Trident Microsystems, Inc. F4Q09 (QTR End 06/30/09) Earnings Call Transcript

| About: Trident Microsystems, (TRIDQ)

Trident Microsystems, Inc. (TRID) F4Q09 Earnings Call July 27, 2009 5:00 PM ET


John [Swanson] – Investor Relations

Sylvia D. Summers – President, Chief Executive Officer & Director

Pete J. Mangan – Chief Financial Officer & Senior Vice President


Rajvindra Gill – Needham & Company


Welcome to the Q4 2009 Trident Microsystems earnings conference call. My name is Deanna and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to now turn the presentation over to your host for today’s call Mr. John [Swanson] of Trident Microsystems.


Welcome to Trident Microsystems’s fiscal fourth quarter conference call. After the market closed today Trident issued a press release discussing results for its fiscal fourth quarter ended June 30, 2009. The press release is accessible online at This call is being broadcast live over the web and is accessible using the link found in today’s press release. A replay of the webcast will be available starting tomorrow and for the next 90 days by accessing the investor relations section of Trident’s website which is again

Before we begin, please note that during this call we will make forward-looking statements. These include statements related to guidance on anticipated revenues, cost reductions and other financial information for the fiscal quarter ended September 30, 2009 and statements about prospects for the company’s business and the development status and planned availability of new products. We are not obligated to update these statements.

Actual results may differ materially from the forward-looking statements made today and have in fact done so in the past. These projections are forward-looking statements and are subject to certain risks and uncertainties. These risks include in particular our ability to realize the benefits from our acquisitions of product lines from Micronas including our ability to build upon our core strengths, including our technology, engineering team, competitive cost structure and strong balance sheet, the timing of product introductions ,the ability to obtain design wins among major OEMs for Trident’s products, competitive pressures including pricing and competitors and new product introductions, the impact of the deteriorating global macroeconomic environment, the increasingly competitive DTV market and our ability to retain key employees.

These and other factors are discussed in our press release and in the company’s filings with the SEC. We encourage you to read these documents and to come to your own conclusions about the risk and uncertainties inherent in Trident’s business. Also, please note we will present non-GAAP financial information in this call and that we do exclude certain recurring items in our non-GAAP financial information. For a reconciliation of our non-GAAP information to the most comparable information under GAAP, please refer to our press release.

On today’s calls are Sylvia Summers, Trident’s CEO and President and Pete Mangan, Trident’s Senior Vice President and CFO. Pete Mangan will review the financial results for the quarter and Sylvia will follow with further discussion of Trident’s business. Finally, Pete will provide guidance for the fiscal first quarter and we will then open the call for questions. Now, I’ll turn the call over to Pete Mangan.

Pete J. Mangan

The headline for Trident in the fiscal fourth quarter was closing the acquisition of selected Micronas product lines which we accomplished in May. The fiscal fourth quarter therefore includes approximately one half of the quarterly run rate for these product revenues and related costs. Let me go straight to the results for the quarter; the reported net revenues were $14.9 million for the fourth quarter of fiscal year 2009, of this $8 million was from the new acquired product lines and $6.9 million was from core Trident. This compares with $6.9 million we reported on a standalone base for the March quarter 2009 and $39.5 million we recorded in the fourth quarter of fiscal year 2008.

We drove a modest increase in SSE product revenues which represented 14% of revenues in the quarter. Our combined discreet products represented 86% of revenues in the quarter and the overall new blended ASP for the fourth quarter was approximately $4.50. Our largest customer represented 23% of total revenues and was an acquired as well as returning customer for us from Korea. Our top customer for the past several quarters, a Japan based OEM, now our number two customer contributed 11% of revenues. Regionally, revenues were fairly balanced with Korea contributing 33% followed by Asia Pac 24%, Japan 23% and Europe at 20%.

