GSI Technology Inc (GSIT) 2009 Q2 法說會逐字稿

Welcome to GSI Technology's Fiscal 2009 Second Quarter 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 question-and-answer session.

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

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.

Additionally, I have also been asked to advise you that this conference is being recorded today, October 30, 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.

Good afternoon, everyone, and thank you for joining us today.

On balance, we saw for the second quarter of fiscal 2009 was somewhat better than we had expected.

Revenues of $17.1 million came in in the high end of our estimate.

And gross margin of 45.7% once again exceeded our expectations by more than 200 basis points, offsetting a decline in sales from Cisco to $4.2 million or 25% of revenue, from $5.7 million or 33% of revenue in the first quarter, with strong sales in Europe and Asia.

Equally important, those sales to reflect increasing assistance of our SigmaQuad product line and we did a continuous shift in product mix to higher density, higher margin photo with higher ASPs.

Particularly important during the quarter were sales of our 36 and 72-megabit SRAM.

The military and the defense segment did particularly well, growing to approximately 15.9% of net revenue from 13.0% during the first quarter and the 12.6% in the fourth quarter of fiscal 2008.

[Operating expense] of $3.7 million were essentially unchanged from the prior quarters.

Slightly higher R&D expense were largely offset by lower SG&A expenses, with an improvement in gross margin, operating margin likewise improved to 24.0% from 23.0% in the first quarter.

We ended the quarter with $15.6 million in inventory, up from $13.7 million at end of the first quarter.

It is now closer to where we would like it to be, given that timely delivery to our customers' benefit from inventory-based [robbery] equal to quarterly revenues.

When we last spoke, I alluded that any concerns to further growth would likely be external, rather than internal.

There is even truer now than it was three months ago.

Fortunately, we are blessed with exceptionally strong balance sheet.

We have no debt, almost $45 million in cash and liquid investments, as we continue to generate cash.

Nonetheless, we do not expect to escape the turmoil in today's market, with low debt and plenty of liquidity, we are in far better position than many other companies of our size.

So looking forward to the third quarter and the balance of the year, we clearly will be affected by the fall-out of the credit crisis that pervades the world economy.

We cannot expect to remain immune to what is expected to be a severe and prolonged recession.

In this environment then, we remain extremely cautious in our outlook.

We consider it unlikely the top and bottom line third quarter results will surpass those of the second quarter.

In fact, in line with others in our industry, we expect to see at the very least a modest sequential decline in posted net revenue and gross margin in the third quarter.

That said, our current expectations in the third quarter 2009 net revenue will be in the range of $14.6 million from $15.4 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 20th consecutive profitable quarter.

Net income for the quarter was $3.6 million, or $0.12 per diluted share on a revenue of $17.1 million.

This compared to net income of $1.2 million or $0.04 per diluted share on revenue of $12.7 million in the comparable period a year ago, and $3 million and $0.11 per diluted share in the prior quarter.

Second quarter 2009 gross margin was 45.7%, compared to 44.3% in the prior quarter and 36.2% a year ago.

The improvement in gross margin in the September quarter compared to the prior quarter reflects a continued shift towards higher density, higher margin products.

SigmaQuad shipments for approximately 10.2% of total shipments in the second quarter of fiscal 2009 compared to shipments of approximately 8.2% from the first quarter of fiscal 2009.

Our military business increased from 13% of net revenue in the June 30, 2008 quarter, to 15.9% of net revenue in the September 30, 2008 quarter.

Second quarter operating margin was 24% compared to 22% in the prior quarter a year ago and a year ago, operating margin by 10.9%.

The SG&A expenses were $2.4 million or 13.9% of revenue, compared to $2.5 million or 14.2% of revenue in the prior quarter, and $2.1 million or 16.7% of revenue a year ago.

Our expectation is that operating expenses will be approximately $1.2 million higher from the December 31, 2008 quarter, due to research and development projects, and then return to more normal levels in the March 2009 quarter.

The total second quarter pretax stock-based compensation expense was $309,000, compared to $329,000 in the prior quarter and $374,000 in the comparable period a year ago.

Net accounts receivables have increased to $10 million, up from $8.3 million at June 30, 2008, as a result of the timing of shipments during the quarter, and does not reflect a deterioration in our [agent], which has actually improved.

At September 30, 2008, we had $44.9 million in cash, cash equivalents and short-term investments, $14.8 million in long-term investments, $62.8 million in working capital, no debt and stockholders' equity of $84.8 million.

We have $1.9 million in auction rate securities that have been classified as long-term investments.

