SemiLEDs Corp (LEDS) 2012 Q1 法說會逐字稿

Welcome to the SemiLEDs fiscal first quarter earnings conference call for the quarter ended November 30, 2011. This call is being webcast live on the Events and Presentations page of the Investor section of SemiLEDs' website, at www.semiLEDs.com. This call is property of SemiLEDs and any recording, reproduction or transmission of this call without the express written consent of SemiLEDs is strictly prohibited. As a reminder, today's call is being recorded. You may listen to the webcast replay of this call by going to the Investor section of the SemiLEDs website and visiting the Events and Presentations page. I would now like to turn the call over to Erica Mannion, of Sapphire Investor Relations, Investor Relations for SemiLEDs.

Good morning. Thank you for joining us to discuss SemiLEDs financial and operating results for the fiscal first quarter 2012. With me today are Trung Doan, Chairman and Chief Executive Officer, and David Young, Chief Financial Officer. Today, Trung will begin with a brief overview of industry dynamics and details of the first quarter. David will review fiscal Q1 financial results and provide fiscal second quarter 2012 guidance. Trung will then provide a summary.

On the call today you may hear forward-looking statements about events and circumstances that have not yet occurred. Actual outcomes and results may differ materially from the expectations contained in these statements, due to a number of risks and uncertainties. Please refer to the Company's recent SEC filings at the SEC's website, at www.SEC.gov, for detailed discussions of the relevant risks and uncertainties. The Company undertakes no responsibility to update this information in this conference call under any circumstance.

The press release distributed today that announced the Company's results is available on the Company's website, at www.semiLEDs.com, in the Investor section under financial press releases. The current report on Form 8-K furnished with respect to our press release is available on the Company's website in the Investor section under SEC filings and on the SEC's website. You will also hear discussions of non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP financial measures are contained in the press release distributed today and available on the Company's website.

Now, I will turning the call over to Trung Doan, Chairman and CEO. Trung, please go ahead.

Good morning, and thank you for joining our call today. I would like to begin by talking a bit about industry dynamics that we are currently seeing. On our last quarterly call in early November, I said that the market remained challenging in Asia for LED chips and components. The China market is still the same, and economic conditions around the world are full of uncertainty. However, pockets of demand have emerged.

As you may have seen, on December 15, 2011 Taiwan announced a street light project. The project is valued at approximately NT2 billion, or $66 million US dollars, and will be used to help local government install 250,000 LED street lamps in place of existing mercury vapor lamps. While this is a very new announcement, no further details have been shared. We do plan to actively pursue the business as details emerge.

During the last quarter, we increased our component sales and developed new products designed to address the indoor market. This strategy has proven fruitful. Our first quarter results met the high end of our expected guidance for both top line as well as bottom line. Revenue was $6.7 million, which is up 21% sequentially. David will discuss the financial results in more detail shortly.

Last quarter we talked about China's five-year plan, which includes a commitment to drive energy efficiency and LED lighting adoption. Not much has changed since our last November call. We have not seen these funds released yet. Therefore, we are still producing a limited production and are continued to focus on yield and reducing costs to ensure we are well-positioned when the market improves. Currently in our Taiwan fab, our production lines are now qualified to produce chips and 4-inch wafers. However, we are still running some 2.5-inch wafers for R&D and certain legacy products. As a reminder, China [Similac] is running entirely at 4-inch. Last quarter, we talked about growing our component business. We are scheduled in Q2 2012 to start selling in China market package products that will be locally packaged and incorporate chips manufactured by China Similac.

Now, I will turn the call over to David, who will take you through our third quarter financials and provide some guidance.

Thank you, Trung, and thanks everyone for joining us today. As a reminder, our fiscal year ends on August 31, making the quarter ended November 30 our first fiscal quarter. I will begin by walking through the fiscal Q1 financials and then provide guidance for fiscal Q2 2012. For the first quarter 2012, revenue was $6.7 million. This is a 48% decrease from $13 million in the first quarter of 2011, and a 27% sequential increase. The increase in total revenue was primarily due to an increase in component sales, as we continue to diversify our product revenues and provide more complete product solutions for customers. Revenues attributable to the sales for LED chips decreased 29% sequentially, and represented approximately 30% of our total revenue in the quarter. Revenue attributable to the sales of LED components increased 93%, representing approximately 45% of our revenue in the quarter.

