Symmetricom Inc. F2Q08 (Qtr End 12/30/07) Earnings Call Transcript

Symmetricom Inc. (SYMM)

Q2 2008 Earnings Call

January 31, 2008 4:30 pm

Executives

Ellen Brook – Stapleton Communications

Tom Steipp – CEO, Pres, Director and Member of Stock Option Committee

Bill Slater – CFO, Principal Accounting Officer

Analysts

Simon Leopold – Morgan, Keegan & Company Inc.

Mark Sue - RBC Capital Markets

Steve Bush – Micron Technology

Chris Blackman – Empirical Capital

Presentation

Operator

(Operator instructions)

I would like to turn the call to Ms. Ellen Brook, our host, thank you ma’am.

Ellen Brook

Good afternoon, welcome, and thank you for attending Symmetricom’s Fiscal 2008 Second Quarter Conference Call. With me today are Tom Steipp, President and Chief Executive Officer and Bill Slater, Chief Financial Officer. If you have not received today’s news release, you may download it www.symmetricom.com. During the course of this conference call, we will make forward looking statements within the meaning of the Securities Act of 1933 and the Securities and Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in the company’s Form 10-K for the year ended July 1, 2007 and subsequent fillings with the SEC as well as in today’s news release. Certain non-GAAP pro forma financial information maybe referred to in the course of this conference call. Non-GAAP pro forma earnings exclude certain items related to non-cash compensation and apparent charges for goodwill and other intangibles, amortization of acquired intangible, integration and restructuring charges acquired in process research and development and unusual and non-recurring items. Symmetricom believes that excluding such items provides investors and management with the representation of the company’s core operating performance and with information useful in assessing underlying trends and future operating results. Non-GAAP pro forma information should not be considered superior to or as a substitute for data prepared in accordance with GAAP. A reconciliation of the non-GAAP pro forma results to the GAAP results is provided in the consolidated statement of operations schedule provided in the press release on Symmetricom’s website.

I will now turn the call over to Tom Steipp, CEO.

Tom Steipp

Welcome to our review of Symmetricom’s Fiscal 2008 Second Quarter results. In today’s call I will cover the highlights and performance of each business segment. Bill will then give a detailed analysis of the financials before we take questions. Let us get started with the quarterly highlights.

Second quarter revenues were $48.8 million 6% below the prior year, but on track with our expectations. Consistent with our initial guidance for fiscal 2008, we expect that our largest costumers to resume their spending in the second half. Our cable business gained significant traction with bookings for our DOCSIS timing product, topping $1 million for the quarter.

Verizon continued to be our largest customer in excess of 10% of overall revenues. Our government business showed continued strength driven by a broad mix of domestic communications programs and strong international business.

In our quality assurance division, we entered two new trials, received a new order for initial deployment and successfully completed a very important proof of concept with IPTV setup box manufacturer, Sagem which has agreed to trial our software in their setup boxes. We opened our new R&D facility in Beijing and hired an additional contingent of engineers to support sustaining engineering on core product lines, which will reduce our cost structure overtime.

We reached an agreement with Sanmina, a world-class contract manufacturing partner which will reduce manufacturing cause and take advantage of best in class production processes for our standard boards.

Let me now turn to the operational results for each segment. Our telecom solutions division posted revenues for the second quarter of $30 million, down 8% from the prior year. Wire line revenues were $19 million, 10% lower than a year ago. Our strongest sales results occurred with next generation sync products at Verizon. We also received orders for initial deployments our new NTP blade servers illustrating the continuing interest in our packet-timing technologies.

With less than 5% of the AT&T and Verizon installed basis currently upgraded, we expect to see strength in this market through the second half and into the future, although we are mindful of the fact that their operational budgets are not yet finalized for calendar 2008.

In cable, bookings for our DOCSIS-timing product came in at more than $1 million and an important milestone was the successful trial of this product in a modular CMTS installation with a European provider, which should lead to our first field deployment later this fiscal year.

We are seeing a significant increase in activity with MSOs around the world, which we believe will be converted to increased revenues throughout this calendar year. Service revenues were $5.5 million, about flat with the prior year. This is a relatively low-margin business but tends to enable greater levels of wireline installations at our largest customers. In our wireless OEM segments, second quarter revenues were $5.6 million down 7% from the second quarter a year ago.

