Transcript from Ramtron's 4th Quarter and Full-Year teleconference call held Thursday, March 11, 1999.
Comments by L. David Sikes, Chairman and CEO
Statements made in the course of this conference call that state the company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements for several reasons, including production slowdowns, higher costs or market weakness. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's SEC filings.
As many of you are aware, Rich Mohr and I have been spending a significant portion of our time working the issues surrounding the company's capital structure. Despite this time allotment, I would like to assure you that the company continues to move forward with its business, as we'll discuss in detail later in this call. Our staff of design and process engineers, material scientists, product engineers, and sales and marketing personnel continues to work diligently toward achieving success in the commercialization of our products and technologies.
Before I address the status of each of our business units, I want to clear up a few misconceptions regarding our 1998 placement of preferred stock.
First, let me say that no one associated with this financing – neither Ramtron nor the preferred shareholders themselves - anticipated that the impact of the placement would be so dramatic. Prior to the preferred placement, Ramtron investigated many avenues of straight-equity financing. Due to the large overhang of Ramtron stock in the hands of three entities, one of which is a liquidating trustee for the Benton bankruptcy, the investment banking community could not find a straight-equity fund-raising approach that satisfied the boundary conditions of the large stockholders, the company, and potential new investors. While the company's first choice, a straight-equity fund-raising was regretfully not possible.
Under the right circumstances, i.e., a rising stock price, convertible preferred financing can be a cost-effective method for a company to raise money. At the time we consummated the preferred placement, the market was continuing to reach new highs, which provided us with a fundamental comfort level with the instrument. We also added specific language to the preferred shareholder agreement in order to mitigate our concerns regarding potential, abusive trading practices and their effect on share value.
Despite these efforts, several other factors - in addition to the structure of the instrument itself - compounded the negative effects.
Soon after March of last year, the market for small stocks, especially technology stocks, dried up. In fact, a number of established semiconductor memory firms, such as Atmel, Xicor, and Alliance, suffered sharp declines in share value along with Ramtron. Compounding the market effect, the short selling of company stocks with convertible preferred instruments became common practice, as evidenced by the amount of media attention surrounding this phenomenon. For example, one article in a financial publication recommended companies with preferred placements for short selling. Ramtron was unfortunately on that list.
A floating point convertible instrument, inopportune stock market timing, a crash in the semiconductor memory market, and aggressive conversions by certain preferred stockholdersall contributed to our current, difficult capital structure situation.
As we announced last week, we have filed a revised preliminary-proxy statement with the SEC that seeks approval for an expanded restructuring of the company in order to rationalize the company's capital structure. CIBC Oppenheimer, our financial advisor, has been instrumental in the design of this restructuring, and believes that it is the best available solution for the preferred and common shareholders, as well as the company. The Ramtron board of directors recommends a vote in favor of this proposal. If accepted by the preferred shareholders, this approach will bring an end to the floating floor-conversion feature of the preferred stock and set a finite, maximum share dilution for the company's common stock. I might also add, we have received inquiries from several investors who have been confused with the conversion prices stated in this proxy, and how those prices would adjust with the reverse-split. To clarify, the $0.75 and $1.00 conversion prices are pre-split prices. These prices will adjust to $3.75 and $5.00, respectively, on a post reverse-split basis.
Before I turn to a discussion of our business units, I'd like to clarify one other important issue: our continued listing on the Nasdaq national market system. Nasdaq contacted us in early December, informing us that we were not in compliance with the market's minimum bid requirement and that we risked delisting. We have since requested a hearing with Nasdaq officials to propose a solution to our situation, and we hope that by the time that hearing occurs, the new proxy vote will be completed. That will enable us to present a specific plan to meet all of the requirements, thereby continuing to trade on Nasdaq. In the meantime, the common stock will continue to trade, as usual, on the Nasdaq National Market System.
Now, turning to the business itself, and what we're doing to improve our fundamental performance.
FUNDED R&D STATUS
As you may remember during our 2Q 1998 earnings teleconference, we set an objective to establish a self-funded research and development program to develop a next-generation FRAM manufacturing technology. The goal of this program was to not only create a pathway to more advanced and economical FRAM products, but to do so without delaying our pursuit of profitability as a company. I am pleased to say that we have made very good progress toward this goal, and our current objective is to close an arrangement with a major partner by the end of the first quarter.
FRAM PRODUCT UPDATE
So far, 1999 has started off rather well for our FRAM product business. Early first quarter product billings are up from the end of last year, and we are currently on target with the sales plan for the quarter. Billings contributions were made mostly by Ampy and Schlumberger with the 4K, FM24C04 for power meters. In addition, security hardware manufacturer, Ademco, has increased their production rate on security systems using our 16K, FM24C16, and is bringing up a new design, which will require additional parts. Currently, Ademco is our #1 North American customer. Running a close second is Cubic Transportation Systems, which is taking delivery of parts due to increased distribution of the FRAM-enabled Smartrip mass-transit smart card.
