GSI Technology Inc (GSIT) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to GSI Technology's Fiscal 2010 Third 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've also been asked to advise you that this conference is being recorded today, February 4, 2010, 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 you can see in today's announcement of our third quarter fiscal 2010 results, GSI continues to generate solid financial results in what remains a challenging environment.

The environment, however, is getting better, both for GSI and for the country as a whole, as evidenced by the fact that GDP grew at an annualized rate of better than 5% in the last quarter.

Although we do not expect growth to continue at these rates throughout calendar 2010, we are optimistic that we will remain solidly profitable for the year in full.

In terms of both revenues and gross margin, we did slightly better than we had anticipated three months ago.

Net revenue of $17.4 million, which was about the high end of our earlier estimate of $15.1 million to $15.9 million, was the result of strong demand of a tier one customer.

The Sony acquisition completed last summer contributed approximately $1.9 million to third quarter net revenue, compared to $349,000 in the second quarter, with little negative effect on gross margin.

In fact, at 43.0% compared to 44.4% in the prior quarter, gross margin was about two percentage points higher than we had anticipated.

We continue to believe that the acquisition can achieve a loan rate of approximately $2 million in incremental quality net revenues.

Gross margin benefited from continued strength in sales of SigmaQuad product, which accounted for 20.4% of shipments, compared to 17.1% in the prior quarter.

One negative development in the quarter was an unanticipated increase in SG&A, which was $541,000 higher than in the prior quarter.

However, $217,000 of the increase was related to the Sony acquisition and is not expected to recur in future quarters.

The increase in SG&A was largely offset by a $393,000 decrease in R&D, with the result that operating expenses were essentially unchanged at $5.1 million compared to $5 million in the second quarter.

With net revenues at $17.4 million, compared to $14.7 million in the second quarter, we enjoyed the significant increase in operating margin to 13.5% from 10.3% in the prior quarter.

Net income was $2.0 million, compared to $2.4 million in the prior quarter, as we pointed out in today's release.

However, the second quarter benefit from a gain of $1.1 million in the income is attributed to the Sony acquisition.

There was no comparable gain in third quarter.

Inventory at December 31 was $15.8 million, which was unchanged from September 30th.

We believe this will be adequate to meet anticipated fourth quarter shipment.

In last quarter's conference call, we [set a] growing consensus that the global economy was no longer contracted.

The positive GDP number for the December quarter suggests that the US economy as a whole has exited the recession and supports our belief that GSI will see further growth in the March quarter.

With that understood, our current expectation is that fourth quarter revenue will be in the range of $18.3 million to $19.1 million.

Gross margin is expected to be similar to the third quarter.

I will now turn the call over to Doug.

Thank you, Lee-Lean.

The December quarter was our 25th consecutive quarter of profitability with net income of $2.0 million or $0.07 per diluted share on net revenues of $17.4 million.

In the third quarter of fiscal 2009, we earned $1.5 million or $0.05 per diluted share on net revenues of $14 million.

Sequentially, third quarter fiscal 2010 net revenues increased by $2.8 million or 18.8% from $14.7 million in the second quarter.

Net income decreased by $321,000 from $2.4 million in the prior quarter.

The prior quarter benefited from a gain of $1.1 million in other income attributable to the Sony acquisition.

There is no comparable gain in the third quarter.

The Sony acquisition completed last summer contributed approximately $1.9 million to third quarter net revenues compared to $349,000 in the second quarter.

Third quarter direct and indirect sales of Cisco systems were $6.7 million or 38.4% of net revenues, compared to $4.8 million or 32.6% of net revenues in the prior quarter and $3.6 million or 25.7% of net revenues in the third quarter of fiscal 2009.

Sales to Huawei were $1.6 million or 9.2% of net revenues, compared to $1.7 million or 11.7% of net revenues in the second quarter.

Military defense sales were 11.2% of shipments, compared to 14.8% of shipments in the prior quarter.

For the nine months ended December 31, 2009, we reported net income of $6.6 million or $0.24 per diluted share on net revenues of $46.3 million compared to net income of $8.1 million or $0.28 per diluted share on net revenues of $48.5 million for the nine months ended December 31, 2008.

Gross margin and operating margin were 43% and 13.5% respectively in the third quarter of fiscal 2010, compared to 44.4% and 10.3% respectively in the prior quarter.

