芯源系統 (MPWR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems third quarter 2011 earnings conference call.

(Operator Instructions).

As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Ms. Meera Rao, Chief Financial Officer. Ma'am, you may begin.

Thank you. Good afternoon and welcome to the third 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 fourth quarter of 2011, projected fourth quarter revenues and gross margins, our expectations for fourth quarter mitigation, stock-based compensation and GAAP and non-GAAP operating expenses, our target of setting ranges for gross margins and inventory, 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 product cost reduction and new product introduction, potential customer acceptance and opportunities these present and the prospect of 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 4th, 2011, and form 10-Q filed on August 9th, 2011, which is accessible through our 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 will direct our investors to the Q1 through Q3 2010 releases and Q1 2011 to Q3 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 earnings release filed with the SEC earlier today.

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

Let's start with the business highlights. We saw sales in the channel slow down in the third quarter of 2011. Net sales were $53 million. As a result, Q3 revenue increased $1.3 million or 3% from the prior quarter, but that was less than the typical seasonal increase. Q3 revenues were $12.9 million or 20% lower than the third quarter of the prior year, when we had a very strong third quarter.

We're now in production with products based on a new [strength] process of [interconnect] technology for what we believe is (inaudible) for the smallest size or unit areas. As a result, our new step-down DC to DC products introduced a quarter ago have experienced a very fast design win, and will be ramping to production this December.

We are making good progress on our diversification in (inaudible) and would like to highlight a couple of successes. One, the form factor and reliability of a new high-current family has led to an expansion of our industrial customer base in the ITC market. Two, we have expanded our automotive (inaudible) 100 portfolio to penetrate more automotive markets. We are pleased to inform you that automotive parts are [in silent] production in Europe.

In the manufacturing area, third quarter gross margin was 52.5% compared to gross margin of 51.4% in the prior quarter. Bottom line, non-GAAP net income was $7.8 million, or $0.23 per fully diluted share.

Taking a deeper dive into the numbers, let's look at the profit and loss statement. Looking at our revenue by product type, third quarter DC to DC product sales were $44.4 million, up 4% or $1.7 million from the prior quarter, mainly due to stronger set-top box demand. Q3 2011 DC to DC product sales were down 20%, or $10.8 million from the $55.2 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 family. The (inaudible) end markets for MPS DC to DC product family were set-top boxes, flat-panel TVs, (inaudible) and general consumer electronics products. Licensed controlled revenues for the third quarter were $8 million, up from the $6.9 million in the prior quarter, mainly due to increasing demand for illumination and backlighting products.

Audio revenues came in at $500,000, down from the $2 million in the prior quarter and down from the $1.2 million recorded in the third quarter of 2010. Let's move down to the gross margin line. Our third quarter gross margin was 52.5%, at the high end of our expectations for the quarter. Gross margin was up from 51.4% in the prior quarter due to improvements in revenue mix and higher in-house manufacturing cost adoption.

The gross margin was down from the 54.7% in the third quarter of 2010 as lower Q3 2011 revenues resulted in lower in-house manufacturing cost adoption.

Let's review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the third quarter of 2011 were $19.5 million, up approximately $600,000 from the $18.9 million we spent in the prior quarter and up $1 million from the $18.5 million we spent in the third quarter of 2010.

The increase in non-GAAP third quarter spending from the prior quarter was as follows. Higher R&D spending of $129,000 in support of a new product initiative, higher SG&A spending of $227,000 and lower mitigation expenses of $217,000. Our non-GAAP operating margin was 15.9% in the third quarter of 2011 compared with 14.9% in the prior quarter and 26.7% in the third quarter of 2010.

Now let's move to our reported expenses and operating margins. Our GAAP operating margin was $22.8 million in the third quarter compared to $22.5 million in the prior quarter and $22.6 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 expense.

The stock comp expense was $3.3 million in the third quarter compared to $3.6 million in the prior quarter and $4.1 million in Q3 2010. Our GAAP operating profit was 9.5% in the third quarter of 2011 compared to a GAAP operating profit of 7.8% in the prior quarter.

Skipping to the bottom line on a GAAP basis, our Q3 2011 net income was $5.5 million or $0.16 per fully diluted share. On a non-GAAP basis, our third quarter 2011 net income was $7.8 million or $0.23 per fully diluted share.

Now let's turn to some of the major changes in the balance sheet. Cash, cash equivalents and investments were $126.6 million at the end of the third quarter 2011, down from $180.5 million at the end of the prior quarter and down from the $204.4 million we had on the books at the end of Q3 2010.

On August 5th, 2011, we purchased as a new corporate headquarters a property located at 79 Great Oaks Boulevard in San Jose for $11 million. We also purchased capital equipment and software in Q3 2011 for $1.5 million. In the third quarter, MPS had operating cash flow of about $8.9 million and cash receipts of $918,000 from ESPP and option exercises by employees.

Accounts receivable ended the third quarter at $16.4 million compared with $17.6 million at the end of the prior quarter and $32.3 million at the end of Q3 2010. Day sales outstanding were down to 29 days in Q3 2011 from 31 days in Q2 2011 and 45 days in Q3 2010.

Our internal inventories at the end of the third quarter were $23.6 million or about 86 days of inventory on a historical basis, which we are currently managing to less than our inventory model of 100 to 110 days. This compares with $24.7 million or 90 days of inventory at the end of the prior quarter.

Inventory in our distribution channel decreased in days, and total days of distributed 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 growth in all markets with the exception of the consumer market, where sales of products such as TVs and digital video players declined. Q3 began strong and ended up softer. Demand slowed down considerably. Through July, bookings and billings followed a typical third quarter seasonal pattern.

After that, we saw inventory build-up at distributors and lower Q3 re-sales forecast from distributors, particularly in September. Consistent with our inventory management philosophy we took steps to slow down the inventory channel to reflect on certain business climates. Despite the softening business climate, we have made considerable progress in design-ins.

We saw an increase in design-ins for our 25-amp Intelli-Phase product in market for customers and applications. We won our first major design in for our high-performance DC to DC products at a tier one telecom server company for production next year.

We grew AC/DC design-ins at market for the U.S. customers, particularly with the primary controller and synchronous rectifiers for 10-watt applications.

I would like to turn to our outlook for the fourth quarter of 2011. Our revenue guidance is in the range of $44.5 to $48.5 million for the fourth quarter of 2011 as we continue to see softness in channel demand. We expect gross margin to be in the range of 50% to 51%. Stock-based compensation expense in the range of $2.6 million to $3 million. We expect non-GAAP, R&D and SG&A expense to be in the range of $17.8 million to $18.8 million.

This estimate excludes the stock compensation estimate mentioned above. We expect mitigation expense in the range of $900,000 to $1.1 million.

In conclusion, while demand continues to be weak, we are controlling expenses. At the same time, we continue to invest in R&D and diversify our product portfolio. We will be well positioned when the economy turns around.

I will now open the microphone for questions.

(Operator Instructions).

Our first question comes from the line of Ross Seymore from Deutsche Bank. Your question, please?

Hi. This is (inaudible) for Ross Seymore. Thanks for taking my question. My first question is just on your guidance, can you talk about how the different revenue components are between lighting, AC/DC and audio amplifier for 4Q and how we should be thinking about modeling that.

We expect to see the decline across all our product lines.

Okay, thanks. The follow up really is your revenue guidance, and you have revised your guidance for 3Q, the midpoint dropped by 8% but in the quarter your gross margins came at the top end of your guidance. Can you just talk a little bit about that and what was the main factor behind that?

Sure. In Q3 we saw a richer mix of products from a gross margin standpoint, and particularly with some of the products that we saw declining demand in Q3, so the mix, the remainder of the revenue that we got was a higher gross margin mix.

