SemiLEDs Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2011; unaudited results compared with the three months ended November 30, 2010. Amounts below are in U.S. dollars.
Business context and key financial results
SemiLEDs develops, manufactures and sells LED chips and components, with operations concentrated in Taiwan and sales across Asia, Russia and North America. Its portfolio also includes lighting products following its acquisition of a 51% interest in Ning Xiang.
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $6.747 million | $13.016 million |
| Gross profit (loss) | $(0.822) million; (12)% margin | $6.640 million; 51% margin |
| Operating expenses | $5.594 million | $1.734 million |
| Operating income (loss) | $(6.416) million | $4.906 million |
| Net income (loss) attributable to SemiLEDs stockholders | $(7.721) million | $3.820 million |
| Basic and diluted loss per share | $(0.28) | Income per share: $0.11 |
| Operating cash flow | $(3.456) million | $1.569 million |
| Investing cash flow | $(5.913) million | $(8.258) million |
| Capital expenditures | $5.808 million | $8.240 million |
Financial position and liquidity
- Cash and cash equivalents were $73.954 million at November 30, 2011, down from $83.619 million at August 31, 2011. Cash decreased by $9.665 million during the quarter.
- Total assets were $167.324 million; current assets were $97.735 million and current liabilities were $13.532 million.
- Debt totaled approximately $7.5 million: $0.961 million in bank notes payable and $6.544 million in long-term debt, including current installments. Long-term notes carried variable rates of 1.8%–2.0%; unused bank credit lines were $7.6 million.
- Management stated that existing liquidity and anticipated operating funds were expected to meet cash requirements for at least the next 12 months, but warned additional financing might be needed if operations do not generate positive cash flow. No assurance of available or favorable financing was given.
- Property, plant and equipment purchase commitments were $9.2 million at quarter-end.
Material changes and management commentary
- Revenue declined approximately 48%. LED chip revenue fell due to a 46% decrease in average selling price and a 58% decrease in volume, reflecting aggressive competition, weaker demand and reduced government spending on Asian street-lighting projects. The prior-year quarter benefited from a large project order.
- LED component average selling prices fell 76%, partly offset by a 249% increase in volume. Other revenue increased, including $0.9 million from lighting products associated with Ning Xiang and $0.2 million in service revenue.
- Cost of revenue rose 19%, driven mainly by $0.9 million of excess-capacity charges and $0.9 million of inventory valuation adjustments. Inventory write-downs were $994,000, versus $140,000 a year earlier.
- R&D expense increased to $1.689 million, primarily from materials and supplies used in development of larger wafers, including 4-inch wafers. SG&A increased to $3.905 million, including higher legal, accounting and advisory costs, staffing and public-company expenses.
- Equity-method losses from unconsolidated entities were $1.526 million, largely reflecting increased losses at China SemiLEDs, which management described as early-stage and expected to incur near-term losses.
- Management attributed weak margins to lower prices and capacity utilization, which left fixed costs, including depreciation, under-absorbed. It said it would continue to focus on cost management and invest in capacity as market conditions and demand warrant.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management’s liquidity outlook assumes current operations and spending levels.
- Key risks include LED market cyclicality, falling selling prices, weak demand, manufacturing underutilization, customer and geographic concentration, and reliance on limited suppliers and contract manufacturers. The top ten customers represented 58% of quarterly revenue; the three largest represented 36%.
- SemiLEDs and Cree are engaged in patent litigation in both directions. Cree added willful-infringement claims seeking treble damages. SemiLEDs said it would contest the claims and considered an unfavorable material loss less than probable, but stated potential losses were not reasonably estimable and an adverse result could materially affect financial condition and results.
- The company reported a $2.966 million foreign-currency translation loss in comprehensive income. It disclosed that a hypothetical 10% adverse U.S. dollar/New Taiwan dollar movement would have produced a $9.8 million translation adjustment and approximately $1.7 million additional foreign-exchange loss.
- Management concluded disclosure controls were effective at a reasonable-assurance level as of November 30, 2011; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether revenue, chip pricing and sales volumes stabilized after the sharp year-over-year declines.
- Whether capacity utilization, inventory write-downs and gross margins improved.
- Cash burn, capital spending and the execution of the $9.2 million equipment purchase commitments against management’s 12-month liquidity outlook.
- Developments and potential financial exposure in the Cree litigation, including the willful-infringement claims.
- China SemiLEDs’ operating performance and the recoverability of SemiLEDs’ investments in unconsolidated entities.