MIPS Technologies Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: MIPS Technologies, (MIPS)
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MIPS Technologies Inc. (NASDAQ:MIPS) F2Q09 Earnings Call January 29, 2009 4:45 PM ET


Jen Bernier – Public Relations Manager

John Bourgoin – Chief Executive Officer and President

Maury Austin – Chief Financial Officer


Anthony Stoss CraigHallum Capital

[Curt King – Harvest] Capital Strategies

Gene Fox – Cardinal Capital Management

Good afternoon, and welcome to the MIPS Technologies second quarter fiscal 2009 financial results call. I will now turn the call over to Jen Bernier, MIPS Public Relations Manager. Ma'am, you may begin.

Jen Bernier

Thank you. Welcome to the MIPS Technologies second quarter 2009 earnings conference call. I am Jen Bernier, Public Relations Manager. Leading the call today are John Bourgoin, Chief Executive Officer, and Maury Austin, Chief Financial Officer. After they discuss the business highlights and detailed financial results, we will open the call for Q and A. If you do not have a copy of the earnings release, it is available on our website at www.mips.com.

Before we begin, I would like to remind you that the conference call may contain forwardlooking statements as defined in the Private Securities Litigation Reform Act of 1995, including projections of certain operating results for the third quarter of 2009. Listeners are cautioned to not place undue reliance on this forwardlooking information.

Many important factors could cause the results to differ materially from those contained in such projections or forward-looking statements. We refer you to the risk factors section of the documents we file from time to time with the Securities and Exchange Commission for factors that may cause the results to differ materially from our forwardlooking statements.

In our financial discussion today, we will be referring to second quarter 2009 GAAP and nonGAAP results. MIPS management believes that nonGAAP information is useful because it can enhance the understanding of the company's ongoing economic performance. MIPS Technologies uses nonGAAP measures when evaluating financial results, as well as for internal planning and budgeting purposes. The nonGAAP results exclude FAS 123R stock option expense, certain costs and expenses related to the Chipidea acquisition, impairment, and restructuring costs incurred during the quarter.

Please refer to the earnings press release or to the investor relations page of our website for a reconciliation of GAAP to nonGAAP. As a reminder, the playback number for this conference call is (203) 3690984 and the access code is MIPS. A recorded call will be available for 30 days after the call. An audio replay will also be posted on the investor relations page of our website at www.mips.com. That said, I will now turn the call over to John Bourgoin.

John Bourgoin

Thank you, Jen, and thank you for joining our call today. Given the market environment today, MIPS' December quarter has to be considered excellent. We set new standards in both royalty revenues and unit shipments, and our licensing activity tracked with expectations.

Calendar year 2008 revenues were essentially flat with calendar year 2007, despite the generally weaker environment. We experienced positive cash flow of $4.3 million, our second consecutive quarter with strong cash generation. And, our cost trimming efforts resulted in proforma operating margins, which at 33% comfortably exceeded our goal of 25%. Further, the actions we have taken are achieving the desired results.

Let's take a closer look. Unit shipments of our licensing companies are, of course, a true measure of the penetration of MIPS in the marketplace. Q2 was MIPS Technologies’ highest quarter for such unit shipments in the history of the company. Processor core royalties also exceeded all quarters in our history at $12.6 million. With analog royalties, the total reached $13 million. The growth in units from $112 million to $126 million means MIPS’ licensees are now shipping at a collective rate of half a billion units a year.

A large percentage of this growth came from continued success in the networking infrastructure and digital living room markets. We saw a significant increase in our licensees’ set top box product shipments as well as a healthy and increasing [ADSL modem shipments. We also saw an increase in wireless LAN product shipments in the higher speed standards of 802.11G and N. MIPS continues to see steady volume shipments and maintain our market share in the areas of digital TV and digital still cameras. And we're starting to receive royalties from blue ray DVD shipments as well.

Our processor licensing numbers were in line with expectations, and a healthy interest in our products continues. Despite weak macroeconomic forces and market conditions, we experience normal activity in the quarter with an ordinary number of deals pushing out at the end of the quarter.