In the third quarter fiscal 2009 gross margin and operating margin were 42.7% and 15.1% respectively.

Third quarter 2010 gross margin reflects approximately $150,000 in cost of goods sold related to masks valued at approximately $600,000 that were acquired in the Sony acquisition and are being amortized over four quarters.

Total third quarter pre-tax stock-based compensation expense was $411,000, compared to $383,000 in the prior quarter and $348,000 in the comparable quarter a year ago.

We currently expect our effective tax rate to be 21% in fiscal 2010.

During the third quarter, we acquired a 44,277 square foot office building and associated grounds at 1213 Elko Drive in Sunnyvale, California at an aggregate purchase price of $4.6 million.

We intend to use the property as our corporate headquarters.

The facility will house US development and production operations.

The improvements to the building will be approximately $1.2 million over the next two quarters with an expected move-in date of mid-May 2010.

Net accounts receivable have increased to $9.4 million, up from $7.7 million at September 30, 2009.

DSO is 52 days compared to 51 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 September quarter.

On December 31, 2009, we had $40.8 million in cash, cash equivalents, and short-term investments, $21.2 million in long-term investments, $58.5 million in working capital, no debt, and stockholders' equity of $93.4 million.

We held no auction rate securities at December 31, 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, the Company may repurchase shares from time to time within open market or in private transactions.

The specific timing and amount of repurchases will be dependent on market conditions, securities lost, 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 an average cost of $2.80 per share.

There were no repurchases in the December quarter.

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

(Operator instructions).

The first question will come from Edwin Mok of Needham & Company.

Hi.

Thanks for taking my question.

Just a housekeeping question.

What was your accounts payable for the quarter at the end of the quarter and also regarding the March quarter, you guys talked about having about $1 million mask costs impacting your R&D.

Do we still expect that in the March quarter?

Sure.

I can answer both of those.

Accounts payable at the end of December was $5.8 million.

It was up a bit from the prior quarter.

Basically, it reflects additional wafer purchases during the quarter or purchases at a higher level and the manufacturing related items increasing burning capacity, burning-board sockets, and so on for increasing our test capacity.

In terms of the R&D tape-outs, there will be a couple of taped-outs occurring toward the latter part of this quarter.

But we currently don't expect to receive those masks until the June quarter.

So right now I'm not expecting any tape-out expense for R&D tape-outs in the current quarter.

I see.

So in June quarter, it's when that $1 million will hit.

Okay.

That was helpful.

And then, as I back out the one-time item on the SG&A, it still went up a bit sequentially.

Can I ask what drove that?

Is it just because of better sales, related spending, or other items that --?

Yes.

It's a little bit of labor costs, a little bit of rep commissions.

But the biggest items would be -- there are certain items that we agreed with Sony to share as a result of the acquisition, primarily involving an audit of their financials, to carve out financials for a two-year period.

And Sony received certain quotes for that.

But the effort involved in doing that work was significantly higher and more costly than what they were expecting and what we were told to believe.

So that's part of it.

And there were $270,000 in this quarter related to that.

And additionally, at the latter part of the year our audit fees are higher in this month or this quarter than prior quarters.

It's really a matter of timing of when they submit the bills versus what our earlier expectations were.

Okay.

That's fair.

If I look at your count-off run rate, you have been -- your operating expense has been around $5 million over the last two quarters.

Now, granted, part of that was due to the Sony thing.

But [even right] back, that's always maybe at the high $4 million range versus historically you guys are closer to the high $3 million range.

Is that how we should look at your OpEx going forward?

Yes.

Right now, I would expect operating expenses for the March quarter to be similar to this quarter, down very slightly.

Two reasons for the increase.

We've got two new design groups.

Our LLDRAM Design Group is fully on board.

And also not part of the Sony acquisition, but we did hire approximately 10 people that were ex-Sony employees.

And we have a design effort going on with them at this time.

I see.

I see.

So, it sounds like that's a (inaudible).

Yes.

I would expect that to be between $4.5 million and $5 million a quarter at this point.

You mentioned your tax rate is going to be 21% this year.

Any kind of idea what kind of tax rate we should expect for the coming year?

You know, we haven't put anything together for next year.

It's really dependent on where the revenues are.

We've been seeing an increasing level of revenues being recorded offshore at very low tax rates.

And those revenues have been very profitable.

And that's the reason for the decline in the tax rate as we go throughout the year.

