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Miranda Technologies (NYSE:MT)

Q1 2010 Earnings Call

May 5, 2010 2:00 pm ET

Executives

Strath Goodship – President, Chief Executive Officer

Mario Settino – Chief Financial Officer

Analysts

Deepak Chopra – Genuity Capital Markets

Sera Kim – GMP Securities

David Kwan – Cormack Securities

Brian Picciono – BMO Capital Markets

Todd Coupland – CIBC

Chris Umiastowski – TD Newcrest

Operator

Welcome to the Miranda Technologies Q1 2010 results conference call. (Operator Instructions) Joining us on today’s call are Strath Goodship, President and Chief Executive Officer of Miranda Technologies and Mario Settino, Chief Financial Officer.

Before turning the call over to management, please be advised that today’s remarks forward-looking statements and reflect Miranda’s objectives, estimates and expectations. Such statements may be marked by the use of expressions such as believe, anticipate, estimate, looking ahead and expect as well as the use of conditional or future tense. By their very nature, such statements involve risks and uncertainties. Consequently, results could differ materially from the company’s expectations. Miranda’s business remains subject to risk factors described in the company’s annual information form available on Sedar under the heading Risk Factors. Any forward-looking statement represents the company’s current expectations and accordingly, are subject to change. The company disclaims any intention and assumes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise unless required to do so by applicable security laws.

I would now like to remind everyone that this conference is being recorded as of Wednesday, May 5, 2020 at 2:00 pm Eastern time. We will now turn the conference over to Mr. Strath Goodship.

Strath Goodship

Good afternoon everyone. Thanks for joining us. As mentioned, the purpose of today’s call is to review our results for the quarter ended March 31, 2010, which were released earlier today. For your convenience, the press release is also available on our website at Miranda.com/investors and will also be available on Sedar. Joining me on today’s call is Mario Settino, our Chief Financial Officer.

Turning to our results, quarterly sales were $29 million, down from $33.2 million last year. Excluding foreign exchange, volumes were up 1% over 2009. International markets remain strong, increasing 26% as we saw meaningful improvement in Canada, recording a quarterly gain of 116%. Although U.S. sales were still lagging the rest of the market with revenues declining 50% over last year, customer interest appears to be building.

In addition to stronger sales outside of the U.S., our gross margins also improved considerably, coming in at 58% of sales and we continue to generate strong cash flows.

The company recorded a net loss of $1.7 million or $0.07 per share. This compares to a net income of $1.1 million and $0.05 per share in 2009. Expenses for the quarter included a $1.9 million foreign exchange loss, which Mario will discuss shortly.

Despite the weak macroeconomic environment over the past year, Miranda has continued to invest significantly in R&D and bring new impetus solutions to the market. In April, we showcased many new products at the National Association of Broadcasters Show in Vegas. There was strong interest at the event for both Stereoscopic 3D technologies and for products that take cost out of broadcast infrastructure; two areas in which Miranda is leading.

For Stereoscopic 3D, our new launches included a Stereoscopic 3D multi-viewer, a local generator channel brander and video processor for which we won a show award. These 3D products were on display on one of the first broadcast 3D production trucks recently completed by [Almawel] Video.

We also demonstrated our first video processor equipped with Sensio 3D technology, polling our recently announced partnership with Sensio to develop a suite of products that will enable end to end Stereoscopic 3D play out.

Some examples of our cost saving innovations introduced at the show included a compact card based multi-viewer as well as an enterprise class router with integrated audio processing, both of which offer significant space and cost savings.

We also showed network wide electronic lip sync monitoring, implemented control and view automatic loud responder and control solutions for which we received a second show award.

In summary, after removing unfavorable movements of foreign exchange, sales had some strength in the first quarter. As well, gross margin improved over recent quarters and we remained a strong cash generator. We continue to believe broadcast markets have stabilized. Internationally, markets appear to be in a broad based recovery in the U.S., despite the lower sales in the first quarter.

We believe that the level of sales activity and the solid response we received from U.S. broadcasters at NAB will translate to stronger U.S. sales going forward.

We know that television advertising forecasts, a leading indicator of broadcast capital expenditure, have been revised upward recently and U.S. station groups have shown more optimism than last year, particularly for the second half of the year.

Our extensive product reach, sound financial position, combined with a number of sporting and political events in 2010 will clearly allow us to benefit from improvements in demand.

I’ll now turn the call over to Mario

Mario Settino

Thank you, Strath and good afternoon everyone. As usual, I would like to cover a few things before beginning. First, I’d like to remind you that today’s remarks may contain forward-looking statements. Secondly, references to dollars referred to are in Canadian dollars. Finally, I would like to note that N-Vision, which was acquired on December 22, 2008, has been fully integrated into operations and we will no longer be providing sales numbers separately.

