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Integrated Silicon Solution Inc. (NASDAQ:ISSI)

F3Q10 Earnings Call

July 27, 2010 16:30 am ET

Executives

Scott Howarth - CEO

John Cobb - CFO

Analysts

Jie Liu - Auriga USA

Jeff Schreiner - Capstone Investments

Chris Sigala - B. Riley & Company

Allen Hebrew - Miller Tabak

Shawn Boyd - Westcliff Capital Management

James Gornick - US Silent Partner, Inc.

Andy Ng - Morningstar

Shawn Boyd - Westcliff Capital Management

Operator

Good day everyone and welcome to the ISSI Fiscal Third Quarter 2010 Quarterly Earnings Conference Call. As a reminder, today’s conference is being recorded. At this time, I would like to turn the proceedings over to Mr. Scott Howarth, Chief Executive Officer. Please go ahead, sir.

Scott Howarth

Good afternoon and welcome to ISSI’s conference call for the quarter ended June 30, 2010. I am Scott Howarth, President and Chief Executive Officer, and with me is John Cobb, our Chief Financial Officer.

Before we proceed, I have asked John to comment on the nature of this call and any forward-looking comments that may be made.

John Cobb

During the course of this conference call, we will provide financial guidance make projections, comments and other forward-looking statements regarding future market development, the future financial performance of the company, new products or other matters.

We wish to caution you that such statements are just predictions or opinions, and that actual events or results may differ materially due to fluctuations in the marketplace, delays in developing new products, changes in demand or supply, our ability to secure manufacturing capacity or adverse developments in the global economy.

We refer you to the documents ISSI files from time to time with the SEC, specifically our most recent Form 10-K filed in December 2009 and our Form 10-Q filed in May. These documents contain and identify important factors that could cause our actual future results to differ materially from those contained in our financial guidance, projections, comments or forward-looking statements.

Scott Howarth

We are very pleased with our results in the June quarter. Demand growth and market share gains accelerated this quarter continuing the strong recovery from last year's recession and pushing ISSI revenue to a new record for the company.

Revenue growth was a strong 24.9% from the previous quarter and over 80% higher from the same period last year. Our demand is being driven by secular growth in our key markets such as networking, telecommunications, industrial and automotive coupled with market share gains in the same segments as customers see stable long-term supply.

Pricing remain stable as other memory suppliers continue to deemphasize legacy and lower density segments of the memory industry. This pricing environment shows a growing demand for DRAM and also a much healthier balance between market supply and demand. Overall we expect these trends to continue for the foreseeable future.

Our product mix also shifted to higher margin products and market segments such as networking and telecommunications, which help to grow our margins this quarter. Looking forward, we think much of this momentum will continue into the September quarter.

We entered the September quarter with very strong backlog, higher than the June quarter, and so far our bookings this quarter have also been very good. In addition, we had a very strong quarter of design wins and continue to see a high level of customer design activity in both DRAM and SRAM.

Our employees continue to work hard, do everything they could to improve the company, grow our business and support our customers and these results show their hard work and dedication.

I will now discuss the result of this recent quarter. Our top line growth this June quarter was 24.9% from the prior quarter, allowing us to achieve the highest revenue in the company’s 22-year history.

Our revenue for the June quarter was $71.2 million. This compares to $57 million in the March quarter and $38.9 million in the June 2009 quarter, which was a growth of 83.1% from the June quarter in 2009.

Revenue growth this quarter was very strong and surpassed the high end of our guidance and also showed dramatic recovery from the depth of recession a year ago, plus the strength of our business model as we gain market share in our key markets.

Our gross margin was also highlight for the quarter, as we achieved a gross margin of 38.4% in the June quarter. This margin includes a 1.7% point net benefit from the utilization of reserves. This compares to the 37.2% gross margin in the March quarter, which included a 1.1 percentage point benefit from the utilization of reserves.

Our gross margin increase, again this quarter as we saw the benefits of improved mix and accumulative effect of better pricing in certain target markets. With the higher revenue and strong gross margin we were able to achieve $13.3 million of operating income.

Our net income in the June quarter was $16 million. We are very proud of the fact that we are able to come out the recession so strong and demonstrate the strength of our business strategy and support the growth in many of our end-markets to deliver profitable results for four consecutive quarters.

Looking ahead, demand is strong and visibility is improving, despite continue global economic uncertainty. We believe that our strategy is sound. We had the right products for our key markets, a very strong customer base, and we remain focused on long-term revenue and profit growth. When we entered the global downturn, we focused on strengthening the company. We now delivered four consecutive quarters of strong profitability.

