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February 11, 1998
INTEGRATED DEVICE TECHNOLOGY INC (IDTI)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All references are to the Company's fiscal periods ended December 28, 1997, and December 29, 1996, unless otherwise indicated. Quarterly financial results may not be indicative of the financial results of future periods. The following discussion contains forward looking statements that involve a number of risks and uncertainties, including but not limited to operating results, marketplace competitive conditions, capital expenditures and capital resources, manufacturing capacity utilization, customer demand, customer inventory levels and intellectual property in the semiconductor industry. Factors that could cause actual results to differ materially are included in, but are not limited to, those identified in "Factors Affecting Future Results." The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof.
Results of Operations
Revenues
Revenues in the third quarter of fiscal 1998 of $144.2 million increased $13.2 million, or 10.1%, over the same fiscal quarter of last year. Revenues increased primarily due to a 44% growth in product units shipped over the same quarter of fiscal 1997, partially offset by a decrease in the weighted average selling price (ASP) for all products over the same period last year. The largest increase in revenues were in SRAM and specialty memory products driven by increases in units shipped, offset by slightly lower ASPs. While logic units shipped were also up significantly in the third quarter of fiscal 1998 compared to the same fiscal quarter of 1997, the ASP declined sufficiently during the same period such that related net revenue gains were minimal.
Revenues for the nine months ended December 28, 1997, of $436.9 million were up $42.9 million, or 10.9%, over the $394.0 million reported for the comparable fiscal 1997 period. Consistent with the trend for the third fiscal quarters described above, revenues increased primarily due to a 59% growth in product units shipped for the first nine months of fiscal 1998 over the comparable period for fiscal 1997, partially offset by a decrease in the weighted average selling price for all products. Increases in revenues were realized primarily in SRAM, specialty memory and logic products.
Revenues in the third quarter of fiscal 1998 versus the second quarter of fiscal 1998 increased from $143.8 million to $144.2 million or .3%. Net units shipped during the same periods increased 2.1%. The ASP realized across all products declined slightly in the third quarter of fiscal 1998 when compared to the ASP realized for the second quarter of fiscal 1998. Quarter over quarter increases were realized primarily in SRAM and both RISC and x86 microprocessors. As noted above, when comparing revenues for specialty memory products in current fiscal periods with corresponding periods of the previous fiscal year, revenue increases were realized. However, revenues realized from the sale of these products in the third quarter of fiscal 1998 decreased when compared to revenues for the second quarter of fiscal 1998. The Company believes this decline in revenues is due to reduced demand associated with customers adjusting inventory levels.
During late fiscal 1996 and into fiscal 1997, commodity SRAM average selling prices experienced market price declines of as much as 80% over twelve months. ASPs for other products also declined over the same period, although not as significantly, as existing products matured. In fiscal 1998, average selling prices have declined compared to fiscal 1997 and 1996, although not as significantly. In the third quarter of fiscal 1998, prices in all major product lines were relatively stable. In the future, market prices and customer demand for the Company's products may change, especially during periods of over supply, or seasonal demand weaknesses, or as a result of changed economic conditions in other countries, especially in the Far East, where competitors produce significant volumes of commodity semiconductor products and where demand for semiconductors can be significantly price sensitive. See "Factors Affecting Future Risks - Fluctuations in Operating Results, Cyclicality of Semiconductor Industry and Risks of International Operations."