Our non-GAAP gross margins for the quarter were 37.3% which compares with 22.3% in the prior quarter. Of this large percentage improvement approximately seven points is attributed to a richer product mix, five points is attributed to better leverage of our fixed manufacturing costs and three points is due to onetime reserve benefits. The adjustments between non-GAAP and GAAP gross margins was $0.9 million resulting in a GAAP gross margin of 31% up from 7% in the prior quarter. Non-GAAP operating expenses were $19.5 million for the quarter. Of this R&D was $13.6 million and SG&A of $5.9 million.

Total op ex increased approximately $4.1 million from the prior quarter which reflects the additional R&D spending related to the acquired product lines. Total GAAP adjustments for the quarter were $5.4 million, this compares to $2.2 million in the prior quarter. The adjustments in the fourth quarter included $3.3 million in stock-based compensation expenses, $1.7 million related to a write off of certain acquired IT and $0.8 million of amortization of intangibles. These were offset primarily by a $0.5 million reserve reversal for accrued software license fees.

Net loss for the fiscal fourth quarter on a non-GAAP basis which excludes the adjustments noted above was approximately $15.7 million or $0.24 per share. This was favorable to our post merger guidance for the quarter and compares with a non-GAAP net loss of $14.4 million or $0.23 per share in the prior quarter and a non-GAAP net income of $7 million or $0.11 per diluted share for the like period of fiscal 2008.

Before I turn to the balance sheet, let me provide a quick summary of some of the purchase accounting related to the Micronas acquisition. For further details including the carve out financial statements, please refer to our Form 8K that we expect to file tomorrow. The total estimated purchase price for the acquisition included seven million shares of common stock with a fair value of $10.7 million and future warrants of $1.4 million. We also incurred certain fees and other transaction costs of $4.9 million and assumed liabilities of $0.3 million.

For accounting purposes, the final purchase price of $17.3 million was allocated as follows: $4.8 million for fixed assets, $4.1 million for core developed technology, $0.7 million for in process R&D and $7.7 million to goodwill. With that covered, I will now provide a few comments on key balance sheet items for the quarter.

Cash and cash equivalents decreased from the prior quarter by $14.6 million to a total of $187.9 million. The decrease in cash was driven primarily by a non-GAAP operating loss of $13.9 million. The $188 million balance compares favorably to our cash forecast guidance as our non-GAAP operating loss came in lower than forecasted and our working capital position was essentially neutral for the quarter. Our working capital balances at quarter end included accounts receivable at $9.4 million or 58 days sales outstanding, inventory at $6.8 or 66 days and payables and accrued expenses of $35.5 million or 112 days. Each balance increased in the quarter as a result of the acquired product lines.

Going forward we expect DSOs to be in the range of 50 to 60 days consistent with the metrics of most fables semiconductor companies. In summary, for the fourth quarter, although revenues came in at the low end of guidance, our non-GAAP operating loss was better than expected being flat with the prior quarter. This in turn improved our cash burn rate and ending cash balance.

This concludes our financial review of the quarter. Before I address the guidance for the September quarter, let me turn the call over to Sylvia for her comments.

Sylvia D. Summers

The fourth quarter capped a year of great challenges but also significant progress towards the turnaround of Trident. We believe we enter our fiscal 2010 very well positioned to capture significant [inaudible] design wins and to drive growth which is critical to our long term objective of profitable market leadership. Before I discuss some of the specific achievements in the fourth quarter, I’d like to give you an update on the current view of the DTV market, the evolving TV architecture and how our strategy fits in to these trends.

The DTV market is very concentrated. The two large Korean OEMs together currently comprise approximately 30% of the market followed by the two largest Japanese OEMs which comprise 20%. So, we have roughly 50% of our market controlled by four customers and 70% of the market controlled by the top seven. At the same time we have roughly 10 competitors in the DTV chip market and only two of these have market share of greater than 10%.

