GSI Technology Inc (GSIT) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to GSI Technology's Fiscal 2011 Second Quarter Conference Call.

(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 risk 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 28, 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 Doug 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 morning, everyone, and thank you for joining us.

Today, we are pleased to report our 28th consecutive quarter of profitability and our second consecutive quarter of record revenues and net income.

These results, we believe, are a testament to the merit of our business model, to which we have adhered since the Company was founded 15 years ago.

Above all, this result reflects a longstanding commitment of (inaudible) and capital to the (inaudible) of ever-faster (inaudible) and more efficient memory devices for growing customer base.

We are now at a point where limited competition and the strong demand for our product are supporting higher revenues with gross margins well above 40%.

Even with strong demand, such gross margins could not be possible were it not for our (inaudible) technology -- arguably, the hallmark of GSI's success.

It has enabled us to survive and ultimate thrive in the marketplace otherwise dominated by much bigger players.

In fact, one of those players, [Symco], has not introduced a new SM product in over two years, and all indications are that they are exiting the SM market.

Given our results, (inaudible) [exceptionally] from balance sheet with no debt and almost $70 million in working capital, we see this as a key opportunity to further increase market share.

[Also] we have avoid leveraging the balance sheet, we have (inaudible) to effectively leverage our growing revenue stream in support of stronger operating margins.

In fact, we're optimistic that we will be able to maintain operating margins within our target range of 22% to 27%.

This outlook is based on three [constellations].

First is our belief that we are at a point where we can sustain gross margins of close to 45%.

Second is an ongoing commitment to controlling SG&A expenses.

Third is the fact that much of the R&D expense associated with the development of three new product lines expected to drive revenues in fiscal 2012 and beyond.

It's (inaudible).

We [surpassed] that our outlook for the balance of fiscal 2011 is decidedly positive.

Networking and telecom companies which account for approximately 80% of our business -- are facing strong demand for evermore (inaudible) in light of the continuing growth of the Internet and the wireless [business].

Even though the global economy remains sluggish, we currently have little doubt that fiscal 2011 will be a record year for GSI.

For the first time in the Company's history, net revenue could approach $100 million.

Looking to the (inaudible), however, I would caution that we do not anticipate a third consecutive quarter of record top and bottom-line results.

In fact, we anticipate a modest down-tick from the second quarter.

As we mentioned in today's press release, second-quarter revenue was somewhat [anonymous] and benefit from two timing issues.

Just as last quarter's net revenue was slightly lower than anticipated due to a push-out of orders some of our customers had difficulty in procuring (inaudible) components from other vendors.

So this quarter's net revenue benefited us.

We were able to ship all delinquent first-quarter (inaudible).

In addition, concept manufacture for major customers [to] $1.2 million for inventory at end of the second quarter, rather than in the third quarter, as we have already [oted -- expected -- benefiting second-quarter net revenues.

In short, first-quarter net revenues were lower than anticipated, and second-quarter net revenues were higher than anticipated.

Third-quarter net revenues are expected to fall somewhere between the two.

More precisely, we currently expect that third-quarter 2011 net revenues will be in the range of $24.3 million to $24.8 million with gross margins of approximately 45%.

The single biggest contributor to sales continues to be first-year emerging SigmaQuad products, which in the second quarter accounted for a third of total (inaudible).

Also worth mentioning are products associated with (inaudible) 2009 acquisition for approximately $7 million in cash of a [SONY] SM business consisting of Sigma (inaudible) and the (inaudible) .

These two product lines have already contributed $6.6 million to fiscal 2011 net revenue.

A moment ago, I referred to R&D expenses, $9.1 million in fiscal 2010 -- $5.4 million year-to-date in fiscal 2011 -- in support of three new product lines.

Among these are second and third generation SigmaQuad products.

Although they have yet to generate significant revenues, both show considerable promise.

The 65-nanometer, 144-megabit SigmaQuad type II and two part family began shipping early this year.

That has been well received, and we expect to see a considerable increase in volume of shipments early in calendar 2011, lending to a point where they should measurable contribution to physical 2012 revenue.

Equally promising is the 72-megabit SigmaQuad III-E, which is -- and addressing the growing memory disk of [labor] consistence.