Thanks. I just have one quick follow up. On your litigation, your guidance is pointing to a higher litigation expense in the next quarter than you had in Q3. How much longer do you expect that to persist in 2012? Thanks.

I think we expect it to start coming back down in 2012. We have a trial in Q4 and the expense increase reflects that.

Thank you.

Thank you. Our next question comes from the line of Patrick Wang from Evercore. Your question, please.

Hi, how you doing? This is actually Mike (inaudible) on for Patrick. I'm hoping you guys can just give me a little color on the linearity expectations for the fourth quarter.

(Technical difficulty) we couldn't hear you.

Can you talk about the linearity expectations for the fourth quarter?

Linearity?

Yes. Do you think have bookings bottomed out, have they gotten better?

The bookings at the bottom, same as before, and in the last couple of weeks are stable.

Okay, they've been stable the past couple of weeks, thank you. What were the turns last quarter and what is needed for the midpoint of guidance?

(Technical difficulty) we have a pretty good backlog and the turns are in line with what we get in other quarters.

So the turns last quarter were in line, and expectations for this quarter guidance are normal turns?

Normal turns.

Okay. Can you remind me what normal turns is again?

We don't usually give our turns for numbers.

Okay, that's fair. What are the moving parts for gross margin in the fourth quarter?

We expected a (inaudible) and earlier. We expect the other product line, other products, the demand will be renewed so that the consumer portion of it will be even larger, so that the gross margin will be slightly lower in an unfavorable mix.

Plus, with the revenues going down, we have lower adoption of in-house manufacturing costs as well.

Thank you. Our next question comes from the line of Steve Smigie from Raymond James. Your question, please.

Great, thank you. I was hoping you could talk a little bit about the March quarter to whatever extent you can at this point. I think normally you're down something like 8% sequentially. Given the drop we're going to likely see here in the December quarter, would you still think there would be normal seasonality in Q1 or do you think you might be doing a little bit better than normal since you're probably getting some inventory draw-down already in Q4?

It's too early to call Q1. We don't start seeing Q1 orders until closer to the end of this quarter, and currently under these macro conditions we just see uncertainty. So we couldn't call it at all. But you're right, our normal seasonality is usually down from Q4 to Q1.

In the last six weeks or seven weeks we see the decline in the demand, and cancellation of push-out and although as I said, the last couple of weeks sort of a stabilizing, but we couldn't foresee beyond Q4.

Okay, great, thank you. Then just a couple of product questions. Can you say how much of your lighting revenue, how much was CCFL and can you talk a little bit about the LED market right now, is that reasonably in growth? Is it looking a little bit better or is it still challenged? If it is challenged, is it the same reasons it has been?

Let me start with how much is CCFL. CCFL was about $800,000, so a drop from last quarter was a million, but it always somehow seems to be a slower drop.

Yes the other ones, there was an issue side from the lighting, LED lighting, the market is slower now from a Q1 from the beginning of this year, and I think that they have [a belief] there's some inventory issues and although the demand's still there, and I think that that's the new market for us to get in there, and we believe the market will take off in the next year or so.

Okay, great. If I could just squeeze one last one in, just you mentioned the Intelli-Phase success. Can you provide some more color on that? I think you gave a power range, but how is that product type going to take off here over the next couple of years? Is it just in one spot or is it you're getting traction across multiple customers? Thanks.

That type of a product we are designing takes a lot longer time than other consumer products, and now at the beginning we'll see some meaningful results and we'll have a multiple customer design-in and it starts to ramp.

Okay, thank you.

Thank you. Our next question comes from the line of Tore Svanberg from Stifel Nicolaus. Your question, please?

Yes, hi, this is Alan Wang calling for Tore. Thanks for taking my questions.

If I could just ask quickly about your Q4 outlook, could you talk a little bit about the relative strength by end market, which areas do you see less weakness than others, and maybe also what might drive you to the high end of your guidance versus the lower end?

