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Executives

Bob Strickland - Corporate Treasurer and IR

Aaron Tachibana - CFO

Alex Hui - President & CEO

Analysts

Krishna Shankar - Roth Capital

Christopher Longiaru - Sidoti & Company

Pericom Semiconductor Corp. (PSEM) F4Q12 Earnings Call August 7, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Pericom Semiconductor fourth 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 follow at that time. (Operator Instructions). As a reminder this call maybe recorded. I would now like to introduce your host for today's conference, Mr. Bob Strickland. You may begin.

Bob Strickland

Thank you. Good afternoon, and welcome to Pericom’s fourth 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 first quarter of fiscal 2013.

Certain matters discussed in the press release and on this conference call may contain forward-looking statements that involve risk and uncertainties.

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 the regulations of fair disclosure, Pericom will continue to only provide guidance via it's earnings release and its conference calls. The company will not provide further guidance or updates during the quarter unless it does via press release.

Please note that we are referring non-GAAP financial measures for net income, gross profit and operating expenses in addition to our GAAP financial results. Due to the PTI acquisition and also non-recurring items, we have a significant amount of non-cash and non-operating expense included in the income statement which are not reflective of the performance for our normal business operation.

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 2013. Aaron?

Aaron Tachibana

Thank you, Bob and good afternoon everyone. We recently concluded fiscal year 2012 and although our revenue declined year-over-year, we continue to lay the foundation for long-term growth with higher levels of profitability. Our focus to expand business within the end markets as networking and telecom, server and storage and embedded has resulted in a 180 basis point improvement in gross margin year-over-year. Fiscal year 2012 also marks eight consecutive year of profitability on a non-GAAP basis and we have been profitable each quarter for the last five years

Now let’s review some of the detail. Our consolidated net revenues for the fourth quarter were $37.9 million, an increase to 40% sequentially from the $33.4 million last quarter and decreased 12% from the $43.3 million for the same period last year.

Revenue increased in all key market segments with the exception of PC and notebook. The full fiscal year 2012 net revenues were $137.1 million compared with $166.3 million for last year which represented an 18% year-over-year decline.

For Q4, sales by channel were international distribution 64%, contract manufacturers 26%, OEMs 8% and US distribution was 2%. Consolidated non-GAAP gross profit was $14.1 million for Q4 compared with $12.1 million last quarter and $15.7 million last year.

The non-GAAP gross margin for the fourth quarter was 37.1% and was up approximately 90 basis points from both last quarter and last year’s 36.2%. The sequential quarter improvement was primarily due to the improved FCP factory utilization which exceeded 80% in Q4 compared with 70% last quarter. Our consolidated gross margin has been in the 37% range for the past three out of four quarters now.

We've been making good progress towards enhancing our margins and are within reach of our targeted margin levels of 38% to 40%. For the current quarter that we are in now, we could see a 20 to 40 basis points improvement based on the billings and backlog thus far. Our strategy does not change. We continue to focus on increasing penetration of our GEN3 USB and PCI Express and clock products across server, networking and embedded applications for margin accretion and long-term sustainable growth.

These end markets and applications generally have a much longer design and sales cycle which could take 18 to 24 months to realize revenue compared with the PC or consumer segments that generally have a nine to 12 months cycle. Non-GAAP operating expenses were $11.8 million for Q4 and were up $0.8 million sequentially.

The increase was primarily due to shutdown savings of $0.4 million last quarter whereas Q4 had none. We are committed to being a leader in connectivity solutions and will continue to invest in next generation solutions that will drive both growth and margin expansion.

In any given quarter, our operating expenses could vary plus or minus a few percentage points, but should remain in a range similar to Q4 in the near term. Although we've been discussing non-GAAP results thus far. I would like to point out our GAAP tax expense was $3 million in Q4 which was unusually high.

We had determined that our California tax credits mostly from research and development might not be utilized in the foreseeable future. Therefore we established a $2.8 million reserve against the deferred tax asset on the balance sheet. On a non-GAAP basis the effective tax rate was 26% for Q4 compared with 11% last quarter. This rate increase was primarily due to the mixture of foreign versus domestic income and some year-to-date true ups.

As we go forward, our non-GAAP tax rate should remain in the mid-to-upper 20% range of periodic variability from the foreign versus domestic income net. Non-GAAP net income was $2.5 million or $0.10 per diluted share for Q4 compared with $1.7 million or $0.07 per share last quarter. The $0.03 increase was from higher revenue volume in cash investment income, which was partially offset by higher income tax expense.

