Pericom Semiconductor Corporation F1Q10 (Qtr End 09/26/09) Earnings Call Transcript

Pericom Semiconductor Corporation (PSEM)

F1Q10 (Qtr End 09/26/09) Earnings Call Transcript

November 4, 2008, 4:30 pm ET

Executives

Bob Strickland – Public Relations

Angela Chen – VP, Finance and CFO

Alex Hui – President and CEO

Analysts

Hans Mosesmann – Raymond James

Suji De Silva – Kaufman

Christopher Longiaru – Sidoti & Company

Jim Larkins – Wasatch

Presentation

Operator

Good day, and welcome to today’s Pericom Semiconductor first quarter 2010 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Bob Strickland. Please go ahead, sir.

Bob Strickland

Thank you. Good afternoon and welcome to Pericom's first quarter fiscal 2010 conference call. Our speakers today are Alex Hui, President and CEO; and Angela Chen, 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 second quarter of fiscal 2010.

Certain matters discussed in the press release and on this conference call may contain forward-looking statements that involve risks and uncertainties. Therefore, we encourage you to review all the 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 call. The company will not provide further guidance or updates during the quarter unless it does so via a press release.

Angela will discuss the financial performance for the quarter, and Alex will give his comments on the industry and on Pericom's business. Then he will provide guidance for the second quarter of fiscal 2010. Angela?

Angela Chen

Thank you Bob. Consolidated net revenues of our first fiscal quarter were $33 million, an increase of 10.9% from the $29.7 million reported last quarter. Some revenue statistics including the following

Turns bookings in the first quarter were in the 40% range. Our consolidated end market shipments were Computer, 47%; Communication, 32%; Consumer, 15%; and the 6% from other material markets.

Under GAAP, which include expenses of share-based compensation, consolidated gross margin in the first quarter of fiscal 2010 was 32%, up from 28.7% last quarter. GAAP basis operating expenses were $10.9 million compared with $9.5 million last quarter, and $11.1 million in the same quarter last year. Expenses in Q1 included year-end and SOX audit fees of $0.5 million, and the additional expenses related to accounting review of $1.2 million.

Our GAAP basis first quarter operating expenses, including FAS 123R expenses, total share-based compensation expenses in the first quarter was $930,000. Our GAAP operating loss was $338,000 as compared with operating loss of $1 million in the preceding quarter. Consolidated interest and other income of $1.6 million was net of most of the interest income and realized gains of investment.

Income from unconsolidated affiliates PTI and JCP was $0.5 million. Our first quarter GAAP basis income before tax was $1.3 million compared with $671,000 in the fourth quarter of fiscal ‘’09. In the first quarter, our effective tax rate was approximately 36.4%. GAAP-basis net income in the first quarter was $1.3 million, or $0.05 per share compared with $1 million or $0.04 per share in the fourth quarter of fiscal 2009, and net income of $3.7 million or $0.14 per share in the same quarter of last year.

Now, I would like to provide some details that complement the information provided on the slide you are viewing. Our cash balance including both short and long-term investments in marketable securities, as of September 26th, 2009, was $127 million versus $125 million last quarter. We have a very strong balance sheet with total assets of $448 million, working capital of $141 million, and the cash and marketable securities of $127 million. This translates to book value of $8.51 [ph], and cash per share of $4.99.

We will continue to manage our expenses tightly. As we go through this challenging market environment, strong cash flow and a strong balance sheet are certainly very important and should be able to help us compete in global market that we are experiencing with demand.

Now, I will turn the call over to Alex for comments on our business and our industry. Alex?

Alex Hui

Thank you Angela. Our business has continued to improve with increased billings and bookings in fiscal Q1. Revenue of $33 [ph] million increased 10.9% sequentially, due to higher end demand from PC customers and also initiation of shipment to programs in server and embedded systems.

Our gross margin also improved in Q1 versus last quarter, as a result of increased shipment volume, reduced product costs, and improved product mix. We expect gross margins will continue to improve in fiscal Q2. Our top five end customers in fiscal Q1 were Dell, Cisco, HP, Gigabyte, and Garmin.

