GSI Technology Inc (GSIT) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's fiscal 2013 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 the 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 risk and uncertainty that could cause actual results to differ materially from those anticipated. 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 26, 2012, 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.

Good afternoon, everyone. Thank you for joining with us. I am pleased to note that despite a challenging environment, today we were able to report our 35th consecutive quarter of profitability.

Net revenue of $16.8 million was slightly below the lower end of our guidance, due primarily to softness in orders from our three largest customers, each of whom does significant business in Europe where the ongoing economy, turmoil and the slow economy have led to a reduction in capital expenditures for network equipment manufacturers by our OEM customers. As in the previous quarter, our revenues were also lightly affected by uncertainty regarding our pending patent litigation with Cypress Semiconductor Corp.

Gross margin was 40.3% compared to 44.2% a year ago and 46.2% in the prior quarter principally as a result of a shift in our product mix and, to a lesser extent, the impact of reduced revenue on our fixed manufacturing costs. First-quarter gross margin was lower than we had expected. The unusually high fourth-quarter 2012 gross margin also was outside our target range, and this sharp quarter-to-quarter fluctuation points to the considerable effect of product mix on our gross margins as well as the challenge of accurately predicting product mix and gross margin on a quarter-to-quarter basis.

Last quarter, noting that gross margin was outside our target range, I cited a particularly favorable product mix and cautioned that such margins are not sustainable on a regular basis. (inaudible) it is to be expected from time to time we will see margin close to 40%. With that in mind and given that much of Europe again appears to be in or on the verge of another recession, we currently expect that second-quarter gross margin will be approximately 41%.

First-quarter operating income of $880,000 or 5.2% of net revenue continued to be adversely affected by legal expenses related primarily to a patent infringement proceeding pending before the United States International Trade Commission, which was instituted in response to a complaint filed by Cypress Semiconductor in which they allege patent infringement on CSI's part. First-quarter litigation-related expenses of $455,000 were in line with our forecast and far less than in the preceding quarters when total litigation-related expenses of $3.7 million led to an operating loss.

Total second-quarter litigation-related expenses are currently expected to be less than $500,000. We anticipate that, for at least the next several quarters, litigation-related expenses will continue to have a negative effect on operating income and the bottom line. Some of these expenses will be associated with ITC proceedings. That proceeding is now in abeyance pending the issuance of an initial determination by the administrative law judge handling the case. Citing the workload consideration, he recently announced that initial determination could be delayed by approximately three months to October with the conclusion of the proceeding not expected until February 2013.

Based on evidence presented at the hearing in March and the post-trial brief submitted in April, we continue to believe that both the law and the facts are on our side. In coming quarters, we will also incur litigation-related expense in pursuing our antitrust lawsuit against Cypress filed in July of last year. A recent ruling by the US District Court in which it denied Cypress' motion to dismiss our complaint is of major significance since it now allows GSI to actively pursue pretrial discovery of all our claims against Cypress. In this suit, we seek treble damage, recovery of attorneys fees and costs, and especially important, an injunction prohibiting Cypress from continuing its illegal behavior, behavior that has limited our ability to fully benefit from international property that is rightfully ours.

I will now turn the call over to Doug.

We reported net income of $920,000, or $0.03 per diluted share, on net revenues of $16.8 million for our first fiscal quarter ended June 30, 2012, compared to net income of $3.3 million or $0.11 per diluted share on net revenues of $23 million from the comparable period a year ago. In the prior quarter ended March 31, 2012, we earned $829,000 or $0.03 per diluted share on net revenues of $18.7 million.

Total operating expenses were $5.9 million compared to $8.7 million in the prior quarter and $6 million from the first quarter of fiscal 2012.

First-quarter 2013 research and development expense was $2.8 million compared to $2.7 million in the prior quarter and $2.6 million a year ago.

First-quarter selling, general and administrative expense of $3 million included $455,000 in litigation-related expenses compared to SG&A of $6.1 million in the prior quarter when litigation-related expenses of $3.7 million comprised more than half of SG&A. A year ago, SG&A of $3.4 million included $782,000 in litigation-related expenses. As has previously been explained at considerable length by us, these litigation-related expenses are primarily associated with a patent infringement proceeding pending before the United States International Trade Commission, which was instituted in response to a complaint filed by Cypress Semiconductor Corp. in June 2011 and a related antitrust lawsuit filed by GSI against Cypress in July of 2011.

