shut the other three approaches. At the time, you might have expected the operating expenses to fall back to the 45% region, they did not. Instead, we kept our investment right the same and came out with the strong portfolio of flash products that include super low power and mix signal products.

In doing so, I think we have succeeded in reinventing ourselves and being recognized accordingly. I think that the world in general views us as the stock power leader and a mix signal leader in the programmable space and that is good. But the world also sees that we are not making much money and the world does not like that. Our plan to achieve better profitability was to grow sales while we held spending relatively flat. It has not happen.

Now, let us fast forward and look at some recent history. We spent five or six months from around December of 2007 through maybe May of 2008. I think we have done it. Orders were pouring and our back log was growing by leaps and bounds and our sales force was more bullish than I have ever seen them be and then it started to turn and that brings us up to today. Today there are lots of good things going on at Actel. We have outgrown every one of our competitors for two consecutive years and I think we have a great shot at doing so again in 2009. We are being given a multitude of Product of the Year awards. We have continued to be profitable on a pro forma basis and as I just said, I think we are being recognized as being the leaders in two areas that I think we are going to be increasingly important as time passes.

But we do not see big growth on the horizon until the economy rights itself and it is not just clear when that is going to happen in maybe quite a while. We are in business to make money and since rapid growth in the near future is far from the sure bet, we think an adjustment in philosophy is appropriate. So instead of growing into our expenses, we are going to reduce them. Accordingly, we have now resolved to earn 15 points of pro forma operating margin on sales in the neighborhood of our last couple of quarters. By pro forma, I mean that I am excluding stock option expenses, restructuring cost and the other thing that Dirk usually excludes.

Now, we have done the math and determined that this cause for cutting $6.5 million from our quarterly spending using Q3 of 2008 as the baseline. So that is what we are going to do. We started in October. We are going to do another cut this quarter but we will not be finished for a year or so. Why not? Because we want to do this right, we want to do this in a measured and thoughtful fashion. We are not going to approach it in a [will know] fashion. So, how can you model this? Well that is a good question. As you know, we have already made some of the cuts by virtue of the risk that we had in October and some other actions that we took at that time.

Dirk has just told you about some changes that we expect this quarter. In light of that, my starting point coming up with a model would be to assume that the remaining reductions are made linearly starting with the Q1 2009 OpEx estimates that Dirk just gave you and ending in Q3 2010 at a rate commensurate with a $6.5 million cut and quarterly spending from a baseline of our actual spending in Q3 2008.

Now, if all the cuts were below the line, you could simply cut your operating spending models by $6.5 million. However that is not the case. Some of the reductions will be above the line and some below. That means that some of the improvements will appear in direct margin. The way we see it today, the $6.5 million of cuts will break down to roughly $5.5 million in operating expenses and $1 million in lower manufacturing costs which you would see as an improvement in direct margins.

So, all has been sort of complicated. Let us do the math together. Looking at Q3 2008 OpEx, you will see that we spent about $29.5 million, subtract the $5.5 million OpEx reduction that I just mentioned and you will get $24 million. We are projecting that Q3 2010 OpEx spending will be $24 million or less. Moving on to direct margin, you will see that we run 58% in Q3 2008. By saving $1 million, we expect that to translate to 2 percentage points of improvement in direct margin. In other words, we expect the margin to come in at 60% or higher, assuming the same mix.

With respect to the total, we mean these numbers to be firm. With respect to the quarter by quarter timing, the estimates had made it rough. My hope is that we able to do it faster than that but only time will tell. In any event however, however the timing plays out; we are absolutely committed to the overall savings. We absolutely plan to make that $6.5 million per quarter happen.

So, I will wrap up by summarizing the change in our philosophy. Our old philosophy was first, invest in order to reinvent our self; second, grow sales as fast as we could and third, make money. We think that we have been successful in reinventing ourselves and that now is appropriate to adopt the new philosophy and the new philosophy is first, make a healthy profit and second, grow sales.

That concludes my formal remarks. Rachel, would you please open the line for questions? Rachel, are you there?

