Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

SRS Labs Inc. (NASDAQ:SRSL)

Q4 2005 Earnings Conference Call

March 14th 2006, 5:00 PM

Executives:

Thomas Yuen, Chairman and CEO

Ulrich Gottschling, Chief Financial Officer

Analysts:

James Capello, Kern Capital

Adam Fischer, UBS

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter and Year-end Earnings Conference Call. At this time all participants are in listen-only mode. Later there will be a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference please press “*”then “0” on your touchtone telephone. As a reminder this conference is being recorded. And now I would like to turn to the host for this conference as well as our Chairman and CEO, Mr. Tom Yuen. Sir, you begin your conference.

Thomas Yuen, Chairman and CEO

Thank you. Welcome to the SRS conference call in which we will discuss our fourth quarter and fiscal year 2005 financial results, our accomplishments of the past quarter, and our general business outlook for the months ahead. As we begin, I would like to take a few minutes to introduce SRS’ new CFO, Ulrich Gottschling, who joined us in early January. I know most of you have read of the January news release highlighting all his experience and expertise, and some of you already have had the opportunity to talk with him in telephone conversations in recent weeks. We are delighted to have Ulrich join our senior management team and believe he will make a significant contribution as we go forward. In fact he already has in these short months, since the beginning of the year. I’d also like to introduce, Ponteau Chantler (phonetic) from our Investor Relations firm, who has recently joined SRS to work with us and tell our story to investors and the Wall Street community in general.

Ponteau Chantler, IR

Thank you Tom. And I am going to go ahead and read the forward-looking statement as we go through the commentary today. Except for the historical information contained in this release, statements in this release including those of Mr. Yuen are forward-looking statements and projections, which includes statements concerning plans and objectives of management for future operation that are based on management’s belief as well as assumptions made by information currently available through management. While the Company believes that its expectations are based upon reasonable assumption, there can be no assurances that the Company’s goals and strategies would be realized. Numerous factors including risks and uncertainties may affect the Company’s actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the company. Some of these factors include uncertainties related to the sale of Valence Technology Limited, and the divestiture of the Company’s equity interest in the joint venture, the general market condition concerning the semiconductor business, the acceptance of new SRS Labs’ product and technology, the impact of competitive products and pricing, the timely development and release of technology by the company, general business and economic conditions especially in Asia, and other factors detailed in the company’s Form 10-K and other periodic reports filed with the SEC. SRS Labs specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise. And with that I will turn it back over you to, Tom.

Thomas Yuen, Chairman and CEO

Thank you. I’ll begin by reviewing with you the performance and accomplishments of the licensing business, which as we announced earlier this month will be our strategic focus going forward based on our decision to divest of the semiconductor business. We believe this increased focus on the opportunities with the licensing business provide a strong basis for enhancing shareholder value and maximizing our market opportunities.

During the year we continued to execute successfully and diligently on our strategy for the licensing business, by firstly strengthening and expanding our platform strategy. Secondly, further penetrating and growing our OEM base. Thirdly, both diversifying and fortifying our five target segments in the consumer products market; and finally continuing to build our brand. As a result, we achieved four consecutive record setting quarters of licensing revenue growth, and in fact for the year our high margin licensing business grew 37% from the year before.

During the year we further increased the number of platforms that now embed our technology. Among the new partners we began working with in 2005 are Action Semiconductors, OT Semiconductors, CODSPs, and Symbian, Intel, Nextel who have enabled us to broaden our coverage across each of our five market segment targets. The growth we experienced from both existing major accounts and new accounts resulted from our sales force attention to building existing customer relationships as well as acquiring new customers especially in the Asia-Pacific countries including Japan, Korea and China.

Let me detail some of the licensing business highlights of the year by market segment. First, our home entertainment segment. The home entertainment segment continues to be the biggest contributor to revenue, and our diversification strategy of limiting our reliance on this market continues to be successful as the percentage of revenue from the home entertainment decreased to 51% in 2005 from 67% in 2004. Our WOW and TruSurround technologies have become highly visible features in the advance display TV products such as LCD and plasma TV.

Over the year we saw growth in this segment through continuous design wins from Sony, Samsung, LG, Toshiba, Hitachi, Sharp, Dell, HP and just to name a few. Our strong relationship and broad technology availability from leading IT company such as Micronas, Phillips, Analog Devices, and New Japan Radio fuse this market for us.

Second, market segment is the personal computer segment. PCs are entertainment devices now, and use of our technology significantly enhances DVD, Music and Radio playback. Our customers who introduced new products with our technologies in this segment include Toshiba, Sharp, Plano as well as many display companies in Asia-Pacific.

Our engineering team has developed a technology in a low-level format for the PCs, which resulted in two new customers in 2005, LG and Samsung, who launched their first SRS technology products in time for the holiday selling season last year. We anticipate that our revenues on the PC market will continue to show strength as these customers run into full production.

For the automotive segment, our customer base in the automotive market continue to solidify as our technologies graduated in 2005 from only dealer options in Japan through aftermarket products around the world, and finally to factory installed products. More products are shipping from our previously announced customer such as Honda, Toyota, Eclipse, Fujitsu-Ten, Kenwood and Panasonic.

And in 2005, we are pleased that our focused effort to penetrate this market resulted in announcement and shipping of the first US base automobile with the SRS technology, that is in the Toyota Avalon. For the portable media devices market segment, we made especially strong progress in the MP3 market last year, which grew from the 11% of total revenue in 2004 to 23% in 2005.

Our WOW technology and brand continued to be a must-have feature for MP3 makers. Samsung’s usage of WOW grew and we see new design wins from LG, Toshiba Gigabeat, JVC, Phillips and Pachelbel.

New chips from Action Semiconductor, SigmaTron, product chips and others are also contributing to the growth of this segment. Finally, the personal telecom segment, the mobile phone market remains steady for us last year as Samsung, Sharp and NEC continue to use our technology on entertainment phones. The challenge we face is that up unto this point, the highest volume based phones are not the models, where entertainment is critical. We believe that our relationship with the Asian based chip companies for mobile phones such as OT and Frontech will help us to maximize opportunities in this segment and we believe will result in stronger growth moving ahead.

Now lets review our research and development activities. Our team of expert engineers and scientists were able to continue to innovate in also timely and leading edge audio, voice and surround technologies for the variety expanded and specialized solutions, our segment roadmap requires. During the year, we introduced numerous new technologies including Xbase, a 3D positioning technology for mobile gaming sound, and WOW HD for MP3 and TV markets. This rich and comprehensive technology portfolio allow us to serve as the one-stop audio technology partner for many of our world-class OEMs, who produce diverse products for the consumer markets.

On the branding fronts, after many years of brand-building efforts, we have seen our brand increasingly become globally recognized. It is appearing on products ranging from flat panel TVs, MP3 players, power audio head-end units, PCs and cell phones, and even on broadcast programs. So in summary, 2005 was the banner year for the licensing business. We are pleased with the progress and the trends we are seeing in the marketplace. We believe we are well positioned to execute on the opportunities 2006 pose for us.

Let us now turn to our semiconductor business. While we attempted to improve our semi business during the past year, the competitive nature of the industry, coupled with major cutbacks in our A6 customers orders as reported previously, we were unable to meet our financial objectives. During the year, we are focused on trimming expenses and rebuilding the business. In the meantime, the success of our licensing business prompted management and the Board to assess our strategic focus. Upon careful analysis and consideration of our business model, our resource availability as well as management bandwidth, the company had made a decision to divest of the Semiconductor business.

So beginning with the quarter ending March 1st 2006, we will account for this business segment as it is continued operation. We have engaged our bandwidth to help us divest of Valence, as the company focuses its full attention on leveraging our licensing business with its historical gross margins of above 95%. It is a business in which we have excellent market know how: broad technology expertise, and increasing brand recognition. So, and now Ulrich will review the financial results for the fourth quarter and the year, Ulrich.

Ulrich Gottschling, Chief Financial Officer

Thank you Tom. First, let me say that I am very pleased to be part of the SRS Labs team and to speak about our strong fourth quarter and annual 2005 financial performance. I will start by giving an overview of revenues and earning results for the fourth quarter ended December 31st, 2005. Our licensing revenues for the fourth quarter increased to $4.3 million, representing a 59% increase for the quarter on a year-over-year basis. We realized revenue increases in all of our five product categories, notably in portable media devices and advance displays. The breakdown of our licensing revenues for the fourth quarter by category is as follows: Home Entertainment 49% of total licensing revenues, Portable Media devices 25%, Personal Computers 13%, Personal Telecommunications 9%, and Automotive 4%.

