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

Integrated Silicon Solutions, Inc. (NASDAQ:ISSI)

F2Q 2011 Earnings Call

April 27, 2011 4:30 PM ET

Executives

Scott Howarth – President and CEO

John Cobb – CFO and VP, Finance and Administration

Analysts

Jeff Schreiner – Capstone Investments

Daniel Berenbaum – Auriga USA

Raji Gill – Needham & Company

Chris Sigala – B. Riley & Company

Jack Walker – Peninsula Capital Management

Operator

Good day everyone, and welcome to the ISSI fiscal second quarter 2011 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 March 31, 2011. I am Scott Howarth, President and Chief Executive Officer and with me, is John Cobb, our Chief Financial Officer.

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

John Cobb

Thanks Scott, and good afternoon. 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, events in Japan, 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 20-K filed in December 2010 and our most recent Form 10-Q filed in February. 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 other forward-looking statements.

Scott Howarth

Thank you John. We are pleased with our overall performance in the March quarter. We believe the quarter demonstrated the strength of our high-quality specialty business during an otherwise seasonally slower March quarter, and it also marked the end of the market inventory correction that began last summer.

We experienced strong demand in the industrial market, which nearly offset the normal seasonal slowdown and general softness in the communications market. In addition, we completed our acquisition of Si En Integrations, adding high margin, analog and mixed signal products to our portfolio.

I will discuss Si En in more detail later after a brief review of our March quarter performance. Revenue in the March quarter was $63.3 million, which was at the high end of our guidance range. Our SRAM and DRAM revenue was $59.6 million and declined less than 1% from the December quarter, but increased 15.6% over the year ago quarter.

Si En contributed $3.7 million in analog revenue in the two months after our integration, or after acquisition, which is also at the high end of our guidance range.

As we discussed on our last earnings call, we had expected our SRAM and DRAM revenue to be flat to down sequentially due to normal March seasonal quarterly activity. Looking at the breakout, SRAM revenue decline 8% sequentially due to seasonality and general softness in the communications market. However, our DRAM revenue actually grew 3% sequentially driven partially by strong demand from our industrial customers.

The end market inventory correction that began late last summer was completed early in the March quarter as customers returned to normal ordering patterns.

GAAP gross margin in the March quarter was 33.1% and non-GAAP gross margin was 33.7%. The gross margin was at the low end of our guidance range due to a higher mix of DRAM and less SRAM and also due to foreign currency fluctuations. John will explain the gross margin in more detail.

Our GAAP net income was $5.8 million or $0.20 per share and our non-GAAP net income was $7.4 million or $0.26 per share. The non-GAAP numbers exclude stock compensation, and Si En acquisition related items.

In addition to the continued strong performance of our specialty memory products, on January 31 we completed our acquisition of Si En Integrations Holdings Ltd., a privately held FAB’s provider of higher performance analog and mixed signal integrated circuits, headquartered in Xiamen, China. Their high margin products are sold into the mobile communications digital consumer networking and automotive markets, highly complementary to the core markets of our specialty memory.

Si En’s products include audio power amplifiers, LED drivers for back lighting and panel display, voltage converters and temperature sensors. Approximately half of Si En’s revenue is from power amplifiers for the cell phone market.

Si En currently has approximately 13% share of the worldwide audio power amplifier cell phone market and approximately 70% share of the audio power amplifier market in China, non OEM, non ODM cell phones. Key customers for Si En include Linovo, Alcatel/Tel, Pagum [ph]/Bird and ZTE. This acquisition enables us to sell a broader range of products across our combined customer base while also increasing our presence in China and expanding our addressable market by $4 billion.

We are just beginning the process of integrating Si En into our business and see many opportunities to leverage our products, expand our share at new and existing customers and grow the business. As expected Si En was accretive to our earnings per share in the March quarter.

Now, I will briefly review our key markets and products including DRAM, SRAM and analog. DRAM represented 62% of our total revenue in the March quarter and increased 3% on a sequential basis and 20% over the prior year quarter. The increase was driven primarily by strength in the industrial and automotive markets. Our specialty DRAM revenue increased 29% over the March 2010 quarter, with commodity DRAM declining to only 2% of our total revenue.

In terms of specialty DRAM design wins, we had another strong quarter across all of our end markets including numerous large design wins for automobile systems, industrial equipment, telecom and networking applications.

We also achieve a number of key design wins in the automotive, telecommunications and consumer markets in both BI16 and BI32 configurations. We are experiencing strong design activity for our new DRAM products including our 256 megabit, 512 megabit and 1 gigabit DDR2, our mobile SD RAM in our 64 megabit and 128 megabit lower power SD RAM KGD product. We expect these new devices to contribute to revenue growth in the coming quarters.

