Pericom Semiconductor CEO Discusses F4Q11 Results - Earnings Call Transcript

Aug. 9.11 | About: Pericom Semiconductor (PSEM)

Pericom Semiconductor Corporation (NASDAQ:PSEM)

F4Q11 (Qtr End 07/02/2011) Earnings Call

August 9, 2011 4:30 pm ET

Executives

Robert Strickland - IR

Alex Hui - President and CEO

Aaron Tachibana - CFO

Analysts

Brian Peterson - Raymond James

Krishna Shankar - ThinkEquity

Operator

Good day ladies and gentlemen and welcome to the Pericom Semiconductor Corporation fourth quarter 2011 earnings conference call. (Operator Instructions) I would now like to turn your conference over to your host for today, Mr. Robert Strickland.

Robert Strickland

Good afternoon and welcome to Pericom's fourth 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 first quarter of fiscal 2012. 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 first quarter of fiscal 2012. Aaron.

Aaron Tachibana

Thank you, Bob, and good afternoon everyone. We recently concluded fiscal year 2011, which was very successful. Although the economic environment was turbulent, we still reached a new record revenue level of $166 million for the year.

Another key highlight was the PTI acquisition that we closed during the first quarter of the year. Our balance sheet remained in excellent condition. We improved our cash per share by 8% year-over-year to $5.12, and also improved our book value per share by 11% year-over-year to $9.74.

Consistent with the last three 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 results. Due to the PTI acquisition, we have a significant amount of cash and non-operating income and expense items included in the income statement, which are not reflective of the performance of our normal business operation.

Now let's review some of the detail. Our consolidated net revenues for the fourth quarter were $43.3 million, an increase by 10% from the $39.6 million reported last quarter, and increased by 4% over the $41.5 million for the same period last year. Please note that last year's Q4 included one extra week, so the normalized year-over-year change was actually 12%.

During Q4 the networking and communications and the enterprise computing segments were relatively strong, while the consumer segment was weaker on a sequential basis. For the full fiscal year, net revenues were $166.3 million and represented a 13% year-over-year increase. When normalizing for last years extra week, the growth was 16%.

The Q4 geographic distribution was as follows, Asia 91%, U.S. 6%, and Europe 3%. Our channel sales mix was, international distribution 68%, contract manufacturers 24%, OEMs 6%, and U.S. distribution 2%.

Consolidated non-GAAP gross profit was $15.7 million for Q4 compared with $12.9 million last quarter, and $15.4 million last year. Non-GAAP gross margin for the fourth quarter was 36.2% and was 3.6% higher than last quarter's 32.6%, and 0.8% lower than year's 37%.

The sequential quarter gross margin increase was due to a couple of factors. First, we had some favorable mix due to the decline in product shipment for the consumer segment. And also, our oscillator volume increased quarter-to-quarter. And second, we had much lower unfavorable absorption charges compared with last quarter due to higher volume.

For the full fiscal year consolidated gross margin was 35.1% compared with 34.8% last year. And gross profit was $58.4 million compared with $51.2 million last year.

Non-GAAP operating expenses were $11.2 million for Q4 compared with $10.6 million last quarter and $10.8 million last year. The Q4 operating income on a non-GAAP basis was $4.5 million or 10% of revenue compared with $2.2 million or 6% of revenue last quarter, and $4.5 million or 11% of revenue for the same period last year.

The sequential increase was primarily due to the higher revenue volume and also the 3.6% increase in gross margin. Our total fiscal year 2011, non-GAAP operating income was $15.7 million and was 37% higher than the $11.5 million last year.

Interest and other income was $0.9 million for Q4 compared with $1.3 million last quarter, and $1.1 million last year. The decrease of $0.4 million was mostly due to Q4 having a $0.1 million currency exchange loss, while last quarter had a $0.3 million gain.

Income before tax was $5.4 million on a non-GAAP basis for Q4 compared with $3.6 million last quarter, and $5.6 million last year. The non-GAAP effective tax rate was 34% for Q4 compared with 31% last quarter, and 28% for the same period last year. The Q4 tax rate was higher than last quarter and last year, primarily due to the mixture of domestic versus foreign income.

Non-GAAP net income was $3.6 million or $0.14 per share for Q4 compared with $2.5 million or $0.10 per share last quarter, and $4.8 million or $0.19 per share for the same period last year. For the full fiscal year, non-GAAP net income was $14.4 million or $0.56 per share compared with $13.9 million or $0.54 per share last year, which was a 4% year-over-year increase.