In addition, we have added engineering teams, improved productivity and quality gain market share and strengthen our position with our key customers. We are very optimistic about our long-term growth prospects and work hard to keep building a stronger company.

ISSI is a leader in high-quality special memory products and our goal is to continue to extend our products in the new applications and markets that require high quality and long-term support.

In the past few years, we have transitioned our business to be a supplier of high quality specialty memory and in doing so has steadily improved our gross margin. We continue to manage our business carefully, control the areas that we can and reduced our exposure to the risky commodity memory markets.

We believe our financial results show clear evidence of the strength of our strategic direction, the strength of our end-markets and the hard work of our employees. We believe we have established an excellent foundation to continue to drive our strategy and penetration into our markets.

Our strategy is to focus on key applications in markets that can provide sustainable revenue and profit growth. Our strategy is design to leverage our strengths and target those markets, where we believe we can add value through engineering, quality, service and long-term support.

Our broad product portfolio, customer service, long-term support and high quality products provide a competitive solution, that we believe will help further our growth in our focused market segments.

The key markets we are focused on include automotive, networking, telecommunications, industrial and specific consumer and peripheral markets. Our goal is to use our strengths to further penetrate these markets and to also expand our addressable markets with new products.

Let me give you an example of one of our largest markets, the networking and telecom market. Specialty memories and base stations, routers and switches require a broad temperature range to support outdoor equipment or indoor equipment with constrained air flow.

The market also requires some of the highest quality memory. Any loss of data is unacceptable. In addition, many applications in this market have lifecycles of more than five years. These are all attributes of a market that fits very well with our strategy of providing high value memory products.

We have been focused on this important market for several years and have leveraged our engineering expertise to develop specific SRAM and DRAM products to serve this market opportunity. As a result of our focus, our networking and telecom revenue has experienced strong growth over the last few quarters and we continue to gain significant new design wins.

Our networking and telecom revenue in the June quarter grew 43% over the March quarter. Networking and telecom revenue represented 37% of our total revenue in the June quarter. We intend to increase our market share in all of our key target markets through superior execution and high quality product support.

Overall, we feel that a combination of focus on strategic markets, breadth of our product offering, long-term support and a low cost model will drive our continued success.

Now, I will return to our key markets and products. The DRAM market continued to strengthen in the June quarter. Demand was the strongest that we have seen since 2008 and pricing remains strong. As a result, our total DRAM revenue increased 29% on a sequential basis. DRAM represented 59% of our total revenue in the June quarter. Our focused DRAM business represented 54% of total revenue, while the commodity business represented only 5%.

We began the September quarter with the strongest backlog in several years and July orders have also been very strong. Many of our customers are experiencing shortages from some other suppliers in SRAM, SDRAM and DDR and we have been actively supporting those customers and gaining many new design wins. We expect this trend to continue and to gain share in our DRAM market segments. For the September quarter, we expect our overall DRAM revenue will increase in the range of 5% to 12%, sequentially.

During the June quarter, demand for our focused DRAM strengthened in all of our markets. We also had one of our best quarters in design wins. For example, we had numerous large DRAM design wins for automotive, infotainment systems, industrial equipment and telecom and networking applications.

We also achieved numerous key design wins in the automotive, telecom and consumer markets in both x16 and x32 memory configurations. In addition, we are experiencing strong design activity for our new DRAMs, our 256 megabit, 512 megabit and 1 gigabit DDR2, our mobile SDRAM and our 64 megabit low-power SDRAM KGD product. We expect these devices to contribute to revenue growth in the coming quarters. Overall we continue to see opportunities for us to expand our market share and grow our revenue.

Our commodity DRAMs, demand and pricing remain strong in the June quarter for 64 megabit to 128 megabit SDRAMs. Demand for commodity DRAM exceeded our supply this quarter as we supported our focused customers instead. While we continue to support some key customers in commodity markets, we intend to gradually reduce our commodity DRAM revenue as a percentage of total revenue.

As previously stated, the commodity DRAM revenue was approximately 5% of our total revenue in the June quarter compared to 5% in the March quarter and 9% of our revenue in the June 2009 quarter.

Let me now turn to our SRAM business. The SRAM ASPs were generally flat to slightly down this quarter due to competitive pressures. Demand in all end-markets and geographies improved from the March quarter. Our SRAM revenue increased 18% from the March quarter, and was approximately 31% of our total revenue.

We saw strength in our Async and also Synchronous SRAMs. The March quarter was also one of our best quarters for SRAM design wins as our customers seek stable supply and long-term support.

We won several major designs in our key markets for various densities of our products. As an example, we had several large design wins with our 4 megabit, 8 megabit and 16 megabit asynchronous product, mainly in automotive, telecom and industrial applications. We also had other large design wins for networking equipment, industrial and automobile applications.

