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Executives

Mike Hickey – CEO

Mark Cubitt – CFO

Analysts

Francois Meunier – JPMorgan

Simon Schafer – Goldman Sachs

Didier Scemama – RBS

Tim Shaw – Citi

Nick James – Panmure Gordon

Daniel Ridsdale – Edison Investment Research

Arun George – Execution Noble

Ian Robertson – Seymour Pierce

Daniela Ventrone – Piper Jaffray

Susan Gordon – Speirs and Jeffrey

Wolfson Microelectronics Plc (OTC:WLFMF) Q1 2010 Earnings Conference Call May 5, 2010 9:00 AM ET

Mike Hickey

Good morning and welcome to the Wolfson Microelectronics Q1 2010 results conference call. I’m Mike Hickey, CEO of Wolfson and also here in Mark Cubitt, the CFO of the company.

Let me quickly go through some of the key points of the first quarter and then we’ll be happy to take any questions.

Before I go into the details of the business, let me summarize the first quarter financial performance. We continued to make progress with revenues up both year-on-year and sequentially to $28.5 million, an increase of 13% and 4% respectively.

Gross margin was up to 51.5% compared with 50.2% same period last year reflecting product mix and effective supply chain management.

Gross profit increased by around 15% to $14.6 million compared with $12.7 million for the same period last year. There was an underlying operating loss of $4.9 million.

Our net cash balance as at 4th of April 2010 was $91 million and we have no debt.

Now let me give you a progress report on how the business has performed in the quarter and the flavor of where we anticipate growth is going to come from in 2010 and beyond. We continue to make progress in the first quarter with revenues up both year-on-year and sequentially and coupled with an increasingly strong design-ins performance and the launch of another nine new products.

2009 design-ins including audio hub designers from several tier 1 mobile phone manufacturers are beginning to translate into revenue, overcoming the normal Q4 to Q1 seasonal revenue decline with the balance of the previously reported design-ins transition into volume manufacturing in line with our expectations.

In the quarter sales into mobile phones, multifunction printers and eBook showed good growth specifically sales into mobile phones grew 50% sequentially.

Sales into digital still cameras and PNDs (inaudible), however, the new digital still camera products we launched last year are beginning to bear fruit and we expect sales into digital still cameras to recover as we progress through the year.

We’re also pleased that the design-in and product launch momentum we achieved last year has continued through to this quarter.

We are increasingly seeing the benefits of our refreshed product portfolio with another strong design-in quarter. We secured over 90 new design-ins across a range of consumer electronic products with both existing and new customers.

The most significant of these was our latest audio hub solution being designed into a new tier 1 Smartphone platform from which we will generate revenues in 2011.

We’re also delighted to have been selected by a leading brand for its breakthrough new Windows Mobile Phone with the inclusion of one of our high performance ultralow power audio hubs.

Product development performance was maintained with the launch of nine new products. This includes two new audio amplifier products that will feature many of the world’s most highly integrated mid and low tier mobile phones.

We also introduced the world’s first digital audio hub solution. We signed an agreement to integrate Tensilica’s high quality digital signal process and IP cause into our audio subsystem solutions.

This enabled Wolfson to continue to lead the way in bringing category defining high definition sound to portable multimedia platforms including mobile phones, netbook, smart books and other converge multimedia devices. Further progress across our audio plus solutions, power management, noise cancellation in MEMS microphones as they continue to gain traction with customers with each of them gaining further design-ins in quarter one.

We earned record revenues for our power management products, which reflect our strength and positioning in this market. Of particular note is Wolfson’s leadership in the rapidly expanding eBook reader market, where our family of power management products are ideally suited.

We introduced our first Stereo Ear-Bud Noise Cancellation Headset reference design. This product can be customized and branded by customers for (inbox) or aftermarket sales.

Our SoundStage Software was selected by BBK Electronics, a leading Chinese mobile phone provider for inclusion in its latest handset. This includes virtual 3D surround sound, which creates a sensation of virtual speakers around the head of the listener.

Our MEMS based silicon microphone products, which are designed into multiple applications shipped in volumes to numerous customers. We’re also introducing the second generation of our MEMS technology products with a new family of digital MEMS microphones announced this week.

Looking ahead, as previously mentioned, previously reported design-ins are transitioned into volume production in line with our expectations. As more of these design-ins reach full production during the year, we expect our revenues to increase leaving us well placed to return to sustainable profitability.