First (inaudible) just about a year ago is the last shipping to a major customer.

Perhaps our most exciting R&D undertaking is our investment in low-latency dealings.

This represents GSI's first venture beyond [SRA], occupying a [leech] between the (inaudible) processors and to commodity [dealing].

The earlier [dealings] offer both telecom and networking providers extremely [effective] combinations of price, density, and performance.

It is a new design with a new (inaudible) in a marketplace currently dominated by microtechnology.

Our first density will be 576 megabits, a segment in which Micron is currently the only supplier.

Having achieved (inaudible) August, we hope, in time, to establish GSI as an attractive second source to existing Micron customers.

Longer term, we continue to believe that there is a growth driver the earlier dealings can do for GSI in the future what our SigmaQuad products have done in the past.

I caution, however, that we do not expect [aerial] dealings to make a measurable contribution to net revenue until we're into fiscal 2012.

I will now turn the call over to

Thank you, Lee-Lean.

September quarter was our 28th consecutive quarter of profitability, with record net income of $5.2 million, or $0.18 per diluted share, on record net revenues of $26.7 million.

In the three months ended September 30, 2009, we earned $2.4 million, or $0.09 per diluted share on net revenues of $14.7 million.

Sequentially, net revenues grew by $3.8 million, or 16.7%, from $22.9 million in the first quarter.

For the six months ended September 30, 2010, net income was $9.6 million, or $0.33 per diluted share, on net revenues of $49.7 million, compared to net income of $4.6 million, or $0.70 per diluted share, on net revenues of $28.9 million in the first six months of 2010.

Product acquired in the Sony acquisition completed last summer contributed approximately $3.5 million to second-quarter net revenues, compared to $3.1 million in the first quarter and, to date, totaled approximately $12.1 million.

Second-quarter direct and indirect sales to Cisco Systems were $10.4 million, or 39.1% of net revenues, compared to $9.1 million, or 39.8% of net revenues, in the prior quarter, and $4.8 million, or 32.6% of net revenues, in the second quarter of fiscal 2010.

Sales to Huawei Technology were $2.7 million, or 10.1% of net revenues, compared to $1.8 million, or 7.9% of net revenues in the first quarter, and $1.7 million, or 11.7% of net revenues in the second quarter of fiscal 2010.

Military defense sales were 7.7% of shipments, compared to 7.8% of shipments in the first quarter, and 14.8% of shipments in the second quarter of fiscal 2010.

Second-quarter operating margin of 25% was slightly better than we had expected.

We had earlier anticipated a sequential increase of approximately $1.1 million in operating expenses due to higher earned expenses related to two mass sets.

The exact increase was only $134,000.

The cost of the larger mass set for our forthcoming 576-megabit LLDRAM product was $492,000 versus our estimate of $750,000.

And the cost of the second set was expected to be approximately $350,000 -- will now be realized in the third quarter.

Selling, general and administrative expense was down by $195,000, to $2.6 million, or 9.8% of net revenues, compared to $2.8 million, or 12.3% of net revenues in the first quarter, reflecting reductions in professional fees.

Total second-quarter pre-tax stock-based-compensation expense was $430,000, compared to $446,000 in the first quarter, and $383,000 in the comparable quarter a year ago.

Operating expenses are expected to be approximately $5.7 million in the third quarter, and reflect max expenses of approximately $350,000, and higher professional fees related to our fiscal 2011 audit.

We expect our effective tax rate to continue to be 23% in fiscal 2011.

Net accounts receivable have increased to $15.1 million, up from $13.5 million at June 30, 2010, and $9.2 million at March 31, 2010, and reflect a higher volume of shipments in September, including an increase in deferred revenue of approximately $500,000.

DSO is 52 days, compared to 58 days in the prior quarter.

Accounts payable at September 30 is $10.5 million, up from $7.2 million at June 30, due to increased wafer purchases and manufacturing expenses, and consistent with the increase in the inventory from $19.3 million at June 30th to $23.2 million at September 30th.

Inventory turns are unchanged from June 30 to September 30, at 2.5 times.