Question-And-Answer Session

Operator

Thank you so much, sir. (Operator instruction) Your first question comes from the line of Neil Gagnon - Gagnon Securities, LLC.

Neil Gagnon - Gagnon Securities, LLC

On the cut in OpEx, can you give us an idea where the bigger chunks are coming from?

John East

Sure. At the top level, I expect about 60% to come from R&D and about 40% from SG&A. The SG&A by the way will mostly not come out of the sales. It will mostly come out of the other parts of SG&A. More specifically, we are tackling this by, first of all, prioritizing and/or focusing our new product development so that a year from now, we would have fewer new product developments going forward and therefore we are spending less. So that would be the first thing we are doing.

Second thing we are doing is being smarter about where we do the work and then the third is what I will refer to as good old-fashioned cost cutting which is line by line, look at what we are spending and how we can reduce it. You want to follow on, Neil?

Neil Gagnon - Gagnon Securities, LLC

Yes, I do. This implies some housekeeping question that your new flash product program is maturing up at this point that you can have the growth that will lead because a lot of other parts are falling off.

John East

Well that is my thinking. Obviously when you go through this, you want to do lots of cuts because it makes the short-term profits better. But on the other hand, you do not want to do any damage to the long term. We spent a lot of time looking at this, Neil, a lot of time looking at it with a lot of different help. The numbers we put on the table, I think, are the sweet spot. I think they will allow us to make, what I view, as a substantial cut to spending without mortgaging the future and then you would ask - Why all of a sudden we think we can do that? A few years back we were trying to reinvent our self. It is more expensive to reinvent yourself than it is to defend yourself, in my view, particularly since I said in my script that reinvention usually does not work out like the first time. You usually go through some board of efforts that just do not pay off.

But now we feel like we have reinvented ourselves and we know who we are trying to be and that we should be able to spend less and still do a pretty good job of maintaining or growing that position.

Neil Gagnon - Gagnon Securities, LLC

Okay, John, not a question but just congratulations. This is a very hard stuff to do. It is hard in the management and it is something obviously that you want to get done.

John East

Neil, I appreciate that. It is hard in the management. It is hard in the people with the company that will have to go through it, that is for sure, this is business. So, thank you Neil. Next question please.

Operator

Your next question comes from the line of [Mike Radcliff] - Global Crown Capital.

Mike Radcliff - Global Crown Capital

Yes, I was wondering if you can provide us a little more color with respect to the market share gains that you have made and should those trends continue?

John East

Well, I have already said that we did gain share of at least every one of the competitors. I once upon a time pictured gaining share as a huge pile of sand and I drive up to it with a backhoe and start getting huge scoops and in fact, we are gaining our share more with a teaspoon. It has not been a huge amount of share but it has gone on for a couple of years and by and large, it has come from success we have had in flash and in satellite products which are the ones we have been pushing so hard for a couple of years. So it is gratifying to see that.

Now, the market share for a year tends to be dominated by the sales towards the end of the previous year, if that makes any sense. So when I sit down and look at the sales that we had in Q4 of 2008 and then the forecast that I see for Q1 of 2009, that leaves me to think that we will be able to grow share again but before I beat my chest too much on that, we have got to get a little closer to the end of year and make sure it plays out the way that I think it is going to. Do you want to follow on, Mike?

Mike Radcliff - Global Crown Capital

No, that’s it thank you.

John East

Rachel, next question please.

Operator

Your next question comes from the line of Richard Shannon - Northland Securities.

Richard Shannon - Northland Securities

I am sitting in the airport. I might be a little loud so I apologize if there is any background noise.

John East

No, you are just right. Do not worry about it.

Richard Shannon - Northland Securities

I just wanted to add my comment about Jon Anderson. It is certainly a pleasure working with him for the last almost 5 ½ years and I found him to be one of my favorite people to deal with in this business and I know it is a big loss for Actel as well. So, I just want to make that comment.

John East

Richard, I appreciate that.

Richard Shannon - Northland Securities

You bet. I guess first of all on the restructuring, any sort of the cuts that you are going to be making in R&D? Are they going to be having the impact on any of the end markets that you have been serving in the flash market and/or the timeframe from which you might be introducing any products, any large product or process geometry?

