Trident Microsystems F1Q10 (Qtr End 9/30/09) Earnings Call Transcript

Trident Microsystems, Inc. (TRID)

F1Q10 (Qtr End 9/30/09) Earnings Call

October 26, 2009 5:00 pm ET

Executives

John Swinson (ph) - IR

Sylvia Summers Couder - President, Chief Executive Officer, Director

Pete J. Mangan - Chief Financial Officer, Senior Vice President

Analysts

Rajvindra Gill – Needham & Company

Yang - Unidentified Company Name

David Muller - Unidentified Company Name

Presentation

Operator

Good day ladies and gentlemen and welcome to the Q1 2010 Trident Microsystems' earnings conference all. My name is Ken and I will be your coordinator for today. At this time all participant are in listen only mode. We will be facilitating a question and answer session toward the end of today’s conference. (Operator’s instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Mr. John Swinson (ph), please proceed.

John Swinson

Thanks, Ken. Good afternoon and welcome to Trident Microsystems' fiscal first quarter conference call. After the market closed today Trident issued a press release discussing results for its fiscal first quarter ended September 30, 2009. The press release is accessible online at www.tridentmicro.com.

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 by accessing the investor relations sections of Trident’s website which again is www.tridentmicro.com.

Before we begin please note that during this call we will make forward-looking statements. These include comments related to guidance on anticipated revenues and operating losses, closing of the NXP transaction, future product shipments and other statements. 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 or forward-looking statements are subject to certain risks and uncertainties. These risks include, in particular, our ability to close and realize the benefits from the NXP transaction, the ability to obtain design wins from a major OEMs for our products. And competitive pressures, including pricing and competitors new product introductions, increasingly competitive DTV market and our ability to retain key employees.

These and other factors are discussed in our press release and on the company’s filings with the SEC. We encourage you to read these documents and to come to your own conclusions about the risks and uncertainties inherent in Trident’s business.

Also, please note we will present non-GAAP financial information in this call. For a reconciliation of our non-GAAP information to the most comparable information under GAAP, please refer to our press release.

On today’s call are Sylvia Summers, Trident’s CEO and President and Pete Mangan, Trident’s Senior VP and CFO. Pete will review the financial results of 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’ll then open the call for questions. Now I’ll turn the call over to Pete Mangan. Pete?

Pete J. Mangan

Thank you, John. And thank you all for joining our call today. Let me start by stating the results for the quarter were consistent with our revised guidance announced on October 5^th. Net revenues for the quarter were $31.1 million, up from $14.9 million in the prior sequential quarter. This reflects the full quarter impact of the product lines acquired from Micronas in May and is close to the combined revenue levels we had anticipated at the time of the acquisitions.

Discreet products accounted for 92% of revenues and were up substantially on the strength of FRC, D-Mod and audio products. For the quarter we had three customers with greater than 10% of revenues. Samsung represented 27% of total revenues, while LG and Philips represented 15% and 11% respectively.

Regionally, revenues were more concentrated with Korea at 44%, followed by Europe, 27%, Asia Pacific 17%, Japan 11% and North America 1%.

Blended ASPs for the quarter were approximately $3.50 which compares with the prior quarter of roughly $4.50.

Our non-GAAP gross margins for the quarter were 36.9% which were essentially flat with the prior quarter. This is better than our original guidance and reflects a stronger mix of discreet products as well as better economy as a scale resulting from higher revenues.

The adjustment between non-GAAP and GAAP gross margin was approximately $1 million, resulting in a GAAP gross margin of 34% up from 31% in the prior quarter.

Non-GAAP operating expenses were $22.1 million for the quarter, of this R&D was $15.6 million, and SG&A $6.5 million. Total OF Ex increased approximately $2.6 million from the prior quarter which primarily reflects the full quarter’s impact of R&D and SG&A expenses related to the Micronas acquisition.

