Identiv Inc (INVE) 2004 Q4 法說會逐字稿

Good morning.

My name is Kimberly, and I will be your conference facilitator.

At this time, I would like to welcome everyone to SCM's fourth-quarter and year-end conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you.

Ms. Darby, you may begin your conference.

Thank you.

Hello, everyone, and thank you for joining us today as we discuss select preliminary unaudited results of SCM's fourth quarter and fiscal year ended December 31, 2004.

Speaking on today's call are Steve Moore, Chief Financial Officer, and Robert Schneider, Chief Executive Officer.

As we begin today's call, let me remind you that during the course of this conference call, management will make certain remarks regarding SCM's expectations as the future events and future financial performance, plans and prospects of the Company.

These remarks constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

We caution you that such statements are subject to risk, uncertainties and other factors.

And that actual events or results may differ materially from those indicated by these forward-looking statements.

We refer you to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed March 12, 2004, and the other reports the Company filed with the U.S.

Securities and Exchange Commission from time to time.

For a discussion of some of the risks, uncertainties and other factors that could cause actual results to differ from those contained in the projections or forward-looking statements.

In addition, any forward-looking statements represent SCM's views as of today and should not be relied upon as representing the Company's views as of any subsequent date.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change whether as a result of new information, future events or otherwise.

Now, I would like to introduce Steve Moore, SCM's Chief Financial Officer.

Hello, everyone.

Thank you for joining us today.

On today's call, I will discuss our preliminary unaudited results 2004 fourth quarter, then provide some guidance into our expectations for the first quarter of 2005.

Robert will then give you an update on our market and business activities.

First, I would like to provide some further explanation as to why we have announced select preliminary results today rather than final results for the fourth quarter and year.

As you are probably aware, U.S. public companies have been faced with a number of new financial control and reporting requirements under the Sarbanes-Oxley Act over the past 2 years.

Like many U.S. companies, SCM is subject to additional new reporting and documentation and control requirements under Section 404 of Sarbanes-Oxley at this time affecting the disclosure of our 2004 results.

Due to these requirements, these new requirements, the review of our financial statements and results of operations by management and our independent auditors has required significantly more time than in past years.

In addition, management and our independent auditors are still in the process of finalizing our respective assessments of the Company's financial controls.

Therefore, we feel it prudent to release only select preliminary unaudited results at this time.

We expect to report full results for the 2004 fourth-quarter and fiscal year in our 10-K filing, which is due to be filed with the SEC by March 16th.

Going forward, we are considering what might be the best timing for our quarterly financial announcements in relationship to our quarterly SEC filings.

We will keep you all informed of any decision we make.

This morning, we announced select preliminary unaudited results for the fourth quarter and fiscal 2004 year, which were substantially in line with the expectations we had discussed at the beginning of the quarter -- with revenues coming in above guidance, underlying gross margins remaining stable, and underlying operating performance showing continued improvement as a result of the cost-cutting activities we initiated in the third quarter.

We expect to report revenues from continuing operations in the fourth quarter of $13.4 million, exceeding our previously communicated guidance of $8 million to $11 million and reflecting higher than unusual sales of our Smart Card readers for U.S. government programs.

As we have said before, large security programs tend to be quite variable in terms of timing.

And in Q4, we saw the positive side of this trend.

Year-over-year fourth-quarter revenues were up approximately 6 percent from revenues of $12.6 million recorded in the fourth quarter of 2003 and sequentially up 22 percent from revenues of $11 million in the third quarter of 2004.

Looking at revenue by product line, we expect to report sales of our Smart Card readers and related products used to provide secure access to PC's and computer networks of $6.8 million in Q4, representing 51 percent of revenues.

Our market focus here continues to center around a mix of Smart Card based personal identification and authentication programs being implemented by the U.S. and other governments, corporate enterprises, and European banks.

We believe the market opportunities we see here will continue to develop and grow in 2005.

