PRKR 2008 Q4 Conference Call
March 16, 2009
Morgan Payne with Allen Ewing & Co
Phil Anderson with Pinnacle Fund
Operator: Please stand by. We're about to begin. Good day, everyone, and welcome to the ParkerVision fourth‑quarter and year‑end‑2008 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Paul Henning. Please go ahead, sir.
Paul Henning: Thanks very much. Before we get started, I want to remind the listeners that this conference call will have certain forward‑looking statements, which involve known and unknown risks and uncertainties of our business and the economy and other factors that may cause actual results to differ materially from our expected achievements and anticipated results. [0:36] Included in this respect are the visibility to maintain technological advantages in the marketplace, to achieve timely market introduction and acceptance of our products, and to maintain product‑company protection in the availability of capital, among others.
Given these uncertainties and other factors about our business, listeners are cautioned not to place undue reliance on any forward‑looking statements contained within this conference call. Additional information concerning these and other risks can be found in our filings with the Securities and Exchange Commission.
We'll begin today's call with Cindy Poehlman, CFO, who'll review the financial results of the year, and followed by Jeff Parker, CEO of ParkerVision, who'll report on the company's business activities.
Cindy, would you like to go ahead, please?
Cindy Poehlman: Sure. Thank you, Paul, and thank you to those of you joining us today for our fourth‑quarter and year‑end‑2008 conference call. We reported today a 5.7 million, or 22‑cents‑per‑share, net loss for the fourth quarter of 2008, compared to a 4.7 million, or 19‑cents‑per‑share, loss for the same period in 2007. For the full year, our net loss was 23.1 million, or 88 cents per share, compared to 18.2 million, or 74 cents per share, the previous year.
The increase in our net loss from 2007 is primarily the result of the same factors we discussed last quarter. That is, an increase in product‑development expenses, along with an increase in non‑cash, stock‑based compensation expense.
Stock‑based compensation, while not affecting cash, does have a significant impact on our net loss. Our stock‑based compensation nearly doubled, from 2.3 million in 2007 to 4.2 million in 2008.
As you may recall from our discussions last quarter, much of this increase results from long‑term, equity‑based incentive awards made during 2008 to executives and other employees in the form of restricted stock units. These awards are expensed based on the $10 to $11 price of our stock on the date of the award, irrespective of the actual value ultimately realized by investing. The accounting for stock‑based compensation is an area where the recognized expense for financial reporting purposes often differs materially from the realized value of the award, particularly in today's highly volatile environment.
For example, approximately half of ParkerVision's 2008 stock‑based compensation expense is related to options awarded in previous years, all of which have strike prices well in excess of current market price, and many of which are nearing expiration. Because of the accounting in this area and the effect of prior awards, we do anticipate that our stock‑based compensation will continue, at these levels in 2009 and 2010, based on the unadvertised book value of existing awards.
So we've discussed where approximately half of our increase in net loss arose from, from 2007 to 2008. The other half is largely due to product‑development expenses incurred in 2008, particularly in the second half of the year, as we completed development of the customer chips delivered in December. As we discussed in more detail in our 10‑K that was filed this afternoon, we engaged a number of outside firms to supplement our in‑house engineering resources. In 2008, these firms were tasked with a variety of projects, but in particular we used these supplemental resources to assist with the non‑proprietary circuit layouts for our receiver technology, and also for the digital IC that drives our RF‑transmit ICs and interfaces to the baseband processor.
As you may recall, the relationships with both our chipset customer and LGI anticipate incorporating our D2D RF‑receiver technology into their product offerings, in addition to our D2P RF‑transmission technology. Many of our external design projects were largely completely at the end of 2008, and, as we'll discuss in a moment, this is one of the areas where we expect significant reduction in expenditures in 2009.
Our cash usage for 2008, excluding any proceeds from stock issuances, was just under 19 million, an average of approximately 4.7 million per quarter. We ended the year with working capital of approximately four million, which included 4.8 million in cash.
Our recently completed equity offering was important in ensuring our ability to continue executing on our business plans throughout 2009. We were very pleased to successfully secure the necessary funding, particularly given the heightened selectivity of where investors place their liquid assets in today's current environment.