We are also encouraged by a good increase in bookings and billing activity with our distributors, particularly Future in North America and Arrow in the UK. Additionally, we are getting off to a good start with newly enlisted North American reps, who are identifying fresh opportunities, sending samples to customers, and initiating new design wins. Also, with a new rep in Southern California, we are now fully represented in the entire domestic marketplace.
I believe that the reason we are experiencing early success this year is due to our focus on two primary issues -- high manufacturing costs and a dormant sales network.
To address the cost issue, we negotiated lower package and test costs, and are currently negotiating to lower our overall wafer manufacturing cost from our supplier. As a result of these efforts, we expect margins for our FRAM products to continue to improve, and before year-end we hope to address some of the more cost-sensitive applications.
To fine tune and revitalize the sales network, we have replaced a number of non-performing firms, including those in Illinois, Wisconsin, Northern and Southern California, Canada, Washington, and Oregon. On the international front, we have been pleased with the level of work and interest by our international sales reps and distributors, and we don't believe that any big changes are necessary. Our primary objective is to maintain mind-share with the reps, keep product flowing through their hands, and provide top-rate applications support and sales materials to facilitate product sales.
In terms of new products, we recently began shipping product samples of our 64K and will soon ship our first 256K to a limited number of customers. These new byte-wide, parallel-interface products were produced at Fujitsu's development facility in Kawasaki Japan. The Kawasaki fab was a pilot- line facility with limited production capability. Fortunately, Fujitsu was able to produce enough samples of the 64K and 256K for us to begin seeding the market prior to the closing of the development facility in Kawasaki.
Commercial production of the 64K and 256K will take place at Fujitsu's Iwate CMOS fab in Japan. Iwate has been outfitted with the required FRAM production equipment, and Fujitsu expects to have the ferro process qualified by the middle of July. Iwate will have an initial capacity of 2500 wafers per month, on which Ramtron expects to run 64K and 256K parallel and serial products. The addition of this production capacity will greatly increase our ability to grow the FRAM business. With these products, we will begin to address the battery-backed SRAM market. We believe we have a distinct advantage in this market, since we will be able to offer a more efficient memory with better features and at a lower price.
EDRAM BUSINESS UPDATE
Now lets turn to the EDRAM business. Our 4-meg sales were down in the fourth quarter due to two major customers tightening end of the year inventory controls. Despite this, our sales of the product actually exceeded our target for the year. We expect total 4-meg sales to decrease this year; however, with gross margins running at nearly 50%, we will stay in the 4-meg business for as long as possible.
Our new 16-meg enhanced synchronous DRAM or ESDRAM will drive increased sales in 1999. We have spent the better part of the last three months making minor design changes to the ESDRAM to increase yield and improve performance. The final revision of the 16-meg is scheduled to ship at the end of this month. Over 25 customers are currently sampling the ESDRAM, and we have just received our first two production orders. The orders are for pre-production quantities at two prominent network communications companies. In addition, two video board makers are scheduled to demo ESDRAM-enabled 3D graphic accelerator boards at a major graphics show - the Hanover Fair - in Europe next week.
To keep this side of the business on track for long-term success, we are addressing three primary issues: product density, product cost and increasing market acceptance.
Although the 16-meg product presents a sizable opportunity for the business this year, we must address the issue of migrating to mainstream DRAM densities in order to capture high-end computing applications like workstations and servers. To meet this challenge, we have added resources to our internal design team and contracted with two external design firms. From the technology side, Siemens has agreed to provide us with the necessary process technology to manufacture high-density products through 256-megabit.
To address the cost issue, we just completed a 16-meg design shrink that will increase our die leverage and margin prospects in the near term. We are also in the process of pursuing new product suppliers, with the Taiwanese foundries as the primary targets. We view competition and expanded capacity from multiple low-cost producers as the best way to drive our manufacturing costs down.
To increase market acceptance we have to attack the issue on three fronts. First, in parallel with the cost issue, we must line up as many suppliers as possible to reduce single-source concerns in the market. Second, we are targeting market enablers, such as chip-set suppliers, to include EDRAM performance hooks. This makes it easier for end users to design the EDRAM into their products. And lastly, we are working to educate OEMs to the core advantages of using EDRAM technology in their systems.
The aforementioned tasks certainly present a considerable challenge to a small memory company; however, we must remember that this business made a profit last year in the face of the worst downturn in the history of the semiconductor-memory market. We believe that with perseverance and hard work, we can carve out a very nice business for ourselves in this market.
CLOSING REMARKS
On a final note, we are pleased to announce the appointment of a new director to Ramtron's Board, filling the vacancy due to the unfortunate death of LT Womack. Albert Hugo-Martinez has joined our Board, bringing with him over 27 years of management experience and 22 years of direct P&L responsibility in the electronics industry. Albert has negotiated and built facilities in Scotland and Japan, and has negotiated several international strategic alliances with top firms such as Plessey, Seiko-Epson and Hewlett-Packard. Albert had previously served at Applied Micro Circuits Corporation, where he was President and CEO. He also has held various executive management positions with Burr-Brown, Motorola, and TRW, and holds Board positions with microcontroller maker, Microchip Corp, as well as the UCSD Cancer Center. We are pleased to have Albert on our Board and look forward to benefiting from his experience and guidance as the company moves forward.
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