Sales of our digital TV security modules are expected to be $4.7 million in Q4, representing 35 percent of total revenues.

These modules are used in conjunction with open architecture, set-top boxes and cable or satellite ready digital television to protect digital pay-TV broadcasts and enable legitimate subscribers to decrypt broadcast content.

And finally, we expect to report sales of our third product area, flash media card readers, of $1.9 million in the quarter or 14 percent of revenue.

For the year as a whole, we expect to report total revenues of $49.1 million, a decrease of 26 percent compared to the revenues of 66.5 million in fiscal 2003.

By product categories, Smart Card readers and flash media interface product sales remained flat year-over-year, while digital TV product sales decreased by approximately 46 percent.

As we have mentioned on past calls, we have seen a significant decline in sales of our digital TV security modules over the last several quarters.

The growth rate of new digital TV subscribers in Europe has slowed significantly, and aggressive competition from non-license modules has captured significant market share among our traditional base of small operators in Europe.

Robert will discuss the current trends in our strategy for digital television markets in a few moments.

The geographic split of revenues in the fourth quarter included approximately 42 percent of sales from Europe, 34 percent from the United States, and 24 percent from the Asia-Pacific region.

For the year as a whole, 47 percent of sales came from Europe, 32 percent from the U.S. and 21 percent from the Asia-Pacific region.

We expect to report gross margins for the fourth quarter of 35 percent, which includes a write-down to inventory of approximately $1.4 million.

Without this write-down, gross margins would have been 45 percent, above the range of guidance for the quarter of 38 percent to 41 percent.

By product line, gross margins for our Smart Card readers -- reader products were 37 percent in Q4 including a $700,000 of the inventory write-down.

Gross margins for our digital TV products were 25 percent, including 600,000 of the inventory write-down.

Gross margins of our flash media interface products were 51 percent of revenue.

Operating expenses in the fourth quarter, as reported under U.S.

GAAP, are expected to be in the range of 7.2 million to 7.7 million, including amortization of intangible assets as well as the restructuring and other charges between 100,000 and $500,000.

The underlying fourth-quarter expense level of $7.1 million reflects a 19-percent decline in spending from baseline levels in the second quarter at the end of which we initiated a number of cost-cutting measures.

We have reduced expenses across our organization, particularly in headcount, which has come down by 62 full-time equivalent positions or 18 percent as well as a significant reduction in spending on non-audit third-party professional fees.

While we have made material progress against our goals, our savings were negatively affected by exchange rate changes in the last quarter, affecting our significant non-U.S. dollar expense base along with continued high levels of third-party professional fees related to our Sarbanes-Oxley Section 404 compliance program.

These have been the primary factors that have prevented us from realizing reductions and reported expenses at the levels originally planned.

Loss from operations in the fourth quarter of 2004 is expected to be between $2.6 million and $3 million, as reported under U.S.

GAAP, including the range of amortization of intangible assets and restructuring and other charges already mentioned.

This compares with loss from operations of the fourth quarter of 2003 of $6 million including amortization of intangible assets and restructuring and other charges of $3.2 million.

Turning now to select key items from the balance sheet.

Cash and investments held fairly stable over the last quarter.

And we expect to report that we ended fiscal-year 2004 with cash, cash equivalents and short-term investments of $46.2 million compared with $46.8 million held at the end of the previous quarter.

Net accounts receivable are expected to be $8.7 million at the end of Q4 compared with 6.7 million at the end of Q3, reflecting the higher revenue levels in the fourth quarter.

Inventory levels are expected to be at $8.3 million at the end of Q4 compared with 9.6 million at the end of Q3.

Excluding write-downs to inventory in Q4, inventory levels were flat with prior quarter.

I'd now like to wrap up this financial review with some comments about management's outlook over the near term.

For the first quarter of 2005, we expect revenues to be in the range of 8 million to $11 million, and gross margins to be in the range of 38 percent to 41 percent.

