芯源系統 (MPWR) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Monolithic Power Systems Incorporated second quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I will now introduce you to today's conference, Meera Rao, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, and welcome to the second quarter 2014 Monolithic Power Systems conference call. Michael Hsing, CEO and Founder, 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 uncertainty which could cause results to differ materially from management's current views and expectations. Please refer to the Safe Harbor Statement contained in the earnings release published today. Risks, uncertainties, and other factors that could cause actual results to differ are identified in the Safe Harbor Statement contained in the Q2 earnings release, and in our SEC filings, including our Form 10-K filed on March 5th, 2014, and our Form 10-Q filed on May 1, 2014, 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 gross margin, operating expense, operating income, net income, and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP, and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release which we have filed with the SEC. I would refer investors to the Q1 and Q2 2013 releases, the Q1 and Q2 2014 releases, as well as the reconciling tables that are posted on our website.

I would 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. MPS again delivered record breaking quarterly revenue, and more importantly, MPS achieved greater than 50% year-over-year growth in both non-GAAP operating income and non-GAAP EPS, revenue grew 18.6% compared with the same quarter of 2013 to $68.4 million. This increase, which is well above industry average was fueled by organic growth in revenue from our industrial and newer consumer markets. Non-GAAP gross margin expanded by 70 basis points to 54.5% in Q2 2014 from 53.8% in Q2 2013. We continue to grow the business while holding expenses relatively flat by leveraging the infrastructure investment made over the last few years.

This has resulted in a significant 54% year-over-year growth in both non-GAAP operating income and non-GAAP EPS. The strong organic revenue growth is attributable to our efforts initiated four years ago, when we set our goals to diversify our products. To further enhance our growth strategy, we have acquired Sensima Technology SA, a Swiss company. Sensima is a developer of magnetic sensor technologies for angle measurements, as well as three-dimensional magnetic field sensing. Sensima's patented magnetic angle sensors are used in rotary encoders, electronically commutated motors, and a broad range of products. Combining Sensima's realtime precision magnetic angle sensing with MPS' technologies could offer revolutionized solutions for key industries, such as automotive, industrial, and cloud computing.

We believe Sensima's unique technology will enhance our diversification strategy, and create new opportunities with key customers. Turning to the deal terms, MPS has acquired all of the outstanding shares of Sensima, the purchase price includes an initial cash payment of $11.7 million, and a subsequent cash earnout payment of up to $8.9 million, which will be based upon Sensima achieving certain performance goals in 2016. Sensima is a pre-revenue company. We expect this acquisition to be accretive in the second half of 2016, the initial cash payment was paid with offshore cash, and any future earnout will also be paid with offshore cash.

Now a quick review of other recent business activities. In the past, MPS' demand creation and sales effort was driven mainly by our internal sales force. Now we are accelerating these designing activities through the addition of two key distribution partners. We've added Future and Avnet Memec for coverage in North America and Europe. These partnerships will multiply the number of sales and field application engineers focused on selling and promoting MPS products. At the same time, we have been seeing significant design win momentum, new product ramps and market share gains in battery management, cloud computing, and industrial applications.

Turning to the financials, our second quarter revenue of $68.4 million was well above the midpoint of our guidance, compared with the first quarter of 2014, revenue increased by $8.4 million, or 13.9%, primarily due to growth in the communications, industrial, and consumers markets.

Looking at our revenue by end market, communications revenue grew approximately $3.4 million over the prior quarter to $17 million. Fueled by the ramp of networking and telecomm design wins, as well as our Gateway business. Revenue from consumer markets increased $2.4 million to $28.5 million on higher TV and gaming demand. Industrial revenue also grew approximately $2.3 million to $12.1 million over the prior quarter, fueled by smart meter and other industrial applications. We are pleased to report that industrial revenue is now 17.7% of revenue. Computing revenue increased slightly from $10.6 million to $10.8 million.

