GSI Technology Inc (GSIT) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to GSI Technology's fiscal 2008 third-quarter results conference call.

(OPERATOR INSTRUCTIONS).

Before we begin today's call, the Company has requested that I read the following Safe Harbor statement.

The matters discussed in this conference call may include forward-looking statements regarding future events and the future performance of GSI Technology and involve risks and uncertainties that could cause actual results to differ materially.

These risks and uncertainties are described in the Company's Form 10-K filed with the Securities and Exchange Commission on June 20, 2007.

Additionally I have also been asked to advise you this conference is being recorded today, January 31, 2008 at the request of GSI Technology.

Hosting the call today is Lee-Lean Shu, the Company's Chairman, President and Chief Executive Officer.

With him are Douglas Schirle, Chief Financial Officer, and Didier Lasserre, Vice President of Sales.

I would now like to turn the conference over to Mr.

Shu.

Please go ahead, sir.

Thank you.

Welcome to everyone, and thank you for joining us today.

If you have not already seen this afternoon's press release, please call 310-208-2550, and we will have one faxed or e-mailed to you immediately.

I am pleased to know that today's GSI Technology (inaudible) is its 17th consecutive quarter of profitability, a significant accomplishment I believe for some of GSI's sites in what is a very competitive marketplace.

As we noted in today's press release, third-quarter revenue was somewhat higher than we had forecast in early November, due primarily to a continued improvement in shipment to all customers in more regions with the exception of North America distribution.

Direct and indirect sales to Cisco Systems, our largest end customer, grew to approximately $4.2 million from $3.7 million in the second quarter.

Equally gratifying was the improvements in gross margins to 39.7% from 36.2% in the second quarter, due primarily to a shift in product mix during the quarter to higher density, higher margin products.

Shipment of [30] megabit and higher density products all grew during the quarter in comparison to the prior quarters, and shipments of our SigmaQuad product grew to 5.4% of revenue in our December quarter compared to 3.1% in the prior quarters.

First was the case last quarter.

Inventory adjustments among our distributors had essentially no effect on third-quarter revenues.

And we are optimistic that these are now behind us, at least for the foreseeable future.

In fact, our own inventory start by approximately $700,000 from second-quarter levels, reflecting the continued drawdown of wafers purchased from TSMC at favorable price in the December 2006 and the March 2007 quarters.

We expect in the foreseeable future that our owned inventories were not very significantly from the current level of 15.8 million.

We are still understanding that we may already be in the early stage of prolonged economy slowdown.

Our current expectation of first-quarter revenue will be in the range of $13.6 million to $14.4 million with gross margins near third-quarter level.

We expect less income to be in the range of $1.4 million to $1.7 million.

Shares outstanding for diluted earnings per share calculation will be approximately 28,700,000 shares.

I will now turn the call over to Doug.

Thank you.

The December quarter was our 17th consecutive profitable quarter.

Net income for the quarter was $1.7 million or $0.06 per diluted share from revenue of $14 million.

This is compared to net income of $1.5 million or $0.07 per diluted share on revenue of $15.3 million in the comparable period a year ago and $1.2 million or $0.04 per diluted share in the prior quarter.

For the nine months ended December 31, 2007, the Company earned $4 million or $0.14 per diluted share on revenue of $38 million compared to net income of $6 million or $0.26 per diluted share on revenue of $44.2 million in the first nine months of fiscal 2007.

Diluted earnings per share for the three months and nine months ended December 31, 2007 includes the impact of our issuance of 6,131,111 new shares in our initial public offering that closed on April 1, 2007.

Operating margins, which improved to 14.4% from 10.9% in the prior quarter, reflects slightly higher selling, general and administrative expenses that are more than offset by higher gross margins -- higher gross profit.

The increase in operating expenses is primarily due to consulting fees related to Sarbanes-Oxley compliance and after go-live support for SAP.

Total stock-based compensation costs for the third quarter were $387,000 compared to $374,000 in the second quarter of fiscal 2008 and $591,000 a year ago.

At December 31, 2007, the Company had $50.7 million in cash, cash equivalents and short-term investments; $68.4 million in working capital, and stockholders equity of $74 million.