Through Q2, we haven't witnessed any exceptional reluctance among customers to close new license agreements. The analog business group had roughly flat revenues quarter on quarter, but well below our goals. Analog licensing activity was strong, with connectivity solutions, such as HDMI and USB.

We believe that strong local leadership is quite valuable for our Portuguesebased analog business group; and this month we named Cesar Martin-Perez as Vice President and General Manager of the Analog Business Group. We're confident that his leadership skills will drive improvements in our results in this business unit.

As analog licensing continues to be challenging, we are very carefully managing costs and commitments around the globe to insure the overall financial health of MIPS. This quarter, we announced a modification to our senior credit facility with Silicon Valley Bank, which gives us greater flexibility to move cash between our worldwide subsidiaries.

Our restructuring efforts, which began in August, have exceeded our target results. Spending levels are such that even with flat revenues, we experienced our nonGAAP operating margins actually exceeded 30% last quarter. We are reasonably well positioned from a spending perspective at this point.

Our product development activities are also producing results. We signed 10 new license deals on the processor side. We booked multiple licenses for our 74K core products and have seen a steady increase in interest in that product. It is still the world's only synthesizeable core capable of achieving one gigahertz with commercially available libraries.

The interest level in our highest performing cores in both single-threaded and multithreaded products is growing as companies recognize the value of these enhanced products. Momentum also continues for our low-powered mainstream cores with multiple new and renewal licenses this quarter, including several multicore deals.

We publicly announced several licensees, including processor engagement with Micronas and Sigma Designs. We also announced licenses from Taiwanbased companies Gateway Silicon and Socle Technologies on the analog side and ASMedia on the processor side.

This quarter, our 1004K won a leading product award from EDN China. And earlier this month, we announced that the 1004K was named one of the EDN Magazine’s hot 100 products of 2008. It was also named last week as one of the editor's choice products for 2008 by Embedded Computing Design Magazine and it has been named a finalist for the prestigious EDN Innovation Awards.

As we enter calendar 2009, we of course have concerns about the overall economy and general business climate. While our business has not been affected in a significant way to date, we're conscious of the potential for such an impact. We've taken strong steps to protect ourselves in a downturn, and we will continuously reevaluate market conditions to help ensure our stability.

We recognize the need to be ready to take further measures to protect the company in the event of a severe drop in demand. We began this calendar year by announcing new executive appointments, entering 2009 with strong leadership around the globe to drive our integrated analog and processor business.

In addition to the previously mentioned Cesar Martin-Perez, we appointed Mark Pittman as vice president of Asia Pacific sales and Stefan Buechmann as vice president of European sales. All three executives have a deep understanding of MIPS business and technology and are stellar professionals. We're delighted to have them in place in our team.

MIPS continues to hold the leading position in key markets, including many areas of networking, like residential gateways and the digital living room with products like cable and IPDB set top boxes and Blu-ray DVD players. We saw many MIPS space chips and end products in these markets at the consumer electronics show this month, including digital home and portable products of Broadcom, Dish Network, Net Gear, RMI, Samsung Electronics, Sigma Designs, and Zoran. We also saw networking infrastructure products from companies such as Broadcom, Entropic, Net Gear, Aconis, Nexcom, RMI, and Atheros.

A large number of products at CES also contained MIPS analog ID, including our HDMI and USB solutions. MIPS Technologies is still the only company offering the combination of analog IP, processor IP, and development tools for the embedded market.

It's a clear and unique value proposition for our customers. We look forward to continuing to building our leadership position in key markets like the digital home and expanding our presence in other markets that will benefit from compelling solutions and a robust ecosystem.

With that, I will hand the call over the Maury, who will discuss the financial results in depth.

Maury Austin

Thanks, John. I am also happy to report we have another quarter of improved financial performance, especially in our processor business. Our royalty units and revenue increased sequentially. We generated over $4.3 million in cash during the quarter. And our cost reduction efforts initiated in the September quarter have generated the expected results.

In addition, MIPS delivered a positive GAAP net income for the first time in seven quarters and achieved a 33% proforma operating margin. Compared with many earnings reports I’ve heard recently, I believe those results are fantastic.

