GSI Technology Inc (GSIT) 2013 Q3 法說會逐字稿

Thank you for standing by.

Welcome to GSI Technology's fiscal 2013 third-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 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, January 31, 2013, 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 ever to Mr. Shu.

Please go ahead, sir.

Welcome, everyone, and thank you for joining us.

Due primarily to stronger sales to Cisco Systems, which were $6.5 million compared to $4.9 million in the prior quarter, today we reported higher than anticipated third-quarter net revenues of $17.5 million compared to our earlier estimate of $15 million to $16 million.

Another factor in the increase was an up-tick in military and defense sales which were inherently lumpy and difficult to predict on a quarter-to-quarter basis.

Gross margin of 41.9% was a little lower than anticipated, but still well within our target range.

Year to date we reported net revenue of just over $50 million and diluted earnings per share of $0.10.

This is somewhat lower than the first nine months of fiscal 2012 when we reported net revenues of almost $64 million and diluted earnings per share of $0.20.

Some of the drop-off in net revenue can be attributed to Cypress Semiconductor's complaints before the ITC which has occupied us since the summer of 2011 and which since the later part of physical 2012 has affected net revenue on a quarterly basis.

The bottom line has also suffered almost as much as in the prior fiscal year as we continued to incur significant legal expenses related to ITC litigation.

I am optimistic that well before next year's first-quarter earnings release we will be able to report that the ITC litigation is behind us.

An initial determination issued last October by the administrative law judge handling the case was overwhelmingly in GSI's favor, effectively alluding that GSI had not infringed any valid Cypress patents related to SRAMs.

As we previously announced, the administrative law judge handling the ITC case issue his initial determination on October 25, 2012 finding no infringement of the Cypress patents by the accused GSI products.

Although the ITC has granted review of the judge's initial determination and remanded the case to the judge to consider our further claims that the patents are invalid and unenforceable, we believe that the full ITC will uphold the judge's favorable determination with a final ruling now expected in June.

Legal expenses could again become substantial depending on the final outcome of the ITC proceeding and whether Cypress chooses to proceed with other patent litigation which has been stayed during the ITC proceeding.

Whatever the outcome of the patent litigation with Cypress, we will continue to incur legal expenses, although to a lesser extent, as we pursue our antitrust lawsuit against Cypress in which we have alleged that Cypress has conspired to monopolize the market for high-performance SRAMs.

We have never shied away from competing with Cypress on the basis of technology and performance, nor have we shied away from aggressively (inaudible) their baseless complaint before the ITC.

Addressing their misleading and defamatory statements surrounding the complaint has presented a challenge of a different sort.

It is clear that to some extent they have succeeded in intimidating existing and prospective GSI customers.

Sales have been adversely affected and regaining that lost business will take time.

With that I now turn the call over to Doug.

Thank you, Lee-Lean.

The quarter ended December 31, 2012 was our 37th consecutive profitable quarter.

We reported net income of $844,000 or $0.03 per diluted share on net revenues of $17.5 million for our third fiscal quarter ended December 31, 2012, compared to net income of $991,000 or $0.03 per diluted share on net revenues of $20 million in the comparable period a year ago.

In the prior quarter ended September 30, 2012, we earned $1.1 million or $0.04 per diluted share on net revenues of $16 million.

For the nine months ended December 31, 2012 net income was $2.9 million or $0.10 per diluted share on net revenues of $50.3 million compared to net income of $5.9 million or $0.20 per diluted share on net revenues of $63.8 million in the first nine months of fiscal 2012.

Gross margin was 42.4% compared to 43.9% in the comparable period of fiscal 2012.

Third-quarter direct and indirect sales to Cisco Systems were $6.5 million or 37% of net revenues compared to $4.9 million or 30.6% of net revenues in the prior quarter, and $9.9 million or 49.5% of net revenues in the same period a year ago.

Military defense sales were 11% of shipments compared to 7.4% of shipments in the prior quarter and 6.3% of shipments in the comparable period a year ago.

SigmaQuad sales were 33.7% of shipments compared to 33.9% in the prior quarter and 32.1% in the third quarter of fiscal 2012.