During the quarter, our board of directors received a letter from a major shareholder suggesting that we implement a large share repurchase.

Our board has considered implementing a share repurchase from time to time and reviewed this issue again in response to the shareholder's letter.

The board has decided not to implement a repurchase at this time, due to the current uncertain economic climate, the low trading volume of GSI's stock, which would only be worse with your shares on the market and the importance of cash in times like these for access to credit and public funding is difficult to obtain.

We will continue to review this issue on a regular basis, just as we have in the past.

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

(Operator Instructions) Our first question comes from the line of Edwin Mok with Needham and Company.

Great, thanks for taking my question.

Good quarter, guys.

Let me first clarify, just on some housekeeping.

How much of your revenue came from the [ASIC] business, after for the last quarter?

Well, ASIC, this was probably in the 10% range.

Around 10%, great.

And then, talk a little bit about that military business.

Given that you guys have such strong margin in the last quarter and you mentioned that military has gone up, is that a one quarter event where you have a one-day customer buying volumes of inventory or do we expect that trend to continue going forward?

How do we feel about that?

Hi, Edwin, it is Didier.

So it is a combination, so we've had our core military business going for some time.

We historically have run in the eight, nine kind of percent range and the last few quarters, we have bumped them up.

As I mentioned, this quarter, we are in the 15% to 16% range and the quarter before, we were in the 13% range.

So some of it is just core military business.

With that said, there was a portion of that revenue that was a lumpy one-time government build-out and so we will not see a repeat of that.

So with that said, my guess is that the military percentage will probably come down as a percentage of the business a bit that quarter.

I see, so that partially explains why you have a lower guidance this quarter.

Now, once you asked a little bit about these military products.

Are those products, do they have unique configuration, maybe higher temperature requirements, stuff like that?

And do you guys typically have higher margin for those products, first of all?

So, some of the lumpy business that we have done have been the highest density and they have been extended temperature range.

So in that respect, yes, they tend to be higher margin business.

Great, that is what I was looking for.

Two more questions from me and I will let someone go on.

First one just housekeeping, the tax rate came down a little bit for this quarter.

How do you view the tax rate for the rest of the year?

We are anticipating currently, Edwin, that the tax rate for the year will be 25%.

What we've seen halfway into the year that this is internally robust in terms of revenues and margins outside of the U.S.

And that is contributing to a lower expected tax rate for the year.

Originally, we were looking around 30%, but we currently believe we will be in the 25% range for the year.

Great.

That is what I was looking for.

And then on the balance sheet side, how much was your [accounts tables] for the last quarter and also, I noticed that interest has gone up a little bit before.

Yes, accounts payable ended the quarter maybe around $4.2 million, which is up slightly from the prior quarter.

And that's mainly due to the inventory build, buying wafers and paying for some test burn and other manufacturing expenses.

It has gone up a bit, but not significantly.

And then in terms of inventory, it ahs gone up a little bit.

How do you view that going forward?

Yes, last quarter, we said that we were going to be building inventory this quarter.

Getting at the point last quarter where $13.5 million or so, whatever it was, was on the low side.

Currently, I think our inventory levels are reasonable.

I don't think we are currently looking right now at that going up next quarter.

It will be flat to down.

Okay.

I actually have one more question, if I may.

Just talk a little bit about demand.

We all know that demand will recur for the December quarter.

Given that you guys have said at least on your press release that you have strong sales in Europe and Asia.

Can you kind of explain a little bit which area is stronger or remains strong in the coming quarter and which areas at least are all and starting to weaken in the quarter?

So, in the military business, as I mentioned, that should be down a little bit, and that would be in the U.S.

market.

We actually have some military business.

When I say military, I lump in into military, I lump in government defense and also avionics.

And so that outside of the U.S.

should be fairly flat.

We are seeing also some weakness that we haven't talked about yet -- I shouldn't say weakness, that is not the right word.

We also had some lumpiness in that we had a customer in the test equipment market.

They come in and they do probably every other month -- I am sorry, every other quarter, I should say, build and they had a large build-out for this past quarter which certainly helped us offset some of the decline in revenue from Cisco.

They will not be within our numbers this quarter.

Okay, how much was that customer in terms of [defense]?

They were as far as percentage just over 5%.

They were nearly $1 million this quarter.

Great, that's all I have, thanks.

Our next question comes from the line of Tristan Gerra with Robert W.

Baird.

Yes, this is [Scott Hurlman] calling in for Tristan.

Thanks for taking my questions.

I wanted to also say great quarter, so congrats on that.

Sigma Quad was 10.2% of revenues this last quarter.

