芯源系統 (MPWR) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to Monolithic Power Systems' second-quarter 2012 earnings conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time (Operator Instructions) As a reminder, this conference cal may be recorded. I would like to hand the conference over to Miss Meera Rao, CFO. Ma'am, you may begin.

Good afternoon, and welcome to the second-quarter 2012 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 2012; our expectations for third-quarter litigation, stock-based compensation and GAAP and non-GAAP operating expense; projected third quarter revenues and gross margins; our target operating ranges for gross margins and inventory; our expectations for revenue growth and gross margins beyond Q3, 2012; our expected average tax rate for 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 expectation for future cost reductions and new product introductions; 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 12, 2012, and Form 10-Q filed on May 8, 2012, 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 2011, Q2 2011, Q1 2012, and Q2 2012 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 highlights. Following this update, we will discuss our operating results. We will conclude by discussing expectations for the third fiscal quarter of 2012. We will then open up the call to your questions. Let's start with the financial highlights. The second quarter 2012 net revenue of $58.6 million was above the mid-point of our guidance range. Q2 revenue increased $8.1 million, or 15.1%(sic-see press release "16.1%") from the prior quarter, as MPS revenues increased in all end markets. Q2 revenue also increased $7 million, up 13.5% from the second quarter of the prior year. MPS saw the strongest growth, both in dollars and as a percent of revenue, in the industrial markets. For the first time, revenues from industrial markets crossed 10% of revenue. Industrial revenues were 14% of revenues in the second quarter.

Second-quarter gross margin rose to 53.2%, compared to gross margin of 52.3% in the prior quarter, and 51.4% in the same quarter a year ago. Bottom line, non-GAAP net income was $10.1 million, or $0.28 per fully diluted share. Turning to the business highlights, in the Computing and Storage Space, we have multiple design wins with industrial leading integrated part products on the Shark Bay notebook platform. Not only does this reduce our customer solution costs, it also increases the notebook battery's life. In addition, MPS has also sampled parts for a Shark Bay Ultrabook platform that meets Intel's low power requirements. Last quarter we mentioned Intel's validation of MPS's core-power Grantley server solution. We now have also been accepted by several Tier 1 server customers for a point-of-load power solution, ranging from 4 amps to 20 amps.

In the Storage market, our SSD [p-wrench] has been widely adopted since its introduction last quarter. In Industrial and Automotive markets, we have expanded our presence in security, smart meters, and automotive markets. Our battery charger design wins in industrial measurement applications further extended our footprint in the industrial space beyond DC to DC. In the AC/DC market, our new easy-power product family has been widely accepted by customers in the so-called Internet of Things space, like smart power grid, environmental controls, and building automations. This easy-power product family is based on a proprietary high-voltage technology which provides unique, simple, cost-effective solutions for the Internet of Things, and creates a significant barrier to entry for our competitors.

Moving to the profit and loss statement, looking at our revenue by end market; all four end markets enjoyed revenue growth compared to the prior quarter. Second-quarter Industrial and Automotive revenue grew by $3.2 million, to $7.9 million, compared to $4.7 million in the prior quarter. Industrial and Automotive sales growth was fueled by lighting, security, industrial meters, and automotive applications. Consumer sales increased $2.3 million quarter-over-quarter, to $26.2 million in the second quarter of 2012, largely due to continued growth in Set-Top Box and general purpose consumer sales. Communication revenue grew $1.8 million, to $14.3 million in the second quarter of 2012. Sales to D3 systems drove increase in the Communication market. Computing Sales increased to $10.2 million in Q2 2012, mainly due to growth from graphics cards and storage applications.

Let's move down to the gross margin line. Our second-quarter gross margin increased to 53.2% from the 52.3% in the prior quarter, largely due to favorable product mix and overhead absorption. Second-quarter gross margin was also up from the 51.4% reported in the same quarter a year ago. Let's review our non-GAAP operating expenses. Excluding stock compensation, our non-GAAP operating expenses for the second quarter of 2012 were $20.7 million, up $700,000 from the $20 million we spent in the prior quarter. Second-quarter non-GAAP R&D and SG&A spending increased $1.1 million from the prior quarter, mainly due to higher R&D spending in support of our new product initiatives. This increase was partially offset by about $400,000 lower litigation expenses in the second quarter.

