SemiLEDs Corp (LEDS) 2012 Q3 法說會逐字稿

Good day, and welcome to the SemiLEDs fiscal third-quarter earnings conference call for the quarter ending May 31, 2012. This call is being webcast live on the investor presentation 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 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 investors section of SemiLEDs website, visiting the events and presentations page.

I would now like to turn the conference 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 third 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 third quarter. David will review fiscal Q3 financial results 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 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 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.

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. The industry continues to face challenges. The demand for our general lighting market [we saw] has improved during the quarter. However, we still see still all the effect of the declining [pipeline] market.

Our focus on packaging and indoor lighting continues to yield results during the quarter. This, combined with diligent management of both inventory and cash, is helping us work through this market environment. We achieved revenue of $9.2 million, an approximately 16% increase compared with last quarter, above the guidance of $7.9 million to $8.9 million provided on our fiscal second-quarter conference call.

Later, David will discuss the financial results in more detail. As many of you may have seen, on June 26 we announced SemiLEDs and Cree agreed to settle our patent litigation against each other. This is very positive for us. We are pleased to have this behind us, as it allows us to focus our energy and resources on product development and satisfying our customers' needs.

As part of this settlement, we agree to make a payment to Cree without admitting that any of the Cree patents [or still organers] are valid. Neither SemiLEDs nor Cree admitted infringement of each other's asserted patents. SemiLEDs also agreed to stop selling its current SL series chips to the US on October 1, and we'll begin shipping new generation products for the global market, including the US market.

On June 27, we announced the launch of our new Enhanced Vertical LED product series called EV for global market, including the US. The EV LED series can operate at junction temperature of up to 150 degrees C, and it also has higher thermal endurance, allowing eutectic die attachment temperature greater than 325 degrees C, comparing to 200 degrees C for MvpLED technology. Using eutectic die attach will give low package thermal resistance compared to silver paste, resulting in improved package performance.

The EV LEDs feature SemiLEDs' vertical chip structure on a patented metal alloy chipset, also advantage in optical output and high thermal conductivity. EV LEDs are available for global sales and immediate sampling.

Today we are also announcing the delivery of our new ceramic component, the C35 LED emitter, which incorporates our Enhanced Vertical LED chip, that feature narrow beam emitting, low thermal resistance and a special optic design. The C35 is SemiLEDs' first series of product to feature new color position technology, which will offer customer greater flexibility when making color choices. The C35 can give consistent color within a single seven-step, four-step or two-step MacAdam ellipse center in the ANSI defined standard color spaces. We are excited to introduce these new products to the global market, and increasing our addressable market.

We have received many inquiries for EV LED, and our existing customers are prepared to do qualification to adopt EV LED as soon as possible. The qualification process will take time. It can take up to 6000 hours to qualify for LM-80, which may affect our short-term sales and revenue for the current and following quarter. But these products will be the foundation of our future.

During the past year we have been investing in our future by increasing R&D spending. I'm happy to report that this investment in R&D has produced great results, and we are intent -- and we intend to announce additional new [EV LED] products in coming months to further strengthen our position in the marketplace.

We believe in China LED market, China opportunities, and are fully committed to China. However, given that this market has not yet to improve, we have decided to cut back at China SemiLEDs to reduce operation costs. This cost-cutting effort should reduce our [full-time] operation loss in the next quarter.

In summary, the LED market environment is still challenging. However, we are excited about our newly introduced products and expecting more to come. We will continue to focus on managing our fixed and capital expenses to reduce our cash burn, while continue to invest in a strong portfolio of new and exciting products, [varying] product churn and the new products demand from our customer.

Now I will turn the call over to David, who will take you through our third-quarter financial results.

Thank you, Trung, and thanks, everyone, for joining us today. As a reminder, our fiscal year ends on August 31, making the quarter ended May 31 our third fiscal quarter. I will now walk through the fiscal third-quarter financials.