It's important to note that our projected cash needs for 2009 are less than our 2008 actual cash usage, and not by an inconsequential amount. This is, in large part, due to our reduced product‑development needs, having completed certain major design tasks last year, particularly with regard to the use of outside design firms, as I mentioned earlier.
When we assessed our liquidity needs for 2009, we did so with a few key goals in mind. First, it was essential to ensure that we have sufficient capital to fully support our customers and their implementations. That meant keeping intact our highly skilled technical team, a very talented team that has been built over a number of years, and continuing to provide this team with the necessary tools to ensure their continued success.
Secondly, as a publicly held company, there are certain legal, financial, and other compliance costs that are necessary to ensure proper corporate governance and continued compliance with federal and state laws. While that may seem obvious, for a small company like ParkerVision these fundamental costs are quite significant when compared against our overall operating expenses. The good news is that as we begin to enjoy revenue growth, this is an area where we do not expect to see a correlated growth in expense.
Lastly, while we have taken steps, as most companies have these days, to reduce discretionary spending and tighten our belts across the company, it was important for us to ensure that we weren't cutting so deeply as to impair our ability to support our customers as they deploy our technology into the marketplace, or to damage the relationship we have with our employee base, by far our most valuable asset, next to our intellectual property.
So, with those goals in mind, we assessed our liquidity needs for 2009. It's important to point out that, although we certainly expect revenue growth to begin in 2009, for purposes of our liquidity assessment we gave very little weight to these revenue expectations ‑ for several reasons, not the least of which is the external auditor's preference to evaluate our liquidity needs based on historical trends, not forward‑looking events. I mention this because, despite our giving very little weight to expected revenues for '09, our ability to reduce our operating expenses has resulted in an expectation of a reduction in our cash needs by about 30 percent for 2009, to approximately three to three and a half million per quarter.
We will continue to look for ways, to further reduce our cash usage throughout the year. Certainly, receipt of incoming revenue is the preferred method and the goal that both we and our customers understand is first and foremost. Jeff will address our expectations with regard to the estimated timing of additional revenues in his prepared remarks. Which sounds like a very good segue to Jeff Parker for an update on the business.
Jeff Parker: OK. Well, thank you, Cindy. And good afternoon and thank you for joining us for our fourth‑quarter and year‑end conference call update. I'm very proud to say that ParkerVision is well‑positioned to move from an enterprise that's focused on advancements in the laboratory to one that's focused on revenue generation from the volume production of our customers.
Our company's heritage is its commitment to the innovation of truly revolutionary RF transmission and reception technology, and it will emerge as one that generates meaningful revenue growth from that success. Coupled with a discussion of our expectations for 2009, I'll include a review of what we achieved last and early this year that positioned us to have this excellent opportunity before us.
So, today we'll discuss, first, the progress made with each of our three existing customers, and the next milestones with each of them. Second, our thoughts with regard to the current economic environment and how we believe that impacts our future prospects. Third, our recent equity raised and how that supports our goals for the year. And finally, how all of these issues converge and inform our outlook for 2009 and beyond.
So let's start with an update with regard to our current customer base. As you know, we delivered production‑ready silicon to our first mobile chipset customer. Since that time, we have been working closely together as they productize this into their chipsets for mobile handsets. This will be an upgrade to some of their existing platforms that are currently shifting in volume. Their first 3G RF solution incorporating d2p will be an industry first, as in a single package they are providing all of the transmit and receive functions between the base band processor and the antenna, with almost no external supporting components. Their single package 3G product is revolutionary in and of itself and that it replaces what is today built in two to four packages plus around 100 to 200 supporting external components.
All of this comes with the benefits of better power efficiencies for longer battery life, excellent transmit and receive signal quality for more reliable connections, easier phone design‑in for faster time to market, and better manufacturing yields for lower costs. We believe we will see the first mobile handsets that incorporate this product, built and tested during the first half of this year. And that they will ramp up volume production, shortly thereafter, which will lead to d2p enabled phones in the marketplace.
