Adesto Technologies Corporation (NASDAQ:IOTS) Q2 2016 Earnings Conference Call August 9, 2016 10:00 AM ET
Leanne Sievers – EVP of Shelton Group, IR
Narbeh Derhacobian – President and CEO
Ron Shelton – CFO
Gary Mobley – Benchmark
Rajvindra Gill – Needham and Company
Suji Desilva – ROTH Capital
Good morning, and welcome to the Adesto Technologies Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call instructions will be given for the question-and-answer session. As a reminder, this conference call is being recorded today, August 9, 2016.
I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.
Good morning. And welcome to Adesto Technologies' second quarter 2016 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, Adesto's Investor Relations firm. Joining me today are Narbeh Derhacobian, Adesto's President and CEO; Ron Shelton, Chief Financial Officer.
Before I turn the call over to Narbeh, I'd like to remind our listens that during the course of this conference call, the company will provide financial guidance, projections, comments and other forward-looking statements regarding future market developments, the future financial performance of the company, new products or other matters.
These statements are subject to risks and uncertainties that we discuss in detail in our documents filed with SEC, specifically the final prospectus related to our initial public offering and the most recent 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.
Also the company's press release and management statements during this conference call will include discussions of certain non-GAAP financial measures. These financial measures and related GAAP to non-GAAP reconciliations are provided in the company's press release and related current report on Form 8-K, which can be found in the Investor Relations section of Adesto's Web site, at www.adestotech.com.
For those of you unable to listen to the entire call at this time, a recording will be available via webcast on that company's Web site.
And now, I'll turn the call over to Adesto's President and CEO, Narbeh Derhacobian. Narbeh, please go ahead.
Thank you, Leanne. Good morning everyone. I'll begin with a brief overview of our financial results, then, address our design win pipeline and product development efforts that will support our future growth initiatives. I'll then turn the call over to Ron Shelton to discuss our second quarter financial results in more detail before opening the call for questions.
Results in the second quarter met our expectations with revenue of $10.3 million reflecting the softer ramp in the consumer market that we discussed on our last quarter call. We continued to make notable progress during the quarter on our design win momentum across our end markets, achieving a quarterly record of 59 design wins bringing our first half total to 88. Over 70% of this second quarter design wins were with new customers reflecting our efforts to further diversify our customer base and increase our market penetration.
From an end market perspective, approximately 42% of second quarter wins were enough to a market 29% in consumer, 19% in communications and the remaining 9% in automotive medical and computing. In terms of total revenue run rate potentials for our Q2 design wins went fully reached to full production as are always subject to market conditions and customers' production timelines the total dollar value opportunity amounted to a quarterly record of $4 million or $7.5 million for the first six months of the year. This compares to $9.8 million for all of last year and 7.7 million for the full year of 2014.
Similar to the trend design 2015 the consumer market represented the largest portion of the total dollar value opportunity in Q2 at 57% of the total with industrial representing 31%.These figures highlight the success of our efforts to further expand into high-volume consumer market while continuing to further broaden our leadership position in the industrial market. As an example, we recently secured design wins in two high profile consumer products, the first off which is a personal Bluetooth tracking device that essentially acts as the location beacon and is sold exclusively in Tier 1 retail stores.
And the second is for a Bluetooth wearable accessory that was designed specifically for a recently popular gaming application. These are great examples of how our low power application-specific memory is being used in high-volume small form factor applications. Additionally, we continue to have growing number of design win ramps into production at leading consumer manufacturers including those for Bluetooth low energy headsets, advanced remote controls, programmable electronic toys as well as other wearables.
As for the second quarter consumer represented approximately 30% of our revenue and we expect this amount will continue to grow in both absolute dollars and as a percentage of total revenue in 2016 as these and other design wins ramp into production. In the industrial market which represented roughly 55% of second quarter revenue design wins included new smart meter platforms with our leading metering customers as well as instrumentation and industrial control applications. We continue to see previous design wins in '14 and '15 advance to volume production and come to market.
With that let me take a few minutes to talk about each of our product families in more detail. Our DataFlash family remains the largest revenue contributor reflecting our broad industrial customer base for high volume smart meter markets where we have a leading share position. Most notable during the quarter we rolled out the AT-35 family of DataFlash product specifically designed for the smart meter market in China. As part of China's five year plan they've been investing heavily in construction and development of smart grids for more efficient gathering and distribution of electricity across the country.
