Pericom Semiconductor F2Q10 (Qtr End 12/26/09) Earnings Call Transcript

Feb. 3.10 | About: Pericom Semiconductor (PSEM)

Pericom Semiconductor (NASDAQ:PSEM)

F2Q10 (Qtr End 12/26/09) Earnings Call

February 03, 2010 4:30 pm ET

Executives

Bob Strickland - Treasurer

Alex Hui - President & CEO

Angela Chen - CFO

Analysts

Hans Mosesmann - Raymond James & Associates

Suji De Silva - Kaufman Brothers

Christopher Longiaru - Sidoti & Company

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Pericom Semiconductor second quarter 2010 earnings call. As a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Bob Strickland, Treasurer for Pericom Semiconductor. Please go ahead.

Bob Strickland

Thank you. Good afternoon and welcome to Pericom's second 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 the 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 2010. 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. 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 third quarter of fiscal 2010.

So, we'll begin with Angela.

Angela Chen

Thank you, Bob. Consolidated net revenue for our second fiscal quarter were $35.8 million, an increase of 9% from the $33 million reported last quarter. Some revenue statistics included the following. [Current] bookings in the second quarter were in the 30% range. Our consolidated and market shipments were computer, 47%, communication, 31%, consumer, 15%, and the 7% from other miscellaneous markets.

[All together] which include expenses for share based compensation, consolidated gross margins in the second quarter of fiscal 2010, was 33.6%. Operating expenses were $10.4 million compared with $10.9 million last quarter and $10 million in the same quarter last year.

On a GAAP basis, second quarter operating expenses, including FAS 123R expenses, total share based compensation expenses in the second quarter was $933,000. Consolidated interest and other income of $1.3 million will make (inaudible) of interest income and the realized gain from investments.

Income from unconsolidated of PTI and JCP was $0.5 million. Our second quarter GAAP basis income before tax was $3 million compared with $1.3 million in the first quarter of fiscal 2010. In the second quarter, our effective tax rate was approximately 33.9%.

GAAP-basis net income in the second quarter was $2.5 million or $0.10 per share compared with $1.3 million or $0.05 per share in the first quarter of fiscal 2010 and the net income of $1.1 million or $0.04 in the same quarter of last year.

Now, I would like to provide some detail that complements the information provided on the slides you are viewing. Our cash balance including both short and long-term investments in the market for securities, as of December 26, 2009, was $126 million versus $127 million last quarter. We have very strong balance sheet with total assets of $252 million, working capital of $130 million and the cash and marketable securities of $126 million. This translates to book value of $8.58 per share and cash per share of $4.94 per share.

Now, I will turn the call over to Alex to comment our business and the industry.

Alex Hui

Thank you, Angela. We are pleased to report a strong sequential revenue increase of 9% driven by a pickup in demand from all key market segments that we serve. We achieved a sequential improvement in gross margin and a reduction in operating overhead, giving us better operating results. We will continue to drive improvement in these areas going forward.

Our top five end customers in fiscal '10 Q2 accounted for 29% of total revenue and no customer accounted for over 10% revenue in Q2. In house inventory ending December increased by a few days, mainly due to a staging of products to support heavy shipment in January before Chinese New Year, which has happened as expected.

Distributor channel inventory remained lean and was far more than one week in the December quarter versus the September quarter, due to strong ship flow to customers. On a consolidated basis the revenue mix for our product families was IC 62%, which included analog switches, 28%, digital switches, 8%, silicon clocks, 8%, connect 16%, and interface, 2%.

Revenue for all our focus IT product lines and our switches, clocks and connect all increased sequentially. Frequency control products account for 48% of our total revenue. Our PCI Express and eSATA revenue came in around $8 million, similar to last quarter. PCI revenue was up again, while eSATA was down somewhat due to a lower mix of notebook computers. We are seeing strong pickup in our (inaudible) switches with revenue up sequentially last quarter.

In the December quarter, we expanded our serial connectivity solutions with the introduction of nine new products that were across the signal integrity, switching and timing product areas. I will refer you to our press release and recent product announcements for details.

Our focus has been and will continue to be the penetration of more and more applications with our serial connectivity solutions. We are happy to see the deployment of our serial connectivity solutions and timing products beyond the digital media and PC markets that we have served in recent years.

In the recent quarter, we initiated volume shipments of our PCI Express product into embedded applications such as multifunctional printers and wireless routers. We also scored multiple design wins with our signal integrity solutions at key networking and server OEMs.

