SemiLEDs Corp (LEDS) 2012 Q2 法說會逐字稿

Welcome to the SemiLEDs fiscal second-quarter earnings conference call for the quarter ended February 29, 2012. This call is being webcast live on the Events and Presentations page of the Investors 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 expressed written consent of SemiLEDs is strictly prohibited.

As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the Investors section of 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.

Thank you. Good morning. Thank you for joining us to discuss SemiLEDs' financial and operating results for the fiscal second-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 second quarter. David will review fiscal Q2 financial results, provide fiscal Q3 2012 guidance and then open up the call for questions.

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 the information on 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 Investors 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 Investors 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.

Before I turn the call over to Trung Doan, I would like to mention that SemiLEDs will participate in the Deutsche Bank Clean Tech Utilities and Power Conference in New York on May 14 and the Barclays Clean Solutions Conference in New York on May 30. Now I will turn the call over to Trung Doan, Chairman and CEO. Trung, please go ahead.

Good morning and thank you for joining our call today. Similar to last quarter's call, the industry faced the same challenges it has for the last few quarters. Specific to Asia there is weak demand for street lights in China due to lack of funding even if the 12th five-year plan has been defined. However, there are pockets of demand from the local Guangdong government. Last quarter I talked about the Taiwan Street Light Project and I'm happy to report that we have won an initial order from this project and continue pursuing more.

Our focus on packaging and indoor lighting continued to yield results during the quarter helping us manage through this market environment. While the second fiscal quarter is typically a slow season due to the Chinese New Year, our fiscal second-quarter results are coming in at the top end of our guidance with revenue up $7.9 million, a sequential increase of 17%. David will discuss the financial results in more details.

During the second quarter the mix of products changed, resulting in higher component revenue compared to chip revenue. We expect that this will continue in future quarters. Concerning ASPs, the ASP of components was more stable than previous quarters and chip ASP erosion slowed down to low single digits.

In fiscal Q2 2012, our utilization at both of our facilities was low due to Chinese New Year holidays. We increased our utilization after the Chinese holidays.

To summarize, our strategy is working. We continue seeing steady revenue growth and our focus on managing our fixed and capital expenses have reduced our cash burn rate. We are preparing for the return of demand, specifically in the strip light market by improving our yield and continuing our migration to 4 inch wafer.

Now I will turn the call over to David who will take you through our second-quarter financials and provide guidance for fiscal Q3. David?

Thank you, Trung, and thanks everyone for joining us today. As a reminder, our fiscal year ends on August 31 making the quarter ended February 29 our second fiscal quarter.

I will begin by walking through the fiscal second-quarter financials and then provide guidance for fiscal Q3 2012.

For the second quarter of 2012 revenue was $7.9 million, which was at the top end of guidance we provided on our last earnings conference call. This is a 21% decrease on $10 million in the second quarter 2011, and a [17]% sequential increase. The increase in total revenue was primarily due to the increase in component sales as we penetrated the indoor market and provided a more complete product solution to our customers.

Revenues attributed to the sale of our LED chip decreased 37% sequentially and represented approximately 16% of our total revenue of the quarter. Revenue attributable to the sale of our LED components increased 79% and represented approximately 69% of our revenue in the quarter. Revenue from our other products decreased 29% and represented approximately 15% of our total revenue in the quarter.

GAAP net loss attributable to the SemiLEDs stockholders was $7.1 million for the quarter compared to a loss of $1.2 million for the second quarter of 2011. GAAP diluted loss per share was $0.26, also at the top end of our guidance.

On a non-GAAP basis, net loss attributable to SemiLEDs stockholders was $6.1 million compared to non-GAAP net loss of $0.7 million for the second quarter of 2011. GAAP -- non-GAAP net loss per share was $0.22 compared to non-GAAP net loss per share of $0.03 for the second quarter of 2011. Non-GAAP net loss excludes stock-based compensation expense of $965,000 net of tax.

R&D expenses were $2 million, a $300,000 sequential increase; SG&A expenses were $3 million, a $900,000 decrease. Total operating expenses are also in line with our guidance. One of our main goals this quarter was controlling expenses and spending, which we believe we have done effectively.

Moving to the balance sheet. The Company has working capital of $78.8 million and a cash and cash equivalent of $66.4 million, which is a decrease of $7.6 million on the prior quarter's cash balance. We reduced the cash we spent this quarter and we will continue to manage our cash prudently in the coming quarters.

Days sales outstanding was 33 days as compared to 56 days for the prior quarter. Inventory days on hand were 187 as compared to 200 days at the end of the prior quarter. Inventory was $17.9 million for the second quarter of 2012, an increase of $1.1 million.

We spent $3.3 million on capital expenditures in Q2. Capital expenditures were higher than we expected this quarter primarily due to accepting some equipment earlier than anticipated. This resulted in free cash flow of a negative $7.8 million. We define free cash flow as cash provided by operations less capital expenditures.