Our recently M&A and customer activities has created some turbulence in Op Ex this past quarter. Compared with our original guidance of $20-$21 million. We incurred approximately $800,000 of additional costs and expenses related to the Micronas and NXP transactions and $500,000 of extra tooling and other costs related to our design win activities in the quarter.

Total GAAP adjustments for the quarter were $5.6 million. These primarily included $2.8 million of professional fees related to the NXP transaction. As expected $1.5 million of restructuring, $1.2 million in stock based compensation expenses and $1 million of intangible amortization. These were offset by $1.6 million in reimbursement from DNO Insurance.

Net loss for the fiscal first quarter on a non-GAAP base, which excludes the adjustments noted above were $11.6 million or $0.17 per share. This compares with a non-GAAP net loss of $15.7 million or $0.24 per share in the prior quarter and a $3.3 million or $0.05 per share for the first quarter of fiscal 2009.

Please note at the time of the Micronas product line acquisition we talked about delivering a 10%-25% improvement in the non-GAAP operating performance. In our first full quarter post close we delivered a 24% improvement. We believe this validates the strengths of these product lines and our ability to execute on the integration plan.

Now turning to the balance sheet. Cash as the end of the quarter was $161 million, down $27 million from the prior quarter. The decrease in cash was driven primarily by the operating loss in a $16 million net increase in working capital. Primarily related the timing of payables as well as higher inventories and receivables consistent with a ramp in revenue.

All working capital metrics improved in the quarter with DSOs of 53 days, days of inventory of 50 days and days payable in accrued liabilities of 83 days.

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

Sylvia Summers Couder

Thank you, Pete. And thank you all for joining us on the call today. Despite the net loss which we expected at this point in our turnaround, our report for this quarter is almost uniformly positive.

Financial results for the quarter were in line with our improved guidance and consistent with expectations we set at the time of the acquisition of the Micronas product lines. These products delivered solid revenue and gross margin in the quarter. More importantly, the (inaudible) D-Mod that we acquired in that transaction were critical to win the large Korean OEM design win that we announced today.

This OEM is the largest manufacturer of LCD TVs in the world, with an estimated market share of approximately 20%. Our SoC were in lost of the low end sockets for North America and all of Europe their two highest (inaudible) regions. We believe we also are currently the preferred supplier for the 2010 mid-range socket at this customer. However, we are still modifying the chief to meet the customer’s requirements. And finalizing the economics.

Finally, for a portion of that high end business, at this customer our FRC disk shift will again be one element of LCD TV stand solution.

Based only on the low end win, we believe we have captured the majority of these customers volume for 2010. Which we establish as Trident as a true market leader in the TV. Winning the midrange would enhance and solidify this position. (Inaudible) Trident win.

There are several reasons for that. First our technical performance was very strong. We met or exceeded the customer’s critical requirements for picture quality. And for the first time, we also were able to offer best in class audio and D-Mod as part of a full TV system solution.

Second, we have a very robust and user friendly software platform, which the customers familiar with and which allows rapid tuning and quicker time to market. This platform is common across our low end and midrange product lines.

As the customer continues to consider our midrange solution, we believe this cross platform capability offers the customer significant competitive advantage. And finally, from sales to insuring to software, we kept the focus on meeting the customer's requirements and establishing a strong ongoing relationship with this leading OEM.

Price certainly played a role as well. While we do not believe that we were the cheapest, there was a price point that we needed to hit. With a two chip solution, our product cost is not optimal and there will be an impact to margins until we can enter production with a one-chip solution in 2011. We look at this as an investment to reestablish our leadership in both technology and market share. As we work next year to securities and wins for 2011 production, our conversation with OEMs will be different because we will have a Trident SoC in volume production with the largest player in the industry.

We believe this significantly enhances our opportunity to win additional Q1 designs for 2011. We are on track with our one chip SoC solution for the DTV low end and midrange. We anticipate tapering out the new midrange product in the current quarter and our new SoC for the low-end segment in calendar Q1. Both products are on schedule to sample with customers next year for 2011 production decisions. And again, both products will share a common software platform which provides customers with significant advantages in insuring cost and time to market.

