Executives
Chuck Bland - CFO
Bob Van Buskirk - President and CEO
Analysts
Harsh Kumar - Morgan Keegan
John Lau - Jefferies & Company
George Iwanyc - CIBC World Markets
Sirenza Microdevices Inc. (SMDI) Q3 2007 Earnings Call October 24, 2007 4:45 PM ET
Operator
Ladies and gentlemen, thank you for standing by and welcometo the Sirenza Microdevices Third Quarter Earnings Call. At this time, allparticipants are in a listen-only mode and later we will conduct thequestion-and-answer. Instructions will be given at that time (OperatorInstructions).
As a reminder, this conference is being recorded today,Wednesday, October 24, 2007. I would now like to turn the conference over toMr. Chuck Bland, Chief Financial Officer. Please go ahead, sir.
Chuck Bland
Thank you operator. Good afternoon, and thank you forjoining the management of Sirenza Microdevices for our quarterlyteleconference. Today we'll discuss with you the company's financialperformance for the third quarter of 2007.
Joining me is Bob Van Buskirk, President and CEO of SirenzaMicrodevices. Bob will briefly summarize the financial results for the quarterand I'll follow with a more detailed financial analysis of Q3. We will thenopen the call for questions.
Please be advised that the matters discussed in thisteleconference contain forward-looking statements regarding future events. Wewish to caution you that such statements are in fact predictions that aresubject to risks and uncertainties that could cause actual events or results todiffer materially.
We may mention some of these risks on today's call and also havedetailed a number of risks and uncertainties relating to these forward-lookingstatements in our related press release and Form 8-K of today, and our Form10-Q filed in August 2007, each of which is available on the SEC's EDGAR siteat www.sec.gov.
With respect to any statements regarding our proposedacquisition by RFMD, we encourage you to read RFMD's registration statement onForm S-4 filed in connection with the transaction, which contains importantrelated risk factors and other information about the transaction and that isalso available at www.sec.gov.
In addition, we will be presenting figures for gross margin,various components of operating expense, income before taxes, net income, netincome margin, income before taxes margin, and earnings per share on this call,which have not been prepared in accordance with GAAP and which exclude theeffects of certain non-cash or infrequent and/or unusual charges.
These non-GAAP measures will be referred to as pro formanumbers or as excluding the effects of stock based compensation and/or othercharges. Listeners are cautioned not to view non-GAAP results as an alternativeto GAAP results.
The reconciliation of our historical GAAP to non-GAAPnumbers is available in our press release and Form 8-K filing of today, and canbe found at www.sec.gov or under the SEC filings link on the Investor Relationspage of our website at sirenza.com.
Now, let me turn the call over to Bob.
Bob Van Buskirk
Thank you, Chuck. First I'd like to recap some financialhighlights from our third quarter. Our net revenues grew 16% year over year to$45.9 million, just under the low end of our revenue guidance.
This compared sequentially with $46.7 million and with $39.7million year over year. We've reached a record revenue level of $131.7 millionfor the first three quarters of 2007, an increase of 32% over the same periodlast year.
We also grew our pro forma income before taxes for the firstnine months of 2007 to $26.6 million, an increase of 36% over last year.
In Q3 our revenue in our broadband and consumer division wasapproximately 53% of sales, and in our wireless division revenue wasapproximately 47%. Our GAAP EPS was $0.05 per share, just below the low end ofour guidance, due to a $0.03 per share impact from RFMD-related deal costs. Andour pro forma EPS was $0.18 per share, at the high end of our projected EPSrange.
Our third quarter gross margin was 47%, coming in at thehigh end of our guidance, compared to 49% last quarter. In each case this wasexcluding the effect of stock-based compensation expenses and the other chargesdetailed in our reconciliation of pro forma to GAAP results.
The company's pro forma expenses for research anddevelopment, sales and marketing and general and administrative expenses forthe third quarter were $11.1 million, compared to $12.8 million last quarter, whichwas a 14% reduction in pro forma expenses for combined R&D and SG&A.
We generated approximately $7.2 million in cash flow fromoperations this quarter, and we've generated $19.8 million in cash flow fromoperations year-to-date. We've also extended our consecutive quarters ofpositive operating cash flow to four years.
At September 30, 2007 Sirenza's total assets were $227.3million, including cash and cash equivalents of approximately $35.5 million, anet cash increase of $8.6 million over Q2.