As Strath indicated earlier, quarterly revenues were down 13% over 2009, although they were up 1% if you exclude foreign exchange. We continue to see strong growth in professional markets and also saw a meaningful gain in Canada. The U.S. and Canada accounted for 42% of sales while international markets accounted for the remaining 58%.

Gross margin as a percentage of sales was 58%, coming in at the higher end of our target range. This is up considerably from 52% reported in the fourth quarter of 2009.

Turning to expenses, selling, general and admin costs were down considerably from 2009, decreasing 16% to $10.4 million. The decrease is due to cost saving initiatives implemented in 2009 and the favorable impact of foreign exchange on expenses denominated in foreign currencies. SG&A as a percent of sales was 36% for the quarter, down one point over 2009.

Gross R&D investments were $.48 million, down 5% from last year. As with SG&A, the decrease was largely due to the impact of foreign exchange on expenses denominated in foreign currencies. R&D tax credits for the quarter were $1.2 million compared to $1.5 million in 2009.

Other operating expenses, which include interest, foreign exchange, stock based compensation, and amortization were $3 million for the quarter, up from $.9 million in 2009. The increase was driven by $1.9 million foreign exchange loss in the quarter compared to a gain of $.6 million in 2009.

The company realized a considerable portion of its transactions in foreign currencies, and consequently holds significant assets in U.S. dollars and Euro’s on its balance sheet. The decline in these currencies against the Canadian dollar during the quarter resulted in the $1.9 million loss.

Moving to EBITDA, we came in at $.7 million or 2% of sales compared to $3.8 million or 4% of sales last year. I would like to remind you that EBITDA is a non-GAAP measure.

Turning to taxes, the company incurred a quarterly income tax expense of $.4 million compared to $0.7 million in 2009. The effective tax rate for the quarter is higher than the company’s tax rate of 31% largely due to the non-deductibility of unrealized foreign exchange loss.

Moving to the bottom line, the company recorded a quarterly net loss of $1.7 million or $0.07 per diluted share compared to net income of $1.1 million or $0.05 per share in 2009.

On the liquidity side, we continue to be a solid cash generator with cash flows from operating activities coming in at $5.1 million for the quarter, up from $3.4 million in Q1 last year. Cash, cash equivalents and temporary investments rose $3.2 million over year end ’09 and in the quarter at $52.4 million. During the quarter, no shares were purchased in connection with our NCIB program.

In conclusion, we remain financially strong with a strong product line up and we are well positioned to capitalize on opportunities as they arise.

Finally, as mentioned at the beginning of the call, I would like to remind you that certain statements presented today are forward-looking, subject to a number of risks and uncertainties. For more information on the risk factors described in our annual information form on Sedar, at sedar.com.

The ends our formal remarks and we can now take questions.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Deepak Chopra – Genuity Capital Markets.

Deepak Chopra – Genuity Capital Markets

I was wondering if maybe you could talk a little bit about the market. Can you tell us what you see at ground level and both the U.S. and international levels and what do you think from a constant currency or organic basis market growth rates will be this year when you look across the globe?

Strath Goodship

It will certainly be better than last year, that’s the short of it, although the mix may be a little bit different from last year. I think internationally, things started soon this year than they did last year and have continued to progress quite well so I think internationally, that’s where we’ll see the strongest growth right throughout the year.

The U.S. is the one that’s the hardest to read. All the right signs are there. As I said, it looks like the forecasts for advertising are up. The broadcasters are making all the right noises. They’re just not necessarily following through with orders yet. So does that happen in Q2? Does that happen in Q3? It’s very hard to read right now, but overall, I think overall 2010, I believe it will be a better year in the U.S. than 2009.

Deepak Chopra – Genuity Capital Markets

I know you don’t like to provide guidance, but just in terms of the Q2 quarter here, I’ve noticed historically it’s been up quarter over quarter on Q1. Should we expect similar type of trends we’ve seen in the past few years or last five years more or less where we’ll see an uptick in Q2 over Q1?

Strath Goodship

We have no reason yet to believe, in fact every indication is that the seasonality will remain in place this year as well.

Deepak Chopra – Genuity Capital Markets

In terms of from a pricing competition point of view, what are you seeing out there. It may seem like it’s still a bit of an issue out there. Just your comments around that will be great as well.

Strath Goodship

It’s still there. As I’ve always said, it really depends on which market we’re dealing with. It seems to have spread, but I’d say at the end of Q1 is no worse really than the end of Q4. It’s very similar.

