芯源系統 (MPWR) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Monolithic Power Systems third-quarter earnings conference call. (Operator Instructions) Please note today's conference is being recorded. I would now like to hand the conference over to Meera Rao, Chief Financial Officer. Please go ahead.

Thanks, Karen. Good afternoon, and welcome to the third-quarter 2014 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. 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 Q3 earnings release and in our SEC filings, including our Form 10-K filed on March 10, 2014 and our Form 10-Q filed on July 29, 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, the GAAP financial measures is included in our earnings release which we have filed with the SEC. I would refer investors to the Q1 through Q3 releases for both 2013 and 2014 as well as to the reconciling tables that are posted on our website.

I'd 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.

As expected, MPS delivered again. In the third quarter of 2014, we achieved yet another record with revenue of $78.3 million, 20% growth over the same quarter of 2013. This growth, which was well above the industry average, was organically fueled by sales into high-value consumer, storage and industrial markets.

At the same time, the quality of revenue improved, resulting in a 60-basis-points expansion in non-GAAP gross margin from 54.3% in the third quarter of 2013 to 54.9% in the third quarter of 2014. More importantly, non-GAAP operating margin grew from 21.3% to 25% for the same period. As a result, we achieved record non-GAAP EPS of $0.46 per share.

Now let's talk about a few business highlights. In cloud computing, our QSMod digital solutions have been very well received. This product family introduced earlier this year has won many design-ins with major customers. We have already started shipping core power for Grantley servers.

In automotive, MPS' high-voltage and high-performance solutions are being designed into a broad range of applications including the USB hub power inverters, infotainment, climate control, interior lighting, ignition lock and keyless entry.

In the Internet of Things, MPS has grown in various home automation projects. Our tiny AC/DC products have won multiple sockets where only a few watts of power are required; for zigbee, Wi-Fi, sensors and similar applications. Our MPM modules are attractive to customers with space-constrained applications, and we have won several sockets in this market.

In sensors, our recent addition of Sensima Technology is progressing very well. Multiple European motor driver customers are designing in these revolutionary motion control systems. We are very excited about the future of this technology.

Turning to the financials. Our third-quarter revenue of $78.3 million was above the midpoint of our guidance. Compared with the second quarter, revenue increased by $9.9 million, or 14.5%, primarily on growth in the consumer, storage and industrial markets.

Looking at our revenue by end market, consumer revenue grew approximately $7 million to $35.5 million, fueled primarily by high-value consumer markets like gaming, battery management and home appliances.

Computing revenue also grew by $2 million, driven by higher storage revenue. Industrial revenue increased by $1.7 million to $13.8 million, with growth in automotive, general industrial, security and smart meters.

Revenue in the communications end market was down $800,000 due to lower gateway revenue.

Moving on to gross margin. Our third-quarter non-GAAP gross margin expanded from 54.5% in the prior quarter to 54.9% due to improved product mix. On a GAAP basis, our Q2 and Q3 gross margin was 54.2%. In prior quarters, stock comp expense was the only difference between MPS' GAAP and non-GAAP gross margin.

Starting with the third quarter of 2014, amortization of acquisition-related IP intangibles will also be a reconciling item between GAAP and non-GAAP reporting. So the 40-basis-point improvement in third-quarter gross margin over second quarter was offset by the addition of 40 basis points of intangible amortization for GAAP purposes.

Let's review our non-GAAP operating expenses. Excluding stock compensation, acquisition-related transaction costs for Sensima and income on an unfunded deferred comp plan, our non-GAAP third-quarter 2014 operating expenses were $23.4 million, an increase of $1.6 million from the $21.8 million we spent in the second quarter largely due to the addition of Sensima's R&D spending as well as higher new-product development costs.

Moving on to our GAAP operating expenses, our GAAP operating expenses were $32 million in the third quarter, compared with $30.5 million in the second quarter. The difference between non-GAAP operating expenses and GAAP operating expenses for these quarters is stock compensation expense, transaction costs related to the Sensima acquisition and income on an unfunded deferred compensation plan.

