Techwell, Inc. Q2 2009 Earnings Call Transcript

Jul.30.09 | About: Techwell, Inc. (TWLL)

Techwell, Inc. (TWLL) Q2 2009 Earnings Call Transcript July 30, 2009 5:15 PM ET

Executives

Tom Krause – IR

Mark Voll – CFO

Hiro Kozato – CEO

Analysts

Quinn Bolton – Needham & Co.

Tore Svanberg – Thomas Weisel Partners

Operator

Good day, ladies and gentlemen, and welcome to the Techwell Inc. second quarter 2009 earnings conference call. (Operator instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr Tom Krause, Techwell Investor Relations. Sir, you may proceed.

Tom Krause

Thank you and good afternoon. Welcome to Techwell’s second 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 Web site at www.techwillinc.com. This call is being broadcast live over the Internet and may be accessed in the Investor Relations section of Techwell’s Web site.

Before management begins the discussion of the second 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 percentage of future revenue fabricated in 0.18 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 third quarter of 2009, anticipated effective tax rate for the third and fourth quarter of 2009, future objectives and anticipated trends and growth in the company’s business and end markets in which it operates and the company’s performance in the second half of 2009 and 2010.

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 quarterly report on Form 10-Q filed with the Securities & Exchange Commission on May 07, 2009.

Techwell undertakes 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 during today’s call, management will be reporting certain financial information on a non-GAAP basis such as non-GAAP net income, which excludes stock-based compensation and its related tax effects. Techwell cautions investors not to place undue reliance on non-GAAP measures and to read them in connection with its GAAP results. You can find a detailed reconciliation between Techwell’s GAAP and non-GAAP results in the financial tables included in its earnings release, which is currently posted on its Web site.

Thank you for your time and attention. I will now turn the call over to Mark Voll, Techwell’s Chief Financial Officer. Mark, please go ahead.

Mark Voll

Thanks, Tom. Good afternoon everyone and welcome to our second 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 third 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 second quarter ended June 30, 2009, we reported total revenue of $12 million, which was at the top of the range of our guidance of $11 million to $12 million. Total revenue for the second quarter compares to $10.3 million last quarter, $17 million in the same period a year ago. Total revenue in the second quarter for each of our product lines consisted of security revenue of $8.4 million, representing 69% of total revenue, automotive infotainment revenue of $2.3 million, or 20% of total revenue, consumer revenue of $1.3 million, or 11% of total revenue, and other revenue of approximately $6,000. Security revenue declined 35% year-over-year but increased 12% sequentially. Automotive infotainment revenue increased 19% year-over-year and 39% when compared to the first quarter. Consumer revenue declined 38%, when compared to the same period last year but increased 15% sequentially. In the second quarter, we had one customer that represented more than 10% of total revenue.

Sales to our distributor in China represented 37% of revenue in the quarter, which includes shipments to multiple end customers, with no single end customer representing 10% or more of total revenue. For the quarter 52% of revenue came from products sold into China. Combined, our 10 largest customers represented 74% of total revenue in the second quarter, eight of which 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 62% in the second quarter of 2008 and 60% in the prior quarter. During the second quarter 74% of our total revenue came from products fabricated in 0.18 micron, down slightly from 77% in the prior quarter. We expect the percentage of our revenue fabricated in 0.18 micron to continue to increase throughout 2009.

Total operating expenses were approximately $8 million for the second quarter of 2009, representing 67% of total revenue. This compares to operating expenses of $8 million or 47% of revenue in the second quarter of 2008 and $7.8 million or 76% of revenue in the first quarter of 2009. Of the $8 million of operating expenses in the quarter, $4.3 million consisted of research and development expenses or 54% of operating expenses and included more than $350,000 in tape-out expenses for new product development. Operating expenses also included approximately $1.6 million of pre-tax stock-based compensation expenses.

We recorded $330,000 of interest income in the second quarter of 2009, compared to $540,000 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 second quarter totaled $416,000 or $0.02 per share. Net income includes pretax stock-based compensation expenses of approximately $1.8 million for the tax effect of $418,000 equating to a $0.06 per share charge. We recorded a tax benefit of $98,000 in the second quarter.

Earnings per share for the quarter were calculated using 21,467,000 shares. Net loss per diluted share of $0.02 for the second quarter compares to net loss per share of $0.03 in the first quarter and net income per diluted share of $0.08 in the second quarter of 2008. Non-GAAP net income for the second quarter totaled $932,000 or $0.04 per share. Non-GAAP net income excludes stock-based compensation expenses and the related tax effects.