What do you expect it to be in the December quarter and kind of, what do you expect it to be exiting either calendar 2009 at?

Is it going to be about 20% of revenues or any kind of guidance on that would be good.

Yes, okay, for the September quarter, I am sorry, for the December quarter, we are currently looking at somewhere around 15% for Sigma Quad.

And out into the end of calendar 2009, it could be in the 20% range.

Okay.

And I guess just trying to figure out on margins how do Sigma Quad margins in general compare to the rest of the business?

They are as good or better.

Okay.

Especially when we are looking at the higher densities and some of the higher speeds.

It definitely doesn't hurt the gross margins.

Okay.

Cisco orders were down a bit in Q3.

What should we expect them to be in calendar Q4?

Fairly flat.

Any kind of guidance on end markets for the communications markets about what is kind of causing this weakness for quarter over quarter?

Are you seeing you weakness in or I guess some softness in wireless or wire line or any kind of geographic color would also be useful?

Sure.

So in the wireless, so far the end markets seem to be holding up.

There has been some inventory buildup on the component side, so we'll see a little bit of a slowness as far as that is concerned on the component sales, but not on an end market sale.

On the other end, we also have seen some weakness in the switching enterprise and Internet switching kind of areas, certainly with some of the doubts or some of the issues going on with the credit crisis, there has been some a couple expenditures on the end market that haven't gone out.

So we think that there will be certainly some weakness there in the fourth quarter.

Okay, that's great.

Thanks.

And then, I know the visibility is probably pretty low right now.

But any thoughts on what calendar Q1 might look like?

I mean, should we expect another big leg down or do we kind of see this as the trough quarter or-?

Well, that is a good question.

Certainly, look at some of the design wins that we are having.

We have another Sigma Quad design win that we'll be closing in November, which we anticipate to be able to get some awarded business for the first quarter.

I am hoping this is a trough.

I am hoping that the first quarter is going to be healthier, but again, like you said, with the visibility and what is going on, it is impossible to predict.

Just to remind you that usually when we come into a quarter, we have about a third of the quarter in backlog.

Okay.

And then Cisco is usually somewhere in the 30% range.

That still leaves around 40% to be returned and then another quarter out just makes it that much more difficult.

Okay, that's helpful.

Thank you.

You guys talked a little bit about there being a decent amount of inventory out there on the component side.

Should we think about Q4 kind of being throughout the industry being kind of like what we saw in Q4 of 2007, where the Chinese communication infrastructure guys were kind of sluggish to weak, because they were pulling down inventories, or?

Again, I think it is a little bit different in the fact that this time, I think we actually have less visibility than we had a year ago.

I think it was a little bit more known what was happening then.

Today, there is just a little bit more uncertainty.

I mean, I know I am not fully answering your question, but unfortunately, there just isn't the visibility now that we have seen in the past.

Okay.

I think that the Chinese vendor you mentioned, actually, they have a lot more business outside of the Chinese market.

So they are pretty much in the emerging market, rather the Chinese market, okay?

Right, okay.

And then, there has been some talk from a couple of people about the possibility of the -- your customers kind of pulling back on R&D expenses and not really looking at ramping kind of new technologies that would launch two, three years out.

Have you seen them kind of pull in their design budgets at all, or what are your thoughts on that kind of situation?

Well, I am going to answer your question in two different ways.

First, I will answer the new R&D.

We actually have a new class of devices that is going to be the follow-on generation for the Sigma Quad [tailing] we are still in to date.

And some of our top customers, OEM telecom customers, are looking at the parts very closely and some of them are nearly committing to it.

We actually haven't seen First Silicon on it yet, so they obviously need to look at the parts.

But with that said, there is R&D being spent on those future programs that will utilize this class of a product.

Okay.

So the second part of the answer is, some of the upside and new design wins we are getting will be the Sigma Quad family, which are in the existing programs to date or coming in as a second source.

So that, for us, it will be a design win and will be increased revenues in the future.

But it is not a new R&D spend for our customers.

Okay.

But they are - with these new products, they are still kind of doing these new programs?

Correct.

Okay, that is very helpful.

So again, guys, thanks for answering my questions and congratulations on the great quarter.

Thank you.

Our next question comes from the line of Manoj M.

Nadkarni with Chip Investor Group.

Hi, good afternoon, and congratulations on achieving solid operating margins and net income.

Thank you.

Yes, what was the cash flow from operations for the last quarter?

I don't have it broken out by quarter, but the six-month date is $5.1 million.