Stock comp expense attributable to operating expenses was $8.6 million in the third quarter, compared with $8.2 million in the prior quarter due to a higher charge for pay for performance stock plan and performance shares granted to Sensima employees post-acquisition.

We are required under the accounting rules to assess the probability of hitting the performance metrics under these plans on a quarterly basis and record catch-up adjustments on future 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 $107,000 of deal-related expenses in relation to the Sensima acquisition. Investment income related to an unfunded deferred compensation plan reduced GAAP operating expenses by $110,000.

Switching to the bottom line. On a non-GAAP basis, our Q3 net income was $18.3 million, or $0.46 per fully diluted share. This result is computed with an estimated tax rate of 7.5%. Q3 2014 GAAP net income was $11.2 million, or $0.28 per fully diluted share.

Now let's look at the balance sheet. Cash, cash equivalents and investments were $238.5 million at the end of the third quarter of 2014, below the $250.7 million at the end of the prior quarter. This reduction in cash was attributable primarily to the $11.6 million paid in July for the Sensima acquisition.

We also spent $9.2 million under a stock buyback program to purchase 212,000 shares. We funded our first quarterly dividend of $5.8 million and purchased $2 million of capital equipment.

In Q3, MPS generated operating cash flow of about $14 million. Cash proceeds from employee stock option exercises and employee stock plan purchases contributed $2.4 million.

Accounts receivable ended the third quarter at $24.3 million, compared to the $21.4 million at the end of the prior quarter and the $22 million at the end of the third quarter of 2013. Days of sales outstanding were down to 28 days in the second and third quarter of 2014 from 31 days in Q3 2013.

Our internal inventories at the end of the third quarter were $41.6 million, essentially flat with the $41.2 million at the end of the prior quarter. Days of inventory decreased to 106 days at the end of Q3 from the 120 days at the end of Q2. Days of inventory in the distributor channel decreased from the prior quarter.

I would now like to turn to our outlook for the fourth quarter of 2014. We entered the fourth quarter with strong bookings as well as the lowest days of inventory with distribution channel that we have seen in the last two years.

We continue to see strength in many markets. However, we have taken into consideration signals of weakening macro conditions from other analog companies and reflected that in our guidance for the fourth quarter. We are forecasting Q4 revenue in the range of $72 million to $76 million.

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 53.6% to 54.6%; total stock-based compensation expense of $8.5 million to $9.5 million including approximately $300,000 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 the range of $22 million to $23 million. This estimate excludes stock compensation and litigation expenses.

Fully diluted shares to be in the range of 40 million to 40.5 million shares before share buyback.

In conclusion, MPS continues to execute according to the plan established three years ago. We are seeing positive earlier results and are optimistic about our future growth. I'll now open the microphone for questions.

(Operator Instructions) Steve Smigie, Raymond James.

Congratulations on another good quarter here. I was hoping you could talk a little bit about your segments here. So in particular, you had a lot of strength in consumer. I think you mentioned gaming. Is that seasonal? And then as we look into next quarter, any color on how those segments might perform? Thanks.

Sure. Some of the strength in consumer, like in gaming, is seasonal. There's a definite seasonal pattern to it. But one of the things that we are excited is we have gotten into a bunch of new markets that we call high-value markets where they pay a premium for our performance products. And those are markets like gaming. We have battery management. We have lighting, and we have appliances. In all these markets, we have seen growth in the third quarter.

Q4, typically there is a seasonal decline from Q3 to Q4. And we do expect to see some seasonal softness in consumer and consumer-like markets.

Okay. And one item you mentioned there, battery management, you guys talk about that a lot. Sorry if you've addressed this in previous calls, but can you go into a little bit more detail about what exactly you were addressing with battery management?

Yes. Hi, Steve. This is Michael. We -- our battery solutions in battery management, these are for mostly for portable and these are not for electrical vehicles. So everything from -- these are handheld from industrial use to tablets. We have very good solutions. And just two years ago, we released the product, and now we have a meaningful revenue now.