Now turning to the balance sheet, accounts receivable were $900,000 compared to $3 million at the end of the first quarter, Historically, we have sold on credit terms only to OEM customers and as a result, our accounts receivable balances have been low in comparison to overall revenue. In the second quarter, revenue from direct sales to OEMs represented 26% of our revenue, while sales to distributors represented 74% of revenue. Inventory as of June 30, 2009 was $5.8 million, increasing from $4.3 million at the end of the first quarter of 2009. Our cash, cash equivalents in both short and long-term investment balance, as of June 30, 2009 was approximately $87 million compared to approximately $81.4 million as of December 30, 2008. Our cash, cash equivalents in both short and long-term investment balance at the end of the quarter of $87 million represents cash per share of $4.05. At the end of the second quarter, we had 165 employees 78 of which are in research and development.

In terms of guidance for the third quarter of 2009, we are now seeing a much-improved environment in the security surveillance market as end customer inventories are fully depleted. We expect to see sequential revenue growth of our automotive infotainment revenues as more of our earlier secured design wins go into volume production. As a result, we expect total revenue for the third quarter to range between $16 million and $17 million reflecting growth of 33% to 42% compared to the second quarter. We anticipate gross margins for the third quarter to remain comparable to second quarter results. We anticipate operating expenses for the third quarter to range between $7 million and $7.5 million excluding stock-based compensation expenses as tape-out expenses for new product development will include an increase in the quarter. We estimate our effective tax rate for the third and fourth quarter of 2009 to be 0%. We expect to be profitable on a GAAP basis in both the third and fourth quarter of 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. In the second quarter we saw positive signs that security surveillance market is on track to return to a more normal demand environment in the second half of this year. As you may recall, our security surveillance business started to slow towards the end of the first quarter of last year. As end market demand failed rapidly our customers were left with a buildup of inventory in their channel and with little visibility on when demand for their solutions would return. As a result, our security business dropped significantly in the first quarter of this year as our security customers focused on working down inventory in their channels. In their vision, they limited new orders and focused on reducing their inventories to reflect the weak demand environment.

Towards the end of the second quarter, we began to see our security customers’ forecast for the second half of the year improved significantly. Customers are now reporting that the end market demand is on pace to return to ’08 levels by the fourth quarter. This gives us more confidence that the fundamental demand drivers for our security business are solid and that the inventory correction is complete.

Looking at our security business in more detail, we continue to see a shift in our customer base to China. As we have discussed, we see two fundamental reasons for this shift. One, the market for security equipment in China is outperforming other regions throughout the world. Our China customers have access to this channel that our customers in other regions do not have. In addition, our China customers have access to lower cost labor and manufacturing which gives them a percentage [ph] in the market. As a result, we expect this shift to continue.

On the product front, we continue to focus on going into production with our TW2880 multi-channel HD display solution. We plan to start shipping to our early adaptor [ph] customers in the fourth quarter. We have also secured design wins for TW2880 with the majority of our security customers. As a result of these design wins, we believe that TW2880 will be one of the key drivers in the growth of our security business in 2010.

We also are seeing a tick up in demand for our PC based security products. These are our low-cost solutions that utilize standard PCs to perform DVR functions like compression, display and networking. We have a more highly integrated PC solution that embeds PCI Express coming to the market in the second half of this year that would allow us to continue to increase revenues in this segment of the market.

Looking at competition and ASP, we feel that the downturn has certainly benefited us as smaller competitors have had more difficulty securing and maintaining customers. However we still see competition from our largest competitors and as a result we continue to provide modest price reductions to our customers to maintain our market share. With this in mind, we see current ASP declines rather in line with historical annual price reductions. We are offsetting this price reduction with reductions in wafer, package and test cost [ph] from our suppliers, which have allowed us to maintain our gross profit margins. We expect to be able to continue to do this for the remainder of this year. With a strong competitive position for our security products and the robust product roadmap that is focused on expanding our service to available markets, we are excited about our prospects for the second half of 2009 and into next year.

Turning to our automotive infotainment business, our second quarter results mark the second consecutive quarter of double-digit sequential growth. This is largely a result of more existing design wins going into production and in particular we are starting to see the after-market installer segment pick up. This segment consists of customers that design customized solutions for specific makes and models and sell these solutions for installation to car dealers and retailers. In review of the OEM market, we continue to see increases quarter over quarter but end market demand continues to be weak. We do believe as more of our design wins go into production and more video applications are installed into new automobiles, this market segment will grow more significantly over the next several years.

In general we feel confident that the demand for larger and more feature-rich displays that support applications like navigation, DVD entertainment and backup camera will continue to expand. We also feel confident that our competitive position is strong as a result of a unique set of products we have developed for this emerging market. We have spent the last several years developing highly integrated mixed signal solutions especially for LCD displays in automotive infotainment applications. Given the long (inaudible) times and product life cycles, we feel we are well positioned to benefit from growth in this market. In addition with six products started in this emerging market segment and limited competition from other vendors, we feel confident that we can continue to grow our market share. As a result, despite what most are forecasting to be a challenging market for automobile sales, we believe that our growth prospects for our automotive business in the near term as well as the longer term remains quite attractive.

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 Quinn Bolton with Needham & Co. Go ahead please.