Our Semiconductor revenues for the fourth quarter of 2005 increased to $2.0 million, representing a 12% increase for the quarter on a year-over-year basis. This increase is due to the introduction of the new standard IC chip, which has received the favorable response in the marketplace. The product mix in our Semiconductor business continues to migrate from A6 to standard ICs with A6 accounting for 50.4% of our Semiconductor revenues during Q4, and standards ICs accounting for 49.6%. Net loss for the fourth quarter was $2.9 million or $0.20 per diluted share on 14.2 million shares, down from net income of $569,000 or $0.04 per diluted share for the same quarter during the previous year. The loss for the quarter was primarily due to a non-cash and non-recurring impairment charge of $3.3 million related to our investment in the CHS/SRS LLC.

This charge is accounted for in several components of our statement of operation including cost of goods sold, general and administrative expenses and other non-operating expenses. The gross margin percentage in the licensing segment of the business was 30%, a significant decrease from 2004, and is due to a $2.8 million write-off of capitalized production cost related to the CHS/SRS LLC. Excluding the asset impairment charge, the gross margin percentage in the licensing business was 95%. We believe it is important to mention both gross margins in the licensing business to provide important perspective related to the operating performance of the business going forward.

The Semiconductor margin percentage was 53%, a decrease from 74% during 2004. This decrease in Semiconductor gross margin percentage is predominantly due to the continued change in product mix from A6 chips to standard IC chips, which have a lower gross margin percentage. Total consolidated operating expenses for the fourth quarter of 2005 were $5.0 million or 79.7% of net sales compared to $3.5 million or 78.7% of net sales in the fourth quarter of 2004. Included in the fourth quarter 2005 operating expenses is a charge of $348,000 related to the impairment of our investment in CHS/SRS LLC. During the fourth quarter, the major categories of consolidated operating expenses were as follow:

Sales and marketing expenses were $2.0 million or 31.9% of sales during 2005 compared to $1.3 million or 29.0% of sales in the prior year. This increase of $700,000 is primarily attributable to increased staffing and related cost including recruiting and severance cost related to changes in our executive team and commission on higher licensing revenues. Research and Development expenses remained flat at $1.1 million, and as a percentage of revenue decreased from 25.6% in 2004 to 17.4% in 2005. General and Administrative expenses were $1.9 million or 30.4% of sales during 2005 compared to $1.2 million or 26.5% of sales during 2004.

This increase is primarily attributable to increased public company costs, expenses related to the CHS/SRS LLC, and increased amortization cost associated with capitalized technology. Our effective tax rate was approximately 4% as compared to 0.1% in 2004. This increase is primarily due to changes in geographic revenues first from countries with very important with holding rates, primarily Korea.

Now for an overview of our 2005 annual results. Consolidated revenues for 2005 were $23.2 million as compared to $21.6 million during 2004, an increase of 7.5% year-over-year. Our licensing revenue for 2005 increased to $14.8 million, representing a 36.6% increase year-over-year. The major increases for the year were realized in personal media devices, personal computers, and personal telecommunications. As noted earlier in 2005, revenues increased in all of our five product categories, the breakdown of our licensing revenues by categories as follows: Home Entertainment 51% of total licensing revenues, Portable Media devices 23%, Personal Computers 12%, Personal Telecommunications 11%, and Automotive 3%.

Our Semiconductor revenue decreased to $8.4 million, representing a 21.7% decrease year-over-year. In 2005, A6 Semiconductor revenue was negatively affected by a decline in demand for our products utilized in the traditional TV Combo and Boombox market due to increased sales of MP3 players, and our phasing out of certain of our A6 products due to changes in customer demands. This decrease was partly offset by increases in our standard IC revenues. During the year A6 accounted for 62.8% of our Semiconductor revenues and standard ICs accounted for the remaining 37.2%.

