IXYS' (IXYS) CEO Nathan Zommer on Q3 2015 Results - Earnings Call Transcript

| About: IXYS Corporation (IXYS)

IXYS Corporation (NASDAQ:IXYS)

Q3 2015 Earnings Conference Call

February 2, 2016 5:00 PM ET

Executives

Uzi Sasson - President and Chief Financial Officer

Nathan Zommer - Chairman, Chief Executive Officer and Chief Technology Officer

Analysts

Christopher Longiaru - Sidoti & Company, LLC.

Quinn Bolton - Needham & Company, LLC.

Vad Yazvinski - Jordan Capital

Operator

Good day and welcome to the IXYS Corporation’s Third Fiscal Quarter Ended December 31, 2015 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Uzi Sasson, President and CFO. Please go ahead, sir.

Uzi Sasson

Good afternoon and welcome to the IXYS Corporation’s third fiscal quarter ended December 31, 2015 earnings conference call. I’m joined by Dr. Nathan Zommer, our Chairman and CEO, who will give us an overview. I will lead us through the financial discussion later in the call.

First, I’ll review the formalities. Our discussion today contains forward-looking statements, including statements related to potential future revenues and earnings. Any statement in this conference call that are not statements of historical fact may be deemed to be forward-looking statements.

There are a number of important factors that could cause the results of IXYS to differ materially from those indicated by these forward-looking statements, including among others risks detailed from time-to-time in our SEC reports, including our Quarterly Report on Form 10-Q for the period ended September 30, 2015. IXYS does not undertake any obligation to update the forward-looking statements.

Also, please be advised that the financial data related to today’s conference call is available on our website, www.ixys.com, clicking on ‘Corporate’ and then click on ‘News & Events’.

Nathan Zommer

Uzi, thank you, and good afternoon, everybody. I would first like to point out a few financial highlights. Gross profit for the quarter ended December 31, 2015 was 32%, an increase of 60 basis points from the gross profit margin in December 31, 2014 quarter. Gross profit margin for the nine months ended December 31, 2015 was 31.9%, an increase of 190 basis points as compared to the same period in the prior fiscal year.

Adjusted EBITDA, which excludes stock-based compensation expense, was $10.8 million for the December 2015 quarter and $30.9 million for the nine months ended December 31, 2015.

IXYS declared a $0.04 per share dividend, marking the 13th consecutive quarter of dividends. When we are pleased with our gross margins EBITDA and other strong financial metrics, we were disappointed that the slower revenues our business experienced a seasonal decline in revenues, as expected for the third fiscal quarter, accentuated by the current weakness in some developed countries as well as Asian economies, most notably China, we as well as many of our competitors were impacted in the short-term.

Importantly, we’ve had no notable customer attrition rather the scope of product purchasing has been slower during the holiday period, as is common in our industry. But IXYS’ diversified product lines and geographic reach, we expect to weather this period and increase revenues going forward.

Our investments in technology and the world of IXYS marketing campaign, where we highlight the full width of our products have shown growth in the Internet of Things and automotive markets. We expect to see the return of revenue growth in the industrial, clean energy, infrastructure, medical, telecommunication, and consumer markets on the strength of our technology and products.

As a percentage of total revenues for the third quarter of fiscal year 2016, North America represented 24.8%, EMEA 30%, and Asia and the rest of the world 45.2%. As a percentage of total revenues for the nine months ended December 31, 2015, North America represented 24.8%, Europe and Middle East 28.5%, and Asia and the rest of the world 46.7%.

Our revenues by market segment for the third quarter fiscal year 2016 were as follows. Industrial and commercial including renewable energy 42%, communication and infrastructure 16%, medical electronics 9%, consumer 13%, transportation, including auto and traction 7%, and others 13%.

Our revenues by market segment for the nine months ended December 31, 2015 were as follows. Industrial and commercial 43%, communication and infrastructure 14%, medical electronics 9%, consumer 15%, transportation 5%, and others 14%.

Our revenues based on product group for the third quarter fiscal year 2016 were as 68.1% for semiconductors, 25% for integrated circuits, which includes microcontrollers, and 6.9% for system and RF.

Our revenue based on product groups for the nine months ended December 31, 2015 were 67.2% for power semiconductors, 26.7% for integrated circuits, and 6.1% for systems and RF.

