Pericom Semiconductor CEO Discusses F1Q2011 Results – Earnings Call Transcript

| About: Pericom Semiconductor (PSEM)

Pericom Semiconductor Corporation (NASDAQ:PSEM)

F1Q2011 (Qtr End 10/02/10) Earnings Conference Call

November 2, 2010 4:30 PM ET

Executives

Robert Strickland – Director, IR

Aaron Tachibana – SVP of Finance and CFO

Alex Hui – President and CEO

Analysts

Christopher Longiaru – Sidoti & Company

Hans Mosesmann – Raymond James

Operator

Good day, ladies and gentlemen, and welcome to Pericom Semiconductor Corporation’s first quarter 2011 earnings conference call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Robert Strickland. Please go ahead.

Robert Strickland

Thank you. Good afternoon and welcome to Pericom’s first quarter fiscal year 2011 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 2011. Certain matters discussed in the press release and on this conference call may contain forward-looking statements that involve risks 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.

Aaron will discuss the financial performance for the quarter and Alex will give his comments on the industry and on Pericom’s business. Then he will provide guidance for the second quarter of fiscal 2011.

Aaron?

Aaron Tachibana

Thank you, Bob, and good afternoon everyone.

Although the current business climate remains somewhat cloudy, Pericom continues to solidify its strong market position through serial connectivity solutions as evidenced by the pace of our new product introductions along with several key design wins during the first quarter. We also achieved our sixth consecutive quarter of revenue growth while maintaining both profitability and the very strong cash position.

Also during Q1, we successfully closed the acquisition of PTI which we announced in early September. The addition of PTI adds approximately $20 million plus dollars of annual revenue at gross margins that exceed 50%, and the combination of Pericom and PTI is accretive immediately after excluding one-time cost and ongoing amortization expenses. We will expand upon the benefits and synergies of PTI later in our discussion.

Before getting into the results for the quarter, we would like to point out that we are reporting non-GAAP financial measures for net income, gross profit, 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 income and expense items included in the income statement this quarter which are not reflective of the performance of our normal business operations. Also, Q1 includes one month of PTI results since the acquisition was completed on August 31st. Now let’s review some of the detail.

Our consolidated net revenues for the first quarter were $42.8 million and represented a 3% increase from the $41.5 million reported last quarter and a 30% increase over the $33 million for the same period last year. Q1 was a 13-week quarter while Q4 had 14 weeks. The PTI revenue was $1.8 million for Q1, and this was the first quarter of consolidation since the acquisition.

Consolidated non-GAAP gross profit was $15.1 million for Q1 compared with $15.4 million last quarter and $10.6 million last year. Non-GAAP gross margin for the first quarter was 35.3% and was 170 basis points lower than last quarter’s 37% and 300 basis points higher than last year’s 32.3%. The sequential quarter gross margin decline was primarily due to product mix and unfavorable absorption from lower production volume related to FCP.

Non-GAAP operating expenses were $10.3 million for Q1 compared with $10.8 million last quarter and $10 million last year. The Q1 expenses were sequentially lower by 0.5 million due to Q4 including one extra week of expenses. Q1 operating income on a non-GAAP basis was $4.8 million or 11% of revenue compared with $4.5 million or 11% of revenue last quarter and $0.7 million or 2% of revenue for the same period last year.

Interest and other income for Q1 was $1 million compared with $1.1 million last quarter. The $0.1 million sequential quarter decrease was due to currency exchange losses. Income from our own consolidated affiliates, PTI and JCP, was $0.6 million for Q1 compared with $0.8 million last quarter. The sequential quarter decrease was due to Q1 including only two months of PTI income whereas Q4 was a full quarter.

Income before tax was $5.8 million on a non-GAAP basis for the first quarter compared with $5.6 million last quarter and $2.3 million last year. On a non-GAAP basis, the effective tax rate was 35% for Q1 compared with 28% last quarter and 32% for the same period last year. The Q1 sequential tax rate increase was due to the mix of income by jurisdiction and also last quarter included year-end true ups. As we go forward, we expect the tax rate to be in the range of 33% to 34%.

Non-GAAP net income was $4.3 million or $0.17 per share in Q1 compared with $4.8 million or $0.19 per share last quarter and $2.1 million or $0.08 per share for the same period last year.

Now let’s turn to the balance sheet. Cash, including both short and long-term investments and marketable securities, was $113 million at the end of Q1 and was down approximately $6 million from last quarter. The sequential quarter reduction was primarily due to the PTI acquisition. Cash plus investments per share were $4.55 at the end of Q1.

