Supertex's CEO Discusses F3Q 2014 Results - Earnings Call Transcript

| About: Supertex, Inc. (SUPX)

Supertex, Inc. (NASDAQ:SUPX)

F3Q 2014 Earnings Call

January 21, 2014 05:30 PM ET

Executives

Phil Kagel - VP, Finance and CFO

Henry Pao - President and CEO

Analysts

Tore Svanberg - Stifel

Jiwon Lee - Sidoti & Company

Tony Grover - Needham and Company

Operator

Good afternoon everyone and welcome to today’s Supertex Third Fiscal Quarter Earnings Release and Conference Call. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the Q&A Session. Please note this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Phil Kagel. Please go ahead sir.

Phil Kagel

Thank you and good afternoon everyone. On the call with me today I have Dr. Henry C. Pao, President and CEO. First, let me remind you that all statements made during this conference call, including in response to your questions, which are not historical facts are forward-looking statements. They are not guarantees of future performance or events. They are based upon current expectations, estimates, beliefs and assumptions about the future, which may prove incorrect. Furthermore, our goals and objectives, which may change, are also factored into the forward-looking statements. Often such statements can be identified by the use of the words such as, "will," "intends," "expects," "plans," "believes," "anticipates" and "estimates."

Examples of forward-looking statements include our guidance and projections as to our sales, both overall and for particular customers, market segments and products, our anticipation for release, performance and customer adoption of new products and our guidance for financial measures such as a gross margin and tax rate and a rationale for such guidance. Additional information about risks and other factors relating to such statements may be found in our earnings news release of today as well as other risk factors detailed in our Form 8-K, 10-K, 10-Q and other filings with the Securities and Exchange Commission. Due to these risks and other factors, our future actual results could differ materially from those contained in the forward-looking statements made during this conference call.

Forward-looking statements speak only as of today and we undertake no obligation to publicly release updates or revisions to these statements. I would also note that our customers have requested that we do not identify them except to the extent required by SEC disclosure rules. Therefore we will only be giving a general description of any customer to whom our sales exceeded 10% of total company sales in this reporting period.

And now I will turn the call over to Henry Pao.

Henry Pao

Thank you, Phil. Good afternoon. Overall it was a very good quarter. We responded to a steep production ramp requested by an LED TV backlighting customer, increasing sequential sales in that product by 112%. We would normally have a seasonal sales dip in our medical ultrasound products. However this year that did not happen, partially due to ramp-ups from recent design wins.

The temporary reduction in printer head driver shipments in the third fiscal quarter was nearly offset by an increase in EL inverter sales, including a recent keyboard backlighting design win. Last January we announced our plan for a 20% year-over-year quarterly run rate sales growth in the fourth fiscal quarter, from $14.6 million in the March 2013 quarter to $17.6 million in the March 2014 quarter, which we believe we will achieve.

We decided that amount -- we exceeded that amount in our fiscal quarter two and came close in our fiscal quarter three, achieving sales of $17.4 million. For the past three quarters, sales of our four growth markets were much higher than in the fourth quarter of fiscal 2013. Particularly, in our third fiscal quarter LED backlighting and general lighting driver sales grew 12% sequentially. We continue to achieve design wins in many of our new products, some of which have gone to volume production faster than we expected and have many more innovative new products in the pipeline. We're meeting our operating objectives. Gross margin was 56% for both the third fiscal quarter and the nine month period, which is running nearly eight percentage points higher than last year.

Net margin was 15% for the third quarter and 16% for the nine month period of this fiscal year and over 10 percentage points higher than the nine month period of last year. We generated $3.1 million of positive cash flow from operating activities. Our sales in the fourth fiscal quarter are expected to be slightly higher at $17.6 million, driven by increased LED driver and printer head driver sales.

We expect to launch several exciting new products for Medical Ultrasound Imaging and for Industrial, and for driving LEDs for General Lighting and TV Backlighting. Many of our recently launched products have been well received and are expected to go into volume production in the coming months.

Now I would turn over the call to Phil, who will elaborate on the financial results of our fiscal 2014 third quarter. Thank you.

