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Edited Transcript of VXS.TO earnings conference call or presentation 12-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Vixs Systems Inc Earnings Call

Toronto Apr 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Vixs Systems Inc earnings conference call or presentation Wednesday, April 12, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles F. Glavin

ViXS Systems Inc. - CFO and Head of Business Development

* Sohail A. Khan

ViXS Systems Inc. - CEO, President and Director

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Conference Call Participants

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* Daniel Kim

Paradigm Capital Inc., Research Division - MD of Research and Senior Analyst of Industrial Technology

* Kevin E. Cassidy

Stifel, Nicolaus & Company, Incorporated, Research Division - Director

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Presentation

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Operator [1]

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Welcome to the ViXS Systems Fourth Quarter Fiscal 2017 Conference Call. My name is Karen, I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Sohail Khan. Sohail, you may begin.

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Sohail A. Khan, ViXS Systems Inc. - CEO, President and Director [2]

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Good evening, and thank you, everyone, for joining us.

Today, we issued our fourth quarter and annual fiscal results, a copy of which is available in the Investor Relations section of our website at www.vixs.com and posted on SEDAR.

On today's call, I will summarize the key highlights from the quarter and then Charlie Glavin, our Chief Financial Officer, will review our financial results followed by Q&A.

Today, we reported fourth quarter revenue of $7.7 million, a 47% year-over-year growth driven by multiple product lines including our XConnex, XCode and XCodePro.

I'm very pleased to share with you that our video-based revenue grew over 25% during fiscal '17, driven by the strong demand for our XCode5 and XCode6 product lines. These XCode products are the core foundation for our future growth and profitability.

We did experience a small 7% sequential decline in the revenue from the previous quarter due to expected seasonality, which is very typical of our industry. We did, however, experienced strong design activity during the quarter and announced the industry-first dual tuner OTA product, the XCode 5516. Initial production shipment for both of our OTA single and dual streaming products, the XCode 5505 and the new XCode 5516, were delivered to leading ODMs for a retail launch expected this summer.

We believe our product helps our OEM and ODM customers to be well positioned for the cord-cutting migration by the viewers. Those have been supported not by any recent comments from AT&T's CEO but also by third-party research firms such as MPL analysis and supported by the actual design activity. Even our former product partners who were apprehensive this time last year about the OTA market now have joined the bandwagon and have partnered with us in creating this solution. We also had a successful consumer electronics show during the quarter, with strong interest from the new as well as existing partners of ViXS. The new product offerings which were displayed were the UHD Blu-Ray and the CordCutter Stick and dual and quad products.

During the show, we also announced the partnership with MaxLinear, Morega Systems and GEIC to offer differentiated OTA solutions for cord-cutter customers.

Since then, in March, Sharp announced 3 new Ultra HD Blu-Ray video recorder products in their AQUOS product family based upon ViXS XCode 6800 and XCode 5190. These products support 4K Ultra HD 60 frames per second with HDR and white color space BT.2020 high-quality video playback. These products will enable viewers to record at least 3 HD broadcast channels at the same time as well as UHD 4K HDR playback. These are mainstream products which are expected to be high-volume offerings by the retail channel, and the ramp is expected in the second half of the year. The initial products are already available in the retail market, with volume ramp expected in the second half.

I have one very important announcement which we made earlier today about the sale of our MoCA business to MaxLinear for $5 million in cash, which included a nonexclusive patent license limited to the manufacturing and implementation of the XConnex MoCA business line.

Going forward, ViXS will focus all our fixed resources on the core video business where it can provide differentiated solutions to its customers, which will help to achieve growth and profitability. During November of last year, we completed the second and the final tranche of our 2 non-brokered private placements that we announced on September 12, 2016, raising an aggregate gross proceeds of approximately USD 5.9 million or CAD 7.7 million. Along with the proceeds from today's MoCA asset sales, these net proceeds have strengthened ViXS' financial position to enable profitable growth in the later part of the year. Also, during the quarter, Fred Shlapak was appointed to the Board of Directors. Mr. Shlapak was President and Chief Executive Officer of Semiconductor Product Sector at Motorola Corporation, a multibillion dollar company when he retired in February 2004. He brings over 3 decades of leadership and operational experience, coupled with deep knowledge of the semiconductor industry. His perspective and guidance will be invaluable as we continue to grow ViXS to the next level.

I will now turn the call to Charlie for the detailed summary of our financial results. Charlie?

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Charles F. Glavin, ViXS Systems Inc. - CFO and Head of Business Development [3]

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Thanks, Sohail. I'd like to take a moment to remind our listeners that as is common with semiconductor companies, all figures reported on today's call are in U.S. dollars and that our fiscal year-end is January 31, with reported figures based on IFRS standards, unless otherwise specified.