For the third quarter of 2012, revenues were $9.2 million, above our guidance of $7.9 million to $8.9 million, which we provided on our last earnings conference call. This is a 64% increase from $5.6 million in the third quarter 2011, and approximately 16% sequential increase. The sequential increase in total revenue was primarily due to an increase in chip sales as we work through chip inventory.

Revenue attributed to the sale of our LED chip increase increased 79% sequentially, and represented approximately 25% of our total revenue in the quarter. Revenue attributable to the sale of our LED components decreased 14%, and represented approximately 51% of our revenue in the quarter. Revenue from our other products increased 87% and represented approximately 24% of our revenue in the quarter.

GAAP net loss attributable to SemiLEDs stockholders was $10 million for the quarter, compared to a loss of $5.1 million for the third quarter of 2011. GAAP diluted net loss per share was $0.36. On a non-GAAP basis, net loss attributable to SemiLEDs stockholders was $8 million, compared to non-GAAP net loss of $4.3 million for the third quarter of 2011.

Non-GAAP diluted net loss per share was $0.29, compared to non-GAAP diluted net loss per share of $0.16 for the third quarter of 2011. Non-GAAP net loss for the third quarter of 2012 excludes stock-based compensation expense of $498,000 and provision for potential litigation settlement of $1.5 million, net of related taxes.

R&D expenses were $2.2 million, a $200,000 sequential increase. SG&A expenses was $3.2 million, a $160,000 sequential increase. We continue to control expenses and spending. Total operating expenses, excluding the one-time provision for potential litigation settlement, were in line with our guidance.

Moving to the balance sheet, the Company had working capital of $70.1 million in cash and cash equivalents of $62.9 million, which is a decrease of $3.4 million from the prior quarter's cash balance.

Days sales outstanding was 42 days as compared to 33 days for the prior quarter. Inventory days on hand was 131 days as compared to 187 days at the end of the prior quarter. Inventory was $14.9 million for the third quarter 2012, a sequential decrease of $3.1 million, with the $1.3 million on capital expenditures in Q3 coming at the low end of our CapEx spending guidance. This resulted in free cash flow of negative $3.8 million. We define free cash flow as cash provided by operations, less capital expenditures.

Cash used in operation during the third quarter was $2.5 million, compared to $4.5 million in the second quarter. But we are prudently managing our cash and will continue to do so.

Before we open up the call for questions, I would like to address guidance. Historically we have provided guidance for the upcoming quarter. However, given our lack of revenue visibility, we won't be providing guidance at this time.

With the launch of the Enhanced Vertical LED and the C35 ceramic LED emitter, we will be working with our customers to qualify these new products. The timing and length of the process may impact customers' near-term orders, making it very difficult to accurately predict next-quarter sales.

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

(Operator Instructions). Min Xu, Jefferies.

Thank you for taking my question. First, can you give us some color on what is current utilization at your Taiwan facility?

For our Taiwan facility, our utilization hasn't really -- this is David here, by the way -- our utilization in Taiwan hasn't really changed much from the prior quarters. And right now, we really try to manage our inventory, try to work its way down. So as a result of that, we are very -- we try to take a very prudent approach in terms of our utilizing our factories, so utilization has been flat from quarter to quarter.

Which means the utilization is still at around 50%?

No. I think last quarter was below -- it was around 30%. And as Trung mentioned in the last call, it did pick up a little bit after the Chinese New Year's holiday, but we trim it back down as part of our plan to control inventory level.

So, Min, you see that our inventory have dropped by $3.1 million.

Right. Okay. So, which means that utilization is anywhere between 30% to 50%. Okay. So -- and you mentioned your component sales down 14%. Can you give us some more color on that?

Yes. I think for components, we are down a little bit. You know, the HP has been -- for components has been stable, continue to be in the single digits. And so the drop in component revenue was primarily due to the lower volumes.

Okay. So I didn't catch all the number, so you mentioned your chip sales, 25% of total revenue; component, 51%; and are those numbers correct?

