Norsat International Inc. Fourth Quarter 2008 Earnings Conference Call March 12, 2009

Transcription

1 Norsat International Inc. Fourth Quarter 2008 Earnings Conference Call March 12, 2009 Operator: Good day and welcome to the Norsat 2008 Year End Earnings Conference call. All lines have been placed on listen only mode and after the speakers remarks there will be a question and answer session. It is now my pleasure to turn the call over to Dr. Amiee Chan, the President and CEO of Norsat International. Amiee Chan: Thank you operator. Hello everyone and thank you for participating in our 2008 Fourth Quarter and Year End Conference call. Earlier today we released our financial results for the three and 12 month period ended December 31, The press release and other materials are available on our web site at and will be available on SEDAR. With me on the call is Eugene Syho, our Chief Financial Officer. For today s call, once I have summarized the key results for the year, Eugene will review our financial results. I will then conclude with a brief overview of our strategic outlook after which I will take your questions. Before beginning with my formal remarks let me remind you that listeners are cautioned that today s call and the responses to questions may contain forward looking statements within the meaning of the Safe Harbor Provision of the Canadian Provincial Securities Law. Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors and assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements. A discussion of factors that may affect results are contained in Norsat s filing with SEDAR. Norsat does not undertake to update any forward looking statements. Such statements speak only as of the date made. Now on to our results. In 2008 Norsat set out to build on the successes of the turn around in Since I moved into the role of CEO in late 2006 Norsat has now reported nine consecutive quarters of profitability was a banner year for Norsat as we recorded the highest annual profit in the company s history. We also reported the highest quarterly profit in Norsat s history with the results of the fourth quarter of Our microwave product segment continues to provide a solid base. Additionally our satellite system segment continues to gain traction and becoming a strong growth driver for Norsat. Using these two business segments as the foundation we seek to develop additional initiatives that would drive the company s growth over the long term. Norsat s top line growth of 10% on a year-over-year basis and holding operating expenses at the same level as the previous year provided the impetus for a 57% growth in earnings over the previous year. The financial results of the last two fiscal years is an affirmation of the approach we re taking towards managing our business that balances growth and profitability. That being said, we continue to face some seasonality in our business which can lead to lumping quarterly results. On the expense side we continue to evaluate our cost structure in 2008 and made changes where optimization was necessary. This includes a continued commitment to allocating resources to research and development which is the key differentiator that enhances our ability to grow the business. In 2008 we were successful in obtaining government contributions related to R&D activities in Canada and these contributions assisted in keeping our costs contained. Most notably, we opened up an R&D facility in Daejeon Korea to take advantage of the expertise in satellite technology being developed in that area. The increase in satellite sales volume allowed us to develop some cost advantages as we re able to gain operational efficiencies due to 1

2 economies of scale. And last, but not least, the company finished fiscal 2008 debt free and significantly reduced interest costs year-on-year. With respect to revenue improvements our satellite system segment, which we only added to our suite of offerings four years ago, serve as a primary growth driver. During the year we received $5.5 million US order for portable satellite terminals from the US Department of Defense. This order was partially filled during 2008 and will be completed in the first half Despite our cost cutting in 2007 we maintain our R&D momentum, we just found a more efficient approach. In 2008 we increased R&D efforts by establishing a center in Daejeon which is a cluster for satellite technology in Korea. We also added resources in the Canadian office to expedite product development in order to get product to market in a more timely manner. In 2008 we maintained our pace for new product launches both in the microwave product segment as well as in the satellite system segment. Historically, Norsat has been faced with the challenge of customer concentration. We have a number of strategies in place to drive growth which we are successful to help diversify our customer base and we have already made preliminary progress. In 2007 we grew our customer base to include seven militaries worldwide with our products now deployed in 17 countries spanning five continents. We continue this trend in We can now report nine militaries worldwide as Norsat customers and have brought resources on board to pursue commercial opportunities in a more aggressive manner. As we begin 2009, Norsat has evolved even more from the company that was in We now operate from a much stronger financial position and look to continue the company s growth. On that note I ll pass things over to Eugene to discuss the financial results for the year in greater detail. Eugene Syho: Thank you Amiee. Good afternoon everyone and thank you again for joining us. Let me preface this section by reminding everyone that Norsat s reporting currency is United States dollars. All the dollar amounts mentioned on this call are in US dollars unless otherwise specified. As Amiee mentioned one of the key mandates for Norsat entering 2008 was to build on the successes of 2007 and consolidate the company s financial platform while continuing to drive growth. Overall revenue in 2008 grew $1.6 million to 18.1 million up from the $16.5 million last year. Revenue from our microwave products business, which serves as a fairly stable revenue base for Norsat, decreased slightly to $8.7 million from 9.1 million in Revenue from our satellite systems business segment grew to $9.3 million up from 7.3 million last year. As Amiee has mentioned we regard our satellite systems business as our key organic revenue growth driver for the foreseeable future. This is where the new market opportunities lie and where we continue to focus our efforts on gaining market share. Continuing on the revenue front let me take some time to delve specifically into revenue for the fourth quarter. The fourth quarter of 2008 was the strongest quarter recorded over the past three years. We saw growth of 31% comparing the fourth quarter of 2008 to This quarter s performance was primarily driven by the start of satellite systems shipment against the $5.5 million order from the United States Department of Defense. These shipments helped increase satellite systems sales to $4 million up from $2.6 million for the same period last year. Microwave products also contributed with segment sales for the quarter of $2.3 million compared to 2.1 2