I will now turn the call over to Uzi Sasson, President and CFO, who will discuss the financials in more details.

Uzi Sasson

Thank you, Nathan. GAAP net income for the quarter ended December 31, 2015 was $2.3 million, or $0.07 per diluted share. The December 2015 quarter non-GAAP net income, which excludes the impact of charges for the amortization of acquired intangible assets and stock compensation was $3.9 million, or $0.12 per diluted share.

GAAP net income for the nine months ended December 31, 2015 was $8.5 million, or $0.26 per diluted share, as compared to net income of $15.9 million, or $0.50 per diluted share for the same period in the prior fiscal year.

For the nine months ended December 31, 2015, non-GAAP net income, which excludes the impact of charges for amortization of acquired intangible assets and stock-based compensation was $14.3 million, or $0.43 per diluted share. This compares to the non-GAAP net income of $22.1 million, or $0.69 per diluted share for the same period in the prior fiscal year.

Gross profit for the quarter ended December 31, 2015 was $24 million, or 32% of net revenues, as compared to the gross profit of $25.5 million, or 31.4% of net revenues for the same quarter in the prior fiscal year. Our gross profit margin increased by 60 basis points this quarter over the comparable period in the prior fiscal year.

Gross profit for the nine months ended December 31, 2015 was $75.6 million, or 31.9% of net revenues, as compared to the gross profit of $76.7 million, or 30% of net revenues for the same period in the prior fiscal year. This is an increase of 190 basis points in gross profit margin over the comparable period in the prior fiscal year.

R&D spending for the quarter was $7.3 million, or 9.7% of net revenues, as compared to $6.3 million, or 7.7% of net revenues in the prior year quarter. For the nine months, R&D spending was $22.8 million, or 9.6% of net revenues, as compared to $20.5 million, or 8% of net revenues in the prior fiscal year.

SG&A expenses were $9.2 million, or 12.2% of net revenues, as compared to $10.2 million, or 12.5% of net revenues in the prior year quarter. For the nine months ended December 31, 2015, SG&A expenses were $29.6 million, or 12.5% of net revenues, as compared to $31.7 million, or 12.4% of net revenues in the prior fiscal year. It is important to note that on a comparable basis for both quarter and the nine months period, SG&A expenses were down in absolute dollars.

CapEx was approximately $820,000 for the December quarter. Capital expenditures, including purchases of manufacturing equipment.

Adjusted EBITDA, which excludes stock-based compensation expense was $10.8 million for the quarter and $30.9 million for the nine months ended December 31, 2015.

Turning to the balance sheet. The ratio of current assets to current liabilities was 7.1. The company exited the December 2015 quarter with cash and cash equivalents totaling approximately $154.2 million. IXYS generated about $5.7 million in cash from operations during the quarter.

In the December 2015 quarter, the company declared a $0.04 per share dividend. This is the 13th consecutive quarter of dividend. So far, we have returned about $3.6 million to stockholders in fiscal 2016 through dividends.

Net accounts receivables at December 31, 2015 was $36.2 million and DSO was about 43 days. As of December 31, 2015, net inventory was $89.7 million and inventory turns were 2.3 times during the quarter.

Customers continue to rely on short-lead time product deliveries, causing limited visibility to buying pattern. We are constantly working with our customers to increase their inventory and expect that our sales and marketing efforts will bear fruit in the coming quarters. Therefore, we expect revenues in the March 2016 quarter to be modestly higher when compared to those of the December 2015 quarter.

We will now open the floor for questions.

Question-and-Answer Session

Operator

[Operator instructions] We’ll take our first question from Christopher Longiaru with Sidoti & Company.

Christopher Longiaru

Hey, guys. Thanks for taking my question. So first, just on your mix, it seems like your IC revenue was down as a percentage of your sales, but your gross margin was up? Was that due to higher power savings and better utilization? Can you talk a little bit about that?

Nathan Zommer

Yes. Thank you, Chris. Indeed, the mix of change and we’ve seen average selling prices on all the product lines basically went up. So it’s a mix related than more wafer the power semiconductor. So that showed improved margins by the mix change.

Christopher Longiaru

And what about – can you talk about where utilization is, and how it’s been trending, and kind of what your expectations are going forward?

