ParkerVision Q4 2004 Earnings Call

 

March 17, 2005

 

Jeffrey L. Parker, Chairman and Chief Executive Officer

Cindy Poehlman, Chief Financial Officer

Will Lewis, Bay Star

 

Operator: Good day, ladies and gentlemen and welcome to the Fourth Quarter 2004 ParkerVision, Inc. Earnings Conference Call. My name is Bernie, and Iíll be your coordinator today. Before we get started I would like to remind listeners that this conference will contain forwardlooking statements which involve known and unknown risks, uncertainties about our business and the economy and other factors that may cause actual results to be materially different from expected achievements and anticipated results, included in these risk factors, such as the ability to maintain technological advances in the market place, ability to sufficiently increase manufacturing capacity and meet demand, achieving timely market introduction and acceptance of our products, maintaining our patent protection and availability of capital, among other things. Given these uncertainties and other various factors about our business, listeners are cautioned not to place undue reliance on any of the forward-looking statements contained in this conference call.

 

Additionally, additional information concerning these, and other risks, will be found in our filings with the SEC. I would now like to turn the presentation over to our host for today, Mr. Jeff Parker, Chairman and CEO.

 

Jeff Parker: Well good morning and thank you for attending ParkerVisionís Fourth Quarter and Year-End Earnings Conference Call. Iím Jeff Parker, ParkerVisionís CEO. And before I get into my comments, Iíd like to introduce our CFO, Cindy Poehlman, and ask Cindy to review the financial information that we have released, and then I will further discuss some of the key milestones that the Company achieved this past year, along with several comments of what we expect for this year and beyond.

 

Cindy Poehlman: Thanks, Jeff and good morning. Iím going to assume that everyoneís seen our earnings release so Iím not planning to go line by line through the numbers. Rather, Iíd like to highlight what I think are some of the key financial points for both the quarter and the year and try to give you guys a little bit of additional clarification on what drove the numbers, as well as our performance.

 

The fourth quarter was the first full quarter that our wireless networking products were in distribution at a national level. As Iím sure you are aware, our products showed up at our first national retailer, CompUSA, throughout the month of September. The fourth quarter sell through without deducting certain marketing expenses from revenue was about $140,000. The accounting rules for retail require that we deduct certain channel related marketing expenses from revenue, hence our net revenue on the financials of $19,000 for the quarter.

 

Our fourth quarter net revenue reflects a high ratio of marketing costs to sell through revenue, which is to be expected early in the ramp of a retail program where one of our goals, obviously is to begin to establish brand and product awareness. Just to put this into perspective, companies that are well entrenched at retail generally net 6-8% channel marketing costs against revenue.

 

Itís also important to note that our policy for recognition of revenue at retail is conservative. We donít recognize any revenue until product has sold through the channel, meaning itís actually in the hands of the end consumer. Even then, we defer revenue for another 30 days until the consumerís right of return has expired. We have deferred revenue at the end year of about $400,000, with another $100,000 recorded in reserves for sales returns. Jeff will speak more to our strategy moving forward and help provide guidance on the Companyís activities to continue increasing revenue.

 

Also in the fourth quarter we made the decision that it was important for the companyís products to be priced more competitively for the markets that weíre targeting through our retail channels. We determined that although we want to maintain a premium pricing to other WiFi competitor products, we wanted to narrow the gap in that premium. We believe the positive impact of this decision will be reflected in better positioning of ParkerVision SignalMax brand to appeal to a more mainstream audience. However, this did result in a revaluation of certain of our 802.11b inventory, resulting in a fourth quarter impact of $2.8 million. This revaluation not only reduces finished goods inventories to their net realizable value, but it also accrues for the cost to complete certain work in process inventories and takes into consideration the selling costs expected to be incurred to sell through this inventory.

 

Although our November price adjustment largely drove the inventory revaluation, itís also a reflection of the high production costs for initial inventory build for retail. Along with the channel marketing expenses that we talked about a little earlier, this is another area of start-up expense that we have to incur to enter into the retail marketplace.

 

Another important area Iíd like to touch on related to the fourth quarter is the increase in operating expenses. Fourth quarter operating expenses, as Iím sure youíve seen were $6.7 million. That compares to 5 million in the same quarter of 2003, and $5.1 million in the third quarter of 2004. Iím sure a lot of you are wondering why the increase, and should you expect it to continue into future quarters, and Iíd like to touch on some of the reasons for the increase and then Iíll answer the latter question.