3 million for the same period last year. The combined result of the two business segments was an increase in sales of $1.5 million to $6.3 million up from 4.8 for the same period last year. The fourth quarter historically tends to be our strongest quarter; that has been the case in the past three years. The US military, a long standing and major Norsat customer, has a September 30 th year end. Often this can lead to us receiving orders in the final days of the third quarter which we fulfill and generate revenue from in subsequent periods. We are working to minimize the impact of the seasonality of our business and we continually look for ways to address these quarterly fluctuations. Our overall gross margin in 2008 remain consistent with 2007 at 52% of revenue. We have maintained that this gross margin is right in and around our target range. However, it is valuable to note that gross margins may be negatively impacted by the current financial crises and global recessionary trends for For satellite systems our gross margins grew to 60%, up from 57% last year while gross margins for microwave products decreased to 43% from the 48% experienced in In 2008 our operating expenses were 40% of revenue, or $7.2 million. This compares to the $7.2 million, or 44% of revenue in Operating expenses as reported for 2008 were offset by Canadian government contributions of $0.7 million; without these government contributions operating expenses would have been around the 43% of revenue mark or $7.9 million. For 2008 net earnings were $2.2 million or $0.04 per share compared to last year s earnings of $1.4 million or $0.03 per share. For the fourth quarter of 2008 net earnings were $1.3 million or $0.02 per share compared to 0.2 million or $0.00 per share for the same period last year. As at December 31, 2008 our cash balance was $1 million compared to 0.7 million at December 31, Working capital increased from $4.9 million at December 31, 2007 to 8.5 million as at December 31, The majority of this increase was due to an increase in receivables which are from the United States Department of Defense. Overall, 2008 is a reaffirmation that Norsat has the ability to grow the business while keeping control of its cost structure. The task at hand in these challenging economic times is to stay the course and continue driving for growth. I will now pass things back to Amiee to conclude the call. Amiee Chan: Thank you Eugene. With two successful years under our belt we have demonstrated our ability to manage both costs and revenue growth to deliver profitable financial performance. Moving into 2009 we re going to focus our efforts directly on growing our business. More specifically we plan to drive growth through three initiatives; one, enhancing our products and service offering; two, extending our geographic reach; and three, expanding into new market verticals. Historically Norsat has been focused on the government market, however, as the market place evolves and commercial concerns, such as business continuity (sp?) move to the forefront there is increasing opportunity for us to leverage our more than 31 years experience and technology leadership to develop inroads in emerging markets. We believe that through partnerships with service providers and strategic relationships with other equipment vendors there is an opportunity to capitalize on what is still a nascent market opportunity and develop leadership positions fairly early on. Over the next four years we intend to invest more than 15 million in R&D to fill out our existing OmnilLink (sp?) and Globe Trecker (sp?) product families while also expanding our product 3

4 portfolio to include vehicle mounts and maritime product families. But our plan doesn t stop there. Our excellence in R&D has been recognized by being provided government contributions through Industry Canada s Strategic Aerospace and Defense Initiative or SADI program. The contribution of up to $5.97 million Canadian would definitely provide assistance to Norsat as we embark on the journey to build a world class technology company based in Canada. In addition to building out our product offering we will also work toward owning the user experience. We plan to increase our service offering to move up the value chain and become an integrated end to end solutions provider specifically by adding services such as air time, network design and last mile solutions program management. This should enable us to grow revenue associated with each sale and better service our customers and binding customer loyalty to Norsat. Geographically the satellite communications market is increasingly becoming a global market place. In addition to land based satellite terminal solutions, marine satellite solutions are becoming a critical element of communication infrastructure for various industries. From commercial fishing vessels to oil and gas platforms real time data and communication flow is a key tool to providing companies with a competitive advantage. Looking past the current economic conditions, as the world comes out on the other side of the recession, more companies will recognize the global nature of the business we re setting ourselves up to take advantage of the opportunities that will arise with the addition of the Korean office and the Rome office. We continue to monitor and evaluate the situation to expand our reach to serve the growing base of military and commercial customers worldwide. To complement our organic growth strategy we plan on being opportunistic in exploring and identifying acquisition targets. We believe there is potential in the current business environment to accelerate our growth through acquisitions. We will seek out companies that will provide us with opportunity to advance our core business while providing operational synergies. Going forward we remain confident in the expansion of our sales pipeline over the long term. We believe the combination of our world leading technology, our track record of innovation, our strong reputation for quality products and service and our long standing history of acting as a trusted partner to our clients have Norsat well positioned to continue to expand our presence in the satellite terminal industry as a whole. I would now like to open up the call to questions. Operator. Operator: At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad. We ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jim Powell with Northern Securities. Mr. Powell your line is open. Jim Powell: Hi, thanks. Good morning and congrats on the great results Amiee and Eugene. Amiee Chan: Thank you Jim. Jim Powell: I guess I ll start with a question on the US government. Can you say what portion of your sales, I guess in the satellite systems, the US government makes up? Amiee Chan: It s still about 70-75% right now on the satellite sales. US Military continues to be a very large customer for Norsat. 4