So now let's shift for a moment to the progress we are making with our first customer, ITT. Although the incorporation of new technology into military and government devices is a longer process than what is typical in the commercial market, the leadership in ITT's communications and system business is committed to the need for advanced RF technology that satisfies the requirements of their customers and to execute on their own goals for next‑generation products. ITT has progressively grown the scope and view of their next‑generation products that would benefit from the incorporation for our technology.
Because of the confidential nature of their business, I'm not at liberty to discuss specifics, but I'm confident that you will see in the near term verification that ITT, is actively promoting d2p technology in their marketplace and incorporating d2p technology into their product development. Based on their progress, I expect that ParkerVision will receive initial revenue from ITT's efforts in the second half of this year. So while this takes a little time and patience for new technology to find its way into these types of products, once they launch, it will be a solid source of recurring revenue complementing our major focus in the commercial markets.
So next, let me provide you additional color on our most recent customer, LG Innotek. Our first product with LGI is a HEDGE product that incorporates all of the transmit and receive functions between the base band processor and the output to the antenna into a single package for phones that incorporate the mobile standards of 2G GSM, 2.5G EDGE, 3G wideband CDMA, and 3.9G HSPA. The advantages of our technology in the HEDGE product are similar to what I covered earlier in the 3G product replacing, what today requires, eight to 10 separate packages and 200 to 300 supporting components will be a single package with greatly reduced external parts, providing better talk times through higher power efficiency, enabling simpler design of the RF in the handsets and is cost effective and available to be produced in high volumes.
LGI's largest customer is a sister company, LG Electronics, has recently taken the number three cell phone share market position, and this year it's forecasted to ship 110 million mobile handsets. In addition to LG Electronics handsets, LGI has a number of other blue‑chip handset customers as well in their relationships with Nokia, Sony, Sharp, Motorola, and others.
LGI ships mobile handset components that include display modules, Bluetooth, WiFi, RF switches, transceivers, and RF power amplifiers. We are actively working with LGI to finish the product definition. We will then finalize the sourcing agreement, which will include the delivery of silicon to LGI by the middle of this year. LGI will then build their products and provide samples and market to their customers, in the second half of this year. Given their existing customer base, it's our belief that LGI and ParkerVision can capture a significant market share.
I will circle back a little later in our discussion, to this point, as I review how our progress with LGI and our other two customers translates into revenue and cash flow. But first I would like to speak about our recent capital raise, the economic environment and how that positions us with future prospects.
As I'm sure you're all aware, we completed the raise of, approximately, $10 million just a few weeks ago. This was accomplished during one of the most challenging environments for the equity markets in decades. We engaged Roth Capital Partners who took on the task of being our partner to get this funding completed. As would be expected in any underwritten transaction, Roth conducted a significant amount of first person due diligence on both the company and due diligence with our customers. Although there are uncertainties in the health of the economy, our current customers themselves are continuing to grow and prosper even during these challenging economic times. In fact historically, it's during economic downturns like this that new technologies are often launched as companies seek to grow market share and shore up their own revenue growth opportunities.
One benefit that we've seen is that our supply chain has not, in recent memory, been more accommodating with quoted lead times and terms or in their willingness to help the newer entrants get products to market. It is also during challenging economic times when companies with me‑too offerings tend to get squeezed out of the market and commoditized product offerings shrink to just a few key players. Product differentiation becomes more highly valued, and this is exactly what ParkerVision brings to this industry, and at a time when our market segment continues to enjoy double‑digit growth.
Based on the expected milestones we are achieving with our first chipset customer, we believe initial revenue from these efforts will occur in the first half. From there we see them ramping product shipments beginning in the third quarter, generating a royalty revenue stream for us as chipsets are shipped and volume growth builds throughout the balance of this year and into next.
We've revisited our previous expectations that the first 12 of shipments with this customer are expected to generate between $5 million to $10 million in revenue for ParkerVision. As of our customer continues to enjoy good adoption and growth, we feel there is actually upside to those numbers.
In addition to our chipset customer, ITT has continued to expand their approach for adoption of d2p into their market. Not only will you see more visible activities of ITT's product partnership with ParkerVision throughout the year, but as a result of their efforts, ITT should begin to generate revenue for ParkerVision sometime in the second half of this year.
