芯源系統 (MPWR) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by and welcome to the Monolithic Power Systems 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 follow at that time.

(Operator Instructions)

As a reminder this conference call is being recorded I would now like to turn the floor over to Meera Rao. Ma'am the floor is yours.

Thank you good afternoon and welcome to the third quarter 2013 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 risks and uncertainties which could cause results to differ materially from management's current views and expectations. Risks, uncertainties, and other factors that could cause actual results to differ are identified in the Safe Harbor statements contained in the Q3 earnings release and in our SEC filings including our Form 10-K filed on March 5, 2013. And a Form 10-Q filed August 6, 2013. Which is accessible through our website at www.MonolithicPower.com. MPS assumes no obligation to update the information provided on today's call.

We will be discussing operating expense, operating margin, 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 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 the first, second, and third quarter releases of 2012 and 2013 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.

Let's start with the highlights. MPS delivers again with another outstanding quarter. All key financial metrics -- revenue, gross margin, non-GAAP operating income, and in particular non-GAAP EPS -- grew sharply for the second consecutive quarter. Revenue of $65.3 million grew 13% from Q2 with growth in the consumer, industrial, and storage computing market segments. Gross margin expanded by 40 basis points. We continue to grow the business while holding expenses flat. As a result non-GAAP operating income rose 37% over Q2, and non-GAAP EPS grew by 38%. More importantly non-GAAP operating margin grew from 13.5% in Q1 2013, to 21.3% by the third quarter.

These achievements are attributed to our first initiated three years ago when we set our goal to diversify our product and establish a consistent model for growth. We targeted multiple market segments including; cloud computing, communication infrastructure, industrial, and automotive. Since then we have executed against our plan. First we created a technology road map to leap frog the competition and to expand our lead. Next, we organized the company into product lines focused on strategic target market and hired the marketing and sales talent to drive revenue growth in these markets. Further, we enhanced our systems and processes by implementing demand and supply chain management and CRM systems. Finally we expanded our manufacturing capacity by adding another foundry partner. As a result we have expanded our [SAN] by 4 billion with growth in cloud computing, communication infrastructures, industrial, and automotive. More importantly, major OEMs in these market segments are accepting MPS as a strategic supplier. We have seen the earlier results and are now positioned for future growth.

In our last call we updated you on our progress with [point of loads] for servers, modules, and SSDP mix. We continued to do well in these segments. Now let me give an update on other opportunities we discussed a few quarters ago. Among our new products are switching battery charger products are performing better than expected as a result of this smaller size and superior performance. We continue to expand this product family with higher current switching charges for false charge applications. In the automotive product market MPS has had early success with many European models covering chassis, lighting, and ignition systems. We have now expanded into several US, Korean, and Japanese models using our high performance products such as the 60 volt small footprint synchronous regulators. Within the key industrial and white goods market; MPS has earned name recognition with many high-end US and European brands. White goods are increasingly offering intelligent interfaces with connectivity. MPS delivers the entire power solution to address AC/DC and DC/DC white led lighting and back lighting for LCD panels and wireless connections. These projects will start to ramp in the first half of 2014 and continue with long lifecycles.

Turning to the financial summary. A third-quarter revenue of $65.3 million was at the midpoint of our guidance. Compared with Q2 revenue was up $7.6 million or 13.2%. Our third-quarter gross margin expanded 40 basis points to 54% from the 53.6% reported in the previous quarter primarily on richer product mix. Our non-GAAP operating income increased from $10.1 million reported in the prior quarter to $13.9 million in the third quarter as a result of higher revenue gross margin expansion and relatively flat R&D and SG&A expenses. Q3 non-GAAP net income was $12.8 million or $0.33 per fully diluted share, compared with $0.24 per share in the previous quarter.

Looking at our revenue by end market; consumer revenue grew $4.2 million to $28.1 million over the prior quarter driven by increased product sales in new markets such as gaming and battery chargers. Industrial revenue increased by $2 million over the prior quarter to $10 million fueled by strong demand for its solutions in the security, power adapter, and power tool space. Storage and computing revenue also grew $1.3 million to $12.2 million. Revenue in the communications and telecom markets increased slightly to $15 million.

