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InterVideo (OTCPK:IVII)

Q4 2005 Earnings Conference Call

March 2nd 2006, 5:00 PM.

Executives

Steve Ro, President and CEO

Randall Bambrough, CFO

Mike Ling, Vice President Marketing and Sales

Molly Plyler, Investor Relations Blueshirt Group

Analysts

Mark Harding, Maxim Group

Operator

Good afternoon ladies and gentleman and welcome to InterVideo’s Fourth Quarter 2005 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question and answer session. If anyone needs assistance at anytime during the conference please press the * followed by 0. As a reminder, this conference is being recorded today, Thursday, March 2nd 2006. I would now like to turn the conference over to Ms. Molly Plyler with Blueshirt Group, please go ahead madam.

Molly Plyler, Investor Relations Blueshirt Group

Good day and welcome everyone to the InterVideo Fourth Quarter and fiscal year 2005 Earnings Results Conference Call. Joining me on the call today is Steve Ro, President and CEO; Randy Bambrough, CFO; and Mike Ling, VP of Marketing and Sales of InterVideo. Today’s earning call will contain forward-looking statements including without limitations statements relating to our business outlook, revenue, earnings per share, gross margins, and other future financial performance and projections regarding the market for our products. These forward-looking statements are subject to risks and uncertainties and actual results could differ materially due to several factors including but not limited to the anticipated benefits of the Ulead transaction including the strengthening of engineering resources and accelerated product development, unanticipated developments or events concerning the financial condition, assets, operations, business or prospects of Ulead.

The ability to forecast customer behavior and recognize a response to emerging trends, changing preferences, or competitive factors, the market acceptance of our new product and product enhancements, the uncertainty of litigation and the resolution of any claims regarding alleged infringement of third-party’s intellectual property right, the ability to maintain our external relationship with PC OEM and other risks and uncertainties. Please consult InterVideo’s financial report statements on Form 10-Q for other risk factors that could cause actual results to differ. All forward-looking statements are made of the date hereof and InterVideo disclaims any responsibilities to update or revive any forward-looking statement provided in this conference call. In addition, InterVideo will present non-GAAP financial information in today’s conference call. The reconciliation from GAAP to non-GAAP financial measures is included in our earnings release and is available on the company’s website. At this time, I would like to turn the call over to Steve Ro.

Steve Ro, President and CEO

Thank you. Welcome and thank you for joining us today as we report the fourth quarter and the fiscal year 2005 financial results. For the fourth quarter InterVideo reported revenue of $30.7 million on a GAAP base. Net income for the fourth quarter was $215,000 or 0.01 per diluted share. On the non-GAAP base excluding amortization of intangible assets and one-time charge. Net income for the fourth quarter of 2005 was $3 million or $0.20 per share. Randy will discuss the financial results for the quarter in more detail. The fourth quarter marks a stronger course through 2005 for InterVideo. We made significant progress on the number of initiatives. We successfully diversified our revenue beyond our flagship product WinDVD and ended the quarter with 59% divided for other products such as InstantON, WinDVD Creator, Video Studio, and DVD Movie Factory. Our majority investment in Ulead has contributed to this and has also expanded our retail presence.

Beyond our PC OEM channel, we continue to expand our relationships with consumer electronics company. During the fourth quarter, we entered agreements to provide our video and audio technologies to leading manufacturer of Smartphone, PDA, and the video game, and entertainment systems. We also further penetrated new areas such as the automotive, electronics market and during the quarter entering into a development agreement with a leading automotive consumer electronics systems supplier: Alpine Electronics. We are enthusiastic about the growth opportunities we see to leverage our strong multimedia technology in consumer electronics and wireless mobile market. With our enhanced engineering resource through our investment in Ulead, we continue to make stress in product development using both HD-DVD and the Blu-Ray formats. At the CES, we demonstrated our Blu-Ray authoring, navigation, and the playback solution, as well as our WinDVD HD playback and HD-DVD authoring.

We continue to believe the full launch for the next generation disc format will occur in the first half with both formats coming to market. We are excited about all capabilities to provide the solution in both HD-DVD and the Blu-Ray format. Now Randy will provide a detailed financial review and outlook

Randall Bambrough, CFO

Thanks Steve. Thanks to all of you for joining us today to review our financial results for the fourth quarter and full year. For the fourth quarter 2005, InterVideo reported revenue of $30.7 million compared to $20.4 million reported in the fourth quarter of 2004. GAAP net income for the fourth quarter 2005 was $215,000 or $0.01 per diluted share compared to net income of $3.8 million or $0.25 per diluted share reported in the fourth quarter of 2004. On a non-GAAP basis excluding acquisition related intangible amortization of $320,000, $1.7 million for currency exchange relating to InterVideo investment in Ulead, $650,000 for prior year VAT charges related to international sales and other charges totaling $446,000. Net of minority interest in the overall tax effects on these excluded items. Net income was $3 million or $0.20 per diluted share.

For the full year 2005, we reported revenue of $109.2 million, an increase of 47% over $74.5 million reported during 2004. GAAP net income for 2005 was $3.6 million or $0.23 per diluted share based on 15.3 million diluted shares, as compared to net income of $8.8 million or 0.58 cents per diluted share, based on 15.3 million diluted shares for the same period in 2004. On a non-GAAP basis excluding acquisition related intangible amortization of $897,000. In process, research, and development of $2.6 million and other acquisition related expenses of $1.2 million, and charges including $1.7 million for currency exchange, expense relating to InterVideo’s investment in Ulead, $550,000 for prior year VAT expenses related to international sales. $1.1 million in expenses related to permanent cost reductions of Ulead and other charges totaling $501,000. Net of minority interest in the overall tax effect of these excluded items. Net income was $11 million or $0.72 per diluted share.

