Actel Corporation Q2 2009 Earnings Call Transcript

Jul.28.09 | About: Actel Corp. (ACTL)

Actel Corporation (ACTL) Q2 2009 Earnings Call July 28, 2009 5:00 PM ET


John C. East - President, Chief Executive Officer, Director

Dirk Sodestrom - Interim Chief Financial Officer and Corporate Controller


Richard Shannon - Northland Securities

Neil Gagnon - Gagnon Securities

Tom Clause - Graham Partners


Good afternoon ladies and gentlemen and welcome to Actel Corporation's conference call regarding its results for the second quarter of 2009. A replay of this call will be available for one week at 1-800-642-1687, conference ID number 80687423. You can also access this call on Thomson CCBN through a link on Actel's website at

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 form 10-K or 10-Q, which is available on Actel's website. (Operator Instructions) 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

Thanks Marcello. Good afternoon, I am John East the President and CEO of Actel. With me is Dirk Sodestrom our interim CFO and Corporate Controller. After Dirk reviews the results for the quarter, I will talk about our current business environment and give you a brief update on the status of our restructuring plan, and then we will open up the call for questions.

Now I would like to turn the call over to Dirk.

Dirk Sodestrom

Thanks, John. Before I talk about the financial details for the second quarter let me tell you how we will provide financial information regarding the third quarter of 2009. We will give guidance on the call today. The guidance will be the Company’s targets for the third quarter of 2009 on sales, gross margin, operating spending, other income, tax provision, and share count. Next we expect to provide a financial update in early September. 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: First quarter sales were $45.2 million which was in the mid range of the updated revenue guidance for the quarter. This represented a decrease of 21.5% in comparison with the same quarter one year ago and a decrease of 6.7% compared with last quarter. Revenue from Flash technology based products was 29% compared with 24% last quarter. By market segment 7% of revenue was in communications unchanged from last quarter. Aerospace and military was 39% compared with 40% in the previous quarter. Industrial was 34% compared with 37% last quarter and consumer was 20% of revenue compared with 16% last quarter.

Market segment numbers are based on our estimate of end uses by our customers.

Geographically 52% of the revenue was in North America, unchanged from last quarter; 25% in Europe compared with 27% in the previous quarter and 23% in Pan Asia compared with 21% last quarter.

By channel 71% of the revenue was through distribution compared with 67% last quarter and 29% through OEM compared with 33% in the previous quarter.

Overall units sold increased by 9% compared with last quarter and ASP decreased 14%. Net in customer bookings increased compared with the previous quarter. Overall book-to-bill was well above 1%. Total backlog is higher entering the third quarter of 2009 then it was entering the second quarter.

Now I will talk about gross margin, operating spending, net income, and earnings per share on a non-GAAP basis. Non-GAAP calculations exclude stock based compensation charges, certain excess inventory reserves, restructuring and fixed asset impairment charges, acquisition related charges, adjustments to deferred tax valuation allowances 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 pressroom of the Company’s website.

Non-GAAP gross margin in the second quarter was 57% unchanged from the first quarter of 2009. This excludes $13.3 million of excess reserves taken during the second quarter for some of our newer product lines. As noted previously during 2008 the Company built up inventory for the new Flash products due to a conscious effort to support increased turns business and shorter lead times for the consumer products at which many of the new Flash products are targeted; however due to uncertainty regarding the timing and extent of the economic recovery, coupled with the high levels of inventory on hand compared with historical norms, the Company determined that the excess reserves were appropriate based on its historical excess reserve accounting policies.

Compared with the first quarter of 2009 gross margin in the second quarter of 2009 was down due to negative overhead variances as a result of lower production volumes. Gross margin in the second quarter was also impacted by product mix with a higher proportion of sales coming from the lower margin Flash products. Gross margin in the first quarter of 2009 was negatively impacted by a $1.5 million charge associated with low yield wafers.

Operating spending for the quarter was $26.6 million or 59% of revenue as compared with $27.6 million or 57% of revenue in the first quarter of 2009. The spending for the second quarter of 2009 does not include $1.8 million of stock based compensation charges; $5.6 million of costs associated with fixed asset impairments and other restructuring charges; $0.6 million of charges associated with the acquisition of Pigeon Point Systems, and $0.2 million of charges associated with certain Board Advisory services.