For the second quarter, we expect revenue to be in the range of $30 million to $35 million. Our backlog is currently at $27.5 million compared to $23 million at the equivalent point for Q1 2010 and we expect gross margins to be between 50% and 51%. Thank you for listening and we’ll be happy to take any questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We are taking our first question from Francois Meunier from JPMorgan.

Francois Meunier – JPMorgan

Hello, yes, it’s actually Francois Meunier from JP Morgan. Good morning everyone, and well done on the Q1 performance, that’s very good on the revenue line on gross margins. You were talking in the press release about a new tier 1 customer, which is going to lead to significant revenues next year. Could you please tell us a bit more about that? I understand you can’t really disclose the name, but if you could tell us what type of product it is, if it’s going to include a bit more than a simple audio chip and if it could become one of your top customers next year? Thank you.

Mike Hickey

Good morning Francois. Imagine that we’re not able to disclose who the customer is; we’ve been working for a long time on the design-institution, is full audio solution and we expect that to translate into meaningful revenue in 2011 and it has the potential to be one of our top three customers.

Francois Meunier – JP Morgan

Okay, and could you please tell us, because apparently you’ve been working on this for quite a long time. How did you beat your competitors on this one, what has changed compared to the period before your time where actually you were losing market share? Has something changed in the company, which would make investors more confident about your prospects?

Mike Hickey

We’re having record design-ins across the board. So as you know we fully refreshed our portfolio. We keep adding more and more functionality to our chips. And we think we’re at the leading edge of providing audio solutions. We’re winning slots.

Mark Cubitt

I mean I think I would add on this particular one, we came up on the outset with the specification the customer liked the best and most importantly and I think this is a very important point, we had all the dates that were required to get the design-in.

Francois Meunier – JP Morgan

So does it mean that one day you would be more competitive to come back to a US customer that you’ve kind of lost two, three years ago?

Mike Hickey

We think we’re extremely competitive already in the market and we continue to work with all of the – our customer base includes all of the top consumer electronics customers and we have meaningful conversations about our technology. So we’ve got a wide base of customers, we’re across a lot of platforms. We have over 250 design-ins last year, we got 90 in the first quarter this year and we expect over the – to participate right across the industry.

Operator

Again we’re now taking our next question from Simon Schafer from Goldman Sachs. Please go ahead.

Simon Schafer – Goldman Sachs

Yes, thanks very much. I was just wondering about the operating expense run rate, and you have (inaudible) in the press release that obviously some cost increase is coming through on the DSP side and some of the new many product ramps. So I guess I’m just trying to get my head around as to what sort of run rate we’re looking at? Does that still need to rise significantly as you ramp new products?

Mark Cubitt

No, we think that the overhead levels that you’ve seen in Q1 probably will be similar in Q2. Our hope is that – our expectation is that in Q3 and Q4 that they will not rise and maybe a very, very slight fall. But the level of overheads you are seeing now we think is the highest we’re going to see for the year.

Simon Schafer – Goldman Sachs

I see. So no ramp on the variable side even if your sales come up in the latter half of –

Mark Cubitt

To be honest, we have had huge costs in Q1 on the stuff that’s ramping in the second half of the year, I mean we’ve got basically engineers everywhere at the moment. So we are effectively we’re incurring the costs now for the ramp. There might be a (inaudible) additional freight cost but the big cost is supporting all these global tier 1 customers where they are ramped and that’s all happening now ahead of the revenues, which we will start to see the backend of this quarter.

Simon Schafer – Goldman Sachs

Right, understood. And just sort of adjacent to that, I understand there’s obviously some ramp costs associated as you come up with volume with some new customers but what’s your initial experience with respect to pure gross margin negotiation with some of the Korean handset makers. These guys typically or historically I guess it’s fair to say, have been relatively fluid in the way that they choose supplies as well as how they negotiate their margin structures. I’d just be interested in any initial observations that you’re seeing as a large percentage of your revenue increase is derived by those customers.

Mike Hickey

Well, we’ve – there’s always – gross margin is a battle between cost and price and our customers always want a lower price and we always want a lower cost and we’re working both through design and through the supply chain to make sure that we’re able to maintain margins around about the 50% and as our – we’ve been operating with a similar mix of customers and the amount of time now. So we are predicting in quarter two that we can hold our margins above 50%.

