芯源系統 (MPWR) 2006 Q1 法說會逐字稿

Good day and welcome to the Monolithic Power Systems First Quarter 2006 teleconference. As a reminder, today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Rick Neely. Please go ahead, sir.

Good afternoon, and welcome to the First Quarter Monolithic Power Systems’ Conference Call. Michael Hsing, CEO and founder of MPS, is with me on today's call. During the course of today's conference call, we will make forward-looking statements and projections that involve risk and uncertainty. For example, our business outlook, which includes our outlook for the second quarter of 2006, projected second quarter net revenues and gross margins, our expectations for second quarter litigation and GAAP and non-GAAP operating expenses, our targeted operating model range for gross margins, growing acceptance of our next generation DC-to-DC products, our expectations concerning pending litigation, our activities and plans for production in our China test facility, our new product plans, process development, design activities, and relative competitive position, and expected growth in our product lines.

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. Risks, uncertainties, and other factors that could cause actual results to differ are identified in our SEC filings, including, but not limited to, our 2005 Form 10K, filed on March 28th, 2006, which is accessible through our website.

Also please note that during this call, we will discuss net income and operating expenses on both a GAAP and a non-GAAP basis. The non-GAAP financial measures exclude charges related to stock-based compensation. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release, which we have filed with the SEC and included on our website, at www.Monolithicpower.com. 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.

We would like to start this call be reviewing our first quarter business highlights. Following the business update, I will discuss our financial results for the first fiscal quarter of 2006. We will conclude today by discussing our current expectations for Q2, 2006. We will then open up the call to your questions.

Moving on to the business highlights, for the first fiscal quarter, net revenues were $24.8 million, an increase of 69% from the first quarter of 2005. This compares to net revenues of $32.5 million in the prior quarter. Gross margin for Q1, 2006, was 62%, compared to 62% for the same quarter a year ago and 64% last quarter. We reported a net loss on GAAP basis of $408,000, or $0.01 per share, compared with a net loss of $1.4 million, or $0.05 per share, in the first quarter of 2005. This figure for Q1 '06 includes the first quarter impact of the implementation of FAS 123R, and MPS has recorded a total stock-based compensation expense of $2.7 million for the first quarter. Excluding this expense, non-GAAP net income for the first quarter was $2.2 million, or $0.07 per share. For the fourth quarter of 2005, GAAP net income was $3.8 million, or $0.12 per share, and non-GAAP net income, which excludes $1.2 million of stock-based compensation, was $4.7 million, or $0.15 per share.

Our first quarter revenues from our DC-to-DC product line were $16.4 million, up 125% from the same quarter a year ago. For the fourth quarter of 2005, DC-to-DC revenues were $18.8 million.

Our LCD backlight revenues came in at $7.4 million, a growth rate of 10% from the first quarter of 2005. In the fourth quarter of 2005, LCD backlight revenues were $12.8 million.

Other business highlights for the quarter include the fact that our DC-to-DC product growth has been very strong, up 125% year-over-year. Our next generation DC-to-DC products feature higher power handling capability and smaller footprints, and we believe that these products are gaining wide acceptance in the marketplace.

In the first quarter of 2006, we qualified our third generation BCD Plus process technology, which enables higher current density and increased switching frequencies, using a smaller die size. We believe that this technology provides a competitive advantage that will allow us to address additional networking and high-volume consumer applications.

We introduced a new family of products for the battery charger market. These products, which offer higher electrostatic discharge protection and higher input voltage capability, are targeted to hand-held applications such as cell phones and digital still cameras. And, we also introduced our first 175-volt power-over-Ethernet product. This product is targeted at new Voice-Over-IP applications.

I'd briefly like to give everyone an update on our litigation situation. First, at our request, the case involving O2 Micro’s 129 Patent has been transferred from Texas to the Northern District of California where it will be heard by the same judge who has presided over the cases involving O2s other two patents asserted against MTS. Secondly, our request to the U.S. Patent Office to reexamine O2 Micro’s 129 Patent was recently granted. And finally, as we previously announced, the Microsemi litigation was settled amicably in the first quarter.

Let’s move on to some more detailed financial results. On our P&L, I would like to break down our Q1 ’06 revenue by product line. For the LCD backlight product group, our Q1 ’06 revenue was $7.4 million which compared to $6.8 million in Q1 of ’05, growth rate of 10%. For our DC-to-DC product lines, the first quarter saw revenues of $16.4 million versus $7.3 million a year ago for a growth rate of 125%. And finally, our audio product line showed revenues of $0.9 million compared to $0.6 million a year ago or 65% growth rate year-over-year.

For the prior quarter, LCD backlight revenues decreased $5.4 million. Normal seasonality accounts for about $2 million to $3 million of this change and secondly the impact of some order cancellations from Sumida was equal to about $1.5 million to $2 million impact in the first quarter. And the remainder of the decline for Q4 of 2005 was due to excess distributor inventory build-up in Q4 that we spoke about in our prior conference call.

Our first quarter 2006 DC-to-DC product sales of $16.4 million requested seasonal guidance for our business which is weighted toward consumer related end-point. Looking at gross margins, our Q1 gross margin was 62.1% which is flat compared to the 62.1% in Q1 ’05 and 64% in the fourth quarter of 2005.

Our Q1 ’06 gross margin was impacted by about $540,000 for start-up costs for our new test facility in Chengdu, China which is equivalent to about 2.2 margin points. Our target operating model range for gross margin remain in the range of 58% to 63%.

Our GAAP based operating expenses for the first quarter were $16.6 million. This includes $4.1 million per patent litigation costs and $12.5 million in R&D and SG&A expense and that total of $12.5 million includes $2.5 million for stock compensation expense under the new FAS 123R accounting rules.

Compared with Q1 ’05, GAAP operating expenses increased by $5.3 million. This is comprised of an increase in stock comp expense of $1 million, an increase in R&D spending to $1.3 million, an increase in SG&A of $3.4 million and a decrease in litigation costs of $400,000. In the fourth quarter of 2005, GAAP operating expenses totaled $15.3 million.

Let’s look at these expense changes in a little more detail. The increase in R&D spending year-over-year and quarter-over-quarter reflects the Company’s aggressive investment in growing our design teams and new product introductions. Year-over-year, we added about 10 to 15 quality analog design engineers. Our SG&A expense growth was driven by headcount increases in the sales force as well as the cost of stocks and our restatement project that was completed in Q1 ’06. We estimate that the combined costs of stocks compliant and the restatements was approximately $1 million in the first quarter for MPS.

On a non-GAAP basis for operating expenses, if you exclude stock compensation and litigation costs, our operating expenses were $10 million in Q1 ’06 compared to $5 million in Q1 ’05 and $8.1 million in Q4 ’05. Sequentially, the $1.9 million increase was primarily composed of the $1 million stocks and restatement impact I spoke about previously with the remaining amount put between growth in the R&D and sales and marketing functions.

In Q1 our GAAP net loss which includes a $200,000 tax benefit was a loss of $400,000 or $0.01 per diluted share. This compares to a loss of $1.4 million for the first quarter of 2005 which is a loss of $0.05 per diluted share. On a non-GAAP basis, our first quarter 2006 net income which excludes the stock comp expense in total of $2.7 million, was $2.2 million or $0.07 per share on a non-GAAP basis.

Let’s look at our balance sheet briefly. Cash, cash equivalents, restricted cash and investments increased to $68.2 million in the quarter, up from $66.8 million at the end of 2005 and up from $49.6 million a year ago. Accounts receivable ended the quarter at $8.3 million compared with $9.5 million at the end of ’05 and $4.1 million at the end of the first quarter of 2005. Day Sales Outstanding (DSO) were 28 days in the first quarter of 2006 compared to 27 days at the end of the fourth quarter of 2005 and 25 days in the first quarter of 2005.

Our inventory ended the quarter at $8.5 million or about 85 days of inventory. This compares with $6.2 million or 48 days of inventory at the end of the fourth quarter of 2005. After the end of the first fiscal quarter of 2005, our inventories totaled $6.5 million or about 108 days of inventory. The quarter-to-quarter increase in inventory levels that we saw in Q1 ’06 is consistent with our usual build-up in the first two quarters of the year to address the expected increase in demand that we typically see for the second half of the year.

A brief comment on general business conditions in the DC-to-DC market we believe our overall business remains very strong. In the current quarter, we are projecting healthy growth for the Q2 ’05 levels in the DC-to-DC market. We have had successful design activity in new applications such as digital still camera and passive optical network.

In the U.S., we have seen sales within only a few months after product training with our new distributor Avnet Memec, we have begun to penetrate U.S. business in new applications such as IP Set Top Box and Cable Modem. Geographically, sales are increasing in Japan and Europe. For example, our Q1 ’06 European sales were equal to total 2005 European sales. First quarter of 2006 sales in Japan were over 100% higher than the first quarter one year ago.

For the CCFL product line we project flat CCFL sales in the second quarter of 2006 compared to the first quarter of 2006 as a result of decreased demand primarily relating to market share saturation in notebook computer segment and some ongoing impact of selected customers from our litigation.

Finally, in our distribution channel, inventory issues identified in Q1 are being addressed. We have set up management review processes to more closely monitor our distributor inventory. A number of distributors were audited in March and our overall distributor inventory levels are back to appropriate ranges.

So our outlook for the second quarter of 2006, we believe that revenues are expected to be in the range of $25 million to $27 million dollars. Gross margin is expected to be in the middle of our target range of 58% to 63% as there will continue to be some impact with the Chengdu operation start-up in the second quarter.

We expect litigation expense in the range of $2.5 million to $3.5 million. Our non-GAAP operating expenses which exclude the litigation expense and stock-based comp expense which is expected to be in the range of $2.5 million to $3 million, are expected in the range of $8.75 million to $9.5 million; again, $8.75 million to $9.5 million for non-GAAP operating expenses.

In conclusion, we feel that MPS is continuing to develop new products and technologies addressing different market segments. This quarter we have expanded our sales channels and customer base growing our revenue geographically. We have strengthened our infrastructure by improving our control systems and management processes and finally, we continue to innovate with our proprietary BCD process introducing the third generation BCD Plus this quarter.

Now we would like to open the microphone and take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Craig Berger with Wedbush Morgan.

Good afternoon. Thanks for taking my question. I wanted to talk a little bit just about your guidance. Last time we chatted on one of these conference calls I think you said Q2 was lining up to be normal. I’m looking at your guidance which appears to reflect less than normal growth in the second quarter for you guys. Can you talk about the overall demand environment, where you’re at with inventories and the impact from the litigation driven market share losses? Thank you.

Thanks, Greg. If you look at all those elements, when we look at the quarter we’ll probably see the impact -- we have not yet replaced the loss of several million dollars a quarter from the Sumida business. That’s probably the single most impact. The other thing we’ve seen is as we’ve reached a saturation of our market share on the notebook segment, we’re now growing at the rate of the notebook market; which I’ve seen different unit demand loads of 10% to 15% so it’s difficult for us to grow the notebook market greater than that. And then we’ve got the impact from the Sumida litigation which has not yet been replaced. So those combinations are limiting our CCFL growth.

Does that answer your question?

Can you discuss what kind of traction you are getting with CCFL on either monitors or T.V.?

These are fairly new products that we introduced; although we see the strong design wins especially in Q1 of this year. But for Q2 I don’t expect to have significant revenue from LCD monitor and LCD T.V.

Okay. And then just another question, I think the last time we chatted, Sumido was running at or below a million dollars a quarter. Were they just a bigger customer than we thought last time or what’s going on there?

We agree with the projected $1 million to $2 million. The actual impact when we looked at them was $1.5 million to $2 million so it would spread out in more places than, perhaps, we had thought. That’s probably the answer; but that’s the actual number.

Are you seeing any other customers actively moving away, driven by the litigation issues? Or is it pretty much customer-by-customer?

We always have to fight for our customers every year; but we have not seen any general movement away from us based on the litigation. It causes us some more effort in some cases but we haven’t seen any significant movement away.

Last question for me and then I’ll let others get some in. What type of contribution did the Avnet Memec agreement produce and how do you see that ramping throughout the course of ’06. Thanks a lot.

Well, for the first quarter - we shipped our first products in April - so we did the training in the first quarter and our first products went out in April. So that was a very good milestone. In terms of significant contribution we don’t expect to see significant revenue contribution until 2007.

Thank you.

Next you’ll hear from Tore Svanberg with Piper Jaffray.

Yes. I have a couple of questions. First of all you mention the inventory at the distributors that that situation is looking better right now. Can you give us a little bit more color there and does that comment apply to where we are right now or was that in the last quarter?

Well thanks, Tore. As you know at our conference call at the end of March we said we had found some issues in our inventory build. We’ve addressed those. We’ve met with all the distributors, we’ve audited, we’ve basically feel that the inventories are now at appropriate levels for our business.

Very good. Do you also have internally a target from when you’re inverter business could possibly bottom? I think you’re guiding it to be flat to down this quarter; but I’m just trying to understand that business for the rest of the year. Do you think this quarter could be the bottom or how are you looking at that internally?

Well, we didn’t guide it to be down. We said it would probably be around flat quarter-to-quarter. So what we’re looking at going forward is we still have a lot of new products that, as Michael said, the revenue traction from the T.V. and monitors won’t show up more until the second half of this year and next year. Plus we’ve introduced new products for the notebook market; so we don’t see this as a no-growth market at all. We see that right now with our current product set we’ve hit a market saturation but we have not only new products coming in but typically, seasonally the notebook market is stronger in the second half than the first half. So we would also expect the seasonality to pick up later.

Very well. Two last questions - first of all what your internal inventory goals for this June quarter and also give us a little bit of color on how you see [foundry] capacity and wafer pricing at this point?

Okay. On inventory, as we said, what we do is we actually have less inventory at the end of Q1 on a days basis than we did a year ago. So we have about 85 days and a year ago we had 108. So we’re managing our inventory to make sure we have enough for the second half which, typically, has a big jump. So if we don’t build now we won’t have enough. So we plan to keep that inventory level about flat by the end of Q2 which will give us the ability to meet Q3 and Q4 demands.

Relative to the other part of your question -- I’m sorry Tore, what was it?

Yes. It was just --

Oh, the wafer prices. Yes. We have seen more pressure in that market. The assembly guys are filling up and so are wafer fabs. So price reductions are hard to come by and in some cases they are asking for increases.

Great. Thank you very much.

Now we’ll hear from Quinn Bolton with Needham & Company.

I just wanted to follow-up on the question about the converter business. It sounds like seasonally the notebook market should pick up in the second half, plus you’ve got LCD monitor and LCD T.V. business that should kick in, in the second half?

That’s correct.

Okay. So what you’re kind of saying today, it sounds like we should see a decent ramp in the third and fourth calendar quarters?

Yes. [Inaudible - highly accented language] other surprises. Yes. That’s what we expect. In the second half usually from the previous year it’s a lot higher than the first half of the year.

Again, Quinn, as you know, we don’t give guidance specifically on numbers. We’re just directionally talking about how our business historically behaves.

Right. What orderly times are standing at right now?

I’m sorry. We didn’t hear your question.

I’m sorry. Lead times? Where are lead times generally across the product lines?

Our lead times?

Your lead times.

Most of our business is turns business and so the lead times are kind of short.

Yes. We generally have four week lead times or less for orders.

Okay. So no real visibility yet into September quarter orders yet?

No.

Okay. Wanted just to clarify if the inverter business is flat. Looks like the DC-to-DC business would be up - would account for all of the growth in the quarter?

Yes.

Okay. Do you feel that that’s kind of normal seasonal patterns? Are you seeing sort of more seasonal trends in that business?

I think we don’t have -- in the last couple of years we’ve grown DC-to-DC tremendously and we haven’t really established a seasonal pattern yet. But we believe all our products are consumer related. So we will show some kind of seasonality patterns.

I guess what I’m trying to get at - you haven’t seen any inventory issues in the DC-to-DC. I know you’re growing off a larger base so you’re probably not going to see the same percentage growth but from what you can see in terms of market health, the market’s pretty healthy for the DC-to-DC product line?

We don’t have any specific inventory issues. Rick maybe can get --

Yes. Michael is right. The inventory issues were confined to CCFL. We don’t have any particular DC inventory issues and we haven’t - as Michael said the market has been -- we’ve been growing it very quickly so it’s hard to establish any seasonal trend other than the consumer --?

Just a couple of questions on the gross margin. It looks like if you backed out the Chengdu OpEx that your gross margin would have been around 65% on a sort of pro forma basis?

Well, pro forma takes away stock comp and things. On a GAAP basis we’re looking at about 64 and .2 or something; so it would have been pretty consistent with prior years.

Okay. But without Chengdu, you sort of actually were still a little bit above the longer term?

Yes.

Right. Okay. And then lastly, Michael, any comments you can make about the adoption or customer reception to the new power-over-Ethernet and battery charger IC’s?

Yes. We introduced the product in Q1 and we have seen orders from battery chargers which was a big surprise to us. And also the design wing for power-over-Ethernet - we’ve seen many, many activities both in the U.S. side or in the Asian side.

Great. Thank you.

[OPERATOR INSTRUCTIONS] And now we hear from Eric Gomberg with Thomas Weisel.

Hi. Good afternoon. Could you talk a little bit about the key applications and opportunities for BCD Pluses? Is that going to be new products or does it replace existing products?

It is an enhancement of an existing product. And in this process we qualified is for higher current in a high switching frequencies and the application can be used for DC-to-DC products, audios and [AOD] drivers and just across the board our existing product line. And so it really permits us to broaden our base on a potential application because we offer the high-speed and the switching frequency in high current with a smaller die at a very competitive cost.

So I don’t know if I answered that --?

Is that something that will enter your mix, I guess, in the near term? Or is that something that impacts you later in the year or next year?

Most likely, it’s next years and we plan to introduce a product based on this technology in the second half of this year.

I was going to ask about that. Could you talk a little bit about the timing of some of the new product introductions, voltage references op amps and others?

In Q2 or Q3 we’ll have those products.

Okay. Could you let us know, what should we be thinking of tax rate for Q2 and for the year?

The tax rate -- it’s about 25% would be the right estimate at this time.

Okay. And given that your court dates of ‘02 are no longer on the calendar, how should we be thinking of that litigation in the back-half of the year?

That’s a good question. For mitigation perspective, again we already guided that we expect Q2 to be down, so because of the Microsemi settlement and the change in venue in the [total] litigation we do expect a decline but - and that’s what we forecasted for Q2. We can’t give specific guidance because of the nature of litigation is not as predictable as other expenses. But we do expect a decline from Q1 to decline to Q2, Q3 levels.

Okay. And then if I could just ask one more question. Could you talk a little bit about how Chengdu is ramping and should we expect to see benefits emerge from that in the back half of the year?

Yes. I think that’s on schedule for what we planned. Q1 was a complete bring-up quarter. It was all hiring people and training and no production. We shipped our first production cards in April. I think we’re planning to ship 8 million to 10 million parts in April and ramping up from there. So it’s on its way up and we’ll be adjusting our activities in Los Gatos in Q2 as Chengdu ramps up. So you’ll see a mix in Q2 and by Q3, Q4 you’ll start to see more positive impact from Chengdu or at least you won’t see the extra start-up costs.

Great. Thank you.

[OPERATOR INSTRUCTIONS] Mr. Neely, we have no further questions at this time. I’d like to turn things back over to you for any additional or closing comments.

Okay. Well, thank you very much for attending the conference call and we look forward to talking with you the next time around after we report Q2 ’06. Thank you.

Again, that does conclude today’s conference. We thank you for your participation.