SemiLEDs Corporation — Q1 FY2014 10-Q
Reporting period: Three months ended November 30, 2013; comparisons are with the three months ended November 30, 2012 unless otherwise stated. SemiLEDs develops, manufactures and sells LED chips, LED components and lighting products. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change / context |
|---|---|---|---|
| Revenue | $3.417 million | $6.227 million | Down 45% |
| Gross loss | $2.337 million | $3.288 million | Gross margin worsened to negative 68% from negative 53%, primarily due to excess capacity and lower factory utilization |
| Operating expenses | $3.770 million | $4.886 million | Down 23% |
| Operating loss | $6.107 million | $8.174 million | Improved |
| Net loss attributable to SemiLEDs stockholders | $6.292 million | $8.923 million | Basic and diluted loss per share: $0.23 vs. $0.32 |
| Cash used in operating activities | $5.428 million | $3.250 million | Use increased, primarily reflecting lower customer collections |
Revenue fell across product categories: LED chips declined 46% to $0.975 million, LED components declined 51% to $1.187 million, lighting products declined 8% to $1.227 million, and other revenue declined 96% to $0.028 million. Chip average selling price fell 43%; component volume fell 60%, partly offset by a 24% increase in average selling price. Inventory write-downs were $0.187 million, down from $0.712 million.
Research and development expense was $1.126 million, versus $1.223 million; selling, general and administrative expense was $2.644 million, versus $3.663 million. The latter fell mainly due to lower bad-debt and professional-service expenses. Net foreign-currency transaction loss was $0.197 million, compared with $0.926 million. No income tax benefit was recognized.
Balance sheet, liquidity and debt
- At November 30, 2013, cash and cash equivalents were $28.122 million, down from $36.272 million at August 31, 2013. Current assets were $43.163 million and current liabilities were $10.551 million.
- Total debt was approximately $7.998 million, including $2.243 million current and $5.755 million long-term, down from approximately $8.463 million at fiscal year-end. Long-term notes carry variable rates, were secured by property, plant and equipment, and had rates of 1.9%–2.0%.
- Cash declined $8.150 million during the quarter. Investing activities used $2.364 million, including $1.626 million related to an LED-components production-line acquisition; financing activities used $0.559 million, principally for debt repayment.
- Management stated that existing cash was expected to cover requirements for at least 12 months based on current operations and spending. It cautioned that continued operating cash outflows could require additional financing, which might not be available on favorable terms.
Material changes, outlook and risks
- Management attributed weak sales to reduced chip and component volumes, pricing pressure, slow demand for older-generation components, constrained sales and distribution expansion, and weak conditions in Russia. Three largest customers represented 19% of revenue; the top ten accounted for 43%. Sales to Taiwan, the United States, China and Russia together represented 61% of revenue.
- The company continued to prioritize cost reduction and focus on UV LEDs and other targeted segments, while de-emphasizing chip sales in selected price-pressured markets and emphasizing LED components. It did not provide quantified revenue, earnings or margin guidance.
- Management initiated consolidation and relocation of manufacturing at the Sinwu facility to existing facilities, with planned build-out at Chu-Nan. It expected substantial completion in Q4 FY2014; the work would require capital spending and could cause delays, production difficulties or business disruption.
- SemiLEDs increased its ownership of Ning Xiang to 87% in November 2013 by acquiring a further 21% interest. Ning Xiang designs and sells lighting fixtures and systems.
- A securities class-action complaint alleges Exchange Act violations related to statements concerning the IPO and 2011 quarterly results. Management said it intends to contest the case and assessed a material unfavorable outcome as less than probable; potential losses were not reasonably estimable.
- Key risks include sustained losses, LED-market competition and price declines, underutilized manufacturing capacity, customer and geographic concentration, reliance on limited suppliers and contract manufacturers, currency movements, financing needs, and intellectual-property constraints. A permanent injunction agreed in the Cree dispute restricts certain accused products in the United States.
- In January 2014, the board approved a proposal to add 2.5 million shares to the 2010 Equity Incentive Plan, subject to shareholder approval at the 2014 annual meeting.
Important facts for investors to verify
- Whether cash burn moderates and the company can maintain liquidity without additional financing.
- Whether revenue recovery, factory utilization and gross margins improve, particularly given the negative 68% gross margin.
- Whether the facility consolidation meets its timing, cost and production targets.
- Customer collections, inventory quality and the concentration of revenue among customers and markets.
- Developments in the securities litigation and the status and scope of intellectual-property restrictions.