SemiLEDs Corp (LEDS) 2012 Q4 法說會逐字稿

Welcome to the SemiLEDs Fiscal Fourth Quarter and Year-End Earnings Conference Call for the year ended August 31, 2012. 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 recordings, reproductions, 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 a webcast replay of this call by going to the investors section of SemiLEDs' website and visiting the events and presentation 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 2012 fourth quarter and year-end. 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 provide details regarding the fourth quarter. David will review fiscal Q4 and financial yearend results. The operator will then open the call up 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 on 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 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 turn the call over to Trung Doan, Chairman and CEO. Trung, please go ahead.

Thank you, Erica. Good morning, and thank you for joining our call today. In the fourth quarter, we focused on working with our customers to qualify our new products. As we cautioned on our last quarterly call, it takes time for our customers to complete the qualification process, and, as a result, our fourth quarter financial results were negatively affected as we worked with our customers to qualify products. We reported revenue of $5.5 million, a decrease of approximately 40% compared with the third quarter.

During the past year, we modified our strategy to serve the packaging and indoor lighting markets. Overall, this strategy change yielded positive results, with component revenue up 38%, year over year. Revenue attributed to the sales of LED components for the year represented 50%.

We are also working on managing our cost structure. We brought costs more in line with the recurring revenue level and restricted spending in area which would provide the highest return of investments. However, to invest in our future, our R&D is increased by 63%, year over year. In addition, we come -- we came to a settlement with [Cree] and focus our attention on running this business.

Today, the market is slowly improving for LEDs, and industry pricing has somewhat stabilized. There is still some residual effect from the decline in the black light -- backlight market, but the end demand for the general lighting markets we saw improve during fourth quarter -- fourth fiscal quarter, and continued to improve. In particular, we are seeing more orders from street light customers, and China has begun to release money to fund projects.

Our enhanced vertical LEDs and the C35 ceramic LED emitter globally address customers' needs and increase our addressable market. The EV LEDs feature SemiLEDs' vertical chip structure on a patented metal alloy substrate, offering advantage in optical output and high thermal conductivity.

The C35 LED emitter, which incorporates our enhancement vertical EV LED chip, feature narrow binning, low thermal resistance, and a special optical design. The C35 is SemiLEDs' first series of products to feature new color precision technology, which offer customers greater flexibility when making color choices.

As of today, we have had a handful of customers adopt EV LED and C35 products. The majority of our customers are still in the process of qualifying EV LED and C35. So far, the feedbacks have been very positive. Orders for EV chips and C35 components have increased significantly during the quarter. For November quarter, we are seeing encouraging signs our revenue is improving and the increased adoption of EV chips and C35 product.

Earlier, I mentioned industry pricing has stabilized. We are also seeing improved product pricing due to product mix. We are still working down our chip inventory, which have lower pricing. However, our regional new products are commanding slightly higher pricing compared with our legacy products.

We will continue to manage our cost structure. We believe additional improvements can be made to lower operating expenses, and we keep a keen eye on conserving our cash balance. In addition, last quarter, we mentioned that, given that this market has yet to improve, we decided to cut back at China SemiLEDs to reduce operation loss.

Given our ongoing discussion amongst China SemiLEDs shareholders, going forward, we will focus our resources on Taiwan -- on our Taiwan operations to serve all of geographic market. For China, we will continue to serve the China market through our SemiLEDs China branch office in Shenzhen. We see the China market is improving and are fully committed to serve a China market.

In summary, the LED market environment is improving. We are excited about our newly introduced products and focus on getting our products qualified and ramped at customers with our EV chip and C35 components that could deliver more than 130 lumens per watt at [350 million]. Additionally, we will continue to carefully invest in our strong portfolio of products to further strengthen our positions in the marketplace, in anticipation of sustainable demand returning.

With the Cree settlement behind us, we will continue to manage our cost structure together with growing our revenue. With our new products providing the foundation for our future, we look forward to calendar 2013, as we believe we are well positioned to benefit from increased demand in the industry. Now, I will turn the call over to David, who will take you through our financial results.

Thank you, Trung, and thanks, everyone, for joining us today. I will begin by walking through the details for the fiscal fourth quarter and provide a summary of the yearend financials.

