Executives
Tom Krause - IR
Mark Voll - CFO
Hiro Kozato - CEO
Analysts
Bevan Wang - Thomas Weisel Partners
Quinn Bolton - Needham & Company
Christopher Longiaru - Sidoti & Company
Rajvi Gill - Needham & Company
Techwell, Inc. (TWLL) Q1 2009 Earnings Call Transcript April 30, 2009 5:15 PM ET
Operator
Welcome to the Techwell Incorporated first quarter 2009 Earnings Call. My name is Jeri and I will be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)
As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Tom Krause of Techwell Investor Relations. Sir, you may proceed.
Tom Krause
Thank you and good afternoon. Welcome to Techwell’s first quarter 2009 financial results conference call. The press release and financial tables associated with today’s conference call were distributed after the close of the market today. If you do not have a copy you may find them on the company’s website at www.techwellinc.com. This call is being broadcast live over the internet and maybe accessed in the Investor Relations section of Techwell’s website.
Before management begin the discussion of the first quarter’s results, I would like to remind you that this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to the company’s belief the demand for its products will continue to grow, percentage of future revenue fabricated in .18 micron, the company’s ability to achieve greater market share, anticipated success in the company’s strategy and long-term prospects, its anticipated revenue, gross margin and operating expenses for the second quarter of 2009, anticipated effective tax rate for the second quarter and full year 2009, the number of design wins in the future, future objectives and anticipated trends and growth in the company’s business end markets in which it operates and the company’s performance in the second half of 2009.
Any forward-looking statements made during this call are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information concerning factors that could cause actual result to differ materially from any forward-looking statements made during this call are contained in the company’s written earnings release and in the company’s annual report on Form 10-k filed with the Securities & Exchange Commission on March 11, 2009.
Techwell undertake no obligation to publically update any forward-looking statements for any reason, except as required by law even as new information becomes available or other events occur in the future. In addition, the reporting financial results in accordance with GAAP, the company’s reports non-GAAP net income, which excludes stock-based compensation expense and it’s and related tax effect. The company believes its non-GAAP income provides useful information to management and investors relating to its financial condition and results of operations.
Company also believes the non-GAAP measure provides useful supplemental information for investors to evaluate its operating results in the same manner as the research analysts, who follow it, most of whom present non-GAAP projections in their published reports. Techwell cautions investors however, not to place undue reliance on non-GAAP measures and to read them in connection with its GAAP results. Confined detail reconciliation between Techwell’s GAAP and non-GAAP results in the financial tables, included in its earnings release, we just currently posted on its website.
Thank you for your time and attention. I will now turn over the call to Mark Voll, Techwell’s Chief Financial Officer. Mark, please go ahead.
Mark Voll
Thanks Tom. Good afternoon everyone and welcome to our first quarter 2009 financial results conference call. With me today is our Chief Executive Officer Hiro Kozato. I will begin today's call with a review of our quarterly financial results. We will then provide our business outlook for the second quarter of 2009.
Following my remarks Hiro will provide an update on our business. We will then open the call for a question-and-answer session. Please keep in mind that all reported financial results, unless otherwise noted are presented on a GAAP basis.
For the first quarter ended March 31, 2009, we reported total revenue of $10.3 million, which was within our range of guidance of $10 million to $11 million. Total revenue for the first quarter compares to $15.6 million in the same period a year ago.
Total revenue in the first quarter each of our product lines consisted of security revenue of $7.5 million, representing 73% of total revenue, automotive infotainment revenue of $1.7 million, or 16% of total revenue, consumer revenue of $1.1 million, or 11% of total revenue, and other revenue of approximately $6,000.
Security revenue declined 36% year-over-year and decreased 46% sequentially. Automotive infotainment, which we formally referred to as LCD display revenue declined 1% year-over-year, but increased 20%, when compared to the fourth quarter. Consumer, which we formally refer to as video decoders, revenue declined 45%, when compared to the same period last year and 10% sequentially.
In the first quarter we had one customer that represented more than 10% of total revenue. Sales to our distributor in China represented 36% of revenue in the quarter, which included shipments to multiple end customers, with no single end customer representing 10% or more of total net revenue.
For the quarter 45% of our revenue came from product sold in to China. Combined, our 10 largest customers represented 74% of total net revenue in the first quarter of which nine of these customers are distributors.
Gross margin for the quarter was 60% and continues to exceed our long-term target of 55%. This compares to gross margin of 61% in the first quarter of 2008 and 62% in the prior quarter. During the first quarter 77% of our total revenue came from product fabricated in .18 micron, up from 66% in the prior quarter. We expect the percentage of our revenue fabricated in .18 micron to continue to increase throughout 2009.