Both quarters of 2012 included the benefit of $300,000 each quarter under a settlement and license agreement of $2 million. Non-GAAP operating expenses for Q2 2012, were up $1.7 million from the $18.9 million we spent in the second quarter of 2011. The increased year-over-year was primarily driven by sales and marketing hires, commissions on higher sales, and higher R&D spending in support of new product initiatives. Our non-GAAP operating margin was 18.1% in the second quarter of 2012, compared with 12.9% in the prior quarter, and 14.9% in the second quarter of 2011.

Moving on to our reported expenses and operating margins. Our GAAP operating expenses were $24.4 million in the second quarter, compared to $23.2 million in the prior quarter, and $22.5 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 $3.8 million in the second quarter, compared to $3.3 million in the prior quarter, and $3.7 million in Q2 2011. Our GAAP operating profit was 11.6% in the second quarter of 2012, compared to our GAAP operating profit of 6.3% in the prior quarter, and 7.8% in the second quarter of 2011.

Switching to the bottom line, on a GAAP basis, our Q2 2012 net income was $6.6 million, or $0.18 per fully diluted share. On a non-GAAP basis, our Q2 2012 net income was $10.1 million, or $0.28 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. We recorded a one-time settlement of $169,000 as other income in the second quarter. Fully diluted shares increased slightly from 35.5 million shares in the prior quarter to 36 million shares in the second quarter of 2012.

Now let's look at the balance sheet. Cash, cash equivalents, and investments were $196.4 million at the end of the second quarter 2012, up from the $194.6 million at the end of the prior quarter, and $180.5 million we had on the books at the end of the second quarter 2011. In Q2, MPS had operating cash flow of about $8.9 million and cash proceeds of $3.4 million from employee option exercises. We spent $10.4 million in the quarter, mainly on capital equipment and also on our headquarter building improvements.

Accounts receivable ended the second quarter at $21.4 million, compared with $19.9 million at the end of the prior quarter, and $17.6 million at the end of the second quarter of 2011. The increase in accounts receivable from Q1 2012 was largely due to higher revenues in the second quarter. Days of sales outstanding were down to 33 days in Q2 2012 from 36 days in Q1 2012, and up from 31 days in Q2 2011. Our internal inventories at the end of the second quarter were $29.5 million, or about 98 days of inventory on a historical basis, which is just below our inventory model of 100 to 110 days. This compares with $21.5 million, or 81 days of inventory at the end of the prior quarter. Inventory in our distribution channel was about the middle of the target range of 30 to 45 days.

Let's turn to a discussion of general business conditions. While our design-wins cycle continues to be robust, and we believe that we have maintained our recent market share gains, we saw resales and auto momentum start to slow down, particularly in the second half of June. The industry-wide slowdown is most noticeable in the consumer space, where projected demand is down in what would otherwise be a strong quarter for the consumer market.

I would now like to turn to our outlook for the third quarter of 2012. Our revenue guidance is in the range of $56 million to $60 million for the third quarter of 2012. We expect gross margin to be in a range similar to the second quarter. We expect stock-based compensation expense in the range of $4 million to $4.5 million. In 2012, we implemented pay-for-performance equity compensation program for our key employees. As a result, we are required under the accounting rules to assess the probability of hitting the performance metrics on a quarterly basis. This will add volatility to stock comps, compared to the typical straight-line approach associated with time-based grants. We expect non-GAAP R&D and SG&A expense to be in the range of $20 million to $21.5 million. This estimate excludes the stock compensation estimate mentioned above.

In conclusion, we are well positioned with new product revenue ramping in multiple market segments. At the same time, we will closely monitor the macro-economic conditions and control expenses during the slowdown. Our goal is to exit the slowdown stronger and better positioned for success in 2013 and beyond. I'll now open the microphone for questions.

Thank you. (Operator Instructions) And please limit yourself to one question and one follow-up. Steve Smigie, Raymond James.

