GSI Technology Inc (GSIT) 2013 Q2 法說會逐字稿

Welcome to GSI Technology's fiscal 2013 second-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 Q&A.

Before I 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 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, October 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 call over to Mr. Shu.

Please go ahead, sir.

Good afternoon, everyone; thank you for joining us.

As noted in our press release this morning, second-quarter results were somewhat mixed, net revenue of $16 million compared to $16.8 million in the first quarter were at the low end of our [July] guidance.

Although the US economy has continued to show moderate growth, this was not enough to offset continuing weakness in orders from suppliers of (inaudible) equipment in Europe, nor was it enough to offset the slowdown in manufacturing in China.

The softness in second quarter revenues also reflects, we believe, continuing uncertainty surrounding our present dispute with Cypress Semiconductor of which I will say more in a moment.

Gross margin on the other hand rebounded nicely to 45% from 40.3% in the prior quarter.

This was still primarily to a greater percentage of product with higher ASPs and higher margins.

As we have noted before, GSI's gross margin is very sensitive to shifts in product mix, which in turn are difficult to predict from quarter to quarter.

With that caveat, our current expectation is that third-quarter gross margin will be approximately 43% due in part to a modest decline in mitigation-related expenses, which are $778,000 year-to-date compared to $2.7 million in the first six months of fiscal 2012.

Second-quarter operating margin also rebounded nicely to 9.4% from 5.2% in those quarters.

Although still well below our target range, this is a testament to the fact that we can be solidly profitable even with a smaller revenue base with which to cover fixed cost.

Indeed we have been profitable every quarter since the third quarter of our 2004 fiscal year, a nine-year period that included the worst recession in half a century.

This record of 36 consecutive quarters of profitability is particularly noteworthy in light of the fact that in the last year and a half we have incurred more than $10 million in mitigation-related expenses, most of it in fiscal 2012 as we prepared our response to Cypress Semiconductor's complaint before the ITC in which they alleged patent infringement on GSI's part.

Year to date Chief Administrative Law Judge Charles E. Bullock issued his initial determination in the patent litigation between GSI and Cypress Semiconductor pending before the ITC.

The ITC investigation was instituted in July 2011 in response to a complaint filed by Cyprus.

Cyprus complained -- alleged that GSI products, including [its] SigmaDDR and the SigmaQuad families, all static (inaudible) SS memory products infringing four Cypress patents and sought an order including the alleged infringement (inaudible) and products containing them from entry into the United States and (inaudible) orders directing GSI and other responders to cease and desist from selling these products in the United States.

An evidentiary hearing before Judge Bullock took place in March 2012.

In his initial determination he issued yesterday October 25, 2012, Judge Bullock [held] that the importation of GSI SRAM products and products containing them and the sale within the United States of such products has not violated applicable federal law with respect to any of the four patents that Cyprus had alleged were infringed.

Detailed findings in support of Judge Bullock's determination have not yet been released.

Either party may request a review of the initial determination by the full commission.

Requests for commission review must be submitted in early November 2012.

The target date for concluding the ITC investigation is February 25, 2013.

As you probably already know, Cyprus has indicated its intention to seek review of Judge Bullock's order even before seeing his detailed findings.

We will, of course, respond vigorously to any petition for review that Cyprus may file.

And we believe that Judge Bullock's decision will be upheld.

I will now turn the call over to Doug.

Thank you, Lee-Lean.

We reported net income of $1.1 million or $0.04 per diluted share on net revenues of $16 million for our second fiscal quarter ended September 30, 2012 compared to net income of $1.7 million or $0.06 per diluted share on net revenues of $20.8 million in the comparable period a year ago.

In the quarter ended June 30, 2012 we earned $920,000 or $0.03 per diluted share on net revenues of $16.8 million.

For the six months ended September 30, 2012 net income was $2.1 million or $0.07 per diluted share on net revenues of $32.8 million compared to net income of $4.9 million or $0.16 per diluted share on net revenues of $43.8 million in the first six months of fiscal 2012.

Gross margin was 42.6% compared to 43.9% in the comparable period in fiscal 2012.

Second-quarter direct and indirect sales to Cisco Systems were $4.9 million or 30.6% of net revenues compared to $4.1 million or 24.2% of net revenues in the prior quarter, and $7.9 million or 38% of net revenues from the same period a year ago.

Military defense sales, which varied considerably from quarter to quarter, were 7.4% of shipments compared to 11.9% of shipments in the prior quarter and 10% of shipments in the comparable period a year ago.

