Entorian Technologies Inc. (NASDAQ:ENTN), a leading provider of vertical technologies and solutions to original equipment manufacturers (OEMs), announced financial results for the third quarter ended September 30, 2008.
Total revenue for the quarter was $18.5 million, which was in line with the company’s previously stated guidance. This compares to $8.9 million in the second quarter of 2008, and $10.9 million in the third quarter of 2007. Product revenue was $17.8 million, compared to $7.7 million in the previous quarter and $8.7 million in the third quarter of 2007. Product revenue included $7.4 million from the company’s memory business, and $10.4 million associated with its Augmentix subsidiary. License revenue was $713,000, compared to $1.2 million in the previous quarter and $2.2 million in the third quarter of 2007.
“Total revenue for the third quarter more than doubled compared to last quarter due to the expansion of our product offerings to now include rugged computing solutions as a result of the acquisition of Augmentix Corporation,” stated Stephan Godevais, who was recently appointed chief executive officer of Entorian Technologies. “These new products include server solutions sold directly to U.S. government agencies and rugged notebooks developed and distributed exclusively through a leading, U.S.-based PC OEM. We believe the acquisition of Augmentix will add significant long-term value to our business as it offers large-scale revenue opportunities. It provides immediate entry into high-growth, profitable markets, and expands our targeted customer base. Additionally, Augmentix’s engineering expertise in designing government and military-grade systems and intelligent servers complements Entorian’s core technical expertise in high-speed electrical signaling, thermal design and packaging.”
Mr. Godevais further commented, “In addition to focusing on maximizing the benefits from the acquisition, which we have made good progress in integrating to date, during the quarter we have also implemented some cost reduction initiatives on the memory portion of our business in order to optimize our cost structure with our revenue and the current economy. As part of these efforts, we have streamlined our staffing requirements in Irvine and Austin, and have relocated our Irvine manufacturing operation to our lower-cost facility in Reynosa, Mexico. In addition, we have started scaling our Reynosa facility to better align with our current volume.”
For the third quarter, the company recorded gross margin of negative 18 percent, compared to a negative gross margin of 3 percent in the previous quarter. The gross margin was negatively impacted by a charge of $3.9 million to impair assets associated with the acquisition of Southland Micro Systems in August of 2007. On a non-GAAP basis, gross margin was 9 percent in the third quarter, compared to 7 percent in the previous quarter.
In accordance with generally accepted accounting principles (GAAP), total operating expenses in the third quarter were $16.8 million, compared to $4.2 million in the previous quarter. Third quarter GAAP operating expenses included a charge of $9.3 million to impair assets associated with the acquisition of Southland. Including stock-based compensation expense of $0.4 million, SG&A represented approximately 28 percent of net revenue, compared to 31 percent in the previous quarter. R&D was approximately 11 percent of revenue, compared to 12 percent in the previous quarter.
On a non-GAAP basis, total operating expenses were $6.9 million, compared to $3.4 million in the previous quarter. Excluding stock-based compensation expense, SG&A was 26 percent of net revenue, and R&D was 11 percent of net revenue.
On a GAAP basis, the third quarter operating loss was $20.1 million, compared to a loss of $4.4 million in the previous quarter. On a non-GAAP basis, the third quarter operating loss was $5.2 million, compared to a loss of $2.8 million dollars in the previous quarter.
On a GAAP basis, the net loss for the third quarter was $19.6 million, or ($0.42) per diluted share, compared to a net loss in the previous quarter of $4.0 million, or ($0.09) per diluted share. This also compares to a net loss of $1.3 million, or ($0.03) per diluted share, in the same quarter one year ago.
Excluding non-cash charges for stock-based compensation, amortization and impairment of acquisition intangibles, the non-GAAP net loss was $4.6 million, or ($0.10) per diluted share, compared to the non-GAAP net loss of $2.4 million, or ($0.05) per diluted share, in the previous quarter. Non-GAAP net income in the third quarter of 2007 was $973,000, or $0.02 per diluted share. A reconciliation of GAAP results to non-GAAP results has been provided in the financial statement tables following the text of this press release.
Cash, cash equivalents and investments on September 30, 2008 were $23.1 million, compared to $52.2 million on June 30, 2008. During the third quarter of 2008, the company used approximately $23.5 million of cash to purchase Augmentix. Also during the third quarter, the company repurchased approximately 91,000 shares of its common stock under its repurchase program at a cost of approximately $71,000. As of September 30, the company had approximately $6.8 million remaining under its stock repurchase plan.