In terms of markets where we're seeing relatively more strength, I would say industrial. We are seeing industrial markets continue relatively stronger as you would expect. It doesn't have some of the seasonality that you would see in other markets like consumer and computing. So I would say that is certainly one of our stronger markets.

We're also seeing enterprise storage doing pretty well, but I think in most of the consumer markets and in other markets like (inaudible) set-top boxes we continue to see [decrease].

Okay, thank you. My followup question is about the note that you received from the IRS. I was wondering if you have any updates on that.

No, there's no updates.

No updates? Okay. All right, well, thank you very much.

Thank you. Our next question comes from the line of Vernon Essi from Needham & Company. Your question, please?

Thank you. I just wanted to focus in, if I could, on your commentary regarding the markets and their strength sort of in the third quarter in terms of I guess you drove a lot of growth out of industrial, and I'm just curious what applications you're seeing that you're getting lift out of, and then I know you don't formally break out the markets, but just do you anticipate that to continue into the fourth quarter?

You've said things are going to be down across the board, but on a relative basis do you feel like you're going to get more out of that versus, say, a restocking scenario in consumer?

Sure.

Any color there? Thanks.

Yes. In industry in Q3 we were very happy with the performance that we saw in illumination and in automotive and some of our industrial (multiple speakers).

(Multiple speakers) lighting, and (inaudible) are very industrial. We also see the typical -- these are oil refineries, all these automotive factories, and then these are control systems and also we see the power meters have a good demand. Also variable things that I don't quite even remember, and many small volumes and so much small customers, just more small customers. That's where MPS is starting to see results from the industrial side.

Michael, if I can interrupt here and just elaborate, and I want to make sure I understand this, are these scenarios where you feel like you're gaining share, perhaps, and winning out in maybe a head-to-head socket situation, are these more Greenfield, and then geographically, are these more developing economies, more China-driven, or are these in the Western areas?

These are more in Europe and the designing of power meters more in the U.S., although China's industrial demand is also quite healthy, these are mining industries and so we definitely are winning shares in the market. The reason it gave us opportunity is a green energy requirement, or about longer battery run times. Those are new requirements that give us an opportunity where we can grow.

Just to follow up one last point here, it's fair to say that you're probably less channel-dependent in these markets. In other words, these are supported by your own direct sales force, or is this still a demand-driven scenario with a third party?

No, it's not from a third party. 80% of our design win is a form or, or MPS field application engineers.

Okay.

Including those products. It's service-oriented rather than volume by, supported by the (inaudible).

Okay. All right, thank you very much.

Thank you. Our next question comes from the line of Rick Schafer from Oppenheimer. Your question, please.

Hey, guys, this is Sean Simmons calling in for Rick. Just had a couple questions. What do you expect inventories to do here both in the channel and internal in 4Q? It looks like they're at least internally at pretty lean levels. Just wondering if you had any plans to build anything just in case you see a snap back in demand.

We'll continue to monitor demand as it comes in. I would expect in-house inventory to be flat or slightly down. In terms of this inventory, we expect it to be down in dollars, for sure. Not so sure about days, because resale days is going to be lower in Q4 and we also have Chinese New Year earlier this year, so the days might be slightly up, but dollars are expected to go down.

Okay. Then just to clarify on the internal inventories, that's flat to slightly down on a days or dollar basis?

Dollar basis.

Dollar basis, okay, great. Then can you just talk about pricing out there? Have you guys seen any pricing pressure outside of the normal difficult declines, and then also I guess on the wafer side, I know you guys were impacted by some higher wafer costs. Have you seen any better wafer pricing, given the soft demand?

Let me take the wafer pricing question. So far we haven't seen any change in our wafer pricing, so that's something we constantly pursue. So far we haven't seen any changes over there. In terms of price, I think price declines are still in the normal range.

Okay, great. Well, that's it for me. Thanks, guys.

Thank you. Our next question comes from the line of Brian Piccioni from BMO Capital. Your question, please?

