GSI Technology Inc (GSIT) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to GSI Technology's Fiscal 2010 First 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 Q&A.

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

Additionally, I have also asked to advise you that this conference is being recorded today, July 30, 2009, 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.

As we noted in this morning's press release, we were pleased to report solid first quarter results in the face of an economy that is far weaker than it was a year ago, and that, even today, is showing few signs of measurable improvement.

Year-over-year first quarter revenue was $14.2 million, compared to $17.3 million in fiscal 2009, a decline of $3.1 million, or 18%.

Net income was $2.1 million compared to $3.0 million, a decline of [$907,000], or 30%.

But again, the global economy and the fortunes of many of our customers was very different a year ago.

Despite the continuing deterioration in economic activity of the past 12 months, we have continued do well.

In fact, with our first quarter 2010 results, we reported our 23rd consecutive quarter of profitability.

Moreover, we were pleased to achieve modest gain over the prior quarter when we reported net income of $1.2 million on revenues of $13.6 million.

A good measure of the sense of our business is to be advancing our margins.

Gross margins, as you know, is highly dependent on product mix.

The sequential improvement of 5.5 percentage points to 42.5% from 37.0% in the fourth quarter of last year is a case in point.

The sequential improvement in gross margins was attributable to several factors.

First, was the increase in sales to Cisco Systems and other telecom customers during the June quarter compared to Q4 '09.

Second was the fact that sales of a lower margin product to Huawei returned to a more normal level, and the third factor was the reduction in product costs achieved during the quarter, as a result of reduction in manufacturing costs, primarily wafer costs.

In the prior quarter, you may remember sales to Huawei increased sequentially over the third quarter of fiscal 2009 by $1.8 million.

This was due largely to acceleration in the 3G build-out in China during the fourth quarter.

We continue to believe that longer term gross margin in the range of 40% to 43% is a realistic and achievable target.

Inventory at June 30 was $12.5 million, compared to $11.0 million at the fiscal end 2009.

As we said at the time, the March 31 figure was somewhat lower than ideal, given that we like to have inventory sufficient to meet anticipated shipments in the forthcoming quarter.

That said, $12.5 million is closer to where we belong.

This brings me to our expectations for the second quarter.

When we spoke with your three months ago, we know that by all appearance the economy was continuing to deteriorate, with the likelihood that global economy activity could not bottom out until later into 2009 and earlier.

Although there are some indications that the [concession in] economic activity is slowing and may even be approaching the bottom, about only thing we at GSI Technology can say with assurance is that the end of the recession is three months closer than it was at end of fiscal 2009.

Although we are now a third of the way through the quarter, visibility, nonetheless, remains vivid, which (inaudible) our current expectation is that revenues are expected to be flat compared to the June quarter just completed, with gross margin similar to the June quarter.

We anticipate that operating expense will be approximately $1.5 million higher, reflecting the tape-out of a new 65-nanometer product that had been expected in June, but which was pushed out to the second quarter and the addition of design resources for our LLDRAM project and the various SRAM projects.

I will now turn the call over to Doug.

Thank you, Lee-Lean.

The June quarter was our 23rd consecutive quarter of profitability with net income of $2.1 million, or $0.08 per diluted share, on net revenues of $14.2 million.

In the comparable period a year ago, we earned $3 million, or $0.11 per diluted share, on net revenues of $17.3 million, and $1.2 million, or $0.04 per diluted share, on net revenues of $13.6 million in the prior quarter.

Gross margin and operating margin were 42.5% and 16.8%, respectively, in the first quarter of fiscal 2010 compared to 37% and 9.7%, respectively, in the fourth quarter of fiscal 2009, and 44.3% and 23%, respectively, in the first quarter of fiscal 2009.

Gross margin was considerably ahead of expectations, due largely to the change in customer mix discussed by Lee-Lean, and manufacturing cost reductions.

Military/defense sales were essentially flat at 15.8% of net revenues, compared to 15.7% of net revenues in the prior quarter.

The SigmaQuad line of products continued to do well, accounting for 15.9% of total shipments in the first quarter.

