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Pericom Semiconductor (NASDAQ:PSEM)

F1Q 2012 Earnings Call

November 1, 2011 04:30 PM ET

Executives

Robert Strickland – IR

Aaron Tachibana – SVP and CFO

Alex Hui – President and CEO

Analysts

Krishna Shankar – ThinkEquity

Chris Longiaru – Sidoti & Company

Brian Peterson – Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Pericom Semiconductor First Quarter 2012 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded.

I would now like to introduce your host for today’s conference, Mr. Bob Strickland, Treasurer. Sir, you may begin.

Robert Strickland

Thank you. Good afternoon, everyone, and welcome to Pericom’s first quarter fiscal year 2012 earnings conference call. Our speakers today are Alex Hui, President and CEO, and Aaron Tachibana, the CFO.

Before we get started, please be aware that we will be presenting several visual slides during management’s discussion of the business. To view these slides, please go to www.pericom.com, and click on the Investors link. Today, the company will discuss its financial results, comment on the industry and on Pericom’s business, and provide guidance for the second 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 Factors 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 press release.

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 non-cash and non-operating expense items included in the income statement, which are not reflective of the performance for our normal business operations. The non-GAAP financial measures help to clarify the impact of these items.

Aaron will discuss the financial performance for the quarter, and Alex will give us his comments on the industry and on Pericom’s business. Then, Aaron will provide guidance for the second quarter of fiscal 2012. Aaron?

Aaron Tachibana

Thank you, Bob, and good afternoon, everyone. Our consolidated net revenues for the first quarter were $35.3 million, and decreased by 18% from the $43.3 million reported last quarter and decreased by 17% from the $42.8 million for the same period last year. Most end market segments declined sequentially due to the reduction of inventory by our distributors and direct customers.

The distribution channel inventory declined approximately 11% sequentially, and exiting Q1 there was roughly 6.5 weeks of inventory, which was well within our normal range of six to 10 weeks. During the last four to five quarters, we had peaked around eight weeks, so 6.5 was really healthy given the economic situation. The Q1 geographic mix was as follows; Asia 90%, U.S. 6% and Europe 4%. And our sales by channel were; international distribution 65%, contract manufacturers 23%, OEMs 9%, and U.S. distribution 3%.

Consolidated non-GAAP gross profit was $13.1 million for Q1 compared with $15.7 million last quarter and $15.1 million last year. Non-GAAP gross margin for the first quarter was 36.9%, and was up 70 basis points from last quarter’s 36.2% and 160 basis points higher than last quarter’s 35.3%.

The sequential quarter gross margin increase was primarily due to having less PC and consumer mix in Q1, which carries a lower gross margin percentage than our consolidated average. During the quarter PC and consumer volume decreased more than 25% sequentially due to the channel inventory reductions and weaker end customer demand.

We’ve been talking about margin expansion through a better mixture of products and we are starting to see some early signs of traction. As we look forward four to six quarters, we continue to target gross margins in the range of 38% to 40% as a run rate.

Non-GAAP operating expenses were $11.3 million for Q1 compared with $11.2 million last quarter. We will continue to tightly manage our spending until we have signs of a recovery and revenue returned for a normal run rate at a minimum. The non-GAAP effective tax rate was 36% for Q1 compared with 34% last quarter. The Q1 tax rate remain high primarily due to the mixture of domestic versus foreign income. In addition, we have some foreign entities that have losses for which we cannot offset against income.

Non-GAAP net income was $1.8 million, or $0.07 per share, for Q1 compared with $3.6 million, or $0.14 per share, last quarter. Most of the net income decline resulted from the lower revenue volume.

Now turning to the balance sheet. Our balance sheet remained in excellent shape and the cash generation of our business remained strong. We exited Q1 with $124 million of cash including both short and long-term investments and marketable securities, which equated to $5.06 per diluted share. Cash decreased by $3 million from last quarter due to the final PTI acquisition payment, and also we repurchased 456,000 shares for $3.5 million at an average price of $7.67 per share. The repurchase price was approximately $2 below our book value of $9.71 per share for Q1. And starting the buyback program back in 2007, we have repurchased over 4.5 million shares for $46 million.

Net inventory was $18.4 million, or 75 days of supply, for Q1. We reduced inventory by $3.5 million, or 16% sequentially. This was the fourth consecutive quarter of inventory reduction over that time span. We reduced inventory approximately 40%, while continuing to service our customers well. Accounts receivable reduced to $22.7 million due to lower revenue volume and DSO was 58 days, which was within our normal range. Capital equipment additions were $0.9 million for Q1 and depreciation expense was $2 million.

