Richardson Electronics Ltd (RELL) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter and year-end release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call please press star then 0. As a reminder this conference is being recorded. I would now like to turn the conference over to our host, Chief Executive Officer Ed Richardson. Please go ahead.

Thanks, Beverly. Good morning. Well, we apologize for the early start on this call. I have Dario Sacomani with me, Chief Financial Officer, and Greg Peloquin, who is Executive VP and General Manager of the RF and Wireless Group. We are in New York starting the fourth day of a road show on a three million share offering and that's the reason for the early start. We have Bruce Johnson on the phone. He's in LaFox, Illinois, running the business and making money while we're out spending it. We're really pleased.

We released earnings last night for the year and the quarter and we'll go through both. e had a record year in sales, 520 million. The fourth quarter was also a record at 145 million, up 22% from the prior year fourth quarter and up 14% sequentially from the third quarter. All four of the strategic business units were up from the prior year, and it was the eighth consecutive quarter of year-over-year growth. We reported net earnings of 17 cents versus a loss last year of 81 cents, which, of course, had an inventory write-down and restructuring charge in it. By SBU, RFW ,CDRF and Wireless Group was up 30% to 68 million. The highlights there were the passive and interconnect business unit was up 77% with sales at 14 million in the quarter. Network access was up 54% with sales of 26 million.

Infrastructure was up 44% with sales of 20 million and Asia was up 63%, China still on fire with sales of 25 million. Bookings for the quarter, Bruce will tell you about, but they're also a record high for all of the SBUs. The Industrial Power Group for sales in the fourth quarter was up 29% to 32 million. Excellent margin, they were at 31.6%. The power component side of the business, which is FDR's and ITBTs and assemblies was up 39%. The tube business, believe it or not, was up substantially, 24%. A lot of that had to do with the increase in business with the semiconductor wafer fabrication. Asia was up 48% to 7 million for IPG and the U.S. was up 3%.

So strong all across the board for the Industrial Power Group. The Security Systems division was up 13% in the quarter to 25 million and they increased their gross margin a full point at 26%. Led this time by the U.S. which is really rebounded nicely for security, they were up 19% to 8 million. Canada continued their strong performance, they were up 12% to 13 million. The Display Systems Group was up 4% to 19 million and the legacy CRT, cathode ray tube, business was up about 8% in the quarter and specialty displays was up about 94% in the quarter. They really did well.

That had to do primarily with displays and we had one very large order which Bruce will tell you about in his highlights from the quarter. Geographically, North America was up 20% to 76 million. The U.S. was up 21% to 58 million, Canada up 16% to 18 million. Europe was up 11% to 31 million, led by Italy, which was up 48%, the U.K. up 37%, Israel up 56%. Nice to see Israel turn around. Asia Pacific continued really well, they were up 54% in the quarter and total sales 33 million, led by Korea, which was up 84%. Many of the products that are being sold into Korea are built into systems that go into the Chinese telecom infrastructure. China was right there, they were up 79% to 9 million.

Taiwan was up 105% to 3 million and Japan was up nicely, they were up 45% in the quarter. Latin America continues to be the lagger, they were down about 10%. Major decline was in Mexico which was down 43%. We did see Brazil turn around, they were up 16% in the quarter. Okay, for the full year, again, sales were a record high 520 million up 12% from last year. All four SBUs were up from 2003. And we reported net earnings for the year of 42 cents versus a loss for the prior year due to inventory write-downs and restructuring. By SBU, RF & Wireless was up 13%, ended the year at 231 million. Margin was up slightly at 22.6%.

Within RF and Wireless the Passive and Inter Connect Group was up 29% with sales of 45 million. Network access was up 26%, sales of 86 million. The infrastructure business was up about 8% to 68 million and geographically, of course, they were led by Asia. Asia for RF and Wireless was up 37% to 77 million. The Industrial Power Group sales for the year were up 18%. This is our most profitable business unit. They ended the year with sales of 113 million at 30.8% gross margin, led by power components, which was up 26%, tubes which were up 15% for the year with a margin of 32.1%, and geographically for IPG, Asia was up 37% to 23 million, Europe was up 23%, and Europe had nice margin for our IPG as well, they were at 31.8%.

