芯源系統 (MPWR) 2005 Q3 法說會逐字稿

Good day, and welcome to the Monolithic Power Systems third quarter 2005 teleconference. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Rick Neely. Please go ahead, sir.

Thank you. Good afternoon, and welcome to the third quarter Monolithic Power Systems conference call. Thank you for taking the time to join us today. Michael Hsing, CEO and founder of MPS, is with me on today's call.

In the course of today's conference call, we will make forward-looking statements and projections that involve risk and uncertainty, including our future financial performance targets, our expectations concerning pending litigation, our plans for facilities in other countries, our new product plans, growth in our product lines, and our business outlook, including our outlook for the fourth quarter 2005, projected fourth quarter net revenues and gross margins, our expectations for fourth quarter operating expenses and effective tax rates, and our outlook for continuing growth.

Forward-looking statements are not historical facts or guarantees of future performance or events and are based on current expectations, estimates, beliefs, assumptions, goals and objectives, and involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from the results expressed or implied by these statements. Additional factors that could cause actual results to differ include, but are not limited to, the potential impact, risks, uncertainties, and cost of litigation in which the company is involved, the potential impact of our financial performance if our tax and/or litigation provisions are inadequate, risks associated with the continued development and expansion of our business and facilities, acceptance of, or demand for, our products being lower than expected, and difficulty in predicting or budgeting for future expenses and financial contingencies.

Other important factors are identified in the company's SEC filings, including, but not limited to, our Form 10-K filed on March 31, 2005, and our most recent Form 10-Q filed August 12, 2005, which are accessible through our website, all of which factors are incorporated by reference into today's discussion.

I'd also like to remind you that today's conference call is being webcast live over the Internet and will be available for replay on our website for one year at www.monolithicpower.com, along with our earnings release, the reconciliation between GAAP and non-GAAP numbers, and other financial and statistical information presented during the call.

Now, I will turn the call over to Michael for a review of the third quarter's business highlights. Following Michael's comments, I will discuss our financial results for the third quarter and our business outlook for Q4. We will then open up the call to your questions. So, at this point, I'll turn it over to Michael.

Thanks, Nick. Welcome to MPS' earnings call for the third quarter of 2005. I'm pleased to announce that we end the third quarter with a record revenue of $29.7 million, an increase of 102% from the third quarter of 2004, and up 33% from last quarter. Our third quarter gross margin was 64.3%, compared to 60.4% for the third quarter of 2004 and 63.4%, last quarter. Our revenue exceeded our mid-quarter estimates.

We are continuing to benefit from the global market acceptance of our power management solutions, particularly in the DC to DC market. Revenues from our DC to DC products grew 165% from the same quarter, a year ago, and 41% from last quarter. Our LCD backlight revenues grew 39% from last year and 20% from last quarter. The DC to DC growth is occurring across all market segments, including consumer, computing, networking, and industrial applications.

Some of our other current business highlights include the following -- we are continuing to expand our product portfolios, our new product release is on track, and we have introduced 24 new products in the past nine months. We are continuing to focus on operational excellence, which is reflected in the gross margin results in this quarter, driving down overall costs and increasing productivity of key priority for MPS. The construction of China's test facility should be substantially completed by the end of this year, and we hope to have a full production by the middle of 2006. The CFO transitioning is complete with the hiring of Rick Neely in September. Tim Christoffersen is continuing to work with us as a consultant.

The third fiscal quarter for MPS is traditionally the strongest. The financial results reflect this. Without litigations and a stock compensation expense, operating margin was a record 38%, well above our model.

Now, let me comment on the key litigation events in the third quarter. As we announced, a few weeks ago, MPS and Linear Technology Corporation entered into a settlement agreement in the investigation issue initiated by Linear Technology before the International Trade Commission. A joint motion to terminate the investigation was granted by Judge Harris. ITC is reviewing the initial determinations. (inaudible) involved trade secret claims against MPS and MPS patent claims against (inaudible). The jury verdict issued in July is not a final judgment. The judge is currently considering matters, but were not submitted to the jury, as well as some post-trial motions. We expect a final judgment later this year or early next year. Meanwhile, a partial judgment has been entered that MPS does not infringe (inaudible) patent concerning the prior summary judgment entered in February 2004.

Now, let me turn the call over to Rick Neely, our new CFO, for a more detailed review of our performance and outlook. Rick?

