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Endwave Corp. (NASDAQ:ENWV)

Q3 2009 Conference Call

October 27, 2009 04:30 PM ET

Executives

Curt P. Sacks - Chief Financial Officer and Senior Vice President

Edward A. Keible Jr. - Vice Chairman and Chief Executive Officer

John J. Mikulsky - President and Chief Operating Officer

Analysts

Chris Ryder - Lucrum Capital

Kevin Dede - Morgan Joseph & Co., Inc.

Operator

Good day everyone. And welcome to the Endwave Corporation's Third Quarter Conference Call, held October 27th, 2009. In today's call will be Ed Keible, Vice Chairman and CEO, John Mikulsky, President and Chief Operating Officer and Curt Sacks, Chief Financial Officer.

I would like to remind you that this call is being recorded and simultaneously webcast on the investor's page at www.endwave.com. For opening remarks, I would like to turn the call over to Mr. Curt Sacks. Please go ahead sir.

Curt P. Sacks

Thank you operator. Before I turn the call over to Ed, I'd like to make to a brief statement regarding forward-looking remarks. During the course of today's call, the company may make projections further, forward-looking comments regarding future events or future financial performance of the company.

We wish to caution you that such statements are predictions and actual results may differ materially. We refer you the documents the company files with the SEC as well as the Safe Harbor included in today's press release.

Finding the supplement company's financial statements presented in accordance with generally accepted accounting principles or GAAP and we may discuss certain information that is non-GAAP.

These non-GAAP measures are adjusted from results based on GAAP to exclude certain expenses, gains and losses and are provided to enhance investor's overall understanding of the company's financial performance. Specifically, Endwave released the non-GAAP measures provide useful information by including certain expenses that may not be indicative of its core operating results.

These measure should be considered in addition to results prepared in accordance with GAAP but should not be considered (inaudible) or superior to GAAP results. Now, we'll like to begin our call and for opening remarks, I'd like to turn the call over to Ed Keible. Ed?

Edward A. Keible Jr.

Thank you Curt. And good afternoon everyone joining us on this quarter's call. As we announced last week, after 16 years of CEO with Endwave, I will be passing on the CEO range to John Mikulsky and his team and this is my 36th quarterly investor call. And I do so with renewed enthusiasm for the company's future.

It is extremely fortunate that Endwave has such a capable executive as John available to take on the CEO role. John joined us 13 years ago, there still almost every senior management role.

Perhaps most importantly, in this environment, John is instrumental on re-building the company after the telecom market collapsed in 2001. I believe that his leadership during those turbulent times will serve him well in leading during this current turn downturn.

Now, as we have reported revenues for the quarter were most disappointing. But I'm confident that for semi-conductor strategy in products that we've introduced over the past four years will be instrumental in rebuilding our overall business frame.

Later, John will bring us up to speed on the current developments with this bright future market. With that in mind, I'd like to the turn the call over to Curt, to provide more detail on the current quarter's performance and to indicate next quarter's expectations. Curt?

Curt P. Sacks

Thanks Ed. On today's call, I will review the results for our third quarter of 2009 and provide an outlook for remainder of the year. As you recalled in the second quarter, we sold our defense and security business to Microsemi Corporation for $28 million in an all cash transaction.

In the call today, please be aware that all comparisons will exclude the defense and security business. Today, we've reported revenues of $3.1 million for the third quarter, just above our updated guidance of 2.5 to $3 million discussed in our press release of September 9th, 2009.

This reflects a 44% decrease over last quarter's revenue on a continuing operation basis. During Q3, Nokia Siemens Networks and its manufacturing partner Essar (ph) represented 42% of total revenues.

On the other networks represented 35% of total revenues. Our non-GAAP gross margin for this quarter was 27%, up from 25% last quarter. Following improvement over the prior quarter, our gross margin in Q3 continued to be negatively impacted by reduction of our over-head absorption resulting from a decrease production during the quarter.

Our non-GAAP operating expenses decreased approximately $300,000 or 11% as compared to the second quarter, primarily due to reductions in force and other cost saving measures, we have enacted thought the year.

Our non-GAAP net loss for the third quarter was $1.7 million or $0.18 per share compared to a non-GAAP net loss of $1.4 million or $0.15 per share during the second quarter.

Including the restructuring related expense, discontinued operations and the expense of our non-cash stock compensation, our GAAP net loss for the third quarter was $2.6 million or $0.27 per share as compared to a GAAP net income of $16.6 million or $1.76 per share in the second quarter.

The second quarter results includes the gain from the sale of our defense and security business.

Turning to the balance sheet. We ended the quarter with cash and investments of $68.2 million and no debt. During the quarter, cash and investment decreased approximately $430,000 as our loss from operations and increased inventory position were partially offset by collections from our accounts receivable.