Now let's turn to the balance sheet. Cash, including both short and long-term investments in marketable securities was $128 million or $5.12 per share at the end of Q4, an increase by $7 million from last quarter. Capital equipment additions were $2.4 million and depreciation expense was $2.2 million for Q4. During the quarter we also repurchased 334,000 shares for $3 million.

Working capital was $129 million at the end of Q4. Accounts receivable was $28.2 million and DSO was 59 days. Net inventory was $21.9 million and decreased by $3.5 million from last quarter, and days of supply was 72 days compared with 87 days last quarter. And as mentioned earlier, our book value per share was $9.74 at the end of Q4.

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

Alex Hui

Thank you, Aaron. We are pleased to see revenue and gross margin for our fiscal Q4 came in at the high-end of our previous guidance. We also reported record revenue in fiscal '11. We made very good progress in reducing our in-house inventory, improving inventory returns from $4.2 million to $5.0 million sequentially.

Channel inventory of 7.4 weeks ending in Q4 was within a healthy range of six to eight weeks. However, with the reduced lead time on our products and also because of slow global macroenvironment, we expect our channel partners might work to further reduce the inventory on hand.

We had a very nice rebound, while our gross margin in fiscal Q4 improving 3.6% sequentially to 36.2% on a non-GAAP basis. This was driven by a combination of better product mix and also reduced manufacturing capacity and absorptions.

We acquired the remaining interest of PTI, our sister company in China, in August of 2010 and made a very good progress in the integration of PTI into Pericom. We are pleased to report that PTI has achieved its revenue and margin dollar goal for fiscal '11. We look at consolidation of PTI functions in the Pericom and driving sales synergy in fiscal '12.

Our top five end customers account for 29% of our total revenue and no customer accounts for over 10% of revenue in Q4. The revenue mix for our product families was IC 66% and FCP 34%. IC revenue includes 12% from PTI. The remaining 54% of the IC mix include analog switches 26%, digital switches 5%, clock 7%, connect 14% and interface 2%.

We introduce a total of 17 new products across Signal Integrity, Timing and Switching product lines in our fiscal Q4. I'll refer you to our earnings press release for further information.

I will give you some updates on our recent design win activities. We scored multiple design wins with our high-performance IC product family at several key networking and telecom customers in North America, China and Japan. Some of these parts are being used across multiple system platforms with good total volume. We have received early production orders and expect to ramp up in 2012 with multiple million dollar revenue and better gross margin.

We saw strong interest in our USB 3.0 signal integrity solution, and we have multiple programs going on to the next-generation notebook and PC platforms. We have multiple design wins with our PCI Express Gen III switch and signal integrity solution in next-generation PCs and servers.

While the major chipset suppliers have delayed the launch of PCI Express Gen III system department to early next calendar year, many customers are designing their parts to be launched at Gen III initially and upgrade to Gen III next year.

We have seen the spread of our USB smart charge solution from initially PC and notebook applications to now embedded applications such as automobile, printers and chargers. We also have multiple design wins with our timing products in SSD, solid-state drives, applications.

We see many opportunities for our products in networking telecom, service, storage and embedded markets. And we are pushing hard to increase our revenue mix from these market segments.

Recently, we are pleased to obtain preferred supplier status with a major automobile system provider, leveraging our broad timing product solution and our automobile certified-factory in Taiwan. As serial high-speed protocols continue to upgrade their speed from generation-to-generation, we have seen an increasing demand for our signal integrity and switching solution to achieve good system performance and high system reliability in data center, enterprise network and telecom applications.

We are excited with the expanding solution that Pericom provides to our customers to enable high-performance serial connectivity. While we see the near-term macroenvironment as challenging, we believe our leadership position in serial connectivity solution, which will drive our growth going forward.

I'd like turn the time back to Aaron to give our guidance.

Aaron Tachibana

The overall macroenvironment has been weak in the past few months, especially for the consumer segment. We are expecting a sequential decline of 4% to 12% for our Q1 revenues due to the recent slowdown and possible inventory corrections that could take place near term.

