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IXYS Corporation (NASDAQ:IXYS)

F3Q2014 Earnings Call

February 5, 2014 5:00 p.m. ET

Executives

Nathan Zommer - Founder, Chairman and CEO

Uzi Sasson – President and Chief Financial Officer

Analysts

Christopher J. Longiaru - Sidoti & Company

Operator

Good day everyone, and welcome to the IXYS Corporation's Third Fiscal Quarter Ended December 31, 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Nathan Zommer, Chairman and CEO. Please go ahead.

Nathan Zommer

Thank you. Good afternoon and welcome to IXYS Corporation third fiscal quarter ended December 31, 2013 earning conference call. I am joined by Uzi Sasson President and CFO. Uzi will lead us through the financial later in the call.

First, to review the formalities. Our discussion today contains forward looking statements, including statements related to corporation future revenues and earnings. Any statements in this conference call which are not statements of historical fact may be deemed to be forward looking statements. There are number of factors that could cause the results of IXYS to differ materially from those indicated by these forward looking statements, including among others risks we detail from time to time in our SEC reports, including our reports on Form 10-Q for the fiscal quarter ended December 31 2013.

IXYS does not undertake any obligation to update forward looking statements. Also, pleased be advised that the financial data related to today’s conference call is available on our website www.ixys.com. Click on corporate and then click on news and events.

We are pleased to report significant revenue growth for the quarter ended December 31, 2013. To point out some of the highlights for the quarter. Net revenues for the fiscal quarter ended December 31, 2013 were $89.3 million, up $25.5 million or 40% from the fiscal quarter ended December 31, 2012.

December quarter net revenues were also up $3.4 million from the September 2013 quarter, marking the fourth consecutive quarter of revenue growth. IXYS declared dividends for the fifth consecutive quarter. Our cash was at $99.1 million, an increase of $3.9 million from the prior quarter.

It is equally noteworthy that net revenues for the nine months ended December 31, 2013 were $246.4 million, up $33.3 million or 15.6% from the nine months ended December 31, 2012.

As a percentage of total revenues for December 2013 quarter, North America represented 26.4%, Europe and Middle East 25.7% and Asia and the rest of the world 47.9.% As a percentage of total revenues for the nine-months ended December 31 2013, North America represented 27.9%, Europe and Middle East 29.8% and Asia and the rest of the world 42.3%.

Our revenues by market application for the December quarter were as follows: Industrial and commercial which includes renewable energy, 40%, communication infrastructure 14%, medical electronics 9%, consumer 23%, transportation 4%, others 10%.

Revenues by market segment for the nine months ended December 31 2013 were as follows: industrial and commercial 47%, communication infrastructure 16%, medical electronics 10%,consumer 13%, transportation 4% and others 10%.

As can be seen, we have increased our penetration in the consumer market with wider product offering of integrated circuits. Correspondingly our revenues based on product groups for the December quarter 69% for power semiconductors, 34.8% for microcontroller and other integrated circuits and 6.2% for systems and RF.

For the nine months ended December 31, 2013, our revenue based on product were 66.6% for power semiconductors, 26.7% for microcontrollers, and other integrated circuits and 6.7% for systems and RF.

As a leading global power semiconductor company, we have adjusted our strategy to increase our presence in Asia. We focus on expanding our product lines to offer complete system solution to our customers, ranging from microcontrollers to mixed signal ICs to the widest range of power semiconductors.

We have launched our worldwide marketing campaign by which we offer a broad range of preference designs across our products with the goal of optimizing our product offerings to any account worldwide. Thus we reduced our selling expense and differentiate our solution when compared to our competitors that do not have our wide product range.

I will now turn the call over to Uzi Sasson, President and CFO who will discuss the financials in more detail.

Uzi Sasson

Thank you, Nathan. The December 2013 quarter non-GAAP net income which excludes the impact of charges for amortization of acquired intangible asset and stock compensation was $4.4 million or $0.14 per diluted share which is an increase of $2.1 million as compared to the non-GAAP net income for the same period in the prior fiscal year.

