Pericom Semiconductor F1Q08 (Qtr End 9/29/07) Earnings Call Transcript

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Pericom Semiconductor Corp. (NASDAQ:PSEM) F1Q08 (Qtr End 9/29/07) EarningsCall October 30, 2007 4:30 PM ET

Executives

Jason Golz - IR

Angela Chen - CFO

Alex Hui - President and CEO

Analysts

Krishna Shankar - JMP Securities

Christian Schwab - Craig-HallumCapital Group

Jay Srivatsa - Roth CapitalPartners

Richard Shannon - NorthlandSecurities

Operator

Good day, everyone and welcome tothe Pericom Semiconductor Corporation First 2008 Results Conference Call.Today's call is being recorded. At this time for opening remarks andintroductions, I'll turn the call over to Jason Golz, Investor RelationsCounsel for Pericom. Please go ahead, sir.

Jason Golz

Thank you, Lucy. Good afternoonand welcome to Pericom's first quarter fiscal 2008 conference call. Ourspeakers today are Alex Hui, President and CEO; and Angela Chen, the CFO.

Today the company will discussits financial results, comment on the industry and on Pericom's business, andprovide guidance for the second quarter of fiscal 2008.

Certain matters discussed intoday's press release and on this conference call may contain forward-lookingstatements that involve risks and uncertainties. Therefore, we encourage you toreview all filings made by the company with the Securities and ExchangeCommission, particularly the risk factor sections of such filings.

In accordance with regulations offair disclosure, Pericom will continue to only provide guidance via itsearnings release and its conference call. The company will not provide furtherguidance or updates during the quarter unless it does so via press release.

Now Angela will first discuss thefinancial performance of the quarter. Then Alex will give his comments on theindustry and on Pericom's business. Afterwards he will provide guidance for 2QFiscal 2008. I'll now turn the call over to Angela Chen. Angela.

Angela Chen

Thank you, Jason. Consolidatednet revenue for our first fiscal quarter were $38.5 million an increase of 22%from last quarter and 24% increase over the same period last year. Some revenuestatistics include the following: Turns bookings in the first quarter were inthe low 40% range, as expected. Our consolidated end market shipments wereComputer, 29%, Communication 34%, Consumer 33% and 4% from other materialmarkets.

Consolidated geographicdistribution in the first quarter was domestic 11%, Asia 86%, Europe 3%. Salesinto the domestic distribution were 3% of revenue. (inaudible) distribution was46%. Sales directly into contract manufacturers were 31% and the sales to OEMswere 20%.

Under generally acceptedaccounting principles, which include expenses for stock based compensation.Consolidated gross margin in the first quarter of fiscal 2008 was 36.4%, whichis very close to the 36.5% in the fourth quarter and up 260 basis points from33.8% compared to last year.

We were preset to deliveroperating income of $4.1 million under GAAP in the first quarter of fiscal2008. This is the 8th quarter in a row the company has delivered operatingincome. GAAP basis operating income was $9.9 million in the first quartercompared with $9.8 million in the fourth quarter.

On a GAAP basis fourth quarteroperating income including FAS 123R expenses. Total stock based compensationexpenses in the first quarter was $508,000 and for information purpose theforeign stock based compensation amount are quoted in our GAAP results, part ofwhich though $29,000, R&D $150,000, sales and marketing $143,000, [C&A]$186,000 all combined to a total of $508,000. Consolidated interest and otherincome of $1.4 million was net of most of the interest income.

Our first of quarter GAAP basisincome before tax was $5.5 million, compared with a $3.1 million in theprevious quarter. In the first quarter, our effective tax rate was approximately31%. GAAP basis net income in the first quarter was very strong that is $3.9million or $0.17 per share, compared with $4.1 million or $0.08 per share, inthe previous quarter and the net income of $1.6 million or $0.08 per share inthe first quarter of last year.

Our total assets at the quarterend were $418.7 million, compared with $214.2 million in the previous quarter.Our cash balances including both short and long term liquid assets, as ofSeptember 29th, 2007 was $130.9 million was $131 million in the previousquarter.

We used the $5 million torepurchase 454,000 shares of stock. Cash and the marketable securities is $5.08per share, and the net book value is $7.44 per share.

Now I will turn the call over toAlex to comment on our business and the industry.