With new versions of serial protocols operating at high-data rates like PCI Express going from Gen2 to Gen3, USB standard going from 2.0 to 3.0, we expect to see increasingly for our products with our broad and expanding connectivity and timing solutions, we believe Pericom is well-positioned to support our key customers in their next generation designs. We look forward to resuming our revenue growth and delivering better operating results in 2010.

I will now give our guidance for Q3 fiscal 2010. We currently expect Q3 results to be as follows, revenues of $34 million to $36 million, gross margin in the range of 33% to 35%. Operating expenses are expected to be in the range of $9.8 million to $10.4 million, which includes stock based compensation expenses of approximately $1 million. Other income is expected to be $1.1 million. Net income from unconsolidated period is expect to be about $400,000. Effective tax rate of about 33%.

This completes my prepared remarks. We now open for question and answer.

Question-and-Answer Session

Operator

(Operator Instructions). And we'll take the first question form Hans Mosesmann with Raymond James & Associates.

Hans Mosesmann - Raymond James & Associates

Thanks. Congratulations, guys, on good execution. A couple of questions, Alex. You mentioned, I may have missed it, that in your notebook area, your sales in notebooks were they down, or they decelerated? If you could give some clarity on what happened in notebooks?

Alex Hui

Actually, the overall notebook is actually up. But I mentioned just now that our eSATA revenue in the notebook segment was down somewhat last quarter.

Hans Mosesmann - Raymond James & Associates

I see, okay.

Alex Hui

It's just the mix, within the mix.

Hans Mosesmann - Raymond James & Associates

Okay. And can you give me the sense, how big was notebooks overall, as part of the computing part or as part of overall sales?

Alex Hui

It still remains in the range about 20% to 25% of our total.

Hans Mosesmann - Raymond James & Associates

Okay. And how do you see that element or that part of your business growing into the first half of the year? There's a series of new product launches by Intel, I guess, the Calpella platform. How is that looking here into the March quarter?

Alex Hui

Actually, we are seeing a pretty healthy demand and we expect the Calpella platform will probably begin to kick in, in late spring and early summer, probably around the May/June timeframe. Yes. So, as we mentioned, (inaudible) design wins that is actually done, and we're just waiting for the platform to be deployed.

Hans Mosesmann - Raymond James & Associates

Okay. And then, in terms of your commentary inventory, you said that they were down a week. What are those inventories in the channel? What would be considered normal inventories?

Alex Hui

Actually, the inventory ending December was slightly less than five weeks, which is actually significantly lower than the historical range, about seven to nine weeks. I would say in eight weeks it's probably a reasonable level, in Asia, to buffer the customers. So, we are several weeks below. And that, pretty much, is due to pretty strong ship flow in December. And we now begin to see the shipments begin to replenish there. So, we actually see a very, very strong booking in January.

Hans Mosesmann - Raymond James & Associates

And strong booking in January that would be considered unseasonably strong? Or is that normal?

Alex Hui

I think, it's significantly stronger than what we typically see. But, you know, Chinese New Year is mid of February. So, there's some effect of that, too.

Hans Mosesmann - Raymond James & Associates

Okay. And then, one more question, and then I'll let the others in the queue to ask questions. Your lead times, I'm assuming they're holding or are expanding. Where are they now?

Alex Hui

Our lead time is probably anywhere from 6 to 10 weeks. It's pretty much similar to what we saw last quarter.

Operator

And we'll now take question from Suji De Silva with Kaufman Brothers.

Suji De Silva - Kaufman Brothers

So, can you talk about what the typical March seasonality is, and then which segments. What the look is across the end markets for the segments, Alex, as to what you're tracking, maybe above seasonal versus as expected?

Alex Hui

Typical seasonality, I'd say is probably down 5% to 10%. And this quarter, as you can see, we are seeing better than normal seasonality. In terms of (inaudible) actually, similar to last quarter is pretty much across the key segments including digital video, PC as well as the telecom. So edge is quite uniform.

Suji De Silva - Kaufman Brothers

As you look ahead, it sounds like lunar New Year, people are trying to stock up and have orders ahead of that. What's your visibility, kind of post that holiday, kind of come back late February into March at this point?

Alex Hui

I think, typical it's [brief] into March, right now. As I said, we had pretty strong booking into January. So, we're actually filling up March and then actually going quite, we're being, reasonable backlog for next quarter as well. I think right now we can probably see to like maybe early May.

