芯源系統 (MPWR) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Your Monolithic Power Systems Incorporated Q4 and full-year fiscal 2010 earnings conference call. Currently all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference is being recorded. I will now turn the program over to Meera Rao. Please go ahead.

Thank you. Good Afternoon and welcome to the fourth quarter and fiscal year 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 first quarter of 2012, our expectations for first quarter litigation, 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 Q1 2012, 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 reductions, new product introductions for 2012, potential customer acceptance of our products and opportunities these present, and the prospects of diversification and 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 October 27, 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 Q4 2010 releases, and Q1 2011 through Q4 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 fourth quarter business highlights. Following this update, I will discuss our operating results. We will conclude by discussing our expectations for the first quarter -- first fiscal quarter of 2012. We will then open up the call to your questions.

Let's start with the business highlights. 2011 was an exciting year for MPS. We successfully executed our plan by introducing many innovative products, expanding our sales and marketing team, and a winning designs in many new high-value markets. These actions will diversify and sustain our future revenue growth.

In the process technology and product arena, MPS had a stellar year. We set a goal to leapfrog our competition by developing multiple generations of process technologies. We are happy to report that the MPS proprietary BCD3 process has been released, which offers higher efficiency and up to 50% reduction in die size compared to our previous BCD Plus process. We are qualifying our proprietary BCD4 process which further reduces die size 20% to 50% from BCD3.

We introduced many innovative products and core key design wins in the following markets. For industrial and automotive we had our first [wide goods] design in. Our high-voltage DC-DC parts enable the customer to meet new energy requirements. Our high-voltage, small footprint solution was successfully designed in by a major part manufacturer, opening the door to a new market. We continue gaining traction in automotive markets. MPS products are now designed in the fixed models at five major European car makers, and we scored our first design win in Asia.

In the networking and service base, we won our first server design in as a major US company. This has opened the door for future design activity utilizing our Intelli-Phase family of products. Our new BCD3, DC to DC product, which offers very high performance in a small footprint, won MPS the first design in at one of the largest networking companies in the world. In addition, we are sampling our high current, fully integrated module for the networking and cloud computing market.

In lighting, we won a key A19 incandescent bulb replacement based on the unparalleled performance of MPS's white LED solution at a large lighting company in Japan. We introduced the first of our new flicker free, white LED dimming family of products. Their ability to dim to very low levels is generating interest at various large customers. Finally, in high volume consumer markets, our newly introduced [cool power] family of DC-DC products have gained traction in high volume markets. The cool power series are replacing the older generation devices designed on BCD Plus. Our new white LED back lighting architecture solution is now ramping at the major Japanese TV manufacturer. Easy configuration and the lower system cost, empower the customers to design the solution in multiple models.

Now we turn to the financial summary. Strong demand activity in December boosted Q4 revenues above the midpoint of guidance to $47.5 million. Enterprise storage revenues ramped up in the fourth quarter. For the year, our revenues came in at $196.5 million, down $22.3 million from 2010, mostly due to the Korean TV business loss from 2010.

In the manufacturing area, fourth quarter gross margin was 52.5%, consistent with the prior quarter and improved by two percentage points over the same quarter a year ago. Our internal days of inventory remain well below our target range coming in at 81 days, while inventory at the distributors was lean. Bottom line, non-GAAP net income in the fourth quarter was $5.2 million, or $0.15 per fully diluted share. 2011 was also a good year for IP litigation activities. We successfully enforced our rights against the Chinese company that entrenched our patents. In the cases against O2 Micro and Linear Technologies, the courts granted us multi-million dollar attorney fees awards against the other parties.

Moving to the profit and loss statement, Q4 revenues are slightly above the $47.1 million in the same quarter a year ago, and declined $5.5 million, or 10% from the prior quarter, largely attributable to seasonal softness in consumer and notebook markets. Looking at the fourth quarter revenue by product type, DC to DC revenues were $41.3 million, down 7% or $3.2 million from the prior quarter. Lighting control revenues were $5.7 million, down 29% from the third quarter, mainly due to higher than seasonally slow down in notebooks and tablets. While Q4 revenues declined in most end markets, enterprise storage revenues were up quarter-over-quarter and gateways and set top boxes were relatively flat to the prior quarter.

