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Pericom Semiconductor (NASDAQ:PSEM)

Q4 2014 Earnings Conference Call

August 6, 2014 4:30 PM ET

Executives

Robert Strickland – Investor Relations

Kevin Bauer – Chief Financial Officer

Alex Hui – President and Chief Executive Officer

Analysts

Krishna Shankar – ROTH Capital Partners LLC

Christopher Longiaru – Sidoti & Company

Operator

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

I would now like to turn the call over to Mr. Robert Strickland. Sir, you may begin.

Robert Strickland

Thank you. Good afternoon and welcome to Pericom’s fourth quarter and fiscal year 2014 results conference call. Our speakers today are Alex Hui, President and CEO and Kevin Bauer, our 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 in business and provide guidance for the first quarter of fiscal 2015.

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 factor sections of such filings. In accordance with regulations of fair disclosure, Pericom will continue to only provide guidance, its earnings release and its conference calls. The company will not provide further guidance or updates during the quarter unless it does so via a press release.

Please note that we are reporting non-GAAP financial measurements for gross profit, gross margin such as operating income, net income and diluted earnings per share in addition to our GAAP financial results. We have a significant amount of non-cash and non-operating expense as well as the release of tax reserves included in the income statement. To facilitate the complete understanding of comparable financial performance between periods we present these non-GAAP measures.

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

Kevin Bauer

Thank you, Robert. And good afternoon everyone. We’re pleased with the improvement in our financial performance this quarter and for the full year. Looking at Slide 3, of the presentation, our consolidated net revenues were $32.7 million for Q4 compared with $30.7 million last quarter. The sequential revenue growth of 7% was primarily in the Server and Embedded market segments. Market segment wise, revenue was essentially flat for network and telecom, PC notebook and storage as compared to last quarter.

Server and Embedded market mix were up 1% each, while consumer came down 1% due to softer shipments into the smartphone market and partially offset with stronger shipments into the home appliance applications. Network for the quarter was 38% of revenues, consumer was 17% of revenues, PC and notebook 14%, server storage 10% and embedded and other 21%.

Net revenues for the fiscal year 2014 were $128.1 million slightly down from $129.3 million in fiscal year 2013. On an annual basis we saw growth primarily in the ultra-mobility and embedded segments offset by declines in the networking and PC notebook market segments.

Gross profit and gross margin our consolidated non-GAAP gross profit was $14.1 million for Q4, compared with $13 million last quarter and increase of $1.1 million. Our non-GAAP gross margin for the fourth quarter was 43% a record high since we acquired the SaRonix FCP business in 2003 and up from 42.5% that we achieved in Q3 and up approximately 3.7% from the 39.3% in the same quarter last year.

FCP’s non-GAAP gross margin for Q4 increased 1% sequentially to 29.1% from 28.1% last quarter driven by better product mix and higher factory utilization and also significantly improved from 22.7% in the same quarter last year. IC non-GAAP margin of 52% was similar to last quarter.

For the fiscal year 2014, non-GAAP gross profit was $53.2 million and non-GAAP gross margin was 41.6% compared with $50 million and 38.7% respectively in fiscal year 2013. Growth and margin year-over-year was primarily associated with improved product mix. In IC products and within FCP products driven by an increase in crystal oscillator mix of sales to 50% in fiscal year 2014 from 45% last fiscal year as well as improved factory utilization.

Our non-GAAP operating expenses were $11.1 million in Q4 which was slightly up from last quarter and were $44.5 million for the fiscal year 2014. A reduction of $1.4 million is compared to $45.9 million in fiscal year 2013, as we continue our cost management efforts.

Interest and other income were $0.5 million for the fourth quarter down approximately $0.3 million from $0.8 million last quarter due to unfavorable foreign exchange impact. The non-GAAP effective tax rate was 18% for Q4 compared with 36% last quarter. And the difference was primarily due to non-recurring discrete items. The non-GAAP effective tax rate for fiscal year 2014 was 28%.

Non-GAAP net income was $2.8 million or $0.12 per diluted share for the fourth quarter up from $1.8 million or $0.08 respectively compared to the prior quarter as a result of our increased revenue and margin improvement. For fiscal year 2014, non-GAAP net income was $8.5 million or $0.36 per diluted share as compared to $6 million or $0.25 per diluted share in fiscal 2013.

Switching to slide 4, I will review certain working capital items and our stock repurchase activity. Exiting Q4 cash and investments in marketable securities was $119.1 million a decrease of approximately $1.5 million from last quarter. At the end of June cash per share was $5.42.