Let's review our non-GAAP operating expenses; excluding stock and net deferred comp expenses our non-GAAP operating expenses for the third quarter of 2013 were $21.6 million, an increase of $600,000 from the $21 million we spent in the second quarter. This increase was largely due to a $400,000 litigation benefit in the previous quarter which was not repeated in Q3.

Moving on to our GAAP operating expenses. Our GAAP operating expenses were $26.6 million in the third quarter compared with $26 million in the second quarter, most of the difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock comp expense. Stock compensation expense was $5.1 million in the third quarter compared with $5 million in the prior quarter. Switching to the bottom line, on a non-GAAP basis our Q3 net income was $12.8 million or $0.33 per fully diluted share. This compares to Q2 net income of $9.3 million or $0.24 per fully diluted share. These results are computed with an estimated tax rate of 7.5%.

Now let us look at the balance sheet. Cash, cash equivalents, and investments were $214.2 million at the end of the third quarter of 2013, up from the $201.3 million at the end of the prior quarter, and up from the $197.3 million at the end of the third quarter of 2012. In Q3, cash proceeds from employee stock option exercises and employee stock plan purchases contributed $17.4 million. Operating cash flows generated another $6.8 million.

In our last conference call MPS announced $100 million stock buyback effective August 2013. Under this program we bought back approximately 268,000 shares for a total of $8 million in the third quarter. We also spent $3.4 million on caps and equipment during the quarter. Accounts receivable entered the third quarter at $22 million compared with the $20.3 million at the end of the prior quarter and $21.6 million at the end of the third quarter 2012. Days of sales outstanding were down to 31 days in Q3 from 32 days in Q2 and 35 days in Q3 2012. Our internal inventories at the end of Q3 were $43 million, up from the $40.3 million at the end of the prior quarter. However, days of inventory decreased from 137 days at the end of Q2 to 130 days at the end of Q3. Days of inventory in our distributor channels stayed at the same level as the last four quarters.

I would now like to turn to our outlook for the fourth quarter of 2013. Despite the softness in the economy, MPS expects to achieve a record fourth quarter. Our revenue guidance is $61 million to $65 million. We are seeing continued success from revenues generated from our newer products offsetting typical seasonal declines in consumer. We also expect the following -- gross margin to be in the range of 53.55 to 54.5%, stock-based compensation expense to be in the range of $5 million to $5.8 million, non-GAAP R&D and SG&A expense excluding stock compensation to be in the range of $20 million to $21 million, fully diluted shares to be in the range of 39.7 to 39 9 million shares before buyback.

In conclusion MPS had an outstanding third quarter with sequential organic revenue growth of 13.2% well above industry average, we continue to closely monitor the macroeconomic conditions and to control expenses. We are well positioned with new product revenue ramping in multiple market segments for 2014 and beyond. I will now open the microphone for questions.

(Operator Instructions)

Our first question will come from the line of Patrick Wang, with Evercore.

Thanks so much congratulations on the quarter and guide and I think the 16% year-over-year organic growth you just posted is pretty impressive. On that note, for my first question you know analog periods have been fairly disappointing so far, I think the world seems to be slowing, and you are typically down quite a bit seasonally in the fourth quarter. Can you talk about why you're not seeing such huge decline this quarter?

As we said last quarter we have several new product that are growing and we expected that revenue growth to offset some of the seasonality, and that's what you are seeing play out in our Q4 guide

Yes, Patrick, Meera spent quite amount of time in the script talking about in the last three years we really build the fundamentals of the company. We have focused on the multiple growth markets such as crowd computing, and also less growth in the industrial and automotive side.

But all of these market segments are new to MPS, it is just for us, the opportunity is enormous. We're executing our plan that would deliver the product and introduce to a market in the last 12 to18 months and then we start to see the result. This is one of the reasons we don't see Q4 as a down -- as traditionally from a 5% to 10% and now we're almost as good as Q3.

Great. Is there anything in particular you can highlight for us here that you are seeing traction in the fourth quarter that you are working on in the past?

It is pretty much evenly spread, and Meera can give you some details.

