Ikanos Communications, Inc. (NASDAQ:IKAN)
Q2 2014 Earnings Conference Call
July 31, 2014 04:30 p.m. ET
Keith Kummerfeld – Corporate Controller
Omid Tahernia – Chief Executive Officer, President and Director
Dennis A. Bencala – Chief Financial Officer and Vice President of Finance
John Cangelosi – Private Investor
Welcome to the Ikanos Communications Fiscal Second Quarter 2014 Results Conference Call. I would like to remind everyone that today's call is being recorded. (Operator Instructions)
I will now turn the call over to Keith Kummerfeld, Corporate Controller at Ikanos. You may begin sir.
Thank you for joining us today. Our CFO and Vice President of Finance, Dennis Bencala; and our President and CEO, Omid Tahernia, are on the call today. The information discussed on this call speaks only as of today, July 31, 2014. Statements made during this call that are not historical facts, including statements accompanied by the words like will, believe, anticipate, expect, estimate, or similar words, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's estimates and assumptions as of the date of this call and are not guarantees of future performance. Actual results may differ from those expressed or implied by these statements as a result of uncertainties and other factors including the factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2014. The company cautions you not to place undue reliance on these forward-looking statements.
In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, Ikanos reports non-GAAP financial results. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in the press release available on our website at ikanos.com.
Now I'll turn the call over to Ikanos President and CEO, Omid Tahernia.
Thank you, Keith, and thank you, all, for joining us today. As stated in our earnings announcements, we ended the second quarter with revenues and operating expenses all within our guidance, well exceeding our targets on gross margin. With return to revenue growth still on the horizon, we’ve taken steps to right size our expenses and ensure that our investments are aligned with expected revenue levels. As a result, we anticipate a nearly 20% reduction in our operating expenses in the second half of 2014 relative to the first half.
For our new products, I’m pleased to report that we’re seeing very positive momentum on many fronts. We achieved an important milestone for the Velocity family and our access business. We officially rolled out our new Vx500 multimode gateway processor family at Computex in June and our award winning inSIGHT software product is now in planning stages for field trials at our top 2 carrier customers.
For the access business and the Velocity product family, we have now shipped initial quantities of Velocity-3 to our lead OEM. While meaningful revenue for this product line is expected in 2015, initial shipments are an important milestone for any new product line. We’re making good progress at various trials with our lead OEM and expect to secure several tenders for volume shipments in 2015. We’re also seeing strong interest in our G.fast technology which offers significant differentiation in power, performance, integration and scalability. To enable this differentiation we are effectively leveraging the R&D investments we’ve made in our Velocity family Vectoring and inSIGHT to-date.
We continue to see increasing carrier interest in our inSIGHT product line. Particularly give its unique ability to enable self install, a key feature required by most carriers looking to deploy next-generation xDSL and G.fast services.
Carrier field trials are planned for second half of this year with deployment revenue ramp expected in 2015. We continue to drive our inSIGHT product portfolio roadmap with new features to cover non-DSL gateways. These new features in the roadmap expand the TAM for inSIGHT and allow us to target the broader gateway market. One such capability which enables the carrier to monitor its services delivered is already deployed by a North American carrier.
The other significant milestone last quarter with the full platform rollout of our latest gateway processor family is a Vx500. The new platform which showcased last month at Computex in Taiwan, OEM and ODM feedback has been extremely positive. We already have a growing backlog for evaluation platforms and expect to secure several design wins in the next few months for revenue staring in second half of 2015. In addition, we are seeing continued momentum for our current generation gateway processors with three new design wins for Vx185 just last quarter. In addition to showing continued traction in the market these new wins for Vx185 are also extending our reach into new carriers in Europe in support of our carrier diversification strategy.
Now, let me turn to our second quarter results. As we reported in today's press release, highlights of Ikanos' second quarter results are as follows: Revenue for the second quarter was $11.3 million, which was within our Q2 guidance of $11 to $13 million; GAAP gross profit was 49%, which was above our guidance of 46% to 48%; GAAP operating expenses were $17.5 million, which was on the low end of our OpEx guidance of $17.5 million to $18.5 million. GAAP EPS was a net loss of $0.12 per share on 99.1 million weighted average shares outstanding; quarter ending cash, cash equivalents and short-term investments was $20.6 million.
On a percentage basis, our shipment revenue for Q2 is as follows: Europe represented 47% of revenue; Americas represented 29% of revenue; Japan and Korea combined, represented 20% of revenue; rest of the world represented 4% of revenue.