For the fourth quarter of fiscal 2012, revenue was $5.5 million. This represents a 40% sequential decrease and a 3% increase, year over year. For the 2012 fiscal yearend, revenues were $29.3 million. This represents a 14% decrease, year over year. As Trung mentioned, we began working with our customers to qualify the enhanced vertical LEDs and the C35 ceramic LED emitter. As expected, the timing and length of the process impacted customers' near-term orders and, as a result, our fourth quarter revenue.

Revenue attributable to the sale of our LED chips decreased 6%, sequentially, and decreased 25%, year over year. LED chip revenue represented approximately 40% of our total revenues in the fourth quarter and 27% of our total revenue for the full year. Revenue attributable to the sale of the LED components decreased 64%, sequentially, and increased 9% over year, representing approximately 31% of our revenue in the fourth quarter and 50% of our revenue for the full year.

Our LED component revenue represented a larger portion of our total revenue in the fiscal 2012, compared to fiscal 2011, as a result of our strategy to focus on packaging and indoor lighting. However, LED chip revenue increased in the back half of the year, as we worked through chip inventory.

GAAP net loss attributable to SemiLEDs stockholders was $24.6 million for the quarter, which compares to $10 million in the third quarter of 2012 and $13.6 million in the fourth quarter of 2011. GAAP diluted net loss per share for the fourth quarter was $0.90, which compares to $0.36 in the third quarter of 2012 and to $0.50 in the fourth quarter of 2011.

GAAP net loss attributable to SemiLEDs stockholders for the full year of 2012 was $49.5 million, which compares to $16.1 million for the full year of 2011. GAAP diluted net loss per share for the full year was $1.80, compared to $0.88 for the full year of 2011.

On a non-GAAP basis, net loss attributable to SemiLEDs stockholders was $16.6 million for the quarter, which compares to $8 million in the third quarter of 2012 and $13.2 million in the fourth quarter of 2011. Non-GAAP diluted net loss per share for the quarter was $0.60, compared to $0.29 last quarter and $0.49 for the fourth quarter of 2011.

Non-GAAP net loss for the fourth quarter of 2012 excludes stock-based compensation expense of $502,000 and impairment charge on long-lived assets of $7.5 million, net of related taxes. On a non-GAAP basis, net loss attributable to SemiLEDs stockholders for the full year of 2012 was $37.8 million, which compares to $14.3 million for the full year of 2011.

Non-GAAP diluted net loss per share for the full year was $1.38, compared to $0.79 for the full year of 2011. Non-GAAP net loss for the full year of 2012 excludes stock-based compensation expense of $2.6 million and impairment charge on long-lived assets of $7.5 million and a provision for litigation settlement of $1.5 million, net of related taxes.

At August 31, 2012, working capital was $61.8 million. Cash and cash equivalents were $47.2 million, which compared to $62.9 million at May 31. The Company also had short-term investments of $8.8 million at the end of the fourth quarter of fiscal 2012, consisting of time deposits with initial maturity of between three months and one year.

In fourth quarter, we spent $1.2 million on capital expenditures, and cash used in operations was $5.2 million. Capital expenditure for the year totaled $11.6 million.

GAAP gross loss for the quarter was $3 million, which compares to GAAP gross loss of $1.1 million for the third quarter of fiscal 2012 and a $5 million loss in the fourth quarter of 2011. GAAP gross loss for the full year of 2012 was $5.6 million, which compares to a GAAP gross profit of $4.5 million for the full fiscal year of 2011.

Gross margin for the fourth quarter of 2012 was negative 55%, compared to negative 11% in the fiscal third quarter. This sequential change was due to a change in product mix to a lesser percentage of our revenue generated from the sale of LED components in the fourth quarter.

Gross margin for the full fiscal year was negative 19%, compared to positive gross margin of 13% for the same time period last year. Gross margin for 2012 fiscal year was negatively impacted by an excess [capacity] charge at $6.8 million, inventory write-down of $3.1 million, and reduction in inventory -- and reduction in revenue, primarily due to a decrease in average selling price of LED chips.

GAAP operating loss in the fourth quarter was $16.2 million, which compares to $8 million lost in the third quarter of fiscal 2012 and $12.1 million lost in the fourth quarter of 2011. GAAP operating loss for the full year was $36.4 million, which compares to $11.7 million loss for the full year 2011. GAAP operating loss for the fourth quarter includes an impairment charge on long-lived assets of $7.5 million and, for the full fiscal year of 2012, also included a provision for litigation settlement of $1.5 million.