To discuss our detailed financial results this quarter, I will start with our balance sheet. As investors expect in this type of economy, liquidity is a closely monitored metric for the management of most small cap companies.

MIPS has always been a company whose processor business model was supported by a very strong balance sheet. Over the last year, we have been rebuilding our balance sheet, strengthening our banking relationships, and streamlining our P&L. I can assure you that liquidity is one of metrics that John and I talk about regularly.

As you know, last July, we entered a new banking relationship with Silicon Valley Bank. As a result of our track record of providing them what we committed to deliver, and their responsive actions, we were able to enhance the loan facility last December to provide us more flexibility to move money between MIPS' entities worldwide. SVB has been a very good partner to work with. I believe that relationship is going extremely well.

In August, we announced a plan to reduce our quarterly investments in R&D and SG&A by about $5 million a quarter. Those proactive actions have paid off. MIPS has generated approximately $8 million in cash from operations in the last two quarters and has paid down over $2 million in debt during that period as well.

These actions have improved the quality of our balance sheet and put us in an excellent financial position to capitalize on new business opportunities as they may arise.

We ended Q2 with cash and investments of $20.5 million, up approximately $4.3 million from the prior quarter. During Q2, we also expended about $600,000 to fund previously announced restructuring efforts and reduced our debt by approximately $1.6 million.

Total debt now stands at $16.5 million, which includes $1.8 million associated with our analog business unit in Portugal.

Turning now to the P&L, total revenue came in slightly above the midpoint of our expectations. MIPS had total revenue of $26.4 million in the second quarter of fiscal 2009, slightly better than the $26.2 million reported in the prior quarter and essentially flat from the $26.5 million reported in the same quarter a year ago.

Total second quarter revenue from the processor business was $20.3 million, and revenue from the analog business group was $6.1 million.

Royalty revenue in the second quarter was $13 million, an increase of 9% from the $11.8 million reported in the prior quarter, and an increase of 3% from the $12.5 million reported in the same quarter a year ago.

Our processor licensees reported shipments of 126 million units during their September quarter, approximately 13% higher than the 112 million units shipped in the prior quarter and an increase of a little over 18% compared with 107 million units shipped in Q2 2008.

Q2 2009 contract and license revenue was $13.4 million, a decrease of 7% from the $14.4 million reported last quarter and 4% from the $13.9 million reported in the same quarter a year ago.

License revenue from the processor business was $7.8 million with ten new license agreements signed during the quarter.

Contract and license revenue from the analog business was $5.7 million generated from existing contracts, along with a portion of the 14 new license agreements they signed during the quarter.

We continue to improve our gross margins. Our second quarter gross margin of $20.6 million increased $2 million or 10% compared with the first quarter results, benefiting from higher royalty revenues and a favorable mix of foreign exchange rates and lower ADG cost of sales.

Our blended gross margin for the quarter, for the entire company, was 78% which is up from 71% in Q1 2009 and 65% in Q4 2008.

More importantly, the 78% gross margin is in line with our 75% target gross margins used in our long-term business model.

Turning now to operating expense. Our Q2 2009 operating expense was $15.7 million, including a restructuring charge of $.5 million, excluding the structuring charge, our operating expense of $15.2 million compares favorably with the $19.4 million we incurred in Q1 2009, mainly reflecting the positive impact of our cost reduction programs implemented during the quarter, coupled with some one-time accounting adjustments of approximately $.5 million.

There was $1.3 million in 123R stock option expense and $1 million in amortization charges related to the Chipidea acquisition included in our second quarter operating expenses.

In order to control our costs, we have reduced our employee count by approximately 85 employees during the last two quarters, including 29 additional reductions this Q2, thus achieving all of the reductions we have committed to during our September quarter conference call. Ending Q2 2009 personnel count was 427 employees, of which approximately 279 are related to our analog business group.

We recorded a $.9 million credit to our income tax provision during Q2, which is a combination of foreign withholding taxes more than offset by the tax benefits associated with the losses incurred overseas.

Longer term, our effective tax rate will be in the 36% to 38% range, but for the next two to four quarters, it's likely that we'll continue to record a net tax benefit from the utilization of the foreign tax credits.

