Pericom Semiconductor's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

| About: Pericom Semiconductor (PSEM)

Pericom Semiconductor Corporation (NASDAQ:PSEM)

F2Q 2014 Earnings Conference Call

January 28, 2014 4:30 PM ET

Executives

Robert Strickland – Treasurer

James B. Boyd – Chief Financial Officer

Alex Hui – President and Chief Executive Officer

Analysts

Krishna Shankar – ROTH Capital Partners LLC

Christopher Longiaru – Sidoti & Company

Brian C. Peterson – Raymond James & Associates, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Pericom Semiconductor Corporation’s Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s program is being recorded.

I would now like to introduce your host for today’s program, Robert Strickland, Treasurer. Please go ahead.

Robert Strickland

Thank you very much. Good afternoon everyone, and welcome to Pericom’s second quarter fiscal year 2014 conference call. Our speakers today are Alex Hui, President and CEO and Jim Boyd, our Chief Financial Officer who started with us at the beginning of this month.

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 2014.

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 within 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 measurements 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.

Jim will discuss the financial performance for the quarter and Alex will give us his comments on the industry and on Pericom’s business, and Jim will provide the guidance for next quarter. Jim?

James B. Boyd

Thanks, Bob and good afternoon everyone. Excuse me, starting at Slide 3, our consolidated net revenues were $32 million for Q2 compared with $32.6 million last quarter, a decrease of $568,000 or 2% sequentially, but up 5% from the $30.4 million in Q2 of last year.

The decrease from last quarter was due to lower shipments in our frequency control products group or FCP mainly due to our Asian customers who were working to reduce their third – their year-end inventories, while IC revenues were up slightly during the quarter. Sales by channels for Q2 were international distribution at 66%, contract manufacturers at 23%, OEMs at 8% and U.S. distribution at 3%. Our book-to-bill ratio was slightly under 1.0 at 0.97.

Now moving on to Slide 4, our consolidated non-GAAP gross profit was $12.8 million for Q2, compared with $13.3 million last quarter, a decrease of $581,000 or 4% sequentially, but up $1 or 9% from the same quarter of last year. Our non-GAAP gross margin for the second quarter was 39.8%, down approximately 1.1% from the 40.9% we achieved in Q1, but up 1.3% from the 38.5% margin in the same quarter last year.

Our IC gross margin, which includes PTI, in Q1, was 51.8%, which was down from 52.5% last quarter, but up from 51.2% in Q2 of last year. FCP’s gross margin was 20.2% in Q2, which was also down from 23.4% in Q1, but also up from 21.1% in the same period of last year.

Our non-GAAP operating expenses were $11.1 million in Q2, a decrease of approximately $92 million or $922,000 from last quarter and down $394,000 during the same period last year. Interest and other income were approximately $561,000 from last quarter, due to a $366,000 translation gain during the second quarter versus $197,000 translation loss in the first quarter with interest income roughly flat with the prior quarter.

Our non-GAAP effective tax rate was 32% for Q2, compared with 29% last quarter. This is primarily due to a higher mix of domestic sales versus foreign sales during the quarter. On a GAAP basis, we had a tax benefit during the quarter of $331,000 versus a tax expense last quarter of $231,000 due to a release of tax reserves.

Non-GAAP net income was $1.9 million or $0.08 per diluted share for our second quarter, which was approximately the same as last quarter. The largest unusual reconciling items included the above-mentioned release of reserves this quarter versus the incurrence of approximately $522,000 of lease restructuring and moving costs in Q1, which were related to the purchase of our new headquarters building here in Milpitas, California.

Now let’s take a look at the balance sheet that are summarized on Slide 5. Exiting Q2, cash, including both short and long-term investments in marketable securities, was $117.9 million, an increase of approximately $1.7 million from last quarter. We increased cash during the quarter, while repurchasing 269,000 shares of our common stock at a cost of approximately $2.4 million and at an average price of $8.82 per share. We have a remaining balance of $14.8 million under the Board’s previously approved 2012 – excuse me, 2012 stock repurchase authorization.