In addition, our SD RAM and DDR1 products are seeing more opportunities as some of the large competitors reach end of life’s on their equivalent products. In March, we announced a new family of 512 megabit DDR SD RAM’s with speeds up to 200 megahertz targeted for automotive, communications and industrial applications.

These products, including advanced technology enable ISSI to provide long term product support required for these target applications.

We also continue to make progress with RLD RAM memory development and expect to sample our RLD2 RAM memory this quarter and RLD3 RAM memory in the September quarter. Overall, we continue to see many opportunities for us to expand our market share and grow our specialty DRAM revenue. In the June quarter, we expect DRAM revenue will grow as much as 8% sequentially.

In terms of our SRAM business, SRAM revenue represented 32% of our total revenue in the March quarter, decreasing 8% sequentially and increasing 8% from the year ago quarter. The sequential decrease was primarily a result of seasonal demand softness in the communications market.

During the quarter, we once again secured strong SRAM design wins in our key markets for various densities of our products including several large design wins with our 4 megabit, 8 megabit and 16 megabit asynchronous products, primarily for automotive, industrial and networking applications and with our synchronous products in networking applications.

We also had several large design wins with our pseudo SRAM devices for automotive and industrial applications.

In February, we introduced additions to our quad and DDR2 families of SRAM. These new devices feature on (inaudible) termination, which improves signal integrity, reduces system cost and saves board space. They are ideal for communications applications such as core and edge routers, Ethernet switchers and bay stations.

Other target applications include industrial test equipment, medical imaging and military systems. With our continued investment in SRAM, comparative SRAM solutions and long life cycle support, we are confident we will continue our long term growth in the SRAM market. In the June quarter, we expect SRAM revenue to grow as much as 8% sequentially.

And finally, our analog revenue through our Si En acquisition was $3.7 million in the two months since our acquisition. Nearly all of Si En’s revenue is from China, which helps increase ISSI’s access to this growing market. Much of the revenue was from power amplifiers and LED drivers in the mobile phone and consumer electronics markets. The remainder was from high brightness LED drivers for the lighting market.

Si En had a non-GAAP gross margin of 43.5% and non-GAAP operating income of $1 million for the two months of the quarter. The non-GAAP numbers exclude purchase priced adjustments and intangible amortization.

Si En had strong design wins during the March quarter across all of its product lines. In the June quarter, we expect analog revenue will be in the range of $5 million to $6 million.

Before turning to our outlook for the June quarter, I would like to first say that we are saddened by the recent tragedy in Japan, but thankful our employees are all safe. There was no impact to our business during the March quarter from these disasters and based on our current assessment, our backlog and orders at the beginning of the June quarter have been strong.

However, our outlook for the June quarter is more uncertain due to these events. We have not had any disruptions in supply and don’t expect any at this time. We have also had little impact on orders from our customers to date. However, future customer orders could be impacted by constraints on their ability to obtain components from other suppliers more directly affected or by a reduction in the demand in the Japanese market.

We are most concerned about impacts to our automotive business as there are some component shortages limiting automotive production. But aside from the uncertainty, and assuming that there remains little impact to our business from the Japan disasters, we believe our March quarter was the low point for the year and expect our June quarter to be more in line with normal seasonality for our business and target markets.

For the third fiscal quarter, we expect total revenue to increase approximately 1% to 11% sequentially and SRAM and DRAM revenue to be flat to up 8%. In addition, we expect our analog revenue from Si En to be in the range of $5 million to $6 million, which includes moderate sequential growth in those products.

Overall, our financial performance for the March quarter was within the range of our expectation and much better than other companies that participate in the DRAM market. While our business will be affected by occasional end market demand changes and inventory corrections, we believe our focus on high quality specialty products reduces volatility and provides greater potential for growth and revenue and profits, as well as higher and more sustainable margins than can be achieved by other DRAM suppliers.

In addition, the advantages of our (inaudible) business model combined with stable end markets and support for our customer’s long product life cycles further contributes to our opportunity to grow revenue and profits in the future.

Now let me briefly provide an update on our manufacturing operations, which also have some effect in the second quarter balance sheet. As a reminder, all of our foundry assembly and test locations are outside of Japan. To date we have had no interruption of wafer starts or delivery, nor has there been any impact to assembly or test operations. We’ll continue to monitor the situation very closely.