Congratulations on the nice quarter. I see the macro is a little bit soft here, so I understand the flat guidance. Can you help me understand, though, the implications of that for the December, since we didn't see the seasonality in September? Does that mean we're also likely to not see the negative seasonality in December, so could that be potentially flattish? I know you can do only about one quarter, but since an unusual quarter.

Our seasonality in the last two or three years has been not reflective of what we consider normal seasonality. So Q4 is a hard one to call, because I don't know what the macro-conditions are going to be in Q4. But one of the -- we do expect that on some of our newer product revenue streams, we might see some early revenues in Q4. All in all, as far as how the different trends are going to play up, we don't know at this point.

Okay, great. And could you talk a little bit about your graphics and storage products? I think those are some of the products that are going to see some earlier ramps relative to some of the others, and how meaningful that could be in September and the back half of the year? And show the profile, how we should be thinking about that into next year?

As -- just echoing back on -- Meera has just said it, we see that the Q3 was very optimistic until the third week of June. And suddenly, all there is slow down, and some of the stuff even pushed out. But as I said in the last conference call, in the future revenues, and particularly in the second half of 2012, because all these -- we have all these designing activity should hit in the revenue stream. So we have a [pneumation] SSD market, we have a HDD market, in some of the industrial and the off-line, the easy-power product line. They're all going to show some early revenues in -- start from Q4. But that's the way we see it, and that's what our customers forecast what the revenue ramp will be, and so -- and until then, we're not.

Tore Svanberg, Stifel Nicolaus.

Could you talk a little bit about the BCD2 process? How many -- what's the percentage of products right now in production? And could you also comment if BCD4 is ready for Q4 launch?

BCD, we are still converting the -- from the BCD2 to BCD3 technology. I don't know exactly what the percentage, maybe 30%, 40%. Meera can give you the better introduce and --

Sure. As you know, we introduced the BCD3 process last year, and [funds] for us went into production late last year. So we have started shipping, recognizing revenue on the BCD3 process. We have seen a significant portion of design wins all on BCD3. Our new product offerings are also on BCD3. So we are well positioned to see a ramp in revenue from BCD4 in 2013.

Very good. And as far as -- could you just talk about your relative visibility? I know you usually don't comment on backorder and bookings, and things like that, but just so we understand how the linearity has progressed, how you feel right now about the flattish guidance for this -- for the quarter.

You mean the second, but you mean --

For Q3.

Oh, for the Q3. The Q3 is, as I said earlier, was on to the third week of June was still -- was when we realized that there is not as good as we thought. But going for the future, so now Q4 and I go beyond, we remain very optimistic.

Also, just add to that, in terms of our backlog, we have very good backlog, and we are comfortable about the quarter's guidance.

Patrick Wang, Evercore Partners.

My first question; I wanted to follow up on your comments there. It sounds like things softened in the back half of June. Can you talk about how things look thus far in July? And then Meera, you had said that you felt fairly comfortable with the guidance here today. Help us walk through the thought process behind -- behind the guidance here, because if things continue to be soft today, then perhaps you're not really expecting a lot of turns business.

So let me speak to that a little bit. We saw softness in the second half of two, in the consumer areas, particularly in set-top boxes and TVs. We also saw some softness in our gateway product revenue, so we have -- we have taken that into consideration when we came up with the guidance. We still see strong growth in our new product streams; things like storage, lighting, automotive. We still see growth over there, but this is a quarter we typically view that seeing a lot of growth coming in from set-top boxes, TVs, and gateways. So those are the three areas where we are not those trends that we typically would have seen to take us to a higher quarter. In fact, some of the growth in the areas that I talked about, the new revenue streams, are actually offsetting the decline that we are seeing in the consumer and consumer-like markets.

Yes, and usually the consumers and the gateway, those are products in a very fast turn business. We don't see the very long-term from the long-term booking.

Chun's expectation -- from our prospective the market got soft in the second half of June. And this market [seen] has an ability to move fast or pick up within the space of weeks. So we are not -- we are being conservative, as we typically are, and the guiding is to flat, essentially.

Ross Seymore, Deutsche Bank.