Accounts Receivable at December 31, 2007 was $8 million or approximately 47 days.

At this point we will open the call to Q&A.

Operator?

(OPERATOR INSTRUCTIONS).

Edwin Mok, Needham & Co.

Congratulations for a good quarter and good guidance.

So first just talking a little bit maybe about mix.

Did you guys see any mix shift in the fiscal third quarter, and how much was [acing] SRAM to your revenue?

What was the the percentage of that?

Yes, so we faced -- also the market improvement due to the shift to a higher ability, higher margin product, particularly [50] megabit and above density.

I think [acing] probably we are in the 15% now?

Yes, 18% -- basic product was approximately 13% for the quarter and the balance being the [Synchronist] product.

So we're staying at about a similar percentage as previous quarters.

Great.

What about regional strength?

Is it stronger in Asia or America or any kind of color there?

So I think we discussed this a little bit in the initial remarks.

So we saw strength across the board, except for North American distribution.

So we're actually had revenue increases from Cisco, from our other top OEMs with our Asia distributors, our Japanese distributors and our European distributors.

The only segment that was down for us in this past quarter was North American distribution.

Great.

One last question.

Regarding SigmaQuad, any new exciting design that you guys can report that might be able to ramp in the near future?

So we have discussed some of the opportunities that we have been going after.

We aren't actually talking specific company names, but we're going after different applications from multiservice edge routers to channel cards for BTS to optical and multiservice nodes, enterprise switches, you name it.

We're going after a lot of different sockets.

Some of those sockets we have won some design wins this quarter that we anticipate ramping in the near future.

Other design wins we are still in the qualification cycle, and there's various timeframes associated with when those are going to be ready for us to have shipments against.

Well, I guess one more question.

Regarding SigmaQuad, any thought about how much of your revenue will come from SigmaQuad in, let's say, the next quarter or the next fiscal year?

Yes, DDX forecasts shows that for the March quarter we will free somewhere between 7% and 8% of revenue for SigmaQuad.

Bryant Riley, Riley Investment Management.

I'm just trying to understand the valuation your Company currently has in the market.

I mean it seems to me it's basically a negative enterprise value if you kind of adjust your receivables and your inventory.

And you are generating -- what was that non-cash total?

You had D&A, was what number?

Pardon me?

What was your quarterly D&A?

Depreciation was about $866,000.

During the quarter?

For the quarter.

So, I mean if I take operating income and add that back (multiple speakers) I'm sorry?

That is a nine-month figure.

That is what I thought.

Okay.

So it's about $2.5 million EBITDA.

What is your CapEx requirements, just maintenance CapEx requirements?

We don't usually have a whole lot of need for capital equipment.

Most of our manufacturing is outsourced, but in the next month, we will probably be spending about $1 million on test equipment for our Taiwan operations.

Right.

So I know that you just went public pretty recently.

And typically it has been my experience when a company goes public, they cannot even fathom buying back their stock.

But it just appears to me that you are basically buying your business for zero.

I know you guys -- I think your sophisticated financial guys.

You are buying your business back for zero.

And I just don't understand why you would not do that aggressively.

I mean obviously you have become kind of forgotten by your underwriters I guess, and I just think you should take advantage of the disconnect.

And I would just be curious of your comment.

Well, I think we are too early to even talk about that.

So the valuation does not matter?

If they were -- you just kind of rule it out because you just went public?

I mean isn't it just kind of valuation metrics?

If you could buy your business for roughly 0 or $10 million enterprise value and you are doing $10 million EBITDA, why would you rule something like that out?

Well, it is something that we have considered in the past and decided that at the time it did not make sense.

Obviously it is something we can consider in the future.

I mean I'm missing something?

Is the common -- is the logic that -- is there anything that is not logical from what I'm saying on the numbers?

No, I think what you're saying it probably makes sense.

We just look at how difficult it is to raise money, and it probably got out a year ago.

In the recent past, we have discussed it with the board and, at this point, did not think it made sense to buy back shares.

Okay.

Well, I would just urge you guys to just instead of thinking about the timeframe and all that, I would urge you to think about the economics of that.

And if you can buy back 3 or 4 or 5 million shares, at some point you will get a valuation again.