This sets up a very unbalanced relationship with customers and is part of the reason why we see such intense price competition for each new socket. We believe that this market condition is unsustainable and that a further shake out and consolidation will occur over time. There has been a parallel trend in the evolution of television architectures. We’ve seen a move from discreet components to SoC with a related pressure on ASPs and total available dollars for TV units. This in broad terms is the setup for the Trident story.

In fiscal 2008 we were living off of our leadership position in discreet video but we were missing the other pieces necessary to compete effectively at the SoC level. As a result, we did not have significant SoC design wins at tier I OEMs to sustain revenues in fiscal ’09. We believe strongly that our recently completed acquisition provides a complimentary features and technologies critical to our SoC strategy. We now have significant technology advantageous in audio and Demod in particular.

This valuable IP had served as a foundation for the legacy discreet business that we acquired but as the way to reduce product costs continues, all of these technologies will be integrated into SoCs and the existing discreet business will decline. That is why this transaction made so much sense for Trident. We will benefit from the discreet revenues and gross margin in the short term.

In 2010 and beyond, we expect to see significant growth in our SoC business built on strong combined technology and customer relationships. With this investment, we also demonstrate to our customers that we are committed to this market and we demonstrate to ourselves that we can quickly and efficiently integrate a substantial acquisition. This gives us increased confidence as we look to the next opportunities for Trident.

We are nearly finished with the integration of these new product lines and people. An important component of this process has been fully integrating the sales force. We now have on board some of the most talented sales people in the industry with new original leadership in key markets such as Korea, Japan and Taiwan. We are very focused on optimizing our cost structure within our new organizational framework. Given the competitiveness of our market, we must be relentless in addressing both product and operating costs. This means getting products right the first time, migrating our talent to low cost regions when feasible, executing quickly for customers and keeping the organization lean.

In line with this strategy today we announced a planned 10% work force reduction. It is focused on aligning our work force with the opportunities we see in fiscal 2010. During the past year we achieved a number of design wins at tier II and III customers that validated our latest product and our ability to meet customer requirements with a leaner and more focused organization and cost structure. Importantly, we also repeatedly have affirmed our continued technical lead in all aspects of picture quality and moved further down the cost curve.

Let me give you an update on our opportunities and recent developments in both the SoC and discreet product lines. First, the SoCs, in SoC we currently are engaged on two 2010 production opportunities for a large Korean OEM. These would serve the low end and the mid range segments of the market in Europe and North America region. In each case we are working to displace a multiyear incumbent competitors and are proposing a two chip solution with a Trident SoC and our new hybrid Demod. As these design wins are off cycle decisions, we expect to know the outcome of these opportunities in the current quarter.

In addition, two tier II customers entered production using our SoC for the North American market. One is a big box private label brand and the other is a large tier II Japanese brand. Finally, we’ve seen interest in [inaudible] TV in China which is an early adopter for these technologies. We have two design wins that now are in pre-production using our SoC with these features. For 2011 production decision our two chip solution will be replaced by lower costs full SoCs integrating all Trident technology. We anticipate taping out a new mid range product the [Pro FX4] by the end of our fiscal Q2 and our new SoC for the low end segment the [Pro FXL] in our fiscal Q3.

On the discreet side, we taped out a product we call FRCs in mid May. Micronas’ early origination of [inaudible] products has been designed in the mid range and high end socket for the large Korean OEM for the past two years. After competing against an internal solutions in June, we learned that [inaudible] had lost their high end socket. We are still in the running to retain the much higher volume mid range with our integrated SoC but we expect to see a rapid drop off in discreet FRCs revenues over the next couple of quarters.

This is the reason for the change in our revenue guidance for our fiscal Q1 related to our previous expectations. Looking to other potential 2010 production for FRCs we currently are engaged with several other tier I OEMs in Japan and Korea as well as tier II OEMs in China. We also are working on an even more advanced discreet FRC product which we plan to tape out by the middle of next year for potential 2011 production.