For the full fiscal year, non-GAAP net income was $7 million or $0.28 per diluted share compared with $14.4 million or $0.56 per share last year.

Exiting Q4, our balance sheet remains pristine and we continue to generate positive cash flow.

Cash, including both short and long-term investments and marketable securities was $120 million, which equated to $5.41 per share. During the quarter, we repurchased 298,000 shares for $2.4 million at an average price of $8.06 per share. The balance remaining under the 2008 share repurchase plan was 0.7 million as of quarter end.

In addition we have the ability to repurchase an additional $25 million of common stock commencing when the current plan ends.

Net inventory was $60.6 million at the end of Q4, which was down $0.6 million or 3% from last quarter and it equated to 63 days of supply. We have now reduced our inhouse inventory in each of the past seven consecutive quarters, getting back to Q1 of FY11 and the cumulative reduction was 46% over that time span, distributor inventory remains slightly below eight weeks similar to last quarter. Capital equipment additions were $1.2 million of Q4 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 pleased to report Q4 results exceeding the high end of our guidance in both revenue and gross margin. Revenues from all key market segments increased quarter-to-quarter except the PC market. Sequentially, our server and storage revenue increased by [23%] and networking and telecom increased 19% and embedded grew 18%. We have a good rebar in our FCP business with achieved utilization reaching of [10%] plus and ended capacity under absorption issue that we had for several quarters.

We are happy to ramp up the shipment of our US 3.0 ReDriver products into the Intel Ivy Bridge platform in fiscal Q4. Shipment of fabs and signal redrivers also going into new programs contribute significantly to the growth of our service providers revenue in this quarter. We also saw nice increase in our PCI Express product revenue for comprehensive switching, bridging and timing technical solution. Market premium segment-wise, the mix in Q4 was computer 17%, Server Storage 12%, Consumer 14% and Embedded 17%. Our top five end customers accounts for 21% of total revenue and no customer accounted for 10% of total revenue in fiscal Q4

With regard to revenue mix, our product family was IT 60%, efficiency control products 40%, among the IT products, we saw analogue switches at 17%, digital switches 5%, clock 7%, connect 15% and interface 5%, 11% on PCI products.

Swapping that revenue was (inaudible) in the fiscal year, PCI had two strong quarters of growth in fiscal Q3 and Q4. PCI revenue was up 33% in Q4 and it contributed about $1 million in net income to the company.

In fiscal Q4, first let me introduce the total of nine new products across the connectivity, timing and signal integrity areas. We introduced our PCI Express GEN3 and USB switches for computing, consumer and networking applications.

On the PCI side, we introduced a Hi-Flex consumer ASIC platform that now allow us to respond to customer’s feature demand in much sorted time. PCI also introduced a new family of microprocessor supervisory products. We expanded our timing solutions with specialized XO and a multi output clock buffer optimized for networking applications.

We expand our signal integrity solution with new ReDriver products targeting PCI Express GEN3 and 10 Gig, 40 Gig Ethernet applications in servers, storage and networking. Our focus is to continue to increase revenue contribution from service storage, network telecomm and embedded segments while maintaining our strong presence in the PC market. We are proud with best service storage will remain a good growth area. We are engaged with top tier OEMs as last 10 users of service OS systems, who are now working to develop their own solution.

For networking and telecom, we’re leveraging our timing products with signal integrity solutions to increase our dollar content.

In embedded area, we have a strong customer base and video surveillance and we’re expanding our product solution to double our revenue from video surveillance segment in the next two years.

We’re also making good progress to engage with customers in automobile and industrial segments, to believe our effort in these markets will not only increase our revenue but will also expand our gross margin.

At this point, I would like to pass it back to Aaron to give our guidance for Q1 fiscal ’13.

Aaron Tachibana

Thank you, Alex. Our Q1 non-GAAP estimates are as follows. Revenue in the range of $36 million to $40 million, we had over 55% backlog coverage coming in to Q1 and currently we exceed 70% of the Q1 revenue estimate at the midpoint.

Gross margin in the range of 36.2% to 38.2%, operating expenses are expected to be in the range of $11.4 million to $11.9 million. Other income expected to be approximately $0.6 million to $0.8 million and this consist of interest income, realize gains from cash investments and currency exchange gains and losses.