 

About 1/3 of the increase is due to sales and marketing costs as we launched our products at retail. Similar to the increases that we saw in the channel marketing costs that are netted against revenue in the fourth quarter, we also had a spike in other sales and marketing expense. Certainly weíll expect to continue to see sales and marketing costs grow in direct relation to our revenues, however a portion of those costs in the fourth quarter were what we consider to be one-time launch costs rather than recurring items.

 

Another significant portion of the increase in operating expenses in the fourth quarter falls into G&A expense, and that is largely related to the high cost of compliance with Sarbanes-Oxley 404 controls. Iím sure all of you have seen the significant media attention thatís been given to this topic in recent months, especially as it relates to small and medium-sized businesses, which are incurring a disproportionate amount of the costs to comply. We are no different. Our cost to comply with 404 controls in 2004 was about $5-$6,000 per employee. And that doesnít count the cost of internal resources expended on this effort. Thatís as much as we spend on employee benefits in a given year.

 

The good news is, as you can see from our 10-K that was filed yesterday, ParkerVision has a clean audit opinion with regard to both our financials and our internal controls. While I do expect that, excuse me, I do expect that our 404 compliance costs will continue in future years, I believe there are some very significant economies of scale that will result in significant cost reduction in 2005 and future years in that area.

 

Another item that impacted fourth quarter expenses was a change in the companyís employee paid time off policy. While I wonít bore you with the details of this, we had a change in the timing of when employee vacation accruals are made in order to convert our policy to a calendar year end policy. As a result of that change, we incurred about 300,000 in expenses in the fourth quarter to reflect accruals that traditionally would have hit throughout the year. Itís important to note that this is not only a non-recurring item; itís also a non-cash item. In general, the expectations should be going forward that our futurely, our future quarterly operating expenses would be any where from a half million to a million dollars less than the rate that we saw in the fourth quarter.

 

So letís turn from the quarter to looking at the year in total in review. Revenues as youíve seen for 2004 were $441,000, compared to $23,000 in the previous year. Once again, I want to point out that those revenues are reduced by about $230,000 for certain retail marketing expenses. We reported a net loss for the year of$0.82 per share compared to a net loss of$1.43 per share the prior year. Our net loss in 2004 was partially offset by the gains from the sale of our video division at about $8 million or $0.43 per share, excuse me. 2004 was very much a transition year for this company. It was certainly helpful to have that one time gain from the sale of our discontinued operations to weigh positively against some of the early expenses weíve had in introducing our brand new products into the market place. We ended 2004 with about $8 million in cash and investments.

 

As Iím sure everyoneís seen the company over the last week successfully completed an equity placement, which netted just over $20 million, looking forward to our use of cash to fund our business plan, our cash use for this past year was approximately $12.7 million in total. If you net out the proceeds from the sale of our video business and the relative cash consumption of that business prior to the sale, our comparable cash usage for 2004 for continuing operations was about $22 million.

 

Based on the investments weíve already made in product development, initial channel market positioning, and inventory, weíre confident that we have enough cash to execute our plan the balance of this year, and into next year, even though the very moderate revenue growth rate. So, I think this is a good place for me to ask Jeff to continue the discussion of events of the past year, as well as his views about the balance of this year. And both Jeff and I will be available for questions at the end of his presentation.

 

Jeff Parker: Ok. Well. Thank you, Cindy. So, in general, we view 2004, as Cindyís already mentioned, as a transition year. One of the most encouraging achievements made last year was to successfully narrow our focus exclusively to being a wireless technology based company. Even though we closed the sale of the video division in May, due to the transition services that we provided the purchaser, our focus on wireless wasnít truly pure until November of last year. And certainly between that and all of the work that our staff had to do for the 404 controls compliance, there were certainly quite a few additional activities that we donít have at that same degree going forward, so Iím very encouraged now about our narrow focus and with some of these other activities now well behind us.

 

I believe weíre very well positioned for 2005 to be a year where ParkerVision will emerge with many areas of commercial success for the RF technology that weíve been so diligent to reduce to a science and bring to market. I believe that we will find that our strategy to begin commercializing D2D in branded wireless networking products through the retail will prove to have been a significant factor in helping us to also secure OEM business in this year. When ParkerVision showed up on the market last year with WiFi products that sported best distance and reliability and entire home coverage, this industry was myopically focused on more bandwidth, not particularly concerned about distance, and bandwidth, even though it didnít help the vast majority of consumers using WiFi at this particular time, distance and dead zones and reliability were not considered to be important to OEMs last year. But over just the past few months, you can see a definite change in the WiFi trend. Distance is now being touted as something very important and WiFi products lines are being introduced at significantly higher prices to address this newfound industry belief that ParkerVision has been touting from the beginning.