In the third quarter of fiscal 1998, the Company continued its production ramp of the WinChip C6(TM) microprocessor and related quarterly revenues exceeded $1 million for the first time. The WinChip C6 microprocessor is IDT's first product of a planned x86 microprocessor product family. The products shipped are designed to be compatible with similar products manufactured and sold by Intel Corporation, Advanced Micro Devices, Inc. and National
(TM)WinChip and C6 are trademarks of Integrated Device Technology, Inc.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
Semiconductor Corporation (which recently acquired Cyrix Corporation). Current market demand for WinChip C6 microprocessors far exceeds IDT's current limited ability to supply C6 units. The Company is taking steps to significantly increase the available supply of the WinChip C6 product, including transferring production to the Oregon facility and investigating third party foundry relationships; however, there are risks, described in "Factors Affecting Future Results," that the Company will not be successful in its efforts to do so, and that the current level of market demand may change. The Company believes revenues and aggregate costs associated with this product family will continue to increase in future quarters as the Company executes its product introduction strategy. Information on risks associated with this expansion of IDT's product families is included below in "Factors Affecting Future Results." See "Risks Associated with Expansion of Product Families - x86 Microprocessors and Risks Associated with Planned Expansion; Manufacturing Risks."
The semiconductor industry is highly cyclical and is subject to significant downturns. Such downturns are characterized by diminished product demand, production over-capacity and accelerated average selling price erosion. The price the Company receives for its industry standard SRAM and other products, is therefore dependent upon industry-wide demand and capacity, and such prices have been historically subject to rapid change. Low SRAM prices have and will likely continue to adversely affect the Company's operating results. See "Factors Affecting Future Risks - Cyclicality of Semiconductor Industry."
Gross Profit
Gross profit for the current quarter increased $52.9 million over the same fiscal quarter last year to $55.0 million. As a percentage of revenues (gross margin), gross margin improved in the third quarter of fiscal 1998, compared to the third quarter of fiscal 1997, from 1.6% to 38.2%. In the third quarter of fiscal 1997, the Company recorded asset impairment and other charges of $45.2 million which are specifically identified in the Company's Statements of Operations as reducing gross profit. Additionally in the third quarter of fiscal 1997, the Company recorded $10 million in charges which related to the write off of certain technology investments and other miscellaneous items, which were classified in the Company's Statements of Operations in accordance with the nature of the charge, including cost of revenues. The $45.2 million charge related principally to recording reserves against the carrying value of manufacturing assets, including the Company's oldest wafer fabrication plant in Salinas, California, and other items. Excluding the $45.2 million charge for asset impairment and other reserves in the third quarter of fiscal 1997, gross profit in the third quarter of fiscal 1998 increased $7.6 million from $47.4 million and gross margin increased to 38.2% from 36.2% when compared to the third fiscal quarter of 1997. Both gross profit and gross margin for the third fiscal 1998 quarter were essentially flat compared to the second fiscal quarter of 1998.
For the nine months ended December 28, 1997, gross profit of $166.5 million was up $55.2 million over the $111.3 million reported for the same period in fiscal 1997. Gross margin of 38.1% for the first nine month period in fiscal 1998 was 9.9 percentage points higher than the 28.2% for the same period one year ago. Excluding the $45.2 million charge for asset impairment and other reserves in the third quarter of fiscal 1997, gross profit for the nine months ended December 28, 1997, increased by $10.0 million from $156.5 million and gross margin decreased 1.6 percentage points from 39.7%, when compared to the same period one year ago.
The increase in gross profit in the third quarter and nine-month periods of fiscal 1998 compared to the same fiscal 1997 periods was primarily attributable to the charge for asset impairment and other reserves taken in the third quarter of fiscal 1997. Additionally, the increase in gross profit and gross margin for the third quarter of fiscal 1998 compared to the same period in fiscal 1997, is the result of increased revenues associated with increased units produced and shipped, without commensurate increases in manufacturing cost.
For fiscal 1998, gross margin for the nine months ended December 28, 1997, of 38.1% is consistent with the first and second fiscal 1998 quarters and is the result of relatively stable operating conditions. However, for the nine months ended December 29, 1996, excluding the charge for asset impairment and other reserves, gross margin of 39.7% reflects fiscal 1997 quarterly margins which ranged from 49.8% to 31.7% and result from the combined effect of declining SRAM prices and increasing manufacturing costs associated with starting the production ramp in the Oregon wafer fabrication plant.