At the mid-point in the year, we were expecting about a 23% tax rate.

But it looks like this year it should be 21%.

I see.

Okay.

Great.

That was helpful.

Okay.

So, moving on to the product or the business side, I noticed that military is down a little bit.

I was wondering -- I understand that business is typically very lumpy.

I was wondering if you guys have any visibility in that market going into calendar year 2010 you can share with us.

Hi, Edwin.

This is Didier.

The military results actually came back better than we had anticipated.

So if you look at it on a dollarized basis, it dropped from $2.3 million to just over $2.0 million.

And two of our largest military customers attributed very little to this past December quarter.

One of them is a very lumpy contract-based business for Homeland Security.

And there was zero billings this past quarter.

And if you look over the last few quarters, our second -- I mean actually our largest military customer went to a very small number because the program that they are working on is in redesign.

The good news is that the redesign will not affect the memory used on the board.

The bad news is is during that redesign the orders have essentially gone to zero.

So, the fact that we lost our two largest military guys and we were able to keep the number up was actually a positive sign for us.

Great.

That was helpful.

Now, if I look at your Sony business, you guys talked about $2 million per quarter run rate.

But you've already come close to there.

Are you guys implying there's at very least limited growth in the near-term until you do more work?

Or how do I look at that?

With Sony, there's really two product families that we got within the acquisition.

And one of them is SigmaRAM.

The other one is CSRAM, which is a part that is specific for Cisco.

The majority of the revenues you're seeing to date from the Sony business is the SigmaRAM.

We have very little of the CSRAM in there and that's because we're still in the process of qualification.

There's three boards that use that device or that actually to that family, and we are qualified on two.

And we're still in process of qualification on the third board.

And so once that's finished, we'll be able to start getting some of that revenue in sales.

Certainly there's some possibility that we can exceed that $2 million a quarter once that happens.

But with that said, the SigmaRAM over time is going to be ramping -- actually ramping down, but it certainly will become less of a revenue driver for us.

Great, and then just quickly, on the December quarter you came in pretty strong, better than what you guys had already guided.

Was that due to increased volume?

Or was it due to increased mixed to high-end, which obviously drive higher ASP?

How do I look at that?

Both.

Both?

Yes.

So both volume as well as mix have improved?

That's correct.

So our corporate ASP went up in the December quarter versus the September quarter.

And the volume was slightly up, as well.

Great.

And then there's Cisco.

You guys had a pretty good quarter.

And obviously Cisco is doing pretty well themselves.

But how do you look at that?

Do you think that you are actually gaining share against your competitor?

Or do you think just the end market itself is very strong?

So, it's a combination.

Obviously, we went up with Cisco with the acquisition of the Sony product, or products, I should say.

So, certainly that was a contributing factor.

But, with that said, we are certainly gaining market share, specifically in the SigmaQuad arena.

So, we talked about that in the past that we were in the process of getting qualifications for second sourcing, and that it would continue to contribute to the bottom line with Cisco revenues.

And we're seeing that.

And if you recall, a year ago, Edwin, you had asked what type of percent we thought SigmaQuad could be of our revenues going out at the end of calendar 2009.

And the number we gave you was 20%, and that's where we're at.

So, we are anticipating that number to continue to grow as a percentage of our revenues.

Great.

That's all I have.

Thanks very much.

Thanks, Edwin.

The next question will come from Mike Crawford of B.

Riley & Company.

Hi.

This is Sarkis stepping in for Mike.

Can you guys hear me well?

Sure.

We can hear you.

Great.

First, what kind of traction are you guys experiencing in your newest SRAM product?

So we're talking -- so there's -- I'm assuming you are talking either about the SigmaQuad-III or the 144 meg SigmaQuad.

So, we'll talk with the SigmaQuad-III.

So, the SigmaQuad-III, which we actually announced in a press release in the early December quarter, we have a significant design win at one of our top customers.

It's a new platform for this customer.

And they are in the process of bringing the board up.

So we've -- we gave them samples.

And actually in the late September quarter, their board had some issues a little bit because, again, they're bringing it up.

And our part was not bug-free, either.

So we're going through that and getting all the bugs out of the device.

And so we anticipate that design win to start ramping a little bit later this year, but certainly in calendar 2011.

The second family, the 144 meg SigmaQuad, which we announced earlier this month -- or I'm sorry, earlier January.

Is a family we've just started sampling.