On the discrete side which are largely the products we acquired from Micronas, demand in Q1 was better than expected and we now anticipate that these trends will carry into the December quarter. As we look at the calendar 2010 we have discrete design wins across a broad customer base for production next year. We believe that these discrete products will continue to have opportunities as innovative new features will often be implemented in discrete before being integrated into the SoC.

A good example are the NXP TV and the emerging DTV-2 demand standards. A healthy (inaudible) business also allows us to still validate innovative new IP developed in our centers of technology excellence around the world, and then to be a first mover when it makes sense for our Shanghai-based team to integrated these capabilities into an SoC.

Now I want to provide you with an updated on our proposed acquisition of the NXP TV and set-top box product lines which we announced three weeks ago. As we noted at the time of the announcement, through this transaction Trident will be roughly doubling its addressable market which will include DTV and set-top box as well as PCTV and other consumer entertainment products. We believe this will result in a total available market in the range of $5 billion in 2010.

In TV we believe that we'll have a very, very strong market position in 2010 based on having the majority share with two of the top five OEMs as well as minority share across the rest of the Tier 1s. In set-top box we will enter 2010 with a particularly strong position in the satellite segment and a top three position overall in the market.

NXP, like Trident, had exceptional technology and extremely talented people. The combined IP and technology portfolio will include more than 1,500 issued and pending patents from NXP in addition to more than 500 for Trident.

From NXP this includes MEMC condition access and the first 45 nm platform for DTV and set-top box. Combined with the industry leading picture quality, audio, and demand, we believe that we will have a very strong portfolio that can be leveraged across multiple markets that serve the connected home.

Finally, we expect to increase the revenue of the company by a factor of four to five in our first full quarter post closing. This will drive significant economies of scale as we leverage a lean organization that will be 65% in Asia on day one. We are progressing through the regulatory process, consulting with employee groups, and preparing preliminary proxy materials related to the transaction. We also are continuing to develop plans and finalize the ongoing leadership team so that we are in position to efficiently run the business on day one and execute the integration plan.

In summary, we are pleased by the sequential improvement in our quarterly financial results as well as our increasing success with Tier 1 TV OEMs as reflected in the major design win we announced today. Clearly the Trident engineering team in Shanghai, supported by our technology centers of excellence in North America and Europe, have demonstrated their ability to meet Tier 1 requirements and to win significant market share.

As I mentioned, the acquisition of the product line and IP from Micronas has been an important contributor. Looking forward, the product lines and IP we plan on acquiring from NXP will build on this success by significantly upgrading and expanding our IP, adding strong people with complimentary talents, redefining ours kill, and enhancing our ability to leverage our incredibly cost competitive engineering core.

We believe this is the right formula for bringing cost competitive innovation to the DTV and set-top box markets, and also the right formula for Trident to achieve profitable market leadership. With this I would like to turn the call back over to Pete.

Pete J. Mangan

Thank you, Sylvia. I would now like to share some comments on the outlook for fiscal Q2 ending in December as well as some comments on the path to profitability for the company.

We expect net revenues for the fiscal second quarter ending December to be in the range of $31-$34 million. For the quarter we expect SoC revenues to more than double and constitute 15%-20% of revenues for the quarter. We expect non-GAAP gross margins for the quarter to be in the range of 27%-30%. The expected decline in margin is primarily related to product mix including the impact of the initial sales of a recent Tier 1 design win. We're forecasting a non-GAAP operating expense to be in the range of $21-$22 million. Of this, R&D is expected to be in the range of $15-$16 million and SG&A approximately $6 million. We expect to report a non-GAAP operating loss in the range of $11-$14 million.

We anticipate GAAP adjustments in the range of $7-$8 million and income taxes of approximately half a million. Finally, we expect to end the quarter with a cash balance of approximately $135-$140 million. This reflects the impact of the expected operating loss as well as the tax withholding payment of approximately $12 million related to the liquidation of a foreign subsidiary.