R&D spending was $14.1 million or 31% of revenue compared with $15.1 million or 31% of revenue in the first quarter.

SG&A was $12.6 million or 28% of revenue compared with $12.5 million or 26% of revenue in the first quarter.

Other income was $0.8 million compared with $1 million last quarter.

The first quarter 2009 non-GAAP other income amount does not include a $0.7 million gain from insurance. Non-GAAP net income was $14,000.00 compared with $0.8 million last quarter. Diluted share count was $26.2 million. This all resulted in earnings per share on a non-GAAP basis of $0.00 per share compared with $0.03 last quarter.

Non-GAAP net income also does not include non-cash charges of $24.4 million to increase the Company’s valuation allowance associated with this deferred income tax assets the Company established a full reserve for its remaining deferred tax assets as a result of current year and cumulative losses coupled with continuing uncertainties surrounding the nature and timing of the taxable income required to realize deferred tax assets in future periods.

Cash, cash equivalents, and investments were $139.5 million at the end of the quarter a decrease of $0.4 million from the end of the previous quarter.

Accounts receivable increased sequentially by $4.2 million to $25.9 million. DSO increased by 11 days to 52 days.

Net inventory decreased sequentially by $15.6 million largely as a result of the excess reserves of $13.3 million noted previously. Net days of inventory decreased by 97 days to 149 day, when compared with the first quarter of 2009.

Capital expenditures were $1.4 million during the quarter and we recorded $3.3 million of depreciation.

Head count increased sequentially by 7 to 515.

Now I will give you the financial outlook for the third quarter of 2009. Taking into consideration all of the information currently known by us, we are projecting revenue to be up 4% to down 2%. Gross margin is expected to be about 56% or 57%; operating spending is anticipated to come in at about $27.2 million which does not include a non-cash charge for equity compensation of $1.7 million. This operating expense outlook takes into consideration timing issues associated with research and development work and start up costs associated with expansions into off shore locations.

Other income will be around $0.8 million; the non-GAAP tax rate for the quarter is expected to be approximately 30%. Fully diluted share count is expected to be 26.4 million shares.

This guidance for operational expenses does not include the ongoing amortization of intangibles and deferred compensation, or the Pigeon Point Systems acquisition or approximately $570,000.00.

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

John East

Thanks Dirk. First I would like to talk about Q2. As Dirk told you our sales were down 6.7% from the prior quarter. Bookings improved considerably from the prior quarter. The book-to-bill was well over 1:1 although the rates decreased towards the end of the quarter. Bookings so far this quarter have been a little light, but not horrible. It is pretty common for July and August bookings to slow down. If this turns out to be a typical summer quarter, bookings will remain light through July and August, and the key question will be do bookings come back in September. My gut feel is that they will, but only time will tell.

Let me give you some details on Q3. As Dirk also told you, our six month backlog entering this quarter is considerably higher than the Q2 beginning six month backlog. A relatively high percentage of that increased backlog is now scheduled in Q4, that is the Christmas quarter, so the Q3 schedule backlog beginning backlog for this quarter is a little higher than it was when we entered Q2 but not by a lot.

We also had a relatively high amount of backlog on hold when we entered Q3. We don’t include backlog on hold in the six-month backlog number, so if we get some of that backlog off of old and ship it that would be upside to the numbers I have just given you.

In the general case we put backlog on hold for credit or ITAR reasons. In most cases the issues eventually get resolved and the product ships, but there is no guarantee of how long that may take to happen. Sometimes it happens within the quarter, sometimes it doesn’t.

Given the uncertainties of the backlog on hold, in addition to the normal summer bookings concerns, we are going to call Q3 revenue as somewhere between down 2% and up 4%. Assuming that we get some of the held backlog released in like the mid point of that range we will need fewer turns than the last quarter.

Let’s talk now about my overall feelings for the PLD market conditions.

One quarter ago I told you that I believed that Q2 would be the bottom for Actel, but that I didn’t expect a V shaped recovery. I still believe that. As I see it today, Q3 will be approximately flat with Q2 and Q4 will be somewhat higher. How much higher is a good question. We have two camps here in Actel. One camp believes that Q4 will be considerably higher and the other camp thinks somewhat higher. My bet is that we are in for a relatively slow booking for July and August and won’t know which camp is right until we see what happens to bookings in September.

Two quarters ago I laid out a plan to arrive at a new financial model; now I am going to give you an update.