As we caution with every call, our quarterly results are highly variable due to new design wins, customer concentration, geographic concentration, seasonality and the timing of customer rollout schedules.

As Sohail mentioned previously, revenue for the fourth quarter of fiscal '17 grew 47% year-over-year to $7.7 million or a $2.5 million increase from the $5.2 million we've reported in the fourth quarter of last year. The significant annual improvement was primarily due to growth across all major lines, including higher demand for our XCode 5505, and the 5516 products are being used for new OTA or cord-cutter products, along with initial sales of our new XCode 68 product, which commenced during the second half of last year, along with higher volume sales of the XConnex product, incremental NRE revenue and continued demand for certain legacy products. This quarter's results did represent a sequential decline from the $8.3 million last quarter but was primarily due to the seasonality that Sohail referenced.

Gross margin for the fourth quarter was 30.8%, a 3.4 percentage point increase from the 27.4% level in the third quarter and a 6.5-point increase from the 24.3 margin level in the fourth quarter of fiscal '16. This sequential margin increase in the fourth quarter was primarily due to better mix of XCode and XConnex products, along with the favorable contribution of higher NRE revenues in the quarter. The year-over-year impact was significant due to a combination of higher volume sales, which lessened the impact of mask and IP amortization plus better product mix from higher sales of the XCode 5 units plus higher XConnex unit sales and the incremental sales from the new XCode 6800. Keep in mind, this improvement was also significant when you factor in that the launch of the 6800 added roughly $400,000 of incremental amortization to our COGS versus levels in the comparable quarter last year or roughly a 525-basis-point noncash impact to our gross margin. So excluding the effects of amortizations for contracts or SDKs, the product margin in the fourth quarter of fiscal 2017 would have been 36.3%, an improvement from the 35.3% level in the third quarter and 26.8% level in the fourth quarter of last year. With the sale of our MoCA products, we will -- we do expect our gross margin to get back to our expected levels more in the 50% range.

Research and development expenses for the fourth quarter was $400,000 higher than the third quarter. And while we had lower salary and overhead costs during the quarter, these were offset by changes in noncash adjustment to provision for government assistance and investment tax credits. I should point out that savings from the sale of our MoCA business and the closing of our Austin office did not take effect until after the close of the fiscal year.

SG&A expenses for the fourth quarter of fiscal '17 decreased by $100,000, compared to the prior quarter, mainly due to reduction in seller or related costs as well as lower professional fees and overhead expenses. The IFRS comprehensive loss for the fourth quarter of fiscal '17 was $1.9 million or a loss of $0.03 per share, basic and diluted, compared to a loss of $3.1 million in the previous quarter and a $2 million improvement from the $3.7 million loss in the fourth quarter of fiscal 2016. The IFRS comprehensive loss for all of fiscal year 2017 totaled $10.9 million, a $700,000 improvement as compared to the $11.6 million loss over the same period the prior -- previous year. The continued year-over-year decrease in loss reflects higher revenue, ongoing cost efficiency in our operations, which resulted in $1.1 million of lower operating expenses in addition to favorable realized and unrealized currency impacts this year compared to fiscal '16. The non-IFRS loss of $2.6 million or $0.04 per share improved from the $3 million loss in the third quarter or $0.05 per share and a $700,000 improvement versus the $3.3 million loss or $0.07 per share in the same quarter last year. This improvement in the non-IFRS loss from operations reflects a combination of higher revenue, cost efficiency plus fluctuations in the fair value adjustment in our convertible debt and warrants as well as the foreign currency exchange rates.

To give a better reflection of our operation and performance cash usage as we did in prior quarters, the adjusted EBITDA for the fourth quarter would have been a loss of $1.6 million, which is flat with the loss of $1.6 million in the third quarter even with the sequential decline in revenue and a $600,000 improvement versus a $2.2 million loss in the fourth quarter of last year. ViXS does not pay taxes at the Canadian parent level; however, we did finish fiscal year '17 with $177 million of total deferred tax assets, including $117 million in R&D expense carryforwards that can be applied against future Canadian taxable income with no expiration date, $27 million in nonrefundable investment tax credits and $24 million in non-capitalized NOL carryforwards.