Alex Hui

Thank you, Angela. We are verypleased to report very good results in Q1 driven by strong demand for our ICand FCP products across the board in Computer, Communication and Consumersegments. Net revenue of $38.5 million represents a sequential increase of 22%from Q4 fiscal '07 and up 24.8% compared to the same period last year.

On a consolidated basis, therevenue mix for our product families was IC 60%; which included analog switches28%, digital switches 12%, silicon clocks 8%, connect 7%, and interface 5%.Frequency control products, from SaRonix-eCERA accounted for 40% of our totalrevenue.

Gross margin of 36.4% was in linewith last quarter and 20 to 60 basis points higher than the comparable periodlast year. Operating income of $4.1 million represented a sharp increase of143% compared to last quarter and 487% compared to the same period last year.

We are very pleased to see adouble digit operating margin of 10.6%. The sharp improvement in operatingresults shows a leverage of increasing gross profits, while keeping expensesunder tight control.

Our top five end customers infiscal Q1 were Cisco, Dell, HP, Samsung, and Garmin. These customers accountedfor about 22% of our total revenue, and there was no 10% customer this quarter.

IC revenues went up highdouble-digits in the fiscal Q1. This is driven by strong demand for productsacross the board with particular strength in digital video, ultra mobilitydevices and serial protocol solutions for computer systems.

Digital video revenue ramped up30% sequentially, driven by increased shipment of our HDMI products to digitalTV and multifunction monitor applications.

Revenues from Ultra Mobilitydevices grew more then 20% quarter-to-quarter driven by strong demand from GPScustomers and increased market end penetration in Chinese cell phones.

Serial Protocol Solutions forservers and PCs registered growth of 80% quarter-to-quarter and accounted forabout 4% of our total revenue.

As we shared our view in our lastconference call, we had projected FCP revenues to show a strong rebound thisquarter and indeed it happened. FCP revenue increased close to 30%quarter-to-quarter driven by strong demand across the board, with particularstrength in wireless line, telecom and storage applications.

We also benefited from ramp-up involumes from several computer and communication customers. These are newcustomers that we start shipping to a few quarters ago, and we see additionalramp-up of revenue this quarter.

This is a breakdown in revenuecontribution from the key market segments in Q1. Computers 29%, Communication33%, Consumer 23% and other about 4%. The mix was very similar to what we hadlast quarter.

Bookings remained strong infiscal Q1 with book-to-bill ratio greater than one. This led to a high backlogand during the current quarter and we currently expect to see another quarterof sequential growth.

We expect business on computersystems and ultra mobile devices to increase sequentially this quarter and weexpect a taper off in our digital video business after you have reached a peakin shipments to OEMs customers in the September quarter.

Let me make some new comments ofour new products introduced in fiscal Q1. Pericom expands our digital videosolution and continue to maintain our leadership in this fast growing market.We introduced a dual mode the Display Port-to-DVI/HDMI Bridge product anddemonstrated the technology at a recent IDF in San Francisco. The Display Portproduct has positive color of up to 12bits per channel on the HDMI output.

We also launched two new HDMIswitches that (inaudible) with HDCP communicating capability and a family oflow power, low jitter, spread-spectrum clock generators. This products targetapplications in HDTV, Display Monitors, Notebook and Desktop PCs.

We also expanded our solutionsfor high bit serial protocol signal integrity solution in solid applications.Pericom introduced several (inaudible) tools fast ReDriver products in smallpackages. This ReDriver products we ensure ultra high-speed performance withgood signal integrity for disk verifications in notebook computers, PC, serversand storage arrays.

For the last few years Pericomhas focused their efforts on enabling the transition from parallel to serialconnectivity in computer, communication and consumer systems. The industrymigration for parallel BUS to serial BUS is generating opportunities forbillions of dollars of semiconductor content, and we believe Pericom is wellpoised to take advantage of these opportunities. We have invested heavily indeveloping key IPs and products to enable serial protocols like PCI Express, HDMI,DisplayPort, Gigabit Internet, USB, SAS and SATA.

Leveraging our core competence issignal switching and routing, signal conditioning, and frequency timing. Wehave provided our customers with reading access from connectivity solutions.Our strong customer relationship has led us to develop cutting edge technologythat is often first in the market. As time progresses we believe our vision isbeing validated with the responses that we see from our customers on ourproducts and solution.

