奇異 (GE) 2006 Q2 法說會逐字稿

Welcome to the SBS Technologies earnings conference call.

At this time, all participants are in a listen-only mode.

After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded, so if you have any objections you may disconnect at this time.

I'd now like to turn everything over to your host, Ms. Jennifer Wade.

Ma'am, you may begin.

Thank you.

Good afternoon and welcome to the SBS Technologies fiscal 2006 second-quarter earnings conference call.

I am Jennifer Wade, Vice President, Investor Relations, and joining me are Clarence Peckham, Chief Executive Officer, and Jim Dixon, Chief Financial Officer.

As is our custom, today's call is being broadcast live over the Internet and recorded for both Web and telephonic access.

The earnings press release was issued at approximately 4 PM Eastern Time today and is available on the major newswire services and is posted in the Investor Relations section of our website at www.sbs.com.

Remarks made during this conference call about future expectations, trends, plans, forecasts and performance for SBS and its markets are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements reflect our current beliefs, estimates and expectations that involve a number of risks and uncertainties.

Listeners are cautioned that these forward-looking statements may differ materially from actual future events or performance and are advised not to place undue reliance upon any forward-looking statements, which speak only as of the date of this call.

Factors that could affect results are outlined in today's press release, and a more thorough listing of risk factors is discussed in our Annual Report on Form 10-K for the year ended June 30, 2005, filed with the Securities and Exchange Commission in September 2005.

Now I am pleased to turn the call over to Jim.

Thank you, Jennifer, and good afternoon, everyone.

During the quarter ended December 31, 2005, we continued to make excellent progress in implementing our long-term growth strategy.

The December quarter was the fourth consecutive quarter of increased bookings, with $42 million reported.

Due to the recent decision by a government customer to change their project requirements, a $4.7 million order received in fiscal year 2005 was canceled, resulting in net bookings for the quarter of 37.3 million.

The order cancellation was not caused by a funding issue or dissatisfaction with SBS.

Total backlog at the end of the quarter was 49.9 million.

For the quarter, 15 design wins were reported, bringing the six-month total to 26, compared to 15 for the first six months of the prior fiscal year, with one of these design wins being our first AdvancedMC design win.

We're beginning to see the effects of cost control initiatives we began implementing at the beginning of the fiscal year.

These events, plus our strong backlog, have reinforced our confidence in the growth we anticipate in the second half of the fiscal year.

Sales for the second quarter were 37.3 million, a decrease of 11.7% compared to 42.2 million in sales for last year's second quarter.

On a sequential basis, total Company sales increased 9.2%, compared to the 34.1 million in sales for the quarter ended September 30, 2005.

Sales for the six months ended December 31, 2005, were 71.4 million, a decrease of 7.4% for the same period of the prior fiscal year.

By segment, sales for the second quarter by the Americas group were 21.3 million, a decrease of 21.4%, and sales by the Europe group were 16 million, an increase of 5.4%, net of a 9.6% decline in currency exchange rates, both compared to the second quarter of the previous fiscal year.

On a sequential basis, sales by the Americas group decreased 3.2% and sales by the Europe group increased 31.7%, net of a 3.7% decline in currency exchange rates, both compared to the quarter ended September 30, 2005.

Sales for the six months ended December 31, 2005, by the Americas group were 43.2 million, a 14.3% decrease, and sales by the Europe group were 28.2 million, an increase of 5.8%, net of a 5.4% decline in currency exchange rates, both compared to the six-month period ended December 31, 2004.

By end market for the quarter ended December 31, 2005, sales to government customers were 19.4 million, an increase of 3.2%, sales to communications customers were 10 million, a decrease of 12.8%, and sales to commercial customers were 7.9 million, a decrease of 34.1%, all compared to the second quarter of the prior fiscal year.

On a sequential basis, sales to government customers increased 34.1%, sales to communications customers decreased 6.9% and sales to commercial customers decreased 11.7%, all compared to the quarter ended September 30, 2005.

