Integrated Silicon Solution Inc. F4Q09 (Qtr End 30/09/09) Earnings Call Transcript

Integrated Silicon Solution Inc. (ISSI)

F4Q09 Earnings Call

October 29, 2009; 04:30 pm ET

Executives

Scott Howarth - President & Chief Executive Officer

John Cobb - Vice President of Finance, Administration & Chief Financial Officer

Analysts

William Myers - Computer Aid Inc.

Chevelu [ph] - Unidentified Company

Presentation

Operator

Good day everyone and welcome to the ISSI fiscal fourth quarter 2009 quarterly earnings conference call. As a reminder, today’s conference is being recorded.

At this time, I would like to turn the proceedings over to Mr. Scott Howarth, President and Chief Executive Officer. Please go ahead.

Scott Howarth

Good afternoon and welcome to ISSI’s conference call for the quarter and fiscal year ended September 30, 2009. I am Scott Howarth, President and Chief Executive Officer, and with me is John Cobb our Chief Financial Officer.

Before we proceed, I have asked John to comment on the nature of this call and any forward-looking comments that may be made.

John Cobb

Thanks Scott and good afternoon. During the course of this conference call we will provide financial guidance, make projections, comments and other forward-looking statements regarding future market development, the future financial performance of the company, new products or other matters.

We wish to caution you that such statements are just predictions or opinions, and that actual events or results may differ materially due to fluctuations in the marketplace, delays in developing new products, changes in demand or supply, or adverse developments in the global economy.

We refer you to the documents ISSI files from time to time with the SEC, specifically our most recent Form 10-K filed in December 2008, and our Form 10-Q filed in August 2009. These documents contain and identify important factors that could cause our actual future results to differ materially from those contained in our financial guidance, projections, comments or forward-looking statements.

Scott Howarth

Thank you, John. We are very pleased with our results in the September quarter. The recovery in demand we saw during the June quarter continued into the September quarter, resulting in revenue growth of almost 20% quarter-to-quarter. The demand recovery was strongest in Asia, and we also saw growth in all of our markets and geographies.

Overall end market demand remains below year ago levels due to worldwide recession, but we believe this quarter shows that the worst is over and the demand for memories is increasing. In addition, DRAM pricing significantly improved during the quarter as we have seen spot prices for certain DRAMs double and triple off their lows earlier this year. This pricing recovery shows a growing demand for DRAM and also a much healthier balance between market supply and demand.

Looking forward, we think this momentum will continue into the December quarter. We ended the December quarter with the strongest backlog that we have seen since the beginning of the downturn over a year ago. So far our bookings this quarter have also been stronger, and in many markets we have seen pricing improve. While we look at the elements that we control, we see many positives.

During the September quarter, we are able to return to profitability, generate $30 million in cash and improve our gross margin. Our employees worked hard to do everything they could to improve the company, and the results show their hard work. In addition, we had a strong quarter of design wins and continue to see a high level of customer design activity, as our customers face shortages and seek stable supply for both DRAM and SRAM.

Our revenue for the September quarter was $46.4 million. This compares to $38.9 million in the June quarter, and $55.3 million in the September 2008 quarter. For all of fiscal 2009, we had revenue of $154.3 million, compared to $235.2 million in fiscal 2008. The 34.4% decline in year-over-year revenue was the result of the worldwide recession. Our non commodity revenue declined by only 30.7% in the fiscal 2009 from fiscal 2008, while we further reduced our commodity revenue from fiscal 2008 by $19 million or 57% as part of our strategy to improve our gross margin and increase the stability of our business.

Our gross margins were a highlight for the quarter and for the year, as we achieved a gross margin of 33.9% in the September quarter. This margin includes an 8.3 percentage point net benefit from selling previously reserved inventory. This compares to the 25.1% gross margin in the June quarter, which included a 2.7% benefit from sales of previously reserved inventory.

Our increased gross margin reflects significant strengthening of demand and pricing in our end markets, along with our inventory management, cost reductions and a shift in our product mix to higher margin products. For all of fiscal 2009 our gross margin was 25.7%, compared to 22.6% in fiscal 2008, which is an increase of 310 basis points year-to-year.

In fiscal 2009, despite the economic downturn we achieved our fourth consecutive year of gross margin improvement. With our higher revenue, much improved gross margin and overall cost control, we were able to generate a net income of $3.6 million in the September quarter. This return to profitability is earlier than we had expected and is a reflection of our actions along with the strengthening marketing conditions.

