Hifn Inc. F1Q08 (Qtr End 12/31/07) Earnings Call Transcript

Jan.29.08 | About: hi/fn Inc. (HIFN)

Hifn Inc (HIFN) F1Q08 (Qtr End 12/31/07) Earnings Call January 29, 2008 4:30 PM ET

Executives

Bill Walker – VP of Finance and CFO

Al Sisto – Chairman and CEO

Analysts

Ramesh Misra - Collins Stewart

Sean Jackson - Avondale Partners

Manoj Nadkarni

Morgan Frey

Larry Latin

Greg Weaver - Kern Capital

Joseph VonMeister

Operator

Good afternoon. My name is Terese and I will be your conference operator today. At this time, I would like to welcome everyone to the Hifn's first quarter fiscal '08 conference call. (Operator Instructions).

Thank you. I would now turn the call over to Mr. Bill Walker. You may begin sir, sir.

Bill Walker

Thank you, Terese. I'd like to welcome everybody to our conference call. I'm Bill Walker, Hifn's Chief Financial Officer. With me today is Al Sisto, Hifn's Chairman and Chief Executive Officer.

Agenda for this afternoon is Al will discuss both our strategic and operational progress during the quarter and some of our business initiatives. Next I will provide more detailed factors affecting the number in the first quarter of fiscal '08. We will then open it up to questions.

But first, in this conference call we'll be making forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995 regarding the Company's financial performance. These forward-looking statements are subject to risks and uncertainty. Actual results could differ significantly from our forward-looking statements. Design wins may not produce significant results in the future period.

These and other risks are detailed at Hifn's registration statements and other reports filed with the SEC. Hifn undertakes no duty to update these disclosures. It is company policy not to update guidance during the quarter, even to the extent of reaffirming guidance previously given.

During this call we may also discuss non-GAAP calculations for both net income and loss and earnings per share. We believe that investors might find these non-GAAP financial measures provide both meaningful and supplement information. Items which the investor may consider are found in our financial statements accompanying the press release dated January 29, 2008.

And in fact Hifn reports Q1 fiscal ’08 results revenue up 18% from prior first quarter results. This is also on our company website www.hifn.com.

Let me also remind you that we are operating under the SEC's Regulation FD, which precludes us from giving individual updates throughout the quarter. So, if you have any questions on guidance or anything we say during the call, please ask it when we open up the line to questions.

Let me now turn it over to Al Sisto, President and CEO and Chairman of the Board. Al?

Al Sisto

Thank you Bill. On behalf of the Hifn team, thank you all for participating in this first quarter fiscal 2008 conference call. I would like to start off by reviewing our quarterly performance and updating you on the progress we’ve made since my joining of the company as Chairman and CEO a year ago. I'll then talk about our growth opportunities and then in a moment Bill will provide you with the financial details of the quarter. As well as, what we expect going forward.

Let me begin by stating that the obvious, that we are not pleased by posting an operating loss of $680,000 dollars this quarter. We reported revenue of $10.9 million, which was in line with our guidance. We are encouraged by the 18% year-over-year topline growth, but we are disappointed that we were flat sequentially. We did however see an improvement in gross margins to 68% from 65% a year ago, and we continue to generate cash for the fourth sequential quarter of $831,000.

First, let me begin with a little more detail about the first quarter. We continued to be encouraged by our consistent business performance at Cisco, whereas our revenues at Huawei came in at $500,000, down from the historic levels of $1.3 million. This revenue shortfall was one of the contributors to the bottom-line outcome.

We believe that the divestiture of their position in Huawei-3Com, coupled with the negative publicity and outlook for US government approval of this deal, created inventory softness.

But the important news is that Hifn employed service processors and are now designed into approximately 30 different Huawei products and during this quarter of fiscal 2008, we reached an agreement on pricing in volumes for the calendar year. We are optimistic that Huawei will begin to return to their historical levels this quarter and ultimately grow, its inventories normalize and products shipped in volume.

The second factor contributing to our operating results was our higher level of new product investment particularly in R&D. Sequentially Q1 for fiscal 2008 was up about $1 million from Q4 of fiscal 2007. Over the course of the past year we have made significant progress in penetrating the storage market and broadening the appeal of our innovative FlowThrough architecture products, which I will talk about more later in the context of specific customer’s progress.

We made a strategic decision to stay on this path of expanded market opportunity and potentially accelerate delivery of two new applied services processors that provide us with important competitive advantages in the fast growing storage data de-duplication market and the zero [waste] security processing space. Both segments, that we will believe will be important contributors to our market share in topline growth. We expect to return to profitability this quarter and for the year, and Bill will provide you with more color during his discussion of the results.