Gross margins for 2005 were 63% on a GAAP basis as compared to 56% on a GAAP basis for the same time period in 2004. We had strong revenue diversification during the quarter and sales from products other than WinDVD, such as WinDVD Creator, InterVideo DVD copy, InstantON Ulead products such as Video Studio, DVD Factory, and PhotoImpact represent 59% of total revenue in the fourth quarter 2005. Web and retail sales grew as a percentage of sales and made up 27% of total revenue during the fourth quarter versus 14% a year ago. Gross margins for the fourth quarter were flat with the third quarter 66% on a GAAP basis.

Moving on to operations for the quarter. R&D was 18% of revenue for the fourth quarter down from 22% in the third quarter and up from 13% in the previous year. This was somewhat below our expected range. For the first quarter we expected R&D spending to be in the 24% to 25% range, mainly due to some bonus payments for the quarter and additional hiring and its associated cost. We continue to invest heavily in new technologies such as HD-DVD and BD and especially mobile and wireless opportunities. Several marketing expenses in the fourth quarter are 18% of revenue, down from 19% in the third quarter and up from 12% in the fourth quarter 2004. This was slightly above our range due to the VAT expenses previously mentioned. We expect this to be in the 16% to 17% range for the first quarter.

G&A expenses were 17% of revenues during the fourth quarter, up from 14% in the third quarter and 13% the prior year. This was slightly above our expected range of 15% to 16%, principally due to higher accounting and legalities. For the first quarter 2006, we expect G&A to be in the 16% to 17% range due to higher audit. This also relates to well as legal expenses. Stock compensation charges $6,000 compared to $45,000 in the year-ago quarter.

Turning to the balance sheet, we closed the quarter with $75 million in cash, cash equivalence, and short-term investments. Note this is up from a $72 million last quarter and is after the purchase of $1.6 million of stock in the open market. The third revenue decreased to $3.9 million from $8.2 million in the prior quarter principally due to recognizing revenues from Microsoft. Days sales outstanding declined to 43 days from 38 days in the prior quarter. Accounts receivable was $12.9 million compared to $13.3 million in the prior quarter.

InterVideo estimates its revenue for the first quarter of 2006 to be in the range of $25 million to $27 million and earnings per share of $0 to $0.01 excluding amortization of intangible assets of $320,000 in quarterly stock-based compensation expense, which cannot be determined at this time. For the full year 2006, InterVideo estimates revenue in the range of approximately $125 million to $135 million, and earnings per share of $0.57 to $0.63 excluding amortization of intangible assets of $1.3 million and stock-based compensation expense, which cannot be determined at this time. We thank you for joining us today on our call. And with that I will turn the call to the operator for questions and answers.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press * followed by 1 on your pushbutton phone. If you would like to decline from the polling process press the * followed by 2. You will hear a three-tone prompt acknowledging your selection, and your questions will be poured in the order they are received. If you are using speakerphone equipment, you will need to first lift the handset before pressing the number. Once again ladies and gentlemen, if you do have a question please press the * followed by 1 at this time. As a reminder, if you are using speakerphone equipment, you will need to first lift the handset before pressing the number. Our first question is from Mark Harding with Maxim Group.

Q – Mark Harding

Thanks, hi guys. I was wondering if you could give us a little bit more color on R&D, why it was down for the quarter?

A - Randall Bambrough

Why it was down?

Q – Mark Harding

Yeah, why it was below expectations, also seem to be down on a sequential basis. I was wondering if you could just give us a little bit more color on that.

A - Randall Bambrough

Sure, yeah, so there was some attrition that took place during the third quarter that had an impact on that, and then a little less in the way of some outside consulting fees that we have been using historically.

Q – Mark Harding

Was that a thing coming in from the attrition, I mean.

A - Randall Bambrough

Yes.

Q – Mark Harding

Ulead's side or from InterVideo?

A - Randall Bambrough

More from Ulead's.

Q – Mark Harding

Okay. Also if you could just speak a little bit more about the mobile phone initiatives, which you are working on?

A – Steve Ro

Oh yes, hi, this is Steve and the mobile phone, right, last quarter we just shipped some, I mean, all those multimedia solution tools to some small phone company in China and in Taiwan. However, this year, the most exciting technology in the mobile phone industry is mobile TV and they have just recently introduced DVB-H in Europe and T-DMB in Korea, and one-segment DTV in Japan. At InterVideo, we provide those three technology in the Windows and Linux platform, and in the hardware platform we pull into the TI, Intel, and Ambase (phonetic) Technology chipset, and in this year 3GSM we do the live DTV streaming in DVB-H demonstration in the Samsung and TI booth. So, if it is in the mobile space especially in the emerging technology era in the DTV, we do have a lot of opportunities. Currently, we do work for several customers in Korea, Japan, and China.

Q – Mark Harding

Okay, thank you very much.

A – Steve Ro

Okay.

Operator

Thank you. At this time, I like to turn the call back to management for additional remarks.

A - Randall Bambrough

Yes, we would like to thank everyone for joining us for this fourth quarter 2005 earnings call and we look forward to talking to you with our results in the first quarter. Thank you.

Operator

Thank you. Ladies and gentlemen this concludes InterVideo’s fourth quarter 2005 financial results conference call. If you would like to listen to a replay of today’s conference please dial 1-800-405-2236 or internationally at 303-590-3000 with access number 11052259 followed by the £ sign. Once again if you would like to listen to a replay of today’s conference please dial 1-800-405-2236 or 303-590-3000 with access number 11052259 followed by the £ sign. Again, thank you for your participation today and you may now disconnect.

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