Mark Cubitt

I mean I don’t think – nothing has changed Simon, it’s a constant battle. It will always be a constant battle but we don’t see any change in patterns or the discussions with the customers you’re referring to. It’s tough, it always has been and always will be.

Simon Schafer – Goldman Sachs

Got it. And my last question would be just on the sourcing side, how are you guys thinking about available capacity with your foundry partners? Any bottlenecks there in the corridors as you look at a significant ramp in the second half or even into Q2?

Mike Hickey

I mean obviously we’ve got – we have the ramp in the second half of the year, we’ve been saying really consistently now for a while and we’ve been planning that with our supply chain. So we are doing things like basically bringing inventories in to support the ramp etc. We feel secure on our supply base up to where we expect to be in 2010 and beyond. So, we’re managing it closely but we think we can – we will get it delivered what we need to in 2010.

Mark Cubitt

We’re basically investing a wee bit earlier in some inventory than we normally we don’t, but we think that’ll all sort of (inaudible) by the end of the year.

Mike Hickey

The other thing is as we’ve moved our portfolio from custom products to more market generic products. We’re able to take inventory decisions earlier than in the past.

Simon Schafer – Goldman Sachs

Thanks so much.

Operator

We are now taking a question from Didier Scemama from RBS.

Didier Scemama – RBS

Good morning, it’s tough in the morning, yes? My name is Didier Scemama from RBS, not RBC. Just one – it’s tough. Just a couple of questions, gentlemen. First of all, on your revenue guidance for the second quarter, I appreciate only maybe a shy of $1 million from consensus. But just like to understand your guidance, what are the key drivers for that? And secondly, when I look at the sterling, I was just wondering, Mark if you could remind us of your hedging sort of policy for the second half of this year. And I have got a quick follow-up. Thank you.

Mark Cubitt

Okay, well, I cover the hedging one. It’s actually in one of the notes. The exchange rate that we had in the first quarter was 1.62. We have not hedged the balance of the year. And so the average rate for the two years is going to be 1.565, which is pretty similar to actual rate that we had last year. We currently have no hedging in place for 2011.

Didier Scemama – RBS

Is that a decision now that you won’t hedge any more, or is it –?

Mark Cubitt

No, specifically what we tend do is hedge one or two quarters out.

Didier Scemama – RBS

Okay.

Mark Cubitt

So that’s what we have done. We made the decision at the Board just to take out the balance of 2010. My expectation is by the time we are certainly into going into Q3, we will probably have started taking some hedging on 2011. But it will probably just be a quarter at a time.

Didier Scemama – RBS

Understood.

Mike Hickey

Okay. Hi Didier, I will take the guidance question. What we have – as our visibility’s improved, we have returned to guidance after well over a year or a year and a bit without giving guidance. So the reason for the range we have given is, I mean not obviously as we go through this year, I mean I think we told you in February, our full-year results that we had roughly a third of the 2009 design-ins were actually in volume production and there is a little bit more than, but still the balance the – more than 60% still has to reach fully in production. And we are working with all of our customers, we know where all of that is, but that can easily move a couple of weeks. And if it moves over a quarter end, then that makes a difference to us. So that’s really why we have chosen the range that we have. I mean we have been pleased with the way the backlog has been building. The backlog number has also served as well through last year in terms of getting some view of what we are following quarter numbers are as our customer and product mix changes slightly through the – that will become less reliable, but we are happy with the way the backlog’s building. And we – overall, we see our revenues increasing through quarter two and then through the balance of year as more of the design-ins reach full production.

Didier Scemama – RBS

Okay, great. And just going back to the design win with this Tier 1 OEM, could you maybe comment on the platform of your designs for that particular customer? I have got a rough idea of which customer that is, but there are multiple platforms. Are you designing the CDMA as well as wide density (inaudible) platform for this customer or is it just on the wide density CDMA side?

Mike Hickey

I mean, we are not at liberty to discuss that Didier.

Didier Scemama – RBS

Okay. But it’s a broad engagement as opposed to maybe one phone?

Mike Hickey

We think it will be – well, we think it will be in multiple products and we think it will be meaningful to our revenue in 2011.

Didier Scemama – RBS

Well, congratulations. Thank you.

Mike Hickey

Thank you.

Operator

And now we are taking a question from Tim Shaw from Citi. Go ahead.