R&D expenditures were $1.5 million for the quarter, a decrease of 32%, sequentially, and a decrease of 35%, compared to the fiscal fourth quarter of 2011. For the full year 2012, R&D expenditures were $7.4 million, which is a 63% increase compared to $44.6 million for the full year in 2011. R&D spending in 2012 increased to strengthen our competitive advantage within a challenging industry by ensuring we continued to produce innovative new technology, such as our newly launched enhanced vertical LEDs and the C35 ceramic LED meter.

SG&A was $4.1 million for the quarter, which is a 29% sequential increase from a 14% decrease from the fiscal fourth quarter of 2011. The sequential increase was mainly due to a charge to a bad debt expense of $1.4 million to reflect impairment of accounts and notes receivable from China SemiLEDs. SG&A for the full year was $14.3 million, which is a 23% compared to $11.6 million for the full year in 2011.

For fiscal 2013, we remain focused on managing our cost structures as we wait for steady demand to return.

Day sales outstanding was 79 days, as compared to 42 days for the prior quarter. This increase was due to longer credit terms as we extended to certain key customers in the fourth quarter, as compared to third quarter, where a significant portion of our revenue were derived from sales with advance payments.

Inventory days on hand were 138 days, as compared to 131 days at the end of the prior quarter. Inventory was 13 million at August 31, 2012, a sequential decrease of 1.8 million from the third quarter. Inventory on hand consisted primarily of finished goods. The decrease in inventory was primarily due to a continued work down of our inventory and inventory write-down of 815,000 in the fourth quarter.

As we said on our last conference call, we scaled back at China SemiLEDs to reduce operating -- operation costs. Our effort had reduced portion costs in the fourth quarter. However, the net loss reported by China SemiLEDs was higher, because it took an impairment charge on its long-lived assets as a result of the believed likelihood that the shareholders of China SemiLEDs may fail to agree to implement a restructuring plan for China SemiLEDs.

Our proportionate share of the operating loss of China SemiLEDs, including the impairment charge it took on its long-lived assets in the fourth quarter of 2012, exceeded the carrying amount of our investment. As a result, we reduced the carrying amount of our investment in China SemiLEDs to zero at August 31, 2012, as compared to $8.7 million at the end of the prior quarter.

Our visibility today is better than when we reported to you on our last quarterly call back in July. However, as we say last quarter, the qualification process makes it very difficult to accurately predict near-term sales and may affect revenue for near-term quarters. Therefore, at this time, we are refraining from providing guidance and will revisit this policy when we have visibility to accurately predict revenues. This concludes our formal comments, and I would like to ask the operators to open the line up for questions.

Thank you. (Operator Instructions) Olga Levinzon, Barclays.

Hi. Thank you for taking my question. Just to probe a little on the China SemiLEDs scale back, is that operation, now, essentially completely shut down? And, if so, should we be assuming, basically, no losses going forward? And also, I guess, can you talk about what the plans are in that scenario, in terms of selling off or what you plan on doing with the capacity there?

Well, right now, that -- this is David here. And, yes, the Company -- right now, the China's operation is basically idle, and right now, we are -- we're still negotiating with our shareholders in China SemiLEDs for a restructuring plan, and the negotiation process is ongoing right -- at this moment. And so, if we're successful, then the China SemiLEDs operation will continue, perhaps, under new management. And -- but, of course, if the negotiations fail and, in a worst case scenario, liquidation is a possibility.

Got it. Okay. And then, regarding --

(inaudible - multiple speakers)

This is Trung.

Yes.

Yes. We don't [implant] -- intend to fund China SemiLEDs every time.

Yes. Okay. So, any sort of restructuring plan would have to be funded by the other shareholders.

That's correct.

Got it. And then, regarding the comments on the pricing -- talked about some stabilization there. I think, on the last call, you mentioned pricing was down in the sort of -- in the single digits. Can you talk about what that -- what the range was in the August quarter and given we're essentially almost done with the November quarter, how pricing has trended in the November quarter as well?

Well, Olga, I think, as Trung mentioned, right, that the industry pricing has been stabilizing. From time to time, we make special offers to some of our customers as a channel to clear out some [of our age] inventories. And put those aside, the average selling price for most of our chip products are continuing declining at a similar single digit pace, quarter to quarter. And for our component products, we actually saw a slight uptick in the pricing in Q4. However, but I would not commit that it will be a trend going forward in the coming quarter.

