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Executives

Dennis Bencala - Chief Financial Officer

Dado Banatao - Executive Chairman and Acting CEO

Kanwar Chadha - Founder and VP of Marketing

Analysts

Nicolas Gaudois - UBS

Analyst for Yair Reiner - Oppenheimer & Co., Inc.

Scott Middlemen - AM Investment Partners, LLC

Analyst for [Drew Frigdor - Tideman]

SiRF Technology Holdings, Inc. (SIRF) F1Q09 Earnings Call Transcript May 5, 2009 4:30 PM ET

Operator

Good day and welcome to the SiRF Technology Holdings, Inc. first quarter 2009 financial results conference call. All participants are currently online and on listen-only mode and please note, this call may be recorded and also note there will be an opportunity to ask questions later on in the call. (Operator's instruction)

I would now turn the program over to our moderator for today, Mr. Dennis Bencala, SiRF's Chief Financial Officer. Please go ahead, sir.

Dennis Bencala

Good afternoon. This is Dennis Bencala, Chief Financial Officer at SiRF Technology. Welcome to our first quarter 2009 earnings conference call. Please see our Q1 2009 earnings release in the Q1 10-Q that were issued earlier today and are also available on SiRF's website. Participating on the call today with me will be Dado Banatao, SiRF's Chief Executive Chairman and acting Chief Executive Officer and Kanwar Chadha, our Founder and Vice President of Marketing.

First, Dado will provide a brief update on the pending SiRF-CSR merger transaction then I will take you through the Q1 2009 numbers and provide guidance for the second quarter. Finally, Kanwar will provide a review of the strategic benefit of the planned combination with CSR.

Before I begin, I need to mention this call will contain certain forward-looking statements which represent the current expectations and beliefs of management of SiRF concerning our financial results and the outlook in the proposed merger between SiRF and CSR including statements relating to anticipated financial and operating results, potential cost savings and other statements including words such as anticipate, believe, plan, estimate, expect, intend, will, should, may, and other similar expressions.

The forward-looking statements we make in this call, including our projections for Q2 2009, are based on our current expectations with respect to future events including contemplated changes in our organization, strategic product development and planning and potential benefits related to these contemplated changes in terms of our projected future revenue, gross margin, operating expenses, litigation expenses, DSO, tax rate, earnings per share, product portfolio, and the strength of our Company among others. These statements are not guarantees of future results and are subject to a significant number of risks and uncertainties.

These risks and uncertainties include the ability to obtain approval of the contemplated merger transaction by SiRF's stockholders and CSR's shareholders; the ability to obtain governmental approvals of the transaction, or satisfy other conditions to the transaction; the ability to realize the anticipated synergies from the transaction in the amount and/or in the timeframes anticipated; the ability to integrate SiRF's business into CSR's business in a timely and cost-effective manner; the combined company's ability to develop and market a multifunction radio product; the extent to which current weak economic conditions will continue into the future; the difficulty in predicting sales, even in the short-term in light of current economic condition; factors affecting the quarterly results of each company such as our sales cycles, price reductions, dependence on the qualification of foundries, production capacity, uncertainty of demand, changes in customer relationships, our product warranties and the impact of litigation and other legal proceedings.

We ask that you keep these in mind to the extent you are relying on any forward-looking statements made during this call. Information provided here speaks only as of this date, and SiRF disclaims any duties to update the information herein. For a more thorough discussion on the risks associated with these forward-looking statements, please refer to our press release from earlier today and our periodic reports filed with the SEC including our current quarterly reports on the Form 10-Q, and annual report on Form 10-K. In particular and without limitation, we refer you to "Item 1A, RISK FACTORS", of our Quarterly Report on Form 10-Q for the quarter ended March 28, 2009.

In addition, on this call and in our press release from earlier today, we discussed our financials on both the GAAP and non-GAAP basis. The non-GAAP financial measures included in our press release today and discussed on this call are included with the intention of providing investors a more complete understanding of our operational results and trends which should only be used in conjunction with the results reported in accordance with GAAP numbers. The non-GAAP financial measures should enable investors to analyze our base financial and operating performance and to facilitate period-to-period comparisons and analysis of operating trends.

Non-GAAP measures presented and discussed today, presentations, and similar documents issued by us, exclude such charges as stock compensation, amortization of acquisition related intangible assets and certain non-recurring non-cash impairment charges. A detailed reconciliation of the adjustments between results calculated using GAAP and non-GAAP has been included in our press release.

