GSI Technology Inc (GSIT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

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 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 been asked to advise you that this conference is being recorded today, October 29th, 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.

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

When we spoke with you during our last conference call in July, we anticipated that second quarter 2010 results could be pretty much in line with first quarter 2010 results.

By that measure, we did slightly better than what we had expected.

Given the persistent recession, second quarter results were, of course, measurably lower than those of the same period last year.

Revenue was $14.7 million compared to $17.1 million.

Net income was $2.4 million or $0.09 per diluted share, compared to $3.6 million, or $0.12 per diluted share a year ago.

Of more immediate interest, however, on a sequential basis, we continued to do well.

Net revenue increased by $468,000, or 3.3%, to $14.7 million, and the net income increased by $325,000, or 15.3%, to $2.4 million.

The majority of the second quarter increase in net revenue is attributable to $349,000 in revenues that came with our recent acquisition of substantially all the assets of Sony's SRAM product line.

Current expectations are that acquisition may add revenue in excess of all previous quarterly guidance for the acquired products to third quarter net revenues, due to a one-time build in inventory at a Tier 1 customer.

In fact, we anticipate that within a year, the Sony acquisition will add as much as $2 million to quarterly revenue, at which point gross margin on the foremost Sony product is expected to be in line with the corporate average.

Sequentially, gross margin improved by almost 2 percentage points to 44% from 42.5% in the first quarter.

Gross margin benefited from the increase in higher density, higher margin products.

Sales to Cisco during the second quarter were $4.8 million, approximately $1.5 million higher than the prior quarter.

Sales to Huawei also increased [stopped] by this amount to $1.7 million from $1.3 million in the prior quarter.

Prior sales to the military/defense sector were essentially flat.

As expected, operating margin declined significantly due to slightly higher SG&A expense and a $1.1 million increase in R&D expense, due to a new product tape-out.

Operating margin was 10.3% compared to 15.8% in the prior quarter.

Inventory at September 30th was $15.8 million.

We believe this is adequate to meet anticipated third quarter shipments, which we expect to be as much as 12% higher than the shipment in the second quarter.

This outlook is based on our internal projection and is supported, we believe, by the growing consensus that the global economy is no longer contracting.

It does not, however, assume any quick return in economic activity to pre-recessionary levels.

With that said, our current expectation is that third quarter revenue will be in the range of $16.1 million to $16.9 million.

Gross margin is expected to be approximately 41%.

Operating expenses are expected to be approximately $300,000 less than in the second quarter.

I will now turn the call over to Doug.

Thank you, Lee-Lean.

On August 28th of 2009, we acquired substantially all of the assets related to the SRAM memory device product line of Sony Electronics, Inc.

The acquisition was accounted for as a purchase under authoritative guidance.

The acquisition resulted in an excess of fair value of assets acquired over the purchase price and was accounted for as a gain of $1.1 million on the income statement, included in other income.

We allocated the purchase price, including the value of identifiable intangibles with finite life supported by a third party appraisal.

The results of the acquired business have been included in our consolidated results from the date of acquisition.

Shipments of products obtained in acquisition amounted to approximately $349,000 in the quarter ended September 30th, 2009, and are expected to approach $2 million on a quarterly basis in the second half of calendar 2010.

Operating expenses are not expected to increase significantly from the level incurred in the quarter ended September 30th, 2009, as a result of the acquisition.

The consideration for the assets consists of approximately $6.4 million in cash, of which approximately $5.2 million was paid at the closing in August, 2009, and the balance of approximately $1.2 million was paid in October, 2009, following a post-closing adjustment to reflect actual product inventory on hand at the closing.

We are also required to make future cash payments based on the sale of certain acquired SRAM products over an eight quarter period, commencing with the September, 2009, quarter, the quarter in which we first derived revenue from shipments of such products.

As part of the transaction, we also entered into an intellectual property agreement with Sony, under which we acquired certain patents and license rights to other intellectual property used in connection with the acquired product line.

The September quarter was our 24th consecutive quarter of profitability, with net income of $2.4 million, or $0.09 per diluted share, and revenues of $14.7 million.

In the second quarter of fiscal 2009, we earned $3.6 million, or $0.12 per diluted share, on net revenues of $17.1 million.

Sequentially, second quarter fiscal 2010 net revenues increased $468,000, or 3.3%, from $14.2 million in the first quarter.

