SemiLEDs Corporation — Q1 FY2013 Form 10-Q
Reporting period: Three months ended November 30, 2012; comparative period is the three months ended November 30, 2011. The company develops, manufactures and sells LED chips, components and lighting products. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 | Change / context |
|---|---|---|---|
| Revenue | $6.23 | $6.75 | Down 8% |
| Gross loss / margin | $(3.29) / (53)% | $(0.82) / (12)% | Material deterioration |
| Operating expenses | $4.89 | $5.59 | Down 13% |
| Operating loss | $(8.17) | $(6.42) | Loss widened |
| Net loss attributable to SemiLEDs stockholders | $(8.92) | $(7.72) | Loss per share: $(0.32) vs. $(0.28) |
| Operating cash flow | $(3.25) | $(3.46) | Cash used in both periods |
| Investing cash flow | $(3.92) | $(5.91) | Included HPO investment and equipment purchases |
| Financing cash flow | $(1.87) | $(0.21) | Included $1.62 repayment of credit lines |
Cash and cash equivalents were $39.32 million at November 30, down from $47.23 million at August 31, 2012. Cash, cash equivalents and short-term investments totaled $47.66 million, versus $56.06 million at August 31. Current assets were $64.53 million and current liabilities $11.36 million. Debt comprised $1.00 million of current installments and $4.85 million of long-term debt; no credit-line balance remained at quarter-end. The company reported no income tax expense.
Material changes and operating drivers
- Revenue declined by approximately $0.5 million. LED component sales fell as demand for a lower-priced product category weakened; LED chip revenue declined as average selling prices fell 48%, partly offset by 65% higher volume. Lighting-product revenue increased on a project-based order.
- Cost of revenue rose 26%, primarily due to $0.9 million more in excess-capacity charges amid continued manufacturing underutilization. The resulting gross margin fell to negative 53% from negative 12%.
- R&D expense declined to $1.22 million from $1.69 million, largely on lower materials and supplies. SG&A declined to $3.66 million from $3.91 million, but included a $0.7 million increase in bad-debt expense, mainly related to two customers; SemiLEDs said it had stopped selling to them.
- Foreign-currency transaction loss was $0.93 million, compared with a small gain a year earlier. Foreign-currency translation adjustment was positive $2.69 million in other comprehensive income attributable to SemiLEDs stockholders.
- Top ten customers accounted for 47% of revenue, down from 58%; sales to the three largest customers were 23%. Sales to China, Taiwan, Russia and the United States collectively represented 62% of revenue, versus 86% a year earlier.
Outlook, risks and unusual items
- Management stated that existing cash, cash equivalents and short-term investments were expected to cover cash requirements for at least 12 months at then-current operating and spending levels. It cautioned that continued operating losses could require additional financing, which might not be available on favorable terms. No quantified revenue or earnings guidance was provided.
- Management cited intense LED pricing pressure, declining average selling prices, excess manufacturing capacity and fixed costs, and the need to improve yields and margins. The company had substantially converted chip production to 4-inch wafers, but expected cost savings were constrained by underutilization.
- In October 2012, SemiLEDs invested $2.9 million for a 9.9% interest in High Power Optoelectronics (HPO), with an option to increase its stake to more than 50% within one year. It also became an HPO distributor and entered into a joint R&D agreement.
- After quarter-end, China SemiLEDs shareholders agreed to a restructuring plan under which another shareholder would contribute approximately $8.0 million and take control; SemiLEDs’ ownership would be diluted from 49% to approximately 16.3%. SemiLEDs agreed to the plan and said recovery of its investment was uncertain. It planned to pursue China through its wholly owned Shenzhen subsidiary instead.
- The Cree patent dispute had been settled in June 2012. An agreed permanent injunction effective October 1, 2012 bars SemiLEDs from making, using, importing, selling or offering certain accused products, or assisting others to do so, in the United States. The filing says remaining claims were withdrawn without prejudice.
- China SemiLEDs had defaulted on approximately $0.2 million of advances; the amount was fully provided for. Separately, related-party receivables included a significant allowance for doubtful accounts.
- In January 2013, SemiLEDs entered a new NT-dollar credit facility of approximately $4.1 million and had drawn $1.0 million by January 11. Management identified currency movements, customer and market concentration, supplier dependence, IP claims, and potential asset or investment impairment as risks. No material pending legal proceedings were reported as of November 30.
Most important facts for investors to verify
- Whether revenue and product pricing stabilize, and whether manufacturing utilization, yields and gross margins improve.
- Whether the stated 12-month liquidity expectation remains supportable given ongoing losses, cash burn, capital commitments and any further financing needs.
- Recoverability of customer receivables and related-party exposures, and the impact of the two customers associated with increased bad-debt expense.
- HPO’s performance, the terms and feasibility of exercising the option to obtain control, and the returns on the $2.9 million investment.
- Execution and financial consequences of the China SemiLEDs restructuring and the separate Shenzhen China strategy.
- The scope and commercial impact of the Cree injunction, including any future claims or constraints on U.S. sales.