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Exar Corporation
Q4 Fiscal 2016 Financial Results May 11, 2016
Safe Harbor Statement and Notice to Investors
2
Forward-Looking Statements Except for historical information contained herein, this press release and matters discussed on the conference call contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In particular, the statements regarding the Company entering fiscal year 2017 with strong momentum on multiple fronts, and the Company’s financial outlook expectations for the first quarter ending July 3, 2016, respectively, are forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties. Therefore, actual outcomes and results may differ materially from what is expressed herein. For a discussion of these risks and uncertainties, the Company urges investors to review in detail the risks and uncertainties and other factors described in its Securities and Exchange Commission (SEC) filings, including, but not limited to, the “Risk Factors”, “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our public reports filed with the SEC, including our periodic reports on Form 10-K and Form 10-Q, which are on file with the SEC and available on our Investor webpage and on the SEC website at www.sec.gov. Additional risks include uncertainties of whether any strategic alternative will be identified by the Board of Directors, whether it will be pursued, whether it will receive Board of Directors and stockholder approval if necessary, whether it will be consummated and, if consummated, whether it will enhance value for all stockholders of Exar. The Company assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. There can be no assurance that Exar’s review of strategic alternatives will result in any specific action. Exar does not currently intend to disclose further developments with respect to this process unless and until its Board of Directors approves a specific action or otherwise concludes the review of strategic alternatives.
Generally Accepted Accounting Principles The Company’s non-GAAP measures exclude charges related to stock-based compensation, amortization of acquired intangible assets and inventory step-up, impairment charges, technology licenses, restructuring charges and exit costs which include costs for personnel whose positions have been eliminated as part of a restructuring or are in the process of being eliminated, severance costs associated with the former CEO, accruals for and proceeds received from dispute resolutions and patent litigation, merger and acquisition and related integration costs, certain income tax benefits and credits, certain warranty charges, net change in the fair value of contingent consideration, the write-down of deferred revenue under business combination accounting, and related income tax effects on certain excluded items. The Company excludes these items primarily because they are significant special expense and gain estimates, which management separates for consideration when evaluating and managing business operations. The Company’s management uses non-GAAP net income and non-GAAP earnings per share to evaluate its current operating results and financial results and to compare them against historical financial results. Additionally, we disclose below the non-GAAP measure of free cash flow, which is derived from our net cash provided (used) by operations, less purchases of fixed assets and IP, plus proceeds from the sale of IP. Management believes these non-GAAP measures are useful to investors because they are frequently used by securities analysts, investors and other interested parties in evaluating the Company and provides further clarity on its profitability. In addition, the Company believes that providing investors with these non-GAAP measurements enhances their ability to compare the Company’s business against that of its many competitors who employ and disclose similar non-GAAP measures. However, the manner in which we calculate these financial measures may be different from non-GAAP methods of accounting and reporting used by the Company’s competitors to the extent their non-GAAP measures include or exclude other items. The material limitation associated with the use of non-GAAP financial measures is that non-GAAP measures may not reflect the full economic impact of Exar’s activities. Accordingly, investors are cautioned not to place undue reliance on non-GAAP measures. The presentation of this additional information should not be considered a substitute for measures prepared in accordance with GAAP.
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Introduction and Opening Remarks
Richard Leza Chairman of the Board, Interim President & Chief Executive Officer
Objective: Staying Focused
4
! Business Focus: Increasing Revenue, GM, EPS, and Cash continues.
! Operations Focus on China: Transfer to China underway with significant progress in the reduction of COGS. This effort is driving GM expansion and Cash generation.
! Product Focus on our Core Strengths: We continue to narrow our scope to concentrate our resources on our core technology advantages, know-how, and favorable market positioning.
! Sales & Marketing Focus on Quality Tier 1 Design Wins: The right combination of experienced leadership and new products focusing on Tier 1 accounts. Account access with follow-through execution has never been better.
We are focusing on these initiatives to deliver a “50/50 (Quarterly Sales/Gross Margin) Target Model”
Note: Based on Non-GAAP financial data.
Financial Review
Ryan Benton Senior Vice President & Chief Financial Officer
High End Consumer
33%
Infrastructure 20%
Industrial 47%
Eur Amer Asia
6
Fiscal 2016 Q4 $36.8M Revenue
! Q4 End-Market Q/Q Notes: " Industrial: Down 5% due to
seasonally soft demand in Asia (CNY) and reduction in channel inventory
" High End Consumer: Down 8% due to timing of $1.1 million of display shipments to a single direct customer
" Infrastructure: Up 23% attributable to increased legacy telecom sales
! Channel Sales Mix: " 73% Distribution " 27% Direct
! Geographic Sales Mix: " 78% Asia " 12% Americas " 10% Europe
Note: Based on Non-GAAP financial data.
End Market vs. Geography
COGS Reduction: Ahead of Schedule
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! All Functions Focused on Cost Downs for high volume business
" Top 20 cost downs already achieved $750k of quarterly savings
" Reduced manuf. overhead by over 30%!
" Die size reductions and negotiation with Foundries showing limited progress
" Progress on display products gated by PCNs with end customers
! Move to China Reached Critical Mass " China Ops Team is now over 10 people
" China back-end spend expected to grow to 60% in Q317. Win-Win!
Goal of $1 million Quarterly Savings in COGS achieved ahead of schedule! Mission not accomplished. Team is hungry for more.
40%
41%
42%
43%
44%
45%
46%
47%
48%
49%
50%
GM%
GrossMargin%
Q3'16 Q4'16 Q1'17F*
Target Model: 50% GM
Q117GM%GuidanceRange
*MidpointofGuidanceRange
Note: Based on Non-GAAP financial data.
