ParkerVision Q1 2005 Earnings Call

 

May 17, 2005

 

Cynthia Poehlman, Chief Financial Officer

Jeffrey L. Parker, Chairman and Chief Executive Officer

John Bucher from Harris Nesbitt

George Yo from George Yo & Company

Pete Welles from EGA

 

Operator: Good day, ladies and gentlemen and thank you for standing by. Welcome to the ParkerVision, Inc. First Quarter Earnings Conference Call. My name is Anthony, and I will be your operator for today.

 

Before we begin, the Company has asked me to read the following statement. Today’s presentation by management contains forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the Company’s present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions which are subject to risk and uncertainty which could cause actual results to differ materially from those indicated today. These risk factors include changes in general economic conditions, recent geopolitical events, increased competition, work stoppages and slowdowns, exchange rate fluctuations, variations in the mix of products sold, fluctuations in the effective tax rates resulting from shifts in sources of income and the ability to successfully integrate and operate acquired businesses. Further information on these risk factors is included in the Company’s filings with the Securities and Exchange Commission. I would now like to hand the call over to your host for today’s call, Ms. Cindy Poehlman, CFO of ParkerVision, Inc. Please proceed, ma’am.

 

Cynthia Poehlman: Thank you, Anthony. Good morning. I’m assuming that all of you have seen our earnings release that went out yesterday afternoon so, rather than going through it in detail, I’m just going to touch on a few financial highlights and then I’m going to turn the call over to our CEO, Jeffrey Parker, for an update.

 

Our product revenue of $172,000 for the quarter reflects sales of our 802.11b products through a very select retail channel. Looking from the fourth quarter of last year to this quarter before deducting certain marketing costs that end up netted against revenue, this quarter reflects an increase in gross product revenues of about 40% over prior quarter. In addition, our deferred revenue, which reflects product shipments into the retail channel, increased by approximately 50% during the quarter. These increases are due to our efforts with our retail channel partners to increase sell-through of our products and does not reflect any material expansion of the retail distribution channel during the quarter. As discussed in our 10-Q filing, we are continuing to maintain a narrow retail focus at this time as we balance our retail activities with our exciting OEM opportunities which Jeff will speak more about in a moment.

 

As we discussed in our 10-K at the end of the year, we reduced the carrying value of our 802.11b inventory to reflect its net realizable value and, as a result, we anticipated selling this inventory through with no margin generation in the first half of  2005. You will see in the first quarter that our cost of sales actually exceeded revenues somewhat resulting in negative margin. This was due to some additional inventory obsolescence reserves on raw materials inventory and was not a reflection of any further price reductions on our existing 802.11b inventory. We fully expect that our future products, whether branded products or chips, will be produced at manufactured costs that generate attractive margins for the Company. Our operating expenses for the quarter were 5.4 million. This is exactly in line with our expectations as we discussed in our last conference call. On a same-quarter basis, the most significant increase in operating expenses is in the area of sales and marketing. These increases are a reflection of personnel and promotional costs to support the retail channel. The general and administrative expenses also reflect a sizable increase on a same-quarter basis.

 

As we discussed last quarter, this is largely due to the increases in our external accounting fees related to first-time 404 controls work. Although the audit opinion is for the 2004 fiscal year, much of the services are actually performed in the first quarter and, thus, the continued high expense this quarter. We do expect to see significant reductions in our 2005 external accounting fees. Another notable difference in a quarter-to-quarter comparison is the prior year loss from discontinued operations. This was related, as you know, to the sale of our Video Division in May of  2004. The Video Division results for the first quarter of  2004 have been reclassified to be reflected as discontinued operations.

 

From a balance sheet perspective, most notable certainly is in the first quarter is the 20 million increase in cash from the Company’s March private placement of  2.8 million shares. Our use of cash in the first quarter was approximately 4.8 million, which was in line with our expectations. As you may have noted, the Company filed its 10-Q under a five-day extension this quarter and I want to speak to that for just a moment to answer any questions you may have about the events that caused this delay. There is some relatively complex accounting guidance surrounding the accounting for financial instruments such as the warrants that were issued in conjunction with our March private placement. Management’s position, which was supported by our external audit firm, Price Waterhouse, was that these warrants should be accounted for as a component of equity. As this is a relatively complex issue, we chose to submit our accounting position to the SEC for a determination. What that means is the SEC’s Office of Chief Accountant reviews the management’s position and they either agree or disagree. Due to the timeframe involved in this process, we chose to file an extension to our 10-Q in order to obtain the SEC’s position prior to our filing. We did receive that position on Friday and we were pleased that the SEC supported our accounting position. Those are the highlights for the quarter and, at this time, I’d like to turn the call over to our CEO, Jeffrey Parker, and then at the end of the call we will have a Q&A session to answer any questions you may have. Thank you.