Third-quarter fiscal 2013 operating income was $595,000 or 3.4% of net revenues compared to $1.5 million or 9.4% of net revenues in the prior quarter and $683,000 -- $687,000 or 3.4% of net revenues a year ago.

Total operating expenses were $6.7 million compared to $5.7 million in the prior quarter and $8.1 million a year ago.

Research and development expenses of $2.9 million were unchanged from the prior quarter and slightly higher than the $2.6 million reported a year ago.

Selling, general and administrative expenses were $3.9 million compared to $2.8 million in the prior quarter and $5.5 million in the third quarter of fiscal 2012.

Included in SG&A during these periods were respectively $1.1 million, $323,000 and $2.9 million in litigation-related expenses.

Total third-quarter pre-tax stock-based compensation expense was $565,000 compared to $560,000 in the prior quarter and $532,000 in the comparable quarter a year ago.

For the nine-month periods total pre-tax stock-based compensation was $1.7 million in fiscal 2013 compared to $1.6 million in fiscal 2012.

At December 31, 2012 we had $65.6 million in cash, cash equivalents and short-term investments; $31.6 million in long-term investments; $87.8 million in working capital, no debt, and stockholder's equity of $130.4 million.

Accounts payable at December 31 was $3.7 million, down from $5.5 million at March 31.

Net inventory was $15.2 million at December 31, down from $16.7 million at March 31.

Inventory turns at December 31 were 2.7 times compared to 2.4 at March 31.

Depreciation and amortization expense was $576,000 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 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 be suspended or terminated at any time without prior notice.

During the quarter ended December 31, 2012 we repurchased 97,438 shares at an average cost of $4.84 per share.

To date we have repurchased a total of 3,631,230 shares at an average cost of $3.89 per share or a total cost of $14.1 million.

We currently expect net revenues in the fourth quarter of fiscal 2013 to be in the range of $15.6 million to $16.6 million with gross margin of approximately 43%.

We also expect that ongoing legal expenses related to the 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 $750,000 in the fourth quarter.

Operating expenses in total are expected to be approximately $6.5 million.

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

(Operator Instructions).

Tristan Gerra, Robert W. Baird.

This is Daniel Marquardt on Tristan's behalf.

I wanted to see if you'd talk about the developments since last quarter with regard to opportunities from Samsung's exit from SRAM?

Yes, so we have kind of discussed this in the past and it is going to be a similar story, which is Samsung was shipping up until if you weeks ago and we certainly believe that there is -- parts are still being shipped and inventory out in the channels on the Samsung parts.

And certainly some of the larger OEM customers from what we understand are also getting extended terms as far as that goes.

I have had some discussions actually with some of our -- I will call them chip partners, other folks that sell chips into our OEMs that our parts interface with.

And they have said that there has been some dialogue with those customers looking to second source Samsung.

So it looks like right now they certainly still have enough Samsung inventory to carry them on.

And my guess is that we'll start seeing some of that business in the next few quarters ahead.

All right.

And then in terms of your primary competitor, Cypress, they had a pretty dismal quarter from an SRAM perspective and you had two positive bumps in Cisco and the military.

Any sense that there is -- that that could be share shift or is this just a timing thing?

No, so certainly if you look at Cisco, one of them was an upside on a part that is a significant socket at Cisco that we actually do not share with Cypress.

So it certainly wasn't any shift from anybody else to us.

From everything we have gathered it was just upside from Cisco.

And I say upside, it was completely un-forecasted.

So it was a surprise to us within the quarter.

The other bump that we got from Cisco during the quarter was a 90-day pull.

So if you're familiar with the hub model, we consign material into the hubs and if they haven't been used within 90 days the parts get pulled.

So we had actually a fairly significant 90-day pull that happened within the quarter which has nothing to do with market shifts.

And military was actually just a return to where we have been.

We have historically run about 10%, 11%, 12% of our revenues in military and in the September quarter we had dropped down to 7.4%.

So that was unusual.

So again, I think the returned to military is just where we have been in the past and I don't see it being much of a share shift at this point.

All right.

Thank you.

Raji Gill, Needham & Company.

The OpEx associated with the litigation, the ongoing litigation, I know that you can't specify a range, but it seems like it is kind of nearing completion; you only have maybe four or five months left.