We are very proud of the fact that even in the face of very difficult market and economic forces, we’ve been able to significantly improve the company’s financial performance over the past few years, and particularly this year, incurred a net loss of only $6.2 million while growing cash by $15 million during one of the worst recessions in decades.

Looking ahead, visibility is improving, but we still see a lot of uncertainty in end market demand given today’s continuing uncertain economic conditions. Still we believe that our strategy is sound and we have the right products for our key markets, a very strong customer base and we remain focused on long term revenue and profit growth.

When we entered this recession we set two goals for the year, to be cash flow positive and to strengthen the company. As you can see, we clearly exceeded our first goal. In addition we added two new engineering teams to our company, which will lead to new and advanced memory products in the future. We also improved productivity and strengthened our position with customers. With these changes in 2009 we are even more optimistic about our long-term growth prospects and we work hard to keep building a stronger company.

ISSI is a leader in high quality memory products. Our goal is to continue to extend our products in the new applications and markets that require high quality and long term support. In the past three years, we’ve been transitioning our business via supplier of high value specialty memory, and in doing so have improved gross margins despite very difficult memory markets.

We continue to manage our business carefully, control the areas that we can and reduce our exposure to the risky commodity memory markets. Our financial results show clear evidence of the success of our strategic direction and hard work of our employees. We believe we have established an excellent foundation to continue to drive our strategy and penetration into our markets.

Now, I will turn to our key markets and products. The DRAM market strengthened considerably during the September quarter. Demand was the strongest we have seen since last year, and the pricing was the best we have seen in several years. As a result, our DRAM revenue increased more than 20% on a sequential basis. DRAM represented 52% of our total revenue in the September quarter. Our focused DRAM represented 43% of total revenue, while the commodity DRAM business represented 9%.

We begin the December quarter with the strongest backlog in over a year and October orders have also been strong. Many of our customers experience shortages from other suppliers in SDRAM and DDR and we’ve been actively supporting these customers in gaining many new design wins. We expect this trend to continue and gain share in our DRAM market segments. As a result we expect that our overall DRAM revenue will increase sequentially in the December quarter.

During the September quarter, demand for our focused DRAM strengthened in all of our markets. We also had very strong quarter design wins. For example, we had several large design winds for automotive infotainment systems, mobile internet device, industrial measurement equipment, computer server and several other designs for automotive and networking applications.

We also achieved numerous design wins in the automotive, telecom and consumer markets in both Y-16 and Y-32 configurations. In addition, we added two new DRAMs, a 256 megabit and a 512 megabit DDR2, which are both being sampled in our target markets and will expand our serviceable market significantly. Overall, we continue to see many opportunities to expand our market share and grow our revenues.

Our strategic direction is to focus on key applications and markets that provide sustainable revenue and profit growth. Our strategy leverages our strengths and targets those markets, where we believe we can add value to engineering, quality, service and long term support. Our broad product portfolio, customer service, long term support in high quality products provide a competitive solution that we believe will help further our growth in our focused market segments.

The key markets that we’re focused on include automotive, networking, telecommunications, industrial and specific consumer and peripheral markets. Our goal is to use our strength to further penetrate these markets and to also expand our aggressive markets and new products.

For example, one of our key markets, the automotive market requires a much broader temperature range to support the high temperatures of vehicles to as high as a 125°C in the highest quality memory, with a goal of zero defects. We have developed extensive product and process design expertise and knowledge to meet these stringent requirements.

We’ve been focused on this important market for several years and have leveraged our engineering expertise to develop specific markets to serve this market opportunity. Overall, automotive demand has dropped worldwide, but we started to see growth again during the September quarter, and had a number of significant new design winds. Our telecom and networking customers also require both high quality memory and long term support.

Additionally, our strong presence in Asia provides critical technical resources, closer assess to our customers and excellent leverage to our business model. We intend to increase our market share through superior execution and high quality product support. Overall, we feel that our combination focused on strategic market, breadth of product offering, long term support and our low cost model will drive continued success in our focused DRAMs.