Tim Shaw – Citi

Good morning guys, thanks for taking my questions. Most have been answered. I just wanted to clarify, firstly on the Tier 1 design win. Just to clarify the language, is it a new platform win or is a new customer with this sort of audio solution?

Mike Hickey

I mean, what we will say it’s – the reason we called it out is it will be incremental revenue to us in 2011. So it will be from a customer that will currently not –

Mark Cubitt

It’s any customer –

Mike Hickey

Shipping to.

Tim Shaw – Citi

Okay. And just a quick follow-up on something slightly unrelated. The headset reference design that you had at the low-end noise canceling, how is that sort of tracking in terms of your engagement with customers and the interest there and where do you think that could possible go in the next couple of years?

Mike Hickey

Basically – well, the reason we did the head – the reference design was to, I mean, with the noise cancelling technology, the acoustic design of the year of what goes in the year, along with the electronics around the noise – the ANC technology itself is what gives the full solution. So we have put that reference design together, so that would be able to allow a customer very quickly to get to an end product. We have only really launched that in the last couple of months, we have got – we are talking to a lot people about it, quite how that gets to market where we have got the different engagements with different customers, et cetera.

But all of that would be incremental to anything that we are doing with customers now in terms of the headset design. So we think it will develop nicely. We do think – we have had very good feedback, we do think it’s the – from a technology perspective, we are the leaders in ANC technology and our customers confirm that to us and it works very well. But depending on how that gets deployed, obviously, inbox is a lot bigger volume than after-market sales, et cetera. So we are just working that along with very early stages in the engagement on it.

Tim Shaw – Citi

Okay. Thank you very much.

Mike Hickey

Thanks Tim.

Operator

We are now moving to Nick James from Panmure Gordon. Please go ahead.

Nick James – Panmure Gordon

Yes, good morning. I just had a –

Mike Hickey

Hi Nick.

Nick James – Panmure Gordon

Hi. I just had a few questions. Firstly back on the Tier 1 new smartphone platform, could I just ask if that solution includes noise cancellation or not?

Mike Hickey

We are not going into details of what the solution will include. So it is our latest audio solution and so it’s not insignificant, but we are not going into the details of it.

Nick James – Panmure Gordon

Okay, no problem. And then secondly, you said that mobile phone was up 50% sequentially in Q1. Have the ramps there – are they much completed for the first half or is there further to go in Q2?

Mike Hickey

No, I mean, we have – they are really just at the very start of their ramp.

Nick James – Panmure Gordon

Okay. So –

Mike Hickey

We would be delighted if they transferred into production, but we still – they still got to reach volume. And also we did – I think we said about a lot – around about a 100 of the design-ins out the 250 last year were in mobile phones and only a few of them have made it so far.

Nick James – Panmure Gordon

Okay. So is it kind of up 50% from a low base type of thing?

Mike Hickey

Yes.

Nick James – Panmure Gordon

Okay, so that sort of makes sense. And then just thirdly, just in terms of, obviously, you have made a lot of success in terms of winning new designs over the past year. I mean, to what extent have you seen a competitive fight back from the people where you have taken sockets away from them and to what extent do you expect that in the future?

Mike Hickey

Well, we – I mean, we compete for every slot as you know. So we have been successful in winning. We also – we do believe we are especially with our audio hub products, we are creating a whole new category and we were very strong there and we continue to win, win by influencing the end architectures of the phone people designing us in. So we are really actually just mopping up a whole load of other components and adding extra functionality, and actually disintegrating audio from some of the SOCs, et cetera. We can talk about that at our Tech Day, the next week. But we are – we feel we are in a very strong competitive position and we think that’s been translated in our design-ins. We were very pleased last year with the amount we have gotten, and we have got a very strong first of design-ins.

Nick James – Panmure Gordon

Okay, great. Thanks very much.

Mike Hickey

Thanks Nick.

Operator

The next question is from Daniel Ridsdale from Edison Investment Research. Please go ahead.

Daniel Ridsdale – Edison Investment Research

Good morning, Dan Ridsdale from Edison Investment Research. Just had a quick question about the MEMS microphones. You said you are shipping those. Are those shipping in production volumes right now or is that still pre-production at this stage?

Mike Hickey

We are shipping in production volumes.

Daniel Ridsdale – Edison Investment Research

Okay. And that’s –

Mike Hickey

So they are fully qualified, they are designed-in, the customer is making products, and we shipping them.