However GAAP net income was $552,000 or $0.02 per diluted share, a decrease of $637,000 from the December 31, 2012 quarter where we reported net income of $1.2 million or $0.04 per diluted share. The net income and EPS were impacted by an unfavorable tax rate instead of the expected tax rate similar to the last fiscal year. Due to a discrete item, the tax rate increased during the quarter.

Additionally, net income and EPS were affected by seasonally slower sales in power semiconductors. We do not expect this trend to persist as we believe that this is merely a reflection of slower buy-in during the holiday season. Our sales team have evaluated this issue highlighting healthier micro-economics trend and positive forecast from customers for upcoming quarters in the next fiscal year.

Gross profit was $25.8 million for the quarter ended December 31, 2013 or 28.9% of net revenues as compared to gross profit of $19 million or 29.7% of net revenues for the same quarter in the prior fiscal year. CapEx was $1.9 million for the December quarter.

R&D spending for the quarter was $7.9 million or 8.8% of net sales as compared to $6.8 million or 10.6% of net sales in the prior year quarter. R&D spending remains an imperative in a company like IXYS. SG&A expenses were $10 million or 11.2% of net sales as compared to $9.2 million or 14.3% of net sales in the prior year quarter.

Turning to the balance sheet. The ratio of current assets to current liabilities was 3.7. The company exited the December 2013 quarter with cash and cash equivalents of approximately $99.1 million, up $3.9 million from the September quarter.

During the December 2013 quarter, IXYS generated about $5.7 million of cash from operation and the adjusted EBITDA was approximately $10.5 million. Net account receivables at December 31, 2013 were $79.9 million and the DSO was about 40 days.

As of December 31, 2013, net inventory was $93.6 million and inventory turns were 2.75 from the quarter [ph], reflecting about 133 days of inventory on hand at the end of the quarter. As global macro-economic conditions evolve, we are seeing pockets of strength in Asia, stability in the United States and uncharacteristic improvements in Europe.

Customers remain cautious in this environment with purchasing limited to product for immediate demand. Although semiconductor industry ordering trends remain modest likely affected by uncertainty in Europe, we expect a slightly increase in revenue in the March 2013 as compared to revenues in the December 2013 quarter. We will now open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go to Christopher Longiaru with Sidoti & Company.

Christopher J. Longiaru - Sidoti & Company,

So my question has to do with the gross margin obviously, can you give us a little bit of a breakdown of how much of this was kind of pullback from manufacturing perspective and how much of this is product mix and maybe a little bit more color on how you expect it to play out in the March quarter?

Nathan Zommer

So the reason that our margins went down predominantly because of the fact that the December quarter -- the December month I should say has only 17 working days and many of our customers had a shutdown beginning on the 19th, or the 20th of December causing us not to be able to ship products to them. And the other part of the question has to do with the mix as well as capacity or absorbed manufacturing at our own internal fabs. We also had a shutdown and the utilization at the fabs was not as robust as it would be in other quarters. And that was the cause for the margins.

With respect to the second part of your questions, we are taking action and we believe that we will see the margins being growing in the next coming quarters.

Christopher J. Longiaru - Sidoti & Company,

What was the utilization rate at your internal fab this past quarter?

Nathan Zommer

Between 70% to 85%, it depends on the fab but that was the range.

Christopher J. Longiaru - Sidoti & Company,

Can you remind us what it was in the September quarter?

Nathan Zommer

It was approximately 85% or higher than that.

Christopher J. Longiaru - Sidoti & Company,

And just from an operating expense standpoint going forward you’ve kind of been in this range here around $21.5 million at least on a GAAP basis for the last two quarters. Is that kind of a level you expect to stay at or what are your operating expect expectations going forward, and that includes amortization and obviously stripping that out around 18 million?