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

Alex Hui

Thank you, Aaron. While we see a significant drop in our revenue and unit volume in fiscal Q1, we were pleased to see sequential gross margin improvements. This is due to a more favorable product mix, as we see the high percentage of our revenue from server, storage and embedded system markets. We continue to generate cash and our balance sheet remains strong. Given the rapid changes in business cycles, we’ve put a lot of our attention on managing inventory in-house and in the channel, while maintaining our service levels.

Operationally, we made very good progress in reducing our in-house inventory by $3.5 million in Q1. Year-to-year we’ve reduced our in-house inventory by $12.5 million. Channel inventory of 6.5 weeks ending Q1 is within the healthy range of six to eight weeks. It continues to decline for our products and uncertain global macro environment, we expect our channel partners will continue to keep their inventory lean in the near term. Markets have been light. In fiscal Q1 we saw higher mix of revenue coming from server, storage and embedded markets, and we see a lower mix from PC notebook, as well as networking and telecom was down slightly.

The PTI consumer business was very weak in the quarter due to significant drop in business from South China consumer customers. Our top five end customers account for 29% of our total revenue, and there is no 10% customers.

The revenue mix for our product families was, IC 64%, and FCP 36%. Within IC, 9% came from PTI. As we look at (inaudible) the breakdown of the IC products include analog switches, 24%; digital switches, 5%; silicon clocks, 8%; connect, 14%; and interface, 4%.

I’d like to make some comments with regard to our new products introduction. In the first quarter of fiscal ‘12, we introduced a total of 31 new products. Please refer to our press release and recent product announcements for more details.

The number of new products that were introduced this quarter is a record high in recent years. We continue to focus on offering differentiated solutions in high-speed serial signal switching, Signal Integrity, Connectivity and Timing.

We are pleased to be the first vendor to introduce new products supporting all three new protocols that will appear on next-generation CPU chipset in 2012. This includes our solution for USB 3.0, Display Port 1.2 and PCI Express 3.0. We showcased a live sample of these three protocols at the recent Intel IDF in September of this year.

In the Signal Integrity area, we are pleased to report Pericom scoring another industry first. Again, our USB 3.0 SuperSpeed ReDrivers product is the only one in the industry that has passed the stringent USB 3.0 compliant test in the recent USB. We are working closely with our key customers to design in the USB 3.0 Signal Integrity solution for volume production next year. But we also sample our customer with our next generation USB Sleep-and-Charge solution. These products are being designed into the Intel Ivy Bridge platform for two trial production release.

Some update on our recent design win and design-in activities. We have multiple HiFlex clock IC qualified with top-notch networking telecom customers, and we begin to ship in volume in the December quarter. Design wins with our PCI Express and USB switch bridge product in multiple platforms, including high end graphics monitor, network switch and embedded systems.

Apart from our Signal Integrity solution in security switch, network IP switch, blade servers and workstations. Multiple design wins and design-in of our USB 3.0 ReDrivers for several key PC customers. Also our PCI Express 2.0 Signal Integrity solution is being designed-in for networking application, including several design-ins for next generation LTE applications.

All along, our strategy is to first deploy our Connectivity and Timing solutions in computer applications and leverage the products over time to penetrate other applications, to optimize our return on R&D. In the last two years, we have put a focused effort in the designing in our serial connectivity and timing products to server, storage, networking and embedded applications, which you will see would be significant growth drivers for us going forward.

We have made good progress last few quarters with our designing activities and we’d begin to see the results reflected in the revenue coming from these market segments. We continue to work on increasing the revenue contribution from these areas, which we expect not only will help to grow our revenue, but also increase our gross margins.

For the serial connectivity technology platform standpoint, our first and second generation serial connectivity solution are well deployed in computer and digital media applications. We are seeing the deployment of these products spreading to telecom, networking and embedded applications.

We are working with our key computer and storage customers to design-in our third generation PCI Express, USB and display card products, which we expect to go into production next year. Our development team is now working on the fourth generation solutions. We believe Pericom is well-positioned to benefit from increasing speed upgrade in high-speed serial protocols and expand these protocols to more and more applications.

On Timing product side, we are seeing very good acceptance of our LC-based HiFlex, clock IC and crystal oscillator product. We expect revenue from the HiFlex product families will grow to multi-million dollars in 2012, with very good margin and break the $10 million run rate in 2013. We also currently introduced a new wave of HiFlex products in 2012 to expand our Timing portfolio.

