GSI Technology Inc (GSIT) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to GSI Technology's Fiscal 2011 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 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, July 29th, 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.

Welcome, everyone.

And thank you for joining us today.

When we last spoke in May and noted that in the fiscal year ended March 31st, 2010, GSI achieved revenue, net income of $57.6 million and $10.4 million, respectively.

With the understanding that there can be no assurance that fiscal 2011 will surpass or even match fiscal 2010, it is clearly off to a strong start.

For the quarter ended June 30th, we reported record quarterly net income of $4.4 million and record quarterly revenues of $22.9 million.

The Company, the record top and bottom line first quarter results were solid operating metrics.

Gross margin of 47.2% was among the highest ever and well above our target.

And the operating margin of 23.8% was well within our target range.

The trends of the quarter can be attributed to the number of factors.

Not least among them was the contribution of Sony (inaudible), which we acquired last August for approximately $7 million in cash.

First quarter revenues from the Sony product lines were unchanged from the prior quarter at $3.1 million.

Today, the Sony product has contributed over $8 million to the top line, which is to say we effectively bought the business at less than one times revenues.

Our partnership is strong.

And in fact, it is occasionally suggested that GSI is underleveraged.

It is true that at year end fiscal 2010, for example, we had a low debt and almost $70 million in liquid assets and long-term investments.

This was net of the Sony acquisition, net of $6 million to secure our own headquarter [duties] in Sunnyvale and net of a record $9 million spend on R&D during fiscal 2010.

Our lack of debt we believe puts GSI in an enviable position.

And if one argues that a lack of leverage is due to return on equity, we could not disagree.

But this is perhaps not to hide a (inaudible) stability and the piece of mind in what continues to be an uncertain global economy environment.

In any event and despite our conservative balance sheet, it should be clear that we are not opposed to stepping up to the plate and making a sizable investment in both capital and (inaudible), where we see the likelihood of a substantial return on debt investment.

With our commitment to the development of the first-generation SigmaQuad products, first [enabled] 2006, in the quarter just ended, SigmaQuad products accounted for 32.6% of gross shipments.

Or consider a more recent undertaking, namely our third-generation 72-megabit SigmaQuad/SigmaDDR 3E series, which we introduced last November, following more than two years in development.

In addition to offering exceptionally high data bandwidth and high signal integrity, they are capable of transaction rates that are as much as 50% faster than the published specifications of the nearest competitors.

Consider as well our forthcoming line of low-latency DRAMs.

This is our first venture outside the world of SRAM.

And as such, it is a (inaudible) for GSI.

While we see a great deal of potential in this endeavor, our optimism is based in part on the continuing growth of wireless networks and the internet and with it the lead among telecom and networking providers for ever greater bandwidth and ever faster transaction speed.

In terms of cost and performance, LLDRAMs are ideally suited to meet this demand.

Although considerable slower than SRAM, they're over four times the density of SRAM with three to four times the speed of a DRAM.

First silicon is expected within a month or two.

LLDRAMs are complex devices.

And both the FAB and the technology are new.

Accordingly, there's sure to be a number of bucks spent over year-to-year addressed in the months ahead.

But that is in the nature of the semiconductor business.

And it is a challenge we welcome.

It is to be understood then that their contribution to net revenue in current fiscal year will be minimum.

Looking to fiscal 2012 and beyond, however, we consider it likely that for GSI, LLDRAMs could be the growth driver the SigmaQuad product has been in years past.

Now immediately and before turning the call over to Doug, let me address the outlook for the current quarter, during which we anticipated that our existing core products, in particular our 36- and 72-meg SigmaQuad SRAM will support continued strong financial results.

Our current expectation is that second quarter fiscal 2011 net revenue will be in the range of $23.9 million to $24.7 million with gross margin of approximately 45%.

I will now turn the call over to Doug.

Thank you, Lee-Lean.

The June quarter was our 27th consecutive quarter of profitability with net income of $4.4 million, a record, or $0.15 per diluted share, and net revenues of $22.9 million, also a record.

In the comparable period a year ago, we earned $2.1 million, or $0.08 per diluted share, on net revenues of $14.2 million and $3.8 million, or $0.14 per diluted share on net revenues of $21.2 million in the prior quarter.

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

First quarter direct and indirect sales to Cisco Systems were $9.1 million, or 39.8% of net revenues, compared to $8.7 million, or 41.1% of net revenues, in the prior quarter and $3.3 million, or 23.1% of net revenues, in the first quarter of fiscal 2010.

Sales to Huawei were $1.8 million, or 7.9% of net revenues, compared to $2 million, or 9.5% of net revenues in the fourth quarter.

Military/defense sales were 7.8% of shipments compared to 6.7% of shipments in the prior quarter.

Both gross margin and operating margin increased sequentially and year over year.

They were respectively 47.2% and 23.8% in the first quarter of fiscal 2011, 43.2% and 20.6% in the fourth quarter of fiscal 2010, and 42.5% and 15.8% in the first quarter of fiscal 2010.