 

Jeff Parker: Thank you, Cindy, and thank you, folks, for taking the time to join us for this conference call update. I want to take a moment first to acknowledge that I know this is not necessarily the most convenient time for some of you, but due to my extensive travels, it was frankly the only time that I had available for this call to happen this week. In the future, if possible, we will definitely try to hold these calls after market hours.

 

I’d like to focus my update today with you on where we’re making the best progress towards building shareholder value, both our near-term and longer-term views. If you’ve followed our history and progress, then you know that the investment we’ve made in our direct-to-data technology had always been with an eye towards bringing significant advancements to the state-of-the-art of radio communications through the innovation of new architectures, to process radio signals, and to enable the ability to create very high performance radio transceivers using digital circuits to replace the legacy analog architectures that have existed since the beginning of radio communications.

 

Marconi himself would recognize many of the circuits that you would find in today’s widelydeployed wireless products. You know he might not recognize the microelectronics parts, but he would certainly recognize the schematics that these products are built upon today. Perhaps it’s possible that circuits almost 100 years old would still be the best means for implementing today’s sophisticated digital radio communications in our cell phones, our Wi-Fi internet links, base stations and infrastructure products and the dozens of other widely-deployed radio communication applications; however, common sense would strongly suggest to the contrary. It’s certainly an enigma at least to me that some of the world’s most advanced products, such

 

as cell phones and wireless Internet products, still employ some of the world’s oldest analog circuit architectures. This has always been the foundation for why we believe ParkerVision is on the track to building significant shareholder value.

 

I want to discuss what ParkerVision is today and I want to discuss with you what ParkerVision is poised to become. Today, ParkerVision sells Wi-Fi products through a limited retail distribution channel to consumers who are looking for excellent coverage, reliable connectivity of wireless internet for their homes and small offices. There is literally not a week that goes by that I don’t receive an e-mail or a phone call with the anecdote of a consumer who has gone out of their way to share with us the improvement in their wireless experience that our Wi-Fi product built upon our digital D2D transceiver has delivered. Last week, I received a very nice e-mail from an executive at one of our retail accounts who replaced the Wi-Fi system in his home that was using a product built upon a recent MyMo technology and he replaced that with our Wi-Fi product. He was able to get the coverage he’s been looking for that he couldn’t get and the reliability that he hasn’t been able to achieve. And while it has been encouraging and even energizing to see in practice what we knew our D2D technology would do in theory, we have never wavered from our goal to advance and innovate our technology to fulfill the original goal of bringing fresh, high performance digital architectures and all of their benefits to the radio transceiver to obsolete the analog circuits still in widespread use today.

 

In late January, we announced that we would be bringing to market a chip product line that extends our D2D technology into the area of RF power amplification and it is based on the latest advances of our R&D efforts. Another goal that we have never wavered on is to advance our technology to a form where it can be rapidly applied to a much wider range of applications - implementations that can truly become universal platforms. ParkerVision is not a Wi-Fi company. Wi-Fi is but one application for our technology in its state-of-the-art at the time. Because we’ve not wavered from our goal - and I will tell you that this commitment has not been easy, as I’m sure our long-term shareholders know - we’ve been able to advance our technology to create a product line that I am very confident we will find a level of adoption by wireless OEMs in a way that we had originally hoped for with the D2D Wi-Fi transceiver.

 

So what is different with this chip introduction and our Wi-Fi transceiver? Why do I believe that we are on track to secure OEM business with this offering? For starters, this offering was developed as a direct response to what we’d learned from OEMs from our first offering. We’re calling this chip product line-up our Direct-to-RF-Power chips because they convert any digital or analog data stream directly to an on-channel RF-transmitted carrier at the desired power level - direct-to-RFpower.

 

Unlike the application of our radio transceiver, these chips accommodate the existing way OEMs have created their interfaces. Unlike our transceiver, this product is a universal platform in that it interfaces with all the standard data streams that come from the base band processors used in cell phones, Wi-Fi products, cordless phones, Voice Over IP and the like. Unlike our RF transceivers where we would require a strong measure of cooperation between our transceiver chip and what it interfaces to, our Direct-to-RF-Power chips accommodate those standard interfaces and in the process eliminate significant portions of hardware that are no longer necessary.