As you saw our gross margins improved a little bit. We were less subject to it, probably more to do with the geographic mix than anything else, but I can’t see it’s increased in any major way in the last quarter here.

Deepak Chopra – Genuity Capital Markets

Could you talk a little bit about from an OpEx point of view, what should we think about the OpEx going forward here on an absolute dollar level. Should we more or less model a flat OpEx on a quarterly basis for the rest of this year or a slight uptick here and there, just to get a bit of a directional trend.

Mario Settino

You should use the prior year as a table, seasonality of the top line, and there’s an uptick usually in SG&A in the second quarter for any expenses. But the balance of the year should be comparable to prior years.

Deepak Chopra – Genuity Capital Markets

In terms of the target business model, I guess EBITDA margins of 20% to 25%, that’s still the targeted goal.

Strath Goodship

Yes.

Deepak Chopra – Genuity Capital Markets

I noticed the inventory was up a little bit this past quarter. Were you just procuring components that were in short supply? Maybe you could talk about that a bit.

Strath Goodship

Normally, the inventory does go up in the second quarter as we build for the seasonality that we’ll have in Q2 and Q3 and also, we were quite low at year end as we shipped quite a bit in Q4. So it’s really replacing our standard inventories.

Operator

You're next question comes from Sera Kim – GMP Securities.

Sera Kim – GMP Securities

For the international markets, it was down quarter over quarter. I’m just wondering is it project related and could you talk about whether the trend has been consistent in the regions that you’ve seen strength in prior quarters or have you seen new areas that have improved?

Strath Goodship

Did you mean year over year or did you mean sequential quarters?

Sera Kim – GMP Securities

Sequentially.

Strath Goodship

I think that’s more to do with seasonality than anything else.

Sera Kim – GMP Securities

I’m just wondering in the international regions if you’re seeing strength, new strength coming from other areas relative to what you’ve seen in the last couple of quarters or is it pretty consistent.

Strath Goodship

It is pretty consistent. Really, any change is really a seasonality thing more than anything else.

Sera Kim – GMP Securities

I thought that usually international markets are more project related rather than the typical seasonality that we would normally see in North America.

Strath Goodship

They still contribute to a lower level of business in Q1 as well. Q4 worldwide is a stronger quarter than Q1.

Sera Kim – GMP Securities

In terms of gross margins, you mentioned mix. Do you expect this mix to be consistent for 2Q or is there something out of the ordinary that came up in Q1?

Strath Goodship

Nothing really out of the ordinary. We adjust our window. Last quarter we said we feel pretty comfortable anywhere between 55% and 59%. We’re prepared for revenue. We’re prepared to give up some margin to get some of the bigger deals. In some markets you don’t need to do that, so it really does depend on where we’re selling in any particular month in any particular quarter. So we’re sticking to that range of 55% to 59%.

Operator

You're next question comes from David Kwan – Cormack Securities.

David Kwan – Cormack Securities

I think you kind of touched on this in light of the OpEx and the related expenses. I think last year you saw a disproportionately higher amount of that flow into Q1. It doesn’t sound like that played out this quarter, so I’m wondering what kind of uptick we might be able to see in Q2.

Mario Settino

If you remember, last year the U.S. dollar was about 1.24 and this quarter at more parity, so a bit of the uptick has been in U.S. dollars, probably about $600,000 less than last year.

David Kwan – Cormack Securities

In terms of the sequential increase, what can we expect for Q2, something similar to what we would have seen in prior years?

Mario Settino

That’s right. Use the prior year model as your basis for the quarterly spend, the percentage points.

David Kwan – Cormack Securities

Have you seen any increase in the credit risk and bad debts over the last quarter?

Mario Settino

No, it’s been very constant throughout. It’s nothing extraordinary to report.

David Kwan – Cormack Securities

Given where the stock is trading right now, I’m just curious as to why you’re not aggressively buying back your stock given that you have cash sitting on the balance sheet and the cash flow generation that you have been able to generate.

Mario Settino

Of course as you’d expect we’ve discussed this at length and we can’t really comment on it right now. We’re in the black of the period right now so it wouldn’t be appropriate to comment exactly what our position is on that.

Operator

You're next question comes from Brian Picciono – BMO Capital Markets.

Brian Picciono – BMO Capital Markets

There’s been some pretty scary news coming out of some of the competitors. I was wondering whether that’s been reflected somehow in maybe an improved competitive environment relative to the competition relatively speaking or whether that’s had any impact whatsoever that you’ve notice.