For commodity DRAMs, pricing and demand for 16 megabit to 128 megabit SDRAMs increased slightly from the June quarter. Demand for commodity DRAM exceeded our supply this quarter as we focused our support on our focused customers instead. While we continue to support key customers, we intend to gradually reduce our commodity DRAM revenue as a percentage of total revenue.

As previously stated, the commodity DRAM revenue was approximately 9% of total revenue in the September 2009 quarter, compared to 9% in the June 2009 quarter and 10% of our revenue in the September 2008 quarter. In fiscal 2009, commodity revenue was 9% of our total revenue compared to 14% in fiscal 2008. We expect commodity DRAM shipments to continue to decline as a percentage of DRAM revenue, as we place greater emphasis on our focused DRAM.

Let me now turn to our SRAM business. SRAM ASPs were generally flat to slightly down this quarter due to competition. Demand in all end markets and geographies improved. The SRAM markets in China, Taiwan and Japan had the strongest demand this quarter, while markets in US and Europe had moderate improvement with automotive markets showing life again. Our SRAM revenue increased 16% from the June quarter and was approximately 33% of our total revenue. We saw strength in our async and also synchronous SRAMs.

During the quarter we won several major designs in our key markets for various densities of our products. As an example, we have several large design wins with our 4 megabit, 8 megabit and 16 megabit asynchronous product, mainly in networking application. We also had other large design wins for networking equipment industrial and automotive applications.

This quarter we made progress on new product development as we taped out two new 65 nanometer SRAMs. With our continued investment in SRAM, competitive SRAM solutions and long-term support, we’re confident we will continue our long-term growth in the SRAM market. We expect the SRAM revenue in the December quarter to increase from the September quarter.

Our overall ASSP business increased 27% from the June quarter and represented 15% of total revenue in the September quarter. Market demand for EEPROM and Smartcard was strong this quarter. However, ASPs for both, serial EEPROM and Smartcard declined slightly.

We secured several large EEPROM design wins for wireless networking and LCD panels, and had several large design wins for Smartcard in public transportation and security application. For EEPROM the December quarter is usually seasonally weaker than the September quarter. So we currently expect ASSP revenue in the December quarter to be down slightly from the September quarter.

Let me now turn to our manufacturing operations during the quarter. Wafer supply has become tighter in the past few months, as foundry utilization has increased. We have experienced longer lead times in foundry and assembly in test, but presently our supply is not constrained. We have experience some constraints on assembly and test capacity, but have been able to manage those without impacting our business.

Looking forward to the December quarter, would you not expect wafer or backend capacity constraints to have a significant impact on our business, and we’ll make strategic investments in the back end to ensure supply of our products. We continue to make progress in product cost reduction programs and improvements through operational efficiency and effectiveness.

I’ll make some closing remarks in a moment, but first let me ask John to discuss the numbers.

John Cobb

Thank you Scott. As Scott mentioned, our revenue for the September quarter was $46.4 million, which was 19.4% higher than the previous quarter, and above our guidance of $40 million to $45 million. Compared to the same period a year ago, this revenue was a decrease of 16.1%. Our SRAM, DRAM and ASSP revenues all grew from the June quarter, but were lower than in the September 2008 quarter.

Revenue in fiscal 2009 totaled $154.3 million, compared to $235.2 million in fiscal 2008, a decline of 34.4%. Our non-commodity revenue declined 30.7% year-over-year in fiscal 2009. As planned, we further reduced our lower margin commodity DRAM revenue by $90 million from 2008 to 2009.

Commodity revenue represents 9% of our revenue in fiscal 2009. We have been reducing our commodity revenue over the past few years, in order to improve our gross margin and to increase the stability of our business. As a result of our strategy ,commodity revenue was $53 million lower in fiscal 2009, than it was just three years ago.

Gross margin was 33.9% in the September quarter, which was significantly above the high end of our guidance range of 22% to 25%. This compares to 25.1% in the June quarter and 24.2% in the year ago quarter. Our gross margin in the September quarter was the highest in eight years, and reflects the significant improvement in end market conditions.

Also during the quarter, we sold significant inventory that had been reserved in prior quarters. This provided an 8.3 percentage point net benefit to our gross margin in the quarter. Overall, we achieved a 25.7% gross margin in fiscal 2009 compared to a 22.6% gross margin in fiscal 2008. In fiscal 2009, we achieved our fourth consecutive year of gross margin improvement.

