GSI Technology Inc (GSIT) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to GSI Technology's Fiscal 2010 Fourth Quarter and Year End Conference Call.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

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 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, May 6th, 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.

Fiscal 2010 ended on a firmly positive note as we reported second best quarter in our history with net income of $3.8 million of net revenues of $21.2 million.

Gross margin of 43.2% was well within our target range and operating margin of 20.6% reflects slightly lower SG&A, as well as the leverage that comes with higher net revenues.

For the year, gross margin was 43.3% and operating margin was 15.7%.

Fourth quarter net income was driven by a combination of slightly higher ASPs due to a higher density product mix and a significant higher volume.

The increase in volume was attributable to two factors in particular.

First is the continuing strength in our core products, below the 40Mb of 36Mb and 72Mb SigmaQuad SRAMS.

In fact, in the fourth quarter, SigmaQuad products grew significantly as a percentage of production lines to 33.4% from 20.4% in the third quarter.

Not included here is our recently launched 144Mb SigmaQuad-II series which has been assembling since their introduction in January.

All those that have been successfully received, this is essentially a new market and we do not expect them to make measurable contributions to revenues until late calendar 2010 at earliest.

Also not included are any sales of our SigmaQuad-III series of products along since last November.

We can report, however, a major design win at a Tier 1 OEM with other wins on the horizon.

Here again, however, there will be no significant near-term contributions to net revenues.

The second notable factor adding to fourth quarter volume was higher than expected sales of products, primarily Sigma and that came with our acquisition of Sony's SRAM business last summer.

Together, sales of the Sigma RAMs and the CSRAMS push us strategically designed to Cisco to specifications at $3.1 million to fourth quarter sales.

We have previously said that we are fully integrated.

We expect that Sony acquisition to contribute an incremental $2 million also to quarterly net revenues.

Last quarter's sales of $3.1 million, may I suggest that this figure is somewhat low, but we should caution against reading too much into the fourth quarter number.

Much will depend on the future of Sigma RAM sales and the anticipated ramp in deliveries of CSRAMS, which today are only a small percentage of today's -- of total deliveries.

All told, sales with Cisco, including the Sony contribution, were $8.7 million or 41.1% of net revenues in the fourth quarter.

We are fortunate that the networking and telecom sectors, which account for roughly three quarters of our business, are doing well.

In this environment, it is apparent that we are beneficiaries of Samsung's low profile investment markets.

Moreover, all of this is difficult to quantify.

We have no doubt that we are gaining market share as well.

We are clearly beneficiaries of a growing economy.

Although the rate of growth appears to have slowed in the March quarter, coming on the heels of 5.6% annualized growth in GDP in the fourth quarter of calendar 2009, we learned last week that the government's initial estimate is that first quarter GDP grew at an annualized rate of just 3.2%.

Although that is respectable, in its own right, it appears to have been slightly below Street expectations.

It may have tempered some optimism recently evident in the market.

This brings me to our outlook for the current quarter.

Assuming that in the June quarter the economy as a whole does no worse than it did in the March quarter, our current expectation is that first quarter fiscal 2011 net revenue will be in the range of $23.1 million to $23.9 million.

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

I will now turn the call over to Douglas.

Thank you, Lee-Lean.

The March quarter was our 26th consecutive quarter of profitability with net income of $3.8 million or $0.14 per diluted share.

Our net revenues were $21.2 million.

In the comparable period a year ago, we earned $1.2 million or $0.04 per diluted share.

Our net revenues were $13.6 million and $2.0 million or $0.07 per diluted share while net revenues were $17.4 million in the prior quarter.

The Sony acquisition completed last summer contributed approximately $3.1 million to the fourth quarter net revenues compared to $1.9 million in the third quarter and $349,000 in the second quarter.

Fourth quarter direct and indirect sales to Cisco Systems were $8.7 million or 41.1% of net revenues, compared to $6.7 million or 38.4% from net revenues in the prior quarter and $2.5 million or 18.1% of net revenues in the fourth quarter of fiscal 2009.

Sales to Huawei were $2 million or 9.5% of net revenues compared to $1.6 million or 9.3% of net revenues in the third quarter.

Military defense sales were 6.7% for shipments compared to 11.2% of shipments in the prior quarter.

For the full fiscal year, our net revenues were $67.6 million and net income was $10.4 million or $0.38 per diluted share, compared to net revenues of $62.1 million and net income of $9.3 million or $0.33 per diluted share for the fiscal year ended March 31st, 2009.

