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Pericom Semiconductor Corporation (NASDAQ:PSEM)

F2Q 2013 Earnings Call

January 29, 2013 04:30 pm ET

Executives

Bob Strickland – Investor Relations

Alex Hui – President, CEO

Aaron Tachibana – Chief Financial Officer

Analysts

Hans Mosesmann – Raymond James

Christopher Longiaru – Sidoti

Operator

Good day, ladies and gentlemen, and welcome to the Pericom Semiconductor Corporation Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions). And as a reminder, today’s conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Bob Strickland. Sir, you may begin.

Bob Strickland

Thank you. Good afternoon, and welcome to Pericom’s second quarter fiscal year 2013 conference call. Our speakers today are Alex Hui, President and CEO; and Aaron Tachibana, the CFO.

Before we get started, please be aware that we will be presenting several visual slides during management’s discussion of the business. To view these slides, please go to www.pericom.com and click on the Investors link. Today the company will discuss its financial results, comment on the industry and on Pericom’s business and provide guidance for the third quarter of fiscal 2013.

Certain matters discussed in the press release and on this conference call may contain forward-looking statements that involve risk and uncertainty. Therefore, we encourage you to review all filings made by the company with the Securities and Exchange Commission, particularly the risk factor sections of such filings. In accordance with regulations of fair disclosure, Pericom will continue to only provide guidance via its earnings release and its conference calls. The company will not provide further guidance or updates during the quarter unless it does so via a press release.

Please note that we are reporting non-GAAP financial measures for net income, gross profit, operating expenses and income tax in addition to our GAAP financial results. We have a significant amount of non-cash and non-operating expense included in the income statement, which are not reflective of the performance for our normal business operations.

Aaron will discuss the financial performance for the quarter and guidance for the third quarter of fiscal 2013. And Alex will give his comments on the industry and on Pericom’s business. Aaron?

Aaron Tachibana

Thank you Bob and good afternoon everyone. Our consolidated net revenue were $30.4 million for Q2 compared with $36.7 million last quarter and $30.5 million last year. The 17% sequential decline was a result of weakness within all end market segments. The enterprise segments for PC, notebook and networking were especially weak as IT spending curtailed during the quarter which was consistent with the trends and corporate earnings. Also we believe the supply chain has continued to work down Windows 7 related PC and notebook inventory as new hardware platforms with Windows 8 continues to ramp.

Alex will comment further on the end markets a bit later. Sales by channel for Q2 were international distribution 62%, contract manufacturers 27%, OEM 8% and U.S. distribution was 3%. Our book-to-bill was 1.0 for Q2 throughout the quarter the demand environment and customer order patterns were pretty consistent and we did not see any particular signs of improvement. As of the first few weeks of January new orders have picked up a bit but we will have to see if it continues after the Chinese New Year holidays.

Consolidated non-GAAP gross profit was $11.7 million for Q2 compared with $14.5 million last quarter and $11.4 million last year. The non-GAAP gross margin for the second quarter was 38.5% and was down approximately 80 basis points from 39.3% last quarter and up 120 basis points from last year’s 37.3%. The sequential quarter declining gross margin was primarily due to under- absorption costs associated with lower FCP volume. For Q2 the FCP factories operated slightly below 70% utilization compared with mid 80s last quarter, our IC gross margin that includes PTI with 51% for Q2.

In the near term our gross margin should remain within the 37% to 39% although we may see some periodic volatility due to how susceptible the margins are to the changes in mix and also the absorption impact related to changes in FCP volume. For Q3 our estimates have lower range in Q2 because of FCP under-utilization cost that will have a negative impact of 200 basis points. As we look forward six to eight quarters we remain confident that our strategic direction will help us achieve growth margins in the low 40% range. Non-GAAP operating expenses were $11.5 million for Q2 and we’re down 0.4 million sequentially due to the one week of shutdown during the December holidays and also from lower payroll taxes that are typical at calendar year end.

Our operating expenses should remain flat for the next couple of quarters but could vary plus or minus a few percentage points.

The non-GAAP effective tax rate was 70% for Q2 compared with 28% last quarter. The rate of decline was primarily due to the mixture of our foreign versus domestic income. In Q2, we incurred a GAAP tax expense of $5 million related to the implementation of some legal entity and business process enhancement that we mentioned during our last conference call in October.

These changes were intended to better align our income recognition by jurisdiction along with our global operational footprint. Longer term, we expect our non GAAP tax rate to be in the range of 20% to 23% compared with our historical range of 27% to 32% and we should begin to see this new level in fiscal year 2014. Non-GAAP net income was $0.9 million or $0.04 per diluted share per Q2 which was down from $0.10 last quarter and was flat with the same period last year.

Now let’s take a quick look at some balance sheet items, exiting Q2 including both short and long-term investment to marketable securities was $124 million which increased approximately 1 million from last quarter. During the quarter, we repurchased 150,000 shares for 1.1 million at an average price of $7.47 per share and have a remaining balance of 24 million on the 2012 stock repurchase plan. Net inventory was $16.1 million at the end of Q2 which was down 1.4 million or 8% from last quarter.