Thanks, Michael. Let's discuss our financial results for Q3. Our September quarter exceeded our expectations both for revenue growth and margin performance. As Michael mentioned, revenues were $29.7 million for the quarter. This compares to $14.7 million for the third quarter of 2004, an increase of 102%. Our Q3 revenues also grew 33% from the $22.3 million reported last quarter. Beginning this quarter, we have combined (inaudible) driver revenues with the DC to DC revenues due to the similarity of product usage and customer base. Previously, we had discussed combining White LED revenues with the LCD backlight data, but upon further analysis, have decided they fit best within the DC to DC product area. Based on this segmentation, let me give you, in summary, of the revenue breakdown for the quarter by our major product lines.

For LCD backlight, Q3 revenue was $10.1 million, compared to $7.3 million, one year ago. That's an increase of 39%, year-over-year. For DC to DC, our Q3 revenue was $18.5 million, compared to $7.0 million in Q3 2004. That's an increase of 165%, year-over-year. Our audio components were $1.1 million in Q3 '05, compared to $400,000 in Q3 '04, an increase of 143% for the audio line.

As Michael mentioned, gross margin came in at 64.3% for the quarter, compared to 60.4% for the third quarter, a year ago. Generally, our gross margin percentage is similar across all product segments. While we are pleased with this record performance, our target-operating model for gross margin remains at 58% to 63%.

The third quarter is traditionally our strongest due to high demand prior to the consumer-selling season. GAAP-based operating expenses in the third quarter were $12.5 million. This includes $1.1 million for stock compensation expense, $3.5 million for patent litigation cost, and $7.9 million in the R&D and SG&A expense line. This compares to GAAP-based operating expense of $10 million in the third quarter of 2004 and $26 million, last quarter. As you may recall, last quarter, MPS had $1.6 million of stock compensation expense, $17.4 million of litigation expense and provisions, and $7 million in R&D and SG&A expense.

Year to year, our R&D outlay has increased by $1.4 million, or 66%, primarily related to headcount increases, while SG&A increased by $2.6 million, year-over-year, or 138%. The increase in SG&A over the prior year was driven by (inaudible) compliance, headcount growth, commissions on higher sales volumes, and marketing programs for the second half of 2005, primarily as a guidance.

Non-GAAP operating expenses, which exclude $1.1 million in stock compensation, or $11.4 million, end of September 2005 quarter. GAAP profits, which includes a $2.9 million tax revision, was $4 million for the quarter, or $0.13 per diluted share. This compares to a loss of $1.5 million for the third quarter of 2004, or a loss of $0.06 per diluted share. On a non-GAAP basis, net profit for the third quarter was $5.3 million, or $0.17 per share.

Turning now to our balance sheet, cash, cash equivalents, and investments increased to $60.3 million in the quarter, up from $51.8 million at the end of last quarter. Accounts receivable ended the quarter at $9.8 million, compared with $6.7 million, last quarter. Days sales outstanding, or DSOs, were 30 days in the September quarter, compared to 28 days, last quarter. Our inventory has decreased to $5.7 million in the September quarter, down from $6.3 million, last quarter. These levels reflect careful inventory management.

Now, let me additionally address our outlook for the fourth quarter of 2005. For the December quarter 2005, consistent with historic seasonality, we are targeting total revenues to be relatively flat to the third quarter, in the range of $29 to $31 million. We expect gross margin to be at the upper end of our target model of 58% to 63%. We expect our non-GAAP operating expenses to be between $12 million and $13.5 million in Q4. As part of those expenses, we estimate our litigation expense to be in the range of $3.5 to $5 million. Lastly, we anticipate an effective tax rate of approximately 40% for the fourth quarter, which reflects changes and estimates of the timing and the setup of our overseas test facility and our assumptions on geographic revenue distribution. Operator, we would now like to open the microphone and take your questions.

Thank you very much. The question-and-answer session will be conducted electronically. (Operator instructions). We'll take our first question from Quinn Bolton (ph).

Hi guys. Nice quarter. I have a few questions. I guess, first, maybe for Rick, just trying to look at the OpEx. It looks like the OpEx you said, the pure R&D and SG&A, is going to see a decent uptake in the December quarter. Can you sort of talk about what might be driving that? Is that just increased headcount, new takeouts, kind of final SAR (ph) bucks, the expenses, or what's behind that uptake in the operating expenses?

Yes, Quinn, thanks. Actually, you hit two of the three right on the head. We continue to add headcount again. We're growing very rapidly on the revenue side. We'll continue that headcount. This is our first year of (inaudible) compliance, as everyone knows, so we'll continue to have significant compliance costs in that area. And you're right, the increase in core operating expenses is similar to the increase we had in Q2 and Q3. It should be in that similar range.

Okay. Next question, maybe for Michael. Can you sort of give us an update just on some of the new op amps, voltage references, and LDOs, and sort of how the product development looks there, and sort of your outlook for those products, heading into 2006?

Yes, we haven't quite released op amps and the voltage reference as of yet, but we released a couple of LDO products, which is a very low-voltage operation. Only required 1.3 volts operations, so these are high performance, and LDO, which does not compete with other mass markets. We believe this has a premium price for that kind of product.

Okay. Will the -- I thought you, on the last conference call, you said that voltage reference to op amps. Are those still sort of targeted for introduction by the end of the calendar year, or does that drive the time that you're --

Yes, we're hoping to release in the next couple of weeks or the next few weeks before the end of this year.

Okay, and then, it probably takes what? Anywhere from 12 to 24 months to really get out there, get the design wins, have the design wins to ramp up, so this is probably in terms of meaningful revenue, kind of late '06 into 2007 for these new product families?

Yes, and these are the very beginning and the initial product of these product lines, and possibly may take a little longer time.

Okay. Two more questions. One, it looks like you guys did a great job of managing the inventory on your books, very aggressively, this quarter. Do you have a sense as to where inventory at your distributors are, and can you just give an update what percent of sales went through dist, this quarter?

Yes. Rick Neely can comment on it later, and to rewind, we use our distributor as logistical centers, so we carefully manage their inventory. We don't allow them a stock of more than a month's inventory.

That's correct, and relative to our customer mix, it is similar to (inaudible). The top customers are the same. Eight of the ten top customers are distributors -- channel partners, as Michael called them -- and they're going to be changing that mix, this quarter.

Okay, great, and then, just last question. What kind of typical linearity do you see, here, in the December quarter? I would imagine it might be front end loaded as you sort of hit the tail end of it -- holiday build, probably in the October/November timeframe. Is that the right way to look at it, or do you see actually more, better linearity through the quarter because of the (inaudible), maybe that kind of push towards the month of December?

I think, traditionally, we pretty much see it evenly, as in we don't have an up and down through all the months.

Our products own a broad variety of applications and products, so there isn't any particular spike. It tends to be more even.

Okay, great.

But we do see a format in the first half of year to second half of year. The seasonality is very clear.

Okay, and I'm sorry. One last one, and then I'll yield the floor. Rick, any idea for tax-rate guidance in 2006? I know it looks like it's going to be 40% for the last quarter of '05, but any sense you might be able to provide, heading into next year?

We're in our normal bracket, this quarter. We're only giving one-quarter forward guidance so I'll be happy to talk about 2006 in the next call.

Okay, fair enough. Thanks, guys.

Thank you. Next, we'll hear from Torres Vandberg (ph).

Hi, good afternoon. This is actually Jeremy, calling for Torres. It looks like the gross margin was a nice speed there. I was wondering if the new China test facility -- can that help you guys perhaps move your target range up, or is it something that will help basically keep the cost down and maintain your high margin at this point once that facility ramps for production?

Commenting on your question whether we're maintaining the 64.3% of gross margins, and our take on it is we have an older product, I would say it's more pricing pressures. And meanwhile, we're focused on reducing our production costs and increase the production of

The logistics is what he's getting into.

-- efficiency, and also we introduced a new product which tends to have a higher gross margin, so our China testing facility will be fully in production some time next year. In that business environment, we can't really forecast our gross margins.

Yes, just to expel further, relatively what we're transferring over is just a test portion of our manufacturing backend, so you won't see a significant number there. The big advantage for us is the logistics. Instead of taking die and finishing from Asia back here to test and back to Asia to the customers, it'll all be done locally. So, I think the customer-service angle logistics and supply chain will be much tighter. We'll be able to interact better, so I don't think you'll see any specific margin number because the test component is not that much of a portion of our total cost.

That would use 58% to 63%. We feel comfortable in that range.

Fair enough. Just moving on to the combined DC to DC and what LED portion, can you tell us which of these two product segments grew faster than the other? Was there a significant difference in the two growth rates?

No, the DC to DC has a significant growth rate, and in the last quarter, you've seen it. Our White LED revenue is a small portion of the entire revenue.

Yes, White LED is similar and well over, but White LED, alone, was 133%, year to year, so it's very similar to the DC year-over-year growth.

The revenue numbers are smaller.

Much smaller. The revenue number's much smaller. We put them together because of the similarity of the product and the phone factors that they go into.

Okay, and just one final question. If you can give us maybe an update in terms of the -- and I know you gave us a legal update on the Linear Tech and O2 Micro -- can you give us any update, here, on Microsemi and O2 Micro, and how those are addressing as you encounter maybe important, notable events that might be coming up for us to keep an eye for?

Well, on the other cases, we don't have any updates. In the Microsemi case, the trial's set for May 9, 2006, and O2Micro's still in a discovery phase. No trial date is being set.

Great. Thank you very much.

At this time, we have one question remaining in the queue. (Operator instructions). We'll take our next question from Zhang Fururi.

Hi, guys. Can you just walk through the OpEx and how we should be thinking about that, going into next year, for different scenarios of revenue growth? Should we continue to think that core OpEx kind of grows 10%, 15%, a quarter, or will it be a lot slower? Or, if you can kind of do what the corporate model is for R&D and SG&A.

Thanks, Zhang. As we mentioned, this quarter, we grew very rapidly, quarter to quarter, from historic seasonal trends, so the operating margin -- and again, I'm taking out stock comp expense, really on a non-GAAP basis -- the operating margin was 38%, which is well above our model of 30%. We believe -- we plan 2006 to bring operating closer to our model, which is 30% to 32% range. In any quarter where you have fantastic growth, you actually --operating wise, you cannot hire the quality of people quickly enough to cover your sales growth. We're in one of those very positive quarters where you'll operate above model because of the historic seasonality increase in our revenue.

So, on the operating expenses, though, we continue to hire the best hires we can find. We're going to continue to grow R&D and create new products. The rapid infrastructure of the company will grow, again, to match the growth. So, we expect to operate in '06 at our historical model. This quarter is an outstanding quarter, but it's really probably higher than we will do, long term, if you were looking at your model.

And then, R&D and SG&A, should they grow in Q4?

As we've mentioned to answering Quinn, the growth and the core operating expenses, R&D and SG&A, would be similar total growth to the Q2, Q3 delta. That's what the guidance would show you.

Okay, and now in terms of Q1, what should we kind of expect in terms of seasonality? Is this the kind of your typical seasonality that you've had, and will OpEx go down with seasonality, or it kind of stays more flattish?

Well, Zhang, we only can comment on the fourth quarter and won't give any guidance on the first quarter of next year, but you can look at our seasonality in the past histories, in which they consistently show our first quarters as the lowest. Our majority of our business hasn't really changed yet.

I see. Okay. Thank you. Keep up the good work.

(Operator instructions). We'll take our next question from Quinn Bolton.

Hi. I just want to do a quick follow-up. I know you're guiding gross margin to the high end of your 58% to 63% range, but on a pro-forma basis, you were close to 65%. Can you say whether there's any specific factors that might drive down the gross margin, quarter over quarter, or could it be if you have a similar product mix, pricing trends stay sort of similar to the third quarter, that you could actually be over that high-end of that range of 63%? Is there something specific that might drive it back down, or you just sort of try to be cautious and operate within your model?

Yes, let me comment in a general sense. In driving down the gross margin, if we can't increase or maintain and release a new product or get those product designed and made, then we reduce our gross margins. And also, if we can't increase our productivities and the volume can't increase, that will also affect our gross margins. At this time, I don't see these two negative things, that I mentioned, happening. We are executing our products well, and we are introducing the products from last year and also, from this year.

Yes, I wanted to clarify Michael's comment. What he was saying -- if the new products do not introduce as fast as we would like, the older products will suffer a bit more gross-margin pressure, and so, the trade off is do we get the new products introduced quick enough? Those are always higher. The older products have a little more competition. For example, the area where we had the most competition, not surprisingly, is in White LEDs. They go into cell phones. Cell phones are a very competitive market, so the real question of introducing new products for higher margins versus an inevitable decline on ASP of older products is the max. We don't anticipate Q4 to be different, one way or the other. There's no trend that we can point to, this quarter. We are consistently sticking to our new product introduction, so that's why we've maintained our guidance in that same range.

Okay, great.

We do have another follow-up question from Torres Vandberg.

Hi, it's Jeremy, again. Just wanted to see if you guys can provide a little more color, in terms of what's driving the inverter business. Is it just typical seasonal build in notebooks, or is there something else there? And also, what can we expect in the audio business? It looks like that's come back pretty nicely, here. Thanks.

Well, first, the notebooks -- we increase the market increase, I guess, but we do see some design wins in the LCD monitors and the LCD TV, and then, we start shipping in volume, now. In audio products, the revenue's still very small. As we increase our design team, you will see a nominal product when we introduce in this product line.

Alright. Just a follow up on the LCD monitors and TVs. Any notable customers you can mention, at this point?

We don't announce which customers, but you can see the Samsungs and the LGs and Sharps -- they are the leader in the area, and we do have design win with these guys.

Great. Thank you.

It appears there are no further questions at this time. Mr. Neely, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you. I appreciate everyone listening to the conference call, and we look forward to seeing you, next quarter. Thank you.

Thank you.

Thank you very much. That does conclude today's conference. We thank you for joining. Have a wonderful day.