GAAP gross loss was $0.8 million. GAAP operating loss was $6.4 million. GAAP net loss was $7.7 million for the quarter, compared to GAAP net income of $3.8 million in the same period last year. GAAP diluted loss per share was $0.28. On a non-GAAP basis, net loss was $7.1 million, compared to non-GAAP net income of $3.9 million for the first quarter of 2011. Non-GAAP annual loss per share was $0.26. Non-GAAP net loss excludes stock-based compensation expense of $0.7 million, net of tax.

R&D expenditures decreased sequentially $0.6 million to $1.7 million. SG&A expenditures decreased sequentially $0.9 million to $3.9 million. As a reminder, SG&A expense last quarter included a charge of $1.1 million for bad debt reserve. The Company's balance sheet remains strong, with working capital of $84.2 million, and cash and cash equivalent of $74 million, which is a decrease of $9.7 million from the prior quarter's cash balance. Days sales outstanding was 56 days, compared to 82 days for the prior quarter. The shorter collection period was due to improved collection and advanced payments we received from certain customers. Inventory days on hand was 200 days as compared to 142 days at end of the quarter -- at end of the prior quarter, as we carry a higher level of component inventories. Inventory was $16.8 million for the first quarter of 2012, an increase of $0.6 million from the fourth quarter of 2011. Inventory on hand consists primarily of finished goods.

We spent $5.8 million on capital expenditures in Q1, which resulted in free cash flow of negative $9.3 million. We define free cash flow as cash provided by operations less capital expenditures. Cash used in operations was $3.5 million.

Now, let's turn to guidance. We expect Q2 revenue to be in the range of $7 million to $8 million. We expect GAAP gross margin to continue to be negative for the quarter, as we will not fully utilize our production capacity. GAAP net loss for Q2 is targeted to be $7.6 million to $7.1 million. GAAP EPS is expected to be negative $0.28 to $0.26 per diluted share. The diluted share outstanding count is estimated at 27.4 million. I will now turn the call back to our CEO, Trung Doan, for closing remarks.

Thank you, David. To summarize, in an effort to manage through the current environment, and more importantly ensure that we are well-positioned for the next upturn, for the next several quarters we will continue addressing the indoor lighting market, supply the China market with high power, locally manufacturing package, cheap (unintelligible) package, continue focus on product development, introduce new products and continue to manage our fixed and capital expenses.

This concludes our formal comments. I would like to ask the operator to open the line up for questions. Thank you.

Thank you. (Operator Instructions)

We'll go first to Jesse Pichel with Jeffries.

Hello. Good evening, gentlemen.

Could you discuss first the pricing trend that you're seeing and are we seeing any signs of stability?

Hello, Jesse. This is David here.

As we mentioned earlier, this quarter's revenue growth came from higher component sales in the indoor lighting market. And a good portion of that was attributed to lower price indoor products. So when we look at the ASP from quarter to quarter, the change in product mix was somewhat distorted for Q1 ASP. But if you were to exclude those items and do a like-for-like comparison, the overall -- the ASP decline was just over 10%.

And what is your expectation built into your guidance for the next quarter?

I think we can see in our guidance for the next quarter, we believe the price decline will continue to be -- will be flat quarter to quarter, high single digits to maybe low double digits, in the neighborhood.

Baked into your guidance is price -- can you repeat that again? Price decline is low double digits, you said --

High single digits to low double digits.

Sequential decline?

Correct.

Okay. You mentioned the indoor solutions quite a bit. Have you shipped many small chips at this point? And can you give us an update on what are your products and solutions addressed in the indoor market, and specifically what type of efficacy you expect for the 15 to 25 mill chips?

You know, we ship smaller die size. Normally, previous quarter, we concentrated a lot on the 1 millimeter square die, and in recent -- because of the indoor market, require small light size, so these are -- our mix reflects the needs of the indoor market.

Yes. And how are you positioned with indoor solutions?

I think obviously you see that our sales have increased.

Okay. I'll let someone else ask a question and then come back. Thank you.

We'll go next to Andrew Huang with Sterne Agee.

Hello. Just a quick question on the February quarter guidance. Is there going to be any impact from Chinese New Year in the guidance and is that already kind of taken into consideration?

Yes, that has, the impact of Chinese New Year has already been taken into account in our guidance for Q2.

And as a result of Chinese New Year, do you typically experience a kind of seasonal slowdown or what typically happens?

Typically, you see Chinese New Year a slowdown in the month of the Chinese New Year. This month it happens to be a little bit early. That is in January. January, about 24.

21.

January 21, yes.