Meera, could you just walk us through, or Michael, what percentage of your sales do you now deem to be new product versus the legacy product?

I think, at the moment, the bulk of our revenues are still from the BCD plus.

BCD2

BCD2 or BCD Plus. We have just started shipping on our BCD3, but based on our design wins, as we have seen out there, we expect a larger portion of the 2013 revenues to be from BCD3

If I could, strictly - say the base on the BCD2s and I think the BCD2 we rough estimated would be somewhere 70%. And if it continues effort to change the -- to upgrade the BCD2 process to a final version of a BCD3. The full BCD3 as we said it, we've used [buys size bottom] percentage, up by 30%, 40% -- up by 50%. And those products are hitting on the market, and since last year, second quarter -- third quarter of the last year. Those products, my guess would be like a single digit of a percentage. But, in between, other ones, like a back [logged] product we released last year, it's in between. So overall, the rough number is probably 30% to 40% and 20% to 30%. Then, going forward, all the product will be based on this BCD suite, which is all using the mesh-connect network and also the technology with a 40% shrink.

Great. And as my one follow-up, switching gears just a little bit to a earlier question. If we assume the fourth quarter is down 5% sequentially from a historically normal range, could Meera talk us through what some of the puts and takes would be on both gross margins and OpEx? Again, that's not so much guiding on revenues, I know you're not going to do that, but assuming down 5%, what would those two lines of your income statement be? Thank you.

Your assumption -- were you asking me hypothetically if our revenues were to go down 5%?

Yes, 5% sequentially. What's the puts and takes, new product mix, those sorts of things? How does that help or hurt gross margin, and I don't know if there's any seasonality here, OpEx, as well?

I would expect our gross margin, if it was a 5% decline, I would expect our gross margin should be flat to maybe slightly down. It also depends on how much of that early revenue we get. If it's in the hundreds of thousands of dollars, it may not have as much of an impact. If it runs in the millions of dollars, then I think it could have a bigger impact on gross margin.

Yes, for the utilizations, of course, that's a negative side. And it's definitely linear lined, and if you drop 5%, you will see it in the world of that percentage as we talk about it in the prior quarters, and so what Meera just brought up, the new product mix, and the -- I feel very strongly optimistic in the second half of this year, in that the new product will ramp, and those went with a high gross margin. So if you, for pure modelling purpose, we will be a slight -- flat or slightly down.

Jason Schmidt, Craig-Hallum.

Meera, wanted to get your thoughts on what you think the inventory situation is, and overall inventory in the channels? And then secondly, how should we look at litigation both for Q3 and Q4, and then into 2013?

Inventory in the channels will be off a little bit, we were in the lower end of the range, and again, the increase in inventory has largely been in gateways and set-top boxes and TVs. We are going to try to extend the possibles to keep it at this level. So that's without any further deterioration in the environment, that's what I would expect. In terms of litigation expenses, as you know, we are going to be getting another $300,000 for this quarter. And our litigation expenses right now are really low, so we're expecting it to be some bit less than $100,000.

All right. Thanks.

Cheng Cheng, Pacific Crest Securities.

Just a quick question on inventory, I know it's -- the lows go under your target level, but it did see a little jump in Q2. Just wondering what your thoughts are on the current level of inventory, and what you're planning for in Q3.

Our inventory, I think we mentioned in the last call that we were planning to increase our inventory, because we were substantially below what our model is. With the slowdown, we have ended up a little higher than we had expected going into the quarter, and my expectation is, given the [rate-pers] in line, that we will more sharply end up this quarter, at the high end of our inventory range, or a little higher than that. But most of the inventory that we'll be holding will be in die.

I see this as not necessarily just a negative thing. In the past, we have a sudden slowdown, and you always will expect to see a sudden snap back. So given the long-term, these are slightly higher than our model inventory, difference -- it's slightly higher. Those products will have no effect in the long term, because our product life cycle is about at least five years.

Thank you. One quick follow-up, and maybe on your computing segment. Just wondering if you would break out about how much of that is for storage applications?

Storage right now is slightly above 50%, and it's both [XUD] and SSD, and the SSD portion is growing -- is the faster growing of the two.