Quinn Bolton – Needham & Co.

Hi guys, congratulations on the good second quarter results and the strong third quarter outlook.

Hiro Kozato

Thank you.

Quinn Bolton – Needham & Co.

I wanted to see first if you could just sort of talk about the mix in the third quarter, obviously you have guided for very strong sequential growth, should we think about sort of roughly equivalent quarter-on-quarter growth from both the security and the auto businesses or are there specific programs going into production in auto or the end of inventory depletion in security that really drives stronger growth in one of the two markets?

Hiro Kozato

Yes, we think the security business will grow about 35%, and auto will grow approximately 20%, and consumer will drop slightly at 3% to 5%.

Quinn Bolton – Needham & Co.

Okay and it is just – I guess I would have thought seasonally consumer might have been strong in the September quarter, is there anything sort of happening there or is that just that you had a big second quarter and demand kind of flattening out?

Hiro Kozato

As we mentioned in the last earnings call, we are no longer focused on our consumer business and we chip into all the (inaudible) projects now.

Quinn Bolton – Needham & Co.

Okay great, second question in the guidance for OpEx to increase to $7 million to $7.5 million range in the third quarter, Mark, can you give us a sense what the tape-out expense is going to be for the third quarter?

Mark Voll

We anticipate that the tape-out expenses would be somewhere between $1 million to $1.3 million. So all the incremental increase in operating expense, almost all of it is coming from tape-out expenses.

Quinn Bolton – Needham & Co.

Okay, great and then just on the tax rate, I know you mentioned that the tax rate would be effectively 0 for Q3, Q4, should we continue to use a sort of full tax rate for 2010 or any idea where it goes in 2010?

Mark Voll

Yes, so for 2010 I would use the 35% tax rate the company has guided to.

Quinn Bolton – Needham & Co.

Okay, great and just in the auto business, I know you have a number of programs that are set to enter production sort of second half of this year, I was wondering if you might be able to just highlight the opportunity in the rear-view mirror cameras because it sounds like that is potentially a new segment for you and I think you have got some designs set to ramp later this year.

Hiro Kozato

Yes, we think we will start seeing a sharper ramp from Q4 this year, from the rear-view market and as we mentioned in the last earnings call Congress passed a deal for the backup camera. In 2011 all the new cars, new automobiles have to have either a backup camera or a peak sensor, so I think this will help our rear-view mirror business also.

Quinn Bolton – Needham & Co.

I am sorry, Hiro, you said that that was passed by Congress since your last conference call.

Hiro Kozato

Yes (inaudible) months ago.

Quinn Bolton – Needham & Co.

Great, okay thank you.

Hiro Kozato

Welcome.

Operator

(Operator instructions) Your next question comes from the line of Tore Svanberg with Thomas Weisel Partners. Please proceed.

Tore Svanberg – Thomas Weisel Partners

Yes, great thanks, good quarter, with regards to your guidance $16 million to $17 million I know you usually do not give any bookings, numbers or anything like that but just qualitatively can you just talk about your visibility towards those numbers please?

Hiro Kozato

Yes, we usually do not give numbers but I would say this is much better than what we usually see.

Tore Svanberg – Thomas Weisel Partners

Can you maybe also reference how your lead times have changed over the last 90 days?

Hiro Kozato

Lead times from our supplier?

Tore Svanberg – Thomas Weisel Partners

No, the lead times on you from your customers.

Hiro Kozato

Yes, it is shorter than before but similar to what we saw last quarter.

Tore Svanberg – Thomas Weisel Partners

Okay, very good, and I hear you mentioned that TW2880 is going to start generating revenues in Q4 but the bulk of the growth is going to come in 2010, what exactly are we talking about in magnitude to Q4, could this already be pretty steep initial ramp or is there going to be a very gradual – to my understanding you have a lot of design wins here and I am just wondering from a timing perspective, if they all hit it once or if they all hit it at different quarters.

Hiro Kozato

They will all hit it in different quarters and from Q4 a couple of key customers will start production.

Tore Svanberg – Thomas Weisel Partners

Great and last question, I know historically we were talking about the Safe City programs in China and obviously China has really outperformed here quite a bit near term for you so are we starting to see the benefits from Safe City or do you think it is more basically just the Chinese OEMs gaining share vis-a-vis specially Korea?

Hiro Kozato

I would say more the Chinese customers are gaining share from other regions but also Safe City program is helping a little bit and we believe that the Safe City program will start helping more next year due to the World Expo next year in Shanghai.

Tore Svanberg – Thomas Weisel Partners

Great, thank you very much.

Hiro Kozato

Welcome.

Operator

There are no further questions in queue. I would now like to turn the call back over to management for any closing remarks.

Mark Voll

We encourage you to visit our Web site at www.techwellinc.com to view our latest announcements as well as our calendar of events. Additionally if you have any questions or would like more information, please contact me directly. Thank you for joining us today.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Good day.

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