Nathan Zommer

If you look at IXYS and compare the numbers quarter to quarter, you will find out that our operating expenses are very stable. While we are spending money on R&D in developing new product and new solutions for customers, we will continue to do so and with respect to SG&A, I don't anticipate any spikes or any increase in the level that one would expect. I would suggest to you that the operating expense will remain at the same level.

Operator

We have a question Tim Donovan [ph] with Needham.

Unidentified Analyst

I am jumping in for Vern. I was wondering if you were able to identify what the European –

Nathan Zommer

Well, Europe, if you look historically just for information how we transformed the company we anticipated Europe to slow down the manufacturing base in Europe. It’s in line with the relative reduction of percentage of our revenues that was relying on the industrial base. We have seen a lot of our customers in Europe shifting their production to Asia and thus we put more and more emphasis in the Asia continent. And as Uzi mentioned that North America we see some stability and you all see from the news also that manufacturing is kicking up a little bit in the US but Asia, not only China, we talk about whole Asia in the Pacific Rim is coming back starting manufacturing out of Europe and investment in infrastructure.

So we believe that Europe will continue to be lethargic in that respect and that's why you see this strength in Asia. So it was an interim change in the mix in our transition, as end of the year – we will see that business coming back more and more into Asia and Pacific Rim.

Uzi Sasson

If you compare our numbers in the last several quarters with respect to revenue by geography you will find out that in Europe we were approximately 30% and also in Asia but the trend for us to continue as Nathan mentioned invest more and more our resources in Asia. Therefore we’re seeing a spike in our business, a level in business we are doing in Asia and lesser business in Europe.

Operator

We will go to Greg Lever with Investa [ph].

Unidentified Analyst

Just a follow up on the – is it the same customers that are moving their manufacturing operations to Asia or is it just fully loaded [ph] customers?

Nathan Zommer

Well it’s the same customers, major is the same customers that we see demanding, that the supply will be in Asia, and in some cases you have contract manufacturers that manufacture to those customer, European customers and then manufacture it in Asia. Needless to say we expect Europe to come back in growth numbers but not percentage wise. So if you look at the signatures that Uzi said, just comparing to Q3 of fiscal of – our last fiscal year, Q3 our last fiscal year Europe and Middle East were 36.1% of our revenue, Asia and rest of the world was 32.4. Today we look at Europe and Middle East is 29.8% -- I am sorry for the quarter Europe and Middle East it 25.7% and Asia and rest of the world 47.9%. And of course some of it came with the microcontroller business that we mainly focus in consumer markets in Asia.

But nonetheless in gross numbers, we see Asia very strong for us going forward and as Uzi said, in his statements that our sales team indicated the forecast for Europe is a little more positive than it was in December.

Unidentified Analyst

Just could you maybe talk a little bit about linearity in the quarter, our future accounts receivable was down nicely sequentially by a better part of $10 million and your revenue is up, so will you talk a little bit about that?

Nathan Zommer

So we at IXYS work very diligently to collect, obviously DSO also stands at 40 days, which is pretty low. Frankly speaking I believe that our teams around the globe are very diligent about cash collections and that’s something that is very important to us. In addition in many instances, we work smart of collecting some times cash right at the time of delivery or if we have long contracts with various customers we get something in advantage [ph].

Unidentified Analyst

Your inventory was up, could you talk a little bit about that, in terms of the – is it explanatory [ph] that you built in the quarter did it hut you all, with these unabsorbed overhead, as you leaving OpEx up, how does that work?

Nathan Zommer

Greg, the inventory was – the net inventory increased by approximately $4 million from $3.9 million to be exact, or 4.3% and we’re seeing a good traction in the business. We had a deliberate increase in inventory predominantly in raw materials that went up that we invested in inventory and that was the substantial part of our investment in inventory. So the majority of the $4 million increase in inventory came out of raw materials and some of which –

Uzi Sasson

Let me add also, Greg, because of the shutdown in December we have also products being shipped because if we ship customers will take it. So it’s finished goods that accumulated and this will shift, no question about it.

