SemiLEDs Corporation — Q3 FY2012 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended May 31, 2012. Amounts are in U.S. dollars; financial-statement figures are in millions unless stated otherwise. The filing is unaudited.
Business context and results
SemiLEDs develops, manufactures and sells LED chips and components, with substantially all manufacturing and other core operations in Taiwan. It also sells lighting products through its majority-owned Ning Xiang subsidiary and holds a 49% interest in China SemiLEDs, an unconsolidated joint venture.
| Metric | Three months ended May 31, 2012 | Three months ended May 31, 2011 | Nine months ended May 31, 2012 | Nine months ended May 31, 2011 |
|---|---|---|---|---|
| Revenue | $9.18 | $5.60 | $23.83 | $28.57 |
| Gross profit (loss) | $(1.05) | $0.48 | $(2.60) | $9.45 |
| Gross margin | (11%) | 9% | (11%) | 33% |
| Operating loss | $(7.98) | $(3.89) | $(20.19) | $0.41 |
| Net loss | $(10.10) | $(5.12) | $(25.25) | $(2.47) |
| Net loss attributable to SemiLEDs stockholders | $(10.00) | $(5.12) | $(24.84) | $(2.47) |
| Loss per share, basic and diluted | $(0.36) | $(0.19) | $(0.91) | $(0.28) |
Financial position, cash flow and liquidity
- Cash and cash equivalents were $62.9 million at May 31, 2012, down $20.7 million from $83.6 million at August 31, 2011. Current assets were $84.8 million and current liabilities $14.6 million.
- For the nine months, operating cash used was $10.5 million, investing cash used was $10.4 million, and financing provided $0.1 million. Investing outflows were mainly capital expenditures; reported capital expenditures were $10.4 million.
- Debt at May 31 included $1.6 million of bank notes payable, $1.0 million of current long-term debt and $5.2 million of long-term debt, or approximately $7.8 million in total. Long-term notes are secured by property, plant and equipment; some borrowings have variable rates.
- Management said existing liquidity sources were expected to cover cash requirements for at least the next 12 months, based on current operations and spending. It cautioned that continued inability to generate positive operating cash flow could require additional financing, which may not be available on favorable terms.
- Purchase commitments for property, plant and equipment were $3.5 million. Noncancellable operating lease payments totaled $4.1 million. The filing reported no off-balance-sheet arrangements.
Material changes and drivers
- Quarterly revenue rose 64%, principally from increased LED-component and lighting-product sales. For the nine-month period, revenue fell 17%, as lower LED-chip sales more than offset growth in components and lighting products.
- LED-chip average selling prices fell 46% year over year in both the quarter and nine-month period. LED-component average selling prices fell 82% in the quarter and 81% for the nine months. Component sales volume increased substantially, but lower pricing and product mix pressured results.
- Gross margin turned negative, from 9% to (11%) for the quarter and from 33% to (11%) year to date. Management cited price pressure, underused manufacturing capacity and inventory write-downs. Nine-month excess-capacity charges increased $3.8 million; inventory write-downs were $2.3 million, versus $1.5 million a year earlier.
- Research and development expense increased to $5.9 million for the nine months, from $2.2 million, reflecting materials and work on yields, chip brightness, 4-inch wafers and product improvements. Selling, general and administrative expense increased to $10.2 million from $6.8 million.
- Equity-method losses from unconsolidated entities rose to $4.9 million for the nine months from $2.0 million, primarily due to China SemiLEDs. SemiLEDs’ investment in unconsolidated entities declined to $10.6 million from $15.6 million at August 31, 2011.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management emphasized that results are not necessarily indicative of the full fiscal year and identified pricing, demand, capacity utilization, yields and new-product adoption as key factors.
- In June 2012, SemiLEDs and Cree settled their patent litigation. The agreement provides for a settlement payment for past damages and a permanent injunction, effective October 1, 2012, barring U.S. activity involving the accused products. The settlement amount is not stated clearly in the filing; the company had recorded a $1.5 million litigation provision, which it said was in line with the agreed payment. Claims were dismissed without prejudice, and could be asserted again. SemiLEDs said it did not expect the injunction to have a material adverse effect because it planned new products outside its scope.
- SemiLEDs announced its Enhanced Vertical (EV) product series and a ceramic component in June 2012. Management noted that near-term prospects depend on customer appeal, qualification timing and the company’s ability to achieve suitable manufacturing yields.
- China SemiLEDs faced weaker street- and tunnel-lighting projects, intense competition in indoor lighting, excess capacity and inventory valuation charges. Its senior management departures increased SemiLEDs’ involvement in operations. Management expected continued near-term losses and noted that additional financial support might be needed; SemiLEDs is not legally obligated to provide it.
- Key risks include continued LED price erosion and product obsolescence, customer and geographic concentration, reliance on suppliers and contract manufacturers, execution and funding risks at China SemiLEDs, foreign-exchange exposure, and the U.S. injunction. The top ten customers represented 57% of quarterly and 55% of nine-month revenue; the four principal markets—China, Taiwan, Russia and North America—accounted for 78% and 80%, respectively.
- Management assessed disclosure controls as effective at a reasonable assurance level as of May 31, 2012; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the post-quarter Cree settlement payment, October 1 injunction and planned replacement products affect U.S. sales, customer demand or costs as management expected.
- Whether operating cash burn slows enough to support the stated 12-month liquidity expectation, considering capital spending, debt and purchase commitments.
- Whether LED pricing and capacity utilization stabilize, and whether inventory write-downs and negative gross margins persist.
- China SemiLEDs’ operating performance, staffing recovery, potential funding needs and recoverability of SemiLEDs’ investment and related-party receivables.
- Whether revenue growth in components and lighting products is sustainable given sharp average-selling-price declines and customer concentration.