Ending inventory was $10.8 million, compared to $3.9 million in the previous quarter. Accounts receivable was $9.1 million, compared to $5.1 million in the previous quarter. Capital expenditures were $300,000 for the third quarter and depreciation expense was $900,000.
Business Outlook
“In the current economic environment, our top priority is to achieve profitability, and we are evaluating our businesses, not only for their growth potential, but most importantly for their long-term profitability prospects. We plan to make some critical decisions in the fourth quarter of 2008 to position the company for success in 2009,” concluded Mr. Godevais.
Entorian expects fourth quarter 2008 revenue to range between $14 million and $16 million. The company expects fourth quarter 2008 capital spending and depreciation expense to be approximately $300,000 and $900,000, respectively.
Cautionary Language
This press release contains forward-looking statements. These statements are generally accompanied by words such as “expect,”“believe,” and similar expressions. These statements include our fourth quarter 2008 revenue, capital spending and depreciation expense, as well as our plan to make critical decisions in the fourth quarter of 2008 to position the company for success in 2009. We do not have long-term agreements with our customers or sufficient backlog to rely upon when forecasting results, so our future performance is very difficult to predict. Our forward-looking statements are based on our current expectations, estimates and assumptions and are subject to many risks, uncertainties and unknown future events that could cause actual results to differ materially. Risks and uncertainties that may cause future results to differ include, but are not limited to, transitions in the technologies utilized by OEMs and others (including but not limited to increased use of dual-die and planar solutions and a continuing shift from DDR-1 to DDR-2) and the resulting impact on our business; reduced DRAM pricing and less demand for our products, due to a DRAM oversupply in certain instances; our inability to successfully integrate our acquisitions of Augmentix Corporation and Southland Micro Systems; the potential loss of key employees resulting from acquiring Augmentix and Southland Micro; the risk of diverting management’s time and attention from the normal daily operations of the business to integrate Augmentix and Southland Micro Systems; having significant customer concentration and the impact on our operating results of a material decline in orders from any customer or of a consolidation of our customers; the risk that a competitor or significant customer develops or adopts an alternative solution or competing product; the risk that demand for our solutions is lower than expected; the risk that our average selling prices decline during the period more than we expect because of competitive pressures, substituted products or overall reduced demand for systems that incorporate our technologies; an increased risk associated with the volatility of the price of DRAM, given our increased purchases of DRAM as a result of our acquisition of Southland; the risks that a substantial portion of our revenue depends on the sale of our ruggedized notebook products; the risk that we are dependent on a limited number of suppliers; risks associated with budget constraints of federal, state and local governments that could negatively impact sales of our ruggedized products; risks associated with the failure of our ruggedized products to meet the military specification MIL-STD-810F; the risks associated with expanding into new markets without past experience in those markets and to releasing new products generally; the risk that our new technologies are not completed, tested or accepted in a timely fashion; the risk that we are unable to protect our intellectual property rights; the risk that we are unable to productize or monetize the intellectual property that we develop; the area in Mexico in which we manufacture is subject to earthquakes, fires, flooding and other natural disasters, for some of which we are not insured; the risk that we will be unable to enter into additional license agreements to license our technologies; the risks associated with intellectual property litigation or other litigation; the risk that our customers or we are unable to obtain adequate memory or other materials; the risk that we incur problems in our manufacturing processes or facilities or that we are unable to maintain or improve our manufacturing capacity and turnaround times; risks related to qualifying our current or future products in our customers’ future products; risks related to increasing our royalty-based revenue; risks associated with competing with larger companies and companies with market share where we are targeting expansion; risks related to product liability claims in the event our services and technologies are used in defective products or include defective parts; risks associated with failing to achieve standardization of certain of our products from JEDEC; risks associated with acquiring other businesses or technologies in the future; our inability to identify companies to acquire; the risks of seasonality, to which we are subject; and the risks associated with our dependence on a few key personnel to manage our business effectively.
For a discussion of these and other factors that could impact our financial results and cause actual results to differ materially from those in the forward-looking statements, please refer to our recent filings with the Securities and Exchange Commission, and in particular, our Form 10-K filed on March 14, 2008. The foregoing information concerning our business outlook represents our outlook as of the date of this news release, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.