Yes. So right now, our chip is 25%, and our component 51%, that's correct.

51%. Okay, perfect. Thank you very much.

Andrew Huang, Sterne Agee.

Hi, this is [John Chen] in for Andrew. I was wondering if you could clarify on what's going on with China SemiLEDs with respect to capacity utilization, and also on the ability to participate in China lighting subsidies if the chips are made in Taiwan.

To clarify about China SemiLEDs, we still are -- our operation is still in China. We do have chipmaking in China also. What we do is -- the FB we are running in Taiwan, and then we run some of the steps in China. So we still get, from the manufacturing standpoint build, they still get -- is produced in China.

Okay. So there is some reports on most CVD reactors being deactivated from --

They are not deactivated. They are not deactivated. I just want make sure we are very clear. We idle the MOCVD for now, because we want to maximize utilization at Taiwan, and when the environment is coming up, we will run the MOCVD in China. And we expect that when the utilization, when the market -- supply market coming up -- we're fully utilized in Taiwan. China will be turn -- the FB will turn back on very quickly, within a week. Then -- yes, so that will resume in a quick.

Okay, great, thanks. And also, can you give us some color on the pricing environment for components and chips? Like what the ASP erosion was for the February quarter, May quarter, and the expected for the August quarter?

Yes, John, so as I mentioned briefly, for the components, the ASP erosion will come into -- it'll be in the single digits. And for chip it was higher for Q3, and it was in double digits. And the reason for that is that we were happy. We kind of work through -- we are working on some of the old inventories, so we clear those out. And with [manufacturing] discounts to our customers, that led to a double-digit decline for our chip ASPs.

But overall, if you look at the market for chip, if you were taking those special cases aside, it's pretty much the same as last quarter. And we don't -- this is what we are seeing in the marketplace, and we don't anticipate there will be any significant changes, at least for the next quarter to come.

Okay.

Olga Levinzon, Barclays.

Hi, thank you for taking my questions. Just wanted to follow up on the new products and the decision not to offer guidance for the August quarter. What percentage of your business do you expect will come from the C35 and EV chips in the next quarter or two?

Yes, our guidance -- Olga, this is Trung. We introduced -- after we introduced the new product of EV in June 27, and that is essentially after our settlement agreement. And what happens, our customer have been react very quickly, and we also send them sample and get them to start look at everything actually, and fast, so we can start shipping.

But it's also, our customer also look at and say, wow, this is far -- is better. So I really want to use this product also for replacing their SL product. And that create a -- that they have to requalify the EV, because this is a different product. It is not the same as the SL product, so they have to qualify it. And this vary from customer to customer. Some customer will say, oh, if I use in a flashlight, it take me 1000 hours. Some people say, oh, by the way, I just qualified for Energy Star, so I need LM-80 testing, and that takes 6000 hours.

So right now we are trying to understand from our customer, because this happened about -- less than two weeks ago, about a few weeks ago. How say, today is the 10th, that's 30 days now since that happened. So we still try to sort the things out to understand where are the qualification that takes place and how long it takes, and if some customer want to change it immediately. Some customer will say, well, I have to qualify, but -- so it's really create a very confusing situation for us at this time. That's why we couldn't give guidance.

Now, C35 product is also another product that we are just offering. We have received some qualification early on, because with that product we have offered in the market, it --was before we announced today. We just offered to some customer outside US and different place. And the reception has been very good. We ran from -- yes.

That is very well accepted. We have sold quite a good number of C35 as a component, and that is very well accepted. But now, this other customer also want to qualify it, so that's why we couldn't give you a very clear picture at this time, because there is a lot of -- the product with qualification, product reordering, product repositioning taking place due to the settlement that we have. I hope I answered that very clear?

Yes, that was helpful, thank you very much.

Thank you, Olga.

