Focus Enhancements, Inc. Q2 2008 Earnings Call Transcript

Focus Enhancements, Inc. (FCSE)

Q2 2008 Earnings Call

August 14, 2008 4:30 pm ET

Executives

Brett A. Moyer - Chief Executive Officer

Gary L. Williams - Chief Financial Officer
Tony Parker - Vice President of Product Marketing of Semiconductors

Analysts

Robert Ainbinder - Montauk Financial

[John Glenn]

Presentation

Operator

Welcome to the Focus Enhancements second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Kirsten Chapman.

Kirsten Chapman

Thank you, Christine. This is Kirsten Chapman of Lippert/Heilshorn & Associates. Good afternoon and welcome to Focus Enhancements Second Quarter 2008 Conference Call. With us today from management are Brett Moyer, President and Chief Executive Officer, Gary Williams, Chief Financial Officer and Tony Parker, Vice President of Product Marketing of Semiconductors. If you need a copy of this press release, please visit our website at focusinfo.com.

As a reminder, this conference call may contain four booking 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 four booking 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 Form 10-K for the year ended December 31, 2007, as well as other periodic filings with the SEC. These statements are based on information as of August 14, 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 today, Brett Moyer, Chief Executive Officer, will provide you with a review of the business and overview of the year. Gary Williams, Chief Financial Officer, will view the financial results after which Brett will open the call to questions.

It's my pleasure to turn the call over to Brett Moyer, please go ahead, sir.

Brett Moyer

Thank you, Kirsten. Thank everyone for participating today. For the second quarter we reported revenue of $4.0 million up from $3.9 million in the first quarter of 2008. While revenue performance continue to be disappointing as our direct to edit disk recorder sales adjusted a new competitive landscape, we're encouraged, given then, we began shipments during the last week of June of our fifth generation Focus brand and FireStore disk recorders, which has increased metadata functionality to take advantage of our media asset management solution.

In the current third quarter, we expect revenue to increase significantly as we begin shipments of ProxSys and FS-5 under OEM agreements with three different partners.

Also, to improve our strategic and financial position we are implementing a three prong stratify investing in quick time to market technologies, rationalizing our UWB investments as we wait for the ultra wideband market to materialize, and reducing non-core engineering expenses.

As we have discussed, the deal with UWB industry adoption has been slower than anticipated. First investing in related technology to quick time to market revenue potential, required our digital wireless audio technology at the beginning of July.

Our present DWA technology has a rapid time to revenue with relatively low cash requirements. It delivers fast speed providing 2 millisecond latency to avoid noticeable lip sync errors which occur above 10 milliseconds, scalability enabling up to 16 channels, high quality delivering independent 24 bit 48 kilo-Hz audio to each channel and unique simplicity in the industry offering speaker finder, which identifies within centimeters where each speaker is relative to the rest of the room, and my zone, which identifies and adjusts each set speaker to where the listener is for the center of the surround sound regardless of listener's position.

The asset purchased includes two patent applications originally filed by Audio Mojo and the rights to intellectual property which allowed Focus Enhancements to file four more provisional patents.

With a low engineering investment of approximately $1.5 million, we expect to tape out in September, receive back 100 chips in October, bring up and demonstrate technology in November and sample with customers in November and December. All this is driving towards our goal of securing customer design commitments and announce to them at the consumer electronics show in early January '09.

Since we have developed significant long standing relationships with large consumer electronics companies with our video conversion technology, we intend to leverage these for distribution. Already we have demonstrated or discussed our DWA approach with over 25 potential customers, including some of the largest consumer electronics companies in the world.

We have received a very strong response to this technology and the timeline of this introduction. We are very excited about DWA market opportunity as well as the prospects of positioning our existing UWB chip for audio/video applications in conjunction with our new DWA technology.

Our ultimate goal is to deliver high quality audio/video via UWB using a single radio, thereby lowering the system cost through large consumer electronics manufacturers. According to Consumer Electronics Association's CEA market data, there are approximately five million home theater systems sold per year.

We believe if we sold 350,000 DWA chip stats to consumer manufacturers, our semiconductor business revenues would increase from the running rate of approximately $4 million to approximately $18 million with UWB revenue in addition to that revenue string.