Sales to top five end customers accounted for 34% of revenue, and there was one customer more than 10%. Revenue contributed from computer segment was 47% versus 44% last quarter, due to increased shipment to PC and storage customers. On a consolidated basis, the revenue mix for our product families was IC at 64%, which included analog switches, 29%; digital switches, 9%; silicon clocks, 8%; connect, 16%; and interface, 2%.

Frequency control products accounted for 36% of our total revenue. We are happy to see that PCI Express and e-SATA serial protocol product revenues continued to ramp up nicely and accounted for 24% of our total revenue in Q1 versus 18% last quarter. This was up almost 50% sequentially. We expect PCI Express revenue and e-SATA revenue will continue to grow in Q2, with ramp-up of shipments in the computer service and embedded systems.

With regard to new products, we introduced a total of 15 new products across signal integrity, timing and connectivity product areas in our fiscal Q1. I would like to refer you to our earnings press release and other recent product releases for details.

Enabling serial connectivity in computer, communication and consumer applications remains a primary focus of Pericom. In fiscal '09 ending June of this year, we had a broad deployment of our serial connectivity and timing solutions into PC notebook, desktop and digital video applications. As we entered fiscal '10, we are pleased to see the application base expanding into new areas including PC servers and embedded systems, such as printers, wireless routers, and digital media gateway. We continue to leverage our core technologies in signal switching and routing, signal integrity and timing to develop solutions for new serial protocols. This is exemplified in our recent introduction of five new products supporting the emerging USB 3.0 Superspeed standard that will operate at 5-gig speed per second.

I will now give our guidance for fiscal Q2. Our overall Q1 book-to-bill ratio was greater than 1, which gave us a high backlog entering the December quarter versus last quarter. As we leave the increasing bookings and backlog, it’s different by a combination of increased product lead times as well as pickup in product demand.

We currently expect Q2 results to be as follows; revenues of $34 million to $36 million, which give us a sequential increase about 6.2% at the midpoint; gross margins in the range of 32.5% to 34%. Margins are influenced by product mix of turns business and sales. Operating expenses are expected to be in the range of $9.7 million to $10.5 million, which include stock-based compensation of approximately $1 million. Also, there is about $300,000 to $400,000 of expenses included in here related to the initial startup costs of our China FCP factory.

Other income is expected to be $900,000, consisting primarily of interest income. Net income from unconsolidated subsidiaries of $400,000, primarily came from 43% ownership of PTI, our sister company in Hong Kong and Shanghai. The tax rate will be approximately 32%.

This completes my detailed remarks. We will now open for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Hans Mosesmann from Raymond James.

Hans Mosesmann – Raymond James

Okay. Thank you Alex. Congratulation on the quarter. Just a couple of questions, you mentioned that in PCI Express, your connectivity products were up 50%, what’s driving that acceleration by specific application? Has that to do with the Calpella platform in notebooks, or what is going on there?

Alex Hui

Actually, you know, this is really driven by the strength that we see in both notebook, desktop and servers, and we see particularly pretty strong demand from our PC customers overall. But also, we are beginning to reship into some embedded applications, as I mentioned, in our printers and some wireless router applications. Again, overall strong demand from the PC segment and then some new applications. We do not see that Calpella is contributing significantly yet, and we don’t expect to see significant contributions in Calpella, our revenue to (inaudible).

Hans Mosesmann – Raymond James

Okay. You are not seeing that. Is that because phase 1 of Calpella is kind of more focused at the high end of the notebook market or what’s going on?

Alex Hui

Yes, we will begin to ship into the Calpella platform this quarter, but we are really seeing the significant ramp, which is going to come next spring, preparing for the back to school.

Hans Mosesmann – Raymond James

Okay. And the then one other follow-up, there is a lot of concern regarding the double ordering and a lot of inventory that people perceive that was put into the market in Q3 that may not be selling or maybe it is selling, can you give us some kind of qualitative commentary in terms of how you see the supply chain and how the sell-through may be going on given your guidance which seems to suggest sort or normal –?

Alex Hui

Yes, if you look at our channel inventory, ending September versus June, we are up probably a few hundred thousand dollars, but if you look in terms of weeks of inventory, we are essentially flat. And so, if you look at our channel inventory now compared to historical, we actually still see that our inventory is on the lean side. This time, our company stretch out – the customers and distributors have certainly placed orders further ahead. That’s why we believe the substantial increase in the backlog entering the December quarter, is driven by a combination of longer lead time and also end time. We expect in this particular quarter, we see substantially lower turns compared to historical, just because customers have placed all the more a hit.

