Earnings Transcript for LEDS - Q1 Fiscal Year 2013

Operator: Welcome to the SemiLEDs Fiscal First Quarter Financial Results Conference Call for the quarter ended November 30, 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 & Presentations page.:

I would now like to turn the call over to Ms. Erica Mannion of Sapphire Investor Relations, Investor Relations for SemiLEDs. :

Erica Mannion: Good morning. Thank you for joining us to discuss SemiLEDs' financial and operating results for the fiscal first quarter of 2013. With me today are Trung Doan, Chairman and Chief Executive Office; and Timothy Lin, Interim Chief Financial Officer. Today, Trung will begin with a brief overview of industry dynamics and details of the first quarter. Tim will review fiscal Q1 financial results and then open up the call for questions. VP of Sales and Marketing, Ilkan, will join Trung and Tim for the Q&A session on the call today.

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 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 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 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'll 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. :

Trung Doan: Good morning, and thank you for joining our call today. On our last call in mid-November, the LED market remained weak. However, the pockets of demand [indiscernible] industrial and EV applications [indiscernible] the qualification of EV and C35 products are going well. We have multiple customers qualified, and these customers have started to purchase and begun to forecast. As a result, we had whole fiscal Q1 revenue of $6.2 million, an increase approximately 14% from fiscal Q4 quarter.

As many of you know, our focus has been on the component segment of our business to drive growth. Everyday [ph] attributable to the sales of our LED components quarter-on-quarter represented 39%, which was up 43% from last quarter. We will continue to manage our cost structure, keeping our expenses in line and target our resources on securing profitable business in high-growth markets with good margins.:

We will continue to carefully invest in our portfolio products, with a focus on products such as EV and camera flash to meet customer demand. With the acceptance of our C35 and based on what we are hearing from customers and seeing in the market, we expect increased demand for our C35 and EV LED products. Therefore, we will expand our package capacity.:

During the quarter, we are still working [ph] now our chief inventory, which has low pricing. Arrival of new product are commanding slightly higher pricing compared with our legacy products.:

Consuming [ph] China SemiLEDs, we agreed on a restructuring plan on January 11, 2013, whereas the China SemiLEDs, second largest shareholder would contribute an additional RMB 50 million to China SemiLEDs, an increase of ownership to 60.5%, diluting our other shareholders' ownership interest, including ours.:

Under this new capital structure, our ownership interest would be proportionately 16.3%. The new majority owner will also assume control of China SemiLEDs operation. We continue to believe China offers opportunities, and we continue to serve the China markets through our SemiLEDs China branch office in Shenzhen. Considering China’s street light market, we are seeing the demand is improving and we are working closely with our customers.:

I would like to thank you all for joining our call today. I will close my comments by saying we are committed to achieve profitable growth with a goal of reaching cash flow positive by the end of calendar 2013.:

Now I will turn over the call to Tim, who will take you through our financial results. :

Chen-Hao Lin: Thank you, Trung, and thanks, everyone, for joining us today. As Erica mentioned, I’m the Interim CFO. For those of you who don’t know me, I’ve been with SemiLEDs for over 2 years as part of the finance team as the Deputy Controller responsible for Finance and Accounting, including budgeting and forecasting.

For the first quarter of 2013, revenue was $6.2 million. This is a 8% decrease from $6.7 million in the first quarter of 2012 and an approximately 14% sequential increase. The sequential increase in total revenue was primarily due to increased sales of our LED components, such as our new C35 Ceramic LED Emitter, which our customers are qualifying.:

Revenues attributable to the sales of our LED chips decreased 16% sequentially and represented approximately 29% of our total revenues in the quarter. Revenues attributable to the sales of our LED components increased 43% sequentially and represented approximately 39% of our revenues in the quarter. Revenues from our lighting products were flat and represented approximately 22% of our revenues in the quarter.:

GAAP net loss attributable to SemiLEDs' stockholders was $8.9 million for the quarter compared to a loss of $7.7 million for the first quarter of 2012 and a loss of $24.6 million in the previous quarter. GAAP diluted net loss per share was $0.32.:

On a non-GAAP basis, net loss attributable to SemiLEDs' stockholders was $8.6 million compared to a loss of $7.1 million for the first quarter of 2012 and a loss of $16.6 million in the previous quarter. Non-GAAP diluted net loss per share for the first quarter of 2013 was $0.31 and excludes stock-based compensation expense of $336,000 net of related taxes.:

SG&A expenses were $3.7 million, which represents a $482,000 sequential decrease from the previous quarter. The sequential decrease in SG&A reflects our continued efforts to manage our cost structure. Next quarter, we expect SG&A to drop approximately to $2.6 million, while R&D is remaining flat. Gross margin for the first quarter was negative 53%, which compares to negative 12% in Q1 2012 and negative 55% in the previous quarter.:

Moving to the balance sheet. At November 30, 2012, working capital was $53.2 million. Cash and cash equivalents were $39.3 million, which compares to $47.2 million at the end of Q4 2012. The company also has short-term investments consisting of time deposits with initial maturities greater than 3 months for less than 1 year of $8.3 million at the end of the first quarter, which compares to $8.8 million at the end of Q4 2012. Total cash and cash equivalents and short term investments was approximately $47.6 million.:

Days sales outstanding were 59 days as compared to 79 days for the prior quarter. Inventory days on hand were 111 days compared to 138 days at the end of the prior quarter.:

Inventory was $11.7 million for the first quarter of 2013, a decrease of $1.3 million from the previous quarter. Cash-using operations during the first quarter was $3.3 million compared to $5.2 million in the previous quarter.:

We spent $1.7 million on capital expenditures in Q1. This resulted in free cash flow of negative $4.9 million. We define free cash flow as cash provided by operations less capital expenditures.:

As discussed, we will resume giving guidance starting this quarter for Q2 fiscal quarter ended in February 2013. We expect revenues to be in the range of $5 million to $5.5 million and GAAP gross loss to continue to be negative for the quarter, as we will now fully utilize our production capacity.:

GAAP net loss attributable to SemiLEDs stockholders for Q2 is expected to be $7.3 million to $7.7 million. GAAP EPS is expected to be negative $0.27 to $0.28 per diluted share. The diluted shares outstanding count is estimated at 27.5 million.:

As a reminder, Q2 result is negatively impacted by Christmas, New Year and Chinese Holidays. In addition, as Trung mentioned, we are focusing on profitable growth, so this may impact near-term revenues as well. We expect to spend approximately $1 million for package capacity expansion in the fiscal February quarter.:

This concludes our formal comments. Operator, please open up the line up for questions. :

Operator: [Operator Instructions] And we'll go first to Olga Levinzon with Barclays.

Olga Levinzon: Now that you’re providing guidance, could you tell us how much cash burn we should expect in the second quarter based on the guidance you provided?

Trung Doan: Olga, this is Trung. Would you please repeat your question, Olga?

Olga Levinzon: Sure. Could you tell us, based on the guidance that you offered for the February quarter, what the cash burn will be?

Chen-Hao Lin: Yes, absolutely. This is Tim speaking. As for this quarter, we -- our cash for operations is about $3.3 million. And this includes our professional fees because of the year-end activities for corporate, for legal corporate, as well as we have some year-end audit that we do going on. But next quarter, we expect this number to decrease because we don’t expect that to happen. So I -- for Q2, I expect that’s going to be around $2.5 million to $3 million. Keep in mind that we also have an investment for this quarter, so.

Olga Levinzon: Yes, so the cap is [indiscernible] $1 million?

Trung Doan: Olga, this is Trung. Yes.

Olga Levinzon: Okay, got it. And then, from an industry standpoint, could you let us know what you are seeing in terms of pricing, both within China and within Taiwan, for your components business and, I guess to some extent, the chip business, although that seems to be -- you're de-emphasizing that part of the -- some more, I guess, on the component side. How have pricing trended through the November quarter, and what do you see for the February quarter?

Trung Doan: So the question from you, Olga, is what is the pricing for the component and the chip for this quarter?

Olga Levinzon: Yes.

Trung Doan: Okay. For the chip business, we expect the pricing to just follow normal decline, descending with the components. Actually, the new product -- actually, the price is very stable.

Olga Levinzon: So I guess, normal declines, is that kind of mid-single digits, low-single digits per quarter? How should we think about that?

Trung Doan: Yes, mid-single digits -- yes, you’re correct. Mid-single digits, yes.

Olga Levinzon: So around mid-single digits? Okay, got it. And just finally, what’s the current utilization level for you guys?

Trung Doan: We remain the same as last quarter, about 30%.

Operator: And we’ll take our next question from Andrew Huang with Sterne Agee.

Andrew Huang: I was wondering if you could just remind us when you expect to be cash breakeven?

Trung Doan: Yes, Andrew, this is Trung. My goal is by the end of the year we’ll be cash flow positive.

Andrew Huang: So, that’s the end of the calendar year or the end of your fiscal year?

Trung Doan: The end of calendar year.

Andrew Huang: Okay. And if you’re projecting, I guess, cash flow positive by the end of the calendar year, what kind of revenue would you need to get to, to be at least breakeven?

Trung Doan: We never -- so far we didn't talk -- the breakeven point -- what we're doing now is that, Andrew, is that I focus on the market that would provide a profitable market. So for example, we focus very much on the EV market, so -- and industrial market where we make better margin. At the same time, we have also -- we are cutting our SG&A, as you see, okay. So with all these cost containment [indiscernible] with a focus on the business that make profitable, our gap [ph] between the company becomes cash flow positive. And from that cash flow positive, then we go from there to become -- to be a profitable company. That’s my goal.