Before I get into the details on the quarter, I would like to introduce Dado, who will provide an update on the announced merger with CSR. Dado?

Dado Banatao

Thanks, Dennis. Thank you all for joining us today on this call. I am pleased to announce that SiRF-CSR merger continues to move forward and as previously announced, we expect to complete the merger in Q2 subject to regulatory and stockholder approval. On March 25 this year, the HSR antitrust waiting period with respect to the proposed transaction expired. In addition, SiRF and CSR are making good progress towards obtaining the necessary regulatory approvals from the SEC and UK Listing Authority. We are working towards mailing our proxy statement to SiRF stockholders by mid May and are looking forward to stockholder approval for this strategic transaction.

Now, I would like to turn the discussion over to Dennis to cover our Q1 financial results and provide guidance for Q2.

Dennis Bencala

Thank you, Dado. SiRF recorded revenues for the first quarter 2009 of $34.2 million which is in the high end of our Q1 guidance of $30 million to $35 million. The first quarter 2009 sales breakdown by product platform was approximately 45% in automotive, slightly more than 45% in wireless and slightly less than 10% in consumer platforms.

First quarter revenue was comprised of $32.3 million of product sales and approximately $1.9 million of license, royalty and service fees.

SiRF's GAAP gross profit for the first quarter 2009 was $13.8 million or 40.2% of net revenue. First quarter GAAP gross profit includes stock compensation charges of $0.3 million and amortization of acquisition-related intangible assets of $2.2 million.

SiRF's non-GAAP gross profit for the first quarter 2009 was $16.2 million or 47.4% of net revenue. This first quarter non-GAAP gross profit excludes stock compensation charges of $0.3 million and amortization of acquisition-related intangible assets of $2.2 million.

SiRF's GAAP net loss for the first quarter of 2009 was $16.9 million, or a loss of $0.27 per diluted share on 62.8 million diluted weighted average shares outstanding.

The first quarter 2009 net loss includes $6.8 million of stock compensation expense, $3 million in amortization of the acquisition-related intangible, $0.7 million of restructuring charges and the $7.3 million gain on a note receivable previously recorded as impaired.

We recorded a non-GAAP net loss in the first quarter of a loss of $13.8 million, or a loss of $0.22 per diluted share, again within our guidance of a loss of $0.18 to minus $0.23 per diluted share. Non-GAAP net loss for the first quarter of 2009 excludes $6.8 million of stock compensation expense, $3 million in amortization of acquisition-related intangible assets, $0.7 million of restructuring charges, and a $7.3 million gain on a note receivable that was previously recorded as impaired.

SiRF's Q1 2009 non-GAAP operating expense of $29.9 million includes both litigation and merger-related expenses, represents a $10.5 million quarter-over-quarter reduction from our Q1 2008 non-GAAP operating expense level of $40.4 million. The combined chip set volume decreased approximately 36% during the first quarter of 2009 as compared to the first quarter of 2008 while ASPs declined approximately 16% over the same period. The combined chip set unit volumes in the first quarter of 2009 decreased approximately 21% from the fourth quarter of 2008 while ASPs decreased 7%.

Headcount at the end of the first quarter of 2009 was 505 versus 571 at the end of the fourth quarter 2008. This reduction in headcount is a result of the continuing reduction in force announced in December and to a lesser extent, some additional employee attrition.

Q1 2009 DSO was 58 days, compared to 32 days in Q4 2008. The increase in DSO is primarily due to the timing of shipments being later in the quarter. Inventory turns in Q1 2009 were at 5.8, down from 6.3 in Q4 2008 as the Company continues to manage inventory. However, due to slightly lower Q1 sales volume, the inventory turnover was lower.

SiRF had cash, cash equivalents, and short-term investments of approximately $110 million as of March 28, 2009, compared to a $116 million at December 27, 2008. SiRF cash balance was positively affected by completing a $9 million outstanding loan settlement.

The geographic revenue for the quarter by region was Asia-Pacific 50%, U.S. and the Americas at 42% and Europe at approximately 8%.

Now I will turn to our Q2 outlook. Although we have seen increasing traction from our newer products and early signs of customer demand stabilization, we remain cautious in our outlook due to ongoing competitive pressures, SiRF's existing patent litigation and the continued prevailing macroeconomic uncertainties. Accordingly, we are guiding Q2 2009 revenues in the range of $42 million to $46 million in non-GAAP EPS from a loss of $0.11 to a loss of $0.16 per share.