Costs associated with the eight-inch wafer fabrication facility in Oregon continued to adversely impact gross margin for both the current quarter and the nine months ended December 28, 1997, as these costs were not fully absorbed by additional revenues. Over the remainder of fiscal 1998 and into fiscal 1999, in an effort to achieve more efficient and effective capacity utilization and increase IDT's available supply of C6 microprocessors, the level of expense
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
associated with the Oregon fabrication facility is expected to increase on a quarterly basis over the levels of each comparable previous quarter. The anticipated increase in expenses is mostly associated with the installation of new equipment. Additionally, in the third fiscal quarter of 1998 and in future quarters, the percentage of these costs recorded as cost of revenues, versus process engineering research and development, has and may continue to change based upon production volumes and activities performed. See "Factors Affecting Future Risks - Risks Associated with Planned Expansion; Manufacturing Risks."
The Oregon facility provides the Company with significant additional available production capacity, but, to date, as a result of current market conditions, the Company's production volumes at its wafer fabrication facilities have not increased sufficiently to take full advantage of the additional capacity. The WinChip C6 microprocessor product family provides an opportunity for IDT to improve utilization of its Oregon facility; however, additional spending for capital equipment and set up time is required to manufacture substantial volumes of these products. Historically, SRAM products have been and will continue to be produced at the Oregon facility, and the Company is unable to predict whether demand for industry standard SRAM products or IDT's share of the available market will improve. Should IDT's production volumes, especially at its fabrication facilities, remain constant or decline and should the Company be unable to otherwise decrease costs per unit sold, the Company's gross profit and gross margin will continue to be adversely impacted. Further, if prices on industry standard SRAM products do not improve, or recent improvements in market demand for SRAM production volumes do not continue, or the Company is not able to manufacture and sell other products at comparable or better margins, and if a greater percentage of the Oregon facility's operating costs are allocated to cost of goods sold based on activities performed, then gross margin may decrease.
Research and Development
Research and development (R&D) expenses decreased in absolute spending and as a percentage of revenues for the third quarter of fiscal 1998, and for the first nine months then ended, when compared to the same periods for fiscal 1997. R&D expenses for the current quarter of $31.3 million and for the first nine months then ended of $91.7 million, were down $9.2 million and $25.7 million, respectively, compared to $40.5 million and $117.4 million in the comparable fiscal 1997 periods. As a percentage of revenues, R&D expenses were 21.7% in the current quarter and 21.0% for the first nine months then ended. Respectively, these percentages were down 9.2 and 8.8 percentage points from the same periods one year ago. Third quarter fiscal 1998 R&D expenses were up $.7 million from the second quarter in fiscal 1998 and also increased slightly as a percentage of revenues from 21.3% to 21.7%.
The Company's policy is not to capitalize pre-operating costs associated with new manufacturing facilities, and in fiscal 1997, significant facility start-up and staffing expenses were incurred at the then new eight-inch wafer fabrication facility in Hillsboro, Oregon. Operating expenditures associated with the start up of the Oregon fabrication facility were classified in part as process engineering R&D expense and, in part, as cost of revenues, based upon the nature of the activities performed. In the third quarter of fiscal 1998 and for the first nine months then ended, total R&D expense, both in absolute dollars and as a percentage of revenues, declined principally because a greater proportion of manufacturing facility operating costs, including Oregon facility costs, were classified as cost of goods sold, rather than process engineering R&D.
Current R&D activities include developing the next generation of WinChip C6 microprocessors for use in personal computer applications, conducting research into applications of high speed DRAM technology for the communications market, developing RISC microprocessors for primarily communications and embedded control applications, developing an advanced SRAM architecture that significantly improves performance of communications applications requiring frequent switches between reads and writes, developing a family of specialty memory products for the communications and networking markets, and efforts to introduce products into the 3D graphics market.
IDT believes that high levels of R&D investment are required to support its strategy of providing products to its customers which are not readily available from its competitors. However, there can be no assurance that additional research and development investment will result in new product offerings, that any new offerings can be manufactured at gross margins comparable to or better than the Company's current products, or that new products will achieve market acceptance.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.) |
