Executives
Robert Strickland – Corporate Treasurer and IR
Alex Chi-Ming Hui – President and CEO
Aaron Tachibana – SVP, Finance, CFO
Analysts
Krishna Shankar – Roth Capital Partners
Brian Peterson – Raymond James
Christopher Longiaru – Sidoti & Company
Pericom Semiconductor Corporation (PSEM) F3Q12 Earnings Call May 1, 2012 4:30 PM ET
Operator
Good day, ladies and gentlemen, and welcome to the Pericom Semiconductor Corp third quarter 2012 earnings conference call. (Operator Instructions).
I will now turn the call over to your host, Mr. Robert Strickland. You may begin.
Robert Strickland
Thank you. Good afternoon, and welcome to Pericom’s third quarter fiscal year 2012 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 fourth 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.
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 last year, 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.
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 2012. Aaron?
Aaron Tachibana
Thank you Bob, and good afternoon everyone. Our consolidated net revenues for the third quarter were $33.4 million, an increase by 10% from the 30.5 million reported last quarter, and decrease by 16% from the 39.6 million for the same period last year.
All end market segments were up sequentially except for consumer. The mobility and home appliance areas within consumer were flat quarter-to-quarter. PC and notebook shipments were up 12%, and approximately half of this growth came from initial shipments of our USB 3.0 products for the Ivy Bridge platform.
The server segment was up 8% and storage increased 17%, as the shipments for hard disk drives improved. Networking and telecom continued to perform well, and was up 11%, while embedded grew 10% on a sequential basis. Sales by channel were: international distribution 64%; contract manufacturers 25%; OEM 9%; and U.S. distribution 2%.
Consolidated non-GAAP gross profit was $12.1 million for Q3, compared with 11.4 million last quarter and 12.9 million last year. Non-GAAP gross margin for the third quarter was 36.2%, and was down 110 basis points from last quarter’s 37.3%, and 360 basis points higher than last year’s 32.6%.
The sequential quarter gross margin decline was a result of unfavorable absorption expenses related to our FCP factories. Although the FCP volume increased 9% sequentially, the factories remained underutilized during Q3, at roughly 73% utilization. On a positive note, our IC gross margins exceeded 47% and PTI margins exceed 55%. If we exclude the FCP under-absorption expenses, we are not too far away from the targeted margin level of 38 to 40%. Our strategy is to increase penetration of our Gen Three USB PCI Express and clock products across server, networking and embedded applications for margin accretion and sustainable revenue growth.
Non-GAAP operating expenses were $11.1 million for Q3, and was up .1 million sequentially. Going forward, our operating expenses could vary plus or minus a few percentage points in any given quarter, but we don’t expect to see any significant changes from this run rate at this point in time.
On the product development front, we have been, and we will continue to, invest in next generation solutions that will drive both growth and margin expansion for applications in server, embedded, networking and telecom and mobile computing.
The non-GAAP effective tax rate was 11% for Q3, compared with 9% last quarter. The Q3 tax rate included the impact of a favorable year-to-date (inaudible) of approximately $.2 million. Our tax rate has fluctuated a bit during the past few quarters, primarily due to the mixture of foreign versus domestic income, as well as having a lower pre-tax income amount as the basis for calculation.
Non-GAAP net income was $1.7 million, or $0.07 per diluted share for Q3, compared with 1 million, or $0.04 per share last quarter. Half of the net income increase came from the higher revenue volume, and the other half from cash investment income and tax.
Exiting Q3, our balance sheet remained in excellent shape, and we continued to generate positive cash flow. Cash, including both short- and long-term investments in marketable securities, was $125 million, which equated to $5.20 per share. During the quarter, we repurchased 426,000 shares for $3.4 million, at an average price of $8.03 per share. The balance remaining under the 2008 share repurchase plan was $3.1 million as of quarter-end. On that note, we are pleased to announce that our board of directors have approved and authorized us to repurchase an additional $25 million of common stock, commencing when the current plan ends.
Net inventory was $17.2 million at the end of Q3, which was down 1.1 million from last quarter, and equated to 73 days of supply. We have now reduced our in-house inventory in each of the past six consecutive quarters, dating back to Q1 of FY11. And the cumulative reduction was 45% over that time span. Distributor inventory increased a bit to eight weeks, and this was due to the timing of demand pools as well as the lower January sales-out due to the Chinese New Year holiday.
Capital equipment additions were $0.8 million for Q3, and depreciation expense was $1.9 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. We are happy to report Q3 revenue at the high end of our guidance. Revenue for all end-market segments increased quarter-to-quarter, except our shipment into the digital media market. At the end of the quarter, our book-to-bill ratio was significantly over one, and our debt loss going into the fourth quarter increased substantially. We have initiated (inaudible) shipment of our USB 3.0 ReDriver products for the Intel (inaudible) in fiscal Q3, and we expect this to ramp up in the next few quarters.