John East

Well, as I mentioned already, we are going to have a cut this quarter and when we have a cut, it has some effects but I am not looking for a major effect on things we had in the pipe. I should go on to say that, for I have been in the business 41 years now. I have been through these kinds of times so often and one of the pet peeves I have was one out of hip-shooting kind of reaction, people would cut projects that could have been good projects and were mostly done just so they could make the number right the next quarter and I am opposed to that.

So, if we look at silicon projects which are kind of the easiest ones for you guys to understand, we are not cutting any that we believe in and that we are getting close to being done. We are going to get them out and we are going to sell them and we are going to make money on them. So what, in fact will happen with the silicon projects is as we wrap existing ones down, we will start fewer so if you will look a year down the road, we will have fewer going. We will be spending less money but you will not have to see that we did not come out with products that we were planning to come out with.

Now, since the whole industry is a little secret, if I have not told you everything I am planning to come out with so that will not mean that much to you but it is a true statement. We do not plan on making cuts. Now, with the respect to end markets, when we reduce the products that we are doing in the future, that may well be accompanied by some changes in the end markets we are after but I do not think it is appropriate to talk about those today. You want to follow on, Richard?

Richard Shannon - Northland Securities

Yes. I mean a quick question as it relates to guidance, are you positioned where you have seen a slowdown or a complete cessation or cancellation of orders or push out of orders and what does that say about how much your monthly revenues need to grow in February and March to get to the midpoint in your guidance?

John East

Well, first of all, I think we can make our guidance without an up tick in orders. I mean, I am a conservative guy. If we needed orders to turn around tomorrow, I would not give that guidance but talking about kind of the shape of bookings, you are right. When these times come around, they are usually marked by a whole bunch of cancellations in the early days and boy that happened in a speed. Do you remember how excited I was in the April conference call?

We were booking up a storm and we had shockingly high backlogs. We were delinquent. As you, know we started wafers like crazy and bought test equipment to take care of it and then come the summer where orders got cancelled. It was gut-wrenching but that is sort of the normal thing to go through. You go through the cycle of cancellations, cancellations and cancellations and eventually all the stuff that was really softer, most of the stuff was really soft goes away and now you are left with kind of a run rate which is a lower run rate than you had to start with.

To me, that is a situation we are in now. We have seen just minor cancellations but even the best of times, you would see those. So, I would take the stance but mostly the cancellations are gone and if I look at the last six weeks or so bookings, they are relatively stable so it does not look like they are ready to take another dive down. That does not mean they will not but it does not look like they are going to and as I mentioned, they are stable at a place that I would call mediocre. It is not exciting. It is not good. It is not one to one, but it is not a horrible disaster either. So, if I were to try to map this into turndowns that I have seen before, I would say that okay, we are kind of in the second stage of a turndown which the cancellations are gone. Now, you run at a lower run rate for a while and then it starts to pick up and then the $64 question is - how long is a while?

People use to predict “the recessions,” "Oh, it will drop down and pick right back up." Well, I personally have never seen the recession. I have been around a long time but I am all for it. I hope this is one, but I would not bet on it. More commonly, they go two, three, four quarters of kind of modeling along at the bottom before they start to come back and I know you want me to be the expert of that but to be honest with you, I think you maybe as much of an expert as I am because I think it depends on the economy in general, probably more than it depends on the classic semiconductor FPGA kind of stuff that I am used to looking at.

Well, I think I just talked to you leg off, but did I answer the question, Richard? I must have because it sounds like Richard is gone.

Operator

Yes, sir. It looks like he disconnected.

John East

Yes, could you take the next question now, please?

Operator

I sure can. (Operator Instructions) Sir, I am seeing no more questions at this time. Do you like to have any closing remarks?

John East

Well, ladies and gentlemen, I was prepared to be grilled for hours on the basis of this call but I do have some work I can do so I will go do it now. We look forward to seeing you at same time and same place with the next call to report the results on what we have told you we are going to do. See you then.

Operator

Thank you for your participation. This concludes today's conference call. You may now disconnect.

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