Working capital was $137 million at the end of Q1. Accounts receivable was $26.1 million and DSO 56 days. Net inventory was $31 million equating to 100 days of supply. The sequential increase of $7.6 million was due to adding $3 million of PTI inventory, $2 million of additional IC raw material and $2 million from FCP inventory that resulted from lower than anticipated Q1 shipments.

Channel inventory at the end of September was around 8.5 weeks which was within our target of six to 10 weeks. We expect both in-house and channel inventory to come down by the end of Q2. Our book value per share was $9.37 at the end of Q1. During the quarter, we repurchased approximately 163,000 shares of common stock at an average price of $8.54 per share. The total cost of repurchase was $1.4 million.

At this time, I would like to turn over the call to Alex for commentary about our business, the industry, and the Q2 guidance. Alex?

Alex Hui

Thank you, Aaron, and good afternoon. We are pleased to report our sixth consecutive sequential growth quarter driven by increased adoption of our serial connectivity solutions in server, telecom and embed applications. Our top five end customers in fiscal ’11 Q1 accounted for 29% of our revenue with one customer got over 10% of the total revenue.

On a consolidated business, the revenue mix for our product family was IC 68%, and frequency-controlled product 32%. IC revenue we included analog switches 31%; digital switches 7%; servers and [inaudible] 7%; connect, 17%; interface, 2%; and 4% from our PTI products.

Our connect product line which includes our PCI and PCI Express switches, package switches and ReDriver product continued to grow nicely with 14% sequential growth in fiscal Q1. Our book-to-bill ratio was lower than one for the quarter just concluded, which was a result of weaker PC and consumer market demands.

We also saw channel inventory adjustment and customers reducing their backlog coverage with our product lead times coming down. In the September quarter, we introduced a total of 12 new products across the signal integrity, timing and connectivity for the areas. Seven of the 12 new products introduced during the quarter support the new PCI Express 3.0 running at 8 gigabits per second specification.

PCI Express 3.0 is being adopted for next generation server, storage, networking market segments. We have received very strong interest from key customers of these products since introduction. We believe Pericom is well positioned with our first generation serial connectivity solution for PCI Express, Serial Attached SCSI, Serial ATA and USB connectivity protocols.

These designs are expect to design-in in calendar ’11 with production ramp in 10 to 12. And I’d like to refer you to our recent press releases for the details of regard to these products.

Demand creation is a key focus of our sales and marketing team. Our design activities for our serial connectivity and coming products remain strong. I like to take a few minutes to share with you some of our recent key design wins.

Our DisplayPort switch design win of a top PC brand name customer. But today we have design wins with most of the top worldwide computer makers with our Display switch product. Our high-volume solid-state drive fresh memory customer are targeting high performance giving applications have used our PCI Express to PCI-X Bridge, [inaudible] and ReDriver in their design.

PCI Express packet switch, Core IC and digital switch product on a high-volume home gateway program of a top European broadband IT provider. As of today, our PCI Express to PCI switch product has been designed into more than 30 programs at Huawei, and we expect the number of programs will further increase over time, representing multimillion dollar revenue overtime.

USB switch and touch [ph] products with several top local customers. Also we have a design win with our serial attached SCSI crystal oscillator on HP server platforms, our SATA ReDriver on Intel server platforms, as well as a recent win with our HDMI switch on the Sharp TV platform.

Our new PCI Express to USB 2.0 switch bridge combo chip is also showing a lot of interesting from customers. This is very interesting single-chip product that could replace up to three ICs and save customers significant bond [ph] costs, phosphate and [inaudible] budget.

As Aaron mentioned, we completed acquisition of PTI at the end of August. This acquisition adds $20 million plus revenue, a record margin, and provide a stronger platform in the fast-growing quicker China market.

We are working to leverage the team at PTI to engage with broader customer base in China. We’re also mobilizing our North America and European sales force and distribution networks to promote PCI products in these key regions.

At this time, I would like to provide our guidance for our fiscal second quarter of 2011. Although we expect to see lower revenue stream in this quarter, these are combinations of weaker PC and consumer market demands and channel inventory adjustment. On the other hand, we expect to see higher gross margin to better product mix.

We currently expect the Q2 non-GAAP results to be as follows. Revenues in the range of $40 million to $42 million; gross margins in the range of 36% to 39%; operating expenses are expected to be $10.6 million to $11 million which include all the consolidated expenses from PTI. Other income is expected to be approximately $0.7 million consisting of interest income and realized gains from tax investments. Effective tax rate will be in a range of 33% to 34%.

This concludes our prepared comments and we’ll now open up the section for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Christopher Longiaru with Sidoti & Company.

Christopher Longiaru – Sidoti & Company

Hi guys.

Alex Hui

Hi Chris.