 

We have always said D2D as a technology enables the best blend of performance, size, cost and power consumption, and I believe that as the market continues to evolve and as ParkerVision introduces more products this year, that you will find each subsequent product introduction will be hitting closer and closer to the sweet spot of what it takes to achieve meaningful commercial success.

 

We will begin sampling our 802.11g products in the very near future, likely in the next four to six weeks. Our ďgĒ products will be marketed as the only digital ďgĒ on the marketplace, meaning that our RF transceivers are digital, while the rest of the industry is using the old analog transceivers. In our dialog with consumers and retail customers alike, there has been an excellent reception to understanding that digital electronic is state of the art and is likely to provide much better performance and much more consistent performance over time.

 

In our case, since our digital ďgĒ is powered by our D2D technology, we will be explaining that our ďgĒ solution will provide distance and data rates that will go toe-to-toe with the much more complex, more expensive and more power hungry, and not as reliable technologies that are showing up in the market place today to try and provide better coverage. Our technology allows us to bring high performance ďgĒ to the market place today, while still having the very elegant designs that do not require shielding or tuning, and maintaining superior reliability in the presence of other wireless devices, when compared to the analog based products. In essence, our drumbeat is unchanged.

 

I would expect that you would start to see our digital ďgĒ products showing up in stores sometime late in the second quarter. I would also expect the cost and performance of our digital ďgĒ to be very attractive to any number of OEMs that we are already in dialog with, and for a wide range of applications. What we are consistently hearing from the OEMs we are in dialog with, many who have tested now our ďbĒ products, is that if our digital ďgĒ provides the same performance as our ďbĒ products, but at the ďgĒ data rate, then there are a wide range of applications they are interested in using our products in. Wireless networking is still very much in its infancy, with excellent growth at present and ahead. We will be able to sample to OEMs in the second quarter our ďgĒ and weíre encouraged that this will lead to our first OEM business on a variety of fronts.

 

We have learned a lot by closely working with our retail customers. One milestone we achieved in 2004 is the shipment of our first $1 million of WiFi products. Getting products onto the retail shelf was not a trivial achievement and we are now heavily focused on working with some of our key retail accounts to grow our sell through and Iím very encouraged about this important area. Our first national retail account, CompUSA, has been very supportive of our efforts. One of the chickens and eggs that a new company on the shelf has to work through is to prove that your products are worthy of getting the retailerís attention to participate in any number of programs that will dramatically increase sell through. Of course, until you earn that right, you donít get access to all the tools of the trade, so hence the chicken and the egg. Iím happy to report that at

 

CompUSA we have now earned that right and so throughout this year you will see ParkerVision SignalMax products ever more visible in the kinds of sales and marketing activities that I believe will have significant positive impact on our sell through and in helping us build our brand. For starters, you will see freestanding displays versus the very limited shelf space that we currently have. These displays will help us better describe to the consumer the many advantages of the D2D technology, our digital ďgĒ and itís digital transceivers, and why our product is an excellent choice for both home and small businesses alike. This will also help us to build better brand awareness all around.

 

You will also see ParkerVision products advertised in Sunday magazine circulars. This activity will start more towards the middle of the year, and I believe you will see us probably every three to five weeks, depending on the time of the year. ParkerVision will also be participating in various programs that will help the retail and commercial sales associates much better explain why ParkerVision products are an excellent choice for many of their customersí applications. As many of you have seen on our website, Larry Mondry, the CEO of CompUSA uses ParkerVision in his own home because of the reliable broad coverage that he enjoys from our product.

 

On the topic of additional products we expect to be sampling our first cordless phone products based on D2D in the next four to six weeks as well. It has taken us a little longer to complete this product, but for those of you who have used our WiFi products, I hope you realize that we donít field a product until it is absolutely right and that has been our goal and our mantra on our cordless phone, and weíre well down the path of getting there now on that. However, there is quite a bit of interest in various channel partners for the cordless phone from ParkerVision who are anxious to try this phone based on the reliability and quality of our digital transceivers.