Hans Mosesmann – Raymond James

Okay. And then one clarification, these orders that you are getting are for delivery and to, obviously some of it in Q4 calendar, but also for next quarter?

Alex Hui

Yes, we are already beginning to separately fuel up the backlog for the March quarter, yes.

Hans Mosesmann – Raymond James

Great, thank you very much.

Alex Hui

Thank you.

Operator

We will take our next question from Suji De Silva with Kaufman,

Suji De Silva – Kaufman

Hi guys, nice job on the quarter. Just a couple of housekeeping questions first. You talked about the stock expense by line items, I think that’s up in the prepared remarks.

Alex Hui

Actually, we have now included in the financial tables.

Suji De Silva – Kaufman

Okay. That will be fine.

Alex Hui

Yes, so we thought we will skip that, you know, by reading those numbers to you.

Suji De Silva – Kaufman

Okay. I will go find it there. Thanks. You talked about the one-time costs you had with the accounting review and stocks, how those play out from this quarter to next quarter, those fall off?

Alex Hui

Yes, I think the $1.2 million related to the accounting review definitely gone, and also we have expenses related to typical year-end. Those are pretty much gone. Definitely, we still have expenses related to the normal quarter we real, but certainly at a lower number.

Suji De Silva – Kaufman

Okay. Great. And I think you talked about turns being lower this quarter, can you talk about what the turns expectation is in the guidance?

Alex Hui

I think roughly if you are looking at meeting the midpoint, we will be probably talking about maybe 30% in ’10 [ph].

Suji De Silva – Kaufman

Okay. And historically flat 30 to 40, is that right?

Alex Hui

Yes, likely. Angela just mentioned that in the September quarter, we were in the 40% range.

Suji De Silva – Kaufman

Okay. And then last question, can you talk about your outlook here by end markets, are all of them attracting stronger or are there strengths or weakness? Thanks.

Alex Hui

Certainly, I think in PC, we are beginning to head into some, for seasonality. We feel our business will be slightly better in seasonality (inaudible), we expect it to train you that way. The rest of the family, we see actually networking and telecom coming back up with a stronger relatively speaking in the December quarter versus last quarter.

Suji De Silva – Kaufman

Okay. Great. Thanks guys.

Alex Hui

Thank you.

Operator

As a reminder, that is start one if you would like to ask a question. And our next question comes from Christopher Longiaru with Sidoti & Company.

Christopher Longiaru – Sidoti & Company

Can you hear me guys?

Alex Hui

Yes, hi Chris.

Christopher Longiaru – Sidoti & Company

How are you Alex? Congratulations on a great quarter.

Alex Hui

Thank you.

Christopher Longiaru – Sidoti & Company

I guess my biggest question, the gross margins ticked up, I mean I guess a part of that is the sales, but does the majority of that have to do with product mix and should we expect that going forward?

Alex Hui

Yes, for a combination. First of all, we do have much of an overhang from the higher cost inventory that we put in the box like previous quarters, that’s shouldn’t have. And we also see some benefit in terms of product mix, and we expect that will continue. That’s why if you look at the guidance, we expect the December margin will continue to trend up.

Christopher Longiaru – Sidoti & Company

And what kind of possible improvement is left as we move on here?

Alex Hui

We continue to ship more and more of our PCI Express and e-SATA and some of those products. Certainly, they have the margin.

Christopher Longiaru – Sidoti & Company

What’s the gross margin on those products just to refresh your memory?

Alex Hui

Those are running at 50% plus.

Christopher Longiaru – Sidoti & Company

Okay.

Alex Hui

Yes. So, as with the mix improve, we will sort of get the benefit of averaging up.

Christopher Longiaru – Sidoti & Company

Got it. All right. I will jump back into the queue. Thanks.

Alex Hui

Thank you.

Operator

As a final reminder, that is start one for questions. Our next question comes from Jim Larkins with Wasatch.

Jim Larkins – Wasatch

If you could just give a little bit more color on the gross margins, maybe talk about in terms of FCP, and maybe your legacy products as well as your newer IC products?