The non-GAAP effective tax rate will be in the range of 24% to 30%. This now concludes our formal comments and we can open up the session to Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Suji De Silva. Your line is open.

Unidentified Analyst

Hey guys this is Noah Huth in for Suji De Silva, congratulations on the nice result so far. My first question is what was the linearity like for the quarter you say the book-to-bill was over one and I was just wondering if this was accelerating or decelerating towards the end of the quarter and then may be any comments you have so far in terms of the July?

Aaron Tachibana

With regards to the booking rates, yes we were over one in Q4 and we had (inaudible) amount of backlog coming into the quarter and the rate actually started to drop off towards the end of the quarter and we saw that slow down little bit.

Unidentified Analyst

Okay and through July?

Aaron Tachibana

So right now in terms of the current month of July, the booking rate actually has been continued as it did towards the end of Q4 it was on the slower side right now?

Unidentified Analyst

And then once more question to you any commentary on the overall the distributor inventory levels, you said they kind of remain flat, are you expecting to kind of sit around that same level or are you seeing any replenishment?

Aaron Tachibana

No, we do see them in the same level over the last three quarters our shipments in equated to demand and so we don’t anticipate over shipping demand or under shipping demand this current quarter either.

Unidentified Analyst

Okay and then one last one, any commentary on the PC and demand are you seeing any positive from the upcoming Windows 8 release or trying to see any acceleration already of people building for that?

Alex Hui

Yeah this is Alex here I think we do see some slowdown in the PC segment as our industry sales have recorded. We expect Windows 8 will be coming out probably some time in Q4 so we are hoping we will see the pace picking back up some time in the September time.

Operator

Thank you. Our next question comes from Krishna Shankar with Roth Capital. Your line is open

Krishna Shankar - Roth Capital

Couple of questions what was PCI Express overall as a percent of revenue and can you talk about the uptick of your PCI Express timing and switching products and in the Romley server ramp?

Alex Hui

PCI Express today account for a total of about to 10% to 25% of our revenue and you know HR solution include switching, timing and you know also very (inaudible) products we see a channel we have the demand Romley platform for our PCI Express product and also other benefit we actually saw is going into the server in a Romley side.

Krishna Shankar - Roth Capital

And then on the FTP you said that I get your reached a point in capacity utilization 80% that is no longer a drag on gross margins?

Alex Hui

Yes we have seen utilization at 80% plus and also we are happy to see the (inaudible) going away and then we contribute you know either a positive uptick in our operating result for the PC and control business?

Krishna Shankar - Roth Capital

Okay and then I guess you have a long-term growth margin had been same sort of 40% to 42% are you being a little more conservative when you are saying 38 to 40 is on the GAAP gross margin target can you clarify the long-term gross margin target.

Aaron Tachibana

In terms of near term yes we are still targeting 38% to 40% near term in the next few quarters. Long-term we would be targeting 42% to 44%, but that’s going to continue to evolve that's probably two to three years out that’s going to require to continuously shift this mix to embedded networking and telecom and service storage.

Krishna Shankar - Roth Capital

And for all of fiscal ’13 Aaron what would be the pro forma tax rate?

Aaron Tachibana

Well, now we should assume again the mid to high 20s, so I would assume 27% to 28% from a pro forma tax rate standpoint.

Operator

Our next question comes from [John Chen] of BNP. Your line is open.

Unidentified Analyst

I had a couple of questions related to the PCIe segment, particularly how you view the impact of the PLXT/IDTI transaction. So I guess, first of all assuming that transaction closes, how do you expect it to impact Pericom and overall pricing for the segment especially for the third-generation PCIe products.

Aaron Tachibana

Hi John, this is Aaron Tachibana. With regards to the merger and what's going on there, I think you know from Pericom’s perspective we are just in a wait and see mode. We are just kind of going to see what happens and in terms of the competitive environment and customer environment, you know we are just in the wait and see mode; we will take a look at it once it gets consummated.

Unidentified Analyst

Well I guess if pricing were to become more favorable for you guys as a result of the transaction going through. Are there any constraints such as alternative technologies like InfiniBand or the competitors that you view as, you know would be realistic threats further down the line?

Alex Hui

This is Alex; we still see that PCI Express is really the mainstream technology. We are certainly aware of other and certainly the InfiniBand, and so we’re feeling that’s more of a niche classification. So if you believe that you know the mainstream technology will be the PCI Express.