Christopher Longiaru – Sidoti & Company

My biggest question really comes from with PTI mixed in, it looks like your gross margin going forward obviously in the product mix is – you should keep that up. What about your operating expenses? What do you think you can strip out now that you have got the whole company in the mix, and how do you see that moving going forward?

Aaron Tachibana

Hi Chris, this is Aaron. Good question. Yes, so in terms of OpEx we had mentioned before that with the acquisition of PTI, we don’t anticipate reductions of operating expenses. What it really allows us not having Pericom to have to reinvest or recreate a supply line and an infrastructure in greater China.

So right now our expense base or our estimates share for Q2 is $10.6 million to $11 million range on an non-GAAP. We anticipate this would be the relevant range as we go forward and as volumes increase there could be a little bit of variable costs due to the some of the variable selling costs. But we think this is a good number here.

Christopher Longiaru – Sidoti & Company

How much revenue do you think you can handle in leverage this cost point with?

Aaron Tachibana

Yes, so that’s another good question. So I think in terms of the revenue increase, its probably a few million dollars at this level and until we have to increase for some variable selling costs, right.

Christopher Longiaru – Sidoti & Company

Okay, correct.

Aaron Tachibana

Yes, so this level here – I think we have a pretty good leverage model here, so as we have increases in volume, increases in gross margin, we should see a lot of that fall to the operating line.

Christopher Longiaru – Sidoti & Company

Great, thank you.

Operator

(Operator Instructions) Our next question comes from Hans Mosesmann with Raymond James.

Hans Mosesmann – Raymond James

Thanks. Hey guys, can you give us a little more resolution regarding the inventory dynamic in the – in terms of rebalancing, where is it happening or located. Is this more wireless infrastructure or is data com or is it PC consumer, little more resolution that would be helpful. And also within that, if its more PTI related or just the former Pericom reported.

Alex Hui

Yes, Hans this is Alex here. The higher revenue that, inventory that we are seeing now are more related to the computer segment and to a lesser extent the consumer segment. Its mostly related to the each other, Pericom side infrastructure as to where we began to see a slowdown in the PC, consumer segment probably in the August timeframe.

So eventually now the channel has other more products in the beginning and that they are looking to absorb it. And actually as we look at the distributor inventory, we actually peaked that in August and we actually see them coming down already in the September, we expect that to continue to come down this quarter.

Hans Mosesmann – Raymond James

I’m sorry distribution peak what in September?

Alex Hui

The distribution inventory peaked in August.

Hans Mosesmann – Raymond James

Okay.

Alex Hui

And that has come down – came down in the September and we expected it to continue to come down for the balance of this quarter. But as Aaron mentioned, September quarter ending inventory was roughly about 8.5 weeks, which is still within our range of six to 10 weeks but we expect that with the current environment and also product lead time coming down, that will probably come down in this quarter.

Hans Mosesmann – Raymond James

Okay and then as a follow-up within just the inventories and the inventories that are on your balance sheet. What is that the composition. Is it mostly FCP or is it IC-based, and what is the nature of these inventories?

Aaron Tachibana

So Hans, this is Aaron hi.

Hans Mosesmann – Raymond James

Hi.

Aaron Tachibana

Composition of the inventory is pretty balanced mix of both IC and FCP. So in terms of the increase that we saw, PTI added $3 million in Q1 . FCP grew by a little over $2 million and IC grew by little over $2 million.

The IC was in the form of wafer and die, so its really good fresh inventory and basically as you’ll recall the last couple of quarters we’ve had book-to-bill significantly over 1% and so that’s when the supply line was pretty tight and we had wafer and die on order and a lot of that has starting to come in now and, that’s good strategic product for us.

In terms of the FCP inventory, we had a little bit of a short fall shipments in Q1. And the FCP inventory build there, hopefully we’ll flush it self through here in Q2. So we anticipate Q2 reducing both in-house and channel inventory.

Hans Mosesmann – Raymond James

Okay, and then if I can and then I’ll leave it open for other questions, to the degree that you have visibility in terms of the rebalancing and it looks like its consumer related and PC-related, not necessarily communications. Could you see a more like a seasonal or breathless seasonal March quarter, with these trends that you’re seeing with inventories coming down?

Alex Hui

I think that’s well possible, but right now its too early to say we certainly update you when we come into January but this probably not necessarily a wrong thing to kind of look forward at this point. It is just – we are seeing this quarter is called the less seasonal intense of traditional PC uptick.

Hans Mosesmann – Raymond James

Okay, thank you.

Operator

Thank you. (Operator Instructions) I am showing no further questions at this time.

Alex Hui

Okay, thank you. I’d like to thank all of you for joining us on the call today and wish all of you a good afternoon. Thank you.

Aaron Tachibana

Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the conference and you may now disconnect.

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