 

The first two and a half months of this year have been extremely busy for the company. Our WiFi products have just landed on the shelves, I believe, last week, of Office Depot of Canada, which now begins to give us more presence in the Canadian market place. We announced in January our digital power amplifier technology and product line up, which I believe will both significantly enhance our own branded products later this year and early next, as well as making our WiFi offerings even more attractive to OEM. The power amplifier also expands our offering into the important cell phone marketplace, and since our January announcement we have had many contacts by OEMs for both cell phone and WiFi applications alike. The reaction to this offering has been extremely good.

 

We also recently announced that we have selected IBM Microelectronics, where we will manufacture our power amplifier chips and likely additional products will be manufactured there as well. This relationship is in addition to our already existing and good relationship with Texas Instruments. I am encouraged that IBM views ParkerVision as a valuable up and coming customer as there have been articles about IBMís semiconductor business moving away from taking on smaller emerging customers at the rate that they did in the past.

 

And of course, as Cindy just mentioned, ParkerVision completed a private placement for just over $20 million net to the company to continue to fund our business plan. I believe that the balance of this year will continue to be just as busy with advances as what youíve seen in the first two and a half months. Hence my early comment that itís my view ParkerVision is very well positioned towards achieving a growing number of commercial successes this year and beyond for itís unique wireless technologies.

 

For those of you that have been invested in the company for a number of years, I continue to thank you for your support and enthusiasm and belief in us. Bringing a disruptive technology to market, to making it a commercial success, has many challenges and obstacles to maneuver around, and I believe we are getting better and better at getting to our goal with the technology that I still believe has been an extraordinary investment of our time and dollars. To those of you that are more recent shareholders, we also thank you for your support and for discovering the opportunity that ParkerVision is now narrowly focused on making a commercial success and we hope that you will become long-term shareholders that will enjoy shareholder value increases that you will find very attractive. And so on that note, I think this is a good time for us to open up for your questions. So, could we take questions please?

 

Operator: Your first question comes from Will Lewis of Bay Star.

 

Will Lewis: Hey Jeff and Cindy, congratulations on a pretty important transition year.

 

Jeff Parker: Thank you, Will.

 

Will Lewis: My first question is, I have several, but Iíll try and limit to one follow on: how would you characterize the 802.11b product line update since itís first been deployed, and do you expect quarter over quarter to show dramatic improvement or will it require more time for people to learn about the advantages, including the sales people, of the productís technology? Or, I guess a different way of asking this is, do you view this as a strategic way of breaking into the OEM channel or is this retail sell through a long-term strategy?

 

Jeff Parker: Iíll grab that one, Cindy. Hey, Will, thank you for your question. I think itís a combination of both. I think as the year goes on we will see the sell through going up. You know, itís hard to predict, is that going to go up 25% quarter over quarter, 50%, 100%, you know, Iím hoping that itís going to go up quarter over quarter more in that 50 to potentially 100% range. It is very, you know, dependent on how good we are at getting our information out to the, you know, to the sales organization, the programs we participate in. You know, as I mentioned earlier, I think that the thing thatís happened for us thatís the most notable in terms of the sell through opportunity is to have earned the right now to start participating in the programs at retail that, frankly, if you canít get into those programs, you are just a small spike on the shelf. That said, when I look at the sell through for the last, you know, three, four months, being just a spike on the shelf at, letís say our largest retailer, CompUSA, we made actually quite a bit of progress.

 

The, you know, the company is positioned there against, I donít know, 8 or 9 other brands with much more shelf space, who are advertised in the Sunday circulars all the time, many of them with free standing displays, and many of them with programs already to the sales associates. So weíve gotten our opportunity now to participate in that and, you know, Iíve actually had dialog with people up and down the management chain at CompUSA, all the way from Larry Mondry down to the various managers, you know, the buyer and the merchandizing manager and, you know, what theyíve said to me is, look, you guys have done a good job so far. We like what we see and we think when you participate in these programs, you are going to see significant uptake.