Strath Goodship

I can’t think of really any specific change in the competitors that’s made any sort of difference in the last quarter. Has the landscape changed? Not that significantly. I think there are some competitors that are probably in a little more trouble than they were three months ago. It hasn’t really reflected itself in a drastic behavior in price dropping or anything like that.

I still maintain that we’re one of the strongest out there. We tend to compete with two other manufacturers mostly, and I’d say 80% of the bids that we’re involved with worldwide it’s the same two that keep coming back. So I can’t say I’ve noticed any big change.

Brian Picciono – BMO Capital Markets

There’s been a lot of profile lately with respect to the 3D products, I mean 3D media offerings in general, and of course you mentioned those products that you have in your opening comments. Is this the sort of thing that people are actually spending money on or is it still just sort of hovering around and looking at kind of phase.

Strath Goodship

They’re spending and there’s some hovering around as you call it. There’s both. I’d say we’re spending a lot of time educating right now. We’re spending a lot of time helping customers understand what’s out there, what’s available, what their options are. And this is part of the problem.

There are lots of options. There are lots of choices. There’s no real standard as yet, so we’re really helping many of them, spending a lot of our time helping our customers get their head around it. But there are some who have made the decision and are buying, and we are selling product and I gave the example of a truck in the U.S., which we sold equipment to. So I think it’s something that will build certainly as we go forward.

Brian Picciono – BMO Capital Markets

You had reflected on an improved outlook for ad spending which is obviously of pivotal importance in the U.S. Has there been a change at all to your sales funnel since NAB?

Strath Goodship

No, not significant. We actually uncovered some new business at NAB, which doesn’t always happen at NAB, so NAB itself is good. Has something happened since? No. I think there’s of course, the ongoing business. I can’t say there’s been an uptick necessarily since NAB.

I’d say that the funnel generally looks pretty good. What we still have a problem with in the U.S. is nailing the timing. We have a lot of customers now delaying projects that were due at the end of last year that were due the first few months of this year, and now they have been postponed into Q2 and for all we know, they may end up in Q3.

Operator

You're next question comes from Todd Coupland – CIBC.

Todd Coupland – CIBC

In the U.S. market, I was wondering if you could talk about the types of projects that are being contemplated. I’m interested if you could give us some color on the types of projects that are being contemplated. Is it local news, conversion to HD? Is it upgrades of older equipment and networks? Maybe just talk a little bit about the types of projects that are in the funnel.

Strath Goodship

I can’t say they’ve changed over the last year. I guess there’s more interest generally in infrastructure products that help with streamlining work flows and things like that. That product tends to be generally of more interest. But the projects are still mostly around HD conversion, HD upgrades. That’s still really for us the product line we have to offer. That’s where we see most of the projects coming in.

I can’t say it’s at the local level or the national level. It’s across the board. It’s just that all over there’s less of it. There are less orders being placed than there were in previous quarters.

Todd Coupland – CIBC

On the 3D question, what do you expect your initial customers will use the equipment for? What type of content will they be coming out with? Is it sports? Is it news? What are they initially hoping to use your 3D products for?

Strath Goodship

There’s a mix. It depends on the type of customer and we’ve sold equipment to a satellite operator that also generates content, so I think that’s mostly like movie content. I believe that most of the interest is coming from live events and those are mostly sports.

Todd Coupland – CIBC

On the gross margin, I thought you had said last quarter that you were going to be prepared to use it to protect your competitive position. You saw your gross margin come up this quarter from mix, what have you. Do you still think that the gross margin is going to be volatile if you’re pressured particularly in international markets to be aggressive in order to win the business? Maybe talk a little bit about your anticipation of that.

Strath Goodship

Yes, we haven’t changed our plan. As I said, we didn’t feel that we needed to do it in the last quarter, and therefore we’ve seen maybe slightly a bit of the high side of the range of 55% to 59%, which we gave in previous quarter. So I expect it to continue to be volatile and we will use our business when we believe we need to. So it will still sit within that range and it could be lower than where it is today if we need it to, to gain market share.

Operator

You're next question comes from Chris Umiastowski – TD Newcrest.

Chris Umiastowski – TD Newcrest

I wanted to ask a little bit about R&D plans. I noticed your R&D ticked up a little bit in the quarter and just hoping to get a sense of where you expect that line to go given it sounds like you’re completely done the restructuring that you instigated last year.

Strath Goodship

What we aim to do, we’ve typically given the range of 14% to 16%. That’s where we aim to bring it back to. I think right now, because of the market conditions, we’re prepared to continue to hold it above that window and then when demand returns to more normal levels and we get the revenue line back up, we expect to be able to keep it in line.