With our continued investment in SRAM, competitive SRAM solutions and long-term support, we are confident that we will continue our long-term growth in the SRAM market. We expect SRAM revenue in September quarter to grow in a range of 5% to 12% sequentially.

Our overall ASSP business increased 24% from the March quarter and represented 10% of total revenue in the June quarter. The June quarter demand is usually seasonally stronger than the March quarter.

ASPs for serial EEPROM and Smart Card declined slightly compared to the March quarter. We secured several large EEPROM design wins for wireless networking and LCD panels, and had several large design wins for Smart Card in public transportation and security applications in China and India. We currently expect ASSP revenue in the September quarter to be relatively flat with the June quarter.

As we announced in January, we have formed a new business unit called Giantec Semiconductor, focused on our ASSP business that includes EEPROM, Smart Card and analog power management products.

We believe this new ventures strengthens our business opportunity in the all-important Chinese electronics market. Since ISSI still owns more than 50% of Giantec, the financial statements of Giantec are consolidated into ISSI financials. However, we expect that additional outside investment in the next few months will reduce our ownership percentage of Giantec to below 50%, which will result in ISSI no longer including the revenue expenses, an operating results or balance sheet of Giantec in our consolidated financial statement.

Let me now turn to our manufacturing operations during the quarter. Wafer supply both DRAM and SRAM have become very tight in the last few months, as foundry utilization has increased. We have experienced longer lead times in wafer foundry and assembly and test, and did have some small supply constraints in the June quarter.

We believe we have strong relationships with the foundries, but with foundry capacity so tight, we have entered into a long-term supply agreement with one of our key foundries, and also have placed long-term purchase orders with others to help ensure we have the wafers to grow our business and support our customers. Some foundries have also increased wafer pricing which will have a small effect in the September quarter and beyond.

We increased our inventory levels in the June quarter to better support a growing business and support the DRAM transition from SMIC who is ending all DRAM production to other foundries.

To maintain long-term support for our customers, we will have to hold wafers for our customers over the next year, which means we will continue to hold slightly higher inventory levels. We have experienced some constraints on assembly and test capacity and have made selective investments to help ensure we have the capacity to support our business in the future.

Looking forward to the September quarter, we do not expect wafer of backing capacity constraints to have a significant impact on our business and we will continue to take actions to ensure adequate supply of our products. We continue to focus on product cost reduction programs and improving our operational efficiency and effectiveness.

I will make some closing comments in a moment but first let me ask John to discuss the numbers.

John Cobb

As Scott mentioned, our revenue for the June quarter was a record $71.2 million which is a 24.9% increase from the $57 million in the March quarter and an 83.1% increase over the $38.9 million reported in the June 2009 quarter.

Our June quarter revenue exceeded the high-end of our guidance as demand was very strong throughout the quarter.

Gross margin was 38.4% in the June quarter which includes a 1.7 percentage point net benefit from utilization of reserves. This compares to 37.2% in the March quarter which included a 1.1 percentage point net benefit utilization reserves and 25.1% gross margin in the year-ago quarter. Our gross margin in the June quarter reflects the improvement in end market conditions and our product mix shift to higher margin business.

Operating expenses were $14 million in the June quarter. This compares to $14.4 million in the March quarter and $11.6 million in the year ago quarter. The operating expenses were higher than our guidance range due mainly to higher sales expenses associated with higher revenue and higher employee profit sharing tied to operating income.

We achieved operating income of $13.3 million in the June quarter, compared to operating income of $6.8 million in the March quarter and an operating loss of $1.9 million in the June quarter a year ago.

Interest and other income in the June quarter were $3.1 million, which includes a $2.6 million gain on sales of investments, and the company had $300,000 in income tax expense.

Net income in the June quarter was $16 million or $0.57 per diluted share, which exceeded the high-end of our guidance range of $0.44 to $0.50 per share. This compares with net income for the March 2010 of $7.2 million, or $0.27 per diluted share and a net loss for the June 2009 of $1.9 million, or $0.08 per share.

Moving to the balance sheet, we ended the quarter with $90 million in cash and short-term investments, compared to $83 million at the end of March. We generated $10.5 million in cash flow from operations in the June quarter.

Our inventories increased by $9.8 million from March 31. Our inventory turns were 3.9 turns in the June quarter compared to 4 turns in the March quarter. As many of you know, one of our foundries, SMIC decided to exit the DRAM market and we are currently in process of transitioning customers to other foundry.