The Security Systems Group continued their solid performance, they were up 11%, they passed the $100 million mark for the first time, ended the year at 102 million, and they increased their margin nicely to 25.5%. We saw nice turnaround for security in the U.S. U.S. for Security Systems division was up 11% to 31 million and Canada continued to lead the group up 14% to 52 million. The Display Systems Group was up about 4% to 66 million. They were led there by medical monitors, gray-scale monitors that go into diagnostic imaging applications, were up about 15%, and that's remarkable in that the price of those monitors has come down about 40, 50% during the year. The specialty displays were up 42% and geographically they were really led by Europe where we had nice expansion for display, they were up 17%. Okay, on a geographic basis for the total company, North America was up 6% to 276 million. Margin in North America was 26.1%.

U.S. was up 2% and Canada was up 19%. We're seeing a lot of designs done in the United States but actually when the material is purchased, the manufacturing is done in China and we had an internal system where we can track that very well, but that's why the business has not increased more in the United States. Europe was up 13% to 117 million led by Italy up 35%, France up 18% and Israel, a nice turn around at aviv, they were up 50% this year. Asia Pacific up 33% to 104 million. They crossed the 100 million mark in sales for the first time. China was up 83%, Taiwan was up 57%, southeast Asia was up 36%, which is Singapore and Thailand, and Korea was up 21% to 33 million. Korea is now the third largest country in sales for us in the world led first by the U.S. then Canada, then Korea. A lot of the Korean business, of course, goes into China. Latin America was the only area we had decline. Latin America was down 2% for the year at 20 million and Mexico was down about 2% and Brazil was flat.

Okay with that I'll turn it over to Dario and maybe we'll have Bruce first do the highlights of the quarter and then Dario can do the financial end. Bruce.

Okay. Well, I'm happy to say that bookings were very strong and excellent throughout the quarter as well, and obviously mirrored the billing. For the company overall, sequentially we were up 4.9% on bookings and 36.7% over the prior year. Wireless was up about 0.6% sequentially but 64.4% over the prior year. And some of the highlights in wireless, new designs were completed for two additional engineered solutions cellular enhancer products, primarily those in the wireless area. One for the auto industry and the other for the recreational vehicle and marine markets and samples are scheduled to be available sometime next month and Greg will probably want to comment on this later on in the call. In the interconnect and passive components product area wireless signed two major global RF passive line franchises.

The first with Teledyne for a manufacture of solid-state switches and the other with Aeroflex Inmet, who's a major supplier of RF Co-axal attenuators, terminations and related passive components. Ed had mentioned previously network access. Our network access business unit within RFW by itself broke $25 million in sales for the quarter and, additionally, new franchise agreements were signed with Z-Communications, which is a major USA market provider of voltage controlled oscillators, and the other agreement with Calmos Technology for their microwave pin and shot-key diodes. Turning to industrial products, sequential bookings up 11.3% and 35.1% over the prior year and, as Ed had mentioned, led really by the tube business. Tube sales grew from about 68 million to 78 million for the year, representing about a 15% growth rate and an excellent 32.1% gross margin and both the volume as well as the margin established new records for IPG.

And at domestic and international tube seminars to our customer base, which we've been doing throughout the year, they've been very well received and they were our key factor in increasing our market share during the past year. Turning to Security Systems, sequentially up 5.1% in bookings and ahead of the prior year by 11.2%, and we have a number of initiatives now active within Security Systems. First of all they introduced a new matrix switch under our proprietary national electronics brand name, which represents a significant addition to our national line, and that allows us to participate in larger system quotes using our own proprietary products. Other matrix switches that are on the market today are multi-protocol and only interface with one brand at a time whereas our product allows the user to interface with multiple brands at the same time with one switch. And the way this is used, if you after site that uses multiple cameras from various manufacturers with our new product you can now control all of them with a single matrix switch.

Secondly, we also introduced our first collaborative development effort between Security Systems and Display Systems within Richardson for a combined digital video recorder touch-screen solution and we did this at the international security conference in Las Vegas. And the DVR has embedded software that allows the unit to read, record and display multiple point of sale, POS, data formats, making it an ideal solution for retail and loss prevention applications. Also the ability to control the unit by a touch screen simplifies use in training and certainly will set us apart from the competition. This, we think, is very significant because it really represents the blending from a marketing and engineering standpoint of two of our SBUs, primarily because of the revolution of digital technology. You're going to hear more about this in quarters to come, not only involving these two SBUs, but other SBUs as well.