This investment by China is driving the rollout of growing number of smart meter which is the bulk of the meters being produced in China today. The family of new product offers features on reliability of our data logging architectures that's popular for smart grid applications. We are currently in sampling with customers and are excited about the opportunities for these products as we leverage the success and market leaderships we have gained in other geographies. In terms of our 65 nanometer version of the DataFlash sampling has been progressing very well and as I have mentioned in the past migration to a more advanced node provides a path for both cost reduction version of the product and a wider application by customers.
Turning to our Fusion Flash family, which provides additional benefits specific to battery-operated systems for use in high-volume consumer applications such as wearables, mobile and other energy conscious design, the two high profile design wins that I mentioned earlier for the personal tracking device and the Bluetooth wearable accessory for gaming are both using our Fusion Flash devices. Consumer product in this space that value long battery life also see the benefits of using our low power and wide voltage solutions over commodity devices.
For example the beacon product I mentioned earlier has some of the best-in-class battery life in its category and integrate our solutions in their system as a value added component. We have also seen additional opportunities for Fusion Flash across other areas of consumer market including remote controls and home automation.
In terms of our EcoXip family of products we continue to be on track with our original schedule follow-up our development and rollout program. As mentioned earlier this product was developed in close collaboration with two industry leading partners as a companionship for IoT systems. I am happy to announce that we've received our first silicon back and so far cauterization indicates that the device is working as expected and we remain on track to rollout of the product in the second half of this year as planned.
Now turning to our CBRAM based product beginning with Mavriq. During the quarter we continue to ship increasing number of samples to customers as well as to actual customer orders. This product is the industry's first commercially available resistive RAM product. CBRAM is ideally suited for low energy applications such as IoT. As I've stated in the past we continue to expect more revenue contribution from this product family in the second half of '16 and into 2017.
In the last quarter we announced the availability of Moneta, our second product based on our CBRAM and Moneta is architected to highlight the low power characteristics of CBRAM technology even more aggressively. This product is uniquely suited to ultra low energy IoT electronics and enables applications never before possible in energy harvesting and other energy cautious system designs.
During the quarter we showcased Moneta at the Internet of Things Developers Conference where we received strong interest for our product. We've also been talking to customer throughout the quarter who are specifically interested in energy savings and have been receiving great feedback on Moneta.
As part of our market outreach program we have developed hardware demo boards to highlight the benefits of our product families in various applications using controllers from different suppliers. These demo board are now available using industry-leading [indiscernible] platforms that showcase the system level benefits of the features incorporated in our Fusion, Data Flash and Mavriq families.
And I finally I would like to discuss recent developments around our standard serial flash product family which is not an area that I've talked extensively about on past calls. Following the recent volatility we experienced in Q1 which was primarily driven by the consumer market we increased our activity around this product group as an extension of our strategy to pursue higher unit volume opportunities and further diversify our customer base and revenue.
It allows us to have products readily available at attractive price points to create a more quarterly turns business opportunity for us. It also helps mitigate end market volatility since for Adesto we experienced a bigger impact because of our scale which is why we acted upon this strategy so quickly. The standard product family provides us more flexibility in terms of the competitive price structure to go after high volume opportunities. Additional typical time to revenue from design win is much faster for the standard products than our more value added solutions.
During the quarter we introduced four new standard serial flash products including 32 megabit, 64 megabit and 128 megabit and 128 megabit at 1.84 volt primarily for mobile applications. We're currently in the sampling and qualification stage with customers and are working with contract manufacturers to be included in their forecast and established work flow.
Although this process will take some time we believe availability of this product and the expansion of our sales effort in this area should help drive additional top line revenue opportunities in the future. It's important to note that the focus of the company continues to be centered on development and marketing of application specific memory such as DataFlash, EcoXip, Fusion or Moneta. These new standard products are simply one more component in our portfolio of solutions we offer to our customers.
In closing, there a number of factors that will serve as key catalyst to driving our future growth namely the emergence of IoT market. According to a recent report published by Axon Mobility [ph] IoT devices are expected to increase at a compounded annual growth rate of 23% from 2016 to 2021 driven by new use cases.