Our largest wireless customers in the quarter were Nortel, Samsung and Lucent.

Moving now to the timing test and measurement division, revenues were $18 million down 3% from the prior year. Domestically, we saw strong sales to the government for communication electronic systems programs, including two new program wins, one with the US Army and the other with Lockheed.

In the first we received orders to deploy ruggedized rubidium to upgrade electronic systems in a helicopter program. In the second, we received orders for systems used in an advanced Army communication subsystem.

Our international business showed continuing strength in network time servers, hydrogen masers, Cesium clocks and other timing devices. We had noteworthy program wins for Cesium in Japan and shipboard timing devices in Norway.

Now on to our quality insurance division, where the increasing rollout of IP based video services generating interest in our end-to-end solutions for monitoring perceptual video quality. Last quarter we set out key metrics to measure progress in fiscal 2008. As a reminder, these metrics relate only to 20 strategic accounts and they include initiating at least five new trials securing at least two new deployments and entering into at least four strategic partnerships with systems integrator’s, OSS vendors and OEM partners.

During the second fiscal quarter we secured two new trials for V-FACTOR with international service providers adding to the two trials begun in the first quarter. In the deployment category, we received an order for a new win with a service provider in Western Europe.

With regards to strategic partnerships, we are working on a number of relationships, but did not complete any agreements during Q2. In one of the most strategic events, IPT, the setup box manufacturer, Sagem agreed to embed our software in its setup boxes on a trial basis. This will allow interested service providers to trial our V-FACTOR solution for measuring perceptual video quality at the setup box.

The obvious advantage of this is that it allows the service provider to gauge with certainty, the quality the customers experience before the subscriber calls and complains. While our focus remains on building relationships with 20 strategic accounts, we continue to receive interest for our QAD products from non-strategic clients. Where we can generate this kind of business with a limited effort, we will do so and a classic example, we booked an order for V-FACTOR equipment in Russia. As a result we expect approximately $1 million in revenue during the second half.

While we are encouraged by this win, I need to point out that it does not count against our metrics as the service provider was not on our strategic account list.

As a reminder, we believe that Symmetricom’s V-FACTOR is the most advanced end-to-end perceptual video monitoring solution available today. Designed for both telecom and cable environments, our solution includes the following components.

At the head ends, our video serving office, we monitor the quality of incoming video with a deep packet analyzer capable of detecting, encoder, transcoder, and streaming impairments. Our recently launched Q1000 addresses this need.

The second component consists of network probes, software agents and NOC software providing a comprehensive view of even the most complex IP environments.

And finally, in setup boxes located for customer premise, we offer a world-class client agent, noteworthy for its minimum resource requirements in monitoring accuracy. Taken together, these components form a state of the art end-to-end solution for delivering real-time understanding of video service quality, throughout either a telecom or cable network.

One validation of products comes in a form of a best-in-test award for our Q400 network probe by testing measurement world as the industry’s best IPTV test probe. With that, let me turn the call over to Bill for details on the financials.

Bill Slater

Revenues in the second quarter of $48.8 million, a decrease of $2.9 million or 5.6% from revenue of $51.8 million in the prior year.

Telecom solution revenues in the quarter were $30.2 million, down $2.6 million or 7.9% over the prior year. Wireline revenues for the quarter were $19.1 million. Service revenue was $5.5 million and OEM wireless revenue was $5.6 million.

Compared to the prior year, wireline revenues were down 10.2%. Service revenues were down 4/10 of 1% and OEM wireless revenue was down 6.9%. TT&M revenue for the quarter was $18.3 million, down 3.3% over a year ago. QAD revenues in the quarter were $305,000.00. Gross margin in the quarter was 44.3% compared to 41.8% from the prior year. On a non-GAAP basis, gross margin was 46.8% compared with 44.2% for the same period in the prior year. Operating expenses were at $22.4 million, up $2.8 million or 14.6% from the prior year quarter.

On a non-GAAP basis, operating expenses were $21.3 million, up $3.5 million or 19.9% from the same quarter in the prior year. The increase in quarterly non-GAAP operating expenses over the prior year is principally attributable to the build out of the QAD division, which accounts for $2.4 million of the increase and $400,000.00 increase in TSD R&D expenses to accelerate new products and to startup an R&D office in China.