Most of the places where we have seen the softness in Q4 has been in consumer and consumer like markets out there. What's happening for us is, we're also seeing some areas where because we have design wins ramping we are seeing them being on par with the prior quarter and other markets where we have seen some growth and you combine all of this together and you are seeing the guide that we just shared with you in this street.

Okay, so I guess it's far to say your bookings have been pretty good into the fourth quarter?

We are happy with the bookings.

Okay, great. Just for a follow up here, when we look into the first half of next year, I know you cannot talk about timing, can't give us too much detail, but can you walk us through some of the key growth drivers that you think are going to show up then that are going to help you continue to outperform the analog market thanks.

Again, in the industrial portions of white goods were classified in the industrial side, and Meera talked about it in the script and we will have a [fill year] in the next year, especially start ramping the first half of 2004. Other ones in a, Grantley's a little delayed intel delayed the introductions, but we have a lot of design win activities, and we start to late first half or second half of the next year. And we have so many other projects and we are mentioning about the lighting and also the battery chargers and these are all moving up by a percentage evenly. So, this is really what we want we want to grow evenly and in a consistent way.

I will just add to that list we also expect to see growth in SSD. We expect to see growth in various industrial markets, including automotive. We expect to do well in networking, and telecom will also be an area where we will see growth. So the key for us is that we have multiple areas where we see growth, against the backdrop of whatever the macroeconomic conditions are.

Okay terrific thanks so much and congratulations.

Thank you.

Thank you.

Next, Tore Svanberg, Stifel.

This is Evan Wang calling for Tore Svanberg. Thank you for taking my question. I would just like to delve into telecom or your communications end market a little bit. This quarter it grew slightly, but I was wondering if you could talk about the opportunity that you see there and maybe the timing where the growth might resume.

In the telecom market we see some of the sentar box is being changed to a newer models and so the revenue stays about the same, a little bit lower, but the other new, newer business is start to ramp. But is not, it is not big enough to offset the other areas that we were in before

I see. I was also wondering about your new product the power modules. I think you did not touch on that quite as much this time around. I was wondering if you could give us a sense of how well that's doing in ramping and whether it is reaching new applications markets.

Yes, we continue to introduce the modules in that we want to complete a product and the product family which is really a catalog of product. So, in a particularly in the telecom, the modules, they shipped, and also we have a multiple other design wins and we expect the revenues coming in the next year.

Great. I want to maybe change gear and ask you quickly about given that your growth, your accelerated growth, are you seeing that your current channels are adequate for that growth, to handle that growth and also if you can touch on whether you have made any key new hires this past quarter.

We are expanding our channels in the new age of selling is a e-commerce, in which we will update our website and where internally we will establish a group there for e-commerce. And also this is a particularly it's a game before our module business. So will e-commerce we can reach thousands of millions of a smaller, smaller customers.

Other ones have other business again and or other channels, sales channels we will outreach. We will be significant players now. And the large distributors start to looking at us, so start negotiating with MPS. So these are still in development. We will expect to complete some agreement of contract in the next few months.

Great. Excellent to hear. Thank you very much for taking my question.

Next, Ross Seymore, Deutsche Bank.

Good afternoon. Sorry, this is actually Matt, I'm in on Ross's behalf here. I want to talk about the gross margin dynamic. I know it was highlighted last quarter that you have some gross margin consumer products out. I would imagine that contributed to the results here. But what factor, if any, did industrial play into that? I am trying to figure out if the gross margin came largely as a result of the better mix within consumer, or the better mix of industrial versus consumer.

As industrial revenue grows, clearly that is one of our better gross margin segments, and that helps. But overall I think the story for us in Q3 is that our product mix has gotten better even in the various segments. Clearly industrial (inaudible).

Okay. And I wanted to ask Patrick's question, one of Patrick's questions, just a little bit differently. Could you point out the winarity of bookings within the quarter? Is there any time that really stood out when they hit an inflection point, or weaken somewhat? If you could just shed some more light on that, it would be greatly appreciated?