While the near-term macro environment is challenging, we believe our effort to penetrate new market segments and our focus on providing differentiated serial connectivity and timing products to our target applications would drive long-term revenue growth and margin expansions in our business.

At this time I’d like to pass it back to Aaron to give our guidance.

Aaron Tachibana

Thank you, Alex. We currently expect a sequential decline of 4% to 15% for our Q2 revenue. We entered Q2 with backlog 20% lower than going into last quarter, and the booking rate has yet to increase. We also expect distributors and direct customers to keep inventory lean again this quarter, so channel inventory could be plus or minus a few percent. With this limited visibility, we’re providing a wider range for our revenue guidance.

We currently expect the Q2 non-GAAP results to be as follows. Revenues in the range of $30 million to $34 million, gross margin in the range of 35% to 37%, 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, and this includes interest income and realized gains from cash investments and currency exchange gains and losses. The effective tax rate will be in the range of 34% to 36%.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Krishna Shankar of ThinkEquity.

Krishna Shankar – ThinkEquity

(Inaudible) in the March quarter, and do you think that the OEM and distribution channel inventory correction will be pretty much completed in the December quarter, so that you may potentially see a revenue growth begin in the March quarter?

Alex Hui

Yeah. We expect – since we are entering this quarter at 6.5 weeks, we expect the inventory correction will be stabilized hopefully by this quarter. So that is pretty much what we’re seeing. And we expect if business recover, then we’ll see some replenishment.

Krishna Shankar – ThinkEquity

Okay. And Alex, what was your revenue mix for some of the higher margin areas, such storage, servers, networking and embedded versus PC and consumer?

Aaron Tachibana

Hi, Krishna. This is Aaron. So in terms of server, storage, it was about 13% for the quarter, so is up 1 point from last quarter. In terms of PC notebook, PC notebook was 22%. So we typically call computing, PC notebook and server, storage, it was about 35% of the total mix.

Krishna Shankar – ThinkEquity

Okay.

Aaron Tachibana

Networking and telecom was about 31%, so that was down significantly, primarily because of some of the slowdown in China from a manufacturing perspective and the inventory rebalancing. Embedded was another area we’re really happy with, it was up to 7%.

Krishna Shankar – ThinkEquity

Okay. Great. And you said that – gross margin improvements you said getting up to 40% over the next four to six quarters. What are the target model again?

Aaron Tachibana

Yeah, 38% to 40% would be the run rate we would see four to six quarters out.

Krishna Shankar – ThinkEquity

Thank you.

Aaron Tachibana

You’re welcome.

Operator

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

Chris Longiaru – Sidoti & Company

Hey, guys. Congratulations on the gross margin.

Alex Hui

Thank you.

Aaron Tachibana

Thanks, Chris.

Chris Longiaru – Sidoti & Company

That’s what my question is actually about. So, your revenues are actually down, looks like we’re kind of bottoming out here with your comments on the inventory channel. But how much gross margin impact does the lower sales have? Because basically your product mix looks like this lower margin, you could get 38% range even quicker. So I’m trying to kind of gauge how much of the lower sales – what that did to your gross margin this quarter and your guidance? And basically engage how much those product introductions and the product mix shift has affected year gross margins to-date?

Aaron Tachibana

Hey, Chris, this is Aaron. Thank you for joining us on the call today. And to answer your question about the volume impact here in Q1, so revenue was down about $8 million quarter-to-quarter. And if we had that $8 million back with the same mixture that we had in prior quarters, which was not as optimal, we’d probably see a 50 to 100 basis points improvement in margin. Okay. But if we had the mixture that we have today in Q1, which is higher server storage content and all of the embedded, it’s probably a little bit higher than 100 basis points. When you look at the absorption impact and all that, definitely we would have better margins if we had $8 million back.

Chris Longiaru – Sidoti & Company

Got it. That makes a lot of sense. And just in terms of how much is left in your buyback?

Aaron Tachibana

So we had about $8.5 million left in our buyback.

Chris Longiaru – Sidoti & Company

Okay. And just in terms of the high-speed serial protocols contributing in terms of the server refreshes that are coming up and things of that nature, are you seeing initial orders in the December quarter yet, or are those still a little bit out?