Our goal of delivering LGI their HEDGE silicon by midyear should enable samples to their customers in the third quarter and we are hopeful that they will place orders with ParkerVision for initial production ships within a quarter or two after they sample to their customers.
So let's summarize what this all means from a financial perspective for 2009 and into the first half of 2010. As Cindy discussed earlier, we have significantly reduced our use of cash from the second half of last year based to a large degree on the completion of some contracted product design activities. We anticipate that our cash usage will be in the $3 million to $3.5 million per quarter range.
With the ramp in revenue that we expect to see from our chipset customers in the second half of this year, the start of successful programs with ITT and that associated revenue, and the start of a revenue ramp with LGI in the first half of 2010, our goal is for ParkerVision to reach its cash flow breakeven point within the next four to six quarters. In fact, we believe this customer base alone will take us, significantly beyond that breakeven point.
While we stand by our previously stated goal of achieving significant 3G market share and becoming a de facto standard to important segments of that industry, achieving self sustainability is the next significant milestone to achieving that longer term goal.
And that's been the focus of our update to you today, which leads me to my last topic before I open this call to your questions. And that deals with our efforts to secure additional customers. Based on the potential of our existing customers, it is clear that the most important priority for ParkerVision is to do whatever is necessary, to ensure that they have successful and timely product launches with our technology. This is the fastest way to achieve profitability and those successes will surely open the door for other opportunities.
Accordingly, we have to be very selective about what additional customer relationships that we take on, and to ensure that those relationships are complementary to what we are already doing, so that we have a good leverage point in both sales and marketing and engineering resources that we spend. That being said, we continue to be in active discussion with several new customer prospects. Some of them are suggesting that our ability to commit to certain product time frames will win us their business.
Now, while this poll and interest from additional customers is very encouraging and enticing, especially in these economies, we are carefully reviewing what we can take on, while not compromising, in any way, our existing customer commitments. I feel that the end result is that, yes, we will have opportunities to add an additional customer or customers this year, but we must be careful to balance this with delivering on the important progress that's being made right now with our existing customer base.
So, in this challenging economy, I feel very fortunate that we are partnered with topnotch customers, whose businesses continue to grow and gain market share and who are passionate about our technology and what it will do for their own business growth, to have investors who remain committed to supporting our business plans and with team members, here at the company, that have never been more energized, as we work with our customer partners to realize the fruition of many years of work and to attain the next key milestone soon of self sustainability.
And so with that, I think it would be appropriate to open this call up for your questions. Operator?
Operator: Thank you, sir. Today's question‑and‑answer session will be conducted electronically. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to ensure that our equipment can hear your signal. Again, that is star, one on your touchtone telephone to signal with a question. I will pause for just a moment to give everyone a chance to signal. And again that star, one if you would like to ask a question at this time.
We will take our first question from Morgan Payne with Allen Ewing & Co.
Morgan Payne: Hey guys, good report. Cindy, without waiting for the 10‑K, could you tell me what the tax loss carry forward is?
Cindy: Sure. I don't have it off of the top of my head. Give me just a second, I can tell you exactly what it is. Tax loss carry forward is just over $180 million.
Morgan Payne: Great. Good news and good report.
Jeff Parker: Thank you, Morgan.
Morgan Payne: Thank you very much guys.
Operator: We will take our next question from Philip Anderson with Pinnacle Fund.
Philip Anderson: Hello Jeff, hello Cindy.
Jeff Parker: Hello Phil.
Cindy: Hi Phil.
Philip Anderson: Jeff, what is the market share, I guess between LGI Innotek and unnamed cellular customer No 1? What is the most recent market share that you have seen in 2G all the way through 3.5G for those two customers?
Jeff Parker: You know mostly focused, Phil, on the 3G. And if you look at LGI's biggest customer, it's the internal or sister company LG Electronics, who currently is about 9% market share, is the No three worldwide leader in mobile handsets and growing. Then, as I mentioned earlier, they've also got business that they do with Nokia and Sony and Sharp and Motorola. And while I don't have, at least, access to the exact specifics of what their penetration into those accounts are, I mean I know over half of their total business is in the mobile handset components business, so it's significant for LGI.