We had solid financial results in Q3 with pro forma pre-taxincome at 22% of sales, exceeding our goal of 20%, while we continue togenerate strong operating cash flow. We had a very strong quarter from both afinancial and operational viewpoint.
Now let me turn to some color for Q3. Regarding sales, firsta note about our current divisional alignment. Our current business units, ourSBUs, are grouped in our two operating divisions, Broadband and Consumer, andWireless.
Under our broadband and consumer division, our SBUs for CATVRF components, and broadband consumer products, similar to the compensation orthe composition of our historical PDI segment, were adjusted for the move ofour consumer products into our broadband division from our historical SMDIsegment.
Under our Wireless division is our mobile wireless, standardproducts, aerospace and defense and wireless access SBUs, which also made upthe bulk of the SMDI segment. Again, our Wireless division accounted forapproximately 47% of total Sirenza sales in Q3.
Wireless division sales, on a percentage basis by SBU, wereapproximately 50% mobile wireless, 24% standard and catalog products, 14%wireless access and 12% aerospace and defense. Our Wireless division had oneend customer, Motorola, for wireless infrastructure, above 10% of sales thisquarter, and additionally Nokia also for wireless infrastructure came in atroughly 9% of sales.
Our Broadband and Consumer division representedapproximately 53% of total Sirenza sales, and on a percentage basis sales bySBU within the division were approximately 52% CATV products, 25% for broadbandconsumer products, 18% in engineered technological services or ETS and 5% in RFcomponents.
Our Broadband and Consumer division had two end customerseach at or above 10% of sales this quarter, Motorola connected home solutionsfor CATV infrastructure applications and RFS, a division of Alcatel, an ETScustomer, as well as Luxim for light source applications at approximately 9% ofsales.
On a ship-to basis, Sirenza sales into Asia, including Chinawere about 50% this quarter with North America at 42% and Europeand the rest of the world combining for approximately 8% of Sirenza sales.
Distribution sales for total Sirenza were approximately 5%in line with Q2, and our aggregate average selling prices were within ourexpectations this quarter. And regarding design wins and production shipments,design activity remains solid in selective end markets for both divisions, andour design wins were again well diversified.
Design activity remained high for wireless access, led by WiMAXapplications, and in our broadband consumer SBU, we continue to see a widerange of potential design and opportunities for our high performance integratedRF IC products.
We also continued our volume production of our PowerMaxpower amplifier module for Luxim's long-life LIFI light source and its initialapplication in a new generation of microdisplay projection HDTVs. Our LDMOSsemiconductor technology and our high-powered design and manufacturingexpertise have allowed us to bring innovative products like the PowerMax poweramplifier module to the commercial marketplace. In our global operations wemade excellent progress in our commercial manufacturing expansion andtransition to our new facility in Shanghai, China.
We've moved our smaller Premier Devices Shanghaifactory into the new facility, and we've started shipping products from our newfactory there in Q2. We've installed factory equipment for our multi-chipmodule products. We've begun the installation of our IC test equipment and testhandlers.
We've hired our key technical and administrative personnel,and we've continued to host customer site audits, and we've begun production inShanghai for certain SMDIcustomer-approved products.
We're on track with the facility, the capital equipment, thepeople and the manufacturing and test systems for this world-class facility. Wecurrently expect to achieve our remaining scheduled milestones and to achievecustomer approval for full commercial production ramp of both IC and multi-chipmodule products this year. I'm very proud of our successes to this point in2007.
We've diversified our end-market base, highlighted by mobilewireless infrastructure, CATV transmission and wireless access WiMAXapplications, grown our business profitably, generated cash and enhanced ourglobal position as the RF component supplier of choice for our worldwidecustomer base.
As we look forward to the closure of the RFMD acquisition,we anticipate a new phase in the growth of our business. We're confident thatwe can continue to grow profitably as a much more enabled RF componentsupplier, leveraging our platform as the multi-market products group withinRFMD. And we're excited at the prospect of becoming a strategic operating groupwithin the largest, most diversified and best-positioned RF company in theworld.
Now I'll turn the call over to Chuck for his comments.
Chuck Bland
Thanks, Bob. I'll begin my comments with a focus on grossmargin. Our GAAP gross margin of 45% for the quarter was at the high end of ourguidance range of 44% to 45%. Our pro forma gross margin was 47%, also at thehigh end of our guidance range. In calculating our pro forma gross margin weeliminated $690,000 associated with the manufacturing transition to Chinaand $78,000 in stock-based compensation charges included in cost of goods sold.