SigmaQuad sales were 33.9% of shipments compared to 38% in the prior quarter and 35.4% in the second quarter of fiscal 2012.

Second-quarter operating income was $1.5 million or 9.4% of net revenues compared to $880,000 or 5.2% of net revenues in the prior quarter and $1.9 million or 9.2% of net revenues a year ago.

Total operating expenses were $5.7 million compared to $5.9 million in the prior quarter and $7.1 million in the second quarter of fiscal 2012.

Second-quarter research and development expense was $2.9 million compared to $2.8 million in the prior quarter and $2.7 million a year ago.

Second-quarter selling, general and administrative expense of $2.8 million included $323,000 of litigation-related expenses compared to SG&A of $3 million in the prior quarter when litigation-related expenses were $455,000.

A year ago SG&A of $4.4 million included $1.9 million of litigation-related expenses.

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 2011.

Total second-quarter pre-tax stock-based compensation expense was $560,000 compared to $562,000 in the prior quarter and $515,000 in the comparable quarter a year ago.

At September 30, 2012, we had $67.1 million of cash, cash equivalents and short-term investments and $26.1 million in long-term investments, $91.7 million in working capital, no debt and stockholder's equity of $129.2 million.

Accounts Payable at September 30 was $3.8 million, down from $5.5 million at March 31.

Net inventory was $17.3 million at September 30, up from $16.7 million at March 31.

Inventory turns at September 30 are 2.0 times compared to 2.4 times at March 31.

Depreciation and amortization expense was $633,000 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.

The specific timing and amount of the repurchases will be dependent on market conditions, securities laws limitations and other factors.

The repurchase program may be suspended or terminated at any time without prior notice.

During the quarter ended September 30, 2012 we repurchased 286,232 shares at an average cost of $4.68 per share.

To date we have repurchased a total of 3,533,792 shares at an average cost of $3.86 per share for a total cost of $13.6 million.

We currently expect net revenues in the third quarter of fiscal 2013 to be in the range of $15 million to $16 million with gross margin of approximately 43%.

We also expect our ongoing legal expenses related to patent litigation and antitrust litigation will continue to affect our operating income and our bottom line.

These expenses are difficult to forecast, but we currently estimate that they will be approximately $1.1 million in the third quarter.

Operating expenses in total are expected to be approximately $6.6 million.

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

(Operator Instructions).

Tristan Gerra, Baird.

Daniel Marquardt on Tristan's behalf.

Thanks for taking my question.

I wanted to see if you can talk about your market share currently and what market share you think you can gain next year given the outcome of the lawsuit?

Daniel, this is Didier.

It's certainly a tough question.

I would say that our market share is somewhere in the 8% to 10% would be my guess.

As far as what market share we can obtain, it's going to take some time obviously to gain the market share.

Samsung is still shipping through the end of the year for the general market; they will continue to ship beyond that to some of the major accounts out there.

So certainly that business isn't going to be turning over overnight.

Certainly we have always had a goal that we were going to try and double the Company as far as market share over time.

I just can't tell you if it is going to happen by next year or if it is going to spill into the fiscal 2014.

But certainly our goal has always been to double the size of the Company.

Okay, that's fair enough.

And then in terms of the [RLD] revenue opportunity, could you quantify that opportunity for next year and kind of longer-term?

I'm sorry the --

LLDRAM.

The LLDRAM.

Yes, the LLDRAM, as we spoke in the past, is somewhere roughly $200 million to $250 million market TAM, it has been obviously -- serviced primarily by Micron.

We have had the parts right now sampled into our customer base, as we talked about before, the call process will take anywhere between three months to six month and sometimes longer for some of the major customers.

There have been a few quals that we understand have been put temporarily on hold due to the outcome of the ITC litigation and certainly the ruling that we received yesterday was very favorable.

And so we anticipate those quals to be released now.

So again, we anticipate the quals to go through the end of this year with some type of revenues first half of next year and certainly ramping in the second half of fiscal next year.

All right.

I have more questions but I will jump back into the queue.

(Operator Instructions).

Tristan Gerra, Baird.

Hello, this is Daniel again on Tristan's behalf.

I just wanted to get an idea of when you guys think we could see a rebound in US wireless spending?

Wow, that is a great question.

I'm not sure if anybody has been able to answer that question for you.

It is hard to tell.

I mean so certainly unlike some of the reports that we have been hearing from other companies in the market space we have seen some light at the end of the tunnel.