I believe that if you add LGI and our confidential chipset customer together in the 3G space, they are greater than 10% and not 20, somewhere in that range. I would think, probably more than halfway to that 20% is my guess. And I'm watching both companies on continued growth, which I think in this market is great, and gives us great partners to be working with.
So, when we talk about the goals, that we've talked about in the past, of achieving the prominence of being adopted as a de facto and perhaps reaching a third of the total market, I can see those customers alone getting us significantly beyond half way there, and maybe even further, depending upon what our technology might do to help them grow their own business share of market.
Philip Anderson: Well, you would certainly think in this environment, that product differentiation is more important than ever. And certainly, the technology creates a differentiated product in what is basically a commodity marketplace.
Jeff Parker: Our Vice President of Engineering, Domingo Figueredo, who has been with us now for about seven or eight months and who has the good fortune of having introduced three other, what he calls disruptive innovations in his career, mentions to us all the time that in his career, these are the kinds of economic times when those types of innovation get launched. So he personally is very bullish on the fact that we're moving through this phase of our company during this time of the economy. Because you're absolutely right, differentiation is what it's all about in this type of an environment.
Philip Anderson: So, you gave us some almost a reverse bill of materials, if you will, in the type of componentry that our technology is going to eliminate, in the single package. And you mentioned eliminate two to four packages on the platform and 100 to 200 supporting external components. Can you give us a sense as to maybe on a percentage basis or even better on an absolute dollar basis perhaps a range of what that elimination of components yields in terms of a cost saving to our customer and ultimately the ultimate customer, which is a cellular OEM? Can you help try and quantify the significance of those component eliminations?
Jeff Parker: Yes, when we last did the analysis on this, it looks like, on a 3G handset, this will reduce that part of the bill of materials, if you look at the transmit and receive function and all of its supporting components in the aggregate; we will reduce that by about 50%. And we will ‑ I'm sorry, Phil. What other part of the question did you have?
Philip Anderson: I wondered if you could associate a dollar figure or a range of dollars with that 50% reduction?
Jeff Parker: I don't have it on top of my head but I believe it reduces it from about what's today $7 or $8 down to about half of that.
Philip Anderson: All right.
Jeff Parker: On the HEDGE application, it's a little different. Those are more expensive RF solutions because they do a lot of other standards and lots of other frequencies. And those today we see are more in that $15, $16, $17 range and we see reducing that to less than $10, maybe $9, something in that range.
Philip Anderson: All right, that's fantastic. What about yield improvements or reductions in yield? How do you think the yields are going to be ‑ I don't know what the yields the customers are currently having for a completed platform or even components, which are going into those platforms. But can you, to the extent that your manufacturing partners have discussed, how yields are likely to be impacted by our products? Can you comment on that?
Jeff Parker: Sure. Well, as we are moving now towards the volume production, we are actually getting some good visibility into yields. And one of the challenges that mobile handsets have today is that when the radio components get populated onto a onto a phone board, they are seeing each other in operation for the first time. So, you've got these 100 or 200 supporting parts and these two, three or four separate packaged silicone chips. And so, they all are now playing together for the first time when they're populated on a phone board. They all have tolerances but if those tolerances all stack up adversely, then you won't get the performance that you need. And in fact, you may not pass the performance metrics enough to have a phone that actually can pass the testing at the end of the line.
It is not uncommon from what we've heard to see on a mature phone line, that the yield loss from this part of a phone can be as high as 3%, which if you think about it, is a pretty expensive proposition, because you've got components that maybe costing pennies that are preventing the phone board, which might be $35 or $45 or $55 or more dollar item from being useful - and they can't typically rework those. They don't have the ability labor‑wise to rework those. So, those tend to get discarded. We unify the entire radio function. So when our customer builds a complete single packaged device, there's no question that the yield will be significantly higher.
Can we reduce that yield from 3% to 0%? Probably not. There will always still be a yield issue. But can we cut it in half or greater than an half? Our intuition right now tells us that until we get into volume production, that's probably the order of magnitude that we will improve it, maybe more.
And the other place that we were going to help manufacturing yield, which is obviously lower cost, is when you put new phones into production. We've been told that it is not uncommon that the yield loss in the initial phone production can be low double digits 10%, 15% yield loss. To the extent we can help manufacturers cut that initial yield loss down or move through that yield loss much quicker, that's very valuable.