Daniel Ridsdale – Edison Investment Research

Okay. And how are you feeling about the ramp for that product line going forward?

Mike Hickey

Well, I mean, I think we have got a very competitive offering and we expect that to continue to increase as we go through in the next couple of years. We are up and running in that business, our technology is good, we are adding to the portfolio products, we are now adding the digital mics to the analog mics. And we have spoken before about how we believe because of the way our MEMS is processed, but we can get to fully integrate microphones and be very, very competitive there. So we are optimistic for the business.

Daniel Ridsdale – Edison Investment Research

Okay thanks. And just on the power management, is – are you getting design wins on handsets for that product range or is it really sort of focused on the eBook reader?

Mike Hickey

Most of our – and we had again a record revenues on power management this quarter. Mostly, the tractions being in eBooks, we are – we have had some success in debt funds, et cetera. But mostly, it’s been in eBooks so far and PMP players as well.

Daniel Ridsdale – Edison Investment Research

Okay, great. Thank you.

Operator

Your next question comes from Arun George from Execution Noble. Please go ahead.

Arun George – Execution Noble

Good morning, guys. It’s Arun from Execution Noble here. I just, if I may, two questions. Firstly, Mike, in terms of the 2009 design wins, can you say what percentage of the revenues is roughly contributed in Q1? And as you look into the financial year ‘010, what percentage of revenues do you think will come from the 2009 design wins?

Mike Hickey

We are still seeing a relatively smooth contribution to – from the 2009 in Q1. So we – it is adding and it’s helping us to get over the seasonal trends. We expect, probably on balance roughly around 40% to 50% of our total year would be on products which were announced last year. Obviously when we get into the second half, the percentage goes up, so maybe 60% of revenues in the second half will go up. Something of that order.

Mark Cubitt

Yes, in Q1, we are – there maybe something in the order of 15% of the Q1 revenues were on what we call the product that was launched in 2009.

Mike Hickey

Yes, that’s not necessarily design wins because we had design wins in 2009 from across our whole product portfolio, but this was a products that were launched in 2009. And we expect they will move up through the year as we –

Arun George – Execution Noble

Alright, that makes sense. And Mark, and just in terms of the inventory days, it looks to have ticked up to about 138. Can you just comment on that?

Mark Cubitt

As you go through the press release, the inventory days I think were 71. So –

Arun George – Execution Noble

71, okay.

Mark Cubitt

Let me just check quickly. So inventory days were 72, which was actually bang in line with the end of December and compared to 138 this time last year.

Arun George – Execution Noble

Yes, sorry, I read that wrong. And just finally, in terms of the win with this Tier 1 handset vendor. If you look into 2011, do you think that design win could contribute to say to 5% to 10% of your revenues?

Mark Cubitt

It will certainly be our top three customer, which means it can get to high single figures, yes.

Arun George – Execution Noble

Okay, alright, thank you.

Operator

We are now taking a question from Ian Robertson from Seymour Pierce. Please go ahead.

Ian Robertson – Seymour Pierce

Hello, there guys. Well done on the first quarter, excellent performance. Just a couple of technical tidying up questions. On the gross profit, you are talking about the shift in profitability due to product mix, effective supply chain management. Could you quantify the split between the two and to why they should reverse in the second quarter? And a similar sort of question, as far as operating expenses on the R&D line as to how much is this extra R&D on combined DSP audio solutions and how much is product ramps bought in costs?

Mark Cubitt

I mean the gross margin to be honest there is a – the gross margin is already it’s a mix, we get the sale in places and we also have the cost of manufacturing. So I mean it moved, I mean it came in maybe less than 1% higher than I think we’re consensus was. Could you point it to anyone area not really, it was quite likely the product mix that we had at that time. I think that if we then look at the customers in the geographies and the products that we’re selling in Q2, that makes us slightly different and looks as if contain a fraction. So I would say there is no single reason you could point to our customer or supplier. It’s just the overall mix, I mean we have products range from the low 40s to the high 50s and it’s a quite a mix as we said in the earlier call, some of the customers we deal with pretty aggressive as a constant buyer, we constantly buy and with the supply chain.

And the projection we’ve got at the moment, it’s just showing – just being a little bit weaker but still healthy 50% which is what we said the target would be. On R&D, I mean if you actually the a lot of the ramp costs are coming through in the selling and distribution. So you see there is a lot of cost there for basically a lot of engineers all over the world at the moment supporting customers and their ramps. So you can see that numbers a little bit higher think that you know for half a million dollars.