Sure, in times of timeline I usually look at both bookings, as well as resales in the channel. And resales in the channel all the way through the end of September looked good in terms of bookings. Looking back the last two weeks in September was pretty good. Maybe we're a tad bit lighter in some areas, like, particularly, the consumer and the consumer related markets. And that is something that we have seen continue through right now in October.

Okay, great thanks so much.

Next, Vernon Essi, Needham & Company.

Thank you very much. Wondering if you could give us a little guidance Meera on the OpEx. Rarely does not tick down, I think sequentially in the fourth quarter, and I just was wondering how we should look about at which segment, or which portion is going to be down more pronounced either in R&D and SG&A in the fourth quarter?

Our plan, as we have done in the past, is always to control our cost, and I would expect that you would see these costs reductions in both in R&D, as well as SG&A.

So evenly spread between the two. I wanted to go back to the comment you made earlier on the industrial side. You had a nice sequential growth there. It sounds like you are putting white goods into that mix. I just was wondering if that was historically how it is been handled? I assume it is. And, how do you define white goods necessarily? Is it more -- because most companies are lumping that in the consumer side. But is it a specific company your shipping it to? Is it the voltage, or the power density of the product itself? How is that definition taking place? By the way the other question is, was that where the growth was sequentially? Or was it in a lot of different areas?

It was in a lot, it was in different areas. Security has been one of our big areas, power adapters, some of the power tools, those are all the areas where we saw growth.

Okay. And I assume the power tools that is a battery-related product?

No it is not, Vern. We always have classified the same way in white goods. What the component that we sorting to it is an IC, is a high-voltage IC, and your refrigerators, and your washing machines, dishwashers, and some of, even, the coffee makers. They need an AC to DC power supply and also DC to DC panel and some of the small white goods have LCD panels. For the LED panels, LCD displayed which they need power to. And also the back light.

These are the areas where we shipped product to it. And we have another industrial area growth, and these are the more like a plant control and the power stations, or as well, even in the large production point. And they needed 60 volt power supply lines for their communications. That is where our point of rolls really shines in that area.

Okay thanks for helping out on that and then just one follow-up question here. Just going back to inventory, and I think there was a prior question along those lines, but Meera you've had the inventory levels running in sort of this 110- to130-day range for the last year or so. Is this going to be kind of a new norm for you? And is there, it looks like you have got a newer distribution sort of partners set up that is stocking a lot of components. Is that what is happening here? Or can you describe that life you've had over the last five or six quarters?

No, we've had for two reasons, one you know, as we have got these newer products we have got these products designed in, in some of the very large companies and they look to us to be able to support any upside that they might have, and so we're holding strategic inventories in those instances. Because as you know these are the first one or two products we have designed in where we see an opportunity to sell a lot more products to these customers and we want them to be very happy with us both on the product front and as a reliable supplier.

The second thing is we have trained the channels over the last few quarters to be fairly lean and let us hold the rest of the inventory, because we have more flexibility in being able to do that. And I want to repeat again we have said on the script we have over the last five quarters we have held inventory in the channel at the same level, and the reason we could do that is because we are holding the inventory.

No, I realize you are holding the inventory, I was just wondering if you had new stocking partners? But you answered the question. You've got it, obviously, with larger end customers. Okay. Thank you. Thanks for the clarification. That's all. Yes.

(Operator Instructions)

It looks like our next question, Mitch Ulman, Wells Fargo Securities.

Hi Meera, could you comment on your design win activity in the Shark Bay?

We have multiple design wins in Shark Bay, and we have had some of the revenue that you seeing in storage and computing segment is from Shark Bay. So for us, as you know, this is just incremental revenue that we get, for us it is a new market, incremental revenue that this is a way for us to monetize technology that we actually devil up for the server market.

And that is ramping in line with your expectations?

Yes.

Okay and then Meera can you comment maybe, on uses of cash, and after you finish your share repurchase program whether you plan to entertain paying out a dividend?

Sure. We have discussed this before. We plan to have a balanced capital allocation program. Weve already done the first phase of it, or we have initiated the first phase of it, which is $100 million buyback program. We're also having a lot of discussions with our board about initiating a dividend program. And the third a part of it is to acquire small technology companies out there, and we are actively in the market looking at companies.