Moving on to gross margin, our second quarter non-GAAP gross margin was 54.5%, compared to 53.8% in the prior quarter. Higher manufacturing overhead absorption contributed 20 basis points of growth, the remaining 50 basis point improvement was attributable to the impact of a special non-executive employee bonus expense in the first quarter of 2014 that was not repeated in Q2. On a GAAP basis, our Q2 gross margin was 54.2% compared to 53.4% in the prior quarter. The only difference between the GAAP and non-GAAP gross margin is stock comp expense and a special non-executive employee bonus.

Let's review our non-GAAP operating expenses. Excluding stock compensation and transaction costs related to the Sensima acquisition, our non-GAAP operating expenses for the second quarter of 2014 were $21.8 million, an increase of $6.2 million from the $15.6 million we spent in the prior quarter. This increase was largely due to a $9.5 million legal payment in our favor from O2 Micro recorded during the first quarter of 2014 as a benefit to litigation expenses. This pickup was partially offset by one-time charges in the first quarter of $500,000 for payments to the law firms that successfully represented us against O2 and special non-executive employee bonuses of $2.8 million.

Moving on to our GAAP operating expenses, our GAAP operating expenses were $30.5 million in the second quarter, compared with $23 million in the first quarter. The only difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense and transaction costs related to the Sensima acquisition. Stock comp expense attributable to operating expenses increased to $8.2 million in the second quarter compared with $7.4 million in the prior quarter, as a result of a higher charge for pay for performance stock plans implemented from 2012 to 2014.

Accordingly, we are required under the accounting rules to assess the probability of hitting the performance metrics under the plans on a quarterly basis, and record catch-up adjustments reflecting our 2-year revenue projections. As we noted before, this has increased the quarter-over-quarter volatility of stock comp charges compared to the typical straight line approach associated with time based grants. In addition, we incurred approximately $500,000 of legal and accounting expenses in relation to the Sensima acquisition.

Switching to the bottom line, on a non-GAAP basis, our Q2 net income was $14.6 million, or $0.37 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q2 2014 GAAP net income was $6.4 million, or $0.16 per fully diluted share. Now let's look at the balance sheet. Cash, cash equivalents, and investments were $250.7 million at the end of the second quarter of 2014, above the $238.5 million at the end of the prior quarter, as well as the $201.3 million at the end of the second quarter of 2013. In Q2 MPS generated operating cash flow of about $22.9 million. Cash proceeds from employee stock option exercises contributed another $3.5 million. MPS announced a $100 million stock buyback program effective August 2013. Under this program, we bought back approximately 322,000 shares for a total of $12.4 million in the second quarter of 2014. We also spent $1.7 million on capital equipment.

As a reminder, MPS initiated a dividend program in the second quarter of 2014. The $0.15 per share dividend declared and accrued in Q2 was paid on July 15th, to shareholders of record at the close of business on June 30th 2014. Accounts Receivable ended the second quarter at $21.4 million, down from the $22.1 million at the end of the prior quarter, and up from the $20.3 million at the end of the second quarter 2013. Days of sales outstanding were down to 28 days in Q1 from 33 days in Q1 of 2014, and 32 days in Q2 2013. Our internal inventories at the end of the second quarter, were $41.2 million compared with the $39.8 million at the end of the prior quarter. Days of inventory decreased from 130 days at the end of Q1 to 120 days at the end of Q2. Inventory in the distributed channel decreased in both dollars and days from the prior quarter.

I would now like to turn to our outlook for the third quarter of 2014. We expect yet another quarter with record, we are forecasting Q3 revenue in the range of $76 million to $80 million. At the midpoint of the guidance, we are projecting approximately a 14% growth from the prior quarter. We also expect the following. Non-GAAP gross margin in the range of 54.4% to 55.4%. GAAP gross margin in the range of 54.1% to 55.1%, total stock-based compensation expense of $7.7 million to $8.3 million, including approximately $200,000 that would be charged to cost of goods. Litigation expenses of $200,000 to $400,000, non-GAAP R&D and SG&A expense to be in the range of $22.5 million to $23.5 million. This estimate excludes stock compensation and litigation expenses. Fully diluted shares to be in the range of 39.5 million to 40.1 million shares before share buyback. This Q3 outlook validates our overall business model discussed in prior calls as the midpoint of the guidance would produce a 25% non-GAAP operating margin. In conclusion, as we continue to execute on our growth strategy formulated four years ago, we are delighted to see these early results. I'll now open the microphone for questions.