Given our current level of cash and investments, I would like to take this opportunity to comment on a frequent question we have received about the possibility of a common stock buyback program or cash dividend to our common shareholders.

Due to the liquidation preference associated with our outstanding preferred shares, we are precluded from either repurchasing our common shares or issuing dividend to our common shareholders without first obtaining the approval of our preferred shareholder. Turning now to accounts receivable, DSOs were 60 days, down from 69 days last quarter while outstanding receivables are primarily current and within terms.

Inventories at the end of the third quarter were $6.2 million, up approximately $1.2 million as compared to the second quarter due to an unanticipated decline in our customers forecast. Inventory turns were 1.5 compared with 3.4 turns in the previous quarter.

Moving forward, our guidance for the fourth quarter is guarded. We are beginning to see some improved demand from our major customers. But we don't believe this will have a significant impact on our revenues until the first half of 2010.

As a result, we currently anticipate that revenue for the fourth quarter will be similar to that of the third quarter. At this level of revenue, we would expect gross margins for the fourth quarter to be flat, dependant on product mix and our operating expenses to decrease moderately relative to the third quarter.

Finally, we believe the combination of our operating loss, working capital needs and executive restructuring related cost will result in a cash burn of approximately $2 million during the quarter.

In conclusion, while we are faced with very challenging times, we believe we remain well positioned for long term success and are taking those actions necessary to maintain our financial health.

That concludes my summary. Now, I'll turn the call over to John for additional comments on other developments with the business. John?

John J. Mikulsky

Thank you Curt and good afternoon everyone. From an operational perspective, I would like to focus my comments in three areas, our review of the overall communications equipment market and update on our progress in introducing new module products.

And an update on our newly launched mimic device product line. As to the state of the overall market, our view is the same as reported last quarter.

Our visibility is very poor. The market seems to have found its bottom. And we're entering a period of stability, hopefully, with a prospect of some modest growth beginning to emerge.

A long term underline market drivers are intact that is both build outs of new networks in developing countries and upgrades to existing networks to support mobile internet access. The issue was timing.

The question is that component suppliers in the mobile infrastructure industry face are first, how quickly operators will act to extend CapEx to serve these underline needs.

And second, which network equipment suppliers will have the right product at the right price to benefit from that CapEx spending. In my remarks that follow, I will be outlining Endwave's strategy for competing in this environment and for delivering the right product at the right price. Let me turn next to our specific customer base.

As always, we are limited in what information we can reveal due to our various non-disclosure agreements. But allow me to provide additional details or I'm permitted to do so.

Nokia Siemens Networks traditionally, our largest customer is still experiencing wide swings in its microwave radio demand levels. This is occurring as it implements a shift to outsource radio production and works to better align its product offerings with market needs.

Our pre-announcement regarding Q3 revenue was primarily driven by unexpected short falls in demand from NSN. In our recent discussions with NSN, they have indicated some firming in demand and have noted a very positive response to their new flexi-pack of radios, a product line for which we supply several sub-assemblies for different frequency bands.

Near up, another of our larger customers is continuing to do well with their radio platforms for which we supply RF modules. As reported last quarter, we are seen growing revenues from these programs. And our expectation is that Nera will be a significant and stable customer in the coming quarters.

During Q3, we ramped our shipments to E-Band Comp, one of our new 70 and 80 gigahertz E-Band customers as they also have met with good market acceptance of their products.

Now, I'd like to turn to product development in our marginal business lines. During Q3, we made good progress on developing and qualifying new module products for a number of our customers thus building the foundations for future revenues.

In particular, I would note that most of this development has been for radios that are specifically designed to support IP based back haul networks which are clearly the trend moving forward.

One industry report recently predicted that by the end 2011, over 50% of all cellular backhaul call traffic will be I.T. based. Next, I'd like to discuss the launch our new mimic (ph) product line, the highlight event of Q3.

As many of you know, these integrated circuits typically perform key RF functions such as frequency conversation, power amplification, lower noise amplification and higher frequency switching. Over the years, we have developed a wide range of mimic devices to support our radio module business.

The motivation for this work was either an inability to source the desired parts from the existing mimic suppliers or a need to optimize the price performance ratio of the products, in order to support the requisite module price point.

Over time, we found that we had developed a large repertoire of integrated circuits that were particularly optimized for radio application and we took the decision to offer these products to the industry as a whole.

We believe these products offer the industry a particularly useful set of integrated circuits to facilitate radio design, especially the new IP based broadband systems. And providing these products expands our revenue opportunities.

Some radio OEMs prefer to fabricate their own modules rather than purchasing them from trade suppliers such as ourselves. We now have products to offer those potential customers. We have presented our mimic product line to several of key radio manufacturers throughout the world.