Let's move down to the gross margin line. Our fourth quarter gross margin of 52.5% was above the high end of our guidance range. Product mix was richer than expected. Fourth quarter gross margin was flat with the prior quarter, and grew from the 50.5% in the same quarter a year ago, largely due to include revenue mix.

Let's review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the fourth quarter of 2011 were $19.5 million, same as the prior quarter. Our non-GAAP operating expenses were up $2.7 million from the $16.8 million we spent in the fourth quarter of 2010, largely due to higher spending on new products and market diversification initiatives. Our non-GAAP operating margin was 11.6% in the fourth quarter of 2011, compared with 15.9% in the prior quarter and 15% in the fourth quarter of 2010.

Moving on to our reported expenses and operating margins. On GAAP operating margin -- our GAAP operating expenses were $22.5 million in the fourth quarter, compared to $22.8 million in the prior quarter and $19.8 million in the same quarter a year ago. The only difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense. Stock comp expense of $3 million in the fourth quarter was flat with the same quarter a year ago and down from the $3.3 million in the prior quarter. GAAP operating profit was 5.1% in the fourth quarter of 2011, compared to GAAP operating profit of 9.5% in the prior quarter. Switching to the bottom line, on a GAAP basis, our Q4 2011 net income was $2.5 million, or $0.07 per fully diluted share. On a non-GAAP basis, fourth-quarter 2011 net income was $5.2 million, or $0.15 per fully diluted share.

On the tax front, we have an update on the IRS noticed of proposed adjustments, or NOPA, that we discussed in the first quarter of 2011 conference call. We recently received a revised notice of proposed adjustment, or NOPA, from the IRS regarding our returns for the years ended December 31, 2005 to December 31, 2007. In the revised NOPA the IRS reduced it's proposed adjustment substantially. This represents a potential income tax liability of $10.5 million, plus interest and penalties if any. We continue to believe that the IRS position is incorrect and that our tax returns for these years, for those year's are correct as filed. We expect to contest these proposed adjustments vigorously.

Now, let's turn to the balance sheet. Cash, cash equivalents and investments were $187.9 million at the end of 2011, up $11.3 million from the $176.6 million at the end of the prior quarter. In Q4, MPS generated operating cash flow of about $13.3 million and used $2.3 million to purchase capital equipment. Cash, cash equivalents and investments were down from the $196.9 million we had on the books at the end of 2010. In 2011 we generated $42.7 million of operating cash flow and $6.5 million from [ESPP] purchases and option exercises by employees.

In the first half of 2011, we bought back approximately 2.5 million shares for a total of $38.5 million. On August 5, 2011 we purchased, as our new corporate headquarters, a property located at 79 Great Oaks Boulevard in San Jose for $11 million. We also purchased other capital equipment in 2011 for $8.7 million.

Accounts receivable ended the year at [$15.1] million, compared with $16.4 million at the end of the prior quarter and $18.3 million at the end of 2010. Days sales outstanding were 29 days in Q4, slightly up from 28 days in the prior quarter and down some 35 days in Q4 2010. Our internal inventories at the end of the year were $20.1 million, or about 81 days of inventory on a historical basis, which we managed to less than an our inventory model of 100 to 110 days given the slow down we saw entering the quarter. This compares with $23.6 million, or 85 days of inventory at the end of the prior quarter.

Inventory in our distribution channel decreased in both dollars and days. Total days of distributor inventory are lean and at the low-end of our target range of 30 to 45 days, largely due to higher than anticipated resales in December. I would now like to turn to a discussion of general business conditions. As we enter the first quarter of 2011, inventory in the channel is lean, the order momentum that we saw in December continues and storage demand continues to ramp.

Turning to our outlook for the first quarter of 2012, we are expecting Q1 revenue in the range of $46 million to $50 million. We expect gross margin to be similar to those reported in the third and fourth quarters of 2011. Stock-based compensation expenses are expected to be in the range of $2.5 million to $3 million. In 2011, we expanded our sales and marketing teams in support of our diversification strategy. Expected non-GAAP R&D and SG&A expense are in the range of $19.5 million to $20.5 million. This estimate excludes the stock compensation estimate mentioned above.

We expect litigation expense in the $500,000 to $700,000 range. Our fully diluted share count is expected to increase as the average quarterly stock price goes up. At current levels, the estimated fully diluted share count would approximate 35.3 million.