Certainly our bookings are a little bit better than what we have seen with some of the other folks in this segment.

With that said, the visibility in a lot of cases in the wireless and wireline have been really hazy still.

Some of the forecasts have changed, certainly within a short amount of time, and I think part of that has to do with the fact that lead times in general from our sales and from competitors are at an all-time low.

So I think that certainly that dynamic has allowed our customers to be -- lack of a better word -- a little sloppy in their forecast.

And so in that respect, unfortunately we don't know -- signs are leaning towards middle of next year, but it is really difficult to say.

All right, thank you.

Anthony Cambeiro, Anthology Capital.

Congrats on the ITC case.

I wanted to ask about the process for getting qualified on a Samsung socket as a second source as for whomever is already providing the other side of the source there.

So if you could kind of talk about what -- how that process goes and how it may be different from a new customer, if you will, if there is any difference, that would be helpful.

So, it's certainly not going to be uniform in the way that we obtain that market share.

And what I mean is you can kind of look at it in three stages -- customers that use my -- I'm sorry, that use Samsung we are already qualified on the same socket; customers that use Samsung that are our customers that we are not qualified at; and then of course lastly, a customer that uses Samsung and we are not there, we are not a qualified supplier at this point.

Certainly the first category, which is where we are already on the same socket, that is going to be the easiest transition.

That is just simply a market share shift that the purchasing folks do.

That is very simple, that is done during a normal quarterly cycle quotation cycle.

The second category, which is customers that know we are already a supplier to but may not be qualified on that particular Samsung socket, that is where we have already identified those and in many cases have either started qualification or at least submitted the samples to start qualification.

As we discussed in previous calls, some of those qualification efforts were placed on temporary hold obviously waiting for the initial ruling or I should say initial determination of what is happening with this ITC case.

Certainly with the resounding results that we received, we anticipate that those quals will be released.

And I say anticipate because obviously the determination came in yesterday so we haven't had a chance to follow up with all the customers.

Lastly, we have that set of customers that we are not qualified in, but we certainly know about it and so we are actively going after those folks.

So it is going to be a process from the first category I mentioned which is a simple shift to the last category which is certainly becoming a qualified supplier and getting qualified on that particular socket.

So it's going to be a range of time frames in order to start obtaining that market share.

Perfect.

And on this I'm just curious if you could comment on the idea that, all right, so Cypress has the largest market share today and so it is more likely or [if it could come out] -- is it more likely that Cypress is paired with Samsung as a secondary source in more customers than you are and, as a result of customers wanting to maintain secondary sources, they are not going to give all the business to one customer that you are more likely doing more than your fair share of the Samsung business over time than other competitors out there?

That is probably a fair statement.

Again, Samsung historically had been the number one SRAM supplier, Cypress passed them a few years back.

So, but Samsung still has been through this year the second largest.

So it's fair to say that between Cypress and Samsung they were -- certainly had the highest concentration of penetration at the OEMs.

With that said, I do agree with the statement you made.

I think any one supplier will have a ceiling to what percentage of business they can get in a market.

Certainly if there are multiple suppliers like there still are in the SRAM market, I should say, there will be a glass ceiling.

And certainly that is what we have said in the past which is one of the speculation -- or one of the reasons we feel that Cypress came after us with the ITC was they certainly didn't want to have this glass ceiling as far as share of the market.

And they felt that one of the ways they could get beyond that was to try and attack one of the up and comers in the market, certainly with the new products that we've had, the SQ-3 and some of the high-end parts, we are having some very good traction and certainly I don't think they wanted to see that continue.

So that is where this started from.

Well, thank you and best of luck to you guys.

I will leave it there.

[Eric Niche], Barclays.

I was hoping you could provide any more detail about what you think the time frame might be for the lawsuit going forward?

And if you plan on trying to reclaim the $10 million in litigation expenses from Cypress and, in addition, possibly a penalty.

Well, at this point in ITC action there is no recovery of legal fees.

So that is gone.

In terms of time frame, currently the final determination is due in February.

But we believe -- we are not lawyers here, but at least we believe that by sometime maybe around Christmas time we will know where Cypress' request for a hearing by the entire committee stands.

If you go, from our understanding, a number of different ways, they could review the entire case, they could review part of the case or they could review none of the case.

So -- about the only thing we can say at this point is that it's definitely supposed to be over February -- end of February.

We know that all along we have been saying that we felt that we violated no valid Cypress patent rights.

And the outcome that we were hoping for and expecting in the initial determination came our way.

