Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Pericom Semiconductor Corporation (NASDAQ:PSEM)

F4Q10 (07/03/10) Earnings Call Transcript

August 9, 2010 4:30 pm ET

Executives

Bob Strickland – Director, IR

Aaron Tachibana – SVP of Finance and CFO

Alex Hui – President and CEO

Analysts

Suji De Silva – Noble Financial

Christopher Longiaru – Sidoti & Company

Hans Mosesmann – Raymond James

Bob Strickland

Thank you and good afternoon. And welcome to Pericom's Fourth Quarter Fiscal 2010 Conference Call. Our speakers today are Alex Hui, President and CEO, and Aaron Tachibana, the CFO.

Before we get started, please be aware that we will be presenting several visual slides during management's discussion of the business. To view 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 first quarter of fiscal 2011. Certain matters discussed in the press release and on this conference call may contain forward-looking statements that involve risk and uncertainty. Therefore, we encourage you to review all filings made by the company with the Securities and Exchange Commission, particularly the Risk Factors sections of such filings.

In accordance with regulation of fair disclosure, Pericom will continue to only provide guidance via its earnings release and conference calls. The company will not provide further guidance or updates during the quarter unless it does so via a press release. Aaron will discuss the financial performance for the quarter and Alex will give his comments on the industry and on Pericom's business. Then he will provide guidance for the first quarter of fiscal 2011. Aaron?

Aaron Tachibana

Thank you, Bob, and good afternoon, everyone. We have just concluded our fiscal year 2010 in a positive light. Just over a year ago, we and many other industry participants were wondering if and when the bottom of the cycle would be reached. At this time, we are pleased to report that Pericom has just achieved its fifth consecutive quarter of revenue growth since the global recession began late in 2008.

In addition to our outstanding financial results, today we announced entering into an agreement to acquire the remaining shares of PTI, a fabless IC company that we previously held a 40.6% ownership stake within. The transaction is expected to close late in Q1 and we expect the PTI results to be accretive immediately. We will explain more about the PTI business later on this call.

Our fiscal year 2010 fourth quarter results were better than expected with net revenues growing by 13% sequentially and 40% year-over-year. This was a 14-week quarter and when normalizing for the extra week, revenue grew – revenue growth was 5% sequentially and 30% year-over-year.

We expanded gross margin sequentially for the fourth consecutive quarter and it was up 146 basis points over last quarter. GAAP net income exceeded last quarter by 28% and was nearly 277% higher year-over-year.

Now, let's review some of the detail. Our consolidated net revenues for the fourth quarter were $41.5 million and represented a 13% increase from the $36.7 million reported last quarter and a 40% increase over the $29.7 million for the same period last year.

After normalizing for the extra week, quarter-to-quarter increase was 5% and the year-over-year increase was 30%. The full fiscal year 2010 net revenues were $146.9 million and represented a 14% increase year-over-year and was 12% higher, when normalizing for the extra week.

End market shipments for the fourth quarter were as follows, computer 45%, communication 35%, consumer 11% and 9% from all other. Geographic distribution was as follows, U.S. 10%, Asia 85%, and Europe was 5%. Channel sales mix was as follows, domestic distribution 6%, international distribution 57%, contract manufacturers 24% and OEMs were 13%.

Consolidated gross margin for the fourth quarter was 36.7% and was 146 basis points higher than last quarter's 35.3% and 806 basis points higher than the 28.7% for the same period last year. Q4's gross margin of 36.7% was a two-year high for Pericom as we had improvements from mix and favorable absorption from increased volume.

Gross profit was $15.2 million for the fourth quarter, compared with $12 million reported last quarter and $8.5 million for the same period last year. For the full fiscal year, our consolidated gross margin was 34.6%, compared with 33.5% last year and gross profit was $50.8 million, compared with $43.1 million last year.

Operating expenses were $12 million for the fourth quarter, compared with $10.5 million last quarter. Share-based compensation expense for the fourth quarter was approximately $1.2 million. The additional week accounted for approximately $0.5 million of the expense increase over last quarter.