Our days of supply remained extremely healthy at 78 days and distributor inventory was approximately 7.5 weeks ending the quarter so no significant change there. Capital equipment additions were $1.3 million for Q2 and depreciation expense was $1.9 million.

At this time, I would like to turn the call over to Alex for commentary about the business and the industry. Alex?

Alex Hui

Thank you, Aaron. Our business in fiscal Q2 will impact by the overall slowdown in the industry in particular the softness in the PC industry we were pleased to see our Q2 gross margin holding up quite well and exceeded 38% for the second consecutive quarter. This is a result of our continued effort to improve gross margin for a combination of better product mix and expanding customer base outside the PC, digital media markets.

Market settlement wise the mix in fiscal Q2 loss computed 16%, service knowledge 12%, networking and telecom 43%, consumer 12%, embedded 10% and other 7%. While all market segment experienced softness in demand, relatively speaking shipments into networking, telecom and embedded customers as held up better than other market segments. Our top five end customers accounted for 30% of total revenue and one customer account for 10% of total revenue in Q2. The revenue mix for our product family was IC 59%, FCP 41%. For the IC revenue we included analog switches 17%; digital switches, 5%, SiliconClock 9%; connect 13%, interface 4%; 11% from PTI products.

Our focus is to continue to drive new business across server, networking and embedded applications for margin accretion and long term sustainable growth, with our low high-speed stereo connectivity and timing products. While we expect to see a continued softness in the notebook, desktop, PC area we are encouraged with our designing activity on new fabric platforms with our Signal Integrity, switching and timing products.

The recent introduction of our small size die CDM VCXO products will further enhance our product solution for smart mobile applications. We are happy to see good adoption of our Serial Connectivity and Timing solution in embedded applications, including set-top box, media gateway, video surveillance and automobile infotainment. We believe these activities will continue to increase our penetration into the embedded market segments over time.

We also scored a number of design wins with our timing solution, that leverage a combination of our ultra low jitter crystal oscillator together with our gigahertz high frequency clock buffer for 10 gig and 40 gig applications. This unique combination offers the best by performance for 10 gig, 40 gig timing requirements.

For new product introduction in the second quarter of fiscal 2013, we introduced a total of 23 new products in our Signaling Integrity, connectivity and timing areas. We introduced 13 new products in the connectivity area that included a HDMI switch, a new family of Microprocessor Supervisors and a new family of Universal Level Shifters. All of these products were sampled to key customers during the quarter.

We expanded our Timing solutions with six products, including embedded clocks, a new family of ultra low jitter buffers, and a PCI Express clock generator. These products target mainly networking, storage, server and embedded systems.

For Signal Integrity, we introduced four new ReDriver products targeting USB3 applications in notebook, server, storage, and networking applications. We now offer the industry’s broadest U.S. based free Signal Integrity solution. Our latest offering comes in an ultra small size 2 millimeter by 2 millimeter package which is ideal for – smart mobile applications. We also added to our portfolio a very low power PCI Express GEN2 ReDriver for servers and computing applications.

While the near term environment remains challenging with the modest inventory level in the channel we expect a recovery would come soon as inventory got further depleted and demand resumes. We see an increasing adoption of high-speed serial connectivity and Timing solution among our existing customer base. Our customer base is also expanding as we penetrate new market segments our good line up of new products that will further strengthen our solutions to target market segments. These drivers will help us realize our goal of growing revenue expanding gross margin in the next few years.

At this time I will pass it back to Aaron to give our guidance for Q3.

Aaron Tachibana

Our Q3 non-GAAP estimates are as follows. Revenue in the range of $27.5 million to $30.5 million; gross margin in the range of 36.0% to 38.5%; operating expenses are expected to be in the range of $11.3 million to $11.7 million; other income is expected to be approximately $0.6 million to $0.8 million consisting of interest income and realized gains from cash investments and currency exchange gains and losses. Our effective tax rate will be in the range of 30% to 32%.

This concludes our formal comments and we can now open up the session to questions and answers. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Hans Mosesmann from Raymond James. Your line is open.

Hans Mosesmann – Raymond James

Okay, question on the FCP utilization rate, they seem to be varying here, what’s the expectation throughout the year Alex in terms of utilization rates and the follow on to that question is how successful have you guys been in integrating the oscillator to crystal that mix of business with the acquisition that you made while back with PTI and others? Thanks.

Alex Hui

The utilization recently it’s running at low of 70% we expect that probably pick up to 80%, 85% range in couple of quarters. We continue to actually push guard utilization of our PDIC into our crystal oscillator today I think we’re using actually over 80% in the hookah of the IC in our crystal oscillator 80 on my internal source. This also applies to the recent deduction of our TCXO products we’re the first in industry we’ve actually indicated IC, crystal brand and also in motor manufacturing in the TCXO arena.

Hans Mosesmann – Raymond James

And when do you expect to be at 100% from internal sourcing for manufacture of the oscillator?

Alex Hui

Actually we manufacture all the oscillator in house it’s 100% what am referring to is the IC that’s being used in the oscillator.

