GSI Technology Inc (GSIT) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to GSI Technology's Fiscal 2009 First Quarter Results Conference Call.

At this time all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

At that time we will provide instructions for those interested in entering the queue for the Q&A.

Before we begin today's call, I have been asked to advise you that this conference call is being recorded today, July 31, 2008.

At the request of GSI Technology, 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 that involves 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.

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

With him our Douglas Schirle, Chief Financial Officer, Didier Lasserre, Vice President, Sales.

I would not like to turn today's conference over to Mr.

Shu.

Please go ahead, sir.

Thank you.

Good afternoon everyone and thank you for joining us today.

With the quarter just ended, GSI Technology begins its second year as a public company with solid advances in both revenue and profitability.

Since we spoke with you in May, at the time of our fiscal 2008 year-end conference call, we surprised ourselves on three fronts.

First, at $17.3 million, revenue in the first quarter exceeds the high end of our guidance by 11%.

In fact, it was the highest quarterly revenue since our fiscal 2001.

Second, thanks largely to a shift in product mix to higher density device, gross margin exceed our expectation and our guidance by more than 200 basis points.

And third, operating expenses of $3.7 million were marginally lower than the prior quarter where we had expected them to be slightly higher.

It was due to [modest] higher R&D expenses that were more than offset by lower SG&A expenses.

Cisco Systems continued to be our largest [all-in] customer with direct and indirect sales of $5.7 million in the first quarter, it accounted for approximately a third of our total net revenue.

Strong demand for telecommunications and networking equipment helped drive sales of our SigmaQuad to 8.2% of shipments from 5.5% in the prior quarter.

The Military and Defense segment also did well, growing to approximately $2.3 million from $1.9 million in the prior quarter.

The stronger than expected first quarter sales continued to a decline in inventory to $13.7 million from $15.7 million at March 31.

At this level, it is somewhat lower than we would like and less than optimal, if we are to consistently fulfill customer's orders in a timely fashion.

As a rule, an appropriate level of inventory would be roughly equal to anticipated quarterly revenues.

With low debt and $47 million in working capital, our balance sheet remains exceptionally strong.

Even with a shortage of wafers, which we do not consider likely, [depleting] our inventory should not be a problem.

Put another way, it constraints to further growth will be external not internal.

The biggest external variable is the economy as a whole which appears to be no stronger than [U.S.] when we last spoke.

Accordingly, our outlook remains one of cautious optimism.

With that understood, our current expectation is that the second quarter 2009 net revenue will be in the range of $16.5 million to $17.3 million.

Gross margin is expected to be in the range of 42% to 43%.

I will now turn the call over to Doug.

Thank you, Lee-Lean.

The June quarter was our 19th consecutive profitable quarter.

Net income for the quarter was $3 million or $0.11 per diluted share on a revenue of $17.3 million compared to net income of $1.1 million or $0.04 per diluted share on revenue $11.3 in the comparable period a year ago, and $2.8 million and $0.10 per diluted share in the prior quarter.

First quarter 2009 gross margin was 44.3% compared to 44.5% in the prior quarter and 39.1% a year ago.

Fourth quarter 2008 gross margin benefited by approximately 2.4% from a one-time payment received from a third-party for the rights to second source of 36Mb SigmaQuad product.

This payment reduced the fourth quarter 2008 costs of goods sold by approximately $371,000.

The improvement in gross margin in the June quarter compared to the prior quarter reflects the continued shift for higher-density, higher-margin products.

SigmaQuad products shipments were approximately 8.2% of total shipments in the first quarter of fiscal 2009 compared to shipments of approximately 5.5% in the fourth quarter fiscal 2008.

Our military business increased from 12.6% of net revenue in the March 31, 2008 quarter to 13% of net revenue in the June 30, 2008 quarter.

First quarter operating margin was 23% compared to 19.7% in the prior quarter.

Our operating margin, like gross margin, benefited by approximately 2.4% from the aforementioned one-time third-party payment.

A year ago, operating margin was 9.7%.

SG&A expenses were $2.5 million or 14.2% of revenue compared to $2.7 million or 17.6% of revenue in the prior quarter, and 2.2 million or 19.3% of revenue a year ago.

SG&A expenses were less than the prior quarter and our forecast for the June quarter due to reduction in spending of consultants related to SOX compliance on our SAP implementation.

Our expectation is that operating expenses will be slightly higher in the September 30, 2008 quarter.

Total first quarter pre-tax stock-based compensation expense was $329,000 compared to $312,000 in the prior quarter and $387,000 in the comparable period a year ago.