First-quarter direct and indirect sales to Cisco Systems were $4.1 million or 24.2% of net revenues compared to $6 million or 32.1% of net revenues in the prior quarter and $9.6 million or 41.6% of net revenues in the same period a year ago. Sales to Huawei Technologies, our second-largest customer, were $1.3 million or 7.5% of net revenues in the first quarter, compared to $1.4 million or 7.2% of net revenues in the prior quarter and $1.4 million or 6% of net revenues a year ago.

Military and defense sales were 11.9% of shipments compared to 11.1% of shipments in the prior quarter and 8.9% of shipments in the comparable period a year ago. SigmaQuad sales were 38% of shipments compared to 38.3% in the prior quarter and 32.5% in the first quarter of fiscal 2012.

Total first-quarter pretax stock-based compensation expense was $562,000 compared to $539,000 in the prior quarter and $511,000 in the comparable quarter a year ago. A June 30, 2012, we had $59.2 million in cash, cash equivalents, and short-term investments; $30.4 million in long-term investments; $86.2 million in working capital; no debt; and stockholders equity of $128.6 million.

Accounts Payable at June 30 is $4 million, down from $5.5 million at March 31, 2012. Net inventory was $17.1 million at June 30, slightly up from $16.7 million at March 31. Inventory turns at June 30, 2012 are 2.3 times compared to 2.4 at March 31, 2012.

Depreciation and amortization expense was $638,000 for the quarter. Under our expanded repurchase program, we are authorized to repurchase up to a total of $20 million of our common stock from time to time on the open market or in private transactions. Specific timing and amount of the repurchases will be dependent on market conditions, securities law limitations, and other factors. The repurchase program may suspend it or terminate it at any time without prior notice.

During the quarter ended June 30, 2012, we repurchased 424,500 shares at an average cost of $4.25 per share. To date, we have repurchased a total of 3,247,550 shares at an average cost of $3.79 per share, for a total cost of $12.3 million.

We currently expect net revenues in the second quarter of fiscal 2013 to be in the range of $16 million to $18 million with gross margin of approximately 41%. Net revenues in the June quarter continue to be negatively affected by uncertainty regarding our pending patent litigation with Cypress. We believe that this uncertainty will continue to affect our revenues and will likely have a continued impact on the second quarter.

We also expect ongoing legal expenses related to patent litigation and antitrust litigation will continue to affect our operating income and our bottom line. These expenses are expected to be approximately $500,000 in the second quarter.

Operating expenses in total are expected to be similar to the first quarter of 2013.

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

(Operator instructions). Rajvindra Gill.

Yes, thanks. Your competitor just announced a potential acquisition to acquire a company in the embedded NOR market. I'm wondering if you have any thoughts there and if you are looking outside of the SRAM market as well, or are you -- continue to focus on the SRAM side?

Yes, we do look at the opportunity which can be assimilated to our product lines. I think so far we do look at it but we, at this moment, we don't have anything concrete to buy. But we continue looking for it.

And could you describe the demand landscape a little bit more in the com equipment space? That continues to be soft, given a lot of the results coming out of that sector. Are you getting any indication that there's going to be some sort of a rebound and if there's going to be any resurgence in demand exiting the year?

That's certainly hard to predict at this point. We certainly have some programs on the horizon which should certainly benefit us. We've talked in the past about the Edge router or the service provider router coming out of Alcatel. And certainly they're in trial right now with their customers and they are looking for orders to be placed. And certainly we hope that is going to help us this calendar year, towards the end of the year.

Also, which may not benefit us this year but certainly into early next year is Alcatel has also announced that they are entering the core market space. This is a market that they have not participated in the past. And this is especially exciting for us because they, in this system, have two very high end parts from GSI, two high ASP, high-margin parts. So we are certainly looking forward to that program taking off.

But certainly, in general, I still think visibility is hazy. I read somewhere yesterday -- I want to say it was TI that said that a lot of the folks are placing orders at the last second because lead times are as low as they have been. And certainly, we are seeing similar dynamics as to that. Certainly, our lead times are very low right now, and so there is a lot of last-second ordering. And so in that respect, it's really hard for me to predict exactly what's going to happen at the end of the year.