And we have no reason to believe that the final determination would be any different.

Great, thank you.

Ted Moreau, Knight Capital.

Doug, this might be a hard question to answer, but I'm going to ask it anyway, you may have touched on it.

But how -- in light of your top-line, how much do you think the litigation actually cost you in terms of -- we know what the expenses are, but in terms of revenue or customers or customers holding back?

And do you get any sense that now -- is it too soon to get a sense of now that it is resolved that some of these delays might move forward or are they still going to wait for the final litigation decision?

Yes, I will take the first crack at it and then Didier can finish.

It is hard to put an answer on what we feel that we have lost in revenue on a quarterly basis, but we have to believe that it's a couple million dollars, potentially may be more.

We know the level of business that we have seen in the past, we know where we haven't gotten awards of business that we typically had in the past.

But it is hard to say it is all Cypress-related because the market has been pretty bad for a while with Europe and activity in China.

In terms of when will it come back, the initial ruling ago came out yesterday and no one has really had a lot of time yet to respond to it.

I know Didier; I'm sure he will have all of his area sales managers and reps go out and knock on the customers' doors again and make sure that they see that we have gotten a favorable ruling.

I know I have already seen some activity, e-mails from customers indicating that they are starting to move more business our way.

But again, a lot of orders are already in place for probably the next couple months or so and we will have to wait and see how long it takes to turn some more of that business our way.

And basically I will mirror what Doug said, certainly we have had a lot of contact with customers in the last day, they are certainly very happy for us.

But honestly there were a few customers out there that were surprised by the ruling.

And I say that only because the very strong and misleading communications they have been receiving from Cypress certainly had them thinking that maybe there was something there, which we said all along there wasn't.

And now the judge has agreed with us.

And so, to mirror Doug's statements, some customers will reward us earlier than others, certainly there are different categories of customers.

You have the customers that were involved in the case, and what I mean by that is Cypress involved them in the case by naming them in the ITC lawsuit.

And then you have folks that weren't involved, but yet Cypress kept going to them and making, again, these strong misleading statements.

So some of those folks have already contacted us and I made it clear that certainly they are happy that we have gone -- done very well in the initial determination.

And I think that we will start seeing some of that momentum carry into first quarter next year.

Certainly nothing is going to happen before then; the purchase orders are already placed and the commitments have been made.

But I think maybe first quarter and certainly into second quarter I do think we will see some of the benefit of our victory.

Didier, why was the lawsuit a factor in people withholding orders?

Were they concerned about the viability of the Company?

Were they concerned about various product lines would be discontinued or not viable any longer or what was the thought process here?

I suppose the market was so weak that it gave them an excuse not to do business with you.

Yes, I do think that the misleading statements that were being made were certainly scaring some of the potential customers.

And certainly it became clear to us early on that that was one of Cypress' biggest strategies was to try and intimidate our customers and they even came -- went so far as to try and intimidate our shareholders.

They made statements out to our shareholders -- I mean that was kind of the tactic that they took.

And unfortunately those kinds of tactics work for a short period of time.

And in this case, again, there were customers out there who have been dealing with Cypress for many years and I suppose gave them the benefit of the doubt in this case and we had never been through a process like this so they didn't know what to expect.

And then they were hearing conflicting information, they have us saying we absolutely aren't violating patents and they had Cypress saying it's a blatant violation of our patents and nobody knew who was right.

Well, now after yesterday's ruling where, again, the ALJ was completely in our favor.

We do have a third party biased opinion from somebody whose job it is to get through to the truth of the matter.

And so in that respect I think customers now will understand that, again, we are a credible supplier, we're an honest supplier, what we say is true.

And I think in that respect we will start seeing some of the benefit of that going forward.

And then one final thing and I will turn it back.

But I know the stock reacted positively with the legal announcement, but I am a little surprised that -- I know your results were weak and all that, but it seems to me the resolution of this would sort of mitigate and overcome any short-term economic issues in terms of your top-line.

I would have thought there would be more follow through on the stock, but maybe that is coming here.

Maybe it's market issues, but -- I mean it just seems to me to be such a favorable development that it should overwhelm any let's say softness in your business.

Well, we hope that will happen, we will see.

Okay.

All right, well thanks.

Best of luck.

(Operator Instructions).

There are no further questions in queue.

I hand the call back over to the presenters.

Thank you all for joining us.

We look forward to speaking with you in January when we will report our third-quarter results.

Bye.

This concludes today's conference call, you may now disconnect.