艾睿電子 (ARW) 2003 Q2 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Nu Horizons Electronics Corp. second quarter fiscal 2004 earnings call. At this time, I would like to inform that you this conference is being recorded and all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. For purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, our statements today may include certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Such statements are based upon, among other things, assumptions made with information currently available to the management, including management's own assessment of the Nu Horizons' industry and competitive landscape. At this time, I would like to turn the conference over to Mr. Richard Schuster, vice president of Nu Horizons Electronics and president of their NIC component subsidiary. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us. I am Richard Schuster. Here with me today are Paul Durando, our chief financial officer, and Arthur Nadata, president and CEO. Paul will report on the financial results for the second quarter of fiscal 2004. I will then make some comments on those results and finally open the floor to your questions. Now I'll turn the call over to Paul.

Thank you, Richard.

Net sales for the quarter ended August 31, 2003, were $80 million, compared to $80.3 million for the comparable period last year. Net loss for the quarter was $623,000 or four cents per share on 16,681,145 basic shares outstanding, compared with net income of $254,000 or 2 cents per share on 16,646,868 basic shares outstanding and 16,714,882 diluted shares in the same period last year. Overall gross profit margin for the quarter ended August 31, 2003, was 18.0% as compared to 18.1% for the prior year quarter ended August 31, 2002.

For the 6 months ended August 31, 2003, net sales decreased to $152.8 million from $155.3 million in the comparable period last year. Net loss for the first half of fiscal 2004 was $1,454,000 or 9 cents per share on 16,678,093 basic shares outstanding compared with net income of $262,000 or 2 cents per share on 16,641,658 basic shares outstanding and 16,783,837 diluted shares in the year earlier period. Overall gross profit margin for the current six-month period was 18.6%. That's compared to 18.7% for the year ago six month period.

On a sequential basis, sales for the current three-month period increased from $72.8 million for the quarter ended May 31st to $80.0 million reported here. A sequential increase of approximately $7.2 million or 10%. This sequential sales growth came entirely from our Nu Horizons Asia Pacific and our Titan Supply Chain Services operations, with our domestic core business sales remaining flat. Those operations generally yield lower gross margins than those available to our North American core business. As a result, our overall gross margin fell to 18.0% for the quarter from 19.3% in the sequential prior quarter ended May 31, 2003, with no reduction in domestic core business gross margin.

Operating expenses increased $1.3 million to $15.4 million for the three months ended August 31, 2003, and from $14.1 million for the same period one year ago, an increase of approximately 9.5%. Operating expenses for the current six-month period ended August 31st increased $2.4 million over the same period last year, an increase of 8.5%. The increase in operating expenses resulted from increasing -- increased staffing levels in connection with the expansion of the company's Asian and U.S. operational capabilities over the last several fiscal quarters. I should make note that the loss of $623,000 in the current quarter represents a sequential bottom line improvement from the $831,000 net loss reported in the May quarter, which in turn was a sequential improvement from our fourth quarter fiscal 2003 loss of $1,775,000. But overall sequential improvement of more than 65%.

Now I'll turn the call back to Richard.

Thank you, Paul. Before I turn the call over to questions, I just wanted to make a few additional comments.

As I am sure you are all aware, and as we've mentioned before, the electronic component market continues to be in a state of change and that the manufacturing function is increasingly being performed in the Asia Pacific area. This change, of course, is substantially driven by the need to supply more cost effective end product demanded by the marketplace. This reality coupled with a continued globally weak economic environment has resulted in generally flat domestic demand for electronic components. We believe this correlates to our own domestic sales performance, which has continued to show flat to minimal growth over the last several quarters.

This brings me to the source of our current sales growth: Asia Pacific distribution and supply chain services. As we have mentioned in the past, we believe that we needed to enter the Asian distribution and supply chain market as both a defensive and offensive strategy for the future. As a result, we are pleased with the recent success of both these efforts. Titan Supply Chain Services provides contract solutions to its customers. These services may include, but are not limited to, a direct fee for service model, which has minimal impact to the top line, billing is for fee and service only, along with a manufacturer to manufacturer asset-based fulfillment model which has greater top line impact. Titan purchases inventory and carries a receivable in this model. Titan's growth provided $2.8 million of our current incremental sales growth in the second quarter. We are pleased with the positive reception we have received for this concept. We believe that Titan should be a key factor in our future growth prospects.

Nu Horizons' Asia distribution is beginning to provide the critical mass that can now affect our bottom line performance in a meaningful way. Nine of our vendor lines have granted us distribution agreements for Asia, and all of our lines allow us to follow business we have generated here or designed here, which has been transferred to Asia from the States. Sales for the Asia semiconductor business increased $4 million in the second quarter alone. We are profitable in Asia on the Nu Horizons' consolidated basis, and I see components continues to be profitable in its own right.