Financial Highlights
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Q4FY16 (Mar-16)
Q3FY16 (Dec-15)
Q/Q Change
Q1FY17 Guidance (Jun-16)
Quarterly Target Model
Revenue $36.8M $37.4M 2% Up 7% to 12% $50M
GM % 47.6% 46.1% 144 bps 47% to 49% 50%
Opex. $13.6M $13.7M 1% $13.5M to $14.0M 35%
Oper. Income $3.9M $3.5M 10% $4.5M to $6.7M 15%
EPS $0.08 $0.07 14% $0.09 to 0.13 $0.15
Note: Based on Non-GAAP financial data.
Q4-FY16 Comments ! Quarterly Revenue impacted by Chinese New Year
slow-down, $1.1M display products shipments in-transit at quarter-end, offset by infrastructure resurgence
! Quarterly Gross Margin improved due to favorable product mix & realization of COGS reductions from China transfer and lower overhead
! Free Cash Flow of $4.3M, excluding $1.7M payments relating to patent lawsuit settlement. Cash balance of $55M.
! Federal NOLs of $295M.
Q1-FY17 Guidance Comments ! Quarterly Revenue expected to grow 7%-12%
on strength in industrial, higher HeC
! Quarterly Gross Margin expected to continue improvement in Q1’FY17 due to manufacturing cost reduction initiatives
! Quarterly OPEX expected to be flat to only slightly higher, despite 14 week quarter, as a result of reductions implemented in April
! Fremont Campus Sale-Leaseback expected to close in May for $26M
Non-GAAP Revenue and EPS
Q1:FY15
Q2:FY15
Q3:FY15
Q4:FY15
Q1:FY16
Q2:FY16
Q3:FY16
Q4:FY16*
Q1:FY17*
EPS $0.02 $0.05 $0.11 $0.11 $0.10 $0.06 $0.07 $0.08 $0.11 Revenue ($M) $32.6 $43.3 $44.3 $43.9 $40.4 $37.2 $37.4 $36.8 $40.3
$-
$0.02
$0.04
$0.06
$0.08
$0.10
$0.12
$0.14
$0.16
$0.18
$-
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
EPS
Revenu
e$M
Q1 FY15
Q2 FY15
Q3 FY15
Q4 FY15
Q1 FY16
Q2 FY16
Q3 FY16
Q4 FY16
Q1 FY17E*
Revenue($M) $32.6 $43.3 $44.3 $43.9 $40.4 $37.2 $37.4 $36.8 $40.3
EPS $0.02 $0.05 $0.11 $0.11 $0.10 $0.06 $0.07 $0.08 $0.11
9 Note: Based on Non-GAAP financial data. * Q1 FY17E based upon midpoint of guidance.
Target Model: $50M Revenue, 50% GM, $0.15 EPS
Non-GAAP Revenue and EPS 5 Year Trend
-$0.10
-$0.05
$-
$0.05
$0.10
$0.15
$0.20
$-
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
Q1-FY12
Q3-FY12
Q1-FY13
Q3-FY13
Q1-FY14
Q3-FY14
Q1-FY15
Q3-FY15
Q1-FY16
Q3-FY16
Q1-FY17*
EPSRe
venu
e$M
10 Note: Based on Non-GAAP financial data. * Q1 FY17E based upon midpoint of guidance.
Target Model: $50M Revenue, 50% GM, $0.15 EPS
Sales & Marketing Update
James Lougheed Senior Vice President, Sales & Marketing
Sales and Marketing Strategy
! Leverage breadth of IP and expertise ! Focus on core IP
! Restructured product lines ! Added expertise to team
! Account classification ! Tier 1 focus ! Capitalize on market consolidation ! Leverage Exar agility
! Modernized website (launched Q416) ! New sales tools
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www.exar.com
Product Portfolio with SAM
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• Standard Integrated Circuits
• Telecom • Solutions
SDH/SONET & PDH Timing Components
• Power Management
Products
Integrated Circuits Power Modules
Interface Products
Transceivers UARTs & Bridges
• Display Products Display Products for LCD TVS, Tables, Monitors
• Data Compression & Security Products
Data Compression and Security Devices, Cards, and System Solutions
• Analog Products
Amplifiers Force Sensing AFEs
• Video Surveillance
Products
Video Processors Video Add-in Cards
SAM
$1.8B
$800M
$800M
$300M
$50M
$100M
$150M
Tier 1 Market Penetration Strategy
+ Increasing Number of Tier 1 Engagements + Increasing Level of Tier 1 Engagements = Increasing level of ROI
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Phase 1 Initial Engagements
Phase 2 Expansion
Phase 3 Proprietary Designs
Smart Phone
Server
Display
SSD Storage Switch / Router
Video Conference Automotive Infotainment
IoT Gateway Downlights
Drones POS
IPC
Ret
urn
on In
vest
men
t
Level of Engagement
Concluding Remarks
Richard Leza Chairman of the Board, Interim President & Chief Executive Officer
Executing Equals Improving Results
! Increasing Revenue, GM and EPS continues
! Focusing on our core technology
! Streamlining the business and continuing to identify areas of further improvement
! Nimble sales organization with new sales tools is executing on strategic Tier 1 engagements with our latest advanced products
! Supply chain migration and optimization have commenced, while operating expenses remain in check
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Q & A
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Exar Corporation ~ Thank You
Q4 Fiscal 2016 Financial Results May 11, 2016