In conclusion, as we said a year ago, 2011 was a transition year. We successfully executed our plan. We introduced many innovative products, expanded our sales and marketing teams, won designs in many new high-value markets and effectively increased our sales available market. We believe that these successes will lead to a growth year in 2012 and beyond. I'll now open the microphone for questions.

(Operator Instructions). Patrick Wang, Evercore Partners.

Congrats on a really good quarter and really nice guide. Just, two quick questions for Meera, on gross margins, you had really, really nice gross margins. As we think about the rest of the year and as revenues keep ramping here, I know that you guys had under loading charges from your facility in Chengdu and you used to pay higher wafer costs, just curious what's the trajectory we should be thinking about for margins over the course of the year?

Lets just hope that, that - I think our forecast and where we sit in the recent quarters, we're staying in similar levels and although we are designing many -- we've had a lot of - many design wins, in the last year, it's difficult for us to project when these revenue will take an -- will have a significant effect on the gross margin.

I see, but there's no reason that this is a temporary uptick in gross margins? This is a structural improvement that we see today?

If you look at the past in the past several quarters, in the modeling we continue to improve. Improving.

We expect it to stay at these levels, Patrick.

Okay, great. And then just a quick one on OpEx before I ask a more interesting question. OpEx is up a bit here in the first quarter. I know you guys said you did a lot of hiring at the end of the year, how should we think about that, again, as you guys continue growing over the course of the year?

We expect it to be -- have a little growth from these numbers, but pretty much the impact of lots of hires, annual pay raises are all already baked into these numbers. So, there will be a small up tick but it's going to be small.

Okay and Michael I want to ask you about process technologies. This is something that I'm really happy to hear you guys kind of going back towards. BCD3 coming out and then of course you guys mentioned BCD4. Can you talk about some of the competitive advantages that you are seeing there? And maybe perhaps timing of when we see products based on these processes?

BCD3 are the products that are out now, and so we see a lot of good results, as Meera said it awhile ago. And BCD4 we are trying to roll out the end of Q3.

By the end of third quarter, okay. And with the products that you've seen out there based on BCD3, can you talk about the kind of customer feedback you've seen, the die shrink and the better performance, something that customers are really flocking towards? Are they kind of pushing back? What are you hearing?

Well its high current products, without the BCD3 we wouldn't be able to do it and these are very high current products in a very small, in a very small package. That enabled us to open the door to those major networking industrial accounts. And on the other high - volume business with the BCD3, our die size reduced a significant amount and that enabled us to compete effectively in the high-volume market again.

Last question. The - can you talk about how your product pipeline and design pipeline looks today based on your new technologies coming out?

As we said before, we plan to release about 70 products every year and these products, we really believe will further diversify or strengthen the seeds that we planted in the last couple of years.

Vernon Essi, Needham and Company.

Echoing the congratulations. I was wondering, Meera, if I could dive in and I apologize if maybe you answered this, but your OpEx looks to be going up about $1 million sequentially on this guide. What exactly is driving that and where will we be seeing that growth between R&D and SG&A or weighted towards one or the other?

You will be seeing the impact of pay raises will be across both R&D and SG&A. In fact, off the hires that we have had is largely going to be in the sales and marketing area. Most of the hires have been done. We will just have a few more as we go through the year.

And then also, will this -- just a follow-on that point -- will this impact your stock-based comp in the out quarters? Will you be granting more options on the sell side, or what should we be expecting to kind of be in through the remainder of the year?

We will have annual refreshers and grants for new hires as we go through. I think the bigger factor that is going to impact our share count, for our fully diluted shares, is going to be our average stock price for the quarter. As the average stock price goes up, we expect fully diluted share count will be higher. This just reflects the impact of under water options coming into the money.

Moving over to sort of the product front, you - this is probably more of Michaels front. You've made some comments about the enterprise storage area. Obviously there's been a lot of turmoil in that market of late. How do you see that playing out through the remainder of year? It sounds like you've obviously got an incremental customer onboard that's ramping. Are you prepared for any other disruptions that may happen? I think there's some consolidation also going on perhaps with this customer? If you sort of vetted that out and you are confident that your pipeline is pretty strong all the way through 2012?

We have been working with the storage company for over a year and last year the Thailand event didn't affect us and actually delivered our product according to a schedule. And our orders ahead of schedule. And in 2012 we have many more design wins in the last year which will grow in 2012.