Non-GAAP Financial Measurements
In addition to the GAAP results provided by this document, the company has provided non-GAAP financial measurements that present operating income, net income and earnings per diluted share on a basis excluding non-cash charges for stock-based compensation and amortization and impairment of acquisition intangibles and the associated income tax effect. Details of these excluded items are presented in one of the tables below, which reconcile the GAAP results to non-GAAP financial measurements described in this press release. Also, this press release, the associated tables and the reconciliation from GAAP results to additional non-GAAP financial measurements that may be discussed in the second quarter 2008 earnings conference call can be found on the company’s web site at http://www.entorian.com. Entorian has chosen to provide non-GAAP financial measurements to investors because it believes that excluding certain charges represents a better basis for the comparison of its current results to the results of its peer companies. In addition, the Company believes that it provides a means to highlight the results of core ongoing operations to investors. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with GAAP.
About Entorian Technologies
Entorian Technologies Inc. (NASDAQ:ENTN) is a leading provider of vertical technologies and solutions to OEMs. With an IP portfolio of more than 200 patents and pending patent applications, the company offers high-speed, high-capacity solutions, and technology licensing. Headquartered in Austin, Texas, Entorian operates an ISO-certified manufacturing facility in Reynosa, Mexico. Entorian’s subsidiary, Augmentix Corporation, provides military, enterprise and government customers with mission–critical computing solutions for rugged environments. Augmentix servers and mobile products combine best–in–class technologies and standardized components from industry leader Dell, with proven ruggedization methods from Augmentix. Its rugged systems are environmentally robust and technologically advanced. For more information, go to www.entorian.com and www.augmentix.com.
Entorian is a trademark of Staktek Group LP and Augmentix is a trademark of Augmentix Corporation.
ENTORIAN TECHNOLOGIES INC. | |||||||||
| CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS | |||||||||
| (in thousands, except per share data; unaudited) | |||||||||
| Three Months Ended | |||||||||
| Sept. 30, | Jun. 30, | Sept. 30, | |||||||
| 2008 | 2008 | 2007 | |||||||
| Revenue: | |||||||||
| Product | $ 17,750 | $ 7,677 | $ 8,756 | ||||||
| License | 713 | $ 1,236 | 2,185 | ||||||
| Total revenue | 18,463 | 8,913 | 10,941 | ||||||
| Cost of revenue: | |||||||||
Product(1) | 16,861 | 8,382 | 6,522 | ||||||
| Amortization of acquisition intangibles | 970 | 603 | 1,120 | ||||||
| Impairment of acquisition intangibles and fixed assets | 3,937 | 160 | - | ||||||
| Total cost of revenue | 21,768 | 9,145 | 7,642 | ||||||
| Gross profit (loss) | (3,305 | ) | (232 | ) | 3,299 | ||||
| Operating expenses: | |||||||||
Selling, general and administrative(1) | 5,132 | 2,727 | 4,101 | ||||||
Research and development(1) | 2,089 | 1,093 | 1,373 | ||||||
| Restructuring | 192 | 214 | 356 | ||||||
| Amortization of acquisition intangibles | 165 | 167 | 183 | ||||||
| Impairment of acquisition intangibles | 4,312 | - | - | ||||||
| Goodwill impairment | 4,952 | - | - | ||||||
| Total operating expenses | 16,842 | 4,201 | 6,013 | ||||||
| Loss from operations | (20,147 | ) | (4,433 | ) | (2,714 | ) | |||
| Other income (expense): | |||||||||
| Interest income | 218 | 352 | 798 | ||||||
| Interest expense | (195 | ) | (3 | ) | (2 | ) | |||
| Other, net | 6 | 29 | (34 | ) | |||||
| Total other income, net | 29 | 378 | 762 | ||||||
| Loss before income taxes | (20,118 | ) | (4,055 | ) | (1,952 | ) | |||
| Provision (benefit) for income taxes | (528 | ) | (52 | ) | (695 | ) | |||
