Exar Corporation F4Q08 (Qtr End 03/30/08) Earnings Conference Call

May.16.08 | About: Exar Corporation (EXAR)

Exar Corporation (NYSE:EXAR)

F4Q08 Earnings Call

March 15, 2008 04:30 pm ET

Executives

Ralph Schmitt - President and Chief Executive Officer

Scott Kamsler - Senior Vice President and Chief Financial Officer

Thomas Melendrez – Executive Vice President, Secretary and General Counsel

Analysts

Nicholas Aberle - Caris and Company

Sandy Harrison - Signal Hill

Operator

Ladies and gentlemen thank you for standing by. Welcome the Exar 2008 fourth quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instruction will be given at that time. (Operator Instructions) As a reminder this conference is being recorded. I would now like to turn the conference over to your host Mr. Thomas Melendrez. Please go ahead.

Thomas Melendrez

Thank you Sandra. To our listener’s good day and thanks for joining us for our fiscal 2008 fourth quarter and year end investor conference call. We will begin the call with a financial overview of the quarter and year-end by Scott Kamsler, Senior Vice President and CFO, which will be follow by a discussion of the business by Pet Rodriguez, our President and CEO. We will then open the conference call to questions.

Before we begin I would like to remind you, the Company provides investors, financial analyst and general public with a business and financial update each quarter in it’s results news release and conference call. Please note that our fiscal 2008 fourth quarter and year end results release was distributed today after market closed and can be viewed on our website.

Exar will not provide any further updates on its performance during the quarter unless it does so in a news release or other manner that’s compliant with Reg FD and Reg G as the case maybe with other applicable laws. The company’s guidance and remarks are based on current information and expectations as of today May 15, 2008. The Company undertakes no duty to update such statements.

The Company reports it’s financial results in accordance with GAAP. However for the periods presented today we are disclosing various non-GAAP measures. The Company uses these non-GAAP measures to evaluate the Company's operating performance and the measures are used for planning and forecasting of our future periods.

The Company believes the non-GAAP measures are useful to the performance of financial analysis. The reconciliation from non-GAAP to GAAP financials for the most recent or prior period or event that maybe discussed today can be found in the Company's applicable SEC filings. I also need to inform you that during the course of this conference call we will be making forward-looking statements that involve a number of risks, uncertainties and are not guarantees of future performance.

Please review the Safe Harbor statement contained in today’s press release as well as other risks detailed from time-to-time in the Company's and Sipex Corporation SEC filings. Listeners are encouraged to review these documents. I will now turn the discussion over to Scott Kamsler, our Senior Vice President and CFO.

Scott Kamsler

Thank you Tom and good afternoon. I will review our financial results for the fiscal 2008 fourth quarter on both a GAAP and non-GAAP basis. Non-GAAP results excludes stock based compensation, purchase accounting, merger related expenses executive officer, separation cost, goodwill and intangible asset impairment charges other than losses on long term investments and the tax impact of these adjustments. As in the past two calls I will also provide net sales on an as if combined basis which we provide to offer insight into the underlying level of our business during the first several quarters of transition following of our August 2007 acquisition Sipex.

We defined as if combined as net sales of both Exar and Sipex using their respective historical pre-acquisition revenue recognition methods. We expect that the difference between GAAP and as if combined net sales to narrow significantly in the June 2008 quarter and beyond. I will then provide the Company’s financial guidance for the first quarter of fiscal 2009. I would like to address the non-cash impairment charge we’ve reported this quarter.

This non-cash charge resulted from the evaluation of the Company’s carrying value of goodwill and other intangible assets which was required under FASB Statements No. 142 and No. 144 as the Company's market capitalization like others in our industry was below its net book value for an extended period. This impairment charge adjust the Company’s net book value to be more inline with the markets recent valuation of the Company but there does not affect it’s business operations or cash position.

On a GAAP basis net sales were $28.3 million for the fourth quarter of fiscal 2008 slightly below the low end of our guidance range and up compared to the $25.2 million for the third quarter of fiscal 2008. GAAP net sales excluded approximately $2.5 million in the fourth quarter and $9.3 million in the third quarter as a result of one, purchase accounting which precludes revenue recognition on purchase date inventory held by Sipex distributors upon sell-through and two, the change in revenue recognition to the sell-through method or the selling method for accountings two primary distributors.