Also, we reinstated salary increases that were absent for over a year and removed the mandatory time-off program, which was in place through early last quarter and both combined were $0.4 million of the increase.

Audit-related expenses were $0.3 million higher than last quarter, primarily due to the year-end work that began this quarter. We are estimating that approximately $0.7 million of the Q4 OpEx increase will not repeat going forward.

Operating income for the fourth quarter was $3.3 million or 8% of revenue, compared with $2.5 million or 7% of revenue last quarter and an operating loss of $1 million for the same period last year. We were extremely pleased with the 31% sequential increase in our operating income for the quarter concluded. Our total fiscal year 2010 operating income was $7.1 million and was 135% higher than the $3 million last year.

Interest and other income was $1.1 million for the fourth quarter, compared with $1.2 million last quarter and $1.7 million for the same period last year. Income generated from our unconsolidated affiliates, PTI and JCP was $0.8 million for the quarter.

Income before tax was $4.3 million for the fourth quarter, compared with $3.7 million last quarter and $0.7 billion for the same period last year.

The fourth quarter effective tax rate was 27.1% and was 6.8% lower than last quarter. The lower rate in Q4 was due to a true-up for the actual annual tax rate being lower than the rates throughout the year.

GAAP net income for the fourth quarter was $3.9 million or $0.15 per share, compared with $3.1 million or $0.12 per share last quarter and $1 million or $0.04 per share for the same period last year. Our total fiscal year 2010 GAAP net income was $10.8 million or $0.42 per share, compared with $6.1 million or $0.24 per share last year, which was a 77% increase year-over-year.

Now, let's turn to the balance sheet. Cash, including both short and long-term investments and marketable securities was $119 million at the end of Q4 and was down approximately $7.5 million from last quarter. The sequential quarter reduction was due to stock repurchase of $4.4 million, tax prepayment of $2 million and debt repayment of $1.6 million. Cash plus investments were $4.72 per share at the end of Q4.

Working capital was $138 million at the end of Q4, up $2 million from last quarter. Accounts Receivable was $25.4 million and DSO was 60 days.

Net inventory was $23.4 million, equating to 87 days of supply. We increased inventory approximately $4.8 million to support the higher volume and also to be able to fulfill early orders here in Q1.

Our book value was $8.80 per share at the end of Q4. During the quarter we repurchased approximately 467,000 shares of common stock at an average price of $9.48 per share. The total cost of the repurchase was $4.4 million.

At this time, I would like to expand on the PTI acquisition. As we announced today, we entered into an agreement to purchase the remaining shares of PTI, a subsidiary that Pericom has held the minority ownership position within.

PTI was incorporated in 1994, is headquartered in Hong Kong and has significant operating presence, including research and development, sales, marketing and supply chain management in Shanghai and Shenzhen, People's Republic of China. PTI has 99 employees.

Under the terms of the agreement, Pericom will pay approximately $29 million in upfront consideration for the remaining 59.4% of the shares and up to an additional $6 million in earn-out consideration based upon the achievement of gross profit milestones during the first 12 months after the closing of the transaction.

Although the upfront consideration is $29 million, it is expected that Pericom will use only $10 million in cash to conclude the purchase since PTI has approximately $20 million of cash and investments on their balance sheet.

PTI's revenue, gross margin and operating margin for fiscal year 2010 were $17.9 million, 51% and 26% respectively. PTI has been very successful with its products for telecom, consumer and portable power market segments and their top 15 customers account for approximately 65% of their total revenues.

We expect our consolidated gross margin to increase by approximately 150 to 200 basis points per year by adding PTI and net earnings are expected to be accretive the first quarter of consolidating the results with Pericom.

At this time I would like to turn the call over to Alex for commentary about our business, the industry and the Q1 guidance. Alex?