As we previously discussed, one of our foundries, Smith, decided to exit the DRAM market and we are transitioning our customers to other foundries over the next several quarters. In addition, another foundry shut down their 0.11 micron process which we are still using. As a result, we made final purchases of both Smith inventory and of the 0.11micron process inventory to help ensure a smooth end of life transition for our customers.

At the end of March we had $2.2 million in DRAM inventory purchased from Smith and $3.4 million of the 0.11 micron process inventory. We expect to sell all of the Smith inventory in the June quarter and the 0.11 micron inventory throughout 2011, 2012.

From a planning standpoint, lead times and foundry and assembly and test have shortened from a year ago. We have recently purchased testers and made advance payments to foundries to help ensure adequate capacity for certain devices and reduce test costs. We will continue to make strategic investments to ensure adequate supply of our products.

Looking forward to the June quarter, we do not expect wafer or back end capacity to have a significant impact on our business.

Now let me turn it over to John to discuss the number and I will then provide some closing remarks.

John Cobb

Thank you Scott. As Scott mentioned, our revenue for the March quarter was $63.3 million, at the high end of our guidance range of $59 million to $64 million. SRAM and DRAM revenue was $59.6 million and analog revenue from Si En was $3.7 million in the two months since its acquisition.

The SRAM and DRAM revenue declined less than 1% from $60 million in the December quarter and increased 15.6% over the $51.5 million in the year ago quarter, which are good results compared to normal seasonality and reflect the end of the market inventory correction that began last summer.

We saw orders strengthen after the lunar New Year and that strength has continued into the June quarter. Our revenue in the March quarter by market was 29% communication, 26% automotive, 26% consumer and 19% industrial, medical and military.

Gross margin was 33.1% in the March quarter, which was at the low end of our guidance range. This compares to 34% in the December quarter and 37.2% in the year ago quarter. The non-GAAP gross margin in the March quarter was 33.7%, which excludes purchase price adjustments to Si En’s inventory and the amortization of intangibles recorded in the acquisition of Si En.

This compares to 34% in the December quarter and 37.2% in the year ago quarter. The March and December gross margins included inventory reserve charges that reduced the gross margins by 110 basis points in each quarter. In the year ago quarter, the gross margin included inventory reserve credits that increased the gross margin by 110 basis points.

In addition, the March gross margin was lower by 40 basis points on a sequential basis due to shipping more DRAM and less SRAM and was lower by 80 basis points due to the strengthening of the new Taiwan dollar relative to the US dollar since most of our back end costs are priced and paid in new Taiwan dollars.

Operating expenses were $15.4 million in the March quarter, which included $600,000 of Si En expenses and $200,000 of amortization of intangibles related to the Si En acquisition compared to $16.1 million in the December quarter, which included $1.6 million of Giantec expenses and $14.4 million in the year ago quarter, which included $1 million of Giantec expenses.

In the March quarter, the company spent $1.5 million for product math costs compared to $900,000 in the December quarter and $900,000 in the year ago quarter. In addition, the company incurred $1 million in stock compensation in the March quarter compared to $800,000 in the December quarter and $500,000 in the year ago quarter. Our operating expenses were in line with our guidance this quarter.

We achieved GAAP operating income of $5.5 million in the March quarter compared to $6.3 million in the December quarter and $6.8 million in the year ago quarter. The non-GAAP operating income in the March quarter was $7.2 million, which excludes stock based compensation and the inventory purchase price adjustments, legal fees and amortization of intangibles related to the acquisition of Si En, compared to $7.5 million in the December quarter and $7.3 million in the year quarter.

Interest income in the March quarter was $300,000. We had no gains on sales of investments during the quarter. In the December quarter, we had $600,000 in gains on sales of investments.

GAAP net income for the quarter was $5.8 million or $0.20 per diluted share. This compares to GAAP net income of $7.2 million or $0.26 per share in the December quarter and GAAP net income of $7.2 million or $0.27 per share in the year ago quarter.

Non-GAAP net income was $7.4 million or $0.26 per share. This compares to non-GAAP net income of $8.3 million or $0.30 per share in the December quarter and non-GAAP net income of $7.7 million or $0.29 per share in the year ago quarter.

Please refer to our press release and Form 8-K for a reconciliation and further explanation of our GAAP to non-GAAP results. Both GAAP and non-GAAP results met our guidance.

Before I discuss our balance sheet, I will provide some additional information on the accounting for the Si En acquisition. The total purchase price was $27.4 million. Si En had $7.2 million in cash, so the net cash purchase price was $20.2 million, of which $4.2 million was held back in escrow for two years and has been recorded as a non-current liability.

The purchase price was allocated to tangible and intangible assets and liabilities based on fair value. As a result, $11.6 million was allocated to intangible assets that would be amortized over periods ranging from three to eight years.