The Vx18x, Vx17x Fusiv communications processor family maintained a sizable portion of our business at 59% of total revenue in Q2. As a percentage of shipment revenue, the Americas experienced the largest increase going from 9% of revenue in Q1 to 29% in Q2, as new customer products began to ramp including a triple play gateway at a large North American carrier. Europe remains strong representing 47% of our business.
Our broadband access business represented 22% of total revenue in Q2, as compared to 29% of total revenue in Q1. Our gateway processor business represented 78% of total revenue in Q2, as compared to 71% of total revenue in Q1.
We secured four new design wins in our gateway business, three for Vx185 and one in legacy during the quarter with the production timeline expected in late 2014 to early 2015. We ended the quarter with our new products representing 75% of revenue compared to 84% in Q1. This drop in percentage of new products was primarily due to an inventory shift in one of our key gateway accounts coupled with a slight increase in demand in the Japanese market. The impact of these factors is expected to primarily be a second quarter dynamic.
Now, I will turn the over the call to Ikanos CFO and Vice President of Finance, Dennis Bencala, who will cover the second quarter financial results in more detail.
Dennis A. Bencala
Thank you, Omid. Now turning to the details of our financial results, our GAAP gross profit for the second quarter was approximately 49%, consistent with our GAAP gross profit of 49% for the first quarter. We continue to effectively manage operating expenses, as GAAP operating expenses were $17.5 million for the second quarter compared to $17.5 million for the first quarter and GAAP net loss for the second quarter was $12.3 million or a loss of $0.12 per share, this compares with a net loss of $10.3 million or loss of $0.10 for the first quarter.
Moving on to our non-GAAP results, non-GAAP gross profit for the second quarter of was 50% consistent with our non-GAAP gross profit of 50% for the first quarter. Non-GAAP operating expenses for the second quarter were $16.6 million compared to $16.5 million for the first quarter. Operating expenses for the second quarter were managed to the low end of our second quarter guidance of $16.5 million to $17.5 million.
Our non-GAAP net loss for the second quarter was $11.3 million or a loss of $0.11 per share compared to a non-GAAP net loss of $9.2 million or a loss of $0.09 per share for the first quarter.
Turning to our balance sheet: As a result of the continued management of our inventory levels, operating expenses and capital expenditures, we ended the second quarter with total cash, cash equivalents and short-term investments of $20.6 million. This compares to $33.7 million at the end of the first quarter. Our second quarter cash, cash equivalents in short-term investments include $6.9 million of draws under our accounts receivable secured line of credit.
Inventory was $2.2 million at the end of the second quarter compared to $1.3 million at the end of the first quarter. To close the balance sheet, accounts receivable at the end of the second quarter was $9.4 million compared to $11.0 million at the end of the first quarter.
Finally, current liabilities at the end of the second quarter were $21.6 million, compared to $22.5 million at the end of the first quarter. The $21.6 million in current liabilities at the end of the second quarter included a reduction of $1.6 million during the quarter under our line of credit, which brought the total advances under the line of credit to $6.9 million. For a more complete review of our 2014 results and quarter-over-quarter comparisons, please see our press release issued earlier today in the attached financial schedules.
Now moving on to guidance: As we look ahead, we expect the continued softness in our legacy business as well as some delays in the production ramp of certain new multimode gateway customers to keep the overall revenues sequentially flat. We anticipate revenues to be in the range of $11 million to $13 million for the third quarter of 2014. We expect GAAP gross profits to improve to be between 48% and 50%. Non-GAAP gross profits are expected to be between 49% and 51% for the third quarter. GAAP operating expenses for the third quarter are expected to be reduced to be in the range of $14.5 million to $15.5 million. We expect non-GAAP operating expenses to be reduced to the range of $13.5 million to $14.5 million for the third quarter.
As a result of improved gross margins and reduced operating expenses the GAAP net loss for the third quarter is expected to be in the range of approximately $8.3 million to $10.5 million, or a GAAP loss per share of $0.08 to $0.11. Non-GAAP net loss for the third quarter is expected to be in the range of approximately $7.2 million to $9.4 million, or a non-GAAP loss per share of $0.07 to $0.09.
Now I will turn the call back to Ikanos' President and CEO, Omid Tahernia.
Thank you, Dennis. We continue to rebuild our base business, the transition has been a challenge, but the good news is that new products now constitute a large percentage of our quarterly revenue. With a stable base of new revenue, we anticipate more predictability of our business further strengthened by new customer product ramps. With Velocity-3 and InSIGHT continuing the progress through carrier trials and the rollout of our Vx500 multimode gateway processor family, we are adding new layers of revenue starting in 2015.