Unidentified Analyst

And on the under-absorption just to expense in the period, your standard cost being whatever went into inventory?

Uzi Sasson

I think that was right at very minimum.

Unidentified Analyst

Do you think we will see that back to the September quarter level again here with the mix getting better in the March quarter.

Uzi Sasson

I believe that we will get back to the September to the levels of what we saw it in September. I think that there were two main points to the gross margin decrease, one of which is the unabsorbed manufacturing at our own fabs and the second one is related to product mix predominantly in Europe I would say.

Operator

And we have a question from Josh Hoverhault [ph] with ITM.

Unidentified Analyst

Hey guys, Uzi, I think you mentioned tax rate was up, you may have said specifically but I didn’t hear it. Can you give some guidance for the year on what you think tax rate would be – I am sorry for the March quarter what you think tax rate would be and then if you could give some color on the continued integration and prospects within the microcontroller business?

Uzi Sasson

So the tax rate went up because of nonrecurring item that we had to account for and I anticipate that our tax rate for the March quarter will go to the same level that we had in the September quarter or in June of last year quarter. And consequently the rate for the year would be normalized.

The second part of your question, Josh, has to do with the integration of the microcontroller business. I think we’re way underway in terms of the integration. Our teams around the globe are integrating nicely. We’re seeing the benefit from that and quite frankly thus far we are pleased with the way things are going with this acquisition that we’ve done back in June.

Unidentified Analyst

Can you give maybe some color going forward on potential future integrations if that’s a priority for you going forward and just maybe some guidelines on what you’d be looking for from a accretion perspective?

Nathan Zommer

Well, you can imagine that in any integration like this, this is Nathan speaking, you have – financial adjustments and the focus of investment we have to make to transition the products, and as Uzi said this wen smoothly as expected. So we expect going forward great benefits for that business, it’s very accretive and with that we penetrate their new customers that we didn’t have before in the consumer market and surprisingly even some pockets in the industrial, medical and automotive market. So it gives us a great upside. The major focus of the integration first now is the sales force that the same salesmen that sold microcontroller to customer acts, can also now push our mixed signal ICs and power semiconductor. So what we see is a tremendous upside potential and as Uzi said we are very pleased with the dynamics so far.

Unidentified Analyst

And what about future acquisition opportunities?

Nathan Zommer

Well, we always look at something that is accretive and beneficial for IXYS and as we move forward the main focus with our business is the internal organic growth. I think you have our hands full with the work we are doing in the business. But as I said, we are blessed with a strong balance sheet and we are being a target for lot of companies offering – if it’s investment bankers or companies that are talking about strategic corporations. So we are always open but we like to do those things in a very responsible and profitable way. So we are not buying companies like Google does.

Operator

And next we have a follow up from Christopher Longiaru.

Christopher J. Longiaru - Sidoti & Company

I don’t know if you said this and am I missed or not, could you say what the contribution was from the sense of microcontroller business in the December quarter?

Nathan Zommer

No, we didn’t but you can decipher that from pie chart of the integrated circuits and microcontroller business. So we usually don’t divulge the division but you can see that our revenues in the microcontroller and integrated circuit showed up significantly and that majority upswing was for the microcontroller business.

Operator

And with no further questions in queue, I will turn the call back to our speakers for any additional or closing remarks.

Nathan Zommer

Thank you. As there are no more questions, in closing the conference call we need to remind you that our discussions contain forward-looking statements and that there are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including among others risks detailed from time to time in our SEC reports, including our report on Form 10-Q for the fiscal quarter ended September 30 2013. We do not undertake any obligation to update forward looking statement. Thank you all for your time. We also would like to take this opportunity to thank our supplies, customers, employees and stockholders for the support of IXYS.

Operator

This concludes today's conference. You may now disconnect your lines and have a wonderful day.

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