On an as if combined basis net sales were $30.8 million, $700,000 below the low end of our guidance range for the fourth quarter and $3.7 million lower than the third quarter; net sales were $34.5 million. The short fall from our net sales guidance on both the GAAP and then as if combined basis resulted from missed shipment of approximately $1.5 million for a variety of reasons.

The gross margin for the fourth quarter increased to 38% from 13% with the third quarter primarily due to reduced affects of purchase accounting as detailed in the press release. Improved manufacturing efficiencies offset by a significant increase in lower margin Sipex product sales. The non-GAAP gross margin for the fourth quarter declined to 45% from 47% due principally to the product issue which is been addressed.

Non-GAAP operating expenses decreased to $17.8 million in the fourth quarter from $18.1 million in the third quarter primarily due to the decrease in our headcount. Reversal of accrued performance based benefits and lower designed tool expense, which more than offset higher legal and new calendar year employer taxes. On a non-GAAP basis our net loss for the fourth quarter was $1.7 million or $0.04 loss per share, compared to a net lose of $1.8 million or $0.04 loss per share for the third quarter of fiscal 2008.

On a GAAP basis, we reported a net loss of $172.4 million or $3.77 loss per share including the non cash impairment charge of $165.2 million or $3.61 loss per share for the fourth fiscal quarter of 2008 compared to a net loss of $11.7 million or $0.24 loss per share for the third quarter of fiscal 2008. I will now provide some comments on our March 2008 balance sheet.

Our balance sheet remained strong; the company generated cash from operations of $3.4 million in the March ’08 quarter and $13.8 million in the fiscal year ’08. We ended the year with $269 million in cash from marketable securities or $6.12 per share in cash. Our current ratio was 8.6:1 and our net book value was $8.45 per share.

During the March, ’08 quarter, the Company used $35 million in cash to repurchase a 4.5 million shares of its common stock at an average price of $7.71 per share and ended March with 43.9 million shares outstanding. At the end of March, the Company had approximately $25 million remaining under its authorized stock buy back program.

Day sales outstanding using an as if combined revenue basis remained at 41 days. Inventory days were 82 at the end of March versus 57 at the end of December. During the quarter we built some inventory buffers to better respond to unforeasted demand and reduce the impact of any interest by change issued.

CapEx for the March quarter was $300,000 compared to $6.1 million in the December ’07 quarter and included $5.2 million from capitalized insuring design tools. In addition we required intellectual property from Frye Storm for $3.2 million. Depreciation for the March quarter was $1.8 million compared to $1.7 million at the December quarter. Our March ending headcount decreased by 43 employees to 404 from 447 at the end of December 2007; primarily as a result of a workforce reduction.

I will now provide financial guidance; for the first quarter of fiscal 2009, ending June 29, 2008 the company projects that net sales will increase to between $29.0 million and $31.5 million. The gross margin is expected to be between 44% and 46% on a GAAP basis and between 47% and 49% on a non-GAAP basis. Our operating expenses are expected to be between $19.2 million and $19.7 million on a GAAP basis and between $17.2 million and $17.7 million on a non-GAAP basis.

I will now turn the call over to Pete. Pete?

Pete Rodriguez

Thanks Scott. Good afternoon everyone. As you know this is my third week of CEO. First I like to thank John McFarlane, for the work he did as interim CEO and to John and the board for the help they’ve given me through the transition. While I am not new to the company, having been a member of the board for the past two and half years, I am very excited about the opportunity to lead Exar.

Clearly, there is a lot of hard work ahead, but I’m optimistic about where we are headed and I see some clear opportunities for significant improvement. Exar has experienced a number of recent leadership changes that has come during a significant merger integration process of Sipex. At the same time; we’ve all been watching the concerns in the macro economy being a significant drop in valuation within the semiconductor market.

Fortunately, despite our management changes in the broader market concern, Exar is enjoying firm and improving demand for our products. Internally, we are stable; we are focused on improving operations, customer relationships and on building value for our shareholders. As Scott mentioned we have a solid balance sheet and continue to generate cash from the strong set of core products.

Finally and this really excites me -- we have gifted group of employees that’s committed to winning in the market place. Again, I am excited by the potential here and I am committed to this role for the long-term and I am working very hard on a long-term strategy road map.

With regards to the integration of Sipex, I am pleased with the progress that we have made to date. The integration of sales, marketing, finance, engineering and operations is complete. The integration of business processes and information systems is about 75% complete and will be finished later this calendar year.