As a result, during the June quarter we purchased approximately $5.5 million an additional inventory to help insure a smooth transition. Excluding that additional inventory, our inventory turns were $4.4 million at June 30.

We expect the customer transition will be completed in several quarters so we will continue to carry higher inventory to support customers during this period.

Our accounts receivable increased during the quarter by $2.9 million to $39.9 million, and the days sales outstanding were 51 days compared to 58 days for March.

Overall, our balance sheet is very strong. At the end of June, we had $3.46 per share cash and short-term investments and a book value per share of $6.28.

Let me turn to our guidance for the September quarter. All of our comments in this conference call regarding future numbers are forward-looking comments and subject to a number of risks and uncertainties. Our guidance assumes that we will continue to consolidate Giantec throughout the entire quarter.

As previously stated, we saw strength in our key end markets in the June quarter. In addition, our beginning backlog in our orders-to-date this quarter had been very strong. As a result, we expect revenue for the September quarter to be in a range from $74 million to $80 million.

We expect DRAM pricing to be relatively flat and SRAM and ASSP pricing to be flat to slightly down. Gross margins will likely be in the 34% to 37% range.

Operating expenses should be flat to slight up in the $14 million to $14.7 million range. We expect to realize gains from sales of investments of about $500,000 and we have about $300,000 from interest and other income.

As a result of the above, net income is expected to be between $12 million and $14.5 million in the September quarter or $0.42 to $0.52 per diluted share.

Now back to Scott for final comments.

Scott Howarth

Worldwide memory demand is now strongly recovered from the downturn, and currently DRAM demand and even some SRAM demand is exceeding supply for some devices and markets.

As our customers seek stable supply and long-term support, we've been working hard to support many new design wins which is helping our growth. In addition, we have taken many actions to strengthen our company.

As a result, our revenue in operating profits are now added near record levels. We are working hard to develop products for the future, support our customers, and increase profit from operations.

From our results, we clearly see success for the long-term strategy as a specialty memory provider. In the months ahead, we will continue to focus on our five key objectives, which are; number one, grow our customer base and number of design wins; number two, increase our product portfolio while maintaining long-term support in our target markets; number three, identify and extend our reach into underserved and growing markets; number four, serve our customers as strategic partners; and number five, remain focused on profitable growth and the effective use of our resources.

In the past few years, the memory markets in the economic environment have been very difficult yet ISSI has continuously improved its gross margin and generated cash. Now, as a world economy struggle to improve we believe we have an opportunity to improve on those results with a healthier memory market and strong growth in our end markets. We also believe that if we continue to successfully execute on our objectives we will also continue to build a stronger business. We remain committed to achieving that goal.

We'll take your questions now.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Jie Liu with Auriga USA.

Jie Liu - Auriga USA

Congratulations on the good results and the guidance. Just a couple of questions on the gross margin. In your guidance for the next quarter, 34% to 37%, does the guidance include any previously written down inventory reserves?

John Cobb

No.

Jie Liu - Auriga USA

Okay. Then how should we think about your gross margin beyond next quarter? Clearly, your gross margin guidance, the mid-point is, is somewhat below what you reported for this quarter. I bet that's partially due to the wafer pricing, so how should we think about that?

Scott Howarth

Hi, Jie, this is Scott. Overall, we are looking at the wafer pricing increase could have anywhere from 2% to 2.5% impact. So that’s why you see a slightly lower gross margin from a guidance standpoint in what we reported.

Also, we have been trying to increase pricing in some of our key markets also to offset some of the wafer pricing. So we have been hoping that we can balance those two. Looking forward, as we expect pricing to probably stabilize, we expect to see a little bit of impact from the increase in wafer pricing.

Operator

We will go next to Jeff Schreiner with Capstone Investments.

Jeff Schreiner - Capstone Investments

Staying with that, I was just trying to understand, I believe you commented, Scott, during your prepared remarks that that you are seeing either flat to slightly down SRAM ASPs, and I was wondering if you could comment on why you are seeing maybe a difference in some of the other competitors right now, and what seems with a backdrop of a very strong market?

Scott Howarth

We do continue to see competitive pressure in some of our markets with one of the largest competitors, which principally was Cyprus. In some of the markets that we have, we will see competitive pricing, so that's why we are seeing a little bit of downward pricing pressure.

Jeff Schreiner - Capstone Investments

But if Cyprus was raising their prices in the market, wouldn't you be able to at least maintain I guess is that maybe lean towards more of the flattish comment. Just trying to understand, because we were expecting that perhaps there might have been even a little up-kick for you in terms of ASPs in the quarter within the SRAM market? So just trying to get my arms around this?