Our pro forma expenses for R&D and SG&A were $11.1million, a decline of $1.8 million or 14%. We did an outstanding job ofcontrolling expenses this quarter in the midst of the heightened activityrelated to the RFMD acquisition and parallel with our ongoing businessrequirements.
For GAAP purposes, our total R&D plus SG&A expenseswere $14.1 million. Included in the R&D plus SG&A expenses for Q3 were$973,000 in stock-based compensation charges, $239,000 in manufacturing transitioncharges and $1.8 million in costs associated with the RFMD acquisition. As apercent of sales our pro forma total for these expenses was 24% in Q3 versus27% in Q2.
Our tax provision for the quarter was $464,000 orapproximately 15% on pretax income of $3.1 million. The tax provision for thequarter was lower than our sequential guidance due primarily to a significantreduction in the German corporate income tax rates that will take effect at thebeginning of next year.
Regarding our earnings this quarter, our GAAP earnings pershare of $0.05 was negatively impacted by $0.03 per share due to the RFMD dealrelated costs incurred this quarter.
I'm turning to our balance sheet. Inventory returns came inat 3.8 this quarter, decreasing from 4.1 in Q2. Our DSI increased to 94 days,up from 89 last quarter as we continue to build buffer stock for our Chinamanufacturing transition. We expect to maintain inventory levels in this rangethrough the end of the year.
Our DSO decreased from 63 to 58 days, driven largely by thetiming of shipments in the quarter and our ongoing collection efforts. Our cashflow from operations for the quarter was $7.2 million, our sixteenthconsecutive quarter of positive cash flow from operations.
Now, turning to the outlook. As a reminder, our practice isto provide annual guidance in our January earnings teleconference, which we didon January 31, 2007, and to provide only sequential guidance updates as theyear progresses.
Due to the pending acquisition of Sirenza by RFMD, we are currentlyexpected to close during the fourth quarter of this year, and we do notanticipate that we will report stand-alone financial results for the fourthquarter of 2007 or any future period, and accordingly we are not issuing anysequential guidance at this time.
We'll now open the call for questions. Operator?
Questions-and-AnswersSession
Operator
(Operator Instructions) Our first question comes from theline of Harsh Kumar with Morgan Keegan. Please go ahead.
Harsh Kumar - MorganKeegan
Hi, guys. It's Harsh Kumar. A couple of quick questions,Bob, for you. I think your revenues were a little shy of street. Can you talkabout what went on? And I've got one or two other follow-ups.
Bob Van Buskirk
Yes, as we talked about in Q2 when we had exceptionallystrong revenue growth, it was across the board. And I would say the corollaryto that this quarter is that we had a little softness, a little bit softer thanwe anticipated toward the close of the quarter.
And again it was across the board. If you recall we had apretty substantial first half in mobile wireless, and particular in China, withthe combination of some pretty robust growth in GSM plus the TD-SCDMAbuild-out, which we had predicted would be a first-half event.
Our cable business was well within our expectations for thisquarter. In our other SBUs and in particular standard products we just had kindof a plateauing effect that took over toward the latter part of the quarter andcaused us to come in essentially at the low end of the guidance.
Harsh Kumar - MorganKeegan
Very well. And Bob, can you just quickly give us the mergerupdate? Just give us the important timelines and the events that are left. Ibelieve it's the 29th of October. Is there anything that's left to be done outsideof just the reward? And maybe you can just talk about that for a second.
Bob Van Buskirk
We have our respective shareholder meetings where we would,of course, count and certify the votes this coming Monday, the 29th of October.Ours is in the morning, Mountain Time, and I believe RFMD's is in theafternoon, Eastern Time.
Assuming that goes as planned, then the only thing left toclose the deal would be typical regulatory and legal actions that have to occurto close off something like this. So we're still predicting that it will beshortly after the 29th of October, again assuming that the vote comes in, inthe right direction.
Harsh Kumar - MorganKeegan
Got it. So that's the only -- seems to be that's the onlybig thing that's left to finish.
Bob Van Buskirk
Well, yes, the vote's a reasonably large event, so yes.
Harsh Kumar - MorganKeegan
No, no. I didn't mean it quite like that.
Bob Van Buskirk
I know. I'm being facetious.
Harsh Kumar - MorganKeegan
Okay.
Bob Van Buskirk
As soon as we get the vote done, it's just a matter of doingthe blocking and tackling it from a regulatory standpoint to get things done.