At September 30, our balance sheet remained exceptionally strong, with $46.6 million in cash, cash equivalents, and short-term investments; $28 million in long-term investments; almost $70 million in working capital; no debt; and stockholders' equity of $110 million.

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

(Operator Instructions)

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

Riley and Company.

Thank you.

I'd like to delve a little bit further into what you see for the low-latency DRAM market -- or other people call it NLDRAM, or whatever other names they have for this market -- maybe even the bandwidth engine that [Mostis] is trying to develop.

And, maybe -- could you size that market, and then say what kind of revenues you would hope to start to capture there on an annual basis?

So -- this is Didier.

The market's been estimated to be somewhere in the neighborhood of $200 million to $300 million annually.

And it's broken up into two quantities.

So there's a 288-meg and a 576-meg.

So the first density we're going to offer is the 576 meg.

You know, certainly the 576 meg is the growing portion of the market.

But, right now, the 288 is actually the larger of the [TAM].

So we -- certainly, we're looking to, at least in the 576 -- if we're not getting 20% of the market, then we're certainly -- feel like we're not doing our jobs adequately.

So we certainly feel like it could be adding somewhere -- in the early stages, it should add $5 million to $10 million per quarter; and I say -- we're in the early stages -- when we're in full production ramping.

And Didier, that -- assuming you're able to start sampling these chips -- is that something that could happen by year end, or is that something that's more in the March quarter?

Year -- so you're talking calendar-year end?

Calendar.

Yes, so not this year.

So certainly the silicon we have now -- though it's functional, it has some bugs, so we won't -- we will not be sampling out of this first batch, so we're looking at second silicon for customers' samples, which is going to be end of the year, beginning of next year, before we see those devices.

So there certainly will be no revenue this calendar year.

As far as calendar year of 2011, certainly, assuming everything works out with second silicon, we anticipate seeing revenues in that calendar year.

As Lee-Lean mentioned earlier, it's a market that's dominated by Micron, and so we're going to go in and be second-sourcing Micron's single-source sockets.

So that should be -- some of it should be business that's ongoing, and some of it will be new applications as well.

And, then, the final question related to that is, "Do you have an expected gross-margin profile once you're in full production?"

So, certainly, at this point, it looks like it's within our standard corporate gross-margin models.

Okay.

And, then, final question is -- relates to the effects of a slowdown, if any, that you saw starting in September and into today.

Is -- are you seeing any of that, or is that not really what you're seeing in the super-fast SRAM space?

So what we -- so, certainly, our backlog is lower than it was in the past.

But that's, I think, more of a reflection of the fact that lead times have come way down.

So lead times, the last few quarters, have been running, for most of the suppliers, in the 12 to 20-week kind of lead time.

Certainly, we were generally in the 12-to-14-week-maximum lead time.

With that said, our lead times, now, in most cases, are in the six-to-eight-weeks.

So what's happening is certainly our backlog is has taken a hit just because there's not a need to place more future backlog because of the lead times being pulled in.

As far as a slowdown, we've certainly seen -- a couple of our customers look like they're going to be going through some inventory, but a very high percentage of our customers are still ordering healthy, and are still [extraditing] us.

So I think it's -- there's certainly spot guys that are out there that are going to be working through some inventory.

But in general, I think the -- when the backlog has come down, it's been more of a reflection of the lead times reducing than it has business slowing down.

Okay, great.

Thank you.

Welcome.

Your next question comes from the line of Raji Gill of Needham & Company.

(Inaudible) taking my questions.

Just a follow-up on that previous question -- maybe if you could talk about the demand from some of your largest customer on the networking side -- maybe characterize the order rates this quarter and what you're seeing going into the next quarter.

Are they continuing to pull inventory from the hub?

Any color around that would be helpful.

Thank you.

So, without getting into specifics -- specific customers -- I think that if you look at our top three guys, which are all in this space, two of them are certainly still ordering and doing well.

One of them which, certainly, they've come out within the last month and said they were working through some inventory.

We are seeing that.

So, certainly, we expect them to be a little soft this quarter as they work through their inventories.

Right, but I mean, do you see -- what about going into the fourth quarter and exiting the year?

Yes, that's -- so you're talking about December quarter?