That compared to 19% -- 19.8% in the fourth quarter fiscal 2009, and have grown from 8.2% of total shipments in the first quarter of fiscal 2009.

At 16.8%, first quarter operating margin was higher than anticipated.

We had expected R&D expenses to increase by approximately $1 million over the prior quarter.

In fact, they increased by less than 10%, reflecting the tape-out of a new 65-nanometer product that had been expected in June, but which was pushed out to the second quarter.

Total first quarter pre-tax stock-based compensation expense was $291,000 compared to $342,000 in the fourth quarter of fiscal 2009, and $329,000 in the comparable quarter a year ago.

We currently expect our effective tax rate to be 23% in fiscal 2010.

Net accounts receivable have increased to $7.1 million, up from $5.6 million at March 31, 2009.

DSO is 50 days compared to 44 days in the prior quarter.

We do not expect any collection issues with any of our receivables, and have not revised any payment terms for our customers during the quarter.

There has been no change in the aging of our receivables compared to the March quarter.

At June 30, 2009, we had $44 million in cash, cash equivalents, and short-term investments, $23.4 million in long-term investments, $58.6 million in working capital, no debt, and stockholders' equity of $87.4 million.

We held [no] auction rate securities at June 30, 2009.

On November 6, 2008, the Board of Directors authorized the repurchase, at management's discretion, of up to $10 million of the Company's common stock.

Under the repurchase program, we may repurchase shares from time to time on the open market or in private transactions.

The specific timing and amount of the repurchases will be dependent on market conditions, securities law limitations, and other factors.

The repurchase program may be suspended or terminated at any time without notice.

During the quarter, we purchased 21,783 shares at an average cost -- at an average price of $2.66 per share.

Through June 30, 2009, we have repurchased a total of 1,481,962 shares at an average cost of $2.80 per share.

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

(Operator Instructions)

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

Hey, thanks for taking my question, and congratulations for coming in at the high end of guidance.

I have a -- first, let me settle a housekeeping question.

Doug, just on payables, how much was that -- was account payables in the last quarter, and what was the depreciation expense?

Okay, accounts payable at the -- June 30 was $3.2 million, and that compares to $2.9 million at the end of last quarter.

It's up slightly because of the inventory build, higher mask purchases, and other manufacturing costs.

And depreciation expense for the quarter was $352,000.

Great, and sorry, one more housekeeping question.

I didn't catch it.

You said you bought back some stock.

How much did you actually spend on buying back stock?

It's about $50,000.

$50,000.

Right around $4.1 million for the entire plan.

I see.

Great.

Now, moving along to just the end market.

I think last quarter you guys talked about a good size ramp on the -- on 3G in China, and this quarter it sounds like Huawei has softened, (inaudible) has softened, yet you came in on the high end of guidance.

Can you maybe talk about end market demand, and besides Cisco and the networking, any other end market is driving?

And just kind of follow-up to that is, in terms of Cisco, you mentioned that it was strong for Cisco, and you mentioned other telecom, can you maybe quantify the whole telecom revenue for the quarter?

So, Edwin, it's Didier.

So if you look at our percentages of business, revenue wise, almost all of the markets stayed fairly flat.

I mean, if you looked at what we did in our fiscal fourth quarter, it was 72.4% in networking and telecom.

This last quarter it was 72.9%, so essentially flat.

Our second largest market is military.

In the March quarter, it was 15.7%.

In the June quarter, it was 15.8% -- again, flat.

So as far as that goes, if you look at the high view, the percentages didn't change much.

What did change, though, is the mix inside of those percentages -- or inside of those market segments, I should say.

As you mentioned, we had a couple of the China 3G components were much lower in the June quarter than they were in the March quarter.

Besides those folks, if you look across the rest of our networking sector, they were all up.

Cisco, along with all of our tier two networking customers, were all up across the board.

So we certainly saw recovery there.

Great.

And based on your guidance of how flattish gross margin, I imagine you expect 3G to remain slow this coming quarter?

Any kind of idea -- let me first start by saying is that correct?

And then, also, follow-up to that is any idea when you might see a resumption of all business on that end market?