Total operating expenses were approximately $7.8 million for the first quarter of 2009, representing 76% of total revenue. This compares to operating expenses of $8.5 million or 52% of revenue in the fourth quarter of 2008 and $7.2 million or 46% of revenue in the first quarter of 2008.
Of the $7.8 million of operating expenses in the quarter, $4.3 million is consisted to research and development expenses or 55% of operating expenses, included more than $300,000 in tape out expenses for new product development. Operating expenses also included approximately $1.7 million of pre-tax stock-based compensation expenses.
We recorded $368,000 of interest income in the first quarter of 2009, compared to $755,000 of interest income in the same quarter last year. The reduction in non-operating income reflects lower interest rates available on cash, cash equivalents and investments.
Net loss for the first quarter totaled $697,000 or a loss of $0.03 per diluted share. Net income includes pre-tax stock-based compensation expenses of approximately $1.8 million before the tax effect of $661,000 equating to a $0.05 per diluted share charge.
We recorded a tax benefit of $544,000 in the first quarter. Fully diluted earnings per share for the quarter were calculated using 21,383,000 shares. Net loss per diluted share of $0.03 for the first quarter compared to net income per diluted share of $0.09 in the first quarter of 2008.
Non-GAAP net income for the first quarter totaled $486,000 or $0.02 per diluted share. Non-GAAP net income excludes stock-based compensation expenses and the related tax effects.
Now turning to the balance sheet, account receivable were $3 million at the end of the first quarter, compared to $2 million at the end of the fourth quarter. Historically, we have sold on credit terms only to OEM customers and as a result, our account receivable balances have been low in comparison to overall revenue.
In the first quarter, revenue from direct sales to OEM represented 19% of our revenue, while sales to distributors represented 81% of revenue. Inventory as of March 31, 2009 was $4.3 million, decreasing from $4.8 million at the end of fourth quarter 2008.
Our cash, cash equivalents in both short and long-term investment balance, as of March 31, 2009 were approximately $80.8 million compared to approximately $81.4 million as of March 30, 2008. Our cash, cash equivalents in both short and long-term investment balance at the end of the quarter of $80.8 million, represents cash per diluted share of $3.78. At the end of first quarter, we had 159 employees, 77 of which are in research and development.
In terms of guidance for second quarter of 2009, while we continue to see a very challenging environment in each of our markets, we do expect first quarter results to represent the low point in terms of revenue and profitability for 2009,
As a result, we expect total revenue for the second quarter to be in the range of $11 million, $12 million or growth of 7% to 17% compared to the first quarter. We anticipate gross margins for the second quarter to remain comparable to the first quarter results. We anticipated operating expenses for the second quarter to range between $6.5 million and $7 million excluding stock-based compensation expenses.
We estimated our effective tax rate for the second quarter and the full year of 2009, to be 35%. As a result, we expect we will continue to generate positive non-GAAP net income, in the second quarter and throughout 2009.
This concludes my prepared remarks. Now, I will hand the call to Hiro for additional comments
Hiro Kozato
Thanks Mark. Good afternoon everyone. Thank you for joining us today. As we expected, the first quarter was a difficult quarter for Techwell, especially in our core security surveillance business. With end market demand soft, our security customers spent most of the quarter working through inventories. That had built up, as a result of significant slowdown that began in fourth quarter of last year.
In particular, we have continue to see weakness in Korea, Japan and Taiwan, as volumes are shifting more and more to China. On the competitive front, the downturn has allowed us to continue to build on our leadership position.
Our focus continues to be on extending our served available market, by introducing complimentary surveillance ICs with higher levels of integration and higher ASPs per channel.
TW2880, our newest security IC with integrated multi-channel display processing, has been very well received by the market, with designs now underway with majority of our customers. While we don’t expect this product to have material impact on our security business until next year, the initial success of the TW2880 gives us confidence in our surveillance strategy and the long-term prospect.
Looking forward to the second quarter, we expect to see revenue to grow over our first quarter, particularly as we believe, we will see the effect of a recovery beginning in the security surveillance market. Current inventory levels at our customers are now at below normal levels. However, the demand environment remains soft in the near-term. In addition visibility remains limited as customers are very cautious to place their orders.
Looking forward to the second half of the year, our customers six months rolling forecast, indicate a significant pickup from the first and second quarter levels. While we remain very cautious, this gives us some comfort that market is returning to a more normal demand environment in the second half of the year.
With respect to our automotive infotainment business, we are very happy to report 20% sequential growth in revenue from our first quarter results. Even though automotive manufactures are significantly cutting back on manufacturing. We believe our first quarter results are testament, to our design win activity over the last several years.