Net loss for 2005 was $1.4 million, or $0.10 per diluted share on 14.1 million shares, down from a net income of $1.6 million or $0.10 per diluted share for the previous year. Total consolidated operating expenses for 2005 were $80.0 million or 77.4% of net sales compared to $15.9 million or 73.5% of net sales in 2004. Sales and marketing expenses were $6.9 million or 29.7% of sales during 2005, compared to $5.5 million or 25.2% sales in 2004. This increase of $1.4 million is primarily attributable to increased staffing and related cost including recruiting and severance costs, commissions on higher licensing revenues and continued advertising campaigns to brand DSR as logos. Research and Development expenses were $4.7 million or 20.2% of sales during 2005 compared to $4.8 million or 22.1% of sales in 2004. The decrease was attributable to minor adjustments in staffing and related cost. General and Administrative expenses were $6.4 million or 27.6% of sales during 2005, compared to $5.7 million or 26.3% of sales during 2004.

This increase is primarily attributable to increased public company cost, expenses related to the CHS/SRS LLC, professional fees, including costs associated with Sarbanes-Oxley 404 compliance, and increased amortization cost associated with capitalized technologies. Our effective tax rate for 2005 was 2.7% as compared to 3.8% in 2004. This decrease is primarily attributable to changes in geographic revenues, both licensing and semiconductor sourced from countries with very important with holding rates and taxes related to profits in Hong Kong. We’ve continued to maintain net operating loss carry-forwards for both federal and state income tax purposes in the United States.

Turning to financial fundamentals, as of December 31st 2005, our balance sheet remains very strong with $25.8 million in cash and investments available for sales, operating activities provided approximately $3 million of positive cash flows for the year and overall cash and investments available for sale increased by over $1.7 million. We continue to be free from external debt. This concludes my discussion on the financial results and at this point I would like to turn the call back over to Tom.

Thomas Yuen, Chairman, Chief Executive Officer

Thank you Ulrich. So we are looking ahead into 2006. Two market trends are amplifying each other. The first is the consumer transition to HDTV’s in the home, which create an expectation of surround sound. The second is the mass distribution of the digital video content, which expands the consumers’ home theatre expectations beyond the home, create a power and on the growth. We are working to leverage SRS Labs audio technology strength in HDTV, digital content and portable players to take advantage of these trends.

SRS Labs do not sell into our market segments independently, rather these segments are part of our unified digital media strategy, we follow the personal HD experience. Customers in each of our market benefit from our reach and the others. Consumers see that digital experience as connected and so do we. The consumers advertise that these products are market opportunities for our licensing business looks strong. Demand for our technology continued to grow. We have the majority of the market leading platforms enabled in all five of our market segments, with many of the world’s most successful consumer products manufacturers as our license fees. We have a consumer friendly brand that is appearing on millions of popular products. Moreover, with the recent appointment of several experienced executives, we believe we have a strong leadership team capable of achieving increased success in the marketplace.

With our decision to divest of Valence, we have committed our full attention to our licensing business, we are intend to broaden our technology coverage, and provide efficient and proven solutions to supply our platform partners. We expect to further coordinate our global sales activities to provide major account focus and develop greater business opportunities across our customer base. In a coordinative and aggressive execution, with a focus on both top line and bottom line growth in 2006 as we work to deliver increased value to all our shareholders. So at this time, I would like to turn the conference call back to the operator, so we can take your questions. Operator.

Question-and-Answer Session

Operator

Operator Instruction The first question is from James Capello.

Q – James Capello

Hi good afternoon guys.

A - Thomas Yuen

Good afternoon.

Q – James Capello

What was the percent of revenue garnered from the TV market?

A - Ulrich Gottschling

Well, when we refer to the home entertainment market, we refer to a number of different categories, some of which include television, both advanced displays as well as regular CRT, but there is other items that are included in home entertainment such as DVD and set top boxes. For the quarter, that represented 49% of our overall licensing revenues and for the year that category represented 51%.

Q – James Capello

Okay, can you give me a sense of what percent of revenue comes from the CRT TV market?

A - Ulrich Gottschling

Well the CRT market has traditionally – I can put it this way, the CRT market continues to decrease based on the number of CRTs that are sold into the marketplace, and we are continuing to see growth in both the plasma as well as the LCD and projection category, so the advance display category is growing quite nicely and the CRT is not a growing category for us at this time.

Q – James Capello

Okay, what was the revenue number in the fourth quarter, I didn’t see it on your press release just the license number?

A - Ulrich Gottschling

Licensing number?

Q – James Capello

No, the total rev.

A - Ulrich Gottschling

Total licensing revenues was about 4.3 million.