We are now reaping the earlybenefits of our efforts in providing serial connectivity solutions to ourtraditional PC, server and networking communication customers, as well as thenew fast emerging applications like digital video and auto-mobility devices.For our expanding ASSP, serial connectivity solutions and strong design winactivities we expect to see sustained momentum, improving our revenue andprofitability in fiscal '08.

I'd like to now give someguidance for the next quarter. We currently expect Q2 results to be as follows,revenues of $39.3 million to $40.8 million, gross margin in the range of 36% to37%. Operating expenses are expected to be in the range of $9.7 million to $10million, which includes stock-based compensation expenses of approximately$600,000. Operating income is expected to be approximately $1.4 millionconsisting primarily of interest income. Tax rate is of about 32%.

We now open up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) We'lltake our first question today from Krishna Shankar with JMP Securities.

Krishna Shankar - JMP Securities

Yes, congratulations on a goodquarter. I just had a couple of questions, as you look at the December quarter,you indicated that you expect continued strength in computing andcommunications with the digital video business tapping off. Within thosesegments, Alex can you talk to where your things turn to the notebook servers?What type of networking equipment? And gross margins, what is the outlook forsome potential upside there given the mix improving?

Alex Hui

We expect to see [continued]strength in the notebook and server segments, [adjacent] by year demand as wellas our continued ramp up of our PCI Express solution. On the communicationsside, we expect to see continuous trend in the Wireless LAN area, and also theEnterprise Network area. We expect to gain on the gross margin in 36% to 37%range this will be somewhat dependent on the final mix. But our goal isobviously continue to drive, richer mix of our focused products.

Krishna Shankar - JMP Securities

And what about the timing modulesolutions business, the outlook for Q4?

Alex Hui

We expect that both our IPbusiness and our frequency control business would move up sequentially.

Krishna Shankar - JMP Securities

Great thanks. Thank you.

Alex Hui

Thank you.

Operator

Our next question will go toChristian Schwab with Craig-Hallum Capital Group.

Christian Schwab - Craig-Hallum Capital Group

Great thanks. Great quarter,guys.

Alex Hui

Thank you.

Christian Schwab - Craig-Hallum Capital Group

This PCI-Express, I missed, whatwas the revenue that we did this quarter in PCI-Express?

Alex Hui

We are approximately up about 80%compared to last quarter.

Christian Schwab - Craig-Hallum Capital Group

We had kind of talked about maybelast quarter that only growing at 20% to 30%, where does the surprise comefrom?

Alex Hui

Look we see a strong demand fromsome of our customers from the PC segment and it seems like some of theapplications are ramping up earlier then we expect.

Christian Schwab - Craig-Hallum Capital Group

Is this the beginning of a trendhere, we are on a trajectory, kind of had a delay in our trajectory to $10million is that, can you give us an update on how you see this growthaccelerating?

Alex Hui

We believe the business willcontinue to grow, but as you have seen overtime it's highly dependent on theramp-up of customer programs. So, we are really hesitant to give more guidanceat this point. But we are happy to see some of the programs initiating, that weexpect to see an additional benefits in the following quarter. And then as wesee the new Intel chipset, [Egulled] introduced in the second quarter of nextyear and we expect to see a further momentum.

Christian Schwab - Craig-Hallum Capital Group

Great.

Alex Hui

Yeah certainly now the platforms,we are monitoring very closely.

Christian Schwab - Craig-Hallum Capital Group

Right. Who are your leadingcustomers in the Wireless LAN and the Enterprise Networking space that aregoing to drive sequential communication growth?

Alex Hui

In the Enterprise customer thepeople like Cisco, and Huawe, and ZTE and ASUSTek in China. Wireless LAN gottoday major participation is on the wireless LAN, add on cost, to the notebookand PC platform, is actually aligning with the wireless LAN chipset suppliers.

Christian Schwab - Craig-Hallum Capital Group

Who are those that you arealigned with?

Alex Hui

This are the people like Aptos,Marvell, Broadcom those guys.

Christian Schwab - Craig-Hallum Capital Group

Right. And given, when can wekind of think about this big picture, we still kind of driving this company,where we think or its going to be growing in that 15% to 18% or some of thesedesign wins in market dynamics that we are seeing [eligibly] that you couldultimately grow faster than that?

