Ditech Networks Inc., (NASDAQ:DITC)
Q1 2009 Earnings Call
August 21, 2008 4:30 pm ET
Marie France Nelson - Vice President of Finance
Todd Simpson - President and Chief Executive Officer
Bill Tamblyn - Chief Financial Officer
Ladies and gentlemen, thank you for standing by, and welcome to the Ditech Networks First Quarter Fiscal Year 2009 Earnings Release. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded.
I would now like to turn the conference over to our host, the Vice President of Finance, Marie France Nelson. Please go ahead.
Marie France Nelson – Vice President of Finance
Thank you. Thank you for joining us for this conference call which will cover Ditech Networks’ announcement of results for its fiscal 2009 first quarter. Today’s conference call will cover our financial results for the quarter and our outlook for the second quarter fiscal 2009. Todd Simpson, Ditech’s President and CEO, will provide the business and strategic analysis and Bill Tamblyn, Ditech’s Chief Financial Officer, will provide a more detailed analysis on the financials. Following we will open up the call for Q&A.
Before we begin, let me state that this conference call is being held on August 21, 2008. Any sound recording or republishing of the contents of this conference call is expressly forbidden without the written approval of Ditech Networks.
Also we must point out that as with similar presentations, the following discussion contains forward-looking statements and in particular the financial projections of our second fiscal quarter of 2009 that involves risks and uncertainties. Our actual results may differ materially from those discussed here. We will attempt to identify such forward-looking statements with qualifying words such as: we intend, plan, believe, estimate or predict, or we may, could, or will, or other comparable language.
Factors that could cause results to differ include factors discussed today in this conference call and in our press release today, as well as those detailed in the section entitled Item 1-A risk factors of Ditech’s Form 10-K for the year ended April 30, 2008 filed July 10, 2008 with the Securities and Exchange Commission. We assume no obligation to update these projections or other forward-looking statements.
Today’s announcement was released over the wire this afternoon in a press release, and you may also read it on Ditech’s website by going to the Investor Section of the website at www.ditechnetworks.com.
Non-GAAP financial measures will be discussed on the call and a reconciliation of GAAP and non-GAAP financial measures is disclosed in our press release of today, as well as in our press release of February 21, 2008 with respect to our fiscal Q4 numbers, which is also located on our Ditech Networks’ website, www.ditechnetworks.com.
With that, I’d like to turn the call over to Todd to comment on the announcement and our strategy going forward. Todd?
Todd Simpson – President and Chief Executive Officer
Thanks Marie France, good afternoon and welcome. Today we would like to discuss our current revenue and financial outlook and also comment on our recent announcement about entering the licensing business. So, today we announced our Q1 results for the 2009 fiscal year and as we had pre-announced a couple of weeks ago, our revenue at $4.5 million fell short of the projection we gave in May. We anticipate our Q2 revenue to modestly exceed Q1 revenue. Our quarter and our forward projections have been impacted by the slow down in spending across the telecom industry as well as by our continuing challenges to bring deals to a timely closure.
In the last quarter, we saw reduction in short-term potential from the North American carriers and had timing issues internationally. We continue to be involved in reasonably sized customer trials and market studies, and we continue to believe that there are significant opportunities for us in the voice quality marketplace worldwide. That said, we are very cognizant of the need to build towards more consistent and predictable business model. To that end, we are managing our operating expenses with the following agenda.
First, we want to maintain critical functions in our core business as the upside potential is significant. Second, we don’t want to overspend on that core business as we have had challenges in getting to the upside in a timely manner. And third, we need to invest in diversification efforts. This agenda led to us reduce our operating expense plan after one-time charges for Q2 and beyond by approximately 20%.
In our core platform business, we continue to work on our EXi everywhere initiative, on working with carriers to prove our impact to their businesses, and to innovate around our marketing approaches. Our initial efforts with EXi everywhere should be more visible in the industry as our partners launch their products and services with EXi integrated into them. We have also engaged with industry advocates and marketing experts to help us overcome the hurdles of accelerating voice quality and spending on voice quality.
In the current quarter Q2 we will also market a smaller version of our PVP platform. That is more cost effective for smaller carriers or those carriers that are evolving into voice over IP. We believe that this new packaging will also enable us to more aggressively pursue applications and service providers that need to deploy a higher number of units but with lower call capacities per unit.
Moving on to our diversification efforts, we just announced our intention to license portions of our voice quality algorithms to a wider marketplace. We believe that our many years of experience with voice quality algorithms in the carrier networks give us a distinct advantage over other players in the algorithm business. We have technology to solve voice quality problems both inside and outside of the network and licensing our algorithms for deployment on other platforms gives us access to a broad, worldwide market for consumer devices and new services. Of course, once established, licensing has the potential to add a predictable revenue component to our business.