Q – James Capello

So licensing is your total revenue number?

A - Ulrich Gottschling

No, we also have Semiconductors revenues, which were approximately 2.0 million.

Q – James Capello

Okay.

A - Ulrich Gottschling

So overall we are at $6.2 million, $6.3 million number.

Q – James Capello

Alright got you, okay thank you.

Operator

The next question is from Adam Fischer, UBS.

Q – Adam Fischer

Hi guys, how is it going?

A - Ulrich Gottschling

Good Adam.

Q – Adam Fischer

Couple of questions, have you started thinking about what the operating expenses should look like after Day 1, now there’s discontinued operation, I guess the operating expenses will just reflect the licensing business?

A - Ulrich Gottschling

That’s correct, going forward with the results from Q1 going on it would be separated out.

Q – Adam Fischer

And do you have any kind of estimate as to what those might be?

A - Ulrich Gottschling

At this point Adam, we are still trying to finalize all of those numbers, we feel like we have somewhat of a handle around it, but we are still not 100% sure, so we want to go ahead and hold off on them until we get a little bit more time to scrub all those numbers and get them just right.

Q – Adam Fischer

Okay. I guess going back to the growth rates, but at this point I guess in the year, given our sales cycle and our implementation cycle, we should have a pretty good sense of the products and going into the rest of the year that are going to include our technology. Is your sense Tom that we can maintain this 30% to 40% growth rates or even kind of piece in it, this year or do you have a comment on that?

A - Thomas Yuen

I think that 2005 was a very good year, I think that we feel that the momentum continues to be with us, it would be nice if we can continue with that momentum, and I think the management certainly have the bandwidth and the focus to try to accomplish or similar kind of a success. But we are not in the situation to provide guidance but I think you can, I would just share with you that we got very good momentum going and the market has a lot of exciting new products that we have suitable technology for, and Ulrich mentioned about the plasma TV, we have a very good stability and lot of strong following, and so I think our management are excited.

Q – Adam Fischer

The trends that we saw in ’05 are – my sense is from your statements are actually being amplified going into 2006, so there is nothing, you know, all the trends getting better, not worse, is that perhaps?

A - Thomas Yuen

I think I cannot really speak for the future, but 2005 has been a very rewarding year and we like the way the trend is moving, especially the fourth quarter was very surprisingly strong, but again, we cannot comment about the future at this moment.

Q – Adam Fischer

Okay, and then, just one other question, there has been a couple of products from former, from partners like Samsung and SanDisk– released in the last couple of weeks MP3 players, those were, were we on a first generation – There are couple of products from Samsung and SanDisk introduced in the last week, both kind of partners of ours in the past, which either don't include our technology or don't always include our technology in this aspect. Can you, those are in kind of obviously high growth areas in, at least in Samsung traditionally very strong partner of ours. Can you just comment on the dynamic of that?

A - Thomas Yuen

I think that consumer market is a market that changes a lot and that we hope to be able to in every device, last company's competitive situation, one can always anticipate some devices being introduced with different features.

Q – Adam Fischer

Correct.

A - Thomas Yuen

And what we do well as a technology company is that essentially we know we live and by technology. So for ourselves, one of our strengths is to be able to come up with brand new technologies that excels. So our engineering team continuously work on innovations, and we hope that while we may lose a revision of a product from time to time, we would like to regain those. So I think that you will continue to see situations where we are in, and situations that we may not be in, but of course the goal is for us to be to become a must-have and that we dominate every single device.

Q – Adam Fischer

Okay, that's it from me, thank you.

A - Thomas Yuen

Thank you, Adam.

Operator

Again if you have a question at this time please press the "1" key on the touchtone telephone. There are no further questions.

Thomas Yuen, Chairman and Chief Executive Officer

Well, thank you very much, and we appreciate your interest in our conference call, and we again would be joining us for this afternoon and the support of SRS, look forward in the near future that we can continue to dialogue with you, and perhaps when we go out to visit the different towns, we will be able to set up appointments with you, so thank you again for taking part in our conference call.

Operator

Ladies and gentlemen, thank you for participating in today’s conference, this concludes the program, you may now disconnect.

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: transcripts@seekingalpha.com. Thank you!

Source: SRS Labs Inc. Q4 2005 Earnings Conference Call Transcript (SRSL)
This Transcript
All Transcripts