During the quarter, we paid a couple million dollars in taxes, federal income taxes and we paid for inventory build.

I believe at the end of last quarter, it was probably somewhere between $4 million and $5 million.

So it wasn't much of an improvement this quarter.

Okay.

And secondly, can you give some details on the R&D expense you are - rather than increasing R&D, that you are anticipating for the current quarter?

Yes, we have a new device we are taking out pretty soon.

So the R&D expense is pretty much accounted for the mass cost of the new device.

Okay, so that side, this is a one-time type of expense?

Yes.

Okay.

And finally, outside of Cisco and outside the United States, especially in Asia, what kind of demand are you seeing for your products from telecom and networking customers?

So, the major OEMs, we'll talk in China, we actually saw some growth in this past quarter.

So they certainly have had some healthy growth, and that's in the telecom market.

So as I mentioned earlier, we did have the build-out for the tester company as well and they are out of Asia.

And then some of the, we'll call it military, again, lumped into the military [out of ages].

So certainly we saw some strengths in more than one market segment within the Asian market.

Out of Europe, the strength was built on some of the Sigma Quad design wins and the network and telecom folks.

Okay, and you anticipate some of that to [retail] or do you think that will be more or less flat as the U.S.

business weakens?

So, I think that will be flat except for the tester market.

As I said, it was a build out.

They usually do them twice a year and this happened to be the time they built out.

So I don't anticipate seeing anything from them until next calendar year.

Okay, and any pockets of growth in these segments.

I still think there is possibilities to get some growth in the networking and telecom, just because of some of the design wins on the second sourcing for the Sigma Quad that we'll be seeing this quarter and next quarter.

Okay, very good.

Well, again, congratulations on very good execution.

Thank you.

Our next question comes from the line of Steve McCann with Courtside Capital.

Yes, hello, congrats guys on a nice quarter.

Just some questions, just if I understand correctly, you said Sigma Quad should be 15% of revenue by the end of the December quarter or the March quarter?

We are preforecasting it will be in the 15% range for the December quarter.

Why would it - I think you went on to say that it would end the calendar '09 at 20%.

Why wouldn't it be much more than that, just given all the design wins you have talked about.

What - just as a percentage of the pie, what else makes up - what would cause it to not grow much faster as a portion of your total business?

Sure.

So the 15% I think is going to be a bit artificially high for this quarter, because remember, we are talking about percentage of revenues, not total dollars.

And so some of the weakness that we are seeing this quarter and the fact that we are losing the one-time build off in the military company and the other build-off in the tester company, those are not Sigma Quad products.

So although the percentage won't grow as high as you might expect, the dollars are going to and that means that our other product lines, our other devices that are outside Sigma Quad will also come back next year.

Okay.

So roughly speaking, 15% of roughly $15 million middle of your guidance, $2.25 million or so, in dollars, should it continue to grow sequentially given the design wins you see at this point throughout the coming quarters?

Yes.

Okay, got you.

And the combined -- I think you mentioned that the military build-out this last quarter was about $1 million.

How large was the tester?

No, the tester was a million.

Pardon.

The military guy was -- well, it was actually two and they were, combined, under 0.5 million.

Okay, got you.

So you are looking for approximately a $2 million sequential decline, 1.5 million of it comes from these two and I guess the rest is not Cisco, because Cisco is flat, but the rest of the customers are down a little bit.

Exactly.

It is just on average.

Yes, I mean, roughly speaking, that is correct.

Understood.

Can you talk a little bit more, I think, Didier, you were quoted in a Dow Jones piece about the new product that I guess the mask is for, the LLD RAM.

Can you talk a little bit more about what it is and I guess more importantly from my perspective is, what are the very short-term milestones that you are looking for to see if the investment was worth it, and more importantly, that you can put a real number on the market opportunity for next calendar year?

So we are not going to talk a lot about the new product, because we haven't seen First Silicon.

But the tape out or the R&D expense that Lee-Lean mentioned is attributable to this new family.

So we will be seeing a tape out in this quarter.

So certainly, it is going to be a new technology for us using a new wafer fab partner and so certainly, it is going to be a new product line that we are anticipating going to take a while to ramp up.

As far as the market acceptance, we will be second sourcing another supplier out there and the feedback we have gotten from our customers is very, very positive.

I can leave you with that.

When will you know though, I guess my question is, how long will it take before you know you have gotten the technical okay from those customers that the new product is working to the specifications that they need?

What is the timeline for that?

Yes, well, this is the fourth attempt we tried to bring up the product.

So we are pretty [manascated] the whole next year.