Yes, of course most of the questions I had have been asked and answered already. I was wondering, looking at the revenue line for Q4 and the operating expense line, it kind of does seem that there's a bit of a gap opening up between the operating expense that we would expect given the lower revenue line. Do you have any plans in that regard, or is that something you hold off on for a couple of quarters, depending on the business environment?

We are doing what we typically do in a quarter where revenue is lower -- we're holding down all discretionary spending, some of our variable components, like bonuses and everything are going to be down. But at the same time we're kind of always cognizant of the fact that whatever we spend on R&D we're investing for our revenue two years out, and so we continue to invest there and also with a focus for diversified markets we also kind of hiring the sales folks to focus on strategic accounts, on strategic markets for us.

Again, all this is tied to revenues down the line rather the short term. But in the short term we'll do everything we can to control costs.

Okay. Also, you mentioned earlier valuations, I think it was of the automotive sector, automotive space. Do you see that becoming a material component of your business, let's say within the next year or two?

It will be in 2013, will be material, have a big impact on the revenue side.

We expect our market revenues to grow, but particularly out in 2013 we expect some of our other new products to start [kicking in].

We have multiple design wins and they are testing them in a multiple side. All these things are happening now and we do expect in 2013 the revenue will be significant.

Okay, great. Thank you.

Okay, thank you.

Thank you.

(Operator Instructions).

Our next question is a follow up question from Steve Smigie from Raymond James. Your question, please.

Great, thank you. With regard to that 2013 ramp, can you talk a little bit about what types of products or what end markets you expect to see that opportunity in?

2013, first it's at an AC to DC. We would expect it from (inaudible) volume either start from the next year and will be much bigger in 2013, and that's included in the LED. LED is just a part of it. LED illumination will be a part of the AC to DC line.

You know what is the Intelli-Phase and the high current product lines, these are for the networked product and a point of (inaudible) for networking distant data from a server, data centers in a server farm, and those programs are kicking now and we will see some revenues starting next year, and 2013 will be a lot more significant.

The last one that we talked about, the industrial and automotive, and all these programs are ongoing now, and so we are excited all these things are happening. We'll see some results in the second half of the next year and in 2013.

Okay. In the past you've been able to drive pretty high top-line growth. Is it fair to think that all this being equal, as we get into 2013, a normal global economy, you could see 20% or 30% revenue growth? Is that sort of the opportunity we should be thinking about?

That's what I expect. This time, our growth is a lot more controlled growth. It's not like last time, very concentrated in the consumer sector. But all these are new markets to MPS and at this time, as I said, we'll be opening up many different [fronts].

Okay. Last question is just in the past you'd had a pretty good ramp of new product introductions, sort of on the order of doubling every year or so. Is it still happening that way? Is it even fair to think about that way? Are the products more complex now that that wouldn't make sense to even think about it that way? Any thoughts on that would be helpful. Thanks.

Yes, we reduced the number of products we introduced and I think it was this year compared to last year. This year we expect about 70 products. Last year we introduced about 100 products. But these 70 products have a high revenue content and a higher ASP. These are for networking, industrial, automotive and those types of high-value markets.

They've taken a longer time to develop and it takes more focus to do those products, so the number of products will be smaller, will be less.

Thank you very much.

Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank, a follow up question.

Hi, thanks. I may have missed this. Could you just talk about inventory in the distribution center in the quarter, both in absolute dollar terms and days, and whether the days were in the 30 to 45 target range? Thanks.

Our [DSO] inventory in the different channels was in the range of 30 to 45 days, and they were down in days, flattish in terms of dollars. In terms of our in-house inventory, it was down in days, below our normal range, but that's where we chose to have it this quarter.

Thank you.

Thank you. There are no further questions in the queue at this time. I'd like to turn the program back to management for any further remarks.

Thank you all for joining us on this call. We look forward to talking to you again at the Q1 call. Thank you. Bye-bye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.