While customers generally prohibit us from announcing project in the quarter, with this start shipping to new customers in Japan and North America for automotive OEM business related front console navigation and rear view mirror applications.
With the current challenge in automotive end market, we are forced to remain cautious. However, we believe the number of designs going into production, we have continued to raise throughout the year.
In addition, with limited competition for integrated LCD controllers for automotive infotainment applications, we believe we will continue to build design win momentum throughout the year, which gives us confidence that our automotive business would begin to become a significant growth driver for Techwell.
That concludes my prepared remarks. Operator, we will now open the call for questions.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Tore Svanberg with Thomas Weisel Partners.
Bevan Wang - Thomas Weisel Partners
I’m calling in for Tore Svanberg. This is [Bevan Wang]. I have a quick question about your inventories, it sounds like from your commentary that it is largely behind, is that correct and looking at your inventory days, it seems to be up a bit and I was wondering if you could explain, whether that is in preparation for the growth quarter in Q2 or if there is something else behind that?
Mark Voll
So, I’d say as far as our own inventories are concerned, we are holding higher inventories because we anticipate growth in Q2. I’m sorry the other question was related to our customer’s inventory?
Bevan Wang - Thomas Weisel Partners
Yes.
Hiro Kozato
The inventory level at our customer’s site, are there its well below normal level now. So, that’s why we start preparing some inventory at our site, so that, we can satisfy that demand in Q2 and Q3.
Bevan Wang - Thomas Weisel Partners
Could you also give us a little more color on, what you are seeing for the second half of ‘09? You mentioned about the customer forecast being showing some pickup? Could you add some more color to that and maybe also mention, which areas specifically you’re seeing that growth?
Hiro Kozato
Yes, we think the Q1 is the trough and we start seeing some pickup in Q2, but we still remain very cautious, but according to the six months (inaudible) forecast from our customers. They are forecasting much higher quantity compared with first half of this year, especially in Q4. We think, we strongly believe that in Q4 we will probably return to the previous year run rate.
Bevan Wang - Thomas Weisel Partners
My last question is about your automotive. I was wondering that, if you know of any seasonality to your automotive business, that this last quarter’s growth seems really good and that you expect that to sustain for the remainder of the year?
Hiro Kozato
Yes, we don’t see the seasonality. At this moment we think this is the worst time for automotive and our pickup, our upside would be for the design wins, we had worked down for past several years.
Operator
Your next question comes from the line of Quinn Bolton with Needham & Company.
Quinn Bolton - Needham & Company
Hi guys, just wanted to raise I guess two issues. First it sounds like the 2880 is slipping. I think in previous calls you talked about it been a revenue driver in the second half of the year. Now it seems like you're talking about just a return to more normalized order rates and security market driving that second half ramp. How should we be thinking about the 2880? Have you had to take another thin of silicon or just taking longer to ramp the production?
And then the second question for Mark. Mark it looks like your guiding OpEx $6.5 million to $7 million, that’s a pretty big jump from March levels. Is there a significant increase in the tape out costs that we should be thinking about or is there some other factor behind the jump in OpEx quarter-over-quarter?
Hiro Kozato
Yes. To answer your first question, our TW2880, at this moment we have more than 20 design wins and that we will see our first customer going into production starting from Q3. So, at this moment we don’t see any significant delay in this project, except that the chip, the scale of this chip is so big.
So, it taken a little longer time for customers to move into production. Its more than 5 million Gate chip or they are (inaudible) software from were involved in the system level. So, we’ll still see revenues, in second half of this year from this chip.
Quinn Bolton - Needham & Company
But it sounds like it won’t be material revenue in the second half.
Hiro Kozato
It’s a little bit difficult to forecast at this moment, that’s why we just be, in a little cautious conservative.
Mark Voll
Quinn regarding the OpEx increase, it will all be related to take out costs for new product development. So, the rest of our expenses will remain flat. The only think we would see increasing is tape out expenses related to new product development and we’re being somewhat cautious there because trying to forecast the timing on tape out is very difficult.
Quinn Bolton - Needham & Company
Now I understand that it’s very unpredictable on the timing, but it sound like more likely I think in the press release you talked about R&D in Q1 you had 300,000 of tape out expenses. If I just go to the mid point of the range, it sounds like you’re going to be closer to 1 million of take out expenses than Q2, is that about the rate figure?
Mark Voll
Yes, it’s correct. We will probably somewhere a range about 500,000 to 1 million.
Quinn Bolton - Needham & Company
Okay. Can you guys, I know you sort of talked about inventories in the security channel being at the low normal levels. I was just wondering if you could talk about any patterns you’ve seen in order patterns, has there been any pickup in activity, I would have thought that its inventories were down to those kind of levels, that you might be starting to see some request for extradited shipments or any encouraging signs that you might be able to seek about?
