Home » Chip Stocks » Transcripts

Standard Microsystems Corp. Q1 2009 Earnings Call Transcript

posted on: July 01, 2008 | about stocks: SMSC

Single Page View
Font Size:
Print
Email

Standard Microsystems Corp. (SMSC)

Q1 2009 Earnings Call Transcript

July 1, 2008 8:00 am ET

Executives

Carolynne Borders – Director of Corporate Communications

Steve Bilodeau – President, Chairman, and CEO

Aaron Fisher – SVP, Products and Technology

Analysts

Josh Baribeau – Canaccord Adams

Vernon Essi – Needham & Company

Jonathan Dorsheimer – Canaccord Adams

Presentation

Operator

Good morning ladies and gentlemen; and welcome to the SMSC first quarter fiscal 2009 results conference call. At this time I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. Following management’s discussion we will open the conference for question and answers, and such instructions will follow at that time. I will now turn the conference over to your host, Carolynne Borders of SMSC. Ms. Borders, please go ahead.

Carolynne Borders

Good morning, and thank you for joining us today for SMSC’s first quarter fiscal 2009 conference call. You should have all received a copy of our press release issued this morning. If you’ve dialed in on the phone line, please note that there is also a slide presentation that accompanies today’s call, which can be found in the Investor Relations section of our website.

Representing management today are Steve Bilodeau, Chairman, President and CEO; and Aaron Fisher, Senior Vice President of Products and Technology. Following management’s discussion we’ll open the call to a Q&A session, and I will also note that a replay of today’s call will be available on our website.

If you are participating in our online webcast, please move on to slide two for a quick note on our Safe Harbor Statement. Certain matters discussed in this teleconference are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected or forecasted.

Such risks and uncertainties include, but are not limited to, those discussed in this teleconference, and those found in the Company’s Form 10-K, 10-Qs and other filings with the Securities and Exchange Commission. I would also refer you to the forward-looking statement language contained in today's press release regarding risks and uncertainties.

Today's presentation also includes non-GAAP financial measures, which should not be considered in isolation or as an alternative to results of operations data, or any other measure of performance derived in accordance with U.S. GAAP. However, these non-GAAP financial measures are presented because SMSC believe they provide useful supplemental information for management and investors and allow them to perform meaningful comparisons to the Company's past and present results.

Guidance is presented on a non-GAAP basis only, given that the GAAP basis charges for equity based compensation related to stock appreciation rights, cannot be projected reasonably. GAAP and non-GAAP numbers along with a reconciliation of the two are available in today’s press release and in the appendix of this presentation. So, with that I will ask you to advance to slide three in the presentation, and I’ll turn the call over to Steve Bilodeau.

Steve Bilodeau

Thanks Carolynne, and thank you all for joining us this morning. SMSC delivered solid first quarter results with both sales and earnings near the high-end of guidance. Despite absorbing the impact of foreign exchange fluctuations and unanticipated executive transition cost. Revenue grew by almost 14% on a year-over-year basis, from $81.5 million to $92.8 million. This growth was driven largely by our High Performance Analog and Automotive Infotainment products.

On a sequential basis, sales declined modestly from Q4, which was both typical of the seasonality of our business, and predicted in our previous guidance. Non-GAAP gross margin percentage for the quarter was inline with prior guidance of a modest sequential improvement, despite a slight adverse impact from gold price fluctuations. Non-GAAP operating expenses were also inline with guidance, which was flat sequentially, even after absorbing the adverse impact of the foreign exchange fluctuations and transition cost just mentioned.

Non-GAAP diluted EPS grew by 30% on a year-over-year basis and came in at $0.39, despite a higher than previously predicted tax rate. Our non-GAAP tax rate in Q1 was 2.3% higher than expected primarily due to the U.S. Federal R&D tax credit, still not being approved by Congress, but for that we would have actually exceeded guidance. On a GAAP basis, diluted EPS was $0.20 and grew by over 43% on a year-over-year basis. With that financial snapshot, let’s move on to slide four, for a view of our vertical market performance.

Absolute dollar sales into all three of our vertical markets grew on a year-over-year basis, with consumer electronics and infotainment revenues growing sharply at 23%. Mobile and desktop PC’s grew 10% and industrial and other grew 5%. This drove a mix shift, such that our CE and infotainment increased its overall share of SMSC revenues to 41% of total Q1 sales versus 38% of Q1 in Q1 of fiscal 2008.