On the R&D, the costs they are on the DSP and associated software and lot of things, again probably in the region of about half a million higher than we would normally have. And I think Q2 will still have some of those costs, as I said earlier, we think that certainly in terms of R&D we don’t anticipate those costs going out in the same top. There could be some costs associated with higher volumes in the same time selling and distribution, but we would anticipate that we wouldn’t be having to support all the ramps because they will all start and so that should compensate for that.

Ian Robertson – Seymour Pierce

Should I be factoring in for 2011 a little of Q1, Q2 blip on supports costs, is this going to be an ongoing feature of the new Wolfson business model?

Mark Cubitt

Actually we have to call.

Mike Hickey

I mean I think just the volume of design and the sort of big transition we did on our portfolio functionality next year is along with a lot of extra warranty, I mean for example we last year was – we lose a lot of products as we sort of tried to pull things through that were little bit stuck in the prior years. So I think we launched (inaudible) products. I think that will normalize back down to somewhere in sort of mid to low 20s. It’s a right amount and we increased the functionality and obviously with all of our new technology stuff coming in as well. So I’m not sure it’s, I think that’s going to be expanded thing going forward.

Ian Robertson – Seymour Pierce

Being partly addressed by sort of selective hiring overseas perhaps in Korea perhaps in the States?

Mike Hickey

The answer to that is yes.

Ian Robertson – Seymour Pierce

Okay fair enough. Thanks very much.

Operator

And now we are taking a question from Daniela Ventrone from Piper Jaffray.

Daniela Ventrone – Piper Jaffray

Hi guys, a very simple question. I was just wondering of the 19 new design wins during the quarter. How many will ship if any in 2010?

Mike Hickey

Yes, I mean some of them will ship. They all have different lead times in terms of introduction to new product into revenue. Although what we’re doing is trying to build an inventory of design wins to support 2011 number.

Daniela Ventrone – Piper Jaffray

Okay, and could you tell us what percentage of those go to, I don’t know power management, ANC, I mean just give us a little bit of granularity there.

Mike Hickey

Roughly in terms of – there is small percentage of in overall times, I mean from an application market perspective.

Daniela Ventrone – Piper Jaffray

Yes.

Mike Hickey

What we’re really seeing is roughly the same type of mix that we saw in 2009 and we gave in our full year results. And so most of the design wins are with mobile phones. We have seen a nice upward trend around the digital still cameras. We introduced three or two products last year in the digital still camera space and so it’s really a continuation of the same balance of design in the application space that we talked about in our full year results.

We are seeing a continuing design wins on the new product stuff, on the new technology stuff. It’s obviously a much lower number than for example we have in our audio hubs or our high performance audio devices etcetera.

Daniela Ventrone – Piper Jaffray

Okay, thanks a lot.

Operator

Our next question comes from Susan Gordon from Speirs and Jeffrey. Please go ahead.

Susan Gordon – Speirs and Jeffrey

Good morning guys.

Mike Hickey

Good morning Susan.

Susan Gordon – Speirs and Jeffrey

Just a couple of non-trading things from me. I notice running through the P&L there’s a further payment of deferred consideration on the two acquisitions, could you just confirm whether still to go out there, should they meet their milestones and when, if you think that would happen, and that’s the first one. Sorry Mark, well do you want to answer that first one?

Mark Cubitt

Yes on the balance recording $6.5 million at the end of the quarter are for deferred consideration and not split $2 million in less than one year and $4.3 million in greater than one year.

Susan Gordon – Speirs and Jeffrey

Okay, and do you – these are likely to be hit, because obviously there was little bit of a hiatus last year in terms of making those payments?

Mark Cubitt

Yes, I mean that is based on when we anticipate on the milestones being hit.

Susan Gordon – Speirs and Jeffrey

Okay, and just as a last and final thing on that. Are any of those milestones related to profitability?

Mark Cubitt

No, the ones the all of milestones are (inaudible) are related to volume shipments.

Susan Gordon – Speirs and Jeffrey

Okay, second thing I just wanted to touch on was just to ask you to remind us of the terms of the employee share scheme. Because I noticed you’ve given us the statistic that the employees are the trust now owns just over 4% of the Company and you’ve continued to make payments into that despite the fact that you were loss making last year and loss making this quarter. What actually happens at the point where you get back into profitability again, does that number – does the employee ownership continue just to rise and as you come back into profit?