One last question, sorry. What's -- your competitor has been making some decent traction on the LLDRAM opportunity. They are talking about some revenue in the second quarter, and then sampling their LLDRAM III product for production in 2013. I'm wondering where you are with respect to that opportunity.

Yes, so we are currently in the qualification phase ourselves. We have a couple of high-value sockets that we are chasing that our competitor that you mentioned cannot. This is the 533-megahertz sockets that are 50- nanosecond latency, which their part isn't able to obtain. So a couple of the sockets that you've mentioned are the lower end sockets. The high-end, higher-value sockets are the ones we're in the process of qualification now. Certainly, that process is taking a while. And I'm not sure how much it's going to help us this calendar year, but certainly we will be closing a fair amount of those qualifications this year.

As far as the LL III, we are not doing an LL III. We are going a different correction, which we will talk about later. But that RL III is, as you know, is really just a micron die that they are repackaging. So it's certainly not their own design.

Tristan Gerra.

Can you give us some more feedback on what products impacted gross margin in the quarter and whether there's a permanent mix change?

It's not a permanent mix change. And so, as Lee-Lean mentioned earlier in the call, from time to time, we have -- do have mix changes. And in this particular quarter, some of the higher-end margin parts were less ordered and replaced that with lower-margin parts. So the answer is there certainly room for return. As Doug mentioned, some of the reasons for the lower margin have to do with the fixed costs that we associated with our lower-revenue market. So certainly, once we get the revenues back up, the margins will grow as well, even without the mix. But in general, I would say this is something that we can certainly return to the 43%, 44%.

Yes, we don't see any change in our more near-term/long-term view. We still believe the 43% to 45% range that we have been experiencing the last couple of years is where we should be and will be. My calculation -- it would probably cost us some were about 1.5% or so, plus or minus, impact on gross margin because of lower revenue and, of course, the mix. That was the bigger part.

And then do you guys have a sense of inventories at the hub? I'm curious if automatic inventory pull from the OEMs to the hub is still happening.

Yes. No, we are actually in pretty good shape there. First of all, in distribution, we are a sell-through model, not a sell-in. So there's certainly no issue there.

As far as the hubs, what you are referring to is the aging hubs where they are forced to take product to the 90-day refresh. And we haven't seen those happen, either. So in general, I would say we are in good position as far as valid inventory, not excess inventory.

And then in terms of the second half, are you guys seeing any inflection points, positive or negative?

Well, I think -- well, just like we focus, hopefully -- I think we pretty much have focused at the third quarter. I think the bigger customer looks like it will be healthier. But I think the general condition is still sluggish, so I think that we probably are looking at the third quarter.

All right. And if you could give me an idea of the trends that you are seeing by your end markets in the second half? Really, where do you think com is tracking, and what do you expect out of military?

So military has actually been very stable for us. It has been running, really, about 11%, 12% for a few quarters now, so military has been very stable. As I've mentioned in the past calls, it's never the same. Well, I shouldn't say it's never the same. The military folks kind of, being that they are lumpy, will have five or six guys in the top 20, and they are not always the same five or six guys, just because of their nature. But we certainly see that market continuing.

There's a few programs that we've talked about in the past that hopefully will start kicking in, in the fourth quarter of this year. Certainly, it will be more on a limited basis. It will be a little bit more in 2013 and 2014. But in general, the military has been healthy.

Again, networking and telecom has been 70-plus% of our business historically, so we are really tied to that market. And as we discussed about earlier, it's still, unfortunately, a bit hazy out there as far as the forecasting and the visibility that we are seeing from the top telecom folks.

Ted Moreau.

Just a general question, probably for Didier more than anybody else. But in light of the overall market, maybe even the lawsuit and the situation with Samsung, how do you think you are coming out on market share in your core market? Do you think it's stable? Do you think you are improving if everybody else has been weak? Or -- is Samsung sort of winding down? Where are you on the share?

Yes, I don't think that the Samsung share has been divided out yet. Certainly, I don't see that happening before the end of this year. So in that respect, I think people have been slowly designing them out and adding sources, if they are not already sharing the socket with Samsung. But as far as the revenues go, I haven't seen them being dispersed yet.