Suji De Silva - Kaufman Brothers

Okay, great. And lastly, you talked about gross margin expanding here and OpEx controls. What's the trend you expect for gross margin and OpEx, as we look into the quarters remaining in 2010?

Alex Hui

Are you talking about this quarter or going forward?

Suji De Silva - Kaufman Brothers

No, going forward, because you guided to the first quarter. Beyond that, for the March quarter.

Alex Hui

Yes, I think, we are still looking at probably expanding the margin by a couple of points in the next 12 months and then continue to drive our OpEx down, as a percentage. In terms of absolute dollar, I don't think the number would change that much, but as a percentage, we expect to drive the OpEx percentage down.

Suji De Silva - Kaufman Brothers

Okay, great, thanks Al. Well job on the quarter.

Operator

(Operator Instructions) And we'll take our question from Christopher Longiaru with Sidoti & Company.

Christopher Longiaru - Sidoti & Company

It looks like your expenses are still coming down gradually. Can you give us an idea of what it is that's causing the expenses, the operating expenses to come down and how this plays out over the next couple of quarters?

Alex Hui

Actually, and I think the expenses is probably coming down around the $10 million plus or minus level. As I just mentioned to Suji, we don't expect that number to come further down. If anything, is the revenue expanding, expect to pick up a little bit because of a commission that we have to pay. As a percentage of revenue, certainly we'll continue to drive the overhead down as a percentage of revenue.

Christopher Longiaru - Sidoti & Company

But even though you were at 35.8 this quarter, which is within your guidance range, even though 10.4 is at the high-end of your guidance range. Is there anything else going on there besides that? It seems like it's inching down. Am I wrong?

Alex Hui

I think there's some G&A expenses; they were kind of one-time that we do not see again.

Operator

Thank you. And we'll now take question follow-up from Hans Mosesmann with Raymond James.

Hans Mosesmann - Raymond James & Associates

Hi Alex, just a follow-up on USB3.0, where are we in that ramp? As an industry, are we in the first inning, or is this thing, are we further along? And what would be the dynamic there versus eSATA? Would there be some cannibalization of that standard or that storage standard thing?

Alex Hui

I think, let's just talk about further introductions, then, we see where are we in terms of the deployment. We are focusing, again, on signal integrity, switching and timing and we introduced our first wave of five or six products at IDF last year, a few months ago and we've been seeing very strong interest and design activities going on. I think you're beginning to see some first generation USB3.0 devices out there, but we expect the [OEM] deployment will probably happen like this year early next year. My personal view is that any further deployment is going to be a multi-year transition. But certainly, we expect USB3.0 will be a very broad based deployment.

Over time, I do expect the USB3.0 in some like have stratification will replace eSATA. But for us, I think, it's just transition from one to the other. So, in terms of the business, we do not see an impact there. In fact, we expect, since USB is so universal, it's really going beyond the traditional IT market in the consumer and other areas that is certainly a very, very big opportunity for us.

Hans Mosesmann - Raymond James & Associates

Okay, thanks. And can you give us an update on the SaRonix and eCera businesses, what's happening with the competitive dynamic there in terms of overall, what your Japanese competitors maybe doing in terms of capacity, and is there an opportunity there for you as time goes on?

Alex Hui

Actually, you could see that, the [eCera] control business bounced back from 36% to 38% of our mix last quarter, and we expect there will be pointing back to a higher level this year. As we pointed out in the PNS conference call, in the last few quarters of calendar 2009, we were constrained by ceramic package supply, and I think that problem is going away. I think, by Q2 calendar year, the June quarter that problem will be completely gone. So, we expect, we'll see again that constraint going away in terms of unit shipments.

In terms of capacity expansion, from what we can see it's actually pretty modest out there from our competitors, so we believe the best opportunity to gain market share overtime.

Hans Mosesmann - Raymond James & Associates

Okay. And then, if you were constrained, as a follow-on, if you were constrained last quarter, in the December quarter, by how much could you have up sided, if you had the proper package supply?

Alex Hui

I'm going to have to say, because this, in some cases there are different competitors, but I think without the constraints, we could probably see a 5% to 10% upside in that business.

Hans Mosesmann - Raymond James & Associates

A 5% sequential higher number?

Alex Hui

Yes, 5% in therefore other business. If you cannot ship it somewhere they would take it, we have to gauge what that is.

Operator

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

Alex Hui

Okay, I'd like to thank all of you for your support and your participation in the conference call. I wish all of you a great afternoon. Thank you. Bye-bye.

Operator

Thank you very much. Again, that does conclude today's call.

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