A deferred tax liability of $1.7 million was recorded. Good will of $8.2 million was recorded, and the remaining amount was allocated to Si En’s existing assets and liabilities. The amortization expense will be approximately $500,000 per full quarter.

On the balance sheet, we ended the quarter with $74.4 million in cash and short term investments, down only $6.9 million after the $16 million payment for Si En compared to $81.3 million at the end of December. We generated $7.6 million in cash flow from operations in the March quarter. We expect to generate cash flow from operations in excess of our net income for the remainder of fiscal 2011 due to expected reductions in inventory in the second half of this fiscal year.

We did not repurchase shares during the quarter. Our inventories increased by $5.2 million from December. Si En inventory represented $1.8 million of the increase. In addition, the strengthening of the new Taiwan dollar relative to the US dollar represented $1.7 million of the increase. Most of our inventory is carried on the books of our Taiwan subsidiary in new Taiwan dollars and the increase resulted from translating the inventory at quarter end into US dollars.

As a result of the inventory addition and the end of life transition Scott mentioned, inventory turns were 2.8 in the March quarter. Excluding the additional end of life inventory, we had 3 turns, which is below our goal of 4 turns but still healthy for our business in our current environment.

Our accounts receivable decreased during the quarter by $500,000 and the day sales outstanding were 53 days compared to 52 days in December.

Overall, our balance sheet continues to remain very strong. At the end of March, we had $2.82 per share in cash and short term investments and a book value per share of $7.47.

Let me turn to our guidance for the June quarter. Our outlook for the June quarter is more uncertain due to the disasters in Japan. In the following guidance, we assume that there will be little impact to our business from the Japanese disasters. As such, we expect total revenue in the June quarter to range between $64 million and $70 million.

This guidance reflects a range between 33% and 5%. We expect DRAM and SRAM pricing to be flat to slightly down sequentially. Operating expenses are expected to be between $15 million and $15.5 million and we expect about $300,000 from interest and other income.

So taking this all into account, the company expects GAAP net income to be between $0.22 and $0.30 per diluted share and non-GAAP net income, which excludes stock based compensation and the amortization of intangibles related to the acquisition of Si En to be between $0.27 and $0.35 per diluted share.

Now back to Scott for final comments.

Scott Howarth

Thanks John. As I mentioned in my opening comments, over the past few quarters we have made solid progress on our strategic objectives. We demonstrated the benefits of our focus on high quality specialty memory, spun off our low margin (inaudible) and smart card business and completed our acquisition of Si En.

In addition, as a customer seeks stable supply and long term support, we believe we will see future growth through new product introductions and new design wins. We continue to work hard to develop products for the future, support our customers and increase profit from operations.

In the months ahead, we’ll continue to focus on our five key objectives which are; number one, to grow our customer base and the number of design wins, number two, increase our product portfolio while maintaining long term support in our target markets, number three, to identify and extend our reach into under-served and growing markets, number four, to serve our customers as strategic partners and number five, to remain focused on profitable growth and efficient use of our resources.

So far in 2011, we have navigated through the recent end market inventory correction with minimum impact and are now poised for growth in future quarters if global economic conditions remain stable. We believe these results show the value of our specialty memory strategy and as we continue to successfully execute on our objectives, we believe we will build an even stronger business. We remain committed to achieving that goal.

We’ll take your questions now.

Question-and-Answer Session

Operator

Thank you Mr. Howarth. (Operator Instructions) And our first question comes from Jeff Schreiner with Capstone Investments.

Jeff Schreiner – Capstone Investments

Yes, good afternoon gentlemen. Thank you very much for taking my questions. The first question I want to ask either Scott or John is can you help us with what maybe the lever may be between the high end and the low end of the guidance you gave because just looking at the guidance and what you reported last quarter, with just the lift in Si En that you’re alluding to, would get you to kind of the low end of your guidance by itself, suggesting almost no growth in the DRAM/SRAM, yet Scott you were talking about as much maybe 8% growth in each of those businesses sequentially. So could you kind of help us there with the guidance and maybe understanding kind of what the puts and takes are?

Scott Howarth

Yes, basically you’re asking what do we see as some of the volatility throughout the quarter, or I should say some of the variability and right now, as we see, it looks like it’s definitely heading into normal seasonality. And typically we see the June quarter as kind of a flattish to a slightly up quarter. And so we’re guiding to kind of a flattish to being an increasing quarter.

Now Si En has a range we put of about $5 million to $6 million. We do expect to see flat to up or growth in both DRAM as well as SRAM businesses as well so it’s really dependent right now from a business standpoint on the strength of businesses we continue to see new orders coming in throughout the quarter.