In fact, the report estimates that by 2018 IoT sensors and devices are expected to exceed mobile phone as the largest category of connected devices. By 2021 it's estimated there will be around 28 billion connected devices of which close 16 billion will be related to IoT. We're very well-positioned to be a day beneficiary of this trend toward an always on everywhere connect network as we break through the power consumption barriers with our ultra low power intelligent application specific solutions.
As we move to the second half of 2016 we expect to grow revenue 15% over the first half with continued acceleration as we move into 2017. Variability in customer in customer forecast is limiting visibility across our end markets causing us to take a more cautious view than our previous expectations. We remain well positioned with customers across our product portfolio and expect our ramping design wins will serve us a key catalyst to future growth. With the recent closing of the third facility our business is fully funded enabling us to remain focused on executing our growth initiatives.
With that, I will now turn the call over to Ron Shelton to review financial results in more detail as well as more detail on our third quarter outlook. Ron?
Thanks Narbeh and good morning everybody. Revenue in the second quarter of 2016 was 10.3 million and that's compared to 10.2 million in the first quarter of 2016 and 10.6 million in the second quarter of 2015. Gross margin in the second quarter was 46% that's compared to 49.1% last quarter and 39.6% in the prior year period. The sequential decrease in gross margins was due primarily to product mix that weighted more towards the lower margin consumer market but it's still within our long-term model range of 45% to 50%.
GAAP operating expenses in the in the second quarter were 8.7 million, that's compared to 6.3 million in the first quarter and that included a 3 million gain from a settlement with former foundry supplier and we had $6 million of GAAP OpEx in the prior year quarter. Excluding the benefit of the gain in the first quarter operating expenses increased sequentially and that was primarily due to the higher cost related to development of our 45-nanometer CBRAM process technology. We currently expect operating expenses to remain essentially flat on a sequential basis in the third quarter.
Non-GAAP operating expenses in the second quarter were $7.6 million and that's compared to $7.1 million in the first quarter and $5.7 million in the second quarter of 2015. Looking at GAAP OpEx in more detail R&D expenses were 4.2 million that's compared to $4.9 million last quarter and $3.1 million in the second quarter of 2015. As I discussed earlier the sequential increase in R&D expense primarily reflects a higher spending on development activities associated with brining up our 45-nonmeter CBRAM process technology.
Sales and marketing expenses were $2.8 million. That's compared to $2.6 million last quarter and $2.1 million in the year ago period. The increase was largely driven by higher personnel related costs.
G&A expenses were approximately $1.7 million, that's consistent with the prior quarter and that's compared to $800,000 in the second quarter of 2015. The year-over-year increase in G&A primarily reflects our transition to a public company and the associated costs. Stock based comp in the second quarter was $820,000 and amortization of intangible assets was $309,000.
Accounting for these items, adjusted EBITDA for the first quarter of 2016 was a net loss of $2.7 million. That's compared to a loss of $1.9 million in the first quarter of 2016 and a loss of $736,000 in the second quarter of 2015.
GAAP net loss for the second quarter was $4.3 million or $0.29 per share, that's compared to a GAAP net loss of $1.5 million or $0.10 per share in the first quarter of 2016 and a loss of $1.8 million or $3.14 per share in the second quarter of 2015. GAAP net loss was calculated using approximately 15 million shares for the first and second quarters of 2016 and 562,000 for the second quarter of 2015.
Second quarter non-GAAP net loss was $3.1 million or $0.21 per share, and that's compared to a loss of $2.4 million or $0.16 per share last quarter and a loss of $1.5 million or $0.15 per share in the second quarter of 2015.
Turning to the balance sheet, we ended the quarter with $14.1 million in cash and short-term investments. After the quarter ended we closed on a $20 million senior secured debt facility which replaces of exiting April 2015 facility. If the debt facility, if we would have closed that before quarter end we would have some cash on the balance sheet of little more than $22 million. Inventory in the second quarter was $9.1 million that's up from $8.6 million last quarter and that reflects our anticipated higher revenue for the third quarter and accounts receivable is $5.9 million.