(Operator Instructions). Our first question comes from the line of Tore Svanberg from Stifel, your line is open.

Thank you very much, and congratulations on the record results. So my first question is on communications and industrial, it had a very strong quarter in Q2, and I'm just wondering if that's what's going to continue to drive growth in Q3?

I think it's difficult to comment on quarter by quarter, but the overall trend is an increase because we in the past two or three years, and we focus on that segment, and we generate a lot of design wins, and as design wins comes into revenues, and we see a very steady increase in the next few quarters, and in the near future, so the next quarters will probably follow the similar trend, okay? But it's not exactly a number, but overall direction is the same.

Very good. And on gross margin, you've had a very nice steady increase now for a while, and as we look forward, I'm just wondering if we should expect that similar improvement, and I assume that it's primarily mix-driven, or is there anything else going on there?

We've been saying for a while that our gross margin improvement, it's going to improve slowly and steadily, and that's exactly what's panning out. So we have in the latest quarter, Q2, we also had, because of the big increase in revenue, we also had a pickup from a better absorption of our test manufacturing capacity that we have, the overhead costs, our mix also continues to improve as new products come out.

Just one last question, if I may. Could you update us a little bit on your Monolithic power module business, I know that is revenue primarily slated for later, but just hoping you could give us an update on reception so far, when you expect more meaningful revenue and so on? Thank you.

Yes, we introduced, as you know, we have a matrix of our products, in the last quarters, we introduced a few more. And as the release of these products are kind of difficult, where it goes through a full qualification, every one of them, and they need about 2,000 hours, and so we are gradually completing that matrix, and in terms of our market, reception is extremely well. Our customers and some consumer customers adopted our modules very quickly, and some industrials, automotive and for traditional markets, and they followed a similar trend as they do other business, which takes about 24 to 36 months to generate any revenues, but we see a lot of designing activities, and there are no other, there are not any surprises.

Very good. And again, congratulations on the strong results.

Thank you very much.

Our next question comes from the line of Steve Smigie with Raymond James. Your line is open.

Thanks. This is Vince Celentano speaking for Steve. I was wondering within your memory and storage business PMIC is looking really strong lately. Do you see this trend continuing, and do you believe share growth will be a part of that?

SSD PMIC continues to do well, we expect to see growth next quarter as some design wins ramp up next quarter. I mean in Q3.

Okay. Great. Thank you. And then within the LED driver market, I was wondering what your share is of that, and what you see as the growth drivers?

In the LED lighting market, this is a market that in the long term, our interest is in industrial and commercial applications. We're playing in the consumer market right now because it's a good market, and it's very profitable for us. We're only playing in key segments of this market, and not across the board like some of our peers.

Okay. Great. Thank you.

Our next question comes from the line of Rich Schafer with Oppenheimer. Your line is open.

Hi, guys. I'll add my congratulations on another nice quarter.

Thank you.

I had a quick question, first, I think, on the Sensima acquisition. I know you talked about it being accretive, I think you said in the second half of 2015. When do you expect to see first revs from that business, and in the meantime, can you quantify the dilution, or is it a noticeable impact?

Well, okay. I can answer the first part of the question so, and it is revenue, it's a small, small revenue. The key is that we acquire technology that is proven, proven technology, and our customers accept it, and so whether you generate $1,000 or $100,000 of revenue, that's not really important. Where we see this technology is truly revolutionized the motion control. You have a motor driver, you have a robot, you have industrial machineries, and automotive, and this is a really something where nobody else has seen it before. And we are glad to find this company, and we can--, and the founders like MPS, and they turned down all the other offers and they joined us.

Rick, we expect this deal to be accretive by the second half of 2016.

Got it. Okay. And my next question is on mix. Obviously it continues to improve as comms and auto and industrial continue to ramp as a percent, what is the right split for you guys long-term between your sort of four main buckets? I'm just curious what gross margins are going to look like once we've sort of hit that optimum mix?