Net inventory was $13.3 million at the end of Q2, which was down $1.3 million from last quarter with our days of supply remaining very healthy at 63 days. Estimated inventory in the channel was approximately flat with last quarter.

At this time, I’d like to turn the call over to Alex for commentary about our business and the industry.

Alex Hui

Thank you, Jim. Our fiscal Q2 result came in pretty much within our expectation. IC revenues were up slightly, while FCP revenue came down. The lower FCP margin last quarter was due to lower factory utilization, as well as lower crystal oscillator mix. Even though FCP factory utilization in the current fiscal Q3 will be lower compared to Q2, with shutdown during Chinese New Year period, we do expect that the margin will move back up this quarter due to ramp up of several [indiscernible] new crystal oscillator programs.

Market segment wise, the mix in fiscal Q2 was computer, 14%; networking and telecom, 38%; server storage, 11%; consumer, 20%; embedded and others at 17%. In fiscal Q2, revenue from notebook went up, while server and storage was flat. Networking and telecom were down slightly. In the consumer side, we had the increased shipments to smartphone applications and lower shipment to home appliance.

Our top five end customers accounted for 33% of our total revenue and one customer accounted for 11% of total revenue. The revenue mix for our product family was IC, 62% and frequency control products, 38%. For the IC revenues we have analog switches at 17%, digital switches at 5%, silicon clocks at 10%, connect at 17%, interface 3% and PTI at 10%.

In fiscal Q2, we introduced a total of 14 new products in our signal integrity, connectivity switching and timing product areas. All these products are targeted to our focused market segments and were center to key customers during the quarter. I will refer you to our recent press releases for details.

The designing activities, we had very good design activities in Q2. We saw another major smartphone design win with our USB 3 signal integrity Solution. Our customers are looking at welcoming these in the April quarter. so we’ll be beginning to ship into this program later for this quarter and wind up next quarter.

We are not smartphone customers looking at designing their future models for the USB 3.0 interface than we are working with them to designing our solution. We believe this year many of the electronic system designs will quietly migrate from USB 2.0 to USB 3.0 interface and we would see strong design activities, we saw signal integrity and switching products.

We also have a major design win with our 32K small size crystal oscillator products and a wireless HDMI dongle. we saw shipping some from the last quarter and we expect to ramp up the 7 million units for this program in this quarter.

For the designing of leading commercial display customer, we will use 1,000 pieces of our spread spectrum crystal oscillator of our system. We also designed our design wins at two leading telecom customer in China with our 1.5 gigahertz low-jitter clock buffers. We have a significant design win with our USB 3.0 signal integrity products on a pipeline of 10.1 inch in our tablet signal starting this quarter.

We have some of the difficult opportunity in progress that we expected to go into production later this year. among them, several data send several programs along with the Intel Grantley platform using our socket SAS signal integrity solution and Universal Level Shifter products. we also have several programs looking at using our HDMI signal integrity and switching products and analog solution, OKTV, camcorders and system product flows.

We also have O&M access point system from a customer using our PCI Express signal integrity solution and Universal Level Shifter products. Moreover designing in multiple products including our multiple output crystal oscillator and Universal Level Shifter on a high volume high people spectrum, they expect going to production and develop this year.

Embedded content could be a key focused area. I would like to give you some updates. In embedded space through our major revenue generating segments, our automotive and video surveillance, we have been shipping our crystal oscillator products into first thing [indiscernible] infotainment system for the last two years.

Coming this quarter, we’ve begun to ship into the [indiscernible] platform. we expect to see our products to more and more [indiscernible] orders. There’s also completed classification of our PCI Express clock buffer as a major European also mobile infotainment supplier and we expect to start shipment in second half of this fiscal year.