Hiro Kozato
Yes, we have seen some unexpected orders. Volume is still small, but we have seen multiple upside.
Quinn Bolton - Needham & Company
Got you, okay and obviously you have talked about the customer forecast. My last question just, it obviously sounds like the securities business is still slow in the first half. Should we be thinking about most of the sequential growth coming from auto and consumer or do you think that the security business can grow sequentially, just trying to think about the mix of business Q2 versus Q1?
Hiro Kozato
Yes, in Q2 we think the percentage for the automotive was increased slightly, compared with surveillance. Video decoder consumer, we think it will stay flat.
Quinn Bolton - Needham & Company
Sorry, was that on a mix basis Hiro or is that on a--
Hiro Kozato
Yes, mixed base.
Quinn Bolton - Needham & Company
Okay. So --
Hiro Kozato
Go ahead.
Quinn Bolton - Needham & Company
It sounds like auto will be the fastest grower again in the second quarter, but you will see some growth quarter-over-quarter in security on dollar basis?
Hiro Kozato
Yes, exactly.
Operator
(Operator Instructions). Your next question comes from the line of Christopher Longiaru with Sidoti & Company.
Christopher Longiaru - Sidoti & Company
I guess my question was really just on the video surveillance side. How do orders track throughout the quarter and into April, I mean did you see a pickup? Were they lumpy? I mean can you give us some insight into how those were tracking?
Mark Voll
Right, as we had said that Q4, in Q1 we had the lunar New Year that would be in January and so we expected January to be quite slow, which it was. We saw a more pickup in February again as some of our customers were able to reduce their inventories and sell their products through then, March was the strongest month in the quarter, as we had forecasted.
Christopher Longiaru - Sidoti & Company
Okay. That strength continue to move into April?
Mark Voll
Yes, it has.
Operator
Your next question comes from the line of Rajvi Gill with Needham & Company.
Rajvi Gill - Needham & Company
Quick question on the geographic mix for this quarter, maybe if you can provide some color on that and how do you see that going forward in the second quarter. Also any color in terms of the revenue mix by vertical and how do you see that going into the quarter as well?
Hiro Kozato
Yes. We've seen more and more shift to China in terms of the revenue, especially in the lower end four channel market, I think China is taking over Taiwan's market share. In terms of Korea, I think they were stay quite flat, because they are shift into more high-end market, same with Japan and I’m sorry, I forgot about your second question.
You said a mix between auto and security?
Rajvi Gill - Needham & Company
No. The geographic mix that going forward into the second quarter, given the fact that Korea is roughly 40% of your sales and mostly sold into industry and government transportation verticals. Do you see that business Korea and China and Taiwan are making in the second quarter and also what was the percentage of sales by vertical in March and also going to June?
Mark Voll
We don’t have the percentage of sales by vertical for Q1. I would tell you, we see the mixed for Q2 trending perhaps higher in China.
Hiro Kozato
Yes, that’s correct.
Operator
You have a follow-up question from the line of Quinn Bolton with Needham & Company.
Quinn Bolton - Needham & Company
Just wanted to follow-up, Hiro you talked about that the stronger or strengthening six months rolling forecast from customers, you know, when you get those better forecast, you tend to negotiate price and I’m just trying to see, if there is anything rate into pricing, as the business comes back in the second half. Is it getting more aggressive or with those forecast, February had established, where you think pricing will be for that business, is that strengthens in the second half of the year?
Hiro Kozato
I think pricing would be quite stable because we already negotiated the pricing in the beginning of this year, but definitely customer would keep negotiating with us. At the same time, we will be negotiating with all vendors.
Quinn Bolton - Needham & Company
At this point the rolling forecast, you’re receiving have already set prices.
Hiro Kozato
Yes, we already accounted the discount.
Quinn Bolton - Needham & Company
Got you, that’s what I wanted ask. Thank you.
Operator
This concludes the question-and-answer portion of your conference. I would now like to turn the call back over to Mr. Mark Voll, Chief Financial Officer for closing remarks. Sir, you may proceed.
Mark Voll
We encourage you to visit our website at www.techwellinc.com to view our latest announcements as well as our calendar of events. Later this quarter, we will be presenting at the UBS Global Technology and Services Conference in New York from June 8th to the 10th, the Noble Financial’s Fifth Annual Emerging Growth Equity Conference in Hollywood, Florida on June 8th and 9th and the Craig-Hallum Institutional Investor Conference in Minneapolis on June 11th. Additionally, if you have questions or would like more information, please contact me directly. Thank you for joining us today.
Operator
We thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a great day.
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