Phil Kagel

Thank you, Henry. Sales for the quarter were $17.4 million, a 2% decrease sequentially and a 21% increase year-over-year. The percentage breakdown of our total sales by end-market in the third fiscal quarter was as follows; Medical, 39%; LED Lighting, 18%; Printers and EL, 23%; Telecom, 2%; and Industrial and Other, 18%. Two companies accounted for more than 10% of total sales; a major medical instrumentation customer at 12%, and a distributor at 11%.

GAAP diluted earnings per share were $0.23, compared to $0.24 in the prior quarter. Year-over-year EPS was higher by $0.11. Non-GAAP diluted earnings per share for the third fiscal quarter excluding pre-tax employee stock-based compensation were $0.28 or $0.02 lower sequentially and $0.10 higher year-over-year.

For the balance of this discussion, I’ll be referring to GAAP numbers only. Gross margin for the third fiscal quarter of 56% was 140 basis points lower than the prior quarter, primarily due to unfavorable product mix, sales mix; partially offset by greater sales of previously reserved inventory. We expect that our fiscal fourth quarter gross margin will be 53% to 55%, due to higher average cost in inventory

Wafer fab utilization was lower in the third fiscal quarter due to the annual shut down and is expected to remain low in the fourth quarter. This effect will dampen the gross margin in the first half of fiscal 2015 to the low 50% range. Total net inventory in the third fiscal quarter increased $1.7 million sequentially, as we build inventory in anticipation of higher future sales and higher average product cost due to lower fab utilization in the third quarter compared to the second quarter.

Days of inventory increased 7 to 147, but we were 17 days lower than the same period last year, and we believe we can sustain gross margin in the 57% to 56% if sales increased to around $20 million per quarter.

Total operating expenses were 2% lower, compared to the prior quarter, primarily due to lower benefit expenses resulting from a decrease in stock-compensation expense and also a decrease in expense associated with our non-qualified deferred compensation plan assets as they increased less than the prior quarters. This NQDCP, Non-Qualified Deferred Comp Plan decrease and expense was offset in other income net.

Interest in other income net in the third fiscal quarter was approximately $700,000; was flat with the prior quarter. Our fiscal third quarter tax rate was 20%, compared to 26% last quarter. The reduction resulted from changes in income among different tax jurisdictions. We expect the tax rate in the fourth quarter to be about 25%.

We generated $3.1million of positive cash flow from operating activities in the third fiscal quarter. Net income adjusted by non-cash items was $4.2 million. Changes in operating assets and liabilities decreased operating cash flow by $1.1 million, mainly due to increased inventory.

During the third fiscal quarter we repurchased approximately 28,000 shares of our stock for $674,000. Thus, we have approximately 637,000 shares remaining in the program, and we plan to continue to repurchase shares from time-to-time.

Now, we’re open for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tore Svanberg with Stifel. Please go ahead.

Tore Svanberg - Stifel

Congratulations on being on track to meeting your revenue run rate growth objective. I would like to -- I know that you still have one quarter on that objective but I was wondering if you can give us sort of a breakdown contribution by the three categories and I’m [indiscernible] with your regional estimates.

Phil Kagel

We have one correlation contribution by the three categories. Could you explain that a little further?

Tore Svanberg - Stifel

Yes. I think probably a year ago you said that maybe half a million of that 3 million increase would come from medical ultrasound, and may be one would come from -- 1.5 will come from LED and one will come from printer head driver.

Phil Kagel

Absolutely, yes. Now I understand where you’re coming from. Yes, you are right. A year ago just at this time, we had about 14.5 million in sales and then we guided flat in that fourth quarter and I think we came out with 14.6 million and we had -- we committed to achieving a 20% increase on a quarterly run rate to $17.6 million. So and I think you’re asking as our progress by breaking that down by product markets. And sure, Ken. So in the printers as you said, they were to be 1 million higher on our quarterly run rate and they’re right on plan, they’re doing very well. The medical analog switches were to be a 0.5 million higher and they’re also running on plan. The LED general lighting and backlighting combined was to be 1.5 million and it’s also running on plan with an emphasis on the backlighting. That market is going very, very well.