And it will accrete to the shareholders much more dramatically if we can create and buy more stock at zero enterprise value or close to it.

So I would encourage you strongly and your board strongly to look at that and think as -- just think of what an opportunity that is.

That is all I have.

Thank you.

Well, we will consider that.

Thank you.

[Manash Nadkarni], [Chip Investor Group].

Good afternoon and congratulations on solid improvement in revenues and operating margins.

Thank you.

Okay.

Can you please elaborate on seasonal effect if any that you see in the March quarter and during the calendar year?

Well, our business really is not seasonal.

We don't have any product aimed at the consumer area, for example.

Our business is more closely tied into how Cisco does and how the networking and telecom industries go.

Okay.

And related to margins, what are your expectations for operating margins in the March quarter?

Also, gross margins and operating margins for calendar year 2008?

Okay.

For the fiscal year or for this current quarter, we are expecting somewhere numbers to what we just presented for the December quarter.

For the calendar year, we are in the process of putting together a plan for this next year.

So actually I don't have that yet, but what I can tell you is that in terms of an operating model, we're targeting gross margin of up to about 43%, and we're looking at the R&D spending to vary between 8% and 10% and SG&A 7% to 9% with operating margin excluding stock-based compensation expense somewhere in the low 20% range.

So again, these are our targets, but we have not yet finalized the plan for our March 2009 fiscal year yet.

Okay.

And in this particular model, at what revenue levels -- as you mean the typical product mix do you think you could achieve?

What margin?

Yes, I mean this model margin value.

Well, we are very close to the 40%, so we don't believe it will be very long before we see a 40% gross margin.

Okay.

And in terms of quarterly run-rates, right now you are at $14 million.

So are these numbers achievable in, let's say, the 15 to $20 million quarterly run-rate, or are you talking about --?

Oh yes, not a problem.

Okay.

Now next talking about your TSMC foundry, can you give us any details on your work at TSMC with regard to 90 nanometers and 55 nanometer processes?

How many products you have currently at this process nodes, and anything else you would like to comment on?

Yes.

Right now the 90 nanometer we have probably four or five products in the 90 nanometer.

Our SigmaQuad 36 and 72 and those are our (inaudible) to 54, 34 and 72 are all in 90 nanometer right now.

We are doing 144 SigmaQuad in 55 nanometer right now.

I mean in the development manner in TSMC, and we are -- we can almost foresee a [silicon] in the third quarter, calendar third quarter this year.

So calendar third quarter this year, you could begin production of 65 nanometer?

And we will see the silicon on the 65 nanometer.

You could?

Okay.

So production quantities, do you have any kind of target date for 65 nanometer transition?

None really.

The target quantity.

We will see what -- I think in the first week in our normal year, we expect the first week and not really working.

So that is why we give a little bit of leadtime for the production.

But, in general, we still have production quantities come out within three or four quarters.

Okay.

And competitive landscape, do you feel competition-wise you are ahead or at pace with some of your major competitors in process technology?

Yes.

I think in the product line we have the most competitive high-speed (inaudible) in the industry, and that will begin for the advantages is the QDR we call the SigmaQuad.

In three or four years, we're not in the QDR camp, so basically we are a little bit behind on QDR.

Now we've got the SigmaQuad up and running.

I think now we are in the equal 14 with the QDR tie.

So I would say that we definitely have the best product offering in the industry.

And in terms of positive technology, sure, I mean the product competitively has to come from the process side.

I mean you have to come up out of it and overcome the design.

And that certainly is the strength of our (inaudible).

You know, our competitor is also start growing the (inaudible) model.

So our model is proven, and people starting doing our -- (multiple speakers)

Okay.

And really say competitor difference, this is not the one, the major memory manufacturer from Korea.

Except for that, you're talking about the other competitor going into foundry?

Yes.

I see.

Okay.

Can you give some color on new customers and market opportunities for your newest very fast SRAMs?

So if you look at the markets that we are addressing with the SigmaQuad, it was certainly our belief at the beginning that it was going to extend our relationship with our current customer base, which is if you're familiar with our model, we have over 70% of our revenues are in the networking telecom.