 

Additionally, staying with the concept that we’ve developed a universal platform, our chips accommodate all of the frequencies and modulation types for all of these applications. They are very cost-effective for basic applications where only a low-cost solution with extraordinary efficiency is desired for an OEM or is just as attractive to the OEM who wants to design next generation products that incorporate multiple standards and multiple frequencies but using the smallest space and power consumption possible.

 

Our conversations with OEMs have given us great insight to the issues of getting a disruptive technology adopted into the marketplace. We clearly understand what they want and what they need to make it acceptable for them to enable broad adoption of our technology. We developed our Direct-to-RF-Power chips which, unlike our transceivers, can be quickly tailored for a wide range of OEM products.

 

In our dialogue with OEMs, we provide highly-detailed case studies of the benefits to their product of interest and I want to share with you today an example. The example I’m going to cite is a cell phone example that we use with handset OEMs. And what you would hear from us are metrics such as the reduction by 50-80% less space required within the product than the traditional transmitter that the OEM uses today. This is very attractive to OEMs who are looking to shrink their form factors or looking to add more features and are desiring space without growing their product to add these features. You would hear that we reduced the number of components for the entire transmitter by 50-90%. In certain handsets, this has reduced from a couple of hundred components to less than 20 and, in other handsets, from 90 components to around 10. You would hear that we improved the energy efficiency for the transmitter in the cell phone by anywhere from 100% improvement for some of the older standards built around the 2 and 2.5G to greater than 300% improvement for the 3G CDMA and wideband and CDMA cell phones. OEMs can leverage this to increase talk times or they can shrink the battery size and save costs or add new features while not increasing battery size. You would hear that we reduced the cost for the transmitter in the handset by over 50% which in 3G applications is a savings measured in dollars and, in a market where OEMs are looking to shave pennies, nickels and dimes, these are very attractive and notable savings. Last, but not least, you would hear that we provide all of these benefits without making a single compromise on the specifications that determine the quality and integrity of what OEMs expect from the RF transmitter today. In fact, our offering provides significant improvements to many important figures of merit. We will soon be putting examples like this of our direct-to-RFpower on our website.

 

We’ve engaged both large and small OEMs in meaningful dialogue to provide initial demonstrations of our direct-to-RF-power technology in the first half of this year and we are doing just that. Our goal is to get OEMs to incorporate our chips as quickly as possible in a number of products in a multitude of standards. Our next milestones for these products is to sample to the OEMs’ chips who we are in dialogue with in the third quarter of this year.

 

ParkerVision has, in my opinion, an enviable opportunity and also an interesting balancing act to perform over the next few quarters. Our retail products have helped us emerge as a company that has had the tenacity to stay with it in bringing products based on a disruptive technology all the way to finished products. Our retail products ended the speculation about whether our technology could be produced. Could you really make high performance transceivers that don’t require shields or tuning? Could a digital RF energy sampling technology that is direct conversion actually outperform the best-performing super heads? Could this be achieved while using less power? And dozens of other important achievements that we fielded products to put to rest the skepticism that we initially ran into from a lot of the engineers who didn’t understand or believe that our technology could offer this level of performance in a finished product. Along the way of getting past the skepticism of our disruptive technology, ParkerVision had to invest in areas of consumer product development that frankly is not the core competencies of our team or I believe our greatest shareholder value will be built from, but this was necessary to take us to our important next steps.

 

The same can be said of our investment in sales and marketing in the retail channel. ParkerVision’s core competencies were not in-field in retail products. However, we’ve made the investments that we felt were strategically necessary to achieve our longer-term goals. ParkerVision’s core competency is the ability to innovate revolutionary wireless digital architectures that have never been available before for wireless communications. I said we have an enviable as well as an interesting balancing act - enviable because we have developed quite the skill set within our firm that can look at the way many of the key legacy RF circuits and architectures are built and create fundamental invention to the next generation of architecture that provides ultra-efficient digital solutions to many of the challenging problems OEMs are trying to solve for today.