Net earnings in the quarter before discontinued operations were $141,000.00 or break even EPS compared with net earnings of $2.5 million or $0.05 per share for the same period in the prior year. Non-GAAP net earnings in the quarter were $1.8 million or $0.04 per share compared with $4.7 million or $0.10 per share in the same quarter in the prior year.

The decline in net earnings is principally attributable to investment in our QAD business, which increased year-over-year operating expenses by $6.1 million on a GAAP basis, and $4.7 million on a non-GAAP basis.

I would like to note that the second quarter financial statements include an estimated impairment charge of $620,000.00 on a short-term investment that is in receivership, as well as $700,000.00 gain on the sale of an unused domain name. Also, I would like to note that we expect to take charges during fiscal 2008 of approximately $0.02 per share for a reduction in force at our Puerto Rico plant as we outsource additional manufacturing.

Our backlog ended the quarter at $49.1 million. We estimate that $37.2 million of that backlog is shippable within six months, $9.3 million is shippable within six to 12 months and that $2.6 million will be shippable beyond one year.

As indicated in our prior conference calls, we expect that there maybe fluctuations in both revenue and backlog as we are now receiving larger orders over extended periods. Cash and investment balances were $162.1 million at the end of the quarter compared with the $188.7 million at the end of the prior year quarter.

The primary uses of cash year-over-year included approximately $20 million for acquisitions and approximately $11 million for stock buybacks. DSO is 61 days in Q2 compared with 59 days in the prior quarter. Inventory turns were $2.5 compared with $3.8 for the prior year. The decline in the inventory turns primarily represents a combination of increases in finished goods and an anticipation of a resumption of purchasing by AT&T, coupled with a build-up of safety stock as we begin to move more production to our contract manufacturer.

I would like to now, hand the call back to Tom for his closing remarks.

Tom Steipp

To summarize, at the midpoint of our fiscal year, we are optimistic about the upgrade cycle for our core frequency in time products, believing that second half purchases will accelerate over the first half. Our TT&M business continues to do well both domestically and internationally.

We are excited about the level of activity that we see in both QAD and cable, where we are gaining traction in both trials and deployments and finally, we will remain committed to our strategic plans for reducing future costs and improving profitability with the recent opening of our R&D facility in Beijing and our new partnership with Sanmina to take advantage of their world-class manufacturing efficiencies.

I want to thank everyone for joining us today and close with a reminder that we will be presenting in two upcoming conferences, the Roth Conference on February 19 in the Laguna Niguel and the B. Riley conference in Las Vegas in April.

This concludes the prepared portion of our presentation, Mike you can now pull the audience for any questions.

Question and Answer Session

Operator

(Operator instructions)

Our first question comes from Simon Leopold.

Simon Leopold – Morgan, Keegan & Company Inc.

I have got a couple of pretty straightforward ones. First of all, you mentioned Verizon was greater than 10% this quarter, could you be a bit more specific on where they came in?

Tom Steipp

I think they actually came in at about 13% this quarter.

Simon Leopold – Morgan, Keegan & Company Inc.

You talked about the Cesium arrangement, I am wondering if you could tell us a little bit more about how that deal was structured in terms of how you get paid. Are they the customers, is it a sort of a licensed deal, shall we think of it in terms of per box business?

Tom Steipp

Yes, Simon, I think we have not yet finalized the pricing structure of the agreement. What we were really focused on during the last quarter was just completing the trials. I will just give you a summary there; we are in 10 home trials with their own employees. Initially, we are in a hundred unit trial in customer homes at this point in time, and if those all work well, we will kind of go to a thousand-unit trial. But in terms of the specifics of the licensing agreement that has not been nailed down yet, but you need to think of it on a per box basis.

Simon Leopold – Morgan, Keegan & Company Inc.

Give us some sense of how many boxes they typically ship, aside the opportunity?

Tom Steipp

I do not know what Sagem setup boxes are in terms of their shipments at this point in time. The service provider that we are working with in Western Europe is well known. It is unclear to us at this point in time, exactly how much of their installed base they might try to cover with this. A lot of it will just depend on how this next trial of 100 units works.

Simon Leopold – Morgan, Keegan & Company Inc.

Typically, how are long are your trials lasting, I am assuming, since it is an update, they are about three months or less?