Okay, great. And if I could sneak one more in here. On the gross margin, another nice improvement. I think it's essentially flat sequentially, but into a down seasonal quarter. You've got a little bit of back-end capacity. So is that what is causing the flatness sequentially, just so maybe utilization? And if that's the case, what utilization rate are we at on the tests? Thanks.

It's not exactly utilization. We just look at the mix and essentially expect gross margin to be in the same range in Q4 as well.

Okay, great. Thank you.

Tore Svanberg, Stifel.

Very nice quarter. I was hoping you could talk a little bit about what you said about the distribution channel. You said it was at a two-year low? Would you care to quantify that?

Sure. Inventory -- we've been managing inventory in the channel very well over the last two years, and we've been able to hold it at the same level for over eight quarters, I would say. And in Q3, we had addressed some of the concerns that they could be double booking, et cetera, by shipping early and managing the disti concerns. And we were able to complete the quarter with lower days of inventory in the channel than we have seen in two years.

Okay, very good. And my second question is in relation to your computing business. It was up 19% sequentially. Is that a reflection of some of the design wins in Grantley, or is there is more seasonality and then the Grantley designs are yet to come?

We have already started shipping for Grantley, as we said earlier. A lot of the growth in computing in the third quarter is from storage. If you remember, this is something we had pointed out in the last call that we had one of the design wins ended in Q2 and was ramping up again in Q3 in addition to several other customers. And that's what you've seen driving up the revenue in Q3.

(multiple speakers) Michael, the Grantley cycle just started. And there's a lot more revenue behind it.

Okay. Yes, that's what I was trying to get to. And then lastly, your communications business was up a lot in Q2. That's probably why it took a breather in Q3. But can you talk a little bit about the dynamics there? And are we getting to a point now where some of your bigger design wins in networking could potentially start to become more meaningful production?

Sure. What we saw in Q2 is some of the networking and telecomm design wins that we've been talking about in the past started ramping in Q2. And what we saw in Q3 is while we still have good revenues coming from the network and telecom, we saw a certain amount of softness, I would say, in our more traditional gateway business. These are things like the modems, the routers, the line cards that we sell mostly on the client side. And that's where we saw a little bit of softness. But the networking and telecom, we still saw good revenues this quarter.

Very good. Just one last question, if I could. So given your conservativism and also the way you are managing your distribution channels, is it fair to say that your backlog is actually -- that your backlog percentage into your guidance is actually very high?

I'd say that we are very happy with it.

Okay, all right. Great quarter, guys. Thank you very much.

Ross Seymore, Deutsche Bank.

Congrats on that quarter-end guide. Just following on Tore's question, on the Gateway business, that was little bit weak -- the traditional coms. Is that something that is just choppy, or is it something that you expect to be a persistent headwind?

I think it was just choppy.

These are the business that we have, Ross. You know, these are the set-top boxes in the wireless lan, those type of business which we are not really concentrated. What's exciting about that is that these are infrastructure. We made a significant headwind, and we do expect revenues will grow. But you know, these designing cycles takes two to three years.

Great. And I guess as a last follow-up on the revenue side of things, when you talked about the conservativism that you put into your guidance from what everybody else is seeing, what are you guys seeing as far as the bookings on your side?

Our booking, I will have Meera to talk about bookings. I will see our future is great. We executed in the last two or three years all the product that we released working toward revenue.

In terms of bookings, Ross, we've seen good bookings as we go through the quarter. We are not seeing any signs of softness. But we are cognizant of the fact that if there is a slowdown, it's going to impact us. And we just want to give a guidance that we are comfortable that we are going to be able to meet. As you know, we have a history of meeting our guidance, and so we just factored that in.

I think many in the buy side will appreciate that. My last quick question -- you guys have done a great job controlling OpEx. Can you just talk about how you think OpEx versus revenues could grow? As we think a little bit longer term in the 2015 and 2016, et cetera, what sort of band should we put about the relationship in growth rates between the top line and OpEx?