Net income increased by $325,000, or 15.3%, from $2.1 million in the prior quarter.

For the six months ended September 30th, 2009, we reported net income of $4.6 million, or $0.17 per diluted share, on net revenues of $28.9 million, compared to net income of $6.6 million, or $0.23 per diluted share, on net revenues of $34.4 million in the first six months of fiscal 2009.

Gross margin and operating margin were 44.4% and 10.3% respectively in the second quarter of fiscal 2010, compared to 42.5% and 16.8%, respectively, in the prior quarter.

In the second quarter of fiscal 2009, gross margin and operating margin were 44% -- 45.7% and 24% respectively.

Gross margin was slightly better than we had anticipated, due to shift in product mix during the quarter to a higher percentage of higher density, higher margin products.

The improvement in gross margin also reflects the continuing strength in sales of SigmaQuad products, which comprised 17.1% of shipments in the second quarter of fiscal 2010, compared to 15.9% in the first quarter.

Military/defense sales were $2.3 million, or 14.8% of net revenues, compared to $2.4 million, or 15.8% of net revenues, in the prior quarter.

Lower operating margin reflects a sequential increase of $1.1 million, or 70.9%, in research and development expense, related in large part to the tape-out of a new 65-nanometer product that accounted for $650,000 in R&D expense in the second quarter.

Selling, general, and administrative expenses increased sequentially $213,000, or 10.3%, primarily reflecting professional fees related to the acquisition of the Sony Electronics SRAM product line.

Selling, general, and administrative expenses were $2.3 million, or 5% -- 15.5% of net revenues, in the second quarter, compared to $2.1 million, or 14.5% of net revenues in the prior quarter and $2.4 million, or 13.9% of net revenues in the second quarter of fiscal 2009.

Total second quarter pre-tax stock-based compensation expense was $383,000 compared to $291,000 in the first quarter and $309,000 in the comparable quarter a year ago.

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

Net accounts receivable have increased to $7.7 million, up from $5.6 million at March 31st, 2009.

DSO is 51 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.

The aging of our receivables has actually improved compared to the March quarter.

At September 30th, 2009, we had $37.2 million in cash, cash equivalents, and short-term investments, $29 million from long-term investments, $52.3 million in working capital, no debt, and stockholders' equity of $90.5 million.

We held no auction rate securities at September 30th, 2009.

The sequential decrease in working capital, from $58.6 million at the end of June is largely attributable to the aforementioned Sony acquisition.

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

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

The specific timing and amount of 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 prior notice.

We have repurchased a total of 1,481,962 shares at average cost of $2.80 per share.

There were no repurchases in the September quarter.

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

(Operator Instructions).

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

Hey, thanks for taking my question.

And first one, wanted to ask you about -- just some housekeeping question.

What is the accounts payable for the quarter?

And also, I noticed your property plan increment has gone up.

Is that due to the Sony acquisition?

Yes, the accounts payable at the end of the quarter were approximately $5 million.

It's up from $2.9 million at the end of the March fiscal year, primarily related to wafers and other manufacturing expenses related to putting inventory in place to support our customers' business.

And the increase in fixed assets is primarily related to the Sony acquisition.

We acquired equipment with a fair value of $2.8 million.

I see.

So, CapEx was pretty low, then, for the quarter, right?

Yes.

Okay, yes, thanks for clarifying that.

And then, my second question relates to just -- again, related to financial.

Just -- on the R&D, you mentioned that there is a one-time sale charge, which was expected, and based on your guidance, you're only guiding down $300,000 for the coming quarter.

Does that mean that there's more tape-out in the coming quarter?

Is that why it doesn't go back to the less than [$200,000] range?

No, it relates to the Sony acquisition.

There -- and our LLD RAM product that we're working on.

Most of the expenses were in our forecast last quarter, even though we hadn't completed the Sony acquisition.

The way things worked out, the acquisition was completed at the end of August, but there were a number of employees that -- ex-Sony employees that took early retirement in June, and most of those people have been on board since the June timeframe.

There were a couple stragglers later on in the quarter that will add a little bit of additional expense this quarter, but not a significant amount.

I see.

So, should we assume the R&D is coming down as a result, no tape-out?

Obviously, SG&A will go up as a result of the Sony acquisition.

Is that a fair way to look at that?

Well, the operating expenses that you're looking at, including R&D -- most of the people were R&D related.

Most of the people were R&D.

Okay, great.

That was helpful.