We expect expenses to remain roughly in line with current levels.

Within the range of revenue, gross margins and operational performance, we expect to report an operating loss from our continuing operations in the first quarter.

With that, I would like to now turn the call over to Robert.

Thank you, Steve.

As Steve mentioned, the Q4 -- we continued to make progress against our plan to reduce costs across our expand states.

Those are executed well on the revenue side in what remains a difficult market environment.

As a result, we reduced our underlying operational loss by nearly 2 million from the previous quarter's levels.

Or compared with Q2 levels, the reduction was even greater, as we reduced underlying operating costs by 4.6 million or 65 percent.

The maturity of our cost reduction plans has now been implemented.

And our focus will be to grow revenues.

The trends in our target market remain mixed.

In our PC security business, as Steve has mentioned, we benefited from higher than usual sales during the quarter of Smart Card readers intended for the U.S. government security projects.

This included the shipment of readers to MPC Computers for use for various U.S. government agencies under the common access card programs, as well as shipments of readers to a major Smart Card manufacturer for employee identification and other indication programs.

As we have said in the past, the timing of Smart Card based security projects is quite variable.

And while it tends -- convenient, strong participation in this market sector is very positive.

One should not look at this quarter or any particular quarter's revenue levels as a specific trend.

At the same time, we're seeing a continued increase in the number of planned and active security programs utilizing Smart Cards across many industries, including banking, government, health care, corporate security and others.

The writing volume of these programs and other associated industry activities should gradually make this business more predictable. 3 years ago, the U.S. common access card program was the only large Smart Card based security program and identity program in the world.

Today, there are several large Smart Card based programs requiring large scale reader infrastructures worldwide that are either actively deploying or in the planning stages as well as multiple smaller projects.

This creates a much larger base of opportunity for SCM.

Our potential opportunities include government-driven personal ID and auto identification programs, such as the e-passport, all checks in several European Union countries like Belgium, Denmark, Netherlands, Sweden and the U.K. as well as in Australia, China, Hong Kong, Japan, Korea, Malaysia, Singapore, Canada and in the U.S.

Opportunities also include planned programs for citizens' ID or drivers' license cards in Japan, Thailand and the U.K.

Governments around the world are also beginning to use Smart Cards to store healthcare records electronically and to authenticate card holders for healthcare services.

The markets research firm, IDC, states that electronic patient records are the top priority solution for healthcare providers in Western Europe over the next 4 to 5 years -- with total IT spending in this area to grow from 1.1 billion in 2004 to 2.1 billion in the year 2008.

Taiwan, Germany, Italy, Austria, France and other countries or regions are deploying healthcare Smart Cards for healthcare users.

Altogether, there are various programs for personal identification and auto identification -- are expected to roll out to hundreds of millions of users over the next several years.

So the potential here is really tremendous.

SCM is providing the readers for some of these early stage projects including Belgium's national ID card and the European Union's net card health card project.

Both are working with several partners to develop a prototype terminal for the German government's rollout of healthcare cards to a total of 80 million citizens beginning in 2006, which we will be demonstrating at CeBIT in a few weeks from now.

So the German government is preparing to deploy a second generation of its Smart Card based e-health program, which will require a complete new Smart Card terminal effective as Smart Card reader infrastructure.

Today's state-of-the-art Smart Card readers will be replaced by terminals which incorporate two Smart Card readers, a so-called SAM Smart Card for secure communications and display and a PINpad or an optional singaporesandrome (ph).

This new high-security concept was required because the first generation of simple memory cards could not prevent fraud in the German healthcare market.

Germany is leading the world with this new healthcare program, and SCM has strong relationships with the key partners in this initiative.

Many Smart Card based ID programs are planned to use contactless interface technology.

And SCM has been developing a full range of contactless readers to address these opportunities.

Earlier this year, we announced a partnership with Sharp Electronics to provide readers for their contactless Smart Cards for electronic payment applications.