Also in the discreet world we see the demod standards evolving with Europe for example moving from DVB-T to DVB-T2. We currently are working on the next generation demod to address this transition. Again, our ultimate goal is to achieve profitable market leadership and we have our sites clearly set on executing to this goal. Trident has the DTV technology portfolio, engineering team and cost structure that is second to none and a balance sheet that will allow us to continue to invest in product development or acquisitions in DTV and adjacent markets.

Our investment in fiscal ’09 already has positioned Trident to increase market share and revenues in the current fiscal year. In fact, if we are successful in capturing the significant opportunities in front of us, we expect to end our fiscal 2010 once again amongst the top players in DTV. With that, I will return the call back over to Pete.

Pete J. Mangan

Before I provide guidance for our first quarter, I’d like to give some additional information regarding the planned work force reduction that we have announced today and that will occur on Thursday of this week. We’ll be eliminating approximately 10% of our work force and the total headcount for the company immediately after the reduction will standard at approximately 600 people with 74% in R&D, 19% in SG&A and 7% in operations. The reduction will include employees in our Santa Clara headquarters as well as our Asia Pacific offices. Overall, the projected dollar savings from the reduction in force is approximately $1 million per quarter which will start to contribute this quarter.

Now, for our guidance for the first quarter of fiscal year 2010. Net revenues are expected to be in the range of approximately $22 to $25 million. Discreet products are expected to contribute over 90% of revenues in the quarter. Non-GAAP gross margins are expected to be in the range of 31% to 33%. Non-GAAP operating expenses are projected to be in the range of $20 to $21 million with $14 to $15 million for R&D and approximately $6 million for SG&A. Provisions for income tax is expected to be approximately $0.3 million.

Overall, we project the non-GAAP operating loss to be in the range of $12 million to $14 million. Additionally, based on our planned reduction in force, we expect to incur a restructuring charge of approximately $1.5 million. Total GAAP adjustments are projected to be in the range of $6 to $7 million for the quarter and our quarter end cash balance is projected to be in the range of $165 to $170 million range driven primarily by our projected quarter operating loss, reduction in force and working capital needs.

That ends our prepared statements. Sylvia and I will now take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Rajvindra Gill – Needham & Company.

Rajvindra Gill – Needham & Company

A question on the reduced guidance for September, when you preannounced positively back in May you were very confident of the $35 million guidance. I know Sylvia touched upon why the guidance is coming down but, if you could kind of elaborate what’s happening on the discreet FRC side? Why did the customers decide to use an internal solution as opposed to an external solution and what changed from mid May when you preannounced positively to now? If we could talk just a little also about how you see the discreet FRC business going forward over the next several quarters.

Sylvia D. Summers

You are asking several questions in one so I’m going to take some of them and Pete will take the rest. Regarding what happened in Korea, for the last two years in fact Micronas has been fighting against the equivalent solution which is internal. This time we basically taped out until we acquired the company, and it was the first time we could actually see the product, they were very confident that liked the two previous years they would be able to win. When we taped out we went to propose the solution to Samsung and it turned out that the solution from Micronas we just acquired was not a lot better than the Samsung one. So, that’s what happened.

There’s another phenomena going on which is until recently we really had inside this company three different branches of products: a low end; a mid range; and a high end. For the mid range and the high end they were using external FRC types of solutions. This is changing because only in the high end are they going to be using these so the whole mid range volume is actually moving towards integrated solutions that we are currently competing against which is the news de jour really. So, that’s what happened on this business.

You combine this with the fact also that on the current version of FRC that we’re shipping to these Korean customers, there has been a reduction of volume. This is what happened and we found this out actually recently.

Pete J. Mangan

I’d just add to it that the current product in place will be sold in the September and December quarter and we’ll begin to transition next calendar year.

Rajvindra Gill – Needham & Company

So the $22 to $25 million guidance, what’s the rough break out between core Trident and Micronas?

Pete J. Mangan

I think going all the way back, back to the announcement of the acquisition, we’re going to be looking at the company going forward as a discreet business similar to the way we have in the past adding to the discreet [inaudible] in the past will be the FRC, demod and audio and SoCs. We don’t report or look at the two separately.