Uzi Sasson

Yes, Chris, I’ll take that question. Utilization in our old fabs is approximately around 55% to 60%, whereas the improvement that we’re seeing in terms of the backlog or the book-to-bill ratio, we anticipate that the utilization will go up. And another comment that I would like to add to Nathan’s comment, I think that we also improved efficiencies in our manufacturing, which really helped us keeping the margins where they are.

Christopher Longiaru

And in terms of the improvements that you expect, can you give us kind of a long-term view on – right now you’re in 55% to 60%. What it means, as that moves up and kind of quantify it?

Nathan Zommer

Yes, I will follow up with Uzi. When we look at the average, but the major fabs that we have are actually running at a very high utilization rate. And we are actually addressing now the issues of expanded capacity in old fab. But it looks good, as Uzi said, it’s trending up, and we see good demand going forward in our power semiconductors. An overview of the future, we believe that we will see this year some return of investment in the infrastructure in several geographical location. We suspect that even in China, they will have to make investments in light of the Paris Climate Change Conference. They are committed and it plays directly to our sweet spot, and some indication of that we’ve seen in the improved book-to-bill ratio going forward.

Christopher Longiaru

Did you give the book-to-bill ratio, is it over 1:1?

Uzi Sasson

Yes, it’s a 1.06.

Christopher Longiaru

And can you just – how long is that based off of the backlog?

Nathan Zommer

Well, traditionally, we calculate backlog on the 12 months rolling period. But what happened is, let us not forget that we just finished the December quarter. And in December, we have about 18 or 19 working days. And many of our customers did not like to pick up inventory, and they’re placing orders for the year to follow. So that’s what we are seeing.

Christopher Longiaru

Yes, I’ll jump out with that. Thank you, guys.

Nathan Zommer

Thank you.

Uzi Sasson

Thank you.

Operator

And we’ll take our next question from Quinn Bolton with Needham & Company.

Quinn Bolton

Hey, Nathan, just wanted to follow up on Chris’s question just looking at the utilization rates, if I heard you right. I think you said earlier, it’s currently 55% to 60%. To the extent you can continue to increase those loadings? Is there a good incremental gross margin we can think about that as you grow revenue with product manufacturing your fabs that you are going to drop through with certain gross margin on that incremental revenue dollar?

Nathan Zommer

The answer is affirmative. As we are improving our operations efficiencies, the idea is to increase the utilization in our own internal fab, which will be converted to dollar margins, which in a lot of ways I’m telling you that’s going to drop through the bottom line. So I would expect improvements in gross margins.

Uzi Sasson

Quinn, I want to add to that. We also finished the transition over the last three years, the larger wafer diameter in our internal fabs. If we would have stayed there at five years, we would have been close to 80% utilization. So we have the quantum jump by 40% just relating to wafer diameter in capacity with very little capital x, CapEx.

But definitely going forward, the utilization will increase and that will translate to better margin, because less of an absorb manufacturing costs. Don’t forget also that 50% of – about 50% of all revenues come from utilization of foundries externally. So those are the foundries that we basically throttle down based on demand. But the in-house fabs that we have made in Germany and in Massachusetts are running at a very, let’s say, satisfactory and optimize clip in producing good margin dollars.

Quinn Bolton

Just trying to quantify a little bit, I guess, Nathan, is it – could I assume maybe a 40% or 50% incremental margin on each revenue dollar producing your own fabs? Is that a reasonable ballpark we’re thinking about on an incremental margin basis?

Uzi Sasson

Well, on the fabs in Germany, I would say on the incremental, it’s – I would say, the average is about 35% gross margin. In the fab in Massachusetts, it’s much higher. It’s about 48% incremental margin contribution.

So, if you average the two, of course, the revenues on the power is about two times higher than the revenues on the ICs, on the fab. In Massachusetts, you can see that – you will see improved margin going forward due to the calculation on the weighted average.

Quinn Bolton

Got it.

Nathan Zommer

That does mean that – that does mean to ROI that Uzi maintains [ph] the company and the return or I would say the return on investment on increasing the ways of diameter. Although in the short-term, some of you guys have more capacity, because it’s like larger diameter wafer 6-inch. But the manufacturing cost per diode was done vis-à-vis you have the balance between volume versus unabsorbed manufacturing costs. So going forward, we’re very, very happy to see that the book-to-bill ratio is about 1, and this will lead to naturally manufacturing improved margins.