We are also supplying contactless Smart Card readers to NTT in Japan for their internal employees' identification program, which uses contactless Smart Cards.

The financial industry is also adopting Smart Cards as a way to protect consumers, vendors and banks.

Canada, most of Europe and Asia Pacific and some markets in the Middle East as well as Africa and Latin America are rapidly moving to Smart Cards to reduce banking fraud.

Most of those applications are for online banking over the Internet.

Last year, SCM introduced mobile readers to serve this Internet banking application.

And we've established a close relationship to the credit card industry, specifically here the announcement with -- along with MasterCard.

We believe we are very well-positioned at this emerging stage of deployment of mobile Smart Card readers.

In summary, the volume of Smart Card based security programs continues to increase and so the need for the Smart Card reader and terminal infrastructure.

Many applications including Citizen ID, healthcare, banking and network access -- SCM is well-positioned to participate in these programs and to leverage market opportunities as they develop.

In the digital TV market, we continue to experience the impact of profound competition that has been going on in the industry for some time now.

Unlicensed digital security modules continue to take market share at the small, very small operator place.

And the pricing pressures continued to increase over the last several quarters.

Our core customer base is shifting from the smaller, specialized content operators to midsize blue key (ph) operators.

We believe these midsize operators are a good target for our security modules because they need to protect their pay-TV subscriptions against hackers and unauthorized access.

Initial deployment has started at these midsized operators, but high-volume digital TV module applications will not be deployed in 2005.

We have been working to develop new opportunities with this midsize and larger operators for more than a year now.

And we continue to believe that these new market operators will result in significant revenues over time.

In 2004, we have made good initial progress with these midsize operators driving contracts with DigiTurk in Turkey.

And start up – a pay-TV operator called TopUpTV in the U.K., which has resulted in a total shipment of over 80,000 modules to those two operators.

We have also been positioning the Company to take advantage of emerging trends in the digital TV market.

Recently, Kabel Deutschland, the largest cable operator in Germany and one of the largest in the world, announced that it will no longer control the digital TV receiver platform used by 10 million subscribers to access its broadcast, which opens the door to the use of common interface technology and our digital TV security modules for the first time.

In addition, we continued to work closely with a number of major consumer electronic manufacturers in Europe, Asia and the U.S. to make our security modules plug and play with the common interface slot in their digital receiver platforms and so to encourage the widespread adoption of common interface technology.

As reported earlier in Korea, where there is a government mandate to implement digital TV broadcasting using this common interface and digital TV module technology based on the U.S. cable standard, we have now signed two of the largest Korean operators, BSI and CJ CableNet.

The rollout official to be broadcasting in Korea has been slower than expected, as the Korean government delayed the approval of digital certificates for operators under the new program.

However, in Q4, we shipped our first 5,000 digital TV security modules to operators in Korea for field trials.

It is unclear at this time, how rapidly this program will now move forward.

However, SCM remains the only supplier capable of providing open cable digital TV security modules for the Korean market.

And our current contract retains exclusivity through the end of 2005.

We will continue to work closely with our customers in Korea, the Korean government, in order to roll our digital TV services as quickly as possible.

As we have discussed on the past calls, the other significant digital TV market opportunity for SCM is the introduction of the so-called integrated digital TV sets, which contains a digital TV tuner and the decryption technology right in the television console, rather than in an external set-up box.

Integrated digital TV sets or cable ready TVs in the U.S. require the use of digital security modules to decrypt digital TV broadcast.

INS Research predicts 17 million integrated digital TV sets will be sold each year starting in 2007.

Already more than 1 million integrated digital TV sets are forecasted to be sold for example in the U.K. market alone in this year, 2005.

To address the U.K. market, TopUpTV is funding our security modules with new integrated digital TVs and making the modules available in major retailers' electronics stores, such as Dixons.