As was the case in the prior two quarters, approximately $150,000 in the first quarter 2011 cost of goods sold was related to masks valued at approximately $600,000 that were acquired in the Company's August 2009 acquisition of substantially all of the assets of Sony's Electronics SRAM product line.

The value of the masks is being amortized over four quarters.

First quarter research and development expenses were $2.5 million compared to $2.4 million in the fourth quarter and $1.6 million in the comparable period a year ago.

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

Selling, general, and administrative expenses were $2.8 million, or 12.3% of net revenues, compared to $2.4 million, or 11.2% of net revenues, in the prior quarter, reflecting increases in professional fees and independent sales representative commissions.

Total first quarter pre-tax stock-based compensation expense was $446,000 compared to $395,000 in the fourth quarter and $291,000 in the comparable quarter a year ago.

Operating expenses are expected to be approximately $6.5 million in the second quarter and reflect mask expenses of approximately $1.1 million for two projects, one of which is a high-speed LLDRAM.

We currently expect our effective tax rate to be approximately 23% at fiscal 2011.

Net accounts receivables have increased to $13.5 million, up from $9.2 million at March 31st, 2010.

This reflects the high volume of shipments in June, including an increase in deferred revenue for approximately $3 million.

DSO is 58 days compared to 46 days in the prior quarter.

At June 30th, our balance sheet remained exceptionally strong with $43 million in cash, cash equivalents, and short-term investments, $27 million in long-term investments, almost $64 million in working capital, no debt, and stockholders' equity of $104 million.

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

(Operator Instructions).

Your first question comes from the line of Mike Crawford with B.

Riley.

Thank you.

Doug, you mentioned one of the mask sets in that forthcoming or in the current quarter is going to be for the LLDRAM project.

What's the other project?

Well, it's for a non-SRAM-based product that we've been working on with our -- with the design group that we have in Georgia.

Lee-Lean can talk a little bit more about the technical aspects of it.

Yes, we've been working on the project for awhile.

But I think the noise (inaudible).

So it's an unannounced project?

No.

Product?

Correct.

Yes, so it's unannounced.

It's more of a design -- we're basically looking at a different product that we've been working on for some time that's more of a design verification, [this tape out].

And it's something that we haven't announced.

And it may be some time before we do.

Okay.

Thanks, Didier.

Hey, can you just talk a little bit about this component difficulty from vendors, exactly what that's all about?

So you're talking about -- okay, so certainly this environment that we're in right now, the supply is certainly tight.

I mean, we certainly have had tight supply.

In fact, we came into this quarter with pretty much record delinquent backlog.

So we're certainly playing catch up.

But there were certain areas or certain market spaces that we actually had material available.

But there were other critical components on those boards from other suppliers that weren't available.

Their -- they were having their material constraints.

And so we were not able to visualize those revenues because we couldn't ship the parts because of these other components that were missing.

And would you say that has eased or is easing?

Easing.

It hasn't eased yet.

But I think it's easing this quarter.

Okay.

Great.

And then last question is -- Doug, I think you were quoted in -- it was maybe an IBD article talking about M&A strategy, where you're looking for some acquisitions.

Is there anything you could add to that?

I think that guy blew it up more than what the intent was.

He asked -- basically the question was -- what are you going to do with all this cash we have?

And my answer was that we did the Sony deal, which was a good opportunity for us and has been very successful and that we could foresee in the future potentially using some of our cash to acquire some additional technology or product lines.

There's nothing in the works that we're looking at currently.

But we do have our eyes open.

Okay.

Thank you.

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

Baird.

Tristan, you may have your line on mute.

Hi.

Sorry.

This is Scott Hirleman calling in for Tristan.

Can you hear me?

Yes, hi, Scott.

Sorry about that, little difficulty with the headset.

So can you walk through a little bit more about what was driving the strong gross margin?

I mean, I know military ticked up a bit.

But I would've thought that with Huawei ticking down, it seems like they're using more of the newer products.

So I would've thought that that actually would've been a headwind.

Can you give us a little bit more visibility into what caused the gross margin to be --?

Well, I think one answer -- I don't want to speak for Didier.

But one thing I can tell you is that we were fairly selective in I guess where we ship product this quarter.

We couldn't ship everything that we -- all the backlog that we had.

So we did the best we could at optimizing our customer requirements and margin.

Okay.

Yes, and just to go back, you're talking about Huawei.

Huawei actually uses a lot of legacy products.

And so in general, our China sales were down this past quarter.

We're hoping they come back.

It's certainly -- China Mobile is out bidding right now.

We're hoping that may help in September quarter.

But with that said, they certainly -- that portion of the market of our revenues was down this quarter.

And it doesn't always -- it's not always the highest margin business for us.

Okay.

And actually, can you give an update on kind of where we are in the phase for spend?

How much of that is in the calendar three guidance and kind of what your thoughts are on how big that might be and when that really takes effect?

Right, so there's some in there.

I'm being conservative with that forecast.

And as I mentioned, China Mobile is out bidding now.

There's a chance that if it gets wrapped up quick enough that it could turn into revenues for August, September timeframe.

Again, I was fairly conservative in that forecast because we're not sure of the timing of that bidding or that release.

Okay.