Net accounts receivable have increased $8.3 million up from $7.5 million at March 31, 2008 and in line with an increase in quarterly revenues.

DSO is 47 days as of June 30, 2008, unchanged from March 31, 2008.

At June 30, 2008 we had $32.1 million in cash, cash-equivalents and short-term investments, $27.2 in long-term investments, $47.3 million in working capital and stockholder's equity of $80.9 million.

We have $1.8 million in auction-rate securities but they're classified as a long-term investment.

Operator, at this point we will go to open the call to Q&A.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Edwin Mok with of Needham & Company.

Hi, guys.

Congratulations for a great quarter.

Thank you.

So let's talk about Cisco.

Looks like Cisco has bounced back quite strongly last quarter.

Do you think it was it because the customer has been more aggressive buying for it?

Or are you guys [gaining] shares in certain areas?

Can you give a little more color on that?

Yes, if you recall when we had the conversation three months ago, we were actually disappointed with our Cisco revenues because they were flat from the December to the March quarter.

And certainly this quarter it's much higher.

What we've seen is that, again, going through the analysis, we think that some of the orders that we should have received in the March quarter were actually came in to the past June quarter.

With that said, we did also receive a little higher awarded business for that time frame than we had the quarter before.

So if there was a pull then you expected this going to be flattish or even possibly down this coming quarter then?

That's correct.

We anticipate that their actually going to be down a little bit this quarter.

Certainly the $5.7 million short-term is a little higher than we anticipate, I guess by about 500,000, and I say short-term because certainly some of the qualifications we're working on that will kick in early next year will bring us back over that threshold.

I see.

So that's fair.

Regarding a SigmaQuad, it looks like you guys have pretty good growth this quarter, up around 14%.

Any color on which customers pulling?

I know you guys were shipping to a telecom customers, what about other projects that you guys are working on, like the military or [the server] or any other projects?

In general, if you look at the top 20 customers from the March quarter, and you look at the June quarter three-quarters of them were up in revenues and some were flat and some were down.

So in general, even besides Cisco we did have some other customers that were up.

We had one military customer who came in for a contract this past quarter, which certainly helped the revenues as well.

And that particular customer, it's -- the way the contract works it's really a build-out to contract and then they wait for the next contract, so we built it out last quarter, the product has shipped out and as of now, it doesn't look like there's going to be another contract this quarter, or certainly not a significant contract.

Okay, I think you were referring to just general overall, right?

But what about (inaudible) specifically?

Any other new design that start to ramp to drive the growth that you've shown through the last quarter?

Yes, so Edwin you're familiar with list that we're targeting for the design wins on the Sigma family.

We actually closed out one of the two largest [calls] this past quarter.

When I say closed out, it's complete.

And we actually received an award of business for this quarter, the problem is by the time it closed out and we received the award, the orders are actually already set with another supplier for this quarter.

But it certainly will help us for the December quarter.

So that was one of the two largest opportunities we were chasing and it's now officially closed and we are getting awarded the business on.

That's great.

Great progress there.

Just a few question on the financial model.

Margin was very strong the last quarter, but you guys only got in for 42% to 43%.

What drives the lower margin besides mix?

Well, Didier had already mentioned this one piece of military business that was very good business for us in the quarter, and we're also expecting that [your] distribution businesses had a very good quarter for us but we saw going in to the September quarter that and the June quarter the bookings on their end were a bit light.

So we're expecting the military business to be down.

We will have business to replace the military business and distribution business but obviously we're depending on close to two-thirds of our revenue every quarter being based on turns, and we just leave it.

We're expecting to see right now, we don't expect the margin to be at 44% but we expect it to be close to that.

Somewhere between 42% and 43%.

Right.

And then one question regarding your August guidance.

I remember last quarter we talked about having a [tape-out] charge coming in in the September quarter.

I don't remember, like $300,000, $400,000.

Yes, I know what you're talking about.

Right now it looks like we've pushed that out to the December quarter.

We don't expect to see the charge on that until probably October, November timeframe now.

Are you referring to the 65nm tape-out charge?

Because there was supposed to be two tape-out charge.

I just want to be clear here.

No, we just have one in the September quarter that's been pushed up to the third fiscal quarter.

Can you provide a color on how big that tape-out charge you expect it to be?

That one will be between $300,000 and $400,000.

Edwin Mok.

Okay, great.

That's all I have.

Thanks.

Your next question comes from the line of [Scott Hurlman] with Robert W.

Baird.

Hi, guys this Scott Hurlman calling in for [Tristan].

Congratulations on a great quarter.

I had some questions kind of on linearity in the quarter.

How do you think that that came in?

