Focus Enhancements Inc Q4 2007 Earnings Call Transcript

Focus Enhancements Inc (FCSE)

Q4 2007 Earnings Call

March 17, 2008 4:30 pm ET

Executives

Brett Moyer - President and CEO

Gary Williams - CFO

Kirsten Chapman - IR

Presentation

Operator

Welcome to the Focus Enhancements Fourth Quarter and Year-end 2007 Earnings Call. (Operator Instructions). As a reminder, the conference is being recorded March 17, 2008.

I would now like to turn the conference over to Kirsten Chapman. Please go ahead, ma'am.

Kirsten Chapman

Thank you, Christian. Good afternoon and welcome to Focus Enhancements fourth quarter and year end 2007 conference call. With us today from management are Brett Moyer, President and Chief Executive Officer; and Gary Williams, Chief Financial Officer. If you need a copy of the press release, please visit our web site at www.focusinfo.com.

As a reminder, this call may contain forward-looking statements, including statements regarding management's intentions, hopes, expectations, representations, plans or predictions about the future. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding management's expectations of funding requirements, demand for Focus Enhancements' products, revenue expectations, gross margin percentages and cash from operations. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements.

Factors that could cause actual results to differ materially are specified in Item 1A of the company's 10-K for the year ended December 31, 2006, as well as other periodic filings with the SEC. These statements are based on information as of March 17, 2008, and the company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

On the call, Brett Moyer will provide you with a review of the business and an overview of the quarter and year. Then Gary Williams will review the financial results, after which we will open the call to questions.

I'll now turn the call over to Brett.

Brett Moyer

Thank you, Kirsten. Good afternoon, everyone, and thanks for joining us today. Admittedly, 2007 was a challenging year for the company. While we are disappointed with our 2007 financial results, we did achieve some important operational milestones over the last six months, which will drive the next phase growth in 2008 and beyond.

In April, at the National Association of Broadcaster Conference Call, NAB, we'll be demonstrating six new products. There will be a completely new FireStore product, new media asset management products with a significant partner, and new digital signage software. As a result, we expect sequential revenue growth beginning in the second quarter of 2008.

Our UWB technology continues to expand, with official certification by the WiMedia organization for our PHY, and the new all CMOS single chip is progressing nicely. Additionally, our TV-out chips are continuing to peak interest, especially among smartphone manufacturers.

Before I discuss these in detail, I will review 2007. We reported revenue of 6.8 million for the fourth quarter, and 30 million for the year. Our 2007 revenues were impacted by a number of factors. Our adoption rate for media asset management products was slower than expected. However, in the fourth quarter, we posted record process revenues and the pipeline of this continues to build.

The acquisition products, FireStore, saw a significant decline as a result of competitive pressures from the professional camcorder manufacturers, as the result of a new camcorder introduce by Sony. We believe it will take our customers through this quarter to balance out inventory and promotions against their competitors. As a result, they adjusted their forecast and impacted our revenue run rate.

That said, we have taken comprehensive actions to improve our operating position. We increased liquidity immediately, and are projected to improve financial performance in February. We closed 20.8 million of financing, under which we restructured our existing debt and allocated 9.3 million to support our UWB chip development and general operations.

Then, two weeks ago, we secured a $6.5 million credit facility with Heritage Bank of Commerce, which is guaranteed by Carl Berg, one of our Board of Directors, and shareholders. In addition, we reduced our sales, marketing and G&A costs.

As noted, operationally, we achieved a number of significant milestones in 2007. In UWB, we introduced our first-generation UWB technology. Then, we paired with Amcor to deliver a wireless USB hub and dongle, and with Macally for wireless USB disk storage when they become commercially available. We expect these efforts to result in revenue beginning in the second quarter of 2008.

Now, our second-generation UWB technology, the all CMOS single chip aimed at the low cost market segment, is well underway and tracking to deliver significant cost improvements. Also, our UWB technology has been recognized among industry leaders. Last week, the WiMedia Alliance certified our physical layer chip (inaudible).

During 2007, we filed for three provisional patents for our UWB technology, and in the fourth quarter, we are granted a patent for Method and Apparatus for Frequency Division Multiplexing. This contains key intellectual property for achieving better performance from UWB radios.

In video convergence chips, we completed development of the FS-471, an ultra-mobile TV-out chip solution. To-date, the 471 has been incorporated in design start for applications in PMPs, iPod docking stations, automotive reference designs, among others. What's exciting is the increased interest from the Smartphone market, which we expect to materialize into design wins in 2008.