So, there's no question that, not unlike a lot of disruptive innovations, our technology was designed to do a number of benefits. It's doing all those benefits but we're discovering there are some additional key items, yield being one of them, that we bring great advantage to.
And I, personally think that as the year goes by, we will come out of the year with people who are manufacturing products based on this technology going, "Wow, that's the way RF should work. That's the way it should be designed in. That's the way we should experience it." And I think that we'll help establish a whole new expectation for the RF front end.
Philip: So, what are the latest forecasts you have seen for the number of units in the 3G marketplace worldwide this year, Jeff?
Jeff Parker: The latest forecast that we saw, and I believe this came from an Allied Business Intelligence report that we subscribe to, is that 3G, Phil, it's either this or next year, will attain about a 500 million to 550 million units shipments. I think that might be 2010, I don't recall. I don't have it in front of me. [30:46] And that by the year 2013, that will double to one billion handsets shipped, which include a small amount of 4G handsets within that, as well but it's predominantly 3G.
So, it's still a market that's enjoying double digit market share growth for the foreseeable future. And so, we think we're getting into this market exactly the right time, because it's got enough volume to certainly make it very attractive to us and yet enough growth, but there's still a lot of new design‑in opportunities. So, we're very pleased with where we're merging into the market.
Philip Anderson: Got it. So, it's 500 million plus growing 15%, 20% a year for the next few years?
Jeff Parker: That's right.
Philip Anderson: And so LG has 10% to 20% of the marketplace now?
Jeff Parker: I believe LG Electronics has 9% or 10%. And I think certainly, if you add up the rest of their customers, it's a vast majority of the market, right? Because it includes Motorola and Nokia and Sony and Sharp.
Philip Anderson: Sure. But if LGI were to keep their current share, you had guesstimated that would be about 15% of the 3G market this year?
Jeff Parker: I think that, they're probably in 15% of the 3G handsets this year or more. We don't have visibility into exactly the market share of their other customer ‑ the business they are into.
Philip Anderson: And then, unnamed cellular customer No 1, I think you've said in the past is 5%?
Jeff Parker: They're in what I would call lower‑to‑mid single digits and we see them growing. And I think that their view is that with our technology, as well as some other things they're doing, they'll enjoy even more growth beyond maybe some acceleration of that.
Philip Anderson: It certainly makes all of the sense in the world, which is why we invested in the stock. So, if there is 500 units and our current customers have, call it 20%, that would be 100 million unit market opportunity with the current two customers?
Jeff Parker: That's right.
Philip Anderson: And that of course would be growing as they win share and the market itself grows in overall size...
Jeff Parker: That's right.
Philip Anderson: ... against what should be a $12 million to $14 million cash burn in the next 12 months.
Jeff Parker: That's right.
Philip Anderson: All right, Jeff, well it sounds like it's all coming together very nicely. Thanks very much for the hard work and for everybody there too.
Jeff Parker: Thank you, and thank you for the continued support. We appreciate it very greatly.
Operator: And as a reminder that is star, one on your touchtone telephone as this time for questions and we will pause for just a moment. And as there appear to be no further questions, that does conclude our question‑and‑answer session. I'd like to now turn the call back over to you, Mr. Parker, for any additional or closing remarks.
Jeff Parker: OK. So folks, thank you for your continued support and taking time to listen to our conference call. I think what's most significant is that we have stayed the course. We started investing number of years ago to target the mobile handset space. And we found the right place to enter into this space, with great customers who are growing and who, I believe will take us, pretty quickly, through our point of being self sustainable, and then into that next goal that we've all talked about over the last nine months or so.
Which is that meaningful market share, maybe a third of the market that can really lead us into the kinds of earnings per share that that we've talked about, and that we absolutely still believe that this company can achieve and achieve in a timely fashion.
So, thanks for your support and we look forward to bringing you our updates in our next quarterly conference call as well. Bye‑bye.
Operator: And that does conclude today's conference. Thank you for your participation. You may disconnect at this time.
[34:31] [audio ends]