Scott Howarth

Sure. Good question. We have heard of Cyprus raising prices in the past quarter, but at the same time, they are competitive in some of the markets that we participate. We have also raised prices in some areas that we could, where we have competitive advantage and where we don't we've had to be competitive, so really it depends on each individual segment of the SRAM market, whether it's either in the higher performance sync, the low power, the legacy or asynchronous and for us, we are stronger in automotive and that's where we have seen better overall results as well.

Jeff Schreiner - Capstone Investments

What about the overall, we have seen a nice push up in the gross margin over the last few quarters certainly coming off a trough back in there early ‘09 period. Do you think that allow the incremental opportunity your low hanging fruits really been captured here in gross margin and if not I mean how much further can we really get, have we topped out at this kind of 40%, 38% type of level here?

Scott Howarth

Well, I think in the short-term, when you look at the product mix that we have today and the markets that we are serving, we think we will probably remain somewhere and about the range that we are, the current guidance that we are giving. As we look longer term, we are going to continue to work to increase those market segments that give us highest gross margin and also introduce new products that we think will also help us to improve our gross margin.

Jeff Schreiner - Capstone Investments

How you guys talk about great backlog already. How much is September quarter is already booked for you right now?

Scott Howarth

We are probably close to two-thirds at this point.

Jeff Schreiner - Capstone Investments

I’ll step out and let someone ask some questions.

Operator

We will go next to Chris Sigala with B. Riley & Company.

Chris Sigala - B. Riley & Company

Just quick question was on the inventory, is there anything in particular that you would consider to be at risk should things start to slow down?

Scott Howarth

No, we really don’t. The slowdown if that were to occur would impact our commodity business. The commodity inventory that we carry is very small, but our commodity revenue right now is down to about $3 million to $3.5 million, so if we saw pricing drop 10%, we would see, maybe a 10% risk.

Even the devices that we sell into commodity, we could test those and move them into our baseline product line if we need and we need additional wafers and additional inventory to be able to support our overall baseline inventory requirement, so we're really not concerned at all about the quality inventory or the risk if we are to see commodity markets starting to decline.

Operator

We'll go next to [Allen Hebrew] with Miller Tabak.

Allen Hebrew - Miller Tabak

Let's jump over to the balance sheet for quick second. I am sure you get asked this plenty. What do you think the optimal cash level you need to be at to operate your business? Meaning is there any near-term plans for the excess cash, acquisitions, buybacks, what have you?

Scott Howarth

We have typically set a goal of maintaining at least $50 million in cash to operate the business. We are as you can see, generating cash. At this point, I think, we generate a little bit over $10 million in terms of operating cash flow this quarter.

As I have discussed in the past, we continue to look for strategic alternatives to try to grow the company. Those are challenging and very difficult to find. We had some success in the past with small companies; we have looked at much larger, we continue to look at smaller, so we will continue to look focus on trying to find areas to grow outside of organic growth.

Then secondly in the past, we have been buying back shares. We are going to continue to evaluate share repurchase going forward. If we can’t or if we don’t think that the price is right for share buyback, then longer term, we will continue to evaluate some way to return cash to shareholders and it’s a topic we haven’t decided, but its certainly one that the board will continue to discuss.

Operator

We will go next to Shawn Boyd with Westcliff Capital Management.

Shawn Boyd - Westcliff Capital Management

I wanted to just come back to the situation with SMIC a little bit here. Can we talk about what, maybe, how much of your DRAM they produced in the past or what, in terms of the additional inventory that you are taking on, how far out that goes or that lasts?

Scott Howarth

Sure. I can’t think right off the top of my head how much they have been providing in the past. SMIC, a little over, or I go back to almost two years ago, they cutback their DRAM support significantly, they maintain about 5,000 starts a month that they were allocating to us, and then last year with the downturn, even that was no longer profitable for them. So they decided to completely get out of any DRAM wafer starts and converted the rest of that to logic process.

At the time, we were probably buying maybe 2,000, 3,000 wafers a month. A lot of it was being used more in commodity markets. We also were using it into baseline markets. So we did last time buy with them and we received a bulk of the wafers this last quarter. We will receive some more wafers during this September quarter. And with those wafers, we are going to hold them, and as John said, we estimate about $5.5 million. We will hold for about a year for our customers to continue to receive parts from us and maintain long-term support and then we'll give them a last time buy and covert those wafers.

Now the supply of SMIC, we were able to immediate, when SMIC announced this, which was calendar Q4 last year, we were able to move our devices over to Nanya who is one of our other key foundries and convert our devices to be able to run on their processors, and that transaction has gone very, very smooth. So, we are able to maintain supply. It's just some customers don't want to change the design once it's in their system, and they need long-term to be able to qualify the new devices, so that's what we'll do and I estimate it will be carrying about that much inventory for our probably three to four quarters.