Did you see any weakening in orders towards the end of the quarter?

And have you seen any over the last couple of weeks?

Didier can talk about the orders, but just linearity and shipments in general, we did not see any kind of hockey stick or anything, it's fairly linear throughout the quarter.

And that's actually, that's very common for us.

We don't generally have a hockey stick.

It's usually pretty linear.

As far as any lumpiness, it was pretty much just that military order because when they come in for these contracts, the order comes in and they need the parts ASAP.

But besides that it was pretty predictable.

Okay, and are you expecting any kind of other mix shift in this next quarter as compared to the June quarter outside of military being down a bit?

I mean are you expecting networking and telecom to kind of pick up the slack?

Or is something else, ATE coming back or something like that?

It will come from networking and telecom.

Okay.

And also can you talk about what your expectations are for SigmaQuad as a percentage of revenues in the September quarter?

As Lee-Lean mentioned, the revenues were up this past June quarter.

The quarter we're in now, we anticipate that they're actually going to crack double-digits for the first time.

So we're looking in kind of the 10% to 11% range.

Okay, and where kind of should we expect those exiting this fiscal year?

The fiscal year, so you're talking, so out of March.

Do you have those numbers, Doug?

Yes, I think by the time we get to the March quarter we could be close to the 20% range.

Okay.

Very good.

And just to refresh my memory, SigmaQuad has above corporate average gross margins or significantly above?

Equal to or better.

Okay.

And then can you guys update me a little bit on your thoughts around the model.

You guys had kind of talked about 43% gross margin and then I can't remember exactly where OpEx was supposed to fall.

Can you update me on where your thoughts are?

We haven't really gone back and revised our long-term model.

The schedule I have shows us 40% to 43% up.

Obviously we're at that [point, we're proceeding] upward of that.

R&D, our model is 8% to 10%, SG&A 10% to 12%.

Okay.

And our operating margin target is without pockets comp is between 22% and 27% so obviously we're working those ranges.

And R&D's a little bit below.

Should we expect that to sort of just kind of trend up more?

It's going to be a little lumpy this next year.

We have a number of take-offs that we're doing that are on process technology that we haven't done before.

We also have a new product family, we haven't talked about that yet but that we're working on a bit.

And there will be some take-offs [extensive labor] on in the year.

So in general, the basic expenses aren't going to vary much but there will be some quarterly hits related to some of these other items.

Typically R&D [masks] that we got charged R&D expense.

Okay, great.

And then my last question is just kind of on inventories.

You guys said that you're going to be picking up some inventory, you think they're a little too low.

TMSC this morning was talking about that their increasing their prices kind of across the different process technologies.

Would you look at doing another kind of big inventory buy like you guys did a couple years ago to kind of get ahead of that?

What are your thoughts around that?

No, not at all.

I think we intend (inaudible) we understood, we are not going to affect this price increase.

So it's a really, the inventory field, it's a very ready to stock up on material for ASAP order.

Right now we're just too lean and mean.

We have to [beauty] up to serve the customer.

Okay, thanks guys.

And congrats on a great quarter.

Your next question comes from the line of Manoj Nadkarni with ChipInvestor Group.

Hi, congratulations on great results.

You have started the new fiscal year with a fantastic quarter.

Thank you.

Yes, keeping aside fiscal for a moment, can you give some color on where you're seeing growth in market wise and geographies wise?

Besides Cisco, certainly the top tier folks for us in China have trended up with the 3G launching in China we're in a good position to take advantage of that launching.

And so certainly we've seen some strength there as well.

Okay, so it's more so telecom related.

It is.

That's correct.

With that said, we actually are also doing better in Europe.

I think I mentioned in the past calls that we've always been less than 10% of our revenues coming out of Europe which is certainly, compared to our competitors, less of a percent of revenues.

These past six months, we've actually been averaging 12% of our revenues coming from Europe and that's trending up as well.

So we're seeing some strength, I shouldn't say strength as much as we're finally getting to a level in Europe that we should have been in the past.

And is that because you now have more sales offices, applications, support in Europe that you lacked before?

No, we haven't actually increased the headcount.

It's more of just the work we've done over the years.

Europe is a little bit slower to adopt either new technologies or new companies as opposed to Asia or the U.S.

And so it just took a while for a lot of these customers to start putting GSI in a higher category as far as their vendor list.

Okay.

And talking about your operating margins.

Your pro forma operating margins were close to 25% this quarter.

Are these representative of the revenue levels of around $17 million?

Or what should we expect the range of operating margins for this type of revenue?

I would expect that with revenues in the range that we're at right now that we'll be in that range for operating margins.