Operating expenses were $12.2 million in the September quarter, which was within our guidance. This compares to $11.6 million in the June quarter, which included the $700,000 in process R&D charge. Non-GAAP operating expenses were $13.8 million in the year ago quarter, which excludes the $25.3 million goodwill write down.

For fiscal 2009, we incurred $46.3 million in non-GAAP operating expenses, which excludes the in-process R&D charge, compared to a non-GAAP $52.3 million in 2008, which excludes the goodwill charge. This $6 million or 11.5% reduction in spending, is the direct result of extensive expense reductions we have made during this difficult year.

We achieved operating income of $3.6 million in the September quarter, compared to an operating loss of $1.9 million in the June quarter, which included the $700,000 in-process R&D charge, and a $400,000 non-GAAP operating loss in the September quarter a year ago. In fiscal 2009, the company had a non-GAAP operating loss of $6.5 million, compared to a non-GAAP operating income of $900,000 in fiscal 2008. Please refer to our press release and Form 8-K for a reconciliations and further explanation of our GAAP to non-GAAP results.

Interest and other income in the September quarter was $100,000. We had no sales or investments during the quarter. Net income for the quarter was $3.6 million or $0.14 per share. This compares to a net loss of $1.9 million or $0.08 per share in the prior quarter, and compares to a non-GAAP net income of $600,000 or $0.02 per share in the September 2008 quarter.

In fiscal 2009, the company incurred a GAAP net loss of $6.2 million or $0.24 per share. On a non-GAAP basis, without the in-process R&D charge, the company had a net loss of $5.5 million or $0.22 per share. This compares to a non-GAAP net income in fiscal 2008 of $7.6 million or $0.25 per share, which excludes the goodwill charge. The fiscal 2009 results include no gains on sales of investments, compared to $1.8 million in gains recognized in fiscal 2008.

Moving to the balance sheet; we ended the quarter with $83.4 million in cash and short term investments, compared to $71.6 million at the end of June. We generated $13.1 million in cash flow from operations in the September quarter, and $22.6 million for all of fiscal 2009.

During the quarter we repurchased 329,000 shares of our stock, for an aggregate purchase price of $1.2 million. In the past year we repurchased a total of 2.1 million shares for an aggregate purchase price of $4.9 million. We intend to continue repurchasing our shares in the December quarter.

Our inventories increased by $1.5 million from June 30, however our inventory turns were seven turns in the September quarter, the same as the June quarter due to higher revenue. Our accounts receivable increased during the quarter by $1.8 million to $26.4 million, and the days sales outstanding declined to 52 days from 58 days at the end of June. Overall, our balance sheet continues to remain very strong. At the end of September we had $3.32 per share in cash and short-term investment, and a book value per share of $4.86.

Let me turn to our guidance for the December quarter. All of our comments in this conference call regarding numbers are forward-looking statements and subject to a number of risks and uncertainties.

As previously stated, we saw a strength in our end markets in the September quarter, which has continued into the current quarter. As such, we expect that our December quarter revenue will increase from our September quarter for our focused DRAM and SRAM products. In total, we expect revenue for the December quarter to be in the range from $48 million to $52 million or growth of 3% to 12 % over the September quarter.

We expect DRAM pricing to remain flat or increase modestly and SRAM and ASSP pricing to be flat to slightly down. Gross margins will likely be in the 24% to 28% range. Operating expenses should be relatively flat in the $12 million to $12.6 million range. We expect about $200,000 from interest and other income.

So taking all this into account, we expect to achieve net income in the range from $200,000 to $1 million for the December quarter or net income of $0.01 to $0.04 per share. We do not give guidance for the fiscal year, but as we look at the economy and recovery in our business, we currently expect our revenue to continue to grow and to be profitable in fiscal 2010.

Now back to Scott for final comments.

Scott Howarth

Thanks John. Overall, 2009 was a very challenging for all businesses, especially for memory suppliers. Demand and pricing dropped dramatically in the first half of our fiscal year as a result of the worldwide economic crisis. Our revenue declined 43% from the September 2008 quarter to the March 2009 quarter, and we incurred large operating losses during the first half of our fiscal year.

However, the worldwide demand is now partially recovered and we have taken many actions to strengthen our company. As a result, while our revenue remains below year ago levels, we returned to profitability and we continue to generate cash. Despite the recent recovery, we remain very cautious and are working hard to develop products for the future, support our customers and generate cash from operations.

