Identiv Inc (INVE) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SCM Microsystems first quarter earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one, followed by the four on your telephone.

As a reminder, this conference is being recorded Thursday, April 25, 2002.

I would now like to turn the conference over to Miss Darby Dye, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Hello, everyone, and thank you for joining us today as we discuss the results of SCM's first quarter fiscal 2002. Speaking on today's call will be Andrew Warner, Chief Financial Officer, who will provide analysis of SCM's recent quarter and also provide forward-looking commentary, and also Robert Schneider, Chief Executive Officer, who will provide an overview of SCM's strategy and business.

As we begin today's call, let me remind you that during the course of this conference call, management will make certain forward-looking statements regarding future events, or the future of financial performance of the Company. We caution you that such statements involve risks and that actual events or results may differ materially. We refer you to the Company's 10-K and other recent SEC filings, which explain several important factors that could cause actual results to differ from those contained in any projections or forward-looking statements. Any forward-looking statements made on this call are based on information that is currently available and which is likely to change over time. Although our projection will likely change, we do not plan to update them. SCM will provide our analysts and investors with information and forward-looking guidance in our quarter financial news releases and conference calls. We will not provide any further guidance during the quarter unless done through a new release, conference all or SEC filing in accordance with regulation fair disclosure.

Now I'd like introduce Andrew Warner.

Thank you, Darby.

As we announced earlier today, the results of our first quarter were strong, exceeding the range of expectations we had set at the end of Q4 for revenue, gross margin, expense reduction and operational performance. These results were driven by solid execution in both our Security and Digital Media and Video divisions, each of which benefited from an increased focus on our recent reorganization.

As a reminder, in February, we announced that we would reorganize the Company into two major businesses, the first being Security Solutions with digital TV and PC platforms, which will remain the long-term focus of our business going forward. The second a more consumer-oriented business, providing solutions for the digital media and video markets.

As part of its strategy, we have been - we have been preparing legally to separate these two businesses, to allow the Digital Media and Video business to become an independent entity. We have made significant progress towards this separation during the first quarter. Activities associated with setting-up the division as an independent legal entity are near completion. Plans are in place to logistically separate our two businesses as well. The recent performance of this division, which I will go into detail in a moment, provides a positive indication of the viability and appeal of this business as an independent entity.

To assist us with positioning the Digital Media and Video business for the capital markets, we also announced today that we have engaged the investment bank of US Bancorp Piper Jaffray. Piper Jaffray will work with us to evaluate how best to exploit the potential of the Digital Media and Video business, while unlocking value for SCM shareholders. At this stage, we continue to expect that we will be able to complete the separation by the end the third quarter.

Now let's take a look at the numbers. We reported revenues of $43.4 million in Q1, exceeding the Company's guidance of $39 million to $42 million and down 4 percent from revenues of $45.1 million in the first quarter of 2001. As I mentioned, that Q1 revenues were driven by good performance from both our Security and Digital Media and Video businesses. In particular, we have strong sales of our smart card readers, network security programs in the U.S. and saw increase momentum in sales of our digital media readers to OEM customers as well as to the retail channel under our Dazzle brand.

Gross margin for Q1 was 33.6 percent, boosted by strong revenues and above the range of 32.5 percent to 33.5 percent we expect for the quarter.

Underlying operating expenses came in at $13.3 million, below the range of 13.5 to $14 million we had previously indicated and down by $1.5 million from Q4 2001 levels. This is primarily the result of expense reduction programs put in place in our Digital Media and Video business. We have followed an aggressive expense management strategy over the past few quarters to bring this division to profitability. A year ago, the division posted a quarterly loss of $6.8 million. In Q1 2002, this loss narrows to $984,000 and the division is now poised for break-even. The underlying fundamentals of this business continue to improve, positioning it - positioning it favorably as it prepares to separate from SCM into an independent strategy.

On a divisional basis, our Security business posted revenues $22.4 million this quarter 2002 and had gross margins of 40.7 percent. Operating expenses were at $6.9 million, resulting in an operational profit of $2.2 million. In our Digital Media and Video division, revenues were $21 million in Q1, gross margin was 26 percent, operating expenses were $6.5 million, resulting in an operational loss of $984,000.

As a result of the favorable performance from both our divisions in revenue, gross margin and expense management, SCM realized an operating profit of $1.2 million in the first quarter, compared with guidance of a $500,000 loss to break-even. On an as-reported basis, we recorded net earnings of $113,000 this quarter or 1 cent per share.