Also within SSD, Bertech, our Canadian organization in collaboration with a major vendor partner, established a relationship with a large land developer in western Canada to install structured wiring in their new E-communities and this is significant because it positions Bertech as a key supplier of structured wiring to builders and developers. Of course, with the housing industry booming as it is right now this bodes well for the future as well. In Display Systems, sequentially up 13%, 9.7% over the prior year in bookings. As Ed had mentioned we had a good quarter. We booked an initial $2 million engineered solutions order from a large financial institution and the good news is it represents only the first phase of a multiphase project. Pixel link, which is our DSG engineered solution integrations center, shipped a record 5,000 touch-screen displays in the quarter. And we also received a $600,000 first release order for medical monitors from one of the country's leading medical institutions and that also has tremendous upside going forward for subsequent orders as well.

And geography, geographically Ed covered most of this,but I will go over it again because the news is still good, anyway. First of all sequentially in North America bookings are up 4.2% but ahead of the prior year by 25.7%, Europe sequentially was up 2.2% but ahead of the prior year by 16.7%. Latin America, unlike the billing, was strong from a bookings standpoint. Bookings sequentially in Latin America were up 45.3% and 16.5% over the prior year which we hope bodes well for future quarters. And AsiaPac's up bookings 4.8% sequentially and over the prior year by 120.7% and Ed covered much of the specifics but I'll go over them one more time. Asia became a $100 million geography for the first time and their sales have doubled from 51 million in FY '01 to over $100 million in FY '04 in just three years. Quarterly billings set an all-time record at 32.2 million and May also, just for the month of May by itself, came in at $14 million in sales. Ed had mentioned Korea, our third largest geography, their sales topped 32.7 million and with both billings and bookings over $9 million in the quarter. And China, our growth star, sales have more than tripled since '01 and doubled from '03 to '04 to $25.2 million and the momentum continues.

And I'll turn this over now to Dario.

Thanks, Bruce. Like Ed and Bruce said, we do have good top-line momentum. We got solid gross margins. I just want to point out that with respect to sales from Q3 '04 were up sequentially 14% which is stronger than our normal seasonal sequential increase of 9%. With respect to SG&A for the quarter at 20.7% of sales and for the year at 20.9, both of those are diluted from the prior year but I do want to point out we did have some incremental expenses associated with some entity restructuring we're doing in our foreign subsidiaries in order to improve our cash management. We had expenses associated with our PeopleSoft implementation and Sarbanes-Oxley compliance which is probably going to continue through fiscal Q1 '05 and those totaled about $700,000. Other expenses are down slightly mostly due to foreign exchange and interest is flat at 10.3 equaling the EPS of 42 cents. Turning to the balance sheet, cash is flat, accounts receivable are up $20 million but DSOs are sitting at 52 days versus last year at 59.

Inventory is down $4 million, that's an excellent result with days at 77 versus the prior year at 97. I'm going to talk about three accounts. All the fluctuations between other current assets, noncurrent assets and other noncurrent liabilities are really associated with just the reclassification of our deferred tax assets, so fluctuations there are reclassification entries primarily. Property, plant, and equipment is down slightly. It was really a wash between depreciation of 4.9 million and CapEx of 4.9 million. Accounts payable are up 9.8 million, that represents payable days of approximately 26 versus last year at 22. Long-term debt is down 4.6 but 4 million of that was reclassed to current, so basically debt is flat. In summary, while we're up 12% in revenue with no incremental debt requirements, so we operationally funded our growth.

With that I'll pass it back to Ed.

Thanks, Dario. Well, we sort of are at the bottom of the mountain in starting on FY '05 but we never had a better bookings situation, never had better activity as far as the engineered solutions activity and programs that we're working on. I think what's really exciting is we're starting to see the convergence of the technologies from all of our SBUs into the same systems, some of which Bruce explained, and really a tremendous amount of interest in new systems, new technology, and so we're really excited about the year. Again, the bookings and backlog strength lead us to believe that we'll do better than our seasonal sequential decline. Normally the summer quarter is our weakest, Europe about closes up for August, so we normally see about a 5% decline in the first quarter. However, with the bookings that we have we anticipate the first quarter sales to be sequentially flat, might be down slightly, but certainly not what it's been in the past. We see continued growth in Asia. However, the margin in Asia still is below the corporate average in the short term, so for Q1 we expect gross margin to be around 24.5% with SG&A and other expenses to be about flat with the fourth quarter. And the anticipated tax rate should be about the same at 34%. So, Beverly, I think that covers it for the moment. We'll open it up for questions.

Absolutely. Ladies and gentlemen, if you wish to ask a question, please press star then 1 on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone please pick up the handset before pressing the numbers. Once again if you have a question please press star 1 at this time. One moment for the first question. Our first question comes from Rob Damron with Century Research. Please go ahead.

good morning, guys, great quarter.