And then, just quickly, on Huawei.

If I'm -- from what I remember, I think Huawei revenue actually has gone up a little bit.

Can I ask if that is related to Huawei going back to acquire -- to a copy out the 3G, or is that related to some other business?

Can you help me out with that?

Yes.

So, they've recovered just slightly, and when I mean by just slightly is -- by the way, I'm sorry, this is Didier, Edwin.

If you look back in the March quarter, we did $2.8 million with Huawei, and then in the June quarter, it dropped to $1.4 million, and so it's only recovered slightly, up to $1.8 million.

So, they're certainly doing some of the build out, but they are not, certainly, what we consider the majority player in this particular phase of the 3G build out.

Okay, great.

That's helpful for clarifying.

And then -- and lastly, in the coming quarter, I imagine part of that was based on the Sony acquisition.

Any idea how much that is, or give us a range, maybe, to help us on -- a little on that?

The range of the forecast?

Yes, the forecast.

In terms of the forecast, how much of that was from the Sony acquisition?

Yes, so it's -- as we mentioned in our release, we are looking to be about $2 million a quarter of revenue from the Sony products, and the forecast for this December quarter is slightly higher than that, and it's attributable to the fact that there is a bit of a bubble build out on some of the products related to the Sony, specifically.

So, it's going to be a little bit higher than what our anticipated $2 million run rate a quarter.

Oh, I see.

Okay.

Yes, I thought you won't get to that for a few more quarters.

I misunderstood that.

Sorry.

But -- and lastly, I guess this build out.

Is that just a one quarter event, or do we actually assume more than that, or how do we look at that?

For the Sony products, no, it's going to be ongoing, but there was a buildup in demand for it.

And because of some of the lead time issues we had, we could not fulfill that demand, and so, essentially, we should have had more of the Sony revenues in this past quarter, and they've spilled over into this quarter.

Okay, great.

And then, just one more.

Sorry about it.

On SigmaQuad, I may have missed it.

Did you talk about how much SigmaQuad was in the last quarter?

Yes, about 17.1%.

Great.

Thanks.

That's all I have.

Thanks, Edwin.

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

Baird.

Hey, guys, this is Scott Hirleman calling in for Tristan.

Thanks for taking our questions.

Doug, real quick -- looks like the tax rate fell off quite a bit in the quarter.

Any reason for that?

Specifically, was that related to the gain, and how should we think about the tax rate going forward?

Yes, the tax rate should be 23% going forward.

The gain on the books is net of a deferred tax liability.

It's not taxable income for tax purposes, so there's a timing difference.

Okay.

But yes, you basically -- if you want to take a look at the effective tax rate for the year, you pull it out and look at the remaining pretax income.

That's why the rate looks low this quarter is because --

So, I mean, for the remaining two quarters, we should just throw it at 23%, or we should throw it at a little higher, because the first quarter was 21%?

No, no -- 23%.

For the next two quarters?

Yes.

The $1.1 million is -- in that other income is untaxed.

There won't be any tax liability associated with that.

Okay.

And you talked a little bit about the kind of base level OpEx.

Previously, we had talked about base level OpEx being $4.2 million to $4.3 million.

Should we think of that being, now, more the $4.7 million range?

And can you give a brief split of that between R&D and SG&A?

And then also, any major tape-outs that you're expecting over the next four quarters?

Maybe any thoughts about the timing of those?

Yes, okay.

R&D expense will be more in the range of $2.2 million type number, and -- I'm sorry, more $2.4 million type number, and SG&A -- my forecast for next quarter has a couple hundred thousand dollars in there related to Sony professional fees.

We're required to report two years of audited historical information related to the Sony acquisition and some filings we have to do, and we're sharing that cost with Sony.

So, some of that will hit next quarter, but other than that, if you take a look at $300,000 below this quarter, and given what we said R&D was, you can figure out where the balance will fall.

Okay.

And then, tape-outs?

Yes.

In terms of tape-outs, we're looking at potentially about $1 million in the March quarter.

Okay.

So, we're still looking for that in the March quarter.

Any other major tape-outs that we're expecting the next four quarters or --?

That's a better question for Lee-Lean.

I'm looking more in the current year.

No, no, a single year.

Yes.

For the coming year, we -- one major tape-out is just a confirmation.

It's R&D related to the $1 million compound.

The other one, I think, will be focused mainly on the 65-nanometer tape-out, but those are pretty much all derivative product.