(Operator Instructions) Steve Smigie, Raymond James.

Just in regard to the Shark Bay wins, can you talk a little bit about how many OEMs you think you might have opportunities with there?

The Romley and the Shark Bay - we currently have design wins, and not in the typical server makers. But we are in the networking company, and these are server -- these are Romley and Shark Bay designs. Or Romley designs. Okay.

Okay. And going back to the questions on the storage, do you have better margins on, say, SSD versus the HDD, and as that stuff ramps within your computing mix, would that storage business be better in overall so we would see margins going up as storage rises in your mix?

All of the new products for our servers, and even for some of the Ultrabooks, they are all higher than the corporate margin, and much higher than the corporate margin, and you mentioned the SSD and HDDs, and I think these are the margin about the same, where they are much higher than the corporate model -- corporate average now.

And going forward, as the revenue for SSDP kicks in, that would be even better margins.

Patrick Wang, Evercore Partners.

Yes, I just was hoping you could rank order for us in the back half of the year what you think some of your more compelling material catalysts are? You had talked about some of these notebook server designs, talked about storage, auto, industrial. Could you highlight a couple that we should be looking forward to in the next couple of quarters?

I think one of the definite ones will be on graphics. We will continue to see incremental revenues coming in. They -- from -- both from the p-link and from the other products that we have been releasing. So we'll continue. That's going to be a continuing story. On the networking side, for the margins that we had talked about, we expect those revenues to ramp in 2013. We might even see some of the early revenue towards the end of the year. And then the other one, going into -- if you go into 2013, is going to be our revenues from Shark Bay.

All right, everybody easy to remember only seven things, okay? I can add a few more. Like the lighting, and Meera did mention that, and we expect to see a lot more revenues. And easy-power, the product line, as I mentioned, other -- Meera mentioned that in the script, and we -- and the Internet of Things. And, really, I think it will hit the market. And, as I said two or three quarters ago, this product was at the industrial standards, and that's the product where we'll see a lot of activities in the market, and we expect the volume will ramp very soon.

Okay, great. And then, also, wanted to touch on inventories -- your internal inventories again. So it sounds like it's $2 million heavy, based on slower trends that we've seen recently here, but do you think that -- I mean, can you just help us characterize how quickly those inventories went up? Was it a more recent phenomenon? Was it -- just the timing of the change there?

We weren't planning to increase our inventory that we had, because our goal was to keep inventory as lean as we could in the channel, and so our goal was to hold more inventory internally. So some of the increase was expected, with the slowdown in turns, we are going to have a little bit more inventory. So we are going to hold most of the inventory in die banks, so that allows us to respond to either a snap back or to where -- so we can package it wherever the demand is.

Let me add some more color on it. I said many -- a long time ago, I've always said it, in the MPS, the inventory is not by one-to-one relationship with the revenue, especially during a time when you are ramping up a new product, and we have to strategically build up the inventory for those products. The more new product you have, the larger inventory. And so it's not quite a one-to-one relationship -- pure relationship with future revenue.

Tore Svanberg, Stifel Nicolaus.

Yes, I just had two quick follow-ups. First of all, at the margin it sounds like you're a little bit more optimistic about new products maybe ramping as early as Q4. Is that due to some pull-ins, or some programs being launched earlier than expected?

It's just -- In some aspects it's earlier adoptions than we would expect from new product ramp. We are seeing this in areas like in SSDP, which we talked about. We have seen some of that in easy-power. We think things are positive, think that we might see something similar in networking, as well. So we are seeing a lot of interest in here, and based on early feedback from customers, we think that we could get some design wins, we could get some early revenues in late Q4.

Yes, our story hasn't changed since the last couple of quarters. We all said that in the middle of this year, most of our products were generating from exists products, and in the second half, later this year, all of the new product will be -- will move the needle slightly, and so we haven't -- so that story hasn't changed yet.

Very good. Thank you very much.

Thank you. I'm showing no further questions at this time.

All right, okay. Thank you, everybody, and looking forward to talking to you in the next quarters.

Thank you. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.