For the digital TV platform, SCM remains the leading supplier of legal authorized security modules to address the security requirements of large and small operators.

And we're well-positioned to benefit from the growth of integrated cable and satellite-ready digital TVs, as these devices enter the consumer market.

In summary, we are committed to leveraging the Company's assets to create shareholder value and to return the Company to profitability and growth.

Now, I would like to turn the call over to the operator for questions and answers.

(OPERATOR INSTRUCTIONS).

Adrian Pehl, DZ Bank.

Just a couple of questions -- maybe you could do them one by one.

I would like you to teacher (ph).

First of all, in the beginning, I didn't get it correctly.

You said that you reduced your headcount by 18 percent?

So what number is your current headcount at the end of 2004?

Hey, Adrian, this is Robert Schneider.

Our headcount by end of 2004 is -- full-time employees are 300.

And we are expecting a reduction during Q1.

Some of this has happened already by another let's say around 5, 8 people.

So as we said in the beginning, by end of Q1, we expect the headcount reduction program to be in full effect.

As you know, we started this in September last year.

When I look at your guidance that you have provided so far, it is pretty much the same as you have given at the end of Q3.

When you look at the fourth quarter with really good revenues, I'm just wondering if you are just cautious now when it comes to your guidance.

Or if there is a trend in the PC security business that does not seem actually to be longer lasting?

So you referred to timing when it comes to government projects.

So is that your primary trigger to say that you believe sales are coming down on the first quarter?

Yes, correct -- first of course we are cautious.

But we almost in every year experience Q4 being the highest quarter of the year and Q1 being lower than Q4.

So we expect a similar to happen this year.

And in terms of all the new programs we're talking about, both in the PC security field as well as the Korean operator, we do not see a significant contribution on these things in Q1.

A little contribution starting in Q2 -- majority really is in the quarters beyond.

So therefore, Q1 will be -- we will see the typical pattern from lower than Q4 revenues.

Okay.

Well, is there any -- do you have visibility that you have especially when it comes to Korea to say, okay, they are definitely ramping volumes in the second half?

First, we have definitive OEM agreements, which are -- I think we have announced this in the two press releases.

It is more than 100,000 units of modules.

What we don't know exactly how they will complete the field test and so on.

For now, there is another certification required by the Korean regulator or telecom regulator, which is in the final stages.

And after that is signed and completed there will be another test and acceptance scenario.

And then probably another field test somewhere in Q2.

And then, we expect the initial roll-out happening in second half.

But you know with government programs, you always have to be careful.

So that is what we can say at the moment.

But we cannot guarantee it of course.

So given the opportunities that you mentioned, it sounds really like a great pipeline.

But I understand the timing is always a difficult topic.

So what would you do when the demand in 2005 does not pick up as you assume?

So I guess then you would make potentially losses in all quarters.

What additional measures would you then start to take?

Good question -- first, we have about five new market segments and related new products, which we have introduced and which are starting to roll out.

So, then all of those five new segments won't work is very unlikely.

So we are reasonably optimistic that some of those things really commercially will take a positive effect.

In the meantime, of course, we will be extremely careful on Op-ex.

We are rather on our way to try to reduce Op-ex during Q1 and eventually Q2 without any major layoff program.

So I think that is behind us.

But we will be extremely tight in expense control.

And also on developing new projects, we would ask of course customers for contributing on our R&D development.

The last question from my side so far would be on the most recent press release when it comes to box or TV access.

Could you quantify -- you have already supplied 10,000 modules.

Can you quantify which one you expect to ship into Scandinavia?

Very difficult -- box (indiscernible) is a rather small player, probably comparable to TopUpTV in the U.K.

And so we do not know.

I think something like proximivelcanaves (ph) is a much smaller opportunity than what we have in Korea for example.

And gentlemen, at this time, we have no further questions.

Okay.

Thank you for joining us today -- and looking forward to see you at the next analyst call in April.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.