Also, our H and A associates projects the total available market for DWA to reach approximately $53 million in 2009 and growing to approximately $136 million in 2011, excluding two potentially enormous growth markets for DWA, digital TV's and set top boxes. We believe our DWA and UWB technologies combined with our existing customer base that this is achievable first step in building up the business. In addition, in April we formed a technology alliance with Sony Electronics, we are partnering to customize our new ProxSys PX100 Media Asset Management Solution with Sony XDCAM EX.

The second prong of our strategy is that we are rationalizing our UWB investments to time with a delay in the market. We have deferred semiconductor research and development for the next generation UWB and we have re-deployed resources on positioning our existing UWB chip with available AB applications in conjunction with our new DWA technology.

The third prong, we are reducing costs further. In addition to the expense cutting action taken in February, in July we began deferring certain non-critical engineering expenses.

Since the beginning of the year, excluding the hiring of six employees to work on our DWA technology, we have reduced our headcount by 35 and cut our annual payroll by approximately $2.2 million a year or $550,000 a quarter. We believe the combination of these actions will strengthen the company and we will present this to the NASDAQ panel on September 4th.

Regarding our semiconductor business, we've demonstrated low-cost UWB chips, extremely high-def video of Computex type A in June, our FS-453 TV out encoder chip will power Tachyon's Mad Dog home media center with on TV navigation for iPod devices. While we have discussed earlier the home theater system as a primary market for DWA, products like this media center are prime opportunities for wireless AB solutions and incorporating streaming video using UWB and wireless audio.

We strengthen our team hiring Michael Hudson as CTO of semiconductor group. This is a new position that will lead our vision of investing in quick time to market technologies and implementing our objective to deliver high quality audio and video via UWB using a single radio. Michael brings almost three decades of engineering, design creativity and result serving management including his work on Intel's first motherboard and industry's first MP3 player at Diamond Multimedia.

Now regarding our system business NAB 2008 was a success. We demonstrated new products including our MM-1 Universal Media Manager for Digital Signage and our FS-100 250 GB FireStore product. And we unveiled our FS-5, which is the fifth generation of our award winning line of direct edit recorders. During the show, we highlighted our system business focus, which is to expand file format and multi-platform support across our product families to establish a continuous work flow and seamless interoperable platform with popular non-linear editing systems and video camcorders.

We also announced our partnership with Sony Electronics to customize the media asset management solution for the XDCAM EX to support Sony's powerful new PMW-EX camcorder.

And now I'll turn the call over to Gary for financial review.

Gary Williams

Thank you, Brett. For the second quarter of 2008, revenue was $4 million compared to $3.9 million in the first quarter of 2008 and $8.4 million in the second quarter of 2007. The decrease from prior year relates to decreased sales of our FS-4 DTE recorders. During the second quarter, revenue from the system business was $3.2 million and revenue from the semiconductor business was $745,000.

Gross profit as a percent to sales for the second quarter of 2008 was 41% compared to 39% in the first quarter of 2008 and 47% in the second quarter of 2007. The decrease in gross margin as percent to revenue is related to lower overall sales.

Operating expenses during the second quarter of 2008 totaled $7.4 million compared to $7.6 million in the second quarter a year ago. Research and development expenses were $4.2 million compared to $4 million in the same quarter last year. On that loss for the second quarter was $6.7 million or 8 cents per share vs. the net loss of $4 million or $0.05 per share in the same quarter of 2007. In July we reduced our expenses by eliminating or furloughing non-critical positions. We believe this will lower our quarterly operating expenses until it is appropriate to ramp our R&D.

Revenue for the six month ended June 30, 2008 was $7.9 million compared to $15.4 million reported for the same period of 2007. Net loss for the six month period was $12.7 million or $0.15 per share versus a net loss of $8.4 million or $0.11 per share in the same period of 2007.

Moving on to the balance sheet. Accounts receivable at June 30, 2008 was $2.6 million compared to $2.3 million at March 31. DS sales improved to 56 days compared to 77 days at March 31, 2008. Inventories at June 30, 2008, were $4.1 million compared to $3.7 million at March 31. Sales order backlog at June 30, 2008, was approximately $841,000. At June 30, we had cash and cash equivalents of $2.1 million. At June 30, total share of the common stock outstanding were $85.1 million.

And now I'd like to turn the call back over to Brett.

Brett Moyer

Thank you, Gary. In summary, with three OEM agreements impacting our business going forward and the lower cost structure in place, we expect our financial performance to improve this quarter and beyond. Adding DWA revenue and UWB revenue to the 2009 business plans provides the next lift. As we stated before, our objective is to be shipping three product lines for revenue by the third quarter 2009 in the semiconductor division. DWA, UWB and TVL .