Mark Cubitt

I don’t it really, it’s a profitability, the basically the employee trust is effectively acquire shares. When we make awards so like the three year award, normally what we do is at the time of award the employee trust we’ll go secure the shares in the markets. So it’s not really it’s a profitability as such as just still that we do not dilute the shares and our diluted shares are kind of an issue when we do awards, we’ve got this effectively we trust and the market, it goes into market and buy shares and bottom. So what you saw actually in Q1 was that some shares had wasted the trust effect we transferred them to the employees to meet the tax liabilities that the employees have to sell some shares and the trust had the opportunity to buy those shares back. So it’s a warehousing making them for share awards.

Mike Hickey

Where the profitability elements comes in, when those shares have performance conditions on them, then they lapse etcetera but the trust has to buy shares in order to cover the eventualities I think.

Mark Cubitt

Yes basically the trust, that’s 4% it’s held just 4%, that’s held by the trust is effectively to cut our outstanding awards, that had been made over the last few years to having invested.

Susan Gordon – Speirs & Jeffrey

So for example in a year where you didn’t make any money and does that influence whether you make any share awards to employees or not?

Mark Cubitt

Annual awards I would say is not really, when we make awards typically in Q1 of each share that’s not based on the profitability of the Company, clearly what is based on the profitability of the Company is when we have various incentive schemes and to the extent that we do make money that not impacts on those but the share awards tend to be fairly share each year.

Susan Gordon – Speirs & Jeffrey

Okay, alright. Thank you.

Operator

We have follow-up question from Didier Scemama from RBS. Please go ahead.

Didier Scemama – RBS

Guys thanks for taking my follow-up.

Mike Hickey

Hi Didier.

Didier Scemama – RBS

Yes, I Just wanted to have your feel for how you see lead times at the moment and the sort of feedback you get from clients, are they still chasing parts. Are you seeing any extension or lead times or reduction of lead times in fact, and secondly, I think you alluded to that from Simon’s question earlier on sort of capacity, some of, or in fact I think all the foundries are increasing prices at various nodes. I was just wondering how you plan to mitigate that. Would you be able to even increase some of your prices or have you got any contingency plans for that?

Mike Hickey

Couple of things so in terms of the overall capacity situation, we feel again we’re said early we’re solid with that. I think in the pricing we had agreements that we got in place last year which were moving through. So we feel pretty solid with that. I think lead times are increasing. We’re in terms of by few weeks, I don’t think it’s out of the bounce of normal operation but things are tightening up.

Didier Scemama – RBS

Okay.

Mike Hickey

I keep on telling the sales force to raise prices to gain and they never listen to me.

Didier Scemama – RBS

Sure. But, so you don’t feel under any pressure from your foundry partners when it comes to wafer cost or even testing and packaging?

Mike Hickey

Well I think, we’ve – there is a little less flexibility in the market than there was last year, sometimes when we want things done a little bit quicker than normal than that’s been less easy to do, but I think it’s the operations guys are working pretty hard and so micromanaging things we have got around to go through, but we think it’s all within the balance of normal operation right now.

Didier Scemama – RBS

Okay, and just on that if I remember correctly, in the past when Wolfson has got a huge amount of business to deal with, your gross margins tend to fall a little bit because your testing is not able basically to handle all the volumes coming through, so this may be different this time, any thoughts on that?

Mike Hickey

We’ve had test time reduction plans team worked really for the past year or 18 months etcetera and with the products coming through. So we had some, again we’ve don’t feel we feel we got enough capacity agreed to secure our plan and more for this year.

Didier Scemama – RBS

Alright, well done. Thanks.

Mike Hickey

Thank you.

Operator

(Operator Instructions) That will conclude today’s question and answer session. I would now like to turn the call back over to Mr. Hickey for any additional closing remarks. Thank you.

Mike Hickey

Okay, well thanks very much for dialing in and listening in and just to reiterate we think we’ve made good progress in 2010 in the first quarter, we still got strong designing performance and product launch momentums continue and then 2009 designing are flowing through as we expected into volume manufacture and we expect our revenues to increase. When that happens we continue to work our cost base and we think we will return to sustainable profitability. So thanks very much for listening and speak to your next time.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Wolfson Microelectronics Plc Q1 2010 Earnings Call Transcript
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