As a follow-up on the litigation side, you reserved $1.5 million in the May quarter for the settlement. Is that the final sum, or should we factor in an additional remaining expense into the August quarter as well?

So the total settlement are confidential. We don't want other settle. We don't have any comment beyond what have we disclosed in the press release, related to the settlement. And we made a provision for it. The information is disclosed in our 10-Q for the third quarter, so you can look at it and understand, but we are obligated not to disclose press release, anything, because the term are confidential. I hope you understand that.

Got you. And then just as a final question, you talked about expectations in the overall market in the August quarter to have a bit more pricing pressure on the chip side, and more stable price declines on the component side. Where are you seeing incremental strength in terms of specific lighting applications or in specific regions?

Olga, it's Trung again. The lighting market is very interesting, is very much market dependent in the area. In Japan it's very good. In US I think things are also -- is improving, is getting better. In China, things still wait and see. And there are other markets; in Central Asia, it's really growing very well. And we see -- so that is by the market demand, and it vary from market to market. We did not participate before in US very much, so -- we did not participate in market very well in Japan before very much, but I expect that area will be start picking up, because of our -- because our position to launch our product globally.

In terms of pricing, the component pricing, as David said -- David, can you comment on that, hopefully, in the pricing of the component and the chip, what you see?

Yes, let me just kind of repeat -- yes, as for the components, we're stable in Q3. We're looking at single digits. And chip, due to some special discounts we offered to our customers, and clearing out the old inventories, was in double digits for the components. And for going forward, we would anticipate the trends will be the same, and that Q4 I think we'll continue to try to work down inventory. So for Q4, I think for your information, I think that you can anticipate more or less the same. The chip will probably be double digits versus single digits for components.

Yes, my -- Olga, my first priority is to reduce my inventory. And you see that our inventory have dropped by $3.1 million, so we work down our inventory, and that probably driving more very specific in our situation.

Thank you.

Thank you, Olga.

Jed Dorsheimer, Canaccord.

It's Josh for Jed. Thanks for taking the question. Can you just talk a little bit about how you got -- how confident you are that this new product line, the EV series, will not have any IP issues?

You know, when you talk about IP, it's a very interesting subject, is that people have -- as anyone in US, anyone can sue you. And so when you talk about IP, is a big world, but the things -- we also have very good IP, very good patents. As you see, that we have able to resolve our current litigation very successfully, and we expect continue to defend our customer and our position, because our technology is very unique and very good IP also.

Can you give us the number of customers that are currently sampling this product within the US? The new product line?

I can't give you the exact number, but there is a lot of calls. There's a lot of call, there's a lot -- and we are sending out sample because people are excited about the new product, because of the performance. It can do eutectic, which can lower the thermal resistance of the package, and is a very new technology, is very improved the performance. So our customers are very excited.

Okay. Can you talk about the cost structure of these new products, if they will be potentially accretive or in line with a fully utilized corporate average?

Actually this product cost is lower than our SL-1 series because of the -- actually it is -- I cannot go to into process details of how we make it, but it is make with less number of steps, and better. So that is beautiful, right? So we've been working on this product, and want to introduce it very quickly, but we want to wait until things have settled down before we do it.

Okay. And then lastly, I'm sorry if I missed this, did you write down any inventory in the quarter?

Yes, we -- Josh, this is David here. Yes, we do the markdowns every quarter. And the amount of the write-down from quarter to quarter is -- in Q3 is very consistent with what we wrote down in Q2. It's roughly, it was less than $1 million.

Less than $1 million?

Yes.

Okay, great. That's it for me, thank you.

Daniel Amir, Lazard.

Yes, hello. Thanks a lot. Couple questions here. First of all, just to better understand your -- in terms of the inventory, are you planning to -- is the goal to basically sell more inventory than you did last quarter, which was $3 million? Is that the goal that you're planning this quarter?

The goal is to reduce inventory as much as we can, and we are doing that now. Doesn't mean that we will do it by giving it away. We will very prudently and selective selling our inventory so that we reduce and work that out.