Thank you, Rob.

Maybe Greg could talk a little bit about some of the new products in the marketplace such as in-home compensator and the wireless jammer and any of the others that are on the drawing board or out being tested in the marketplace and where we stand with rolling them out more aggressively.

Yeah, we had to put the hold on the press release because of what we're doing this week but late next week a press release will go out on a family of cell enhancing devices. We've used the in-office compensator and this case spent TCS as a beta site. We've got a lot of data from them and have taken that technology and kind of going to go on our own now and introduce a full family, this is for the automobile, for the RB unit, and for the marine. Those three products are the family of four, the fourth one, of course, being the in-office, are now FCC approved, we got that in May. They're all wireless units, meaning they are portable, similar to setting up a satellite radio in your car. They work for all protocols, GSM, CDMA, TVMA, so in essence they work for any phone in North America through any provider. They retail for under $200 and, of course, they are wireless using Bluetooth technology, so you can be in the backseat or the back of the boat or the front of the RV and it will work fine.

We're very excited about this. We haven't promoted it too much because we've been focusing on the Sprint PCS and that's where most of the questions were but we've done this in unison and these will be in full production August 1st. We have, as Bruce mentioned, 25 prototypes being sent out in the middle of July to numerous different customers such as Sprint PCS, Best Buy, Radio Shack, John Deere, Over Ten Boat Accessories, a whole list of them that are very, very interested in this. Rob, it's a different way of going to market. In the component world engineers want to see a product 18 months before you even have the wafer approved. In this business they want to see a working unit, FCC approved that meets all the qualifications I just mentioned. One good thing about it, Rob, is the qualifications I just mentioned in terms of the attributes that is exclusive to the industry, we have not found one other product that meets every one of those attributes. So that's kind of an update on the cell enhancing technology which, as you know very well, we've developed with Motorola's Telematics organization for nearly seven years now so we really think we have a jump on costs and understanding that technology.

Okay. But with the in-home compensator being marketed through Sprint and possibly Verizon, I don't know if Verizon was in the running there or not, but is that technology going to be rolled out to their stores and their affiliates soon, or what's the status there?

Yeah, the in-office compensator, in-home compensator, we continue to work with Sprint PCS and Verizon and AT&T Wireless on an 800-megahertz brand. They continue to adjust the spec, they continue to decide whether they want it for the whole home or just the office. They're still discussing how they want to market it, so really what we have to do, Rob, and I've been saying this for a number of quarters, we won't see revenue from this product until the third, fourth quarter of FY '05 but we're going to have to introduce a universal product. It has to work for all protocols and my opinion is it will have to be sold through Sprint PCS's outlets, like a Radio Shack. I don't think the service providers really want to put their name on something that admits they don't have proper coverage. We continue to work with them and it's not a dead issue but we're not waiting anymore. We're going to introduce the family ourself. And they will all be universal. The only one in the family that's not universal yet in terms of working for any cell phone is the in-home. So that's where that's at and I'll continue to update you as I get more.

Okay.

But the thing of it is, Rob, the exciting part of this is the other three products. I mean there's 168 million subscribers in just North America, people who have cell phones. There's 7.2 million RVs in North America, there's 3.8 million boats that are over 19 feet long, which we would assume would be the ones that would go two miles offshore which is where this compensator works. So we're seeing a huge market. But, Rob, it is a different market, it's a different customer base and a different sales strategy and we're just driving it through but I fully expect to see orders in Q1 for three of those product and revenue in Q2, 3, and 4 for the RV, marine, and auto.

Okay, excellent. And just one other question for Dario. On the SG&A guidance I think this last quarter you mentioned that you had $700,000 of one-time expenses but then Ed mentioned, thought that SG&A would be flat sequentially from Q4 to Q1. Do you anticipate additional one-time expenses in the fiscal Q1?

That's a great question. Actually, to say they were one-time in Q4 is probably wrong. There are really, actually some two-timers, if I talk about it real briefly. The entity restructuring that we're doing for the cash management was about 300K in the fourth quarter. It's going to be 300K again in the first quarter. Then as you know our PeopleSoft implementation, about 200K of our expenses, were associated with travel and training of our people and, as you know, the rollout of that isn't scheduled until September, so the training and travel costs are going to continue through September and then lastly, we're trying to get done with our documentation for Sarbanes-Oxley by December so those expenses will also reoccur in the first quarter. I think they're not really one-timers, they're like two-timers, or two and a half timers, if you will, then they'll start tailing off in Q3 and Q4.