For the six months ended December 31, 2005, sales to government customers were 33.9 million, a decrease of 1%, sales to communications customers were 20.7 million, a decrease of 0.5%, and sales to commercial customers were 16.8 million, a decrease from 24.2%, all compared to the same period of the prior fiscal year.

Reduction in sales to commercial customers for the quarter and year to date was due to reduced demand from semiconductor manufacturing equipment customers.

For the quarter ended December 31, 2005, as a percentage of total sales, sales to one communications customer, Ericsson, represented 16%, and no other customer represented more than 5% of sales.

Net income for the quarter ended December 31, 2005, was 1.1 million, compared to 2.2 million for the same period of the prior fiscal year and a net loss of 539,000 for the preceding quarter.

For the six months ended December 31, 2005, net income was 524,000, compared to 3.4 million for the six months ended December 31, 2004.

Net income per common share assuming dilution for the quarter ended December 31, 2005, was $0.07, compared to $0.14 reported for the second quarter for the prior fiscal year and a net loss per share of $0.03 for the previous quarter.

Net income per common share assuming dilution for the six months ended December 31, 2005, was $0.03, compared to $0.22 for the same period for the prior fiscal year.

For the quarter, our effective tax rate was 35%.

Currently, we expect a similar rate for the entire fiscal year.

Total diluted outstanding shares for the quarter were 15.7 million, compared to 15.8 million for last year's second quarter.

Gross profit for the quarter as a percentage of sales was 43.5%, compared to 44.4% for the second quarter of the prior fiscal year and 41.6% for the preceding quarter.

Compared to the preceding quarter, an increased proportion of higher-margin government sales favorably impacted gross profit as a percentage of sales.

Consistent with our Form 10-K for the year ended June 30, 2005, we have included the amortization of intangible assets associated with completed technology and license agreements as a separate component of cost of sales.

Selling, general and administrative expense for the quarter was 8.4 million, compared to 9.1 million for the second quarter of the prior fiscal year and 8.7 million for the preceding quarter.

We're beginning to see the effects of the cost control initiatives we began implementing at the beginning of the fiscal year.

Compared to the preceding quarter, SG&A as a percentage of sales decreased to 22.6% from 25.4%.

Research and development expense for the quarter was 6.5 million, compared to 6.1 million for the second quarter of last year and 6.7 million for the preceding quarter.

Looking forward, we expect our R&D expense level to remain relatively constant, which is in line with our current development plans.

Compared to the preceding quarter, R&D expense as a percentage of sales decreased to 17.5% from 19.6%.

Now turning to the balance sheet, our total cash balance at the end of the quarter was 53.2 million, compared to 55.9 million at the end of the prior quarter, and we'll remain debt-free.

The declining cash balance compared to the previous quarter was due to the timing of cash collections and payments.

Compared to the previous quarter, our outstanding accounts receivable balance increased approximate 1.5 million to 28.7 million, while our days outstanding decreased to 58 days, compared to 60 days for the prior quarter.

Federal inventories increased approximately 321,000 compared to the previous quarter.

Capital expenditures for the quarter were approximately 536,000, in line with our current-year capital expenditure plan.

In summary, during the quarter we made excellent progress in the implementation of our long-term goals.

We are pleased with the strength of our design wins, bookings and backlog, and are beginning to see the effects of our cost control initiatives we began implementing during the first half of our fiscal year.

We are executing our strategy and continuing to believe we are profitably positioned for long-term growth.

I will now turn the call over to Clarence.

Thank you, Jim.

We closed the December quarter with strong bookings.

At 42 million, our bookings increase from the September quarter was driven by strong design wins and follow-on orders from previous design wins.

Our government backlog has increased 31% since June 30, 2005, and overall backlog has grown by 12% in the same time frame.

During the first six months of fiscal year 2006, we have implemented cost control initiatives which we began to see the effects of in the December quarter.

We will continue to control our costs while executing our long-term strategy.

In the December quarter, we released a new product line, the Rugged Operational Computer, which is a new direction for our military computer product portfolio.

It is the first commercially available small form factor military computer on the market.