Our Q4 book-to-bill was slightly less than 1, and we entered Q1 with lower backlog than last quarter. Our quarter-to-date turns bookings have been relatively slow thus far, and our backlog plus billings has us roughly 75% covered for this quarter's targeted shipment.

As Alex mentioned earlier, it's quite possible that our distribution channel partners could reduce their on-hand inventory this quarter and lead times have come way down. And this could have a negative effect on us near term.

With this uncertainty and very limited visibility, we're providing a wider range for our revenue guidance this quarter. We currently expect the Q1 non-GAAP results to be as follows: revenues in the range of $38 million to $41.5 million, gross margin in the range of 34.5% to 36.5%. Operating expenses are expected to be in the range of $10.8 million to $11.4 million. Other income is expected to be approximately $0.6 million to $0.7 million, consisting of interest income and realized gains from cash investments and currency exchange gains and losses. The effective tax rate will be in the range of 32% to 44%.

This concludes our formal comments, and we can now open up the session for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Hans Mosesmann from Raymond James.

Brian Peterson - Raymond James

This is Brian Peterson in for Hans. Just first question on the guidance. It sounded channel like you're baking in not only a slowdown in demand, but an inventory correction. I wanted to get a sense of how low do you think inventories could potentially go with distribution and how would that compare to the lowest levels when we saw the downturn in 2008 and 2009.

Aaron Tachibana

As Alex had mentioned, the lead times have come down and capacity is out there from the fab and sitcomp perspective. And so we believe that distributors are going to try to not hold on to any more inventory than they need to. Right now, we ended the quarter with 7.5 weeks or so. So it could go down as much as a week, which would be 6% to 7% or so from the volume standpoint.

We believe our inventory has been in pretty good shape over the last couple of quarters as we've ratcheted it down, but we believe there could be some further tightening from the distribution side.

Brian Peterson - Raymond James

And just on the demand point, is it just more consumer-related softness that you're kind of baking in for the third quarter, any color by end market?

Aaron Tachibana

In terms of the weakness, it's still in the consumer sector, and some of the low-end PCs that are going into consumer hands, that has a little bit of weakness as well. Our enterprise computing and networking has been pretty strong over the past couple of quarters. And right now, looking for the economic environment to that, it could flatten out a little bit, but we believe it's still going to be okay.

Brian Peterson - Raymond James

Could you talk about Japan, any potential impact it had this quarter?

Alex Hui

Our revenue contribution from Japan was relatively light, and we did not see a sustained impact from the Japan market.

Brian Peterson - Raymond James

I know a lot of your competitors are located there. Do you think that that there is any benefit to you guys in this?

Alex Hui

Not really. We believe Japan has recovered pretty well by now. So we did not see any issue either for us or for our competitors.

Brian Peterson - Raymond James

Could you guys talk about the utilization rates in your FCP factories?

Alex Hui

Today, we've running at about 80% to 85% utilization.

Operator

(Operator Instructions) And our next question comes from the line of Krishna Shankar from ThinkEquity.

Krishna Shankar - ThinkEquity

Can you talk about the design win activities for the new PCI Express Gen III? And collectively what was PCI Express as a percent of revenue? And can you also talk about the trajectory for gross margins beyond the September quarter in terms of the new products and how they would impact gross margins over the next 12 months?

Alex Hui

There were a lot of activities related to the design of Gen III PCI Express platform. But also, the major chipset guy has now essentially pushed out the deployment of Gen III platform to what we could say earlier next year. So interestingly, some of this platform could be released in later part of this year, but initially Gen II and then as time progresses, will be upgraded to Gen III speed. So we are working very closely with the top OEMs in both this Gen II, Gen III transition. And as we mentioned in earlier comment, we're seeing a lot of activities going on.

Today, PCI Express is probably about 20% to 30% of our revenue, and we expect it to continue to ramp up.

Krishna Shankar - ThinkEquity

The longer-term trajectory for gross margins?

Alex Hui

We feel positive about the gross margin trend. We are seeing a better mix of products. As time progresses, we certainly will continue to push towards expanding our margins.

Operator

Thank you. And with no further questions in queue, I would like to turn the call back over to management for any closing remarks.

Alex Hui

I'd like to thank all of you for your support and participation. We'll be at the ThinkEquity Conference in September 13. So we look forward to seeing some of you over there. And if you'd like to set up a meeting, please contact to set up a one-on-one. Thank you again for the participation and support. Wish you all a good afternoon.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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