Okay. And then on your gross margin improvement, it did improve quite a bit on a sequential basis. So is that primarily due to higher factory utilization or is it more -- or a better pricing environment or is it a combination of both?

It's not really because of higher ASP. As we said, the ASP actually reduced. As volume coming up, as well as -- this is a combination of products, I think.

Andrew, as you might recall, last quarter, in Q4, we had a large write-off, over $4.4 million inventories reserved in Q4. That really drove us deep into negative territory. And so that we no longer have that, such a large amount write-off in Q1. And the amount of inventory write-off in Q1 is about $940,000 for this quarter.

Okay. And then just one last question, if you don't mind.

You kind of mentioned in the last question that you started shipping smaller die sizes for indoor applications. Is that for LED bulb replacements or is that for fluorescent replacements? What kind of applications are you talking about, more specifically?

We know the customer we sell to, but we don't really know what application exactly, we just know the general lighting.

Okay. Thank you very much.

Thank you, Andrew.

We'll go next to Peter Christianson with Bank of America-Merrill Lynch.

Good morning. Thanks for taking my questions.

Last quarter without the write-down, gross margins would have been positive 6%. So we're down sequentially. But at the same time, you've added more 4-inch capacity to your Taiwan line, so costs should be going down. So was utilization -- how did that trend during the quarter? And do you think that utilization will have to come down going forward?

Would you repeat the question?

So gross margins came down sequentially, negating the inventory write-down that you had last quarter, but at the same time your 4-inch capacity has -- it seems like it has increased. So unit costs should have fallen quite a bit in the quarter. So I'm curious to see how utilization has trended and what your plans are for next quarter's utilization rate.

Actually as you go to 4-inch wafer, the number of units output is higher. So this depends on how the market will assist utilization. But you are correct that the output, the capability went up. The reason why a 4-inch wafer from a smaller size before. As I said in the call, we still run some 2.5-inch for legacy and R&D, because of the low utilization of fab. If we go to 4-inch wafer fully, that utilization (inaudible) increase output, then we have to reduce utilization proportionately to the increase.

Does that answer your question?

Somewhat. We could take it offline.

Last quarter, 25% of production out of Taiwan fab was 4-inch, so now we're totally -- what's total production now at 4-inch capacity?

The reason why we are underutilized, for sure, and if you run 4-inch wafer, the more 4-inch wafer you run, the more we have to buy new supplies for that, because we have additional 4-inch wafers. So you can use R&D, do 2.5-inch, is low cost now, for R&D. Now, for legacy products, some legacy products, we still run 2.5-inch.

Right.

So it's hard to -- we don't want to give you a number, say -- it is high 25%, for sure. It's in the more than 50%. Just depends on the number, how you look at it and what time period. The reason why is that how we introduced R&D higher, when the legacy product is higher, so that's why I don't want to say exact number in terms of the percentage this time, because our utilization is still low. We can do 4-inch no trouble at all. The yield's higher, the number of die's higher, but for R&D the cost is lower by running 2.5-inch. And some legacy, we have to run 2.5-inch.

I think I get it.

And just finally, Trung, if you could just let us know how you think quoting activity's been going. I know last quarter you said there was some irrational pricing out there, especially for your higher efficacy chips. What kind of quoting activity have you seen lately and how do you think the rest of the year is starting to shape up?

From what we see, we don't see any irrational behavior, any kind of big price movement by -- in the market. And things just become normal at this time and we don't -- I think the price has went down substantially. I don't see things that really drastic as we have seen in March, in the May time frame last year.

Okay. Thank you for answering my questions.

Thank you.

We'll go next to Olga Levinzon with Barclays Capital.

Hello. Thank you for taking my questions.

Just wanted to a little bit on the February quarter guidance. It seems like on a GAAP basis your net loss and net EPS is pretty comparable to the November quarter levels, even though revenues are increasing. Should we expect gross margins to actually come in lower sequentially, or is there an increase in the OpEx as a result of the added capacity that's coming online?

Yes, our gross margin is just slightly lower than Q1. And as far as our OpEx goes, our OpEx total for Q1 was about $5.6 million, and for guidance we're planning for about $5 million OpEx for Q2.

And at that level, what sort of cash flow -- what sort of cash burn should we expect in the coming quarter?

For Q2?

Yes.

Well, I think right now, for example, we're definitely, in terms of cash flow, we're scaling back our CapEx. Our CapEx for Q1 was about $5.8 million. And for Q2 we're looking at about $1.5 million CapEx. As far as the cash burn, this quarter was about $3.5 million, and that might be a little -- actually, that might be a little bit higher next quarter because we have to pay out, for example, the Chinese New Year bonus this quarter. So in terms of cash burn from operations, that will be a little bit higher in Q2.