Okay, great thank you again and congratulations on the quarter.

Next, Anil Doradla with William Blair.

Congratulations on the quarter, Meera couple of questions, can you talk a little bit about the slope of the gaming revenue? Was that weighted more toward Q3 or Q4 and then a follow-up?

Are gaming revenue started in Q3, so Q3 Q4 will be are going to be the big gaining quarters.

So, does that mean it is going to moderate in Q1, or it will just maintain its momentum beyond that?

I think we don't, we really do not know what the gaming market, what the seasonality is. We designed -- the good news iss we have been in several not really designed, gaming consoles, we are in almost all of them now. We have several products, and they are start to ramp in the third and the fourth quarter of this year. And Q1, I think we will see a more product shipment and the market segments. We believe that Q1 still will be a close quarter.

Great, and on the TV side to the silicon labs also talked about weakness in TV for Q4. Now is the softness limited to TVs, or is it beyond TVs? At least from your perspective did you witness the greatest softness from TVs? And can you give us some color on that?

The way, when I look at it I see softness across the board in consumer TVs is one of the markets that I see it, but I also have to say that I've said this before as well, that I don't have as granular vision when I'm looking at it in this stage in the game, as I have when I get to the end of the quarter. So I can just look at it and broad brush strokes. So when I look at it, I can see that consumer is not softer than we would have expected it to be. And TV is one of the markets that I do see that.

So your guidance is based on the current environment continuing on? You're not assuming any improvement on that front?

I have no basis to assume an improvement. I mean we'd be happy to have an improvement.

And finally on the battery management, can you give us a sense how big, is that today, is it from a large customer, or is it more broad based?

Very broad based, and it was probably Meera, if we have the numbers, probably 10 plus customers.

We have multiple customers in this segment.

Okay thanks a lot, guys.

Our next phone question will come from Rick Schafer with Oppenheimer. Please go ahead.

Thanks, guys. Congratulations on the nice quarter and I apologize if some of these questions have been asked, I got dropped off the call here couple of minutes ago. The first question I had, I know you discussed Michael the Grantley ramp beginning midyear next year I believe. Can you just put some numbers around that, how big that revenue opportunity could be for you? The second part of that question would be talking about what your share, you think, on Grantley will be? And did that primarily -- do those wins primarily come from one customer or competitor that was recently acquired?

Let me break it down into even more detail. In the server business we have, we have intelligence of [feud], and also we have a point of a low. Those products we were in, these are very large, these are dominant server players in the past few quarters, and so next year we will see a lot more revenue from a point of low and also on the smart views. And these are product line. They will ramp.

And the Grantley is really on the memory side, the storage side, and also the CPU side. Those are more in Intel's are going to be our 12.5. That product family, or chipset, were accepted now, accepted by a few companies; and some Japanese companies and Taiwan, as well as the US. But we are not being a friend in the top tier server makers, because usually it takes a few in duration to get an. But we will see a significant revenue growth in the market. And the one beyond Grantley was a beyond, beyond 13 I forgot what was the name. I think we will be ready for prime time.

Great. Okay, my second question is, in automotive I know you highlighted that as a growth vector for you guys next year. Can you talk about what your content is per car today? Does that make sense? Do have that metric ready and can you talk about what that trend is? What the potential for you is per car? Or how fast that content is growing? Or just give some color around the auto opportunity?

Auto business is very, very slow. When we start designing to revenue it takes about three years. And we expect a pretty meaningful revenue ramp-up from Europe in 2014. We talked about it in many quarters ago. As you know, these design wins these product -- these are socket is not easy to change. They don't cancel -- they don't drop -- introduce the models like the consumer product. So if three years earlier design to being pretty much set, and in a you will not generate some revenues.

So what the dollar content is, we are yielding headlight, dome light, and consoles, and the dashboards, and the ignition switches, and infotainment units, and we have a more products will be introduced, like a motor drivers and these all suitable for auto industry. For cars. So what current served a product we can sell it to a car maker. I do not have exact number by somewhere between $10 $15 now.