Tom Steipp

I think, in the next quarter we will probably have a better view of what they are going to do next.

Simon Leopold – Morgan, Keegan & Company Inc.

And now just shifting gears, I think the bigger issue is your commentary on visibility and spending from your big customers, particularly Verizon, AT&T. I think within the release you talked about the budget setting cycle and I think both carriers have talked about trying to improve the linearity of their spending and AT&T specifically has talked about shifting from calendar year budgets to these 15-month sliding budgets and your comment sounds like you are not seeing that. Maybe if you could talk about how you envision your CAPEX trends and your confidence or visibility into the second half of our fiscal year?

Tom Steipp

We are working with them on two very specific aspects. One is, making sure that they have got our next generation sync equipment available, so as they roll out these new timing capabilities, it is there for those deployments and the second is, that we have talked about this for a long time. The age of their install-base continues to increase. We have shared with them failure statistics, probabilities, those sorts of things. So, on both sides we are trying to make sure that that transition takes place before there is any impact to their operational networks.

So from our perspective, we are working with them, we have not gotten any definitive budgets at this point in time, but we are certainly in close conversation with them. I think we have a good feel for what they are going to be doing with us, at least in the short-term first half of the year.

Simon Leopold with Morgan, Keegan & Company Inc

So if you were to compare your relative confidence now versus last quarter, is it better, worst or the same?

Tom Steipp

I really cannot comment on that Simon.

Simon Leopold with Morgan, Keegan & Company Inc

Okay, and just one last one, are you reiterating your full year revenue forecast of $210 million to $220 million.

Tom Steipp

Let me just say we are not updating our guidance.

Operator

Our next question comes from Mark Sue with RBC Capital Markets

Mark Sue - RBC Capital Markets

Just a follow up on the Simon’s questions relative to visibility for this calendar year, any thoughts on maybe the wireless segment in detail, maybe customer OEM partners and maybe the federal and any additional help there would be greatly appreciated in terms visibility for the balance of the year.

Tom Steipps

Yes, it is really hard for me to give you any specifics on those other than what we have covered on the conference call. I think our underlying business is real solid across the board and this position that we are in relative to our largest customers is unchanged at this point in time.

Mark Sue - RBC Capital Markets

From this point, a year ago, at least thing are moving a little bit quicker or at the same pace, any qualitative comments?

Tom Steipps

I think that what we said was that we have very much anticipated the second half of the year to be higher than the first half of the year. We said that back at the end of the last fiscal year and reiterated it in this call.

Operator

Our next question comes from Steve Bush.

Steve Bush – Micron Technology

I guess I am still waiting for some answers on this $7 million sub-prime situation.

Tom Steipps

What actually would you like Steve?

Steve Bush – Micron Technology

Why were we investing any of our cash balance in sub-prime in the June quarter of last year?

Tom Steipps

So like any other people Steve, we were not investing in sub-prime, we have an adviser who invested in what was a triple A security and it turns out that they were not able to raise money on a short-term basis and one is a receivership, I think we were caught by surprise.

We have pretty high standards for our portfolio that everything will be rated A or better and this was one of those things where a very large adviser to us believe this was a secure investment.

Steve Bush – Micron Technology

But they must have known it had sub-prime exposure and anyone in the June of last year buying triple A rated sub-prime, had to have known that triple A meant nothing?

Tom Steipps

They may have known that they were sub-prime exposure. I think these were reasonably smart guys, but I think there is sub-prime exposure in a lot of instruments in a lot of different places and that people are being surprised and we are taking the $600,000.00 impairment charge on this.

I think there are a lot of different companies that are finding out that what they thought was triple A had some sub-prime within it.

Steve Bush – Micron Technology

Yes, so the $620,000.00 impairment charge this quarter was actually from the sub-prime?

Tom Steipps

In risky investment for an extra ten basis point and we are not in a game to put any of our investments in jeopardy. This was being caught by surprise like a lot of other companies have been.

Steve Bush – Micron Technology

Yes, I would, so the $620,000.00 impairment charge this quarter was part of that sub-prime?

Tom Steipps

It was. It was part of that investment which includes sub-prime. I believe it is 23% of that investment was in sub-prime.

Steve Bush – Micron Technology

So your SEC filing, the whole $7 million was in default? Is there $7 million worth of possible loss here or is it just 23% of this?