The Rugged Operational Computer is ideal for small platforms such as unmanned vehicles or other applications where minimizing space and weight is critical, but a full ruggedized electrical system is required.

We continue to work on new products, and over the next several months, we will be releasing exciting new products for our AdvancedMC single board computer and systems product lines.

During the quarter, we achieved 15 design wins -- 11 government, three communications and one commercial.

Year to date, we have achieved 26 design wins, over 60% higher than last year at this time.

In the government market, all 11 of the design wins were systems for upgrades of existing platforms or for new unmanned aerial vehicle programs.

The three communication design wins were board products for a traffic management system, a telecom switch application and a WiMax application.

The WiMax application is the first design win for the new AdvancedMC product line.

The commercial design win was a single board computer used in a system to inspect bottles during manufacturing.

Once again, I am pleased with the results of our business development activities in the government market.

This quarter, we had 11 design wins and strong bookings for follow-on production for several pre-existing design wins.

Increasing production orders in the government market is one of the key indicators for our anticipated second-half growth.

In the communications market, we have captured our first design win for AdvancedMC products.

We are continuing to see strong interest in our AdvancedMC product line and expect to close more design wins during the last half of the fiscal year.

In addition to the market opportunity for our AdvancedMC products and systems based on AdvancedTCA, the IBM BladeCenter and proprietary telecommunications systems, we are ideally suited to serve the emerging MicroTCA market.

MicroTCA is a high-performance system-level form factor comprised of AdvancedMC modules, an enclosure with coolant and a power supply.

These systems are smaller and lower-cost than the high-end AdvancedTCA systems designed for the core of the network.

A MicroTCA system is very attractive in a wide variety of edge applications and communication networks and is also gaining interest with both commercial and government customers who require a small high-performance system.

We took an early leadership position with the introduction of our comprehensive line of AdvancedMC products at SuperComm in June 2005 and have many customers who have expressed interest in building MicroTCA systems based upon our new products.

The MicroTCA specification is currently scheduled for release in the first half of calendar 2006, and we are ideally positioned to take an early lead in this emerging market.

Market forecasts for MicroTCA systems are very large, and we anticipate that these systems have the potential for high-volume production.

As I have stated previously, we believe that communications market opportunities are progressing as planned, with the remainder of fiscal year 2006 targeted to capture new design wins and low rate initial production, and significant production to follow in fiscal year 2007.

In the commercial market, we are continuing to follow our strategy of developing opportunities for semiconductor manufacturing equipment, imaging processing and medical electronics applications.

These are segments of the market that require high-performance solutions which are a good fit for our product portfolio.

We are pleased with the order activity we saw in the first half of the year, reinforcing our confidence in the growth we anticipate in the second half of the fiscal year.

Our confidence is based on a strong backlog, increases in government orders, excellent sales growth from our European markets, and in the commercial market, recent strengthening of orders from semiconductor manufacturing equipment customers.

Additionally, we are encouraged by the amount of activity in the marketplace for our AdvancedMC products, which will generate increased sales in the second half of the fiscal year.

Based on that backlog and our customers' forecasts, we expect sales for the third quarter of fiscal year 2006 ending March 31, 2006, to be between 40 million and $44 million.

For the fiscal year ending June 30, 2006, we are reducing our guidance by $5 million due to the recent order cancellation and now expect sales to be between 160 million and $170 million.

In summary, our growth expectations are enhanced by four important events -- strong design wins, with 26 design wins for the first half of fiscal year 2006 compared to 15 for the first half of the previous fiscal year; four consecutive quarters of increasing bookings; capturing our first AdvancedMC-based design win; and a Company backlog increase of 12% since June.

We continue to review and reduce our operating costs, but we will not deviate from our strategic plan.

We will continue to execute our strategy, which we believe will deliver growth in sales and earnings over the next several years.

At this point, with the help of Mark, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS).

Brian White, Kaufman.

I'm wondering if you can talk about operating cash flow and depreciation numbers in the quarter?

Brian, this is Jim.

The depreciation will be right at $1 million for the quarter and our operating cash flow is right about zero.

It's kind of a breakeven.