| Net loss | $ (19,590 | ) | $ (4,003 | ) | $ (1,257 | ) | |||
| Loss per share: | |||||||||
| Basic | $ (0.42 | ) | $ (0.09 | ) | $ (0.03 | ) | |||
| Diluted | $ (0.42 | ) | $ (0.09 | ) | $ (0.03 | ) | |||
| Shares used in computing loss per share: | |||||||||
| Basic | 46,852 | 46,763 | 46,997 | ||||||
| Diluted | 46,852 | 46,763 | 46,997 | ||||||
| (1) Includes stock-based compensation expense as follows: | |||||||||
| Cost of revenue | $ 97 | $ 84 | $ 109 | ||||||
| Selling, general and administrative expense | 388 | 494 | 1,280 | ||||||
| Research and development expense | 108 | 111 | 180 | ||||||
| $ 593 | $ 689 | $ 1,569 | |||||||
ENTORIAN TECHNOLOGIES INC. | ||||||
| CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS | ||||||
| (in thousands, except per share data; unaudited) | ||||||
| Nine Months Ended | ||||||
| Sept. 30, | Sept. 30, | |||||
| 2008 | 2007 | |||||
| Revenue: | ||||||
| Product | $ 32,639 | $ 23,402 | ||||
| License | 3,349 | 4,456 | ||||
| Total revenue | 35,988 | 27,858 | ||||
| Cost of revenue: | ||||||
Product(1) | 34,156 | 18,099 | ||||
| Amortization of acquisition intangibles | 2,161 | 3,239 | ||||
| Impairment of acquisition intangibles and fixed assets | 4,097 | 684 | ||||
| Total cost of revenue | 40,414 | 22,022 | ||||
| Gross profit (loss) | (4,426 | ) | 5,836 | |||
| Operating expenses: | ||||||
Selling, general and administrative(1) | 12,088 | 10,829 | ||||
Research and development(1) | 4,486 | 4,642 | ||||
| Restructuring | 406 | 356 | ||||
| Amortization of acquisition intangibles | 518 | 459 | ||||
| Impairment of acquisition intangibles | 4,312 | - | ||||
| Goodwill impairment | 4,952 | - | ||||
| Total operating expenses | 26,762 | 16,286 | ||||
| Loss from operations | (31,188 | ) | (10,450 | ) | ||
| Other income (expense): | ||||||
| Interest income | 1,076 | 2,473 | ||||
| Interest expense | (201 | ) | (10 | ) | ||
| Other, net | 63 | (87 | ) | |||
| Total other income, net | 938 | 2,376 | ||||
| Loss before income taxes | (30,250 | ) | (8,074 | ) | ||
| Provision (benefit) for income taxes | (795 | ) | 227 | |||
| Net loss | $ (29,455 | ) | $ (8,301 | ) | ||
| Loss per share: | ||||||
| Basic | $ (0.63 | ) | $ (0.18 | ) | ||
| Diluted | $ (0.63 | ) | $ (0.18 | ) | ||
| Shares used in computing loss per share: | ||||||
| Basic | 46,784 | 47,274 | ||||
| Diluted | 46,784 | 47,274 | ||||
| (1) Includes stock-based compensation expense as follows: | ||||||
| Cost of revenue | $ 264 | $ 320 | ||||
| Selling, general and administrative expense | 1,356 | 3,793 | ||||
| Research and development expense | 339 | 664 | ||||
| $ 1,959 | $ 4,777 | |||||
| ENTORIAN TECHNOLOGIES INC. | |||||||||
| RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES | |||||||||
| (in thousands, except per share data; unaudited) | |||||||||
| Three Months Ended | |||||||||
| Sept. 30, | June 30, | Sept. 30, | |||||||
| 2008 | 2008 | 2007 | |||||||
| GAAP loss from operations | $ (20,147 | ) | $ (4,433 | ) | $ (2,714 | ) | |||
| Non-GAAP adjustments: | |||||||||
| Amortization of acquisition intangibles | 1,135 | 770 | 1,303 | ||||||
| Impairment of acquisition intangibles and fixed assets | 8,249 | 160 | - | ||||||
| Goodwill impairment | 4,952 | - | - | ||||||
| Stock-based compensation expense | 593 | 689 | 1,569 | ||||||
| Total non-GAAP adjustments | 14,929 | 1,619 | 2,872 | ||||||
| Non-GAAP income (loss) from operations | $ (5,218 | ) | $ (2,814 | ) | $ 158 | ||||
| GAAP net loss | $ (19,590 | ) | $ (4,003 | ) | $ (1,257 | ) | |||
| Total non-GAAP adjustments affecting income (loss) from operations | 14,929 | 1,619 | 2,872 | ||||||
Tax adjustment(1) | 27 | (10 | ) | (642 | ) | ||||
| Non-GAAP net income (loss) | $ (4,634 | ) | $ (2,394 | ) | $ 973 | ||||
| Shares used in calculating non-GAAP diluted earnings (loss) per share | 46,852 | 46,763 | 47,877 | ||||||
| Non-GAAP diluted earnings (loss) per share | $ (0.10 | ) | $ (0.05 | ) | $ 0.02 | ||||