Harsh Kumar - MorganKeegan
Fair enough. And sorry to just get down to tactical stuff,Luxim seems like they had a nice little pickup. Can you talk about the productsyou're working on? I think you guys were working to reduce the form factor andmaybe work on the projector market. Can you just give us a sense of what'sgoing on there? And then I'll let somebody else come on after this.
Bob Van Buskirk
Yeah. Without talking specifically about Luxim's business,in general, as we talked about it, there's a growing interest and quite a bitof activity around RF generated light, if you will. People have been talkingabout microwave light bulbs.
Luxim, of course, found an opportunity early on forPanasonic rear-projection TVs. We're not experts in the HDTV world, butcertainly flat panels are clearly making an impact below 60 inches, but itlooks like the rear-projection TVs still have a good niche at 60 inches andabove.
Luxim is working and we're working with Luxim to shrink thesize of the power module, but at the same time, increase its output power. Sothey can grow the lumens, if you will, which is the output parameter that theytarget.
So the brighter the output of their light source, which isdriven by a more efficient and more power enabled module on our part, a widerange of applications opens up to them. So they're looking at medical imaging.They're looking at industrial applications including things such as industrialand street lighting.
And they're also looking at front projection, in other words,home theater type projectors also. So it's pretty exciting, and it looks likethere's quite a bit of activity going on in this whole kind of new world for RFin generating light.
Harsh Kumar - MorganKeegan
Got it, Bob. Thank you and best of luck for your votes.
Bob Van Buskirk
Thank you.
Operator
Our next question comes from the line of John Lau withJefferies & Company. Please go ahead.
John Lau - Jefferies& Company
Great. Thanks. And Bob, you had given us some a little bitof commentary with regards to the mobile wireless market. I was wondering ifyou can follow-up with that on your comments and what you're seeing in thecable infrastructure market and that build out? Thank you.
Bob Van Buskirk
Sure. We knew that, since we were closely aligned, inparticular, with Huawei and ZTE in China.That the first half of this year was going to be, we think and we thought extraordinarilystrong, and I think that has turned out to be the case.
Huawei appeared to have received a significant GSM marketshare in the first half of the year. What we believe happened there starting inthis quarter is some share rebalancing. Interestingly, you'll note thatMotorola in their wireless infrastructure again became a 10% customer for thewireless division and that hadn't been the case for a while.
So, it looked like to us there was some rebalancing of GSMmarket share from operators like China Mobile with Motorola and Huawei andperhaps even some others. TD-SCDMA from our standpoint was always a first half'07 event. As I think, we talked about before some rumors/conjecture therecould be some more build-out in the second half.
I still believe that's doubtful. I do believe now, though,that there will be another wave of TD-SCDMA build-outs starting early in '08that would likely again be over by the June quarter of '08. We're also seeingsome uptick in demand in India.
A lot of it is a little masked by the fact that a lot of theequipment that's going into Indiais going through contract manufacturing right now. So, while it may be built inthe Far East in Malaysia or somethinglike that, it appears as if it's destined for India.
But the subscriber activity there is very high. And sothat's kind of what we're seeing, of course in North America there's been alittle slower CapEx I think through the first half of the year than wasanticipated. Ericsson talked about that on their call.
The one thing, I would say though, is almost in every regionit appears as if the revenue from data services is growing at somewhere between40% to 70% year-over-year, which is a very good sign if you're in the networkbusiness or if you're in the hardware business on the networks because all ofthat data is going to drive, I think, the need for additional transceivers andradio access equipment. So that's kind of how we see mobile wireless.
Cable is humming right along. We're very pleased with theconsistency of the line amplifier business we have primarily through Motorolaand SEA CORP. And as you read every day, and in fact I read an article intoday's Wall Street Journal about FiOS and Verizon, and also an article aboutpossibly AT&T looking to pickup one of the satellite operators to get intothe video delivery business.
So there's a lot of activity, a lot of competition brewingaround how I get high-definition broadband and lots of services to consumers.So the cable business appears to be very robust and other than some typicalseasonality in the fourth quarter, again which has been typical in that market,we don't see anything that's kind of changing our view of that end-market for'07.
John Lau - Jefferies& Company
That's a great wrap-up. Thank you very much, Bob.
Bob Van Buskirk
Okay. Thank you.
Operator
Our next question comes from the line of George Iwanyc withCIBC World Markets.
George Iwanyc - CIBCWorld Markets
Thanks, Bob and Chuck. Following up on the seasonalitycomment for cable TV, can you give us a sense of how you think seasonalpatterns will work out on the infrastructure side?
Bob Van Buskirk
In wireless infrastructure?
George Iwanyc - CIBCWorld Markets
Yes.
Bob Van Buskirk
Well, again I think implicit in your question there, Georgeis, are you going to see the typical second half uptick? If you look at what,for example, AT&T has said and if you will interpolate their total capitaloutlay for the year vis-à-vis what they've spent in the first half of the year,some people are pointing toward the fact, or not the fact, but the conclusionthat there should be in fact a second half uptick.
Again, that sometimes can come on very quickly, and so atthis point in time I don't think anybody has a real clear picture in North America. Again, we're hearing good things about 3G uptake in termsof the handsets, and we're hearing good things about data services and dataARPUs, and data revenues.
So, I guess the best way to put it, George, is it kind offeels typical at this point, but feelings are hard to take to the bank. We'llhave to wait and see how it turns out.
George Iwanyc - CIBCWorld Markets
Okay. And when you look at the results for this quarter, andI know you said that across the board you saw a bit of weakness in variousdifferent categories, but was there any area that stood out? I know we've seeninfrastructure as a point of weakness for several equipment vendors.
Bob Van Buskirk
Yes. I'm careful when I choose my words, George. I don'tthink I used "weakness." I used "softness." That may notsound like a big difference to you, but I was trying to give the impressionthat it wasn't anything that was dramatic and it was somewhat across the board.
I would say still the most positive end-market right now forus is in cable infrastructure line amps. But everything else I would againcharacterize as kind of a soft plateauing, not anything that was precipitous,and I wouldn't characterize it as a weakness.
A lot of activity in WiMAX, but, this is kind of in my viewthe pause perhaps before the storm, as a lot of trialing is underway andcertainly you're hearing very good things day-in and day-out about regulatoryapprovals for WiMAX as a 3/4G technology.
Cisco's acquisition of Navini. There are a lot of goodthings. It appears that's happening surrounding the whole WiMAX activity. Butin terms of shipments, a lot of it happened in the first half and as we kind ofwent into the third quarter I think what we're seeing again is a sort of asoftening, but not a weakness there.
George Iwanyc - CIBCWorld Markets
Okay. Fair enough. And Chuck, when you look at the grossmargin, it came in at the higher end, do you believe that with the furtherprogress in Chinaand maybe some supply chain optimization possible with the merger, that there'sroom for a fair amount of improvement there still?
Chuck Bland
Yes, I think we've talked about a 200 to 400 basis pointimprovement as a result of our completion of the move to Chinaonce we're fully integrated and operating over there. And we continue tobelieve that that's a reasonable assessment.
Bob Van Buskirk
And to your comment about supply chain with the merger,George, I think everything we've seen so far about the combination with RFMDwould certainly be supportive of that kind of a goal. Nothing we've seen wouldbe dilutive to that, for sure.
George Iwanyc - CIBCWorld Markets
Great. And just one final question, Chuck, can you give usan idea of how the stock-based compensation expenses and the charges split outbetween R&D, SG&A?
Chuck Bland
Sure, sure. No problem. Of the $973,000 that was included inour reconciliation, $308,000 was in R&D, $157,000 was in sales andmarketing and about $508,000 was in G&A.
George Iwanyc - CIBCWorld Markets
Okay. Thank you very much.
Bob Van Buskirk
Okay. Thank you.
Operator
(Operator Instructions) I'm showing no additional questionsat this time. Back to you for any closing remarks.
Bob Van Buskirk
Thank you, Operator. Thanks again for joining us today forour earnings teleconference. We will be available by phone the rest of the dayfor any follow-up questions you may have.
Since this is likely to be our final earnings call asSirenza, I'd like to take a moment to thank our founders, John and SusanOcampo, our board, our management team and most importantly, our current andpast employees for making this company a great place to work and a positiveforce in the RF industry.
We've accomplished a great deal, and we should all be veryproud of the success and the history of Sirenza Microdevices. Thank you and goodafternoon.
Operator
Ladies and gentlemen, this conference will be available forreplay starting today, 5:45 p.m. MountainStandard Time. This will be available until October 31st until midnight. Youmay access the replay internationally by dialing 303-890-3000 or domesticallyby dialing 1-800-405-2236 and entering the pass code of 11099355.
That concludes today's conference. Thank you for yourparticipation. You may now disconnect.
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