Chris Umiastowski – TD Newcrest

What drove R& higher in Q1 relative to Q4?

Strath Goodship

I guess there’s a couple of soft issues. There are things like we implemented a furlough last year, so we’ve taken that back out. We gave some increases. We’ve also hired some people as well. There’s some key positions in some particular areas that we felt we needed to beef up in and I’m not prepared to say what products, but we also hired some new people as well.

Chris Umiastowski – TD Newcrest

So it sounds like we should be thinking about the dollar amount remaining fairly steady here then until you get your revenue back up and then it will fall back into your normal percentage range?

Strath Goodship

Yes.

Chris Umiastowski – TD Newcrest

I was also hoping you could talk a little bit more about what you described as happening in the U.S. market. You’re seeing more stability there and just not the actual orders yet. Can you give us any kind of anecdotal evidence, any kind of information that you used on which to base those comments?

Strath Goodship

Well, nothing too specific. We work a lot with national broadcasters and we work with a number of station groups. There’s one particular station group that we have been working with for probably close to nine months on a reasonably large roll out. It was a project that was supposed to go through at year end, then it was moved into this year’s budget and it was supposed to happen in February.

Then it was supposed to happen just before NAB, then it was supposed to happen right after NAB. It’s still not happened. We’re still very much in there and they want to make sure that they’re seeing a recovery in their top line and when they’re comfortable with that, they’re going to be prepared to pull the trigger.

So I’m pretty confident this is a good long term customers. I’m confident that the business will come and that their own fortunes will improve. It’s just very, very difficult to nail down when.

Chris Umiastowski – TD Newcrest

Is that just one of many examples that are similar or is that kind of a driver?

Strath Goodship

You asked for an anecdote. I’m only going to give you one, but that’s pretty typical.

Chris Umiastowski – TD Newcrest

On the 3D market, it sounds like you’re not trying to suggest this is going to be a big needle mover for the revenue line in the near term, but it’s just one of these transitions that you’re planning for to maintain your competitive lead. Is that more or less correct?

Strath Goodship

That’s more or less correct. There will be some additional sales. I think we’re actually really considering it as a catalyst. It’s helping some players even move to HD because it’s one more reason to do it. I think it will help some European players develop more HD channels as well.

It’s also providing some additional hype around the world cup as well which I think helps television generally where we sell more advertising, so it should all come back to us at the end. So it’s not the next HD. We’re not counting on that.

Chris Umiastowski – TD Newcrest

I understand from last quarter, you were planning on using gross margin as a way to win some of those bigger deals that I think in the past you hadn’t been as willing to take a bit of a margin hit to win the revenue. So with your willingness to do that as you said in some markets and not required in others, how soon do you think we should expect to see that translate into revenue growth? Is it really dependant on that U.S. market recovery that you’re talking about?

Strath Goodship

Yes. I think that’s really the thing that we believe is holding us back right now. And the margin, we’ll use the margin as we feel fit. It just wasn’t necessary to use in Q1. So for us, the top line, the significant movement in the top line really is dependant largely on the U.S. recovery.

Operator

You're next question comes from Deepak Chopra – Genuity Capital Markets.

Deepak Chopra – Genuity Capital Markets

First, the financial, if the Euro stays at current levels, what sort of impact would that have in terms of your international sales. Maybe another way to ask with question is, could you provide a split in terms of the currency denomination of your revenues.

Mario Settino

It’s seasonal, but I can say that on average it’s between 15% and 20% of our revenue is in Euro’s.

Deepak Chopra – Genuity Capital Markets

And the vast majority of the rest is pretty well, other than the Canadian portion, all U.S. dollars correct?

Mario Settino

That’s right.

Deepak Chopra – Genuity Capital Markets

In terms of the product, one of the things I’ve heard is that user automation systems is a key driver for winning business especially in the U.S. right now. I was just wondering how well is your product portfolio for the X media side stacking up. Do you believe that’s true that having that product is a key item to win business in the U.S. especially in the newsroom side?

Strath Goodship

We don’t do newsroom automation per se. What we do is, we do newsroom graphics and when it’s newsroom graphics automation required, yes we do. It’s an important product. But what we win with the news HD conversion in the U.S. is really an infrastructure here and multi-viewers, and also in play out servers as well.

We have the X channel, which is a combination of a branding server. It’s a brander and a server at the same time. So I wouldn’t say not having newsroom automation per se is a particular problem. That’s not really the leading product.

Operator

There are no further questions as this time. Please continue.

Strath Goodship

This ends our conference call. Thank you all for joining us today.

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