We will now open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) One moment please for the first question. (Operator Instructions) Your first question comes from the line of Robert Ainbinder of Montauk Financial.

Robert Ainbinder - Montauk Financial

Good afternoon, Brett, Gary.

Brett Moyer

Good afternoon.

Robert Ainbinder - Montauk Financial

My question relates to the quarterly revenue performance from the first quarter $3.9 million we showed a slight uptick here to $4 million. With the next generation FireStore product coming onto the market, can we assume that the first quarter was the trough in revenue and we can look forward to steady gains quarter-over-quarter revenue growth from here on out?

Brett Moyer

That is what we expect. Absolutely, as we mentioned in the call there are three OEM agreements that FireStore ProxSys product lines that are going to be impacting Q3 that did not impact Q2.

Robert Ainbinder - Montauk Financial

Okay, and as far as the audio chip is concerned, obviously it sound like you've got a quick timeline to bringing that chip to market. Can you give us an idea of what type of customers we might be attracting with the DWA chip?

Brett Moyer

It all depends on your timeline. The quickest timeline, Bob, of the AVR marketer is a home theater in a box market where they're selling a receiver, an AVR and around it, their external products and we anticipate having those impact revenue in Q2 and Q3 of next year. If you look at the market that we didn't talk about but we noted them as being large as DTV or set top boxes, those are much higher volumes and it would take longer to get through the design cycle on those. So we may catch some at the end of the year for some of the Christmas seasons but by and large, just the market we're focused on, the home theater is 5 million units and the AVR market is another three to five on top of that. And if we just get 350,000 of those home theater guys, we're looking at driving revenue from $4 to $18 million plus some UWB revenues, so potentially $20, $22 million.

Robert Ainbinder - Montauk Financial

Okay, that's good, that's just the semiconductor side, correct? With the sampling taking place, you said in the November timeframe?

Brett Moyer

Yes.

Robert Ainbinder - Montauk Financial

So could we look forward to then hearing about design wins coming in the early part of the first quarter of '09?

Brett Moyer

Yes, our objective is to get this product out in customer hands so that when we come to the consumer electronics show the second week of January, we have a series of customer announcements ahead of it, but we have a lot of attention on this technology at the show. Because this is a show that is really from a technology and chip vendor, this is the show that sets the patterns for what goes into the '09 Christmas season production.

Robert Ainbinder - Montauk Financial

Very good. All right, great, thank you very much gentlemen.

Operator

(Operator Instructions) Your next question comes from the line of [John Glenn].

[John Glenn]

Hi to Brett.

Brett Moyer

Hi, [John].

[John Glenn]

Hey I got a question, there's a lot of fanfare made of the FS-471 from a year ago and shrinking down the size of the chip for all these different TV out applications but more importantly for cellular phone applications.

Brett Moyer

Particularly.

[John Glenn]

Well yes, specifically what really has come of that? I thought that was going to be a critical component in terms of driving a semi [inaudible] to revenue of going through the balance of this year.

Brett Moyer

Yes, so there were, I'd say five or six, a couple very large opportunities, but those plans were from the customer's perspective, not ours. We've spent a lot of work on the implementation of those designs; have moved around quite a bit. So until we start seeing firm POs on them, we're not guiding to them. It's a good little chip, there's been good, smart design started on them. Some of them have been cancelled; some of them are still pending. We've been burned this year with large companies looking at portable PCs or $200 PCs and smart phones not following through on their plans.

[John Glenn]

I guess the secondary question is, granted the meeting is coming up next month, but how challenging is it going to be going forward to make sure that there is financing in place to carry us into the chip plans of the new generation of products coming out in Q1 and Q2 of next year?

Brett Moyer

Yes, we did file forms last week to start the financing process with NASDAQ and all the compliance people. So that process is in place, I think we will fund. The reception — I was in New York a couple weeks ago, the reception to the plan and valuations of the company at its current price were positive, so I think after this call we'll wrap up the financing pretty shortly.

Operator

(Operator Instructions) There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Brett Moyer

I'd like to thank you for joining us today. I'd like to note that on Monday August 18, this coming Monday, I'll present at the Security Research Association's Fourth Annual Summer Technology Conference in San Francisco and on September 3, I will present at the Kaufman Brothers 11th Annual Investor Conference in New York City. And we look forward to speaking to you again soon. Thank you.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.

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