Yes.

So it's actually a quasi complicated answer.

So we saw some parts of the China build-out slow down in this past quarter, and that's in some parts.

There was a certain segment in the CDMA area that was very strong for us.

That segment that was strong in the June quarter will be weak in the September quarter, and as far as the segments that were strong for us in the March quarter and weak in the June, unfortunately, the visibility in that segment is still hazy.

There certainly is some optimism there, but it was too unpredictable for us to guide this quarter.

We do feel comfortable that it'll be hitting this year.

We just weren't comfortable enough to say it's going to happen in the September quarter.

Great.

And then -- just touch on SigmaQuad.

Looks like at least -- let me see -- as absolute revenue, it actually came down a little bit, just a touch, sequentially.

Just curious how -- what is your view there?

What happened there, and then, what's your view for SigmaQuad for the rest of the year, basically?

So one of the segments in this China build-out was one of the systems used significant amounts of the SigmaQuad product, and so it really gave us a nice boost in the March quarter.

That was one of the softened systems for the June quarter, so it certainly affected our SigmaQuad there.

As far as going forward, we're still very positive on the revenue trend of the SigmaQuad families, and we anticipate them coming back up as a percentage of our business going forward.

I mean, it -- we were somewhere in, rough numbers, 20% in the March.

We were down in the 15%, 16% in June.

We anticipate they'll be back up in the high teens shortly.

I see.

And then, I guess one more question I have.

Regarding inventory, you guys -- Lee-Lean talked about wanting to increase inventory a little bit.

Just curious what level do you think you're comfortable with?

And also, any view on the channel inventory that you can share will be great.

Yes, I think, Edwin, we're probably comfortable with the quarter was up for revenue.

Right now we still think we are little below, but I think it's closer to the manageable level.

In terms of the channel inventory distribution, the deferred revenue, which was the value of what we ship to the distributors they haven't resold, that's at $3.1 million at the end of this quarter compared to $2.7 million at the end of the prior quarter.

And those two are relatively low numbers compared to where we've been historically.

So even on the channel inventory, you feel like that could potentially grow a little bit more, right?

Yes, I mean, if it did, it's not a bad thing.

Good.

That's all I have.

Thanks.

Thank you, Edwin.

Thanks, Edwin.

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

Hi.

Good afternoon, and congratulations on a good quarter.

Thank you.

Thanks.

What are your expectations for revenues from Cisco in the second half of 2009 -- into 2009?

So we anticipate it's going to continue to grow.

So if you look at where we finished in the June quarter compared to where we were in the March quarter, we certainly grew nicely in that quarter, and we anticipate to continue to grow throughout the year.

Again, I'm going to hesitate on commenting on Cisco's business, but certainly, they've -- certainly are looking more positive, and we've also have secured some design wins at Cisco that are actually second source, which means it's immediate revenue that we should start shipping again in the rest of the year.

So we anticipate the revenues to be up.

Okay, and how Huawei?

Little [hazier].

So again, they were weak for us in the June quarter.

I think they'll be a little bit stronger in this quarter, but with that said, it looks like the winner of the next phase of the rollout is elements outside of Huawei.

So I -- it's hard for me to venture to guess what's going to happen with Huawei going forward.

Okay.

And looking at your gross margins, they came up very nicely, and you're guiding that they will be flat.

So is it fair to assume that your product mix will be similar?

You just said that Cisco will be reasonably good, so what should we -- can you give some color on that?

Yes.

So, I mean, what's clear is -- I don't want to attribute the increase in margin to Cisco.

That certainly isn't where the increase came from.

It's a part of it.

Yes.

The -- you have to understand, as I mentioned, there was really only two customers that were really down for this June quarter, and the rest of our top customers were all up.

And so, these second tier networking folks for us were all up, which were the higher margin products for us, because they tend to use higher density.

Some of the elements that were down in the June quarter used legacy, low margin products from us, and so that certainly has a lower than corporate average type of margin.

So that's what drug us down.

The other thing is Lee-Lean has been successful in negotiating with TSMC, and we've seen some wafer cost reductions to start hitting in the quarter.

