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conference date: November 1, 2006
for quarter ending: September 23, 2006 (1st fiscal quarter 2007)
Overview: Slight decline in revenues as growth slows. Missed guidance of revenues up 1 to 3% given in August. Also guiding to flat to reduced revenues for December quarter.
Basic data:
Revenues of $502.7 million were down 1.5% sequentially and up 18.5% from September 2005 quarter (Q1 2006).
Net income of $105.7 million for EPS of .33, down 11% sequentially but up 6.5% from Q1 2006. Stock based compensation this quarter was $33.3 million.
Gross margin was 63.9%, down from 66.3% the prior quarter.
Cash ended at $1.4 billion, up $51.4 million. This is despite spending $60.8 million for stock buy back, paying out $50 million for dividends, and $94.9 million in capital equipment expenses.
Cash dividend of .156 per share declared.
Inventories increased $10 million sequentially.
Guidance:
Flat to 4% reduction in December 2006 quarter revenue.
Conference Highlights:
R&D expenses increased $3 million to $130.2 million. A $3.0 million audit of the stock options program increased general and administrative expenses. Operating profit was $150.8 million. There was a 2% increase in the tax rate to 34%.
About 1% gross margin decrease due to increase in inventory; also went down due to increased commodity items in sales mix.
Accounts Receivable decreased $8 million to 291.7 million.
Inventories were up as planned.
Their stock option investigation continues; will make no remarks about it.
Strategy 1 is to pursue high volume markets. 2 is to partner with major electronic device manufacturers; this has grown from 28% to 34% in two years. 3 is to stengthen the core technical competence in analog/digital chips including application-specific ICs (ASICs). 4 is to maintain diversity. No segment is over 15% of business. 5 is attract and retain talented employees.
In high-volume products the low gross margins are compensated for by the spread of development costs and overhead.
Aware of concern in investment community of decline in gross margins. Is taking steps to control. Taking more care with pricing of products (basically admitted to underpricing products and lowering gross margins in the past).
Reviewed products introduced in quarter.
10% decline in gross bookings from prior quarter. Some due to faster lead times. Distributors were reducing inventories. There was overordering in prior quarter. Backlog has declined since prior quarter.
Q&A:
EPS guidance? Is not giving because of expected variance. Expects R&D expenses to not be up.
Bookings? Are doing better in complex products area than in low-complexity area. Mix is probably hurting gross margins. Lots of recent design wins were for high integration consumer products like cell phones and cameras. Believes end demand is flat based on conversations with final customers. No one is saying they have excess inventories.
Will you continue to grow faster than peers? Are nowhere near peak growth. Only recently penetrated these major accounts, and still have some to start. Execution has not been as good as they would like.
Is long-term gross margin target changing? Believes will drop .5% this quarter, but is working on remedies and hopes to get back to normal. But key to plan is revenue growth.
Lead times in supply change? Bookings were down sequentially because of overordering to build for holiday season. Aberation that will correct itself in December quarter. Lead times were down about one week. Customers would like even shorter lead times.
Build inventory to deal with lead times? Already built inventory, the problem is the mix and its visibility.
Linearity of bookings? Does not want to extrapolate based on last 4 weeks. "September bookings were not good, they were very low."
Trying to add wager fab capacity. Barely caught up. Looking at how to reduce cycle time for high volume products. Not anticipating a slowdown.
Inventory write off - about $1 million - because of belief no demand for those specific products in next 4 quarters.
On target for getting complex products launched and into production. 10 to 15% figure is percent of current revenue.
Booking number is $507 million. Distributor bookings were $522 million.
Already seeing some cost reduction benefits and cost price increase benefits; will see more by Q3.
Where are you in capacity expansion cycle? Could ship $634 million in product if full capacity and perfect mix, or they are now at 75% of capacity. Will spend cap ex for long range plan, expanding existing facility by 10%. Will need to acquire another fab within a couple of years if growth goes according to plan.
Lead times are now about 10 weeks. Fab times depend on complexity of individual products.
Thought complex chips were 15% already in 2005? Believes that is correct. Actually believes % has been increasing, does not have exact numbers. Corrected earlier statement to 18% of total revenue for complex integrated circuits for fiscal 2006.
More option investigation expenses? Does not know.
New tax rate? That is what they expect going forward unless the R&D tax credit is renewed.
Fabs contributed about $4 million in overhead capture, so they did much better.
PDA, cell phone, camera markets were up. Networking, data com and industrial were down.
Much discussion of difference between lead time adjustment and excess inventory problems, which they don't believe they have.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but its possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2006 William P. Meyers