Alex Hui

I think our goal all along forthe last few years is to sustain a growth of 15% to 20%. We also mentioned thatif some disturbance in our performing well, look well, we are seeing lumberheight and depth this is obviously one of those quarters.

Christian Schwab - Craig-Hallum Capital Group

Great. No further questions,thanks a lot.

Alex Hui

Thank you.

Operator

Our next question will go to Jay Srivatsawith Roth Capital Partners.

Jay Srivatsa - Roth Capital Partners

Thanks for taking my question.Congratulations on a very good quarter.

Alex Hui

Thank you.

Jay Srivatsa - Roth Capital Partners

On HTMI portion could you tell uswhat the revenues were?

Alex Hui

Essentially it went upsequentially above 30% compared to last quarter.

Jay Srivatsa - Roth Capital Partners

Okay. And as you look aheadbeyond the December quarter do you expect seasonal softness in the TV side toimpact your consumer revenues?

Alex Hui

Our consumer revenue essentiallyconsists of two areas, digital TV, actually digital video as well as the cellphone. So we expensed slightly in the December quarter with a normalseasonality in the TV market, likely there could be a trend down in terms ofdigital video business. The cell phone I think will probably mainly get healthyin Q4 you might see it take off in Q1.

Jay Srivatsa - Roth Capital Partners

Okay and then speaking of cellphone it appears in China there is a big push towards 3G phones starting ofnext year. Do you see yourself participating in that space and if so what kindof opportunity you see there?

Alex Hui

Yeah, our products areessentially in use across multiple platforms and we certainly are seeing a lotof strain on the time the cell phone area ranging from GSM to CDMA and alsosome of the new standards. Another key driver than we've been seeing isactually some of what we call reducing comp application. A lot of cell phonesin China now have two SIM cards to support two different lines and we areparticipating well in that market also.

Jay Srivatsa - Roth Capital Partners

Okay in terms of product mix wehad 60:40 between ICs and frequency control products. Do you expect thatpercentage to stay the same or any shift in anyone of those end markets?

Alex Hui

We except the mix to be 60:40within that ballpark, quarter-to-quarter sometime you see the percentage mightshift one way or the other slightly by few a percent, but we continue tomaintain that we could see good healthy [depositor] to grow in our profile IC and FCPbusiness.

Jay Srivatsa - Roth Capital Partners

In terms of gross margins you'vekind of guide to flat margins. What do you see as the catalyst that could takeyou to improving gross margins if you look ahead beyond the December quarter?

Alex Hui

We have seen a nice pick upyear-to-year of 260 basis points and I think that's within our goal up to the3% a year and again our goal for the last year has now changed, its continuingto re-drive a richer mix of our focus products and I think we continue to makethat progress. So even this quarter as you see while we have a high mix of FCPproducts, we actually to maintain the overall margin very close to what we hadlast quarter and so this is actually coming from benefit of a richer mix offocused products.

Jay Srivatsa - Roth Capital Partners

Thank you very much. Nicequarter.

Alex Hui

Thank you.

Operator

(Operator Instructions). We'll gonow to Richard Shannon with Northland Securities.

Richard Shannon - Northland Securities

Hey Alex and Angela, how are you?

Alex Hui

Thank you. Good.

Angela Chen

Thank you.

Richard Shannon - Northland Securities

Quick question on inventories, isthere any build up in inventory that your customers or anything that would puta halt on the supply chain here in the next few months or so?

Alex Hui

Not really. We actually as I saidwe do a monthly inventory check in the channel and actually now our inventoryat the end of September was lower than the June quarter.

Richard Shannon - Northland Securities

Okay, good. Delving into HDMI alittle bit, kind of curious just to your outlook for your business we see withthe two inputs switches versus the three input one. Take a look at some of theTV's that are being offered out there like there is, frequent opportunities forgrowth there over the next three or four quarters on the three inputs switches.Are you are seeing a lot of interest from your customers in that chip?

Alex Hui

Yeah I think, yesterday wethought actually we have product with two to three and four inputs, so wecontinue to see now pretty much the multiple input is at its actual trend. Sowe think this is a pretty healthy situation.