Quinn Bolton

Great. Thanks for that extra color. And then just looking at the end markets that you’re guiding for March growth on the – in a March quarter, to the extent you look across the end markets. Is there any particular end market either industrial, cum medical, transportation, consumer that seems to be driving growth either for the March quarter, as you look out into 2016 overall, or do you see pretty growth opportunities across the end markets?

Nathan Zommer

Yes, it’s absolutely. The number one area, of course, we look at the Industrial segment and Industrial segment is so diverse. We’ve seen a decline in the mining and oil exploration, which used to consume a lot of power semiconductors two, three years ago. Instead what we see in this investment and infrastructure, mainly in rapid transit. And we’ve seen in the alternative energy, industrial lighting, smart lighting projects with the Internet of Things.

So the IoT side of the industrial market we see very good penetration. And so your question was some of those design wins we have, which are numerous, we’ll translate to volume production.

The second area, which has been a very bright spot is automotive, the transportation. We’re continuously penetrating more and more the power semiconductor demand in the automotive, the car industry, which is riding on the excellence we have in the years in traction in trends.

The third area is the area, which relates to value we see in the consumer market or automation. So that’s an area that it depends how you categorize it, if you have a company like GE and what their ordering products for – or Honeywell for this month. Thermostat, it falls into industrial. But if you have like companies like Kona or Ring [ph] and other companies Ubiquiti lighting that orders those products for the new LED lights.

And the doorbell and lights with security, it falls into the category of consumer. So these are the areas that we see bright spots going forward.

Quinn Bolton

Great, thank you. And just a last question, I know, you’re not guiding beyond the March quarter. But I was just wondering if there’s a normal seasonal pattern in the calendar year. Can you just sort of walk us through what normal seasonality might be in the March, June, September, and December quarters?

Uzi Sasson

Sure, I’ll do that, Quinn. The March quarter is usually a very good quarter for us and so is the June. The September quarter is little tougher, because many of our customers take the summer holiday, especially in Europe and in Asia. So there is a lot of vacations during the end of July, some of August. And this and all we’ve been seeing some impacts there. And I think that the weakest link, the weakest quarter is our December quarter, as I stated earlier on the call.

The month of December has about 17 or 18 working days that depends on when holidays fall. And that’s really goes against us in terms of being able to put our performances on the table.

Quinn Bolton

Great. Thank you very much.

Nathan Zommer

Thank you.

Uzi Sasson

Thank you.

Operator

And we’ll take our next question from Vad Yazvinski with Jordan Capital.

Vad Yazvinski

Good afternoon, gentlemen.

Nathan Zommer

Hi, Vad.

Vad Yazvinski

My question is a little more related to questions that your shareholders might be asking versus analysts. Obviously, over the past decade, you guys have stayed the performance of the stock and the return for shareholders have been virtually stock at zero for about a decade actually even longer. And considering your healthy balance sheet and the asset written – rich nature of your balance sheet, I mean, in addition to cash and equivalents you obviously have lot of other assets that probably not reflected of their true value of real patterns et cetera?

I mean, I’m just curious, why – how me – how should I as a shareholder think of you guys as kind of trying to do a little better job for me as a shareholder versus just you guys as a management team a little more aggressive share buy back, special dividends, strategic alternatives whatever those might be. Obviously, it’s great and you guys have stayed profitable pretty much throughout. But I mean for me, as a shareholder in all adjustments for stock-based compensation it’s all great and wonderful. But there is a true expenses and all the stock price is a true reflection of where – what the market is evaluating the performance to be, and that’s really clearly has not been very acceptable for us as a shareholder?

Nathan Zommer

Well, my quick answer, this is Nathan. We consider all the points you have mentioned and the Board is very proactive, that’s why we had some buyback and we still have. We have a dividend plan. And you can see how we translated to monetize some of the assets by rather than disposing of the real estate, which is not a good not return on investment we were able to get loans at very advantageous terms. So you can see how the balance sheet became stronger on their ratio, year-to-year on current assets versus currently liabilities.