We have determined that we will be cutting $6.5 million from our total quarterly spending using Q3 2008 as the baseline. Our plan calls for completing this by Q3 2010 or about one year from now. Some of the cuts will be above the line, but most will be below the line. With respect to the quarter-by-quarter timing I advised you to draw a straight line graph to try to predict our quarterly expenses. If you did that you have seen that we are pretty much on the plan that we gave you. Actually we are a little ahead. There is little doubt in our minds that we will make the total of $6.5 million quarterly savings. We are still trying to sort out the exact split between above and below the line cut.

Let me talk for a moment about inventories.

Dirk has told you that we spent several months trying to determine the probability of using all of the inventory that we built when we were experiencing our bookings boom in early 2008. We also told you about our decision to take a write off on some of the remaining inventory. On top of the inventory write off we have made a substantial additional reduction in our inventory over the last couple of quarters. These two actions have combined to get our net inventory back to a reasonable as Dirk told you 149 days of net inventory.

Earlier this year we received notice from one of our foundries that they are planning to shut down the FAB where they make our ACT 1, ACT 2 and ACT 3 families. These are our oldest products. In fact ACT 1 was announced more than 20 years ago. As you know, a very large percentage of our business comes from the military, medical, and industrial customer base. One of the ways we compete in this base is to commit to potential customers that we will do our best to avoid forcing them to make last time buys on products.

n order to be good to our word we have decided to buy enough inventory from our foundries to be able to continue to ship these products for at least the next 10 years based on the demand rates that we predict today. This will mean that we buy approximately $7 million worth of wafers from that FAB and add them to our inventory. The FAB has agreed to build the wafers immediately, but to spread the shipments linearly over the next four quarters and you will see the first of that inventory on our balance sheet next quarter.

I will close with a few words about our design win effort. Q2 was the best quarter that I can remember from a design win point of view ever. I mentioned to you on a previous call that our design activity had slowed down a bit towards the end of last year. While that problem went away last quarter. Design activity was very strong for us with the bulk of the success coming from our 130 nanometer Flash product.

Finally, I am going to remind you that Maurice Carson will be joining us as our new Chief Financial Officer next month. Maurice will bring drive, a great attitude, and a vast amount of related experience to the party. We are really looking forward to him joining us. Once Maurice arrives, Dirk will resume his previous duties as our controller. Dirk, thanks for helping us work through the quirky times since John Anderson’s untimely death.

That concludes my formal remarks. Marcello you may please open the lines for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Richard Shannon from Northland Securities.

Richard Shannon - Northland Securities

I apologize, I had a couple of calls going on at once here, so I didn’t hear all of your prepared comments, so hopefully I don’t repeat too much. I have a question about the guidance for the third quarter. I am curious as to how this plays out between your Mill Arrow products and other and I kind of want to get your sense on how Flash should go with it as well.

John East

Okay, well we had a pretty good quarter in Flash, the quarter we just finished the net dollars were up when most of our other lines, in fact all of our other lines, were down. So, you saw the percentage of Flash shipments jump quite a bit. It went from 24 to 29. This quarter would normally be the consumer quarter because Christmas is coming up. What we have seen in our consumer Flash business is that the customers that were so big a year ago have dwindled away. Not to nothingness, but to much smaller numbers and a new set of guys have come on.

The new guys, by the way, are bigger, better-known names so we take some comfort in that. But in general the consumer products that we’re having success with right now aren’t really Christmas type of products. They are not ones you would tend to get in your stocking. They go more in the direction of printers and set top boxes and things like that. So, my gut feel is that Flash will be round figures flat this quarter and I would expect it to take a move up again in Q4.

Since our guidance was for just a little bit of flat that works out to the percent Flash I would expect to stay right around where it was which was 29%; which was, by the way, a record high for us. We only had one other quarter in history where it was that high.

Did I pick up your question Richard?

Richard Shannon - Northland Securities

Yes. My follow up question is in response to your comments about design win activity in the second quarter being very good; I have a multi-part question within that. I would love to get a sense of which end markets you are seeing some of that design activity coming from and also with the time frame we might see some evidence to that on the revenue line. Is that within a couple of quarters, kind of mid next year? Just maybe a sense of when we should see the excitement of what you have seen just from a design activity point of view this quarter.