While gross margins are lower in Asia, overheads are lower as well. We now have six sales branches in addition to our Singapore home base, in India, South Korea, north and south mainland China, Hong Kong and Taiwan. We have opened a new automated warehouse facility in Singapore and plan a mainland China facility in the near future on a smaller scale. We are extremely pleased with our progress in the area thus far, but we still have a long way to go. However, we have built a strong infrastructure and we are continuing to lay foundation for continued future growth.

In conclusion, it continues to be difficult to forecast future performance in the current market climate. We continue to have confidence in our business strategies, both at home and abroad, as evidenced by our progress in reducing our losses, our successes in our newer ventures, the eventual recovery expected in our domestic core markets, and our return to overall profitability in the new future. I will now open the conference call to questions.

Thank you. The question-and-answer session will begin at this time. If you are using a speaker phone, please pick up the hand set before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw your question, please press star two. Your question will be taken in the order it is received. Please stand by for your first question. The first question comes from Matt Sharon with Thomas Weisel Partners. Please state your question.

Oh, yes, thanks and good afternoon. The question regarding the core business you have. Are there any -- I know you've been sort of flat to stable the last few quarters here. Are there any signs that you're seeing things pick up in design activity, for instance, quoting activity, anything that gives you any reason to believe that we're at the beginnings of some sort of recovery?

Hi, Matt it's Arthur, how are you doing? To answer your question, yes, we have seen some signs of, you know, activity-wise, things like that. The thing that has continued to, you know, really be strong for us in North America is designs, is engineering, as far as design wins. Even though sales have been flat and a lot of transfer business to Asia, our design win activity has come up quite a bit. Just to give you a couple of numbers here. In fiscal '03 we did 1656 design wins in North America, which is up from 1222 in FY '02. Today, we're doing over 500 -- closer to 600 design wins per quarter here in North America. A design win for us is actual $2,500 in revenue where the customer really does buy something based on that design. So that activity is good. Obviously that is showing why our Asian sales have increased so much is because some part of that is our design wins that we're capturing over there. But we --

Yeah, but --

We see --

A follow-up question here is, then why are the margins -- I know the margins in Asia are down, but if you are getting that design win, wouldn't you get the better margin from your vendor whether it's in Asia or the U.S.?

Yes, but it's not enough of that yet.

Okay.

Those margins -- in most cases we are. It is a little more difficult to get sometimes the full margin. Here we expect to get between 18 and 21 and 22. There is somewhat of a battle sometimes because some of our lines are first really getting into global price protection. So that's why our tracking of the business and showing them our continued investment here is certainly going to be an ongoing, you know, issue. But I think they realize that they need that investment here and most of our suppliers are giving us close to the margin.

Okay. And then in terms of just your overall semiconductor business, are you starting to see lead times stretch out in the product areas? And then if you can comment on pricing in general?

Okay, well, lead time wise, the biggest issue today seems to be primarily flash. And some discreet items, TO 220, some packages. But honestly, I kind of scanned our product marketing rule prior to the call. And other than a couple of spots here and there, there really is not any real lead time issues. We have seen a number of suppliers that have bottomed out as far as where they want to see pricing. Even though there may not be a lead time, they decided this is the bottom price and we're going to lose the business if we have to.

Mm-hmm. Okay. And then Richie, maybe you can just comment about the passive business and what trends you're seeing there.

The passive business has been somewhat more robust in the last couple of months. And the price erosion has absolutely slowed down. I can't say it stopped completely. We do know that some of our larger competitors are pushing back on price. They're not dropping the price. They've said the same thing that Arthur just mentioned. They'd rather walk away from the business and cut their production than take the orders at a loss. So we're encouraged by the activity. Our unit sales are moving up, and we see some segments of the industry; specifically, consumer, security, automotive picking up substantially in the last few months.

Okay. Thanks very much.

The next question comes from Rob Gameron with 21st Century Research. Please state your question.

Hi, guys. Oh, yeah, a question about your vendor lines that are moving into Asia. You mentioned you have nine so far that you've now been franchised for in Asia. What will it take for to you get the remainder of your lines franchised globally?

Well, our continued investment in penetration and proving to our suppliers that our model here is very critical to our growth and to them getting on the print. I mean, if we don't design a product here and it goes to Asia production, if they are not on the print, no one's going to buy it. So I think that we will have a number of lines continually over the next half of the year, and certainly over the next 12 months. Our key lines are our line card that are beginning to give us the nod for Asia franchises. Some of our very key lines, I can't really put a date on it, but I can tell you that it's a lot sooner than later.

Is Xilinx one of those lines that has franchised you globally?

No, but Xilinx has approved of us as of April 1st to book our design wins in Asia. As a matter of fact, our senior VP of marketing is in Asia right now meeting with many of our suppliers over there as we speak.

Okay.

But there will be some coming, I think, quite soon.

And how about further investments in Asia? How should we look at operating expense going forward? Will there be further investments and will we continue to see SG&A creep higher or are we where we need to be?