We believe the market dynamics and trends remain aligned with our product focus and differentiation, vectoring while still not fully ramped is an integral part of next generation carrier deployments an inherent component of the G.fast standard. The initial large scale vectoring serviced deployments were announced by Dollar comp earlier this year which Ikanos was a part of with our gateway processor.
We expect mounting competitive pressure to accelerate carrier deployments of all enabling technologies towards gigabit services including vectoring and bonding where Ikanos offers differentiated capabilities.
Our base of R&D investments are being leveraged into our next generation G.fast access and gateway solutions where our unique advantages put us in a strong competitive position.
Lastly, we are well aware of the short-term need for raising additional capital. As we have previously stated, we are continuing to actively pursue a number of financing alternatives to raise such capital. We believe that we are making progress in our efforts. We continue to believe that our strategies for rebuilding our business in the growing broadband market through a comprehensive and differentiated new product portfolio renewed go to market approach and our emphasis on customer diversification, key partnerships and strategic alliances should result in Ikanos return to growth.
Now let me open it up to questions.
(Operator Instructions) And we'll go first to Quinn Bolton with Needham.
Hi, this is (inaudible) in for Quinn. Would you guys be able to tell me what is your anticipated cash burn is in the third quarter?
I’m sorry, could you please introduce yourself.
Hi, can you hear me?
Dennis A. Bencala
Yes, thank you.
Okay there we go, hi. This is (inaudible) for Quinn.
Dennis A. Bencala
Oh, yes. Okay, thank you.
Thanks for taking the question sorry about that. Would you guys be able to tell me your anticipated cash burn in the third quarter?
Dennis A. Bencala
Well, Christine. We have given our guidance for the quarter and on our quarterly guidance we gave both revenue, gross margin and OpEx, but we don’t specifically give guidance on our cash.
Okay, understood. Thank you. And then, I know last quarter you were saying, to assume about $25 million revenue breakeven, I’m sorry quarterly $25 million run rate for revenue breakeven, is that still correct?
Dennis A. Bencala
Yes, we are doing a lot to manage our cash and at the same time as Omid mentioned, we are expecting our revenue to be ramping in 2015 and yes that is the approximate breakeven going forward.
Okay, thank you. And then, is $13 million or $13.5 million per quarter for non-GAAP OpEx the correct range to assume after the 20% OpEx reduction in the second half?
Dennis A. Bencala
Yes, that is the approximate number, we are working to reduce our OpEx and that is the range that we are forecasting through the balance of the year.
Okay, great. Also I know last quarter you were saying there were some fastness in the European retail channels, could you provide any color or commentary on the European market using this quarter?
Hi, this Omid. So, yes I think obviously the numbers and percentage of our business peaks to this fact, our business in Europe is a largest portion of our business obviously and continues to be strong, we anticipate that to kind of maintain in the same range if you will and be in the number one position from a share perspective globally. We did have a retail customer, one specific retail customer that had a pretty good holiday period, Q4 timeframe. And as we commented on the earnings call last quarter, we expect this momentary shift that would impact us in Q2. We believe that is behind us and we should, with that particular channel and customer to get back to a normal run rate in Q3 and certainly Q4.
Okay, great. Thanks.
And we will go next to John Cangelosi, who is a private investor.
Yes, good afternoon gentlemen.
How are you doing?
That’s good. I have one question, I’m just concerned about the cash flow of your company, but the short-term investment you have is $20.6 million, is that going to be enough to keep the company surviving, maybe moving, will it keep the company going, despite that we see a significant price or significant drop in the stock price?
Dennis A. Bencala
So John, this Dennis, the CFO. So, as Omid mentioned in the earlier part of the call, we certainly are aware of our short-term needs for raising additional capital, we are actively working to pursue a number of various financing alternatives, and the answer is yes, we will need to raise additional capital and we are working to that end.
Right, okay, it looks you have the things in order and I appreciate you taking my call, so best of luck.
Dennis A. Bencala
Thank you, John.
You are welcome.
(Operator Instructions) And if there are no more questions, I will turn the call back over to Mr. Tahernia for closing remarks.
Thank you for joining us today, this concludes today’s call. I do look forward to reporting on our progress next quarter. Thank you all.
And thank you, this concludes today’s conference, thank you for your participation.
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.