The three targets markets are computing, communications, and industrial, and we'd like to grow those markets as much as we can. We don't have an internal number that we've shared, and our idea is that, as we go out in time, when it comes to gross margins there are no headwinds, and basically we expect to show a slow and steady increase in gross margin.

Okay. And then just I was curious on TV. Can you update us on what your TV exposure is now, and maybe elaborate a little bit on the content increase story there?

Sure. It's roughly about 10% of our business from TV, and I think we talked about this a couple quarters ago, saying that we've got now design wins now in TV, and this is particularly as you see some of the smarter TVs, and some of the demand power requirements are going up, we are seeing higher revenues here.

Can you quantify? Is your average content increasing, I don't know, 5% or 10% year-over-year or any kind of number you could put to that?

We are not really focused on that, on the market segments, really opportunistic , and some of the newer TVs, the small TVs with the processor-based TVs that require higher powers. And we have product, and we have a very cost competitive product, and we just in the past we took the socket. And we have continued to do well in those high current sockets, because our competitor couldn't even match what we do. So in terms of a real percentage of what the gross is, I'm putting very little focus on that, maybe Meera can tell you what is our growth pattern on it.

I think overall what we've got is, we've got more design wins, so you're seeing the increase in revenue. I would attribute it more to design win increase rather than a dollar content increase.

Got it. Thanks a lot, and congratulations again.

Thank you.

Thank you.

Our next question comes from the line of Anil Doradla with William Blair. Your line is open.

Hey guys, let me also join you in congratulating for these good results. Michael and Meera, I have a big picture question. Obviously consumer business continues to do well, you have had some benefits from some of the gaming products. But when I look at Monolithic Power one of the key transitional stories was to step away slowly from the consumers business, and diversify to more longer product cycles infrastructure oriented. The last couple of quarters, consumer has been good, last quarter has been good. How should I be looking at it, are you going to continue working in consumer but your hurdle rates are going to be based on some higher gross margins, or can you lay out what the big picture strategy is going forward? And I have a follow-up?

Sure. The big, our overall strategy is to go into more and more markets where there is a premium for our products, and if you notice, some of the newer consumers markets where we have been seeing higher revenues come in the last few quarters, they have been markets that require higher performance, calling for a thinner competitive landscape, and these are markets like gaming, battery management, these are the markets where we are particularly seeing our revenues increase, so while those happen to be in the consumer marketplace, it still plays into our overall strategy of focusing on performance, and maybe get a premium for our performance. As you will see out in time, you are going to see revenue from computing, from communications, from industrial, continue to go up. I don't actually notice, but industrial revenue is about 17% of our revenue, and just about two or three years ago, it was about 6% to 8% of our revenue. So I think that we are focusing on differentiated products that make a difference to us, both from a top line gross margin and bottom line.

And on Sensima technology, why did you acquire this, because I'm trying to understand the connection between the sensing technology and a power management company. What were the synergies and can you give a little bit more color on that?

Yes. I give you a longer version answer, okay? That started, okay, the motion control. All the motion control that consisted with a motor in them. And traditionally in all of the motors and for the last centuries, all of the motors are in similar technology, in the last 10 to 15 years, they require higher performance motors in using microcontrollers, and so in order to deliver the power accurate and reduced noise of vibration of the motor, these are considered high-performance. But much costly. And Sensima Technology, we thought can deliver high-performance motors, using the Sensima technology, the motor performance will increase greatly, and consider them even better than any motors, drivers in the market now with the microprocessors. So this is very low cost solutions. We can revolutionize the entire motor drivers, and so you offer using these solutions and the lower performance motors can be even better performance than existing high-performance motors. So that's the reason, one of the reasons we acquired them.

Great. And finally, Meera, BCD3, can you give us a sense, what was the contribution and how did that grow during the quarter? Thanks a lot, guys.

BCD3 and 4, the revenues continue to be about 60%.

Thanks and congratulations, guys.

Thank you.

Our next question comes from the line of Lena Zheng with Blaylock. Your line is open.

Oh, thank you for taking my question, and congratulations as well. So the Company has done a real good job on the diversification by end market, and I believe will continue. How has that impacted your sales in different regions and how well that impact as well?