Tore Svanberg - Stifel

And I don’t know if you gave a breakout of your LED lighting revenue earlier. I think you mentioned that the backlighting because of the emerging order was up, 112% sequentially?

Phil Kagel

Right, yes.

Tore Svanberg - Stifel

So what does that make the general [ph] lighting?

Phil Kagel

Yes. The backlighting in the quarter was around 1.8 -- we had about 3.1 million total LED lighting and the backlighting was about 1.8 and the general lighting was about 1.3.

Tore Svanberg - Stifel

Okay. Okay, great. And you mentioned about your inventory being up significantly and in that you’re preparing for ramp. Could you tell us a little bit about which category that you have more inventory in and where do you plan for inventory to be next quarter?

Phil Kagel

You bet. The inventory grew $1.7 million. Nearly half of that was actually purchased wafers anticipation of selling -- sales on our TV chip. So that is a wafer that is purchased outside. And we -- that is going very…

Henry Pao

Outside foundry [ph] not outside…

Phil Kagel

Outside foundry, perfect…

Henry Pao

That’s not [ph] private label.

Phil Kagel

Right. So that wafer is not produced in house. It’s produced on outside foundry. And so we had, orders are growing very-very strong right now. So we had an inventory buildup here. So that was maybe 40% of the growth. The other part of the growth relates to higher cost of inventory due to reduced utilization, mainly reduced utilization on our fab.

Tore Svanberg - Stifel

Okay, thank you very much. I’ll get back in the queue. I have some more questions.

Phil Kagel

Sure.

Operator

Thank you. (Operator Instructions) We’ll go next to Jiwon Lee with Sidoti & Company. Please go ahead.

Jiwon Lee - Sidoti & Company

Can you talk a little bit about that sequential relative strength from the Medical Ultrasound? What area did they specifically come from? Was there strength from your large customer or was that strength from overall? Let’s start with that please.

Phil Kagel

You bet. It was strength in mainly in our analogue switches -- excuse me, strength in upholsters [ph] this time around, prior quarter was the switches. So we had some new design wins and several customers and other customers including our main one but also other customers that help with that. There are at least three different customers where we had wins, where we ramped up in the December quarter. And again there was posters that were driving that.

Henry Pao

More importantly is our key number one customer is a sort of most important one in terms of laptop.

Jiwon Lee - Sidoti & Company

Okay. Well, that’s very helpful. Thank you. And then could we talk a little bit about the -- in terms of the printer, did you, if I missed this, sorry about that, the OLED and the 3D printer outlook a little bit?

Henry Pao

Yes. Well the 3D -- the printer has drivers can do 3D but not OLED. OLED is a different type of printer but the general printer has driver which can do 3D as well -- our major customer have an inventory adjustment. So it was a little weak in our third fiscal quarter however the other has resumed this quarter in the backlog.

Jiwon Lee - Sidoti & Company

Okay, that’s helpful. And Henry did you talk about which product category specifically you are kind of excited about when you about the substantial design wins?

Henry Pao

Well, our three major growth buckets are first of all, of course LED drivers. We spent have lot of time and also [indiscernible] ultrasound, many of the new products that we launched and even though they have to go through FDA, the customers are very eager to get going in the pilot productions. So of course the LED, because primarily they are in the consumer area, they ramp up to be very fast.

Jiwon Lee - Sidoti & Company

Okay. And now that you have achieved and you have already the revenue growth goal, would you like to take a stab at how do we move forward from here?

Phil Kagel

We will tell you after we go through our planning phase coming up in the next couple of months. So when we report fourth quarter results, then we will have an indication.

Henry Pao

Because we normally do annual planning in end of March before the new fiscal year begins and then we will have these numbers sort of put in place. But at this time we don’t have that input yet. So we’ll be happy to share with you in our next earnings release.

Jiwon Lee - Sidoti & Company

Okay. And Phil, I missed the comment on your segment revenue breakdown.

Phil Kagel

You want me to give it to you again, the percentages?