From our results in 2009, we clearly see success with our long term strategy as a specialty memory provider. We’re pleased that we have been able to achieve this level of success despite a very difficult economy. In the months ahead, we will continue to focus on our five key objectives, which are, number one, to grow our customer base and the number of designing.

Number two, increase our product portfolio, while maintaining long term product in our target markets. Number three, to identify and extend our reaching to underserved and growing market. Number four, to serve our customers as strategic partners, and number five, to remain focused on profitable growth and efficient use of our resources.

In the past few years the memory markets have been difficult. Yet ISSI has continuously improved its gross margin and generated cash. We believe that if we continue to successfully execute on our objectives, we’ll continue to build a stronger business, we remain committed to achieving that goal.

We’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And it appears that we have no questions at this time. Excuse me, we do have a question from William Myers; please go ahead.

William Myers - Computer Aid Inc.

Hi. On the automotive demand, are you getting any feedback about how much of that is due to the Junkers program and how much of that might be ongoing?

Scott Howarth

Good question. Trying to break down the automotive demand right now, we saw a surge in demand, about the same time that the US Clunker program was kicking in, but overall we have seen more of a continued growth.

The China market is clearly showing a lot of automotive growth. There’s been a clunkers program, similar, that’s been in place, in Germany, the UK, as well as Brazil that has been driving a fairly sustained demand in automotive. So as we kind of look across our different geographies, we did see a spike in the US market I think that was related to the Clunkers, but worldwide we are seeing some recovery principally with the other markets.

William Myers - Computer Aid Inc.

Okay. And, could you say anything specifically about demand for wireless memory, memory in the wireless segment?

Scott Howarth

Wireless are you talking more cell phone?

William Myers - Computer Aid Inc.

Anything.

Scott Howarth

So, in the wireless space, we’ll kind of break it down. What we ship principally in the wireless, is the base stations for a lot of the wireless build out that’s been going on. So we have been participating in growth there, with some of our customers both in Europe as well as Asia.

In particular, in China they have been completing the 3G build out, that’s been continuing throughout the year, and we have seen quite a bit of demand growth based on that particular build out in 3G. Overall though, we have seen continued strength in that particular market segment that we’ve been participating in.

On the handset market specifically, that’ not a market that we sell much SRAM or DRAM into. So it’s really not something I can comment on.

William Myers - Computer Aid Inc.

Okay, and one last question, do you expect manufactures of DRAM to ramp backup. I guess what I’m asking is, do you expect the price stabilization or increases to be temporary until there is some ramp up or what situation do you think we’re going to be in 2010 as far as prices, as far as you can tell?

Scott Howarth

That’s a really good question and a hard one to answer, but as I read, probably many of the same analyst reports that you do in some of the other forward-looking guidance, my perspective is that I think we will clearly continue to see tightening supply in DRAM, but it also depends just on the economic recovery.

As we’re seeing more and more PC DRAM switching to DDR3, I think that will leave a gap for some of the more legacy SDRAM, DDR1, DDR2. Today we are seeing different spot shortages in both SDRAM, as well as DDR, as some of the main suppliers have shift their capacity to either DDR2 or DDR3.

William Myers - Computer Aid Inc.

Okay, well congratulations on a good quarter and thank you very much.

Scott Howarth

Sure, thank you.

Operator

And we will take our next question from Chevelu [ph], please go ahead

Chevelu – Unidentified Company

Good afternoon guys. Good quarter and a good guidance. Just regarding your gross margin guidance for the next quarter, does the 24% to 28% include any additional previously written down inventories?

John Cobb

We would expect to get a modest benefit from that, but nothing like what we’ve experienced in the September quarter.

Chevelu – Unidentified Company

Okay, could you put a magnitude on that or…?

John Cobb

Probably somewhat more similar to what we experienced in the June quarter, which was in June we had a benefit of about 2.7 points.

Chevelu – Unidentified Company

Okay, understood. Great, thank you.

Operator

(Operator Instructions). It appears that we have no further questions at this time.

Scott Howarth

Okay. Before we close, I would like to mention that both John and I will be presenting at the TechAmerica AeA Conference in San Diego on November 3. We look forward to meeting you if you plan to attend. The presentation will also be webcast, so please check our website for details. Thank you for participating on this call and have a good evening.

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