Our HPA solutions which include analog sensors and Hi-Speed drives served multiple vertical markets and applications such as smart phones, personal navigation devices, notebook PC’s and personal media players. Our expectation is the largest source of SMSC’s growth in FY’09 versus last year will come from our HPA products.

HPA sales more than doubled in Q1 on a year-over-year basis and we expect the same here in Q2 and to reiterate prior guidance, we expect HPA sales to double for the full fiscal year to approximately 15% of total FY’09 revenue.

As a reminder, in last year’s first quarter, infotainment revenues were weaker than usual because of a couple non anomalies. First, early last year, Germany had imposed a value added tax increase on car sales, which caused a temporary decline in auto sales in the region. The second contributing factor was an end of fiscal year reduction of inventory at one of our larger infotainment customers.

Note that these factors had the impact of somewhat exaggerating the near term growth rate of our automotive products. We remained very excited, however about the long-term prospects of our automotive products and Aaron. Will talk more about that shortly.

PC sales experienced the typical down-tip in Q1 from Q4 and we expect a healthy seasonal rebound in the current quarter. As a reminder, we continue to invest in the higher value segments of this market, with our focus being on analog and our microcontroller based solutions.

Let’s move on to slide five, for more on our view for the full year. Last quarter, we said that we expected SMSC to grow inline with the semiconductor industry growth this year. In the last couple of months, our estimates have been reduced as the annual semi outlook has softened a bit. We still expect SMSC to keep pace with the industry rate of growth, which is now expected to be approximately 4% to 5% for this year.

History tells us that cyclical markets recover and we’re investing in our business for the next wave of growth and for the long-term. This means development of proprietary market products in defensible markets, and driving sustainable growth with attractive margins.

Our continued focus on gross margin expansion should yield growth of about 1 to 1.5 percentage points over fiscal 2008, which is just slightly tighter than the 1% to 2% we have projected last quarter, and we think it’s important to reiterate that our gross margin improvements during the first quarter of fiscal 2009 should offset the gross margin contribution from the Intel IP payments that are expected to end in the third quarter. For the full year, we expect to again deliver record semiconductor gross margins.

We have some impacts to operating expenses and other income this year that will modestly change our prior bottom-line guidance from when we have met last April.

These include the impact of foreign exchange and current exchange rates, which are difficult for model, but we need to plan for since it’s likely to have a continued unfavorable impact through the remainder of the year.

Additionally, we will absorb some costs related to the previously announced executive transitions. Including these impacts, we expect operating expenses to increase roughly 8% year-over-year. These impacts have also been considered in the second quarter guidance discussed later in the call.

Lastly, related to our investment strategy, we’ve shifted a large proportion of our auction rate securities into the shorter-term vehicles which have much lower yields. Hence, interest income is expected to average around $1 million per quarter for the rest of the year, which is significantly lower than what we were earning on our investments in our previous Q4, for example.

We expect these low yield investment vehicles to be a temporary place to hold this money as we look at mix of investment alternatives that would produce more attractive interest income levels next year, while maintaining our conservative investment practices.

I like to hand the call over briefly to Aaron Fisher to review SMSC’s market highlights. Then I’ll pick it back up to review some balance sheet highlights and guidance for the second quarter, Aaron?

Aaron Fisher

Thanks Steve. Let’s turn to slide six. Starting with our mobile and desktop PC vertical, SMSC continues to build a healthy business. This is a solid profitable cash generating business, and as the industry continues to shift to mobile PCs, SMSC is well positioned to grow revenues with multiple chips per platform and therefore gain market share.

This is particularly true, as we continue to introduce new custom analog products for our large volume OEM customers. We’re merging now from the typical seasonal revenue lull in PCs and entering that time of year when PC sales accelerate.

SMSC’s fiscal Q3, typically marks the seasonal peak. Generally speaking, PC and market demand appears to be following usual seasonal patterns. On to slide seven now. Relative to the first quarter, consumer electronic strength was driven from two sources. First we saw revenues from Chinese set top box deployments originally scheduled for Q4, slip into Q1.

Second, our USB transceivers continued there ramp into new portable products such as smart phones and GPS for example. We’re seeing broad acceptance of SMSC hub products and monitors, docking stations and digital TVs among others. The CE segment is expected to be the strongest driver of the SMSC revenue and profit growth in fiscal year 2009.

Looking at slide eight, our automotive infotainment business continues its steady quarterly performance focusing on production starts in Asia as well as a continued rollout of most 150.