Okay great, thanks Michael. Just the last question was just on, could you give some color on what percent of revs BCD3 and 4 are now respectively? And, maybe I know this is looking way out, but when do we start talking about BCD5? I know a lot of us are starting to model the 2015 numbers. I mean is it the 2016, 2017 before we really start talking about BCD5 contributing to the top line?

Yes, so I think a couple of quarters ago we got this question and we had said that we expect to exit 2013 with about 60% or 70% of our revenue coming in from BCD3. And this quarter exiting Q3 we are already at 60% plus. So that is for BCD3, and then we will expect to be subsequently reshipping BCD4 products which we are not talking about currently for competitive reasons.

Okay.

I can talk about it. In BCD3 is a to BCD4, is really for higher performance products. The latest product we do 6 millimeter by 6 millimeter is the ADM current. These are definitely the only product applications server market.

And then these are the one-of-a-kind and the best efficiency in the industry. And we talk about BCD5, and they will really move to a 12-inch and already in the 12-inch now, so then we were even pushing to 16 nanometers. Those are the fab -- will be the leading supply in the analog world.

It sounds like Michael that's a few years away before we start talking about five, correct?

Nope, we're probably talking about end of next year.

Okay great thanks a lot.

Next, Tore Svanberg, Stifel Nicolaus.

First question actually sort of a follow up to the last question. So, BCD4, I know at your analyst day you talked about working on some cost enhancements. I was wondering if you could update us on those how far you're getting along on optimizing the actual process and it's cost.

I think we will continue to same trend from BCD2, BCD3, where every generation we think about improving cost, about 30%, 40% that means shrink this much. BCD5 announced, and of course we do not expect that these are 16 nanometers, and a 12-inch fabric. Still very expensive. I would foresee in the 2 to 3 years that the cost would be same as now, in the silicon per unit, per-unit area will be the same cost as now.

So, the product we are really aiming for, for BCD4. Now these are a lot of high current product and high-speed. High-speed also apply for modules. We delivered those teeny tiny modules it's because we have our product to switch faster than everybody else, and we can use a smaller inductors and a capacity -- and the capacitors and that is why the modules are very lower cost and are very small. So these are -- the silicon cost is relatively not relevant.

That is very helpful. Also had talked about the fast charging product. Just to clarify, is this basically tied to the rapid charge market, the chips that were going through the smartphone adapters?

It is aiming for the fast chargers, okay, rapid chargers, market. But we are not in the adapter area we are in the phone. Because all the smartphone want fast chargers, and they had increased the current. Now we have a product with the charger, battery chargers of up to 3 amp to 4 amp current. And those chargers cannot be integrated into one of these power management into these TeMIX. So it would be a standalone charger. We have a lot of demand for this product.

Very good thanks for clarifying that. I also had a question on your and SSD par management business is SSD now basically has it surpassed HDD in your revenue mix?

You know, I would say that HDD is still the bigger portion of the revenue. But SSD is growing fast and we have the two additional TeMIX that we introduced that we talked about last year, which is going to be adding revenue mix next year. So next year is the year that I expect SSD to maybe take over HDD. We also got to remember HDD programs tend to be fairly large, so one single program could actually change that equation again.

Very good. Just one last question. I do not think you really comment on backlogs or bookings I think you talked a little bit about it earlier in the call, but can you give us anything specifically sort of where you stand right now, as far as coverage is concerned, and how you feel about your guidance?

Sure, as you know when we give our guidance look at both our backlog of terms business where it is coming from and how comfortable we are about it. And so right now I can say that we are very comfortable with our guidance. We have got good bookings, comfortable about the turns to come

Yes in the history of MPS, I think only 2008 in the middle of a quarter we changed the, we changed our previous guidance. We guided low. And we updated the guidance, and that was an extraordinarily macro condition, micro economy condition change. So other than that I do not remember we ever missed the quarters.

Very good that's all from me, congratulations on the solid execution here.

Thank you.

(Operator Instructions)

Presenters, I'm showing no additional phone line questions in the queue, I would like to turn the program back over to Ms. Rao for any additional or closing remarks.

Thank you for joining us on this call and we look forward to talking with you on the next call have a nice day.

Thank you presenters and thank you ladies and gentlemen again this does conclude today's conference.