Volterra Q1 2009 Earnings Call Transcript Introductory Remarks

| About: Volterra Semiconductor (VLTR)

Volterra (NASDAQ:VLTR)

Q1 2009 Earnings Call

April 20, 2009 4:30 pm EST


Jeff Staszak – Chief Executive Officer

Mike Burns – Vice President and Chief Financial Officer


Mike Burns:

Thank you. Welcome, everyone, to today's conference call. With me to review our first quarter 2009 results is Volterra President and CEO, Jeff Staszak. As usual, we'll begin today's conference call by reminding everyone of a few important items.

First, today's earnings release and financial statements are available on the Investor section of the Company's Website at Volterra.com.

Second, we're going to discuss certain non-GAAP financial measures on this call. We've provided a reconciliation of the GAAP and non-GAAP financial measures in our press release. The non-GAAP measures exclude the effect of stock-based compensation expense and special items such as the effect of accounting changes net of tax. Unless we specifically state otherwise, when we give guidance about a financial measure, we mean the non-GAAP financial measure.

And, finally, I'd like to caution everyone that today's remarks contain forward-looking statements that are based on the Company's current views and expectations. Our actual results or events may differ materially from these forward-looking statements due to a number of risks and uncertainties.

Please review today's press release and our filings with the SEC, including our annual report on Form 10-K filed March 4, 2009, for a detailed discussion of the risk factors that could cause the actual results to differ materially from the forward-looking statements. And, also, please note that the Company undertakes no obligation to update or revise these forward-looking statements.

At this point, I'll turn the call over to Jeff to provide an overview of the business and our results.

Jeff Staszak:

Thanks, Mike. Good afternoon, and thanks for joining us today. First, I'll provide a short recap of the Q1 '09 financials. I'll then give a short update on our four focus markets, and, following this, I'll talk about Q2 '09 and provide guidance for the quarter. Finally, I'll hand it over to Mike to review the details of our financial performance for the quarter. And then we will open it up for any additional questions you may have.

In Q1 '09, revenue came in at the high end of our range at $18.3 million versus $23 million in Q1 '08 and $21.9 million in Q4 '08. Non-GAAP EPS was $0.03 versus $0.13 in Q1 '08 and $0.09 in Q4 '08. Non-GAAP gross margins were essentially flat with Q4 '08, at 56%.

Overall, I believe we hit bottom from a business and orders perspective in Q1. As I mentioned on our last call, orders were pretty bleak in the October/November timeframe last year. Order activity picked up in December and continued in January and February with our strongest month of orders occurring in March. We also believe that we are getting better near-term visibility from our customers. Our major customers adjusted their forecasts in January/February timeframe to a more realistic business environment, reflecting the current macroeconomic situation. As a result, our customer orders in Q1 '09 have been much more in line with forecasts than in Q4 '08.

Therefore, I am cautiously optimistic for an improving business scenario through the balance of this year as new platform launches occur and the economy gradually begins to recover.

Now I'd like to talk about our four focus markets and our current and future business opportunities within those markets. Although the current macroeconomic situation has had a negative impact on our short-term business, our long-term growth and profitability prospects remain very strong. We plan on sticking to our proven strategy of gaining market share, adding new customers, and further penetrating our existing base of customers as new products and platforms are launched in these four target markets.

In the server and storage market, we indicated in our last call that our revenue would be down in Q1. As it turned out, our revenue was down as expected, approximately 15% from Q4 '08, mainly due to the macroeconomic situation and a seasonally weak quarter for the server market.

However, looking specifically at the Thurley server platform launch, revenue and orders for Q1 exceeded our expectations. We expect to see continued growth and market share gains as our customers ramp these and other new servers over the next few quarters. Our fifth-generation products for the Thurley platform have been very well received because our customers increased their total system efficiency demands and added more memory on these new servers to support the latest multi-core processors. This new generation of products enable us to provide the highest efficiency requirements in the industry while saving board area.

As evidenced by IBM's last earnings call, they are still seeing strong growth in their high-end P-series server business and expect their X-series business to improve in 2009. We believe their positive outlook for X-series is a result of achieving the highest measured system efficiency per operation by the Standard Performance Evaluation Corporation, or SPEC, power benchmark on their new 2U rack-mounted server, the X-3650M2. Volterra's latest products enable IBM to achieve this best-in-class energy efficiency.

In addition to IBM's new servers, we are also pleased to announce that we have expanded our position on HP servers with the launch of their new G6 server platforms where we are providing integrated power solutions. Examples include HP's DL-360, DL-38, and BL-460. These high-volume server models at HP and IBM allow us to expand our server market share at the two largest enterprise server companies delivering the best energy savings in the industry to their customers.

We will continue to benefit from the growing market trend for higher efficiency. Our server and storage business will grow in Q2 over Q1 with the continued ramp of Intel's server Thurley platform, and we expect to see growth through the balance of the year with a refreshed launch of AMD's Shanghai in the second half of 2009.

In the notebook market, our revenue was down approximately 40% in Q1 as our customers continued their inventory corrections. This was down more than we expected. However, the good news is that orders came in strong in February and March for Q2 deliveries, which would indicate that the inventory correction is mostly complete.

In the second half 2008, we introduced our third generation of notebook products for the Calpella platform and expect to see even stronger acceptance of these products from our customers as they use more silicon in more programs than the current Montevina programs. This new product family gave us another significant improvement in our cost performance metric and provided our customers increased battery life, component reduction, and space savings through our integrated power solutions.

In the long term, we are very excited about our notebook growth opportunities as our integrated solution gains momentum in this large and fast-growing market.

Near term, we expect to see notebook revenue up in Q2 from Q1, as we believe the inventory correction is essentially complete and as a more normalized demand materializes in this macroeconomic environment.