Fiscal 2010 benefited from a gain of $1.1 million in other income attributable to our acquisition of substantially all of the assets of Sony's Electronic SRAM product line.

There was no such gain in fiscal 2009.

Gross margin and operating margin both increased sequentially in year-over-year.

Gross margin and operating margin were respectively 43.2% and 20.6% in the fourth quarter of fiscal 2010, compared to 43% and 13.5% in the third quarter and 37% and 9.7% in the fourth quarter of fiscal 2009.

It was the case in the prior quarter approximately $150,000 in fourth quarter cost of goods sold was related to mass valued approximately $600,000 that were acquired in the Sony acquisition and are being amortized over four quarters.

Fourth quarter research and development expenses were $2.4 million compared to $2.3 million in the third quarter and $1.5 million in the comparable period a year ago.

An increase in research and development expenses compared to the year ago quarter was related to the increases in staffing levels for our low latency DRAM project and various high speed SRAM projects.

Selling, general and administrative expenses were $2.4 million or 11.2% of net revenues, compared to $2.8 million or 16.1% of net revenues in the prior quarter and $2.3 million or 16.7% of net revenues from the fourth quarter of fiscal 2009.

Fiscal 2010 SG&A expenses included professional fees and other expenses related to the Sony acquisition minus $94,000 in the fourth quarter or $533,000 for the fiscal year, most of which were incurred in the third quarter.

Total fourth quarter operating expenses of $4.8 million were $351,000 lower than in the third quarter and operating income was $4.4 million compared to $2.3 million.

On a sequential basis, pre-tax income increased by 77% to $4.5 million and net income increased to $3.8 million from $2 million in the third quarter.

Total fourth quarter pre-tax stock-based compensation expense was $395,000 compared to $411,000 in the third quarter and $342,000 in the comparable quarter a year ago.

Operating expenses are expected to be approximately $6.1 million in the first quarter and reflect mass expenses related to our high speed LL DRAM project and expenses associated with our move into our new facility in Sunnyvale that will occur during the quarter.

We currently expect our effective tax rate to be approximately 26.3% of fiscal 2011.

Net accounts receivable have decreased to $9.2 million, down from $9.4 million at December 31st, 2009.

DSO is 46 days compared to 52 days in the prior quarter.

At fiscal year end, our balance sheet was the strongest in the Company's history.

We ended the year with no debt, almost $69 million in cash, cash equivalents, short-term investments and long-term investments, $63 million in working capital and stockholder's equity of $99 million.

Operator, at this time, we'll 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 a good quarter.

Let me first start with housekeeping.

What was the accounts payable for the quarter and, sorry, I missed it.

I probably got the wrong number, but what was the Cisco revenue again?

Okay.

Accounts payable ended the quarter at $6.7 million.

That's up a bit from the prior quarter, but significantly up from a year ago.

That's primarily related to the fact that we're trying to build inventory levels as rapidly as we can.

We're buying all the wafers that we can get our hands on.

We've been putting more inventory in place, or at least trying to.

So, it reflects those wafer costs and also other manufacturing costs which are associated with manufacturing our products.

And Cisco revenues ended the quarter with $8.7 million.

That was up from $6.7 million in the third quarter.

Great.

That was helpful.

And then, one question I guess -- you guys talk about higher ASP on your product.

Is that the trend that you guys see on the marketplace, or is it just you guys specifically?

And what is driving the higher ASP?

The higher ASP is more of a mix issue, so it's not the ASPs are increasing per part.

It's just that we're moving to a higher density, higher ASP mix.

Okay.

That's helpful.

And then, how do you guys see the SRAM market right now in terms of competition?

I think one of your -- or actually, two of your peers has reported are suggesting that maybe less competition in this space.

Are you seeing something similar?

Yes.

That's correct.

So, certainly, I think it's clear that Samsung is certainly not as focused on this market as they have in the past.

They have been for many years the largest SRAM supplier market share wise, and I think that's in question if they're still the guy or if it's Cypress at this point.

But they certainly haven't introduced any new parts or -- and there is certainly nothing on the road map from what anybody can tell.

And also, on April 1st was the merger of ADC and Renesas, so at this point it's status go on their business, but at some point they're going to be merging product lines and so, it's not clear what's happening there.

But certainly, there is market share up from grabs right now.

Great.

One question I have is on the single quarter, actually just to clarify, that 33.4% of your revenue come in single quarter, that does not include the Sigma RAM, the [34], $1 million Sigma RAM revenue that you talked about, does it?

No, it does not.

It does not, right?