So there isn't a bunch that's in the guidance.

But if that does come through and if you've got the available parts, then you'll have potential upside is what you're saying there.

That's correct.

Okay.

Can you guys talk a little bit about what happened with SigmaQuad here?

It fell a little bit as a percent of revenues, was up 5%.

Was that again just because of being selective and kind of optimizing, or --?

It was supply limited.

So if you look at the Sigma family, it's on our 90-nanometer process, which was one of the tighter processes we had.

And so it was pretty much because of the supply limit.

Okay.

And but the demand for that still remains very robust.

If you could've had a lot more parts, you would've been able to ship a lot more basically.

That's correct.

Okay.

And is there any reason actually why Huawei fell?

Was that because of the optionization?

Or was it that you're moving to a vendor-managed inventory hub there, like a communications company talked about last night, or --?

So we're already in a consignment hub with Huawei.

So that's --

Okay.

-- for us.

And they were down marginally this past quarter.

I mean, if I look at their numbers, they were almost flat.

I mean, almost flat -- okay, they were -- I take that back.

They were down about 8%.

But it wasn't as far down as the other China customers we had.

So in that respect, Huawei still has pretty good traction with their switches over in Europe.

And so they're not completely reliant on the 3G rollout.

So in that respect, they still did a healthy number with us.

Okay.

So there wasn't anything that was -- really that stood out there.

It was just those guys may be pulling down things a little bit.

And Europe was weak.

Exactly.

And then you were talking about the new mask.

Is that the OC3 that you guys have been talking about?

Or is that something completely that we haven't heard at all?

No, it is -- you got it right.

It is --

Okay.

Yes.

And then lastly, you guys look like you built inventory back up to kind of more where it's been in the historical range.

Is this where we should think inventories are going forward?

Yes, currently, my calculation of DSO is about 2.5.

And that's where we were several quarters ago.

To be honest, the last couple quarters, we've been trying to build our inventory balance.

And we've been successful at doing that.

But inventories have been in our mind too low to be able to continue supporting growth.

Right, and I'm guessing that there's not a whole lot of finished product in this.

Most of it's -- or more than historically, it's in the width and the raw materials.

It's mostly within finished goods.

We don't keep a whole lot of wafer stock.

We do have some.

So but I guess then I'm a little confused as to why you weren't able to fully fulfill demand if you've got -- if you're able to build finished goods as much as you did.

We have finished goods.

But don't forget that it's a continual process.

Okay.

So it's more of a snapshot than anything else.

Yes.

And then DSOs, should we expect those to come down going forward?

Yes, DSO is a little misleading.

I almost don't like to talk about that one.

But if you take a look at the shipments in the month of June, we built $3 million of distribution inventory.

They've been low.

They've actually told us that our lead times are better than some of our competitors.

And they've acknowledged that they agree with us that their inventory levels are low.

Couple of the major ones in the US are trying to build distribution inventories so they can better support us and their customers.

Okay.

And in fact, we shipped quite a bit of that in June.

You recall that we don't record that as revenue.

It gets deferred.

So it's NAR.

But it's not in revenue.

Those are always those fun little accounting things.

So all right, well, that answers all my questions.

So thank you very much.

You bet.

And congrats on yet another quarter of profitability.

Thanks, Scott.

(Operator Instructions).

Your next question comes from [Michael Vapier] with Newbridge Securities.

Yes, the question I have is I see the analysts were expecting $0.12 on sales of $24 million.

Do you think that's going to affect the stock tomorrow?

You guys did $0.08, right?

No, we did $0.15.

$0.15.

Okay.

So and the revenues were higher than expected.

And you forecast better revenues for next quarter?

Well, yes, we are forecasting better revenues next quarter.

But the $22.8 million was actually a little bit below our range.

Okay.

We believe that had we not had issues with our customers getting other components that we couldn't ship more product, and if distribution had turned more but we shipped to them, we actually shipped almost $4 million more on a gross basis this quarter than last quarter.

Good.

That's a good thing.

The only thing is that the market always looks at what you're doing going forward.

So even though that you had a great quarter, do you think it's going to negatively affect the stock tomorrow based on the revenue?

I don't know.

I mean, we're surprised at what we see in the market all the time.

Yes.

We think there are a lot of positives.

We see a lot of growth going forward.

We believe that this quarter, next quarter, and maybe few quarters out that we can achieve a gross margin higher than we've been achieving in the recent past and also above our corporate targets.

And with the revenue level, our operating expenses are getting more in line with our corporate targets.

They're at the high end of those.

But SG&A are almost where we would like to see them on a model P&L.

So we see a lot of positives.

We think that any issues this quarter aren't related to GSI.

It's just the environment up there and tightness of supply that people are experiencing.

So maybe we'll have a good week here and we'll see the stock start to come up.

All right.

Thank you.

Thank you.

(Operator Instructions).

At this time, there are no further questions.

I will turn the conference back over to management.

Thank you all for joining us.

We look forward to speaking with you in October, when we will report our second quarter fiscal 2011 results.

Thank you.

Ladies and gentlemen, this does conclude today's conference call.

Thank you for all participating.

You may now disconnect.