This is still true.

We're certainly going to expand our relationship with the Cisco and the Alcatel-Lucents of the world with this product line.

But what we also found is that this product line is opening up some new market opportunities for us.

Specifically we're going after a server application that we actually have not done much in the server arena in the past.

And this is a market that we are still I say not a market, but an opportunity that we are still pursuing, and we anticipate hopefully getting some favorable news in the next quarter or so in the server market.

Okay.

But you anticipate that Cisco will still remain your largest customer with similar percent in the foreseeable future?

Correct.

Yes, certainly Cisco -- we have a tremendous amount of parts designed in across many platforms.

So I don't see how anybody could surpass Cisco as far as GSI revenues anytime soon.

Okay.

Well, finally I would just like to make a comment.

I agreed with the previous caller, the analyst from B.

Riley, about you should reconsider stock buyback.

And with that comment, I would just does complete my questioning.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Tristan Gerra, Robert W.

Baird.

This is Scott calling in for Tristan.

Congratulations on the great quarter.

I was just wondering if you could give us a little bit of visibility into what you had said on distributors.

If there was any kind of end market weakness that you would've actually seen for those North American distributors, and why those revenues were not above expectations compared to everyone else?

Right.

So we had actually a couple of areas that we have some down revenue, and most of them seem to be tied to an end market of India telecom.

So one of our customers through North American distribution actually filed for bankruptcy.

And so that was a piece of revenue that we had been enjoying for the last few quarters that disappeared for most of last quarter.

We are still trying to understand what is going on with this customer to see if there's going to be any revenues going forward.

Certainly they are looking to protect themselves from creditors at this time and are looking for an acquisition.

So for us it seemed like that the area that hit us was end market of India telecom.

And then where -- were there any specific areas where there was a lot more strength than you would have expected, or was it just kind of everything came in a little bit above expectations?

Yes, everything, so geographically and end markets.

So again, as we mentioned, we were up in every geographical territory, except for US distribution.

And then we also had some additional growth in our strongest market segment, which was networking and telecom, but also the military segment remained strong for us as well.

And then what percentage of revenues in the last quarter were networking and telecom and then kind of breaking it down into the other few segments?

Right.

So the networking and telecom for us always runs in the 70 to 72% kind of range.

The second-largest market is military.

These historically run in the 7 to 8%, but lately they have been running closer to 10 or 11% for us.

And then the other market segments are 5% or less, areas like (multiple speakers) and server markets, industrial markets, test and measurement, professional audio.

All those markets are 5% or less for us.

Okay, sounds good.

And then you also made a comment about distribution being past those -- the kind of inventory corrections.

Have you actually started to see the distributors step back up to the plate and start ordering recently, or we are just through all the corrections?

Well, I think what Lee-Lean Shu was referring to was the issue we had in the middle of the year around the June timeframe.

We had some softness with the Asian distribution, stocking reps.

That has all come back.

And a lot of the revenue in this current quarter was through some of those people.

So from our perspective, it seems during the quarter we are very healthy in all areas.

Okay.

That is just a little surprising relative to some people who are also selling into the Asian telecom market that has said that there were some customers that had some weakness.

So I was just trying to reconcile that.

And then I guess could you talk a little bit more about these tapeouts and where we might actually see kind of the lumpiness in the R&D.

You know, I think a couple of quarters ago there was about a $400,000 charge that kind of got lumped in there.

So I was wondering if you could -- are we still looking for a big tapeout in the June quarter?

Yes, we are still looking for that, but I think that the [HO] charge are probably more likely in the September quarter.

Because normally the [HO] charges, whatever is behind the [HO] table event.

So basically the model you are seeing is a pushed to the September quarter.

Yes, that is the one that is probably closest to a $1 million.

But there will be a smaller one we're anticipating in the June quarter of $400,000 or so.

Okay.

Sounds good.

That answers all my questions.

Thanks, guys, and congratulations again on a great quarter.

There are no further questions at this time.

Alright.

So again, thank you all for joining us.

We look forward to speaking to you in May when we report our fourth-quarter and year-end fiscal 2008.

Thank you.

This concludes today's conference call.

You may now disconnect.