And I'm happy to report that they share our enthusiasm for the applicability and value of our designs. Our particular interest is our ability to supply these products in a cost effective Surface Mount technology format.

This capability allows assembly of radios with standard manufacturing technology virtually anywhere in the world. We have responded to multiple requests for quotes and have made initial shipments to customers. This is an exciting new business opportunity for Endwave and we anticipate that it will be a significant long-term revenue driver.

Before we go to the Q&A period, I'd like to say that we continue to operate in an environment of uncertainty and significant technological change. This situation has presented us with serious business challenges and I wish to thank all of our employees and partners for their diligent efforts during this time.

As we go forward, I am believed by the knowledge that we have a superb balance sheet that both gives us the strength to weather the storm and to make strategic investments where others lack such flexibility.

We have a team that truly has profound knowledge of the industry we serve and that is committed to making this enterprise a success. And we are part of an industry that serves a real demand for communication services around the globe. Now, I'd like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Chris Ryder. Please go ahead.

Chris Ryder - Lucrum Capital

Good afternoon.

Edward Keible Jr.

Hi Chris.

Chris Ryder - Lucrum Capital

Two questions. One on the new part announced. Are there new customers or you're talking about existing customers?

John Mikulsky

Chris, this is John. Both. We expect to be able to sell the mimic both to some of our existing customers and also new customers particularly other people in the radio business who don't buy modules.

Chris Ryder - Lucrum Capital

Can you talk a little bit about where the optimism for and the out year revenue opportunities are?

John Mikulsky

We believe two of our things for two things. In the long term, we expect the total volume of radios to be made will increase. How fast that ramp re-builds I think is little difficult to predict. But everything that we know, the underline drivers are sound.

The chips that we've come up which are particularly optimized for designing and building these new classes of radios. And as we've have talked to the various radio companies, uniformly, the response has been very positive.

Basically, you gentlemen really understand the radio design issues, your parts are very well optimized to the technical problems that we are trying to solve. And we feel very comfortable that we will be able to garner a nice position in that market place and everybody who makes radio has to buy mimics.

Chris Ryder - Lucrum Capital

So we see sort of a second question. With -- what is the revenue level to get to an operating income, breakevens to cause you to no longer burn cash?

Curt Sacks

Hi Chris, this is Curt. Well, the breakeven sort of on a cash flow basis, breakeven on the revenue will have to be somewhere between 7 and 7.5 million. And that includes sort of the transition that we have announced last week between Ed and John and consolidating the CEO and COO under John as well as the cost cuts during the quarter. But certainly, somewhere between 7 and 7.5 million is cash flow break even

Chris Ryder - Lucrum Capital

But still I'm going back to the question on the new product. Do you think about the adoption rate and your potential opportunities, what kind of vision you have to get to that 7 to 7.5 million quarterly run rate revenue.

Edward Keible Jr.

Well, it's new markets that we're working on, new opportunities. How fast we can ramp that might think is little difficult to predict. I would say that as we get into 2011, I would hope that we would have some pretty interesting revenue opportunities during 2010 will be outselling and developing and winning sockets with those parts.

Chris Ryder - Lucrum Capital

Thanks for your time.

Operator

(Operator Instructions). Our next question comes from line of Kevin Dede, the line Morgan Joseph & Co. Please go ahead.

Kevin Dede - Morgan Joseph & Co., Inc.

Hi John. I was wondering if you and Curt sort of sat down and tried to figure out how much it cost to keep this company public. It just doesn't seem to me that to try. I mean, especially even at double the quarterly revenue run rate, it just doesn't seem to make sense to me. So I'm kind of wondering what you're thinking along those lines?

Curt Sacks

Let's see Kevin. This is Curt. I'll start this question off then, we can give it to John if any follow up. In general, keeping the public company cost is somewhere in the neighborhood, between $1.5 million to $2.0 million a year.

And that's including our you know these Delaware and HP Sox compliances, all those types of expenses. So in general, I think to your point, we are currently undersized for a public company.

We know we need to grow the top line in order to as I talked about in the previous question hit a breakeven point. And that's really what we're looking at this point and John, if you want to jump in, you can talk a little about what we see in 2010 and beyond.

John Mikulsky

Kevin, I think the issue that we face obviously cost us a good bit of money to be a public company. We're undersized to support that well. As you well know, there are some options around what we could choose to do.

We do that issue that many of those actions would require approval of the preferred stockholder. And in addition, they obviously have some negative consequences and at some point, we have to go back to being a public company. And there's a lot of cost and effort associated with that.

So, it's not a decision to be taken lightly obviously.

Kevin Dede - Morgan Joseph & Co., Inc.

Okay. I guess where you've got me is the prolonged period of time, I think it will take you to get to a point where it makes sense again. I mean, you're looking at potentially eight quarters.