Right now it looks to us like we’re seeing fairly strong business in the early part of the quarter. We don’t know if that’s customers booking early to ensure that they get secure supply relative to some of the Japanese disruptions or if it’s really an indication that it’s going to be fairly strong throughout the quarter.

So we’ve given a fairly broad range to try to give us some flexibility of managing within that variability from an economic perspective today.

Jeff Schreiner – Capstone Investments

OK. And Scott you touched on a little bit about Japan and maybe people coming in and wanting to order. Are you guys getting any ASP benefits? We’ve heard about that out of Asia with some people looking to secure supply willing to pay up or even maybe some double ordering at this point. Have you seen any of that?

Scott Howarth

We have seen prices increasing in the commodity segment of our business, which as you know, is about 2% of our revenue, so it’s very, very little impact to us. But we’ve seen prices improving there.

We haven’t seen impacts to our business in terms of push outs at this point. We are hearing some of our automotive customers certainly have concerns and they’re just giving us some forewarning. That’s our primary concern.

And then we are supporting any shortages that our Japanese competitors may have in some of our markets as well.

Jeff Schreiner – Capstone Investments

OK. My final question, I’ll jump back into the queue here. That kind of last answer rolls into this final one is just maybe are you really seeing or are you guys really equipped to maybe benefit from some of the SRAM disruptions. You know Renaissance has talked that they may never turn their fab back on that built SRAM and you’ve got two competitors kind of involved in a litigation spat right now. Are you guys capable and able to kind of pounce and take advantage of that in some of those markets?

Scott Howarth

Yes, we have been. Our strength there where we are seeing some design wins or I should say customers are crossing the designs today, is in some of the asynchronous and some of the synchronous and legacy business.

So we are clearly doing everything we can to be able to support customers that may have some exposure to Renaissance. The other place we’ve seen some exposure from lack of supply is with Okey [ph]. They sell into some of the automotive market so we’ve been able to support customers there who are also seeking some supply from disruption in Japan.

Jeff Schreiner – Capstone Investments

If I could just follow up with that Scott, I apologize, but when you’re going out and you’re filling up supply for someone like an Okey [ph] to a customer, are you doing anything that has some strings attached to it where I’m not going to necessarily jack up the price on you customer A if you come back to me and give me X amount of share in the future. Are you doing anything like that that has some strings attached to it?

Scott Howarth

Certainly that is all part of the discussion, negotiation that we have, but there’s nothing that is contractual or would bind the customer. Basically what we try to do is by showing that we have long term support, long term commitment and some of the best customer service in the industry, that we’ll convince customers that they want to stay with us and keep a higher percentage of the share.

So we’ve been able to demonstrate that with other customers and that’s essentially what we’re trying to do in this situation as well.

Jeff Schreiner – Capstone Investments

OK. Thank you very much gentlemen for your time.

Scott Howarth

Sure. Thanks John.

Operator

We’ll go next to Daniel Berenbaum of Auriga USA.

Daniel Berenbaum – Auriga USA

Hi guys. Thanks for taking the call. On gross margin, you talked a little bit about gross margin being a little bit light of guidance, kind of at the lower end of guidance because of mix. Can you help us understand what gross margins are a little bit by segment or maybe in a rank order which of your segments have the highest to lowest gross margin. And then if you can help us understand where you think gross margin goes over the course of the next year, what you think a normal run rate gross margin would be for the business.

Scott Howarth

Sure. Well certainly SRAM is our highest overall gross margin and typically in the past as we’ve commented on it, we typically see SRAM margins in the mid 40’ish range and then we’ll see our focused DRAM typically in kind of the 30’ish range as well.

As we see the business though right now with more DRAM where we’ve seen the growth, we did see a small impact to our margins. Overall we hit the guidance that we expected and it’s in reality, it’s just down slightly.

As we look going forward though Dan, as we’ve said, we see our business really being in the mid 30’s and as we’re still trying to evaluate the margins that Si En will bring in, we think that could also have some benefit for us.

So John and I are still reworking our forward model and we’ll be presenting that here shortly as we get into some of the upcoming conferences, but right now we still think we should be maintaining kind of a mid 30’s type of margin going forward.

Daniel Berenbaum – Auriga USA

So all else being equal, with Si En being the analog business or should Se En be the highest margin of your product segments?

Scott Howarth

It will be very close to SRAM.

Daniel Berenbaum – Auriga USA

OK. And then kind of along those lines in terms of getting maybe a richer mix, can you talk a little bit about RL DRAM, how you see the growth trajectory for that and was that something that could also help bring up the DRAM gross margin?