Okay, so the inventory build for kind of SRAM really hasn't really slowed.

It's still on, right?

Is that basically what you're saying -- because that was kind of confirmed with your competitor last night -- that SRAM market continues to be pretty robust?

Oh, yes, absolutely.

There's no question.

Like I said, I mean, we certainly have a couple customers that, because of their ordering practices over the last few quarters, when there's -- when we have such a tight market -- I think there are some customers that are going to be working through some inventory that they brought in, maybe, in excess.

But, in general, I certainly think that the market's very strong.

Okay.

And, then, any thoughts on kind of the Chinese CapEx spending?

Are you seeing any softness related to that particular geography?

So, in relation to the 3G build-out, yes.

So certainly there's no bidding out right now.

They're still in phase four.

Phase four has slowed down a bit.

So if you're talking specifically for the 3G build-out, yes, it certainly has softened a bit.

With that said, one of our largest customers out of China is doing very well in switches and routers that are shipping into, actually, the European market.

So in that respect, we actually grew with that customer this past quarter, even though the 3G build-out was soft.

Okay, wonderful.

And just last question on me, in terms of kind of overall SRAM pricing -- any thoughts on the pricing environment?

Any thoughts in terms of what your competitors are doing with respect to pricing (inaudible) quarter and going into the fourth quarter?

So, yes, ASPs, in general, just don't fluctuate that much in the SRAM market.

I mean, it's really -- the model or the market, I should say, for SRAMs is really a -- more of a higher-mix, lower-volume type of market space compared to the commodity DRAMs and flash out there.

So we don't have, generally, those wild price fluctuations.

If I look at this past quarter, our corporate ASPs actually went up almost 10%.

But, again, that's more of a reflection -- well, I shouldn't say "more" -- it is a total reflection of the fact that we're still moving to higher-density, higher-ASP parts.

In general, if I looked at the pricing that we saw this year in a tight market, compared to usual, there was nothing out -- nothing unusual about the market.

The lower-density parts remained flat.

The mid-densities were coming down just a little bit -- a percentage or two a quarter.

And then, certainly, the newest products were coming down a few percentages a quarter.

And that's normal whether it's a tight market or a more open lower-lead-time market.

Sure -- and just one last question on Samsung.

The -- obviously, officials there haven't talked about exiting the market -- just wondering if you talked to -- if you're still supporting tier-one customers; or where do you think you'll see the opportunity more in tier two -- tier three -- maybe thoughts about that and what's the opportunity when the exit out of the market, because there's going to be some last-time buys that could last for a significant amount of time.

Any thoughts on that would be helpful.

Thank you.

So Samsung was somewhere in the neighborhood of a third of the market historically.

It certainly, as Lee-Lean mentioned earlier -- they haven't introduced a new SRAM in about two years.

So they've already started losing some market share.

If I were to guess right now, I'd say they're probably in the high 20s -- somewhere -- certainly no less than 25%, but not over 30% of the market.

Going back to who has sort of heard their strategy -- talking to customers, the top tier-one guys haven't gotten the message yet.

And, certainly, I think Samsung is supporting them as if nothing's changed.

The non-strategic customers of Samsung and, then, the tier-twos have certainly gotten the message.

I've asked these customers and they've said they've heard from Samsung that, yes, they're -- it's time for them to start looking for another supplier because Samsung is not long for the market; although it doesn't seem like it's anything official as far as some document or something on their Website.

So it makes it a little bit difficult for us to gauge exactly when that's going to happen.

As far as a last-time buy, the good news with the SRAMs is most of them are -- most of the sockets are multi-sourced and not full-sourced.

So the fact that Samsung is not introducing new parts -- and when we say "new parts," it's new parts and also new die revisions.

And so they're not keeping up with the cost models that the rest of us SRAM suppliers are.

So I'm not so sure a last-time buy is going to be that attractive to any of our customers, especially on a multi-source socket, when I don't see Samsung essentially being -- having any price advantage over anybody else.

So with that said, I'm not sure there's going to be a huge lifetime buy when they do finally announce that they're getting out.

Do you -- is Samsung exiting out of the Sync SRAM business or the Async SRAM business?