Alex Hui

Thank you. We are pleased to report strong sequential revenue increased driven by increased shipments into enterprise computing, networking and embedded market segments. Our gross margin improved by 146 basis points sequentially, driven by improved product mix. As Aaron mentioned with expanded margin expense control, our operating profit increased a substantial percentage up 31% sequentially.

Our top five end customers in fiscal '10 Q4 accounted for 27% of total revenue and one customer accounted for over 10% of total revenue. On a consolidated basis, the revenue mix for our product families was IT 63%, which included analog switches 30%, digital switches 7%, silicon clocks 8%, connect 16% and interface 2%.

Our connect product line switching grew our PCI and PCI Express switches, packet switches and ReDriver products continue to grow slightly with 20% of sequential growth. And in fiscal Q4 our Frequency control products accounted for 37% of our total revenue.

Our in-house inventory increased from 71 days last quarter to 87 days in Q4. This is done purposely to support strong backlog shipments scheduled for the early part of fiscal Q1. We continue to monitor channel inventory very closely. Q4 ending Asia distributor inventories was 6.5 weeks versus 6.3 weeks last quarter and it remains at the lower end of what we see as a healthy range of 6 to 10 weeks.

We continue to work on introducing new products to complement our serial connectivity solutions. During the quarter, Pericom introduced a total of nine new products across signal integrity, timing and connectivity product areas. I will refer you to our earnings press release and recent new product receipts for details.

In Q4 the book-to-bill ratio was significantly higher than 1, which gives us a higher backlog entering fiscal Q1 2011. We continue to uncover new opportunities to deploy our first and second generation high-speed serial connectivity solutions and we have begun to work with key customers on initial deployment of our third-generation solutions such as our PCI Express Gen III and our USB 3.0 solutions.

We believe Pericom is well-positioned to continue delivering both revenue growth and better operating results, as we realize opportunities in end market segments that we serve with our expanding solutions and design win activities.

We are pleased to announce the acquisition of the remaining interest in PTI. This merger is a key set in our corporate goal trends. PTI brings technology, operational, market and financial synergies to Pericom. We have been working with PTI over the years with very good working relationships and matching corporate cultures. PTI has a strong stable team in China with many of the key employees with 10 years or 5 to 10 years or more with the company.

PTI has established a good practice in the greater China market with key customers like Huawei, GTE, Haier, Lenovo and ConEd. China is no doubt one of the fastest growing markets. This position provides Pericom a strong stable platform in China to expand our design, applications and operations functions.

And also allow us to capture business opportunities with strong local presence at competitive costs. We will enhance shareholders value as we leverage our combined resources to serve our top-tier customers, which are also investing heavily in the region.

We also see many opportunities to promote PTI products through our global customer base. Timing, switching and power management products for telecom, consumer and auto mobility markets account for the majority of PTI's revenues. These product families and end markets remain a key focus for new business development going forward.

From the financial standpoint, we expect the deal to be accretive from the very beginning, and as Aaron mentioned, we’ll contribute gross margin expansion of 1.5% to 2% in the next 12 months.

At this time, I would like to provide our guidance for fiscal first quarter for 2011. Right now we plan to complete the announced acquisition of PTI late in the first quarter. Assuming we complete the merger of PTI at the start of September, we currently expect the Q1 pro forma results with the position of PTI to be as follows.

Revenues in the range of $42 million to $45 million. Gross margins in the range of 37% to 38%. Operating expenses in the range of $11.9 to $12.5 million which includes stock based compensation of approximately $1.2 million. It also includes an acquisition cost estimated to be around $0.5 million.

Other income of approximately $0.9 million. Net income from unconsolidated affiliates, PTI and JCP, approximately $0.4 million this includes our share of the income from PTI in July and August prior to the full integration. The effective tax rate is estimated at about 31%.

This concludes my prepared remarks. I will now open up the session for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Suji De Silva from Noble Financial.

Suji De Silva – Noble Financial

Hi, Alex; hi, Aaron. Congratulations on the acquisition there. First of all, Alex, what do you think in terms of backlog coverage? It’s been fairly long dated in terms of the past few quarters, is it still fairly long out there and what is your visibility in terms expected?