Should we expect kind of an additional $750,000 a quarter related to that or should we kind of taper that legal expense down?

Just curious to see how you think about that.

And also, with your lawsuit against them what does that do to the overall legal expenses?

Okay, so for the March quarter where we are forecasting $750,000, almost all of that is related to our antitrust litigation, very little of it is related to the ITC litigation with Cypress.

The ITC litigation hit close to $3 million for a couple of quarters in the recent past and, you are right, that for the most part is behind us.

We don't expect a lot of spending there.

But the antitrust litigation is a much more lengthy process in terms of time than ITC activity.

That could go on, probably not hit trial until the first half of calendar 2014.

So I wouldn't expect $3 million a quarter, but I certainly would expect something more than a few hundred thousand dollars.

It all depends on the activity within a particular quarter what activity is going on.

The last two quarters have been more expensive than previously because of the data gathering, going through, analyzing our data.

This quarter it is deposition related.

So it really depends on the nature of the activity going on in any quarter.

So it really is hard to estimate what it is.

I would hate to throw a number out there because even the attorneys can't tell me what to expect.

But I can certainly tell you that it won't be $3 million a quarter.

But I suspect it will be several hundred thousand dollars a quarter, potentially more.

That was helpful.

And, Didier, on the com equipment market, there have been some relatively positive data points in the com equipment space, whether it's semiconductor companies or actually service providers or other suppliers in the space that are indicating some sort of rebound perhaps in kind of US carrier CapEx spending, Chinese spending and even on the enterprise side.

You are very tight to Cisco and particularly in a certain program at Cisco.

But any kind of insight on how you kind of look at the ramp at Cisco and the overall market going forward?

And does it go into the second half?

Yes.

I've certainly heard some similar rumblings which is the rebounding in the second half of the year and we are certainly hoping to see that as well.

To specifically talk about Cisco or Huawei or what have you is difficult.

But certainly where we see the most upside is from Alcatel.

We've discussed in the past the 7750 which is their edge router and their 7950, their entry into the core routing business.

We have significant content on both of those platforms and those are platforms that really have not kicked in it yet.

Though Alcatel has announced on the 7950 they have had two wins in Verizon and Telephonica most recently.

And so we anticipate that that should take off some time -- we were certainly hoping it was going to take off some time in the June quarter but it is hard to anticipate if it is going to or not.

But certainly by the second half of this year we should see that take off.

So in general I do see the optimism as well in that market space certainly projecting our revenues for the second half of this year.

Now, the win at Alcatel-Lucent, was that a market share again gain or was that -- can you describe how you got the Alcatel-Lucent and the go to market share gain against who?

Or was it just a new program that they were ramping?

No, so it's a new program, new platform, it actually uses a few different SRAMs; one of them is the [SQ3], which is unique to GSI, we are the only one that offers it.

There are also a few other sockets on there as well that we'll be sharing with other competitors.

But on the SQ3, which is on both platforms, both the 7950 and the 7750 we are sole-source.

So certainly that will be a new program, not a market shift.

And on the ASPs, any range there you can provide?

Certainly much higher than corporate average, which corporate average this past quarter was over $15.

So we actually cracked $15 for the first time in the history of our Company.

In fact, if you track our ASPs, they pick up about $1 a year.

And we are up to over $15 now and the ASP is on the families we are talking about for these platforms are much higher than that.

And any update on the LLDRAM opportunity?

Yes, so the LLDRAM, as we discussed last time, there was one last little fix that we are making which has been made.

We've actually closed our first major design win at one of our top five customers, which will start kicking in in the June quarter.

We've also had a few sockets that have opened up.

Certainly I think that some of the [quals] were being put on hold until some kind of feedback from the ITC courts.

Even though the LL has absolutely nothing to do with the case, it is not an SRAM, some of the companies were still waiting to see what was coming back.

And certainly with the very positive, favorable ruling we got in October some of those qual sockets have been opened.

In fact, one of our single largest opportunities that we have been tracking for some time the qual window has just opened and we should start the qual in April time frame.

It is not clear long how long it will take.