Cash used in operations during the second quarter was $4.5 million, compared to $3.5 million in the first quarter. A sequential increase in cash used in operations was expected and discussed in the first quarter's earnings call, as it was primarily due to payout of bonuses for Chinese New Year. Now, I'll provide guidance for our fiscal third quarter.

We expect revenues to be in the range of $7.9 million to $8.9 million. We expect GAAP gross margin to continue to be negative for the quarter as we will [now] fully utilize our production capacity. GAAP net loss for Q3 is targeted to be $7.5 million to $7 million. GAAP EPS is expected to be negative $0.27 to $0.25 per diluted share. The diluted shares outstanding count is estimated at 27.5 million.

This concludes our formal comments and now I will ask the operator to open the line up for questions.

(Operator Instructions) Daniel Amir, Lazard.

Thanks a lot; thank you for taking my call. A couple questions here. Can you give a little more clarity how you think the LED market for you guys could play out as the year progresses? Do you think we've kind of reached bottom and pricing is starting to improve here as we go forward, or do you view it this might be short term in nature?

We have seen our revenue's steady growth from below $5.7 million in a few quarters ago and go up as of today and we said it is $7.9 million. But, you know, we haven't seen the steady growth from quarter over quarter. Now I don't have a crystal ball to know that do we -- how's the market doing, but I think we have beginning of the recovery that we are seeing today.

What was the other -- last question?

In terms of ASPs, I mean going forward.

We see the ASP, as we comment in our call is that component is relatively stable and for the -- our chip is low single-digit so it looks more what we are typically seeing than attractive change that I've seen in beginning of the year of last year.

Okay, and a follow-up question here. When -- there's been a lot of talk around the Chinese government with implementing demand incentive programs. When do you think that will really start kicking in into the market? I mean, is it very much in the near term? Is it 2013? What is your best thought there?

I don't know really. There's been a lot of announcements about the 12th five-year plan, but as I said again and again in previous quarters, when the money hits my lap that's when I count. But as of today it has been slow, as I mentioned this call.

Josh Baribeau, Canaccord.

Hi, thanks. It's Josh Baribeau for Jed Dorsheimer. Just a couple of questions if I might.

Can you talk a little bit more about when you expect the Chinese joint venture to be accretive to the model and how you get there?

In the China market, the majority of purchase are from government and until we see the return of the street light -- we have been announced on the 12th five-year plan and until that return and the funding release I think that we still keep China similar operation run at just holding pattern until we have that release. We have sent a part for qualification and there's a lot of help, support from the (inaudible) government. But until -- as I said before in previous question, when we see the return of street light that is a very important part and right now I don't really want to forecast until we receive and get a substantial order.

Okay, maybe asked a different way. What will it take to get that to be accretive? Is it a function of utilization or is it just a more stable pricing environment?

It is the increased utilization.

Okay and just last one for me. Do you have any updates on your litigation with some of your competitors?

If you refer to about our litigation with Cree we had our Markman hearing and we have a Markman ruling until -- the schedule today is we will have booked it. It is scheduled to be March 2013 for the lawsuit that is brought against us by Cree and we will have the date for ours is November 13; is for our lawsuit against Cree.

Okay. Is there a particular timeframe we should expect an increase in legal expense as a result of those, or is it too early to say at this point?

It's too early to say at this point.

Thank you. I will pass it on.

(Operator Instructions) Andrew Huang, Sterne, Agee.

In your prepared remarks I think you mentioned that after Chinese New Year you started to bring utilization up. So can you give us a sense of where utilization was for the February quarter and then how much you bumped it up by?

Right now during the Chinese New Year actually [production] went down to about [30]% because we didn't -- as you see that shift now of the New Year. And then after Chinese New Year we bring it back up. Right now we are above -- we are about 50% roughly. We're coming up to that range right now.

Okay. In terms of what is driving that is it a function of -- when you look at your product at distribution, is distribution sell-through increasing sequentially or is it just that their inventories are too low?

You know, you see it -- the question is is inventory too low and people had to replenish or is it (multiple speakers)?

Right.

Now we don't really have the visibility into our customer inventory but we have seen that -- obviously, we see our revenue increased from $6.7 million to $7.9 million. And David said that we expect that we will -- that revenue coming up will be forecast to be between $7.9 million to $8.9 million.

Now I wish I can go in and look at every customer inventory to know that. [Without that] really I cannot answer that question.

Okay, okay. And then maybe another question. I just wanted to clarify your commentary on the pricing, so can you just repeat your commentary on the pricing for the component side of the business?

David, do you want to comment on that?

Yes. So Andrew, David here. So basically, again, our ASP has stabilized for this quarter so mainly it has maintained in the single digits and the decline, erosions is the single digits this quarter. And the pricing is a bit better for chip compared to computer components.

Okay. So does this mean that if components was down, let's say, 5% sequential then chips was down like 3% sequential? Is it that kind of a magnitude?