Based on research compiled by independent market research firms as well as investment analyst reports, we estimate that the total addressable market for licensing of voice quality algorithms is over $200 million a year and we see healthy growth in several segments.
This market analysis highlighted the Bluetooth market where voice quality is a known and growing differentiator. This led us to target that Bluetooth market as the first focal point for licensing. We have partnered with Cambridge Silicon Radio or CSR, the market leader in Bluetooth chip set and have ported and tuned our voice quality algorithm suite for their DSP platform.
This market is driven by consumer spending cycles spending cycles and we believe that our release schedule positions us well for those cycles in the calendar year 2009. We are also working on porting our voice quality algorithms to general purpose processors in order to have solutions ready for other segments of the licensing market.
Our second diversification strategy is to add value beyond just voice quality to our platform business. This is a parallel effort that we are undertaking and we will be more specific about this initiative in the next few quarters. We believe that by showing carriers more application value which can aid them in rolling out new revenue generating voice services, we can help to pull our platforms into the network. Using a combination of input from our existing customers and analysis of the evolution of the voice marketplace, we have developed a strategic road map around this initiative.
It will be premature today to be specific on timing of revenues from this initiative but our current plan would have us releasing data product in the first half of the next calendar year.
On a personal note, I have now been at the helm of Ditech Networks for a little over 10 months. In that time we have resized and optimized the company, we’ve made significant improvements in our Voice over IP product offerings, and we’ve invested in new marketing and positioning initiatives for our core business. We have also looked at the overall market evolution and based on this analysis have planted the seeds for diversification and change. While our financial results over that period have been difficult, I am optimistic that we have a great strategy which gives us increased potential over the coming years.
In summary, our quarter has highlighted the variable nature of our current revenue stream. We remain positive on the possible rewards with our current platform business, and are continuing to push hard both domestically and internationally to realize this potential.
However, we are also aware of the risks in our current business and therefore we’re actively investing in both market and product diversification.
With that, I will pass the phone over to Bill Tamblyn to review our financial results.
Bill Tamblyn - Chief Financial Officer
Thanks, Todd. I would like to now share with you the financial results for our first quarter fiscal 2009 as well as our outlook for the second quarter of fiscal 2009. Before doing so, let me comment on our approach to governance and SEC compliance.
Please allow know mention that we have no off balance sheet entities or associations, we believe we have to the best of our knowledge disclosed all other obligations and related party transactions as required, our new auditors do not perform consulting services for such system reviews, IT reviews or other forms of consulting services other than tax compliance services. We comply with all effective SEC and NASDAQ requirements related to audit committee compliance and dependence. We continue to do, here where here to submit the African plans requirements, a discussion today of our operating results will be on non-GAAP basis our press release posted on our website includes the summary information from GAAP and related reconciliations for Q1. The primary changes for the elimination of approximately $700,000 related to the stock compensation under FAS 123R.
Moving on the key points of the first quarter results on our non-GAAP basis and as noted in our press release are as follows. Revenues $4.5 million, non-GAAP gross margin was 49.8%, non-GAAP loss from operations were 6.2 million, non-GAAP loss was $6.3 million and a non-GAAP loss for share for continuing operations was $0.24 per share.
The first quarter non-GAAP details are as follows, total revenue for the quarter was $4.5 million down 42% from the prior quarter of $7.7 million and down from $14 million for the same quarter in fiscal 2008. Q1 revenues where as we commented in our pre announcement earlier this month, international revenues were $1.4 million or 31% of the total revenue we have 3 greater than 10% customers in Q1 and in approximated 59% of revenues, the non-GAAP gross profit for the quarter was $2.3 million or approximately 49.8% of revenues obviously less than our prior projections, this is tied to our product mix and absorption of overheads based on smaller revenue levels.
Non-GAAP operating expenses were approximately $8.4 million for the quarter slightly less than our projections from the May conference call, the details of the operating expenses are as follows. Non-GAAP sales and marketing expense was $3.4 million, this was the $1 million decrease from the prior quarter due to reduced tradeshows internationally lower commissions and marketing activities. The non-GAAP R&D expense was $3.2 million supporting our sustaining and new activities. This was marginally down from the Q4 levels by approximately $300,000.
The non-GAAP G&A was $1.8 million, this was up from the prior quarter approximately the levels expected based to primarily on year end audit expenditures that hits the first quarter, other income expense was an expense of approximately $78,000 due to our Q1 write-down of two auction-rate securities by $600,000 against interest income of approximately $525,000. These auction-rate securities are the same two that issues that we took a $4 million charge in the fourth quarter of last year and are bench marked at the end of July. Obviously there’s been some changes in auction rate securities post July 31, so this as if that date. Non-GAAP pretax operating loss is approximately $6.3 million versus non-GAAP loss of $8.6 million last quarter.