Scott Howarth

Yes. Good question. On RL as I mentioned, we’ll start sampling with RL DRAM 2 this quarter, RL DRAM 3 next quarter. We expect the samples and design wins will take anywhere from nine to 12 months so we would expect to start seeing material revenue coming in about the middle of 2012.

And as that starts to grow for us, we think that some pretty significant potential to it and the margins on it as a really high performance memory we think will actually have higher overall margins than we’re seeing today in our focus DRAM business.

Daniel Berenbaum – Auriga USA

Have you tried to size that market? I mean do you have a sense of how big that market could be because essentially there’s only going to be the two players in it.

Scott Howarth

Well today in the overall RL DRAM market, which is principally RL DRAM 2, we estimate it’s about a $300 million market. We think it will grow to maybe $400 million to $500 million by around 2015. What we don’t know is what will be the split between RL DRAM 2 and RL DRAM 3. But what I expect is RL DRAM 3 will probably take up the highest percentage of that overall market opportunity.

Daniel Berenbaum – Auriga USA

OK. And then just one last question on these foundry transitions that you’ve been going through, how much cost are you seeing associated with these foundry transitions and then related to that, you talked about inventory maybe coming down in the back half of the year. Where would you like to see your inventory levels or how fast do we get back to that kind of 4 turns target for your business.

Scott Howarth

Overall the cost of the transition for both foundries was about $10 million per foundry. We have worked through, or this quarter we will work through just about all the Smith inventory. The .11 micron inventory will take us a bit longer so we’ll need to hold that and sell that as we go through 2012.

Now as we look at our inventory levels going forward, we think we’ve kind of worked our way through this so really by September quarter, we think we’ll have our inventory back down to where we think it’s a healthier level. And as we work through this excess inventory, I’d like to see us back to around $50 million level of total inventory, possibly lower. But there it depends on growth in business as well.

So that’s kind of my thinking is by September is trying to target, trying to get down to a $50 million level.

John Cobb

And just to be clear, the $10 million is the amount of inventory that we purchased so it was really an impact on the cash. It doesn’t really have an impact on our P&L.

Daniel Berenbaum – Auriga USA

Right. So that was actually the question. I’m glad you covered. There was no impact and there’s no sort of ongoing impact to the P&L from anything that you’re doing with the foundries.

John Cobb

No.

Daniel Berenbaum – Auriga USA

OK. Great. Thank you.

Operator

And we’ll go next to Raji Gill with Needham & Company.

Raji Gill – Needham & Company

Yeah thanks and congrats on good results. I wanted to dig a little deeper on the automotive concerns. It is a little more than a quarter of your business. Any specifics in terms of what’s going on there with customers? Are they having difficulty getting their manufacturing operations back online? Are you seeing any slowdown from that particular segment heading into the June quarter? Any thoughts on that would be helpful.

Scott Howarth

Sure. We haven’t seen any specific slowdown yet. We’ve only had about two or three customers starting to warn us that there could be shortages coming from other component manufacturers. I think one of the biggest concerns is Renaissance since they deport a lot of the microcontrollers that go into the automotive market.

So we’re seeing the potential. We might experience – they’re telling us we could see some push outs this quarter if they’re not able to secure the supply that they need as well. So, but no customer is telling us that they’re pushing out yet, so I believe most of our customers are really trying to work through all the supply issues, all the supply problems.

As you know in Japan, I think it’s been difficult to really get updated information, so I know some of our customers from feedback that we’re getting are still trying to work through the information they’re getting, alternate supply and working through their production plans for the quarter.

As you know, recently Toyota for example, announced that they expect to see their production down significantly. We don’t really support Toyota as a primary customer. It’s an area we’ve been trying to grow and develop into, but we’ve seen US customers now are picking up business as well. So we think we might be able to even get some balance if some of the US customers or European customers can get supply of critical components. We might see business balance out between the two.

Raji Gill – Needham & Company

Would you say that the majority of your auto business is from Japanese automotive companies?

Scott Howarth

No, it’s mostly US and Europe.

Raji Gill – Needham & Company

OK. So it seems like it’s you’re saying you don’t see the impact. You don’t see any disruption of supply chain; however, we’re still cautious. I guess based on this commentary from customers, it doesn’t seem anything intangible in terms of order patterns or anything of that nature that you’re seeing.

Scott Howarth

Correct. Nothing has materialized yet.

Raji Gill – Needham & Company

OK.

Scott Howarth

We’ve had a few customers have just given us early warning that they may need to push out backlog.