Looking out to 2010, the margin impact of this new Tier 1 design win will be significantly more pronounced as we shift in greater volume.

Now a few comments on the NXB transaction and our path to profitability. We expect to close the transaction in late January. We continue to anticipate revenues of $140-$160 million and a non-GAAP operating loss in the range of 10%-15% in the quarter ending June 2010.

As we have said previously, we expect to reach breakeven as early as the end of calendar year 2010 and looking forward we continue to project a long-term operating model of 35% gross margins and 12% operating margins and believe that this is achievable as we introduce our integrated single-chip DTV SoC product, ramp expected 45 nm set top box products, and complete our operating expense reduction plans. All three elements are currently projected to be in place in 2011.

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

Question-and-Answer Session

Operator

(Operator's Instructions) Our first question comes from the line of Rajvindra Gill.

Rajvindra Gill – Needham & Company

Yes, thank you. Just some questions first on the gross margin. Clearly the margins are coming down pretty steeply going into the December quarter. Can you talk a little about what was going on in terms of the actual pricing that you got for the Samsung business and the product mix, some of the puts and takes there?

Also you had mentioned at the last section of your call that as the business with Samsung or this Tier 1 TV OEM picks up that the margin impact is going to be significantly pronounced as you ship in greater volume. So should we be expecting that type of margin range, 27%-30% over the next several quarters, and if so, how will that impact the profitability timeframe at the end of calendar year, '10?

Pete J. Mangan

Perhaps I'll start and have Sylvia add to it. So Raj, obviously we don't talk about product specific or customer specific pricing. I think what you can tell by the guidance that we've given for the December quarter is that with SoC doubling as a product mix, you can begin to complete a picture of the margins. We expect the revenue in the quarter again for the low end to only pick up in the month of December so it will not be a full quarter's worth, but can use those elements to project for next year.

Rajvindra Gill – Needham & Company

Well, then should we be looking at a margin of 27%-30% over the next level quarters as it starts to ramp in March and June going forward? Is that the margin range we should be looking at because it appears that you discounted heavily on those components. The integrated SoC is not going to really come into — the revenue is not going to come until probably sometime in mid '11, so is that the range that we should be kind of modeling in? And if that's the case, how do you expect to get to profitability?

Pete J. Mangan

The integrated part, you're right will be for 2011 revenues and as I've indicated before, we're guiding for the quarter, but certainly note that it's a portion of this quarter's revenue and really being shipped just in the last month. I'll leave the projections for the next quarters to you.

Rajvindra Gill – Needham & Company

Right. So just going to the Samsung opportunity, you talked about that you got the low-end socket for Europe and North America. For the midrange, maybe if you could maybe delve a little bit in detail, what was going on in the midrange? You said you're still the preferred supplier, but that you're still working on the, I guess some of the specs or some of the technology around that? What's going on with the midrange? Is that going to be incremental to the revenue opportunity?

Sylvia Summers Couder

So in terms of will the revenue be incremental, the answer is absolutely yes it will be incremental. When we're saying that we're still working on it there are several things that we're doing. For one thing we need to taper out again (inaudible) to meet the customer's requirement which always does create some risk, and then of course when we're talking about the margin and we work with a two-chip solution which is not exactly optimal in terms of cost, so we're still looking at all of these symptoms of how could we reduce the cost of this chip?

And although we mentioned that we were not the cheapest, the competition was pretty fierce in terms of price and I think that gives you the picture for the midrange. We're going to be starting to ramp the low end in Q1 and (inaudible) in Q2 calendar, right? So it's really 2010 business and the midrange will be the same way.

Rajvindra Gill – Needham & Company

I'm sorry, when will the midrange start to — if you do get the business when will that pick up?

Sylvia Summers Couder

It will be probably towards the end of Q1.

Rajvindra Gill – Needham & Company

End of Q1, so end of March then, okay. And so you had mentioned that you were displaced with the FRC and the high end, are you getting that business back now with Samsung? Or if you could clarify on that comment?