Shawn Boyd - Westcliff Capital Management

In terms of the gross margin impact, you already quantified to that on the wafer prices at 1 to 2.5 percentage points thinking about the constraints on assembly and test. Can we allocate any higher expenses there?

Scott Howarth

We've gone the opposite direction on assembly and test by buying some testers over the last two quarters. There have been shortages and tightness. So effectively what we have done is by buying the capacity ourselves, it's allowing us to reduce our total cost assuming that we can maintain utilization on those testers, so the foundries are running it for us and then we get discounts from a product cost perspective, so we think that will be flat to slightly down on some of the backend cost.

Shawn Boyd - Westcliff Capital Management

I'm sorry, but going back to shift over to Nanya for a second. What would you say your capacity is at this point, or you max EBIT at in terms of capacity utilization in Nanya?

Scott Howarth

Right now, Nanya, as far as the information I’m getting is running at full capacity or very, very, close to full capacity. We have been able to get the wafer supply that we need. We were actually buying a fairly large percentage of their current capacity and we have a very, very strong foundry relationship with them. So, we have been able to acquire and continue to get the support that we need.

Operator

(Operations instructions). We will go next to James Gornick with US Silent Partner, Inc.

James Gornick - US Silent Partner, Inc.

I want to tell you, phenomenal quarter. It was impressive that anyone that would look at your company gets to also play the emerging markets. So, again, kudos to your operations.

I'm going to start off one of the first areas just writing notes, do you feel that the area of growth is going to be muted or let's say, as your drivers of growth are continued as a consensus estimate for your auto applications, because it seems like Ford and going into their 10-Q and Ks they were quite impressive about what they were producing along with all the others.

So, what’s going on in that neck of the woods as far as projected growth for yourselves? Is that as previous gentleman asked, is that going down or is that actually ramping up and kind of like the silence sleeper for yourselves?

Scott Howarth

Let me make certain I have the question right, James. I think you're referring primarily to the automotive revenues, is that correct?

James Gornick - US Silent Partner, Inc.

Correct.

Scott Howarth

Overall, what we're seeing in automotive, the units in terms of total automobile sales remains about flat and plus or minus little bit depending on statistics in the US and overall worldwide I think there is a slight growth in terms of automobile sales.

The two things though that are driving it is the electronic content for vehicle is increasing quite significantly. Infotainment and some of the safety features are really driving a much higher demand for DRAM devices where we've really seen significant growth.

We have been in the automotive market for SRAM for quite sometime, but it's the DRAM where we've seen the growth over the past year or so. This quarter our, DRAM revenue increased and if you had followed I think last quarter when we announced, our automobile revenue was 20% of our overall sales. It actually declined this quarter, because of our telecom and networking was so strong.

James Gornick - US Silent Partner, Inc.

That was going to be one of my follow-ups. Looking at telecom, there was a shift with the Motorola's unit and all of what was recently with the merger and acquisitions, any affect on yourselves was that a bonus towards yourselves if that is a market that challenging the iPhone and what part is serious as our USB one of the symbol seems to grown exponentially, could you be sleeping in that category, but that’s really even more of a growth metric for yourselves?

Scott Howarth

A couple of comments and if I got the question, so from the overall automotive piece, I'll just close on that. Our overall revenue is growing. It's just that as a percentage, the other areas are growing faster. We expect that that’s going to continue. We have very, very strong design wins and then going forward that will continue. As the economies improve and unit growth improves in terms of number of vehicles, we will see the benefits of that.

Now, you mentioned the category like iPhone, some of the smartphones and those areas, we don’t particularly play in the main memory in the smartphone market. That’s dominated more by the big memory players that have the fabs and be able to support that type of volume.

Where we do participate though is with our KGD business in Wi-Fi modules or camera modules that are going into certain cell phones, and that’s where we are participating in that market. That’s not a large part of our business today, but we do have some participation in that market.

James Gornick - US Silent Partner, Inc.

Understood. One of the other areas that was of a concern, you have a list of clients', plusses or minuses and you had made comments and I keep a going list myself. Have you gained or lost any of these clients that are your customers looking in the consumer, networking, telecom, automotive and industrial areas, because I definitely I am always impressed that you keep on beating consensus and that's why that question is posed to you.

Scott Howarth

That’s a very good question. So, let's say, overall we haven’t lost any customers or had significant change. What we have really been focused on is gaining share with each of our individual customers. We have, what we call, a key account strategy, where we focus on 25 of our top customers. When we look at the market opportunity, which is those 25, just their revenue alone, we estimate to be close to $900 million a year.