That also improved the margin.

Okay.

And how is overall pricing environment for your products?

The ASPs have been stable.

There certainly hasn't been anything extraordinary that's happened.

The legacy and mature products have all -- are all pretty much flat.

The newer products are coming down, as expected.

ASPs, as they mature, and the years get -- yields get better, and the volumes go up.

Certainly, we're tracking it with our wafer prices coming down for those advanced technologies that use the high density.

So everything is happening in accordance with the way it should happen.

Okay.

And finally, regarding operating margins, I calculated close to 19%, excluding stock compensation.

Do you think if your revenue level remains about the same or improves, you would be able to maintain those margins?

Yes, I would say that we would expect our revenues to grow in the -- I wouldn't expect operating expenses to grow significantly more than what we're forecasting for next quarter.

They will go up marginally, but our target is somewhere in the 21% to 22% range, excluding stock-based compensation, and we're close to that, and I would think we have a chance of getting closer to those numbers as we progress throughout the year.

Okay.

And in the previous up cycle, you had been as high as what -- about 24%?

Oh, yes, we've been in the mid 20% range.

Okay.

All right.

Thank you very much.

Thank you.

Thanks.

Your next question comes from the line of [Cobb Sadler] with [Catamount Strategic].

Thanks a lot, guys.

Another quick question on the competitive environment and Samsung, in particular.

I guess they pulled back somewhat in the market and was just wondering whether or not you expected to pick up any market share from them or not and what it might mean to your '10 numbers?

Sure.

So Samsung has, over time, [opted] some of the lower density families.

They did that pretty aggressively a couple -- year and a half, two years ago, and our sales, among with a few other suppliers, certainly picked up our healthy shares of that business.

With that said, their obsolescence has slowed down, but what we've seen instead is that they have actually not introduced any new SRAMs.

So certainly, Samsung in the past has always wanted to be the first out with the next generation density, and they're not doing that now.

So 72 megs are the ones that have been shipping -- the largest family up till now.

We are introducing 144 megabits in second half of this year, and it's not even on Samsung's roadmap.

So they're certainly not going to have any future roadmap in SRAMs, as far as we can tell, as far as customers can tell.

Now there are certainly rumors that they are going to be more aggressive than obsolete going forward.

To what degree and how quickly is up in the air.

We've heard a lot of different stories, and we're all waiting.

But certainly, they were by far the number one SRAM supplier in the world.

At this point, I would say it's a tossup between them and Cypress.

I know Cypress is certainly telling everyone they're the largest now.

It's probably pretty close at this point, and Samsung will only get smaller going forward.

Okay, got it.

And you wind up -- it sounds like you picked up some shares historically, but going forward, I mean, obviously, you'd want some of that business if you could get it, I guess, if they did pull back.

Yes, and we feel pretty comfortable that will happen, because in the customers that they're fairly strong at are customers we're also strong at.

So we feel like we're in a good position to pick up their market share when they do start de-emphasizing.

Okay.

Great.

Thanks very much.

Welcome.

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

Baird.

Hi, guys.

This is Scott calling in for Tristan.

Thanks for taking my question.

Doug, did I hear you correctly that you said you don't have any more auction rate securities on the balance sheet?

No, we haven't had any for a couple quarters now.

Okay.

I just wanted to make sure.

-- but we had invested in those.

Okay.

And then, you were talking about visibility as being a little bit limited out there.

Is there anything into calendar Q4 -- what that might look like or, kind of, the second half?

Because you were talking about this China business is going to be strong, in general, in the second half, but you're not exactly sure where that falls.

So if you could give any visibility on that, that'd be great.

Let me just make one comment before Didier says something.

You recall that typically when we go into the quarter, we only have about 30% in backlog, and historically, we've had Cisco at somewhere around 30%?

Right.

And lately, that's been 20% to 25%, so that leaves quite a bit of business to turn for the quarter.

We're looking at somewhere around 45% to 50% that we have to turn for the quarter, and we don't have a lot of backlog to date for this quarter -- when we went into the quarter.