The rollout at Toyota is continuing as we had projected earlier with two additional car models that have been launched during the past quarter. Our new most 150 products are gaining strong market acceptance, and we are currently engaged in designing activities at several major auto manufacturers, with initial deployment from the first customer expected for model year 2012.

Please move now to page nine. We like to show this slide, which depicts the most adoption curve, because it helps characterize the large opportunity that exists for SMSC’s auto business in the coming years.

The second wave of adopters represented by the Asian brands, is starting to ramp. Revenues from this set of customers, is expected to materialize more meaningfully beginning in fiscal 2010. Until then we expect growth in these products inline with that of the whole company.

In a new development programs are accelerating with two new automotive manufacturers in the third wave of adopters. These customers are expected to begin production in the calendar year 2010-2011 timeframe. Coupled with the continued ramp of the Asia brands in that same timeframe, you can begin to see an increased growth picture for the automotive business, and we’re really excited about these opportunities.

I’ll hand the call back now to Steve, to wrap up on some other key financial items.

Steve Bilodeau

Thanks Aaron. A few quick notes on our capital structure it should be on slide 10 with us at this time. First we have a strong operating cash flow. This allows us operating flexibility and affords the opportunity to invest in the business and to repurchase stock when that makes sense.

In fact, we’ve continued to invest in SMSC with stock repurchases, totaling 10.7 million in the first quarter. Our stock repurchase activity over the past four quarters, has averaged approximately 13 million per quarter, and net shares outstanding have continued to decline as we reinvest free cash flow.

As I mentioned earlier, when the process of transitioning our exposure in auction rate securities, to more liquid investments. SMSC had 101 million remaining in auction rate securities as of May 31^st, most of which are tied to high grade government backed student loans, and we expect that to be reduced to the mid 70s by current quarter end.

Cash plus investments totaled to 181.1 at the end of the first quarter, net of our buyback activity. Again, operating cash flow remained strong, despite some modest inventory growth. As stated in our last earnings call, we expected inventories to grow modestly in the first quarter. We also said they would trend down after Q1 and then through the remainder of FY ’09, this is till our expectation.

Let’s move on to our final slide for our current outlook on the second quarter. This is slide number 11; we currently project Q2 revenues of $97 to $99 million. At the midpoint of guidance this represents nearly 6% sequential increase and it’s mainly due to seasonal PC trends and the continued expansion of our new HPA products. On a year-over-year basis, this guidance would be about flat from the same period of last year.

As a reminder, however, in Q2 of last year, we enjoyed several million dollars of unanticipated and non-recurring demand related to one of our larger PC customers expanding into the retail channel. This also helps to drive our bottom line results above expectations in that period. Our expectation for Q1 to Q2 growth this year is relatively inline with normal patterns particularly, in a softer semiconductor market.

Sequentially, non-GAAP gross margin is expected to grow approximately 25 to 75 basis points and non-GAAP OpEx should increase by about 3%. As I mentioned earlier, we recommend that you should model about $1 million an interest income per quarter for the rest of the year. We expected the 30% non-GAAP tax rate this quarter and modest growth in cash plus investment balances.

Non-GAAP earnings per diluted share should be in the range of about $0.45 to $0.49, you may recall that last year’s second quarter results included the impact of a reduction in income tax expense of $2.1 million to adjust deferred tax liabilities due to a reduced German statutory income tax rate. This benefited the second quarter of last year by approximately $0.09 in diluted earnings.

Due to current macroeconomic conditions, we want to highlight that this guidance now assumes stable foreign exchange rates, interest rates and commodity prices. Also, as a reminder, our guidance is always represented on a non-GAAP basis due to our inability to predict the impact of stock-based compensation on bottom line results. So, with that I would like to ask the operator to open the call for questions.

Question-and-Answer Session

Operator

Thank you Mr. Bilodeau. (Operator instructions). Your first question comes from Jed Dorsheimer with Canaccord Adams. Please go ahead.

Josh Baribeau – Canaccord Adams

Hi, this is actually Josh Baribeau for Jed. Just a couple of quick questions for you. First, on the most business, you said that two new OEM’s look like they are going to be starting production by around 2010, 2011. Are these in the North America region or these again in Asia?

Steve Bilodeau

This is Bilodeau, we said in 2000 – model year 2012 is our expectation –

Josh Baribeau – Canaccord Adams

Okay.

Steve Bilodeau

For the most 150 launch, for the most –

Carolynne Borders

Now for the –

Steve Bilodeau

For the two new engagements –

Josh Baribeau – Canaccord Adams

Okay.