Excluding amortization of goodwill and intangibles, in-process research and development, stock-based compensation expense, and one-time charges, we reported pro forma net earning of $1 million, or 6 cents per share. This compares with analysts estimates of a net loss of between 1 cent and 9 cents per share.

Now let's look at our results in more detail. And looking at our revenues first in the Security division. Revenues in the first quarter

business were $23.4 million within the Company guidance of 22 to $24 million. This reflects an increase of 19 percent over the $18.7 million recorded in the year ago quarter and is down from the $3.8 million recorded in

2001. Revenues in our Security division sales of digital TV, conditional access modules,

market,

smart card reader products to the government financial and enterprise markets worldwide. Sales of smart card reader products increased in Q1 driven by continued roll-out to readers in the U.S. Army as part of their common access card program for personal identification and network access. Our deployment for the U.S. government are in conjunction with contracts we have won.

As we have said before, orders under these contracts tend to be large, but variable in terms timing, resulting in a fluctuation in revenue levels.

Now moving the Digital Media and Video business. Revenues were $21 million in Q1, exceeding Company guidance which was between 17 and $18 million. This reflects a decrease of 20 percent from the sales of $26.4 million, first quarter of 2001, and a seasonal decrease of 8 percent from the $22.9 million recorded in Q4. Revenues from this division come from sales of our digital media reader writers, as well as sales of our digital video capture and editing products. Both product lines are under the Dazzel brand into the retail channel, as well as to OEM customers in the PC OEM and consumer electronics industry.

Throughout 2001, demand for our consumer-oriented digital media and video

was negatively impacted by the weak economy, particularly in the U.S. In addition to a flattening demand

in what is typically a highly seasonal retail channel, we also experienced decreased sales of digital media readers to our OEM customers. These OEM customers are primarily digital camera manufacturers who are faced with decreased demand from their own customers due to trim costs by seizing

media readers.

During the first quarter we saw an increase sales of media readers

OEM customers

retail channel, as well as increased sales of our own branded readers. Historically we sold our digital media readers into the retail channel primarily through the digital camera after-market network of specially - specialty photography stores. In Q4 we implemented the strategy to leverage the strength of our Dazzle channel into mass merchant retailers and began shipping digital media readers under the Dazzel brand. This has been a highly successful strategy to date as Dazzel readers capturing the number two market share in the U.S. for digital media readers in the first three months in their market. And this information is according to PC Data. Sales of our digital video products were solid during the quarter. While it is still to early to make predictions about the level of overall consumer demand, we are seeing increasing strength in the market for our digital media and video solutions.

Now looking at the revenues split by geography. The U.S. represented 44 percent, Europe 38 percent and Asia Pacific 18 percent of Q1 revenues. And at the end of Q1, backlog stood at $23.4 million against $23.8 million at the beginning of the quarter.

For the second quarter of 2002, we expect revenues from our Security business to be in the range of 21 to $24 million and revenues from our Digital Media and Video business to be range of 19 to $21 million, giving us total Company revenues of between 40 and $45 million. For the year 2002 as a whole, we expect revenues from our Security business to be in the range of 95 to $105 million, including the expected accretive impact of the Towitoko transaction, and full year revenues from our Digital Media and Video business to be in the range of 80 to $85 million.

Gross margin in Q1 was 33.6 percent, up from an underlying gross margin in the - in the fourth quarter of 32.6 percent and slightly above the range we had indicated previously of 32.5 to 33.5 percent.

Looking at the gross margin by division, in Security division, Q1 gross margins were 40.7 percent, slightly above the guidance of 40 percent. This compares with a reported gross margin of 33 percent in the fourth quarter, which included a write-down of $1.2 million for St@rKey product inventory. Excluding this write-down, gross margins in the Security - Security division would have been 38 percent in Q4. Looking forward, we expect gross margins for the Security division to remain around 40 percent for the second quarter and to be in the range of 40 to 45 percent for the full year 2002.

Gross margin for the Digital Media and Video division was 26 percent in the first quarter, above our guidance of 25 percent. And this compares with a gross margin of 27 percent in Q4 2001. Looking forward we expect gross margins for the Digital Media and Video division to remain around 25 percent for the second quarter and remain in the range of 25 to 30 percent for the full year 2002.

Therefore, on a blended basis, we expect gross margins for the Company to remain in the range of 32.5 to 33.5 for the second quarter.