So, we actually sampled the devices in mid-January to a handful of customers.

And we have some more devices coming through now that we'll be continuing sampling.

And so these are -- this is not a second source scenario.

What I mean by that is the 144 meg, the customers that we've sampled have never seen a part from anybody else.

There's one other supplier out there who's claimed they have the part.

But no customer has actually seen a device from this particular company.

So, as far as we're concerned, we're the first to market with the device.

And so we're developing the market.

So, we probably won't start seeing revenues from that family until early or second half of this year.

Okay.

Great.

And I guess, finally, who do you think is taking share in that SRAM market as far as the new products are concerned?

I'm sorry.

I'm not sure I understand the question.

So, I know the gentleman earlier talked about market share.

I guess my question alludes to that, as well.

Who do you think is taking the share in the SRAM market?

So, certainly we're gaining market share.

That's a certainty.

I would say the company right now that's losing the market share is Samsung.

And that's certainly a reflection of their decreased focus on this product family.

But I would say that GSI is certainly one of the companies that's obtaining the market share that's being left behind by Samsung.

Is there any way you can quantify that, perhaps?

Is there any way that we can quantify that for you?

I mean, again, you would have to look at Gartner data.

I guess it's probably the best source to see what the size of the SRAM market is and what the growth of that market is compared to our growth.

There's really no other way to substantiate it.

All right.

Thank you very much for your time.

Thank you.

Your next question will come from Tristan Gerra of Robert W.

Baird.

Hi, guys.

This is Scott Hirleman calling in for Tristan.

Thanks for taking our questions.

One thing I was trying to get at is the core business of the Cisco business.

I know it's an apples to oranges numbers with the $1.9 million of the Sony business.

Was that 100% Cisco, the Sony business?

And what would you say that the core underlying GSI business was at Cisco in the quarter?

So, the two price families that we received in the acquisition from Sony are for Cisco.

That's correct.

So --

Okay.

So, they're 100% Cisco?

That's correct.

Okay.

So that's not near -- I have to admit I was a little bit worried to see that number up that huge.

Yes.

So, yes, right now the devices that we got from Sony or received from Sony are strictly for Cisco.

With that said, if you look -- and certainly that portion -- the Sony business, for this past December quarter was obviously a large portion of our upside for the December quarter, the growth from the September to the December quarter.

However, if you look at the guidance that we've given for this March quarter that we're in now, if you look across the board the upside, really, is not coming significantly from the Sony business.

We have growth in a lot of our core products, specifically our 16 meg Synchronous and our 36 meg and 72 meg SigmaQuad are three families that are going to be growing in this March quarter.

And that's completely independent of the Sony products.

I guess another way to put in perspective is of the $2.8 million in growth and revenue for the quarter, approximately $1.5 million or $1.6 million of that was from the Sony products.

Right.

Because there was almost $350,000 or so in the prior quarter.

So there is a lot of activity out there regardless of those new products.

Okay.

But I just wanted to make sure that the Cisco business wasn't something that was going unsustainably high.

No.

Do you have any expectations for what that could be next quarter?

I mean, is it going to be pretty similar next quarter?

Is it going to be up in line with the general business?

We think that the Cisco business will be up.

And we think it will be up more for non Sony-related product.

Is it going to be up more than your overall revenue?

Is it going to be up more than our overall revenue?

Hard to say.

I think it will be -- I don't know.

That's a good question.

It might be close.

Okay.

And there's been a lot of talk out there, especially when you looked at what Cisco reported last night from an inventory standpoint, about inventory being out in the channel.

How comfortable are you guys with that right now?

And then how also comfortable are you with supply chain tightness from your side and ability to get wafers and wafer pricing and testing and all that?

I think that we do (inaudible) on the wafer time, especially in (inaudible).

But the guidance we give out, we are fully prepared for the upside.

So, we are expecting to receive a lot of wafers in the quarter for the (inaudible).

So, for us is everything basically it's already come.

Okay.

And then any commentary on the inventory in the channel out there?

So, certainly by the little of expediting we're doing right now, I don't think there's much inventory out there.

Certainly, as Lee-Lean mentioned, between the lead time push-outs with the material, that, along with the backlog coverage we have, we're in a position we haven't been in in quite some time, which is we're essentially booked for the quarter already.

And so in that respect, I think we're in pretty solid shape.

And what's usual turns versus backlog coverage?