And generally, we bring up the product, so we are not expecting to see any revenue for the entire 2009.

We are expecting to see the revenue start ramping starting 2010 for the year, sometime in 2010 we can do it.

And are you saying -- when you say that, is that calendar or fiscal?

Calendar.

Calendar, okay.

Got you.

And last couple of questions, the auction rate securities, any kind of write down on those?

What is your sense of collectibility?

No, my par value is 1.950 million.

I have a reserve of about 88,000 against that in other comprehensive income.

It's a very highly, very profitable health organization on the West Coast.

They make a lot of money.

They have a lot of these issuances.

This one, the interest rate on this is very high compared to some of the others they have and they are calling in all the others and basically haven't gotten to this one yet.

The investment manager that we are using thinks that sometime in the next year or so, we'll get this.

It is not needed for cash flow purposes.

We have other investments that are current.

We are not expecting to lose anything on this.

Okay, and what else is in that 15 million or so long-term investment?

They are just, they are state and muni corporate obligations that have maturities out beyond one year.

And at this point, you are fairly confident there is no principal risk in any of those?

Yes, there shouldn't be any issues.

Okay.

And finally, if I may, just a comment just as another and smaller shareholder than your large one, I guess I would second their notion to the degree that your shares stay at this valuation level and you historically have never lost money.

And it seems like you are continuing on that streak.

I am curious why the board would look at your equity value net of cash and not buy back stock, given that you have never lost money, given that you continue to generate cash, unless they believe that you might lose money.

Is there a scenario that you can imagine, even in a prolonged downturn, where you guys would burn cash?

Could you explain that, just what that scenario might look like?

And if not, why not buy back stock?

We are not expecting to lose money, that's the first thing.

Second thing is that in our comments that we've already made, that's all that we can talk about right now.

Like we said, the board will continue to review repurchases on an ongoing basis or on a regular basis and enough said for now.

Okay, fair enough.

I appreciate your time.

Thank you.

Thank you.

(Operator Instructions) Our next question is a follow-up question from the line of Edwin Mok with Needham and Company.

Thanks a lot.

To follow-up just quickly, how much are you guys saying you think on CapEx in this last quarter?

We are not looking at much in the way of spending there.

I believe we have already purchased relatively reasonable amount of test equipment at this point and that is really what our big expense is.

I would say less than $1 million or so over the next year.

That sounds great.

That is what I was looking for.

And then, talk a little bit about the market.

In the SRAM space, not a lot of players left behind.

But it seems to me Samsung is still a really big player and given the challenging memory sector right now, any risk that they might come back and deliver their focus in the SRAM space?

And in terms of competition, have you seen any competition by other players like [five players and out players]?

Edwin, your last comment, your last question, you faded out.

Can you repeat it, please?

Sorry.

The question is, in terms of competition, have you seen any competitor come back and be more aggressive, either in pricing or in terms of acquiring the market, have you seen anything like that?

No, so there hasn't really been any extraordinary price pressures.

I mean certainly, the high end or the high density devices are coming down to their natural price progressions.

The mature products are pretty stable as far as ASPs go.

Samsung, as you mentioned, is the largest supplier on the market.

They certainly haven't shown any future programs per se in the SRAM market.

They have some SRAM that they are showing on their roadmap, but apparently, they don't have any commit or resources associated with them.

So I think they are waiting for a certain market size before they commit to building out more SRAM.

So I think right now, the largest suppliers are sort of sitting back and the rest of the folks, again, I don't see any new suppliers coming in.

I don't see any current suppliers getting more aggressive and I only see Samsung getting a little weaker.

I see, great.

And then one more question.

Regarding 144 megabits, can you give some color in terms of the progress there and when do you guys expect to [reach] product?

Do you see a demand for that product?

Oh, yes.

We are right now expecting the [table on Bell One] by the end of calendar quarter -- first quarter 2009.

So we will see the silicon in second quarter 2009.

And we do have a customer expecting to see the silicon and we just sit here and have to come on working.

I see.

Would that mean that you have -- is that [hike] to that one-time R&D expense that you were mentioned on the guidance?

Not in the current quarter.

Not in the current quarter.

So are you --?

That's a take out that we'll expect to see next year.

So you expect to have a one-time take out expense in the March quarter as well?

March or June.

March or June.

I see.

Okay, great, that's all I have.

Thanks.

Yes, more like June.

Great.

Thank you.

And I am showing that there are no further questions at this time.

Do you have any closing remarks?

Okay.

Thank you all for joining us.

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

Thank you.

This concludes today's conference call.

You may now disconnect.