Although we do not provide the specific gross margin guidance, we currently anticipate our Q2 non-GAAP gross margins will be similar to our Q1 2009 non-GAAP gross margins.

Now with that, I will turn it over to Kanwar to provide further update and some additional perspective on the planned strategic merger with CSR. Kanwar?

Kanwar Chadha

Thank you, Dennis. As you know, this transaction unite two market and technology leaders in their respective fields who as a combined company will be able to deliver a strong portfolio of innovative products in both connectivity and location enabled market. We are excited about the market opportunity which is being driven by growing consumer demand for this bigger functionality in a broader end of mobile products.

Our customers responded to the first CSR merger announcement as being quite positive and it has been enforced, our belief, that this merger creates significant strategic benefit for our customers. By creating a global leader in connectivity and location platform, we bring a strong portfolio of products and technologies for our customer's today advantages.

This combined company will have significant economies of scale to capitalize on large and growing opportunities for multifunction radio and multifunction system platform optimized for key target market. Since the planned merger announcement, we have formed small dedicated team to focus on the integration and strategic planning processes. As we expected, the team share a common vision of leading the connectivity and location-enabled market.

Quarterly, our companies are quite similar. Both have been in [35 years] in their respective fields. Both have successfully competed against much larger companies to innovative technologies and independently, both are focused on bringing the benefits of BlueTooth connectivity and GPS location to mainstream consumers. We intend to take advantage of our combined capability to create new products that have market leading performance while helping our customers to lower some cost and thus make innovative locations and connectivity enabled system more affordable to mainstream consumers.

While building our market communication provision and thus creating the single, largest provider of integrated connectivity and location platform, the transaction is offering a system to provide substantial synergy opportunity. Thank you.

Before we start question-and-answer session, I should find out that there are certain issues of confidentiality relating to various customers or partners and the planned merger that we are required to respect and this may limit but possibly, we are able some of your questions. At this time, we will open it up for questions from callers.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Nicolas Gaudois - UBS.

Nicolas Gaudois - UBS

Could you give us some a bit more clarity on what you see the drivers of the new up tick in Q2 by end markets that could be quite useful? And also second question will be, how long should we expect for cash flows, I mean as you said there are I think $9 million receivables coming back into a cash into a prior quarter and so could you give some degree for cash burn, how do you look in the recent two years second quarter with working capital in mind? Thank you.

Kanwar Chadha

This is Kanwar. I will take the first part of the question and I guess Dennis will take those back in. As far as the market questions, if you look at Q1, the automotive side of the market was relatively weak. In Q2, we see stabilization of the automotive market segment and I have some view that in the division of some of the market related coming up, the consumers oriented automotive system market is also going to show better finds of stabilization. But we do see growth and stabilization across our market segment.

Dennis Bencala

This is Dennis. So, regarding cash, couple of things; one, on the very positive side, SiRF has fully implemented its operating expense reductions and we are in the very final stages of our reduction in forces that we have put in place. As a result, we have had positive results in terms of cash, in terms of regulating our cash expense. In Q1, net of the one-time note receivable that we received, we had a cash burn of approximately $15 million and I would expect that to be based on the increase in revenues for Q2 to that rate to be slightly lower than that, perhaps in the $10 million range in Q2. We do not give a long-term cash projection but again, on the positive side, we have fully implemented our operating expense reduction and are confident on our cash position.

Nicolas Gaudois - UBS

I got a very quick follow up. You talked about additional attrition on top of [27.00]. Could you maybe give a little color what came from sales and marketing central functions or R&D? Thank you.

Dennis Bencala

Well, again that is a good question. When I mentioned the attrition, I said to a lesser extent, there has been some attrition and we just considered that as part of the normal turnover that any company, especially here in Silicon Valley, experiences. It was not in any one particular area and we do not believe that the attrition that we did experience in Q1 would have any negative impact on our business at all.

Operator

(Operator's instruction) Your next question comes from the line of Yair Reiner - Oppenheimer & Co., Inc.

Analyst for Yair Reiner - Oppenheimer & Co., Inc.

Actually this is Mike calling in for Yair. I just want to get a sense of inventories and the channel or is there anything you are seeing, I mean it seems like there is a kind of glut drop everywhere in the first quarter and fourth quarter. Was it too much or is it now like in a rebound? How is it looking?