Essentially we have done a lot of our sales using our existing sales force, and if you notice, in the last few months we have announced at least two distributors who will enhance, increase the number of boots on the ground, and we believe will lead to future growth in revenue as well. And as you pointed out, we have a broad breadth of product, and this just takes the revenue to the next level.

Okay. But in other words, so how should I expect which region will grow faster than others?

That's hard to tell, but irrespective of where the demand is created, almost all of the manufacturing ends up in Asia, and if you notice the numbers we report are the sell-to region, and so you're going to Asia revenues grow anyway, but that does not necessarily mean that the demand was created in that region. So kind of hard to answer that question.

Well, to answer your question, the industrial market, automotive market takes two to three years. So you add more people the result will be better in the two to three years later.

Okay. Got it.

It doesn't change the pattern but it changes the numbers.

I see. In terms of the acquisition of Sensima, is your Q3 guidance, does your Q3 guidance include OpEx- from that, because of the acquisition?

Yes, we included about I think just a little under $500,000 in Q3 for the operating expenses of Sensima.

Okay. Got it. Thank you.

(Operator Instructions). Our next question comes from the line of Mike Lucarelli with Evercore. Your line is open.

Mike and Meera, thanks for taking the question. I just want to say congratulations on the good results, also.

Thank you.

If I look at guidance for 3Q, how does that break down by end market, maybe like thinking about which one should grow faster or slower than the midpoint of your guidance?

As I have said before, when we look at the granularity of the forecast data, it's not at the same granularity as we get with actual data, so I can't comment segment by segment, but I can talk about a few drivers that I see that are going to be doing very well for us, SSD for one. We're going to see growth over there. I expect to see that gaming is going to do well. We're going to expect to see growth in battery management, in LED lighting, in TVs, we'll continue to see progress over there. I think industrial, particularly automotive most probably is going to be a growth for us. If you're comparing Q2 to Q3.

Sounds good. What about the design wins you have had in server and PC? How is that shaping up?

In servers, we've have got, we'll be shipping this quarter and next quarter for revenue. in terms of in computing on the notebook side I think the market is shifting from Shark Bay over to Crescent Bay, and we are positioned to do as well if not better in Crescent Bay than Shark Bay.

In the consumer market we expect to do well in the next two to three quarters, even beyond. So you will see some significant changes in the next couple of quarters.

Got you. Okay. Then I guess back to the storage PC bucket, that was the only that was down year on year. What are the moving pieces within there, is that ACGs falling off a little bit?

No, it was actually one of the SSD design wins ramped down, but the successor design win ramps up very fairly strongly for us next quarter, so it ended up being flat this quarter, I mean, computing was flat but SSD within was a little down, but we're going to see that portion go up again in Q3.

Perfect, sounds good guys. Okay. Thanks so much.

Our next question comes from the line of Amit Chanda with Wells Fargo. Your line is open.

Hi. Just had a quick follow-up question, what percent of your industrial revenue at the moment stems from automotive solutions, and I guess what percentage of your industrial mix do you expect automotive to be, exiting calendar year 2014?

I would say industrial is an area where, as I have said before, there are multiple markets that make up that portion. Automotive is one of the markets that is growing for us. I don't think we have disclosed in the past what portion of industrial is from automotive.

But automotive would be a very significant number, so this year's and going out of this year and then next year's. So we may divide it out sometime.

In the future.

Oh, okay. Okay. That's encouraging. And then one final question. I guess as you roll out your broad module product portfolio this year, my understanding is these modules require a higher level of integration. So I guess my question is, will this higher level of integration require you to step up spending on capital equipment that is unique to these modules?

No, in fact, we've already released many of these modules. We have a few others that are being sampled to customers, and the rest of them are in various stages of QA, so we don't need any equipment from an R&D standpoint.

Okay. Great. Okay. Thanks again, and congratulations on the great results.

Thank you.

I'm not showing any further questions at this time, I'd like to call the call back over to Meera Rao for closing remarks.

We want to thank you all for joining us for this call, and wish you a very happy day. Thank you. Bye bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may disconnect. Everyone have a good day.