To the best of our knowledge, Pericom is still the only supplier that has met the stringent USB 3.0 super-speed compliance requirements in the signal integrity area. We are also working with many customers to design in our PCI express 3.0 ReDrivers for the Intel (inaudible) server platforms, which we expect to realize revenue in the second half of this calendar year.
Market-segment-wise, the mix in fiscal Q3 was: computer 21%; networking and telecom 38%; server storage 11%; consumer 11%; and embedded others 19%. Our core five end customers account for 26% of our total revenue and one customer accounted for 10% of total revenue in Q3. The revenue mix for our product family was: IC 62% and frequency control products 38%. The IC revenue increased 9% from our PCI subsidiary in China. The remaining 53% of IC products include analog switch 20%, digital switches 5%, silicon clock 8%, connect 16% and interface 4%.
Operationally, we have done well in managing inventory in the last six quarters. As Aaron mentioned, we reduced our in-house inventory by 45% over this timeframe, and we feel the inventory levels in this 70 to 80-day timeframes will allow us to service our customer well while reducing inventory exposure.
We still have a bit of work to do to fully utilize our FCP factories. Still in Q3, we are operating around 70% utilization and we think this will improve to 80% throughout this quarter and get better utilization going forward.
In fiscal Q3, Pericom introduced a total of seven new products in our connectivity and timing areas. Please refer to our earnings press release for more details. Among the new products introduced, the PCI express Gen2 packet switch is the follow-on to our successful Gen1 packet switch product, that we have shipped millions of units in the last two years to embedded applications. This new Gen2 product features an integrated clock buffer, advanced power management schemes and provides the industry’s smallest footprint.
Our continued focus is to increase revenue contributions from applications across server storage, networking and telecom and embedded segments. For server storage applications, Intel’s (inaudible) platform launch will provide us with opportunities to expand our penetration into the states with our PCI express and (inaudible) data signal integrity solutions, and also our timing products.
For networking and telecom, we have (inaudible) with our high-performance clock generator and clock buffers in the last two years. As you know, design-into-production ramp tends to take some time in networking telecom applications. We are pleased to see the initiation of revenue contribution from this new timing product in fiscal Q3, and we expect to see it ramp up going forward.
On the embedded market side, we have made good progress in increasing our embedded customer base, especially in China. Revenue contributions from embedded customers in China is expected to increase to $3 million in fiscal ‘12, versus $1 million in fiscal ‘11. We plan to make introductions in the second half of this calendar year, new products targeting video surveillance and smart media applications that will significantly increase our (inaudible) in these target areas. We believe our effort in these key market segments will not only increase our revenue, but also expand our gross margin. At this time, I would like to pass it back to Aaron to give our guidance for Q4.
Aaron Tachibana
Thank you, Alex. We currently expect Q4 revenue to be in the range of up five to 11% sequentially. The booking rate was strong in Q3, with a book-to-bill ratio well over one. We had roughly 60% backlog coverage coming into Q4, and we are currently at 80%+ of the Q4 revenue estimate. We currently expect the Q4 non-GAAP results to be as follows: revenues in the range of 35 to $37 million; gross margin in the range of 35 to 37%; operating expenses are expected to be in the range of 10.9 to $11.5 million; other income is expected to be approximately .6 to .8 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 22 to 26%. 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 Roth Capital. Your line is open.
Krishna Shankar – Roth Capital Partners
Yes. Congratulations on the nice results and guidance. A couple of questions. Can you talk about what is driving the strong revenue guidance for the June quarter? What end markets seems to be showing strength for you?
Alex Chi-Ming Hui
Thank you for the comment. In general, I think, you know, we see strength in our [inaudible] across the spot, but in particular, I think we’re seeing strength from the computer segment as well as from the [inaudible].
Krishna Shankar – Roth Capital Partners
Okay. And the leading to the frequency control product line, can you talk about what kind of progress we can expect in terms of employing factory utilization there over the next few quarters?
Alex Chi-Ming Hui
Yes, we have seen a book to bill gain significantly, you know, improve in the frequency control areas and that’s why today, you know, we are looking at utilization well ahead of the 80% target that we’re looking at in this quarter. So we believe over time, you know, the capacity and the [inaudible] will be fully softened and the problem that we see in this quarter in terms of the under absorption impact in gross margin will go away over time.
Krishna Shankar – Roth Capital Partners
Okay. And then leading to PCI Express, can you talk about some of your newer products, PCI Gen2 and also Generation 3, switches, timing and redriver products and the opportunities there?