Just a final question on your outlook for China. You talked about expectations for China [Simulab] to finally begin shipping products in the current quarter. Can you talk about what sort of backlog they have right now, if they've lined up any sort of local or municipal projects, and how you expect that trajectory to move throughout the year.

As we said, the component sales were for both local chip and package part, and that's what we aim for. Right now, we just start coming up in China some of that, we have capability coming up. We haven't had a qualified from that facility yet. We expect that sometime in Q2 2012, when we start shipping from there.

Thank you.

Thank you.

We'll go next to Jesse Pichel with Jeffries.

Hello. Thanks for the follow-up questions.

Trung, what are your current expectations for the 125 plan now?

I have been told before that it's second half of 2011. So I stopped guessing, Jesse. I hope that you -- can give you a better forecast by crystal ball. Right now, it all depends on the Chinese government, when they will release the money. They say they will do it after Chinese New Year, but until the money hits my lap, I wouldn't count.

What are the major provisions of the 125 plan that you think will increase demand? Is it a CapEx -driven subsidy of 30%, or what are you looking for specifically?

You say what is -- I heard there's -- again, this is what I've been told, that they will subsidize luminaire and the light bulb and the street light. And if that went through and actually the local governments have the money easing, that will become very beneficial for local Chinese company.

Are you hearing 30%?

In that ballpark, yes.

In the ballpark. Yes, yes.

Given the general lack of demand and how SemiLEDs is struggling to grow their revenue and volumes, what do you think is happening to the hundreds of MOCVD tools sold across China from the two big equipment vendors? Are these subsidized companies giving up, or are they still continuing on an R&D path?

The question is what -- essentially your question, Jesse, is about what happened to all the subsidized tools in the market.

Correct.

Right?

Correct.

Well, if all of them turned on at this time, it would be an incredible supply for LED. But we haven't seen a drastic change from last quarter in terms of pricing. So I don't know exactly what is turned on, what is turned off or what is restart. So I don't have that data. But yes, having seen the pricing drastic as what we have seen in our previous quarters --

Are you seeing the tools available, Trung, on the secondary market? Maybe you can get a good deal on them.

I wouldn't comment on that one, because that is -- it's very location-dependent and company-dependent.

Last question for you. Is the SemiLEDs technology scalable to 6-inch, and what are you thinking about in terms of 6-inch going forward?

The question is will our technology scalable to 6-inch and beyond? I look at our technology and we always want to grow bigger wafer, we want to be a pioneer in elastic wafer, because that is the premise of our technology. And I believe that we are not -- 6-inch is not -- bigger size will be -- the bigger size, 8-inch, very highly potential.

Are you targeting to produce any 6-inch in the near term or mid-term?

I don't think that with our current capacity like this there's much need for us to convert to 6-inch at this time, Jesse. But development technology for larger wafer size we will continue always try to pursue.

Right. Okay, gentlemen. Well, listen, thank you very much and good luck in the quarter. And happy Chinese New Year.

Thank you.

(Operator Instructions) We'll take a follow-up from Andrew Huang with Sterne Agee.

Thank you very much. First, can you please repeat the revenue breakdown between chips -- sorry, components, chips and other?

Sure. For Q1 2012, chip is 30%, component is 45%.

So that means other increased to 25%. Is that correct?

That's right.

Okay. And can you give us -- or just remind us what's included in other?

In other, a big chunk of that is actually -- some of that is luminaires.

Okay. So you're actually making finished luminaires?

Well, it's a very small part of our sales here. We don't really -- we actually outsource a lot of that.

Okay. Got it.

And then secondly, it looks like your loss from China SemiLEDs increased sequentially, so can you give us some color on China SemiLEDs, on that line item for the February quarter?

Yes. It has increased, indeed, from Q4 from last quarter. And this quarter together with -- actually total equity pick-up loss is about $1.5 million. And the (inaudible) loss is higher than the prior quarter. And part of the reason is that we also had to do an inventory write-down for Q1.

Okay. And how about any commentary on that line item for the February quarter?

We expect that line item will relatively be flat quarter to quarter, maybe just a tiny bit higher, but I think it's about flat.

Okay. All right. Thank you very much.

Sure.

And that concludes our question-and-answer session today. And that concludes the conference, and thank you for your participation.

Thank you.

Thank you. Bye now.