John East

Okay the design activity was pretty much in proportion to the business that we normally do and that is 65% or 70% the Industrial Arrow military market. As you know those markets are really pretty slow to go from design win to sales. So, for in the neighborhood of 2/3 of the design wins it is a matter of a couple of years, probably, before that translates into dollars. We did have some good looking consumer wins that should pick up sooner. But, even in the case of consumer wins it often takes in the neighborhood of a year to go from the wins until there is real volume. So, you definitely wouldn’t want to look for dividends to be paid in the summer, or probably even the Christmas quarter, from the higher activity. We, I think, more than our competitors, are a long time frame, long time constant kind of company and I really don’t see any exceptions with these design wins.


Your next question comes from Neil Gagnon with Gagnon Securities.

Neil Gagnon - Gagnon Securities

On the book-to-bill can you flush out for us, John, the quality and what kind of business is this versus other periods where you have had a big jump in your bookings?

John East

That is a particularly astute question because it couldn’t be more different from a year ago, actually 15 months ago. Then we had just a shocking jump in bookings and it was dominated by the Asian consumer from not really particularly well known companies. It was hard backlog and they were beating us to death for deliveries right away.

The bookings that we saw in Q2 came from exactly the other direction. They were heavily oriented towards the military industrial set of people. They had long lead times. As I have mentioned today already a lot of that business is scheduled out in Q4, the Christmas quarter. The names of the companies are well known. That doesn’t mean they don’t come along and cancel backlog later, but I don’t think they will. So it just couldn’t be more different.

Neil Gagnon - Gagnon Securities

Taking that a little further, it is all going to programs in place and they have slots for them, as much as we know?

John East

Yes, as much as I know. There is always 2% that doesn’t work out that way, but yes these people have platforms. Now they can change their minds later. We have had cancellations from the biggest and best of them, so it could happen here, but I don’t expect it to.

Neil Gagnon - Gagnon Securities

Okay, I would like to switch subjects and talk about this expense reduction that you are going through. I would like a little bit of discussion about why it isn’t going faster and why you aren’t getting it done faster. Why does it have to be done in this measured pace?

John East

When we tried to determine what cuts we were going to make and where and how and when we started out, well we did it in two directions. We did it in a top down and a bottom up. But, one of the things we did was to identify all of the products we were working on and all of the projects we were working on and try and determine which ones we could do without versus the ones that we would be silly to try to do without. Based on that, we laid a cost reduction plan around that with the resolve that we would not chop any product or any projects that we thought was an important one. We wouldn’t have a lay off and ax the people that were on it and take the progress away in order to get the reductions done sooner. So that was reason No.1.

By the way, many of our projects are really pretty long-term. We are working on some projects that take three years to get done. Had we been in the middle of one of those projects we would have said no change for the next year and a half.

Additionally, we are beefing up our infrastructure off shore and that takes time to get it built up, to get people trained and what have you. So, because of those two things we are about halfway into this program and I expect to stay on the straight line graph that you have drawn. It could be accelerated a little bit, but not much.

Again, the answer to your question is to build up the infrastructure and make sure we finish and get to market the projects and products that we believe in.


Your next question comes from Tom Clause from Graham Partners.

Tom Clause - Graham Partners

On the new design wins, I am curious what it looks like between IGLOO and then the Nano and PLUS and all of these types of versions. Can you give me a summary of what products seem to be taking stronger than others, if you can in any way?

John East

Yes, we do stop short of giving a product-by-product break out, so I am not going to violate that policy. I will give you the generalities though. The generality is we have three FPJ families and a couple of kind of smaller derivatives of them based on 130 nanometer. Those are ProASIC3 which has been there the longest. Generally speaking our design wins ramp up over a period of about three years. So up until they have been out three years typically the first product out gets more wins than the next one out.

The second product is IGLOO and the third product is Nano which is a little bit of a spin on IGLOO. All three of those did well. They did well pretty much in proportion to the amount of time that they have been out. And, they did well across the board of the customers that we typically serve which means a lot of wins in industrial, a lot of wins in military, a lot of wins in medical, as well as the consumer wins that we have tended to talk about more.

Tom Clause - Graham Partners

Why is it that the headcount is up sequentially, not that I am a mean guy? When you guys are taking restructuring charges and supposedly cutting costs I didn’t quite understand why the head count was up.