Certainly, I believe it's the whole market.

The whole entire market?

Yes, I mean --

All right, thank you.

Yes, I mean, they've -- they've already obsolete a lot of the low-density Asyncs, and I believe they're only shipping one density in the Async today.

So we're -- really, the meat of what we're talking about is the synchronous market.

Perfect.

Thank you very much.

Welcome.

Your next question comes from the line of [Nate Clair] of Robert Baird.

Hey, guys.

I'm calling for Tristan Gerra, here.

We were -- I just wanted to ask you guys what kind of a SigmaQuad growth are you embedding into your third-quarter guidance?

In the guidance, I think if I were to look at the forecast, it's a similar number to the second quarter.

Okay.

And, then, I know you mentioned turns this quarter were flat -- right around 2.5 times.

And, again, what you're looking into for your fiscal third-quarter guidance, what type of turns are you looking at there?

In terms of inventory?

Yes.

You know, we've been trying to build inventory for the last six months to a year.

And I think at the point where we are today, with the inventory levels where they are, we believe that's reasonable.

I wouldn't expect it to go up significantly from there.

We've taken every opportunity we can over the last three to six months to buy wafers when they were available.

And we've been successful.

And I think we're at a reasonable level today.

Okay.

Okay, and then given ZTE's [nod-fill] with the substantial increase in inventories versus the decline in revenues, do you see a pending correction there?

Or do you think there's other large inventory corrections coming?

So, again, as I mentioned earlier, I think there are a few customers where we're going to see some inventory correction.

ZTE could be actually interesting for us because even though they may be correcting, there's certainly at least one new high-volume socket that we're not qualified on that we're going to be qualified on shortly.

So even if they remain flat or go down, there is a chance that our revenues could increase with them in the near future.

So with that said, I do think there's some inventory corrections.

I don't know if it generally is going to equate to us having lower revenues with that particular customer.

It depends on the situation.

Okay, great.

That was it for me.

Thank you, guys.

Thanks.

(Operator Instructions)

Your next question comes from the line of Jeff Schreiner of CapStone Investments.

Good day, gentlemen.

Thank you very much for taking my question.

I'm trying to look a little philosophically at the business on a go-forward basis, and wondering kind of where you're at right now with the transition to 65-nanometer parts, and is it a strategic move to get all parts moved down to the 65-nanometer node?

And if so, how long will that take, and should that have a positive impact when completed, on margins, on a go-forward basis?

Yes.

The first 65 nanometer -- the first two products we mentioned is the SigmaQuad-III and the 144-megabit SigmaQuad-II and (inaudible).

Today, we already have a [full-silicon] based on the SigmaQuad.

And we've got two more products coming out with the 65-nanometer.

So we will be -- by the end of year, we will have six products based on the 65-nanometer.

So we're looking forward to the 2012 and beyond (inaudible) ramping to the significant number was can [be shown] on the revenue.

So (inaudible) of our existing product.

Addressing the gross-margin side -- you know that ASPs drop on a continuous basis that's standard for the industry.

And by going to 65 nanometers with existing products -- new products -- that is part of our strategy to maintain our gross margins.

Okay.

Thank you very much.

I was just wondering about -- a competitor of your had a misstep in the quarter that they highlighted on their call to the tune of about $4 million -- and was wondering if you guys were a benefactor of that -- as they had said, some other competitors picked up that business for that particular part.

Were you able to pick up any one-time business like that during the quarter?

So we have been picking some of that business.

I can't tell you if it's exactly that $4 million.

My guess is I'm sure we did pick some of that up.

With that said, the particular competitor you're talking about -- I think they were referring to a manufacturing glitch.

But we've also seen some opportunity arising from their transition to 65-nanometer.

I don't think that transition is going across very smoothly.

So, certainly, I think we're going to be seeing some continued opportunities coming from this particular competitor's transition to 65-nanometer as well.

Okay.

Well, thank you very much for your time, gentlemen.

Thank you.

(Operator Instructions)

There are no further questions at this time.

Gentlemen, do you have any closing remarks?

Thank you all for joining us.

We look forward to speaking with you in January, when we will unfold our third quarter fiscal 2011 results.

Thank you.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.