Non-GAAP income taxes are tied primarily to alternative minimum and foreign taxes, our non-GAAP net loss was $6.3 million which is $0.24 per share compared to $12.8 million or $0.49 per share in the prior quarter. To reiterate, all the operating results I have just given you on a non-GAAP basis, please refer to our press releases for the first and fourth quarters of fiscal 2008 compared to GAAP results as well as the reconciliations of the non-GAAP results to our GAAP results.
Moving on to the balance sheet and cash flows which are on a GAAP basis. Cash equivalents short-term and long-term investments at quarter end totaled $60.1 million, $5.6 million reductions from the prior quarter. This reduction was more than expected at our last call; as our projections were potentially flat. Cash used in operations was approximately $5.3 million for the quarter this was more than expected.
At the quarter end, accounts receivable were approximately $3 9 million this was a $1.4 million decrease from the prior quarter. DSOs in Q1 exceeded our long-term expectations at approximately 77 days compared to 61 days in the last quarter.
As we have referred to many times we would expect long-term targets to be between 45 and 55 days on DSOs. Our higher DSOs are affected by the lower revenue levels. Let me emphasize that our DSO numbers are subject to change and the timing of sales and shipments in any given quarter is always subject to fluctuations.
Net inventory was $13.5 million at the quarter end, down $200,000 from the prior quarter of $13.7 million. With reduced revenues we did not utilize greater amounts of inventory. At quarter end we believe the remaining inventory is still usable based on our forecasts.
Gross deferred revenues at July 31, approximated $2.3 million down approximately $ 0.5 from the prior quarter.
Capital spending approximated $200,000 in the quarter. Depreciation and amortization approximated $650,000. We ended the quarter with 143 employees. Additionally, in first week of August we initiated a reduction in force of approximately 20 persons to address operating expenses on a go forward basis.
I will now review our GAAP projections for the second quarter of fiscal 2009. In this regard, please note the cautionary statements regarding these forward-looking statements that we gave at the beginning of the call. Our Q2 outlook is derived from existing backlog, deferred revenues and our booking forecasts. Therefore, they project to be a modestly higher than the Q1 level of $4.5 million.
We believe gross margins will be similar to Q1 levels before the inventory reserves which approximate 50% margins. This may vary based on product customer mix and revenue levels that deal with overhead absorptions.
Regarding operating expenses, we are continuing to sustain our TDM and packet platform businesses and have been moving staff to new initiatives. Operating expense in the second quarter will be tied to customer and channel mix as well as restructuring expense variability.
Overall, we would expect our GAAP operating expenses, including an estimated $700,000 of stock-based compensation and acquisition-related expenses and approximately $1.2 million in restructuring and severance costs to increase marginally to approximately $9 to $9.2 million. The $1.2 million of restructuring should be a nonrecurring on a go forward basis.
Our tax rate should approximate in the range of 1% to 3% due to our loss situation. Deferred revenues at the end of Q2 are expected to approximate the $2.5 million to $3 million level similar to the past few quarters.
Additionally, a couple of other data points for you. Weighted average shares continue to be calculated on basic basis due to a loss and approximately 26 million shares. Based on the sources and uses of cash flows from operations which presumes utilization of inventory from current levels cash should decrease $2 million to $3 million in the quarter before reduction in force costs such as severance, which may approximate $800,000. And therefore cash at the end of Q2 will approximate $56 million to $57 million.
Looking at Q1 as a whole, we were disappointed in not closing some of our opportunities. At the same time, we are encouraged by new opportunities to diversify our revenues and the breadth of our international and domestic opportunities. In looking at Q2, we have short-term concerns on transaction timing, which we addressed in our guidance. Looking forward, we are very focused on running our business for future revenue growth while driving to reduce cash burn in fiscal Q2.
With that I would like to turn it back over to Todd.
Todd Simpson - President and Chief Executive Officer
Thanks Bill. Greg, you can now open the call for Q&A.
Thank you, Mr. Simpson. (Operator Instructions). We have no questions at this time, Mr. Simpson.
Okay, thanks Greg. In closing, we would like to thank everyone for dialing in today and listening to our quarter and announcement. And we look forward to talking to you again next quarter.
Ladies and gentlemen, this conference will be available for replay after 3.30 pm today until February 21, 2009 at midnight. You may access the AT&T executive playback service at anytime by dialing 1800-475-6701 and entering the access code 956943. International participants may dial 1320-365-3844. Again those numbers are 1800-475-6701 and entering the access code 956943. International participants may dial 1320-365-3844 and enter that same access code of 956943. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.