Raji Gill – Needham & Company

And on the, I guess going back to the gross margins, I’m just kind of curious to see why the margins wouldn’t be up if the Si En acquisition is going to accelerated and pricing is going to be kind of flat to down. I’m just wondering why there wouldn’t be a bit of a higher margin lift quarter to quarter.

John Cobb

So two things. First is as I mentioned in the commentary, that new Taiwan dollar, the strengthening of the new Taiwan dollar versus the US dollar pushed down our gross margin about 80 basis points and then the mix also. Our SRAM revenue was down sequentially where DRAM was up and as Scott mentioned earlier, we have a higher gross margin on SRAM.

So those two factors alone are about 120 basis points. So if you take that with our non-GAAP gross margin, we did an adjusted – we did about 35% if you adjust for those two things in the March quarter versus the 34% apples to apples kind of basis that we did in the December quarter.

So I think from that perspective, we did see some improvement and the guidance range that we gave was 33% to 35%.

Raji Gill – Needham & Company

Any visibility or thoughts into the September quarter that you can give us right now with this vantage point?

Scott Howarth

It’s a bit early for us. Typically as I’ve said, we’ll enter a quarter about 50% booked so for the September quarter, we are seeing backlog picking up, but again, I think it’s kind of normal patterns at this time. So at this point we do expect to see growth, which is normal for us going into the September quarter, but we don’t have any other indications really to give us additional details as we look at the September quarter.

Raji Gill – Needham & Company

And the end markets, the strength in industrial, what are some of the primary drivers of that upside in industrial? Is it just expanding memory content? Is it share gains? Any commentary there, and also with respect to communications segment, you had mentioned the inventory correction on SRAM is more or less over, so would you expect communication to start to pick back up? Any commentary on kind of overall enterprise spending, wireless networking spending, wireless spending, wireless CapEx in the back half of the year?

Scott Howarth

Let me start with the industrial. I believe our industrial, we saw a rebound and again, that was partially due to the inventory correction so our customers had slow down ordering, they started to pick up again. I think it’s just a combination.

The industrial market is so broad it’s hard to pinpoint one exact area but it’s – we’re in so many different design wins, we’re just now seeing revenue growing with a lot of design wins that we’ve had in the past. We’re in energy, energy meters for example. We’re in a variety of different industrial applications. So the design wins are too broad. It’s difficult to pinpoint one exact area.

As far as networking and telecommunications, we do believe we’ll continue to see growth there driven by a combination of just networking build out as well as bay station build out. In the last quarter or so, we did see some inventory correction. We saw some of our telecom customers had delayed bay stations as they were going through inventory correction themselves and we now think that they’re starting to get back to normal ordering patterns again.

So our belief going forward is we’ll start to see these end markets continue their normal growth. In our position inside of it, we think we will continue to gain and win designs as well as grow market share.

Raji Gill – Needham & Company

Great. Thank you very much.

Scott Howarth

Sure. Thank you Raji.

Operator

And we’ll go next to Chris Sigala with B. Riley & Company.

Chris Sigala – B. Riley & Company

Good afternoon. Thanks for taking my question. First question is just on the wafer supply front. It sounds like you guys are fairly confident that wafer supplies won’t be a huge issue here in the near term. Just curious what gives you that sort of assurance and if you’ve begun any sort of buffer wafer inventories that you guys are holding now. Any more color on that would be helpful. Thanks.

Scott Howarth

Sure. On wafer starts right now, the DRAM foundries that we use clearly have enough capacity. We haven’t seen any tightness or pushing out of lead times. And also on the SRAM side. We’ve seen adequate capacity on the SRAM side.

For DRAM also, as you know, we’re talking in the past, we have a long term agreement with one foundry to guarantee a minimum supply of wafer starts and that agreement now is now through 2014. So that combination gives us the belief that we clearly have adequate wafer supply.

Secondly then on just inventory, as you can see, I mean we do have a little bit higher inventory than we would like to and I think that’s actually put us in a better position, particularly with the Japan crisis and shortages that may be occurring. It’s really given us a little bit of leverage by the fact that we do have inventory. So it’s actually being a benefit to us at this point.

We’ll transition as I mentioned earlier, the inventory that we’re holding for kind of last time buys for our customers, but at the same time, we have adequate inventory to support current business and business growth.

Chris Sigala – B. Riley & Company

OK great. Thanks. And then just my last question on Si En, it sounds like the integration is going fairly well and to plan. I’m curious if you could kind of walk us through a little bit of your plans for growing that business and if you’re looking outside the China geography, what your plans and timeline is for that? Thanks?

Scott Howarth

Sure. Good question. The integration plans are fairly specific as we start working through different markets. So first goal clearly is to integrate and make certain we can maintain their current customers and support their existing business growth. So we’re taking their products now and putting ISSI brand and we’re starting to move those into other markets.

So other markets being like India market, Korea market, looking at Taiwan market that will use either the audio amplifiers or some of the LED drivers that currently they’re having significant success with in China.

One of the biggest opportunities we see is really going after the India cell phone market. We think that is a very, very large market and one where their audio amplifiers as well as LED products will clearly have a significant market opportunity there. And as we mentioned, the audio amplifier product that they’re selling is not shipping into about 70% of the non OEM, non ODM cell phone market in China, so they’ve had significant success with it.

We’re also trying then to migrate the products into other markets, either for audio looking either at notebook or any type of portable markets where we could continue to leverage it; even introducing it into various headsets as well as bringing out additional amplifier products.

On the LED side, that’s certainly a much broader market and our focus there is first in LED back lighting and then also looking at LED driver in a variety of industrial and other applications as well. So that’s a market as we look at US, Europe, Japan, etc., we’re now starting to work with distributors and start to get information from customers on what specifics and what exact product solutions that they’ll want to see going forward.

So that’s essentially as we look out through the year how we plan to transition their business so we can support it and then also grow into additional markets.

Chris Sigala – B. Riley & Company

Great. Thanks a lot.

Scott Howarth

Thank you.

Operator

And we’ll go next to a follow up from Daniel Berenbaum.

Daniel Berenbaum – Auriga USA

Hi. Thanks for taking the follow up. On OpEx, so basically guided flat sequentially even though you have an extra month of Si En. Are there going to be more costs coming out with the acquisition? I mean how should we think about kind of an ongoing OpEx percent of sales?

John Cobb

As I mentioned in my comments, one of the reasons why actually our operating expenses was a little higher last quarter was product math costs. We spent $1.5 million on math in the March quarter and that’s all expenses in R&D expense and we expect to spend less than half of that in June quarter, so that will offset the addition of the one more month of Si En.

Daniel Berenbaum – Auriga USA

OK. But then should I think about expenses sort of running around this level for the rest of the year?

John Cobb

I think the 15 to 15.5 is as I said, with the math costs it will fluctuate up and down but kind of on an average level, that’s about right.

Daniel Berenbaum – Auriga USA

OK great. Thank you.

Operator

We do have one last question from Jack Walker with Peninsula Capital Management.

Jack Walker – Peninsula Capital Management

Hi Scott and John, how are you guys doing?

Scott Howarth

Good Jack.

John Cobb

Hi Jack.

Jack Walker – Peninsula Capital Management

Jumped in there last minute looks like. The theme over the last several quarters with you guys has been quite a few announcements on design wins. When you look at where you guys are and (inaudible) sampling, are any of those design wins, can they be incremental to revenue this year or is that more of a 2012 type of event?

Scott Howarth

Most of the designs wins as we work through it, there are some that is six months would be the earliest, but typically design win will start to see revenue in about six months out to nine months. In automotive it could even be longer in terms of design wins.

So what we typically will track is the dollarized amount of design wins and what John and I are really reporting is we’re continuing to see an increase in the overall annualized dollarized design wins. And that or us becomes a key indicator that clearly shows us that we’re growing from a design win standpoint over existing business and we think we can continue to grow throughout both SRAM and DRAM.

John Cobb

And where you see that, this last quarter is in both industrial and automotive where we had strong growth in revenue, especially on a year over year basis, in those two markets, and that was driven by some of the design wins that we talked about two or three quarters ago. Unfortunately, because of the weakness in the communications market and to a lesser extent the consumer market, the overall revenue was basically flat in SRAM and DRAM.

But again, the design wins we talked about two or three quarters ago were really major drivers of the strength in industrial and automotive segment.

Jack Walker – Peninsula Capital Management

Got it. OK. Thanks so much guys. Really appreciate it.

Scott Howarth

Sure. Thank you.

Operator

And Mr. Howarth at this time there are no further questions. Sir, I’ll turn the call back to you.

Scott Howarth

Great. Thank you for participating in this call. We plan to participate in two upcoming investor conferences. We will present at the Twelfth Annual B. Riley & Company Investor conference in Santa Monica, California on May 25 and at the Sterne Agee Second Annual Technology conference in New York City on May 26. We hope to see you at these events. Have a good evening.

Operator

And ladies and gentlemen, that does conclude today’s presentation. We thank you for your participation.

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: Integrated Silicon Solution's CEO Discusses F2Q 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts