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Pericom Semiconductor (NASDAQ:PSEM)

F3Q 2011 Earnings Call

May 4, 2011 04:30 PM ET

Executives

Robert Strickland – Treasurer

Aaron Tachibana – CFO and SVP - Finance

Alex Hui – President and CEO

Analysts

Krishna Shankar – Thinkequity

Hans Mosesmann – Raymond James

Christopher Longiaru – Sidoti

Operator

Good day ladies and gentlemen and welcome to the Pericom Semiconductor Corp third quarter 2011 earnings conference. At this time, all participants are in a listen-only mode. Later we will have a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch tone telephone. As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Robert Strickland, Treasurer. Sir, you may begin.

Robert Strickland

Thank you. Good afternoon and welcome to Pericom’s third quarter fiscal year 2011 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.pericon.com and click on the investor’s link.

Today, the company will discuss its financial results, comment on the industry and on Pericom’s business and provide guidance for the fourth 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 factor sections of such filings.

In accordance with regulations of fair disclosure, Pericom will continue to only provide guidance via 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.

Aaron will discuss the financial performance for the quarter, and Alex will give his comments on the industry and on Pericom’s business. Then Aaron will provide guidance for the fourth quarter of fiscal 2011. Aaron.

Aaron Tachibana

Thank you Bob and good afternoon everyone. Although our Q3 net earnings were not at the same level as the previous five quarters, we remain profitable and generated positive cash flow from operations.

We continued to focus on asset utilization and maintaining a strong balance sheet. During the quarter, we reduced in-house inventory by $3 million or 11% sequentially and also reduced channel inventory from eight down to seven weeks.

Cash and marketable securities were $121 million at the end of Q3 and were flat from last quarter. Consistent with the last two quarters, please note that we are reporting non-GAAP financial measures for net income, gross profit and operating expenses in addition to our GAAP financial result. Due to the PTI acquisition, we had a significant amount of non-cash and non-operating expense items included in the income statement which were not reflective of performance for our normal business operation.

Now let’s review some of the detail. Our consolidated net revenues for the third quarter were $39.6 million and represented a 3% decrease from the $40.7 million reported last quarter and an 8% increase over the $36.7 million for the same period last year.

The Q3 sequential decrease of 3% was mostly due to the inventory reduction efforts by our distributors and customers. As mentioned earlier, the channel inventory decreased from eight down to seven weeks during the quarter.

The Q3 geographic distribution was as follows: Asia, 89%, US 7% and Europe was 4%. Our channel sales mix was international distribution 59%, contract manufacturers 25%, OEM’s 12% and US distribution was 4%.

Consolidated non-GAAP gross profit was $12.9 million for Q3 compared with $14.8 million last quarter and $13 million last year. Non-GAAP gross margin for the third quarter was $32.6% and was 3.7% lower than last quarter’s $36.3% and 3% lower than year’s 35.6%. The sequential gross margin decrease was primarily due to higher absorption charges that results from lower production volume.

Non-GAAP operating expenses were $10.6 million for Q3 compared with $10.5 million last quarter and $9.5 million last year. The Q3 operating income on a non-GAAP basis was $2.2 million or 6% of revenue compared with $4.2 million or 10% of revenue last quarter and $3.6 million or 10% of revenue for the same period last year. The sequential decrease was primarily due to the 3.7% decline in gross margin.

Interest and other income was $1.3 million for Q3 compared with $.8 million last quarter and $1.2 million last year. The sequential increase of $.5 million was mostly due to a $.3 million of currency exchange gain in Q3 compared with a $.1 million exchange loss last quarter.

Income before tax was $3.6 million on a non-GAAP basis for Q3 compared with $5.1 million last quarter and $4.8 million last year. On a non-GAAP basis, the effective tax rate was 31% for Q3 compared with 21% last quarter and 33% for the same period last year. The Q3 sequential tax rate increase was primarily due to the mixture of domestic versus foreign income and year to date true ups.

Non-GAAP net income was $2.5 million or $0.10 per share for Q3 compared with $4.1 million or $0.16 per share last quarter and $3.8 million or $0.15 per share for the same period last year.

Now let’s turn to the balance sheet. Cash, including both short and long term investments and marketable securities was $121 million or $4.84 per share at the end of Q3 and was flat from last quarter.

Capital equipment additions were $.9 million and depreciation expense was $1.9 million for Q3. During the quarter, we also repurchased 116,000 shares for $1.1 million.

Working capital was $113 million at the end of Q3. Accounts receivable was $25 million and DSO was 58 days. Net inventory was $25.5 million equating to 87 days of supply.

Our book value per share was $9.63 at the end of Q3.

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

Alex Hui

Hi there Aaron. Our fiscal Q3 revenue and operating expenses came in within our expectations as we conclude fiscal Q3. We believe that inventory corrections we have seen in the last two to three quarters are completed.

Our book to bill ratio in fiscal Q3 exceeded one for the first time in three quarters. Also, sales help from distribution in Q3 was up 3% over the prior period. Our near term outlook is positive and we expect to resume revenue growth and gross margin improvement in the remaining quarter of 2011.

Our Q3 gross margins were down sequentially and this was mostly attributable to the higher (inaudible) related to lower production volume. The Q3 volume should be back to where we were a few quarters ago, minimizing the negative absorption costs.

Our China FCT factory is off to a good start in 2011. We have ramped up to eight million units per month ending March and will continue to ramp up the next few quarters. We have continuously improved our year end quality as volume increased at the factory. We expect the China factory to contribute positively towards our earnings in second half of calendar 2011.

We generated $4.2 million of non-GAAP EBITDA in fiscal Q3 and we reduced in house inventory by 11% and channel inventory by one week, which is now at seven weeks of supply versus eight weeks about a quarter ago.

Our top five end customers account for 30% of our total revenue and no customer accounts for over 10% of total revenue in Q3. The revenue mix for our product family was, IT 67%, of which 11% came from PDI. The remaining 56% of the IT products, including analogy switches 28%, digital switches 5%, silicon clock 7%, connect 15% and interface 1%.

New product introduction and design win activities remained strong in the quarter. We announced 17 new products for our signal integrity, switching and timing products areas for notebook computer, service, networking, storage and embed applications.

To support the adoption of high speed signal connectivity in networking and embed applications, we optimized our five gigabit driver product to enable longer transmission distance in these applications. We also introduced our HiFlex crystal XO and clock related families offering customers their low jitter performance in small size packages with very short production lead time.

I’ll refer you to our earnings press release for additional information regarding the new product introductions.

Some updates on our recent design win activities. We had several design wins on PCI-X with our re-switching and timing products. That will translate to revenues of several million dollars per year. We have started shipping to customers in the March quarter.

We had several design wins with our PCI Express to USB switch bridge combo chip on high performance embed applications. This single chip product will replace up to three IC’s and save customers significant bond costs, (inaudible) and participation budget. We have scored over 20 design wins for this product since introduction last year and we start to ship to customers in volume in the June quarter.

We also had several design wins with our USB three pin charge and also our USB 3.0 re-driver products on several notebook platforms. Several PCI Express have reached design wins on networking and (inaudible) applications.

Today we are shipping our first and generation connectivity and timing products, supporting all major server protocols in computer, communication and consumer applications. Our first generation silicon integrity, switching and timing products for PCI Express 3.0 and USB 3.0 are being designed in the next generation service, high end work stations, storage systems and notebook computers. We expect these designs will enter production in the later part of calendar 2011.

We believe the market opportunities for high speed serial connectivity and timing products will continue to expand. We also believe in the strength of enterprise computing market as the global economy continues to improve. Pericom is well positioned to benefit from these positive business trends.

At this time, I would like to pass it back to Aaron to give our guidance for the fiscal fourth quarter of 2011.

Aaron Tachibana

Thank you Alex. We entered fiscal Q4 with a higher backlog compared to last quarter. We have also seen good turns bookings quarter to date. As of today, our backlog plus billings has us 80% plus covered for our targeted shipments this quarter. Overall, we expect to see sequentially higher revenue shipments and better gross margin this quarter as well as throughout the rest of calendar year 2011.

We currently expect the Q4 non-GAAP results to be as follows; revenues in the range of $41.5 million to $43.5 million, gross margin in the range of 34.5% to 36.5%, operating expenses are expected to be in the range of $10.7 million to $11.3 million. Other income is expected to be approximately $0.6 million to $9 million, consisting of interest income, realized gains from cash investments and currency exchange gains and losses. The effective tax rate will be in the range of 27% to 30%.

This concludes our formal comments and we can now open up the session for Q&A. Thank you everyone for joining us on the call today.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Krishna Shankar from Thinkequity. Your line is open.

Krishna Shankar – Thinkequity

Yes. Alex and Aaron can you give me some sense for it sounds like the China distribution business is improving nicely from the December quarter. Can you give me some sense of which end markets you’re seeing strength in in China and Asia?

Alex Hui

Yes, essentially we seeing our silicon business from enterprise computing and we’ve seen weakness in terms of the consumer computing. Our networking business is up. We see a slight weakness in terms of the telecom business from China, but as of this quarter actually, we’ve seen the telecom business coming back quite healthy.

Krishna Shankar – Thinkequity

Okay. And for the March quarter, can you give us some sense for your revenues by end markets, PC’s, service, storage, networking and consumer electronics.

Aaron Tachibana

Sure Krishna. In terms of the end markets, computing, computer was 40% to 42%. Inside of that, PC notebook was 28% to 29% of the total so basically server storage was one-third of our total revenues, communications and networking and telecom, 32% to 34%, consumer 16% to 17% and all other and embedded was roughly 8% to 10%.

Krishna Shankar – Thinkequity

Okay. And the PCI business has continued to track at about corporate gross margins?

Aaron Tachibana

Krishna, during the March quarter, actually the PCI margins were down as well as the rest of our segments as well so all three business areas were down in the March quarter primarily due to these absorption variances. So the PCI business in the March quarter typically is down because of the holidays so they lose a couple of weeks and in terms of the distribution inventory rebalancing, they were affected a little bit by that as well.

But in terms of that, as we look forward here, the PCI run rate looks like it’s getting back to the normal run rate, over $5 million or so and the gross margins are expected to be over the corporate average as well.

Krishna Shankar – Thinkequity

So the PTS has a quarterly run rate over about $5 million a quarter you said?

Aaron Tachibana

That’s correct.

Krishna Shankar – Thinkequity

Okay, thank you.

Aaron Tachibana

You’re welcome.

Operator

Thank you. Our next question comes from the line of Hans Mosesmann from Raymond James. Your line is open.

Hans Mosesmann – Raymond James

Thank you. Hey Alex, can you give us a sense of how if you were impacted at all by the stall in the March quarter with the intel [sandy bridge] and how does your participation in that platform, how is that panning out as we go forward? Thanks.

Alex Hui

As you see our computing revenues stayed pretty much above the 40% level so we actually see minimal impact with regard to the [sandy bridge] stall. We are pretty much on track in terms of the current generation of the intel [sandy bridge] platform. We are working very actively in terms of the design for the next [sandy bridge] platform.

So basically, we see that in the server products, we’ll probably go as I mentioned earlier, the factory will go into production in the later part of this year. (inaudible) next generation notebook will be a little earlier than that.

Hans Mosesmann – Raymond James

When you say server, are you talking specifically about the intel platform?

Alex Hui

Yes. Exactly.

Hans Mosesmann – Raymond James

Okay.

Alex Hui

We will be deploying the PCI-X generation three.

Hans Mosesmann – Raymond James

Okay. You mentioned you had some design win in tablets and what is the competitive dynamic there and what’s your dollar content if you can share that with us?

Alex Hui

Right now, ranging on the different platforms, we are ranging from about $0.50 to $1.50 from different configurations. We have design wins with several customers in the platform and as I mentioned, we start shipping towards the later part of last quarter and we’ll be ramping up for the rest of this year.