Total operating expenses in Q1, excluding the amortization of goodwill and intangibles, stock-based compensation expense, and separation and other one-time charges were $13.3 million, below the range we had given of 13.5 to $14 million. And this reflects a $1.5 million decrease from the underlying expense rate in Q4, which was $14.8 million. As a percentage of sales, total underlying operating expenses were 31 percent. In Q1, research and development expenses were $2.9 million, sales and marketing $6.4 million, and general and administrative expenses stood at $4.1 million.

Looking forward we expect full year operating expenses in our Security business to be in the range of 25 to 30 percent of revenues and operating expenses in the Digital Media and Video business also to be in the range of 25 to 30 percent. In Q2 2002, we expect to see continued management of operating expenses across the Company with combined expenses from the Securities and Digital Media and Video business in the range of 13 to $13.5 million.

Amortization of goodwill and intangibles in Q1 was $289,000. This is slightly higher than the 125,000 per quarter we estimated at the end of Q4, and we expect quarterly amortization expenses to remain at the Q1 level moving forward.

Stock-based compensation expense in Q1 was $87,000. This results from our acquisition of the remaining portion of Dazzle that was completed back at the end of the year 2000. And going forward, we expect this to remain at the same level.

As we indicated would be the case, we recorded $789,000 in separation costs and other one-time charges in the first quarter. Going forward, we expect to incur charges related to separation of the businesses of between 750,000 and $1.2 million per quarter for each of the next two quarters.

Q1 interest and other stood at a loss of $172,000 resulting in an interest income offset by a loss on foreign exchange.

On an as-reported tax basis, we reported a benefit of $208,000 resulting from losses incurred in the course of in some tax jurisdictions, which were not offset by incomes generated in other jurisdictions. Going forward we expect our normalized tax rate resulting from our Security and Digital Media and Video business combined to be in the range of 28 to 30 percent.

As reported, net income for the first quarter of 2002 was $113,000 or 1 cent per share. This report - this compares with a reported net loss of $18.4 million or $1.20 per share in the year ago - year ago quarter. And on a pro forma basis, that income for the first quarter was $1 million or 6 cents per share, excluding amortization of goodwill and other intangibles, stock-based compensation, and separation and other one-time items. This compares to a pro forma net loss of $8.8 million or 57 cents per share in the first quarter of 2001.

Turning now to our balance sheet, cash and investments were at $59.6 million at the end of Q1, demonstrating our success in preserving cash from previous levels which were $59.4 million at the end of Q4. Accounts receivable were at $39.9 million compared with $44.4 million at the end of Q4, and inventory levels $37.2 million compared to the $32.7 million in the previous quarter. Days sales outstanding at the end of Q1 was 83 days, compared to the 87 days at the end of Q4, and 99 days in the year ago quarter.

Overall SCM has again executed well, again with our operating plan in difficult environment. In particular, by generating cash and reducing DSO.

And finally just to recap on the guidance, we expect revenues from our Security business to be in the range of 21 to $24 million with gross margins around 40 percent for the second quarter. We expect revenues from our Digital Media and Video business to be in the range of 19 to $21 million with gross margins around 25 percent. On a combined basis, we expect revenues to be between 40 and $45 million in the second quarter with gross margins in the range of 32.5 to 33.5 percent.

We expect operating expenses in the second quarter to be in the range of 13 to $13.5 million resulting in operating results of break-even to a $1.5 million operating profit. We also expect to incur charges related to the separation of the business of between 750,000 and $1.2 million for the quarter for each of the next two quarters. We expect amortization of intangibles to be around $290,000 per quarter, and stock-based compensation expense to remain at $187,000.

For the full year, we expect revenues from our Security business to remain in the range of 95 to $105 million with gross margins in the range of 40 to 45 percent, operating expenses in the range of 25 to 30 percent,

full year operating profit range of 10 to 15 percent. For the Digital Media and Video business, we expect full year revenues in range of 80 to $85 million, gross margin between 25 and 30 percent, operating expenses of 25 to 30 percent yielding operating results of break-even to a five percent operating profit.

Over the next few months, we will continue our plan to separate our Digital Media and Video business. From an operational viewpoint, this means that all the assets, staff and expenses will be assigned and allocated either our Security or our Digital Media and Video business. Each business will pursue its own business model and strategy with the overall goal of creating as much value as possible for each business. Until the separation is completed, we will continue to report consolidated results for the two businesses, as well as highlighting detailed performance from each of the businesses.

With that, I'd now like to hand the call over to Robert.

Thank you, Andrew.

As Andrew stated, we are quite pleased with results of our first quarter with solid performance of both our Security and Digital Media and Video divisions demonstrate the success of our strategy to reorganize our Company in order to allow greater focus on each business. By implementing this strategy, we are able to create within each business the necessary technology, structure and resources required to succeed as independent entities.