Our Q2 GAAP net income for the second quarter of fiscal 2009 was $5 million or $0.11 a share, compared with a net loss of $7 million or $0.16 a share in the prior quarter and a net loss of $12.1 million or $0.28 a share in the same quarter a year ago. This positive result marks MIPS' first quarterly GAAP profit since the acquisition of Chipidea in August 2007.

On a proforma basis, excluding expenses associated with equitybased compensation, restructurings, and acquisitions, nonGAAP net income in the second quarter of fiscal 2009 was $8.5 million or $0.19 per diluted share, a significant improvement over the nonGAAP net income of $1.5 million or $0.03 per diluted share in the prior quarter, and a nonGAAP net loss of $2.9 million or $0.07 a share in the second quarter a year ago.

In this business environment, providing guidance for next quarter is particularly challenging. Many of our licensees and other companies in the consumer electronics segment have reported downed guidance and lower projected shipments in their earnings call. Most did not provide any guidance at all.

You recall that we report our royalty units in revenues one quarter in arrears, so the recent slowdown in the semiconductor and consumer electronics segments will likely hit our royalty revenues during this and next quarter. That said, this recession may affect ASPs more than volumes if you assume prices are being reduced to move similar amounts of volumes.

In addition, we're beginning to see some incremental royalty revenues from our new product license deals signed over the last three to four years. Those two forces can potentially offset some of the expected impacts from lower consumer spending as many of our contracts have royalty floors.

On the license revenue outlook, we have been analyzing our sales pipeline and, like many other companies, believe there's sufficient variability in our license revenue forecasting such that it may not provide useful guidance for our investors. But we are managing the company to continue to build the strength of our balance sheet, and that has put us in the favorable position for longer-term growth.

Our current cash flow breakeven point is in the $20 million to $21 million revenue range, and we continue to manage the business to generate cash, even in a weak overall economy.

For Q3 2009, we believe our royalty revenues may drop up to 20% sequentially, reflecting the lower licensee December quarter unit volumes. With the general slowdown in the industry, we believe license revenue can be in the range of $10 million to $13 million. At this point, however, we lack the visibility to provide more specific external guidance for Q3 2009. We believe in providing as much useful information as possible to our shareholders; and as we get enhanced visibility, we will be as open as possible in disclosing this information over the coming months.

With that, I would like to open up the call for any questions the listeners may have.

QuestionandAnswer Session


Thank you. (Operator Instructions)

Our first question comes from Anthony Stoss of CraigHallum.

Anthony Stoss – Craig-Hallum

Great job controlling expenses in the quarter. Maury, can you give us a sense of where you expect operating expenses to be perhaps for the March quarter? Kind of flat, up, down, anything would be helpful. And I have two follow-up questions.

Maury Austin

Up about 300 to 400K from Q2 actuals.

Anthony Stoss – Craig-Hallum

Up, did you say?

Maury Austin

Correct. We had a couple of adjustments during the quarter that gave us a bit of a tailwind that's not repeatable. For instance, our accounting fees have dropped significantly from fiscal 2009 over fiscal 2008. We were accruing at the 2008 rate. We were successful in lowering the estimate for the year, so we got a benefit of that in Q2 that is not going to be repeated in Q3, for instance.

Anthony Stoss – Craig-Hallum

You know that Chipidea for last time you gave us a burn for the quarter. Can you give us a sense of how much they burned in the quarter?

Maury Austin

Approximately $4 million.

Anthony Stoss – Craig-Hallum

Chipidea itself?

Maury Austin


Anthony Stoss – Craig-Hallum

Okay. I will jump back in queue. Thanks.


Our next question comes from [Curt King] of [Harvest] Capital Strategies. Thank you, your line is open.

Curt King

There's been some speculation over the last few months that Chipidea could be a divestiture possibility. I want to get your thoughts on whether that was something that you would consider. If so, what's your confidence there will be buyers out there in this environment? And, if not, what would you say the opportunities might be instead to cut costs and reduce the cash burn?