So, we're continuing to focus on penetrating with those key customers, so we are constantly working on each individual design win with our key customer and then growing as well as supporting a broad number Tier 2 and Tier 3 customers.

So, when we look at it, we're really not seeing a decline in any individual customer. What we are seeing that's helping to drive our growth is greater penetration of those key customers and market share gains overall, and that's what's helping to drive our growth plus, just the secular growth in some of the underlying markets that we're serving.

James Gornick - US Silent Partner, Inc.

Understood, and one of the things that always raises itself for us being analyst is the risk of again competition of success Micron or Cypress Semiconductor or those folks. Is your niche really not at risk?

Because, everything keeps telling me that should not really be exposed to as much risk as the industry maybe showing, and especially if I was working at your quarter coming up from, let's say, I think that fiscal ends in September 2011, I did an estimate that almost brought the model of the price of your stock come to around 13 or 14, but then you are bringing the risk and then that lowers just as a result, but I'm not starting to see as much risk out there. Can you comment towards that because I am starting to see that you don’t maybe have as much risk as the cyclical changes as what’s being purveyed?

Scott Howarth

I think that’s another really good question and it’s probably a pretty long answer to go through in detail, but I’d just say overall when you look at the transition that’s occurred within the industry in the last couple of years, last year over 20% of DRAM capacity disappeared and a lot of the competitors that were in the industry no longer have the cash to reinvest.

So, our belief right now is that there is a much more rationale investment strategy into the memory markets than we see in the past. We have also seen competitors dropping out or deemphasizing certain parts of the segment. Like Micron and Samsung have moved away from a lot of the low density and legacy memory markets and that’s where we have continued to pick up and support those customers.

As they transition to DDR3 we believe we will continue to be able to gain share there. Now as they step away from those markets since they are design win types of markets, coming back in is not a simple step. They will have to go through qualification and design cycle, which typically takes 9 to 12 months. So, as they step away from those markets we pick them up, we think it’s going to be difficult for them just to step back in and that’s automotive, industrial, telecommunications markets and networking.

Over on the commodity side, the design cycles are a bit shorter. So, if competition comes back strongly we will see some pressure there, but as we have seen even through 2008, 2009, we were able to manage it fairly effectively.

Overall I believe we will continue to see secular growth within lot of our market segments.

James Gornick - US Silent Partner, Inc.

I can appreciate that statement because I even was reviewing and saying, "Wow, they have got four to seven year locked in almost design". So that’s that risk model is starting going to become more minimalized and so that’s where I'll be looking but that’s a very big positive. I don’t know if the other analysts pick up on that, certainly we have and we always assist some of the hedge funds out there to recognize what maybe quality and what may not be.

So I want to thank you for answering those questions because I think you had a powerful quarter and I guess the last one I would even ask you is projecting into that third or fourth quarter window, and I think it was asked before but I just want it to be repeated. Your gross margins as far as what you can project and what do you see as your net income per share?

I would loved to hear those one more time, because I think there is going to be something that people have to contend with that makes your stock actually undervalued.

John Cobb

The guidance that we gave for the September quarter was the gross margin of 34% to 37%, and earnings per share of $0.42 to $0.52. At this point we haven't given guidance on the December quarter or beyond.

James Gornick - US Silent Partner, Inc.

Okay, that's fine. I just wanted to see if I could push your envelop a little bit and it helps us out here on the street. Thank you again for your comments and I am done. Thank you.

Operator

And we'll go next to Andy Ng with Morningstar.

Andy Ng - Morningstar

Hi, nice quarter. I was wondering what's your strongest end market right now, is it networking and telecom?

John Cobb

Yes, networking and telecommunication was the strongest. Our growth was 43%.

Andy Ng - Morningstar

But you guys didn’t breakout the automotive sales as a percentage of total revenue for the quarter.

John Cobb

I think it was 17% this quarter.

Andy Ng - Morningstar

But it went down really because all the other end markets grew fast, I guess?

John Cobb

It declined as a percentage but in terms of actual dollars it increased, networking was so strong.

Andy Ng - Morningstar

Finally, have you seen any effects from Europe and whether that’s affecting any of your industrial customers?

John Cobb

A good question. We haven’t. In fact, just about three weeks ago, we had EBV who is our distributor in Europe visit us and I asked them specifically the question, are they seeing any impact in Europe or any type of slowdown and their focus is primarily on the industrial and automotive markets and they said unequivocally, no, they are not seeing any impact in Europe.

Scott Howarth

In fact, of all the regions, this last quarter, Europe grew the most.