Sylvia Summers Couder

Yes. We were happily surprised when this Q1 customer came back to us and asked us for FRC yeah, so it's going to be a portion of high-end business, but again, it's a discrete choice solution which his part an overall solution, the rest of it being provided by their internal design.

Pete J. Mangan

Raj, what's consistent with what we mentioned before is most of the volume went to the midrange as it was integrated, but there is an opportunity still at the high end for our part to participate next year.

Rajvindra Gill – Needham & Company

Okay, well that's good news. And just trying to size up the Samsung opportunity, in the past you've talked about Samsung building about 10-20 million units which are projecting next calendar year '10. On the low end it's half that at probably a $5 ASB. The revenue for June for 140-160, does that include revenue from the low end for Samsung in your forecast or could that be incremental to that guidance for January?

Pete J. Mangan

No. That's embedded in the range of the 140-160.

Rajvindra Gill – Needham & Company

And is that the low end which is embedded or are you assuming you're going to get the low end and the midrange?

Pete J. Mangan

No. We just announced today the winning of the low end positions —

Rajvindra Gill – Needham & Company

So midrange is incremental?

Pete J. Mangan

Yeah.

Rajvindra Gill – Needham & Company

Okay. And so is the FRC portion? Okay, got it. And if you could talk a little bit about some of the integration efforts that are going on now with Micronas and NXP? What's the status of that? I know you mentioned some regulatory approvals. What have been some of the challenges at integrating that? What's going on with the headcount roadmap, resizing that accordingly? Any thoughts on that would be helpful.

Sylvia Summers Couder

So as you know we announced that three weeks ago so we are pretty deep into thinking through not only what the organization is going to look like, but where are the major products going to be built, trying to identify what kind of redundancy we may have between our different centers of excellence, working on defining who the executive teams should be — in fact, we have our first off-site meeting for the next three days here in this country.

So it's too early to give detailed results, but we're certainly looking at the reduction of expense pretty hard and we'll be able to tell more as we progress.

Now, we mentioned in the call that on day one, 65% of our resources will be in Asia. In fact, we do maintain our strategy to have what I would tend to call the production insuring, meaning SoCs and software in Asia and keeping centers of excellence where you find the excellence, meaning in Europe and in this country. That is going to remain our strategy going forward. In other words, we're going to get the best of the worlds and then streamline the whole (inaudible) development to be able to get many products out the door for less cost.

Rajvindra Gill – Needham & Company

Okay. And the cash balance post acquisition, are you still looking at the $180-$185 million range?

Pete J. Mangan

Yes. Same as announced three weeks ago and so it'd be the 135 or 140 from Trident and the additional 45 million.

Rajvindra Gill – Needham & Company

Right. But that balance would then decline, right, with the operating losses and the working capital towards the end of the March quarter?

Pete J. Mangan

Raj, that would be projected if we closed the books on January or closed the deal on January 1. More likely it will close at the end of January.

Rajvindra Gill – Needham & Company

Okay, got it. And if you could just maybe quickly talk about kind of the main landscape that you're seeing in the digital TV environment. Could you talk a little bit about order patterns and sell through forecast? Any insight on that going into December and as well as into next year would be helpful.

Sylvia Summers Couder

So I think we're going to see the same pattern as you're voicing in a DTV business in terms of orders, and of course we're going to become more fluent in this again as we have won our large OEMs because last year was not exactly representative. What I can say also is that judging from what's going on at OEMs, the market is picking up, and in fact some of them are pretty bullish about 2010 in terms of again, market.

In terms of the competitive environment, I mean of course we have been a large contributor in the (inaudible) of the industry so we're seeing less vendors, I would say, which hopefully will stabilize the ASBs going forward.

Rajvindra Gill – Needham & Company

Okay. Thank you very much.

Operator

(Operator's Instructions) Our next question comes from the line of Reuben Roy, please proceed.

Yang - Unidentified Company Name

Hi, this is Yang for Reuben. I just had a quick question on your cash balance guidance. The tax withholding of $12 million, was that previously announced when you guys announced the NXP transaction?