Okay, that helps. All right, thanks again.

Yep.

Thanks, Rob.

Thank you. Our next question comes from Walt Liptak with KeyBanc McDonald. Please go ahead.

Hi, thank you.

Good morning, Walt.

And congratulations on a great revenue quarter.

Thank you, Walter.

In China and Asia where business is really picking up, I imagine most of this is components orders that's going through. Do you have engineers there that are working on engineered solutions? And at what point do we see that gross margin start moving up?

Yes, you're correct. First of all right now it's mostly components business, it's sort of a cycle of building the business as you develop a relationship with the customers. We lead with the component sale and once our engineers develop a relationship with the customers' engineers then we sort of move up over designing the circuit and then ultimately we hope we can get engineered solutions products through the channel. What we are doing is we're opening an engineering Center of Excellence in China. We've just appointed a manager for our engineered solutions program in AsiaPac within the first couple of weeks of June so we're expanding that activity. Maybe you want to speak on it, Greg, as to what your plans are there. Most of that business is wireless.

Yeah. Walt, as you know, we lead with components, and 95% of our engineered solutions opportunities have come from customers where we've started by doing component design work for them in terms of helping them with their circuit and suggesting and doing design work from our tier 1 component suppliers. And Asia really is the slowest to convert to this phenomenon we're seeing over the last three years of outsourcing their engineering needs. Europe and North America, if you look at these orders with Alcatel and Celsion and True Positions and those type of products that are key engineered solution sales, they're all in Europe and North America. So we're doing a fantastic job getting in there and growing our market share with growing numerous customers on the component side. And we feel, over time, that they'll start outsourcing their engineering needs more than they do today but they're just the last one on the totem pole to start doing that as opposed to Europe and North America and we've got the infrastructure and will finish infrastructure in place to support those needs because it has to be done locally with the design centers in Japan, Korea and now China in Q1.

The question is at some point we should see China gross margins in line with the corporate average, is that right?

Yes.

Yes

Okay. And the gross margin over all it's been firming up the last couple of quarters. What's your assumption for fiscal year 05?

We think that to make our plan to get it up to 30% over the next three to five years that we need to get it up about 100 basis points this year.

Okay, great. Okay, thanks a lot.

Thanks, Walt.

Thank you. Our next question comes from Ed Litman from William Blair. Please go ahead.

Hi, guys, great quarter.

Hey, Ed.

Dario, can you just help me a little bit with the guidance that you came out with just a few weeks ago, the 14 to 16 cents and when you guys came in you beat that at 17 cents. What kind of pushed you outside the top end of the range there?

Actually, if you look in the quarter the tax rate was pretty favorable and that was about it.

Anything unusual there because Ed said it looks like next year you're going back to the 34% tax rate for the year.

No, nothing in particular. I think we'll go back to 34, but I think the 34 is a good number for the model. There was nothing in particular.

Okay. So it's just the adjustment in the taxes for the quarter. And then on the wireless gross margins, they came back down after improving a little bit last quarter. Was that pretty much just the lower margin, the Asia business again?

Yeah, this is Greg. That's exactly what it was. It's kind of hard to balance it. It will balance out here over the next 18 months or so, the great increase in component sales in Asia being up close to 40% this year for me, and that, as we just talked about, is component business which is unfortunately the lower margin business.

Okay. All right, guys. I think I'll see you later this week.

Thank you.

Thank you and once again, ladies and gentlemen, if you have a question, please press star 1 at this time. Our next question comes from Bob Schenosky from Jefferies & Co. Please go ahead.

Thank you, good morning, great quarter.

Thanks, Bob.

Dario, one quick question on the tax planning that you're doing internationally. When will that positively impact the tax rate and to what degree?

Actually, it's not associated with taxes, it's associated with the ability to move cash around between entities without incurring dividends between the entities, so it's really not effective tax rate type of thing, it's more cash management related.

Okay, great. Thanks. And then the second one, if you have the ability to talk about this today, what is the planned price point on the in-home compensator that you're thinking about and what type of margin and how would that compare to the corporate average today?

Retail under $200, that's the price point we've gotten from our beta sites, we meet that and it exceeds Richardson's internal gross margin need for engineered solutions which is over 35%.

Excellent. Thank you, Ed.

Yep.

Thanks.

Thank you all. With that being our final question I'll turn it back over to you, Ed.

Okay, Beverly. Well, thanks to all of you for getting up so early. We appreciate your interest, and if you have any further questions, please call us and we'll get back to you. Thanks, Beverly.

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