Jiwon Lee - Sidoti & Company

Yes please.

Phil Kagel

You have Medical 59%; LED 18%, Printers and EL were 23%, telecom 2% and industrial and other 18%.

Operator

(Operator Instructions) We’ll go back to Tore Svanberg with Stifel. Go ahead.

Tore Svanberg - Stifel

I would just like to ask a couple of follow up questions. One is one the near-term the guidance. Could you talk a little bit about the backlog and how -- where you are relative to say previous quarters or historical seasonality?

Phil Kagel

Sure. So we have 74% shipped are in the backlog, our current backlog at this point, slightly higher than -- the last quarter was 72. So we’re running pretty well on track. But always want to caution, orders can be moved in and out always. But that’s an indication.

Tore Svanberg - Stifel

And for the longer term, now that we’re into 2014, could you comment on some of the maybe comments by your customers for the new calendar year? How are they in terms of their optimism or what areas is looking better than others?

Phil Kagel

Right now our sales force is actually visiting many of these key customers and that’s a family [ph] they are trying to obtain. So hopefully in a couple of weeks you will have a better idea.

Tore Svanberg - Stifel

One last question is about your margin. I know that it’s come down a bit because of mix, right? Is there any chance if sales go up, does it matter how that mix evolves for you to reach your target when your revenue reaches $20 million?

Phil Kagel

Yes, that will difference. As we were mentioning it was a bit of an unfavorable mix this quarter and next quarter has evolved a little bit because we’re very strong in our LED areas, especially the TV Backlight, being a consumer chip and that particular one is built in an outside foundry. So that doesn’t help our absorption also. So yes, if we get a lot of backlighting growth and we don’t get other -- like printers and other more commercial type products, it will have some effect. But again the largest overall effect is our fab utilization.

Henry Pao

The largest fact is the economy of scale.

Tore Svanberg - Stifel

Okay. And since you are on the topic of fab utilization, can you tell us where your utilization rate was this past quarter?

Phil Kagel

Yes we have -- we mentioned that we had a year-end shut down. So in third quarter we always run a little bit lower. And we measured this on a 24/7 basis, where we wouldn’t go above say 80% or 85% at the very least. So 43% was our utilization in our December quarter and that compares with 58% in our September quarter.

Tore Svanberg - Stifel

One last question about your industrial/other segment. You’ve had a number of new products as you introduced. I was wondering if you can give us a little update on those. Are they past the new, the initial ramp? Are they taking a pause or what expectations you have for these products going forward?

Phil Kagel

That’s a good question. So we mentioned last quarter we had a new product in industrial for an audio type application and it was running for couple of quarters to fill the channels. It’s going to be down little bit lower because of more normal run rates. But we have also said that we are not too far away from introducing some other new industrial other products that hopefully will also show some nice growth for us.

Operator

Thank you. (Operator instructions). We’ll next to Vernon Essi with Needham and Company. Please go ahead.

Tony Grover - Needham and Company

This is Tony Grover calling in for Vernon. Just a quick couple of questions, I was wondering what the level of foundry business was in the quarter? I apologize if I missed that.

Phil Kagel

Foundry business was about 14% of our sales.

Tony Grover - Needham and Company

Okay, thank you. And then again I know Tore brought it up, about kind of margin expectations if you get that revenue level up to $20 million, but I didn’t hear you mention again what that was, I know I heard, was it 57%-58%, at that level.

Phil Kagel

If you’re talking about 20, that’s a good number 57% - 58%. If you’re talking 25, then we’re thinking in terms of about 60%.

Operator

Thank you. It appears we have no further questions at this time. I’ll turn it back to our speakers for any final remarks.

Phil Kagel

Well, thank you very much for being on the call and for your support and we look forward to talking to you on the next earnings call which remember will be our year end call, which will be a couple of weeks later than normal in the quarter, and that’s a routine.....

Henry Pao

A year end audit.

Phil Kagel

Right, so, it’ll probably be the first week of May. Thank you very much.

Henry Pao

Goodbye.

Operator

This concludes today’s program, we appreciate your participation. You may disconnect at any time and have a great day.

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