During the fourth quarter, we repurchased 535,000 shares of our common stock at a cost of approximately $4.4 million at an average price of $8.30 per share. For the fiscal year 2014, we repurchased 1,355,000 shares of our common stock at a cost of approximately $11.3 million and at an average price of $8.35 per share. At the end of the fiscal year we had remaining balance of $26.6 million under the boards previously approved 2012 and 2014 stock repurchase authorizations.

Accounts receivable was $24 million at the end of Q4 up $1.3 million sequentially on higher revenue and is at 67 days of sales outstanding. Net inventory was $12.3 million at the end of Q4 down $1 million from last quarter, and is at 60 days of supply. And this time I’d like to turn over the call to Alex for a commentary about our business. Alex?

Alex Hui

Thank you, Kevin. We are very pleased to deliver in fiscal Q4 significant improvement in revenue, gross margin and operating profits. Our revenue increased $2 million, while non-GAAP gross margin reached another recent high of 43%. Our non-GAAP operating profit increased 46% sequentially and EPS increased 50% sequentially with higher top line revenue, higher gross margin and only a slight increase in operating expenses.

We finished fiscal 2014 with gross margin expansion of 2.9% versus last fiscal year, this is our fourth consecutive year of gross margin expansion. Our top five end customers accounted for 30% of total revenue and one customer accounted for 11% of total revenue in fiscal Q4. The revenue mix for our product family was IC, 62% and frequency control products, 28%. IC revenues include analog switches 18%, digital switches 6%, silicon clocks 11%, connect 12%, interface 4% and PTI product 11%.

In the fourth quarter of fiscal 2014, we introduced a total of 17 new products in our signal integrity, connectivity, switching and timing product areas. I will refer you to our earnings press release for information. Overall, we are pleased with the enhancement of our product solution with new products introduced in recent quarters. For example we have introduced new family of core IC products and crystal oscillators products with very high operating frequencies and very low jitter

We also expanded our Connect product offerings with middle income PCI Express GEN 2 Packet Switches, Bridges and hardware solutions video decoders. We believe these products expanded our circuit market in networking, cloud computing and embedded markets.

For the timing activities some of the key design wins in fiscal Q4 were signal integrity, solutions for key OEM customer on the all in one test platform with seven of our products in (indiscernible). HDMI 1.4 active switches for several channel videos, with customers at a major TV customer in Japan.

PCI Express, clock buffer for major European automotive infotainment customer. In the level, Universal Level Shifters for several leading server customers. As well as customers in networking telecom applications. Our PCI Express, GEN 2 Packet switches for several customers in networking and industrial segments. Also our high frequency, low jitter clock IC for networking customers. Beside these design wins we have several significant designing opportunity in the pipeline. Among them, our industry leading low voltage USB 3.0 ReDrivers operating were one (indiscernible) and very low participation.

Are being designed into several – and notebook platforms. Our first SAS TV drivers, Universal Level Shifters and timing solution are been adopted in cloud service. In using the Intel Grantley server platform. Also low-jitter timing solution in high (indiscernible) 10 Gig/40 Gig systems and also 10 Gig Ethernet servers. Our USB stick and charge IP for several leading notebook customers and also an IP phone customer.

Our next generation PCI Express GEN2 Packet switches for customers in video surveillance, server and networking applications. Also for video surveillance we have a 968 video decoders as several leading video surveillance customers in China. For our interface products and switches a wide voltage range products are being used in DisplayPort and HDMI applications for several notebook customers.

Although we’re pleased to deliver good sequential growth in revenue together with margin expansion, and this together with (indiscernible) operating expenses result in strong sequential growth in operating profit and EPS. On a fiscal year basis, we’ve finished fiscal 14 with gross margin expansion of 2.9% versus last year and operating margin market improvement of 3.6% versus last year. We believe these results - our strategy of transforming our business will grow for market segments offering high gross margin and growth potential.

We will continue to focus on growing our business in networking, cloud computing and embedded applications. With our value added solutions (indiscernible) timing. I’d like to thank you for your support. And now I will turn it back to Kevin to give the guidance for Q1 of fiscal 2015.

Kevin Bauer

Thank you, Alex. Last quarter our book-to-bill ratio was above parity. And consequently, we ended our fiscal first quarter with higher beginning backlog. That’s our fiscal first quarter non-GAAP estimates are as follows. Revenues of $32 million to $35 million gross margin in the range of 41.5% to 43.5% operating expenses of $11.2 million to $11.5 million slightly up with the implementation of annual merit salary increases. Other income of $600,000 to $800,000 and other income consists of interest income, realized gains from cash investments as well as currency exchange impacts.

And our effective tax rate expected to be in the range of 26% to 28%. And now we would like to open up the call for questions, Candice.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Krishna Shankar of ROTH Capital. Your line is now open.