Alex Hui

Yes. Today, certainly our focus is on to our analog switch, connect and the timing products. Those are the products giving us higher margin on the IC side. And on the frequency control products, our focus is on to the high-performance crystal oscillators. Overall, if you look at trending the gross margin, the IC we are running at the recent quarter probably in the low-40s, and in the frequency control probably low-to-mid 20s, And as time progresses, we expect them to move up in both categories.

Jim Larkins – Wasatch

Okay. And was there anything significant in those categories sequentially that happened?

Alex Hui

Not really. I think as I mentioned earlier, we just get a benefit of the mix and that will allow us to average up the gross margin, and we expect again the trend to continue.

Jim Larkins – Wasatch

And I guess with the analog switch, I think kind of a real nice sequential uptick, that was probably in –

Alex Hui

Yes, if you look in terms of product line, analog switch has picked up nicely, but also the connect, which our bridge packet switch and we drive the growth, that’s also picked up very nicely. (inaudible) it did move up in a much smaller way.

Jim Larkins – Wasatch

All right. And then I think you mentioned something before about inventory, I am not sure if I caught that, or where are you right now in terms of inventory and let you to come down further, how you are –?

Alex Hui

In-house inventory in the September quarter, I believe was slightly lower than the June quarter. We do not expect that to come further down. So, I think we will probably, at that level, maybe even move up slightly in the December quarter. As we see business continue to improve, I think we need to overbalance our inventory and to support demand. In terms of channel inventory as I mentioned, the absolute dollar was slightly up in the September quarter compared to June quarter. So, in terms of weeks of inventory, it was essentially flat.

Jim Larkins – Wasatch

Okay. And then can you just give us a little bit of color on what’s going on at PCI, it seems like that other line is really contributing nicely right now, and just help us understand what your plans are there and do you expect to see that line continue to grow?

Alex Hui

Yes. PCI, they are doing quite well. Revenue-wise, they are doing slightly below $4 million, but because of a good margin and lower overhead, they carried about $1 million of net profit, which give us about $400,000 plus of other income as you could see on the statement. We believe in what we could see, you know, the business in the December quarter, it will continue to be quite nice, and we expect them would have a pretty healthy trend going forward.

Jim Larkins – Wasatch

And on 49%, is that right?

Alex Hui

43%.

Jim Larkins – Wasatch

43%. All right. The startup of the new fab, can you just talk a little bit about those costs, and how should we think about the capacity going –?

Alex Hui

Yes. There’s a factory in China, which is our Jinan factory. Essentially, the construction is completed. Our first phase of equipment is in. We are going for pilot tests right now. As of today, we expect to turn on production in the December time frame. So, prior to that basically, they are couple of months as we are putting the people and equipment. There’s some startup costs that we are taking. That’s why I mentioned, as we look at the expenses, we expect about $300,000 to $400,000 this quarter related to the initial factory startup costs. Yes. And then in the March quarter, we will have the full benefit of manufacturing in the quarter.

Jim Larkins – Wasatch

Do you have a sense for the type of capacity that the factory would be set up to handle?

Alex Hui

Initially, with the number of lines that we have, setup there, the initial capacity about 30% to 35% of our current talent capacity, but as time progresses, we have room to make that two to three times the current capacity in Taiwan. But obviously the ramp-up will pretty much gauge upon the business environment and the demand.

Jim Larkins – Wasatch

And is that Taiwan capacity, is that capacity that you own or is that third-party capacity?

Alex Hui

The Taiwan capacity is what we won. And today, we see ourselves about 30% to 40% of our requirement.

Jim Larkins – Wasatch

Okay. And is there a plan to keep that Taiwan capacity?

Alex Hui

Yes.

Jim Larkins – Wasatch

Shift additional capacity over to –?

Alex Hui

Yes. Our Taiwan plant is actually running very well and we do not expect to shut it down in the foreseeable future.

Jim Larkins – Wasatch

Great, thank you very much.

Alex Hui

Thank you Jim.

Operator

And with no questions remaining, I would like to turn the call back over to your speakers for today for any additional or closing remarks.

Alex Hui

I would like to thank all of you for the participation, and I would like to wish all of you good afternoon. Thank you. Bye-bye.

Operator

Once again, that does conclude today’s conference call, and we thank you for your participation.

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