And that says a lot for the remaining part of the year.

I mean, there is a lot of uncertainty there.

Didier?

Can you repeat the question, please?

So I guess, what is initial visibility into Q4?

What does that look like?

And then, overall, kind of, can you give a sense of what you expect the China business to do, maybe second half versus first half?

Yes.

Because you were talking about you're not sure exactly when that business falls, whether that's in 3Q or 4Q.

Right.

So again, as I mentioned earlier, it really is a hazy visibility.

The forecasts we're getting are limited, and when they do come in, they're not as accurate as we certainly would like.

With that said, we do feel positive about the second half of the year.

I mean, the activity is increasing a bit.

Certainly, there's a summer slowdown that started in Europe, but outside of Europe, the activity is increasing.

Some of the design wins, some of the new programs.

So, we feel good about the future.

As far as the China 3G rollout, we're looking at basically the phase three rollout, and if it goes in accordance to what we've heard, it should be kicking in somewhere probably, best case, end of the third quarter, most likely into the fourth quarter.

And if it goes along the lines that we believe, we certainly are in a good position with the customers that we feel are going to be the winners in that phase three rollout.

Okay.

Thanks.

And any guidance into kind of how the mix really looks for Q3?

I mean, is that going to be similar from a military and defense standpoint, or maybe -- you talked about Huawei may be a little stronger in Q3.

Is there anybody else that should really be ramping that's either on the lower cost side or on the higher margin business type products?

So I think what you'll see is the percentage will stay similar.

The one area that changed -- I mean, it's going to sound insignificant, but it's more significant is in our test and measurement.

In the March quarter it was 1.8%.

In the June quarter that just ended, it was 2.5%, and that was basically -- that jump alone was one order and one customer, and we anticipate that they're going to come back.

It's a customer we had last year that got over inventoried, and so we were waiting through the inventory reduction, and I think we're through that now.

So I anticipate maybe that market might increase it a little bit for us on a percentage basis, and it tends to be higher margin, because it uses our largest density devices.

Okay.

Thanks for that.

And, Doug, you said effective tax rate for the year is going to be 23%.

I've only got it at 21% for Q1.

Does that mean that the rest of the year is going to be 23%, or we should think about the full year being 23%?

Think about the full year being 23%.

So is there going to be a catch-up, then, in the September quarter, or is that going to be kind of amortized over the full year?

Well, part of it depends on when our R&D credit hits, but currently, I'm booking at the rate of 23% per quarter going forward.

Okay, so that is going forward.

And then, should we think about that for fiscal 2011 as well?

It all depends on Obama and his tax plan, and you know that we have a structure where we have an entity offshore that most of our offshore revenues go through, and depending on what changes with these earnings that have no or very low tax rates applied to them, it could impact our tax rate.

But right now, I think for this year, we're okay, and if nothing changes, I would assume that the rate could potentially go lower as we increase offshore revenues.

Okay.

That's helpful.

And then, we had talked previously about there being a -- the LLDRAM tape-out in the December quarter.

Is that still planned for that, or is that pushed out, and how should we think about, kind of, the base level R&D business and where that is actually going to be hitting?

Okay.

Let me respond to that first, and if Lee-Lean has any comments, he can correct me, but right now, in terms of base spending, I'm not breaking R&D versus SG&A, but just combined R&D and SG&A were -- I think, were somewhere now, or will be, in about the $4.2 million, $4.3 million range per quarter.

And then, in terms of the tape-out for the LLDRAM, I have that currently in the March quarter next year.

I think we're looking at right around January timeframe at this point.

And that's a -- is that still about a $1 million tape-out?

Yes, it's in the $1 million range.

Okay.

And then, you guys have been really strategic with your buyback, bringing that in at pretty low levels.

Is there kind of a tendency to pull back, given the significant run in the stock price here?

Well, right now that plan is -- it's -- we have a 10b5-1 plan, and there's certain parameters that are hit.

I'm not going to go into all the details, but basically, it's out of our hands.

Needham is doing this for us.

They have the plan, and when the parameters are met, they buy shares for us.