I would say, you know, we will continue to hold expenses, but we will have pay raises that will go in in the first of each year which could be in the range of $0.5 million to $600,000 impact. And then as we see growth coming in, we will do some investment in the future. We did a bit of that this year. So a lot of it is going to be tied with our growth as we go forward.

No, it's just a clarification. Those pay raises, that was on a quarterly basis, I assume, the $0.5 million to $600,000?

Yes.

Great. Congrats again.

Rich Schafer, Oppenheimer.

Thanks, and let me add my congratulations, guys, on a nice quarter. I guess my first question is you talk about mix. You guys have doubled your industrial and comps business as a percent of revenue over the past three years or so. I guess what's the right mix longer term? And maybe part of that answer, if you could talk about your design-win backlog. If you look at how it breaks out, what percent would be coms and industrial auto, that kind of stuff versus your more legacy PC consumer stuff?

Right now, we have growth drivers in every one of these segments. And even industrial, which typically is a segment where we have expected to see growth coming in slower, we are seeing very strong growth.

And as you know, we don't typically give guidance as to growth by segment. But I think when you see next year, assuming regular macro, you would see us growing in every single one of these segments.

Let's put it that way. It's difficult to give you what the growth -- what percentage of each market segment. What we really focus on, we came -- our customer value, our -- the performance from our product, and a premium and also the market is sustainable, we will grow that market segment.

And the key is also we are focused on diversified revenue growth. So we are happy to see growth across multiple segments versus just one.

And Michael or Meera, is it wrong to think -- I know you talked about premium customers on the consumer side. As those guys become a bigger piece of the mix, should we think of the consumer segments enjoying higher gross margin over time? A better mix over time within just consumer?

Absolutely. No, we are not going to commodities.

Okay. And just a question on the power modules business. When does that begin to ramp in a meaningful way? Is it 2015, or is this really something more out in 2016? And as part of that question, I'm assuming your consumer business would ramp -- would adopt and ramp the power mods first. A, is that right? And then B, the same kind of gross margin question, is that a gross margin positive versus overall corporate average gross margin?

Let me talk about that which market segments accepted our solution. It's actually really across the board from automotive to industrials in a high-end consumer product. So you can guess which ones are ramping fast. And actually, industrials are ramping pretty fast, too.

Also the cloud computing, the SSD side. And we have -- the adoption grew very fast. So for this year, we generate some smaller numbers of our revenue. Meera can talk about the numbers. In 2015 and 2016, will be a significant portion of it, a meaningful portion of it. Let's put it that way.

Right now, it's just early revenues. So we have got fairly big design momentum here. So you are going to see those revenue start ramping next year, and we'll see very significant revenues in 2016.

And in terms of putting a number on it, is this a 10% kind of business unit sometime in the next two years?

10%, or including the MPS -- okay, if you think about 2016 MPS growth, it would be in about 2016 would be difficult, but it will be there in the next few years.

Okay. Thanks a lot, guys.

Anil Doradla, William Blair.

I'm trying to figure out how to ask this question. I know it's kind of tough, but -- so when I look at Monolithic Power, obviously, it's a product cycle story versus the rest of the industry.

So let us say the macro does weaken further over the next couple of quarters. Now, given that you've got some very strong product cycles even in macro-sensitive environments, can you share which are the end markets at least -- or which of the four segments would you start seeing the effect of it on the overall revenue composition?

That -- as you guessed, that's a hard one to answer because we have several -- in all these segments, we have both a combination of new markets they're just getting in, newer customers who are ramping up, as well as markets where we are taking market share from our peers. It would be very hard for us to call because I don't know how the macroeconomic conditions would impact different end markets.

But I can say, just looking at the last few years' history, that we -- even if the macro gets weaker, we still expect do better than our peers.

Okay, very good. And last quarter I know BCD 3 and 4 were about 60% of revenues, Meera. How much was it this quarter?

I think still in the 60s, a little bit above. I think it would be getting close to 2/3 of revenue.