Rajvindra Gill – Needham & Company

So going forward in to December and March say that revenue run rate at about $20 million total and say roughly maybe $8 million to $10 million is related to the FRC business should I be expecting a continual decline in that business going forward? Will the mid range of the market offset any declines in the high end? How should I be looking at that FRC business because that’s really kind of the main reason you got Micronas, or at least a large part of the reason.

Sylvia D. Summers

Actually, it’s not the main reason. The main reason is we were interested in this business for sure but we were also very interested in the technologies associated with audio and demod.

Rajvindra Gill – Needham & Company

So how should we look at the discreet FRC business going forward? Because, when you did provide the guidance of $35 million you had mentioned the majority of that, 50% of that was going to come from the FRC business mostly 40% of that from Korea. Now, how is that business going to be going forward? Are you going to be able to offset the loss of the high end of the business with the mid range and the lower end volume from Samsung.

Sylvia D. Summers

Let me walk you through, maybe remind you what is in the discreet [inaudible]. This discreet FRC business is going to go down in terms of TAM going forward. Why? Simply because all of the discreet components are going to be integrated in to SoCs. When it comes to this particular Korean business, the volume which is in the high end is fairly small, the bulk of the volume is in the mid range. This mid range is definitely going integrated SoC.

So, of course our strategy which is also is in the discreet, our strategies is to integrate all of these technologies in to our SoCs and to be competing in those segments of the market where they take integrated SoCs. For those segments that do not who will be competing with discreet products, and as mentioned also, following the FRCs for Micronas which is taped out, we currently have in our plan to have the next generation of FRCs which is called FRCD which includes the most advantage picture technology. So basically, we do SoC where there is SoC and we will go discreet where there is discreet. For the specifics of the question, Pete?

Pete J. Mangan

I would, given your question related to the product mix within the company obviously this calendar year our SoC business is quite weak we do expect that as SoC recovers that the mix of the company would swing towards and SoC mix and so discreet though 90% of the first quarter, discreet with a healthier profile of SoCs would be about a company of two thirds SOC, one third discreet.

Rajvindra Gill – Needham & Company

I’m just trying to assess what the business is going to be like going forward because if the main reason for the drop of the guidance which is nearly $13 million related to this lost socket for the high end of the business but then you’re saying that there’s very little volume with the discreet FRC for the high end and you’re going to try and offset that with the mid range. It just seems to me that there’s going to be continual declines in the FRC business and you’re not going to be able to offset it with an integrated SoC going forward.

Sylvia D. Summers

We haven’t say the whole thing you just said. We just commented on the fact that there is going to be a decline on the FRC business. We also did comment on the fact that we expect our SoC business and the mix between SoC and discreet is going to move in favor of SoC.

Rajvindra Gill – Needham & Company

How long is that going to take because if the overall market is rapidly becoming an integrated SoC and 80% of your business it seems that it’s going to be very difficult for you to catch up.

Sylvia D. Summers

We’re not going to comment on that.

Pete J. Mangan

I think the message today is twofold, one is the comments we already made on FRC but also that the overall TAM for FRC will remain in the high end.

Rajvindra Gill – Needham & Company

Obviously with the reduced revenue guidance, are you still holding your assumptions of the 10% to 25% reduction in cash burn?

Pete J. Mangan

Yes, the guidance we gave today would suggest that it would be neutral to 15% improvement down from the prior 10% to 25%.

Rajvindra Gill – Needham & Company

The expense reduction at $1 million per quarter, is that included in the $20 to $21 million op ex guidance?

Pete J. Mangan

The reduction will occur at the end of month one so a fair amount of the impact will be in the Q1 guidance.


There are no audio questions at this time.

Sylvia D. Summers

We would like to thank you for joining us on the call today and we look forward to speaking with you again on our next conference call.


Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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