As far as the rest, I would say that we've lost a little bit of market share, only due to the pending ITC litigation. Certainly, we've seen a little bit of drop-off of some of the respondents or co-defendants in the case, which was expected. And there are a few other folks that certainly have been cautious in the way they are spending. Cypress has, as we've mentioned in the past, has been very aggressive in making misleading statements to the market space and to the customers. And so certainly some of the folks have been a little bit cautious.

The good news is, though, is I think we are getting over that. We have had lots of discussions with companies that are already involved in the case and that are not involved in the case, and I think they certainly have a much better feel of what's happening. With that said, we are certainly disappointed that the initial ruling in the ITC case was pushed out because we were certainly looking forward to having the truth come out and get beyond all of these misleading statements that we've been occurring.

So with that said, again, I would say we've lost a little bit of market share, but I think it's certainly very temporary.

Have any of the court proceedings been public at all, to get a sense of your confidence in how the hearings are going and all that? Or --

Well, they are not public in the sense that there has not been a lot of data or information let out. But if you go on the ITC website, if you have the case number, there's a lot of documentation there that you can read. Of course, a lot of it has been redacted. You can't see confidential business information of us or Cypress. But there is a lot of information still there, and a lot of it is very favorable, if you read through that, to GSI.

Okay, that's what I was going to ask is you can get a sense, then, by doing that of your positioning there and how the proceedings are materializing I think?

Yes, you can.

In 2011, before the trial actually started, if you look, there was a lot of motions that were filed by us and then also by Cypress. And so you can see which motions were denied and which ones were accepted. And you can see that certainly we felt like it was very favorable in our camp.

Didier, one other question on Samsung -- are you -- even though there haven't been any revenue shifts as of yet, you mentioned conceivably getting designed in. Are you seeing more -- do you have the opportunity in terms of bidding activity and demonstrations and all of that to, at the expense of Samsung, to move ahead from that standpoint, even though the revenue hasn't developed at this point?

It's not at the bidding stage at this point. Right now, it's at an ABL stage. So what's happening is the customers are just making sure that they have qualified suppliers where Samsung was or is. And so it's more making sure that they have qualified suppliers. So, we haven't gotten to the bidding stage yet.

And in those cases, we are in very good shape. Certainly, as I mentioned earlier, some of the respondents right now are in a bit of a holding pattern. But the good news is that folks like Cisco, which is, of course, one of the respondents, were already qualified in a very high percentage of the Samsung sockets. So at that point, once we go out from the end of the year, we will see just a simple shift in market awards by Cisco. It doesn't require any quals at this point.

One final question on this, and then I'll turn it back -- what -- I'm sure it's readily available, but just your commentary on what the opportunity might be with a Samsung exit over the next couple of years.

The numbers are anywhere between 15% and 20% of the market. I think they certainly were, not too long ago, in the low to mid 20s%. But I think they may have started to fade away. But certainly, I would say no less than 15% and at least 20%.

Yes, so what would that be in dollars, then, roughly?

Well, that's percent.

Yes, correct.

-- So percent of market. So if you were to translate that, it's somewhere, round numbers, $150 million or so.

Right, so that's a pretty sizable opportunity, even if you just get part of that?

Oh, absolutely. Yes, it's certainly exciting for us.

[Chris Odawa].

Didier, I just wanted to go back. You mentioned the core router opportunity. Maybe you can provide a little bit more color and give us a sense for when that opportunity might start to show up in revenue?

Well, that's a great question. Certainly, it's hard for me to predict when it's going to happen. I talked about the Edge router, which was the first product Alcatel had. And certainly, because of some the economic challenges that are out there right now, that program hasn't taken off for Alcatel as quickly as they had expected. So, they have talked about the core router being very end of this year, beginning of next year. And so I'm going to go with their information, but it could certainly be delayed a bit.

Again, what's exciting about it is that it's complete upside for us because it doesn't replace any of their existing boxes. It's a new entry into the market space. And I don't have the numbers in front of me, but I want to say that their performance targets, they are five times faster than any of their competitors. So it's certainly a very bold statement by them getting into this market. And as I mentioned, we have a fairly high dollar content in the box. So we are cautiously optimistic that, when this thing does take off, it's going to be a nice earner for us.

Great. Is that a product that was specifically designed for Alcatel, or could it potentially be sold to other existing customers?

So these products that we have in these boxes can be sold to anybody. And one of them is our SQ III, which, you know, is the part that's very unique to GSI. That also happens to be in their Edge router platform as well.

