Back in April, I again recommended a short position in SemiLEDs (LEDS), a Taiwanese manufacturer of light emitting diode (known as LED) chips and components, following its fiscal second quarter earnings release. (That piece followed up on my original bearish call on the stock in an LED sector overview I published in September 2011). I noted the company's negative gross margin (which came in at -9 percent, and its operating margin was an astounding negative 73 percent), 21 percent drop in revenue, and the burning of nearly 10 percent of the company's net cash in just three months.
My recommendation was correct -- after a 5 percent drop Tuesday following the release of fiscal third quarter earnings, LEDS is off over 27 percent in less than three months. But before I pull a muscle patting myself on the back, any short recommendation in LEDS made since its December 2010 IPO would look pretty good. LEDS is now down nearly 85 percent from its $17/share offering price, and it has missed earnings estimates in every one of the seven quarters since it became a publicly traded company.
Tuesday's earnings release shows that little has changed. SemiLEDs did, in fact, top its revenue guidance, with sales of $9.2 million coming in ahead of its estimate of $7.9-$8.9 million. Revenue grew 64 percent over the year-prior quarter, though that quarter had marked a bottom -- both for SemiLEDs and, it would appear, the LED industry at large.
SemiLEDs' problem is that the revenue growth simply isn't enough. Margins, amazingly, continued to weaken. Gross margin dropped to -11 percent, with operating margin at negative 87 percent. SemiLEDs did manage to limit its cash burn, with its cash balance dropping just $3.5 million in the quarter.
In the press release, CEO Trung Doan touted a new product line, noting, ""We look forward to announcing more innovative products in the months to come that will further strengthen our position in the market place." SemiLEDs' management seems oblivious to the perilous state of the company. It does not need to "strengthen" its market position -- it needs to create a market position.
Compare SemiLEDs' trailing 12-month sales with those of the LED sector's key players:
|Company||TTM Revenue (in millions)|
|Veeco Industries (VECO)||$864.37|
|Aixtron SE (AIXG)||$549.91|
Revenue data courtesy finviz.com. TTM = trailing 12 months
SemiLEDs is simply trying to hold on, and it's pinning its hopes on the Chinese market through China SemiLEDs, a joint venture in which SemiLEDs owns 49 percent. As the company wrote in its most recent 10-K:
Given the significance of the China market as part of our business strategy, our net income growth and overall growth prospects are significantly dependent on the success of China SemiLEDs.
In the first six months of FY12, that JV earned $351,000 in revenue, with LEDS writing down the value of its investment by 19 percent. Given the fact that Doan did not mention any progress in China, investors can likely assume that the 10-Q, when filed, will not show any material change at China SemiLEDs.
In fact, not much has changed at SemiLEDs itself. The company is still an insignificant, almost invisible player in its industry. It continues to burn cash, and its salvation hinges on a minority interest in a joint venture in a still-Communist country, with partners who are all aligned with the authoritarian government there. And, on Tuesday, for the seventh consecutive time, SemiLEDs earnings came in below expectations. In the 19 months since its IPO, SemiLEDs has done nothing but disappoint. Tuesday's earnings give no reason for investors to expect anything else anytime soon.