5 Jim Powell: And I guess, do you, I don t know if you can speculate on this, but the $5.5 million order or contract you got from the Department of Defense, do you see that as a renewable ongoing thing or is it a one time finish it up and get another one but it might be less or more? Amiee Chan: That is a one time order, it s not like an IDIQ (sp?) contract. So it is one time where we are to deliver it. We are delivering this order over Q1 and Q2 as well. We hope to get more orders from the US Military but it may be in different orders of magnitude. Jim Powell: And do you see, of the Militaries you ve added in 08 do you see any of them, obviously not as large as the US but coming up to be a major customer of yours? Amiee Chan: Other branches of US Military, we re currently working with various branches outside the US Army, we re working with the National Guard, we re working with the Air Force, the Marines. So, these are very large business, various government groups that we are working with to grow our business within the US Military sector. Jim Powell: Great. And I guess in terms of the gross margins, that was high in the quarter because of the strong satellite sales, is that right? Amiee Chan: It is. The satellite sales does tend to have a little higher margins than our microwaves and because of the proportion of military sales it does bring up our margins a little bit higher. Jim Powell: And how are you seeing the sales to the more commercial customers in the news gathering, I guess, for the satellite systems? Amiee Chan: On the commercial side it is a little bit weaker especially in the broadcast sector. However, other militaries around the world we are gaining traction with them and that s for homeland security, for peace keeping missions in European militaries. Jim Powell: Okay and in terms of any updates on how things are going in the Maritime and the WiMax for you guys? Amiee Chan: On the maritime side it tends to be a little bit slow and that s because of the current economic conditions. However, on the WiMax side a lot of the regions that we are serving, governments around the world that are looking for WiMax are a little bit decoupled (sp?) from the rest of the economy and this is a very dire need for rural communities around the world needing communications. So we re seeing that still happening and there s a lot of activities and opportunities for Norsat in there. Jim Powell: Any idea when you re going to announce, I guess your first sales or customers for either of those spaces? Amiee Chan: We hope to get something within Jim Powell: Okay. Great and in terms of outlook, on a really strong quarter can you comment at all, what do you see part way (sp?) through the first quarter and second quarter, what do you see in terms of the outlook there? Any color on that? 5

6 Amiee Chan: We don t usually give guidance at all, but however, we see that sales are strong. We have a good backlog going into Q1, so we re not seeing the effects of the economic recession for the moment. Jim Powell: Okay, great, thank you very much. Amiee Chan: Thank you Jim. Operator: Again, if you would like to ask a question please press star then the number one on your telephone keypad. Your next question comes from the line of Martin Saltsman (sp?) with AFM Investments. Martin Saltsman: Hi Amiee. Hi Eugene. Great job. Amiee Chan: Hi Martin. Martin Saltsman: Great job guys. The gentlemen before me had asked a couple of questions that I was going to ask so I ll move on my list. I guess, one of my biggest concerns has to do with your cash. It says, or you say that you basically have $1 million in cash and equivalents, I know your working capital is greater. But the one million in cash and equivalents, is that really enough to do what you want to do? Does that give you enough cushion? Because you are taking on a lot more initiatives now around the world, so if you can comment on that? Eugene Syho: Sure I ll take that question. Hi Martin. Martin Saltsman: Hi. Eugene Syho: You re right definitely that the one million is not going to be enough to sustain all the initiatives that we re undertaking. Fortunately for us we ve been able to increase our working capital and manage it so, for instance my cash position, or our cash position as of the end of last week, or early part of this week, I m sitting on about $2.5 million US in cash right now and my payables are in very, very good shape, receivables are primarily with the government, so knock on wood, not as much exposed to the current economic crisis. And we re looking to continue to build that cash position. In this environment, I m sure as you know, cash is king. Martin Saltsman: That s true, you know, credit has tightened all over and that s why I wanted to ask that question, I was a bit concerned about it and I appreciate your answer. So you re comfortable? Eugene Syho: Yes, we re building our cash position and being very prudent in terms of what we do with our cash. Martin Saltsman: Okay, just one other brief question. You know, in the text of your press release and I didn t have a chance to go to SEDAR in the time that the release came out. Can you just tell me what your latest outstanding shares are? Eugene Syho: Currently we re at 53.5 million outstanding shares. Martin Saltsman: 53.5 million, that s rather manageable. Okay thank you and great job guys. Thank you very much. 6

7 Eugene Syho: You re welcome. Operator: There are no further questions at this time. Amiee Chan: I want to thank everyone for being on the call and if you have any further questions please do not hesitate contact us directly. Operator: (Unintelligible) today s conference call, you may now disconnect. 7