Steve Bilodeau

Model year 2012 and we’re really not discussing, who they are at this point.

Josh Baribeau – Canaccord Adams

Okay, and just one question again on the Intel royalty payments, which will quit they are going out in Q3, what new business, if any do you expect will help replace that? Is that just a gross margin increase or is there some new business you will expect as well?

Steve Bilodeau

Well, we have been ramping, steadily several areas that are representing new business that will fill that void. We have been talking about our HPA products. The main message we want to point out is that we think that just the gross margin improvements we’ll generate this fiscal year, in the first three quarters will actually more than make up for the Intel I payment – IP payment loss in the fourth quarter such that we currently expect Q4 margins to be higher this year than they were last year, and last year they had the IP payments and this year they won’t.

Josh Baribeau – Canaccord Adams

Okay great, I’ll pass it on.

Operator

Thank you and now will go to Vernon Essi with Needham & Company.

Vernon Essi – Needham & Company

Thank you, hi Steve. I wanted to dive into the guidance a little bit here, and just if you could. One thing I’m trying to understand here is you’re talking about how it’s a typical seasonality. In quarters past you have shown better quarter-on-quarter strength and I understand last year you obviously had sort of a onetime upside events. Is there something changing in terms of the supply chain our people pulling in orders a little bit more earlier in the season is sort of one thing I’m trying to understand. Or is this just a simple everything is equal on your book and ship and this is just the way the demand picture is looking for the year. I’m just trying to understand because the guidance seems to be just a touch softer than it should be on a seasonal basis.

Steve Bilodeau

First, let me note, in our book-to-bill was solidly positive in the quarter, but I would note we have sort of two types of, the fundamental seasonality of the business I think we have talked about in the past which is, our Q1 and Q4 our softer two quarters, in Q2 and Q3 is where we get all the growth year-to-year. We had historically two ways that can develop. Either Q1 to Q2 spike, which is up, very significant and then it’s flat to Q3 and then it drops in Q4, or it goes from Q1 to Q2 as a nice jump and then jumps again to Q3. Two separate patterns, if you will more of a linear or more saw tooth kind of pattern, and this year, it looks like it’s going to be a stepped, so we’ll see good growth from Q1 to Q2 and then we’ll see another good growth from Q2 to Q3, and that seems to be being generated this year largely because of some delays in some chips that rollout. So it’s mostly our PC industry that’s generating that.

Vernon Essi – Needham & Company

And do you expect then that that will. I guess in technology companies we always try to relay that this business is going to come back at a later point, but in this business do you expect that you will see a little bit more robust growth rates in the back half of the year versus the typical season because of that delay?

Steve Bilodeau

While we I mean -- the stick and rudder if you will that we’ve given for the whole year it is still consistent with what we said at the last call, which is we expect that they’ll be generally inline with overall industry growth. So the general answer to your question would be yes.

Vernon Essi – Needham & Company

Okay. And then on the some of your core products, can you discuss sort of the competitive nature. I know you’ve in the past made a conscious decision to sort of exit some of the lower gross margin sides of the business. Have you seen anything new on the competitive front with those vendors and any new developments along those lines?

Steve Bilodeau

Well we all of the areas of our portfolio that we had looked at that we were not satisfied with, or I think commoditized we did gracefully exit from last year. So that’s all behind us some we’re just focused on our growth segments at this time.

Vernon Essi – Needham & Company

Okay, and then

Steve Bilodeau

And we don’t have any additional corners of our portfolio that have commoditized at this point.

Vernon Essi – Needham & Company

And also just an overview on the consumer side, you seem to have a positioning that’s as probably, I would imagine, growing. I know you’re giving us a lot of color on this, but in terms of smart phones, you’ve got somewhat of a positioning there. How has that market developed and do you see that being an increasingly larger proportion of sockets going forward. Also, do you see a possibility it would be going downstream as well into lower mix handsets, even though they’ll still be sort of tier one vendors, but not necessarily fully featured smart phones. How do you see that market progressing?

Steve Bilodeau

Well we see a lot of potential growth in the future associated with this area. The type of product we provide brings value and it’s typically the higher end of the market. At this point we don’t see a broad play at the low end of the commoditized cell phone market.

Vernon Essi – Needham & Company

Okay

Steve Bilodeau

This is a market where last year we basically weren’t in at all. So we’re just starting to penetrated this year, and that’s what’s driving a lot of the big year-to-year growth, we expected to grow similar to next year. So, it could be a nice addition to the company in an area that we weren’t really represented it before.