And just maybe talk about trends moving into the March quarter -- kind of what you expect from your three markets in terms of growth.

The government turned in a nice quarter.

It sounds like you expect that to continue in the March quarter.

But we saw that communications market seemed a little weak in the December quarter, declining, which is unusual for a seasonally strong time of the year, and commercial I think was down, as expected.

Maybe talk about what you expect for the March quarter in terms of the end markets?

Well, we expect the government to continue as it was in the last quarter.

We started out the quarter with some good orders already in that market.

So we expect that to continue.

In the commercial, as we mentioned, we have seen an increase in the orders of semiconductor equipment manufacturing.

So we are kind of expecting that we should see some growth there.

And then communications is really driven by capturing more design wins and the strength of Ericsson, which continues to be on track with last year.

Do you think the communications will -- will it grow sequentially, do you think?

I think that probably, yes, that is correct.

And you also think commercial will grow sequentially?

Yes, I believe it will.

Rob Stone, SG Cowen.

I just wanted to follow up on that same thread where you gave your reduced guidance range for the full fiscal year, and you've got about a $10 million range from the low to the high, taking out the 4 million range for the March quarter.

That gives a fairly wide range for the June quarter.

And I'm wondering if you were to hit the high end of that range, which seems like a pretty strong sequential acceleration, as well as return to year-on-year growth, where would that incremental business come from -- the government or one of the other segments?

Well, I think it would come from government, as well as the other segments, as well as Europe, which is continuing to grow.

So we expect in order to achieve the higher range, we'll have to see growth in all of our markets.

In past calls, you have talked about increased price competition affecting the market.

Any updated commentary there?

And beyond the mix changes with increased government helping your margins this time, what do you see going on over the next couple of quarters in terms of pricing and margin trends?

Well, we still see -- it is a very strong, competitive market in just about all the markets.

And we see the most price pressure in our commercial and communication segments.

And that's really driven more on the volume side.

So in the government area, we see much less of a price pressure.

Wes Cummins, B. Riley.

Jim, did you give SG&A guidance?

I got the R&D guidance.

Did you give any SG&A guidance for the next quarter?

No.

Can you give me an idea of the trend?

We would expect it to remain relatively constant from the expense level that we saw kind of on a year-to-date basis.

And on your guys' government business, what percent of the revenue do you expect that to grow to in the second half?

In the same?

In the second half or the first?

Yes.

The second half of this year versus the first half -- do you expect it to remain constant?

Yes, I think it will -- the mix of our business will remain relatively about where it is right now by the end market segments.

And Clarence, on the low end of your guidance, 160, are there any significant government programs, any one or two significant programs that have to ramp in the second half to meet that guidance?

No, we have actually seen some pretty constant ramp on several programs.

So we are not expecting any one real big pop there.

And under the AMC products, you got your first win last quarter.

In the telecom segment in general, we've seen kind of low-single-digit design wins on a quarterly basis.

Should we expect to see that increase in the second half of this year and into '07?

What is a reasonable number for us to look and say we feel like SBS is having a reasonable amount of success on the AMC products?

Yes, I think that you should expect to see those increase over the second half -- in the second half of this year.

We've got a lot of product out there in people's labs being tested for applications, and they are going to have to make a decision over the next six months of how to proceed.

That's really what we're waiting for, is our customers to decide on how they are going to use the product.

And then lastly, M&A -- we've talked about M&A before on the call.

Anything on the horizon?

Any good opportunities in the marketplace?

Yes, we are still active in M&As.

Evaluations of some of the companies we've looked at are relatively high.

But we're still very active at looking at opportunities.

Brian White, Kaufman.

I'm just going back to ATCA.

You have customers that are currently fiddling around with your products.

When do you expect revenue -- or haven't you had any revenue at all yet on ATCA?

Yes, we have.

We've had on our AdvancedMC product line, we've been selling units probably in the quantities of less than 10 to a customer, typically.

All that's going into the labs.

And so it's been relatively small revenue.

I mean, when do you expect for this to be material?

Is that an '07 event, a calendar '07, a calendar '06?