Hans Mosesmann – Raymond James

Okay.

Alex Hui

We think probably we’ll get up to may be 90% but there is always a feel special low OEM situation that we do not see it make sense to have own IC, so we continue to buy from outside when needed.

Hans Mosesmann – Raymond James

Okay, and then Alex and then I open up for others to ask questions so far in terms of the PC market specifically is the quarter – the March quarter so far coming along as normal from a seasonal perspective or just still some more weakness that you.

Alex Hui

I think actually the Q4 last calendar year was actually pretty weak this quarter I think we see the business at a similar level. So we do not see any further weakening but we do not see any strength either because there were some talk about, some of the Q4 business is going to push into Q1 but we are not seeing a lot of that this time.

Hans Mosesmann – Raymond James

Okay, thank you.

Alex Hui

Yeah.

Operator

Thank you. (Operator Instructions). Our next question comes from Christopher Longiaru from Sidoti. Your line is open.

Christopher Longiaru – Sidoti

Hey guys.

Alex Hui

Hello.

Aaron Tachibana

Hi Chris.

Christopher Longiaru – Sidoti

Can you just talk a little bit more about what your visibility is right now depend and also just you said there is 7.5 weeks in the channel is that down slightly from last quarter?

Aaron Tachibana

Hi Chris, this is Aaron, in terms of the channel inventory, it’s about the same as where it was at last quarter. So we’ve been hovering in the low seven to 7.5 range over the past few quarters, but no really – no real significant change there in terms of the channel inventory. So we think we’re in relatively good shape right now as things start to turnaround. In terms of visibility, the visibility right now is somewhat murky I think when you go look at the distributor order patterns everybody through the supply line is trying to keep inventory pretty lean. So cycle times are much quicker and lead times are shorter and so basically there is no reason for people to place live orders just yet for things are somewhat murky. But in terms of our visibility right now through the rest of the quarter in terms of where we’re at today, in terms of billings and backlog going the rest of the way we’re little bit further ahead than what we were at last quarter.

Christopher Longiaru – Sidoti

Okay. And just in terms of the progression of new products and ICs in general that’s driving this gross margin expansion what inning would you say are we in, in terms of your progression there?

Aaron Tachibana

So Chris I think we’re still fairly early innings. When you go look at what we just said I think we’re looking out six to eight quarters and we really believe strongly that we can get our gross margins into the lower 40% range. If we just take a look at our IC gross margins which is the core IC business as well as PTI we’ve exceeded 50% now for the last two consecutive quarters. We continue to do well with designs of higher margin products such as clocks, ReDrivers, which basically are going to help us pull that margin upward. And then if you look at FCP our margin profile there is somewhat muted because in terms of the mixture we still have a high content mixture of crystals but as we continue to win more designs with oscillators there is no reason why we can’t continue to pull the margins upwards.

Christopher Longiaru – Sidoti

All right that’s helpful. Thanks guys I’ll jump out.

Operator

Thank you. (Operator Instructions). We have a followup from Hans Mosesmann from Raymond James. Your line is open.

Hans Mosesmann – Raymond James

Yeah, Alex this is a follow up. What’s the competitive dynamic out there in terms of price competition or behavior of the usual suspects?

Alex Hui

It’s pretty competitive you know as you know some of our competitors they actually have quite a bit of surplus capacity so on the multi source product, we are seeing bit aggressive pricing out there. As you see we continue to ship to some of proprietary mix and also into some of the embarrassment that we see carpet pricing situation. So in all actually thought we only put a full well as we continue to mix those areas.

Hans Mosesmann – Raymond James

Two other questions and look there is only two of us asking questions here potentially, can you give us an update on PTI, how they are doing in China, what’s the environment there, are the markets there they are addressing continue to be more consumer centric?

Alex Hui

Actually no, they are into various areas, they are into timing product, working telecom and also consumer. If you look at our business while opposite decline quite a bit in Q4 actually our traditional core IT business and FCP and PTI, PTI is actually so one that has the lowest decline. So actually they are holding up quite well and the gross margin is also doing very well and also we being to see more sell through, our PTI products in telecom channel so we continue to see that its actually well decision for us.

Hans Mosesmann – Raymond James

And then the last question I have, can you give us an idea in the networking telecom market, is there a particular catalyst that could occur this that could benefit you guys for example perhaps base station deployments in the LTE 4G space and those kinds of catalyst? Thanks.

Alex Hui

Yeah, we surfaced, we said treat it as a catalyst out there because China is probably going to be look at 4G deployment towards later half this year, beginning of next year. Yeah, and so we shouldn’t see that as a catalyst and also we see ongoing more and more demand for networking bandwidth, in some part of form and offices. So I think over time there will be some catalyst factors over there.

Hans Mosesmann – Raymond James

Thank you.

Alex Hui

Thank you.

Operator

Thank you. I show no further questions in the queue and would like to turn the conference back to Mr. Alex Hui for closing remarks.

Alex Hui

I’d like to thank all of you for your support and also to participate in the conference call. I wish you all a good afternoon. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.

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