| (1) The non-GAAP tax adjustment represents the tax effect of the non-GAAP adjustments. | |||||||||
| ENTORIAN TECHNOLOGIES INC. | ||||||
| RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES | ||||||
| (in thousands, except per share data; unaudited) | ||||||
| Nine Months Ended | ||||||
| Sept. 30, | Sept. 30, | |||||
| 2008 | 2007 | |||||
| GAAP loss from operations | $ (31,188 | ) | $ (10,450 | ) | ||
| Non-GAAP adjustments: | ||||||
| Amortization of acquisition intangibles | 2,679 | 3,698 | ||||
| Impairment of acquisition intangibles and fixed assets | 8,409 | 684 | ||||
| Goodwill impairment | 4,952 | - | ||||
| Stock-based compensation expense | 1,959 | 4,777 | ||||
| Total non-GAAP adjustments | 17,999 | 9,159 | ||||
| Non-GAAP loss from operations | $ (13,189 | ) | $ (1,291 | ) | ||
| GAAP net loss | $ (29,455 | ) | $ (8,301 | ) | ||
| Total non-GAAP adjustments affecting loss from operations | 17,999 | 9,159 | ||||
Tax adjustment(1) | 35 | (267 | ) | |||
| Non-GAAP net income (loss) | $ (11,421 | ) | $ 591 | |||
| Shares used in calculating non-GAAP diluted earnings (loss) per share | 46,784 | 48,043 | ||||
| Non-GAAP diluted earnings (loss) per share | $ (0.25 | ) | $ 0.01 | |||
| (1) The non-GAAP tax adjustment represents the tax effect of the non-GAAP adjustments. | ||||||
| ENTORIAN TECHNOLOGIES INC. | ||||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||||
| (in thousands, except share and per share data) | ||||||||||
| September 30, | December 31, | |||||||||
| 2008 | 2007 | |||||||||
| (unaudited) | ||||||||||
| ASSETS | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ 14,490 | $ 34,013 | ||||||||
| Investments | 1,636 | 27,912 | ||||||||
| Accounts receivable, net of allowances of $572 in 2008 and $8 in 2007 | 9,068 | 5,681 | ||||||||
| Inventories | 10,825 | 2,921 | ||||||||
| Prepaid expenses | 789 | 633 | ||||||||
| Income tax recoverable | 2,473 | 1,969 | ||||||||
| Deferred tax asset | 143 | 143 | ||||||||
| Other current assets | 1,389 | 916 | ||||||||
| Total current assets | 40,813 | 74,188 | ||||||||
| Property, plant and equipment, net | 6,027 | 9,212 | ||||||||
| Long-term investments | 6,978 | - | ||||||||
| Goodwill | 4,530 | 4,953 | ||||||||
| Other intangible assets, net | 12,692 | 10,826 | ||||||||
| Other assets | 89 | 234 | ||||||||
| Total assets | $ 71,129 | $ 99,413 | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable | $ 4,860 | $ 3,348 | ||||||||
| Accrued compensation | 1,355 | 1,428 | ||||||||
| Accrued liabilities | 5,617 | 3,077 | ||||||||
| Deferred revenue | 2,091 | - | ||||||||
| Total current liabilities | 13,923 | 7,853 | ||||||||
| Other accrued liabilities | 206 | 253 | ||||||||
| Deferred tax liabilities | 38 | 38 | ||||||||
| Convertible notes payable | 3,847 | - | ||||||||
| Related party convertible notes payable | 6,805 | - | ||||||||
| Redeemable preferred stock; $0.001 par value; 5,000,000 shares authorized | - | - | ||||||||
| Stockholders' equity: | ||||||||||
Common stock; $0.001 par value; 100,000,000 shares authorized at September 30, 2008 and December 31, 2007; 53,230,669 shares and 52,876,038 shares issued at September 30, 2008 and December 31, 2007, respectively | 53 | 52 | ||||||||
| Additional paid-in capital | 148,816 | 163,298 | ||||||||
Treasury stock, at cost; 6,395,311 shares and 6,172,650 shares at September 30, 2008 and December 31, 2007, respectively | (25,822 | ) | (25,601 | ) | ||||||
| Accumulated other comprehensive income (loss) | (758 | ) | 44 | |||||||
| Accumulated deficit | (75,979 | ) | (46,524 | ) | ||||||
| Total stockholders' equity | 46,310 | 91,269 | ||||||||
| Total liabilities and stockholders' equity | $ 71,129 | $ 99,413 | ||||||||
Contacts:
Entorian Technologies Inc.
Kirk
Patterson
Senior Vice President and CFO
512-454-9531
investors@entorian.com
or
Investor
Contact:
Shelton Investor Relations
Beverly Twing,
972-239-5119 x 126
investors@entorian.com