Wanted to mention that in the course of integrating new systems and business processes significant improvement has been made towards best in class procedures towards automation and towards improving the underlying software including tools such as Model-in and Oracle. Above all, our operating expenses are well controlled and we are ahead of plan and are achieving our targeted cost synergies.

Our worldwide sales channel is very healthy and continues to expand. We completed in April our first combined sales conference with an attendance of over 200 distributors and manufacture representatives. We recently added James Lougheed as VP of sales for Asia, to really focus on that area.

By the way, several of our Asia customers are starting to really ramp demand, Samsung for example, has ramped 10 of our core products by nearly 400% from the beginning of the calendar year. We are guiding net sales higher in the current quarter. The supply chain issues that we’re highlighted at last quarter’s call though they have been reduced continued into the March quarter and resulted as Scott mentioned in $1.5 million of missed shipments. Part of these moved into this quarter and the reminder was lost. We believe that these issues are now resolved.

Let me give you a little color here as we went from over 20 Critical supply chain issues in the December quarter to zero in the April quarter, but we are still carefully tracking a few priority items. From the product sides, we released 11 new products in the quarter; these include the industries first wireless UART chipset, our key high input voltage chip expanding our industry leading PowerBlox family, Exar store, our first product for the growing multi port storage market and a new interface product that has seen good traction in the China E meter market.

In summary I’m excited to be leading Exar. I look forward to meeting with the inventor base soon, but my near-term focus is on continuing to drive operating margins and on building winning products that will enable our future growth. I appreciate your time and want to thank you all for being on this call. This concludes our remarks and we are now open for questions.

Question and Answer

Operator

(Operator Instructions). Our first question comes from Nicholas Aberle of Caris. Please go ahead.

Nicholas Aberle - Caris and Company

Thanks guys. Just, can you guys provide a little bit more color on the breakdown of revenues in the current quarter whether the Exar or Sipex's spread or serial communication in that trend, spread?

Scott Kamsler

Nick, we are not going to do it in this call because one of the things as you well aware there is a big gap between the GAAP revenue and as if combined basis. It get’s very confusing into that and we've just transition some of the key Exar distributors to sell-through basis, so we don’t want to provide that until we have a more stable situation which should be in the June quarter because the difference is very -- be very narrow in the June quarter about $1million.

Ralph Schmitt

But what we can say is that all of the product lines performed about according to plan.

Nicholas Aberle - Caris and Company

So from a qualitative standpoint; from the -- in terms of bookings looking into the June quarter, are there anything, any areas that you would expect to perform better than others?

Scott Kamsler

I think when we are looking at the numbers at this point in time, obviously this is a macro-environment which is a little bit dicey but we fell comfortable with the guidance that we have given both on the GAAP and non-GAAP basis, so we think we are going to achieve those numbers

Ralph Schmitt

Yeah there is also a little more color on that. Scott can help you later; we hope to see its must tick in comp.

Nicholas Aberle - Caris and Company

Yes, okay and then on the manufacturing front, can you maybe just give us some color on, where capacity is being driven at this point; at the sales of Sea-Land, just maybe a quick breakdown of what’s where at this point?

Ralph Schmitt

Sure, we have continued the transition to Sea-Land and that has helped the margins and we are just down to a hand full of problem chill down on the product side and we hope to get those results or mostly resolve this quarter.

Nicholas Aberle - Caris and Company

And then from a product standpoint, what’s being down on the clock front, the storage front with some of the new products there. Are those R&D projects that will continue on are those being abandoned at this point.

Ralph Schmitt

Sure, we have a few clock products that we are finished quite well back with our whole lot of attraction to good products but they meet two products and we’re not investing in blocks today and we haven’t been for a while. Storage, we have five or six products out there and have I would say on a per product basis eight to nine ongoing evaluations, so we hope to get some design wins soon -- especially on our new product and we should have some updated results in the June call on the storage products.

Nicholas Aberle - Caris and Company

And then just lastly, in terms of gross margin, that’s obviously been a big focus for you guys basically getting the Sipex business gross margin higher. Any type of qualitative savings you can make about when we will see material improvement in the Sipex gross margin and do you guys have any long-term kind of quantitative targets for that?

Scott Kamsler

Well we have been working on it as we talk about ramping up Salon being in China versus [Episal] in Taiwan. So, as we continue to transition that we will have some benefit from that; we also have a number of our packages cost reduction in place, so we should benefit from that, but the real growth in the margins is going to come from ramp of the new higher margin proprietary products which at this time is a little bit difficult to predict this point in time but we’re -- we think we have number of products that can add a lot of value.