The gross margin was high this quarter at 44.3%, I'm not so sure we're going to beat that every quarter but obviously we'll do the best we can and somewhere within the target range of 44% to 43% range we should be hitting.

Hopefully no worse than that.

Okay, very good.

And can you please provide us an update on activities at TSM space specifically, how your transitions to 90nm then 65nm is proceeding?

Yes, the majority I think right now we're probably 70% of revenue coming from the 0.13 micron.

Now, most of our SigmaQuad and also our (inaudible) than 90nm.

And we think that 99nm especially revenue is swinging up and our finger maybe in the fiscal year, I think 90nm probably I will see revenue probably 40% in that range.

In terms of 65nm we already talked about how we turning out in the year.

So we're going to see the [sales] pretty soon.

I will think a couple months from now.

Okay.

And what was your cash flow from operations?

I don't have that schedule here with me.

Probably somewhere in the range of I think about $4.2 million if I remember correctly.

Okay, all right.

And just one final question, your long-term investments, they increased.

Can you give us some color on what's the mix of it?

Yes, mostly a little bit of corporate notes but mostly state mini-obligations.

My preference is not to go out beyond a year but unfortunately the situation with auction-rate securities and everything that's been happening in that last six month, it's difficult to get high-quality investments.

There just wasn't that much available up to a year, the rates were very bad.

We have very high-quality investments, we continue to purchase only the highest quality available and the downside is that the maturity of some of those stresses is maybe a year and half to two years out on some of them.

We only have one auction-rate security, it's one of the two that we had at the end of March and we still have it, it's a very high-quality investment.

All the others that have been issued by this agency, not all, but they continue to refund or call them.

The one that we have is one of their higher rated ones so the penalty interest [space] on that is very low compared to some of the others so they're not as incentivized to call it and retire it.

But it's a good investment.

Really, it's just a matter of the interest rates that we're seeing out there.

Okay, and you said earlier that you were auction rate [ERS] is only about $1.8 million?

Yes, that's correct.

Oh okay, great.

Well, again, congratulations on an outstanding quarter.

Thank you.

Your next question comes from the line of [Mike Eassan] with Merriman.

Hi, guys.

Congratulations on a very nice quarter.

Thanks, Mike.

Actually most of my questions have been addressed here so maybe we'll just go to a couple high level questions.

First, talking about the competitive landscape, are you seeing any change in the list of six past SRAM vendors you usually present?

Are you seeing any people drop of that list?

Or any change in market share?

Not yet.

And I say not yet, certainly we're starting to hear some grumblings about some changes that may happen for our benefit in that scope in 2009 but nothing short term.

Yes, I just come in here.

We believe the networking telecom market is under-served by the SRAM vendor.

So we go ahead, we have this [SigmaQuad-III] family coming up so we believe that there will be a highest performance product to serve the customer.

So we believe by the time next year, early next year, when we see the [III] and we will be the highest performance[vendors area].

That's a good segue then.

SigmaQuad three product family coming out.

Could you comment on anything you see right now in the QDR consortium front?

I'm sorry, Mike, could you repeat that question?

Could you comment on anything you see right now on the QDR Consortium front?

Obviously their website is down, there's not a lot of, no commentary on the Cypress or where that's going.

What do you see right now?

I mean you pretty much said it.

We haven't seen much activity, we haven't seen any announcements from them for any new products.

We haven't seen any [QDR-3] announcements.

Some of the rumors we've heard about their roadmaps tend to be very TBD with dates as opposed to specific dates.

I think they're -- I don't know.

My impression is they're waiting for a market to just show up without actually having to invest in it beforehand.

So I don't see much activity from them as far as new expenditures and new products.

The best product that they're putting out there is [QDR-2+], the target performance is like 450MHz.

The SigmaQuad-III, in our opinion we are looking at 600MHz and above.

So we firmly believe we -- by the time that we are new (inaudible) we will definitely beat the [de facto spend in the industry].

Great.

And if I could turn just quickly to low-power aspect of your design.

Obviously about three weeks ago, Cisco announced a green initiative where they're focusing on lower-power designs.

I imagine that's something of a trend across the industry.

Can you comment on what you're seeing?

You've obviously had the, one of the lower-powered parts out there.

Is that becoming a more important factor in design wins?

So I was actually just out there a few days ago and there's a new design they're talking about.

Where certainly, there are becoming, not to say becoming, they always have been sensitive to power, especially the more devices they put down on a board.

So they're always asking for lower power.

In some cases, it may lead to a sole-source socket and in a lot of cases, unfortunately, because they're looking for multi-source they're going to design to the highest power guy, unfortunately.