And all strategic alternatives are open. IXYS has been approached by many entities in the past, and we made it very clear, because we are such a rich company. There will be an offer that the Board will accept, it will be announced. So and I made my own comment that I’ve seen companies with lousier results than us selling at three times revenues.

So we basically send the message to everybody. We will consider you as serious offer. Our goal is to get three times revenue to our shareholders on an acquisition. So all those options are open. And as we move forward and you see what the climate in the valley is that a lot of companies are being snapped on. You can imagine we have targets. As soon as there will be anything to value to report, we’ll report.

On the other hand, we are fortunate that we control our destiny by being a very successful company. I cannot understand why we are not getting the value, we should get the value in the market.

Vad Yazvinski

I honestly – this is a – I think this is a good idea that, I mean, I appreciate your honesty refreshing coming from a lot of other people that have a lot of shareholders stake, I do think, from the standpoint of other shareholders and I mean and I hear everything you’re saying and I really appreciate it. And I do think that for your guys own benefit you would be probably beneficial to get there.

In order to get the buyer to come over and even take a look at it, you obviously need to, at least, run a process or get an idea of what the true value of the company might be. But I do appreciate your answer. And as a shareholder, I would just say regardless of what their – how the process runs. And I obviously understand their change in the balance sheet and improvement in the cash balances. But in our opinion the shares are drastically undervalued. And you’re buying any shares out or buying shares more aggressively would be very beneficial.

Have you bought any shares back in the fourth quarter? In the last – last quarter, you guys just bought some shares in one month, and then after that you were pretty passive on the buying front. And I’m assuming the price will probably not go up tomorrow. So that price might actually be might get better. And I as a shareholder and you as a shareholder would probably benefit if you guys were a little more aggressive in buying back shares?

Uzi Sasson

So let me address that. This is Uzi. So, as Nathan mentioned earlier, we do have a buyback plan and we’ll execute on it when the time is right. We constantly monitor where the stock is in terms of pricing and buying back opportunities. We’ll certainly consider certain rules, such as the close window and open window and things like that.

So we followed the rules that are being dictated to us. But I think your point is well taken. And if we see that we need to go back into the market and acquire more shares, we have the cash, as I reported on the call and we’ll execute on that. But the answer to your question, first of all, we are a March 31 year end, so this would be our third quarter, you called it the fourth.

Nathan Zommer

[Multiple Speakers] calendar quarter.

Uzi Sasson

Right. We did not acquire any – we did not buy back during the fourth quarter.

Nathan Zommer

I want to add, Vad, we have first stated many times, we are ready to buy the window shop, nobody is selling. So I’ll ask who is the shareholder that sells the stock at $10.5 or $11 a share. Who are those guys? We always ask ourselves, who are those guys that sells those shares and for surprise them, because we’re willing to buy and there are no blocks available to buy. So, you know, the rules, we’re limited. We are limited and how much we could buy.

Vad Yazvinski

And on that front, as I’m sure, as you guys are aware, there’s a, I mean, program called 10b5-1 plan that allows you to buy that at any point at [pretty selling] price at just FYI. But where you don’t have any blackout periods, it’s just the – you can determine how many shares you can buy every month, and just implement it? And it doesn’t matter, what their – what the price is, or where – and the blackout period or not?

Nathan Zommer

Listen, I – we heard what you said, there are other shareholders that made a comment that the most stupid thing is to buy back shares. So I hear you, I hear others, but we’ve done, as I said, we have [indiscernible] of all the options available to a company to take its own actions to return value to the shareholders. We buy back shares. We monetize assets and we pay a dividend. And if you notice the company consistently increased the dividend year-after-year.

Vad Yazvinski

Yes. I appreciate your time.

Nathan Zommer

Thank you.

Uzi Sasson

Thank you.

Operator

And there are no additional questions in the queue at this time.

Nathan Zommer

As there are no more questions and in closing the conference call, we need to remind you that our discussions contain forward-looking statements and there are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including among others risks detailed from time-to-time in our SEC reports including our Quarterly Reports on Form 10-Q for the period ended September 30, 2015. We do not undertake any obligation to update forward-looking statements.

Thank you all for your time. We also would like to take this opportunity to thank our suppliers, customers, employees, and stockholders for their support of IXYS. Thank you much.

Uzi Sasson

Thank you.

Operator

That does conclude today’s conference. Thank you for your participation.

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