Alex Chi-Ming Hui
Yes, the Gen2 is essentially, you know, [inaudible] focusing on the low income, you know, low power package switches for embedded applications. So our Gen1 product, you know, got – is really one of the best in the industry and we have shipped millions of units to [inaudible] in the last two years. We essentially have upgraded the product to Gen2 performance, but also, you know, we integrated the cross [inaudible], you know, a second shift [inaudible] into ICs, essentially reducing the footprint but also reducing the cost.
We also believe we lead the industry with the smallest package in the industry and also the lowest power. So as you know, embedded processors are not my great thing for my PCI Express Gen1 and Gen2 and we believe we will stay there for at least the next three to four years. So timing wise, I think this is a well decision in terms of house support for the next generation of embedded processers. Essentially, we’re working with our customers to design this product.
For PCI Express Gen3, you know, absolution is essential in three areas. First of all our [inaudible] solution, you know, we have introduced two parts in this area and we’re not working with customers. The second area is essentially our timing solution, you know, our processors and also crystal oscillators. The third area is, essentially, you know, our high-band width that our signals reaches. Those products have actually been shipping, you know, for about a year now in the high-end PCs. Initially, not that much in the Gen3, but it will enable the Gen2 customers to be Gen3 ready.
So again, our Gen3 solution is in three areas; [inaudible], timing and also in switching.
Krishna Shankar – Roth Capital Partners
Great. Thank you.
Alex Chi-Ming Hui
Thank you.
Operator
Thank you. Our next question comes from Hans Mosesmann of Raymond James. Your line is open.
Brian Peterson – Raymond James
Hi. This is Brian Peterson, stepping in for Hans. I wanted to circle back on the utilization rate in FCP and if that’s improving from 70% to 80% next quarter, why are you still looking for gross margins in the 36% vicinity? I would think that that would drive a little bit higher number.
Aaron Tachibana
Hi, Brian. This is Aaron. Yes, so in terms of the utilization, it will step up on the frequency control product side of the house and the margins there will improve. We are seeing right now with the volume coming back, we’re seeing some of the mixture of products where we had more favorable mix in the prior two quarters, you know, some of the lower end mix is coming back right now from a booking and backlog standpoint, so therefore, you know the margins could be flattish. Okay, and that’s why we’re not showing them going up right now.
Alex Chi-Ming Hui
Also, I have an addition comment. Since we have volume, you know, 90 days of inventory, you know, in the frequency control area, so we do have to free up those inventory before we see a lower cost, you know, a contribution on the high-low end. So you [inaudible] the timing left.
Brian Peterson – Raymond James
Okay, understood. And kind of secondly, what is the historical range for your turns business because it sounds like you’re guiding it to 20% for the June quarter and I'm just trying to see what that spend is historically.
Aaron Tachibana
So for the June – this is Aaron. So for the June quarter here, our turns range is 40%, right, because basically we had 60% coming into the quarter. The normal range is typically down between 40 and 45%. The last couple of quarters of business went – declined quite a bit. We were at 50% turns required. So we’re in the normal range right now.
Brian Peterson – Raymond James
Okay. Thank you.
Operator
Thank you. (Operator Instructions). Our next question comes from Christopher Longiaru of Sidoti and Company. Your line is open.
Christopher Longiaru – Sidoti & Company
Congratulations on the results.
Aaron Tachibana
Thank you.
Christopher Longiaru – Sidoti & Company
My question has to do more with the progression of analog server redrivers et cetera as a percentage of your revenue and how you see that kind of moving over the course of the next 12 months. I mean, those products are considerably higher gross margins, so I just want to get an idea of what, you know, what your projects of that progression is as it stands now.
Alex Chi-Ming Hui
Yes, I think, you know, today, we’re probably running about 10% of our revenue, you know coming from those products. [Inaudible] into next 18 months, two-year timeframe. Right now, you know, we see adoption in the Gen1, Gen2 and also beginning of the Gen3 solution in the company. And we’re also beginning to see the Gen1 and Gen2 solutions spreading to embedded you know, telecom and networking. So – those areas tend to take a little bit more timing in terms of designing to [inaudible], but we certainly see that in the business as a very important product line for us and we expect to see, you know, increasing contribution to revenue and also margin dollar.
Christopher Longiaru – Sidoti & Company
That’s all I had for now. Thanks, guys.
Alex Chi-Ming Hui
Thank you.
Operator
Thank you. I’m showing no further questions in the queue at this time. I’ll hand the call back to management for closing remarks.
Aaron Tachibana
Okay. This is Aaron, everyone. We’d like to thank everyone for participating on the call today and we look forward to speaking with you next time.
And next week, next Monday, May 7, I’ll be at the Jefferies Conference in New York City if any of you folks would like to meet. Thank you very much.
Alex Chi-Ming Hui
Thank you.
Operator
Thank you. Ladies and gentlemen, this concludes our conference for today. You may all disconnect and have a wonderful day.
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