Okay, great. And finally, can you give us a little bit more color on the breakdown between TVs and some of the gaming devices?

Sure. I would say right now if you look at things like set-top boxes and TVs, they would be a smaller portion of consumer. And just these newer, high-value markets we talked about, that would easily be a third or more of our consumer revenue.

And then you have set-top boxes, TVs and a lot of different stuff that we call general-purpose, that they would all make up the rest of the 2/3.

Great. And then finally if I can squeeze in -- Michael, given the kind of mixed signals that we're getting in China, especially China 4G, you've got some exposure to some of the OEMs there. How does that play out for Monolithic Power? The volatility on the 4G build-outs in China? Thank you.

Yes, we -- the telecom business is essentially -- for MPS is at the beginning. As long as our customer is expanding, an opportunity for MPS is enormous regardless with the one region expanding or shrinking.

So effectively, you're not too worried about the volatility in the Chinese 4G. That's what I'm hearing.

No.

Thank you, and best of luck.

That's the beauty of a diversified model.

Yes, indeed.

David Wong, Wells Fargo.

You commented about the inventory levels in the channel being so particularly low. So is there a need actually for inventories to be rebuilt in the near future, or do anticipate they'll continue going down from the current levels?

No, we don't anticipate that they'll go down. They'll be at the same levels or maybe be at a more traditional level that we have had. So we kind of look at this inventory level that we had exiting at Q3 as a sign of how well we have managed to execute managing channel inventory. And it also gives us confidence as we look at our Q4 forecast.

Okay, great. And the other thing is on the matter of pricing. With all of your new product cycles, are you finding -- are you seeing pricing go up at all in any segments?

All our -- the new product that we released, and we all have a premium price. For the competitive landscape, and I won't put my fingers on the elephant and describe your -- what kind of elephant it is.

Okay, great. Thanks.

(Operator Instructions) Steve Smigie, Raymond James.

I was hoping you could talk a little bit about gross margin across your end markets. And I guess within consumer, you could differentiate the low end stuff versus the high end.

Sure. As you know, industrial is our best gross margin. And within the different segments, take communication, our networking and telecomm has a better gross margin profile compared to the traditional gateways.

If you look at consumer, the newer markets that we call our high-value markets, they clearly have a better-than-average gross margin profile compared to the rest of our traditional consumer.

And then when you look at computing, SSD is better than HDD, and the cloud computing margins are very good. Modules, of course, have very good (multiple speakers).

All the new products that we -- product in the new-product family will grow. They all have a higher-margin profile. And we -- in this conference call, we never mentioned AC to DC, and that product line growth has a phenomenal growth this year and into next year.

Okay, great. And then I know you don't specifically break out at this point, but it seems like auto in your last call is becoming a bigger portion. Can you just give us roughly -- is it like -- is auto half of industrial at this point or --?

No, I wouldn't say it's quite half of industrial, but it is growing. And we anticipate that some time in the future when it's large enough on its own that we will break it out of industrial. But I think, at least for the near term, we will continue to forecast included with industrial.

Great. Last one is just if you could talk a little bit about LED lighting and the growth prospects of that over the next, say, 12 to 24 months. It seems like we're kind of at an inflection point for that. I know you've kind of got portions where you're better than others, but I was just curious if you could talk about the overall opportunity there.

Sure. We are doing -- we've seen a lot of growth in LED lighting, particularly incandescent bulb replacements. We believe that we have a product that has a superior dimming solution, in particular. So we see a lot of sales from that and strong growth every quarter. Our longer-term view in this market is very interested in industrial and commercial LED lighting more than consumer. But right now, when it has still got an attractive gross margin profile, we are happy to play in consumer as well.

Yes, that's well said. And industrial -- again, industrial in the commercial is our focus. But we are opportunistic in pick-up, whatever the revenues with a higher high-gross margin.

Okay, great. Thank you.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to Meera Rao for any closing comments.

Thank you for joining us for this conference call, and we look forward to talking to you in February. Thank you.

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