Got it.

Yes, Olga.

Yes.

One additional comment that I put in is that our new products' pricing, with high performance, actually is higher than our legacy product.

Yes. Got that. And then, just final question on OpEx. It remained essentially flat, quarter over quarter, I'm assuming, because you were qualifying the new products with customers. What's the trajectory that we should be expecting in the new few quarters?

Well, in the next few quarters, we expect to be flat and down. The reason why is that a lot of these capital expenditure was for equipment we bought a year ago sometime, and then, now, we -- that coming into the payment now. But, for the next few quarters, we expect this -- flat or down.

Got it. Thank you.

Andrew Huang, Sterne, Agee.

Thank you. For -- in your press release, you seem optimistic about China releasing new funding for lighting projects, but now that your investment in China SemiLEDs is down to zero, are you still going to be able to participate as a local player and still have these projects?

We still -- Andrew, thanks. This is Trung, Andrew.

Hi.

We still have a branch office in Shenzhen that [costs] similar China, and we still selling our product through that. Nothing has changed very much, and reason why is that, in the past few quarters, China had been -- remained not coming up strongly at all. And what we do is that we still a major shareholder of our existing China SemiLEDs, so we -- I don't see a lot of changing that at this time.

Okay. So, I guess my second question is your revenue has shrunk to $5.5 million for the quarter, so I would think that some of your customers are thinking, well, why risk doing business with SemiLEDs when your long-term viability is actually a concern right now.

Andrew, if you look at our -- while we are qualifying our new products -- our customers look at our new products, for example, EV products -- the performance of EV products had been better. We are one of two -- a few companies that can deliver above 130 lumens, and that is still (inaudible) had to be reached to qualify for similar projects, and that's one thing.

Second thing is that it be -- people look at our cash balance and look at our financial. We have very, very solid financial statement that a few have. If you look in China right now, and in Taiwan, there are several companies that is really in a very bad position, and as a supplier (inaudible), we have good cash balance, and we have a good position to -- for the -- for this long downturn.

Okay. Along those lines, maybe, can you comment on breakeven profitability? Like, what revenue level do you need to achieve to get the breakeven?

Well, I think -- again, I think, Andrew, you have asked that question before, and there really -- it all depends on -- so many factors are out there, so many moving parts, and at this point, we still want to refrain to talk about the breakeven point. But going back just to revenue -- your revenue questions, yes, our revenue is down, and that mainly is because our component revenues were down in Q4, and, as we mentioned, the timing and the length of product qualification clearly had a negative impact on that.

But, also, I just want to point out that adjustment in the channel inventory also caused some -- the order performance in Q4, and we're actually seeing some of that order coming in Q1.

Okay. And then, just one -- (inaudible - multiple speakers) -- yes?

Go ahead, Andrew.

I'm sorry. Just one final question. I don't really understand why you won't -- you're not able to give revenue guidance for the November quarter when there's only two days left in November. Can you give us some color for the November quarter revenue? Are you going to be up, sequential? Are you going to be down, sequential?

Well, Andrew, I mean, we want to be consistent with our guidance practice, okay? And we will resume giving guidance, and we'll have better visibility on product qualifications with our customers and for -- and market demands for our products. I know it's difficult for analysts to predict our earning without our guidance, and so, please bear with us in the meantime.

You're right. I mean, there's only a few days left until we do the closing, but I do not want to give you guidance this quarter, and then -- but, again, till next quarter and pull back again next quarter. So, again, we want to ask everyone to be consistent with the policy, okay. But I think I can tell you that, as Trung mentioned -- I mean, not Trung. Trung didn't say anything, but as for our guidance for Q1, I can tell that our revenue will be higher than Q4.

Okay. So it will up, sequentially?

Yes.

Okay. Thank you.

Yes.

Thanks, Andrew.

(Operator Instructions). Ben Pang, Caris & Company.

Thanks for taking my question. To follow up on China SemiLEDs, what is the differences in opinion on the restructuring? Can you share some of that? And then, also, it sounds to me like now you guys are saying that it doesn't matter whether you have operations in order to be successful in China and to compete in that market, but I thought that was kind of a key platform in the original strategy for the Company. What's really changed there? Why is that more possible at this point?