Andrew Huang: Okay. And for your February quarter guidance of 5 to -- revenue guidance was $5.0 million to $5.5 million. Can you give us some color on the gross margin associated for that quarter?

Trung Doan: Ilkan?

Ilkan Cokgor: Because we have -- this is Ilkan, VP of Sales and Marketing. I will take this question. Because we have different product lines, we have different margins associated with different product lines. And we expect our -- these product lines to bring different gross margins for this quarter as well.

Trung Doan: And from our projection we did -- there is -- we summed up the gross margins in 2 margin way [ph].

Andrew Huang: Okay. I’m sorry, for the February quarter, you expect some slight improvement relative to the November quarter?

Trung Doan: Just slightly, yes, yes.

Operator: [Operator Instructions] We’ll take our next question from Ben Pang with B. Riley Caris.

Benedict Pang: First on the China market. So your China JV situation has stabilized right now. You mentioned the street light market is improving there. Are you competing with -- against the JV now for that sort of business, or whatever improvement in that business comes through the JV?

Trung Doan: So Ben, so I just want you to repeat your questions. Is that -- do you want to understand how we compete with the China JV?

Benedict Pang: Correct. And particularly because you mentioned, I guess, you’re seeing some improvement in street lighting, right?

Trung Doan: Right, right. So, what happens -- we just had our agreement of restructuring on January 11, so it’s very, very new, right. So we still are working on the restructuring agreements, but from what I've seen is that I don’t think that -- for the next 1 year, 3, 4 quarters, I don’t expect that we will be competing head on with China SemiLEDs. And the final agreement will be worked out. The impact of that will be [indiscernible] through focus on and to ensure that we have a very good agreement in place for the 2 companies work together.

Benedict Pang: Okay. And then to follow-up on some of the comments you made regarding the end markets, I think in your opening comment you mentioned the lighting segment is still weak, but you are getting some forecasts from your customers for your newer products. And then you also commented on the China streetlight. What areas are -- in your opening comments in terms of the weakness, what areas are you seeing, I guess, more weakness, or can you elaborate on which areas are stronger, which ones are weaker?

Trung Doan: So the question is that which market is stronger and which market is weaker, as I mentioned in my initial opening. That’s correct?

Benedict Pang: Yes, yes.

Trung Doan: Okay. For us, the market is strong [indiscernible] now is the EV market, industrial market. These 2 areas are the strongest. Actually, there's still a lot of pricing pressure in the other -- in the general lighting market, and for our market that we are focused on much more right now is, for example, the camera flash is improving, actually, because of [indiscernible] increase. So in general, in some ways, EV is the biggest improved and it is a good market. And you have any other question?

Benedict Pang: Yes, as you kind of look at your strategy going forward, I mean, do you see -- I guess a requirement that you’re going to have to develop more, I guess, niche-type products rather than general lighting, is that how you would see your strategy for the next year?

Trung Doan: Yes, our strategy is to stay in the area where there is a lot of -- people would say, directly, we’d prefer to go to a [indiscernible], so that's where we're going.

Benedict Pang: I’m not sure if I followed that answer. Can you repeat that?

Trung Doan: In the market is very bloody market. We will not try to keep market share and to stay in the spot market. So we will keep on developing technology and wait for the market to become better. So we still have to be building, but we will take more business now to absorb more loss, to move away from that strategy and focus on the strategy where we make profitable in the business where the margin is better. So we focus on the bottom line.

Benedict Pang: Okay, so final question for me. I guess along that line of thinking, for calendar year 2013, what markets are you going to target outside of -- you had mentioned you're already in the camera flash and some other markets. Is there something else that you’re going to target, and do you need to develop new products for that?

Trung Doan: Yes, UV market is really growing, and that market exists for curing for industrial for many markets. We go into also -- in the market of mobile applications, and those are the areas that we are really aiming and focused on.

Benedict Pang: But do you need to release new products?

Trung Doan: Well, I don't have a -- say again?

Benedict Pang: Do you need to -- I guess my bottom line is, I’m always concerned about the qualification of the timing, right, the qualification of your new products. I’m just wondering if, 2013, you’re going to see a lot of new products, you’re going to try to release a lot of new products and we have to be concerned about the timing, the qualification of your customers?

Trung Doan: Well, actually, we have been in the flash -- camera flash for some time now and we have been qualified as many companies. And for the area of UV, our products have been qualified also. Yes, and actually, lighting was qualified a lot. In the industrial market, that is really -- there is not a lot of qualification like LM-80, okay, so this is very different requirements in the industrial market, all right. But the LM-80, I’m certain, is more of a generalizing qualification, and that issue we are going through right now already in some places.

Operator: We currently have no further questions in queue. I’d like to thank you for joining for today’s conference. Thank you for your participation.