Krishna Shankar – ROTH Capital Partners LLC

Yes, Alex and Kevin, congratulations on a nice quarter and guidance, as you look at the September quarter what areas are you seeing strengthen in terms of cloud computing, embedded, networking? Can you talk about some of the areas that you are seeing strength to support the positive revenue guidance for the September quarter?

Alex Hui

In server area we anticipate that we see a greater ramp up of the Intel Grantley platform, should we see – we have our SaaS redrivers, in the Universal Level Shifters as well as our timing products. So we feel we will be benefiting from that. We also in the notebook platform, we see in our current option of our USB charges into the next generation notebook platforms. In a networking area we’re looking at some high performance, Clock IC products that will probably go into production, probably not this fall, that’s what we know in the boring quarter, so these are some of the key areas that we’re seeing.

Krishna Shankar – ROTH Capital Partners LLC

And as you look out to fiscal year 2015 do you still anticipate given the mix of products and some of these high growth markets you would still expect to see gross margins continue to expand perhaps 200 to 300 basis points over the next 12 months.

Alex Hui

I think right now, we are just looking and continue to expand our gross margins from year-to-year basis, our goal roughly being improving – in our gross margin by value 150 to 200 basis points here. And we’ve been able to do that for last two years so this will continue to our goal going forward.

Krishna Shankar – ROTH Capital Partners LLC

And what was the FCT capacity utilization at the end of this fiscal year and what was the mix again between FCT versus the integrated products with clock and crystal?

Alex Hui

Yes, our FCT factory utilization in our last quarter was running above 92% and our crystal oscillator in our mix is the low 50% range versus crystal.

Krishna Shankar – ROTH Capital Partners LLC

Okay, thank you.

Alex Hui

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Christopher Longiaru of Sidoti. Your line is now open.

Christopher Longiaru – Sidoti & Company

All right guys, I’ll add my congratulations, nice quarter.

Alex Hui

Thank you.

Christopher Longiaru – Sidoti & Company

So, my question is – you are seeing this gross margin expansion. Can you get into the gross margin a little more granularly and explain, I mean how much of this came from more server ReDrivers, more oscillators and some of the higher margin products, can you give us a breakdown of where the addition came from this quarter?

Alex Hui

I think – actually the contribution comes from different areas, actually see the frequency control products, the margin increase by 1% and that’s 40% of our mix. So, I think this quarter we are seeing the frequency control product improvement will continue – to the second part of our average market increase. But that’s also some increase in IT side with the products from the server. As Kevin mentioned you know the revenue increase in Q4 was mainly different by the server and embedded and these our market segment there you now on average, heavy better margin.

Christopher Longiaru – Sidoti & Company

All right, and so just in terms of you’re looking out here. At what point is this kind of peak for you, I mean at what point do you see the shift in product mix come to the conclusion, I mean how many more?

Alex Hui

I think it will be several years set you know I had that we continue to looking at that you know, we continue to see that that regular opportunity for our high performance, Clock IC, integrity products and these are essentially in our product that have gross margin very significantly above the company average right now. And on the frequency control side as we mentioned, our crystal oscillator is delivering above 50%, and as we continue to drive the mix of a crystal oscillator going forward. Today, we are likely in the low 50% rate we like pay into 60%, 70% even 80% in the next few years. And that essentially in offering case, our FX margin for the frequency control product up. So, in the next two to three years we will continue to drive our annual margin improvement and beyond that you know we’ll see what we can do.

Christopher Longiaru – Sidoti & Company

And then just in terms of operating expenses this kind of the level, we should expect you guys to be around for the next couple of quarters or there any shifts in your plan for your operating margins. Could you give us some little guidance and so what we should be modeling?

Kevin Bauer

Well, I think we said that there will be a little bit of expansion due to raises next quarter and probably a little bit of continued expansion beyond in the out quarters, but we are very careful about that expansion it’s not going to be that large.

Alex Hui

(indiscernible) higher revenue we’ve got see some additional sales commission and they as Kevin mentioned, we would have - need to give rise for people every year they are doing good job. But beyond that, we recently expect that we are going to add significant headcount in the organizations and other additional it was an open end.

Christopher Longiaru – Sidoti & Company

All right guys, I’ll jump out. Thanks a lot.

Alex Hui

Thank you.

Operator

Thank you. And I am showing no further questions at this time. I would like to turn the call back over to management for any further remarks.

Alex Hui

We like to thank you for the participation in the conference call and again we like to thank our shareholders, analysts, our customer and also our employees for their continued support. So wish all of you a good afternoon. Thank you.

Operator

Ladies and gentlemen thank you participating in today’s conference. This does conclude the program. And you may all disconnect. Have a great day everyone.

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