Okay. And given that the -- so to understand with the new product, you said a lot of companies are sampling. Given where we are in the quarter right now, do we expect any product, any new product sales this quarter? Or is it going to be more the quarter after that?

Well, C35 is a new product, selling right now. That's because we have position-leading technology. It has been selling very well. The EV, I expect there will be some sales, but I don't really know how much. So it's very early, we just released it 13 days ago, so I don't have data to give you. But I am optimistic that the product is very well positioned, with good performance.

So the lack of guidance is really focused specifically on the lack of visibility related to the EV product, is that correct?

Well, the lack of visibility in the sense that, that our customers have said, hey, I want to get EV at the same time. By the way, this SL product is an old product, okay, it's not performing as well. And I want to understand what is the difference, and we told them what is the difference. And a lot of them want to, hey, I want to get EV. I want to able to use the product freely.

And so there are some products that a customer want to push out, to wait for the EV to qualify. And some customers want to switch to a limited extent, so we don't really -- we still sorting things out with our customer. But that's truly the main reason, and it is difficult to say what happen, you know? But we feel that this is the right thing to do, because we prepare for our good foundation for our future.

Okay. And then the final question, so at this point in the quarter do you feel better, the same or worse than you did at this point last quarter, about your business?

It's a tough question for me to answer, again, that's why -- the reason why of just 13 days ago we announced the settlement. And there is a new product, and the old products, and all that. Our sales team and our team have been very extremely busy trying to understand what are different effects and try to refocus, because before the settlement we are not even tell anyone, or keeping very confidential about our new products. Even if -- conventionally, normally, what you do is you introduce product gradually and step-by-steps, and you have a plan, and doing it. This one, we cannot release the product, we would not -- it's not we can't. We didn't -- we intentionally wait until the settlement is done before we release the new product.

Okay. All right, thank you.

(Operator Instructions). At this time we'll take our final question from Ben Pang, Caris & Company.

Thanks for taking my question. First, a follow-on on the qualification of the new product. Does the qualification period depend more on the application or the region?

Actually, Ben -- hi, thanks, this is Trung. It depends on both. There are region dependence and also application dependence.

Can you give --?

So certain region -- [do as I say], hey, let's go and do it. I'll switch. Some regions are, you know, I want to qualify it. China market is very interesting; there are sales to local, and the sales for export. And those depend on the customer, also. So what that customer does and what the region it is, and also what application. If you use -- if people use it for home lighting, for lighting that require Energy Star, they're required to have rebate. Do you want to have LM-80? So that is a very good question, Ben, and we are sorting through that right now.

Can you at least tell us what the best potential is by region and application, in your view? (technical difficulty)

I have to -- Ben, I have to get back to you on that one because that is a lot of data that I don't have in front of me.

Okay. And then to follow on on a previous question regarding the opportunities in China, you kind of talked about the overall situation for overcapacity. If you look towards the end of the year, can you make any projections on what you think the overcapacity specifically in China will be for street lighting?

That is a very interesting situation, and watch very closely. Guangdong province; China is actually have a lot of different province. And Guangdong province, in particular, have been pushing very hard. And there's a lot of announcements, but at the end of the day, the number coming out -- we haven't seen -- we see a lot of paperwork had to be done. We apply for special ID. We apply for this, apply for that. And you know, we have to see when the thing become fruit. And we are prepared; we get very far. But in the government hand, and you know, when government have it, what do you do? Wait.

So there is no better visibility at this point? It's kind of where it was last year, right?

Well, I think the pressure have built up a lot more from the government point of view; there's a pressure inside. But I cannot comment. As I said, I'm being very cautious always. Until the money hit my lap, I say, man, I don't count.

Okay, thank you very much.

(multiple speakers) differently. I want to say it, but I will not say it.

Thanks, Ben.

And at this time, that will conclude today's conference. We thank everyone for their participation.