Okay so just to rephrase that then, you're obviously at this point confident -- it sounds to me like this is probably your best horse in all the diversification efforts you've made. This is the one you are probably seeing the most demand through 2012 on a year-over-year basis.

This is the first horse.

This is the first horse and we have other ones. We have a set top box, LED lighting, industrial markets and especially control and safety. And all of these, we will see a significant growth in this year and also in the next year.

Okay and this is my last point and you brought up the other core sales stuff using that analogy. The LED front, you had an A19 incandescent win out of Japan. How do you feel about that market broadly? Are you engaged with some of the top customers that are penetrating more in the Western Hemisphere or are you sort of going to be playing more in the Asia centric vendors?

No we reported, just have a significant win in A19's incandescent bulb replacement, we just reported that first large win. Other wins that we have, of course in the North America and in Europe, we engage with all of these traditional light bulb makers and we have many, many design wins. But we haven't really seen it in production yet.

You've got the design wins with some of these vendors but none of them except this Japanese one is going into a material production ramp?

That's right, yes.

Steve Smigie, Raymond James.

Great, I'll add my congratulations as well. Just some quick housekeeping items. What will the tax rate look like? I know you are going all these things with the IRS, how should we, just for our models, how should we be modeling that for this year?

In terms of the tax rate, I would say continue to use something like 5% tax rate like we have used in the past. Our US revenues are fairly low so we have a certain amount of volatility from the discreet items, so somewhere in the 5% to 10% range I think sounds right.

Then as we look out to the June quarter, typically if I just take a mean of the June quarter's from the past, you guys had a pretty large number. About -- I know you probably won't give guidance, but how should we think about the seasonality for June and for September?

Typically, Q2 is higher than Q1 and Q3 is higher than that and it comes down in Q4. Beyond that, I don't want to give any color as to how high it could be because the last few years have taught us that the seasonality patterns, other than directionally, we cannot predict it.

At the same time, the MPS businesses as we planned it in the last year has some kind of transition to higher value market and we really don't know what our seasonality and we will have to wait and play out.

If you have maybe somewhat less consumer and more storage networking type product, should we maybe be a little more cautious on that? Am I going to shoot myself in the foot if I model that in an environment where it seems like everybody is turning here and starting to ramp back up?

We got design win activities, and although that's not really a strong indicator of future revenue, but there is no reason for us not to believe we have a significant change.

Can you guys give the 2011 breakout by end market? I think you guys typically sort of give a year end number.

The end markets were consumer was about 39% to 43%, computing was -- actually let me rephrase that. Let me start again, communications was about 39% to 43%, computing was about 17% to 21%, consumer was about 31% to 35% and industrial and others were about 6% to 8%.

Within lighting, how much at this point is white LED, general illumination and CCFL?

We don't have a CCFL. Very, very small portion of revenue.

Less than $1 million. Everything else is white LED.

How much would you say is higher voltage street lights stuff versus a lower voltage light bulb replacement type stuff?

I would say it's about it in the single millions of dollars. We expect that to increase in 2012, as the designs we talked about kick in.

Ross Seymore, Deutsche Bank.

Echo the congratulations. In general in the first quarter guidance, is there any big delta between the three main segments and how they're going to perform in your guidance as a whole?

We expect it to be roughly along the same lines that we talked about.

Then on the gross margin side of things, coming at a prior question but perhaps in a different angle, is thinking about the fixed cost coverage and utilization, under utilization charges et cetera, is the general math that we talked about before that once you got back upwards of the $60 million in revenue range that's what we should kind of equate to, roughly 55% in gross margin? Then, on top of that, as this year progresses, what general mix impact do you think we should be considering with all the new products kind of higher value add, industrial networking, et cetera, as that blends in, does that round things up or will the consumer side snap back and make mix potentially even a little bit more of a negative?

We expect gross margins overall for this year to stay around the 52.5% range. In the quarter, if our revenues were to go up, if they were to go up to around $65 million range, then we would see some improvement in that quarter coming in from better absorption. We still think, since we're targeting revenue growth, I would say that for the most part of the year, we will be at the current levels of 52.5%.

Ross, let me answer that from another angle. Our consumer business as the percentage in the revenue stream went down significantly and I don't see this year will increase and will keep going down. The product and also the high-volume business - in the product we sell in the high-volume business we reduced the cost significantly, so at the same time we still have older generations. Looking to future, we don't see a significant reduction on the gross margin. We've see it in the last three or four quarters and we keep it steadily increased slightly, but we don't forecast a big improvement.