 

Furthermore, I believe it will be in this calendar year that we will demonstrate the proof that we have evolved our technology to achieve OEM adoption at a pace that will build significant value for our shareholders, both those who have been patient long-term shareholders that have gone through each step with us and the new shareholders that have recognized the value that our company has to offer. As we become a valuable partner to certain OEMs having built this skill set, combined with a patent portfolio that would rival some of the larger companies, we will create, in my opinion, a company that our shareholders will be proud to say that they were a part of. If we achieve what I believe we can, then this will be, in my opinion, significant upside potential for our investors.

 

The tricky part of our balancing act is to determine how narrow versus how expansive to maintain our retail product focus. As a company that is not yet internally generating positive cash flow, I want you to know that my goal is to move this company as quickly as possible to that of a company that is cash-flow positive and profitable. As a significant personal long-term investor, believe me when I tell you that I am motivated to do whatever is prudent to get to that goal as quickly as possible.

 

Our dialogues with OEMs have also opened up additional doors of opportunity for ParkerVision to pursue the incorporation of our 802.11g products that we have been developing with certain OEMs and that is also true of our cordless phone products. My last report to you was that we anticipated being able to sample our 802.11g product in the April/May timeframe. While we are still a few weeks away from that goal, what we have been balancing is the use of our resources to move forward quickly with our direct-to-RF-power products in response to the many OEM interests we have received against our desire to sample our next generation of  802.11g products. The time that we have invested in developing 802.11g is to achieve very much the same metrics as what we achieved with our 802.11b products, namely excellent coverage and distance while still achieving reliable connectivity in the presence of interference from microwave ovens, cordless phones and the like. It is our belief that our 802.11g product will provide the kind of data rates over distance, better interference rejection and the kind of cost metrics that make it very attractive to OEMs looking to incorporate video or other multimedia through a wireless network. Many of the new technologies on the market today, while having improved their coverage, still encounter a variety of interference issues that our technology does not suffer from. That is an important consideration to OEMs who are looking to create products that have to move data reliably to make their application work properly. What may influence our distribution channel for 802.11g product, as well as our cordless phone, is OEM interest to incorporate some form of ParkerVision into their product line. This could find for us a better value leverage point to both our core competencies and capital and provide the foundation for building the kind of company that can maximize shareholder value more rapidly moving forward.

 

So, with that I’d like to open up this call for your questions and so I’ll ask our operator to do so, please.

 

Operator: Our first question comes from John Bucher from Harris Nesbitt. Please proceed.

 

John Bucher: Hi, good morning. I’ve got a couple of questions for you on prioritization of the R&D effort. Jeff, I guess you’ve got the Direct-to-RF-Power chip. You’ve got your RF transceiver development effort. There’s the consumer products and then the solutions that have been available on a shrink-wrap basis. There’s the 802.11g chip set. Am I missing anything? And then if you could just go through what your priority is, and then on the first two also how you’re prioritizing the pursuit of wireless wide-area opportunities, i.e., cellular opportunities with the OEMs versus wireless LAN opportunities.

 

Jeffrey Parker: Okay, John. Thanks. Those are great questions. No, your review of the products is accurate, and how we prioritize is basically in direct response to the level of interest that we’ve been seeing from the marketplace. And, in particular, what we are receiving today is more OEM interest in inquiries frankly than we are currently staffed to handle. So while we are adding to our staff in that area to be able to respond to OEMs, we’re also orienting a lot of our resources towards being able to demonstrate and be conversant and responsive to the OEM interest that we’re seeing growing. Kind of the make-up of what we’re doing in terms of where we’re finding the interest, it is from a wide range of both cellular wide-area product OEMs, in particular handset OEMs, as well as quite a few Wi-Fi OEMs, a number of them more in the embedded part of the marketplace than in the finished goods part of the marketplace. But also there are several finished goods OEMs that have contacted us. So, you know, it’s a little bit of a “when it rains, it pours” syndrome, which is a high class problem to have to work with; but currently our priorities have been to lean more heavily on the prioritization of getting the direct-to-power chip demonstrations and the chips readied because the potential for that and the interest from the OEMs has been so large.

 

John Bucher: And so it sounds like the RF transceiver chip, that’s probably more of a longer-term opportunity?

 

Jeffrey Parker: Well, the OEMs that’s we’re talking to about our 802.11g products appear to be most interested in looking at that in a form where they would be buying chips from us. So, no, that would still be a transceiver chip customer. It’s not likely that we’re going to find OEMs who will just take the exact products that we have designed to date and put them on the shelf exactly as we have developed them. They would repackage them in their package and there may be some modifications. So, in essence, we’d be providing a complete reference design that they would then be putting into their product with certain modifications that would tailor it to their needs. But that would also be a chip sale, and it may very well be that those will be our first OEM chip shipments will be our Wi-Fi transceivers that we had initially introduced a couple of years ago and have startedto find their way now into interest with OEMs because they’ve been able to go out and test the products and see what we’ve done with our 802.11b products and are hearing our predictions of what the G is going to do and, again, still with no shields and no tuning, finding that can be very, very interesting.

 

John Bucher: So one final question. So these top two priorities, just to make sure I got the milestones straight, your goal is to be sampling the direct-to-power solutions in the third quarter. And then the RF transceiver for Wi-Fi, you’ve indicated that that’s been pushed back some. Do you have a specific date you’re targeting for that now?

 

Jeffrey Parker: It should just be several weeks from now. Yeah, three or four weeks from now we should be able to start sampling those products on the G, on the G products; and, yes, on the direct-to-power chips in the third quarter, that’s correct and demonstrations of the direct-to-power, yes, here in the first half.

 

John Bucher: Thank you very much for taking my questions.

 

Jeffrey Parker: Okay. No, thank you. Are there other questions?

 

Operator: Our next question comes from George Yo from George Yo & Company. Please proceed.

 

George Yo: Jeff, where do we stand on the cordless phone?

 

Jeffrey Parker: George, cordless phone is we’ve actually now been beta-testing the cordless phone. We’ve been doing it more locally than around the country just to make sure we’re getting the last bugs out of that. The distance performance of that is extraordinary. I mean, it’s what we had predicted we would do. Our goal was to do a 2-mile open field link and we did about maybe between 2 and 2¼ miles. And what that translates to indoors, of course, is very dependent on what the indoor structures are made of, but I personally tested it in some large, difficult environments and we typically, when we benchmark this against other products that are on the market today, are seeing anywhere from about 3, maybe 5 times the distance of indoor coverage. But, again, that depends on what the indoor environment itself is like. George, as I mentioned before, how we take that product to market I think is going to be greatly influenced by what reaction we get to OEMs who may want to incorporate direct-to-data into their own phone products. What I’m looking for is to find the best leverage point for this company and to continue to move more to focusing our commercialization to focus on our competency which is bringing technology and chips to market and to minimize moving forward investments that our beyond our core competency and that dilute where we can be moving our R&D dollars ever more effectively to continuing to innovate and push our D2D technologies forward. By the way, George, congratulations on - I understand you had triplets.

 

George Yo: My daughter did, yes.

 

Jeffrey Parker: Wow.

 

George Yo: Thank you.

 

Jeffrey Parker: Thank you.

 

George Yo: So the cordless phone company purchase that was made last year is not going to go forward as a manufacturing facility?

 

Jeffrey Parker: Well, the cordless phone that we purchased last summer was an asset of a company that was getting out of the cordless phone business, and what that asset came with was a platform that we were able to infuse our own transceiver module versus the one that they were using which was a standard analog transceiver. That asset that we bought also came with some relationships from some OEMs who were purchasing phones like that for their own brand use and so those are the kinds of OEMs that we’re in dialogue with now to see if they’d be interested in taking that phone into their own channels or with their own brand on it. Are there other questions?

 

Operator: Our next question comes from Pete Welles from EGA. Please proceed.

 

Pete Welles: Mine is just a procedural question. It would be helpful if we could get sort of the breakout of current assets and current liabilities, especially when we’re in a cash-flow burn situation, and in the release that I finally got it only had total numbers. And so that’s just a request to Cindy, especially what exactly current cash is today.

 

Jeffrey Parker: Okay, Pete. We will appreciate that comment and that request. Other…

 

Operator: I’m sorry, sir. We have no further questions in queue. I’ll turn it back to you for closing remarks.

 

Jeff Parker: Okay. Well, I appreciate, as I say, your joining us for this conference call. As I say, I know it’s not at the most convenient hour for many of you on the West Coast and, with the market opening here shortly, not the most convenient hour in general. But, again, it was unfortunately the only time that with my travel schedule and meetings that I’ve committed to the only time that I really had available this week. So thank you again for joining in. And for those of you who have continued to be supportive of the company and its efforts, we appreciate that very much and we look forward to reporting back to you the next steps of our advancements in bringing our next products and relationships for the company’s businesses to the market and to reality. Have a great day. Thanks.

 

Operator: Thank you for your participation in today’s conference. This concludes the call at this time. You may now disconnect. Everyone have a wonderful day.