It could take a couple of quarters but it is going to be certainly our single largest design win that will significantly increase the revenues of that family.

Here is the last question for me.

You talked about the fact that you had lost some business because of the lawsuit and that you felt that Cypress might have hurt itself with its customer base due to the lawsuit.

So I was just wondering if you are seeing any recovery in business from any of those customers that you supposedly said you lost business to.

Some yes and some no.

So, some yes, certainly I think the -- even though the case isn't finalized, again, the initial determination that was so one-sided I think they feel comfortable going forward.

And so those customers that are free to do so I think are starting to make those decisions and we are starting to see the momentum.

The ones that aren't are the ones that still have signed agreements with Cypress and from what we gather, and, again, we have not been privy to these agreements.

But our understanding or certainly our belief is that these are -- these agreements are contingent on the final determination.

And so those customers, we won't see that return of revenue until the final determination comes out and obviously in our favor.

Okay, got it.

Thank you very much.

Appreciate it.

(Operator Instructions).

Mike Crawford, B. Riley.

With the LLDRAM part that you are sampling now, does that already operate at 533 megahertz with 15 seconds latency or is that something to come in in the future?

No, we have it now.

So that family -- so there are two densities, the 288 megahertz and the 576 megahertz and there are four different speed grades, you have the low-end which is the 333 megahertz and the 400 megahertz at 20 nanosecond latency and you have the high end which is the 400 megahertz and the 533 megahertz at 15 nanosecond latency.

So we offer all four of them.

In fact, I believe we are the only one to have all four that have been shipping all along.

So the answer is we have them now and those -- that single largest opportunity I mentioned earlier is the high end 533 socket.

Okay, thanks.

Didier, in the past you have talked about this product enabling as much as $10 million a quarter in revenues for GSIT.

I am wondering if that continues to be the belief.

And if so once customers start to take volume deliveries of production is that something that could ramp up all in one quarter or is that going to take a couple years to get to that level?

No, it is going to take some time.

Certainly that's still our goal, but it will take time.

Again, we started some of the quals now, as I mentioned.

A lot of them were on hold due to the ITC.

And so, some have been released now; it will take a few quarters for some of them to happen.

We still have a couple large sockets out there that we haven't received the qual window opening yet, so those will take longer.

So the answer is we are going to have to build up to that and it could take a little bit of time.

But you will start seeing -- as we exited this calendar year you will start seeing the revenues coming from this family.

Okay.

Then back to the SQ3.

So that is being used for core router and edge router.

And is there a way to quantify potential impact at GSIT based on demand you see for those products?

Yes, so we have been given forecasts in the past, but certainly the deployment of these platforms have taken some time.

And so, I really don't want to go off those forecasts because I don't want to lead you down a path that may not happen.

Certainly they are very rosy forecasts.

And so, the answer is when these kick in if they kick in to the degree that we are being told from the OEM it will be significant -- it will be significant revenue for us.

I just can't -- I can't or I don't want to share those forecasts because they are not hard orders yet, and until that happens it's too dicey.

Okay, great.

And then just to go back to Samsung one last time.

So there is going to be Samsung SRAMs swimming around in the market for you think just a year or for several years or when do you think you are not going to see Samsung SRAMs really available in any meaningful amount as an option for customers?

So, I think it depends on the customer and the socket.

I think some sockets -- we'll use military for instance and maybe some automotive sockets.

But certainly military where it is -- they tend to be single source.

Those customers -- the qualification is so difficult that they will, instead of qualifying another supplier, they will do a lifetime buy.

So there will be some sockets that none of us -- the remaining SRAM suppliers will see, they will do a lifetime buy and they are gone.

The other portion of the market where they are going to continue to purchase, it won't be years, no, I don't see that happening.

But certainly this shipment that Samsung made at the end of the year for the majority of the customers and the shipments they are still making for a small portion of their customer base I think will keep Samsung material in the market certainly for the next two to three quarters.

Okay, great.

Thank you.

And if there are no further questions at this time I would like to turn the conference back to our speakers for any additional or closing remarks.

Thank you all for joining us.

We look forward to speaking with you in May when we will report our fourth-quarter and year-end results.

Thank you.

That concludes today's conference.

Thank you for your participation.