So, if I look at that, that's obviously a huge success on the Sigma RAM side, but is that replacing some of the socketed -- historically you guys are selling, more your traditional single SRAM product?

Because if I put that number in, then I would imagine the -- your other products would have a decline in quarter.

Is that correct?

So, in general, it's going into new systems.

Certainly, I had talked about a significant design win that I have been chasing for a few quarters now that was in the SigmaQuad arena, so that happened.

I believe I mentioned in the last call that the qual had finished in the December quarter and we actually received the orders in this part March quarter.

So, that was actually obtaining market share from competitors.

It wasn't actually replacing other product that we were selling to this particular customer.

But then, how do you explain why your x SigmaQuad revenue being down sequentially then?

SigmaQuad's not down.

No.

But your look at your revenue excluding SigmaQuad, is that down or up?

I think it is still up.

Yes, excluding SigmaQuad, still up.

Okay.

All right, then one last question and I'll pass on to someone else.

Just quickly, on the operating expense, how do we look at that trending in this year and I understand there are some one-time expenses that could come in, so maybe you can help us out on that.

Yes, okay.

In the June quarter, we're looking at tape-out, R&D tape-out for the LL DRAM.

I've got in $800,000 -- $750,000 to $800,000 for that.

And then in the September quarter, I've got a $350,000 tape-out that I'm expecting to see.

Other than those two items, I wouldn't expect R&D expenses to vary significantly from quarter to quarter.

And if you take out $750,000 from what we've indicated in terms of guidance for the current quarter, that should give you a pretty good understanding of where we see operating expenses going forward.

Great.

That was helpful.

Thank you.

Thanks, Edwin.

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

Baird.

Hi, guys.

This is Scott Hirleman calling in for Tristan.

Thanks for taking our questions.

You mentioned that you're getting all the wafers that you can get your hands on.

Can you talk a little bit about supply and what you're seeing from that standpoint, and wafer pricing and wafer -- wafer pricing and ability to actually get your hands on those wafers?

Okay, let me answer this one.

The wafer pricing we -- I think we are seeing very stable wafer pricing, okay, so the cost wise, we are still with the higher volume, we're still getting our costs down.

And in terms of wafer supply, we were seeing a lot of a design wind coming our way on the SigmaQuad last year, so we forecast a stiff wind in the SigmaQuad wafer supply this year, each year, late last year, this year.

So, in terms of wafer allocation, we've been allocated to the sequential ramp according to up our lead, so we don't really see too much wafer tightness from our point of view.

And there is no bottleneck in your supply chain, either, from packaging or anything like that?

No.

I think that the packing, similarly we do anticipate that late last year, we are going to have a stiff wind, so we prepared our tests in our global for in socket substrate and so on, so, no, no.

We -- actually, we are comfortable.

Okay.

And then, Didier, I think you mentioned that most of the ASP is driven by mix rather than like-for-like part pricing.

Can you talk about the like-for-like for part pricing environment right now?

We've been hearing that one of your competitors is actually out there raising prices, so can you kind of talk about what you're seeing on that front?

And is there an ability to raise prices or would you even want to do that?

Sure.

So, the pricing hasn't -- there hasn't been anything what I would consider crazy in the pricing arena at this point.

We're still seeing normal erosion on the very high density, high end devices, and then on the lower end, more legacy devices, it's flat.

The comment you made about a particular competitor raising prices, that would be probably on the very low legacy end which is business that GSI would have passed on in the first place.

So, we're not out there chasing the very low margin business to begin with.

So, in that respect, I don't see our ASPs on a like-for-like basis going up at this point.

Certainly, they're not going to go down.

They're going to be, certainly, stabilized.

But, with that said, on the very high end devices I still see a little bit of a normal erosion happening, even in this tight market.

Okay, thanks.

And then, I mean SigmaQuad has really ramped very, very strongly.

Should we see anything similar to that kind of ramp at any point this year?

Or has it -- do you see this being kind of a normal mix for when it becomes a percent of revenue, any thoughts about where that could be at the end of the calendar year or the end of fiscal 2011?

Right.

So, I think the majority of the ramp has happened.

I mean, it's already over 30% of our revenues.

And certainly, a year and a half ago, I think we were less than 10%, and so it's certainly had a nice ramp.

Over time, obviously that's going to become larger as some of the legacy low density synchronous parts and our continued reduction in the percentage of our asynchronous legacy line.

So, by default, it'll go up.

But I think the majority of the ramp has already happened.

So, you'll see a stabilization of somewhere in the 30% to 40% kind of range for this product family.

Okay.