In the system business, our media asset management product line revenue grew from approximately 500,000 in third quarter 2007, to 800,000 in the fourth quarter 2007. We continue to see growing interest for ProxSys, particularly from a Japanese broadcast manufacturer, and we will introducing products and technology at NAB.

Before I discuss 2008, I will now turn the call over to Gary for more on the financial review in details. Gary?

Gary Williams

Thank you, Brett. For the fourth quarter of 2007, revenue was 6.8 million, compared to 10.3 million in the fourth quarter of 2006. During the fourth quarter, the systems business revenue was 5.3 million, compared to 7.2 million in the same quarter of 2006, reflecting lower sales of affordable DTE Recorders. Our semiconductor business revenue was 1.5 million, compared to 3.1 million a year ago, as fourth quarter 2006 revenue included chip shipments for the Microsoft Zune. Such shipments did not recur in 2007.

Operating expenses during the fourth quarter of 2007 totaled 7.7 million, compared to 7.2 million in the fourth quarter a year ago. Research and development expenses were 4.4 million, compared to 3.8 million in the same quarter last year. Increase in R&D is attributable to our continued development of our UWB technology, including our second generation chip.

Although R&D expenses increased, such expenses were actually 1.4 million lower than previously projected, as we reduced fourth quarter obligation and moved such expenditures into the first and second quarters of 2008. Our net loss for the fourth quarter was 5.3 million or $0.06 per share, versus the loss of 3 million or $0.04 per share in the same quarter of 2006.

For the year ended December 31st, 2007, revenue was 30 million, compared to 37.5 million for 2006, reflecting the impacted chip shipments in the third and fourth quarters of 2006 for the Microsoft Zune. As previously noted, such shipments did not recur in 2007. While revenues were lower than anticipated, we were able to maintain a 44% gross margin as a percentage of revenue, compared to 46% in 2006. Net loss for the year ended December 31st, 2007 was 17.4 million or $0.22 per share, compared to a net loss of 15.9 million or $0.23 per share for 2006.

Moving on to the balance sheet, accounts receivable at December 31st, 2007 was 4.3 million compared to 4.2 million at December 31st, 2006. DSOs were at 59 days at December 31st, 2007, compared to 55 days at September 30th, 2007. Inventories at December 31st, 2007, were 4 million, compared to 4.1 million at December 31st, 2006. Sales order backlog at December 31st, 2007, was approximately 800, 000, a decrease of 400,000 compared to September 30th, 2007.

At December 31st, 2007, we had cash and cash equivalents of 1.9 million. As Brett noted in February, we've restructured 11.5 million of debt and raised 9.3 million of additional working capital.

In addition, within the last two weeks, we secured a $6.5 million credit facility. While we believe R&D expenses relating to our EWB research will increase, we believe we have sufficient working capital to continue development of our second generation EWB chip, and to launch new media asset management and acquisition products in the second and third quarters.

At December 31st, 2007, total shares of common stock outstanding were approximately 84.7 million. Also, I would like to note that on February 12th, we received notification from NASDAQ that would be given until August 11th, 2008 to meet NASDAQ's $1 bid price requirement.

I will now turn the call back to Brett.

Brett Moyer

Thank you, Gary. In summary, we believe the strength of our product roadmap, combined with the new merchandising programs that we are working out with our FireStore partners, will successfully position the company for growth in the second quarter.

At NAB 2008 in April, we will be announcing six new products, including one in each of our primary categories. We expect to launch our next generation Portable Direct To Edit, DTE, recorder FS-5, additional ProxSys digital media asset management products, a new software for HD media ingest and delivery.

For acquisition in media asset management, our strategy has expanded from mere file format expertise to -- which includes recording and managing, both the media and meta descriptive information known as metadata. We have successfully demonstrated this workflow to a major Japanese partner, and we will be demonstrating this at the show in two dedicated stations.

Just as our Direct To Edit technology has kept us in the center position between camera manufacturers and lease software companies, we believe the new approach will be of high interest to both our partners, and then customers.

In summary, the main objective at NAB this year will be to show new levels of interoperability with partner products, and expanded support for advanced AC file formats and Media Codecs. We believe these second quarter product launches will deliver revenue growth in the second half of 2008, which will be supported by progress in the wireless USB, EWB and TV-Out SmartPhone relationships.

As Gary noted, we believe we have sufficient working capital to continue development of our second generation EWB technology, and launch new media asset management acquisition products. Our customer base is diverse, the product range is broad and we believe our technology is the best in the industry. I will now open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions).

Brett Moyer

Yeah operator, let's finish up.

Operator

There are no questions at this time, please go ahead with any prepared or closing remarks.

Brett Moyer

Would like to thank you today for joining us and we will be in our offices available at phone, if anybody has additional questions. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!