In the communications market, our communications revenue was down about 15% in Q1 due to higher shipments in Q4 '08 and the macro environment. Currently we participate primarily in the high-end, metropolitan-class of equipment at both Cisco and Juniper Networks, and we are moving into some higher-volume, enterprise-class equipment in 2009. Our business has also been expanding slowly over the last few quarters with Alcatel-Lucent as they have adopted our integrated power solutions across more platforms.

In Q2, we expect our revenue to be flattish with Q1 as our customers continue to work their way through this difficult business environment.

In the graphics market, our graphics revenue was down slight, about 5% from Q4, as a refresh program launched at AMD and we continued to ship existing programs. We expect the Q1 revenues to be lower, so the graphics upside helped balance the notebook downside. Our gen-5 products have also been well received in the graphics market as the power delivery requirements continue to become more demanding.

Currently, we are competing for design wins with both customers on their next-generation cards expected to launch later this year. For these new generations, we expect adoption on higher-volume, performance, and mainstream programs.

We expect graphics revenues in Q2 to be lower than Q1 as current programs ramp down. We anticipate growth resuming in this area in the second half of 2009 when new programs are launched.

Guidance. Finally, I'd like to talk about the business outlook for Q2 '09. As I mentioned earlier, we believe Q1 was out bottom. Visibility with our customers has improved, and we are cautiously optimistic that our business will grow through the balance of the year as new product cycles continue to kick in with our customers and as the economy starts to recover.

We are now anticipating Q2 revenue to be in the range of $20 million to $22 million, with non-GAAP EPS from $0.02 to $0.06. We expect our non-GAAP gross margins to be approximately in the 56% range.

At this point, I'll turn the call over to our CFO, Mike Burns, for a closer review of the financials.

Mike Burns:

Thanks, Jeff. Volterra maintained non-GAAP profitability and positive operating cash flow, despite a 40% drop in revenue from just two quarters ago, by reducing expenses and adjusting down costs. Looking forward, the Company is now positioned to resume sequential growth in net income expansion.

Volterra's $18.3 million quarterly revenue was diversified among four market segments. Server and storage was 61% of revenue. Desktop and workstation, primarily add-in graphics cards, was 17% of revenue. Networking and communications business was 14% of revenue. And the portable and consumer segment, primarily notebook, was 8% of revenue. All segments were down year on year, except notebook.

Despite the challenging economic climate, the Company's notebook business was up 59% from the same quarter a year ago due to Volterra's increased penetration last year in the thin-light, high-performance notebook market.

Gross margins remained flat at 56% as our improved inventory management offset the impact of lower production levels.

We brought non-GAAP operating expenses down another 5% sequentially to a level 14% lower than they were two quarters ago. We maintained the spending cuts we initiated in the fourth quarter of 2008. At that time, we froze salaries, closed job postings, eliminated certain positions, implemented shutdown days, cut travel, and reduced profit-dependent accruals.

The full impact of these expense reductions was partially offset by higher legal expenses that we incurred to protect the Company's intellectual property.

As a result of these prudent management actions, Volterra generated $745,000 positive cash flow from operations. We earned non-GAAP net income of $628,000 and $0.03 non-GAAP diluted earnings per share. GAAP net loss, including $1.2 million of stock-based compensation expense, was $519,000, or $0.02 per share, on basic and diluted basis.

Let's move now to the balance sheet. We continued to be pleased with our ample cash reserves. We exited the quarter with our working capital positioned to support our outlook for growth in the second quarter.

We have a diligent focus on inventory management. Volterra decreased its inventory 19% sequentially to $11.1 million. Work in process was down 35%, and wafer outs were down more than 50% sequentially. Our stocking reps reduced their inventory of Volterra product during the quarter as well.

Accounts receivables decreased 17% sequentially, and day sales outstanding declined to 49 days. Accounts payable decreased significantly, primarily as a result of reduced production levels. Accrued expenses decreased significantly as well, primarily due to the annual payout of profit-dependent accruals.

The Company utilized its cash reserves and flexible operating model to repurchase $5.1 million of stock at an average price of $7.84 per share. The Company has now completed the buyback authorized by the board of directors, totaling $30 million over the past seven quarters. The Company will evaluate future buybacks going forward based on cash reserves and stock valuation levels.

The Company ended the quarter with $53 million in cash and short-term investments invested in US treasuries and money market funds. Other cash-flow-related items to note - depreciation expense for the quarter was $474,000, and cash outlay for capital expenditures was $293,000.

Let's move now to the outlook for the second quarter of 2009. Based on improved backlog position entering the quarter, we are planning for sequential growth of 9% to 20%, or revenue of $20 million to $22 million. Approximately 20% turns orders are required to reach the midpoint of this range.

The Company significantly reduced production orders to manage its inventory levels. It currently expects its supplier cost reductions will enable it to sustain quarterly non-GAAP gross margin in the approximately 56% range. We are continuing to keep a close eye on spending but expect non-GAAP operating expense to be up in the second quarter.

R&D will increase, primarily due to increased investment in a proprietary process and product-development-related work.

SG&A will increase due to additional legal expenditure incurred to protect our intellectual property but also due to profit-dependent accruals and the discontinuation of certain short-term expense reduction measures, such as Company-wide shutdowns.

We expect interest income to remain low, and we expect our tax expense to be low as well.

The Company achieves its goals on revenue, margins, and spending, would expect to earn non-GAAP EPS of $0.02 to $0.06.

We plan to next update our financial results and guidance at our conference call to discuss second quarter results, which is tentatively scheduled for Monday, July 20, 2009. We'll put out a press release to formally announce and schedule the call as we get closer to that date.

This concludes our prepared remarks.

Question-and-Answer Session

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