And is there anything that you're doing where you're replacing any of the Sony parts with your own parts?

Or should we continue to see the Sony business grow at the same kind of rate as Cisco grows in general?

Right.

So, yes, so we will not be replacing those with ours.

One of them is a custom device that was made specifically for Cisco, so there's nothing to replace that.

And at this point, the Sigma RAM, there's no like technology that is looking to replace that anytime soon.

Okay.

And then, my last question, and then I'll go away.

Is -- there's a lot of concerns out there in general in semiconductors about China CapEx, about when that happens, if that falls off in the second half.

When would you expect that spend to really impact you for Phase IV ramp?

And any thoughts around magnitude and what it might look like after that business would tail off?

Can you repeat the question again?

Yes.

So, there's a lot of concern about Phase IV spend in China from the telecom --

I see.

-- guys, and how that impacts Q2 and Q3 revenues and then what that might look like from a spend perspective after that, especially in the Q4?

Well, I think we hear something actually that spending is going up.

The -- well, the China Mobile you probably heard is spend less and they are really wanting to get back into the market and increase their spending.

So, somehow we are hearing a little bit different of what you heard.

I mean, there is essentially three providers out there.

You have the China Mobile, the China Unicom and the China Telecom.

And in each one of the OEMs that we ship parts into will ship in to those folks, and we're entrenched with all the folks that are supporting that build out.

With that said, as Lee-Lean just mentioned, some of the rumors we're hearing is that China Mobile had lost some market share and now, they're really doubling their efforts to gain some of that market share back.

So, I think you're going to see them becoming a bit more aggressive in the near future.

So, you are starting to see the impact of that spend in the quarter?

Yes.

I mean, and some of the folks have been -- who I've been listening to have said that they've seen some weakness in that market, and I'm looking at my revenues and the numbers don't lie.

I don't see the weakness.

All right.

Thank you very much for the color and congrats on another great quarter, guys.

Thanks.

Your next question comes from the line of [Jeffery Myers], Wachovia Capital.

Great.

Thanks, guys.

So, just a little more color on OpEx going forward, so if I -- I guess put in the $750,000 for the tape-out next quarter, that kind of implies I guess $3.1 million for SG&A, which is up a lot from this quarter.

So, is that $3.1 million the right number to use going out beyond the June quarter or should that come back down?

That's a little bit higher than what I'm seeing.

I'm looking at more the $2.8 million range for SG&A, and that number obviously does very little bit from quarter to quarter.

We have audit fees that the timing of which is variable during -- throughout the year and we're fully SOX compliant now.

This is the first year that we've been required to have our auditors do a SOX testing and give an opinion on our internal controls.

So, that's in there.

And as revenues grow, we have to pay our outside reps.

But yes, I'm looking more in the $2.8 million range for the June quarter.

Okay.

Is that -- is -- should that come down a little bit going forward I guess from the SOX -- ?

Plus or minus, every quarter plus or minus a bit, but I think it's a reasonable number to target going forward.

All right, right.

Okay, all right, great.

Thanks, guys.

Your next question comes from the line of [Kenneth Miller] with Nokomis Capital.

Hi, guys.

Thanks for taking my question.

To follow up a little bit more on the operating expenses you just answered regarding SG&A, so it sounds like R&D will pick up to something like $3.2 million next quarter.

And is it safe to say it's going to tick down a little bit in September, but there's still some mass costs there and it'll tick down some more in the September quarter?

Or are you going to --?

It would go down a little bit in the September quarter versus the June quarter, and then it should go down a bit more in the December quarter.

We're not looking at doing any hiring in that area.

We've had a fairly strong design team for a number of years.

They're all still here.

And then, in the last two years, we've added a team for the LL DRAM project.

We've also brought over, not as part of the Sony deal, but we hired about eight or 10 ex-Sony employees prior to the completion of the Sony acquisition.

So, we have a fairly solid base at this point.

We're really not looking to add anything there.

And most of the work that's done is all done internally, so we don't see any external costs to pick up, other than every now and then, we have an R&D mass set.

But it sounds like you're kind of saying that 20.6% operating margin we saw this quarter is going to be the high point for awhile and we'd seen down, and maybe it'll take to the end of the next fiscal year to recover to that kind of 21% level?

I think it'll be a similar number.

Obviously, next quarter is going to be lower because of the R&D tape-out, but yes, we should be approaching numbers in that range.

Okay.

And on the LL DRAM, I know a lot of the R&D costs are related to that program.

Does this schedule still put you on track to possibly sampling the customers by the end of this calendar year and then starting to generate revenue from it in fiscal 2012?