The positive momentum of our Digital Media and Video business is specifically gratifying. Our strategy to separate this division from our core Security activities is intended to unlock value for SCM shareholder and at the same time explore the potential of this business in exciting market segments. With its Dazzle brand and

, the Digital Media and Video division holds the leading market position for digital video capture and edit products and is the second largest provider of digital media readers for the U.S. retail market. Significant in movements in the expanse business-to-business

close to profitability, the division strong performance in the first quarter demonstrates its viability to succeed as an independent unit, uniquely positioned business in the emerging digital media and media market.

Our Security business also demonstrates positive momentum in the first quarter. This business consists of sales of our smart card reader products for the PC platforms and our conditional access security modules for the digital TV platform. Sales of our smart card reader products increased from prior periods driven by continued volume shipments of readers to the U.S. Army for their common access card program. The deployment of smart card readers for this program has been underway for only a few months now. The U.S. Army plans to roll-out program - to roll-out the program to 4 million military and civilian personnel over the next two to three years. So this is just the beginning for this project.

During the quarter, we also announced our intent to acquire Towitoko AG, which is provider of smart card reader solutions with a strong presence and a leadership for the German - in the German market for banking and home-banking applications. We believe this acquisition will further strengthen our position in the global market for smart card-based technology.

We continue to seek new indications that the market for smart card-based security solutions is increasing. In addition to the U.S. government deployment of its personal ID program, banks are aggressively deploying smart cards as its first step to implementing programs that they hope will reduce credit card fraud. And while interest in smart card-based security has increased significantly since September 11th, the first major commitments to implement new security protocols using smart card came fully when the U.S. Federal Aviation

announced that it would develop standards for airport security based on smart card and

and biometric technologies. The FAA plans to distribute smart cards to all airline, airport and FAA employees by 2004.

The use of biometric technologies in combination with smart card is gaining ground as a more secure method of identifying and authenticating cardholders. The cost of biometric sensors has come down considerably over the last several months, making biometric solutions affordable for mass deployment for the first time.

At the world's largest security show currently going on in New Orleans, the CardTech and SecurTech show, SCM announced that we have developed our first biometrics smart card reader in conjunction with AuthenTec. This reader uses a fingerprint instead of a password or into authenticate the user and it will be available to our customers in the third quarter.

We also announced a joint development with Precise Biometrics to develop another combination smart card and biometric reader. We expect that this will be an important market for us going forward. And the smart card reader platform, which we have, is seen as the idea place to position - actually physically position biometric chip.

Today, we announced the addition of Dr. Manuel Cubero to our Board of Directors, which we will - which we believe will further strengthen our position the digital TV security market. Dr. Cubero is a well-known figure in the European digital TV industry and was for many years with the Kirch Group, which is the largest television broadcaster in Europe. Manuel Cubero's

they included representing Kirch in the development of commercial specifications around the Digital Video broadcasting standard. The DVB governs the use of conditional access modules and the open platforms scenario. In the security module technology, SCM of course played a key role so far in the standardization and the first deployment of the modules. SCM provides over 90 percent of the condition access models today used in Europe to all digital division television subscribers.

Dr. Cubero brings a wealth of experience which can help SCM to leverage our strong position to take advantage of changing business models of the major pay-TV operators which are now underway. Right now, the pay-TV industry in Europe is in turmoil brought about by the fall of Kirch. Like most other,

Kirch, has attempted to control the entire value chain of their subscribers maintaining ownership of everything from the rights to television content to the so-called

equipment for distribution of the content and even to the proprietor who set the box with receiver technology at the customer's home.

This was affordable under an analog system but with the more complex digital technology, this has proven to be an extremely expensive business model to maintain. In the area of the receivers alone, the old artificial TV means that Kirch has significantly more costs from supplying and supporting new digital set-up boxes. Because the boxes only can received content from Kirch, the consumer has no desire to pay for them and Kirch is forced

to buy each subscriber's loyalty at a cost that has become unsustainable.

Already Kirch is working on a

to lower its cost and make it's business model profitable. As part of this strategy, they have adopted a plan to provide their subscribers with a common interface module, a security module, that fit into the open standards set-up boxes. This will cost them a fraction of the amount that they would have to spend to support the historical provider business model.

Basic economic pressures combining with continued - combining with continued regulatory pressure coming from individual countries in the European entity, European as a whole. The transition to the next stage of the digital pay-TV industry is likely to be quite dramatic for many participants.

For SCM, this is a tremendous opportunity. We have been working closely with Kirch for many years to convince them to adopt a common interface approach and are now in a favorable position to work with them as they finally begin to deploy this technology. We believe that other operators are also experiencing the pain of financing expensive proprietary model and will follow the Kirch's - in Kirch's footsteps. We're confident that the shift to an open platform will accrue an additional pay-TV market, whether it takes a few months or longer. We're uniquely positioned to leverage as this shift occurs.

So this is the overview and strategic acquisition of the company. But before closing, I would like to say a few words about our President and Director Bernd Meier, who passed away last month. Bernd Meier has been a key contributor in our Company, building-up the business from the beginnings from 1992 to our IPO phase in '97 and secondary offering in '98. Bernd has been dying of cancer and has been out of the operations of business for almost two years now. He has been focusing on our investment strategy and we've lost a key partner and friend here in our business.

And now I'd like to turn the call over to the Operator for questions and answers.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one, followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one, followed by the three. If you are using a speaker phone, please lift your handset before entering your request.

One moment please for the first question.

Once again, ladies and gentlemen, that is the one, followed by the four.

Our first question today is from

with Insteam Partners. Please go ahead.

Good morning, Andrew. Good morning, Robert. Congratulations on a good quarter.

Thank you.

You had mentioned breakdown by geography for the overall business as well as backlog. I was wondering if you could provide more information on the individual businesses?

Yeah, this is Andrew. For our Security business for the quarter, roughly 55 percent of that came from Europe, about 20 percent from the U.S. and the balance in Asia. And in our Digital Media business we look at something in the region of 75 percent coming through from the U.S. and the balance coming through primarily from Europe.

And can you provide the same, similar information on backlog?

I don't actually have the backlog between the two divisions. But it's true to say the majority of our backlog comes through from the Security business, where the sales cycles there tend to be that we have a much stronger backlog position than we would on our Digital Media and Video businesses tend to be more

business rather backlog based business.

OK, thank you.

Once again, ladies and gentlemen, if you do have a question, please press the one, followed by the four at this time.

And our next question is from

with CS First Boston. Please go ahead.

Hi. I just liked to ask on the growth that you've experienced in the Digital Media and Video, to what extent would you say that performance has been due to your own internal efforts of focusing the business versus the external growth of the marketplace?

Should I take that one, Robert?

I think it's a combination of the two, Patrick. What we have seen clearly is the shift in the strategy that we - that we took in order to open-up the Dazzle brand to the digital media reader product and taking that into that Dazzle channel has proved a very successful. As I was saying in the prepared remarks, you know, achieving the number two market position in the U.S. after basically being in that market with those readers for three months, shows the strength behind that brand.

It is true to say that we are seeing signs of a slight recovery in the U.S. consumer market. Our overall level of sales had improved as well. That's really a combination of the two. I do think it's a bit early to see and to project whether that can be, in terms of the U.S. side, certainly can be a sustainable type recovery. But clearly what is a activity that we can do, is to continue to leverage the brand positioning in the channel. And it is also true to say that, you know, separation of the businesses and the increased focus that we can bring on the businesses is also reaping some rewards.

So I think it's a combination of all three factors we've put in place prior to the separation, some early signs of recovery in the consumer market in the U.S. and the increased management and business focus.

Are you experiencing any pricing pressure in the market at this stage?

We're seeing competition, yes. We're not seeing significant pressure on pricing, no.

Thank you.

Ladies and gentlemen, our next question is from

with SG Cowen. Please go ahead.

Hi. I'm sitting in for

. And I had a question with regards to linearity in the quarter. If you could comment on how with the revenue folds, especially on the Security side.

OK, Andrew, I can take this question. The linearity in Q1 for the Security side was extremely good. Probably in this respect, was the best quarter we ever had. So, we really achieved an almost linear production and shipment throughout the quarter from January to March.

OK, thank you.

OK. Operator?

Yes, sir. Did that answer that question?

Yes.

Oh, I'm sorry. Ladies and gentlemen, if you do have a question please press the one, followed by the four.

There are no further questions. Please continue with your presentation or closing remarks.

OK, thanks, Operator.

In summary we are pleased with our performance in Q1 and believe that our strategy to focus

Security and Digital Media and Video business will bring major benefits both to SCM and to our shareholders, partners and customers.

Thank you for joining us today.

Ladies and gentlemen, that does conclude the conference call for today. You may disconnect your lines and thank you for participating.