We really see '07 as being the beginning of production-level systems in the AdvancedMC marketplace as people design it in the rest of this year, and we may see some low-rate beta-type productions from our customers later on this year.

But we are not expecting any of the bigger production to hit until next fiscal year.

And can you just talk a little bit more about some of the cost control initiatives that you've put in place?

And do you think there's a need for any restructuring at SBS?

Well, I think we have restructured over the last six months.

And we have reduced some staff where appropriate, and been watching our expenses in all areas for quite a while.

How many employees do you currently have?

About 517, somewhere around there, including all of the temporary and contract types, too.

And how many of those are engineers?

About 160, I believe, worldwide.

And you look out over the next year, you think you'll have more employees, less or about the same?

I think it will be roughly about the same as I look out over the next 12 to 18 months.

Tim Summers, Stanford.

You mentioned that you saw an increase in your semiconductor equipment biz in the December quarter.

I'm curious -- when did you begin to see that pick up?

And do you think it's going to be strong enough so that you would report any 10% customers in the March quarter?

Well, basically, Tim, we saw the pickup in the orders start coming in about halfway through the quarter -- last quarter, and continue into January so far.

As to whether we'll see them as a 10% customer in the March quarter, that's yet to be seen.

But we have seen some good strengthening of the orders.

(OPERATOR INSTRUCTIONS).

Jeff Meyers, Intrepid.

Just a quick question on the semiconductor manufacturers -- is that I guess mostly Applied Materials at this point or have you guys I guess broadened the customer set there?

Well, we have broadened the customer set there, Jeff, but basically the key one right now is Applied Materials.

And then I think you mentioned this before;

I didn't catch it in terms of the AMC design win that you guys got -- what was the application there?

It was a WiMax application -- provide wireless broadband over a greater area than the traditional wireless.

[Hasne Kayim], Pacific Edge.

I just want to get a feel for I guess what your target operating margins levels are for not only this year, but where you think it -- what you are targeting for fiscal year 2007?

We typically have not given that level of guidance.

The only way we could really answer that is we would expect to over the next year or so to hopefully achieve the kind of operating margins that we historically had generated back several years ago.

But specific guidance, we have not given that.

I guess most companies have a feel for under a certain revenue level, what type of operating margins they will garner.

I mean, internally do you set that at around double-digit rates, or is it a high-single-digit type of [calculation]?

No, our targets for operating margin would be double-digit.

And then in terms of the topline guidance, it's a fairly strong ramp throughout the next two quarters.

Is that something that is cyclical, so that going to the December '06 and December '06 quarters, revenue tends to come down a bit from the June highs?

I think that is true.

I think traditionally, we've kind of been higher on the back end of the year than the beginning.

Okay, higher on the back end for your fiscal year.

Yes, fiscal year.

And then in terms of I guess ATCA, you mentioned that you are expecting revenues to actually ramp in the next few quarters there?

We are expecting to see increased revenues over the next couple quarters, finishing out FY '06, but nothing really significant until next year -- next fiscal year.

So I guess would that imply that you've got more than one design win already in the quarter regarding ATCA?

Well, we have one announced design win and then we have several opportunities that are in the evaluation stage.

So we are expecting to close more design wins over the next six months.

And I guess what type of volumes are you competing for at this point as these products hit maturity?

Are you look at one or two million per design win or is it smaller or larger?

Well, it depends on the market.

But typically in the communications market, we look for opportunities that would be similar to Ericsson, which is a good, solid customer with us.

And the volumes tend to be thousands of boards a year, for example, would be a typical example of a good high-end design win.

(OPERATOR INSTRUCTIONS).

All right then.

We are not showing any questions coming from the phone lines.

We will turn it back over to you for further comments.

Thank you, Mark.

I'd like to thank you for participating on our call today.

We appreciate your continued support.

We anticipate reporting the results of our third quarter ending March 31, 2006, on Tuesday, April 18, 2006.

Thank you for participating in our earnings call.

This concludes today's conference call.

We thank you for participating.

You may disconnect at this time.