So, generally, we have about 40% that we're turning for the quarter.

Okay.

That is pretty good visibility.

And, you know, we've been hearing about wafer price increases.

And I know you said that you're expecting to be able to get wafers.

But are those wafers going to be more expensive this year than they were last?

Or should we expect normal wafer pricing?

No.

Actually, we have wafer price reduction in this quarter compared to the last quarter.

So, we don't see that.

Okay.

And then one more, and then I'll go away.

You guys have been doing pretty well on the gross margin side of the business.

I mean, is there any update to go longer-term model?

What do you think you guys are driving towards?

If I recall, it was more the 40% to 41% percentage type gross margin is what you guys were talking about for more longer-term.

What -- can you give us a quick update on that?

Well, right now wafers are getting tighter.

But we're not really seeing any increase in selling prices at this point.

We generally expect to be able to offset price erosion with reduced costs and better yields.

So, I wouldn't see or I'm not expecting any change in the gross margin profile at this point.

I still would think that we would be in the range that we've been at in the last few quarters.

Okay.

So, we should think about it as more in the 43% range going forward than --?

Yes.

I think that's what we're guiding this quarter.

And that's obviously our intent to do as good as possible.

And right now obviously we haven't put a plan together for the next fiscal year.

But there's nothing that we're aware of that should say that we shouldn't expect to be able to do that.

Okay.

And then just one more quick one.

And that would be is there any one-time impacts or one-time major ramps that we should expect in the next couple of quarters on the revenue side?

Is there any major ramps, any customers that we should watch out for?

Or is it going to be gradual layering like we have been seeing?

Mostly gradual.

With that said, there is a significant design win.

It's actually -- it started off as a second sourcing.

And it's turning into we should actually obtain the majority of the revenue.

But it will still be gradual.

Some of the customers would like us to step function the revenue.

But we won't be able to just because of material limitations.

So, it will fold into that gradual increase as we have the material to be able to ship to this customer.

And that's the SigmaQuad-III part?

No.

It's the SigmaQuad-II part.

Okay.

It's our part that is already in production and in volume today.

Okay.

Thank you guys very much.

And congratulations on another good quarter.

Thank you.

Thank you.

(Operator Instructions).

And we do have a follow-up question from Edwin Mok of Needham & Company.

Great.

Thanks for taking the follow-up.

The first question, Didier, I just wanted to clarify that.

You said that historically you guys have around 40% of your business being turns.

But you are fully booked this quarter already?

Yes.

Does that mean that you have no turn business this quarter?

No.

I guess what we're trying to say is that --

There's no excess wafers.

Right, yes.

So, bottom line is if you look at our business historically we have about a third to 40% is already on backlog.

We have Cisco's business, which, of course, is consigned so it's not dollarized.

But we have it identified.

And that runs a little, call it anywhere between 30% and 35%.

And so we're turning about a third of our business.

I said 40%.

It might be a third where it's not actually on backlog.

I mean, we certainly know where we think it's coming from.

But it's not physically on backlog, and we don't have the orders yet.

This time around, certainly we have plenty of backlog in place.

And I think we're going to be more material-limited than we are anything else in our growth at this point.

You guys have a good sized inventory on your volume sheet.

Can you use that inventory and basically sell the inventory to capture some of that business?

Absolutely.

But it's -- we do have good sized inventory, but it's not a quarter's worth of inventory.

I see.

Okay.

That's fair.

Doug, just a quick question on this.

So I noticed on your gross margin, $150,000 came from this -- basically you have an inventory professional related to the Sony acquisition.

And it says on the press release that will last for four quarters.

Is this quarter the first quarter?

Or was the last quarter the first quarter?

Just, if you could, clarify that.

We've got four months in there already.

You have four months of it?

Okay.

Great.

That was helpful.

Yes.

$150,000 per quarter forma that's already expect -- already amortized.

Right.

And that is on your numbers, right?

So, if I backed that out, that's roughly 1% potential improvement on gross margin if you back that out, basically, right?

But that mask cost will be there for another two quarters plus.

Yes because basically it's for one year, right?

Right.

Great.

That was helpful.

I think that's all I have.

Thank you.

Thank you, Edwin.

Thanks, Edwin.

I'm showing no further questions at this time.

Thank you all for joining us.

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

Ladies and gentlemen, thank you for participating in today's conference call.

You may now disconnect.