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Techwell, Inc. Q3 2009 Earnings Call Transcript

October 29, 2009 | about: TWLL

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Techwell, Inc. (TWLL)

Q3 2009 Earnings Call

October 29, 2009 5:15 pm ET

Executives

Tom Krause -IR

Mark Voll -CFO

Hiro Kozato -CEO

Analysts

Gary Mobley - Noble Financial Group

Quinn Bolton - Needham & Co.

Tore Svanberg -Thomas Weisel Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Techwell Inc. third quarter 2009 earnings conference call. My name is Damali and I will be your operator today. (Operator instructions)

I would now like to turn the presentation over to your host for today, Mr. Tom Krause of Investor Relations. You may proceed, sir.

Tom Krause

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

Before management begins the discussion of the third 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 the company’s guidance about future revenue, gross margin, and other financial measures, anticipated trends in the company’s target markets, and the company’s competitive position within these target markets, and the company’s future research and development plans.

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 August 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 base compensation and its related tax effect.

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 website.

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 third 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. I’ll then provide our business outlook for the fourth 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 third quarter ended September 30, 2009, we reported total revenue of $18 million, which was at the top of the range of our revised guidance of $17 million to $18 million. Total revenue for the third quarter compares to $12 million last quarter and $18.5 million in the same period a year ago.

Total revenue in the third quarter for each of our product lines consisted of security revenue of $13.3 million, representing 74% of total revenue, automotive infotainment revenue of $3.2 million, or 17% of total revenue, consumer revenue of $1.5 million or 9% of total revenue, and other revenue of approximately $13,000.

Security revenue declined 8% year-over-year, but increased 59% sequentially.

Automotive infotainment revenue increased 59% year-over-year and 35% when compared to the second quarter.

Consumer revenue declined 27%, when compared to the same period last year but increased 16% sequentially. In the third quarter, we had one customer that represented more than 10% of total revenue.

Sales to our distributor in China represented 30% of revenue in the quarter, which included shipments to multiple end customers with no single end customer representing 10% or more of total revenue.

For the quarter, 51% of revenue came from products sold into China. Combined, our 10 largest customers represented 75% of total revenue in the third quarter, six of which are distributors.

Gross margin for the quarter was 61% and continues to exceed our long-term target of 55%. This compares to gross margin of 63% in the third quarter of 2008 and 60% in the prior quarter.

In the third quarter, 82% of our total revenue came from products fabricated in .18 micron, compared to 74% in the prior quarter. We expect the percentage of our revenue fabricated in .18 micron to continue to increase over the next several quarters.

Total operating expenses were approximately $9.1 million for the third quarter of 2009, representing 51% of total revenue. This compares to operating expenses of $8 million or 43% of revenue in the third quarter of 2008 and $8 million or 67% of revenue in the second quarter of 2009.

Of the $9.1 million of operating expenses in the quarter, $5.3 million consisted of research and development expenses or 58% of operating expenses and included approximately $1.2 million in tape-out expenses for new product development.

Operating expenses also included approximately $1.7 million of pre-tax stock base compensation expenses.

We recorded $357,000 of interest income in the third quarter of 2009, compared to $507,000 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 income for the third quarter totaled $1 million or $0.05 per diluted share. Net income includes pretax stock base compensation expenses of approximately $1.8 million. We recorded a tax provision of $1.2 million in the third quarter. Third quarter tax provision included discrete tax charge related to stock base compensation expenses of approximately $500,000.

Earnings per share in the quarter were calculated using 22,315,000 shares.

Net income per diluted share of $0.05 for the third quarter compares to net loss per share of $0.02 last quarter and net income per diluted share of $0.11 in the third quarter of 2008.

Non-GAAP net income for the third quarter totaled $3 million or $0.13 per diluted share. Non-GAAP net income per diluted share of $0.13 for the third quarter compares to net income per diluted share of $0.04 last quarter and non-GAAP net income per diluted share of $0.17 in the third quarter of 2008. Non-GAAP net income excludes stock base compensation expenses and the related tax effect.

I also want to provide you with information on the acquisition we recently completed. Earlier this month, Techwell acquired the assets of a China-based video technology company focused on security surveillance market. Purchase price of the acquisition was $4.2 million, less the value of assumed liabilities. We paid the purchase price in cash and agreed to make restricted stock awards, which will vest over four years to employees in connection with their new employment with Techwell.

In the second and third quarters, we incurred expenses of $200,000 and $300,000 respectively for expenses related to this acquisition. After the closing of the acquisition, we expect an initial quarterly increase in non-GAAP operating expenses at approximately $200,000.

Those ongoing expenses are reflected in our fourth quarter guidance. Hiro will discuss in greater detail the benefits of this acquisition.

Now turning to the balance sheet, accounts receivable were approximately $1 million at the end of the first quarter, compared to $900,000 at the end of the second 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 third quarter, revenue from direct sales to OEMs represented 25% of our revenue, while sales to distributors represented 75% of revenue.

Inventory as of September 30, 2009 was $6.7 million, increasing from $5/8 million at the end of the second quarter of 2009.

Our cash, cash equivalents in both short and long-term investment balance, as of September 30, 2009 was approximately $90.2 million compared to approximately $81.4 million as of December 31, 2008. Our cash, cash equivalents in both short and long-term investment balance at the end of the quarter of $90.2 million represents cash per share of $4.04.

At the end of the third quarter, we had 165 employees, 75 of which are in research and development.