Richard Shannon - Northland Securities

Okay. Do you think three inputswitches in terms of revenues could exceed that to three input switches nextyear or something?

Alex Hui

Not necessary because there'ssomething to think generally out there that you might know that, some of thescale attached are also putting up in the multiples outputs. So in some casesthey might use two and in some of the uses they might use three, yeah.

Richard Shannon - Northland Securities

Okay. Circling back to PCIExpress, kind of curious as to the revenue makeup during the September quarter,it's my understanding that most of your PCI Express revenues to date have beenlargely in the signals which is re-drivers. The high growth you saw in theSeptember of course does that elude to any high growth in any of the bridges orthe packet switches?

Alex Hui

Well, actually today the revenueconsists of few areas that our signals reach. Our re-driver products, ourbridge and packet switch products and also actually some of our timingproducts. Actually we began to ship our packet switch and the bridge productslast quarter and we expect it to continue to ramp up overtime. The revenue isactually coming from multiple areas.

Richard Shannon - Northland Securities

Okay. But does that imply that,you’re expecting 20% to 30% growth in remaining of the quarter end and you didsomething like 80% this quarter. That means the packet switches and bridgeswere contributing more than you had thought or is it most spread out roughly?

Alex Hui

It's actually quite spread out,yeah.

Richard Shannon - Northland Securities

Okay. And just last quickquestion any update on PTI?

Alex Hui

I think it’s just another incomeline, because they spend a bulk this quarter. And so we expect they probablycontinue to be profitable in the balance of this fiscal year.

Richard Shannon - Northland Securities

Okay. And actually one morequestion for you, Alex. I think you mentioned in your commentary theexpectations of seeing revenues taper off after the December quarter. Alex canyou give us a flavor as to what kind of tapering off we should expect to see?

Alex Hui

Well, Richard when we saytapering off we were talking about the tapering off of the digital videorevenue in the December quarter which is high, obviously due to the seasonalityof the TV market. But that's all we talk about and when we say that they havetaper off.

Richard Shannon - Northland Securities

Okay. Then let me rephrase myquestion, in March quarter should we expect something that’s different thentypical seasonality for you?

Alex Hui

At this time no.

Richard Shannon - Northland Securities

Okay.

Alex Hui

We are guiding one quarter at atime.

Richard Shannon - Northland Securities

Okay. Great thanks a lot, andcongratulations for the good quarter.

Operator

And we'll go now to KrishnaShankar with JMP Securities.

Krishna Shankar - JMP Securities

Yes can you give us, if you lookat sort of the three key new growth area for revenue PCI Express, HDMI andultra mobility, Alex can you give us some sense for the revenue in each thesethree growth buckets?

Alex Hui

In our digital video today it'sprobably about $3 million for quarter. PCI Express is probably $1.5 million,ultra mobility is kind of like consist of multiple segments and ultra mobilityis about 14% of our business.

Krishna Shankar - JMP Securities

So that would include GPS, cellphones and other types of portable devices?

Alex Hui

Right, yeah.

Krishna Shankar - JMP Securities

I see okay. And can you folksreiterate for us your long term model as growth margins go up 200 to 300 basispoints a year, in a two to three years, what would be the long-term growthmargin and operating margin targets?

Alex Hui

I think we've finished lastfiscal year, fiscal '07 in about 34% to 35%. And our goal is to drive ourmargin improvement 2% to 3% a year. So, if you look out about three year we areprobably looking at a low 40% kind of range in terms of overall operatingmargins. That thing much more we are looking at.

Krishna Shankar - JMP Securities

Okay. Great, thank you andcongratulations on a good quarter again.

Alex Hui

Thank you.

Operator

And ladies and gentlemen thisdoes conclude our question and answer session. I'll turn the conference backour speakers for any closing remarks you may have.

Alex Hui

I'd like to thank all of you forjoining the call today and I like to mention that we would be going to the AeAFinancial Conference in Monterrey next week presenting in section one on Mondayand Tuesday morning. We also would be going to the Needham Conference onJanuary of 2008, so we hope to see you over there and if you would like to havea meeting with Pricom or conference call, please feel free to contact JasonGolz at Ashton Partners. Thank you.

Operator

And ladies and gentlemen thisdoes conclude our conference; we appreciate your participation. You maydisconnect at this time.

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