At in China Public Security Expo in Shenzhen last October, we received vertical response from our customers on our 960H high resolution video decoders with effective utilizations of [indiscernible]. Our technology enables customers to transmit high quality video signal up to 700 meters. Quite few customers are designing in our solution now that and are going to production around summer time.

We expanded our solution for video surveillance in recent years. For example, a leading video surveillance customer in China is now using our PCI Express Bridge, PCI Express Packet Switch, Clock Buffers, Real Time Clock and frequency control products. they also are designing in our video decoder products.

We continue to focus on precluding our strategy to develop and grow our business in cloud, networking, embedded and high-end consumer applications, it means we have better gross margin. We are pleased with the recent design wins with our signal integrity solutions and cellphone and service, timing solution in automotive infotainment, crystal oscillator products for widest video and embedded applications and high currency timing solution for networking telecom systems.

We are excited with opportunities that we have with our 12K SAS and ULS, Universal Level Shifter solution or Intel Grantley platform also our signal integrity and switching solution at a 4K ultra high definition video and also increasing [indiscernible] video surveillance. We believe from executions of these key initiatives will allow us to grow our revenue and expand our gross margin. While we expect to see quarter-to-quarter fluctuation in gross margin, we expanded our gross margin as a year in the last three fiscal years. We are confident to deliver another year of gross margin expansion in fiscal 2014.

I will now pass it back to Jim to give the guidance for the quarter.

James B. Boyd

Thanks a lot. before I give the guidance and open up the call for questions, we’d like to mention that the company will be presenting at the 26th Annual ROTH Conference which is held on – from March 9 and March 12 in Dana Point, California and we’ll be there on Tuesday, March 11. we’ll also be presenting at the securities company Sidoti & Company 18th Annual Emerging Growth in that institutional investor forum, which runs on March 16 to 17 in New York and we’ll be presenting there also on March 18.

Now turning to slide eight, due to the seasonal softness, we expect our fiscal Q3 revenue to come down slightly compared to last quarter. We entered our fiscal third quarter with a lower beginning backlog in the last quarter. However, we’ve had good bookings in the first fours weeks of this quarter. In fact, billing and backlog at this time is at a similar level when compared to the same time last quarter. We do however expect bookings to slow down over the next few weeks due to the Lunar New Year’s holidays in Asia.

Thus, our fiscal third quarter non-GAAP estimates are as follows. Revenues up $30 million to $32.5 million, gross margins in the range of 38.5% to 40.5%, operating expenses up $10.8 million to $11.3 million, other income $500,000 to $800,000 and our effective tax rate is expected to be in the range of 25% to 29%. And now I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Krishna Shankar from ROTH Capital. Your question please.

Krishna Shankar – ROTH Capital Partners LLC

Yes, first of all Jim, welcome on Board and best wishes to you.

James B. Boyd

Thank you.

Krishna Shankar – ROTH Capital Partners LLC

And I had a couple of questions that Alex, it sounds like this quarter is seasonally weak. Can you talk about the outlook for the rest of calendar year 2014, what are some of the new programs that will drive growth and what kind of overall revenue growth can we expect over the next 12 months based on some of these design wins and new programs that you talked about.

Alex Hui

Yes, as we have mentioned what – we have a key design with another majors in our smartphone program that we start shipping in later part this quarter, we expect to ramp up to high volume next quarter. We also have several other programs that I had mentioned, we have a set-top box program and then we have $5 to $6 content for system that will expect to go into production in the April quarters, and then we expect working with our customers on the key in our SAAS program on Intel platform probably would begin to hit in the very next quarters in early summer time. So also I think we are – very positive about our design win in a pipeline and there the new programs are going into production, but there is always uncertainty where the customer is going to hit in the production window at the right time. Although, I think at this program that we’re looking on multiple front, the other one how significant that we mentioned just now is actually a little bit decoder program that we expect again to start ramping with customer in the later part next quarter and early summer time. So I think this will essentially drive our revenue going forward. I think we had to put [indiscernible], but overall I think what I would say to be positive that we expect our revenue will grow to a extend I think it’s really hard to put our finger on the [indiscernible] right now.