Pete J. Mangan

Yeah. And Yang, it was announced three weeks ago and it's related to the liquidation of our TTI Taiwan Organization.

Yang - Unidentified Company Name

Okay, great. Thank you.

Operator

Our next question comes from the line of David Muller. Please proceed.

David Muller - Unidentified Company Name

Hi, this is Dave. I got a question about your dual chip business. When did you say that you were going to transfer over to single chip?

Sylvia Summers Couder

So we're going to have our midrange single chip product which his going to taper this quarter and the low end will taper in the Q1 calendar 2010. Those two are really aimed at the 2011 business so absolute end of the December quarter beginning of the January quarter 2011.

David Muller - Unidentified Company Name

Okay. I just had one followup question, you said 65% of your business is in Asia?

Sylvia Summers Couder

65% of our employees.

David Muller - Unidentified Company Name

Oh, employees. All right, thank you.

Operator

We have a followup question from Rajvindra Gill, please proceed.

Rajvindra Gill – Needham & Company

Yeah, thank you. You had mentioned 2010 with the Tier 1 OEM, any insight in terms of how you're progressing with the 2011 for that Tier 1? I think we talked before that you were trying to negotiate a two year agreement with that potential customer. Is that plan now closer to coming to fruition or are you still waiting for kind of the midrange to finalize that and are they still waiting to see what the status is on when you taper out the SoC?

Sylvia Summers Couder

Right now, I mean ourselves, plus a lot of engineering resources, are focused on the 2010 business. As you know, OEMs now tend to use vendors for two years, but then of course they can change their minds so we're not really focused on 2011 with this particular customer quite yet as we complete the 2010 designs.

We are, however, engaging with other Tier 1s for the 2011 business right now.

Rajvindra Gill – Needham & Company

And how are those discussing going so far now that you have a sizable patent portfolio and technology from Micronas and NXP?

Sylvia Summers Couder

Well, as we are still competing with NXP, the conversations right now with customers are number one, you're really becoming strong which is good, but number two, whether there will be conversation or not. I mean in the meantime of course we cannot answer because we're still two competing companies until we have the antitrust approval. So I think everybody is waiting to see what the combined roadmap will look like. In the meantime we have committed to support all the customers in 2010 we sold, meaning ours plus theirs, and to some extent it (inaudible). We are a lot more credible now that we're doing this conventional step. I mean this Korean OEM win is very significant in line with the other customers, but this additional steps makes us strategic, potentially.

Rajvindra Gill – Needham & Company

Yeah, absolutely. You had talked about the strong percentage of sales for discrete on the frame rater converter and demodulator. Talk a little bit about the frame rater converter market, did you see that as a growing TAM? And what will happen to that TAM? Will that FRC eventually be integrated into an SoC? Is that part of the plan in terms of the single chip or is that going to be still a separate discrete component embedded for 240 panel refresh rate TVs?

Sylvia Summers Couder

So for 240 Hz it will be a discrete chip and in fact we're going to be taking out one discrete chip for that market in this quarter. However, I think the TAM is going to be flat and maybe a little bit decreasing compared to the TAM that used to exist for the current run rate converter 120 Hz. The reason being that it's being integrated and we're the first ones to integrated those, right? NXP, by the way, was also integrating this so there will be a market, it will be potentially a high margin market, but probably smaller.

Rajvindra Gill – Needham & Company

Thank you.

Operator

That concludes our question-and-answer session for today's conference. I will now turn the call back to management for closing comments.

Pete J. Mangan

Thanks everyone for joining us. Just a reminder, the company will be presenting at AEA a week from today, that's Monday November 2^nd, so hopefully we can see you all again there. Thanks for joining us.

Operator

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

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Comments

[demflyn:]

you got the wrong transcript for this conference call bozos, Mr Hungwen wasnt present on the 10/26 call.

Oct 27 05:07 PM

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Oct 28 03:55 AM