Now let me turn to our guidance for the third quarter of 2016. We currently expect revenue to grow to a range between $10.8 million and $11.2 million. Gross margins are expected to be between 45% and 47% and GAAP operating expenses are expected to range between $8.4 million and $8.8 million and non-GAAP expenses between $7.4 and $7.7 million.
Stock-based comp in the third quarter will be approximately $820,000. Amortization of intangible assets will be approximately $300,000, and depreciation and amortization will be approximately $200,000.
We expect to have 15 million shares outstanding on a weighted average basis for the third quarter of 2016. And for the full year, we expect approximately $3.2 million in stocked base comp, $1.2 million in intangible amortization expense and $1.1 million in depreciation and amortization expense.
With that, we'll open the call to questions.
Thank you. [Operator Instructions] And our first question comes from Gary Mobley from Benchmark. Your line is open.
Good morning guys. I have a question about your expectation for second half revenue; Narbeh, did you say 15% growth in the second half over the first half?
Okay. Obviously that would imply about 15% sequential revenue growth rate in Q4. What gives you comfort in the fruition of that type of revenues? Is it seasonality, is it solid -- having a solid handle on your design win pipeline and what goes into production?
Yes, it's primarily looking at the customer forecast, and again, that's more of a near-term winning at [ph] quarter and two quarters away view of the business, we will be looking at actual forecast from the customers going in any given period. Design win to production we always guard against that in terms of including or take a factor into that but for second half our view is based on the forecast we're getting from the customers.
And along those lines do you know off hand what the dollar value of design wins are for the trailing 12 months leading that to June quarter end?
June of 20…
The quarter just ended, what would be the dollar value of those design wins be on a trailing 12-month basis, I believe you gave it on the June quarter basis, just trying to get a sense of the revenue growth potentials as you look out over the next 12 to 24 months.
Okay, so the quarter that just ended are as we reported it's $4 million annual run rate once the design win is reached in full production and comparing that to Q1 numbers we reported about 3.5 million right, so the six month is at 6.5, sorry 7.5 million. Now the entire 2015 was at 9.8 million. And I have go look at what was the second half of '15 to report on that.
Okay, all right. Last question I have and I'll jump in the queue. Just trying to think about cash available to fund the business, you mentioned that the $20 million line of credit would have brought your cash position at $22 million I'm assuming that's not that line of credit is not fully tapped, could you speak to what the gross cash would be today plus your borrowing capacity.
So, Gary this is Ron. I think the borrowing capacity available today it is almost fully drawn so, the $20 million debt facility consist of two pieces $18 million turn debt which is fully drawn and then $2 million working capital piece of which about $1.5 million and strong so the 20 were about $19.5 million drawn and again at the end of the quarter would then were north of $22 million of cash and its I don't want to tell you exactly where it is today other than its still north of the $20 million.
Okay, alright. Great thank you.
Thank you. And our next question comes from Rajvindra Gill from Needham & Company. Your line is open.
Yes, thanks for taking my questions I appreciated. On the different product lines, Ron or Narbeh, I'm wondering if you could and may be give us a sense of how the in terms of dollars to DataFlash used actually ECO chip data in the June quarter and kind of what are you seeing in Q3 of a different product lines. That will be helpful.
Yes, so ECO-chip, we did have revenue on ECO-chip as I mentioned we just received our first silicon back on ECO-chip and we are expecting per plant to sample customers this quarter and also some additional announcements in Q3 and Q4 but expectations for revenue for ECO-ZIP is a primarily in 2017 and that hasn't changed per plant. Again most of our, from a dollar content perspective our DataFlash is our biggest revenue driver as always although in the fastest growing one I would say is the fusion so for if I look at Q1 and you want the Q2, DataFlash stated about 80% after revenue and fusion is I would apply fusion and our standard flash is about 15% of revenue roughly -- is right now is less than couple of percent.
Okay. And in terms of the visibility in the consumer side and you talked about kind of the visibilities Mavriq and what are the kind of strategies to help, reduce the visibility or increase the visibility or diversify the business to take some of the volatility out of the business.
While increasing visibility is we've already incremented some of that since Q1 and that basically frequency of engagement with the again if I go back with our top 20, top 30 customers in the space and but again at some, there is a limit as how much visibility we may have into that or how much does our customer have visibility into their end market as we get that end market visibility gets siphoned down to us more uncertainty goes around that.