Alex Hui

Yeah, I think – we begin to see some orders for essentially in prototype, in kind of (inaudible) probably after the Chinese New Year timeframe. Yeah. And then you really get a positive – tied to the Intel Ivy Bridge platform, which right now Intel, they’re looking at spring of 2012, so that’s seen much is the current schedule.

Chris Longiaru – Sidoti & Company

What’s the timing, I guess, versus the launch? I mean, so if they launch in the spring timeframe, when do you usually start to see orders?

Alex Hui

I think initial ramp-up pretty much tied to when the OEM will get the chip, and typically we see the top tier guy would get it, and then the second and third tier guy. But right now if they give us the forecast and all that, we are probably going to begin to see orders probably six to eight weeks ahead of the ramp.

Chris Longiaru – Sidoti & Company

Okay. So sometime in the March quarter probably you’ll start to see some type of indication?

Alex Hui

Yeah, yeah, could be in the late March quarter or early June quarter timeframe, because right now why Intel is talking about spring, I guess there is no definite schedule OEM.

Chris Longiaru – Sidoti & Company

Got you. And what are the gross margins on those products specifically?

Alex Hui

Those essentially going into the notebook and the desktop, but we (inaudible) we have some of our ongoing products. But the new one that we talk about, the USB ReDrivers and the Sleep-and-Charge, we’re probably looking at probably in the 45% to 50% range.

Chris Longiaru – Sidoti & Company

Great. That’s all I have for now, guys. Thank you very much.

Alex Hui

Thank you.

Aaron Tachibana

Thanks, Chris.

Operator

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

Brian Peterson – Raymond James

This is Brian Peterson stepping up for Hans. I just wanted to kind of bridge the gap from some of your PC-focused peers with Intel and AMD are seeing reasonable demand trends in PC. So as far as the weakness in PCs this quarter, would you attribute most of that to simply inventory adjustment?

Aaron Tachibana

Brian, this is Aaron. Yeah, so unlike some of our peers, we recognized more of our revenue sale into channel. And so when the channel has more inventory rebalancing that’s going on, like they did this quarter, it does have a bigger impact for us.

Brian Peterson – Raymond James

Got it. Okay. And was there any impact this quarter, or maybe you got on your outlook from Romley, which I heard might be a little bit later than expectations?

Alex Hui

Yeah, essentially the Romley platform essentially is the PCI Express developed with the probably PCI Express Gen3. So as we know, it was pushed out from the early autumn timeframe of this year to essentially next spring.

Brian Peterson – Raymond James

Okay.

Alex Hui

(Inaudible), the Romley is targeted at the server platform, and the one that we talked about just now, the Ivy Bridge is kind of like more into the local platform.

Brian Peterson – Raymond James

Right. Have you guys talked about – you’ve factored in your guidance any impact from Thailand, the flooding, and can you give your thoughts on what you think of potentially the PC supply chain?

Alex Hui

I think one of our customers, Western Digital said that they – that’s mainly related to our frequency control products. As you could see from their announcement, they are significantly impacted. So we do think there will be some significant impact in terms of the frequency control product shipment from us into Western Digital this product. And with regard to what expect impact there PC suppliers, I think that remains to be seen. Given that there are multiple suppliers, hard disk drive supply is high, but we believe that the extend of the impact will certainly be less than what you see in WD alone.

Brian Peterson – Raymond James

Okay. Understood.

Alex Hui

I do expect there will be certain degree of impact.

Brian Peterson – Raymond James

I guess the last question for me. Do you guys have any thoughts on the potential telco build-outs in China? Thanks.

Alex Hui

Could you elaborate on your question?

Brian Peterson – Raymond James

Just the 3G, 4G build-outs in China, do you guys have any comments there?

Alex Hui

Well, I think certainly 4G hasn’t been deployed yet, but I think it’s just a matter of time. We should believe that the high Internet traffic and the use of – welcoming use of smartphone in China is going to drive the 4G over time. But again, China is a very big country like we have seen in the U.S., so we expect the deployment will take several stages, probably starting late next year in terms of the 4G deployment and going forward. 3G, I think they’re pretty well covered. There are probably some four tiers allocation that needs to be done and incremental addition.

Brian Peterson – Raymond James

Okay. That’s it for me. Thanks.

Operator

Thank you. I am showing no further questions at this time. I’d like to turn the call back to the speaker for closing remarks.

Aaron Tachibana

Hello, everyone. This is Aaron again. Then we’d like to thank everyone for participating on the call today, and look forward to meeting with you again next quarter with some pleasant results. Thank you.

Alex Hui

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.

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