Tom Steipps

The $620,000.00 impairment is an estimate of what the market value is of the underlying properties. The portfolio that is in the receivership, I believe it is in discussions with the possible purchaser and whatever the purchasers sets up and the receiver agrees to will be the structure that we will live with.

We could end up reducing this impairment charge or increasing it and as I said, it is not our intent to invest in sub-prime or anything that is not the highest quality-rated products out there.

Steve Bush – Micron Technology

I understand and I do not mean to beat a dead horse, but could the entire $7 million dollars be written off?

Tom Steipps

I think that is very unlikely.

Steve Bush – Micron Technology

Okay, half of it?

Tom Steipps

You are asking me something that I do not think anybody knows the answer to right now. I think that considering the fact that 77% of the property that underlies this instrument is considered prime.

I think it is very unlikely that we would see that level of impairment, but again, this is based upon a deal between the portfolio receiver and the company that is buying the portfolio is to what they settle for.

But right now, based upon the estimates using ABX indexes and some other views, the estimate is that there is some level of impairment but that is not significant.

Steve Bush – Micron Technology

Just one last question, what was the operating cash flow for the quarter?

Tom Steipps

The operating cash flow for the quarter was, I believe, I do not have that in front of me Steve.

Steve Bush – Micron Technology

Was it positive or negative?

Tom Steipps

I believe it is probably going be on a year to date basis around breakeven. If you look at our balance sheet, you see that our payables are down $6 million. Our profitability on a GAAP basis is breakeven for the quarter, but we expect to be positive for the year.

Steve Bush – Micron Technology

I would like to see the continued stock buybacks. Thank you.

Operator

Our next question comes from Chris Blackman.

Chris Blackman – Empirical Capital

What is your understanding on the timeframe of when the telecom CAPEX budget should be finalized?

Tom Steipps

I think the short answer to that Chris is, they are in the process of doing that. They have an iterative process whereby they put all their entire requirement down, fund a certain percentage of them to go through. What I have been told by our guys is probably two iterations of that, so they have been through the first pass of it and I think there is at least one or two left. My guess is, sometime in the next month or six week but we are outsiders working with them on the inside. It is always subject to a lot of second guessing and people trying to peer inside and figure out what is really going on.

Chris Blackman – Empirical Capital

You have done business obviously with them for a long, long time. Does history suggest that timetable that you just provided me?

Tom Steipps

Yes, I think from a historical prospective, we saw the same thing last year and there have been some shifts obviously away from things like yearend spending. There used to be a rash of that these days and I think one of the comments earlier on the call was working more towards linearity. So, we have seen that shift, but that has been incorporated into our planning.

Chris Blackman – Empirical Capital

They have been attempting, on my understanding, to give suppliers the better linearity, is that true? I heard that from other suppliers.

Tom Steipps

I can tell you that we are working very aggressively to have an ongoing dialogue with them that gives us better visibility to what they need when, so that we can meet their needs on that and what I would say is that seems to be working. Our relationship with them is good at this point in time, both AT&T and Verizon have taken steps to start to streamline their organization, AT&T in particular. I think this is noteworthy. They have operated historically with five different regions.

All of the sync activity across those five regions and actually globally has now been consolidated under the tillage of one individual who is in Chicago. So, that makes it a lot easier for us to work at with these guys.

Chris Blackman – Empirical Capital

Okay and your dealings with that individual over the years, has it been, have you dealt with that person in the past?

Tom Steipps

Yes. Paul Shermac who is our VPS sales and I and our major account manager had dinner with him a month ago.

Chris Blackman – Empirical Capital

AT&T, how much did they represent in your business this last quarter?

Tom Steipps

It was less than 10%, it was a pretty modest amount

Chris Blackman – Empirical Capital

How many shares do you have left on your share buyback?

Tom Steipps

We have about 900,000 shares left.

Chris Blackman – Empirical Capital

Do you anticipate increasing that?

Tom Steipps

We have discussions with the board every quarter of that, our strategies.

Operator

(Operator Instructions)

Tom Steipp

So that is probably all the questions for today, I just want to thank everyone for joining us on the second quarter call and we look forward to talking to you again at third quarter.

Operator

This concludes today’s conference call. You may disconnect at anytime, thank you for attending.

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