Krishna Shankar – ROTH Capital Partners LLC

Okay, and then you expect the FCT capacity utilization to improve in the June quarter. How much of a drive will that be on gross margins over the next few quarters?

Alex Hui

Yes, I think, last quarter actually we were in the low 90% and this quarter we are probably approaching the high 80%, because of few more days of shutdown in the Chinese New Year. We’re expecting full up to or probably low to a mid 90% again next quarter and the incremental in terms of capacity absorptions probably in another 1% gross margin, So that would be the key side. Yeah.

But I think you know the other key factor that actually is more it is [indiscernible] which I think is more important factor is our continuous drive in those to drive crystal oscillator in a program. So like this quarter, in the current quarter, we are very excited with what I just mentioned very high – significantly high volume HDMI dongle program that has small sized 2K crystal oscillators going to production. And we expect to ship several million units. So that really helped a lot in terms of our gross margin and also you know our crystal oscillators manufacturing line. So even though – that’s why even though we expect a overall fluctuation I think some percentage will be lower this quarter, because of shutdown, our gross margin in the frequency controlled products will actually will move back up in this quarter. So the crystal oscillator mix is actually very important.

Krishna Shankar – ROTH Capital Partners LLC

Great, thank you.

Operator

Thank you. Our next question comes from the line of Christopher Longiaru from Sidoti & Company. Your question please

Christopher Longiaru – Sidoti & Company

Hey, Jim and Alex, my congratulations and good wishes. So my question has to deal you talked about your book-to-bill, you said 0.97 and that was at the end of the December quarter, but you had some better orders towards the beginning of this quarter, what’s the book-to-bill is it back over 1, because of those orders, it was 1.01 last quarter?

Alex Hui

Yes, we were 0.97 last quarter and it’s up today, we actually in a similar level the quarter before. So our book-to-bill last one week that’s just significantly above 1, so allowing us to catch up quite a bit, yes, but we do expecting that the next week or so to slowdown a little bit because of Chinese New Year Holiday and probably we should back to normal in the second or third week of February, yeah.

Christopher Longiaru – Sidoti & Company

And can you just give us kind of relative commentary on how much of that ramp up was in newer products versus flat quarter?

Alex Hui

Our combination, I think we see some improvement in terms of the demand; also we have a couple of new program. Like actually we have one of our videos surveillance customer in China, who just gave us a pretty substantial order and also we have as I mentioned the HDMI dongle program that [indiscernible] so we get some incremental improvement in terms of demand, but certainly we also get a benefit for some of the new volume program that’s kicking in.

Christopher Longiaru – Sidoti & Company

And I think you mentioned that you have some customers reducing inventory at year end, which is pretty normal. How about distribution on that side, is there any change in the inventory situation there?

Alex Hui

No, I think our distribution inventory is [indiscernible] I think we finished last quarter around seven weeks in the channel, which is right at the needle of our target range of six to eight weeks. So we do not see that much change in the distribution channel. The comment, that Jim has done frequency control product is typically because Asian customer has their fiscal end at that same time as the Canada year end. So they often times they would like to walk down the inventory at year end that’s why we see always see a slow pace, but the frequency control product in Asia and after that we see that the trends would replenish so it would cost you a little bit of that at this quarter as well.

Christopher Longiaru – Sidoti & Company

Okay. Great. That’s very helpful. Thank you, guys.

Alex Hui

Thank you.

Operator

Thank you. Our next question comes from the line of Hans Mosesmann from Raymond James. Your question please.

Brian C. Peterson – Raymond James & Associates, Inc.

Hi. This is Brian Peterson in for Hans. Thanks for letting me ask the question. I just wanted to know the communication in market, it hasn’t a grown sequentially the last few quarters and it was a little weaker than my model this quarter, so could you may be talk about some of the drivers there and expectations in March and even longer term as you look at some other opportunities like embedded?

