SouFun Holdings Limited (SFUN)

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Saifun Semiconductors Ltd., (SFUN)
Q2 2006 Earnings Conference Call
July 26, 2006, 8:30 a.m. EST


Dr. Boaz Eitan, Chairman and CEO
Igal Shany, Chief Financial Officer
Kobi Rozengarten, President
Lee Roth, Investor Relations


Daniel Amir, W.R. Hambrecht
Jeff Rosenberg, William Blair
Craig Ellis, Citigroup
Daniel Gelbtuch, CIBC
Pranay Laharia, Deutsche Bank
Khameel Des, Lehman Brothers
Nimal Vallipuram, Halpoalim Securities



Good evening ladies and gentlemen. My name is Charita and I will be your conference facilitator today. At this time, I would like to welcome everyone to your Saifun Semiconductor Second Quarter 2006 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer period. If you would like to ask a question during this time, please press * then the number 1 on your telephone keypad. If you would like to withdraw your question press the # key. Thank you; it is now my pleasure to turn the floor over to your host, Mr. Lee Roth. Sir, you may begin your conference.

Lee Roth, Investor Relations

Thank you, Charita, and good morning everyone. This is Lee Roth of KCSA Worldwide, Investor Relations counsel for Saifun. With me on the call this morning are Dr. Boaz Eitan, Chairman and CEO of Saifun; Mr. Kobi Rozengarten, President; and Mr. Igal Shany, CFO.

Before we begin, I would like to remind you of the following Safe Harbor provisions that are in effect for today’s call. During the course of this conference call, the Company may make forward-looking statements regarding future events. We wish to caution you that such statements reflect only the Company’s current expectations and that actual events or results may differ materially. You are kindly referred to the risks factors and cautionary language contained in the Company’s annual report filed on Form 20-F with the US Securities and Exchange Commission dated April 11, 2006. The Company undertakes no obligation to update any projections or forward-looking statements in the future. With that said I’d now like to turn the call over to Dr. Boaz Eitan, Chairman and CEO of Saifun Semiconductors. Boaz, go ahead please.

Dr. Boaz Eitan, Chairman and CEO

Thank you, Lee. Good day everyone and welcome to our second quarter call. Before I turn the call over to Igal and Kobi for their review of the financials and the quarter highlights, I would like first to share the following.

The second quarter of 2006 was a successful quarter both operationally and strategically. On the operational side, we have exceeded the high end of our guidance range and achieved good year-over-year revenue growth. This growth was driven by an increase in our design activity resulting in an increase in our service revenue.

We continue working with our licensees towards bringing new NROM based flash memory solutions to the market. As these products reach mass production, we will see royalties taking a larger share of our revenue. We believe that this is shift is fueling Saifun’s future growth. Perhaps more important this quarter was the strategic progress we made with our licensees. During the second quarter we continued moving close to mass production of the first flash memory product based on our Quad NROM technology, an advanced manufacturing process.

The introduction of a real 4-bit per cell flash product this year will truly be a revolution for our industry and we are extremely proud that our technology is making this. On the research side, we continue to invest resources in research and development addressing further shrinking and increased performance.

Before Kobi elaborates on the development of the second quarter and outlook for the remainder of the year, I would like to turn the call over to Igal for a review of the financial results. Following these remarks, we will open the call for questions. Igal…

Igal Shany, Chief Financial Officer

Thank you, Boaz. Turning to our financial highlights, please note that we are referring to the non-GAAP information presented in our press release. Revenues for the second quarter were $17.4 million, an increase of 16% compared to $14.9 million in the second quarter of ’05. Our revenues are made up of licensing and service revenues as follows.

Licensing revenues for the second quarter were $11.1 million. Licensing revenues represented 64% of the total revenues this quarter. The majority of the licensing revenues this quarter were derived from Qimonda, Spansion, and SMIC. Service revenues for the second quarter continued to grow and were $6.2 million. Service revenues represented 36% of the total revenues this quarter. In this quarter most of the service activity was driven by data flash projects. Our top three service customers were Qimonda, Spansion, and SMIC.

Gross margin for the second quarter was 82%. Gross margin on the service revenues was 50% or 34% excluding service revenues for which cost of services was recorded in the previous quarters. Operating expenses for the second quarter were $5.2 million or 30% of revenues, which included 19% R&D and 11% SG&A. R&D together with cost of services in the second quarter was $6.5 million or 37% of revenues. This is compared to $4 million or 27% in the second quarter of ’05. The increase in our operating expenses this quarter resulted from increasing R&D expenses primarily. This is the ride from new research and development projects as well as from an increase in our engineering staff.

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