Zilog's Q3
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Zilog's Q3
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Zilog, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZLG)") else Response.Write("(NYSE: ZLG)") end if %> BACKGROUND
Zilog is probably most famous as the company that invented the Z80 chip and was the key competitor to Intel for IBM's original PC microprocessor business. The company now makes application specific microprocessors for data communications equipment, consumer product controllers (like infrared television remote controls, etc.), and computer peripherals.
UNION CITY, Ca., October 14, 1996/FOOLWIRE/ --- Zilog, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ZLG)") else Response.Write("(NYSE:ZLG)") end if %>, a leading semiconductor manufacturer, reported sales and net income for the third quarter 1996 on Friday after the market close and held their conference call for analysts this afternoon.
Net sales for the third quarter of fiscal 1996 were $63.8 million, up 2% from the $62.7 million reported in the third quarter of 1995.
Net income for the third quarter was $1.8 million, down 82% from the $10.3 million reported in the third quarter of the prior year.
Earnings per share for the third quarter were $0.09 on 20.3 million shares outstanding, compared with $0.50 on 20.8 million shares reported in the same quarter of 1995. While these results were significantly below last year, they were $0.02 above analyst consensus estimates.
New product introductions continue to increase. During the third quarter they introduced 15 new products bringing the year-to-date total to 36. Included in that new product list are three new DSP (digital signal processing) offerings which further enhance Zilog's strategy of evolving to digital signal processor-based ASSPs (application specific standard products) for its target market. They are currently on track to surpass last year's new product total of 40.
Also during the quarter, they announced an impending agreement with company MSU to jointly develop and manufacture chips for low cost TV Internet set-top boxes. MSU is a British-based research and design firm which has been in operation since 1992 licensing and selling computer chips, chip sets, and other products for use by manufacturers of multimedia and computer products. That alliance will allow Zilog to enter the new and emerging TV Internet market and potentially enhance their already strong TV infrared remote and keyboard business segments.
QUESTIONS AND ANSWERS
The company refused to make any forecasts or answer questions asking for outlooks for the fourth quarter or FY 1997 due to concerns over current California law and the impending effect of Proposition 211.
The company said that October looks to be up from the first month of the prior quarter, but it is far too soon to make any projections about the fourth quarter.
The company is building in the area where they have backlog and they are simply building a couple months ahead in anticipation of the desire that the revenue will continue to grow over the coming quarters.
They will have added depreciation for the next 3 quarters, probably in the neighborhood of about an additional $1.5 million per quarter each for the next three quarters.
The company is modifying their modem strategy in two ways. One is they are announcing the 8382 chip which is an ISDN number 1 and will also become an ADSL chip. So they are looking for the movement in the marketplace to greater bandwidth in service of the Internet. The other area, very obviously, is that they are tailoring their V.34 modem investment for the set-top box, the Internet set-top box. Their belief is that hthere will be a very good opportunity for Internet in the home either that doesn't have a PC or has one PC in the office but wants Internet in the living room which will be served by a particular V.34 connection. So their modem investment is being directed in those two areas.
Some of these announcements of double-speed of the 28.8 to the 56 speed for analog modems, if taken apart are very limited in their applications. So Zilog thinks people will try to shove more over the wire, but they still think the V.34 28.8 is going to be the center of the market.
The company was asked to quantify their capacity utilization during the quarter to give some idea of leverage going forward on higher volume. The company answered that the leverage, depending upon where you put ASPs, is significant. They've said that they have the capacity, without adding any brick and mortar or additional equipment to generate $100 million of revenue per quarter or more depending on what the ASPs are at the time. They are currently generating revenue at something like 80-85% of that. So there is a significant upside for them in terms of margin improvement as the revenue grows and they begin to use the capacity towards the 100% level where they normally like to operate.
The company was asked to comment on the general trend of orders towards the end of the quarter. The company responded that the profile they watch is the percent of the business in their monthly order input that is shippable in the next 60 days. That has been strengthening, with the exception of the month of August, every month over the past four or five months which is obviously something that encourages them. It is another way to look at book-to-bill ratio and may even be a more realistic way. The businesses that have continued to be strong -- the television business, the infrared remote control business, etc. -- in balance all of the businesses with the exception of the modem business are either on trend or up in aggregate. The number of cases where people are coming in for surprise buys is increasing. It has gone to maybe being a couple of cases per month back in the July/August timeframe to once a week or more now. And people are asking them for lead times as short as four weeks. Their lead times at the moment are stated at six weeks depending on whether they are talking about an on-the-shelf commodity which could be overnight delivery or a proprietary product. Of their 20 "gold" accounts, accounts that make up 1/2 their business, there are probably not more than one or two that have any significant inventory overhang left. And, in those cases, it is maybe only in one commodity.
The company was asked if there was any legacy modem business that could continue to drop and impact the fourth quarter. The company responded that their current plan for the fourth quarter is counting only firm backlog in the modem business.
The company was asked about distribution channels relative to the modem business. The distribution channel was not heavily engaged in the modem activity. The distribution channel is more engaged in other commodities. They are seeing a slow improvement in distribution point-of-sale. As a matter of fact, they have one domestic distributor who is down considerably below his historic inventory rate relative to his turns and they have another one that is about at the historic rate. So they anticipate that the distributors are going to have to increase their buying activity.
The company was asked to give the operating margin contribution for modems in the first half of the year as well as the other products. They couldn't break it out like that, but offered that the percent of sales that is variable cost as opposed to total factory costs has improved from the second quarter to the third quarter.
The company was asked for help to determine what the product mix percentage was in terms of commodity versus proprietary. The company said that 75-80% of the company's product portfolio now is proprietary. That is why they use the 60-day order to ship window measurement and that number has been increasing over the last 4-5 months except for August. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |