芯源系統 (MPWR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your conference titled Monolithic Power Systems, Incorporated Q2 2011 earnings conference call. At this time, all participants will be in a listen only mode, but later we will conduct a question and answer session which instructions will be given at that time. (Operator Instructions)

As a reminder today's conference is being recorded. And now I would like to introduce your host for today, Meera Rao.

Thank you. Good afternoon, and welcome to the second quarter 2011 Monolithic Power Systems conference call.

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. These statements will cover a number of areas concerning our business outlook, including our business and financial outlook for the third quarter of 2011; projected third quarter revenues and gross margins; our expectations for third quarter litigations, stock -based compensation, and GAAP and non-GAAP operating expenses; our target operating ranges for gross margins and inventory; our expectations for revenue growth and gross margins beyond Q3 2011; our belief regarding the outcome of a pending IRS audit; our belief that MPS is well-positioned for future growth; the expected seasonality of our business; our expectations for future cost reductions and new product introductions, potential customer acceptance and the opportunities these present; and the prospects of the expanding our market share.

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 significant 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 form 10-K filed on March 4, 2011 and form 10-Q, filed on April 28, 2011 which is accessible through website, www.monolithicpower.com. MPS assumes no obligation to update the information provided on today's call.

We will be discussing operating expense, net income and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC.

I would refer investors to this Q1 2010, Q2 2010, Q1 2011 and Q2 2011 releases as well as to the reconciling tables that are posted on our website. I would 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 along with the earnings release filed with the SEC earlier today.

We would like to start this call by reviewing our second-quarter business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the third fiscal quarter of 2011. We will then open up the call to your questions.

Let's start with the business highlights. In the second quarter of 2011, net sales were $51.6 million. Q2 revenues seasonally increased $7.2 million or 16% from the prior quarter, and decreased $4.1 million or 7% from the second quarter of the prior year when we had a very strong second quarter. This quarter, MPS experienced growth over the prior quarter in all 3 segments; DC to DC, lighting control, and audio segment. We have expanded our off-line power portfolio with new AC/DC products that target higher power application.

We continue to expand our footprint in LED illumination with the release of multiple high-voltage drivers. A large Internet -based customer has accepted the MPS system solution which include AC to DC. We have introduced several new DC to DC products which combine a new shrink process and mesh connect technology to offer high-performance products that are cost competitive. These products will allow us to win and maintain market share in cost-sensitive markets such a setup boxes, notebooks, TVs and DSL.

In the manufacturing area, second-quarter gross margin was 51.4% compared to gross margin of 50.2% in the prior quarter. Higher in-house manufacturing cost absorption due to higher revenues compared to the prior quarter, as well as improvement in revenue mix, contributed to the improvement in gross margin. Bottom line, non-GAAP net income was $7.2 million or $0.21 per fully diluted share.

Taking a deeper dive into the numbers, let's move to the profit and loss statement. Looking at our revenue by product type, second quarter DC to DC product sales were $42.8 million, seasonally up 16% or $5.7 million from the prior quarter. We saw stronger demand for DC to DC products in setup boxes, portable displays such as digital video players and GPS, as well as gateways and enterprise storage.

Q2 2011 DC to DC products were down 6% or $2.8 million from the $45.6 million recorded in the same quarter a year ago when MPS had an exceptionally strong quarter. DC to DC sales were led by our general-purpose DC to DC products, MiniMonster, LDO and current limit switch product families. The largest end markets for MPS' DC to DC product family were gateways, flat-panel TVs, setup boxes and general consumer electronic products.

Lighting control revenues for the second quarter were $6.9 million up from the $5.9 million in the prior quarter mainly due to increased TV and notebook demand. Lighting control was down from the $7.5 million dollars in Q2 2010. MPS saw year-over-year growth for its white LED products, while the CCS inverters and controllers shrank by $2 million with a continuing shift of back lighting from CCFL to white LED. White LED lighting sales were led by back lighting drivers for monitors, notebooks another portable displays. Audio revenues came in at $2 million up from the $1.5 million in the prior quarter, and down from the $2.6 million recorded in the second quarter of 2010. Increase in TV audio demand led to higher Q2 audio revenues.

Let's move down to the gross margin line. Our second-quarter gross margin was 51.4%, higher than our expectation for the quarter. Increased in-house manufacturing cost absorption due to higher revenues compared to the prior quarter, as well as improvement in revenue mix, contributed to the gross margin improvement. The gross margin was up from 50.2% in the prior quarter and down from the 58.2% in the second quarter of 2010.

Let's review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the second quarter of 2011 were $18.9 million, up $1.5 million from the $17.5 million we spent in the prior quarter, and down $1.3 million from the $20.2 million we spent in the second quarter of 2010. The increase in non-GAAP second quarter spending from the prior quarter was as follows; higher R&D spending of $1 million in support of a new product initiative; higher SG&A spending of $314,000; higher litigation expenses of $126,000.

The decrease year-over-year was primarily driven by lower litigation expenses. Our non-GAAP operating margin was 14.9% in the second quarter of 2011, compared with 11% in the prior quarter, and 22.2% in the second quarter of 2010.

Now, let's look at our reported expenses and operating margin. Our GAAP operating expenses were $22.5 million in the second quarter, compared to $20.4 million in the prior quarter, and $25.6 million in the same quarter a year ago. Since the only difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense, let's look at the stock compensation expenses.

The stock compensation expenses were $3.6 million in the second quarter compared to $2.9 million in the prior quarter and $5.4 million in Q2 2010. Our GAAP operating profit was 7.8% in the second quarter of 2011 compared to a GAAP operating profit of 4.3% in the prior quarter. Switching to the bottom line, on a GAAP basis, our Q2 2011 net income was $3.5 million, or $0.10 per fully diluted share. On a non-GAAP basis, our second-quarter 2011 net income were $7.2 million, or $0.21 for fully diluted share.

Now let's look at some of the major changes to the balance sheet. Cash, cash equivalents and investments were $180.5 million at the end of the second quarter 2011, down from the $193.3 million at the end of the prior quarter, and down from the $209.3 million we had on the books at the end of Q2 2010. In Q2, we bought back 1.6 million shares, for a total of $24.8 million under the stock buyback program. This completes our stock buyback program. In total we have bought back approximately 4.4 million shares for a total of $70 million.

We purchased capital equipment and software for a total of about $2.5 million in the second quarter. In the second quarter, MPS had operating cash flow of about $13.3 million and cash proceeds of $734,000 from option exercises by employees.

Accounts receivable entered the first and second quarter of 2011 at $17.6 million compared with $30.3 million at the end of Q2 2010. Days sales outstanding were down to 31 days in Q2 2011, from 36 days in Q1 2011, and 50 days in Q2 2010. Our internal inventories at the end of the second quarter were $24.7 million, or about 90 days of inventory on a historical basis which is lower than the inventory model of 100 to 110 days. This compares with $23.1 million or 95 days of inventory at the end of the prior quarter. Inventory in our distribution channels increased in both dollars and days, and total days of distributor inventory remains in the target range of 30 to 45 days.

I would now like to turn to a discussion of general business conditions. This quarter, by end market we saw gross and broadband communication markets, as well as consumer markets such as TVs and digital video players. In the computer market segments, we saw strong growth in enterprise storage. This penetration in enterprise storage is leading to additional opportunities with large US customers. In addition, we are shipping our high-density DC to DC product to a large Asia tablet manufacturer.

This quarter, in terms of design wins, we also starting to ramp a custom LED chip with a large panel manufacturer. This backlighting, white LED driver offers unique features to enhance performance. We have strong design wins in automotive and industrial markets worldwide. We won design wins in industrial applications such as flow meters, power meters, adapt control, et cetera. In addition, we got major design wins at large auto makers in Europe.

Now for a quick status update on our system initiatives. The new CRM system has been operational since April. The supply chain management tool is on track and will be implemented in the second half of this year.

I would now like to turn to our outlook for the third quarter of 2011. Our revenue guidance is in the range of $56 million to $60 million for the third quarter of 2011, reflecting the 12% increase from the prior quarter. We expect gross margin to be in the range of 52% to 52.5% as in-house test area capacity utilization improves for the increase in revenue. Stock -based compensation expense in the range of $3 million to $3.4 million. We expect non-GAAP R&D and SG&A expense to be in the range of $18.5 million to $20.5 million. This estimate excludes the stock compensation estimate mentioned above. We expect litigation expense in the range of $600,000 to $800,000.

In conclusion, business continues to be strong. We are pleased that second-quarter revenue growth of 15% is followed by a third-quarter revenue growth of 12%. In addition, we are excited about our product offerings in the last 6 months. First, we introduced products with significantly lower cost which will allow us to continue to be competitive and grow in existing markets. Second, we introduced state-of-the-art high current, high voltage product that will expand our high value product portfolio and customer base. We believe this will position MPS well for future growth.

I will now open the microphone for questions.

(Operator Instructions)

Ross Seymore from Deutsche Bank.

Hi, and congrats on the solid report and guide. I guess that's kind of the topic is -- we've seen most of the analog companies guide weaker for a number of different reasons, and yet you're not. Can you talk a little bit about what this company specific to Monolithic Power to allow you to pretty much guide to a seasonally normal third quarter?

This year, we followed the same kind of a growth pattern as before and also followed a traditional seasonality as the market more settle down, compared to last couple of years. We still grow in the consumer business, there's a lot of opportunities as Meera said in the script, the TV and digital video players, and also we see the tablets opportunities and LED drivers and other industrial growth. These are industrials and opportunity, these are very new to us. So we grabbed the market shares.

I guess within your guidance, can you talk -- actually in the quarter and the guidance -- can you talk a little bit about what your terms were in the second quarters and what you're expectation for turns business will be for your third quarter revenue guidance, please?

Sure. Usually we do not look at a turns guidance because what we find is, we get anything from a 40% to 60% of the business in a quarter can be turns business, and whether we are at 40% or 60% does not make a difference to the end outcome of the quarter. So right now, just like last quarter, we are comfortable with the guidance that we have given.

I guess the last question then for the channel inventory; do you expect the channel inventory in dollars and/or days to rise or fall in the third quarter?

We expect it to be in the normal range. We don't expect anything unusual over there. We watch our channel inventory fairly carefully.

Okay. Great. Thank you.

Tour Svanberg from Stifel Nicholus.

A few questions. First of all, you talked about utilization getting better for Q3 obviously with a higher revenue. What type of utilization rates are we talking about?

Utilization in the last couple of quarters, we were down to about 44% or something. 44 million. That was about 9% in the utilization impact. Now, whatever the ratio we have already calculated and it still have a large impact on our gross margin. 3% or 4%, that's my guess. Meera, you have better numbers?

Sure. When we talk back in Q4 and Q1 that we had about a 3% impact -- adverse impact to gross margin for underutilization. We also said that it could be about 65 or 70 before we would be fully able to absorb it. So we are seeing that utilization come in line. You can almost trend it out. That's what we are seeing from our side.

Very good. Maybe asking [ross] this question a little differently. If you look at that 12% growth in Q3, is that all coming from sort of a new market penetration and share gains, or will sort of the legacy business show some growth as well?

I think both. I'm more excited about the entering the new market. We see result from there. We are a lot more diverse company than a year ago.

And we have seen the demand increase coming from all across the different sectors that we are in.

Okay. Very good. And then last question; you talked about a new design win for AC to DC for an Internet company. Can you elaborate a little bit on that? Is this going into power supply for a server or -- I just want to get a little more color for that particular program please?

That's under NDAs, and we are very excited about this project. It's not only AC to DC, as Meera mentioned in the script. We have a DC to DC, we have other linear analog product and we provide an entire solution for that box.

Great, thank you very much and, again, great quarter. Thank you.

Patrick Wang from Evercore Partners. Patrick, please go ahead.

Great. Thanks for taking my question. I guess you guys aren't talking much about backlog, or anything there, but can you speak about your visibility on the (inaudible) today and perhaps what gets you to the upper and lower end of your revenue guidance?

Sure. It is the same as every single quarter. We look at the orders we already have on the table and we look at the orders that we expect, the degree of confidence we have in that, and based on that, we give the guidance. So just as last quarter, I would say that we are comfortable with the guidance we gave, that we would be in the range that we just guided.

Okay, and what about the visibility today?

Visibility today, we see it as a normal year to us, its not like last couple of years. We don't see anything particularly better or worse.

Meera, just a question for you; can you go over some of the moving pieces of your 130 basis points margin improvement last quarter, and then on the flip side of that, I guess there's still a couple of points of factory under loading impact that you're seeing there, but can you talk about the high wafer cost, when that might come off, and what the ASP trends are?

In terms of our gross margin improvement, it was both that with the higher revenue we had better absorption of overhead cost. We also saw an improvement because of our revenue mix. And we found that some of our high margin products, we actually sold more of those in Q2, and when we looked at it, it wasn't any single market. It was set up boxes, TVs, digital video players, some industrial, enterprise storage; it was everything all across, but we could see some of the higher margin products selling more of those. What was the second part?

The other one is the wafer costs. Patrick, the wafer costs, and although we get some back, but is a one foundry, and actually still increase the price quite a bit. And we couldn't get it down, the pricing. Still, over all, yes, we're still at the very high cost wafers.

We optimized our top loading as much as we can, but in terms of prices, we haven't seen any movement down.

And the last part was ASPs? In terms of ASPs, we're not seeing any significant movement other than whatever would be the normal year-over-year price decreases.

Got it. And your third foundry that comes online in the fourth quarter, is that going to help lower the wafer costs from that other foundry?

It is for industrial customer automotive and networking customer. These are very difficult to move. For consumers, customers are easier, but I don't see it will happen in the fourth quarter, it will most likely in the next year. More expected in the summer, cost-benefit, but the major incentive for us to move to a new fab is to lower the overall cost not by just by better price. We introduced a new shrink process as Meera mentioned, and that will give us a significant cost-benefit.

Got it. Okay. If I could squeeze one last quick one. Michael, can you talk about some of the new products significantly lower cost, how are you guys lowering the cost there, which end markets are you playing there, and how much of an impact are you seeing?

We are very competitive in the mid- to low-end of our consumer market. We introduced the new technologies. With combination with mesh connect, that will really give us the competitive advantage.

Okay. Terrific. Thanks so much.

Steve Smigie from Raymond James. Steve, please go ahead.

Thanks a lot. My congratulations on the nice quarter and guidance. Going back to the origin of some of the issues. You had a couple of major Korean customers where you lost some business, and I was just trying to get an update on that, so for the larger one, you were kind of in the penalty box it seemed like for about 2 years, is that -- we're maybe a year or further along, is there any chance to get back in earlier? How's that progressing in the smaller Korean customer? That one seemed less of an issue and seemed like it might come back quicker, so on that one, is that sort of back online now?

This year, revenue, if you look at it from last year revenue, we have a north of a $35 million in the TV business from Korea not in this year revenue stream. Obviously rest of the products we are doing really well. I don't think it is a good idea to focus on the TV market over all, but we do focus on a couple of pockets. In terms of Korean TV, yes, we do have a lot of revenue still from those manufacturers. In the low end of a product being replaced very quickly, but we still have a revenue and for those products, they cannot replace us. That kind of a product we want to sell them.

For the part where you did get kicked out of the larger one, are you back in the design process there with those guys, or you're just saying you don't want to be in there anymore?

Some of the low end, we choose to walk out last year. The high-end product, yes, we still have a designing activity because that is a one-of-a-kind solutions. For the other manufacturing, we have a full design win for next year's TV models.

Okay. Just to turn back to a question that a couple of other folks have been trying to get at; it seems like you've obviously got some share gains, maybe some dollar content gains on stuff like TVs and other consumer products, if you look at Best Buy data, it seems like TVs are down and various other data points, it seems like TVs are down. That is obviously not showing up in your guidance. Is it fair to say that you're seeing overall fewer TV units of demand just that you're increasing your dollar content and market share that would allow you to guide better than your competitors, or you just not even seeing the weaker TV units or other consumer units?

TV and consumer units and TV, it's not really our focus this year. Although we have some very good [socket], and we still gain some market shares, but that doesn't really drive our 12% gain from quarter to quarter's. That is really -- we look at all the contributions from our market segment, is really across the board. I'm happy to really see the significant growth from industrial, automotive and LED drivers.

Okay. Great. Thanks very much.

To add to that, for us, it feels like a regular Q3.

There is no any single segment that pops out.

Yes, that pops out and tells us it's stronger. So if other companies are seeing weaker then they most probably gain the marketshare there.

Okay. Great. Thank you very much.

Rick Schafer from Oppenheimer. Rick, please go ahead.

Hey guys, this is Sean Simmons calling in for Rick. I just had a question on your end market mix. Can you guys just give us a general breakdown kind of consumer PC communications and industrial, and then how do you expect that in market to trend over the next 4 to 6 quarters as some of these new industrial and automotive (inaudible).

The intents of our consumer which in prior periods used to be over 50%, we are kind of seeing about the 35% to 40% range. For communications, we are seeing it in also somewhere around the 40, 45. Computing is more like a 10 to 15, and industrial is on the 5% to 7%. I think for the next few quarters, at least the next couple, it's probably going to look something similar to that. Where we are focusing to grow, and we might see it later in 2012, we would like to see a pickup in communication and industrial. But those are the slower areas for the pickup. That's where we are targeting to increase mix.

Okay. Great. I guess switching gears to gross margin; next quarter you guys are seeing a nice little uptick here on getting back some of that utilization. How do you expect gross margins to trend over the next few quarters? Do you expected it to kind of trend in line with the revenues? Or how should we think about that within your 50% to 55% target?

I think it will trend with revenue for the most part. The mix will be small factor, but It will be a relatively smaller factor.

In the early as Meera said, in the next couple quarters, more revenue the better margin. Longer terms, now we have better mix of our product, in the way shift to other market, and that will show in our revenue stream.

I guess one last quick question. Can you remind us what typical seasonality is in the fourth quarter? If there is such a thing in the last couple of years.

Fourth quarter we usually [slacktodown] about 5%.

Okay. Thanks guys.

(Operator Instructions)

Brian Piccioni from BMO Capital Markets.

Most of my questions have been asked and answered, of course. With respect to the gross profit margins, you're having a nice recovery off the bottom or hopefully it was the bottom, anyways. How much further up do you think gross profit margins could get, because there's obviously utilization, but there's also external factors such as lead frames and wafer pricing and the rest of it. In the current environment, if you are fully utilized and so on, how high do you think that you could get them?

I think of the way, in the next couple of quarters it will be proportional with our revenue increase. Further increase, we need our new technology. With those products introduce to the market, as we are talking about now, those products will bring a higher gross margin, and that would be a difference from today where we are now.

Okay. So no sort of upper range as to how high they would go without the new technology?

Yes. We still expect to operate in our 50% to 55% gross margin.

Okay. Thank you very much.

(Operator Instructions)

Vernon Essi from Needham & Company.

Thank you, congratulations on this guide, Michael. I was wondering, and I'll take one crack I guess at trying to figure out this guide, I haven had too much luck this evening on some of these calls. If you were to look at your business model, I guess you've been talking in the past 3 to 6 months about getting a lot more content in your solution dollar content that is. Is there a way we could perhaps look at this as maybe an ASP situation where your ASP is rising faster than your units? Is that perhaps an explanation as to why you are tracking so well in revenue? Is there any sort of benchmark you can give us to carve out and get our arms around it?

Actually, if you look at our history, other than we have a hiccup in the Korean TV, we always, in the rest of the business, we always operate as is. As is and as will be. We don't change anything, actually. Nothing new. We just operate same as before. We [widen] the market, and I have to say we have a lot more emphasis on the traditional analog business. A lot of investors lost their faith, we lost them in the Korean TV market and the [NPSs] fell apart, the same company. And we operated same as before, the rest of the company, revenue really grow up.

I guess -- the operator said comments or questions, but I will make a comment here; haven't you not changed your strategy towards obviously tackling more industrial, automotive and storage? These are curing almost a force multiplier dollar content than your traditional parts that went into the TV market. That's probably a likely explanation for maybe why you're getting more revenue growth?

It is true. The number now skews more, but design wins is very significant. I said about a couple years ago in the US side it went up last year, US revenue demand creation was a joke; in the largest market and we got very little revenue. And since then, particularly this year, we do really well in the US side. This is not only industrial, automotive and networking, they are all in the consumer side, too. We just missed that market. We get what we should get it.

And the impact of those markets that you're talking that we've got into, there's going to be more significant revenue next year. We're just seeing the early revenues, so they are not necessarily what's driving the gross margin improvement when we talk about the revenue mix. We did analysis with one market, it was just all across; it was set up boxes, printers, digital photo frames --

And the Gateway flat panel flat panel monitors, and --

And so we saw everything and we looked at it by a product. It just was, we could see higher-margin products were selling -- we were just selling more of them, and these are the same products we have been selling for a while, but we just seemed to -- and that's why the conclusion is we are seeing more market share in some of these --

And from a US side in the last couple of quarters, we mentioned HDD and SSD, and some kind of a electronic fuse, we also call it low switch and is some other earnings calls. Those revenue grow quite well. So they're not necessary only in the industrials and the automotive and networking. These are a lot more design wins that I see in the revenues queue coming quite good, but and that's not significant now.

Okay. Thanks for the clarification.

Patrick Wang from Evercore Partners.

Meera, just had a quick question on op-ex for Q3. It seems like you guys are guiding Q3 non-GAAP op-ex excluding litigation to be modestly lower in the third quarter. Just curious what's going on there?

Operating expenses?

Yes.

Operating expenses are going to be flat to slightly up, because -- are you looking at litigation in this?

When you guys said in your press release -- guided for 16.5 to 18.1.

No, I'm sorry, it's 18.5 to 20.5.

Okay, thanks. I'll just catch up afterwards. Thanks so much.

I'm showing no further questions in the queue. I would like to turn the conference back to your host.

Thank you all for joining our conference call and we look forward to seeing you next quarter. Bye-bye.

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.