Okay.

And then, one last question from me, and then I'll go away here.

We talked a little bit about the competitive update on the Samsung front, but can you give us an overall update on the landscape out there and what you guys are kind of thinking from that, going forward?

Yes.

So, certainly, there are no new players.

As we talked about, Samsung certainly no roadmap and will be de-emphasizing at some point.

The only other update would be the potential merger of NEC and Renesas, so certainly, they're talking about merging companies.

Depending on the market, they have market presence, or they have no market presence.

Certainly, they're -- they've done well with customers like Cisco, and so, losing one competitor there through a merger, we'd certainly be happy.

And it's not clear what will happen once these two large companies merge.

It's unclear what would happen -- if they're going to start reducing some of their products -- product lines or not, and so, it's -- no one can say if SRAMs would survive with the merger.

So certainly, we would lose one competitor, and there is an optimistic chance that maybe we'd lose two during the merger.

So that's the only other real update in the competitive scheme.

Okay.

Thank you, guys, very much, and congratulations on a great quarter.

Thanks.

(Operator Instructions)

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

Hi.

Just quickly follow-up.

Doug, you mentioned that the baseline OpEx is around $4.2 million, $4.3 million?

Yes.

But last quarter you did -- I think it was only $3.7 million?

Is that -- can you explain the difference here?

Yes, we've added some headcount in the R&D area.

Again, I mentioned earlier in our scripted section here that we've added some headcount in LLDRAM area and also to support some additional SRAM projects that we're working on.

Great.

Thanks for clarifying that.

And then, a follow-up question to one of your answers, Didier, that you gave regarding the China 3G?

You said end of third quarter or, more likely, fourth quarter?

Are you talking about calendar or fiscal?

I just wanted to clarify that.

Oh, I'm sorry.

I'm talking calendar.

You're talking about calendar, right?

Yes.

Yes.

Great.

Great.

Thanks for clarifying that.

And then, one last question.

I think Doug mentioned about backlog coverage.

Can you clarify that again?

Was that end of or beginning of this quarter that you typically have 30% backlog coverage?

Right now it's closer to 25%?

Is that --?

What was the question?

I think you were talking about backlog coverage and --

Okay.

Yes.

Just a general statement is that we usually have somewhere around 30% of the quarter in backlog when we start the quarter.

Right.

Well, 30% only because the Cisco business --

Is not considered backlog.

Is not considered backlog, because it's on a consignment model.

I see.

So if you were to include them, we usually have anywhere between 55% and 60% that is identified, and it's the other 40% or so that we're turning.

I see.

I see.

And you said that right now visibility is weaker, right?

So what is your -- at least, what was your backlog coverage ended in this quarter?

It was in that range, the typical range.

I see.

I see.

That was backlog for the quarter, not total backlog.

Yes.

Right.

I mean, so when we're turning 40%, we're -- it's not that we don't know where it's -- that 40% is coming from.

It's just not on backlog yet.

And so, it's that 40% that's more hazy now than it used to be.

I see.

I see.

That's fair.

Okay, great.

That's all I need.

Thanks.

Thanks.

And there are no further questions at this time.

I do apologize.

You do have a question now from the line of Tristan Gerra with Robert W.

Baird.

Quick question on that -- have you seen anything abnormal happening with lead times?

And, are you guys having any difficulties getting any wafers from the fab?

I know you said that you just got some good pricing on the wafers, but has there been anything kind of abnormal in that supply chain?

Yes, TSMC -- I mean, basically they are still part of technology -- or the [best] part of technology.

I think the capacity getting very full now.

We realize that going into this quarter -- I mean, this June quarter, so we set up the position to have enough inventory to cover our customer demands.

That is why you see the inventory is creeping up, and I think we are in the true position to have this (inaudible) wafer capacity be a (inaudible) issue.

Thanks.

Yes.

And there are no further questions at this time.

Okay.

Thank you for -- all for joining us.

We look forward to speaking with you in October, where we will report our second quarter fiscal 2010 results.

Thank you.

Thank you.

This does conclude today's conference call.

You may now disconnect.