Finally, I'd like to discuss in more detail today's announcement regarding the sale of our legacy XConnex MoCA business. This deal consisted of 2 parts. The first part involved a transfer of all fabless production of our XConnex line and associated customer contracts. As we discussed in previous earnings call, the XConnex has been a low-margin product for ViXS that consumed a good deal of working capital, and ViXS was unable to achieve the economies of scale, cost and margin synergies of some of our larger MoCA competitors. Rather than dedicate more R&D resources to this non-core business, which was originally created as part of the company's previous set-top box strategy, we decided that selling this asset was a better use of our resource and focus while significantly generating funds to support our current strategy. In addition to the $5 million, ViXS will be able to free up a significant amount of valuable working capital previously tied up with the support of those MoCA customers.

The second part of the deal involves compensation for a nonexclusive license of our patents limited to the manufacturing and implementation of the XConnex MoCA business line and MaxLinear's MoCA products. Keep in mind, this complements the existing cross-license we granted to Entropic as part of our settlement with that company, which was transferred to MaxLinear when they bought Entropic in 2015. Thus, as of January 31, 2017, the company's cash and equivalent was $2.9 million, a $1.4 million sequential decline from the third quarter, but this does not include the proceeds from our recent announced transaction or the potential release of the working capital.

With that, let me turn it back over to Sohail for closing remarks.

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Sohail A. Khan, ViXS Systems Inc. - CEO, President and Director [4]

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Thanks, Charlie. So going forward, ViXS will focus all its resources on the core video business. That's where we feel that we can add value and provide differentiated solutions to our customers. Our traction continues with our best-in-class transcoder and professional decoder technologies, and we see an increased design in activity. We continue to capitalize on the increasing demand required to transcode, process and transmit the 4K Ultra HD and 10- to 12-bit HEVC content on multitude of devices. The customer products which are built around these solutions are expected to ramp around midyear. And we have engagements with several existing and new strategic partners in the OTA streamer, transcoder and Ultra HD professional decoder segments. The revenue growth, we expect in the second fiscal 2018 and beyond, which will help the company to get back on the path of profitability.

I will now turn the call back to the operator and open the line for questions. Thanks again for joining the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have our first question from Daniel Kim from Paradigm Capital.

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Daniel Kim, Paradigm Capital Inc., Research Division - MD of Research and Senior Analyst of Industrial Technology [2]

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I have a couple of questions. Just a point of clarification, Charlie. I believe in your preamble, you suggested gross margins should trend back up towards the 50% targeted range. I believe, if I'm not mistaken, that was a previous goal. Are you just restating an old goal or -- I would have presumed that, that target would have changed given that some of your...

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Charles F. Glavin, ViXS Systems Inc. - CFO and Head of Business Development [3]

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It is, Daniel, without giving too much guidance off of it. Keep in mind, though, that for the first quarter up through the closing of the deal, we will still have MoCA sales associated with it. So in the current first quarter, you would not see a return to that level, and I'll allow you to model out the weight between the two. Beginning in the second quarter and then throughout the year, as volumes increase -- and again, one of the reasons why I mentioned the 50% is that with the amortization of our mask-sets, we believe that, that is hampering our gross margins, which is why we have provided the product margin. Again, for those who may be new to the story, we amortize our mask-sets at the COGS level to full amount because we've had 9 generations of first getting to volume manufacturing. Most semiconductors do not amortize the entire amount. So we give that as more of an apples-to-apples comparison versus our competitors. What I would say again, you will see the product margin exceed the 50% level. As the volumes increase and the impact from the amortization decreases, gross margin should also not only hit the 50% level but continue to increase, volume just short of that because when we exceed the 50% level, it should be somewhere above the $5 million per quarter range. I'll just give that sort of level without giving explicit guidance on the revenue. But we do -- bottom line and the simple answer, yes, we do expect gross margin to not only hit 50% but exceed into the mid- to high 50% level.

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Daniel Kim, Paradigm Capital Inc., Research Division - MD of Research and Senior Analyst of Industrial Technology [4]

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Okay. Different question, but sort of same tack. With regards to how the company looks going forward, with the exclusion now of the MoCA business, can you perhaps discuss your view in terms of when or if this changes the view to EBITDA profitability within the next couple of quarters?

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Sohail A. Khan, ViXS Systems Inc. - CEO, President and Director [5]

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I think -- Daniel, we don't provide guidance. But as I mentioned in my comment that with the change, it gives us more focus, it gives us more resources to dedicate to supporting these customers to get to production and that later in the second half of the year, that the ramp of some of these products from our customers as we are able to help them get to the market will enable us to get there more towards the end of the year.

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Daniel Kim, Paradigm Capital Inc., Research Division - MD of Research and Senior Analyst of Industrial Technology [6]

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Okay, great. Obviously, you had a great announcement the other week with regards to Sharp. So I'm wondering, can you give us a bit more quantification in terms of the end-market traction? Will we get tidbits in terms of some Tier 1 wins? Is there any way you can perhaps quantify the number of customers or the number of design wins versus last year or perhaps even a backlog number, which you periodically disclose? So maybe you can give us in terms of...