Alex Hui

Yeah. Brian are you asking about the gross margin trend?

Brian C. Peterson – Raymond James & Associates, Inc.

No, more so on the demand drivers, just because looking at 2013 overall communications revenue was down close to 10%. So it didn’t look like it was good in the fourth quarter. So I am just trying to understand what the drivers where there and how that should play out maybe in 2014.

Alex Hui

Yeah, I think, if you look at our key segments pretty much we feel that our computing business is pretty much broader and just probably we are going to stay at that level plus or minus little bit. We see, the networking and telecom business is also [indiscernible], what we see this quarter the key drivers going forward will be some of the high-end our consumer side, our participation in the smartphone markets and also some of the set-top box application. And then we now see the emergence of the outer hardware solution video like [indiscernible].

And the other one obviously that we’re driving very hard and we’re seeing result is the automobile. And we’ve mentioned about now, port 1.0 program expanding to 1.1 the qualification with the major infotainment customer in Europe they will start ramping second half of this year. And then our increasing dollar content to the video surveillance customers.

The other initiative that we are working on in the industrial, medical area, I believe those appear in early stage this year. So we don’t expect to see a big contribution in this calendar year hopefully would be industry contribution in the next calendar year. But our focus is pretty much onto the cloud onto embedded and certain high end consumer applications.

Brian C. Peterson – Raymond James & Associates, Inc.

Okay, that’s helpful. And could you maybe give the mix in FCP versus crystals versus oscillators for the quarter? Thank you.

Alex Hui

We’re running out, meet 40% in terms of crystal oscillators and meet 50% in terms of the crystal.

Brian C. Peterson – Raymond James & Associates, Inc.

Okay, thank you.

Alex Hui

So, roughly we use to say a 45 times and 55 time mix.

Operator

Thank you. Our next question is a follow-up question from the line of Krishna Shankar from ROTH Capital. You might have your phone on mute.

Krishna Shankar – ROTH Capital Partners LLC

Yes, Alex can you repeat the revenue mix by end markets again PC telecom service storage and other segments.

Alex Hui

Yes, okay. Computing 14%, networking and telecom 38%, service storage 11%, consumer 20% and embedded and others 17%.

Krishna Shankar – ROTH Capital Partners LLC

So within that computing is mainly PCs and PC preference and consumer electronics would include the smartphones and tablets?

Alex Hui

Yes, actually computing will include all the notebooks, desktops. And then we now begin live with the tablets in that. Right, consumer will be cellphone, set-top box also home appliances coming from PTI.

Krishna Shankar – ROTH Capital Partners LLC

Okay. Can you comment on what you’re doing in PCI Express and I know that you have some GEN2 design wins and can you talk about your PCI Express revenues and how they’re doing?

Alex Hui

Yeah, our PCI Express is actually probably you know we actually had PCI Express not only in different areas. We have PCI Express brought us the core IC in our bridge products, our packet switch product and also signal integrity products. So, also our PCI Express is probably 15% to 20% of our revenue right now. Our focus is primarily in the embedded space as we’re focusing on GEN2, we are now going after GEN3, which we see is mainly deploy in the storage and server. We see that in the switch product, for our PCI Express product today is actually in GEN2, if you look at our packet switch and our bridge designing space at 80% of our new design is coming for the embedded space. So, that’s why we are focusing on it. And we see that is more a business that has a broader base, you know the longer product live and actually a better margin.

Krishna Shankar – ROTH Capital Partners LLC

Okay. Thank you.

Operator

Thank you. And this does conclude the question-and-answer session of today’s program. I would like to hand the program back to Alex Hui, CEO.

Alex Hui

I like to thank all of you for participating in the call today and wish all of you good afternoon and hope to see some of you at the upcoming conference that we have. Thank you.

Operator

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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