Sometimes it can help us, sometimes it doesn't.

I really depends on how critical it is for that particular application.

All right, I'll leave it there.

Thanks, guys.

Thanks, Mike.

Your next question comes from the line of Evan Greenburg with Meadowbrook Capital.

Yes, my questions have by and large been answered.

Thanks a lot.

Good quarter.

Thank you.

Your next question comes from the line of Dan Zeff with Zeff Capital.

Hi, can you talk about the cash tax rate, effective tax rate for this year and moving forward, if you can?

This year the effective tax rate, we're looking at 30%.

It's actually above the actual for last year which was 27% but the problem there is that the R&D tax credit hasn't been extended yet.

If and when that is, then we'll take another look at the tax rate.

But currently we're anticipating 30%.

I would expect over the years I think we're probably about four years or so, three, four years in to this legal structure, tax structure that we set up and another three, four years it wouldn't be beyond reason to expect a tax rate of 20% or below.

But I wouldn't expect that for a couple of years or more, at least.

So for modeling, 30% for a few years and then possible 20%?

I think 30% for another couple years or so should be reasonable.

Great, and CapEx this year and moving forward?

You know, we're not really looking at a lot of equipment additions this year.

We bought several testers last year, we bought SAP software and installed that.

We have enough capacity right now, not to say we won't buy another tester or some equipment if we see a need for it but we're not expecting a lot right now.

Can you give us a range?

What do you think, Lee-Lean, $1 million to $2 million at most?

Yes.

I'd say $1 million to $2 million at most.

It's not something that we worry about.

It really hasn't been a big concern.

We're really prudent in terms of where we spend our money.

We don't spend it if we don't see a need for it and I guess, enough said.

Okay.

And is that a reasonable amount going forward?

Or is there in two or three years, is there a big spend you need to make?

No.

Nothing special.

Nothing anticipated right now.

Great.

Is the board discussing uses of cash?

And what are you discussing?

Well, there's nothing to talk about right now.

I think the biggest thing that we've been talking about recently is a lot of these designs that we're involved in and the costs associated with doing those and there are a number of math sets this year that we have to go out and purchase.

And obviously inventory is low, but we've talked about building inventory balances.

Okay, thank you.

Awesome job.

Thanks.

Your next question comes from the line of Edwin Mok with Needham and Company.

Hi, thanks a lot.

Just a few housekeepings.

Let's start with accounts payable.

How much was that approximately for past quarter?

Accounts payable at the end of the quarter was $3.6 million, it was down about $600,000 from last year, or last year-end.

Mostly a matter of manufacturing expense were down a bit this quarter.

Great.

And then I just wanted to be very clear, right?

Lee-Lean talked about a 65nm tape-out, I imagine he was talking about end of fiscal year --

It will be the October, November, December.

In the December quarter.

Wouldn't that be $1 million impact to R&D given how expensive those math sets are?

Yes, normally the costs not immediately incurred when we take-off.

Normally it's when we see the first [silicon], so sometimes the paper and the costs make a difference by a couple months.

So it could come in December quarter and it could come in the March quarter.

So it depends on the -- if we tape-out like October time frame then we probably will get a cost in December quarter, but if we tape-out in like November sometime then it will move to January.

So it sometimes, it will be first year, in the timeframe.

Just to kind of get a approximate size of that cost, of that math set?

I think Doug mentioned $300,000, $400,000 maybe that will be on the low side but definitely I think in the $0.5 million I think that would cover it.

I see, okay, great.

Just wanted to get that clear.

And one last thing is regarding Asia, I think in the past you guys have some lumpiness in this quarter of Asia distributor there.

Anything that you have seen this past quarter and also regarding to debt?

Any risk that they may be putting on too much inventory by these Asian distributors?

We actually didn't have lumpiness as much we had one quarter as you recall was the June quarter of last year that they had bought anticipating certain run rates in the base stationary which didn't come to fruition.

Since then, we certainly, when I say we, GSI and our stocking reps over there have done a much better job managing the inventory versus more realistic run rates with our customers.

And so right now we feel pretty comfortable with the amount of inventory that they have.

Just to give you an idea, we are getting a lot of expedites right now from our customers and our distributors so that is also another indicator that certainly our belief that inventories are in check are correct.

Great, that's all I have.

Thanks.

And you have no further questions at time.

Okay, thank you for joining us.

We look forward to speaking with you in another three months when we report our second quarter fiscal 2009 results.

Thank you.

Thanks.

Thanks.

This concludes today's Conference Call.

You may now disconnect.