Operator

We do have a follow-up from Shawn Boyd with Westcliff Capital Management.

Shawn Boyd - Westcliff Capital Management

Thanks for taking the follow-up. Two quick questions. The share count jumping up from the emissary 7.2 to 28 million this quarter, should we expect it to be fairly flat there or continue to creep up a little?

Scott Howarth

It will probably be slightly up again. People have exercised options which increases the base and our share price has been higher recently which, when you do the treasury stock calculation also adds shares.

Shawn Boyd - Westcliff Capital Management

So in terms of the $0.42 to $0.52 guidance, John using like 28.5, maybe you can give us a share count that you are using there?

Scott Howarth

I used 28.5.

Shawn Boyd - Westcliff Capital Management

Great, and Scott, going back to just the company's performance, and we can talk about it by segment or as a whole. The sequential revenue growth of 25%, with that being a little better in DRAM, a little bit less in SRAM, can you talk about that growth versus ASPs for us here, so we can get a little bit more granularity?

Scott Howarth

We've looked at it, we analyze it, and we find that it's meaningless since we have such a mix of devices. In SRAM space alone, we have over 1,000 devices that we sell when you look at all combinations. So it just becomes meaningless to look at it, and part of it also you are seeing in our business, we are seeing increased growth to higher density devices, which has been benefiting us and obviously in a higher dollar per unit that's been a benefit and we also get slightly higher margins there.

Shawn Boyd - Westcliff Capital Management

Then your comments on the design wins that continue to be very strong, can you quantify that in any way? Can you help us on what maybe the growth in the design wins or just some sizing up of what we are seeing in the last couple of quarters versus or that?

Scott Howarth

Yeah. I'm trying to think through the math right now if I take SRAM, DRAM combined quarter-over-quarter design wins, I'll have to come back and I can't think of the exact number right now. By quantifying, we've definitely seen a boost in overall design wins in both of our markets. Right now I don’t have it off the top of my head.

John Cobb

We track the design wins based on annual expected revenue and this last quarter’s design wins were about the same level as the March quarter which, as we stated in the prior quarter’s conference call, that was at record level. So, we are still at a record level in terms of the dollar value of design win.

Scott Howarth

We didn’t see a pick up in DRAM.

Shawn Boyd - Westcliff Capital Management

So, the dollar value about flat in June versus March?

John Cobb

At a record level, yes.

Shawn Boyd - Westcliff Capital Management

At a very high at a record level, okay and September continues? The September quarter so far is showing you roughly the same level?

Scott Howarth

Yes, we are just in the start of September quarter. So we don’t have the full data yet.

Shawn Boyd - Westcliff Capital Management

Right, then I will come back to this.

Scott Howarth

But quantifying those design wins going out, they continue to be very strong.

Operator

We have a follow-up from James Gornick with US Silent Partner, Inc.

James Gornick - US Silent Partner, Inc.

Gentlemen, just one last question because that was one of those ones that I had on my notepad. One of the things that I was looking at is the amount of insider selling that was going on in the last quarter. Looking into this quarter, what is the projection that we are going to see company executives looking at purchasing or was that just a very low amount because if I look at the rest of the industry it seemed comparable but that’s one of those questions that I had as the last follow-up?

Scott Howarth

As far as purchasing from executive level it's something that we track individually. So it's going to up to each individual inside the company what they want to do in terms of their own finances. Most of us though continue to be part of the company's Employee Stock Purchase Plan which, myself included, I played in 10% of my income to continue to buy shares of the company stock. In terms of exercising options or selling shares there have been some selling by employees of the company and will continue to be some selling as people want to gain some individual profits and make some money from the stock options or any investments if they have made in the past.

James Gornick - US Silent Partner, Inc.

The reason for that question was that with the churn and one of the biggest things as so many corporations have found that they have achieved a lot of cash to try to margin themselves through this time that is a big change for many within our world and knowing that it's just one of those things that sometimes when you see the inside starting to purchase more of the shares and that’s been seen in more than a couple of companies that through this reporting period. So that was the reason why that question was posed to you?

Scott Howarth

Yes, there is no leverage planned inside the company. Anybody that’s purchasing is doing so with their own cash.

Operator

And it appears we have no further questions in the queue at this time.

Scott Howarth

Okay. Thank you for participating in this call. John and I will be presenting at the Kaufman Brothers Annual Investor Conference in New York and at the Rodman & Renshaw Annual Global Investor Conference also in New York during the week of September 13 to 16. We hope to see you at one of these events. Have a good evening.

Operator

And this concludes today's conference. Thank you for your participation.

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Source: Integrated Silicon Solution Inc. F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

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