Micro
Linear Q2
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Linear Q2
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SYNOPSIS)* By Debora Tidwell (MF Debit) Micro Linear Corp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MLIN)") else Response.Write("(NASDAQ: MLIN)") end if %> UNION CITY, Ca., July 20, 1996/FOOLWIRE/ --- Micro Linear Corporation reported their Q2 1996 earnings after the market close on Thursday, July 18th. The company reported net revenues of $13.6 million, down from $15.3 million in the prior quarter, a decrease of approximately 11%. Net revenues were also down 4% from the same quarter a year ago. The company reported net income of $1.8 million or $0.14 per share, down from $3 million or $0.22 per share in the prior quarter and $2.2 million or $0.16 per share in Q2 a year ago. Earnings per share were a penny below analyst estimates of $0.15 per share. Gross margin was very good at 65.6%, just a little lower than Q1, but substantially higher than all previous quarters of last year and the year before.
They started the quarter with $12.8 million in shippable backlog, the turns business was much lower than the previous quarter. The shippable backlog at the beginning of Q3 for Q3 is about $10 million which is the lowest it has been in awhile. Even though they expect some turns business during the quarter they are unable to predict this amount. As a result, they expect significant decline in profitability for Q3.
The gross margin on the backlog is approximately 60%. That is because the decline in backlog of communications deliverable products as their backlog went communications rich from Q4 to Q1 climbed quite a bit. Now it is going down, so the backlog now will reflect a gross margin of 60% but the company wants to caution that it is so they could absorb all the manufacturing overhead. And, right now it is not their expectation that they can because they have to get these inventories more in line.
Bookings were very disappointing at approximately $10 million, giving them a book-to-bill of about 0.75, down from 0.96 in the preceding quarter. All of the disappointment was in the communications segment of their business which they attribute to excessive inventories in the hands of their customers and not in the decline of their business. Inventories continued to grow, although at a slower pace, because of commitments made due to more ebullient forecasts. They have taken very strong steps to reduce the inventory the rest of this year as a function of revenue.
New product design and activity was the strongest that they have ever seen. It is difficult, however, to translate this action to future revenues. New product releases totalled 6 during the quarter, up from 3 in Q1. Q2 new products released included a motor controller, an Ethernet media converter, a dual video low pass filter, and 3 high speed buffers. Their 1996 goal is to develop approximately 50 new products. The rate of sample-worthy products currently being shown to customers supports their estimate of 50 new products.
Design opportunities continue to be strong and during the quarter they secured a record 171 design wins. This compares to approximately 155 design wins last quarter. The estimated potential revenue associated with future design wins was also higher than any other previous quarter. Design wins may not always result in revenue and customer demands requirements vary from opportunity to opportunity. Principal design wins this quarter included Motorola, Philips, Fujitsu, Bay Networks, and 3Com.
Their foundry supply of wafers and contract assembly continues to be adequate. They currently have ten wafer foundry relationships and do not anticipate any supply issues. A 6 month wafer price adjustment with their largest bipolar foundry took place this quarter. The adjustment based on the average change in dollar/yen exchange rates resulted in a price decline for bipolar wafers and will benefit manufacturing costs over the next 6 months. In terms of manufacturing process technologies, their migration to bi-CMOS now represents 25% of total production. They expect the bi-CMOS percentage to increase over time.
They are not optimistic about Q3 now, even though just 90 days ago they were cautiously so. Until the order rates improve resulting in higher backlog, they are going to keep operating expenses and headcount under very tight controls.
Micro Linear serves 3 major market segments: computer (19% in Q2), communications (62% in Q2), and industrial (19% in Q2). As a result of weak demand throughout the quarter, the communications segment (which is their largest segment) decreased approximately 15% over the prior quarter. Also contributing to the current quarter revenue decline was a 64% drop in net turns business. Communications products shipments represented 62% of total revenues in Q2, down 7 points from 69% in Q1 and up 15 points from 47% in Q2 last year. Shipments of industrial and computer products increased slightly over the preceeding quarter.
Gross margin for the quarter totalled $8.9 million, down from $10.2 million last quarter and up from $7.5 million in Q2 1995. As a percent of net revenues, gross margin improved from 52% a year earlier to 66% in the current quarter, primarily due to a higher content of communications product. The gross margin in the communications segment is more favorable than in the computer and industrial segments. Gross margin was down 1 point from the prior quarter. Their future gross margin will continue to be a function of product mix and levels of manufacturing.