Alex Hui

In the terms of – we mentioned that we have high fellow competition in this quarter. So right now we are looking about turns in the 30% range in order to meet our guidance. And so while the big time entry had been long and I think has improved slightly recently, but it is still longer than historical.

Suji De Silva – Noble Financial

Okay. And then in terms of inventory, I guess are you – by building inventory there because you're seeing constraints in supply chain? Is that part of what’s a factor here in building inventory?

Alex Hui

No, actually because we are very, very strong in all the – in the June quarter and we have staged a lot of orders to be shipped in the July timeframe, which actually we did. So basically we have to build inventory at the end of June in order to support the shipments in July.

Suji De Silva – Noble Financial

You are not seeing any constraints then in supply chain?

Alex Hui

It is essentially tight, so there is not a whole lot of room to build extra inventory. Also, as we guided, this quarter will be sequentially up. So we pretty much feel those inventory will be put to good use. But going forward we think the inventory will probably stay at similar levels.

Suji De Silva – Noble Financial

And then the last question a little bit longer term out, you talked about your own business model gross margins tracking up 1% to 2% annually. What is the trend for PTI's margins? They seem a little bit higher but what is the go forward trend you expect there as well?

Alex Hui

In the near term, I think we expect PTI has got to be running in the 50% range. Actually, I mentioned a 1%, 2% is with the integration of PTI since they do have a higher margin, you average up the overall margin. So we expect the acquisition will help to expand our gross margin by 1.5% to 2% just with the acquisition and then on the Pericom deal, we continue to strive for improvement in our core business as well.

Suji De Silva – Noble Financial

Okay. Thanks. I’ll jump back in the queue. Thanks Alex.

Alex Hui

Thank you.

Operator

Thank you. Our next question comes from Christopher Longiaru with Sidoti & Company.

Christopher Longiaru – Sidoti & Company

Congratulations on the acquisition.

Alex Hui

Thank you.

Christopher Longiaru – Sidoti & Company

I wanted to ask a couple of questions about that. I know that you gave us the guidance, but what do you think – I mean you have been doing business with these guys for a while. You have owned a good solid chunk of them. I mean, how hard is it going to be to integrate this company and what are your expectations for what you can strip out of costs now that you're getting the rest of it?

Alex Hui

At this time, actually we have been working with PTI over the years and we are quite involved with them. So from an integrated standpoint, I’d say you probably are seeing as minimal a risk as we have ever had in an acquisition. So we really don't expect any major surprises out there. But sincerely we have to go forward with the mechanics of the merging organization, which I think we would do in the next 12 months or so. What is the other question?

Christopher Longiaru – Sidoti & Company

Just your expectations for what you can basically strip out. How much redundancies are there in your cost structure where you can take some of the cost out of the mix?

Alex Hui

We actually – I think that PTI is based in China is very cost-competitive but, as we mentioned, instead of going out there and start an operation from scratch in China, which many of our industry peers and customers are doing. I think the PTI acquisition is going to give us a very mature platform that we can read in a proxy – in more things and allow us to really get going a lot faster in China with a stable platform. So I think, as we continue to look at migrating functions or expanding with design applications, operation resource that will give us a very good platform to ramp.

Christopher Longiaru – Sidoti & Company

Got you. That’s all I have for now. Thank you, guys.

Alex Hui

Thank you.

Aaron Tachibana

Thanks Chris.

Operator

(Operator Instructions) Our next question comes from Hans Mosesmann from Raymond James.

Hans Mosesmann – Raymond James

Thanks. Congratulations, guys. A few questions, in terms of the December quarter and the visibility that you are getting out there, what are the types of products that are driving that demand? Is it broad-based or is it more notebook or enterprise-centric as in blades? If you can give us more granularity there. Thanks.

Alex Hui

I think it is probably a bit early to look at the December quarter. I think we are beginning to build some backlog going into that. But as usual, in the first half of the December quarter, we sort of expect contribution from the computing and the consumer platform to be relatively strong and then probably in the December or in the late November/December timeframe, we will probably begin to slow down. At this time, we do not see any reason that you would be otherwise – but certainly, as time progressed, we will update with what we see.

Aaron Tachibana

Yeah. And this visibility into the December quarter, that is not normal. That is – you did not see this, well, last year or the year before, right.

Alex Hui

No. Actually if you are thinking in terms of backlog Corporation in terms of going into December, we are a little bit ahead of what we’ve seen before. But mainly, as we all know, this was driven by industry product lead time, right? So the end demand, I think most of our industry peers point out, they are still kind of limited with the (inaudible) out there through the December quarter.

Hans Mosesmann – Raymond James

Okay. In terms of the near term, are you seeing any kind of dynamics to suggest that there is a back-to-school pull-in or demand that is driven by back-to-school from your perspective?

Alex Hui

We have not seen anything one way or the other; a lot of those shipments actually have been partly in the June timeframe already, which is a lot broader. Now I think we are more looking at in the industry lumber coming back in terms of how the consumption is on the back-to-school schedule, which I think we will probably know in about a month.

Hans Mosesmann – Raymond James

Okay. And then two other questions in terms of specific applications, you mentioned a quarter or so ago that a new application for Pericom that potentially was growing was switchable graphics. Can you elaborate on the success of that application or is it playing any ….?

Alex Hui

Actually yes, that is doing quite well. That actually has lined up with the Calpella platform, which actually we have begun to ramp. So far I think actually that is doing well as we expect. As to talk about there, we are pretty much on the migration, the transition from Montevina to Calpella and that is happening as we speak.

So the switchable graphics application in the notebook, predominantly we’re seeing that on some of the high-end platforms is happening and actually we are shipping in volume.

Hans Mosesmann – Raymond James

I'm sorry. When you say shipping in volume, what is shipping in – into the switchable graphics application or into Calpella or both?

Alex Hui

Actually, switchable graphics is mainly the Calpella platform.

Hans Mosesmann – Raymond James

Okay. I see. And you mentioned your top five customers as a percentage of sales. Can you tell us who they are? I think last quarter you mentioned that you gave us four of the top five. Can you name some of them?

Alex Hui

You know, it is pretty much a typical branch. I think you're pretty much looking at Dell, Cisco, EchoStar, those guys, Garmin. Historically, Garmin was off as a top five when it comes summertime, September. Again, this year, the pop-up gain is as the top five, so the top customers pretty much remained the same as historical.

Hans Mosesmann – Raymond James

Okay. And then one last one, in terms of blade servers, is the PCI Express 2.0 dynamic in terms of ReDrivers? Has that panned out as you had expected or not as expected or how is that coming along?

Alex Hui

Yes. They are ramping up quite nicely. We see very good – we began recently to deploy that into servers in terms of Q1 and we see the numbers going up in Q2. And we expect they are going up again in Q3 the rest of this year. So actually ramping up quite nicely and we will say today we are shipping to pretty much all the major blade server guys in the industry with our Gen II (inaudible) solution. So actually we are very pleased with that.

Hans Mosesmann – Raymond James

Okay. Great. Thank you very much.

Alex Hui

Thank you.

Operator

(Operator Instructions) I'm showing no further questions in the question queue, so I would like to turn it back over to the speakers for any further comments.

Alex Hui

Okay. I’d just like to thank all of you for participating in our conference call and thank you for your support. I think, Aaron, you wanted to mention that you will be out in a number of conferences.

Aaron Tachibana

Yes, so actually I will be out on the road the early part of September. The week of the 13th of September I will be in New York City for ThinkEquity and also a Kaufman conference.

Alex Hui

Yes, so (inaudible) out there, and again, thank you for the support and we wish all of you a good afternoon. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now all disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pericom Semiconductor Corporation F4Q10 (07/03/10) Earnings Call Transcript
This Transcript
All Transcripts