Unidentified Analyst

And I guess if pricing were to become more favorable, what about like new entrants, potential entrants just like your competitors?

Alex Hui

Again, I think so; we still are in the situation of monitoring, the situation, I think it's a little bit too early to comment at this point.

Unidentified Analyst

And then if in terms of the PCIe like the end customers, what exactly – do you have an idea of like what would be switching cost to them in favor to redesign their product to switch from PCIe to InfiniBand or to competing technology?

Alex Hui

I guess you really have to address the question to them. We are (inaudible) supply to them, so we have no deep insight into the cost various switching factor.

Operator

(Operator Instructions)

The next question comes from Hans (inaudible). Your line is open.

Unidentified Analyst

I just wanted to get some color on the guidance. So it looks like its going to be flat sequentially; what end markets are you expecting to grow and then what the markets do you see as little bit soft?

Aaron Tachibana

So with regards to guidance right now we’re something flattish and that’s predominantly because we grew working percent quarter-to-quarter, so if you do that with both quarters were up 7% to 8% in both quarters on a quarterly basis. So looking at end markets right now we would anticipate most of the end markets just remain flattish; we’re going to continue to focus on embedded superstores so there could be some slight uptick there and if there were to be anything that would slowdown or decline a little bit could be PC notebook and some of the digital media and consumer business.

Unidentified Analyst

Are we not really seeing a pickup at all related to Ivy Bridge because that was the long segment that was down this quarter I would maybe expect it to pickup just given an easy comp is that just conservatism or are you really seeing a lot more softness in PC than you guys expected?

Alex Hui

I think certainly this is ramming up but then we also see more legacy platform being in a slowdown, so even its not bad, overall they are looking at really modest increase of revenue and again (inaudible) of mix and while are they talking about very strong ramp up in Ivy Bridge. So we expected something similar on our side also as we say in anticipation of the Windows 8 we see that we are a little conservative right now and so we if Windows 8 will be on schedule then I think we will probably we will see some sort of uptick in September, so that’s why we’re looking at it on a conservative side and looking at how the transition will work at this point.

Unidentified Analyst

So would it be fair to say that your guidance range was $4 million versus $2 million last quarter, is the PC market kind of the biggest swing factor in that?

Alex Hui

Could be because as I mentioned just now we see this quarter a little more back-end loaded, so it’s there to be a little more conservative seeing how things will evolve. So as I say the PC is the one that we feel little uncertain right now, but it seems to expect ramp up in September then everything will be okay, if there is any push up in relays or the other platform then we could see softening in the PC business in the third quarter.

Unidentified Analyst

And now last one from me, you guys had a pretty good quarter in FCP; can you talk about if that was more weighted towards crystals or oscillators or was that pretty balanced?

Aaron Tachibana

The main factor is about the same we see FCP similar mix to the XO versus crystal. Again, our long-term goal is to drive higher XO mix so that we could improve our margins, but in the most recent quarter you know the good thing is that the people can pickup the other thing is that we didn't see our XO mix increasing.

Operator

Our next question comes from Christopher Longiaru of Sidoti & Company. Your line is open.

Christopher Longiaru - Sidoti & Company

So one question I have is, is there a meaningful content move for your opportunity as we move to Romley and (inaudible) and so on and so forth and can you kind of talk a little bit about that?

Alex Hui

Yes, certainly we see high mix of signal integrity solution you know as the platform speed is increasing, we believe that not only the high end system end system will use signal integrity solution, we think overtime is going to spread you know to the mid-range. So that's one of the defects that we are seeing.

Christopher Longiaru - Sidoti & Company

And the other question I had was kind of housekeeping and in here did you repurchased shares in the quarter and how many and what was the expenditure?

Aaron Tachibana

Yes, we did Chris; we repurchased about 298,000 shares for approximately $2.4 million.

Operator

I am not showing any further questions. I would now like to turn the call back to Mr. Alex Hui for any further remarks.

Aaron Tachibana

Thank you very much. This is Aaron everyone. We appreciate you joining us on the conference today and our next financial investor’s conference will be in the September timeframe, ThinkEquity in New York City on September 12th. So we look forward to meeting with you then and if you have any questions in the interim feel free to give us a call or send us an email.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This concludes today's program. You may all disconnect and everyone have a great day.

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