In terms of guidance for the fourth quarter of 2009, we are now experiencing increase in demand in both of our two main end markets, security surveillance and automotive

We expect to see sequential revenue growth in both end markets and as a result we expect total revenue for the fourth quarter to range between $19 million to $20 million.

We anticipate gross margins for the fourth quarter to remain comparable to third quarter results.

We anticipate operating expenses for the third quarter to range between $7.25 million and $7.3 million excluding stock base compensation expenses as tape-out expenses for new product development will increase over third quarter tape-out expenses.

We estimate our GAAP effective tax rate for the fourth quarter to be 10% and our non-GAAP effective tax rate for the fourth quarter to be 25%.

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 third quarter, the security surveillance market returned to our environment of increase and demand as the majority of our customers met or exceeded their forecast in the quarter.

Demand was strong across all geographic regions with China outperforming Korea, Taiwan, and Japan.

As we previously discussed, our China customers are benefiting from the relative strength in the Chinese domestic economy and their access to low cost engineering and manufacturing.

As a result, they are capturing the bulk of Chinese domestic security surveillance market as well as taking share in the European and North American markets.

Demand was also strong across all market segments of the security surveillance business, including four channel, eight channel, and sixteen channel video recorders, video servers, and PC-based DVRs. In particular, we saw strong demand in the value segment of the market as our customers cut four channel DVR prices.

In general, we now feel market demand in security surveillance is up to 208 run rate levels. With this in mind, as we look to Q4 and look into 2010, we expect the market to return to approximately 20% annual channel growth rates, which is traditionally what we saw before the downturn.

In fact, a report published covering the worldwide markets while video surveillance, estimated the DVR channels with growth from 45 million channels in 2009 to 55 million channels in 2010 or 21%.

Looking at our product development efforts in security, we began shifting our TW2880 multi-channel HD display processor and expect volume production early next year.

We also have taped our follow along product to the TW2880 that integrates display functionality and targets the higher volume four channel and eight channel DVR market segments.

We believe the market for display content in the DVR was approximately $30 million in 2008 and presents more than a 35% increase in our soft available market when compared to the products we incur and shipping to the surveillance market.

We expect our HD display based product to start having material impact on our security business in the second half of 2010.

In terms of competition and ASPs, we have been more aggressive with pricing for specific customers who are placing larger orders in order to maintain our market share. As a result, we see ASPs for some specific products declining more than normal; however, we don’t expect margins to be meaningfully impacted as we are offsetting these price reductions with reductions in wafer, package, and test cost.

Returning to our automotive infotainment business, we had another strong quarter that exceeded our expectations, consistent with last quarter. This is largely the result of more existing design wins going into production. In particular, the aftermarket installer segment has been quite strong.

This segment consists of customers that design customized solution for specific automobile models and then sell the solutions for installation that copied us in retailers.

Looking forward, we feel confident that the demand for larger and more feature-rich displays does support applications like navigation, DVD entertainment, and camera. We’ll continue to expand.

We also feel confident that our competitive position is strong. Even the long design in times in product life cycle, we feel we are well positioned to benefit from the growth in this market. In addition, we are making investments in add-in features and lowering the cost of our existing products, which will help us maintaining our unique competitive position.

On the R&D front, Techwell remains focused on growing our surfed(?) available market by delivering more content in our core security surveillance business. In addition to display based solution, we are investing more R&D resources for the security business, especially as it relates to the video contact and PC-based products.

We are also migrating our analog video to calls from .18 micron process to .13 micron and 99.

We expect to start shipping .13 micron and 99 meter solutions in the second half of 2010. This will enable us to continue to provide attractive pricing to our customers while maintaining our profit margins.

As Mark had highlighted earlier, we acquired the assets of a video technology company based in China. The company has developed a very cost-effective video technology that will help us accelerate our product development effort in the DVR and IT camera markets.

The company has also developed application software for DVR market. That is important to execute in our security road map. As part of the agreement, the extended employments offers to approximately 40 engineers who will be based in China.

The team is made up of hardware and software design engineers as well as field application engineers that would help us create our additional support resource for our security customers in Asia.

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 Gary Mobley with Noble Financial Group. You may proceed.

Gary Mobley - Noble Financial Group

I just have first a housekeeping question for Mark. What was the cash flow from operations in the quarter and depreciation?

Mark Voll

Cash flow from operations was $3.6 million. The depreciation for the quarter was approximately $200,000.

Gary Mobley - Noble Financial Group

Hiro, your automotive segment rapid growth rate and I’m sure a lot of that is certain automobiles coming to market and design coming to market. So I’m wonder what we should expect in terms of continued sequential growth out of that business and potentially what it can be at in 2010.

Hiro Kozato

I think we will continue similar run rate, growth rate, into 2010. I think we will achieve somewhere around $20 million next year assuming all the Japanese going into production second half next year.

Gary Mobley - Noble Financial Group

How do you feel about your long-term margin target? You had been running above the target model for some time, that in the face of aggressive pricing on your behalf. So I’m wondering if you now feel a little better about that long-term target.

Mark Voll

We’ve always stated that our target model for growth margin is somewhere between 55-60%. I think for the last couple of years we’ve been able to do a little bit better than that, but I think particularly as the automotive business becomes a more integral part of our mix, we would probably see margins come down slightly and we’d be probably at the higher end of our range of 55-60%.

Operator

Your next question comes from the line of Quinn Bolton with Needham & Co. You may proceed.