Well, I think most of our investments are in place. The only other offices that we have planned to open immediately would be the northern India, which we are in Bangalore, which is key, northern, which has a lot of design going on, and we recently opened Taiwan. Other than that, we're seeing how things go. As Richie mentioned, we opened our new distribution center, the first -- actually a couple of days ago in Singapore. And we probably will put in a distribution center in mainland China depending on customers' specific products and things like that. But that's a little bit down the road.

Okay, that helps, thank you.

Our investments are in place right now.

Great.

The next question comes from Mike Neary with Neary Asset Management. Please state your question.

Hi, just a quick question. What do you anticipate for option grants for the year?

Well, we had no option grants this past year, if I recall correctly. This is Paul Durando, our CFO. And the directors buy -- according to their plan, received -- the outside directors received 15,000 shares apiece on September 24th. And we're not anticipating any further option grants other than maybe some new employees in the near future.

Okay. I thought last year was a million four total options. Am I looking at the wrong --

I really don't recall. I didn't bring those stats with me, but there were none this year. Not in this fiscal year, no.

So no options this year, okay, thank you.

Once again, ladies and gentlemen, if you do have a question, please press star one on your push button telephone at this time. The next question comes from Jim Buselle with Adelphi Management. Please state your question.

Good afternoon, guys. Which markets are actually product categories? Where were the strengths and weaknesses in the quarter?

Last quarter I would say -- let's see, I have to think about that. The strengths will continue to be in a lot of the analog areas, we've had a lot of strength. It certainly -- as I said, with flash being short. We've had strength in flash and other memory products. And certainly descreets continue to be fairly stable. And where we're seeing some activity pick up is in the wireless area. Where we're seeing weaknesses is still primarily in the commodities where prices are really, you know, low-end stuff, very, you know, small margins. Very tight margins. And that's been primarily continued to be that way. And that's where some of the suppliers, as I mentioned, have decided in certain commodities that they are bare boned and not going to go any lower.

Okay.

Jim, by the way, Adelphi, if you could give me a call, I think you changed your phone number and E-mail address because I had a problem reaching you.

Okay, great.

Thank you.

Yep.

The next question comes from Robert Katz of Sunvest International. Please state your question.

Hi, guys. I have a question both sort a long-term margin model for your international business and where you see that going, both gross margin and operating margin?

In Asia basically?

Yeah, Asia.

Well, in Asia, we're looking at probably a long-term model of anywhere from, you know, depending on the kind of business it is, whether it's a large piece of business or smaller business, anywhere from 8% to 11% margin would be the target. Your overheads, of course, are much lower there. So you are still looking at probably hopefully a 3% pretax minimum. But yeah it is a lower margin, so the quality of the sales dollar, if you want to put it that way, is much lower. You'd need two and a half dollars per sails in Asia to match a dollar of the typical gross margin we make here.

Yeah, and do you foresee that part of the business being the growth element of your business or do you expect your domestic sales to start growing soon as well?

Well, we hope that our transfer business will grow. We do have a lot of design activity that we know is going to be purchased in Asia within the next period of time. And those margins will be higher. We haven't had enough of that yet. In the last 12 months, basically, we've billed about $3 million of transfer business from 15, and customers that we never would have seen -- reaped the awards from if we weren't in Asia. So -- and also, we're planning on having the same model in Asia as we're doing here in North America. We have three engineers there today. There are companies that are designing over there. It's not only fulfillment. We plan on bringing our model into Asia and making sure we get our margins we do design work over there. Our suppliers are supporting that strategy.

Okay.

Domestically, I think you were also asking domestically. We don't want to make is sound like we're abandoning the focus on our domestic market. We think there's going to be a rebound here. Our growth I don't think will go back to the late '90s, no, but we're certainly anticipating that when the market turns around and things get -- the cycle changes and the economy gets better, that we should be back into an 8% to 10% growth mode at minimum on an ongoing basis here in the states.

Okay. Great. Thank you.

The next question comes again from Mike Neary. Please state your question.

Hi, guys. Sorry to harp on this. I want to make sure I'm looking at the right thing. In '03, Arthur, you got 390,000 options, right, as of last year?

That was fiscal '03, that might have been in the spring. There are no more options being given out.

Okay. Is that permanent or is that just this year?

No, that's not permanent but at this point, we really don't have many options left to give out unless we went to the shareholders to request additional options, and the board has decided not -- that it's not appropriate to do that at this time. So we have a very small amount of options left, which are being given out in very small pieces when we need to do that for new employees, but at this point in time, no, there is no intention to attempt to get more options.

Okay. I was just trying to figure out on average, you know, some years it seems like you issued a lot. You know, last year you had a million four and then the year before you didn't have any and this year you are not going to have any. I was wondering overall roughly how many options you issue per year but I guess you can't give me something like that.

It's not a per year thing, no.

Thank you.

As a final reminder, ladies and gentlemen, if you do have a question, please press star one on your push button telephone at this time. If there are no further questions, I will turn the conference back to Mr. Schuster.

Okay. We appreciate your support and thank you for calling in. And we look forward to updating you in the future. Thank you all.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an I.D. number of 307564. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.