Kanwar Chadha

This is Kanwar again. Yes, we just see clearly some in the range where it is not relative on our general efforts in the end market channel and that is depending on just like [28.36] if we use in the road, just like inventory. But that is an indicator explode up our revenue in Q1 what back end loaded and those were some of the early signs of that inventory being pre adopt and the Q2 guidance which we have given indicates to us based on our customers that we are getting in our mass media inventory issue and customers who are actually starting to ramp up for increasing demand. So, we do not see any real major issues as we set forth in [29.17].

Analyst for Yair Reiner - Oppenheimer & Co., Inc.

Okay, so it is not like an inventory replenishment. It is actually a stabilization of demand you are saying.

Kanwar Chadha

That is correct and the question is the P&D market demand and some of the developing market is also coming to us.

Analyst for Yair Reiner - Oppenheimer & Co., Inc.

Sorry, could you repeat that last part?

Kanwar Chadha

I said that especially in the P&D side of both market, we are also starting to see demand ramp up in some of the developing market, not just the US and the European market.

Operator

(Operator's instruction) Your next question comes from the line of Scott Middlemen - AM Investment Partners, LLC.

Scott Middlemen - AM Investment Partners, LLC

I am just wondering if when the F-4 is going to come out so we can just get a little more background on the transaction and make that queue to closing deadline.

Kanwar Chadha

Yes, we are looking at targeting the mid May timeframe. So, hopefully that is for review by the middle of the May.

Scott Middlemen - AM Investment Partners, LLC

And is there any update on synergies? Have you guys found any more synergies throughout the process?

Dennis Bencala

Yes, this is Dennis and of course, we have always stated that we believe that there would be both revenue and cost synergies in the combined merger. Both companies are working to identify those and I think we will hear more about those once the merger is completed.

Operator

(Operator's instruction) You have a follow up question from the line of Analyst for Yair Reiner - Oppenheimer & Co., Inc.

Analyst for Yair Reiner - Oppenheimer & Co., Inc.

Okay, just on the second quarter guidance, just how much visibility or kind of order volume? I know you mentioned the first quarter was back end loaded. I am guessing you are seeing stronger order patterns. Just how is your visibility or backlog?

Dennis Bencala

So, we have had positive backlog coming here into Q2 and at this point in the quarter, our backlog is at or slightly above where we would normally expect it. So, we are very confident on our backlog going into Q2.

Operator

(Operator's instruction) You have a follow up question from the line of Nicolas Gaudois - UBS.

Nicolas Gaudois - UBS

Yes, just to follow up a little bit on that. How much turns would you need to achieve a midpoint of guidance this stage?

Dennis Bencala

I am sorry, could you repeat your question?

Nicolas Gaudois - UBS

Sure. Looking at your midpoint of guidance for Q2, $44 million, how much turns would you require to make a bad number in financial?

Dennis Bencala

Well we do not give specific revenue turns information like that but again, I will restate that at this point in the quarter, we do have a strong backlog that is at or ahead of where we would typically expect it to be in this quarter and so we are confident in our backlog in our guidance.

Operator

Your next question comes from the line of [Drew Frigdor - Tideman].

Analyst for [Drew Frigdor - Tideman]

It is [Edwin Bah] for [Drew Frigdor]. I just wanted to see if there is any update on the US Customs process. Have we gotten any information back from them?

Dennis Bencala

I will let Kanwar answer that question for you.

Kanwar Chadha

We have not yet end up with US Customs. Customs is reviewing our modified products which we firmly believe complied by internal link but we are going to call in for any present event that we completed with you. Hopefully, we will be notified about some evidence at the later part.

Analyst for [Drew Frigdor - Tideman]

Do you think we will have an update in the F-4 manufacturing?

Dennis Bencala

It will be just a matter of timing if we received a positive Customs report. A Customs response, of course, it will be included but at this time, we do not know the timing of when we would expect that.

Analyst for [Drew Frigdor - Tideman]

And that is not a requirement for the deal to get done?

Dennis Bencala

No, it is not.

Analyst for [Drew Frigdor - Tideman]

And we feel comfortable those things are going smoothly and that there is not an issue in the work around works?

Kanwar Chadha

As I said, we firmly believe that our work around complied by easy ruling but beyond that, it is difficult to predict.

Operator

It appears at this point, we have no further questions from the phone lines.

Dennis Bencala

Well, thank you again. That was our last question and we would like to thank you all for participating in today's call.

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