For 1996 they have estimated the financial effective tax rate to be 40%, compared to 19% in 1995. Accordingly, the current quarter EPS of $0.14 compares to a fully taxed $0.12 per share in Q2 1995. Net revenues for the first half of 1996 total $29 million, up from $27.1 million in the first half of 1995. Communications product shipments represented 67% of net revenue compared to 50% in 1995. Shipments of hard disk drive parts in 1995 were significantly higher than the current half. Gross margin improved in the current half to 66% from 53% last year. Net income was $4.8 million or $0.36 per share, up from $3.9 million or $0.29 per share. The 1995 earnings per share was $0.21 on a fully taxed basis.
Sales to the top ten customers during Q2 were down significantly to 36% from 45% in the prior quarter. The decrease is principally due to the decline in shipments to communications customers. Shipments to their largest 3 networking customers in this market were off 72% from Q1. Their largest single customer during the quarter accounted for approximately 8% of quarterly revenue.
Geographic or regional revenues also changed dramatically, as international shipments rose to 45% from 32% of net revenues in Q1. Demand in the Asia/Pacific region increased to 38% of net revenues compared to 24% in Q1. Sales to European customers decreased to 6% from 7% last quarter as business demand softened in that region.
Shipments to domestic distributors total 17% as a percent of total revenue, flat with Q1. Revenues from domestic distribution resales decreased slightly over the prior quarter. Going into Q2, they expected that resales would strengthen as supported by historical trends. This did not materialize and resales in dollar terms were actually off slightly from Q1. Although distribution resales have softened, distribution inventories appear to be in balance with current resale levels. Shipments to domestic distributors in 1995 approximated 17% of net revenues. It is Micro Linear's policy for financial reporting purposes to record domestic revenue only after it has been resold by the distributor.
Operating expenses grew during the current quarter. As a percent of revenue, operating expenses were 45%, compared to 36% in the prior quarter. R&D expenses were up $558,000 over the prior quarter due to prototype inventory primarily associated with their new fast Ethernet chip and continued high mask costs. R&D expenses have historically fluctuated from quarter to quarter due to the timing of new product take-outs. Each new product take-out has an associated mask and silicon cost and the timing of these costs impact the overall R&D spending level. As a percentage of revenues, R&D expenses increased 24% in the current quarter, which compares to 17% in the prior quarter and an average of 18% during 1995.
SG&A increased slightly in absolute dollar terms over the preceding quarter and amounted to 22% of net revenues compared to 19% in the prior quarter. The increase is principally due to higher accruals for sales commissions. Their sales commission plan runs from April to April and has a higher rate associated with the front end. They are also currently being very selective in adding headcount to these expense categories. They expect to add two SAEs in Q3. They are also continuing with their design engineering university recruitment program scheduled for this Fall. Although they are continuing to pursue several new headcount positions, they will closely monitor expense levels in light of future business prospects.
Operating profits decreased $1.9 million over Q1 to $2.8 million. As a percent of net revenues, operating profit declined to 20% from 31% last quarter and compares to 17% in Q2 last year. Other income representing principally the net of interest income and expense amounted to a positive $280,000 for the quarter. Quarterly other income should continue in the $300,000 range, however it is ultimately dependent on the company's net cash flow and market rates.
Their balance sheet continues to remain strong. They closed the quarter with cash and cash investments of $27.7 million reflecting a decrease of approximately $700,000 from the end of Q1. The negative cash flow is principally due to Q2 estimated tax payments and higher inventories which were partially offset by lower receivables. Cash and cash investments at June 30th comprised 40% of total assets. Trade receivables decreased to $4.7 million from $6.6 million at the end of the year. DSOs were dropped to approximately 38 days. Capital equipment expenditures on a cash basis totalled $1 million for the quarter and principally comprised testers and related equipment. Capital expenditures for the first half were $3.9 million and for 1996 they expect to be in the $7 million range. Capital expenditures for the year, however, could go slightly higher if certain product opportunities are realized.
During Q1 they initiated a $3 million stock buy-back program. Through the end of Q2, the buy-back program has resulted in the purchase of 308,000 shares at a total cost of $2.7 million. * 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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