So far I think we’re doing quite well. I expect this will translate to a multi-million dollar business on an annual basis.

Hans Mosesmann – Raymond James

Okay, thank you. And on the frequency control side of things, the fully integrated XO, how is that transitioning? Is that coming along as expected or were there any delays in the consolidation of the supply chain or the build of material?

Alex Hui

Actually it’s going along quite well. Actually as I have shared, (inaudible) our focus in to really increase the mix of our crystal oscillator products with the crystal because we feel that we have a higher margin in the crystal oscillator products. I think we begin to see a positive transpiring this quarter that we’ve seen an increase in the mix of XO products, which I believe will help to uplift the gross margin of our (inaudible) products over time.

Hans Mosesmann – Raymond James

And the last one, what if you can comment on if any impact due to the Japan tragedy in terms of your supply chain and your customers and given that you’re in frequency control products, your competition tends to be located out of Japan. Are you seeing from a competitive dynamic, some kind of uplift coming from them?

Alex Hui

With regard to the supply chain, up to now we did not see any significant impact, so we will not see any impact in terms of our ability to deliver products to our customers. What I think is tricky, most people point out, we don’t know what our industry peers would do and how that would affect the total volume with regard to systems that we’re shipping, so that remains to be seen.

In terms of the frequency control products yes, the bulk of our competitor is from Japan and we are seeing increased inquiries from some of our customers in terms of qualifying our products. So the real benefit remains to be seen but we’re certainly seeing more inquiries in terms of design and our products.

Hans Mosesmann – Raymond James

Thank you very much.

Alex Hui

Thank you.

Operator

Thank you. Our next question comes from the line of Christopher Longiaru from Sidoti. Your line is open.

Christopher Longiaru – Sidoti

Hey guys, congratulations on the guidance.

Aaron Tachibana

Thank you.

Alex Hui

Hi Chris.

Christopher Longiaru – Sidoti

My first question is, I just didn’t hear. Did you repurchase any shares in the quarter?

Aaron Tachibana

Yes we did Chris. We repurchased about 116,000 shares at $1.1 million.

Christopher Longiaru – Sidoti

Okay and that was just a housekeeping question. And my next question actually has to do with just in term of your inventory levels here, what are we looking at going forward? It seems like we’ve been trending up slightly and then that was due to the, a little bit of an inventory glut. It seems like at this point we’ve come down considerably in March. Where do you think we level off and what kind of inventories do you think you’ll be targeting going forward?

Aaron Tachibana

Good question. So basically over the last two to three quarters our inventory was actually on the incline primarily due to some of the longer lead times in placing orders and some of the things that were going on with things in the channel over the last quarters.

This March quarter we decreased inventory by $3 million or about 11%, so we believe in this next quarter, Q4, inventory should be plus or minus 2.5% to 3% range. It’s going to be – we’re going to try to keep it in the flat to down range. We’ve got a lot of focus on the inventory side. We want to make sure that we continue to reduce it and we believe that the next couple of quarters as we had mentioned Chris, the business should be on the incline, so if we can keep our inventory in the flattish range as business increases over the next two to three quarters, I think we’ll be pretty pleased.

Christopher Longiaru – Sidoti

And then just on – what are your lead times looking like now? How did they change over the course of the March quarter?

Alex Hui

We’re running about a six to ten weeks right now. It depends on the type of products and that has really not changed much.

Christopher Longiaru – Sidoti

Okay. And then just lastly, in terms of turns for your guidance, what’s your turns number that you assume?

Aaron Tachibana

So in terms of the turns for the guidance, it’s going to be in the 33% to 35% range, so again, much lower than what we needed in Q3 for the March quarter.

Christopher Longiaru – Sidoti

Great. All right. Thank you guys. Congratulations again.

Alex Hui

Thank you.

Operator

Thank you. And I show no further questions in the queue and would like to turn the conference back to Alex Hui for closing remarks.

Alex Hui

I’d like to thank all of you for participating in the call and I’d just like to wish all of you a good afternoon. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.

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