Now let me address some of the business highlights. During this past year, the company made important improvements in both our cost structure and product portfolio. Since, January last year we have refocused and progressively rebuilt our sales and marketing organization to aggressively target and generate new sources of revenue in large markets and new geographies.

These steps are absolutely necessary in order to help Hifn return to revenue growth and profitability on an ongoing basis. For example, our sales and marketing investment in the Asia Pacific region, now provides us for the first time, with a much needed boots on the ground presence in this highly important market. A market in which our products bring sufficient competitive advantages, where we historically suffered for the lack of local support needed to bring design wins into production.

We've also made solid progress in achieving our goals to be the leading provider of processing ingredients that deliver continuous data protection and capacity optimization solution with the global 2000 enterprise IT environments. By supplying these new ingredients in the form of applied services processors, cards and subsystems to industry leading Tier 1 OEM's, Hifn enables both the creation of new products and the enhancement of existing products for 21st century networking, telecom and storage application. All supported by a rich library of industry proven Hifn software.

We grew our new storage business 643% over fiscal year 2006. We also rolled out new 4450 and 8450 FlowThrough security and compression products led by every metric of customer importance, price, energy efficiency and size out-perform the competition. We’re gratified to report that these products also receive recognition from electronic design publication EDN, something that new Hifn should see more of in the future.

But what is a paramount interest to our shareholders; these new products have enabled us to begin creating new and exciting beachheads for growth with Tier 1 OEM customers like Sun, EMC and IBM. For example, Sun Microsystems will be relying on Hifn data reduction capacity optimization card in both entry level and high end models of their storage backup offerings. Having to decide to choose hardware advantages zero defect compression technology over software-only solutions. After extensive performance testing they concluded that Hifn's Express family provided their customers with superior price performance.

Additionally, now that Sun is integrated the Hifn solution with the Solaris OS platform, Express products can be made available to the install basis Sun’s backup customers.

For the EMC we’re attracting new design wins in storage products targeted as the high volume SMB in mid-range markets. These new storage solutions take the Hifn Express cards beyond the retail markets into continuous data protection or CDP systems. And at IBM we’ve design wins underway targeting VTL backup markets and are also an ingredient in [innovative] design that’s targeting with Sun, NAS gateway market.

Earlier in regard to our expended R&D investments in the quarter I mentioned our focus on new market around data de-duplication. I am pleased to report that that FalconStor Software, our leading storage ISB and our partner, has integrated Hifn support into their recently announced version 5 software platform. FalconStor version 5 provides highly scalable data backup and archive features, including the kind of data de-duplication that benefits from Hifn's hardware advantage approach.

Our storage business offers us the greatest opportunity to capitalize on the new dynamics that have emerged in the data center interconnect markets. Virtualization and globalization of the datacenter have distributed corporate computing and storage resources geographically. While these shifts have created more available and efficient applications and services, the goals can only be achieved when the datacenters are tightly integrated.

As more data needs to travel between corporate owner and service provider environments, Hifn efficient capacity optimized and data protection applied service processors simplify line card solutions. With regulatory mandates firmly in place, here in the US and Europe and Japan, securing these datacenter links is now a requirement. The cost of these interconnects makes every block of data count. Optimizing and securing the link in a single path without impacting the performance of the replications systems on either end, is making a drop in the FlowThrough solution from Hifn, the logical choice.

For example, Hifn's 4450 FlowThrough processors have been designed in at several leading storage OEM and into some of the industries most widely deployed storage gateway platforms, including those from EMCs, Cisco and Brocade.

In addition to attract among Tier 1 storage OEMs, we also are beginning to see momentum for a Hifn applied services processor, building among market innovators and in the 21st century networking markets.

For example, we are seeing market acceptance of the FlowThrough 4450 and 8450 applied processors in the datacenter interconnect and wireless base station systems. Both of these markets areas have new requirements to optimize link capacity and secure data or resources.

The ease of integration with our drop-in FlowThrough approach eliminates the high cost software redesign, which is typical with general purpose processors and enables repurposing existing design for more rapid time to market.

For example, we are addressing a large 3G wireless Voice over IP infrastructure market from where wireless base station and session border controllers time on it, where for wireless base station and session border control market, where time up on the network and bandwidth consumed are all dollars that flow right over the profits for many of the wireless carriers, delivering feature risk content.

Hifn's 8450 applied services processors provide link optimization and security, all in one. With zero-latency throughout as a core capability of the FlowThrough architecture, current and next generation WiMAX and 4G mobile wireless systems can provide two to four times more data, while protecting the wireless infrastructure from downtime imposed by denial of service attack. All of these Hifn advantages just drop in without any redesign of the vital data path software or system components.

The 8450 is currently designed in as a leading wireless and Voice over IP or VoIP infrastructure OEM and last quarter we saw new design wins in both of these fast growing markets. Two of these designs were driven by a market leading innovator that selected Hifn's 8450 FlowThrough applied services processor and their next generation session border controller. These session boarder controllers enable security, service level maximization and SLA assurance the digital voice across the 3G wireless networks around the world.

I will now move beyond our OEM business and take a moment to address our appliance products and the new channel initiatives. As a $1 billion plus Dell acquisition of iSCSI secured storage pioneer EqualLogic indicate, the iSCSI SAN market is poised for significant growth going forward. Correspondingly, Hifn’s acquisition of secure iSCSI innovator Siafu has positioned us with the intellectual property and expertise to play a positive role in this market growth.

Towards the end of Q1 we announced our 2008 channel program and our commitment to partner only come-to-market strategy for the iSCSI appliance business. We’ll continue to invest in this a 100% partner focus business going forward. Our secured iSCSI appliances in the Hifn Express cards and software that powers them are key ingredients in the larger vision of the 21st century datacenter and remote office interconnect opportunity in which continuous data protection of storage and replication links are designed in from day one.

Hifn is not only attacking the high growth markets created as the datacenter transforms. In this last quarter we retained over QLogic to optimize Hifn's secured storage iSCSI storage requirement with QLogic's iSCSI HBAs to create a best in class solution for virtualized clustered servers. Going forward we continue to see virtualization as one of the main drivers of the storage industry, offering us opportunities for strategic partnerships and technology solutions.

Now, I’ll close with a few comments about the overall market environment and the importance Hifn’s places on strategic alignment with industry leaders in the larger process segment. Over the past few years as the rate at which information in all forms is generated, changed, exchanged and archived has increased exponentially. The x86 architecture remained alive and well in the storage segment. While the networking appliance segment embedded leaders like Freescale continue to innovate. And this kind of standard driven environment, Hifn chooses to optimize its market opportunity by partnering with industry leaders in creating complementary capabilities with our applied service processor.

So, let me summarize. During the past 12 months we have made important progress in one, creating customer focused products portfolios; two, expanding into new opportunity segments and regional markets around the world, and lastly, investing in the resources necessary to unleash the pent up potential of Hifn by the establishment of an Asia-Pacific sales region, the appointment of a new sales leader for North America and Europe and the complete revamping of our product marketing.

Our mission is to continue to drive in the transformation of Hifn as an innovative provider of applied service processors, cards and appliances for the 21st century networking storage environment. In achieving these goals we will repressively increase shareholder value by generating substantial revenue growth.

In 2008, Hifn is rightfully focused on becoming the offload management processor or digital brawn for our partners and Tier 1 customers to turn to for the heavy lifting required by the evolution and new changes of the 21st century digital infrastructure.

These new challenges in the conversions of storage and networking drive right into Hifn's unique value proposition and core competencies. Purpose-built, standards are optimized, applied service processors, card and partner configured appliances that are powered, pace and design efficient, dropping right into the flow of interconnect systems and offloading complex infrastructure functionality, inline with low to no-latency and without design disruption. That’s what sets Hifn vision apart and this will be the thrust of our initiatives going forward.

And now, I would like to turn the call over to Bill.

Bill Walker

Al, thank you very much. Let me give you some color on the numbers in the press release. It was said, revenue at $10.9 million. Fiscal continues to be our largest customer at $5.3 million or 49% of our total revenues. We are seeing strong growth in their security applications, as we are able to bring products to them it helps solve their encryption and compression needs.

The new news for the quarter is EMC is now a 13% customer. We are selling both boards or cards, as well as semiconductors to them and they have grown significantly over the last 12 months and as we said we're now for the first time over 10% customer.

Gross margin at 68% are very attractive and the strength of our security processors as well as some of the software offering. Operating expenses at $7.7 million are down from a year ago, but up sequentially I will talk more about that in a minute.

Amortization continues as we write-off prior acquisitions and likewise interest income is in the $400,000 range. So, compared to a year ago, where we lost $2.7 million, we lost $680,000 this quarter or a negative $0.05 per share.

Let's take a look at the operating expenses on a sequential basis. They were up $1.3 million over a $1 million, of that is in the R&D arena. That primarily is in the area of non-recurring engineering as we have started accruing for foundry work being done by our foundry partners as they are designing mass sets for two new chips which will be brought into the production later this year.

We continue to have some offsets from the funding we talked about earlier, but we are now beginning to approve the NRE for foundry related activities. That is the biggest increase in the R&D spending.

Sales and marketing is only up $118,000 on a sequential basis and G&A is up a little bit primarily on bonus accruals as we’re expecting to make as per plan. We look on a year-over-year basis we’re down some $864,000 in operating expenses. Again, the biggest arena of expense reduction is R&D where we've been able to move some of the operating activity to lower cost areas and likewise there is some of the initial startup on our card business and is no longer the case.

Sales and marketing is the big increase of some $572,000 year-over-year, as we strengthen our activity in the boards and in the clients business again, across the board increases. G&A on the other hand is down some $719,000 on a quarter-over-quarter basis reflecting reductions in salaries, buildings, consulting and some recruiting fees.

We turn to the balance sheet again. The good news is we continue to generate cash; cash at the end of the quarter was $37.2 million, up from $35.3 million and almost a $2 million increase in cash during the period.

As Albert had mentioned earlier cash from ongoing operations was up some $800,000 plus. Receivables are back under control, inventory is down slightly and the rest of the balance sheet as we said is fairly calm. Total assets are $61 million compared to $59 million on a sequential basis. We continue to have significant net loss $34 million to $70 million so we’ll not be reporting tax payments in the near future.

If you look at the key takeaways from the quarter the revenues were at $10.9 million. Cisco is continuing its operating levels at $5 million to $6 million a quarter; we’re very pleased with their results. Al had mentioned the decline in the Huawei business, but the good news is from the EMC standpoint, a new 10% customer with both semi as well as a card business.

Gross margins are improving, returning to historical levels as we focus on cost control and likewise the hard margin contribution of our security processors. Operational expenses were up sequentially, that I mentioned. Accruals of NRE for foundry activities for two new chips, which we are making significant progress on and would expect to bring to the market later this fiscal year. Sales and marketing is up because of the development of channels and board support and G&A is back to historical levels.

We generate cash, if we look forward at the last conference call we gave guidance that we'll get 10% to 15% year-over-year growth. We got 18% revenue growth in the first quarter. We continue to stay by that 10% to 15% guidance. If we are able to achieve that we should be able to generate profitability in the relatively near future and return to it as we have for the last two quarters.

From a revenue standpoint, Cisco is still at its historical rates. Huawei, we did see some inventory softness, but that’s being resolved with a longer term purchase agreement and price stability. On the boards, we have some new entrants, HP and IBM. EMC in return of early movers such as network appliance should continue to generate revenue growth for us. We are beginning to expand this out in our partner relationship with the appliance business.

First quarter operating expenses might grow out this March. The quarter for this calendar year might go up a little bit, because social security taxes kicked back in for the last vast majority of our employees, because most of us popped out at the end of last year.

We continue to drive towards GAAP profitability. We didn’t quite make it this quarter, and if we are able to achieve the revenue growth 10% to 15% going forward, we should be able to get profitability back on track. Again our balance sheet remained strong in $37.2 million in cash and so we are very excited on a go forward basis.

Let me turn it over to the operator for opening the line for question. Terese?

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Ramesh Misra with Collins Stewart

Ramesh Misra - Collins Stewart

Okay. Good afternoon, Al and Bill. My first question was in regards to your Express line cards. What were they as a percentage of revenues during the quarter?

Bill Walker

Card is roughly about $2 million in that range, though it's a little over or little less than 20% of our revenue came out of that particular segment.

Ramesh Misra - Collins Stewart

Okay. So that sounds like that is up from the previous quarter?

Bill Walker

Yes, that's correct. We continue to see sequentially growth -- I think with about $1.7 million on a sequential from the prior quarter.

Ramesh Misra - Collins Stewart

Okay. In regards to the multiple design wins that you talked about, can you talk about the timeline for these entering into volume production at least on the more prominent ones?

Al Sisto

I think we should begin to see some of these products coming into market and some volume toward the later half of this calendar year, which would contribute to our fourth quarter fiscal 2008 and also first quarter 2009 and continue to ramp from there onwards.

Ramesh Misra - Collins Stewart

Okay. So right now you would expect that fiscal '09 should be significantly back-end loaded for you is that?

Al Sisto

No, fiscal 2008 will have some loading, back-end loading as a contribute, but in fiscal 2009, we should see steady revenue improvement as consequence of these design coming to market.

Ramesh Misra - Collins Stewart

Okay. In regards to your Siafu business line, how much is it contributing to the topline right now, and what kind of ramp profile do you anticipate over there?

Al Sisto

It's contributing on a minimal basis right now as we are rolling out the channel program. We see it contributing significantly in the second half of the year as our channel bars and channel programs start to take hold, and it should be by the second half of the year contributing in the six-figure range on a quarterly basis.

Ramesh Misra - Collins Stewart

Okay. Would that be high six figures or low six figures?

Al Sisto

Very high six figures, maybe seven.

Ramesh Misra - Collins Stewart

Okay, got it. In any of your products, are you are seeing any design-win losses to competition?

Al Sisto

I think we experienced some design-win losses about two years ago and a year ago. In some of these cases, I think we have been able to regain our position in the account, and the ones that we have lost; we are fighting to get them back. Our new products have substantial advantages with regard to power and size and because of our software; they fit within the existing environment.

So as some of these new designs are struggling to get to market because of software issues, we are seeing some of the engineering organizations -- in particular, one for example -- coming back and re-implementing midlife kicker instead using Hifn products. As Bill indicated, our security products at Cisco in particular were up significantly this quarter, and we expect that to continue.

Ramesh Misra - Collins Stewart

Okay. So, the softness that you've seen in the last two quarters, you really think that these are temporary issues and not related to any design loss?

Al Sisto

Specifically on Huawei, with the Huawei-3Com merger, the gymnastics of rearranging product lines and what was getting divested with regard to going to Huawei-3Com from Huawei created a lot of confusion within those organizations, and as a consequence we suffered in terms of their orders.

Ramesh Misra - Collins Stewart

Okay.

Al Sisto

That’s a phenomena that should rectify itself, as well as, as we said on the call, we were able to put together a purchase agreement with Huawei to stabilize our volumes and our price, and I think we maintained price for the first time in three years. Maintained price with them, so going forward these probation should diminish.

Ramesh Misra - Collins Stewart

So, in terms of your pricing agreements at Huawei, are you anticipating pretty much flat pricing through the rest of the year, or what's the timeline?

Bill Walker

Yeah, we are through the calendar year 2008 we should have, regardless of volumes we shall maintain price.

Ramesh Misra - Collins Stewart

Okay. And in terms of Huawei coming back, are you anticipating that to happen as quickly as the current quarter, or is it kind of a slow ramp right now?

Bill Walker

I think we should make substantial progress in this quarter, if not back to where we were. And we will be for sure there and ahead of historical levels, probably in the June quarter.

Ramesh Misra - Collins Stewart

Okay. Now in terms of looking for year-over-year growth, it's safe to assume that March should be sequentially up as well, right?

Al Sisto

I think, as Bill indicated, we are sticking with our 10% to 15% year-over-year.

Ramesh Misra - Collins Stewart

Okay.

Al Sisto

And 10% to 15% year-over-year should provide some sequential growth.

Ramesh Misra - Collins Stewart

Okay. Alright, I will stop there and let others on.

Al Sisto

Thank you, Ramesh.

Ramesh Misra - Collins Stewart

Thanks, Al.

Operator

Thank you. Your next question comes from Sean Jackson with Avondale Partners.

Sean Jackson - Avondale Partners

Yeah. Again, this digging in the Huawei situation: Look, can you just tell us how where the contracts and I guess relationship you had with them before they changed versus how they arrange now with the long-term pricing deal? In other words, how did you guys go about business before this long-term pricing deal occurred?

Al Sisto

Previously we had reached an agreement on pricing, based on our guaranteed volume for the year of which, if the volume wasn't reached, we would, in affect, have an opportunity to go back and reprise, which in this industry never happened. So as a consequence, we restructured our agreement in setting up some quarterly minimums and those quarterly minimums will be generated with six purchase orders and are more at a price that we agree to in the later part of December.

So, we now have greater visibility into what we are doing at Huawei. They have the opportunity to order more, but we know that we will be shipping them certain amounts on a quarterly basis for the calendar year 2008.

Bill Walker

I think the important part of that Sean is that this is the first time we had such an agreement that guarantees short-term volumes and pricing.

Sean Jackson - Avondale Partners

Okay. And can you go a little bit more detail on why the Huawei-3Com disruption hurt you guys?

Al Sisto

First orders, if removed a certain number of product lines that Huawei was marketing through Huawei-3Com and whether those product lines would continue or not continue with TBD and still is not been fully flushed out.

Also, as the consequence of those purchases within China of Huawei product seemed to have slowed down, and inventory as a consequence was built up. So they elected to order what they taught was prudent whether needed as predicated by their forecast in the October, November, December quarter.

Sean Jackson - Avondale Partners

Okay. On the expense side, again, you do still say that the R&D as is a non-recurring event, so that we would assume that it would go back down around $1million for next quarter, is that correct?

Bill Walker

Now, that’s not true, that’s not correct. Again, we’ve said that we had begun the accrual of foundry NRE, that will continue for a couple of quarters until the complete mask are created and all the development effort at this foundries are completed. So we would expect R&D levels to continue at this level for this quarter for the March quarter for certain.

Sean Jackson - Avondale Partners

Okay. And would it still be similar to the June, or should we start seeing a little decline by that time?

Bill Walker

You will start to see decline, because as I said we are putting together maps for two major projects that should be fully amortized by the June quarter so the June quarter should see a drop-off in R&D spending that is more inline with where we were a quarter before than in the September quarter.

Sean Jackson - Avondale Partners

And can you comment on the markets that you are trying to service with these new products?

Bill Walker

Yeah, I think if you just take a look at the wireless mobility market, all in, WiMAX, Fixed, 3G, and IP. We are looking at an all end of market of about $4.5 billion to $5 billion for 2008. If you just zone in on the wireless base station markets, it's about $1 billion and about 300,000 units. And at least two, if not four, of our processors go into every one of these base station. So, this is a sizeable opportunity for Hifn that was not available to us if you will, a year ago until we developed and delivered this 4450, 8450 capability.

In the storage market, the capacity optimized storage business, again is forecasted at about a $1.5 billion, and when you look at companies like Sepaton and Quantum, for example, that are using Hifn products to optimize their de-duplication solutions, they are getting a 24X multiple over de-duplication solutions while not using the Hifn products.

So, we believe this to be an area where our storage customers are really looking for our leadership here in delivering products that will enable them to have a capability that is friendly from an IT environment with regards to providing more capacity in less space, as well as more capacity with regard storage capabilities under less power with our solutions. So these are two areas of growth that we see as sustainable for a long time to come and while we are making an accelerate from these investment.

Sean Jackson - Avondale Partners

Is this a market that you already have customers lined up for this?

Bill Walker

This is a market in which we have customers, and our customers, in effect, have reviewed our product calendars and have encouraged us to forward.

Sean Jackson - Avondale Partners

Okay. And you assume some pay off -- did you say that end of fiscal year '08 there could be some pay off in this?

Bill Walker

Yes.

Sean Jackson - Avondale Partners

Okay.

Al Sisto

Yeah, this is Al. we are not betting on the Com here. This is one in where we have customers for existing products or encouraging us to really step it up.

Sean Jackson - Avondale Partners

Okay, got it. And just a quick clarification: In regards to the 10% to 15% guidance that I think last quarter you said that was for the year of fiscal year '08: I assume can we assume that's probably each quarter it will be similar in that range?

Bill Walker

We will continue with the annual 10% to 15%. Again, we did 18% in the first quarter, and so again it's arranged. As you know, our ability to forecast 12 months up are not as often as good as what you guys can do, at least your models.

Sean Jackson - Avondale Partners

Okay. So now with the March quarter, 10% to 15% is a good range?

Al Sisto

Right. Again what we said specifically 10% to 15% year-over-year. So if we go year '07 to '08 that also works.

Bill Walker

And the 12 to 12 plus kind of numbers versus the 11 we did in the March quarter of ’07.

Sean Jackson - Avondale Partners

Okay. Thanks. I appreciate it.

Bill Walker

Thanks, Sean.

Operator

Thank you. Your next question comes from [Manoj Nadkarni].

Manoj Nadkarni

Hi. Good afternoon. When you comment on profitability you mean portable on GAAP basis?

Bill Walker

Yes, we do.

Manoj Nadkarni

Okay. Because looking at your non-cash charges, you had stock compensation $433,000 and amortization of intangibles $749,000. So if you add those, that's $1.18 million in charges, and you are still profitable on operating basis, on a non-GAAP basis?

Bill Walker

That is correct. That’s why we’re able to generate the kind of cash that we did and even finance some of the inventory growth and receivables growth.

Manoj Nadkarni

Okay. But it seems like your not at all referring to any non-GAAP expectations for outlining this numbers in your press release. You’re not referring to any non-GAAP profitability that you still have, but you’re just going with the GAAP numbers.

Bill Walker

That is correct. Again, non-GAAP is in the eyes of the beholder, and some people put some of the numbers you mentioned in their calculations, others only put the 123 odd charges. So we founded it prudent to stay with the GAAP but point out the areas where investors might be able to do their own calculations and come up with a different set of numbers.

Al Sisto

Like you have.

Manoj Nadkarni

Okay. Bill, what are your expectations for cash flow in the March quarter, and also for the calendar year 2008?

Bill Walker

On the first quarter, on the December quarter, we’re able to increase our cash balance by almost $2 million to the extent that the revenue continues that way. That seems to be reasonable level of being able to increase our cash on a quarterly basis. So, you ought to be looking at $1 million to $2 million a quarter?

Manoj Nadkarni

Okay, all right. Very good. And what have you guys seen so far? The month of January is almost over, what have you seen so far this quarter, orders and business wise?

Al Sisto

We don’t comment on orders and business during the quarter.

Manoj Nadkarni

Alright.

Al Sisto

We've seen a lot of rain in California.

Bill Walker

You are in Portland, aren't you?

Manoj Nadkarni

Yeah, in Seattle and (inaudible).

Al Sisto

You are seeing the same kind of rain, but that has not affected the order input.

Manoj Nadkarni

Okay. What are your expectations for growth margins in the current quarter and in 2008?

Al Sisto

We've said historically that beyond the 60, mid-60 range, a lot depends upon the product mix. Our security processors have better gross margins. Some of our appliance businesses currently have a lower gross margin. We are continuing to work on cost reductions and depending upon when they come in it will affect the gross margins. So we believe that mid 60s is a reasonable number for modeling purposes.

Manoj Nadkarni

I see, okay. Alright, thank you.

Al Sisto

Thank you.

Operator

Thank you. Your next question comes from [Morgan Frey].

Morgan Frey

Hi, guys. Most of my questions have been answered, but I have one more. Would you give an update on Suite B and what's going on with that development, both of the standard and of the silicon and when you might have First Silicon?

Al Sisto

I'm not going to specifically indicate First Silicon other than it will be this year. But we'll have some things that will come to market prior to First Silicon with regard to enabling people to accelerate their designs to sweep the appliance. I think what is significant is that we have had – sort of come on that the curve course and number of our products for some years now. And the work that we are doing is really moving beyond that into the specific Suite B acceleration support in gateway-type applications.

And the silicon will be out second half of this year, and we will have some development environments that we will brining to market shortly that will enable designs to begin at that or actually accelerate designs that are in place now for the new products, as well as accelerate and bring new opportunities for designs to this kind of market as the silicon is ready.

So, we are pretty excited about that. We are also seeing from [NSP] and DHS. A call for a standardization within the government, for this if you will level of security. So we believe that we will be able to fulfill that mandate with what we are doing especially with our partners or within that hardware community.

Bill Walker

As you can imagine that's one of the reason R&D expenses went up because we are making certain that these chips get designed and had adequate mass support to be able to deliver on a timely basis.

Morgan Frey

Right. Have you ever disclosed who your partners are?

Al Sisto

No.

Bill Walker

One of the points that we won't give you soon now.

Al Sisto

No.

Bill Walker

No.

Morgan Frey

Can't blame you guys you are trying. That’s very helpful. Thanks, guys.

Al Sisto

Thank you.

Bill Walker

Okay.

Operator

Thank you. Your next question comes from [Larry Latin].

Larry Latin

Good afternoon. Couple of clarifications. I understand why you don't want to comment on January, but is that fair to say that in terms of your plan forecast, the quarter still tends to be back-end loaded so that your genuine insight doesn’t really fill out your confidence for the quarter?

Bill Walker

The quarter tends to be loaded in the -- and as a consequence of both what our customers do from a manufacturing point of view as their forecast that are ours. I think our backlog right now and our experience over the past year has taught us that where it goes as indicated, we will do 10% to 15% year-over-year growth.

Larry Latin

Okay. Obviously, the world kind of changed in the first week in January. Are you not feeling that this going to really affect your business in’08?

Al Sisto

I think where we’re involved, the more the world changes, the more appropriate our products and our capabilities become. Capacity optimization and creating more green solutions for the datacenter are part and parcel of the economic reality that’s lowering operating expense.

Larry Latin

No, I understand, Al -- but in terms of possible recession and people pulling back on capital spending in some ways, you could have just cranked into the forecast, but it sounds like you haven’t.

Al Sisto

I think we cranked it into our growth forecast.

Larry Latin

Okay, but still 10% to 15% had enough room in there that are you okay with it?

Al Sisto

Yes.

Larry Latin

Okay. And just expanding on the gross margins -- obviously you are 68% now, which suggests that the mix is very good. The theory is it will, I don’t know if the software business is going to improve. That would improve the gross margins. On the other hand, if the card business gets bigger, that would bring the gross margins down. I guess: Why are the gross margins so good today versus where they are going?

Al Sisto

I think, as Bill indicated, the gross margins were excellent this quarter, or better than historical levels, as the consequence of having shipped more security processors. Our security processors are value priced and as a consequence. We enjoy pretty robust gross margins. But I think going forward our gross margin should stay within the model we outlined and that 65% to 67% range throughout the year.

Bill Walker

And, as you mentioned Larry, it's really a question of product mix. Again, some of it was helped by lower Huawei sales this quarter, but also higher security sales to Cisco. So, it's really a function of mix. You don't have much margin pressure individually on the product lines, but it's a combination of what happened to be sold in that particular quarter.

Larry Latin

Okay. Lastly, the strength of EMC. I'm a little bit confused with EMC so strong, while the card business was only $2 million, which seem to suggest that HP and NetApp weren’t buying much?

Bill Walker

We began initial productions and initial shipments to IBM, to HP. NetApp again did not have -- it came up from the low level the earlier quarter and the quarter before. But, as new products are introduced, the run rates have not reached stable levels yet. It's a new customers like HP and IBM.

Larry Latin

But, are we going to see the same thing with EMC? Perhaps, as we saw with NetApp, where this quarter as a channel fell, next quarter you are going to come back and say EMC was down $0.5 million or $1 million dollars because they sell-through kind of things.

Bill Walker

No, I don't think so Larry -- because the EMC has got a broader product offering. You've selling chips to EMC. I go back and look at my numbers a year ago, and it was only $100,000 of chip sales to EMC. But the chip sales have gone up along with the board sales. So, it's a combination of multiple product offerings to EMC.

Al Sisto

This also reflects on the board side with EMC two quarters of forecasted and delivered growth from the customers. And we are pretty confident and the EMC numbers continuing to progress in a pretty moderately, growth-oriented fashion.

Larry Latin

Okay. Thank you.

Operator

Thank you. Your next question comes from Greg Weaver with Kern Capital.

Greg Weaver - Kern Capital

Just a follow-up to that: So is all the EMC business in the Express category?

Al Sisto

No. We've some security processors that we ship to EMC, and then the remaining is in the Express category. I will say probably -- and now with the newest emphasis on the Express category -- roughly two-thirds are Express cards, and the remaining is the security processors.

Greg Weaver - Kern Capital

All right -- that helps, thanks. The only other question I had was -- maybe I misheard you, Bill, but I thought you said that you characterized the receivables as back under-control. I guess what your target DSO?

Bill Walker

Well, again – DSO, Greg, is a function of when I ship during the quarter. What I really look at is how much I've got over 60 days, and that tends to be less than 2%. From our DSO, if I ship early in a quarter we will have a 40-day DSO, if I ship late in the quarter. I have a 70-day DSO whereas my bad debts are nonexistent.

Greg Weaver - Kern Capital

Okay. If you were just saying that DSOs are really higher this quarter, but your stuff is at still, okay?

Bill Walker

Yeah, the stuff – again, if I looked at where my balances are at the end of January, all the stuff that I had on the books in the end of December most of it's being cleared up. I have no bad -- I have very limited bad debt exposure.

Greg Weaver - Kern Capital

Do you have a target DSO level there?

Bill Walker

Function of when I ship, when they ship during the quarter.

Greg Weaver - Kern Capital

Okay, just…

Bill Walker

As I said, I'd look at aging still on the 45 to 50 days. Those are standard terms. Our current standard terms are 30 days -- but if I get paid in 45, I'm kind of happy.

Greg Weaver - Kern Capital

Understood, okay. Thank you.

Al Sisto

Thank you, Greg.

Operator

Thank you. Your next question comes from [Joseph VonMeister].

Bill Walker

Hi, Joe.

Joseph VonMeister

Hi guys. Can you give an outline of some of the market opportunities for Suite B outside of the government opportunity?

Al Sisto

The two biggest areas of opportunity are in financial services, where financial services communications are subject to communicate with the government or not with the government within certain of the financial networks using the Internet as a backbone. We see that as one large area of opportunity.

The bigger area of opportunity is in critical infrastructure. In the critical infrastructure or embedded systems that are currently unprotected. The Suite B capabilities particularly as we're developing and delivering the products should have the ability to take existing infrastructure and provide a secure capability for communications.

And when I talk about critical infrastructure, I'm talking about water power -- the power grids, for example, that are relatively in the clearance today. And both of these two are substantial market opportunities for our partners, who built switches, routers and gateways that are used in this networks.

Joseph VonMeister

How much is it shipped in the cell phone?

Bill Walker

DVD, but we're probably going to target and keep the ASP low so that the market capability for it has a niche, as well as a line card within a telecom application is an opportunity for us. We believe we can make reasonably good margins that something in the sub-$100 range.

Joseph VonMeister

And how unique is your offering, in other words? Can it be knocked off, and if it can't, why not?

Bill Walker

I think it's pretty unique. Like many things that may have the opportunity to get knocked off. But I think as a consequence of our partner, we've developed and delivered certain functions within the acceleration and the algorithms that are unique to us right now.

Joseph VonMeister

All right -- thanks, guys.

Operator

Thank you. And at this time, there are no further questions.

Bill Walker

Well, I'd like to thank all of you for joining us on our conference call this January day, and we hope to have all of you on our call again at the end of the March quarter. We hope that you'll watch our website and see for some additional products announcements and things that we will bring forth in the quarter as well as announcements of our speaking at a number of financial conferences during the period. Well, once again, thank you all, and we wish you a good day.

Operator

Thank you for joining today's Hifn's first quarter fiscal '08 conference call. Thank you for your participation. You may now disconnect.

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