That's correct.

Yes, so, we certainly -- the timeframe you mentioned, the end of the calendar year, that would be our second silicon which is what we figure we would need to be able to sample the broad customer base.

Okay.

Thanks, that's all my questions.

Thanks.

Your next question is a follow-up question from the line of Edwin Mok with Needham & Company.

Hi.

Thanks for taking my follow-up.

I have a question regarding gross margin.

Is your SigmaQuad product selling at above corporate average gross margin or more in line with corporate average now?

Well, it's a good margin product.

We sell it to a lot of people and we don't sell the parts to everyone at the same price, so yes.

But the margins do vary, but they're at or above our corporate average.

I see.

So, even though SigmaQuad percentage increased this quarter because of increased volume, that's why you guys are -- margins stay around flattish to last quarter?

Is that how we should look at that?

But don't forget the military business has come down again, which is very lumpy.

Good point.

Great, that was helpful.

Thank you.

Sure.

Your next question comes from the line of Robert Johnson with Johnson Investments.

A couple of questions for you -- looking ahead, and I know this is difficult, but looking ahead, say, five years, can you envision through organic growth reaching $200 million or $300 million in sales, or is that not feasible without acquisitions?

Well, I think that is definitely feasible.

I mean, we pretty much are approaching the halfway there and the area is even, but it's obvious a pretty sizable market I think.

Yes, five years, sure.

And similarly, looking ahead five years, can you envision -- obviously it's great to get 40% of your business from Cisco on one hand.

On the other hand, it's sort of a blessing and a curse to be that dependent upon one customer.

Can you foresee looking ahead, say five years, perhaps Cisco revenues, Cisco business declining substantially from 40% relative to other business you develop with other customers?

Right.

So, first of all, let's take a step back.

Part of the percentage with Cisco came from the Sony SRAM acquisition.

And so, the parts that we got from that acquisition go only to Cisco, so that -- so basically there wasn't an opportunity to grow the other customer base with the Sony product.

With that said, the new product line that we're going to be introducing within, which we've talked about, the LL DRAM, Cisco is a user of that, so they will certainly continue to be a large customer of ours.

With that said, we are getting some nice design wins at other customers.

Do I see Cisco being less than 20%?

No.

Do I see them going back into the 30% range?

Probably over time, I could see them going more to a third of our business as opposed to 40% of our business.

Thank you very much.

You're welcome.

Your next question is a follow-up question from the line of Tristan Gerra with Robert W.

Baird.

Hey, guys, two real quick questions for you.

One is tax rate for fiscal 2011, sorry if I missed that.

Yes.

Right now, I'm looking at 26.3% and there are several reasons for that.

We ended the year at a little over -- right around 18%.

But you recall that we had $1.1 million gain from the Sony acquisition.

That doesn't get taxed, so that adds about 3% this year.

Additionally, the R&D tax credit has not been approved or extended.

That's over 1.5% there.

Our forecasted taxable income in the US is at a level now where that raises the tax rate 1%, so a combination of things says that my tax rate probably will be higher in this current fiscal year that we're in now.

Okay.

And then, uses of cash, I know in the past, people kind of pressured you towards doing more on the buy back side, but this Sony acquisition has been very strong for you guys, obviously.

It's probably almost already paid for itself, or it will by the end of this calendar year.

What are your thoughts on uses of cash?

Are you going to try and look at doing more acquisitions or are you going to try and use that to more grow organically, just kind of the puts and takes of that?

Well, certainly at a minimum we'll use it to grow.

We need to go out and buy wafers.

Obviously, if something comes along that's attractive to us, it doesn't mean that we wouldn't do another acquisition.

That's always an opportunity that we have or something we could look forward to.

Currently, there's nothing on the table, but obviously that's something that could happen someday.

In terms of a buyback, we had a Board meeting yesterday and I mentioned to the Board that people are starting to ask questions again about changing our strategy on the buyback.

They're aware of the situation, but we haven't at this point made a decision to change any of our plans associated to that.

So for now, we should just kind of assume that most of that cash sits on the balance sheet until there is -- I mean you guys aren't actively looking for a lot of acquisitions out there, or anything like that?

You're going to use it to just kind of have as a strategic reserve if you need it?

Oh, that's a good way to look at it I think.

Okay.

Thank you very much.

At this time, there are no further questions.

Thank you for all -- all for joining us.

We look forward to speaking with you in July when we will report our first quarter fiscal 2011 results.

This concludes today's conference call.

You may now disconnect.