John East

Well you are not a mean guy, because you know we dry run this meeting in the morning an we ask ourselves the questions that are pretty sure to get asked and that was on the list, so Dirk is well prepared to answer that.

Dirk Sodestrom

Yes, there are just a couple of issues that happened this quarter. We did have a reduction in force in the first quarter, so we did reduced staff at that point. This quarter we transitioned one of our outside sales reps to in house, so that was actually an increase of three head counts, but it was no increase in cost. Then the other increases were largely overseas. There is some overlap in establishing our overseas operation. So, we don’t expect that trend to continue.


Your last question is a follow up question from the line of Richard Shannon with Northland Securities.

Richard Shannon - Northland Securities

My question is on the gross margin guidance for the third quarter. I think in your press release you said the pro forma number for the second quarter was $57 and change and the guidance is $56 6o $57. I got the sense from your response though to one of my earlier questions about how the make up of the revenues in the third quarter, I got the sense that your military and aerospace products might be going maybe a little bit faster than Flash, which would suggest that gross margins should be going up. So, I am kind of curious as to why that range? Is it just to be conservative, or is there something else in there that I don’t know about?

John East

I tried to say, Richard that I expect the summer mix to be pretty similar to the mix that we had in Q2. I said I thought, Flash would be around flat and that the quarter number we expect to be around flat. So, I think the mix is going to be pretty much the same. I don’t really see that much difference when I look at the quarter and try to forecast what things are going to look like. So, if we ran 57 points last quarter and we then give you guidance for 56 or 57, Dirk knows better than I, but I don’t think it is going to be because we have some secret that we know is going to happen. I think we are just trying to give ourselves a little margin there.

Dirk, do you want to add to that?

Dirk Sodestrom

I would agree with that. We did talk a little bit about the overhead variances and we are working on those, but we expect those to continue for a quarter or so. But, yes I think there might be a little bit of conservatism in there.

Richard Shannon - Northland Securities

My next question is obviously we have been through a pretty difficult economic time here. The Flash product line is obviously the primary driver of growth for you going forward. You talked about a very good design win environment in the second quarter. Is there any way you can characterize what your viewpoint is on how fast Flash can grow once some of these new products, new design wins ramp up? Also, how would you compare that relative to other data points in the industry? Like I don’t know if you compare it against, since Flash products in some sense compete against CPLDs from some of your competitors, do you compare it to the growth rate of that or how can we think about it, as investors, how Flash can grow over the next say one to two years?

John East

Good question. I will start with CPLDs. They are sort of at the other extreme and you could argue well from the standpoint of technology they both kind of use Flash or [E-Scored] so why shouldn’t they be the same?

Well the customers don’t really care what technology is used when they are trying to predict how long it takes their systems to come to fruition or to get the volume. The fact is that most CPLDs are really small products that tend to be added to a design right at the end of a design as blue logic to finish the thing off. In a lot of cases the small CPLDs can go from design win to reasonable volume in pretty much of a hurry.

We are at the other end of the extreme of, I have talked to you guys many times about our curve which in general shows that our products peak about seven years after we have introduced them and then they live nearly forever. In fact I just mentioned today that we are going to do some buying of wafers for the ASIC 1 product family that we introduced 21 years ago. So there is pretty good data that says if they don’t last forever it is next to forever.

But if the peak comes in seven years and if the growth to the peak is relatively linear, which on average it is; sometimes I argue that it grows a little faster than linear, sometimes I argue it grows a little less fast then linear. The fact is it really depends on the family. So if you just planned on linear you would say well the designs that won today will be peaking in seven years, they are not going to give me that much volume next year or even two years from now. I think that is the general case.

But, the good news is those aren’t the first designs we have ever won. We have been winning designs at a pretty good clip for, ever since the Flash products first came out. So, we have some designs that we won seven years ago and six years ago and five and four and three and that will be where the bulk of the growth comes from. Now the exception to that will be some consumer wins that we have achieved that we feel pretty excited about. I think some of those will kick in a little sooner.

The generality is that our customer base, industrial, military and medical peaks after seven years. We have 20 years of history that shows us that and I would like to tell you it happens sooner, but the data just says it does not.

John East

I look forward to seeing all of you the same time, the same place one quarter from today. Have a good day.


Ladies and gentlemen this does conclude today’s conference call. We would like to thank you for your participation. (Operator Instructions)

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!