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Sohail A. Khan, ViXS Systems Inc. - CEO, President and Director [7]

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I think -- we've made the Sharp announcement. Sharp has put the product in the retail channel. So first, the high-end product and then they have a plan to go from the 3-tuner to 2-tuner model, that's in the fall timeframe. So I think as the variations of the products start to come in, that will definitely help. Similarly, that in the OTA space, that our ODMs, we have made the initial shipments to our ODMs. So they are working with their OEMs for the product launches, which are anywhere from summer into the fall timeframe. And similarly, that we continue to see more traction on the transcoder side. And so we are working with those customers. As you know, in these products, there is a lot of software which needs to get done, and then the integration and the testing after the products. So sometimes, it -- certain things, which are not in our control, we try to help the customer, but there is so much we can do. So I think with the focus in the given segment and our ability to help them more, I am more confident that we will be able to get these -- our customers to production sooner than later.

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Operator [8]

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And we have our next question from Kevin Cassidy from Stifel.

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Kevin E. Cassidy, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [9]

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Maybe along those lines, can you say internally, say, at your customers if -- Sharp is a good example, what -- of the number of designs that were available, how many you won?

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Sohail A. Khan, ViXS Systems Inc. - CEO, President and Director [10]

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I don't know when you say how many designs are available. In different segments, there are a different a number of customers. But I think the way -- my take is that in any given market segment, that about 60% to 70% of the market is always among 10 or less players. So it's not necessarily the total number, it is about the key customers and the key designs if you can capture those. And if you take a given market segment, the market share of those players don't change drastically year-over-year. So the focus is more towards targeted customers in those targeted segments, not necessarily that we are trying to go for the shotgun approach and going everywhere. So it is very focused because, as a small company, we have limited resources and we can only support so many customers.

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Charles F. Glavin, ViXS Systems Inc. - CFO and Head of Business Development [11]

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So Kevin, let me add on in terms of Sharp, 2 points in particular. One is that Sharp, working with ViXS, is critical to doing an industry-first product. 3 different product lines [ are expected to be volume ] with innovative features that -- 3 channels that broadcast at the same time of a 4K HDR playback. Sharp has done multiple generations with us. So I know that given our financial situation, there may be a given concern. But keep in mind that Sharp was willing to work with us as a partner to get this product out into the market that is a flagship for them. Second of all, more specific to that Japanese market is that the other competitor out there is Socionext, which is actually a captive provider. So we provided -- that which is partly owned by Panasonic and Fujitsu. So consequently, for other Japanese vendors who do not want to use their competitor's chip, we are a logical alternative to that. I guess the last point within it, and we want to stress, this is not necessarily a niche product nor is it something where its transcoding only being used in Japan for this. Transcoding is actually part of the OTA product as well. And there are other markets that we could go after. But right now, we want to focus on the markets with partners who are willing to work on us and compensate us for the design effort. And right now the Ultra High-Def Blu-Ray, the OTA and the professional Dakota markets are 3 of those where we are seeing traction, and that strategy is working.

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Kevin E. Cassidy, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [12]

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Okay, great. And just one other, you had mentioned that the amortization of the mask-sets in the COGS will be decreasing over time. Will there be a time when you expect to see mask charges going back up again, though?

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Charles F. Glavin, ViXS Systems Inc. - CFO and Head of Business Development [13]

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Well, when we do our next tape-out, that would spike it up so there is -- after we complete tape-out, there is a couple months' delay relative to getting the product through the fabs before the amortization kicks in. So in the case of 6800, we started amortizing the month of July. So that's why in second quarter, there was a partial. And then in the third and fourth, you saw the full impact of it.

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Sohail A. Khan, ViXS Systems Inc. - CEO, President and Director [14]

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Just -- it doesn't decrease. The effect of that becomes less as your top line grows.

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Charles F. Glavin, ViXS Systems Inc. - CFO and Head of Business Development [15]

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Right.

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Operator [16]

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(Operator Instructions)

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Sohail A. Khan, ViXS Systems Inc. - CEO, President and Director [17]

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So it seems like no more questions.

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Operator [18]

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No, we have no questions in queue.

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Sohail A. Khan, ViXS Systems Inc. - CEO, President and Director [19]

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So I would like to thank everyone for joining this evening. And we will talk to you a quarter from now. So thanks again for listening to the call. Bye-bye.

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Operator [20]

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Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.