I guess, just by rough numbers. May be, you can give us a little more insight into some of the discussions you've had with customers outside your existing customer base like Wa-way or REMIC for example, given that, I understand Wa-way is doing a bang up job even on the radio side, in the wireless equipment market.

Edward Keible Jr.

As I've said we have talked to radio manufacturers around the world and we've had a good response. Basically, we've talked to virtually all of them, combination of people who we've talked to, I would say constitutes 90% of the radio volume in the world.

And we've had a very good response from them. And as a result, we would hope that our mimic revenues would ramp nicely. In contrast with or in combination with I should say that while we haven't really built our FY 10 plan yet, it's really premature given the uncertainty around the market.

But at least the signals we are getting is that there is some recovery on the horizon in the module business as well. So, we would hope that the combination of those two things on the top-line and then, some pretty strenuous work on all of our cost lines, get us to certainly a cash flow break even point much faster than you've indicated.

Kevin Dede - Morgan Joseph & Co., Inc.

Okay. Given the sizeable cash balance and other depressed evaluations out there, what do you think might happen on the M&A front that could, that you might be able to engineer to helped build your revenues?

Edward Keible Jr.

Well, as we've indicated in the past, we continue to have a relationship with Needham, looking at all in manner of strategic alternatives. There is really nothing to report at this stage. But as you know historically, we have been net acquirer of companies.

And certainly we have wear with all to do that if we find the right deal to do.

Kevin Dede - Morgan Joseph & Co., Inc.

Can you characterize sort of how flexible you think your preferred share holder is in negotiating strategic options?

Edward Keible Jr.

It's not really -- that's really something for them to address. Curt, you might have a comment on that?

Curt Sacks

No. We certainly wouldn't comment on any of our shareholders intentions are. So..

Kevin Dede - Morgan Joseph & Co., Inc.

Okay. So, fair enough gentlemen. Thank you for taking my questions.

Edward Keible Jr.

Thanks Kevin.

Operator

Your next question comes from line of Vijay. Vijay --, if you're on the line, your line is open now.

Unidentified Analyst

Yep. I'll handle offline. Thanks.

Operator

Our next question comes from the line of Richard Brevet (ph). Please go ahead sir.

Unidentified Analyst

Good afternoon gentlemen. Actually, the prior question or as noticed, most of my questions. But I guess what I'm really kind of interested in is have you thought about or have you considered approaching the preferred shareholder and offering them a sum in order to gain their approval on a share re-purchase.

Edward Keible Jr.

Well, as in John talked about, we're looking at a number of different strategic alternatives. We're not going to comment specifically on what we're doing with any number of these strategic alternatives other than to say that we will certainly update our investors when the time is right to do so.

So, beyond that, we're not going to comment on any actions at this point.

Unidentified Analyst

Okay. I would suggest you do that because frankly, think about it assets $.50 on the $1 easily, just pay some money in order to do that. An easy way to get a double in the stock price and realistically, given the outlook is somewhat uncertain that you're going to be able to achieve otherwise.

Unidentified Company Representative

Yeah. I certainly appreciate your comment. I just can't comment on those types of strategic transactions.

Unidentified Analyst

Thank you very much.

Edward Keible Jr.

Okay. Thanks Rich.

Operator

[Operator instructions] And our next question comes from the line of Ray Gallows. Please go ahead sir.

Unidentified Analyst

Hi. Can you give me a little more feedback on the preferred shareholder? I know that they have a cash restriction and pay off the common shares and they also can convert to about 3.9 million of common shares. Is that correct?

Edward Keible Jr.

So, they do have a liquidation preference. You're correct and I commented about that on the script. They can convert their preferred shares into 3 million common shares, not 3.9 million. The 900,000, I think you were thinking about are warrants that have since expired.

Unidentified Analyst

Okay. And there's no cumulative preferred dividend that you owe them?

Edward Keible Jr.

No. No, there's no coupon, there's no cumulative..

Unidentified Analyst

And do you need their approval for any of your strategic options like your exploring.

Edward Keible Jr.

Well, depending on the size of any type of M&A activity, we will certainly need the approval of all our stock holders including our preferred shareholders. So it really depends on the exact deal. But it won't be any difference the vote that our common shareholders would have.

Unidentified Analyst

Okay. It's great. Thank you.

Edward Keible Jr.

Yeah.

Operator

Mr. Mikulsky, I'm showing there are no further questions in the queue at this time.

John Mikulsky

Thank you operator. Thank you everyone for your continued interest in Endwave. And we hope you found this call informative. Please join us again for our next Year End Financial Conference Call currently scheduled for February 2nd, 2010.

Operator

Ladies and gentlemen, that thus conclude our conference for you today. Thank you for your participation and for using SNT teleconference. You may now disconnect.

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Source: Endwave Corp. Q3 2009 Earnings Call Transcript

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