The market in China take a long time to improve, and right now, we just see the beginning of the releasing of similar projects. And waiting for a long time and continued losing cash on China SemiLEDs operations doesn't -- is not something we like to continue get our resources and pouring into China -- why we can focus on Taiwan and make that become profitable and be a strong operation. And this is really truly a strategic decision that we take is that focus on making the Taiwan operation and work on it and into our R&D.

And China -- we said, well, if China SemiLEDs need more funding, we would like to contribute support from our current shareholder and -- yes, that is, local shareholder to support us there, and we will focus on our funding of our Taiwan operation. This is very strategic decision.

And so, just also, to clarify -- we're not going to expect any losses, going forward, on the -- from the China SemiLEDs. Is that correct, David?

Yes, that's correct, because we've basically written down our investment down to zero, and so, there will be no further write-downs from here on.

Okay. And then, in terms of the management changes that you guys have had -- losing some key personnel over the last six months or so, is that related to some of the strategic decisions you guys are making?

Not at all. We had two departures, one from my -- our longtime COO and President, Dr. Chuong Tran, and what we do is -- he resigned for personal reasons, and the other one is with the -- [Adam Ling], a VP of Business Development and General Counsel.

Adam Ling had been fly back and forth between US and Taiwan, economy class, and that's a pretty long and very difficult, so Adam decided that he couldn't do that after some time. So, he said, well, you know, he -- it's very tough on him and his family, so that mainly also purely his decision because of economy travel from US, Taiwan, Taiwan, US.

Okay. And my last question revolves around the product qualifications. This has kind of been an ongoing situation for your guys, where you release a product, and then, revenue goes down, because product qualification timing kind of is within the quarter, etcetera. What -- how do we kind of characterize these stages? I mean, you guys have released some new products that don't give you the visibility that you require to give guidance. What happens if you release a new product in the middle of next quarter?

I mean, does it just become an ongoing situation? It seems like you guys are having to release a product on a quarterly or, at least, a quarter and a half timing type situation. Can you give some visibility, at least, on what that type of product cycle looks like?

Ben, actually, it is not about releasing new products. It is more of about we've switched from SL to EV, and that is a very major switching from product to the next. We did not recognize that the switching of SL to EV would take such a substantial qualification from a lot of our customers, even if the parts are sold in China. So, that's one thing.

For other problem, it was the same platform, and -- for example, we go -- the SL product has been a longtime product, based on the same architecture. The EV is a different product that is with -- give a better performance and higher thermal endurance. So that is a truly substantial qualification. We don't expect, for future products, that we will add bigger effect like what we have in EV.

And so, in terms of that particular product qualification cycle, as you -- I mean, let's suppose you add three new customers next quarter. I mean, as the customer base hopefully gets bigger, do you just have the same problem? I mean, when does the -- (inaudible) -- when, actually, start to get out of these issues, in terms of the timing, because you have a pretty small customer base right now, still, for that product, right?

Well, it's improving constantly, and our existing customers are qualified how -- EV product by now, and normally, for example, you can see some part of EVs for flash -- the qualification could be very short. If a product is used for automotive, the product can take a long time qualify. If your product isn't a required (inaudible), then it will take 6,000 hours, and your 6,000 hours is about closer -- I mean, yes, six months. So, all those things adjust the qualifications -- that time, that --

Okay. Let me back up, and this is my last question. So, the lack of the revenue guidance is due to the qualification schedule or the overall market?

David?

Yes, that's right, Ben.

Which one? I mean, because I think, as earlier analysts question, you guys are pretty much at the end of the quarter, so, if it's a general market, I think you should be able to give guidance, right? If everything is qualified.

So, Ben, as we said -- as David said, the quarter we ended in a few days right now, the revenue is higher. Okay? Now, is it substantial higher? We don't want to comment in the number, exactly how much higher it is. But the adoption of the EV and the C35 product we sent out, we have seen really substantial of increase from quarter to the next quarter.

Okay. Fair enough. Thank you very much.

Thank you, Ben.

Andrew Huang, Sterne, Agee.

Thank you. I just wanted one housekeeping question. For LED chips, did you say it was 40% of revenue for the quarter?

That's right.

And then, packages, 31%?

That's right.

So that means that the remaining other was 29%, and that's like modules and LE light bulbs and things like that?

Right.

Okay. Thanks for the clarification.

No problem.

And there are no further questions in the queue at this time. That does conclude today's conference, and we thank everyone for their participation.