In terms of cushioning volatility is exactly what I mentioned in the call is that we one of the fastest way that we can cushion visibilities to offer solutions that are more faster to ramped and also allows us to react quickly within the quarter in terms of the current business and that that standard serial flash product which I had mentioned in the past that we had this solution as a portfolio -- for us as an opportunity for us but we added to that especially last quarter we added four product, primarily targeting the mobile markets, we rolling that out as fast as we can and currently we are in qualification stages with various contract manufactures and customers for that and we expect that product family to help to be a tool for us to be able to cushion this set of volatility that's make on our way.
And Ron in terms of $20 million of debt capacity of 18 of which is the term loan $2 million working capital, how do we think about the interest rate going forward.
Well, that's the term got biggest piece and that's for -- quarter so if you were looking to model and I just model around that.
For the quarter represents alright, thank you.
All right, yes.
Thank you. And our next question comes from Suji Desilva from ROTH Capital. Your line is open.
Hi, Narbeh, hi, Ron. I'm receiving ramp that -- recommended where you seeing initial customer interest and feedback that's most interesting to you.
Yes, in Mavriq the two products to be ramp up.
Yes, Mavriq although it using CDRAM as the core technology behind it. We've mentioned in the past that Mavriq is basically a product; we brought to market to ramp to manufacture ability of the CDRAM. So today, Mavriq in the market is being sold that the standard serial EEPROM. So the sockets we're going after are typically battery operated solutions that are using problem EEPROM and these include Bluetooth speakers, Bluetooth cameras, mainly components that use Bluetooth for connectivity.
And for Moneta it's a different, because Moneta was designed primarily to act as a companion chip especially for sensors and beacons. And that one why we introduced that they were defined aspects off that parking working with three customers and we are now promoting this product to that end market where the deployment of these components need to be very long or even at some point you need to basically going to an energy harvesting mode to maintain these sensors out in the field. And Moneta is a very unique product in that we need to catch the customer early enough in their system design phase. So the full benefits of the product can come to surface at system level and that the stage we're in.
Great. And then on the Standard Serial Flash kind of working on some products there. What are you seeing in terms of competition in the products when bottoms [ph] of pricing that making feel like there's an opportunity there now we don't target that market more aggressively?
Yes. So the price points for that Standard Serial Flash family for us is very competitive especially when you compare the sockets we're going after are typically sockets that would be served by companies like you mentioned Winbond potentially Macronix and certainly Micron and Cypress. We are not the lowest cost provider as some of the Chinese vendors are, but of course our quality and reliability is more of a higher end Standard Serial NOR Flash. So from a price competitive perspective, we are very competitive, the products are priced in that point and they are basically designed to move into existing sockets as fast but possible.
And last question on the focus on large consumer type of customer wins, should we expect meaningful customer concentration of these succeeds they one or two years out?
For consumer markets?
Yes, again it's consumer markets are one of those that we have we put a deliberate effort to get design winds in the area in the past, and some of them are coming to fruition, we mentioned that this particular location beacon customer that we had designed win in late 2015 and they're ramping in production this year. We already started shipping to them and their forecast has actually gone up. So those are areas where we have multiple opportunities that we've invested in the past. Some of them obviously will suffer the volatility as normal for consumer market, but some have the opportunity to be very, very high volume drivers.
We also mentioned this opportunity for the wearable device in the gaming application the very popular gaming application that again was nowhere about six months ago and now suddenly everywhere. Of course, these are low ASP parts, good margins, but low ASP parts, but volumes are high and this could be very opportunistic for us.
And again, I was happy to talking about, thanks guys.
This concludes today's Q&A session. I would now like to turn the call back over to Narbeh for closing remarks.
Thank you. Thank you all for joining us today. Before we conclude today's call I want to mention that we really participating at the Oppenheimer Technology Internet and Communication Conference in Boston tomorrow, we'd also be at the Drexel Hamilton TMT Conference in New York on September 7, as well about the Adesto Institutional Investor Conference Call in Minneapolis on September 28.
If you would like to request a meeting at one of those conferences or while we are in your area please contact our IR firm other than that thank you for your time today and we look forward to providing updates on our next earnings call. Operator you may now disconnect the call.
Ladies and gentlemen thank you participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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