And then finally, you mentioned Europe headwinds. Just kind of curious what your revenue contribution from Europe is today and, I guess, if you can see anything in the future, what we should expect going forward.

Right now, Europe is a little less than 10% for us, as far as our revenue. But what Doug was talking to or alluding to earlier, he was talking to those markets for our end customers. As far as our -- if you talk about our revenues to Europe, it's just under 10%.

Okay. And you guys don't talk at all about book-to-bill trends during the quarter?

No. It's too difficult. And the reason I say that is two of our larger customers -- they are on a consignment basis. And so by definition, their orders are at $0. So we can't really give you a -- it's not a simple way for us to --

Yes, it's not a booking until that gets pulled.

Right.

So there's also never anything in backlog.

Right. It essentially becomes a booking and a billing on the same day. So it's too difficult for us to try and track a book-to-bill because, again, the high ratio of consigned backlog in our model.

Okay. I guess, then, what gives you confidence in your forward projections, if you really don't have a whole lot in backlog?

Awards. So, we know what the awards are, and that's certainly -- it will be a percentage on a certain part number. And so certainly, if there's a certain quantity involved with that, then we know whether our awards are going up or they're coming down. So in general, Doug -- or I can't remember if it was Doug or Lee-Lean who mentioned earlier in the call a couple of our major customers we see coming back. Certainly Cisco has been down -- I want to say it's two quarters in a row at least. We certainly see them rebounding this quarter and being up a bit.

So our comments are based off of awards are given going into a quarter.

All right, great. That's very helpful. Thanks a lot.

(Operator instructions). George Gaspar.

Good afternoon. I apologize if you've answered part of this. Could you break down your R&D expenditure into product area or specific situations that you are working on? And can you target what your objectives are, looking out three to six months, when you could possibly enter the market with (inaudible) that could add to your revenue stream?

So I can tell you a reasonable way to look at R&D spending. Over the last several years, we have added a couple of groups. One is the LLDRAM group, and that runs about $1 million a year. And then, in the Sony acquisition, we brought over about 10 people. That adds around $1 million a year. So that's the high end, the SQ-III and the next generation, that product and other devices we have been working on. So that runs to about $2 million a year. And we are running -- what -- about $2.7 million, $2.8 million per quarter?

Right.

So the other dollars would be essentially redesigns of existing products, activities like that. Most of our business, as you know, is synchronous. About 40% is, getting close to 40% is QDR. There's very little asynchronous business, so a lot of our activity is spent on synchronous product.

In terms of new products, Lee-Lean? Didier?

Yes. That's pretty much it. I think we always are the new product in the SMA, and those are DMA. Right now we pretty much focus on the 40-nanometer in a higher density SigmaQuad product and also on the next generation area or DRAM type of a product.

Okay, when to be able to quantify -- if you were to look through the rest of this year and you look at the end of your year, you are entering, 2013, and look at what you might be able to capture in new product introduction sales volume relative to what you are doing now, can you quantify that in a percentage opportunity for 2013?

You know, we have new product design shrinks. It's a fairly lengthy cycle from the time we start a design and getting it qualified in and volume production done. I think the biggest thing right now is LLDRAM. And if we can get some of those major quals that Didier was talking about, that could lead to some fairly extensive growth a year from now.

The other stuff is the shrinks and redesigns, a lot of that business is helping to improve our gross margin by reducing product costs by getting a smaller die, maybe a faster die, some features that can maintain EPS -- or, I'm sorry, ASP or at least our gross margin. There's a lot that goes into the R&D. It's not always just new business.

Okay. Well, you are doing very well. Look at the shareholder equity and how it's balanced June to March. But considering what you have been buying back in stock, over, what, $11 million to $12 million you mentioned, you are holding your equity pretty much across the board with what you had. That's -- as a (inaudible) you're doing very well on the equity and your cash position looks pretty good. So keep up the good work.

Yes, we have purchased almost $6.4 million worth of stock since the end of September when that program kicked off again. And we are continuing to buy in today's market. It's all the 10b5-1 plan with Needham. And when our parameters are met, we continue to buy shares, all at Needham's discretion, based on the plan.

Okay, thank you.

There are no further questions at this time.

All right. Thank you all for joining us. Look forward to speaking with you in October, when we will report our second-quarter results.

This concludes today's presentation. You may now disconnect.