John Bourgoin

Let me answer that. Our focus is getting the analog business back on a growth and cash flow track that we want. That's why we put local management in over there, and that's clearly our focus. Having said that, in a difficult time, though, is look at all options. I think we would be remiss if we were not doing that. We have a number of ideas for how to attack the cash burn rate problem over there. Some of them are related to getting revenues up. Some of them are related to doing some things with the organization to cut costs a little bit. But we're looking at everything.

Curt King

That's all I had.


Our next question comes from Rachel Matthews with Cardinal Capital Management.

Gene Fox – Cardinal Capital Management

Hi, it's Gene Fox. I am here with Rachel. Your revenue in Chipidea seemed to decline about $600,000 sequentially yet your cash burn almost doubled. Could you explain that, please?

Maury Austin

Sure. Two things going on. The intraquarter exchange rate impacted our revenue a bit. They actually generated about the same amount of Euro revenue. But with the exchange rate during the month, it knocked a couple hundred thousand dollars off of that. The second issue is we did have one accounting entry that basically deferred about $300,000 in revenue from Q2 to Q3. It's important to, that's sort of the revenue point.

On the cash burn point, Chipidea generates probably twothirds of its revenue from backlog and onethird from current period bookings. So the connection between their revenue and their cash outflows or inflows are not as directly connected as the processor business. So basically their revenue dropped and the timing of collections changed such that the net of those two added to about another million and a half burn addition to the drop in revenues. During the quarter we paid off about $600,000 in Chipidea debt as well.

Gene Fox – Cardinal Capital Management

Was that built into your $4 million burn rate?

Maury Austin

Yes. Total outflows equaled $4 million, of which a little bit over $600,000 dollars was just debt paydown. It was also restructuring a lot of these 600K restructuring cash outflows that I mentioned earlier was in that $4 million as well.

Gene Fox – Cardinal Capital Management

So, when we think about the basically the cash burn rate exiting the quarter, it was more like $2.5 million?

Maury Austin

$2.5 million from operations.


Our next question comes from Anthony Stoss from CraigHallum, thank you.

Anthony Stoss – Craig-Hallum

Maury, perhaps you can give us, you have the number 10% customers, are there any changes or is Broadcom still your largest customer? Or is there a couple more?

Maury Austin

One 10% customer, Broadcom, and no significant change in the other customer percentages.

Anthony Stoss – Craig Hallum

Can you help us understand a little further Scientific Atlanta, Microchip, Media Tek, if any of these guys have come on and to what fashion, I guess.

John Bourgoin

Let me talk a little bit about 24K royalties, because when we talk about Scientific Atlanta, that's specifically what we think. Usually I get questions on the 24K related to Scientific Atlanta. We now, last quarter, we did almost 3 million units of 24K, so we're getting up in the 3%3.5% range of total unit volumes there. Of course, 24Ks have somewhat higher royalties than the average across our line.

We are beginning to get into an area where those royalties are going to begin having a material impact on our overall royalty numbers, at least in terms of mitigating any tendencies towards declines in royalty rates, I think.

That’s good news for us, although it's been perhaps four plus years since we announced the 24K, so it's about time for those royalties to begin mounting. Last quarter, the numbers, I think, grew in the neighborhood of well in excess of 50%. If we continue to see those kinds of growth rates, I think we will be seeing 24K royalties beginning to have a material impact on us as we go through this year.

Anthony Stoss – Craig-Hallum

Also, if you guys wouldn't mind commenting on what your expectations are for Chipidea revenues in March? Overall, I would assume that's down a like amount.

Maury Austin

Yes, a like amount, nothing materially different. I mean Chipidea does have, I mentioned it runs off a backlog for about twothirds of its current period revenues and it does have sufficient backlog to generate roughly the same kind of revenues it did this quarter.

The biggest variable is how we do in new bookings this quarter. But they do have the capacity to generate at least the same amount they did this quarter, depending on what the bookings end up being this quarter.


At this time, there are no further questions.

John Bourgoin

Okay. Thank you for joining us today. As always, Maury and I will be available to talk to you if you would like to call us. Again, thanks for attending the call.


Thank you. That does conclude today's conference. You may disconnect at this time.

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