You will not charge us on recall, you will recharge us because of the [sole].

Yes, what Lee-Lean's referring to is that the charge this quarter, the $650,000 was our first 65-nanometer tape-out.

And our normal policy is that when we move to a new process technology, we expense that first tape-out to R&D expense, so we don't expect to benefit from the mast set.

But future tape-outs, given the experience we get on this device, will be charged to cost of goods sold over a year.

So, what Lee-Lean is saying is there won't be any -- we're not expecting any R&D tape-outs next fiscal year.

So, should that weigh on gross margins, maybe, in the first half of the calendar 2010?

Well, we have debt that is carry off or forever.

Yes.

So, it's a continued -- I mean, we are phasing out the previous cost of goods sold, and then we incurred the new one.

So --

Okay, so it's not a one-time charge.

It's something that gets out --

No, no, it occurred in the cost of goods sold number that you're currently seeing.

Okay.

SigmaQuad run rate.

What are your expectations for that to be, maybe, through calendar 2010 and maybe exiting calendar 2010?

I mean, should we just expect that to kind of slowly ramp up to around 20% and stick there, or should we expect it to continue to ramp up as a percent of revenue?

So certainly, that 20% is the correct number.

That's the number we're looking at short-term.

If you look beyond that, it's -- it really depends on the timing of how quickly we can ramp the LLD RAM, because that should be immediate revenue once the product's ready.

So -- but going back, certainly, short-term, the SigmaQuad should ramp up to about 20% of revenues.

Would you expect that in the December quarter or at least by the end of the March quarter?

I -- it's certainly possible for this quarter.

Okay.

LLD RAM revenues?

When should we really be expecting those?

Yes, and so we're going to have the tape-out in the first quarter, and it's new technology, new process, new family, new everything, so my guess is I don't anticipate to have too much, if any, revenues in calendar 2010.

But it will certainly be a 2011 product -- revenue product for us.

Okay.

And just kind of in general, thinking about the calendar 2010 environment, we've been hearing China CapEx equipment could be down a significant amount next year.

What are your thoughts on kind of what the China CapEx number looks like for calendar 2010, and how does that look linearly?

You're talking about China, specifically, or --?

Yes.

Okay.

Yes, spending within China, not necessarily China OEMs.

Well, I think that the Huawei is a traditional strong for us, and I think we have a very good market share there, and they are continuing to grow.

So, we are expecting -- I mean, continued success in China.

I mean, Huawei, GD, the Taiwan customer there, But Huawei, I mean, they are basically, they are still going.

Okay, so you don't think that China CapEx, specifically within the country, could be down 15%, 20% next year?

No, no, no, no.

We are not seeing.

No.

Okay.

And what about in North America?

What are you seeing in general?

Is there any trends that you guys can talk about there?

And can you talk about on a dollar of CapEx versus dollar of SRAM basis?

So, for a base station, are you -- do -- for every dollar that's spent on a base station, do you get more revenue than something like in back haul or something that sits a little closer to the edge?

Is there any color that you can give on either of those two?

Well, we certainly don't break it down that way, unfortunately, but certainly, if you look at -- we'll use Cisco as a good example just because they have so many different business units.

We certainly have design wins and revenues in several business units.

In fact, if I look at this past quarter, we were in -- we had revenue from 11 different business units.

So certainly, if one segment of their business is up or down, it doesn't necessarily mean that it's going to affect us, because again, we're spread out pretty well.

But we haven't done the analysis that you've talked about -- $1.00 of this equals $1.00 of that.

We haven't broken it down into those types of levels.

In general, though, we do see, with some of the design wins we have in North America with our Tier 1 networking folks, we certainly are looking for some growth going into 2010.

Okay.

And then, just kind of lastly, just trying to get my head around exactly what's going on with the Sony business.

I guess I'd thought previously you had talked about $1 million in the December quarter.

So now, you're talking about a little over $2 million.

Is -- when does that ramp down?

I mean, should we just expect it to step up to, maybe, $2.5 million and then step back down to $2 million immediately the quarter after that?

Or should it step down, maybe, down to $1.5 million and then ramp back up to the $2 million in the second half of calendar 2010, like you talked about previously?

And then, can you talk at all about the gross margin impact of Sony, if there was anything that was more than just a couple 10 of basis points?

So, we certainly didn't expect the Sony revenues to climb this quickly.

That's for sure.