 

And theyíve shown me what other companies who have started kind of where we are now have enjoyed over the course of the next, you know, three, four, five quarters, and itís significant uptake. So, you know, I canít give you an exact number or prediction other than to say that I think directionally weíre absolutely going in the right direction, and some of these programs, by the way, are already in place and running as we speak. And weíre starting to get some of the feedback, and itís definitely helping, so Iím encouraged by that. Cindy did you, I also want to talk to longer term strategy that Will askedÖgo ahead CindyÖ

 

Cindy Poehlman: Yeah, one thing I just wanted to add on top of what Jeff said, Will, to your question, is maybe to put a little bit of numbers around it. Itís a little difficult to glean out of our 10-K filing because of the netting of the channel marketing costs, but if you were to look at comparative revenues say for the third quarter of this year, compared to the fourth quarter of this year, third quarter without channel marketing costs being netted, was about 100,000 in revenue. Fourth quarter without channel marketing costs would have been about 143,000 in revenue. And realize those fourth quarter revenues are also reflective of the price reduction, which was a pretty significant price reduction, especially on our router product. So that just gives you a little bit of a feel for the gross thatís there, as Jeff said, even without real, real significant programs in place yet.

 

Jeff Parker: Yeah. I guess the last comment that I will make is itís interesting. I get calls from investors all the time who have sauntered into one of our retailer partners or another and, I got two calls almost back to back a couple weeks where someone had gone into a CompUSA store, this one happened to be in Dallas, where they had just started working with us on a new program weíve introduced. They walked into the store; they said ďhey, have you ever heard of ParkerVision?Ē The sales associate said, ďoh yeah, great product. Come over here; let me show what it does.Ē You know, he complained that his biggest complaint was he couldnít keep enough product on the shelf. They kept selling out every week, etc., etc. You know, that was the result of this new program.

 

Flip side of that, I get a call, you know, two hours later from someone who goes into a CompUSA in another part of the country, never heard of us, canít find the product on the shelf, you know, etc., etc. So this is kind of an example of, I think, you know, directionally, I think weíre moving in the right direction. And that program by the way that I mentioned has rolled out now, or is in the process of rolling out nationally. We started it in about 10 or 12 stores at CompUSA and now itís rolled out nationally, and itíll take time for it to catch on in all the stores, but my guess is youíll see us go from ten or twelve stores that really are top notch in selling our products, you know, probably over the next 30-60 days probably up to about a hundred, maybe more. And then, you know, maybe by the end of the first half, maybe all 250 or 55 of their stores. Regarding the longer-term strategy, Iíve always viewed that the retail strategy will be successful at helping us generate significant penetration into the OEM space. If we werenít dealing with a disruptive technology here, you know, maybe you could do it a different way, but I think this willówe will look back on this in a year from now, and we will say, you know what, that was a good move. It took time, effort, money, all of the other things you have to do to pull together a program like this, but it was absolutely worth it.

 

And Iím already seeing that, frankly in dialog with OEMs who are saying to us, you know, you guys said a year ago, distance and coverage and reliability and no dead zones was important, and you know what, okay, we agree with you. So tell us, will your ďgĒ product do what your ďbĒ product has done? And thatís what theyíre going to see here in the upcoming several weeks, and I think thatís going to beóitís going to result in our first OEM, our first OEM business. Iím confident of that.

 

Will Lewis: My quick follow up question to that is, do you have any guidance that you want to provide on when you anticipate signing up either an OEM or, I donít know what the status of any discussions may be with cable companies or other folks who may end up, you know, being able to use your product as their means of providing wireless service to their customer base.

 

Jeff Parker: Right. Well, just quick, I mean, I donít know how guidance I can provide other than to say, we have a number of OEMs who are testing our ďbĒ product now. Some of them would be interested in just re-branding our box. They are not looking for us to sell them chips or modules. Some of them want to buy modules or chips out of our products to put into their products, so to the extent we can get some of these guys to ground on orders on just re-branding our box, you know that could potentially result in OEM sales starting in the second quarter. To the extent people want to put in our modules or chips, you know, that will take a little longer, and itíll be a little later in the year. So I guess thatís my way of saying could be as early as the second quarter, you know, it may take a little longer than that, but I do believe this year weíll start to see OEM business, and I donít think itíll just be one or two. I think it will be a number that will, you know, grow as the year goes by and I think by the end of the year weíll be talking about a number of OEMs that are using ParkerVision products in a whole range of applications.

 

Will Lewis: Great. Thanks very much.

 

Jeff Parker: Thank you. Can we take the next question? Operator: Sir you have no further questions at this time.

 

Jeff Parker: Okay. Well on that note then, I appreciate you folks taking the time to listen in today. Thank you for your continued support and weíll be back with another conference call before we know it at the end of the first quarter, and look forward to speaking with you then. Have a great day and a nice weekend. Thank you, bye-bye.

 

Operator: Ladies and gentlemen, thank you for your participation. This concludes your conference call. You may now disconnect.