Nicholas Aberle - Caris and Company

So, I guess excluding timing I mean what is the long-term gross margin target for the overall corporate?

Ralph Schmitt

So, when we looked at this fiscal -- I was on the Board on that time when we looked at doing the Sipex deal long-term our goal was to be -- and granted some of the lower margin products or some of the products that are ramping quicker which makes the equation a little more difficult, but we looked being at a combined 55 points of gross margin.

Operator

Our final question comes from Sandy Harrison, with Signal Hill. Please go ahead.

Sandy Harrison - Signal Hill

Thanks a lot, good afternoon gentlemen. A couple of points in your prepared remarks; it sounds like you guys are still kind of assembling the data for the different channel impact and so forth, but you have made some comments on Asia, which were relatively upbeat, what are you seeing over there? Is this the simple moves of the products you had design wins before, are now moving into production, is this some new wins that you have picked up recently, if could just hang a little bit of more on to that statement from your prepared remarks.

Ralph Schmitt

One of the attractiveness when we looked at Sipex, was that they had a much stronger presence in Asia then Exar did and we are still ramping our distributors and reps in that area onto the Exar products. So, I think there is upside there on the high margin, but specifically on the comments that we made, some of those were the power products and I believe that some of the design wins that we have done a while back that are now really starting to ramp.

Sandy Harrison - Signal Hill

And those designs you are referring to probably telecom oriented versus the Sipex oriented or a combination of both?

Ralph Schmitt

A combination of both.

Sandy Harrison - Signal Hill

And then if you could and you talked your worldwide sales meting and those are often momentum drivers, what was sort of theme and the idea that you guys imparted upon the distri’s and the reps as far as what Exar was going to look like and what they should be doing and what the products are going to be look like going forward?

Ralph Schmitt

Well, of course we wanted to generate excitement. I actually attended about half of the meeting prior to starting and we wanted to generate excitement, but we also wanted to train those representatives and distributors that have been carrying either primarily old Exar primarily old Sipex products on the other set of products. The feedback that I have received, my announcement came at nearly at the end of the conference, so I got to meet a lot of the distributors before they went home. The feedback I received was that it was very professionally done. It was done better than many conferences they have attended from billion dollar semiconductor companies and that they saw that it was one company and that we were in it for the long haul. So it was very positively received and the goal is to get all of our distributors and all of the channels that we are adding, selling, all of our products of course.

Sandy Harrison - Signal Hill

Sure and then you’ve talked about a number of the challenges that you have had in the December quarter; some right into March; sounds like, many of them were behind you. You’ve talked about you think you are 75% to your integration of your infrastructure and your MRP system and so forth. If we had, the two things or three things that you guys think are the biggest hurdle for you and then the two to three things that you have that are most positive going for you; to try to give us some balances of obviously you are talk -- you have been somewhat reserved in giving guidance on a product basis, but if you could just give us some qualitative or quantitative things from maybe a broader perspective that we can look for catalysts for you guys.

Ralph Schmitt

So, I would say our challenges are to complete the integration of our business processes and to continue to train and expand our channel and then longer term challenges is we need to build the winning products so we need to define them appropriately and I'm putting a tremendous amount of my energy having been in this industry for a long time helped out with a lot of leading edge products in reviewing those and making sure that we are doing the right marketing, so that we deliver the right products in the right window with the right value proposition. So those are the longer term challenges; short time challenges it's all about executing on our operations and I think we are doing a pretty good job of getting there and you guys want to add color to that.

Scott Kamsler

Yeah I think as we have talked about we are cash flow positive on this; we have fully amount cash, the ratios are good; in terms the market evaluation, we’ve taken the write down of the intangibles, good will and other intangibles so I think there is probably a lot more upside to our stock and hopefully we get the recognition when we start delivering the result.

Operator

I would now like to turn the conference over to Mr. Melendrez.

Thomas Melendrez

Thank you Santra. A replay of this call will be available today after 5pm Pacific Daylight Time until 11:59 Pacific Daylight Time on May 22nd, 2008. For further details please refer to our website. We thank you all for joining us today. We look forward to communicating with you again in July, to review our FY'09, first quarter results. Have a good day.

Ralph Schmitt

Thank you all.

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