Okay, I guess the one part I'm a little confused on, I get the fixed cost coverage to Meera's answer, but from your answer, Michael, it sounds like the mix component of the equation should be positive, not only from the new products that you have but the cost down version of the older products. Shouldn't that mean that the mix -- shouldn't that mean mix is a positive contributor to gross margin along with the fixed cost coverage side?

Yes. And mix is the most -- the biggest contributor for the modeling expansion.

Last question, a little bit more housekeeping, on the litigation side of things with the cases that you still have outstanding whatever those may be, the $600,000 you talked about for the first quarter, is that the new quarterly run rate or, would you expect that to change much with what you know today as the year progresses?

Yes, roughly I think that's the level that it's going to be at for the rest of the year.

Rick Schafer, Oppenheimer.

Congrats, guys. My questions have been asked and answered, but one I have is, is there any way for you guys to quantify your design win dollars? I know you have a lot of design win activity over the last 12 months, is there any way to -- for us to think about those dollars that are sort of on the com over the next year or two?

We try to do that and we try to set a criteria wouldn't call design wins and some of the highly probable other ones, less probable in that and we still try to figure out how to count it and probably by next year this time we can give you a better forecasts based on the design wins. At this time, it's difficult for us to say it.

Understood. Then I know a lot of guys have asked the utilization question, I'm going to ask it a slightly different way, I'm just curious what is the drag, maybe, Meera, I don't know if you know off the top of your head but sort of per every five basis points of under utilization equates to a percentage point or 0.5% of gross margin drag, is there a way for us to kind of think about that as we kind of look at you guys ramp toward that $65 million quarterly run rate?

It's the same as what we have said in the past, if you look from $48 million to - if we go up to the $65 million,$70 million, there is a 300 basis points that you could get as a pick up from just cost and production. I think every two or three -- we may not see it for a $1 million or $2 million difference, but every $2 million or $3 million of it we might see a pick up, a linear pick up. I would say that is the best way of looking at it.

Super helpful. Maybe kind of a housekeeping question, what's your turns requirement at this point in the quarter? How does it compare to the same point last quarter to make the mid point of your guide?

Usually we don't give our turns business in numbers, but we recognize that this is an unusual quarter. We came in with very strong bookings into the quarter, and so all I'm going to say is that at the beginning of the quarter we needed less than 20% turns business to hit the midpoint of our guidance.

(Operator Instructions). Tore Svanberg, Stifel Nicolaus.

Maybe some more specific questions. First of all, when you talk about storage being now a nice revenue contributor, are we talking specifically about how management for SSD or is there something else?

Both. HDD and SSD.

When we think about BCD3 and you mentioned you can now go up to really high currents, what type of currents are we talking about as you launch BCD4 in Q3, how much higher will we be able to go?

We are not at the 40 amp per single chip now. I don't even remember the [size three by four] package, millimeter package.

And with BCD4?

With the BCD4, we haven't really released any product announced and the chip size will be, as Meera indicated and said earlier, 20% to 15% for the high current probably would be another 30% reduction, from the five. But we have not released any product yet.

Maybe I - either I misunderstand it or may be you guys are just being conservative, but your inventories seem pretty depleted at this point, which probably means that you're going to have to build some inventory this quarter to keep up with demand. Why wouldn't you already get some gross margin upside just from that alone regardless of mix?

It is. The inventory is a pretty low, but then as you know, the world is a very -- the uncertainties in the world and the reason for it is very high, so we are play it very safe.

Michael, I don't know if there's a way to measure it or if you have this number, but just thinking about diversification efforts, is there a way to put a percentage of revenue that's now coming from, let's say, new products introduced over the last two - three years?

Frankly, at this time I don't have the number and I'm glad to answer you off line. Meera if you have them? Okay, Meera can.

If you look, in Q4 about 30%, 32% of our revenues came in from new products, with the launch in the last two to three years.

Thank you. At this time I am showing no additional questioners in the queue. I would like to turn the program back over to Ms. Rao for any closing remarks.

Thank you for joining us on this call and thank you for your questions. We look forward to talking to you next quarter. Bye, bye.

Thank you. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.