Yes, I think we don't want to get too specific with our numbers, but just say that you know I think they are both on single digits. It's just that chip is doing a little bit better than component.

Okay, great. Thank you very much.

Olga Levinzon, Barclays Capital.

Thanks for taking my question. Just wanted to follow up about the contract you highlighted with the Taiwan street light project. Can you quantify what kind of revenue opportunity that may be for the next 12 months and how much of that is embedded in your May quarter guidance?

I don't have that in front of me. Sorry on that one. David, do you have any preparation on that one at all?

I think for the Taiwan project we just want to comment that we did receive orders for the project but that we would rather not get into as specific as to the quantity or the amount. But in our forecast it has been baked into our forecast for next quarter.

And how -- I guess how many quarters will that roll through?

Well, you know, we are not disclosing details on that.

Got you. And then within your May guidance can you talk about what we should expect from an OpEx standpoint? Will it be flat, up, down?

For our forecast for OpEx for next quarter? I think basically for Q3 we are planning -- actually we are a little bit higher in operating expenses for both SG&A and R&D. In total probably about $400,000 higher than Q2.

That is good, and then, finally, just what sort of utilization level are you anticipating in the May quarter? You mentioned that you are currently around 50%. Is that the level we should expect through the full quarter or do you expect that to trend higher?

We just have to see how the market is doing but I just want to let -- you know, the market is very dynamic as we said. We respond to demand, we respond to the mix, the market mix. So, I wouldn't forecast at this time.

Colin Rusch, ThinkEquity.

Hi, can you talk a little bit about what you are seeing from your customers in terms of additional specs that they are looking for as they design new products? Are there new requirements you are starting to see from those folks and how long do you think it will be before you can fully respond to those requests?

Actually, the requirements haven't changed a lot in terms of chip customer. In terms of package customer and the component customer, we have seen some demand for smaller format and higher lumens. And we are introduce products that are addressing that. We should have some product introduction this quarter of the component to address that market.

All right. And then can you just remind us what yields are and how much of your product are you bidding at this point for the general lighting opportunity?

Colin, this is David here. We typically don't disclose our yield information.

Ben Pang, Caris & Company.

Thanks for taking my question. First on the quarter that you just finished you commented that the -- some of the revenue, the reason you were able to get to the high end of your guidance was the mix of components. What level could that go to, let's say, throughout the rest of the year?

In terms of components?

Yes.

I think you know, the components (inaudible) that this quarter was about 69% and it is a record high for us. And you know I think component revenue will continue to be a majority part of our revenue and you know should be maintaining in that neighborhood. It should be stable. I wouldn't say -- we don't give specific detail, the exact number of what it's going to be for the next quarter, but I think we are still definitely above 50% for Q3.

Does that make the overall product --? I guess that's going to give you more instability on pricing, doesn't it?

No, actually component pricing has been pretty stable for the past couple quarters.

So that is just relative to a question that you guys answered that I thought on a relative basis the components has a bigger decline in pricing?

That's true. But I think we're talking about both are in single digits, they is not big differentials between the two prices. It just so happens that we -- the chip price there did relatively well to components, but this is not to say that there's a fundamental difference between chip prices versus component.

Okay and then in terms of the China -- what's going on, you commented the Guangdong incentives that you guys are -- at least that's in the industry. Do you expect that some of the local subsidies or the local government subsidies will decline once the national program, I guess, starts to materialize in the market? Do you expect some change in the behavior for the local subsidies?

I think the local governments are more aggressive than the central at this time.

Is it going to continue to be aggressive when the national program kicks in?

It's very hard to predict what the government will do what, but from what we've seen today we see that the local government is -- must step up to the plate, you know, faster.

Okay, okay. The final question for me is what was -- did you provide your CapEx target for the full year and has that changed?

No, actually, we did not provide CapEx for the full years.

You mentioned that you signed off on tools earlier or can we get an idea of how to think about your CapEx I guess for the rest of the year?

Yes. I think just for your guidance for next year -- I'm sorry for the next quarter, CapEx should between $1 million to $2 million.

Okay. Thank you very much.

All right, thank you.

Thank you, Ben.

Andrew Huang, Sterne, Agee.

Thanks for the follow-up. I just wanted to ask you a little bit more on the CapEx. If your capacity utilization is only in the range of 50% why would there be a need to sign-up on new tools?

Yes, we're definitely scaling back as I just mentioned. The CapEx for this quarter was -- I think it was about $3.5 million and then we are scaling back to below $2 million, more closer to $1 million. We are not adding additional capacities to our existing fab. It's just that some of the CapEx of the equipment we will spend they are upgrades of equipment and as well facilities.

We are still buying tools for -- when needed for our new products.

Got it. Okay, you know, if you don't mind, I just had a follow-up on the Taiwan street lighting project. Are you providing components or chips for that project?

We are supplying components, energy components.

Okay.

Thank you, Andrew.

That does conclude our question-and-answer session and does conclude today's conference call. Thank you all for your participation today.