As I mentioned, there was a bit of a bubble buildup that is occurring this quarter.

Again, it's a bit of a perfect storm where the demand increased while the lead times had gone out.

So, there certainly is additional demand, but there is some delinquencies from this past quarter that are, as I mentioned, spilled into this quarter.

That, along with one of the families from the Sony acquisition we anticipated to have zero revenue this quarter.

It was a device where apparently there was some inventory in the channel, and the Sony device was not fully qualified yet.

While, with that said, that inventory in the channel is gone, and we actually received qualification sooner than we expected, so we are going to be seeing some revenues in this December quarter on that particular product that we were not anticipating.

Okay.

And, I mean, should we see that -- I mean, is that a major -- you said above $2 million.

I mean, is it like $2.5 million, $3 million, or is it more like $100,000 or $200,000 on top, and does that, then, really ramp down sharply in the March quarter?

Yes, so, $2.5 million is probably a good number.

$3 million, I think, is unobtainable, certainly.

As far as what happens going back, I think that $2 million to $2.5 million a quarter is probably a safe number.

Okay.

So, it's not a sharp falloff in the March quarter?

No, because the device that has kind of the bubble build out will come down, but the other family I just mentioned that we're seeing revenue this December quarter we hadn't anticipated -- that family should start ramping up, so it'll offset it.

So, I think it'll look a fair amount like a wash.

Okay, and then, any commentary on the gross margin impacted --?

Yes, I can talk about gross margin.

Initially, the margins on these products are a little depressed because of the fair value accounting.

Right.

It doesn't go on the books at manufacturing cost.

It basically goes on the books at a fair value determined based on who provided the G&A services, who provided the R&D, and then you allocate whatever profits remain to cost of goods sold and the product costs in those other areas.

So, the product on the books, starting off for the first couple quarters is going to be at a significantly higher cost of goods sold value than what we expect to see down the road.

But in terms of the gross margin, we'll probably be up a couple points or so, probably six to nine months from now.

There are some costs hitting cost of goods sold line and impacting gross margin as a result of the acquisition.

We've got the equipment that's being depreciated, and part of the acquisition was acquisition of a couple mast sets that are required for these parts, and those had fair value.

And that was about $600,000 that's being amortized over a year at a cost of goods sold.

Okay, so net-net, if I was looking at actual underlying gross margin for the business, the overall GSI, including the Sony, it would be 43%, 44% for the December quarter, but just some accounting issues.

Because of GAAP accounting, it's going to be depressed, and that's going to slowly go away over the next --

Yes, I'd say that's a reasonable description.

Okay.

I think we'll be hit by a couple percent or so for a couple quarters here.

Okay.

Thank you, guys, very much.

But don't forget that's an added revenue, so net-net, we're ahead.

Right.

Understand that, please.

Right.

It's -- did you guys ever talk about accretion to the bottom line?

Expectations on a full year basis?

No, we haven't given any guidance on full year, just on the current quarter.

Is there any kind of thing that you could give us -- I mean, should we think about $2 million a quarter, 40%-ish gross margin, and 10%-ish OpEx, or is the OpEx going to be a little higher?

The OpEx are already in our operating expense forecast we provided you.

Okay.

Remember when we gave guidance for this quarter, it included most of the expenses, other than a couple hundred thousand more than we're anticipating because of these late hires.

Okay.

Most of the operating expenses are all there, so I guess the fair way to look at it is 40% of sales is the margin that we'd be deriving and a minor rep commission associated with that, usually 3% or 4%.

Okay.

Thank you, guys, very much.

Congratulations on a great quarter.

Thank you.

(Operator Instructions).

Your next question comes from the line of Morgan Frank with Manchester Management.

Hey, guys.

Good quarter.

One question -- sorry if it has been covered.

I got -- I came in a little bit late.

Why is the interest in other income number up so much this quarter?

Yes, that's part of the Sony acquisition.

We've already talked a bit about it, but the fair value accounting leads to that.

We had a bark in gain, net of tax.

It's recorded as $1.1 million on that line.

Okay.

So, $1.1 million of that is just a one-time gain.

Yes.

Great.

That's all I needed.

Thanks so much.

Thank you.

And there are no further questions at this time.

Okay.

Thank you all for joining us.

We look forward to speaking with you in January when we will report our third quarter fiscal 2010 results.

Thank you.

This does conclude today's conference call.

You may now disconnect.